Contents Financial Highlights ..................... 2 Company Profile ................................ 3 Review of Major Corporate Events in 1998 .. 4 Chairman’s Statement ................................... 5 Directors, Supervisors and Senior Management........ 8 Management Discussion and Analysis .........................13 Report of the Directors..................................................34 Report of the Supervisory Committee ....................................44 Audited Financial Statements ................................................... 45 Report of the International Auditors ................................................46 Consolidated Profit & Loss Account .......................................................47 Consolidated Balance Sheet .......................................................................48 Consolidated Cash Flow Statement ....................................................................49 Balance Sheet .....................................................................................................51 Notes to Financial Statements .....................................................................................52 Corporate Information .....................................................................................................78 Financial Highlights ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Pro forma Year ended Year ended 31st December 31st December 1998 1997 Fluctuation Rmb’000 Rmb’000 % 623,614 505,609 439,789 372,226 385,258 296,332 8.87cents 7.77cents 3,605,662 2,598,595 12,971,481 11,466,377 41.80 35.83 30.01 14.16 38.75 13.13 Turnover Operating profit Profit attributable to shareholders Earnings per share Total liabilities (exclude minority interest) Total assets Total liabilities-to-asset ratio 27.80% 22.66% 22.68 2 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Company Profile The H Shares of Zhejiang Expressway Co., Ltd. (the “Company”) were listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) in May 1997 as an infrastructure company focusing on toll road operation. At the time of its listing, the Company (together with its subsidiaries) held interest in only one expressway, namely the Shanghai-Hangzhou-Ningbo Expressway. Subsequently, the Company expanded its toll road portfolio to include a 51 per cent interest in Shangyu-Sanmen Road, and the total length of its expressway portfolio increased from 248km to 391km with operating sections increased from 158km to 285km. The Company and its subsidiaries are principally engaged in investing in, constructing and managing high grade roads. They also operate certain ancillary businesses, such as automobile servicing, operations of gas stations and bill board advertising along expressways. The majority shareholder of the Company is Zhejiang Provincial High Class Highway Investment Company Limited (“Provincial Investment Co”). Provincial Investment Co was established by the Zhejiang Provincial Government through the Zhejiang State Assets Bureau for the purpose of developing high grade roads and other road related infrastructure projects in Zhejiang Province. Set out below is the corporate and business structure of the Company, its subsidiaries and an associated company (the “Group”). Holders of H Shares Provincial Investment Co 33% 67% 70% 80% 84.2% the Company 50% 51% 51% Advertising Co Gaotong Co Jiaxing Co Yuhang Co Shangsan Co Petroleum Co Jiaxing Section 88.1 km Yuhang Section 11.1 km Hangzhou Section 3.4 km Shanghai - Hangzhou Expressway 102.6 km (this entire expressway is open to traffic) Hangzhou - Ningbo Expressway 145.0 km (this entire expressway is open to traffic) Shangyu - Sanmen Road 143.0 km (37.5 km is open to traffic. The entire expressway is expected to be completed by the end of 2000) Operation of gas stations; and sale of petroleum related products Advertising Processing and sale of stones and stone related products Notes: “Jiaxing Co” means Zhejiang Jiaxing Expressway Co., Ltd. “Yuhang Co” means Zhejiang Yuhang Expressway Co., Ltd. “Shangsan Co” means Zhejiang Shangsan Expressway Co., Ltd. “Petroleum Co” means Zhejiang Expressway Petroleum Development Co., Ltd. “Gaotong Co” means Zhejiang Gaotong Stone Development Co., Ltd. “Advertising Co” means Zhejiang Expressway Advertising Co., Ltd. 3 Review of Major Corporate Events in 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ January • Establishment of Shangsan Co, the holding company (in which the Company has a 51 per cent interest) of the Shangyu-Sanmen Road March • Announcement of the 1997 final results April • Being selected as a constituent stock of the Hong Kong Hang Seng 100 Index May • • First anniversary of the the Company’s H share listing on 15th May 1997 Annual General Meeting July • Establishment of Petroleum Co, which is engaged in operation of gas stations and sale of petroleum related products August • Announcement of 1998 interim results November • The Company was selected by International Finance Corporation as a constituent stock of its China Index for investment in Asia. December • The Company increased its equity interest in Jiaxing Co by 30.75 per cent to 84.2 per cent. • The Jiaxing Section and Yuhang Section of the Shanghai-Hangzhou Expressway with a length of 88.1km and 1.3km, respectively, were opened to traffic. This also marked the opening of the entire Shanghai-Hangzhou-Ningbo Expressway (247.6km in length). 4 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Chairman’s Statement Concentrating on the development of core business In 1998, the operations of the C o m p a n y ( i n c l u d i n g o p e r a t i o n a l management, investment and project constructions) progressed smoothly and most of the targets set by the management had been exceeded. The performance of the Group’s toll roads (in terms of traffic volume) was also satisfactory. Despite a slow down of China’s economy, the traffic volume recorded an over 20 per cent growth rate. Investment projects also began t o g e n e r a t e r e t u r n s a n d t h e r e b y increasing the income sources of the Group. Projects under construction also progressed as scheduled. The entire Shanghai-Hangzhou-Ningbo Expressway was opened to traffic on 29th December 1998. Construction of Phase II of the Shangyu-Sanmen Road, representing approximately 44 per cent of the total contract value, was completed. Furthermore, as a result of its continuous efforts in improving transparency, the Company’s corporate image was further enhanced. Operational management Despite a slowdown of the economic growth in China compared with previous years, the Company continued to achieve remarkable results during the year. The turnover of the Group (toll revenue derived from the operation of expressways less related revenue taxes) amounted to Rmb 623,614,000 in 1998, representing an increase of 41.8 per cent over that of 1997. The toll road sections of the Company which were operational in 1998 comprised the 158 km section of the Shanghai-Hangzhou-Ningbo Expressway, Phase I of the Shangyu-Sanmen Road and the East Connecting Road of the Yuhang Section. 80 per cent and 13.8 per cent of the toll revenue were derived from the operational section of the Shanghai- Hangzhou-Ningbo Expressway and Phase I of the Shangyu-Sanmen Road, respectively. The remaining 6.2 per cent was contributed by the East Connecting Road of the Yuhang Section. In 1998, the traffic volume of the Shanghai-Hangzhou-Ningbo Expressway was satisfactory. The average daily full trip traffic volume increased by 22.9 per cent compared to that of the previous year. The increase in traffic volume was attributable to the economic growth of Zhejiang Province and the marketing strategies adopted by the Company. The construction work relating to the upgrading of the toll collection system of, and the installation of the traffic monitoring, communications and lighting systems on, the Hangzhou-Ningbo Expressway (the contracts relating to the work of such traffic management systems are referred to 5 Chairman’s Statement ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ below as “Contract No.8”), progressed satisfactorily. The traffic monitoring, communications and lighting systems are now operational, and the new toll collection system is expected to become operational in the middle of 1999. Project Construction The remaining section of the Shanghai-Hangzhou Expressway of approximately 90km was completed in December 1998. The entire Shanghai-Hangzhou-Ningbo Expressway was opened to traffic on 29th December. The construction of Phase II of the Shangyu-Sanmen Road also p r o g r e s s e d s a t i s f a c t o r i l y . T h e c o n s t r u c t i o n w o r k r e p r e s e n t i n g approximately 44 per cent of the total contract value, was completed in 1998. Investments The Company set up Petroleum Co with Zhejiang Huajing Petroleum Company Limited, an independent third party, in the middle of 1998. Each party owns 50 per cent equity interests in Petroleum Co. It is engaged in the operation of gas stations and sale of petroleum products. On 8th December 1998, the Company entered into various agreements to purchase an aggregate interest of approximately 30.75 per cent in the capital of Jiaxing Co for Rmb914.7 million. The Company’s interest in the Jiaxing Co increased from approximately 53.45 per cent to approximately 84.19 per cent. Human Resources Due to the increase in traffic volume and the opening of the Jiaxing Section of the Shanghai-Hangzhou Expressway by the end of the year, the number of staff employed by the Company increased from 901 in 1997 to 1,368 in 1998. In order to further improve the quality of its services, the Company held seminars in relation to road operation and management and application of computer softwares for its staff members so as to provide them with the relevant expertise with a view to enhancing management efficiency. The Company also provided training to toll collection staff in order to improve the quality of their service. In 1998, the Company has implemented the trial of a performance- linked employee compensation scheme which it believes to be beneficial to the improvement of productivity. Moreover, as an incentive, the Company also rewards outstanding staff members. Corporate Image The management of the Company focuses on communications with its shareholders and public investors as this will help them to better understand the Company’s business and operations. Last year, the management of the Company made considerable effort in this regard 6 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Chairman’s Statement and achieved fruitful results. The Company will continue to improve its transparency so as to maintain effective communications with its shareholders and public investors. Development Strategy The outstanding results achieved by the Company in 1998 were mainly attributable to its focused development strategy. As an infrastructure company principally engaged in toll road operation, the Company’s basic strategy is to invest and develop the toll road business. This generates a stable return. The Company will continue with this strategy. The Company’s focused development strategy is fourfold: Firstly, the Company aims to further increase the efficiency and returns of its existing roads and to improve the quality of the services provided. In addition it will adopt various marketing strategies to attract more vehicles to use its roads. The Company also plans to facilitate toll collection and traffic flow by introducing automatic toll collection lanes and stored value IC cards for trial runs in the course of 1999. Secondly, the Company will continue to acquire roads within Zhejiang Province. Our goal is to establish a road network with the Shanghai- Hangzhou-Ningbo Expressway as the trunk road. To accomplish this goal, the Company will take advantage of the Government’s policy in encouraging investment in the infrastructure sector to seek good investment opportunities in Zhejiang Province. The Company will mainly focus on large-scale road projects which can provide a satisfactory return. To this end, the Company will continue to contact and hold discussions with various local governments and enterprises and obtain information from them to perform internal feasibility study. Thirdly, the Company will develop other road-related businesses, such as billboard advertising along its roads, with a view to increasing its earnings base and the added value to its core business. Lastly, the Company will strive to improve its management quality and reduce its operating costs so as to further enhance the Company’s competitiveness. We realize that the economic environments, on both global and national levels, are undergoing fundamental changes. However, the management believes that the Company can adapt to such changes. Moreover, the Company will capitalize on its competitive edge in toll road operation in order to achieve its long-term objectives. Hangzhou, Zhejiang Province, the PRC 25th February 1999 Geng Xiaoping Chairman and General Manager 7 Directors, Supervisors and Senior Management ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 8 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Directors, Supervisors and Senior Management Executive Directors and Senior Management (1) Mr Geng Xiaoping, aged 50, is the Chairman of the Board of Directors and General Manager of the Company. He is responsible for the overall management of the Company's business. Mr Geng graduated from the East China College of Political Science and Law in Shanghai and obtained a bachelor's degree in law in 1984. From 1979 until 1991 he worked in various positions at the People's Procuratorate of Zhejiang Province including Division Chief and Deputy Procurator. In 1991, he was appointed as the Deputy Director of Zhejiang Provincial Expressway Executive Commission and was responsible for the business operation and administration of the expressway system in Zhejiang. Mr. Geng has entered into a service contract with the Company and works full time for the Company. (2) Mr Ying Shudeng, aged 61, is a senior engineer. He is a Director, the Chief Financial Officer and a Deputy General Manager of the Company and is responsible for administration and finance. Mr Ying obtained a degree from Hangzhou Technical College (which is now Zhejiang University) in 1960 in mechanical engineering, specialising in road construction design. Between 1960 and 1962, he completed a masters degree in advanced mathematics at Zhejiang University. In December 1962, he began his career in the transport industry with the Works Bureau of the Zhejiang Provincial Communications Office. His responsibilities included road construction. From 1964 until 1971, he held a number of positions ranging from Engineer to Division Chief in the Provincial Communications Office. His responsibilities included transport planning, financial administration, auditing and transport enterprise management. Since 1996 and prior to joining the Company, he was a Deputy Head of the Preparatory Unit responsible for establishing the Company and co-ordinating the reorganization of the Group for the purposes of the listing of the Company on the Hong Kong Stock Exchange. Mr Ying has entered into a service contract with the Company and works full time for the Company. 9 Directors, Supervisors and Senior Management ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Executive Directors and Senior Management (Continued) (3) Mr Fang Yunti, aged 49, is a Director and Deputy General Manager of the Company. He is responsible for the overall operations of the Shanghai-Hangzhou-Ningbo Expressway which includes being responsible for the technical equipment used by the Company in its operations. Mr Fang graduated from Qing Hua University with a degree in automotive engineering in 1976. From 1976 to 1988, he was the Deputy Engineer and General Manager of Zhejiang Province Automobile Transport Company. From 1988 to 1990, he was the Chief Engineer at the Provincial Road Transport Company. In 1990, he was appointed as the Head of the Operating Administrative and Technical Equipment Divisions of the Executive Commission. His responsibilities included supervision of the operations and construction of the Shanghai-Hangzhou- Ningbo Expressway. He remained in that position until joining the Company upon its establishment. He has entered into a service contract with the Company and works on a full time basis. (4) Mr Xu Yikuang, aged 64, is a senior engineer, a Director and the Chief Engineer of the Company and is responsible for the planning and development of the Company's operations. Mr Xu graduated from Tong Ji University in 1958 and obtained a degree in engineering, majoring in the construction and design of bridges and tunnels. Since 1958, Mr Xu has held several positions including the Chief Engineer of the Hunan Province Transport Planning Design Institute, and the Chief of the Engineering Administrative Division of the Executive Commission. From 1988 to 1990 he was in charge of the design of the Hangzhou-Ningbo Expressway. From 1990 until 1996, Mr Xu was actively involved in the preparation, assessment, negotiation and implementation o f t h e W o r l d B a n k l o a n p r o j e c t i n c o n n e c t i o n w i t h t h e construction of the Shanghai-Hangzhou-Ningbo Expressway. Mr X u h a s m o r e t h a n 4 0 y e a r s o f e x p e r i e n c e i n t h e d e s i g n , construction and administration of roads and bridges. Since 1996 and prior to joining the Company, Mr Xu was a Deputy Head in the Preparatory Unit which was responsible for establishing the Company, co-ordinating the reorganization of the Group for the purposes of the listing of the Company on the Hong Kong Stock Exchange. Mr Xu has entered into a service contract with the Company and works full time for the Company. 1 0 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Directors, Supervisors and Senior Management Executive Directors and Senior Management (Continued) (5) Mr Xuan Daoguang, aged 54, is a senior engineer, a Director and Manager of the Company. Mr Xuan graduated from the Tong Ji University in 1960 with a degree in engineering, majoring in the construction and design of bridges and tunnels. Mr Xuan has 38 years of experience in engineering maintenance with the Road Administration Division including being the Section Head and, later, the Head of the Road Administrative Division of Jinhua City. Prior to joining the Company, he worked for the Executive Commission and was responsible for the administration of engineering works within Zhejiang Province, including repair and maintenance of the completed sections of the Shanghai- Hangzhou-Ningbo Expressway. Mr Xuan has entered into a service contract with the Company and works full time for the Company. (6) Mr Zhang Jingzhong, aged 35, is a lawyer and is a Director and Company Secretary to the Board of Directors and is responsible for all secretarial and legal matters. He graduated from Hangzhou University in July 1984, obtaining a bachelor's degree in law. In 1984, he joined the Zhejiang Provincial Political Science and Law Policy Research Unit. From 1988 to 1994, he was the Associate Director of Hangzhou Municipal Foreign Economic Law Firm where he obtained considerable experience in company and commercial law. In January 1994, Mr Zhang became the Senior Partner at the T&C Law Firm in Hangzhou. He retired as the Senior Partner to join the Company on 2nd April 1997. Mr Zhang has entered into a service contract with the Company and works on a full time basis for the Company. (7) Ms Zhang Chunming, aged 34, is a lawyer and is a Director and Manager of the Company and is responsible for legal and securities related issues. She graduated from the East China College of Political Science and Law in Shanghai obtaining a bachelor's degree in law in 1986. From 1987 to 1994, she practised as a lawyer with the Zhejiang Provincial Economics Law Firm in Hangzhou and her practice included financial, securities and property matters. Ms Zhang has also obtained the qualifications required by the regulatory authorities in China to practise law involving securities and, in 1994, she spent six months undergoing training in Hong Kong. Since 1994 she has been a partner of the Shield Law Office in Hangzhou. She has entered into a service contract with the Company under which she has agreed to devote 60% of her time to the Company's business. 1 1 Directors, Supervisors and Senior Management ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Independent non-executive Directors (1) Dr Hu Hung Lick, Henry O.B.E. PhD, JP., aged 79, has been practising as a barrister for over 42 years and is currently the President of Shue Yan College, and a member of the Standing Committee of the Chinese People's Political Consultative Congress and the China International Economic and Trade Arbitration Commission. Dr Hu is also an adviser to the China Research Committee on Juvenile Delinquency. (2) Mr Tung Chee Chen, aged 56, is the Chairman of Orient Overseas (International) Limited. Mr Tung was educated at the University of Liverpool, England, where he received his bachelor of science degree. He later acquired a masters degree in mechanical engineering at the Massachusetts Institute of Technology in the United States. He is a registered professional engineer in the State of California. Supervisors (1) Mr Xia Linzhang, aged 55, is an engineer, having graduated from Jiao Zou Mining College. Prior to commencing with the Company, he was the Head of Suichang Gold Mine, Deputy Head and Head of Suichang County, Zhejiang Province and Deputy General Secretary of Lishui District. He was the Chief of the Planning and Finance Division of the Executive Commission and is currently the Deputy General Manager and Finance Department Manager of the Provincial Investment Company. Mr Xia has extensive experience in project planning, finance and administrative management. (2) Ms Ge Ailian, aged 55, graduated from Shanghai Maritime College majoring in water transport economics. She has held positions of accountant, Deputy Chief of the Finance Section, Deputy Manager, and Deputy Chief of the Auditing Division of the Transport Department of Zhejiang Provincial (Communications Office) and has held positions in the Executive Commission as the Chief of the Planning and Finance Division and the Chief of the Supervisory Auditing Division. Ms. Ge is currently the Director of Provincial Investment Company. Ms Ge's area of expertise is financial planning and auditing. (3) Mr Jiang Wenyao, aged 34, obtained a masters degree in engineering from Zhejiang University majoring in industrial automation and manufacturing mechanics. In 1991, he became involved in the Executive Commission in the areas of engineering administration, financial planning, and advising on technical equipment. In 1996, he was involved in the establishment of the Company. At present, he is an Assistant to the Company’s General Manager. Mr Jiang is experienced in project management, equipment purchase and management, advertising and public relations. 1 2 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis 1 3 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Business Review Analysis of Business Environment All roads owned by the Group are situated at prime locations. As Zhejiang Province enjoys a higher economic growth rate than the national level and has a solid economic structure, the Company expects Zhejiang Province to be able to maintain a strong development in the future. Zhejiang Province is one of the most affluent provinces in the PRC in terms of per capita gross domestic product (“GDP”). GDP Growth GDP Growth in PRC The PRC and Zhejiang Province witnessed a strong economic growth in the past four years and the GDP growth rate of Zhejiang Province has been consistently higher than the national level. The GDP growth rate of Zhejiang Province in 1998 reached 10.1 per cent, compared to a rate of 7.8 per cent at the national level. The Group estimates the GDP growth rate of Zhejiang Province in 1999 to be at approximately 9 per cent, while that at the national level % 20 15 10 5 0 1995 PRC 1996 1998 1997 Zheijang Province at approximately 7 per cent. Economic Structure Composition of the total industrial output of Zhejing Province in 1998 The non state-owned enterprises of Zhejiang Province accounted for 80 per cent of the total industrial output in 1998 whereas the state- owned enterprises only represented 20 per cent. The industrial output of foreign investment enterprises, joint stock companies and other types of enterprises accounted for an aggregate of 32 per cent of the total Foreign investment enterprises 15% Joint stock companies 11% industrial output of Zhejiang Province. This type of economic structure enables the vigorous economic growth of Zhejiang Province. Other types of enterprises 6% State-owned enterprises 20% Collective enterprises 48% Retail Price Index Retail Price Index of PRC and Zhejiang Province From 1995 to 1998, the Retail Price Indices (RPIs) fell both at the national level and in Zhejiang Province. In 1998, the national RPI was 97.4 and that of Zhejiang Province was 98.4 both of which are expected by the Group to become stabilized in 1999. % 120 110 100 90 80 1995 PRC 1996 1997 Zhejiang Province 1998 1 4 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis 1980 1985 1990 1995 1996 1997 Ningbo Shanghai Road Traffic in PRC and Zhejiang Province Throughput capacity of each of Shanghai and Ningbo Ports as a percentage of the PRC national throughput capacity % 60 Investment in the PRC national highways Rmb billion 2,000 1,500 1,000 500 0 1995 1996 1997 1998 Aggregate highway mileage in Zhejiang Province km 40,000 38,000 36,000 34,000 32,000 30,000 1995 1996 1997 1998 Aggregate expressway mileage in Zhejiang Province 40 20 0 km 400 300 200 100 0 Ports The Shanghai-hangzhou-Ningbo Expressway of the Group connects the two largest ports in China, namely Shanghai and Ningbo ports. With the increase in the use of containers and the further development of the two additional smaller ports, namely Zhoushan and Zhapu ports, in Zhejiang Province, the traffic volume of the Group’s expressways will increase in the long run. In view of the changes in, and the effect of, international and domestic economic development, the PRC Government has increased investment in infrastructure as an important measure to stimulate economic growth. The Central Government has planned to invest USD1,000 billion in infrastructure projects between 1997 and 2000. Construction of highways is an integral part in the infrastructure investment plan. In 1998, investments in highway construction increased to Rmb180 billion, nearly doubled that of 1997. The pace of highway construction in Zhejiang Province has been rapidly increasing during the past four years. In 1998, the aggregate highway mileage in Zhejiang Province reached 39,091km, an increase of approximately 7.6 per cent from that of 1997. The construction of expressways in Zhejiang Province has grown rapidly in recent years. In 1998, the aggregate expressway mileage in Zhejiang Province amounted to 342km. This represents an increase of 114km from that of 1997. Included in the added mileage is approximately 90km of Shanghai-Hangzhou Expressway which commenced operation last year. The continued development and improvement of the road network in Zhejiang Province will create significant synergies and increase traffic 1995 1996 1997 1998 volume of the Company’s expressways. 1 5 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Due to the increasing economic activities, the number of vehicle Vehicle ownership in Zhejiang Province number of vehicles ownerships in Zhejiang Province has been growing rapidly. The number 600,000 of privately owned cars in 1998 was 116,773, which is approximately 23 500,000 per cent more than that of the previous year. The increase in the number 400,000 of privately owned vehicles will be a key contributor to the future growth in traffic volume. 300,000 200,000 100,000 0 1995 1996 1997 1998 Total vehicles Privately owned vehicles Passenger traffic volume in Zhejiang Province has been rising consistently, which increased to 43.63 billion persons-km in 1998, an increase of approximately 4.4 per cent over that of 1997. The volumes of transporting passengers by highways and freight by highways in Zhejiang Province billion persons km 50 billion tonnes km 30 A slight decline in the volume of transporting freight was recorded in 1998 at 25.71 billion tonnes km. It was down approximately 2 per cent from that of 1997. 40 30 20 25 20 1996 1995 Volume of transporting passenger by highways 1998 1997 Volume of transporting freight by highways 1 6 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis East Connecting Road 6% Shangyu-Sanmen Expressway 14% Toll revenue In 1998 the toll revenue of the operating sections of the Shanghai- Hangzhou-Ningbo Expressway, the East Connecting Road and the Shanghai-Hangzhou- Ningbo Expressway 80% operating sections of the Shangyu-Sanmen Expressway, amounted to Rmb526,485,000, Rmb41,017,000 and Rmb91,003,000 respectively. The toll revenue of the Company reached Rmb658,505,000 in 1998 which was derived mainly from these highways. Shanghai-Hangzhou-Ningbo Expressway The overall lenghth of the Shanghai-Hangzhou-Ningbo Expressway is approximately 247.6km and forms part of the twelve National Trunk Roads planned by the Central Government. The Shanghai-Hangzhou- Ningbo Expressway is the only expressway directly linking the three major cities of Shanghai, Hangzhou and Ningbo, all of which are densely populated and important industrial and commercial centres located in the southeast coastal economic development zones. The Shanghai-Hangzhou-Ningbo Expressway comprises the Shanghai- Hangzhou Expressway and the Hangzhou-Ningbo Expressway. The respective mileages and dates of commencing operation of the different sections of the Shanghai-Hangzhou Expressway and Hangzhou-Ningbo Expressway are as follows: Sections Mileage commencing operation Date of Hangzhou-Ningbo Expressway Hangzhou-Xiaoshang Section Xiaoshang-Shangyu Section Shangyu-Ningbo Section Shanghai-Hangzhou Expressway Hangzhou Section Yuhang Section Jiaxing Section 7.0km 74.1km 63.9km April 1992 December 1995 December 1996 3.4km 9.8km 1.3km 88.1km December 1995 December 1995 December 1998 December 1998 By the end of 1998, a total of 247.6km of Shanghai-Hangzhou-Ningbo Expressway was opened to traffic. 1 7 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Toll revenue Monthly toll revenue Rmb'000 60,000 50,000 40,000 30,000 20,000 10,000 0 1 2 3 4 5 6 7 8 9 10 11 12 1997 1998 month Monthly traffic volume Number of vehicles (distance-based weighted average daily traffic volume) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 3 5 1 1997 9 7 1998 11 month The operating sections of the Shanghai-Hangzhou-Ningbo Expressway from Yuhang to Ningbo with a total length of 158.2km generated toll revenue of Rmb526,485,000 in 1998, representing an increase of 22.7 per cent from the previous year. Traffic volume In 1998, the average daily full trip traffic volume of operating sections in the Shanghai-Hangzhou-Ningbo Expressway amounted to 11,617 vehicles, representing an increase of 22.9 per cent from 1997. The outstanding performance in terms of traffic volume and toll revenue of the operational sections of the Shanghai-Hangzhou-Ningbo Expressway in 1998 was principally attributable to the following: • The GDP of Zhejiang Province achieving a growth rate of 10.1 per cent in 1998. • Drivers‘ preference of commuting via the Shanghai-Hangzhou- Ningbo Expressway. • Completion of the construction of the two interchanges leading to the Hangzhou toll station in December 1997. This has facilitated traffic flow between the Shanghai-Hangzhou-Ningbo Expressway and the Hangzhou city centre and thereby increased the toll revenue. • T h e C o m p a n y ’ s a d o p t i o n o f s e v e r a l m a r k e t i n g m e a s u r e s , including: — conducting surveys in places where traffic volume of heavy vehicles is high; — c o n d u c t i n g c o m p a r a t i v e a n a l y s i s a m o n g t h e c o s t s o f commuting via expressways, national roads and provincial roads, and publicising the benefits of using the Group’s expressways to drivers; and — putting up road signs on other roads and in neighbouring cities so as to direct drivers to the Shanghai-Hangzhou- Ningbo Expressway. 1 8 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis Composition of entrance fee and distance-based mileage fee (1998) Entrance Fees and Distance-Based Mileage Fees Mileage fee 79% Entrance fee 21% The toll revenue of the Shanghai-Hangzhou-Ningbo Expressway comprises two parts, namely entrance fees and distance-based mileage fee. Entrance fees range from Rmb5.00 to Rmb25.00 according to vehicle types, while distance-based mileage fees range from Rmb0.40 to Rmb2.00 per km. travelled according to vehicle types. Out of the toll revenue of the Shanghai-Hangzhou-Ningbo Expressway in 1998, entrance fees totalled Rmb110,560,000, while distance-based mileage fees amounted to Rmb415,925,000, representing 21 per cent (1997: 20 per cent) and 79 per cent (1997: 80 per cent), respectively, of the said toll revenue. Composition of vehicle types (1998) Vehicle Types Type 3 10.76% Type 4 0.62% Type 2 29.95% Type 5 0.13% Type 1 58.54% The Company classifies the vehicles using the Shanghai-Hangzhou- Ningbo Expressway into the following five types and each has a different toll rate. Current toll rates: Type 1 Type 2 Type 3 Minibuses Type 4 Type 5 Buses and trucks and trucks of Trucks of Cars, vans of over 2 tons over 5 tons over 10 tons and trucks of but not more but not more but not more Trucks over 2 tons or less than 5 tons than 10 tons than 20 tons 20 tons E D E D E D E D E D Year 1997 and 1998 5.00 0.40 10.00 0.80 15.00 1.20 20.00 1.60 25.00 2.00 Notes: “E” denotes entrance fee per vehicle in Rmb. “D” denotes distance related toll per vehicle-km in Rmb. 1 9 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Toll rate per vehicle Toll per vehicle The toll rate per vehicle refers to the average toll rate charged per vehicle using the Shanghai-Hangzhou-Ningbo Expressway. In 1998, toll rate per vehicle which was similar to that of 1997 was Rmb36.45. In the light of the entire Shanghai-Hangzhou-Ningbo Expressway being fully operational and the proposed adjustment of the toll rates, a higher toll rate per vehicle is expected in 1999. Hangzhou-Ningbo Expressway The overall length of the Hangzhou-Ningbo Expressway is 145.0km. It starts at Penbu in Hangzhou, passes through Xiaoshan, Shaoxing, Shangyu and Yuyao, and ends at Dazhujia in Ningbo. Toll revenue The aggregate toll revenue of the Hangzhou-Ningbo Expressway in 1998 amounted to Rmb449,740,000, representing an increase of 20.4 per cent from 1997. Traffic volume In 1998, the average daily full trip traffic volume of the Hangzhou- Ningbo Expressway amounted to 11,165 vehicles, rising by 21.4 per cent from 1997. Traffic management system For the purpose of upgrading the Hangzhou-Ningbo Expressway’s toll collection system and installing traffic monitoring, communications and lighting systems on this expressway, installation of such system is being undertaken by the Company through Zhejiang Provincial Expressway Executive Commission. The traffic monitoring, communications and lighting systems have already been installed and are now operational. The new toll collection system is expected to be fully operational in the middle of 1999. Rmb 45 40 35 30 1 2 1997 3 4 5 6 7 8 1998 9 10 11 12 month Monthly toll revenue of the Hangzhou-Ningbo Expressway Rmb'000 5,000 4,000 3,000 2,000 1,000 0 1 2 3 4 5 6 7 8 9 10 11 12 1997 1998 month Monthly traffic volume of the Hangzhou-Ningbo Expressway Number of vehicles (distance-based weighted average daily traffic volume) 13,000 11,000 9,000 7,000 5,000 3 5 1 1997 7 1998 9 11 month 2 0 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis Monthly toll revenue of the Hangzhou Section Rmb’000 2,000 1,500 1,000 500 1 2 3 4 5 6 7 8 9 10 11 12 1997 1998 month Monthly traffic volume of the Hangzhou Section Number of vehicles (distance-based weighted average daily traffic volume) 25,000 20,000 15,000 10,000 5,000 1 3 5 7 9 11 1997 1998 month Shanghai-Hangzhou Expressway The Shanghai-Hangzhou Expressway has a total length of 102.6km, and comprises the Hangzhou, Yuhang and Jiaxing sections. Hangzhou Section The Hangzhou Section of the Shanghai-Hangzhou Expressway has a total length of 3.4km and is one of the busiest sections of the Shanghai- Hangzhou-Ningbo Expressway. Toll revenue T o l l r e v e n u e o f t h e H a n g z h o u S e c t i o n i n 1 9 9 8 a m o u n t e d t o Rmb19,768,000, representing an increase of 34.7 per cent from 1997. Traffic volume In 1998, the distance-based weighted average daily full trip traffic volume of the Hangzhou Section amounted to 16,079 vehicles, rising by 36.8 per cent from 1997. Yuhang Section The Yuhang Section of the Shanghai-Hangzhou-Ningbo Expressway has a total length of 11.1km long of which only 9.8km was opened to traffic in 1998. It is also one of the busiest sections of the Shanghai- Hangzhou-Ningbo Expressway. The remaining 1.3km of Yuhang Section was opened to traffic together with the Jiaxing Section on 29th December 1998. 2 1 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Toll revenue T o l l r e v e n u e o f t h e Y u h a n g S e c t i o n i n 1 9 9 8 a m o u n t e d t o Rmb56,977,000, representing an increase of 34.7 per cent from 1997. Monthy toll revenue of the Yuhang Section Rmb’000 6,000 4,000 2,000 0 1 2 3 4 5 6 7 8 9 10 11 12 1997 1998 month Monthly traffic volume of the Yuhang Section Number of vehicles (distance-based weighted average daily traffic volume) 25,000 20,000 15,000 10,000 5,000 1 3 5 7 9 11 1997 1998 month Traffic volume In 1998, the distance-based weighted average daily full trip traffic volume of the Yuhang Section amounted to 16,079 vehicles, rising by 36.8 per cent from 1997. Jiaxing Section The Jiaxing Section is owned by Jiaxing Co. Construction of this section started on 1st September 1995. The civil engineering tenders involved were selected through international bidding process under the supervision of the World Bank. In addition, the relevant contracts adopted the internationally recognised FIDIC clauses (i.e. the clauses prepared by the Federation Internationale des Ingenieurs-Conseils) which seek to establish a check-and-balance system between the owners and the contractors. During the project’s construction, Wilbur Smith & Associates, an international engineering consultant, conducted on-site inspections which helped to ensure the timely completion, and exert reasonable control over the quality and budget, of this project. After more than three years of construction, the Jiaxing Section was opened to traffic on 29th December 1998, three months ahead of the completion date as specified in the contract. In 1998, Jiaxing Co launched a “Quality 98” programme. The objective of this programme was to ensure, through setting up quality standards and relevant measures, that the stipulated construction specifications of Jiaxing Section were met. The programme achieved satisfactory results. In December 1998, the Shanghai Branch of the Ministry of Communication’s Quality Monitoring Centre certified that the Jiaxing Section’s road surface flatness coefficient was 0.65mm on average. This was above the relevant national quality standard and is among the best nation-wide. 2 2 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis The tender for the installation of the traffic management system (including monitoring, communications, toll collection and lighting systems) of the Jiaxing Section (“Contract No.11”) has commenced. Meanwhile, Jiaxing Co has installed a computerized toll collection system to ensure the efficient operation of the toll collection process. The Jiaxing Section reached a distance-based weighted-average daily traffic volume of 10,352 vehicles in the first three days of its formal opening to traffic. By comparison, it took more than eight months for the first 84km of the Hangzhou-Ningbo Expressway to reach an average daily full trip traffic volume of 10,000. The Directors believe that the excellent performance of the Jiaxing Section in the first three days of its formal opening to traffic was mainly attributable to the opening of the entire Shanghai-Hangzhou-Ningbo Expressway. Toll Adjustment Application Pursuant to the concession agreement relating to the Shanghai- Hangzhou-Ningbo Expressway (the “Concession Agreement”) dated 24th March 1997 between the Company and the Zhejiang Provincial Government (the “Provincial Government”), the Company may make an application to adjust the toll rates applicable to the Shanghai-Hangzhou-Ningbo Expressway once every three years. The first adjustment will take place in 1999. The Concession Agreement stipulates that the Company may submit an application to the Provincial Government for adjusting the toll rates in April 1999. The following preparation work is required of the Company prior to submitting its toll adjustment application: (1) Surveys The management of the Company has been compiling and reviewing information such as historical traffic volume data, travelling speed, toll rates, relevant travelled distances, road conditions and the composition of the vehicle types of the neighbouring national and provincial roads and the Shanghai- Hangzhou-Ningbo Expressway. (2) Analysis The data obtained through such surveys will then be used to construct different toll rate adjustment proposals. After conducting sensitive analysis on all the proposals, the merit of each proposal will be considered on the basis of “achieving maximum overall return” and its chances of being approved by the Provincial Government. 2 3 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (3) Internal consultation The management will then distribute the proposals to the Company’s local management offices and seek their views on the proposals. According to the Concession Agreement, the Provincial Government is required to issue its official reply to the toll adjustment proposal of the Company by 1st June 1999 and the new toll rates will take effect on or before 1st July 1999. Shangyu-Sanmen Road The Company entered into agreements with six parties including P r o v i n c i a l I n v e s t m e n t C o a n d H u a j i a n T r a n s p o r t a t i o n E c o n o m i c Development Center in October and November 1997 to establish Zhejiang Shangsan Expressway Co., Ltd. (“ Shangsan Co”, before 28th December 1998 known as Zhejiang Shangsan Highway Company Limited). Shangsan Co was established on 1st January 1998 and the Company has a 51 per cent. ownership interest in its capital. Shangsan Co is principally engaged in the investment in and construction, development and operation of the Shangyu-Sanmen Road which is approximately 143km long. The total investment in the Shangyu-Sanmen Road is approximately Rmb4,300 million. Details of this transaction were set out in the Company’s circular to its shareholders dated 14th November 1997. Phase I of the Shangyu-Sanmen Road, comprising four sections totalling 37.5km, is already operational. In 1998, these four sections recorded a total traffic volume of approximately 7.24 million vehicles and toll revenue of approximately Rmb91,003,000. 2 4 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis Construction of phase II of the Shangyu-Sanmen Road started in February 1998 and is progressing as scheduled at present. As at the end of 1998, the construction costs incurred amounted to approximately Rmb718 million, representing approximately 44.4 per cent of the total contract value. At this rate of progress, the entire Shangyu-Sanmen Road is expected to be completed and operational by the end of 2000. Investment Projects During the year, the Company made two major investments - the setting up of a joint venture company to engage in the operation of gas stations and sale of petroleum products and the purchase of a further stake in the Jiaxing Section. Petroleum Project The Company and Zhejiang Huajing Petroleum Company Limited, an independent third party, established Petroleum Co on 1st July 1998 with a registered capital of Rmb416 million. The Company has a 50 per cent ownership interest in Petroleum Co which is principally engaged in the investment in, construction and operation of gas stations along high- grade roads and other roads in Zhejiang Province and the sale of petroleum products. Since its establishment, Petroleum Co has been operating with satisfactory results. The number of gas stations under its management grew from 33 (at the time of its establishment) to 65 (as at 31st December 1998). Petroleum Co has plans to increase the number of gas stations under its management to 100 by the end of 1999. For the financial year ended 31st December 1998, the net profit after taxation from Petroleum Co attributable to the Group was approximately Rmb12,418,000. 2 5 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Increase in stake in the Jiaxing Section The Company entered into an agreements with each of Zhejiang Jiaxing Road and Bridge Construction and Development Company, Jiaxing S u b u r b Y i t o n g D e v e l o p m e n t C o m p a n y , J i a s h a n C o u n t y Y i n t o n g Development Company, Haining Hengtong Development Company and Tongxiang Huatong Company on 8th December 1998. Pursuant to the agreement, the Company agreed to purchase from them an aggregate of approximately 30.75 per cent interest in the capital of Jiaxing Co for a total consideration of approximately Rmb914,700,000. As a result, the Company’s interest in the capital of Jiaxing Co has increased from approximately 53.45 per cent to approximately 84.19 per cent. Details of this acquisition were set out in the Company’s circular to its shareholders dated 18th December 1998. Use of IPO Proceeds The net proceeds of the initial public offering of the H shares of the Company (the “IPO”) in 1997 amounted to approximately Rmb3,524 million. Details of the applications of such proceeds as at 31st December 1998 are set out below: • A p p r o x i m a t e l y R m b 5 3 4 . 4 5 m i l l i o n w a s a p p l i e d a s c a p i t a l contribution to Jiaxing Co for completing construction works of the Jiaxing Section. • Approximately Rmb5.34 million was used in relation to Contract No. 8. • Approximately Rmb637.48 million was used towards repayment of loans and payment of interest. • Approximately Rmb 29.4 million was used to purchase approximately 2.44 per cent of the registered capital of Jiaxing Co. • At the time of the Company’s listing, approximately Rmb900 million was reserved for the potential investment in the Huzhou Section of the Hangzhou-Nanjing Expressway. However, after looking into this project further, and considering that: (i) it was expected that the entire Hangzhou-Nanjing Expressway would not be completed and opened to traffic in the next few years; and (ii) the Jiaxing Section (and the entire Shanghai-Hangzhou-Ningbo Expressway) would be opened to traffic in the end of December 1998 and start generating income, the Company decided to use this portion of the IPO proceeds for the acquisition of an approximately 30.748 per cent interest in aggregate in the capital of Jiaxing Co (the “Jiaxing Acquisition”) instead. The total c o n s i d e r a t i o n i n r e l a t i o n t o t h e J i a x i n g A c q u i s i t i o n i s 2 6 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis approximately Rmb914,700,000, and is funded entirely by the IPO proceeds. Half of the acquisition consideration was paid at the end of December 1998, and the balance would have been paid by 31st March 1999. • A p p r o x i m a t e l y R m b 8 1 3 . 4 5 m i l l i o n w a s u s e d a s c a p i t a l contribution to Shangsan Co (The balance of the capital contribution in the sum of approximately Rmb410.55 million will be paid in 1999 and 2000). • Approximately Rmb38 million was used as capital contribution to Petroleum Co. As at 31st December 1998, the balance of the IPO proceeds of approximately Rmb1,008.55 million was deposited in commercial banks in the PRC and used as short term investments. The Year 2000 Problem The Company understands that, with respect to the computer systems that record years by the last two digits as opposed to four digits, at the turn of the century, the two digit representation “00” will be recognised as Year 1900. This is a global issue which will affect many institutions including those which are already Year 2000 compliant, because there may be knock-on effects from counterparts who fail to address the problem properly. To ensure that the Group’s computer systems involved in its operations are Year 2000 compliant, the Group’s management commenced a review of all the issues that may stem from the Year 2000 Problem in relation to the Group’s operations in late 1997, and assessed their potential impacts. The internal review was completed in June 1998. To ensure that the computer systems used in the key operations of the Group, namely toll collection and financial management, are Year 2000 compliant, the Group has obtained letters of confirmation in this regard from the suppliers of these computer systems. A new toll collection system for the Hangzhou-Ningbo Expressway has been installed in the second half of 1998. The supplier of this system has confirmed that this system is Year 2000 compliant. In addition, the Group has performed comprehensive testing on all of its computer systems so as to ensure that they are Year 2000 compliant. In the absence of unforeseen circumstances, the Directors are confident that the Group's computer systems will be tested Year 2000 compliant by mid 1999. 2 7 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The revenue of the Group is principally derived from toll collection, which are cash transactions, and the computation of the amount of toll payable is based on the distance travelled by each vehicle using the expressway irrespective of time. The Directors believe that, in the circumstances, the Group’s computer systems necessary for the purposes of its business operations are Year 2000 compliant. The principal counterparts involved in the Group’s operations which rely heavily on computer systems are the banks and financial institutions with which the Group places cash deposits or from which the Group borrows money. In view of the high awareness of the Year 2000 Problem amongst institutions in the banking and financial sectors, the Directors are confident that the Year 2000 Problem will be properly addressed by these institutions before the turn of the century. In addition, the finance department of the Group has closely monitored the Group’s dealings with banks and financial institutions and will continue to do so to ensure that the interests of the Group are not prejudiced as a result of any of these banks and financial institutions failing to be Year 2000 compliant. As a result of the effort of, and the measures taken by, the Group as aforesaid, the Directors consider the Group’s exposure to the Year 2000 Problem to be insignificant. The costs and expenses incurred in connection therewith are immaterial to the financial position, results of operations or cash flows of the Group. Effects of Recent Asian Economic Developments on the Company In 1998, the PRC economy performed better than many other economies in Asia. Although its momentum slowed down, the PRC economy was still able to maintain a relatively high rate of growth. According to the data received by the State Statistics Bureau, the PRC economy achieved a GDP growth rate of 7.8 per cent and Zhejiang Province achieved a GDP growth rate of 10.1 per cent, which is higher than the national average. Nevertheless, the Asian recession, as well as its far-reaching financial crisis, has adversely affected the economies and stock markets within the region as well as the performance of the Company’s stock price. However, the Company was still able to record substantial growth in both turnover and profit. The Company’s core asset, the Shanghai- Hangzhou-Ningbo Expressway, was fully opened to traffic in December 1998, and the Company is confident of its business prospects and growth. Therefore, the Company further increased its interest in the capital of Jiaxing Co by approximately 30 per cent before the opening of the Jiaxing Section. Prior to the acquisition of further ownership interest in the Jiaxing 2 8 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis Section, the Company appointed professional traffic consultants to conduct a new independent traffic forecast study for the Jiaxing Section (a summary of the forecast study was included in the Company’s circular to its shareholders dated 18th December 1998), and formulated the terms of the acquisition on the basis of new forecast findings. Outlook for 1999 1999 will be a challenging year for the Company. In the coming year, the Company will focus on: — providing safe, comfortable and convenient services to the travellers of its expressways; — completing the toll rate adjustment for the Shanghai-Hangzhou- Ningbo Expressway with a view to “achieving maximum overall return”; — increasing efficiency by attempting to introduce non-stop toll collection lanes at toll stations and stored value IC cards for toll collection; — introducing further marketing strategies to attract more vehicles using the Shanghai-Hangzhou-Ningbo Expressway; — exploring and developing the advantage of its expressways so as to increase their value; — t a k i n g a d v a n t a g e o f t h e g o v e r n m e n t’ s c u r r e n t p o l i c y o n encouraging infrastructure investment to search for high-quality projects in Zhejiang Province in order to increase shareholders’ returns. The Company will focus on investing in large road projects which can provide satisfactory returns. The Company will continue to maintain, or establish, contact with local governments and enterprises in order to collect information for internal feasibility studies; — increasing management and cost control; and — further strengthening communications with its shareholders and investors so as to increase the Company’s transparency. 2 9 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Financial Review The Company recorded a profit before taxation of Rmb525 million in 1998, representing an increase of approximately Rmb177 million or approximately 51 per cent over 1997 (before exceptional item). Profit attributable to shareholders grew by approximately 30 per cent to approximately Rmb385 million. Return on shareholders’ equity 1998 1997 Rmb’000 Rmb’000 Profit attributable to shareholders 385,258 296,332 Shareholders’ equity 8,120,037 8,200,068 Return on shareholders’ equity 4.74% 3.61% Such benchmark increased by 1.13 per cent from 3.61 per cent in 1997 to 4.74 per cent in 1998. Given that new road projects bring about a “ramp-up effect” where the traffic volume of the new roads have a substantial growth during the first few years at the commencement of its operation and then gradually become steady, it is expected that the return on shareholders’ equity will continue to improve in the next few years. Return on shareholders’ equity % 6 4 2 0 1997 1998 Earnings per share 1998 1997 Earnings per share Thousand Shares 5,000,000 4,000,000 4,343,115 4,343,115 3,000,000 4,343,115 3,812,785 1,000,000 2,000,000 Outstanding shares (Thousand shares) Weighted average (Thousand shares) Profit attributable to 0 1997 1998 Outstanding shares Weighted average shareholders (Rmb’000) 385,258 296,332 Basic earnings per share (Rmb cent) 8.87 7.77 Earnings per share grew Rmb1.1 cents to Rmb8.87 cents in 1998, representing an increase of 14 per cent compared with that of Rmb7.77 cents in 1997. The increase was due to the growth of 30 per cent in its profit attributable to shareholders. The Company did not issue any new shares during 1998. However, the issue of 1.434 billion H Shares by the Company in 1997 resulted in an increase of 13.9 per cent in its shares on weighted average. 3 0 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis Total assets Rmb’000 15,000,000 12,000,000 9,000,000 6,000,000 3,000,000 0 1997 1998 Assets Assets Current assets Accounts receivable and 1998 1997 Fluctuation Fluctuation Rmb’000 Rmb’000 Rmb’000 % prepayments Inventories Profits tax refundable 301,698 1,044,481 (742,783) 1,851 36,615 400 17,172 1,451 19,443 Bank balances and cash 1,288,614 2,896,611 (1,607,997) (71) 363 113 (56) Short term investments 994,274 21,991 972,283 4,421 Total current assets 2,623,052 3,980,655 (1,357,603) Fixed assets 8,673,002 5,571,783 3,101,219 Interest in an associated company 220,718 - 220,718 Construction in progress 1,189,187 1,643,231 (454,044) Deferred costs 4,928 Expressway operating rights 249,445 Long term investments 11,149 3,181 256,378 11,149 1,747 (6,933) 0 Total assets 12,971,481 11,466,377 1,505,104 (34) 56 - (28) 55 3 0 13 Total current assets dropped by approximately Rmb1.358 billion or approximately 34 per cent due to the investment in new projects. Short term investments mainly represented investment in the treasury bonds issued by the Ministry of Finance in which the Company invested using its surplus capitals, the yield of which is normally higher than the interest rate of banks’ deposits in the corresponding period. The Company and Shangsan Co held treasury bonds with face values of approximately Rmb707 million and Rmb257 million, respectively. In anticipation of the continuous growth in investment and construction, the amount of such treasury bonds held will be gradually reduced. Moreover, the opening of the entire Shanghai-Hangzhou Expressway, combined with the operation of the operational section of the Shangyu-Sanmen Road, resulted in an increase of 56 per cent in fixed assets and a decrease of 28 per cent in construction in progress. As of 31st December 1998, the total assets of the Group reached approximately Rmb13 billion, representing an increase of approximately 13 per cent compared with that of 1997. 3 1 Management Discussion and Analysis ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Total liabilities Rmb’000 4,000,000 3,000,000 2,000,000 1,000,000 0 1997 1998 Liabilities Liabilities 1998 1997 Fluctuation Fluctuation Rmb’000 Rmb’000 Rmb’000 % Current liabilities Accounts payable and accrued charges Short-term loans 1,336,606 520,191 371,517 528,701 965,089 (8,510) Total current liabilities 1,856,797 900,218 956,579 Long term liabilities Long term bank loans 0 125,000 (125,000) Other loans 1,746,583 1,570,335 176,248 Deferred taxation 2,282 3,042 (760) Total long term liabilities 1,748,865 1,698,377 50,488 Total liabilities 3,605,662 2,598,595 1,007,067 260 (2) 106 (100) 11 (25) 3 39 Due to the increase in amounts payable arising from the settlement of construction costs, the total liabilities grew from approximately Rmb2.6 billion at the financial year end of 1997 to approximately Rmb3.6 billion, representing an increase of 39 per cent. Other loans comprise the World Bank loans and the loans from the Chinese government. Debts in US dollars On 31st December 1998, the Group had debts in US dollars amounting to aproximately USD199 million, of which USD108 million, USD83 million and USD8 million were attributable to the debts of the Company, Jiaxing Co and Yuhang Co, respectively. All such debts in US dollars were the World Bank loans bearing floating interest rates. The portion of these loans attributable to the Company carried an interest rate equal to the Qualified Borrowing Costs determined by the World Bank plus 50 basis points (the latest interest rate being 7.54 per cent per annum), while those attibutable to Jiaxing Co and Yuhang Co carried an interest rate equal to LIBOR plus 50 basis points (the latest interest rate being 6.54 per cent per annum). The Group’s deposits amounted to USD64 million in the late 1998, which were used to reduce the exchange risk exposure. 3 2 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management Discussion and Analysis Net-debt-to-equity ratio Net-debt-to-Equity Ratio (Note 1) Net-debt-to-Equity Ratio (Note 2) (exclude Short term investments) 1998 Cash 12% 1997 Cash Cash Note: 1. Net debt is defined as all loans net of bank balances, cash and short term investments. 2. Net debt is defined as all loans net of bank balances and cash. Capital Structure The capital structure of the Group is summarised as below: 1998 1997 Average interest Rmb’000 percentage rate Rmb’000 percentage Shareholders’ equity Fixed rate liabilities Floating rate liabilities Total 8,120,037 615,043 1,651,731 10,386,811 78.2% 5.9% 15.9% 100% — 6% 8,200,068 756,608 7.3% 1,417,833 — 10,424,104 78.7% 7.2% 14.1% 100% Average interest rate — 7% 6.5% — Shareholders’ equity decreased by approximately Rmb80 million in 1998. Nevertheless, the shareholders’ equity as a percentage of total capital remained basically unchanged as against 1997. The decrease in shareholders’ equity was mainly due to the Company’s acquisition of the interest in Jiaxing Co at a premium. The average interest rate of fixed rate liabilities declined by 1 per cent, mainly because of the easing of interest rates in domestic market and provision of low interest rate loans by the Chinese government for road projects. The average interest rate of floating rate liabilities was up by approximately 0.8 per cent as against a year earlier primarily due to an increase in the Qualified Borrowing Costs of some of the World Bank loans granted to the Group. Capital commitments The capital commitments of the Company and the Group as at 31st December 1998 are set out in note 27 to the financial statemants. 3 3 Report of the Directors ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 3 4 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Report of the Directors The Directors herein present their report and the results of the Group for the year ended 31st December 1998. Principal activities The Group’s principal activities have not changed during the year and consisted of the investment in the construction, operation and management of high grade roads, as well as the development and operation of certain ancillary services, such as automobile servicing and fuel facilities (“Expressway Operations”). Segmented information During the year, the entire turnover and contribution to the operating profit of the Group was derived from toll income earned from Expressway Operations in Zhejiang Province, the PRC. Accordingly, a further analysis of the turnover and contribution to operating profit by principal activity and geographical area is not presented. Results and dividends The Group’s profit for the year ended 31st December 1998 and the state of affairs of the Company and the Group at that date are set out in the financial statements on pages 47 to 77. The Directors recommend the payment of a dividend of Rmb0.035 (approximately HK$0.033) per share in respect of the year to shareholders whose names appear on the register of members on 6th April 1999. This recommendation has been incorporated in the financial statements. 3 5 Report of the Directors ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Summary financial information The only published Group consolidated profit and loss account and consolidated balance sheet are as set out on pages 47 and 51 of the financial statements. The following is a summary of the pro forma consolidated results of the Group prepared on the basis set out in the notes below: Results Turnover Operating Profit before Exceptional Item Exceptional Item Operating Profit Share of Profit of Year ended 31st December 1998 1997 1996 1995 1994 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 623,614 439,789 273,843 59,105 49,331 505,609 346,871 159,964 41,965 36,351 — 25,355 — — — 505,609 372,226 159,964 41,965 36,351 an Associated Company 18,982 — — — — Profit before Taxation 524,591 372,226 159,964 41,965 36,351 Taxation (70,419) (58,639) (60,296) (16,378) (13,915) Profit before Minority Interests Minority Interests Net Profit Attributable to Shareholders 454,172 313,587 99,668 25,587 22,436 (68,914) (17,255) 186 — — 385,258 296,332 99,854 25,587 22,436 Earnings per Share 8.87 cents 7.77 cents 3.43 cents Notes: 1. The pro forma consolidated results of the Group for the four years ended 31st December 1997 have been extracted from the Company’s 1997 annual report dated 24th March 1998, while those of the year ended 31st December 1998 were prepared based on the consolidated profit and loss account as set out on page 47 of the financial statements. 2. The 1998 earnings per share is based on the net profit attributable to shareholders for the year ended 31st December 1998 of Rmb385,258,000 (1997:Rmb296,332,000) and 4,343,114,500 shares (1997: the weighted average of 3,812,785,000 shares). 3 6 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Report of the Directors Major customers and suppliers The five largest customers and suppliers contributed to less than 30% of the total toll revenue and purchases, respectively, of the Group during the year. Accordingly, a corresponding analysis of major customers and suppliers is not presented. Connected transactions Details of the connected transactions (“Connected Transactions”) of the Group carried out in the year which the Stock Exchange has granted a waiver from complaince with Chapter 14 of the Listing Rules pursuant to its letter of 14th May 1997, are disclosed in note 30 to the financial statements. Another connected transaction of the Group carried out in 1998 was the Jiaxing Acquisition details of which are set out under the heading “Increase in stake in the Jiaxing Section” in the “Business Review” section of “Management Discussion and Analysis” on page 26 of this report. The press announcement of the Company dated 8th December 1998 and the circular to the shareholders of the Company dated 18th December 1998 contain further details of the Jiaxing Acquisition. In addition, in the opinion of the independent non-executive Directors, the terms of the Jiaxing Acquisition are fair and reasonable so far as the shareholders of the Company are concerned. The executive Directors and (as required by the Stock Exchange in its letter of 14th May 1999) the independent non-executive Directors have reviewed the Connected Transactions and confirmed that, during the period from 1st January 1998 to 31st December 1998, such transactions were:- (i) carried out in accordance with the terms of the agreements relating to such transactions by, entered into in the usual and ordinary course of business of, and entered into on normal commercial terms by, the Company or its subsidiaries (as relevant); and (ii) fair and reasonable so far as the shareholders of the Company are concerned. Ernst & Young, the auditors of the Company, (as required by the Stock Exchange in its letter of 14th May 1997) have also reviewed the said transactions and have confirmed that the board of Directors of the Company has given its approval of these transactions and they were carried out by the Company or its subsidiaries (as relevant) in accordance with the terms of the agreements relating to such transactions during the said period. 3 7 Report of the Directors ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Fixed assets Details of movements in the fixed assets of the Company and the Group are set out in note 8 to the financial statements. Capital commitments Details of the capital commitments of the Company and the Group as at 31st December 1998 are set out in note 27 to the financial statements. Subsidiaries Particulars of the Company’s subsidiaries are set out in note 9 to the financial statements. Interest capitalization During the year, interest capitalized as part of the costs of construction in progress and fixed assets amounted to approximately Rmb78,964,000. Reserves Details of movements in the reserves of the Company and the Group during the year are set out in note 25 to the financial statements. Substantial shareholder As at 31st December 1998, the following shareholder held 10% or more of the share capital of the Company according to the register of interests in shares required to be kept by the Company pursuant to Section 16(1) of the Securities (Disclosure of Interest) Ordinance (“SDI Ordinance”): Zhejiang Provincial High Class Highway Investment Company Limited Number of shares Percentage 2,909,260,000 (domestic shares) 66.99% Purchase, sale or redemption of the Company’s listed securities Neither the Company, nor any of its subsidiaries purchased, redeemed or sold any of the Company’s listed securities during the year. Bank loans and other loans Particulars of the bank loans and other loans of the Company and the Group are set out in notes 19 and 20 to the financial statements. Trust deposits As at 31st December 1998, the Company did not have any trust deposits with any financial institutions in the PRC nor any time deposits which could not be collected upon maturity. All of the Company’s deposits have been placed with commercial banks in the PRC and Hong Kong and the Company has not encountered any difficulty in withdrawal. 3 8 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Report of the Directors Use of IPO proceeds from the issue of H Shares T h e n e t I P O p r o c e e d s o f t h e C o m p a n y i n 1 9 9 7 a m o u n t e d t o approximately Rmb3,524 million. Details of the applications of such proceeds as at 31st December 1998 are set out below: • A p p r o x i m a t e l y R m b 5 3 4 . 4 5 m i l l i o n w a s a p p l i e d a s c a p i t a l contribution to Jiaxing Co for completing construction works of the Jiaxing Section • Approximately Rmb5.34 million was used in relation to Contract No. 8 • Approximately Rmb637.48 million was used towards repayment of loans and payment of interest • A p p r o x i m a t e l y R m b 2 9 . 4 m i l l i o n w a s u s e d t o p u r c h a s e approximately 2.44 per cent of the registered capital of Jiaxing Co • At the time of the Company’s listing, approximately Rmb900 million was reserved for the potential investment in the Huzhou Section of the Hangzhou-Nanjing Expressway. However, after looking into this project further, and considering that: (i) it was expected that the entire Hangzhou-Nanjing Expressway would not be completed and opened to traffic in the next few years; and (ii) the Jiaxing Section (and the entire Shanghai-Hangzhou- Ningbo Expressway) would be opened to traffic in the end of December 1998 and start generating income, the Company decided to use this portion of the IPO proceeds for the Jiaxing Acquisition instead. The total consideration in relation to the Jiaxing Acquisition is approximately Rmb914,700,000, and is funded entirely by the IPO proceeds. Half of the acquisition consideration was paid at the end of December 1998, and the balance will be paid by 31st March 1999 • A p p r o x i m a t e l y R m b 8 1 3 . 4 5 m i l l i o n w a s u s e d a s c a p i t a l contribution to Shangsan Co (The balance of the capital contribution in the sum of approximately Rmb410.55 million will be paid in 1999 and 2000) • Approximately Rmb38 million was used as capital contribution to Petroleum Co As at 31st December 1998, the balance of the IPO proceeds of approximately Rmb1,008.55 million was deposited in commercial banks in the PRC and Hong Kong and used as short term investments. 3 9 Report of the Directors ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Taxation Details of taxation are set out in note 4 to the financial statements. The Company is not aware of any government policy changes such that the preferential tax treatment set out in the above mentioned note will cease to be available to the Company and three of its subsidiaries namely, Jiaxing Co, Yuhang Co and Shangsan Co. Directors The Directors during the year were: Executive Directors Mr. Geng Xiaoping Mr. Ying Shudeng Mr. Xu Yikuang Mr. Fang Yunti Mr. Zhang Jingzhong Ms. Zhang Chunming Mr. Xuan Daoguang Independent Non-executive Directors Dr. Hu Hung Lick, Henry Mr. Tung Chee Chen All the Directors were appointed on 1st March 1997. In accordance with the Company’s articles of association, all the Directors continue to be in office. Directors’ and Supervisors’ service contracts Each of the Directors and supervisors (“Supervisors”) of the Company has entered into a service agreement with the Company with effect from 1st March 1997, for an initial term of three years. Save as disclosed above, none of the Directors and Supervisors has entered into any service contract with the Company which is not determinable by the Company within one year without payment of compensation (other than statutory compensation). Directors’ and Supervisors’ interests in contracts None of the Directors or Supervisors had any material interest whether directly or indirectly in any contract of significance to which the Company or any of its subsidiaries or fellow subsidiaries or its holding company was a party, at the end of the year or at any time during the year. Directors’ and Supervisors’ interests in shares At 31st December 1998, none of the Directors, Supervisors or their associates had any personal, family, corporate or other interests in any 4 0 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Report of the Directors equity or debt securities of the Company or any associated corporation (as defined in the SDI Ordinance) as recorded in the register required to be kept under section 29 of the SDI Ordinance or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transaction by Directors of Listed Companies. Directors’ and Supervisors’ rights to subscribe for shares or debentures At no time during the year was the Company or any of its subsidiaries, fellow subsidiaries or its holding company a party to any arrangement enabling any Directors or Supervisors or the spouses or children under the age of 18 of any such Directors or Supervisors to acquire benefits by means of the acquisition of shares in, or debentures of the Company or any other body corporate. No rights to subscribe for shares in or debentures of the Company have been granted by the Company to, nor have any such rights been exercised by, any person during the year and up to the date of this report. Directors’ and Supervisors’ remuneration Fees Basic salaries, housing, other allowances and benefits in kind Pension scheme contributions Bonuses paid and payable Rmb’000 — 1,166 — — 1,166 None of the Directors or Supervisors received remuneration in excess of HK$1 million. The amount disclosed above included remuneration of HK$100,000 paid to each of the independent non-executive Directors. There was no arrangement under which any of the Directors or Supervisors waived or agreed to waive any remuneration. Highest paid individuals The five highest paid individuals of the Company were all Directors. The aggregate amount paid to them for the year was approximately Rmb708,755. None of them received remuneration in excess of HK$1 million. Retirement scheme As required by the State regulations of the PRC, the Group participates in a defined contribution retirement scheme. All employees are entitled to an annual pension equal to a fixed proportion of the average basic salary amount within the geographical area of their last employment at 4 1 Report of the Directors ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ their retirement date. The Group is required to make contributions to registered insurance companies at rates ranging from 20% to 21% of the average basic salaries of the previous year within the geographical area where the employees are under employment with the Group. The Group has no obligation for the payment of pension benefits beyond such annual contributions to the registered insurance companies. When an employee leaves the scheme, the Company is not entitled to forfeit any amount of contribution it made. Hence no forfeited contribution was used by the Company to reduce the level of its contributions during the year. Pre-emptive rights There is no provision for pre-emptive rights in the Company’s articles of association or the laws of the PRC which would require the Company to offer new shares on a pro rata basis to existing shareholders. Accommodation benefits for employees According to the relevant rules and regulations in the PRC, the Group and its employees are required to contribute to an accommodation fund, a certain percentage of the salaries and wages of its employees. There are no further obligations beyond the contribution to the accommodation fund. During the year, in addition to the contribution made to the housing fund as required by relevant rules and regulations in the PRC, the Company purchased and fully paid for Rmb19 million worth of apartments. The Company planned to sell those apartments to eligible staff to be determined in 1999 at a discount of approximately 80% when the constructions of the apartments are completed. Accordingly, the Company made provision for the eventual estimated loss on their disposal of Rmb15.3 million in the year. Save as disclosed above, the Company did not own any staff quarters and did not dispose of any staff quarters during the year. Charitable contributions During the year, the Group made charitable contributions totalling Rmb1 million. 4 2 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Report of the Directors Year 2000 compliance Details of the Year 2000 compliance are set out under the heading “The Year 2000 Problem” in the “Business Review” section of the “Management Discussion and Analysis” on page 27 of this report. Compliance with the Code of Best Practice In the opinion of the Directors, the Company has complied with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities issued on The Stock Exchange of Hong Kong Limited. Auditors Ernst & Young will retire and a resolution for their reappointment as international auditors of the Company will be proposed at the forthcoming annual general meeting. On behalf of the Board Geng Xiaoping Chairman and General Manager Hangzhou, Zhejiang Province, the PRC 25th February 1999 4 3 Report of the Supervisory Committee ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Dear Shareholders, The Supervisory Committee, which comprises three supervisors, was established upon the incorporation of the Company in accordance with the Company Law of the People’s Republic of China and the articles of association of the Company. The major tasks of the Supervisory Committee are to carry out the supervisory duties according to law and protect the lawful rights and interests of the shareholders and the Company. The scope of its task includes : 1. supervising the Directors, general manager and other senior management staff. The Supervisory Committee supervises the acts of the Directors, general manager and other senior management staff in business operations and daily affairs mainly by attending board meetings and participating in major events of the Company; and 2. examining the operation and financial conditions of the Company. The Supervisory Committee is of the opinion that the Directors, general manager and other senior management staff of the Company have implemented all the resolutions passed in general meetings in good faith, and they have been fully committed to their jobs and have conducted the business according to the applicable laws. The Supervisory Committee is not aware of any act of the Company or any members of the board which violates any law, regulation or provisions of the articles of association of the Company. The Company has not engaged in any major litigation and there has been no dispute between any representative of the Supervisory Committee and any of the Directors and no litigation has been instituted against any of the Directors. The Supervisory Committee has examined the financial reports for the year 1998 prepared by the domestic and the international accountants which the Directors intend to deliver to the shareholders. In our opinion, these reports have been prepared in compliance with the relevant laws, regulations and provisions of the articles of association of the Company and give a true and fair view of the operating results and asset position of the Company. On behalf of the Supervisory Committee Xia Linzhang Chairman of the Supervisory Committee Hangzhou, Zhejiang Province, the PRC 25th February 1999 4 4 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Report of the International Auditors 4 5 Report of the International Auditors ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ To the shareholders Zhejiang Expressway Co., Ltd. (Established in the People’s Republic of China with limited liability) We have audited the financial statements on pages 47 to 77 which have been prepared in accordance with accounting principles generally accepted in Hong Kong. Respective responsibilities of directors and auditors The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. Basis of opinion We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. Opinion In our opinion the financial statements give a true and fair view, in all material respects, of the state of affairs of the Company and the Group as at 31st December 1998 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance. Ernst & Young Certified Public Accountants Hong Kong 25th February 1999 4 6 Consolidated Profit and Loss Account For the year ended 31st December 1998 TURNOVER OPERATING PROFIT BEFORE EXCEPTIONAL ITEM Exceptional item OPERATING PROFIT Share of profit of an associated company PROFIT BEFORE TAXATION Taxation PROFIT BEFORE MINORITY INTERESTS Minority interests NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS RETAINED PROFITS AT BEGINNING OF YEAR/PERIOD Transferred to reserves Dividends RETAINED PROFITS AT END OF YEAR/PERIOD Notes 2 3 4 5 25 6 Period from 1st March 1997 (date of establishment) to 31st December 1997 Rmb’000 376,785 329,044 25,355 354,399 — 354,399 (53,085) 301,314 1998 Rmb’000 623,614 505,609 — 505,609 18,982 524,591 (70,419) 454,172 (68,914) (15,986) 385,258 285,328 170,585 — (75,656) (45,253) (152,009) (69,490) 328,178 170,585 EARNINGS PER SHARE 7 8.87 cents 7.15 cents The notes on pages 52 to 77 form an integral part of the financial statements. 47 Consolidated Balance Sheet 31st December 1998 FIXED ASSETS INTEREST IN AN ASSOCIATED COMPANY CONSTRUCTION IN PROGRESS DEFERRED COSTS EXPRESSWAY OPERATING RIGHTS LONG TERM INVESTMENTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES LONG TERM BANK LOANS OTHER LONG TERM LOANS DEFERRED TAXATION MINORITY INTERESTS SHARE CAPITAL RESERVES Notes 8 10 11 12 13 14 15 19 20 23 24 25 1998 Rmb’000 8,673,002 220,718 1,189,187 4,928 249,445 11,149 10,348,429 2,623,052 1997 Rmb’000 5,571,783 — 1,643,231 3,181 256,378 11,149 7,485,722 3,980,655 1,856,797 900,218 766,255 3,080,437 11,114,684 10,566,159 — 1,746,583 2,282 1,245,782 8,120,037 4,343,115 3,776,922 8,120,037 125,000 1,570,335 3,042 667,714 8,200,068 4,343,115 3,856,953 8,200,068 Geng Xiaoping Director Ying Shudeng Director The notes on pages 52 to 77 form an integral part of the financial statements. 48 Consolidated Cash Flow Statement For the year ended 31st December 1998 Period from 1st March 1997 (date of establishment) to 31st December 1997 Rmb’000 Notes 1998 Rmb’000 26(a) 610,682 445,150 NET CASH INFLOW FROM OPERATING ACTIVITIES RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received Interest paid Dividends paid Dividends paid to minority interests Net cash inflow/(outflow) from returns on investments and servicing of finance TAXATION Taxes paid INVESTING ACTIVITIES Additions of fixed assets Decrease/(increase) in time deposits Additions of construction in progress Prepayment for the Shangyu-Sanmen Road Increase in long term investments Increase in deferred costs Increase in short term investments Acquisition of a subsidiary 26(c) Acquisition of an associated company Acquisition of additional interest in 62,941 (176,845) (69,490) (11,058) 144,761 (105,455) — (6,145) (194,452) 33,161 (61,881) (35,746) (566,994) 1,045,423 (928,607) — — (2,584) (972,283) 640,782 (208,000) (8,390) (2,049,865) (624,348) (637,500) (4,849) — (21,991) — — a subsidiary 26(d) (457,333) (29,362) Net cash outflow from investing activities (1,449,596) (3,376,305) NET CASH OUTFLOW BEFORE FINANCING ACTIVITIES (1,095,247) (2,933,740) The notes on pages 52 to 77 form an integral part of the financial statements. 49 Consolidated Cash Flow Statement For the year ended 31st December 1998 Period from 1st March 1997 (date of establishment) to 31st December 1997 Rmb’000 Notes 1998 Rmb’000 (1,095,247) (2,933,740) — — 410,000 413,668 (780,930) 489,935 3,655,382 (154,893) — 660,901 (621,015) 135,069 26(b) 26(b) 26(b) 26(b) NET CASH OUTFLOW BEFORE FINANCING ACTIVITIES FINANCING ACTIVITIES Issue of share capital Share issue expenses New bank loans New other loans Repayment of loans Minority interests Net cash inflow from financing activities 532,673 3,675,444 INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year/period CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits (562,574) 741,704 846,746 105,042 284,172 846,746 232,883 51,289 284,172 840,746 6,000 846,746 The notes on pages 52 to 77 form an integral part of the financial statements. 50 Balance Sheet 31st December 1998 FIXED ASSETS INTERESTS IN SUBSIDIARIES INTEREST IN AN ASSOCIATED COMPANY CONSTRUCTION IN PROGRESS EXPRESSWAY OPERATING RIGHTS CURRENT ASSETS CURRENT LIABILITIES NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES LONG TERM BANK LOANS OTHER LONG TERM LOANS DEFERRED TAXATION SHARE CAPITAL RESERVES Notes 8 9 10 11 12 14 15 19 20 23 24 25 1998 Rmb’000 5,094,481 2,881,518 208,000 107,258 196,445 8,487,702 1,961,980 1997 Rmb’000 5,075,424 777,299 — 10,633 203,378 6,066,734 3,627,944 1,291,394 530,220 670,586 3,097,724 9,158,288 9,164,458 — 799,599 2,282 8,356,407 4,343,115 4,013,292 8,356,407 125,000 842,635 3,042 8,193,781 4,343,115 3,850,666 8,193,781 Geng Xiaoping Director Ying Shudeng Director The notes on pages 52 to 77 form an integral part of the financial statements. 51 Notes to Financial Statements 31st December 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of accounting The financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice (“HKSSAP”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. This basis of accounting differs from that used in the preparation of the statutory accounts, which are prepared in accordance with accounting principles and financial regulations applicable in the PRC. The primary differences are set out in note 28. Basis of consolidation The consolidated financial statements include the audited financial statements of the Company and its subsidiaries for the year ended 31st December 1998. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances are eliminated on consolidation. Goodwill Goodwill arising on consolidation of subsidiaries and on acquisition of associated companies represents the excess purchase consideration paid over the fair values ascribed to the net underlying assets acquired and is written off to reserves in the year of acquisition. On disposal of subsidiaries or associated companies, the relevant portion of attributable goodwill previously eliminated against reserves is written back and included in the calculation of the gain or loss on disposal. Subsidiaries A subsidiary is a company in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its board of directors. Interests in subsidiaries are stated at cost unless, in the opinion of the directors, there have been permanent diminutions in values, when they are written down to values determined by the directors. Associated company An associated company is a company, not being a subsidiary, in which the Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence. The Group’s share of the post-acquisition results and reserves of associated companies is included in the consolidated profit and loss account and consolidated reserves, respectively. The Group’s investments in associated companies are stated in the consolidated balance sheet at the Group’s share of net assets under the equity method of accounting less any provisions for permanent diminutions in values deemed necessary by the directors. 52 Notes to Financial Statements 31st December 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Associated company (continued) The results of associated companies are included in the Company’s profit and loss account to the extent of dividends received. The Company’s investments in associated companies are stated at cost less any provisions for diminutions in values deemed necessary by the directors. Fixed assets and depreciation Fixed assets are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price, cost transferred from construction in progress and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditures incurred after the tangible fixed assets have been put into operation, such as repairs and maintenance and overhaul costs, are normally charged to the profit and loss account in the period in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the tangible fixed assets, the expenditure is capitalized as an additional cost of the tangible fixed assets. Depreciation of expressways and bridges is provided by using the sinking fund method whereby the aggregate annual depreciation amounts, compounded at an average rate of 7% per annum, up to the expiry of the underlying 30 year expressway concession period will equal the total cost of the expressways and bridges. Amortization of land is provided for on a straight-line basis to write off the cost of the land use rights over the underlying 30 year expressway concession period. Depreciation of fixed assets, other than expressways, bridges and land, is provided for on a straight-line basis to write off the cost of the assets, less their estimated residual values, being 3% of the cost, over their estimated useful lives. The principal annual rates used for this purpose are as follows: Toll stations and ancillary facilities Communications and signalling equipment Motor vehicles Machinery and equipment Estimated useful life 30 years 10 years 8 years 5-8 years Annual depreciation rate 3.2% 9.7% 12% 12-19.4% The gain or loss on disposal or retirement of a fixed asset recognized in the profit and loss account is the difference between the net sales proceeds and the carrying amount of the relevant asset. 53 Notes to Financial Statements 31st December 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Construction in progress Construction in progress represents costs incurred in the construction of expressways and bridges. Cost comprises direct costs of construction as well as interest charges and certain exchange differences related to funds borrowed during the periods of construction, installation and testing. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use. Expressway operating rights Expressway operating rights represent the rights to operate the expressways and are stated at cost less accumulated amortization. Amortization is provided on a straight-line basis over the periods of expressway operating rights granted to the Company and its subsidiaries. Revenue recognition Revenue is recognized when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: (a) toll revenue, net of any applicable revenue taxes, when received; (b) on the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; (c) on the rendering of services, based on the stage of completion of the transaction, provided that this and the costs incurred as well as the estimated costs to completion can be measured reliably. The stage of completion of a transaction associated with the rendering of services is established by reference to the costs incurred to date as compared to the total costs to be incurred under the transaction; (d) rental income, on a time proportion basis over the lease term; and (e) interest, on a time proportion basis, taking into account the principal outstanding and the effective interest rate applicable. Taxation PRC income tax is provided at rates applicable to enterprises in the PRC on income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, based on existing PRC income tax legislation, practices and interpretations thereof. 54 Notes to Financial Statements 31st December 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Taxation (continued) Deferred taxation is provided, using the liability method, on all significant timing differences to the extent it is probable that the liability will crystallize in the foreseeable future. A deferred tax asset is not recognized until its realization is assured beyond reasonable doubt. Foreign currencies The financial records of the Company and its subsidiaries are maintained and the financial statements are stated in Renminbi (“Rmb”). Foreign currency transactions are recorded at the applicable rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange ruling at that date. Exchange differences are dealt with in the profit and loss account unless such exchange differences relate to funds borrowed specifically for the financing of construction of expressways and bridges, in which case they are capitalized to the extent that they can be regarded as an adjustment to interest costs. Capitalization of borrowing costs Borrowing costs that are directly attributable to the construction of expressways, tunnels and bridges are capitalized as part of the cost of such assets when it is probable that they will result in future economic benefits to the Group and the costs can be measured reliably. Other borrowing costs are recognized as an expense in the period in which they are incurred. The amount of borrowing costs capitalized is determined by reference to the actual borrowing costs incurred on funds borrowed specifically for the construction of expressways, tunnels and bridges during the period less any investment income arising from the temporary investment of those borrowings. Capitalization of borrowing costs on funds borrowed specifically for the construction of completed expressway sections ceases when the construction of such expressway sections is completed and the section completed is capable of commencing toll operations. Leased assets Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals applicable to such operating leases are charged to the profit and loss account on a straight-line basis over the lease terms. 55 Notes to Financial Statements 31st December 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investments Investments held on a long term basis are stated at cost less provisions for any permanent diminutions in values on an individual investment basis. Short term investments are stated at the lower of cost and market value. Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined on the weighted average basis. Net realizable value is based on estimated selling prices less any further costs expected to be incurred to completion and disposal. Deferred costs Deferred costs primarily include deferred pre-operating expenses and are amortized over 5 years starting from the date of commencement of operations. They are stated at cost less accumulated amortization. Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subjected to common control or common significant influence. Cash equivalents Cash equivalents represent short term highly liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when acquired, less advances from banks repayable within three months from the date of the advance. 56 Notes to Financial Statements 31st December 1998 2. TURNOVER Turnover represents toll income from operation of expressways, net of relevant revenue taxes. Period from 1st March 1997 (date of establishment) to 31st December 1997 Rmb’000 398,468 (21,683) 376,785 1998 Rmb’000 658,505 (34,891) 623,614 Toll income Less: Revenue taxes The Company and its subsidiaries are subject to the following types of revenue taxes: — Business tax (“BT”), levied at 5% of toll income; — City Development Tax, levied at 1%-7% of BT; and — Education Supplementary Tax, levied at 3.5%-4% of BT. 57 Notes to Financial Statements 31st December 1998 3. OPERATING PROFIT BEFORE EXCEPTIONAL ITEM The Group’s operating profit before exceptional item is arrived at after charging/(crediting): Period from 1st March 1997 (date of establishment) to 31st December 1997 Rmb’000 58,549 1998 Rmb’000 85,524 2,839 1,746 16,115 160,730 (82,104) 94,741 (74,941) 3,140 (71,801) 22,940 836 6,933 15,300 (127,494) 2,681 — 1,166 1,366 2,964 (2,659) 602 (2,057) 29,325 130,184 (69,237) 90,272 (119,406) 13,623 (105,783) (15,511) 745 4,622 — (52,347) — — 951 1,006 988 (2,620) 3,021 401 Depreciation charges Operating lease rentals: Land and buildings Interest expense on: Bank loans Other loans Less: Amounts capitalized in construction in progress and fixed assets Interest income Less: Amounts capitalized in fixed assets Interest expense/(income), net Amortization of deferred costs Amortization of expressway operating rights Provision for anticipated deficit arising on the disposal of staff quarters Income from short term investments Loss on disposal of fixed assets Directors’ remuneration: Fees Other emoluments Auditors’ remuneration Pension cost Exchange differences incurred, net Less: Amounts capitalized in construction in progress and fixed assets Exchange differences, net 58 Notes to Financial Statements 31st December 1998 4. TAXATION No Hong Kong profits tax has been provided as the Group had no taxable profits in Hong Kong during the year. The Group was subject to the Enterprise Income Tax (the “EIT”) levied at a rate of 33% of taxable income based on income for financial reporting purposes prepared in accordance with the laws and regulations in the PRC. Pursuant to a series of directives issued by Zhejiang Provincial People’s Government, Municipal Governments of Yuhang and Jiaxing in 1997, the Company, Shangsan Co, Yuhang Co and Jiaxing Co are entitled to respective refund from Zhejiang Finance Bureau or Municipal Finance Bureaus of Yuhang and Jiaxing, of an amount equal to 18% of their taxable income in respect of the EIT paid to the taxation bureaus, respectively. However, there is no assurance that the Company, Shangsan Co, Yuhang Co and Jiaxing Co will continue to enjoy such preferential tax treatment in the future. Period from 1st March 1997 (date of establishment) to 31st December 1997 Rmb’000 110,095 (60,052) 50,043 3,042 — 53,085 1998 Rmb’000 142,703 (77,788) 64,915 (760) 6,264 70,419 Group: Taxation charged Taxation refundable Deferred - note 23 Associated company 5. NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS The net profit attributable to shareholders dealt with in the financial statements of the Company is Rmb314,635,000. 59 Notes to Financial Statements 31st December 1998 6. DIVIDENDS Company Period from 1st March 1997 (date of establishment) to 31st December 1997 Rmb’000 1998 Rmb’000 Proposed final dividend-Rmb0.035 (approximately HK$0.033) per share (1997: Rmb0.016 (approximately HK$0.015) per share) 152,009 69,490 7. EARNINGS PER SHARE The calculation of earnings per share is based on the net profit attributable to shareholders for the year of Rmb385,258,000 (1997: Rmb285,328,000) and the 4,343,114,500 shares (1997: the weighted average of 3,986,994,000 shares) in issue during the year. 60 Notes to Financial Statements 31st December 1998 8. FIXED ASSETS Group Cost: At 1st January 1998 Additions Arising from acquisition Express- ways and bridges Rmb’000 Toll stations and ancillary facilities Rmb’000 Communi- cations and signalling equipment Rmb’000 Land Rmb’000 Motor vehicles Rmb’000 Machinery and equipment Rmb’000 Total Rmb’000 527,628 — 4,949,285 79,663 70,364 3,887 2,304 6,181 17,019 10,101 63,732 1,850 5,630,332 101,682 of a subsidiary - note 26(c) — 531,604 13,121 Transferred from construction in progress - note 11 Disposals — 2,538,187 — — — (3,489) — — — 4,328 502 549,555 — — — (146) 2,538,187 (3,635) At 31st December 1998 527,628 8,098,739 83,883 8,485 31,448 65,938 8,816,121 Accumulated depreciation: At 1st January 1998 Provided during the 6,326 43,406 1,833 year Written off for disposal 11,938 — 60,117 — At 31st December 1998 18,264 103,523 Net book value: At 31st December 1998 509,364 7,995,216 At 31st December 1997 521,302 4,905,879 5,545 (949) 6,429 77,454 68,531 Company Cost: At 1st January 1998 Additions Disposals 350,384 — — 4,632,953 79,663 — 65,556 3,591 (3,489) At 31st December 1998 350,384 4,712,616 65,658 Accumulated depreciation: At 1st January 1998 Provided during the 6,326 40,660 1,759 year Written off for disposal 11,668 — At 31st December 1998 17,994 51,638 — 92,298 Net book value: At 31st December 1998 332,390 4,620,318 At 31st December 1997 344,058 4,592,293 2,100 (949) 2,910 62,748 63,797 All fixed assets are located in the PRC. 181 220 — 401 8,084 2,123 2,304 6,168 — 8,472 181 220 — 401 8,071 2,123 1,500 5,303 58,549 2,923 — 4,423 27,025 15,519 16,561 4,093 — 20,654 4,781 (5) 85,524 (954) 10,079 143,119 55,859 8,673,002 58,429 5,571,783 63,287 1,068 — 5,131,045 94,583 (3,489) 64,355 5,222,139 1,500 5,195 55,621 2,644 — 4,144 16,510 15,061 4,716 — 9,911 72,986 (949) 127,658 54,444 5,094,481 58,092 5,075,424 61 Notes to Financial Statements 31st December 1998 9. INTERESTS IN SUBSIDIARIES Unlisted shares, at cost Due from subsidiaries Company 1998 Rmb’000 2,861,875 19,643 2,881,518 1997 Rmb’000 758,943 18,356 777,299 Particulars of the Company’s subsidiaries, all of which are directly held, are as follows: Date and Percentage of equity attributable Name of subsidiaries place of Registered to the registration capital Company Principal activities Zhejiang Yuhang Note 1 75,222,997 51% Construction and Expressway Company Limited (“Yuhang Co”) management of the Yuhang Section of the Shanghai - Hangzhou Expressway Zhejiang Jiaxing Note 2 1,859,200,000 84.19% Construction and Expressway Company Limited (“Jiaxing Co”) management of the Jiaxing Section of the Shanghai- Hangzhou Expressway Zhejiang Gaotong Note 3 5,000,000 80% Manufacturing, Stone Development Company Limited (“Gaotong”) designing and selling of stone and quarry materials 62 Notes to Financial Statements 31st December 1998 9. INTERESTS IN SUBSIDIARIES (continued) Date and Percentage of equity attributable Name of subsidiaries place of Registered to the registration capital Company Principal activities Zhejiang Shangsan Note 4 2,400,000,000 51% Investing, construction and operating the Shangyu-Sanmen Road Note 5 1,000,000 70% Advertising Expressway Company Limited (“Shangsan Co”) Zhejiang Expressway Advertising Company Limited (“Advertising Co”) Note 1. Yuhang Co was established on 7th June 1994 in the PRC as a joint stock limited company and was subsequently restructured into a limited liability company under its current name on 28th November 1996. Note 2. Jiaxing Co was established on 30th June 1994 in the PRC as a joint stock limited company and was subsequently restructured into a limited liability company under its current name on 29th November 1996. Note 3. Gaotong was established on 3rd November 1997 in the PRC as a limited liability company. Note 4. Shangsan Co was established on 1st January 1998 in the PRC as a limited liability company. Note 5. Advertising Co was established on 1st June 1998 in the PRC as a limited liability company. The subsidiaries acquired during the year contributed Rmb86,209,000 to Group turnover and Rmb70,644,000 to Group profit after taxation. 63 Notes to Financial Statements 31st December 1998 10. INTEREST IN AN ASSOCIATED COMPANY Unlisted shares, at cost Share of net assets other than goodwill Provision for diminution in value Group Company 1998 Rmb’000 — 220,718 — 220,718 1997 Rmb’000 — — — — 1998 Rmb’000 208,000 — — 208,000 1997 Rmb’000 — — — — The Group’s share of post-acquisition accumulated reserve of the associated company at 31st December 1998 was Rmb12,718,000. Particulars of the associated company are as follows: Percentage of Place of equity Name of associated establishment attributable to company and operation the Group Principal activities Zhejiang Expressway the PRC 50% Constructing and Petroleum Development Co., Ltd. (“Petroleum Co”) 11. CONSTRUCTION IN PROGRESS operating of gas stations and the sale of pertroleum products Movements in the construction in progress during the year are set out below: Group Company 1998 Rmb’000 1,643,231 2,084,143 1997 Rmb’000 1,079,270 563,961 1998 Rmb’000 10,633 96,625 1997 Rmb’000 — 10,633 At 1st January Additions in the year/period Transferred to fixed assets - note 8 (2,538,187) — — — At 31st December 1,189,187 1,643,231 107,258 10,633 64 Notes to Financial Statements 31st December 1998 12. EXPRESSWAY OPERATING RIGHTS Cost: At 1st January and 31st December 1998 261,000 208,000 Group Rmb’000 Company Rmb’000 Amortization: At 1st January 1998 Provided during the year At 31st December 1998 Net book value: At 31st December 1998 At 31st December 1997 13. LONG TERM INVESTMENTS Unlisted investments, at cost Provision for diminution in value 14. CURRENT ASSETS 4,622 6,933 11,555 249,445 256,378 1998 Rmb’000 11,149 — 11,149 Group 4,622 6,933 11,555 196,445 203,378 1997 Rmb’000 11,149 — 11,149 Group Company 1998 Rmb’000 1997 Rmb’000 1998 Rmb’000 1997 Rmb’000 Cash and bank balances 232,883 840,746 145,380 813,367 Time deposits 1,055,731 2,055,865 1,044,730 2,042,865 Short term investments - note 16 Accounts receivable - note 17 Profits tax refundable Inventories Prepayments, deposits and other receivables - note 18 Due from related parties - note 21 994,274 11,560 36,615 1,851 282,519 7,619 21,991 9,629 17,172 400 1,025,733 9,119 737,475 9,257 3,163 1,517 20,458 — 21,991 9,629 9,496 262 730,334 — 2,623,052 3,980,655 1,961,980 3,627,944 65 Notes to Financial Statements 31st December 1998 15. CURRENT LIABILITIES Bank loans - note 19 Other loans - note 20 Accounts payable Other payables and accrued Group Company 1998 Rmb’000 410,000 110,191 380,645 1997 Rmb’000 284,679 244,022 31,030 1998 Rmb’000 380,000 94,804 13,263 573,575 64,273 4,747 5,800 2,923 152,009 1997 Rmb’000 279,679 84,702 1,657 50,719 3,722 13,287 17,409 9,555 69,490 liabilities 631,272 166,068 Due to related parties - note 21 Due to holding company - note 22 Profits tax payable Other taxes payable 85,889 3,445 64,924 18,422 Proposed final dividend - note 6 152,009 25,338 19,779 42,447 17,365 69,490 1,856,797 900,218 1,291,394 530,220 16. SHORT TERM INVESTMENTS Group Company 1998 1997 1998 1997 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Investments in government debentures, at cost 994,274 21,991 737,475 Provision for diminution in value — — — 994,274 21,991 737,475 Market value of investments 1,027,052 21,991 760,319 21,991 — 21,991 21,991 17. ACCOUNTS RECEIVABLE Group Company 1998 1997 1998 1997 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Accounts receivable Provision for doubtful debts Accounts receivable, net 11,560 — 11,560 9,629 — 9,629 9,257 — 9,257 9,629 — 9,629 66 Notes to Financial Statements 31st December 1998 18. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES Group Company 1998 1997 1998 1997 Rmb’000 Rmb’000 Rmb’000 Rmb’000 — 637,500 — 637,500 246,673 35,846 370,888 17,345 1,121 19,337 79,662 13,172 282,519 1,025,733 20,458 730,334 Group Company 1998 1997 1998 1997 Rmb’000 Rmb’000 Rmb’000 Rmb’000 410,000 — — 284,679 105,000 20,000 380,000 — — 279,679 105,000 20,000 410,000 409,679 380,000 404,679 Prepayments for the Shangsan Agreement Prepayment to contractors in relation to construction of expressways Others 19. BANK LOANS Balances due: Within one year In the second year In the third to fifth years, inclusive Portion classified as current liabilities - note 15 (410,000) (284,679) (380,000) (279,679) Portion classified as long term liabilities — 125,000 — 125,000 Included in the total bank loans of Rmb410,000,000, Rmb100,000,000 is secured by time deposits of Rmb48,000,000. The remaining balance is unsecured. The bank loans bear interest at rates ranging from 5.06% to 6.12% per annum. 67 Notes to Financial Statements 31st December 1998 20. OTHER LOANS Balances due: Within one year In the second year In the third to fifth years, inclusive Thereafter Portion classified as Group Company 1998 1997 1998 1997 Rmb’000 Rmb’000 Rmb’000 Rmb’000 110,191 93,040 244,022 158,234 94,804 86,041 84,702 62,098 371,120 307,562 1,282,423 1,104,539 150,197 563,361 139,266 641,271 1,856,774 1,814,357 894,403 927,337 current liabilities - note 15 (110,191) (244,022) (94,804) (84,702) Portion classified as long term liabilities 1,746,583 1,570,335 799,599 842,635 Other loans are unsecured and bear interest at rates ranging from 3% to 8.37% per annum. 21. BALANCES WITH RELATED PARTIES The amounts due from and due to related parties are unsecured, interest-free and have no fixed terms of repayment. 22. DUE TO HOLDING COMPANY The amount due to the holding company is unsecured, interest-free and has no fixed terms of repayment. 68 Notes to Financial Statements 31st December 1998 23. DEFERRED TAXATION Balance at beginning of year/period Charge for the year/period - note 4 Balance at end of year/period Group and Company 1998 Rmb’000 3,042 (760) 2,282 1997 Rmb’000 — 3,042 3,042 The deferred taxation of the Group and the Company are arising from differences in accounting treatments between the generally accepted accounting principles adopted in the PRC and those adopted in preparing these financial statements. 24. SHARE CAPITAL 1998 Number of shares 1997 Number of shares 1998 Rmb’000 1997 Rmb’000 Registered, issued and fully paid: Domestic shares of Rmb1.00 each 2,909,260,000 2,909,260,000 H Shares of Rmb1.00 each 1,433,854,500 1,433,854,500 2,909,260 1,433,855 2,909,260 1,433,855 4,343,114,500 4,343,114,500 4,343,115 4,343,115 The domestic shares are not currently listed on any stock exchange. The H Shares have been listed on The Stock Exchange of Hong Kong Limited since 15th May 1997. All the domestic shares and H Shares rank pari passu with each other as to dividends and voting rights. 69 Notes to Financial Statements 31st December 1998 25. RESERVES Group Share Capital/ Statutory Public premium (Goodwill) account reserve surplus reserve welfare Retained fund profits Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 At 1st January 1998 3,645,082 (3,967) 30,169 15,084 170,585 3,856,953 Capital reserve arising on acquisition of a subsidiary Goodwill arising on acquisition of additional interests in a subsidiary Net profit for the year Transferred from/(to) reserves Dividends - note 6 — — — — — 9,805 (323,085) — — — — — — — — — 50,437 25,219 — 9,805 — (323,085) 385,258 (75,656) 385,258 — — — (152,009) (152,009) At 31st December 1998 3,645,082 (317,247) 80,606 40,303 328,178 3,776,922 Company At 1st January 1998 3,645,082 Net profit for the year Transferred from/(to) reserves Dividends - note 6 — — — At 31st December 1998 3,645,082 — — — — — 26,722 13,361 165,501 3,850,666 — — 314,635 314,635 36,873 18,436 (55,309) — — — (152,009) (152,009) 63,595 31,797 272,818 4,013,292 In accordance with the Company Law of the PRC and the Company’s articles of association, the Company is required to allocate 10% of its profit after taxation, as determined in accordance with PRC accounting standards and regulations applicable to the Company, to the statutory surplus reserve (the “SSR”) until such reserve reaches 50% of the registered capital of the Company. Subject to certain restrictions set out in the Company Law of the PRC and the Company’s articles of association, part of the SSR may be converted to increase share capital. 70 Notes to Financial Statements 31st December 1998 25. RESERVES (continued) In accordance with the Company Law of the PRC, the Company is required to transfer 5% to 10% of its profit after taxation, as determined in accordance with PRC accounting standards and regulations applicable to the Company, to its statutory public welfare fund (the “PWF”), which is a non-distributable reserve other than in the event of the liquidation of the Company. The PWF must be used for capital expenditure on staff welfare facilities and these facilities remain as properties of the Company. The directors of the Company have proposed to transfer Rmb36,873,000 and Rmb18,436,000 to the SSR and the PWF, respectively. This represents 15% of the Company’s profit after taxation of Rmb368,729,000 determined in accordance with the PRC accounting standards. The transfer to the PWF is subject to shareholders' approval at the forthcoming annual general meeting. According to the relevant regulations in the PRC, the amount of profit available for distribution is the lower of the amount determined under the PRC accounting standards and the amount determined under HKSSAP. As at 31st December 1998, the Company had reserves of approximately Rmb319,056,000 available for distribution by way of cash or in kind. As at 31st December 1998, in accordance with the Company Law of the PRC, the amount of approximately Rmb3,645,082,000 standing to the credit of the Company’s share premium account was available for distribution by way of capitalization issues. 71 Notes to Financial Statements 31st December 1998 26. NOTES TO THE CASH FLOW STATEMENT (a) Reconciliation of operating profit to net cash inflow from operating activities: Operating profit Depreciation charges Decrease in deferred costs Amortization of expressway operating rights Interest income Interest expense, net Loss on disposal of fixed assets Provision for deficit arising on the disposal of staff quarters Decrease/(increase) in prepayments, deposits and other receivables Increase/(decrease) in amount due to holding company Decrease in amount due from related parties, net Increase in other taxes payable Increase/(decrease) in other payables and accrued liabilities Increase in inventories Increase in accounts receivable 1998 Rmb’000 505,609 85,524 837 6,933 (71,801) 94,741 2,681 15,300 (19,854) (16,334) 1,500 1,057 7,871 (1,451) (1,931) Net cash inflow from operating activities 610,682 Period from 1st March 1997 (date of establishment) to 31st December 1997 Rmb’000 354,399 58,549 5,963 4,622 (131,138) 90,272 — — 66,655 9,840 18,422 13,862 (36,267) (400) (9,629) 445,150 72 Notes to Financial Statements 31st December 1998 26. NOTES TO THE CASH FLOW STATEMENT (continued) (b) Analysis of changes in financing during the year: Share capital Minority (including premium) Loans interests Rmb’000 Rmb’000 Rmb’000 At 1st March 1997 Cash inflows from financing Arising on dilution of minority interests Dividends paid to minority interests Profit attributable to minority shareholders 4,487,708 2,184,150 3,500,489 39,886 — — — — — — 545,349 135,069 (22,545) (6,145) 15,986 Balance at 31st December 1997 and 1st January 1998 7,988,197 2,224,036 667,714 Cash inflows from financing Arising from dilution of minority interests Acquisition of a subsidiary Dividends declared to minority shareholders Profit attributable to minority shareholders — — — — — 42,738 489,935 — — — — (591,581) 621,858 (11,058) 68,914 At 31st December 1998 7,988,197 2,266,774 1,245,782 73 Notes to Financial Statements 31st December 1998 26. NOTES TO THE CASH FLOW STATEMENT (continued) (c) Acquisition of a subsidiary Net assets acquired: Fixed assets - note 8 Construction in progress Cash and bank balances Minority interests Capital reserve on consolidation Satisfied by: Prepayments - note 26(d) Rmb’000 549,555 78,826 640,782 (621,858) 647,305 (9,805) 637,500 Analysis of the net inflow of cash and cash equivalents in respect of the acquisition of the subsidiary: Cash consideration Cash and bank balances acquired Net inflow of cash and cash equivalents in respect of acquisition of a subsidiary Rmb’000 — 640,782 640,782 The subsidiary acquired during the year contributed Rmb165,884,000 to the Group’s net operating cash flows, paid Rmb2,141,000 in respect of the net returns on investments and servicing of finance, paid Rmb923,352,000 in respect of the investing activities and contributed Rmb310,380,000 in respect of financing activities, but had no contribution to taxes paid. 74 Notes to Financial Statements 31st December 1998 26. NOTES TO THE CASH FLOW STATEMENT (continued) (d) Major non-cash transactions: i) The Company purchased a 30.748% additional interest in Jiaxing Co from the certain shareholders for a total cash consideration of Rmb914,666,240. According to the payment schedule as defined in the purchase contracts, the Company has paid up Rmb457,333,120 as at 31st December 1998, but is left an amount of Rmb457,333,120 to be paid on or before 31st March 1999. The acquisition was effective on 23rd December 1998; and ii) The Company has prepaid Rmb637,500,000 for the acquisition of Shangsan Co as at 31st December 1997, although the Shangsan Co was incorporated on 1st January 1998 (note26 (c)). 27. COMMITMENTS Group Company 1998 Rmb’000 1997 Rmb’000 1998 Rmb’000 1997 Rmb’000 Contracted, but not provided for — Construction of expressways 831,714 586,741 29,540 142,378 — Proposed investments in the Jiaxing section of the Shanghai-Hangzhou Expressway — Proposed investments in the Shangyu-Sanmen Road — Others — — 14,394 586,500 — Authorized, but not contracted for — Construction of expressways 2,609,547 726,554 — Proposed investment in the Hangzhou-Nanjing Expressway — 900,000 — — 373,665 410,550 586,500 — — - — — 900,000 3,455,655 2,799,795 440,090 2,002,543 75 Notes to Financial Statements 31st December 1998 28. DIFFERENCES IN FINANCIAL STATEMENTS PREPARED UNDER PRC AND HONG KONG ACCOUNTING STANDARDS Profit after taxation 1st March 1997 (date of establishment) to 31st December Net assets As at 31st December 1998 Rmb’000 1997 Rmb’000 1998 Rmb’000 1997 Rmb’000 435,247 284,089 8,542,730 8,174,001 31,605 (15,300) (4,310) 4,427 — 2,503 — — 17,239 3,283 — (3,297) (285,642) (3,967) (15,300) — 12,929 6,317 11,923 (911) 17,239 2,701 11,923 (1,829) 454,172 301,314 8,272,046 8,200,068 As reported in statutory accounts HKSSAP adjustments: (a) Goodwill (b) Provision for deficit arising on the disposal of staff quarters Interest on H shares subscription monies (c) (d) Depreciation provided (e) Difference in capital surplus during establishment (f) Others As restated in the financial statements 29. ULTIMATE HOLDING COMPANY In the opinion of the Directors, the ultimate holding company of the Company is Zhejiang Provincial High Class Highway Investment Company Limited, a state-owned enterprise established in the PRC. 30. RELATED PARTY TRANSACTIONS The following is a summary of the significant related party transactions carried out in the ordinary course of business between the Company, its subsidiaries and certain government bodies in the year: Under the reorganization agreement, the Provincial Investment Co gave a number of undertakings to the Company, including a non-competition undertaking, a tax indemnity, and an indemnity against losses incurred, which were not expressly transferred to the Company pursuant to the reorganization and general indemnity provisions against any breach of representation warranty and undertakings contained in the agreement. 76 Notes to Financial Statements 31st December 1998 30. RELATED PARTY TRANSACTIONS (continued) The World Bank provided financing for the construction of the Shanghai-Hangzhou Expressway and the Hangzhou-Ningbo Expressway through the Ministry of Finance and the Zhejiang Provincial Expressway Executive Commission (the “Executive Commission”), which was responsible for the control of the construction and the management of the Hangzhou-Ningbo Expressway and the Zhejiang Section of the Shanghai-Hangzhou Expressway. The repayment responsibility for the financing provided for the Hangzhou-Ningbo Expressway, which amounted to US$105,720,000 as at 31st December 1998, was assumed by the Company. The loan repayment responsibility for the Shanghai-Hangzhou Expressway, which amounted to US$91,479,133 as at 31st December 1998, was assumed by Yuhang Co and Jiaxing Co. Pursuant to a supplemental agreement dated 18th April 1997, the Company, the Provincial Investment Co, Jiaxing Co, Yuhang Co, the Executive Commission, the Yuhang Executive Commission and the Jiaxing Executive Commission have agreed that the Company will take over the repayment responsibilities under the reorganization agreement and in respect of the World Bank financing as separately agreed. Jiaxing Co and Yuhang Co are required to take over the repayment obligations with regards to the World Bank financing for their respective sections. Appropriate agreements were entered into between the Company and its subsidiaries and the executive commissions, pursuant to which the Company and its subsidiaries will be charged the same rate of interest as that charged to the executive commissions. The Zhejiang Provincial Government and a commercial bank provided a number of loans for the construction of the Shanghai-Hangzhou Expressway. These loans were made available through the Yuhang Executive Commission and the Jiaxing Executive Commission to Yuhang Co and Jiaxing Co, respectively. During the year, the repayment of principal and interest expenses in respect of these loans amounted to Rmb318,900,000 and Rmb81,510,000, respectively. There was no further drawdown during the year. At 31st December 1998, Jiaxing Co had no outstanding loan balance and the outstanding loan balance for Yuhang Co amounted to Rmb 85,070,000. All of these loans are unsecured. The terms of the loans to the executive commission are the same as those from the respective executive commissions to the companies. A contract between the Company and the Executive Commission was reached whereby the Executive Commission will enter into a number of contracts relating to Contract No. 8 on behalf of the Company, for the purpose of upgrading the Operating Systems (as defined in the section “Operation of the Expressway” of the prospectus) of the Hangzhou-Ningbo Expressway. The Company has to take the benefit of these contracts and assume the repayment obligations for any drawdown on the World Bank funding in respect of Contract No. 8. Accordingly, the Company has included construction in progress of Rmb78,730,000, liabilities of Rmb59,552,000 and the repayment obligation on the World Bank funding of US$2,317,000 (equivalent to Rmb19,178,000) in the financial statements. 31. COMPARATIVE AMOUNTS Certain comparative amounts have been reclassified to conform with the current year’s presentation. 32. APPROVAL OF FINANCIAL STATEMENTS The financial statements were approved by the board of directors on 25th February 1999. 77 Corporate Information ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Company Secretary Mr. Zhang Jingzhong Authorised Representatives Mr. Geng Xiaoping Mr. Zhang Jingzhong Business Address 19/F, Zhejiang World Trade Centre 15 Shuguang Road Hangzhou city, Zhejiang Province PRC 310007 Tel: Fax: 86-571-7985588 86-571-7985599 Place of Business in Hong Kong c/o Ernst & Young 11th Floor, Tower 2 The Gateway 25-27 Canton Road Kowloon Hong Kong H Share Registrar and Transfer Office HKSCC Registrars Limited 2nd Floor, Vicwood Plaza 199 Des Voeux Road, Central Hong Kong Principal Bankers Bank of China, Hong Kong Branch China Investment Bank, Zhejiang Branch Industrial & Commercial Bank of China, Zhejiang Branch C o n s t r u c t i o n B a n k o f C h i n a , Zhejiang Branch Listing Information H Shares The Stock Exchange of Hong Kong Limited Code: 0576 Executive Directors Geng Xiaoping Ying Shudeng Fang Yunti Xu Yikuang Zhang Jingzhong Zhang Chunming Xuan Daoguang Independent Non-executive Directors Hu Hung Lick, Henry Tung Chee Chen Supervisors Xia Linzhang Ge Ailian Jiang Wenyao Legal Advisers As to Hong Kong law: Herbert Smith 23rd Floor, Gloucester Tower 11 Pedder Street, Central Hong Kong As to PRC Law: T & C Law Firm 18/F, Block A 100 Moqianshan Road, Yaojian International Building, Hangzhou, Zhejiang PRC Auditors and Reporting Accountants Ernst & Young Certified Public Accountants 15th Floor Hutchison House 10 Harcourt Road, Central Hong Kong Sponsor ABN AMRO Asia Corporate Finance ltd. 31st Floor, Edinburgh Tower The Landmark, Central Hong Kong 7 8