Contents Financial Highlights Company Profile Review of Major Corporate Events in 1999 Chairman’s Statement Management Profile Management Discussion and Analysis - Business Review - Financial Review - Investor Relations - Strategies and Prospects Report of the Directors Report of the Supervisory Committee Audited Financial Statements Report of the International Auditors - Consolidated Income Statement - Consolidated Statement of Recognised Gains and Losses - Consolidated Balance Sheet - Consolidated Cash Flow Statemant - Balance Sheet - Notes to Financial Statements Page 2 4 5 6 13 18 18 31 38 39 42 55 57 59 60 61 63 65 67 Corporate Information 102 Financial Highlights Consolidated Turnover Profit from operating activities Net profit from ordinary activities attributable to shareholders Earnings per share Total liabilities (excluding minority interests) Total assets Total liabilities-to-assets-ratio Year ended 31st December 1999 1998 Rmb’000 Rmb’000 1,050,498 856,915 548,311 655,069 622,859 404,391 12.62 cents 9.31 cents 4,042,416 3,609,038 13,925,688 12,993,990 29.03% 27.77% Due to the adoption of the revised Hong Kong Statements of Standard Accounting Practice (“HKSSAP”) during the current year, the presentation of the above figures has been revised to comply with the new requirements. Accordingly, certain comparative amounts have been reclassified to conform with the current year’s presentation. In addition, a restatement of the carrying values of the Group’s and the Company’s short term investments in securities to their fair values (i.e. the market price) as at 31 December, 1998 was made in accordance with the newly adopted HKSSAP 24. The restatement has retrospectively increased the Group’s profit from operating activities for the year ended 31 December, 1998 by Rmb19,133,000 (net of deferred tax). 2▼▼ 1999 annual report 3 ▼▼ Company Profile Zhejiang Expressway Co., Ltd. (the “Company”) was established on 1 March 1997 as an infrastructure company focusing on toll road operations. The H shares of the Company (“H Shares”) were subsequently listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) on 15 May 1997. The Company and its subsidiaries are principally engaged in investing in, constructing and managing high grade roads. They also operate certain ancillary business, such as automobile servicing, operation of gas stations and bill board advertising along expressways. It is the intention of the Company to become a leading PRC infrastructure investment company by 2010 with the mission to “nurture talents, create and share values”. Set out below is the corporate and business structure of the Company, its principal subsidiaries, an associated and a jointly-controlled entity (the “Group”). Notes: “Advertising Co” means Zhejiang Expressway Advertising Co., Ltd. “Gaotong Co” means Zhejiang Gaotong Stone Development Co., Ltd. “Jiaxing Co” means Zhejiang Jiaxing Expressway Co., Ltd. “Petroleum Co” means Zhejiang Expressway Petroleum Development Co., Ltd. “Provincial Investment Co” means Zhejiang Provincial High Class Highway Investment Company Limited “Shangsan Co” means Zhejiang Shangsan Expressway Co., Ltd. “Shida Co” 4▼▼ “Yuhang Co” means means Hangzhou Shida Highway Co., Ltd. Zhejiang Yuhang Expressway Co., Ltd. 1999 annual report Review of Major Corporate Events in 1999 January 1, 1999 The Company’s office was moved to Zhejiang World Trade Centre to create a better working environment for the benefit of its staff. February 3, 1999 The Chairman attended several presentations in London of Chinese overseas-listed companies organised by the China Securities Regulatory Commission. February 25, 1999 The 1998 annual results were announced. May 6, 1999 The 1998 annual general meeting was convened. June 28, 1999 The Company and Xinchang County Transport Development Company (“Xinchang Transport”) entered into an agreement for the acquisition of the latter’s 4% ownership interest in Shangsan Co, thereby increasing the Company’s interest in Shangsan Co from 51% to 55%. July 1, 1999 Toll rates of the Shanghai-Hangzhou-Ningbo Expressway were increased pursuant to the approval granted by Zhejiang Provincial Government. August 5, 1999 The 1999 interim results were announed. August 20, 1999 The Company and Hangzhou Highway Development Co., Ltd. entered into an agreement to establish a jointly- controlled entity, Shida Co, for the development and operation of the Shida Road project. September 20, 1999 An extraordinary general meeting was convened to approve payment of the interim dividend. November 22, 1999 The 1998 annual report was awarded an Honourable Mention for the 1999 Best Annual Reports Competition organised by the Hong Kong Management Association. 5 ▼▼ Chairman’s Statement It has only been three years since the incorporation of Zhejiang Expressway Co., Ltd. We have been committed to maximising the value of shareholders’ investment during these three years, and have achieved satisfactory results with profit attributable to shareholders growing at an annual compounded rate of 22.8 per cent. In 1998, the Company became an index constituent stock of the “Hang Seng Index 100”. In a survey conducted by Asiamoney magazine, the Company was regarded by fund managers as one of the top 10 overall best managed companies in China in 1999. We believe we have well achieved the targets which we set ourselves three years ago. However, we shall strive for further improvement. Our Vision and Mission Since the second half of 1999, the Board of Directors, management, and external management consultants of the Company have reviewed and discussed about the Company’s future strategies and management. After a thorough study of the toll road industry, its operating environment and the Company’s resources, the Company has arrived at the vision of becoming a leading infrastructure investment company in China by 2010. The Company’s mission is to nurture talents, create and share values. We believe the toll road industry still has great potential for growth in the coming decade. With the gradual maturing of business practices and the reduction of obstacles to cross-regional operations, inter-regional toll road operators are expected to emerge. Hence, the patterns and level of the returns to the toll road industry would increasingly hinge upon the competitiveness of individual operators. 6▼▼ 1999 annual report Demand for infrastructure boosted by the rapid growth of the PRC economy and the State incentive policy has also resulted in the continued rapid growth of the infrastructure industry. The crucial resources and core competence relating to the toll road industry may be extended to other infrastructure businesses. By expanding from expressway operations into the infrastructure business, the Company will be better positioned to seize more opportunities for growth. The Company believes that the recruitment, training, and retention of high calibre individuals is critical in an increasingly competitive business environment. With this in mind, the Company’s mission is to nurture talents, create and share values with its shareholders, customers, partners, staff and the community with the ultimate objective to maximise the value of shareholders’ investment. Furthermore, business ethics and corporate social responsibility are increasingly becoming a concern to the general public. Not only are business interests given due consideration, more attention is also given to the business impact on our environment. Operating Environment Given the dwindling impact of the Asian financial turmoil on the regional economies and the economic recovery in these countries, 1999 witnessed a marked improvement in the overall operating environment. - Macro Environment In 1999, the PRC economy continued to grow rapidly and provinces neighbouring Zhejiang Province were economically active. In particular, Zhejiang Province had one of the highest GDP growth rates in the PRC with an outstanding economic performance. The satisfactory economic growth in neighboring provinces also provided momentum to the Company’s toll road operations. In 1999, China saw a moderate increase in its foreign reserves as well as stability in the Renminbi exchange rate. In the second half of the year, there was a rebound in PRC foreign trade and export, resulting in a healthy state of PRC international balance of payments. In addition, Zhejiang Province, being ranked well above the national average in terms of growth of import and export trade, helped to bring about a surge in the road traffic volume. 7 ▼▼ Chairman’s Statement (Cont’d) Pursuant to the approval granted by Zhejiang Provincial Government, we increased for the first time the distance-based toll rate for Class 1 vehicles using the Shanghai-Hangzhou-Ningbo Expressway on 1 July, 1999. The overall increase is slightly higher than the compounded annual growth rate of the PRC Retail Price Index (4.2 per cent) for the preceding three calendar years (1996-1998). - Highway Law Amendment At the end of October 1999, the PRC Highway Law was amended, pursuant to which, the State will levy taxes instead of imposing road construction and maintenance fees in order to raise capital for road construction and maintenance. We believe that the amended Highway Law, generally being beneficial to the toll road business, will not only facilitate the standardisation and legalisation of the toll road operating rights, but will also be conducive to the investment environment. Furthermore, the Directors expect that the imminent abolition of such charges and other vehicle-related charges will stimulate private automobile consumption, which will, in turn, boost the traffic volume of the Group’s toll roads. - WTO Membership The PRC and the US signed a bilateral agreement on 15 November, 1999 whereby the PRC is likely to join the World Trade Organisation (“WTO”) in 2000. In the long term, the PRC’s WTO membership will be conducive to the PRC economy as PRC enterprises will have to improve their competitiveness. This will in turn increase the overall economic efficiency and give impetus to the continued economic growth, all of which should stimulate further growth in traffic volumes of the expressways. 8▼▼ 1999 annual report We believe that the eventual PRC entry to the WTO will promote foreign trade. With the Shanghai-Hangzhou- Ningbo Expressway being strategically located, the Group will accordingly benefit from such development. Furthermore, we expect that the gradual tariff reduction in respect of automobiles will increase the consumption of cars, which will further boost highway traffic flows. The PRC’s WTO membership will prompt drastic changes in the operating environment as enterprises will have to place more emphasis on efficiency and cost effectiveness, reduce inventory costs and increase productivity. As a result, there will be a higher demand for transportation, in particular, the expressways offering faster and safer services and other infrastructures. This will accelerate the development of the infrastructure industry and give rise to the emergence of a modern logistics industry in the PRC, thereby offering greater challenges and opportunities to us. - Technological Developments The rapid change in modern technological development and in particular, the proliferation of the modern information technology applications have revolutionalized the livelihood of business, society, and the individual. We are now paying more attention to information and knowledge, with the belief that an era of a knowledge economy will come about in the 21st century. Faced with such challenge, we will have to enhance the application of modern technology and to increase the amount of technological investment in our services, with a view to improve management and upgrade the quality of services provided. The 21st Century 2000 is a crucial year. According to most astronomers, 2000 marks the end of the 20th century, and to ordinary people, 2000 heralds the beginning of a new millennium. Others believe that 2000 is a transitional year from the 20th century to the 21st century. We prefer the latter concept, as we will spend the year preparing for all the challenges ahead in the millennium. 9 ▼▼ Chairman’s Statement (Cont’d) - Strategies Maximisation of the shareholders’ value is our main concern and our ultimate goal. We believe that increasing shareholders’ return and the continued growth are the two key elements that drives up shareholders’ value. To increase shareholders’ return and to realize continued growth, our strategies are as follows: • Emphasise Core Business Highway operation will remain our core business and focus, with emphasis on developing certain selected areas along the supply chain of the toll road business. We will capitalise on our competitive strengths and establish a reputation of being “a toll road specialist” by increasing our customer research, improving our business processes, setting up a quality assurance system and establishing a client- oriented toll road operating system. • Develop Road-Related Business We will maintain our presence in the toll road business in Zhejiang Province and continue to develop the road-related business. By leveraging on our established core competence, we will seek appropriate investment opportunities that meet our requirements of return and growth in the PRC infrastructure industry. • Identify and Acquire New Projects We will strengthen our industry research, project development and financial engineering. At the same time, we will actively look for existing and proposed infrastructure projects that meet our requirements for high project growth. • Broaden Scope of Cooperation and Strategic Alliances We will continue to broaden the scope of cooperation and partnership with local governments, financial and academic institutions and seek strategic alliances in different sectors of the infrastructure industry. 10▼▼ 1999 annual report - Strategic Implementation We understand that the formulation of good strategies is only one aspect of realizing our long-term goal. In addition, we also realise that good corporate governance, an efficient organisational system, effective human resourcing system, and a vibrant corporate culture are also necessary for the effective implementation of our strategies. • Strengthen Corporate Governance The respective number of independent directors and independent supervisors in the newly-formed Board of Directors and Supervisory Committee have been increased at the end of February 2000. We have also established an Audit Committee under the Board of Directors to review and supervise the Company’s financial reporting process and internal controls. An incentive and control mechanism for senior management will also be established so as to bring their interests in line with the long-term interests of our shareholders. We believe that corporate governance within our Company will be strengthened as a result. • Improve Organisational System We will need to progressively adjust our organisational structure to accomodate a gradual shift from a toll road operation-based organisational structure to a project development-based one in order to fulfill our vision. • Develop Human Resources In line with our corporate strategies, we will need to further reform our existing human resourcing system, and enhance the remuneration package and performance appraisal systems to attract and encourage future and existing staff. 11 ▼▼ Chairman’s Statement (Cont’d) • Build Corporate Culture We believe that a vibrant corporate culture is instrumental for the successful implementation of our strategies. Accordingly, we will give top priority to the cultivation of our corporate culture, the emphasis and promotion of our corporate core values through earnest practice, thorough communication, and performance appraisals. Secondary Listing in London We plan to seek a secondary listing of our H Shares on the London Stock Exchange (“LSE”) by way of introduction in order to broaden the Company’s shareholder base. However, the Company will not issue new shares for this purpose. Subject to obtaining the approval from the China Securities Regulatory Commission and the LSE, the dealing in the H Shares on LSE is expected to commence in May 2000. Geng Xiaoping Chairman and General Manager Hangzhou, Zhejiang Province, the PRC 1 March, 2000 12▼▼ 1999 annual report Management Profile Executive Directors Mr. GENG Xiaoping, age 51, is the Chairman and General Manager of the Company responsible for the overall management of the Company’s businesses. Mr. Geng graduated from the East China College of Political Science and Law and obtained a bachelor’s degree in law in 1984. From 1979 to 1991, he held various positions at the People’s Procuratorate of Zhejiang Province including Secretary, Division Chief and Deputy Procurator. In 1991, he was appointed the Deputy Director of Zhejiang Provincial Expressway Executive Commission, responsible for the business operation and administration of the expressway system in Zhejiang. Mr. Geng became the Chairman and General Manager of the Company since March 1997. Mr. FANG Yunti, age 50, senior engineer, is the Deputy General Manager and Chief Financial Officer of the Company responsible for the planning, finance, project development, investment and administration of the Company. Mr. Fang graduated from Qing Hua University and majored in automotive engineering in 1976. From 1983 to 1988, he was the Deputy General Manager of Zhejiang Province Automobile Transport Company. From 1988 to 1990, he was the Chief Engineer at the Provincial Road Transport Company. In 1991, he was appointed as the Head of the Operating Administrative and Technical Equipment Divisions of the Zhejiang Provincial Expressway Executive Commission where his responsibilities included supervision of the operation management and equipment purchasing of the Shanghai-Hangzhou-Ningbo Expressway. Mr. Fang was a Director and Deputy General Manager of the Company from March 1997 to February 2000 responsible for the overall operations of the Shanghai- Hangzhou-Ningbo Expressway including responsibility for technical equipment used by the Company in its operations. Mr. ZHANG Jingzhong, age 36, senior lawyer, is the Secretary to the Board of Directors of the Company. Mr. Zhang graduated from Hangzhou University in July 1984 obtaining of a bachelor’s degree in law. In 1984, he joined the Zhejiang Provincial Political Science and Law Policy Research Unit. Since 1988 and until 1994, he was the Associate Director of Hangzhou Municipal Foreign Economic Law Firm. In 1992, he obtained the qualifications required by the regulatory authorities in China in order to practice in law involving securities. In January 1994, Mr. Zhang became Senior Partner at the T&C Law Firm in Hangzhou. Mr. Zhang became a Director and Secretary to the Board of Directors of the Company since April 1997. 13 ▼▼ Management Profile (Cont’d) Mr. XUAN Daoguang, age 55, senior engineer, is the Deputy General Manager of the Company responsible for the operation, maintenance and equipment of the Company. Mr. Xuan graduated from the Tong Ji University in 1967 with a degree in engineering, and majored in the construction and design of bridges and tunnels. Mr. Xuan has 31 years of experience in engineering maintenance with the Road Administration Division including as the Section Head and, later, as the Head of the Road Administrative Division of Jinhua City. He has worked for the Zhejiang Provincial Expressway Executive Commission and was responsible for the administration of engineering work within Zhejiang Province, including repair and maintenance on the completed sections of the Shanghai- Hangzhou-Ningbo Expressway. Mr. Xuan was a Director and Manager of the Company from March 1997 to February 2000 responsible for repair and maintenance work. Non-executive Directors Mr. XIA Linzhang, age 56, senior engineer, is a member of the Audit Committee of the Company. Mr. Xia graduated form Jiao Zou Mining College. He was the head of Suichang Coal Mine, Standing Deputy Head and Head of Suichang County, Zhejiang Province. Mr. Xia was appointed the Chief of the Planning and Finance Division of the Zhejiang Provincial Expressway Executive Commission. He is currently the Deputy General Manager and Manager of Zhejiang Provincial High Class Highway Investment Co., Ltd. responsible for finance. Mr. Xia was the Chairman of Supervisory Committee of the Company from March 1997 to February 2000. Ms. ZHANG Chunming, age 35, senior lawyer, is a member of the Audit Committee of the Company. Ms. Zhang 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 practiced as a lawyer with the Zhejiang Provincial Economics Law Firm in Hangzhou where her practice included financial, securities and property matters. Ms Zhang has also obtained the qualifications required by the regulatory authorities in China in order to practice in law involving securities and, in 1994, she spent six months undergoing training in Hong Kong. Since 1994 she has been a Partner and Director of Zhejiang Shield Law Office. Ms. Zhang was a Director and Manager of the Company from March 1997 to February 2000 responsible for legal and securities related issues. 14▼▼ 1999 annual report Independent non-executive directors Dr. HU Hung Lick, Henry G.B.S. O.B.E. Ph.D. J.P., age 80, is a member of the Audit Committee of the Company. Dr. Hu has been practicing as a barrister for over 45 years and is currently the President of Shue Yan College in Hong Kong, 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 of Juvenile Delinquency. Dr. Hu became an Independent Non-executive Director of the Company since March 1997. Mr. TUNG Chee Chen, age 57, Chairman of Orient Overseas (International) Limited, is the Chairman of the Audit Committee of the Company. 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 currently a registered Professional Engineer in the State of California. Mr. Tung became an Independent Non-executive Director of the Company since March 1997. Mr. ZHANG Junsheng, age 63, professor, is a member of the Audit Committee of the Company. Mr. Zhang graduated from Zhejiang University in 1958, and was a lecturer, an associate professor, an advising professor at the Zhejiang University, and a professor concurrently at, amongst other universities, the Zhongshan University. In 1980, he became the Deputy General Secretary of Zhejiang University. In 1983, Mr. Zhang served as Deputy General Secretary of the Hangzhou City Government. In 1985, he began to work for the Xinhua News Agency, Hong Kong Branch, and became its Deputy Director in 1997. Mr. Zhang took up the post of General Secretary of Zhejiang University in September 1998. In addition, Mr. Zhang is currently a Special Advisor to the Zhejiang Provincial Government, an Advisor to the Sichuan Provincial Government, and a Senior Advisor to the Shenzhen City Government. Supervisors Mr. MA Kehua, age 47, senior economist, is the Chairman and non-executive member of the Supervisory Committee of the Company. Mr. Ma graduated from Shanghai Railway Institute in 1977, after which he worked as an engineer at Shanghai Railway Bureau No. 1 Construction Company and the Plumbing and Electricity Section of Shanghai Railway Bureau, Hangzhou Branch. Mr. Ma was in charge of the Planning and Finance Division at the Zhejiang Local Railway Company, and became Deputy Division Chief and Division Chief of Zhejiang Jinwen Railway 15 ▼▼ Management Profile (Cont’d) Executive Commission responsible for material supply since 1993. Mr. Ma took up the post of Deputy General Secretary of Zhejiang Construction and Investment Company since March 1999, and is currently the Deputy General Secretary of Zhejiang Provincial High Class Highway Investment Co., Ltd. Mr. NI Ciyun, age 49, senior economist, is a member of the Supervisory Committee of the Company representing the staff and workers. Mr. Ni graduated from Tianjin University in 1976 majoring in mechanical manufacturing. He was a Deputy Manager and Manager at Zhejiang Jiaxing Shipping Company since 1981, Deputy Director of Jiaxing Communications Bureau in 1989, Director of Zhapu Port Executive Commission in 1990, Director of Jiaxing Zhapu Port Authority in 1992, and Deputy Director of Shanghai-Hangzhou-Ningbo Expressway Jiaxing Construction Executive Commission in 1993. Mr. Ni is currently the Chief Administrator of the Company’s Jiaxing Section. Mr. LU Fan, age 44, senior economist with a Masters Degree in Economy, is an independent non-executive member of the Supervisory Committee of the Company. Mr. Lu was an assistant researcher at the World Economy Research Institute of Zhejiang Social Science Academy, and became the Vice-Director of Zhejiang Asia-Pacific Research Institute in 1991. Mr. Lu joined Zhejiang Securities Co., Ltd. in 1994. He was the General Manager of Investment Banking Division and is currently the Vice President of Zhejiang Securities Co., Ltd. Mr SUN Xiaoxia, age 37, professor, is an independent non-executive member of the Supervisory Committee of the Company. Mr. Sun graduated from Wuhan University, School of Law with a Masters Degree in law. He had worked as Assistant Lecturer, Lecturer, Assistant Professor and Tutor for graduate students at Hangzhou University, School of Law. Mr. Sun is currently Deputy Dean of School of Law and Dean of Department of Law, Zhejiang University. In addition, Mr. Sun is a lawyer with Zheda Law Firm, a standing member of China Jurisprudence Research Society, a member of the International Society for Philosophy of Law and Social Philosophy (IVR), and a member of the IVR’s China Branch. Mr. ZHENG Qihua, age 37, senior accountant, is an independent non-executive member of the Supervisory Committee of the Company. He is currently the Deputy General Manager of the Zhejiang Pan-China Certified Public Accountants, and guest professor at Zhejiang Finance and Economics Institute. Mr. Zheng was amongst the first batch of Chinese registered accountants to obtain qualifications required for practicing accountancy involving securities in 1992. He has working and training experiences in Hong Kong and Singapore, and spent approximately six months working with the Listing Division of China Securities Regulatory Commission during 1997 and 1998. 16▼▼ 1999 annual report 17 ▼▼ Management Discussion and Analysis Business Review Business Environment Analysis The PRC economy achieved a growth rate of 7.1 per cent in 1999 with a GDP Growth in the PRC and Zhejiang Province GDP of Rmb8,205.4 billion. Composition of the total industrial output of Zhejiang Province in 1999, non state-owned industrial enterprises with sales above Rmb5 million and all State-owned industrial enterprises Zhejiang Province has been one of the fastest growing Chinese provinces in terms of its economic activities. In 1999, Zhejiang Province witnessed a double-digit GDP growth rate of 10 per cent with its GDP reaching Rmb535.0 billion. Economic Structure of Zhejiang Province The continued rapid economic growth of Zhejiang Province was directly attributable to various reforms. Resources were allocated to industries and enterprises with competitive edge. In 1999, the gross industrial output of State-owned enterprises, collective enterprises, joint-stock companies and foreign investment companies increased by 2.7 per cent., 11.1 per cent., 23.0 per cent. and 24.3 per cent. to Rmb70.5 billion, Rmb127.2 billion, Rmb148.7 billion and Rmb91.81 billion respectively. The gross industrial output of joint-stock companies, which has become the dominant economic structure in Zhejiang Province, exceeded that of collective enterprises for the first time. 1999 also witnessed a robust growth of individual private enterprises in the Zhejiang Province. Commanding an increasingly larger market share, the individual private enterprises realised a retail sales of consumer goods of Rmb108.09 billion, representing an year-on-year increase of 11.9 per cent. and accounting for 57.7 per cent. of the provincial total retail sales of consumer goods, as compared with 56.1 per cent. in the previous year. The individual private enterprises operated on an increasingly high standard of quality and stressed the importance of innovation of systems, 18▼▼ 1999 annual report technology, and management. Many were involved in the high technology and service industry, and focused on tapping the foreign markets. Retail Price Index of Commodities PRC price levels have been falling from its record high in 1994. Despite this, a compounded annual growth rate of the PRC retail price index of commodities of approximately 4.2 per cent was achieved between 1996 and 1998. In 1999, the price level of goods other than service items, housing and medical insurance fell, compared to that in 1998. In addition, both the national retail price index of goods and consumer price index decreased 2.9 per cent. and 1.3 per cent. respectively, Retail Price Index of PRC and Zhejiang Province while both the Zhejiang provincial retail price index of goods and consumer price index decreased 2.3 per cent. and 1.2 per cent. respectively. Ports The Shanghai-Hangzhou-Ningbo Expressway links Shanghai and Ningbo, which are the two largest ports in the PRC. In 1999, the throughput capacities of Shanghai and Ningbo were 186 million tonnes and 97 million tonnes respectively, representing a year-on-year increase of 13.50 per cent. and 10.95 per cent respectively. Infrastructure Investment and Road Traffic in Zhejiang Province In 1999, Zhejiang Province continued to make substantial investment in infrastructure amounting to Rmb66.84 billion, representing a year-on-year increase of 9.0 per cent. and accounting for 64.5 per cent. of total infrastructure and renovation investment respectively. The construction of transportation infrastructure in Zhejiang Province progressed smoothly. At the end of 1999, total mileage of the province reached 40,782 km, representing a year-on-year increase of approximately 4.8 per cent., while mileage of the provincial expressways reached 392 km, representing a year-on-year increase of approximately 14 per cent. We expect the mileage for provincial expressways to reach 1,372 km by the end of 2002, according to the provincial planning of “4-hour road traffic cycle”. 19 ▼▼ Management Discussion and Analysis (Cont’d) Passenger and Freight Transport Volume of Passenger and Freight Transport Passenger and Freight volume recorded in 1999 were 43.35 billion tonnes-km and 25.69 billion tonnes-km respectively, which were very similar to that in 1998. 433.53 256.94 Core Business - Toll Road Business Analysis The Group achieved satisfactory results and rapid growth in 1999. The opening to traffic of the Jiaxing Section of the Shanghai-Hangzhou Expressway at the end of 1998 marked the full operation of the Group’s core asset, the Shanghai- Hangzhou-Ningbo Expressway, connecting Shanghai, Hangzhou and Ningbo. Under the “networking effect”, the turnover from toll revenue surged 65.17 per cent. to Rmb1,087,672,000 from Rmb658,505,000 last year. The table below sets out the 1999 toll revenue in respect of the Hangzhou-Ningbo Expressway, the Hangzhou, Yuhang, and Jiaxing Sections of the Shanghai-Hangzhou Expressway, the Yuhang East Connecting Road, and the Shangsan Expressway: Shanghai-Hangzhou Expressway Yuhang East Hangzhou-Ningbo Hangzhou Expressway Section Yuhang Section Jiaxing Connecting Shangsan Section Road Expressway Toll revenue (Rmb’000) 556,136 25,874 81,674 311,203 Year on year growth +23.66% +30.89% +43.35% — % of total toll revenue 51.13% 2.38% 7.51% 28.61% 12,904 -68.5% 1.19% 99,881 +9.75 9.18% Shanghai-Hangzhou-Ningbo Expressway The Shanghai-Hangzhou-Ningbo Expressway is a dual two-lane expressway lying along the southern tip of the Yangtze River Delta. It has a total length of 247.6km and became fully operational at the end of December 1998. The Group has acquired the land use right over two strips of land adjacent to the Shanghai-Hangzhou-Ningbo Expressway, and may widen its existing four lanes to a total of six lanes in due course. 20▼▼ 1999 annual report The following table sets out the basic information on various sections of the Shanghai-Hangzhou-Ningbo Expressway: Date of Mileage Commencing Number of Shareholding of (km) Operation Toll Stations the Company Shanghai-Hangzhou- Ningbo Expressway 247.6 April 1992/ December 1998 Hangzhou-Ningbo Expressway 145.0 April 1992/ December 1996 Shanghai-Hangzhou Expressway 102.6 December 1995/ Hangzhou Section Yuhang Section 3.4 11.1 December 1998 December 1995 December 1995/ December 1998 Jiaxing Section 88.1 December 1998 19 12 7 0 1 6 100% 100% 51% 84.2% 21 ▼▼ Management Discussion and Analysis (Cont’d) Toll Rates The current toll rates in respect of the Shanghai-Hangzhou-Ningbo Expressway are as follows: Vehicle Class Classification Standard (Rmb/Vehicle) (Rmb/Vehicle/km) Entrance fee Mileage Fee Passenger vehicles with up to 20 seats Trucks with tonnage of 2 tons or below Passenger vehicles with seats above 20 and below 40 (inclusive) Trucks with tonnage of above 2 tons and below 5 tons (inclusive) 5 10 0.45 0.80 Buses with more than 40 seats (including 15 1.20 sleeping buses with more than 32 seats) Trucks with tonnage above 5 tons and below 10 tons (inclusive) Trucks with tonnage above 10 tons and below 20 tons (inclusive) Trucks with tonnage above 20 tons below 50 tons (inclusive) 20 25 1.60 2.00 1 2 3 4 5 22▼▼ 1999 annual report Pursuant to the approval granted by Zhejiang Provincial Government, the Group increased the distance-based toll rate for Class 1 vehicles using the Shanghai-Hangzhou-Ningbo Expressway from Rmb0.40/km to Rmb0.45/km since 1 July, 1999. The percentage of Class 1 vehicles has remained steady but the vehicle count is on an upward trend, following the toll rate adjustment. Traffic Volume Monthly Traffic Volume With the full operation of the Shanghai-Hangzhou-Ningbo Expressway, the average traffic volume surged rapidly by 28.5 per cent. to 14,814 vehicles in 1999 from the previous year. (1998/ 1997 : 22.9 per cent.) The Shanghai-Hangzhou-Ningbo Expressway has the following three main features in terms of its traffic volume: • • the ramp-up effect: the Shanghai-Hangzhou-Ningbo Expressway is experiencing a rapid growth phase; the networking effect: the prompt surge in the traffic volume resulting from linkage of disconnected roads. At the end of 1998, the increase was more significant upon the full operation of the Shanghai-Hangzhou- Ningbo Expressway ; and • the seasonal effect: the traffic volume varies with different seasons with a characteristic dip following the Chinese New Year period, and a steady climb after summer. The movement closely resembles the pattern of business activities which in turn is influenced by holidays and weather patterns on a yearly basis. 23 ▼▼ Management Discussion and Analysis (Cont’d) A further detailed analysis for the traffic volume of the Shanghai- Hangzhou-Ningbo Expressway by sections is as follows: Monthly Traffic Volume by Sections In 1999, the average daily traffic volume of the Hangzhou-Ningbo Expressway and the Hangzhou and Yuhang Sections of the Shanghai- Hangzhou-Ningbo Expressway were 14,483, 25,433, and 24,931 vehicles respectively, representing year-on-year increases of 29.73 per cent., 58.7 per cent. and 55.1 per cent. respectively. The average daily traffic volume of the Jiaxing Section in 1999 stood at 13,661 vehicles. At present, the higher average daily traffic volume of the Hangzhou and Yuhang Sections of the Shanghai-Hangzhou-Ningbo Expressway can be attributed to its earlier opening to traffic and proximity to Hangzhou. The opening of the north exit in Hangzhou in February, 1999 resulted in a minor difference of the traffic volume between the Yuhang and Hangzhou Sections. The average daily traffic volume of the Jiaxing Section indicated an uptrend. We believe that this section will outperform the Hangzhou-Ningbo Expressway in terms of traffic volume. Vehicle Composition Vehicle Composition In respect of the vehicle composition on the Shanghai-Hangzhou-Ningbo Expressway, Class 1 vehicles made up a larger share of approximately 62.7 per cent. in 1999 as compared to the previous year. In 1999, Class 2 and 3 vehicles commanded an aggregate share of approximately 36.2 per cent., which is less than that in the previous year, while Class 4 and 5 vehicles have an aggregate share of approximately 1 per cent., increasing annually on the whole. 24▼▼ 1999 annual report Average Distance Travelled In 1999, the average distance travelled by vehicles using the Shanghai- Hangzhou-Ningbo Expressway increased 39.9 per cent. year-on-year to approximately 65.7 km. We believe that the increase is mainly due to an increase in vehicles travelling longer distances upon the operation of the Jiaxing Section. Toll Revenue In 1999, following the operation of both the Jiaxing Section with a Composition of Toll Revenue length of 88.1 km and the final 1.3 km portion of the Yuhang Section, the toll revenue generated by the whole Shanghai-Hangzhou-Ningbo Expressway reached Rmb974.9 million, representing a sharp increase of approximately 85.2 per cent. over 1998 (1998/1997: 22.7 per cent.). In 1999, the entrance and distance-based toll revenues accounted for 15.6 per cent. and 84.4 per cent. of the total toll revenue respectively. The percentage of the distance-based toll revenue had increased as compared to the previous year. In 1999, the average toll revenue per vehicle using Shanghai-Hangzhou- Ningbo Expressway was approximately Rmb47.8, representing a surge of 30.6 per cent. over 1998. We believe this was mainly due to the following increases in: (1) the average distance travelled by vehicles as a result of the full operation of Shanghai-Hangzhou-Ningbo Expressway; and (2) the distance-based toll revenue following the toll increase in July 1999. – RMB 25 ▼▼ Management Discussion and Analysis (Cont’d) Reasons for Growth The impact of the Asian financial turmoil on the region is less significant as regional economies recover. Zhejiang Province economy is more vibrant, and has, in particular, one of the fastest growing economies within the PRC in terms of GDP and has become one of the most affluent provinces in the PRC. Trading and tourism within Zhejiang Province and those areas in its vicinity have also boosted the demand for traffic. The Shanghai-Hangzhou-Ningbo Expressway is strategically located, connecting both Shanghai and Ningbo, which have respectively the largest port and the second largest port within the PRC. Cities situated along the Shanghai-Hangzhou-Ningbo Expressway are economically active. Furthermore, we believe that the substantial growth in terms of traffic volume, toll revenue, and other indicators in respect of the Shanghai-Hangzhou-Ningbo Expressway was mainly attributable to the following: • The full operation of the Shanghai-Hangzhou-Ningbo Expressway at the end of 1998 has given rise to a tremendous networking effect, thus increasing traffic volume and boosting toll revenue. • The toll rate adjustment for the Shanghai-Hangzhou-Ningbo Expressway has resulted in an increase in toll revenue given the stable vehicular composition and the steadily growing traffic volume. • The repair and maintenance services provided by the Group for certain road surfaces of the Shanghai- Hangzhou-Ningbo Expressway has further enhanced its appearance and quality. Yuhang East Connecting Road The Yuhang East Connecting Road is owned by Yuhang Co and became operational in December 1995. With the approval from Zhejiang Provincial Government, it commenced toll collection at the same time, offsetting its construction and maintenance costs. Prior to the opening of the Jiaxing Section of the Shanghai-Hangzhou-Ningbo Expressway, Yuhang East Connecting Road served as the primary carriageway between the Yuhang Section of the Shanghai- Hangzhou-Ningbo Expressway and National Road 320. Following the opening of the Jiaxing Section at the end of 1998, it merely served as a connecting road between the Shanghai-Hangzhou-Ningbo Expressway and National Road 320. In 1999, the toll revenue attributable to the Yuhang East Connecting Road was approximately Rmb12,904,000. The Yuhang East Connecting Road ceased toll collection since 1 January, 2000. 26▼▼ 1999 annual report Shangsan Expressway The entire Shangsan Expressway covers a total distance of approximately 143 km. Phase 1 (comprising four sections with a total length of approximately 37.5 km) of Shangsan Expressway has already been opened to traffic. In 1999, there were approximately 7,274 vehicles passing in both directions daily, representing an increase of 10.0 per cent. over 1998, while the toll revenue was approximately Rmb99,881,000, representing a year-on-year increase of approximately 9.75 per cent. Construction of Phase 2 of the Shangsan Expressway is progressing smoothly and is scheduled for completion by the end of 2000. Upon completion, it will be a dual two-lane expressway with a total of ten interchanges, nine toll stations, and three service areas. Shangyu Section Chengzhou Section Xinchang Section Tiantai Section Length: Width of the road: The number of Interchanges: Number of toll stations: Number of service areas: Designed speed: about 33km 24.5km about 32km 24.5km about 33km 21.5km about 44km 24.5km 4 3 — 1 1 1 2 2 1 3 3 1 100km/hr 100km/hr 60km/hr 100km/hr Given the current construction work of Phase 2, two existing toll stations at Shangyu and Xinchang respectively ceased toll collection since 1 January, 2000. The Directors believe that subsequent work may result in a significant reduction of toll revenue of Shangsan Co in 2000. However, such result is expected to be short-term. Subject to the approval by Zhejiang Provincial Government, new toll stations and toll rates will be in place when the entire Shangsan Expressway becomes fully operational. 27 ▼▼ Management Discussion and Analysis (Cont’d) Xinchang Acquisition On 28 June, 1999, the Company acquired from Xinchang Transport a 4 per cent. interest in Shangsan Co at a cash consideration of Rmb114,080,000. Following the acquisition, the Company’s shareholding of Shangsan Co increased from 51 per cent. to 55 per cent., while Xinchang Transport’s shareholding of Shangsan Co decreased from 6 per cent. to 2 per cent. The acquisition constituted a connected transaction of the Company but pursuant to paragraph 14.24 of the Rules Governing the Listing of Securities issued on the Stock Exchange of Hong Kong Limited, did not require shareholders’ approval. Details of the acquisition can be found in the press announcement made by the Company on 29 June, 1999. Shida Road On 20 August, 1999, the Company and Hangzhou Highway Development Co., Ltd. entered into an agreement (“Shida JV Contract”) to establish a jointly-controlled entity, Shida Co, for the development and operation of Shida Road project with respect to the Shanghai-Hangzhou Expressway. Pursuant to the Shida JV Contract, the Company acquired a 50 per cent. interest in Shida Co for a cash consideration of Rmb65,000,000. Shida Road covers a total length of approximately 9.45 km and is a connecting road of the Shanghai-Hangzhou Expressway which provides access to urban Hangzhou. An approximate 2 km section linking the Shanghai-Hangzhou Expressway will form part of Hangzhou Ring Road. The construction cost of Shida Road is approximately Rmb367,000,000. Shida Road is an improved connecting road of the Shanghai-Hangzhou-Ningbo Expressway network and also serves as the second access to urban Hangzhou, attracting more vehicles onto the Shanghai- Hangzhou-Ningbo Expressway to access urban Hangzhou. Operating Management System The highway operating management system (including traffic control, monitoring, communications, lighting and toll collection systems) has been or will be installed along all the expressways of the Group. At the end of 1999, the new toll collection system of the Hangzhou-Ningbo Expressway was installed and tested while the control, monitoring, communications, and lighting systems had already been in operation. On 1 February, 1999, the Company established a Control and Toll Collection Centre to coordinate the installation and operation of the operating management system in all the Group’s existing roads. 28▼▼ 1999 annual report To enhance toll collection efficiency and reduce cash transactions, the Company introduced the use of “prepaid IC cards” along the Shanghai-Hangzhou-Ningbo Expressway in October 1999. Other Business Petroleum Operations The Company established a joint venture, Petroleum Co, in Zhejiang Province in July 1998, with a 50% shareholding interest. The joint venture is mainly engaged in investments in, construction and operation of, gas stations and to the sale of petroleum products along high-grade roads and other roads in Zhejiang Province. In 1999, Petroleum Co achieved a steady growth. The number of gas stations operated by Petroleum Co increased from 33 since its establishment in 1998 to 77 at the end of 1999. In 1999, the Group’s interests in Petroleum Co’s profit after tax was approximately Rmb21,380,000. Advertising Business Advertising Co was established in June 1998 and is 70% owned by the Company. As an advertising media developer, it is mainly engaged in the development of outdoor advertising media along expressways. The Company has authorised Advertising Co to receive orders, produce and disseminate advertisements on acquired lands along the Shanghai-Hangzhou-Ningbo Expressway since July 1998. In 1999, Advertising Co realised an operating income of Rmb5,859,000 and profit after tax of approximately Rmb2,990,000. 29 ▼▼ Management Discussion and Analysis (Cont’d) In December 1999, pursuant to a document jointly issued by the Zhejiang Provincial Department of Communication, the Zhejiang Provincial Department of Public Security, and the Zhejiang Provincial Administration of Industry and Commerce, an exclusive right of unified installation and dissemination of outdoor advertisements along the Shanghai- Hangzhou-Ningbo Expressway was granted to the Company. The Directors believe that by leveraging on the expansion and management of advertising media and clients, the business of Advertising Co will expand in 2000. 30▼▼ 1999 annual report Financial Review Analysis of Financial Results In 1999, the Group reported profit before tax of approximately Rmb706,552,000, representing a year-on-year increase of 29.1% (before exceptional items), and net profit from ordinary activities attributable to shareholders of approximately Rmb548,311,000, representing an increase of 35.6%. Overall Financial Strategies The management has been committed to maximising the value of shareholders’ investment. The formulation and implementation of the financial strategies is also the extension of this concept. Our objective is investment in strategic projects at the minimum cost by leveraging on the Group’s available financial resources. Hence, the Group can generate long-term stable return on shareholders’ equity. Return on Shareholders’ Equity The return on shareholders’ equity (“ROE”) is the percentage of net profit from ordinary activities attributable to shareholders for the current financial year to the shareholders’ equity as at the balance sheet date. This financial indicator generally reflects the operating performance of the Group and is also one of the most important financial indicators that measure the growth of the shareholders’ value. 1999 1998 1997 Rmb’000 Rmb’000 Rmb’000 Net profit from ordinary activities attributable to shareholders 548,311 404,391 296,332 Shareholders’ equity 8,433,840 8,139,170 8,200,068 Return on shareholders’ equity 6.5% 5.0% 3.6% The ROEs for the past three years were relatively low but have been growing steadily. We believe that this was due to the early stages of operation of our toll roads. However, with the strong growth of traffic volumes, we expect 31 ▼▼ our ROEs will further improve in the near future. Management Discussion and Analysis (Cont’d) Earnings per Share Earnings per share (“EPS”) means the ratio of net profit from ordinary activities attributable to shareholders to the weighted average of the outstanding shares.The management of the Company believes that this financial indicator reflects specifically the growth potential of the Company, and it is also an important reference indicator to determine the dividend policy. 1999 1998 1997 Outstanding shares (thousand shares) 4,343,115 4,343,115 4,343,115 Weighted average (thousand shares) 4,343,115 4,343,115 3,812,785 Net profit from ordinary activities attributable to shareholders (Rmb’000) 548,311 404,391 296,332 Basic earnings per share (Rmb Cent) 12.62 9.31 7.77 Dividend Policy The dividend policy indicates the management’s recognition of the interests of shareholders. The management believes that the formulation of an appropriate dividend policy is instrumental in the future long-term development of the Company. 32▼▼ 1999 annual report 1999 1998 1997 Dividend per share (“DPS”) (Rmb Cent) Payout ratio (%) 5.5 43.6 3.5 37.6 1.6 20.6 Usually the dividend payout ratio of the Company is approximately 40-50% and its shareholders receive dividend in cash or in other forms. The Company will normally maintain a relatively stable dividend policy. While ensuring continued growth, the Company will make corresponding adjustments in accordance with profits, cashflows and opportunities of project investment. Generally, payment of approximately one-third of dividends is declared in the interim period with the balance to be declared at the end of the financial year. Review of Operating Results Toll Revenue Contribution 1999 1998 1997 Rmb’000 YoY Growth Rmb’000 YoY Growth Rmb’000 Toll revenue 1,087,672 65.17% 658,505 41.58% 465,098 Contribution to profit from operating activities 838,887 36.42% 614,915 37.47% 447,318 33 ▼▼ Management Discussion and Analysis (Cont’d) Financing Capital Structure 1999 1998 Gross Average Gross Amount Percentage Rmb’000 (%) Rate (%) Amount Percentage Rmb’000 (%) Average Rate (%) Shareholders’ equity 8,433,840 Fixed rate liabilities 1,408,069 Floating rate liabilities 1,751,828 Interest-free liabilities 2,331,828 60.56 10.11 12.58 16.75 — 8,139,170 5.17 7.55 615,043 1,651,731 — 2,588,046 62.64 4.73 12.71 19.92 Total 13,925,688 100% — 12,993,990 100% Liabilities/Equity Ratio 65.12% — — 59.65% — — 6 7.3 — — — 34▼▼ 1999 annual report Liabilities Portfolio Ended 31 December 1999 Total Drawn Amount Oustanding Gross Amount Fixed Rate Floating Rate Percentage Rmb’000 Rmb’000 Rmb’000 (%) World Bank Loans (US$) Commercial bank Loans Policy Loans 1,751,828 — 1,751,828 1,170,000 1,170,000 238,069 238,069 — — 55.44 37.03 7.53 Total 3,159,897 1,408,069 1,751,828 100.00 Interest Expenses Cover Interest expenses cover is the percentage of profit after tax but before interest to interest expenses. Profit after taxation but before interest (Rmb’000) Interest expenses (Rmb’000) Interest expenses cover 1999 1998 1997 781,726 172,922 22.12% 553,835 94,741 17.11% 407,385 110,350 27.09% 35 ▼▼ Management Discussion and Analysis (Cont’d) Analysis of Capital Expenditure The details of the capital commitments of the Group and the Company are set out in note 32 to the audited financial statements on page 98. As at 31 December, 1999, among the Group’s total capital commitments of Rmb3,252 million to be payable in the next one to four years for the construction and expansion of the expressways, approximately Rmb2,505 million will be used for the construction of Shangsan Expressway to be payable in the next one to two years, and approximately Rmb747 million will be used for the expansion of the existing expressways to be payable in the next one to four years. Cash Management The Company derives its long-term and stable cash inflow from toll revenue operations. Reasonable cash management will further optimise the use of resources of the Company when meeting financing needs of various projects. 36▼▼ Cashflow Analysis of the Group 1999 annual report 1999 1998 Rmb’000 Rmb’000 Net cash inflow from operating activities 1,047,828 610,682 Net cash outflow from returns on investments and servicing of finance Taxes paid Net cash ouflow from investing activities Net cash ouflow before financing activities Net cash inflow from financing activities (312,992) (194,452) (43,978) (61,881) (1,135,201) (1,449,596) (444,343) (1,095,247) 1,110,892 532,673 Increase/(decrease) in cash/cash equivalents 666,549 (562,574) 37 ▼▼ Management Discussion and Analysis (Cont’d) Risk Management Foreign Exchange Exposure Given the Group’s substantial US dollar loans, there were also approximately USD114.7 million deposits set up in US dollars to reduce its foreign exchange exposure. 1999 1998 1997 Current & time deposits (US$’000) Liabilities (US$’000) 114,719 222,482 55,541 209,513 7,073 177,079 US dollar Assets/(liabilities), (US$’000) (107,763) (153,972) (170,006) Deposit/Liabilities Ratio 51.56% 26.51% 3.99% The Directors of the Company believe that taking into account the scale of the Group’s existing US dollar liabilities of the World Bank loans and the interest expenses thereon, the solvency in the near to medium term will not affect its operations to a material extent. Investor Relations We have high regard for our relationship with our investors and communication with our shareholders, and encourage face-to-face contact so as to provide a better understanding of our business and scale of operations, future prospects and quality of the management. For more information on the Company, please contact: Investor’s Hotline :+86 571 798 7700 Fax : +86 571 795 0329 Email : ir@zjec.com.cn 38▼▼ 1999 annual report Strategies and Prospects Toll Road Operations In 2000, the Company will work to ensure the timely completion of the Shangsan Expressway, and to proceed with the widening of the section of the Hangzhou-Ningbo Expressway between Hongken at Xiaoshan and Guzhu at Shangyu from four lanes to six lanes to increase capacity for future traffic growth. Meanwhile, by capitalising on the Company’s extensive experience gained from toll road operations, the Company will strive to establish and refine the client-based operational systems with a view to tapping fully the growth potential of the existing road business. In addition, the Company aims to: - - - enhance travelling conditions and the ability to react in a timely manner to emergencies, enhance the prompt dissemination of travel information and increase the flexibility of the monitoring and toll collection systems in order to improve and develop the operating management capacity of the Company; step up the management and analysis of customers, conduct targeted promotion and marketing, and widen our customer base; and increase the operating efficiency of the Company and customer satisfaction through improvement of the business process and establishment of quality assurance systems. 39 ▼▼ Management Discussion and Analysis (Cont’d) Related Business Development As part of the Company’s new strategy, we will continue to develop the toll road-related business in 2000. With respect to the advertising business, Advertising Co will fully utilise the available resources to broaden its customer base. With respect to petroleum operation, Petroleum Co will concentrate on the cost effectiveness of the retailing business at gas stations so as to secure a reasonable return on the Company’s investment. Organisation Innovation The Company has the long-term task of carrying out continual organisational innovation and development. In 2000, we will make adjustments to our organisational operations with an aim to improve the various organisational structures and to establish the teamwork mechanism. In this regard, we will do the following: - - bring about the continued improvement in project development capacity through enhancement of the research and development function and structure, and the formation of core competence in respect of toll road and other infrastructural sectors; and maintain our leading position in the industry by enhancing our financial management ability. Employee Relations and Development Human resources are an important asset to our Company. Hence, we will enhance our human resources system and establish a market-based salary package, performance appraisal system and performance-linked training system to attract and encourage future and existing staff. Our target is to set up a successful and effective staff recruitment, training, incentive and retention scheme to support the implementation of our strategies. 40▼▼ 1999 annual report Corporate Culture As a company with a relatively short history, we are still in the process of developing our corporate culture. Our mission, vision and strategies are formed as a result of discussions, taking into consideration our operating environment and the Company itself. This common recognition of our future has driven us to promote the following core values: - - - - - - honesty and harmony; continual innovation and improvement; priority to customers; teamwork; pursuit of excellence; and effectiveness and efficiency. We will place emphasis on such core values through performance appraisals and gradual adjustments to our operational systems. Meanwhile, we will continue to strengthen our core values amongst our staff through exemplary practices and day-to-day communications. Our future prospects hinge on our ability to keep abreast of trends and to adapt flexibly to the challenges ahead. We will report to you all about our news, whether good or bad. 41 ▼▼ Report of the Directors The directors of the Company (the “Directors”) present their report and the audited financial statements of the Company and the Group for the year ended 31 December, 1999. Principal activities The principal activities of the Group comprise investment in 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. There were no changes in nature of the Group’s principal activities during the year. Segmented information During the year, the entire turnover and contribution to profit from operating activities of the Group was derived from Zhejiang Province, in the PRC. Accordingly, a further analysis of the turnover and contribution to profit from operating activities by geographical area is not presented. However, an analysis of the Group’s turnover and contribution to profit from operating activities by principal activity for the year ended 31 December, 1999 is as follows: Contribution to profit from Turnover operating activities Rmb’000 Rmb’000 1,028,977 838,887 5,489 6,595 9,437 4,533 5,446 8,049 1,050,498 856,915 By activity: Toll income Advertising income Road maintenance income Others 42▼▼ 1999 annual report Results and dividends The Group’s profit for the year ended 31 December, 1999 and the state of affairs of the Group and the Company at that date are set out in the financial statements on pages 59, 61, 62, 65 and 66. An interim dividend of Rmb0.015 per share (approximately HK$0.014) was paid on 10 October, 1999. The Directors recommend the payment of a final dividend of Rmb0.04 per share (approximately HK$0.037) in respect of the year, to shareholders on the register of members on 20 April, 2000. This recommendation has been incorporated into the financial statements. 43 ▼▼ Report of the Directors (Cont’d) Summary financial information The following is a summary of the consolidated results, and of the assets and liabilities of the Group prepared on the basis set out in the notes below: Results Turnover Operating costs Gross profit Other revenue Administrative expenses Other operating expenses Profit from operating activities Finance costs Share of profit of an associate Year ended 31 December 1999 1998 1997 1996 1995 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 1,050,498 655,069 463,692 273,843 59,105 (298,417) (220,537) (146,046) 752,081 434,532 317,646 167,528 (60,320) (2,374) 856,915 (172,922) 22,559 234,573 (45,611) (635) 197,034 (31,126) (978) 622,859 482,576 (94,741) (110,350) 18,982 — (33,867) 239,976 40,928 (57,716) (243) 222,945 (62,981) — Profit before tax Tax 706,552 (71,810) 547,100 (73,795) 372,226 (58,639) 159,964 (60,296) Profit before minority interests Minority interests 634,742 (86,431) 473,305 (68,914) 313,587 (17,255) 99,668 186 Net profit from ordinary activities attributable to shareholders 548,311 404,391 296,332 99,854 25,587 Earnings per share 12.62 cents 9.31 cents 7.77cents 3.43cents 0.9cents Assets and liabilities Total assets 13,925,688 12,993,990 11,466,377 6,222,082 3,512,648 Total liabilities and minority interests 5,491,848 4,854,820 3,266,309 3,448,751 1,834,709 Net assets 8,433,840 8,139,170 8,200,068 2,773,331 1,677,939 44▼▼ (3,994) 55,111 30,693 (14,540) (58) 71,206 (29,241) — 41,965 (16,378) 25,587 — 1999 annual report Summary financial information (continued) Notes: 1. The consolidated results of the Group for the year ended 31 December, 1998 and the pro forma consolidated results of the Group for the three years ended 31 December, 1997 have been extracted from the Company’s 1998 annual report dated 25 February, 1999, while those of the year ended 31 December, 1999 were prepared based on the consolidated income statement as set out on page 59 of the financial statements. 2. The 1999 earnings per share is based on the net profit from ordinary activities attributable to shareholders for the year ended 31 December, 1999 of Rmb548,311,000 (1998: Rmb404,391,000) and the 4,343,114,500 shares (1998: 4,343,114,500 shares) in issue during the year. Major customers and suppliers The five largest customers and suppliers contributed 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 of the Group carried out in the year, which the Stock Exchange of Hong Kong Limited (“Stock Exchange”) has granted a waiver (for compliance with Chapter 14 of the Rules Governing the Listing of Securities issued on The Stock Exchange of Hong Kong Limited (“Listing Rules”) pursuant to its letter of 14 May, 1997), and the scope of these transactions have been further modified in accordance with paragraph 19A.21 of the Listing Rules (the “Connected Transactions”). For details, please refer to note 35 to the financial statements. Another connected transaction of the Group carried out in 1999 was the Xinchang Acquisition, further details of which are set out under the heading “Xinchang Acquisition” in the section of “Management Discussion and Analysis” on page 28 of this report. 45 ▼▼ Report of the Directors (Cont’d) The Company’s Board of Directors has reviewed the Connected Transactions and confirmed that, during the period from 1 January, 1999 to 31 December, 1999, such transactions were: (i) carried out in accordance with the terms of the agreements relating to such transactions entered into by the Company or its subsidiaries (as relevant); (ii) entered into in the usual and ordinary course of business of the Company or its subsidiaries (as relevant); and (iii) entered into on normal commercial terms and are 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 14 May, 1997), have also reviewed the above transactions and have confirmed that the Board of Directors of the Company has given its approval of these transactions and that 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 period from 1 January, 1999 to 31 December, 1999. Fixed assets Details of movements in the fixed assets of the Company and the Group are set out in note 13 to the financial statements. Capital commitments Details of the capital commitments of the Company and the Group as at 31 December, 1999 are set out in note 32 to the financial statements. Subsidiaries Particulars of the Company’s subsidiaries are set out in note 14 to the financial statements. 46▼▼ 1999 annual report Jointly-controlled entity and an associate Particulars of the Company’s and the Group’s interests in a jointly-controlled entity and an associate are set out in notes 15 and 16 to the financial statements, respectively. Interest capitalised During the year, interest capitalised as part of the costs of construction in progress amounted to approximately Rmb14,843,000 (1998: Rmb78,964,000). Reserves Details of movements in the reserves of the Company and the Group during the year are set out in note 29 to the financial statements. Distributable reserves As at 31 December, 1999, the Company’s reserves available for distribution by way of cash or in kind, calculated in accordance with relevant rules and regulations, amounted to Rmb311,335,000. In addition, 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 capitalisation issues. Charitable contributions During the year, the Group made charitable contributions totaling Rmb450,000. 47 ▼▼ Report of the Directors (Cont’d) Substantial shareholders As at 31 December, 1999, the following shareholders 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”): Number of shares Percentage Zhejiang Provincial High Class Highway Investment Company Limited 2,909,260,000 66.99% (domestic shares) HKSCC Nominees Limited 1,393,711,299 32.09% (“H” shares) Purchase, sale or redemption of the listed securities of the Company 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 note 24 to the financial statements. Trust deposits As at 31 December, 1999, 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 financial institutions in Hong Kong. The Company has not encountered any difficulty in the withdrawal of funds. 48▼▼ 1999 annual report Use of IPO proceeds from the issue of H Shares The net IPO proceeds of the Company in 1997 amounted to approximately Rmb3,524 million. Details of the applications of such proceeds as at 31 December, 1999 are set out below: • Approximately Rmb534.45 million was applied as capital 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 Rmb29.4 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, in November 1998, the Company, with the approval from its shareholders, applied this portion of the IPO proceeds to pay for the consideration for the acquisition of an approximately 30.748 per cent. interest in the capital of Jiaxing Co (the “Acquisition”). The total consideration in relation to the Acquisition was approximately Rmb914.7 million, and was funded entirely by the IPO proceeds. Half of the Acquisition consideration was paid up in December, 1998 and the balance was paid in March 1999; • Approximately Rmb1,048.05 million was used as capital contribution to Shangsan Co. The balance of the capital contribution in the sum of approximately Rmb175.95 million will be paid in the year 2000; • Approximately Rmb38 million was used as capital contribution to Petroleum Co; As at 31st December, 1999, the Company used approximately Rmb3,207.42 million, or approximately 91% of its IPO proceeds. The balance of approximately Rmb316.58 million was deposited in commercial banks in the PRC and invested in listed liquidable state bonds. 49 ▼▼ Report of the Directors (Cont’d) Directors The Directors during the year were: Executive Directors Mr. Geng Xiaoping Mr. Ying Shudeng Mr. Fang Yunti Mr. Xu Yikuang Mr. Zhang Jingzhong Ms. Zhang Chunming Mr. Xuan Daoguang Independent Non-executive Directors Dr. Hu Hung Lick, Henry Mr. Tung Chee Chen All of the Directors were appointed on 1 March 1997. In accordance with the Company’s articles of association, all the Directors will retire and, being eligible, may offer themselves for re-election at the forthcoming extraordinary general meeting dated 28 February, 2000. Directors and senior management biographies Biographical details of the new board of Directors and senior management of the Group are set out under the Management Profile section of this report. 50▼▼ 1999 annual report 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 1 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 direct or indirect, in any contract of significance to which the Company, or any of its subsidiaries, 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 As at 31 December, 1999, none of the Directors, Supervisors or their associates had any personal, family, corporate or other interests in any equity or debt securities of the Company or any associated corporations (as defined in the SDI Ordinance) as recorded in the register maintained by the Company pursuant to 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, jointly-controlled entity, associate or 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. 51 ▼▼ Report of the Directors (Cont’d) Directors’ and supervisors’ remuneration Fees Basic salaries, housing, other allowances and benefits in kind Pension scheme contributions Bonuses paid and payable Rmb’000 — 1,286 — — 1,286 None of the Directors or Supervisors received remuneration in excess of HK$1 million. The amount disclosed above included remuneration of HK$120,000 paid to each of the independent non-executive Directors (1998: HK$100,000). 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 Rmb762,000 (1998: 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 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 the contributions that it has previously made. Hence, no forfeited contribution was used by the Company to reduce the level of its contributions during the year. 52▼▼ 1999 annual report 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. Year 2000 compliance 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 digits 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. The Group’s definition of being Year 2000 compliant is ensuring that every supporting computer information system has continued to function properly and thereby, all the critical business processes have continued to operate after 31 December, 1999. The Group has passed the turn of the century and no significant problems have been noted so far. The Directors believe that the Group’s systems are Year 2000 compliant and that its operations will not be significantly affected by the Year 2000 issue. Accommodation benefits for employees According to the relevant rules and regulations in the PRC, the Group and its employees are required to contribute to a housing fund (based on a certain percentage of the salaries of the employees). There are no further payment obligations beyond the said contribution to the housing fund. In 1998, in addition to the contribution made to the housing fund as required, the Company purchased apartments for the sum of Rmb19 million and made a provision of Rmb15.3 million in that year for the estimated loss on their disposal. The Company planned to sell the apartments to certain eligible employees of the Company at a discount of approximately 80 per cent., and the sale of the apartments will be completed in 2000. Save as disclosed above, the Company did not own, acquire or dispose any staff quarters during the year. 53 ▼▼ Report of the Directors (Cont’d) 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 except the Board of Directors expect that the Audit Committee will be set up on 28 February, 2000. 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 22 February, 2000 54▼▼ 1999 annual report Report of the Supervisory Committee Dear Shareholders, In compliance with the Company Law of the People’s Republic of China, the relevant laws and regulations of Hong Kong and the Articles of Association of the Company, the three-member Supervisory Committee conscientiously discharged its statutory supervisory duties for the purpose of safeguarding the lawful interests of the shareholders and the Company. In respect of our primary tasks covered in 1999, we attended Board meetings, advised on important issues such as project development, investment decisions, and dividend policy, participated in major functions of the Company, and understood and monitored through other means the behaviour of the Directors, General Manager as well as other officers in operational management and routine affairs. In addition, we carried out an earnest review of the financial position of the Company by verifying on schedule the financial report and profit distribution scheme proposed by the Board for submission to the shareholders’ general meeting. The Directors, General Manager, and other officers of the Company were engaged in lawful operations and prescribed activities, while earnestly implementing various resolutions passed at shareholders’ general meetings. With cost-effective measures in place, promising results were achieved in 1999. There were, accordingly, an increase in profits attributable to shareholders and a good corporate image was established. Having examined the financial report and profit distribution scheme for 1999 prepared by the Board for submission to the shareholders’ general meeting, we considered that the financial report presented an accurate reflection of the operating results and asset position of the Company for 1999 pursuant to the relevant laws, regulations, and the Articles of Association of the Company. We also agreed to the said profit distribution scheme. We also reviewed the report of the Directors submitted to the shareholders’ general meeting on this occasion and considered it a presentation of the actual situation regarding the Company. In the course of the business, the Directors, General Manager and other officers of the Company observed their fiduciary duties and worked with diligence during the exercise of their rights or the discharge of their tasks. We did not find any abuse of powers or infringement of the interests of both shareholders and employees. 55 ▼▼ Report of the Supervisory Committee (Cont’d) The various accomplishments of the Company were to our satisfaction, and we have full confidence in the prospects of development of the Company. By the order of Supervisory Committee Xia Linzhang Chairman of the Supervisory Committee 22 February, 2000 56▼▼ 1999 annual report 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 59 to 101 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. 57 ▼▼ Report of the International Auditors (Cont’d) 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 31 December, 1999 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. Hong Kong 22 February, 2000 Ernst & Young Certified Public Accountants 58▼▼ Year ended 31 December 1999 TURNOVER Operating costs Gross profit Other revenue Administrative expenses Other operating expenses PROFIT FROM OPERATING ACTIVITIES Finance costs Share of profit of an associate PROFIT BEFORE TAX Tax Consolidated Income Statement Notes Rmb’000 Rmb’000 1999 1998 4 4 5 6 7 1,050,498 655,069 (298,417) (220,537) 752,081 434,532 167,528 (60,320) (2,374) 234,573 (45,611) (635) 856,915 622,859 (172,922) 22,559 (94,741) 18,982 706,552 547,100 (71,810) (73,795) PROFIT BEFORE MINORITY INTERESTS 634,742 473,305 Minority interests (86,431) (68,914) NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS Dividends RETAINED PROFIT FOR THE YEAR EARNINGS PER SHARE 8 11 12 548,311 404,391 (238,872) (152,009) 309,439 252,382 12.62cents 9.31cents The notes on pages 67 to 101 form an integral part of the financial statements. 59 ▼▼ Consolidated Statement of Recognised Gains and Losses Year ended 31 December 1999 1999 1998 Notes Rmb’000 Rmb’000 Effect of changes in accounting policy 31 19,133 Net gain not recognised in the income statement Net profit for the year attributable to shareholders — — 19,133 548,311 404,391 Total recognised gains and losses 567,444 404,391 Capital reserve arising on the acquisition of a subsidiary Goodwill eliminated directly against reserves 29 29 — 9,805 (14,769) (323,085) 552,675 91,111 The notes on pages 67 to 101 form an integral part of the financial statements. 60▼▼ 31 December 1999 NON-CURRENT ASSETS Fixed assets Interest in a jointly-controlled entity Interest in an associate Expressway operating rights Long term investments Deferred costs CURRENT ASSETS Short term investments Inventories Trade receivables Other receivables Time deposits Cash and cash equivalents CURRENT LIABILITIES Trade payables Profits tax payable Other taxes payable Other payables and accruals Interest-bearing bank and other borrowings Consolidated Balance Sheet 1999 1998 Notes Rmb’000 Rmb’000 13 15 16 17 18 18 19 20 21 22 23 10,621,870 9,862,189 65,000 231,439 240,745 38,650 — — 220,718 249,445 11,149 4,928 11,197,704 10,348,429 1,083,394 1,016,783 1,049 4,749 270,119 417,952 950,721 1,851 11,560 326,753 1,004,442 284,172 2,727,984 2,645,561 226,895 116,245 11,735 524,298 1,106,425 380,645 64,924 18,422 872,615 520,191 1,985,598 1,856,797 NET CURRENT ASSETS 742,386 788,764 The notes on pages 67 to 101 form an integral part of the financial statements. 61 ▼▼ Consolidated Balance Sheet (Continued) 31 December 1999 TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other loans Deferred tax Minority interests CAPTIAL AND RESERVES Issued capital Reserves 1999 1998 Notes Rmb’000 Rmb’000 24 27 28 29 11,940,090 11,137,193 2,053,472 1,746,583 3,346 5,658 1,449,432 1,245,782 8,433,840 8,139,170 4,343,115 4,343,115 4,090,725 3,796,055 8,433,840 8,139,170 Geng Xiaoping Director Fang Yunti Director The notes on pages 67 to 101 form an integral part of the financial statements. 62▼▼ Year ended 31 December 1999 NET CASH INFLOW FROM OPERATING ACTIVITIES RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received Interest paid Dividends paid Dividends paid to minority interests Dividend from an associate Net cash outflow from returns on investments and servicing of finance TAXATION Taxes paid INVESTING ACTIVITIES Additions to fixed assets Additions to construction in progress Decrease in time deposits Decrease in long term investments Increase in deferred costs Increase in short term investments Acquisition of additional interests in subsidiaries Acquisition of a jointly-controlled entity Acquisition of a subsidiary Acquisition of an associate Consolidated Cash Flow Statement Note 30(a) 1999 1998 Rmb’000 Rmb’000 1,047,828 610,682 78,225 (177,880) (217,156) (6,840) 10,659 62,941 (176,845) (69,490) (11,058) — (312,992) (194,452) (43,978) (61,881) (187,903) (808,691) (566,994) (928,607) 586,490 1,045,423 2,500 (174) (96,611) (565,812) (65,000) — — — (2,584) (972,283) (457,333) — 640,782 (208,000) Net cash outflow from investing activities (1,135,201) (1,449,596) NET CASH OUTFLOW BEFORE FINANCING ACTIVITIES (444,343) (1,095,247) The notes on pages 67 to 101 form an integral part of the financial statements. 63 ▼▼ Consolidated Cash Flow Statement (Continued) Year ended 31 December 1999 1999 1998 Note Rmb’000 Rmb’000 NET CASH OUTFLOW BEFORE FINANCING ACTIVITIES (444,343) (1,095,247) FINANCING ACTIVITIES New bank and other loans Repayment of bank and other loans Minority interests 30(b) 2,890,122 823,668 (1,996,999) (780,930) 217,769 489,935 Net cash inflow from financing activities 1,110,892 532,673 INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 666,549 (562,574) Cash and cash equivalents at beginning of year 284,172 846,746 CASH AND CASH EQUIVALENTS AT END OF YEAR 950,721 284,172 ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits with original maturity of less than 300,247 232,883 three months when acquired 650,474 51,289 950,721 284,172 The notes on pages 67 to 101 form an integral part of the financial statements. 64▼▼ 31 December 1999 NON-CURRENT ASSETS Fixed assets Interests in subsidiaries Interest in a jointly-controlled entity Interest in an associate Expressway operating rights Long term investments CURRENT ASSETS Short term investments Inventories Trade receivables Other receivables Time deposits Cash and cash equivalents CURRENT LIABILITIES Trade payables Profits tax payable Other taxes payable Other payables and accruals Interest-bearing bank and other borrowings Balance Sheet 1999 1998 Notes Rmb’000 Rmb’000 13 14 15 16 17 18 18 19 20 21 22 23 5,148,878 5,201,739 3,211,124 2,881,518 65,000 208,000 189,512 30,000 — 208,000 196,445 — 8,852,514 8,487,702 801,766 759,984 810 4,749 40,770 417,952 830,021 1,517 9,257 23,621 1,004,442 185,668 2,096,068 1,984,489 7,315 42,780 4,425 432,827 1,010,956 13,263 5,800 2,923 794,604 474,804 1,498,303 1,291,394 NET CURRENT ASSETS 597,765 693,095 The notes on pages 67 to 101 form an integral part of the financial statements. 65 ▼▼ Balance Sheet (Continued) 31 December 1999 TOTAL ASSETS LESS CURRENT LIABILITIES 9,450,279 9,180,797 1999 1998 Notes Rmb’000 Rmb’000 NON-CURRENT LIABILITIES Interest-bearing bank and other loans Deferred tax NET ASSETS CAPITAL AND RESERVES Issued capital Reserves 24 27 28 29 973,534 3,346 799,599 5,658 8,473,399 8,375,540 4,343,115 4,343,115 4,130,284 4,032,425 8,473,399 8,375,540 Geng Xiaoping Director Fang Yunti Director The notes on pages 67 to 101 form an integral part of the financial statements. 66▼▼ Notes to Financial Statements 31 December 1999 1. Corporate Information The registered office of Zhejiang Expressway Co., Ltd. is 19/F, Zhejiang World Trade Centre, 15 Shuguang Road Hangzhou, Zhejiang, the PRC. During the year, the Group was involved in the following principal activities: (a) The design, construction, operation, maintenance and management of high grade roads; and (b) The development and operation of certain ancillary services such as technical consultation, automobile servicing and fuel facilities. 2. Impact of HKSSAPs The following Accounting Standards have been adopted for the first time in the preparation of the current year consolidated financial statements. • • • • HKSSAP 1: Presentation of Financial Statements HKSSAP 2: Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies HKSSAP 10: Accounting for Investments in Associates HKSSAP 24: Accounting for Investments The following is a summary of the major effects of their respective adoption. HKSSAP 1 prescribes the basis for the presentation of financial statements and sets out guidelines for their structure and minimum requirements for the content therein. The format of the consolidated income statement and the balance sheets set out on pages 59, 61 and 62 respectively, has been revised in accordance with the HKSSAP, and a new statement of recognised gains and losses, not previously required, is included on page 60. Additional disclosures as required are included in the supporting notes thereto. HKSSAP 2 prescribes the classification, disclosure and accounting treatment of certain items in the income statement, and specifies the accounting treatment for changes in accounting estimates, changes in accounting policies and the correction of fundamental errors. HKSSAP 10, which prescribes the accounting treatment for investments in associates, is very similar in most respects to the previous HKSSAP 10, and accordingly has had no major impact on these financial statements. The terminology used and certain disclosures have been revised in line with the new requirements. 67 ▼▼ Notes to Financial Statements 31 December 1999 2. Impact of New HKSSAPs (Continued) HKSSAP 24 prescribes the accounting treatment and disclosures for investments in debt and equity securities, including in certain circumstances alternative accounting treatments. For these financial statements, short term investments in securities held for trading purposes are also stated at their fair values, with differences in valuation being charged or credited to the income statement. The effect of the change of accounting policy, which has been treated as a prior year adjustment, is explained in note 31 to the financial statements. 3. Summary of Significant Accounting Policies Basis of preparation These financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, modified with respect to the measurement of investments in securities, as further explained below. Basis of consolidation The consolidated financial statements include the audited financial statements of the Company and its subsidiaries for the year ended 31 December 1999. 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. 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. 68▼▼ Notes to Financial Statements 3. Summary of Significant Accounting Policies (Continued) Joint ventures A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity which is subject to joint control and none of the participating parties has unilateral control over the economic activity. The joint venture arrangements which involve the establishment of a separate entity in which the Group and other parties have an interest are referred to as jointly-controlled entities. The Group’s share of the post-acquisition results and reserves of jointly-controlled entities is included in the consolidated income statement and consolidated reserves, respectively. The Group’s interests in jointly-controlled entities 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 diminutions in values, other than those considered temporary in nature, deemed necessary by the directors. The results of jointly-controlled entities are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s interests in jointly-controlled entities are treated as long term investments and are stated at cost less any provisions for diminutions in values, other than those considered temporary in nature, deemed necessary by the directors. Associates An associate is an enterprise, not being a subsidiary or a joint venture, 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 associates is included in the consolidated income statement and consolidated reserves, respectively. The Group’s interests in associates 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 diminutions in values, other than these considered temporary in nature, deemed necessary by the directors. 69 ▼▼ Notes to Financial Statements 31 December 1999 3. Summary of Significant Accounting Policies (Continued) Associates (Continued) The results of associates are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s interests in associates are stated at cost less any provisions for diminutions in values, other than those considered temporary in nature, deemed necessary by the directors. Goodwill Goodwill arising on consolidation of subsidiaries and on acquisition of associates and jointly-controlled entities represents the excess purchase consideration paid over the fair values ascribed to the net underlying assets acquired and is eliminated against reserves in the year of acquisition. On disposal of subsidiaries, associates or jointly- controlled entities, 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. Fixed assets and depreciation Fixed assets are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price, costs transferred from construction in progress and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the tangible fixed assets have been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the tangible fixed assets, the expenditure is capitalised 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 average rates ranging from 7% to 8.77% per annum, up to the expiry of the underlying 30-year expressway concession period will be equal to the total cost of the expressways and bridges. Amortisation of land is provided on a straight-line basis to write off the cost of the land use rights over the underlying 30-year expressway concession period. 70▼▼ Notes to Financial Statements 3. Summary of Significant Accounting Policies (Continued) Fixed assets and depreciation (Continued) Depreciation of fixed assets, other than expressways, bridges and land, is provided 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 Annual Estimated depreciation useful life 30 years 10 years 8 years rate 3.2% 9.7% 12% 5-8 years 12-19.4% The gain or loss on disposal or retirement of a fixed asset recognised in the income statement is the difference between the net sales proceeds and the carrying amount of the relevant asset. Construction in progress Construction in progress represents costs incurred in the construction of expressways and bridges. Costs comprise 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 amortisation. Amortisation is provided on a straight-line basis over the periods of expressway operating rights granted to the Company and its subsidiaries. 71 ▼▼ Notes to Financial Statements 31 December 1999 3. Summary of Significant Accounting Policies (Continued) Long term investments Long term investments are non-trading investments in listed and unlisted securities intended to be held on a long term basis. Held-to-maturity securities are stated at cost plus or minus the cumulative amortisation of the difference between the purchase price and the maturity amount, less any provision for permanent diminutions considered necessary by the directors, on an individual basis. The provision is recognised as an expense immediately. The profit or loss on disposal of a held-to-maturity security is accounted for in the period in which the disposals occurs and is the difference between the net sales proceeds and the carrying amount of the security. Unlisted equity securities are stated at cost, less any provisions for permanent diminutions considered necessary by the directors, on an individual basis. The provision is recognised as an expense immediately. The profit or loss on disposal of an unlisted security is accounted for in the period in which the disposals occurs and is the difference between the net sales proceeds and the carrying amount of the security. Short term investments Short term investments are investments in securities held for trading purposes and are stated at their fair values on the basis of their quoted market prices at the balance sheet date, on an individual investment basis. The gains or losses arising from changes in the fair value of a security are credited or charged to the income statement for the period in which they arise. Revenue recognition Revenue is recognised 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 buyers, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; 72▼▼ Notes to Financial Statements 3. Summary of Significant Accounting Policies (Continued) Revenue recognition (Continued) (c) on the rendering of services, based on the percentage of completion basis, 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 terms; (e) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable; and (f) dividends, when the shareholders’ right to receive payment is established. Tax 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. Deferred taxation is provided, using the liability method, on all significant timing differences to the extent it is probable that the liability will crystallise in the foreseeable future. A deferred tax asset is not recognised until its realisation 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 income statement unless such exchange differences relate to funds borrowed specifically for the financing of construction of expressways and bridges, in which case they are capitalised to the extent that they can be regarded as an adjustment to interest costs. 73 ▼▼ Notes to Financial Statements 31 December 1999 3. Summary of Significant Accounting Policies (Continued) Capitalisation of borrowing costs Borrowing costs directly attributable to the construction of expressways, tunnels and bridges are capitalised 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 recognised as an expense in the period in which they are incurred. The amount of borrowing costs capitalised 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. Capitalisation 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. Operating Leases 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 income statement on a straight-line basis over the lease terms. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis. Net realisable value is based on estimated selling prices less any further costs expected to be incurred to completion and disposal. 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 For the purpose of the consolidated cash flow statement, 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. For the purpose of balance sheet classification, cash equivalents represent assets similar in nature to cash, which 74▼▼ are not restricted as to use. Notes to Financial Statements 4. Turnover and Revenue Turnover mainly represents toll income from the operation of expressways, the value of advertising services rendered, and the value of road maintenance services rendered, net of relevant revenue taxes. An analysis of turnover and revenue is as follows: Toll income Advertising income Road maintenance income Others Less: Revenue taxes Turnover Exchange gains Dividend income from unlisted investments Income on short term investments in securities Interest income Rental income Trailer income Others Other revenue Revenue 1999 1998 Rmb’000 Rmb’000 1,087,672 658,505 5,859 6,971 9,918 2,231 24,843 5,697 1,110,420 691,276 (59,922) (36,207) 1,050,498 655,069 — 107 77,577 79,579 4,893 4,309 1,063 2,057 179 150,003 71,801 1,213 5,408 3,912 167,528 234,573 1,218,026 889,642 75 ▼▼ Notes to Financial Statements 31 December 1999 4. Turnover and Revenue (Continued) The Company and its subsidiaries are subject to the following types of revenue taxes: - - - - Business Tax (“BT”), levied at 3% to 5% on toll income and other service income; City Development Tax, levied at 1% to 7% of BT; Education Supplementary Tax, levied at 3.5% to 4% of BT; and Culture & Education Fees, levied at 3% on advertising income. 5. Profit From Operating Activities The Group’s profit from operating activities is arrived at after charging/(crediting): Depreciation Operating lease rentals on land and buildings Auditors’ remuneration Staff costs: Wages and salaries Pension contributions Amortisation of deferred costs Amortisation of expressway operating rights Provision for anticipated deficit arising on the disposal of staff quarters Loss on disposal of fixed assets Net rental income Exchange losses / (gains) Dividend income from unlisted investments Interest income Income from short term investments 76▼▼ 1999 1998 Rmb’000 Rmb’000 140,127 526 1,842 85,524 2,839 1,366 48,865 34,219 3,052 5,102 8,700 — 3,028 (4,893) 182 (107) (79,579) (77,577) 2,964 837 6,933 15,300 2,681 (1,213) (2,057) (179) (71,801) (150,003) Notes to Financial Statements 1999 1998 Rmb’000 Rmb’000 117,446 70,319 103,385 73,460 187,765 176,845 (14,843) (82,104) 172,922 94,741 6. Finance Costs Interest on bank loans and other loans wholly repayable within five years Interest on other loans Total finance costs Interest capitalised 7. Tax 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. According to an approval from Zhejiang Provincial Local Tax Bureau dated 14 February 2000, Shangsan Co was qualified for the exceptions under the category of “New enterprise providing employment opportunities to redundant workers” as defined in the relevant national tax rules, and therefore, was entitled to an exemption from EIT for three years starting from 1 January 1998. Pursuant to a series of directives issued by Zhejiang Provincial People’s Government, and the Municipal Governments of Yuhang and Jiaxing in 1997, the Company, Yuhang Co and Jiaxing Co were entitled to respective refunds from the Zhejiang Finance Bureau or the Municipal Finance Bureau of Yuhang and Jiaxing, of an amount equal to 18% of their taxable income in respect of the EIT paid to the taxation bureau, respectively. 77 ▼▼ Notes to Financial Statements 31 December 1999 7. Tax (Continued) The tax refunded and refundable represents the tax subsidies received during the year or immediately after the year end. It is the directors’ opinion that these refunds are received without recourse. Notwithstanding this, as a result of the State Council’s newly released directive numbered Guo Fa [2000]2 in respect of correcting the tax refund policies adopted by local governments with effect from 1 January 2000, the Company is seeking clarification and advice from relevant government authorities as to whether the Company and its subsidiaries may or may not continue to enjoy the 18% tax refund in the future. Should the aforementioned directive be applicable to the entitlement of the Group’s existing preferential tax treatment, the Group, according to the directive and with the assistance from Zhejiang Provincial Government, will make an application to the relevant national authorities to enable the Company to continue to enjoy the relevant financial subsidies as a major transportation infrastructure investment enterprise listed abroad. However, there is no assurance that the application will be approved. Group: Tax charged Overprovision in prior year Tax refunded/refundable Deferred - note 27 Share of tax attributable to an associate overprovision in an associate in prior year 1999 1998 Rmb’000 Rmb’000 166,839 (10,930) (82,966) 72,943 (2,312) 7,443 (6,264) 142,703 — (77,788) 64,915 2,616 6,264 — Tax charge for the year 71,810 73,795 There was no material unprovided deferred tax in respect of the year (1998 : Nil). 8. Net Profit From Ordinary Activities Attributable to Shareholders The net profit from ordinary activities attributable to shareholders dealt with in the financial statements of the Company is Rmb336,731,000 (1998: Rmb333,768,000). 78▼▼ Notes to Financial Statements 9. Directors’ Remuneration Directors’ remuneration disclosed pursuant to the Listing Rules and Section S161 of the Companies Ordinance is as follows: Fees Other emoluments: 1999 1998 Rmb’000 Rmb’000 — — Salaries, allowances and benefits in kind 1,286 1,166 1,286 1,166 Salaries, allowances and benefits in kind include HK$120,000 (1998: Hk$100,000) payable to each of the independent non-executive directors. There was no other emoluments payable to the independent non-executive directors during the year (1998: Nil). The remuneration of the directors fell within the following band: Number of directors 1999 1998 Nil to Rmb500,000 9 9 There was no arrangement under which a director waived or agreed to waive any remuneration during the year. 10. Five Highest Paid Employees The five highest paid employees during the year included five (1998: five) directors, details of whose remuneration are set out in note 9 above. 79 ▼▼ Notes to Financial Statements 31 December 1999 11. Dividends Company 1999 1998 Rmb’000 Rmb’000 Interim - Rmb0.015 (approximately HK$0.014) per share (1998: Nil) 65,147 — Proposed final - Rmb0.04 (approximately HK$0.037) per share (1998: Rmb0.035 (approximately HK$0.033) per share) 173,725 152,009 238,872 152,009 12. Earnings Per Share The calculation of basic earnings per share is based on the net profit from ordinary activities attributable to shareholders for the year of Rmb548,311,000 (1998: Rmb404,391,000) and the 4,343,114,500 shares (1998: 4,343,114,500 shares) in issue during the year. Diluted earnings per share for the years ended 31 December 1999 and 1998 have not been calculated as no diluting event existed during these years. 80▼▼ Notes to Financial Statements 13. Fixed Assets Group Cost: Expressways and bridges Rmb’000 Land Rmb’000 Toll Communi- stations and ancillary facilities Rmb’000 cations and signalling equipment Rmb’000 Motor vehicles Rmb’000 Machinery and Construction equipment in progress Rmb’000 Rmb’000 Total Rmb’000 At 1 January 1999 527,628 8,098,739 Additions Transfers Disposals — — — — 30,255 — 83,883 4,798 125,790 (7,564 ) 8,485 — — — 31,448 2,086 — (206 ) 65,938 3,176 108,860 (40 ) 1,189,187 10,005,308 892,776 (264,905 ) — 902,836 — (7,810 ) At 31 December 1999 527,628 8,128,994 206,907 8,485 33,328 177,934 1,817,058 10,900,334 Accumulated depreciation: At 1 January 1999 Provided during the year Written off on disposals At 31 December 1999 Net book value: 18,264 17,570 — 35,834 103,523 91,448 — 194,971 6,429 10,124 (4,566 ) 11,987 At 31 December 1999 491,794 7,934,023 194,920 At 31 December 1998 509,364 7,995,216 77,454 Company Cost: At 1 January 1999 350,384 4,712,616 Additions Transfers Disposals — — — — — — At 31 December 1999 350,384 4,712,616 Accumulated depreciation: At 1 January 1999 Provided during the year Written off on disposals At 31 December 1999 Net book value: 17,994 11,668 — 29,662 92,298 55,253 — 147,551 At 31 December 1999 320,722 4,565,065 At 31 December 1998 332,390 4,620,318 All fixed assets are located in the PRC. 65,658 — 29,925 (218 ) 95,365 2,910 3,789 (37 ) 6,662 88,703 62,748 401 819 — 1,220 7,265 8,084 8,472 — — — 4,423 4,009 (206 ) 8,226 25,102 27,025 20,654 1,464 — — 10,079 16,157 (10 ) 26,226 — — — — 143,119 140,127 (4,782 ) 278,464 151,708 1,817,058 10,621,870 55,859 1,189,187 9,862,189 64,355 — 108,818 (40 ) 107,258 33,887 (138,743 ) — 5,329,397 35,351 — (258 ) 8,472 22,118 173,133 2,402 5,364,490 401 817 — 1,218 7,254 8,071 4,144 2,447 — 6,591 15,527 16,510 9,911 14,027 (10 ) 23,928 — — — — 127,658 88,001 (47 ) 215,612 149,205 2,402 5,148,878 54,444 107,258 5,201,739 81 ▼▼ Notes to Financial Statements 31 December 1999 14. Interests in Subsidiaries Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Company 1999 1998 Rmb’000 Rmb’000 3,196,754 2,861,875 28,175 (13,805) 19,643 — 3,211,124 2,881,518 The amounts due from/to subsidiaries are unsecured, interest-free and have no fixed terms of repayments. Particulars of the Company’s subsidiaries, all of which are directly held, are as follows: Date and Percentage of equity attributable Name of place of Registered to the subsidiaries registration capital Company Principal activities Zhejiang Yuhang Note 1 75,223,000 51% Construction and management Expressway Company Limited (“Yuhang Co”) of the Yuhang Section of the Shanghai-Hangzhou Expressway Zhejiang Jiaxing Note 2 1,859,200,000 84.19% Construction and management Expressway Company Limited (“Jiaxing Co”) of the Jiaxing Section of the Shanghai-Hangzhou Expressway Zhejiang Gaotong Note 3 5,000,000 80% Manufacturing, designing and Stone Development Company Limited (“Gaotong”) 82▼▼ selling of stone and quarry materials Notes to Financial Statements 14. Interests in Subsidiaries (Continued) Date and Percentage of equity attributable Name of place of Registered to the subsidiaries registration capital Company Principal activities Zhejiang Shangsan Note 4 2,400,000,000 55% Investing, construction Expressway Company Limited (“Shangsan Co”) and operating the Shangsan Expressway Zhejiang Expressway Note 5 1,000,000 70% Advertising Advertising Company Limited (“Advertising Co”) Note 1. Yuhang Co was established on 7 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 28 November 1996. Note 2. Jiaxing Co was established on 30 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 29 November 1996. Note 3. Gaotong was established on 3 November 1997 in the PRC as a limited liability company. Note 4. Shangsan Co was established on 1 January 1998 in the PRC as a limited liability company. Note 5. Advertising Co was established on 1 June 1998 in the PRC as a limited liability company. 83 ▼▼ Notes to Financial Statements 31 December 1999 15. Interest in a Jointly-Controlled Entity Unlisted shares, at cost Share of net assets other than goodwill Group Company 1999 1998 1999 1998 Rmb’000 Rmb’000 Rmb’000 Rmb’000 — 65,000 65,000 — — — 65,000 — 65,000 — — — Particulars of the jointly-controlled entity, which is directly held by the Company, are as follows: Place of Percentage of Business registration and Ownership Voting Profit Name structure operations interest power sharing Principal activities Hangzhou Corporate the PRC 50% 50% 50% Investing, Shida Expressway Co., Ltd. (“Shida Co”) constructing and operating of Shiqiao- Dajing Road (“Shida Road”) 84▼▼ Notes to Financial Statements 16. Interest in an Associate Group Company 1999 1998 1999 1998 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Unlisted shares, at cost — — 208,000 208,000 Share of net assets other than goodwill 231,439 220,718 — — 231,439 220,718 208,000 208,000 The Group’s share of post-acquisition accumulated reserves of the associate at 31 December 1999 was Rmb23,439,000 (1998: Rmb12,718,000). Particulars of the associate, which is directly held by the Company, are as follows: Place of Percentage of equity Business registration attributable Name structure and operations to the Group Principal activities 1999 1998 Zhejiang Expressway Corporate the PRC 50% 50% Constructing and Petroleum Development Co., Ltd. (“Petroleum Co”) operating of gas stations and the sale of petroleum products The financial statements of the above associate are coterminous with those of the Group. The consolidated financial statements have been adjusted for material transactions between the associate and Group companies. 85 ▼▼ Notes to Financial Statements 31 December 1999 17. Expressway Operating Rights Cost: At 1 January and 31 December 1999 261,000 208,000 Group Company Rmb’000 Rmb’000 Amortisation: At 1 January 1999 Provided during the year At 31 December 1999 Net book value: At 31 December 1999 At 31 December 1998 18. Investments Long term investments 11,555 8,700 11,555 6,933 20,255 18,488 240,745 189,512 249,445 196,445 Group Company 1999 1998 1999 1998 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Held-to-maturity securities Unlisted equity investments, at cost 30,000 8,650 — 30,000 11,149 — 38,650 11,149 30,000 — — — 86▼▼ Notes to Financial Statements 18. Investments (continued) Short term investments Listed government debentures, at market value - PRC Group Company 1999 1998 1999 1998 Rmb’000 Rmb’000 Rmb’000 Rmb’000 1,083,394 1,016,783 801,766 759,984 1,083,394 1,016,783 801,766 759,984 The market value of the Group’s short term investments at the date of approval of these financial statements was approximately Rmb1,082,974,000 (1998: Rmb1,027,052,000). 19. Trade Receivables Group Company 1999 1998 1999 1998 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Trade receivables Provision for doubtful debts 4,749 — 11,560 — 4,749 — 9,257 — Trade receivables, net 4,749 11,560 4,749 9,257 87 ▼▼ Notes to Financial Statements 31 December 1999 20. Other Receivables Group Company 1999 1998 1999 1998 Note Rmb’000 Rmb’000 Rmb’000 Rmb’000 Prepayments Deposits and other debtors Due from related parties 25 Profits tax refundable 77,680 246,673 133,468 — 58,971 43,346 119 36,615 1,832 15,605 — 23,333 1,121 19,337 — 3,163 270,119 326,753 40,770 23,621 21. Cash and Cash Equivalents Group Company 1999 1998 1999 1998 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Cash and bank balances Time deposits 300,247 650,474 232,883 51,289 179,547 650,474 145,380 40,288 950,721 284,172 830,021 185,668 88▼▼ Notes to Financial Statements 22. Other Payables and Accruals Group Company 1999 1998 1999 1998 Notes Rmb’000 Rmb’000 Rmb’000 Rmb’000 Accruals Other liabilities Due to related parties Due to the holding company Proposed final dividend 130,653 94,824 88,449 36,647 114,366 516,906 85,889 3,445 99,859 65,047 88,449 5,747 80,940 492,635 64,273 4,747 173,725 152,009 173,725 152,009 25 26 11 524,298 872,615 432,827 794,604 23. Interest-Bearing Bank and Other Borrowings Group Company 1999 1998 1999 1998 Note Rmb’000 Rmb’000 Rmb’000 Rmb’000 Current portion of bank and other borrowings 24 1,106,425 520,191 1,010,956 474,804 1,106,425 520,191 1,010,956 474,804 89 ▼▼ Notes to Financial Statements 31 December 1999 24. Interest-Bearing Bank and Other Loans Bank loans: Secured Unsecured Other loans: Unsecured Bank loans repayable: Within one year In the second year In the third to fifth years, inclusive Beyond five years Group Company 1999 1998 1999 1998 Rmb’000 Rmb’000 Rmb’000 Rmb’000 30,000 100,000 — 1,140,000 310,000 1,090,000 100,000 280,000 1,170,000 410,000 1,090,000 380,000 1,989,897 1,856,774 894,490 894,403 3,159,897 2,266,774 1,984,490 1,274,403 910,000 100,000 160,000 — 410,000 — — — 830,000 100,000 160,000 — 380,000 — — — 1,170,000 410,000 1,090,000 380,000 Other loans repayable: Within one year In the second year In the third to fifth years, inclusive 196,425 138,282 643,038 Beyond five years 1,012,152 1,282,423 110,191 180,956 93,040 371,120 72,302 252,767 388,465 94,804 86,041 150,197 563,361 1,989,897 1,856,774 894,490 894,403 Portion classified as current liabilities-note 23 (1,106,425) (520,191) (1,010,956) (474,804) Long term portion 2,053,472 1,746,583 973,534 799,599 90▼▼ Notes to Financial Statements 24. Interest-Bearing Bank and Other Loans (Continued) (a) Included in the total bank loans of Rmb1,170,000,000, an amount of Rmb30,000,000 is secured by time deposits of Rmb20,000,000 and cash and bank balances of Rmb10,844,151. The remaining balance is unsecured. Bank loans bear interest at rates ranging from 5.022% to 6.327% per annum. (b) Other loans are unsecured and bear interest at rates ranging from 3% to 8.53% per annum. 25. Balances with Related Parties The amounts due from and due to related parties are unsecured, interest-free and have no fixed terms of repayments. 26. Amount Due to the Holding Company The amount due to the holding company is unsecured, interest-free and has no fixed terms of repayments. 27. Deferred Tax Group and Company 1999 1998 Rmb’000 Rmb’000 Balance at beginning of year 5,658 3,042 Charge/(credit) for the year - note 7 (2,312) 2,616 At 31 December 3,346 5,658 The deferred tax of the Group and the Company arose from differences in accounting treatments between the generally accepted accounting principles adopted in the PRC and those adopted in preparing these financial statements under HKSSAP. 91 ▼▼ Notes to Financial Statements 31 December 1999 28. Share Capital 1999 1998 Number Number 1999 1998 of shares of shares Rmb’000 Rmb’000 Registered, issued and fully paid: Domestic shares of Rmb1.00 each 2,909,260,000 2,909,260,000 2,909,260 2,909,260 H Shares of Rmb1.00 each 1,433,854,500 1,433,854,500 1,433,855 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 15 May 1997. All the domestic shares and H Shares rank pari passu with each other as to dividends and voting rights. 92▼▼ Notes to Financial Statements 29. Reserves Group Share Capital/ Statutory Public premium (goodwill) surplus welfare Retained account reserve reserve fund profits Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 At 1 January 1998 3,645,082 (3,967) 30,169 15,084 170,585 3,856,953 Capital reserve on acquisition of a subsidiary — 9,805 Goodwill arising on acquisition of additional interest in a subsidiary Net profit for the year Transfer from/(to) reserves Dividends - note 11 At 31 December 1998 and — — — — (323,085) — — — — — — — — — — 9,805 — (323,085) 385,258 385,258 50,437 25,219 (75,656) — — — (152,009) (152,009) beginning of year 3,645,082 (317,247) 80,606 40,303 328,178 3,776,922 Prior year adjustment - note 31 — — — — 19,133 19,133 At 31 December 1998 and beginning of year -restated 3,645,082 (317,247) 80,606 40,303 347,311 3,796,055 Goodwill on acquisition of additional interest in a subsidiary Net profit for the year Transferred from/(to) reserves Dividends - note 11 — — — — (14,769) — — — — — — — — (14,769) 548,311 548,311 102,384 42,553 (144,937) — — — (238,872) (238,872) At 31 December 1999 3,645,082 (332,016) 182,990 82,856 511,813 4,090,725 93 ▼▼ Notes to Financial Statements 31 December 1999 29. Reserves (Continued) Share Statutory Public premium surplus welfare Retained account reserve fund profits Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Company Balance at 1 January 1998 3,645,082 26,722 13,361 165,501 3,850,666 Net profit for the year Transferred from/(to) reserves Dividends - note 11 At 31 December 1998 and — — — — — 314,635 314,635 36,873 18,436 (55,309) — — — (152,009) (152,009) beginning of year 3,645,082 63,595 31,797 272,818 4,013,292 Prior year adjustment - note 31 — — — 19,133 19,133 At 31 December 1998 and beginning of year -restated 3,645,082 63,595 31,797 291,951 4,032,425 Net profit for the year Transferred from/(to) reserves Dividends — note 11 — — — — — 336,731 336,731 52,316 26,159 (78,475) — — — (238,872) (238,872) At 31 December 1999 3,645,082 115,911 57,956 311,335 4,130,284 In accordance with the Company Law of the PRC and the companies’ articles of association, the Company, its subsidiaries, its associate and its jointly-controlled entity are required to allocate 10% of their profit after taxation, as determined in accordance with the PRC accounting standards and regulations applicable to the Company, its subsidiaries, its associate and its jointly-controlled entity, to the statutory surplus reserve (the “SSR”) until such reserve reaches 50% of the registered capital of the Company, its subsidiaries, its associate and its jointly-controlled entity. Subject to certain restrictions set out in the Company Law of the PRC and the companies’ articles of association, part of the SSR may be converted to increase share capital. 94▼▼ Notes to Financial Statements 29. Reserves (continued) In addition, Shangsan Co and Petroleum Co were required by the relevant tax authorities to transfer the EIT waived for 1998 to their respective SSR account in 1999. The transfer has been incorporated in these financial statements. In accordance with the Company Law of the PRC, the Company, its subsidiaries, its associate and its jointly-controlled entity are required to transfer 5% to 10% of their profit after taxation, as determined in accordance with PRC accounting standards and regulations applicable to the Company, its subsidiaries, its associate and its jointly- controlled entity, to the statutory public welfare fund (the “PWF”), which is a non-distributable reserve other than in the event of the liquidation of the Company, its subsidiaries, its associate and its jointly-controlled entity. The PWF must be used for capital expenditure on staff welfare facilities and these facilities remain as properties of the Company, its subsidiaries, its associate and its jointly-controlled entity . The directors of the Company have proposed to transfer Rmb52,316,000 and Rmb26,159,000 to the SSR and the PWF, respectively. This represents 15% of the Company’s profit after taxation of Rmb523,165,000 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 31 December 1999, the Company had reserves of approximately Rmb311,335,000 available for distribution by way of cash or in kind. As at 31 December 1999, 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 capitalisation issues. 95 ▼▼ Notes to Financial Statements 31 December 1999 30. Notes to the Cash Flow Statement (a) Reconciliation of profit from operating activities to net cash inflow from operating activities: Profit from operating activities Depreciation Amortisation of deferred costs Amortisation of expressway operating rights Interest income Loss on disposal of fixed assets Provision for anticipated deficit arising on the disposal of staff quarters Unrealised gain from short-term investments Decrease/(increase) in inventories Decrease/(increase) in trade receivables Decrease/(increase) in deposits and other debtors Decrease in trade payables Increase/(decrease) in amount due to the holding company Decrease in amounts due from related parties, net Increase/(decrease) in other taxes payable Increase/(decrease) in other liabilities Increase in accruals 1999 1998 Rmb’000 Rmb’000 856,915 140,127 5,102 8,700 622,859 85,524 837 6,933 (79,579) (71,801) 3,028 2,681 — — 802 6,811 41,762 (4,126) 15,300 (22,509) (1,451) (1,931) (19,854) — 33,202 (16,334) 119 (6,687) 35,252 6,400 1,500 1,057 (70,966) 78,837 Net cash inflow from operating activities 1,047,828 610,682 96▼▼ Notes to Financial Statements 30. Notes to the Cash Flow Statement (Continued) (b) Analysis of changes in financing during the year: Balance at 1 January 1998 Cash inflows from financing Arising from dilution of minority interests Acquisition of a subsidiary Dividends paid to minority interests Profit attributable to minority interests Bank and other loans Rmb’000 2,224,036 42,738 — — — — Minority interests Rmb’000 667,714 489,935 (591,581) 621,858 (11,058) 68,914 Balance at 31 December 1998 and 1 January 1999 2,266,774 1,245,782 Cash inflows from financing Arising from dilution of minority interests Dividends paid to minority interests Profit attributable to minority interests 893,123 — — — 217,769 (93,710) (6,840) 86,431 Balance at 31 December 1999 3,159,897 1,449,432 31. Change in Accounting Policy with Respect to the Investment in Securities A restatement of the carrying values of the Group’s and the Company’s short term investments in securities to their fair values (i.e. the market value), retrospectively, amounting to Rmb19,133,000 (net of deferred tax) was made in accordance with the newly adopted HKSSAP24. 97 ▼▼ Notes to Financial Statements 31 December 1999 32. Commitments Group Company 1999 1998 1999 1998 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Contracted, but not provided for: Construction of expressways 776,119 831,714 — 29,540 Proposed investments in the Shangsan Expressway Others Authorised, but not contracted for: — 8,397 — 189,750 410,550 14,394 — — — Construction of expressways 2,467,163 2,609,547 462,021 3,251,679 3,455,655 651,771 440,090 98▼▼ Notes to Financial Statements 33. Differences in Financial Statements Prepared Under PRC and Hong Kong Accounting Standards Net assets Profit after taxation as at 31 December 1999 1998 1999 1998 Rmb’000 Rmb’000 Rmb’000 Rmb’000 As reported in statutory accounts 615,742 435,247 8,694,253 8,390,721 HKSSAP adjustments: (a) Goodwill 33,016 31,605 (267,395) (285,642) (b) Provision for anticipated deficit arising on the disposal of staff quarters — (15,300) (15,300) (15,300) (c) Interest on H shares subscription monies (6,135) (4,310) 6,794 12,929 (d) Depreciation provided (e) Difference in capital surplus during establishment 67 — (f) Provision for profits tax refundable (7,230) 4,427 6,592 6,317 — — 11,923 11,923 (3,687) — (g) Restatement of short term investments in securities (19,133) 19,133 (h) Recognition of tax exemption related to 1998 17,194 — — — 19,133 — (i) Others 1,221 2,503 660 (911) As restated in the financial statements 634,742 473,305 8,433,840 8,139,170 99 ▼▼ Notes to Financial Statements 31 December 1999 34. 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 (“Provincial Investment Co”), a state-owned enterprise established in the PRC. 35. Related Party Transactions The following is a summary of 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 reorganisation agreement, 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 reorganisation and general indemnity provisions against any breach of representation warranty and undertakings contained in the agreement. 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 31 December 1999, was assumed by the Company. The loan repayment responsibility for the Shanghai- Hangzhou Expressway, which amounted to US$103,551,916 as at 31 December 1999, was assumed by Yuhang Co and Jiaxing Co. Pursuant to a supplemental agreement dated 18 April 1997, the Company, 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 reorganisation agreement 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. ▼▼ 100 Notes to Financial Statements 35. Related Party Transactions (continued) 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 in respect of these loans amounted to Rmb7,000,000. There was no further drawdown and repayment of interest expenses during the year. At 31st December 1999, Jiaxing Co had no outstanding loan balance and the outstanding loan balance for Yuhang Co amounted to Rmb78,070,000. All of these loans are unsecured. The terms of the loans to the executive commissions 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 fixed assets of Rmb108,524,000 , liabilities of Rmb89,346,000 and the repayment obligation on the World Bank funding of US$2,317,000 (equivalent to Rmb19,178,000) in the financial statements. 36. Comparative Amounts As further explained in note 2 to the financial statements, due to the adoption of new HKSSAPs during the current year, the presentation of the consolidated income statement, the balance sheets and certain supporting notes have been revised to comply with the new requirements. Accordingly, certain comparative amounts have been reclassified to conform with the current year’s presentation. 37. Approval of Financial Statements The financial statements were approved by the board of directors on 22 February 2000. 101 ▼▼ 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, Zhejiang Branch Industrial and Commercial Bank of China, Zhejiang Branch Agriculture Bank of China, Zhejiang Branch Shanghai Pudong Development Bank, Hangzhou Branch Listing Information H Shares The Stock Exchange of Hong Kong Limited Code: 0576 Executive Directors Geng Xiaoping Fang Yunti Zhang Jingzhong Xuan Daoguang Non-executive Directors Xia Linzhang Zhang Chunming Independent Non-executive Directors Hu Hung Lick, Henry Tung Chee Chen Zhang Junsheng Supervisors Xiao Hua Ni Cifang Lu Feng Sun Xiaoxia Zheng Qihua 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 Moganshan Road, Yaojiang 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 Limited 31st Floor, Edinburgh Tower The Landmark, Central Hong Kong ▼▼ 102