Zhejiang Expressway Co., Ltd
Annual Report 2001

Plain-text annual report

Contents Contents 2 3 4 5 6 8 Company Profile Particulars of Major Road Projects Definition of Terms Major Corporate Events Financial and Operating Highlights Chairman’s Statement 12 Management Discussion and Analysis 34 Frequently Asked Questions 36 Corporate Governance 40 Directors, Supervisors and Senior Management Profiles 46 Report of the Directors 56 Report of the Supervisory Committee 59 Report of the International Auditors 106 Notice of 2001 Annual General Meeting 110 Corporate Information 112 Location Map of Expressways Operated by the Group ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 1 Company Profile Company Profile Zhejiang Expressway Co., Ltd. is an infrastructure company principally engaged in investing in, constructing and managing high grade roads. The Company and its subsidiaries also carry out certain ancillary businesses such as automobile servicing and the operations of gas stations and billboard advertising along expressways. The Company was incorporated on March 1, 1997 as the main vehicle of the Zhejiang Provincial Government for investing in, constructing and operating expressways and class 1 roads in Zhejiang Province. The H Shares of the Company, which represent approximately 33% of the issued share capital of the Company, were listed on the Hong Kong Stock Exchange in May 1997, and subsequently obtained a secondary listing on the London Stock Exchange in May 2000. On February 14, 2002, a Level I American Depositary Receipt program sponsored by the Company in respect of its H Shares, with the Bank of New York as depositary, was established in the United States and became effective. Each of the ADSs evidenced by the ADRs represents 30 deposited H Shares of the Company. The ADSs are traded on the over-the-counter market in the United States. The H Shares of the Company also have a secondary listing on the Unofficial Regulated Market of the Berlin Stock Exchange. The Company intends to take advantage of the improved investment environment resulting from the latest round of restructuring of State-owned assets. It will actively pursue potential projects to further expand its toll road portfolio within Zhejiang Province, while keeping a look out for suitable projects outside of the province. Set out below is the corporate and business structure of the Group. Holders of H Shares Provincial Investment Co* Huajian 33% 56% 11% The Company 70% 99.99% 51% 63% 50% 50% 27.58% Advertising Co Jiaxing Co Yuhang Co Shangsan Co Petroleum Co Shida Co JoinHands Technology 100% 100% Jiaxing Section 88.1 km Yuhang Section 11.1 km Hangzhou Section 3.4 km Advertising Hangzhou - Ningbo Expressway 145.0 km Shangsan Expressway 142.0 km Operation of gas station and sale of petroleum related products Development, operation, and management Shida Road Development and application of computer technologies Shanghai - Hangzhou Expressway 102.6 km subsidiary associates jointly-controlled entity * To be replaced by Communications Investment Group 2 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Particulars of Major Road Projects Particulars of Major Road Projects Particulars of Major Road Projects Percentage of Ownership Length in Number of Number of Number of Start of Years of Project As at February 28, 2002 Kilometers Lanes Toll Stations Service Areas Operation Operation Remaining Shanghai-Hangzhou Expressway – Jiaxing Section – Yuhang Section – Hangzhou Section Hangzhou-Ningbo Expressway Shangsan Expressway 99.99% 51% 100% 100% 63% 88.1 11.1 3.4 145.0 142.0 4 4 4 4 4 6 2 0 12 11 1 0 0 2 3 1998 1995 – 1998 1995 1992 – 1996 2000 27 25 25 25 29 Detailed locations of these projects are shown on the map provided in the center divide. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 3 Definition of Terms Definition of Terms A Shares ADR(s) ADR Program ADS(s) Advertising Co Board Company Communications Investment Group Directors GDP Group H Shares the domestic ordinary shares of RMB1.00 each in the share capital of the Company proposed to be offered to the public in the PRC by the Company American Depositary Receipt(s) American Depositary Receipt program American Depositary Share(s) Zhejiang Expressway Advertising Co., Ltd., a 70% owned subsidiary of the Company the board of Directors Zhejiang Expressway Co., Ltd., a joint stock limited company incorporated in the PRC with limited liability on March 1, 1997 Zhejiang Communications Investment Group Co., Ltd. （浙江省交通投資集團有限公司）, a sole State-owned enterprise established on December 29, 2001 the directors of the Company gross domestic product the Company and its subsidiaries the overseas listed foreign shares of RMB1.00 each in the share capital of the Company which are primarily listed on the Hong Kong Stock Exchange and traded in Hong Kong dollars Hong Kong Stock Exchange The Stock Exchange of Hong Kong Limited Huajian Jiaxing Co JoinHands Technology Listing Rules Period Petroleum Co Huajian Transportation Economic Development Center, a State- owned enterprise Zhejiang Jiaxing Expressway Co., Ltd., a 99.99% owned subsidiary of the Company JoinHands Technology Co., Ltd., a 27.58% owned associate of the Company the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange the period from January 1 to December 31, 2001 Zhejiang Expressway Petroleum Development Co., Ltd., a 50% owned associate of the Company PRC the People’s Republic of China Provincial Investment Co RMB Shangsan Co Shida Co Zhejiang Provincial High Class Highway Investment Co., Ltd., the former controlling shareholder of the Company, to be replaced by the Communications Investment Group Renminbi, the lawful currency of the PRC Zhejiang Shangsan Expressway Co., Ltd., a 63% owned subsidiary of the Company Hangzhou Shida Highway Co., Ltd., a 50% jointly-controlled entity of the Company Supervisory Committee the supervisory committee of the Company Yuhang Co Zhejiang Yuhang Expressway Co., Ltd., a 51% owned subsidiary of the Company 4 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Major Corporate Events Major Corporate Events January 4, 2001 The China Classification Society Quality Assurance Ltd. certified the quality system of the Company in expressway management as conforming to Quality Standard GB/TI9002-1994 idt ISO9002:1994. February 27, 2001 Trading of the H Shares of the Company on the Berlin Stock Exchange commenced following a secondary listing on the Unofficial Regulated Market of the Berlin Stock Exchange. March 5, 2001 Annual results for 2000 were announced in Hong Kong. March 22, 2001 The Company held an extraordinary general meeting, authorizing the Company to issue not more than 300 million A Shares to the public in the PRC. May 11, 2001 A meeting of the Chairmen of the H Share toll road companies was held in Hangzhou. June 4, 2001 The Company acquired a 2.1% and a 1.0% interest in the capital of Jiaxing Co. December 26, 2001 The Ministry of Foreign Trade and Economic Cooperation of the PRC approved the transfer of 476,760,000 State-owned shares of the Company from Provincial Investment Co to Huajian. December 27, 2001 The Company acquired a 1.5% and a 1.3% interest in the capital of Jiaxing Co, and a 2% interest in the capital of Shangsan Co. January 18, 2002 The Company further acquired a 9.9% interest in the capital of Jiaxing Co. February 14, 2002 The United States Securities and Exchange Commission declared the registration statement in respect of the ADSs evidenced by the ADRs representing deposited H Shares of the Company effective. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 5 Financial and Operating Highlights Financial and Operating Highlights Results 1997 1998 1999 2000 2001 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Year ended December 31 Turnover 463,692 655,069 1,050,498 1,188,604 1,722,517 Profit Before Tax Tax Minority Interests 372,226 547,100 706,552 879,752 1,235,540 (58,639 ) (17,255 ) (73,795 ) (68,914 ) (71,810 ) (86,431 ) (186,391 ) (57,360 ) (363,970) (110,957) Net Profit From Ordinary Activities Attributable To Shareholders 296,332 404,391 548,311 636,001 760,613 Earnings Per Share (EPS) 7.15 cents 9.31 cents 12.62 cents 14.64 cents 17.51 cents Return on Equity (ROE) 1997 1998 1999 2000 2001 ROE 3.61% 4.97% 6.50% 7.10% 8.19% Monthly Average Daily Full Trip Traffic Volume of Shanghai- Hangzhou-Ningbo Expressway 1998 1999 2000 2001 2002 January February March April May June July August September October November December 21,804 20,952 9,881 9,683 11,096 12,159 11,485 11,264 11,004 11,115 12,448 12,710 13,028 13,424 12,559 11,688 13,686 15,061 14,474 14,066 14,546 15,204 16,610 17,012 16,744 16,386 17,125 13,853 18,082 19,458 19,061 17,496 17,058 17,738 18,750 18,300 18,155 17,990 17,290 18,450 20,557 20,993 20,776 19,962 19,520 21,172 22,666 21,887 22,219 21,525 6 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 2,100 1,800 1,500 1,200 900 600 300 0 20 18 16 14 12 10 8 6 4 2 0 Turnover 1,723 1,189 1,050 655 464 1997 1998 1999 2000 2001 EPS (RMB cents) 17.51 14.64 12.62 9.31 7.15 1997 1998 1999 2000 2001 900 800 700 600 500 400 300 200 100 0 9 8 7 6 5 4 3 2 1 0 Net Profit (RMB million) 761 636 548 404 296 1997 1998 1999 2000 2001 ROE (%) 8.19 7.10 6.50 4.97 3.61 1997 1998 1999 2000 2001 Full Trips Monthly Average Daily Full Trip Traffic Volume of Shanghai-Hangzhou-Ningbo Expressway 23,000 21,000 19,000 17,000 15,000 13,000 11,000 9,000 7,000 5,000 3,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1998 1999 2000 2001 2002 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 7 Chairman’s Statement Chairman’s Statement Practicing Good Corporate Governance Pursuing Growth in Shareholder Value 2001 was a satisfactory year. By relying on profit contributions from new expressway projects and strong growth in traffic volume from existing expressways, the Company achieved a double- digit profit growth for the fifth consecutive year. In Asiamoney’s 2001 Best Managed Companies poll, the Company was nominated as one of the top ten China companies in the categories of “Best Overall Managed Company”, “Best Overall Investor Relations” and “Treatment of Minority Shareholders”. It was in fact the fourth time the Company was nominated into the lists by investors. Recently, The ASSET magazine published the results of a survey regarding corporate governance among Asian companies, and the Company was nominated as one of the best companies in the PRC. This achievement is partly attributable to a favorable operating environment, but more importantly, attributable to a quality focused management team with clear vision and a strategy of steady growth concentrating on core businesses. While the above nominations are recognitions of our achievement, we believe that there is room for us to grow and to strive to attain even better results. 8 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 We believe that the primary duty of the Directors and management of the Company is to maintain sustained growth in shareholder value. Good corporate governance will enhance the Company’s trustworthiness, sense of responsibility and transparency, thereby bringing direct benefits to both investors and the Company. As a result, over the past few years, we have actively implemented the principles of good corporate governance and view such efforts as a long-term responsibility for the Company’s management. The Company has enhanced the independence of the Board of Directors by appointing additional independent non-executive directors. The Company appointed two independent non-executive directors upon the establishment of the Company, and since March 2000, the number of independent non-executive directors of the Company has increased to three, representing one third of the members of the Board. The introduction of independent directors enables the Board to make more fair and prudent decisions. In addition, an Audit Committee, a Strategy Committee and a Nomination and Remuneration Committee have also been set up under the Board, thereby making the operation of the Board more effective. Huajian, a subsidiary of the China Merchants Group, officially became the second largest substantial shareholder of the Company, thereby reducing the shareholding of Provincial Investment Co in the Company from 67% to 56%. We believe that an appropriate dilution of State-owned shares is conducive to the improvement of corporate governance. Under the request of Zhejiang provincial government on the reorganisation of State-owned assets, Provincial Investment Co will be replaced by the newly established Communications Investment Group. As a result, all of the shares in the Company previously held by Provincial Investment Co will be transferred to the Communications Investment Group. Communications Investment Group is one of the State-owned asset management companies established by Zhejiang provincial government, responsible for the management of the State-owned assets of Zhejiang provincial government in the communications industry. I myself have been appointed as Managing Director of Communications Investment Group. I am confident that Communications Investment Group will provide strong support to the future development of the Company. I have been Chairman and General Manager of the Company for the past five years. Such an arrangement was beneficial for the management and development of the Company when it was at an infant stage. Now that the Company is operating smoothly, I believe that separating the roles of Chairman and General Manager will be beneficial to the Company’s long-term development. When I was re-elected as General Manager of the Company at the Board Meeting on February 28, 2000, I indicated that these positions should be separated when the time was right. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 9 Chairman’s Statement (Cont’d) The time has now arrived. On the one hand, a solid operating mechanism and a sound corporate culture are now in place to ensure that the Company will continue to operate on the right track and will be adaptable to changes. On the other hand, the emerging corporate governance practice, both domestically and overseas, requires the separation of the roles of Chairman and General Manager. I believe that the separation of the two roles will enhance the demarcation of the different duties of these two positions, thereby serving to clearly distinguish the duties between the board of directors and management. I have resigned as General Manager of the Company, but will continue to serve as Chairman. I believe that in this way I will be able to devote more time to focus on the planning of the long- term development of the Company. I shall continue to provide direction at the Board of the Company and to give my best efforts to enhance shareholder value. I am very pleased to inform you that the position of General Manager of the Company will be taken up by Mr. Fang Yunti. Mr. Fang has many years of experience in the management of expressway and transportation operations, and participated in the establishment of the Company. He has been a Director and Deputy General Manager of the Company for the past five years, and is fully acquainted with the overall business operations of the Company. I believe that under the leadership of the Board, the new management will be able to deliver further growth and realize even better returns to shareholders, customers and staff. Finally, I would like to express my sincerest gratitude to all of our staff and stakeholders for their support and assistance during my office as General Manager. Geng Xiaoping Chairman March 13, 2002 10 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Management Discussion and Analysis Management Discussion and Analysis Business Review The Operating Environment In the face of a global economic slowdown in 2001, the economies in the PRC in general and Zhejiang Province in particular were able to sustain high growth rates, albeit at a slower pace than in the previous year. In 2001, national and provincial GDP grew by 7.3% and 10.5% respectively, compared to 8.0% and 11.0% in 2000. GDP Growth Rate: The PRC Vs Zhejiang Province The PRC GDP Zhejiang Province GDP (RMB bil.) % growth (RMB bil.) % growth 9,593 8,940 8,191 7,835 7,446 7.3 8.0 7.1 7.8 8.8 670 603 537 499 464 10.5 11.0 10.0 10.1 11.1 2001 2000 1999 1998 1997 Source: China Statistical Year Book and Periodical Announcements 12 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 The unrivaled growth was most evident in the cities and provinces situated along the east coast of the PRC. Once again, leading the cities and provinces in economic performance was Zhejiang Province where all of the Company’s business operations are carried out. Economic Performance of East Coast Cities and Provinces in 2001 GDP Total Total Export (RMB mil.) % growth (USD mil.) % growth Shandong Province Jiangsu Province Shanghai Zhejiang Province Fujian Province 943,830 951,460 495,084 670,000 425,800 Guangdong Province 1,055,600 Source: China Statistical Year Book and Media Reportings 10.1 10.2 10.2 10.5 9.0 9.5 18,478 29,388 26,865 24,261 14,790 95,829 14.8 11.4 9.0 18.5 8.6 2.6 A major contributing factor to economic growth was the growth in imported and exported goods. During the Period, total imported and exported goods attributable to Zhejiang Province was valued at US$32.8 billion, a growth of 17.8% over 2000, compared with the national growth of 7.5%. The province’s export growth rate of 18.5% was the highest among the east coast cities and provinces for the third consecutive year. GDP Growth Rate: PRC vs Zhejiang GDP % Growth of East Coast Cities and Provinces in 2001 Growth % The PRC Zhejiang Province Growth % The PRC Zhejiang Province 12 10 8 5 4 2 0 30 25 20 15 10 5 0 1997 1998 1999 2000 2001 Shandong Province Jiangsu Province Shanghai Zhejiang Province Fujian Province Guangdong Povince ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 13 Management Discussion and Analysis (Cont’d) Reflecting the robust economic environment was the sale of motor vehicles in the PRC, which had another record year of growth in 2001, especially with regard to sales to private consumers. It was reported that, in 2001, the total number of vehicles manufactured by the 103 major car maufacturers in China was 2.33 million, and the number of vehicles sold was 2.36 million, representing increases of approximately 12.8% and 13.3% over the previous year respectively. Half of these vehicles were sold to private consumers. The number of sedans manufactured and sold was 703,500 and 721,500, respectively, representing year-on-year growth of 16.4% and 18.3% respectively. To properly serve an increasing number of motor vehicles is a constant challenge for the country’s road system. In 2001, the total mileage of operational expressways in the PRC increased by 3,017km to approximately 19,000km, with another 2,500km earmarked to be operational by the end of 2002. Having a more direct impact on the Company’s business environment was the increasing enhancement of the expressway network within Zhejiang Province, which saw its total mileage of operational expressways extend from 627km to 770km during the year. More mileage of expressways is expected to be completed in the province by the end of 2002 as a result of increased investments in infrastructure. Cumulative Mileage of Expressways in Zhejiang Province 1996 1997 1998 1999 2000 2001 2002 Mileage (km) 158 168 344 392 627 770 1,310* * Forecast figure The combination of growth in the national and provincial economies, together with growth in the number of motor vehicles and the length of operational expressways, provided an all- round favorable business environment for the Group’s business operations. Cumulative Mileage of Expressways in Zhejiang Province Mileage(km) 1,400 1,200 1,000 800 600 400 200 0 14 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 1996 1997 1998 1999 2000 2001 2002* * forecast Analysis of Business Operations During the Period, the Group recorded a turnover of RMB1,722.5 million, representing an increase of 44.9% over 2000. Net profit attributable to shareholders was RMB760.6 million, representing an increase of 19.6% over 2000. The core business operation of toll roads continued to dominate the Group’s turnover. Of the total turnover of RMB1,722.5 million for the Period, RMB1,663.4 million or 96.6% was from toll road operations, with the remainder mainly from advertising along expressways, road maintenance works provided to third parties and services provided at service stations along the expressways. Toll income Other incomes Advertising Road maintenance Service stations, etc Revenue taxes Turnover 2001 2000 RMB’000 RMB’000 % Change 1,756,265 1,219,672 44.0 22,462 4,649 34,465 15,878 5,130 15,582 1,817,841 1,256,262 (95,324) (67,658) 1,722,517 1,188,604 41.5 -9.4 121.2 40.9 44.9 For further analysis on the business segments, please refer to Note 5 to the financial statements. Breakdown of the Group's Income Breakdown of the Group's Other Income 3.4% 96.6% 56.0% 36.5% 7.6% Other income Toll income Service stations Advertising Road maintenance ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 15 Management Discussion and Analysis (Cont’d) Toll Road Operations Following Shangsan Expressway’s completion and opening to traffic on December 26, 2000, toll income for the Group during the Period grew strongly by 44.0% over the same period last year to reach RMB1,756.3 million. Toll Income Contribution by Expressway/Section Shanghai-Hangzhou Expressway Jiaxing section Yuhang section Hangzhou section Hangzhou-Ningbo Expressway Shangsan Expressway Toll Income % of Total % of Growth RMB’000 Toll Income Over 2000 506,463 115,560 36,062 780,106 318,074 28.8% 6.6% 2.1% 44.4% 18.1% 30.0% 14.1% 16.0% 18.3% 732.7% Total 1,756,265 100.0% 44.0% 16 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 The significant growth in toll income was also attributable to the adoption of a new vehicle classification policy, which started on June 13, 2001. This effectively decreased the percentage of the smaller class 1 vehicles by 9.0%, while increasing the percentage of the larger class 2 and 3 vehicles by 6.7% and 1.9% respectively on the Shanghai-Hangzhou-Ningbo Expressway. Vehicle Makeup on Shanghai-Hangzhou-Ningbo Expressway in 2001 Class Vehicles % Before June % After June Change in % 1 Passenger vehicles with up to 20 seats; 69.9 60.9 -9.0 Trucks with tonnage of 2 tons or below 2 Passenger vehicles with seats above 20 19.8 26.5 6.7 and below 40 (inclusive); Trucks with tonnage of above 2 tons and below 5 tons (inclusive) 3 Passenger vehicles with seats above 40; 9.0 10.8 1.9 Trucks with tonnage of above 5 tons and below 10 tons (inclusive) 4 Trucks with tonnage above 10 tons and below 20 tons (inclusive) 5 Trucks with tonnage above 20 tons and below 50 tons (inclusive) 1.3 0.1 1.7 0.1 0.4 0.0 Due to higher fees charged for larger vehicles, the new vehicle classification policy directly increased the average toll collected per vehicle by approximately 9.5% on the Shanghai- Hangzhou-Ningbo Expressway, and by approximately 9.0% on the Shangsan Expressway. With increasing mileage of expressways completed and opened to traffic within Zhejiang Province, a province-wide integrated toll collection system came into effect on December 25, 2001. The Shanghai-Hangzhou-Ningbo Expressway and the Shangsan Expressway were incorporated into this toll collection system. The new toll collection system, managed by the Provincial Integrated Toll Collection Center （省聯網收費中心） under the Provincial Roadway Authority (浙江省公路管理局), aims to integrate the toll collection and distribution of all expressways in the province into one centralized system. With the integrated toll collection system, expressway users who travel across different but inter-connected expressways, which are independently operated, need only stop and pay the usage fees once, upon leaving the expressway system. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 17 Management Discussion and Analysis (Cont’d) Shanghai-Hangzhou-Ningbo Expressway Toll income on the Shanghai-Hangzhou-Ningbo Expressway grew by 21.7% during the Period as compared with 2000 to reach RMB1,438.2 million, representing approximately 81.9% of the Group’s total revenue. The corresponding average daily full trip traffic volume grew by 15.9% over 2000, details of which are set out below: Monthly Average Daily Full Trip Traffic Volume in 2001 Shanghai-Hangzhou Expressway Hangzhou- Ningbo Hangzhou section Yuhang section Jiaxing section Expressway (3.4km) (11.1km) (88.1km) (145.0km) vehicles per day YoY vehicles YoY vehicles YoY vehicles % per day % per day % per day 29,915 33,606 37,262 37,264 36,504 34,123 33,347 36,344 39,446 37,865 38,290 37,038 35,917 2.68 50.15 18.75 9.88 10.57 11.68 10.13 14.07 13.87 14.41 15.40 12.08 15.31 29,092 32,485 36,257 36,389 35,682 33,382 32,553 35,536 38,519 36,950 37,186 35,716 34,979 2.19 48.71 18.74 10.28 10.83 12.48 10.63 14.72 14.82 14.63 15.03 11.19 15.35 16,964 17,915 20,491 21,277 21,232 20,467 20,198 22,398 24,061 23,070 22,940 21,796 21,067 10.23 40.28 23.57 16.54 16.83 23.15 22.04 28.65 35.88 30.49 30.03 24.73 25.20 16,274 17,329 18,982 19,237 18,965 18,273 17,761 18,942 20,179 19,609 20,230 19,790 18,798 YoY % -4.41 26.55 7.13 2.32 3.90 8.90 10.34 14.27 12.96 13.68 18.90 17.42 11.00 Mileage (km) Month January February March April May June July August September October November December Average 18 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 An issue of concern for the Company during the year was to maintain a relatively high level of service for expressway users, while accommodating the growing traffic volume. In addition to putting increased efforts into the maintenance of road surfaces and bridges, a number of measures were taken by the Company to improve the quality of operational management. The computer main board used in toll collection was upgraded to reduce processing time at toll stations, as a result of which incidents of road congestion were reduced by approximately 21% through streamlining the traffic monitoring and control system on the expressway. A further development welcomed by expressway users was the May 2001 launch of the rechargeable non-contact prepaid IC card used in paying toll charges. The new card offers further flexibility and convenience to frequent users, in addition to reducing error rates as well as improving the level of reliability of the collection system and safeguarding of toll income. The unusual surge in traffic volume on the Jiaxing section during the second half of the year was due in part to traffic diversions from the parallel section of Nation Road 320 which was partially closed off for repairs and renovation during that time. The effect is considered to be temporary, and is not expected to last into 2002. Shangsan Expressway 2001 was the first year of operation since the expressway was fully completed and opened to traffic in December 2000. Daily full trip traffic volume grew steadily from an average of 7,901 during the first half of the year to 8,695 during the second half of the year. Daily average full trip traffic volume for the year was 8,301. With toll income contribution of approximately RMB318 million in 2001, representing 18.1% of the Group’s total toll income, Shangsan Expressway has become a significant contributor to the Group in both revenue and net profit. The performance in traffic volume and toll income was generally in line with the latest forecast conducted by the Company’s traffic consultant. This was despite a higher occurrence of partial road closure due to expressway traffic accidents as well as adverse weather conditions during the Expressway’s first year of full operation. Shida Road Traffic volume on Shida Road benefitted from an increasingly enhanced expressway network, as well as persistent efforts by Shida Co in promoting the use of Shida Road through traffic radio broadcastings and installation of road signs. Average daily traffic volume on Shida Road grew by 65% to reach 6,767 vehicles, while toll income grew by 74.3% to reach RMB19.2 million. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 19 Management Discussion and Analysis (Cont’d) Despite its toll income growth, Shida Co nevertheless recorded a loss of RMB5.0 million due to substantial interest payments and depreciation charges. The loss for the year was reduced by 67.9% as compared to the loss of approximately RMB15.6 million during the same period in 2000. The company is expected to break even by the end of 2002. Other Businesses In addition to carrying out advertising business along expressways through a subsidiary, the Group is also involved in the retail sale of petroleum products, as well as the design and marketing of logistics management and anti-counterfeiting systems through two associates, details of which are set out below. Advertising Co During the Period, Advertising Co further expanded advertising along the expressways operated by the Group through flexible pricing and incentive marketing strategies. Turnover from Advertising Co was approximately RMB21.2 million, representing an increase of approximately 46.2% over 2000. Net profit realized by Advertising Co during the Period was approximately RMB7.3 million, representing a reduction of 43.0% over 2000. The reduction was due to the first time levy of enterprise income tax, from which the company has been exempted for the past two years. Petroleum Co With a new emphasis on retail sales of petroleum products, Petroleum Co was able to record a 21% growth in retail sales amid increasing retail competition and substantially reduced wholesale business. However, mainly due to a revocation in corporate income tax exemptions which the Company had enjoyed over the past two years, Petroleum Co suffered a loss of approximately RMB10.4 million for the Period. 20 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 JoinHands Technology Following the completion of a successful trial phase in Zhejiang Province, JoinHands Technology has begun to market its core-technology in logistics management and anti-counterfeiting systems in a number of other provinces with an aim of becoming a leading player in the market. Turnover realized during the Period was approximately RMB24.9 million, while net profit was approximately RMB6.9 million, compared to RMB6.25 million and RMB0.25 million respectively in 2000. Human Resources As at December 31, 2001, the Group had a total of 1,959 employees, of whom 342 were administrative staff, 136 were engineering technicians, and 1,481 were toll collection and maintenance staff. The Company has consistently strived to improve the overall quality of staff through active human resource management. The objective is reflected in its selective training courses organized for existing employees, as well as in its hiring practices. Considering the need for well-rounded management staff, the Company will be conducting periodic rotations in management posts in 2002 to provide different exposures offered by the various positions. Remuneration to staff is devised on a competitive basis, with dual emphasis on job performance and work experience. In addition, the Company has set up an incentive policy under which a portion of the bonus paid t o m i d d l e a n d s e n i o r management relates to the price performance of the Company’s shares. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 21 Management Discussion and Analysis (Cont’d) Project Acquisition In light of the favorable economic growth prospects and the potential growth in expressway traffic in Zhejiang Province, the Company remains focused in its development strategy of acquiring toll road projects within Zhejiang Province, with a preference for operational projects. Through arm’s length negotiations with relevant parties, the Company was able to successfully increase its stake in Jiaxing Co, which is the holding company of the Jiaxing section of the Shanghai-Hangzhou Expressway, details of which are set out below: — On June 4, 2001, the Company entered into agreements to acquire a 2.1% and a 1.0% interest in the capital of Jiaxing Co from Jiaxing Xiuzhou Yitong Development Company （嘉興市秀洲區益通開發公司）and Jiashan County Yintong Company Limited（嘉善縣 銀通有限公司） for a consideration of RMB63,249,984 and RMB30,119,040, respectively. — Subsequently, on December 27, 2001, the Company entered into agreements to acquire a 1.5% and a 1.3% interest in the capital of Jiaxing Co from Haining Hengtong Development Company（海寧囱通開發公司）and Tongxiang Huatong Company（桐鄉市華通總公司） for a consideration of RMB44,620,800 and RMB38,671,400, respectively. — And finally on January 18, 2002, the Company entered into an agreement to further acquire 9.9% interest in the capital of Jiaxing Co from Jiaxing Road and Bridge Construction and D e v e l o p m e n t C o m p a n y （嘉興市路橋建設開發公司）f o r a c o n s i d e r a t i o n o f RMB303,700,000. In addition to the above, the Company entered into an agreement on December 27, 2001 to acquire a 2% equity interest in Shangsan Co from Shengzhou Shangsan Development Company Limited（嵊州市上三發展有限公司）for a consideration of RMB57,600,000. Through the above-mentioned transactions, the Company increased its stake in Jiaxing Co from 84.19% to 99.99% in aggregate, and in Shangsan Co from 61% to 63%, for a total consideration of RMB537,961,224. Project under Construction Construction work to expand a 44km section of the Shanghai-Hangzhou-Ningbo Expressway between Hongken and Guzhu from four lanes to six lanes progressed in accordance with the work schedule. During the Period, soft soil ground treatment and most of the roadbed buildup works were completed along the expansion route. The Company took extensive measures to minimize inconveniences to road users brought on by the construction. As a result, the overall effect on the flow of traffic on existing lanes was not significant. 22 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Financial Analysis The Group adopts a financial policy characterized by being both proactive and prudent. The Directors and senior management review the Group’s liability portfolio from time to time, and make adjustments whenever they deem necessary, to establish an effective and stable capital structure. In view of the Group’s future profitability, the Directors and senior management also make prudent investment decisions from time to time with an aim to achieve long-term stable growth for the Group. Return on Equity The return on equity for the period (before charging the distributable dividends) is 8.2% (2000: 7.1%) representing an increase of 15.5% over the previous period: 2001 RMB mil. 2000 RMB mil. Net profit attributable to shareholders Shareholders’ equity (proposed final dividend not deducted) Return on equity 760.6 9,289.1 8.2% 636.0 8,962.1 7.1% The growth in return on equity is mainly due to: 1. 2. 3. 4. the opening of Shangsan Expressway to traffic; the natural growth in vehicle flow on the Shanghai-Hangzhou-Ningbo Expressway; the favourable classification policy for vehicles; and a one-off net gain arising from the advance repayment of the World Bank loan amounting to RMB27.8 million. Liquidity As the Group is principally engaged in toll road operations, the Group generates strong and steady cash inflows from its ordinary operations. 2001 RMB mil. 2000 RMB mil. % Increase Daily average toll fee revenue Net cash inflow from operations 4.8 1,603 3.3 1,040 45.5% 54.1% The amount of trade receivables, other receivables and inventories of the Group is small. As at December 31, 2001, of the current assets of RMB1,950,483,000 in aggregate, trade receivables, other receivables and inventories represented approximately 6% (December 31, 2000: 6%). The Company plans to raise approximately RMB1 billion by issuing not more than 300,000,000 A shares in the PRC. As a result of these factors, in the opinion of the Board, the Group should not experience any liquidity problems in the foreseeable future. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 23 Management Discussion and Analysis (Cont’d) Capital Expenditure Commitments In 2001, the capital expenditure of the Group was approximately RMB560,000,000 of which the capital expenditure of the Company was approximately RMB210,000,000. As at December 31, 2001, the Group and the Company planned that in 2002 and thereafter, there would be capital expenditure commitments of RMB2,589,625,000 and RMB2,068,945,000 respectively. Details of Expenditure Commitments 1st stage of the project to widen the Shanghai- Hangzhou-Ningbo Expressway (Hongken to Guzhu section) 2nd stage of the project to widen the Shanghai- Hangzhou-Ningbo Expressway (Shenshi to Hongken section) Acquisition of additional 18.4% equity interest in Shangsan Co. Remaining construction works of the Shangsan Expressway Construction works under Contract No. 11 of the Shanghai-Hangzhou Expressway Acquisition of additional stake in Shangsan Co Acquisition of additional stake in Jiaxing Co Others Total Group Company RMB mil. RMB mil. 273.6 273.6 860.0 485.0 485.3 35.4 57.6 387.0 5.7 860.0 485.0 — — 57.6 387.0 5.7 2,589.6 2,068.9 In particular, capital expenditure marked for 2002 and 2003 are RMB1,055.3 million and RMB350.0 million respectively for the Group. The above capital expenditure will firstly be financed by the Group’s internal financial resources, and any shortfall will be financed by new equity issue, bank loans and other appropriate means. 24 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Capital Structure The Group’s capital structure as at December 31, 2001, and the comparative figures for the corresponding period in 2000 are as follows: 2001 2000 RMB’000 % RMB’000 % Shareholders’ equity Fixed rate liabilities Floating rate liabilities Interest-free liabilities 9,289,081 2,093,569 935,440 2,159,448 64.2% 14.5% 8,962,135 1,668,069 6.5% 1,778,529 14.9% 2,177,687 61.4% 11.4% 12.3% 14.9% Total 14,477,538 100.0% 14,586,420 100.0% Gearing ratio 1 Gearing ratio 2 55.9% 15.3% 62.8% 18.0% Note: Gearing ratio 1 represents the sum of fixed rate liabilities, floating rate liabilities and interest-free liabilities vs. the equity; gearing ratio 2 represents the total amount of the long-term liabilities vs. the equity. The Directors believe that the current gearing ratio is relatively low, thus allowing room for obtaining debt financing for the future development of the Group. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 25 Management Discussion and Analysis (Cont’d) Financial Resources and Financing Arrangements As at December 31, 2001 the Group held RMB1,831,212,000 in cash and cash equivalents, time deposits and other short-term investments, details of which are set out below: Cash and cash equivalent RMB US$ in RMB equivalent Euro in RMB equivalent HK$ in RMB equivalent Time deposits RMB US$ in RMB equivalent Euro in RMB equivalent HK$ in RMB equivalent Short term investments RMB Total RMB US$ in RMB equivalent Euro in RMB equivalent HK$ in RMB equivalent December 31 2001 2000 RMB’000 RMB’000 434,771 365,110 7,393 56,991 5,277 384,255 260,579 92,731 24,259 6,686 1,012,186 1,012,186 1,831,212 1,637,875 100,124 81,250 11,963 1,323,513 390,449 932,337 0 727 390,821 273,764 111,754 0 5,303 377,965 377,965 2,092,299 1,042,178 1,044,091 0 6,030 The average interest rates during the period for bank deposits in Renminbi, US dollars, Euro and Hong Kong dollars were approximately 1.5%, 4.0%, 4.1% and 3.6% respectively. Short-term Investments Short-term investments in low risk marketable securities were carried out by the Group as part of its treasury management to maximize returns on funds temporarily idle while limiting investment risks. 26 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 As at December 31, 2001, the market value of the remaining short-term investments for the Group was RMB1,012,186,000. The distribution of investments is summarized as fllows: Government bonds Convertible bonds Close-end equity investment funds Open-end equity investment funds Total 2001 RMB’000 733,724 160,614 97,810 20,038 December 31 2000 RMB’000 156,525 99,485 121,955 — 1,012,186 377,965 In 2001, profit before taxation derived from short-term investments was approximately RMB105,522,000 (2000: RMB153,566,000), and the corresponding average rate of return on investments was approximately 10% (2000: 12%). Borrowings As at December 31, 2001, the interest-bearing borrowings profile of the Group are summarized as follows: Gross Amount RMB’000 Maturity Profiles Within 1 year RMB’000 2-5 years Inclusive RMB’000 Beyond 5 years RMB’000 935,440 77,809 296,692 560,939 Floating rates World Bank loan Fixed rates Commercial bank loans Policy loans Corporate bonds 1,655,500 238,069 200,000 1,510,500 32,469 — 145,000 200,800 200,000 — 4,800 — Total as at December 31, 2001 3,029,009 1,620,778 842,492 565,739 Total as at December 31, 2001 3,446,598 1,831,817 948,328 666,453 During the Period, the interest rates of all borrowings of the Group were not materially different to those in 2000. In particular, the floating rate of World Bank loans in US dollars ranged between 5.11% and 8.76%; the interest rate of commercial bank loans in Renminbi ranged between 5.022% and 5.643%, with the average interest rate of approximately 5.22%. The interest rate of policy loans in Renminbi ranged between 3% and 5.5% and the interest rate of corporate bonds was 3.78%. The average interest rate of all borrowngs of the Group was approximately 5.23% in 2001. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 27 Management Discussion and Analysis (Cont’d) Ratio of Gains to Interests The interest expenses for the Period was RMB218,045,000 (2000: RMB224,318,000) while the profit before tax but before interests was approximately RMB1,038,429,000 (2000: RMB849,659,000). The ratio of profit to interests was 4.8 (2000: 3.8). Profit before tax Interest expenses Ratio of profit to interests Foreign Exchange Exposure 2001 2000 RMB’000 RMB’000 1,038,429 218,045 4.8 849,659 224,318 3.8 With the Company's advance repayment of the World Bank loan denominated in US dollars during 2001, as at December 31, 2001, the Group's liabilities in foreign currency mainly represent a World Bank loan borrowed for the construction of Shanghai-Hangzhou Expressway of approximately US$113 million. In addition, the Company's dividends for H Shares are settled in HK dollars. Currently, the exchange rate of RMB is stable and the Directors do not anticipate any material foreign exchange exposure to the Group. However, there can be no assurance that the foreign exchange exposure will not affect the operating results of the Group. Contingent Liability Other than a loan guarantee provided to a jointly-controlled entity, namely, Shida Co, of RMB30 million, the Group does not have any contingent liability as at December 31, 2001. Pledges and Guarantees of Assets As at December 31, 2001, the details of pledged and guaranteed assets of the Company are set out below: The Company provided a guarantee of RMB200 million in respect of corporate bonds issued by Shangsan Co in November 2000. The maturity of the bonds is 3 years with an annual interest rate of 3.78%. The principal and the interest have to be paid in a lump sum when they fall due. 28 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 The Company has provided a guarantee of RMB565 million in respect of bank loans to Shangsan Co from February 2001 to July 2004, and has provided a guarantee of RMB30 million in respect of bank loans to Shida Co from September 2001 to September 2007 . Shangsan Co has provided a guarantee of RMB280 million in respect of bank loans to the Company from February 2001 to February 2002. Other than the guarantees above, the Company does not have any other guarantees and pledges of assets. Restructuring of State-owned Shares The transfer of 476,760,000 State-owned shares of the Company, representing approximately 11% of the issued share capital of the Company, from Provincial Investment Co to Huajian on December 28, 2000 was approved by the Ministry of Foreign Trade and Economic Cooperation of the PRC on December 26, 2001. Accordingly, Provincial Investment Co’s interest in the issued capital of the Company is reduced from approximately 67% to 56%, while the remaining approximate 33% interest held by overseas investors remains unchanged. Pursuant to a notice (Zhe Zheng Fa [2001] No. 42) issued by Zhejiang provincial government dated July 2, 2001, Provincial Investment Co will be replaced by Communications Investment Group, a newly formed State-owned enterprise under the provincial asset management authority, as the parent company holding approximately 56% of the issued share capital of the Company. The replacement of Provincial Investment Co by Communications Investment Group is subject to the approval of and registration with the relevant government authorities. The change in the Company’s parent company is part of a province-wide restructuring of State-owned assets by the Zhejiang provincial government aimed at improving the effectiveness in the management of designated State-owned assets. Details of the change were set out in the Company’s announcement dated January 21, 2002. The Hong Kong Securities and Futures Commission has confirmed that Communications Investment Group will not be obliged to make a general offer for all the issued shares of the Company upon the completion of the proposed change. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 29 Management Discussion and Analysis (Cont’d) Level-I ADR Program The Board authorized the establishment of a Level-I ADR program sponsored by the Company on October 30, 2001, with the aim of enhancing the liquidity of the Company’s H Shares as well as broadening the Company’s investor base. The Company’s sponsored Level-I ADR program is maintained by The Bank of New York, as depositary, pursuant to a deposit agreement dated February 14, 2002, among the Company, The Bank of New York, as depositary, and all owners and beneficial owners of ADRs representing deposited H Shares of the Company. No new shares of the Company will be issued in connection with the Level-I ADR program. The Registration Statement in respect of the ADSs evidenced by the ADRs was declared effective by the U.S. Securities and Exchange Commission on February 14, 2002. The ADSs are traded on the over-the-counter market in the United States. Investors who wish to participate in the Company’s ADR program are advised to consult with their professional advisors. Proposed Issue of A Shares The volatility of the Chinese stock market during the second half of 2001 resulted in the postponement of the Company’s plan to issue not more than 300 million A Shares for the funding of the 1st and 2nd stages of the project to widen the Shanghai-Hangzhou-Ningbo Expressway. The Board has resolved to seek a further approval from the shareholders of the Company for the plan in the upcoming annual general meeting scheduled to be held on April 30, 2002. 30 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Outlook for 2002 2001 was an eventful year for China, capped with its successful entry into the World Trade Organization in November, a development that has been anticipated with both excitement and anxiety across the country. Nowhere was the news more welcomed than in Zhejiang Province, where the economy is dominated by small to medium-sized non-State-owned enterprises eager to join the global competition. While the forecast GDP growth rate for Zhejiang Province is slightly lower in 2002 when compared to the past few years, the growth rate in traffic volume on expressways operated by the Group overall is expected to be higher than the regional GDP growth rate. With approximately 540km of expressways expected to be completed and opened to traffic in Zhejiang Province in 2002, more kilometers than any other single year before, the need for coordination and cooperation between the various independent expressway operators is stronger than ever. The newly implemented integrated toll collection system, though not without problems and challenges such as the standardization of toll collection procedures among the different participants during its early stage of operation, is nevertheless expected to enhance further growth in traffic volume on the expressways by providing seamless transition for users who travel across different expressways. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 31 Management Discussion and Analysis (Cont’d) The long awaited fuel tax may be implemented later in 2002. The move is structured to reduce government red tape by substituting the numerous administrative fees levied on vehicle owners with a flat surcharge on fuel consumption. This, combined with the immediate reduction in prices of both domestic and imported cars following China’s accession to the World Trade Organization, will make owning a private car in China much more affordable than before, serving to boost traffic volume growth on the expressways. The plan to build a new bridge across the Hangzhou Bay, linking the two major port cities of Shanghai and Ningbo, is reportedly to have obtained the central government’s approval. Though no immediate impact is foreseen in the short-term on the expressways operated by the Group, the new bridge does have the potential to compete to a certain extent with the Shanghai- Hangzhou-Ningbo Expressway for traffic flow upon its completion. The Company intends to take advantage of the improved investment environment resulting from the latest round of restructuring of State-owned assets. The Company will actively pursue potential projects to further expand its toll road portfolio within Zhejiang Province, while keeping a look out for suitable projects outside of the province. 32 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Frequently Asked Questions From left to right: Tony H. Zheng, Assistant Company Secretary; Xuan Daoguang, Deputy General Manager; Geng Xiaoping, Chairman; Wen Xinran, Chairman of Communications Investment Group; Fang Yunti, General Manager; Jiang Wenyao, Company Secretary Frequently Asked Questions Q: What impact does China’s WTO accession have on the Company’s business prospects? A: While the WTO accession presents both opportunities and challenges for China as a whole, Zhejiang Province is poised to be one of the biggest beneficiaries of this development among the provinces due to its well-diversified economy, which is dominated by medium to small enterprises competitive on the world stage. The growth of the economy is expected to increase demand on the expressway networks in the province, thereby benefitting the toll road operations of the Company within Zhejiang Province. Q: What is the Company’s strategy for project acquisitions and what are the assessment criteria? A: The Company remains focused on toll road projects, with a preference for completed and operational projects, located within Zhejiang Province and in other regions where there is good potential for growth in traffic volume. The main criteria for any investment decision in the toll road sector would be the internal rate of return offered by the project. The exact rate is based on the Company’s weighted average cost of capital as calculated from time to time. Q: How does the Company manage its debt and cash, especially its short-term investment portfolios? A: Due to the nature of investment in toll road projects as well as the need for a healthy gearing ratio, the Company maintains both a sizeable position in cash or cash equivalents, supported by its stable cash inflow from its business operations, and short-term borrowings. 34 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 As an integral part of its cash management strategy, the Company invests part of its cash in fully liquid short-term investments such as government bonds, corporate bonds, and equity investment funds. While the Company actively manages its short-term investments with prudence, the overriding factor is always to manage the risk of these investments. Q: What is the Company’s dividend policy? A: The Company intends to distribute both interim dividends and final dividends every year, the actual amount of which will be determined each year. In general, the overall payment in dividends is expected to be around 40-60% of net profit attributable to shareholders. Q: Does the Company have stock option plans or other share price-linked incentive schemes for its management? A: At present, the Company does not have stock option plans for its management due to regulatory limitations. But the Company has set an incentive policy whereby a portion of the management’s bonus can be linked with share price performance so that shareholders’ interests can be more directly reflected. Q: Who are the Communications Investment Group? A: Communications Investment Group is a State-owned enterprise formed by the Zhejiang provincial government. As part of State-owned assets restructuring by the Zhejiang provincial government aimed at improving the effectiveness of management of designated State-owned assets, it is charged specifically to manage State-owned assets in the communications sector within Zhejiang Province. In addition to holding stakes in numerous expressways, the Communications Investment Group also has interests in coastal and transoceanic transport as well as construction of transport facilities. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 35 Corporate Governance Corporate Governance Pursuant to the “PRC Company Law” and other prevailing laws and regulations, the Company has adopted a dual system corporate governance structure. Under this structure, the Board of Directors is the decision making body of the Company, and with the assistance of management, manages the operations entrusted by the shareholders at the general meetings of the Company. The Supervisory Committee is the Company’s supervisory body, whose duty is to determine whether the conduct of the Directors and the General Manager as well as other senior management members of the Company is in compliance with the laws and regulations and in the interests of the Company. Board of Directors The Board of Directors is the decision making body of the Company, and is accountable to the shareholders at the Company’s general meetings. The Directors are elected by the shareholders, and their remuneration is also decided upon by the shareholders. The Board of Directors of the Company comprise nine Directors, four of whom are Executive Directors, and five are Non-executive Directors. Among the five Non-executive Directors, three are Independent Non-executive Directors, representing one third of the Board of Directors. Independent Non-executive Directors do not take up any positions in the Company, and have no connections with shareholders. Accordingly, we believe that the existence of Independent Non-executive Directors is beneficial for maintaining the independence of the Board of Directors and shareholders vis-à-vis the management, and for ensuring that the Board of Directors can make prudent decisions. 36 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 There are also three specialized committees under the Board of Directors, namely, the Audit Committee, the Strategy Committee and the Nomination and Remuneration Committee which assist the Board of Directors in exercising its authorities and duties. — Audit Committee The Audit Committee comprises Non-executive Directors, the majority of whom are Independent Directors. The committee members hold meetings at least twice annually to review the completeness, accuracy and fairness of the Company’s financial reports, and to discuss with the external auditors the nature and scope of the audit work before commencement of audit as well as to review the effectiveness of the internal control system of the Company. — Strategy Committee The Strategy Committee comprises Executive Directors. The principal duties of the Strategy Committee are to appraise the Company’s medium to long-term development objectives, plans and strategies; to ensure that the plans and strategies are in compliance with the long-term interest of the shareholders, customers and staff of the Company and the community. For plans of significance and plans involving mergers and acquisitions, connected transactions or investments in new sectors, the committee will first review such plans before submission to the Board of Directors for decision making to ensure that the Board of Directors has sufficient information to make prudent decisions. The Strategy Committee is also responsible for the appraisal of the implementation of such plans and strategies. — Nomination and Remuneration Committee The Nomination and Remuneration Committee comprises three Independent Directors, whose principal duties are: (1) To study the criteria and procedures in the selection of directors, general manager and other senior management, and to make proposals; (2) To search for qualified candidates for the positions of directors, general manager and other senior management; (3) To assess the suitability of candidates for the positions of directors, general manager and other senior management, and to make proposals; ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 37 Corporate Governance (Cont’d) (4) To review and supervise the salary and welfare schemes of the Company and the remuneration system for senior management members; to make recommendations to the Board of Directors on the principles of the Company’s salary and welfare schemes, the service agreements and the remuneration system for the Company’s executive Directors, General Manager and other senior management members; and to review and discuss the Share Option Plan, Retirement Plan and Long Service Bonus Plan of the Company. Supervisory Committee The Supervisory Committee is responsible to all shareholders for the supervision of the Company’s finance, and the discharge of duties by the Company’s Directors, General Manager and other senior management members to ensure compliance with the laws and regulations, and to safeguard the lawful interests of the Company and its shareholders. The Supervisory Committee comprises one shareholder representative, one staff representative and three independent supervisors, so as to ensure that the Supervisory Committee can exercise its duties independently and effectively. The principal duties of the Supervisory Committee are to examine the Company’s financial matters; to supervise the discharge of duties of the Company’s Directors, General Manager and other senior management and to determine whether such discharge of duties is in violation of the laws and regulations or the Company’s Articles of Association, and in the event that the actions of such personnel are harmful to the Company’s interests, to request remedial actions; to audit financial information such as financial reports, operating reports and profit distribution which the Directors intend to submit to the shareholders at general meetings, and in the event of any reservations, to entrust a registered accountant or certified public auditor in the name of the Company to assist in re-auditing; to propose the convening of a shareholders’ extraordinary general meeting, and to negotiate with the Directors or commence litigation against the Directors on behalf of the Company. Shareholder Being holders of shares in the Company, shareholders enjoy the rights conferred to them under relevant laws and regulations. The Company treats all shareholders equally, and encourages shareholders to participate in corporate governance. Shareholders have the right to access the relevant information and the right to participate in decision making on major issues of the Company. Each shareholder has the right of speech and the right to vote at the shareholders’ general meetings of the Company, except that on approving connected transactions, interested shareholders have to abstain from voting at the shareholders’ general meetings. 38 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 The powers and duties of shareholders principally include : (1) To decide on the operating directions and investment plans of the Company; (2) To elect and remove Directors and Supervisors who are shareholders representatives, and to decide on remuneration in relation to Directors and Supervisors; (3) To consider and approve the Report of the Board of Directors and the Report of the Supervisory Committee; (4) To consider and approve the annual financial budget, the final accounts, the profit appropriation plans and the loss compensation plans; (5) To make resolutions on the increase or reduction of the registered capital, mergers, separation, dissolution and winding up of the Company; (6) To make resolutions on the Company’s issue of bonds; (7) To amend the Articles of Association; (8) To consider resolutions proposed by shareholders representing shares with voting rights of 5% or over; and (9) To make resolutions on the retention or termination of the Company’s auditors. Over the years, the Company has received various international accolades for its achievements in corporate governance. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 39 Directors, Supervisors and Senior Management Profiles Directors, Supervisors and Senior Management Profiles Executive Directors Mr. GENG Xiaoping, aged 53, is the Chairman of the Company. Mr. Geng graduated from the East China College of Political Science and 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 Deputy Director of the Zhejiang Provincial Expressway Executive Commission, responsible for the business operation and administration of the expressway system in Zhejiang Province. Mr. Geng was the General Manager of the Company from March 1997 to March 2002, and has been Chairman since March 1997. Mr. FANG Yunti, aged 52, senior engineer, is an Executive Director and the General Manager of the Company responsible for the overall management 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. During the period from 1991 to 1996, he was the Deputy Chief and Chief of the Operating Administrative and Technical Equipment Divisions of the Zhejiang Provincial Expressway Executive Commission where his responsibilities included operation management and equipment management for the Shanghai-Hangzhou-Ningbo Expressway. Mr. Fang was the Deputy General Manager of the Company from March 1997 to March 2002. Mr. Fang has been a Director of the Company since 1997. 40 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Mr. ZHANG Jingzhong, aged 38, senior lawyer, is an Executive Director and Deputy General Manager of the Company. Mr. Zhang graduated from Hangzhou University in July 1984 obtaining a Bachelor’s degree in law. In 1984, he joined the Zhejiang Provincial Political Science and Law Policy Research Unit. From 1988 to 1994, he was the Associate Director of Hangzhou Municipal Foreign Economic Law Firm. In 1992, he obtained the qualifications required by the regulatory authorities in China to practice securities law. In January 1994, Mr. Zhang became Senior Partner at T&C Law Firm in Hangzhou. Mr. Zhang has been a Director since April 1997, and Secretary to the Board from April 1997 to June 2001. Mr. XUAN Daoguang, aged 57, senior engineer, is an Executive Director and Deputy General Manager of the Company. Mr. Xuan graduated from 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 and has held positions such as Section Head and 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 has been a Director of the Company since March 1997. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 41 Directors, Supervisors and Senior Management Profiles (Cont’d) Non-executive Directors Mr. XIA Linzhang, aged 58, senior engineer, is a non-executive Director and member of the Audit Committee. Mr. Xia graduated from 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 Chief of the Planning and Finance Division of the Zhejiang Provincial Expressway Executive Commission and the Deputy General Manager and Financial Manager of Provincial Investment Co. Mr. Xia was the Chairman of the Supervisory Committee from March 1997 to February 2000. Ms. ZHANG Chunming, aged 37, senior lawyer, is a non-executive Director and member of the Audit Committee. Ms. Zhang graduated from the East China College of Political Science and Law in Shanghai with 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 to practice securities law 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 has been a Director of the Company since March 1997. 42 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Independent Non-executive Directors Dr. HU Hung Lick, Henry G.B.S. O.B.E. Ph.D. J.P., aged 82, is an independent non-executive Director and a member of the Audit Committee. 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 has been an independent non-executive Director since March 1997. Mr. TUNG Chee Chen, aged 59, Chairman of Orient Overseas (International) Limited, is an independent non-executive Director and the Chairman of the Audit Committee. Mr. Tung was educated at the University of Liverpool, England, where he received his Bachelor of Science degree. He later acquired a Master’s 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 has been an independent non-executive Director since March 1997. Mr. ZHANG Junsheng, aged 65, professor, is a member of the Audit Committee. 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 1987. 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. Mr. Zhang has been an independent non-executive Director of the Company since March 2000. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 43 Directors, Supervisors and Senior Management Profiles (Cont’d) Supervisors Mr. MA Kehua, aged 49, senior economist, is the Chairman and non-executive member of the Supervisory Committee. 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 Executive Commission responsible for material supply since 1993. Mr. Ma took up the post of Deputy General Secretary of Zhejiang Construction and Investment Company in March 1999, and is currently the Deputy General Secretary of Provincial Investment Co. Mr. NI Ciyun, aged 51, senior economist, is a member of the Supervisory Committee 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 Jiaxing Section of the Shanghai- Hangzhou-Ningbo-Expressway. Mr. LU Fan, aged 46, senior economist, is an independent non-executive member of the Supervisory Committee. Mr. Lu has a Master’s degree in economics and was an assistant researcher at the World Economy Research Institute of Zhejiang Social Science Academy. He 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 the Investment Banking Division and is currently the Vice President of Zhejiang Securities Co., Ltd. 44 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Mr. SUN Xiaoxia, aged 39, professor, is an independent non-executive member of the Supervisory Committee. Mr. Sun graduated from China Academy of Social Sciences （中國社會科學院）with a Doctor’s degree in law. He worked as Assistant Lecturer, Lecturer, Assistant Professor, Professor and Tutor for graduate students at Hangzhou University, School of Law. Mr. Sun is currently Deputy Dean at the School of Law and Dean of the Department of Law, Zhejiang University. In addition, Mr. Sun is a lawyer with Zhejiang Zheda Law Firm, a standing member of China Jurisprudence Research Society, a standing member of China WTO Legal 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, aged 39, senior accountant, is an independent non- executive member of the Supervisory Committee. He is currently the Deputy General Manager of Zhejiang Pan-China Certified Public Accountants, and a guest professor at the Zhejiang Finance and Economics Institute. Mr. Zheng was among the first batch of Chinese registered accountants to obtain qualifications required for practicing accountancy involving securities in 1992. He has working and training experience in Hong Kong and Singapore, and he spent approximately six months working with the Listing Division of the China Securities Regulatory Commission during 1997 and 1998. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 45 Report of the Directors Report of the Directors The Directors present their report and the audited financial statements of the Company and the Group for the year ended December 31, 2001. Principal Activities The principal activities of the Group comprise the design, 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 the nature of the Group’s principal activities during the period. Segment Information During the period, 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 December 31, 2001 is set out in note 4 to the financial statements. Results and Dividends The Group’s profit for the year ended December 31, 2001 and the state of affairs of the Group and the Company at that date are set out in the financial statements on pages 59 to 105. 46 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 An interim dividend of RMB0.03 per share (approximately HK$0.0283) was paid on October 24, 2001. The Directors recommend the payment of a final dividend of RMB0.07 per share (approximately HK$0.0660) in respect of the year, to shareholders in the register of members on April 8, 2002. This recommendation has been incorporated into the financial statements as an allocation of retained earnings within capital and reserves in the balance sheet. Further details of this accounting treatment are set out in note 12 to the financial statements. Summary Financial Information The following is a summary of the published consolidated results, and of the assets and liabilities of the Group prepared on the basis set out in the notes below. The amounts for each of the 4 years ended December 31, 2000 in the summary have been adjusted for the effect of the retrospective changes in accounting policy affecting dividends, as detailed in note 2 to the financial statements. Summary of the Group’s Five Years Consolidated Results Results Turnover Operating costs Gross profit Other revenue Administrative expenses Other operating expenses 2001 RMB’000 2000 RMB’000 1999 RMB’000 Year ended December 31 1997 RMB’000 1998 RMB’000 1,722,517 1,188,604 1,050,498 655,069 463,692 (392,535) (248,429) (298,417) (220,537) (146,046) 1,329,982 216,690 (88,487) (18,236) 940,175 242,888 (64,978) (75,317) 752,081 167,528 (60,320) (2,374) 434,532 317,646 234,573 (45,611) (635) 197,034 (31,126) (978) Profit from operating activities 1,439,949 1,042,768 856,915 622,859 482,576 Finance costs (215,346) (197,083) (172,922) (94,741) (110,350) Share of profits of associates 12,396 40,584 22,559 18,982 Share of loss of a jointly- controlled entity Profit before tax Tax (1,459) (6,517) — — 1,235,540 879,752 706,552 547,100 372,226 (363,970) (186,391) (71,810) (73,795) (58,639) — — Profit before minority interests 871,570 693,361 634,742 473,305 313,587 Minority interests (110,957) (57,360) (86,431) (68,914) (17,255) Net profit from ordinary activities attributable to shareholders 760,613 636,001 548,311 404,391 296,332 Earnings per share 17.51 cents 14.64 cents 12.62 cents 9.31 cents 7.77 cents ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 47 Report of the Directors (Cont’d) Summary of the Group’s Five Years Assets and Liabilities Assets and liabilities Total assets Total liabilities 2001 RMB’000 2000 RMB’000 1999 RMB’000 Year ended December 31 1997 RMB’000 1998 RMB’000 14,477,538 14,586,420 13,925,688 12,993,990 11,466,377 3,685,828 4,128,921 3,868,691 3,457,029 2,529,105 Minority interests 1,502,629 1,495,364 1,449,432 1,245,782 667,714 Net assets Notes: 9,289,081 8,962,135 8,607,565 8,291,179 8,269,558 1. The consolidated results of the Group for the three years ended December 31, 2000, together with the pro forma consolidated results of the Group for the year ended December 31, 1997 have been extracted from the Company’s 2000 annual report dated March 5, 2001, while those of the year ended December 31, 2001 were prepared based on the consolidated income statement as set out on page 60 of the financial statements. 2. The 2001 earnings per share is based on the net profit from ordinary activities attributable to shareholders for the year ended December 31, 2001 of RMB760,613,000 (2000: RMB636,001,000) and the 4,343,114,500 shares (2000: 4,343,114,500 shares) in issue during the period. 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 period. Accordingly, a corresponding analysis of major customers and suppliers is not presented. Connected Transactions Details of the connected transactions of the Group (the “Connected Transactions”) carried out during the period, for which the Hong Kong Stock Exchange has granted a waiver from compliance with Chapter 14 of the Listing Rules pursuant to its letter of March 10, 2000, are disclosed in note 39 to the financial statements. The independent non-executive Directors have reviewed the Connected Transactions and confirmed that, during the period from January 1, 2001 to December 31, 2001, such transactions were: (i) carried out in accordance with the terms of the agreements governing each respective transaction in question; 48 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 (ii) entered into in the usual and ordinary course of business of the Company; 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 March 10, 2000), have also reviewed the said transactions and have confirmed that the independent non-executive Directors have given their approval of these transactions and that they were carried out by the Company in accordance with the terms of the agreements governing each respective transaction during the period from January 1, 2001 to December 31, 2001. Fixed Assets Details of movements in the fixed assets of the Company and the Group are set out in note 14 to the financial statements. Capital Commitments Details of the capital commitments of the Company and the Group as at December 31, 2001 are set out in note 36 to the financial statements. Reserves Details of movements in the reserves of the Company and the Group during the period are set out in note 34 to the financial statements. Distributable Reserves As at December 31, 2001, the Company’s reserves available for distribution by way of cash or in kind, calculated in accordance with relevant rules and regulations, amounted to RMB634,528,000. In addition, in accordance with the Company Law of the PRC, the amount of approximately RMB3,638,229,000 standing to the credit of the Company’s share premium account as prepared in accordance with the PRC accounting standards was available for distribution by way of capitalisation issues. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 49 Report of the Directors (Cont’d) Substantial Shareholders As at December 31, 2001, 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”): The Group’s Substantial Shareholders Name Number of shares Percentage Provincial Investment Co* 2,432,500,000 56.01% Huajian (domestic shares) 476,760,000 10.98% (domestic shares) HKSCC Nominees Limited 1,397,795,499 32.18% (H Shares) * To be replaced by Communications Investment Group Save as disclosed above, no person had registered an interest in the share capital of the Company that was required to be recorded pursuant to Section 16(1) of the SDI Ordinance. 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 period. Trust Deposits As at December 31, 2001, the Company did not have any trust deposits, nor any time deposits with any financial institution in the PRC. Other than the deposit of HK$4,956,000 (equivalent to RMB5,257,000 approximately) placed in a non-bank financial institution in Hong Kong, all of the Company’s deposits have been placed with commercial banks in the PRC. The Company has not encountered any difficulty in the withdrawal of funds. 50 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Directors The Directors of the Company during the period were: Executive Directors Mr. Geng Xiaoping Mr. Fang Yunti Mr. Zhang Jingzhong Mr. Xuan Daoguang Non-executive Directors Mr. Xia Linzhang Ms. Zhang Chunming Independent Non-executive Directors Dr. Hu Hung Lick, Henry Mr. Tung Chee Chen Mr. Zhang Junsheng Change in Directors and Senior Management At the meeting of the Directors held on March 13, 2002, the Directors resolved to accept the proposal by Mr. Xia Linzhang to resign from his current directorship, and submit his proposal for approval by the shareholders of the Company at the upcoming annual general meeting; the Directors also resolved to accept the proposal to elect Ms. Zhang Yang to be a non-executive (external) director of the Company, and to submit the proposal for approval by the shareholders of the Company at the upcoming annual general meeting. At the same board meeting, the Directors resolved to accept Mr. Geng Xiaoping’s proposal to resign from the post of General Manager of the Company, and resolved to appoint Mr. Fang Yunti as General Manager of the Company, and Mr. Zhang Jingzhong as Deputy General Manager of the Company. The terms of office for Mr. Fang and Ms. Zhang is from March 14, 2002 to February 28, 2003. Mr. Geng continues to serve as Chairman of the Company. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 51 Report of the Directors (Cont’d) Directors’ and Supervisors’ Service Contracts Each of the Executive Directors and one supervisor of the Company has entered into a service agreement with the Company, with effect from February 28, 2000, for a 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 December 31, 2001, 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 Hong Kong 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 entities, associates or fellow subsidiaries or its holding company a party to any arrangement enabling any Directors or Supervisors or their spouses or children under the age of 18 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. Pension Scheme As required by the state regulations of the PRC, the Group participates in a defined contribution pension scheme organised by local social security authorities. Under the 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 52 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 required to make contributions to local social security authorities at rates ranging from 20% to 22.5% 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 Group is not entitled to forfeit any amount of the contributions that it has previously made. Hence, no forfeited contribution was used by the Group to reduce the level of its contributions during the period. During the period, contributions to registered insurance companies made by the Group under the defined contribution retirement scheme amounted to RMB6,900,000 (2000: RMB4,358,000). 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. Taxation of the United Kingdom An individual holder of H Shares who is resident and domiciled in the UK will, in general, be liable to UK income tax on dividends received from the Company. Where such an individual receives dividends from the Company without deduction of tax the amount included as income for the purposes of computing his or her UK tax liability is the gross amount of the dividend and this is taxed at the appropriate marginal rate (currently 10% in the case of a basic rate or lower rate taxpayer and 32.5% in the case of a higher rate taxpayer). Where tax is withheld from the dividend, credit will be given against UK income tax for any tax withheld from the dividend up to the amount of the UK income tax liability. The Company would assume responsibility for withholding tax at source within the PRC if such a withholding is required. The current UK- Chinese Double Taxation Agreement provides that the maximum withholding tax on dividends from Chinese resident companies paid to UK residents is 10% of the gross dividend. UK resident holders of H Shares who are individuals not domiciled within the UK will only be liable to income tax on a dividend from the Company to the extent that it is remitted to the UK. A holder of H Shares which is a UK tax resident company will, in general, be liable to UK corporation tax on dividends received from the Company, with double tax relief available for withholding tax suffered. In certain cases (not discussed here), a holder of H Shares which is a UK tax resident company may be entitled to relief for “underlying” tax paid by the Company or its subsidiaries. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 53 Report of the Directors (Cont’d) Accommodation Benefits for Employees According to the relevant rules and regulations in the PRC, the Group and its employees are each required to make contributions to an accommodation fund to local social security authorities, which are in proportion to the salaries and wages of the employees at an average rate of 7%. There are no further obligations beyond the contribution to the accommodation fund organised by local social security authorities. In 1998, in addition to the contributions made to the accommodation fund, the Company purchased apartments for a sum of RMB19 million and made a provision of RMB15.3 million in that year for the estimated loss on their disposal. As at December 31, 2001, all the apartments have been disposed and cumulative proceeds of RMB4.3 million have been received from its employees. Save as disclosed above, the Company did not own any staff quarters nor dispose of any staff quarters during the period. Subsequent Events Details of the significant subsequent events of the Group are set out in note 40 to the financial statements. Compliance with the Code of Best Practice Only one full board meeting of the Directors was held by the Company during the year as opposed to no less than one such meetings every six months recommended by paragraph 1 of the Code of Best Practice set out in Appendix 14 to the Listing Rules (the “Code”). Except for the above, the Directors are of the opinion that the Company has complied with the Code throughout the accounting period covered by the annual report. Audit Committee The Company has an audit committee which was established in accordance with the requirement of the Code, for the purpose of reviewing and providing supervision over the Group’s financial reporting process and internal controls. The audit committee comprises three independent non-executive Directors and two non-executive Directors. 54 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 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. Gratitude The Board would like to take this opportunity to express its gratitude to Mr. Geng Xiaoping who served as General Manager until March 13, 2002 for his contribution to the Company. ON BEHALF OF THE BOARD Geng Xiaoping Chairman Hangzhou, Zhejiang Province, the PRC March 13, 2002 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 55 Report of the Supervisory Committee Report of the Supervisory Committee In compliance with the Company Law of the PRC, the Company’s Articles of Association and the Regulations of the Supervisory Committee, the five-member committee earnestly discharged its statutory supervisory duties, safeguarding the lawful interests of the shareholders of the Company. The main tasks of the Committee in 2001 included, among others, attending board meetings; advising on important issues such as the Company’s investment decisions and dividend policies; participating in major functions of the Company, and through other means, understanding and monitoring the conduct of the Directors, General Manager and other senior officers in business management; carefully reviewing the financial position of the Company, discussing and reviewing the financial statements and dividend distribution proposal to be submitted by the Board to the annual general meeting. The Committee concludes that the Directors, General Manager and other senior officers of the Company have adopted steady development strategies in 2001, focusing on the principal business operations, obtaining sustained growth in operating results and providing good returns to shareholders, and have expanded the influence of the Company in the international capital market through the establishment of the Level-I ADR program. The efforts of the Board and management in corporate governance have obtained recognition and approval from investors, and this has consolidated the positive corporate image of the Company in both domestic and overseas capital markets. 56 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 The Committee has examined the financial statements of the Company for 2001 prepared to be submitted by the Board to the annual general meeting, and concluded that the statements accurately reflected the Company’s operating results and asset position in 2001 and were in compliance with relevant laws and regulations and the Company’s Articles of Association. Although the dividend payout ratio in 2001 was lower than that of the previous year, the ratio is still relatively high, providing appropriate cash return to shareholders. We, therefore, endorse this profit distribution proposal, and recommend shareholders to approve the proposal at the forthcoming annual general meeting. The Committee reviewed the Report of the Directors to be submitted to the annual general meeting, and consider it to be a fair representation of the Company’s actual situation. In the course of the Company’s business operations, the members of the Board, General Manager and other senior officers of the Company observed their fiduciary duties and worked diligently while exercising their rights or discharging their duties. We did not find any abuse of power or infringement of the interests of shareholders and employees. The Committee is satisfied with the accomplishments attained by the Company in its various tasks. March 12, 2002 By the Order of the Supervisory Committee Ma Kehua Chairman of the Supervisory Committee ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 57 Report of the International Auditors 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 105 which have been prepared in accordance with accounting principles generally accepted in Hong Kong. These financial statements are the responsibility of the Company’s directors. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s directors, as well as evaluating of the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at December 31, 2001 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance. Ernst & Young Certified Public Accountants Hong Kong March 13, 2002 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 59 Consolidated Income Statement TURNOVER Operating costs Gross profit Other revenue Administrative expenses Other operating expenses PROFIT FROM OPERATING ACTIVITIES Finance costs Share of profits of associates Share of loss of a jointly-controlled entity PROFIT BEFORE TAX Tax Year ended December 31, 2001 Notes 2001 RMB’000 2000 RMB’000 (Restated) 5 1,722,517 1,188,604 (392,535) (248,429) 1,329,982 940,175 216,690 (88,487) (18,236) 242,888 (64,978) (75,317) 1,439,949 1,042,768 (215,346) (197,083) 12,396 (1,459) 40,584 (6,517) 1,235,540 879,752 (363,970) (186,391) 5 6 7 8 PROFIT BEFORE MINORITY INTERESTS 871,570 693,361 Minority interests (110,957) (57,360) NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS DIVIDENDS Interim Proposed final 9 12 760,613 636,001 (130,293) (304,018) (86,862) (304,018) (434,311) (390,880) EARNINGS PER SHARE 13 17.51 cents 14.64 cents 60 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Consolidated Statement of Recognised Gains and Losses Year ended December 31, 2001 Notes 2001 RMB’000 2000 RMB’000 Net profit from ordinary activities attributable to shareholders 760,613 636,001 Total recognised gains and losses 760,613 636,001 Goodwill eliminated directly against reserves 34 — (20,844) 760,613 615,157 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 61 Consolidated Balance Sheet December 31, 2001 Notes 2001 RMB’000 NON-CURRENT ASSETS Fixed assets Interest in a jointly-controlled entity Interests in associates Expressway operating rights Long term investments Long term receivables Goodwill CURRENT ASSETS Short term investments Inventories Trade receivables Other receivables Cash and cash equivalents CURRENT LIABILITIES Trade payables Profits tax payable Other taxes payable Other payables and accruals Interest-bearing bank and other borrowings NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other loans Long term bonds Other long term liabilities Deferred tax Minority interests CAPITAL AND RESERVES Issued capital Reserves Proposed final dividend 14 16 17 18 19 20 21 19 22 23 24 25 26 27 28 29 32 33 34 12 Geng Xiaoping Director 62 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Fang Yunti Director 2000 RMB’000 (Restated) 11,681,806 57,126 167,316 232,045 32,867 6,450 — 12,031,012 54,082 156,909 223,345 32,867 9,030 19,810 12,527,055 12,177,610 1,012,186 1,274 54,219 63,778 819,026 377,965 718 19,202 296,591 1,714,334 1,950,483 2,408,810 240,818 95,229 23,219 157,326 1,620,778 204,559 103,022 17,003 313,504 1,831,817 2,137,370 2,469,905 (186,887) (61,095) 12,340,168 12,116,515 1,208,231 200,000 8,694 131,533 1,414,781 200,000 1,134 43,101 1,548,458 1,659,016 1,502,629 1,495,364 9,289,081 8,962,135 4,343,115 4,641,948 304,018 4,343,115 4,315,002 304,018 9,289,081 8,962,135 Consolidated Cash Flow Statement NET CASH INFLOW FROM OPERATING ACTIVITIES 35(a) 1,603,180 1,040,303 Year ended December 31, 2001 Notes 2001 RMB’000 2000 RMB’000 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received Interest paid Dividends paid Dividends paid to minority interests Dividends from an associate Exchange gains realised arising on the advance repayment of the World Bank loan Net cash outflow from returns on investments and servicing of finance TAX Taxes paid and refunded, net INVESTING ACTIVITIES Proceeds from disposal of fixed assets Additions to fixed assets Additions to construction in progress Decrease in time deposits Decrease/(increase) in short term investments Acquisition of additional interests in existing subsidiaries Acquisition of an associate Decrease in investment in an associate 59,869 (260,878) (434,311) (31,177) 6,620 67,253 (254,312) (260,587) (33,324) 8,302 53,172 — (606,705) (472,668) (276,904) (99,805) 1,400 (29,471) (441,630) 311,721 (634,221) (93,368) — — — (72,469) (1,126,911) 27,131 705,429 (172,800) (18,500) 100,000 Net cash outflow from investing activities (885,569) (558,120) NET CASH OUTFLOW BEFORE FINANCING ACTIVITIES (165,998) (90,290) FINANCING ACTIVITIES New bank and other loans Repayment of bank and other loans Minority interests Issue of bonds 35(b) 3,113,850 (3,531,439) — — 2,732,281 (2,645,580) 176,381 200,000 Net cash inflow/(outflow) from financing activities (417,589) 463,082 INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year (583,587) 1,323,513 372,792 950,721 CASH AND CASH EQUIVALENTS AT END OF YEAR 739,926 1,323,513 ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits with original maturity of less than three months when acquired 434,771 320,304 305,155 1,003,209 739,926 1,323,513 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 63 Balance Sheet NON-CURRENT ASSETS Fixed assets Interests in subsidiaries Interest in a jointly-controlled entity Interests in associates Expressway operating rights Long term investments Long term receivables CURRENT ASSETS Short term investments Inventories Trade receivables Other receivables Cash and cash equivalents CURRENT LIABILITIES Trade payables Profits tax payable Other taxes payable Other payables and accruals Interest-bearing bank and other borrowings NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other loans Deferred tax CAPITAL AND RESERVES Issued capital Reserves Proposed final dividend December 31, 2001 Notes 2001 RMB’000 2000 RMB’000 (Restated) 5,095,680 3,549,568 64,910 126,500 182,578 30,000 6,450 5,202,986 3,617,048 64,359 126,500 175,644 30,000 9,030 9,225,567 9,055,686 715,876 610 54,196 58,640 333,420 180,294 454 19,202 190,234 1,340,260 1,162,742 1,730,444 84,269 50,429 10,225 89,288 990,500 13,118 23,020 4,353 224,104 1,320,376 1,224,711 1,584,971 (61,969) 145,473 9,163,598 9,201,159 100,000 62,261 288,526 21,655 162,261 310,181 9,001,337 8,890,978 4,343,115 4,354,204 304,018 4,343,115 4,243,845 304,018 9,001,337 8,890,978 14 15 16 17 18 19 20 19 22 23 24 25 26 27 28 32 33 34 12 Geng Xiaoping Director Fang Yunti Director 64 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Notes to Financial Statements 1. Corporate Information December 31, 2001 Zhejiang Expressway Co., Ltd. was established on March 1, 1997. The H shares of the Company (“H Shares”) were subsequently listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) on May 15, 1997. All of the H Shares of the Company were admitted to the Official List of the United Kingdom Listing Authority (the “Official List”). Dealings on the London Stock Exchange commenced on May 5, 2000. On July 18, 2000, with the approval of the Ministry of Foreign Trade and Economic Co-operation of the People’s Republic of China (the “PRC”), the Company changed its business registration into a Sino-foreign joint stock limited company. On February 27, 2001, trading of the H Shares of the Company on the Berlin Stock Exchange commenced following a secondary listing on the Unofficial Regulated Market of the exchange. On February 14, 2002, the United States Securities and Exchange Commission, following approval by the board of directors and the China Securities Regulatory Commission, declared the registration statement in respect of the ADSs evidenced by the ADRs representing deposited H Shares of the Company effective. The registered office of the Company is located at 19/F, Zhejiang World Trade Centre, 15 Shuguang Road, Hangzhou, Zhejiang Province, 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. In the opinion of the Directors, the ultimate holding company of the Company is Zhejiang Communications Investment Group Co., Ltd. (the “Communications Investment Group”), a State- owned enterprise established in the PRC. Zhejiang Provincial High Class Highway Investment Co., Ltd. (the “Provincial Investment Co”) was replaced by the Communications Investment Group as part of the restructuring of the Zhejiang Government. The Communications Investment Group was incorporated on December 29, 2001. As such, the Communications Investment Group was considered by the Directors of the Company as the ultimate holding company of the Company, which owns approximately 56% of the shares of the Company. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 65 Notes to Financial Statements (Cont’d) 2. Impact of New/Revised Statements of Standard Accounting Practice (“SSAPs”) The following SSAPs and related interpretations have been adopted for the first time in the preparation of the current year’s consolidated financial statements: • • • • • • • • • • • SSAP 9 (Revised) SSAP 14 (Revised) SSAP 18 (Revised) SSAP 26 SSAP 28 SSAP 29 SSAP 30 SSAP 31 SSAP 32 Events after the balance sheet date Leases Revenue Segment reporting Provisions, contingent liabilities and contingent assets Intangible assets Business combinations Impairment of assets Consolidated financial statements and accounting for investment in subsidiaries Interpretation 12 Business combinations — subsequent adjustment of fair values and goodwill initially reported Interpretation 13 Goodwill — continuing requirements for goodwill and negative goodwill previously eliminated against/credited to reserves SSAP 9 (Revised) prescribes which type of events occurring after the balance sheet date require adjustment to the financial statements, and which require disclosure but no adjustment. Its principal impact on these financial statements is that the proposed final dividend which is not declared and approved until after the balance sheet date, is no longer recognised as a liability at the balance sheet date, but is disclosed as an allocation of retained earnings on a separate line within the capital and reserves section of the balance sheet. The prior year adjustment arising from the adoption of this revised SSAP is detailed in note 12 to the financial statements. SSAP 14 (Revised) prescribes the basis for lessor and lessee accounting for finance and operating leases, and the required disclosures in respect thereof. Certain amendments have also been made to the previous accounting treatments, which may be accounted for retrospectively or prospectively in accordance with the requirements of the SSAP. The revised SSAP requirements have not had a material effect on the amounts previously recorded in the financial statements, therefore no prior year adjustment has been required. SSAP 18 (Revised) prescribes the recognition of revenue and was revised as a consequence of the revision to SSAP 9 described above. Proposed final dividends from subsidiaries that are declared and approved by the subsidiaries after the balance sheet date are no longer recognised in the Company’s own financial statements for the year. The adoption of the SSAP has no material impact on these financial statements. 66 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 2. Impact of New/Revised Statements of Standard Accounting Practice (“SSAPs”) (Continued) SSAP 26 prescribes the principles to be applied for reporting financial information by segment. It requires management to assess whether the Group’s predominant risks or returns are based on business segments or geographical segments and determine one of these bases to be the primary reporting format, with the other as the secondary segment information reporting format. The impact of the SSAP is the inclusion of significant additional segment reporting disclosures which are set out in note 4 to these financial statements. SSAP 28 prescribes the recognition criteria and measurement bases to apply to provisions, contingent liabilities and contingent assets, together with the required disclosures. These amendments do not have a material impact on these financial statements. SSAP 29 prescribes the recognition and measurement criteria for intangible assets, together with the disclosure requirements. The adoption of this SSAP has resulted in no change to the previously adopted accounting treatment for intangible assets and the additional disclosures that it requires have not been significant for these financial statements. The SSAP does, however, require that impairment losses on intangible assets be aggregated with the accumulated amortisation, whereas previously they were deducted from the cost of the relevant asset. This disclosure reclassification has had no effect on the net carrying amount of intangible assets in the balance sheet. SSAP 30 prescribes the accounting treatment for business combinations, including the determination of the date of acquisition, the method for determine the fair value of the assets and liabilities acquired, and the treatment of goodwill or negative goodwill arising on acquisition. The SSAP requires the disclosure of goodwill on future acquisitions in the non-current assets section of the balance sheet, and that such goodwill is amortised to the income statement over its estimated useful life. Interpretation 13 prescribes the application of SSAP 30 to goodwill arising from acquisition in previous years which remains eliminated against reserves. The adoption of the SSAP and Interpretation has not resulted in a prior year adjustment, for the reasons detailed in note 21 to the financial statements. SSAP 31 prescribes the recognition and measurement criteria for impairments of assets. The SSAP is required to be applied prospectively and therefore, has had no effect on amounts previously reported in prior year financial statements. SSAP 32 prescribes the accounting treatment and disclosures for the preparation and presentation of consolidated financial statements, and has had no significant impact on the preparation of these financial statements. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 67 Notes to Financial Statements (Cont’d) 2. Impact of New/Revised Statements of Standard Accounting Practice (“SSAPs”) (Continued) In addition to the above new and revised SSAPs and related Interpretations, certain minor revisions to the following SSAPs are effective for the first time for the current year’s financial statements: • • • SSAP 10: SSAP 17: SSAP 21: “Accounting for investments in associates” “Property, plant and equipment” “Accounting for interests in joint ventures” The only significant effect of these revisions is that SSAP 17 requires that impairment losses on fixed assets be aggregated with accumulated depreciation in note 14 to the financial statements, whereas previously they were deducted from the cost of the relevant assets in the balance sheet. The minor revisions to SSAP 10 and SSAP 21 have no material impact on these 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 (“HK SSAP”), 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 December 31, 2001. 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. 68 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 3. Summary of Significant Accounting Policies (Continued) Subsidiaries A subsidiary is a company whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities. Interests in subsidiaries are stated at cost less any impairment losses. Jointly-controlled entities A jointly-controlled entity is a joint venture company which is subject to joint control, resulting in none of the participating parties having unilateral control over the economic activity of the jointly- controlled entity. 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 impairment losses. 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 assets and are stated at cost less any impairment losses. Associates An associate is a company, 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 impairment losses. 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 treated as long term assets and are stated at cost less any impairment losses. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 69 Notes to Financial Statements (Cont’d) 3. Summary of Significant Accounting Policies (Continued) Goodwill Goodwill arising on acquisition of subsidiaries, associates and jointly-controlled entities represents the excess of the cost of the acquisition over the Group’s share of the fair values of the identifiable assets and liabilities acquired as at the date of acquisition. Goodwill arising on acquisitions is recognised in the balance sheet as an asset and amortised on straight-line basis over its estimated useful life of ten years. In the case of associates and joint- controlled entities, any unamortised goodwill is included in the carrying amount thereof, rather than as a separately identified asset on the consolidated balance sheet. In prior years, goodwill arising on acquisitions was eliminated against reserves in the year of acquisition. The Group has adopted the transitional provision of SSAP 30 that permits goodwill on acquisitions which occurred prior to January 1, 2001, to remain eliminated against reserves. Goodwill on subsequent acquisitions is treated according to the new accounting policy above. On disposal of subsidiaries, associates or jointly-controlled entities, the gain or loss on disposal is calculated by reference to the net assets at the date of disposal, including the attributable amount of goodwill which remains unamortised and any relevant reserves, as appropriate. Any attributable goodwill previously eliminated against reserves at the time of acquisition is written back and included in the calculation of the gain or loss on disposal. The carrying amount of goodwill, including goodwill remaining eliminated against reserves, is reviewed annually and written down for impairment when it is considered necessary. A previously recognised impairment loss for goodwill is not reversed unless the impairment loss was caused by a specific external event of an exceptional nature that was not expected to recur, and subsequent external events have occurred which have reversed the effect of that event. 70 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 3. Summary of Significant Accounting Policies (Continued) Fixed assets and depreciation Fixed assets, other than construction is progress, are stated at cost less accumulated depreciation and any impairment losses. 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 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 fixed assets, the expenditure is capitalised as an additional cost of the 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 6.11% 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. 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 Estimated useful life Annual depreciation rate 30 years 10 years 8 years 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. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 71 Notes to Financial Statements (Cont’d) 3. Summary of Significant Accounting Policies (Continued) Construction in progress Construction in progress represents costs incurred in the construction of expressways and bridges, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalized borrowing costs on related borrowed funds, during the period of construction, installation and testing. Construction in progress is reclassified as fixed assets when completed and ready for use. Impairment of assets An assessment is made at each balance sheet date of whether there is any indication of impairment of any asset, or whether there is any indication that an impairment loss previously recognised for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s value in use or its net selling price. An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, when the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is credited to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, when the reversal of the impairment losses is accounted for in accordance with the relevant accounting policy for that revalued asset. Expressway operating rights Expressway operating rights represent the rights to operate the expressways and are stated at cost less accumulated amortisation and any impairment losses. Amortisation is provided on a straight-line basis over the periods of the expressway operating rights granted to the Company and its subsidiaries. 72 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 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 disposal 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 disposal 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. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 73 Notes to Financial Statements (Cont’d) 3. Summary of Significant Accounting Policies (Continued) 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) from toll revenue, net of any applicable revenue taxes, when received; (b) from 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; (c) from 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 tax 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. 74 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 3. Summary of Significant Accounting Policies (Continued) Foreign currency transactions 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. Capitalisation of borrowing costs Borrowing costs directly attributable to the construction of expressways, tunnels and bridges are capitalised as part of the cost of those 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 expressway sections ceases when the construction of such expressway sections is substantially completed and are capable of commencing toll operations. Operating leases Leases where substantially all the rewards and risks of ownership of assets remain with the lessor 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. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 75 Notes to Financial Statements (Cont’d) 3. Summary of Significant Accounting Policies (Continued) 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 estimated costs expected to be incurred to completion and disposal. Dividends Interim and final dividends proposed by the directors are classified as a separate allocation of retained earnings within capital and reserves in the balance sheet, until they have been approved by the shareholders in a general meeting. When these dividends are approved by the shareholders and declared, they are recognised as a liability. In previous years, the Company recognised its proposed final dividend to shareholders, which was declared and approved after the balance sheet date, as a liability in its balance sheet. The revised accounting treatments for dividends resulting from the adoption of SSAP 9 (Revised), have given rise to prior year adjustments in the Group’s financial statements, further details of which are included in note 12 to the financial statements. 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. Related parties may be individuals or corporate entities. 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. For the purpose of balance sheet classification, cash equivalents represent assets similar in nature to cash, which are not restricted as to use. 76 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 4. Segment Information In accordance with the Group’s internal financial reporting, the Group has determined that business segments are its primary reporting format. 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. Business segments The Group’s operating businesses are organised and managed separately, according to the nature of services provided, with each segment representing a strategic business unit that serves different markets: — Toll operation represents the design, construction, operation and management of high grade roads and collecting the expressway tolls. — Advertising business represents the design and rental of advertising billboards along the expressways. — Road maintenance represents the maintenance of expressways and roads, including cleaning of the road surface, minor repairs to the lanes, cleaning of the gutters and sewers, grass mowing, afforestation and maintenance of buildings, equipment and facilities provided to third parties. — Ancillary businesses mainly represent sales of foods, restaurant servicing, automobile servicing, as well as oil stations. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 77 Notes to Financial Statements (Cont’d) 4. Segment Information (Continued) Group Segment revenue: Turnover - third parties Other revenue - third parties Total revenue Segment results Finance costs Share of profits of associates Share of loss of a jointly-controlled entity Profit before tax Tax Profit before minority interests Minority interests Net profit from ordinary activities attributable to shareholders Segment assets Interests in associates Interest in a jointly-controlled entity Goodwill Total assets Segment liabilities Deferred tax Tolls Advertising Road maintenance Ancillary businesses Consolidated 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 1,663,362 209,319 1,157,098 228,950 21,190 72 14,535 23 4,617 3,511 4,853 1,083 33,348 3,788 12,118 12,832 1,722,517 216,690 1,188,604 242,888 1,872,681 1,386,048 21,262 14,558 8,128 5,936 37,136 24,950 1,939,207 1,431,492 1,425,341 1,024,432 11,084 11,261 (976) 3,409 4,500 3,666 1,439,949 1,042,768 — — — — (1,459) (6,517) — — — — — — — — — — — — — 12,396 — 40,584 (215,346) 12,396 (197,083) 40,584 — — (1,459) (6,517) 1,235,540 (363,970) 879,752 (186,391) 871,570 (110,957) 693,361 (57,360) 760,613 636,001 14,089,709 — 14,209,868 — 24,947 — 19,086 — 42,225 — 47,360 — 89,856 156,909 85,664 167,316 14,246,737 156,909 14,361,978 167,316 54,082 19,810 57,126 — — — — — — — — — — — — — 54,082 19,810 57,126 — 14,163,601 14,266,994 24,947 19,086 42,225 47,360 246,765 252,980 14,477,538 14,586,420 3,514,937 4,038,430 131,533 43,101 5,416 — 3,626 — 6,132 12,371 27,810 31,393 3,554,295 4,085,820 — — — — 131,533 43,101 Total liabilities 3,646,470 4,081,531 5,416 3,626 6,132 12,371 27,810 31,393 3,685,828 4,128,921 Other segment information Capital expenditure Depreciation and amortisation Impairment loss recognised in the income statement Write-off of bad debts 546,401 1,228,007 207,099 144,275 7,975 1,692 8,014 1,207 1,190 4,398 446 3,304 187 1,093 13,383 555,753 1,249,850 1,994 214,282 150,780 — 42,239 7,500 — — — — — — — — — — — — — — 42,239 7,500 — 78 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 5. 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 - third parties Advertising income - third parties Road maintenance income - third parties Others - third parties Less: Revenue taxes Turnover Income on short term investments Interest income Rental income Trailer income Exchange gains Others Other revenue 2001 RMB’000 2000 RMB’000 1,756,265 1,219,672 22,462 4,649 34,465 15,878 5,130 15,582 1,817,841 1,256,262 (95,324) (67,658) 1,722,517 1,188,604 105,522 41,503 6,726 8,278 53,172 1,489 153,566 73,195 7,098 6,821 — 2,208 216,690 242,888 1,939,207 1,431,492 The Company and its subsidiaries are subject to Business Tax (“BT”), levied at 5% on toll income and 3%-5% on other services income. In addition, the subsidiaries are subject to the following types of revenue taxes: — City Development Tax, levied at 1% to 7% of BT; — Education Supplementary Tax, levied at 3.5% to 4% of BT; and — Culture and Education Fees, levied at 3% on advertising income. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 79 Notes to Financial Statements (Cont’d) 6. Profit from Operating Activities The Group’s profit from operating activities is arrived at after charging/(crediting): 2001 RMB’000 2000 RMB’000 205,582 142,080 1,364 3,709 75,773 6,900 — 8,700 1,043 7,500 4,313 — (6,726) (53,172) (41,503) (105,522) 930 2,267 51,593 4,358 42,239 8,700 — — 5,595 5,783 (7,098) 35 (73,195) (153,566) 2001 RMB’000 2000 RMB’000 188,400 29,645 218,045 (2,699) 184,969 39,349 224,318 (27,235) 215,346 197,083 Depreciation Operating lease rentals on land and buildings Auditors’ remuneration Staff costs: Wages and salaries Pension contributions Impairment loss on the termination of toll collection in a connection road Amortisation of expressway operating rights Amortisation of goodwill Write-off of bad debts Loss on disposal of fixed assets Provision for impairment of long term investments Net rental income Exchange (gains)/losses, net Interest income Income on short term investments 7. Finance Costs Interest on bank loans and other loans wholly repayable within five years Interest on other loans Total finance costs Interest capitalised 80 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 8. 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 Corporate Income Tax (the “CIT”) levied at a rate of 33% of taxable income based on income for financial reporting purposes prepared in accordance with the laws and regulations in the PRC. Pursuant to a directive issued by Zhejiang Provincial People’s Government in 1997, the Company was entitled to a refund from the Zhejiang Finance Bureau of an amount equal to 18% of its taxable income in respect of the CIT paid to Zhejiang tax bureau. According to a directive of the State Council, the Company was entitled to the tax refund until December 31, 2001. Such beneficial treatment was not granted to subsidiaries, associates or jointly-controlled entities of the Company. As Huajian Transportation Economic Development Center (“Huajian”), a state-owned enterprise under the China Merchants Group, became a major shareholder of the Company, the CIT that the Company paid has been divided into the national portion and the Zhejiang portion. The national portion of the total CIT paid, being Huajian’s portion of the total domestic shares (i.e. 16.39%) according to relevant regulations issued by the Ministry of Finance, is no longer entitled to the 18% refund granted by Zhejiang Provincial People’s Government. In this regard, the tax refunded and refundable represents the financial subsidies received and receivable by the Company from Zhejiang Finance Bureau in respect of the year. Group: Tax charged Overprovision in prior year Tax refunded/refundable Deferred - note 32 Share of tax attributable to associates Share of deferred tax attributable to an associate Share of deferred tax attributable to a jointly-controlled entity 2001 RMB’000 2000 RMB’000 327,718 — (68,791) 258,927 88,432 17,528 (1,951) 1,034 185,307 (1,474) (50,840) 132,993 39,755 6,074 6,302 1,267 Tax charge for the year 363,970 186,391 There was no material unprovided deferred tax in respect of the year (2000: Nil). ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 81 Notes to Financial Statements (Cont’d) 9. 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 RMB544,670,000 (2000: RMB504,441,000). 10. Directors’ Remuneration Directors’ remuneration disclosed pursuant to the Listing Rules and Section 161 of the Companies Ordinance is as follows: Fees Other emoluments: Salaries, allowances and benefits in kind Bonuses paid and payable 2001 RMB’000 2000 RMB’000 — — 1,641 552 2,193 1,440 477 1,917 Salaries, allowances and benefits in kind include HK$150,000 (2000: HK$145,000) payable to each of two independent non-executive directors and RMB20,000 (2000: RMB5,000) payable to another independent non-executive director. There were no other emoluments payable to the independent non-executive directors during the year (2000: Nil). The remuneration of the directors fell within the following band: Nil to HK$1,000,000 Number of directors 2001 9 2000 11 There was no arrangement under which a director waived or agreed to waive any remuneration during the year. 11. Five Highest Paid Employees The five highest paid employees during the year included four (2000: five) directors, details of whose remuneration are set out in note 10 above, as well as a non-director employee, whose remuneration for the year was less than HK$1,000,000. 82 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 12. Dividends Company Interim Proposed final 2001 2000 Per ordinary share RMB RMB 2001 2000 RMB’000 RMB’000 0.03 0.07 0.10 0.02 0.07 0.09 130,293 304,018 86,862 304,018 434,311 390,880 The proposed final dividend for the year is subject to the approval of the Company’s shareholders at the forthcoming annual general meeting. During the year, the Group adopted the revised SSAP 9 “Events after the balance sheet date”.To comply with this revised SSAP, a prior year adjustment has been made to reclassify the proposed final dividend for the year ended December 31, 2000, of RMB304,018,000, which was recognised as a liability in the prior year, to the proposed final dividend reserve account within the capital and reserves section of the balance sheet. The result of this has been to reduce the Group’s and the Company’s current liabilities and increase the reserves previously reported as at December 31, 2000, by RMB304,018,000. The effect of this change in accounting policy as at December 31, 2001, is that the current year’s proposed final dividend of RMB304,018,000, was included in the proposed final dividend reserve account within the capital and reserves section of the balance sheet at that date, whereas in previous years it would have been recognised as a current liability at the balance sheet date. 13. 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 RMB760,613,000 (2000: RMB636,001,000) and the 4,343,114,500 shares (2000: 4,343,114,500 shares) in issue during the year. Diluted earnings per share for the years ended December 31, 2001 and 2000 have not been calculated as no diluting event existed during these years. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 83 Notes to Financial Statements (Cont’d) 14. Fixed Assets Expressways and bridges RMB’000 Land RMB’000 Toll stations and ancillary facilities RMB’000 Communi- cations and signalling equipment RMB’000 Machinery Motor vehicles RMB’000 and Construction in progress RMB’000 equipment RMB’000 Total RMB’000 527,628 11,029,432 212,761 9,881 53,008 205,162 53,346 12,091,218 — 44,160 — — — — — 44,160 527,628 — — — — 11,073,592 (842 ) 277 109,603 — 212,761 (12,344 ) 5,720 165,461 — 9,881 118,654 7,944 3,309 — 53,008 19,552 4,927 778 (334 ) 205,162 (125,020 ) 6,050 7,566 (396 ) 53,346 — 530,835 (287,214 ) — 12,135,378 — 555,753 (497 ) (730 ) Group Cost At beginning of year: As previously reported Reclassified to accumulated depreciation and impairment (Note) As restated Reclassification Additions Transfers Disposals At December 31, 2001 527,628 11,182,630 371,598 139,788 77,931 93,362 296,967 12,689,904 Accumulated depreciation and impairment: At beginning of year: As previously reported Reclassified from cost (Note) As restated Reclassification Provided during the year Disposals 53,404 277,760 13,501 5,544 13,130 46,073 — 44,160 — — — — 53,404 — 17,525 — 321,920 164 140,550 — 13,501 (1,465 ) 14,269 — 5,544 18,293 12,601 — 13,130 11,031 8,668 (40 ) 46,073 (28,023 ) 11,969 (222 ) At December 31, 2001 70,929 462,634 26,305 36,438 32,789 29,797 — — — — — — — 409,412 44,160 453,572 — 205,582 (262 ) 658,892 Net book value: At December 31, 2001 456,699 10,719,996 345,293 103,350 45,142 63,565 296,967 12,031,012 At December 31, 2000 474,224 10,751,672 199,260 4,337 39,878 159,089 53,346 11,681,806 Note: Accumulated impairment losses are aggregated with accumulated depreciation under the revised disclosure requirements of SSAP17, whereas previously they were disclosed as an adjustment to the cost of the assets. This change has been disclosed as a retrospective reclassification. 84 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 14. Fixed Assets (Continued) Expressways and bridges RMB’000 Land RMB’000 Toll stations and ancillary facilities RMB’000 Communi- cations and signalling equipment RMB’000 Machinery Motor vehicles RMB’000 and Construction in progress RMB’000 equipment RMB’000 Total RMB’000 350,384 4,712,616 95,847 9,868 — — — — — — — — (159 ) 105,986 4,471 9,858 — 3,298 325 — 28,532 19,221 3,846 — (24 ) 174,798 (125,048 ) 37,063 5,409,108 — — 3,282 196,988 211,885 766 (150 ) (10,949 ) — — (174 ) Company Cost: At January 1, 2001 Reclassification Additions Transfers Disposals At December 31, 2001 350,384 4,712,616 110,017 119,477 51,575 53,648 223,102 5,620,819 Accumulated depreciation: At January 1, 2001 Reclassification Provided during the year Disposals 41,330 206,672 — 11,668 — 170 63,816 — 9,045 (153 ) 3,631 — 5,538 16,981 12,351 — 10,496 11,025 5,833 (2 ) 40,347 (28,023 ) 7,181 (73 ) At December 31, 2001 52,998 270,658 12,523 34,870 27,352 19,432 — — — — — 313,428 — 104,480 (75 ) 417,833 Net book value: At December 31, 2001 297,386 4,441,958 97,494 84,607 24,223 34,216 223,102 5,202,986 At December 31, 2000 309,054 4,505,944 86,802 4,330 18,036 134,451 37,063 5,095,680 All fixed assets are located in the PRC. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 85 Notes to Financial Statements (Cont’d) 15. Interests in Subsidiaries Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Company 2001 RMB’000 2000 RMB’000 3,648,673 3,555,304 2,375 (34,000) 4,099 (9,835) 3,617,048 3,549,568 The amounts due from/to subsidiaries are unsecured, interest-free and have no fixed terms of repayment. Particulars of the Company’s subsidiaries, all of which are directly held, are as follows: Names of subsidiaries Zhejiang Yuhang Expressway Co., Ltd. (“Yuhang Co”) Zhejiang Jiaxing Expressway Co., Ltd. (“Jiaxing Co”) Date and place of registration Registered Percentage of equity capital attributable to RMB the Company Principal activities Note 1 75,223,000 51 Construction and management of the Yuhang Section of the Shanghai - Hangzhou Expressway Note 2 1,859,200,000 87.29 Construction and management of the Jiaxing Section of the Shanghai-Hangzhou Expressway Zhejiang Gaotong Stone Note 3 5,000,000 80 Manufacturing, designing Development Co., Ltd. (“Gaotong”) Zhejiang Shangsan Expressway Co., Ltd. (“Shangsan Co”) Zhejiang Expressway Advertising Co., Ltd. (“Advertising Co”) and selling of stone and quarry materials Note 4 2,400,000,000 61 Construction and management of the Shangsan Expressway Note 5 1,000,000 70 Advertising 86 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 15. Interests in Subsidiaries (Continued) Note 1. Yuhang Co was established on June 7, 1994 in the PRC as a joint stock limited company and was subsequently restructured into a limited liability company under its current name on November 28, 1996. Note 2. Jiaxing Co was established on June 30, 1994 in the PRC as a joint stock limited company and was subsequently restructured into a limited liability company under its current name on November 29, 1996. Note 3. Gaotong Co was established on November 3, 1997 in the PRC as a limited liability company. Gaotong Co is in the process of liquidation. Note 4. Shangsan Co was established on January 1, 1998 in the PRC as a limited liability company. Note 5. Advertising Co was established on June 1, 1998 in the PRC as a limited liability company. 16. Interest in a Jointy-Controlled Entity Unlisted shares, at cost Share of net assets other than goodwill Amount due to Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 — — 65,000 65,000 54,723 57,216 — — (90) a jointly-controlled entity (641) (90) (641) 54,082 57,126 64,359 64,910 The amount due to a jointly-controlled entity is unsecured, interest-free and has no fixed term of repayment. Particulars of the jointly-controlled entity, which is directly held by the Company, are as follows: Name Business structure Place of registration and Ownership interest operations Percentage of Voting power Profit sharing Principal activities Hangzhou Shida Corporate The PRC 50 50 50 Construction Expressway Co., Ltd. (“Shida Co”) and operation of Shiqiao- Dajing Road (“Shida Road”) ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 87 Notes to Financial Statements (Cont’d) 17. Interests in Associates Unlisted shares, at cost Share of net assets other than goodwill Amount due to an associate Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 — — 126,500 126,500 158,159 (1,250) 167,316 — — — — — 156,909 167,316 126,500 126,500 The amount due to an associate is unsecured, interest-free and has no fixed terms of repayment. The Group’s share of post-acquisition accumulated reserves of the associates at December 31, 2001 was RMB31,659,000 (2000: RMB40,816,000). Particulars of the associates, which are directly held by the Company, are as follows: Name Business structure Place of registration and operations Percentage of equity attributable to the Group 2001 2000 Principal activities Zhejiang Expressway Corporate The PRC 50 50 Construction and operation Petroleum Development Co., Ltd. (“Petroleum Co”) of gas stations and the sale of petroleum products JoinHands Technology Corporate The PRC 27.58 30 Providing logistic management Co., Ltd (“JoinHands Co”) and anti-counterfeiting system in the PRC The financial statements of the above associates are coterminous with those of the Group. The consolidated financial statements have been adjusted for material transactions between the associates and Group companies. 88 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 18. Expressway Operating Rights Group RMB’000 Company RMB’000 Cost: At January 1, 2001 and December 31, 2001 261,000 208,000 Accumulated amortization: At January 1, 2001 Provided during the year 28,955 8,700 25,422 6,934 At December 31, 2001 37,655 32,356 Net book value: At December 31, 2001 223,345 175,644 At December 31, 2000 232,045 182,578 19. Investments Long term investments Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 Held-to-maturity securities 30,000 30,000 30,000 30,000 Unlisted equity investments, at cost 8,650 8,650 — — 38,650 38,650 30,000 30,000 Provisions for impairment of unlisted equity investments (5,783) (5,783) — — 32,867 32,867 30,000 30,000 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 89 Notes to Financial Statements (Cont’d) 19. Investments (Continued) Short term investments Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 Listed in the PRC, at market value — Government bonds — Convertible bonds — Close-end equity funds 733,724 160,614 97,810 156,525 99,485 121,955 562,848 101,078 51,950 — 99,486 80,808 — Open-ended equity funds 20,038 — — — 1,012,186 377,965 715,876 180,294 The market value of the Group’s short term investments at the date of approval of these financial statements was approximately RMB1,022,210,000 (2000: RMB393,704,000). 20. Long Term Receivables Group and Company 2001 RMB’000 2000 RMB’000 Interest receivable in respect of the held-to-maturity securities 9,030 6,450 The interest receivable will be settled upon the maturity of the held-to-maturity securities. 90 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 21. Goodwill SSAP 30 was adopted during the year, as detailed in note 2 to the financial statements. The amounts of the goodwill capitalised as an asset or recognised in the balance sheet, arising from the acquisition of subsidiaries, are as follows: Cost: Acquisition of additional interests in a subsidiary and balance at December 31, 2001 Accumulated amortisation: Provided during the year and balance at December 31, 2001 Net book value: At December 31, 2001 At December 31, 2000 Group RMB’000 20,853 1,043 19,810 — As detailed in note 2 to the financial statements, the Group has adopted the transitional provision of SSAP 30 which permits goodwill and negative goodwill in respect of acquisitions which occurred prior to January 1, 2001, to remain eliminated against reserves or credited to the capital reserve, respectively. The amounts of goodwill remaining in reserves, arising from the acquisition of subsidiaries, is RMB352,860,000, as at December 31, 2001. The amount of goodwill is stated at cost which arose in prior years. 22. Trade Recivables An aged analysis of the trade receivables as at the balance sheet date, based on invoice date, is as follows: Within 1 year 1 to 2 years 2 to 3 years Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 44,918 9,301 — 18,162 208 832 44,895 9,301 — 18,162 208 832 54,219 19,202 54,196 19,202 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 91 Notes to Financial Statements (Cont’d) 23. Other Receivables Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 Prepayments Deposits and other debtors Profits tax refundable 30,808 10,225 22,745 45,214 238,817 12,560 30,028 5,867 22,745 3,637 174,037 12,560 63,778 296,591 58,640 190,234 24. Cash and Cash Equivalents Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 Cash and bank balances Time deposits 434,771 384,255 320,304 1,394,030 137,556 195,864 161,078 1,179,182 819,026 1,714,334 333,420 1,340,260 25. Trade Payables An aged analysis of the trade payables as at the balance sheet date, based on invoice date, is as follows: Within 1 year 1 to 2 years 2 to 3 years Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 113,793 126,796 229 200,761 3,798 — 82,711 1,550 8 12,113 1,005 — 240,818 204,559 84,269 13,118 92 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 26. Other Payables and Accruals Group Company Notes 2001 RMB’000 Accruals Other liabilities Amounts due to 42,566 100,010 2000 RMB’000 Restated 89,943 126,448 2001 RMB’000 10,814 66,323 2000 RMB’000 Restated 42,769 84,222 related parties 30 12,151 92,304 12,151 92,304 Amount due to the holding company 31 2,599 4,809 — 4,809 157,326 313,504 89,288 224,104 27. Interest-Bearing Bank and Other Borrowings Group Company Notes 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 Current portion of bank and other borrowings 28 1,620,778 1,831,817 990,500 1,320,376 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 93 Notes to Financial Statements (Cont’d) 28. Interest-Bearing Bank and Other Loans Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 Bank loans, unsecured Other loans, unsecured 1,655,500 1,173,509 1,230,000 2,016,598 1,090,500 — 800,000 808,902 Bank loans repayable: Within one year In the second year In the third to fifth years, 2,829,009 3,246,598 1,090,500 1,608,902 1,510,500 130,000 970,000 160,000 990,500 100,000 540,000 160,000 inclusive 15,000 100,000 — 100,000 1,655,500 1,230,000 1,090,500 800,000 Other loans repayable: Within one year In the second year In the third to fifth years, inclusive Beyond five years 110,278 76,524 420,968 565,739 861,817 80,646 407,682 666,453 1,173,509 2,016,598 — — — — — 780,376 9,487 — 19,039 808,902 2,829,009 3,246,598 1,090,500 1,068,902 Portion classified as current liabilities - note 27 (1,620,778) (1,831,817) (990,500) (1,320,376) Long term portion 1,208,231 1,414,781 100,000 288,526 (a) The bank loans are unsecured and bear interest at rates ranging from 5.022% to 5.643% per annum. (b) The other loans are unsecured and bear interest at rates ranging from 3% to 5.5% per annum. 94 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 29. Long Term Bonds Long term bonds Group 2001 RMB’000 2000 RMB’000 200,000 200,000 The bonds are unsecured, bear interest at 3.78% per annum and are repayable in 2003 upon maturity. 30. Amounts Due to Related Parties The amounts due to related parties are unsecured, interest-free and have no fixed terms of repayment. 31. Amount Due to the Holding Company The amount due to the holding company (i.e. the Communications Investment Group) is unsecured, interest-free and has no fixed terms of repayment. 32. Deferred Tax Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 At January 1, Charge for the year - note 8 43,101 88,432 3,346 39,755 21,655 40,606 3,346 18,309 At December 31, 131,533 43,101 62,261 21,655 The deferred tax of the Group and the Company arose from differences in accounting profit of these financial statements prepared under HK SSAP, and the taxable income based on income for financial reporting purposes prepared in accordance with the laws and regulations in the PRC. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 95 Notes to Financial Statements (Cont’d) 33. Share Capital 2001 Number of shares 2000 Number of shares 2001 RMB’000 2000 RMB’000 Registered, issued and fully paid: Domestic shares of RMB1.00 each 2,909,260,000 2,909,260,000 H shares of RMB1.00 each 1,433,854,500 1,433,854,500 2,909,260 1,433,855 2,909,260 1,433,855 4,343,114,500 4,343,114,500 4,343,115 4,343,115 The domestic shares are not currently listed on any stock exchange. The H shares have been listed on The Stock Exchange of Hong Kong Limited since May 15, 1997, and were admitted to the Official List on May 5, 2000. Dealings on the London Stock Exchange commenced on the same day. On February 27, 2001, trading of the H Shares of the Company on the Berlin Stock Exchange commenced following a secondary listing on the Unofficial Regulated Market of the exchange. On February 14, 2002, the United States Securities and Exchange Commission, following approval by the board of directors and the China Securities Regulatory Commission, declared the registration statement in respect of the ADSs evidenced by the ADRs effective. All the domestic shares and H shares rank pari passu with each other as to dividends and voting rights. 96 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 34. Reserves Share premium Goodwill account Total reserve RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 welfare Retained profits fund Public Statutory surplus reserve Group At January 1, 2000 3,645,082 (332,016) 182,990 82,856 511,813 4,090,725 Goodwill arising on acquisition of additional interest in a subsidiary — (18,315) — — — (18,315) Goodwill arising on acquisition of additional interest in an associate Interim dividend - note 12 Net profit for the year Transfer from/(to) reserves Proposed final dividend - note 12 At December 31, 2000 and beginning — — — — — (2,529) — — — — — — — (2,529) — (86,862) (86,862) — 636,001 636,001 — 102,041 45,146 (147,187) — — — — (304,018) (304,018) of year 3,645,082 (352,860) 285,031 128,002 609,747 4,315,002 Share premium shared from an associate 644 Interim dividend - note 12 Net profit for the year Transfer from/(to) reserves Proposed final dividend - note 12 At December — — — — — — — — — — — — 644 — (130,293) (130,293) — 760,613 760,613 — 130,267 62,762 (193,029) — — — — (304,018) (304,018) 31, 2001 3,645,726 (352,860) 415,298 190,764 743,020 4,641,948 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 97 Notes to Financial Statements (Cont’d) 34. Reserves (Continued) Share premium Goodwill account Total reserve RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 welfare Retained profits fund Public Statutory surplus reserve Company Balance at January 1, 2000 3,645,082 — 115,911 57,956 311,335 4,130,284 Interim dividend - note 12 Net profit for the year Transfer from/(to) reserves Proposed final dividend - note 12 At December 31, 2000 and beginning — — — — — — — — — — — (86,862) (86,862) — 504,441 504,441 57,063 28,531 (85,594) — — — (304,018) (304,018) of year 3,645,082 - 172,974 86,487 339,302 4,243,845 Interim dividend - note 12 Net profit for the year Transfer from/(to) reserves Proposed final dividend - note 12 At December — — — — — — — — — — — (130,293) (130,293) — 544,670 544,670 79,434 39,717 (119,151) — — — (304,018) (304,018) 31, 2001 3,645,082 — 252,408 126,204 330,510 4,354,204 In accordance with the Company Law of the PRC and the companies’ articles of association, the Company, its subsidiaries, its associates and its jointly-controlled entity (the “Entities”) are required to allocate 10% of their profit after tax, as determined in accordance with the PRC accounting standards and regulations applicable to the Entities, to the statutory surplus reserve (the “SSR”) until such reserve reaches 50% of the registered capital of the Entities. Subject to certain restrictions set out in the Company Law of the PRC and the respective articles of association of the Entities, part of the SSR may be converted to increase the Entities’ share capital. 98 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 34. Reserves (Continued) In addition, Shangsan Co was required by the relevant tax authorities to transfer the CIT waived for 2000 to its SSR account in 2001. The transfer has been incorporated in these financial statements. In accordance with the Company Law of the PRC, the Entities are required to transfer 5% to 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations applicable to the Entities, to the statutory public welfare fund (the “PWF”), which is a non-distributable reserve other than in the event of the liquidation of the Entities. The PWF must be used for capital expenditure on staff welfare facilities and these facilities remain as properties of the Entities. The Directors of the Company have proposed to transfer RMB79,434,000 (2000: RMB57,063,000) and RMB39,717,000 (2000: RMB28,531,000) to the SSR and the PWF, respectively. This represents 10% (2000: 10%) and 5% (2000: 5%), respectively, of the Company’s profit after tax of RMB794,343,000 (2000: RMB570,629,000) determined in accordance with the PRC accounting standards. 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 the HKGAAP. As at December 31, 2001, the Company had reserves of approximately RMB634,528,000 (2000 restated: RMB643,320,000) available for distribution by way of cash or in kind. As at December 31, 2001, in accordance with the Company Law of the PRC, the amount of approximately RMB3,638,229,000 (2000: RMB3,633,159,000) standing to the credit of the Company’s share premium account was available for distribution by way of capitalisation issues. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 99 Notes to Financial Statements (Cont’d) 35. 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 expressway operating rights Amortisation of goodwill Write-off of bad debts Interest income Arising on advance repayment of World Bank loan Loss on disposal of fixed assets Impairment loss Provision for impairment of long term investments Decrease/(increase) in inventories Increase in trade receivables Decrease/(increase) in deposits and other debtors Decrease in trade payables Increase in amount due from the holding company Decrease in amounts due to related parties Increase in other taxes payable Increase/(decrease) in other liabilities Increase/(decrease) in accruals Increase in amount due to an associate Increase in amount due to a jointly-controlled entity 2001 RMB’000 2000 RMB’000 1,439,949 1,042,768 205,582 8,700 1,043 7,500 (41,503) (53,172) 4,313 — — (556) (35,017) 164,981 (874) (2,210) (80,153) 6,216 (26,438) 3,018 1,250 551 142,080 8,700 — — (73,195) — 5,595 42,239 5,783 331 (14,453) (105,859) (12,027) (31,838) — 5,268 31,624 (6,803) — 90 Net cash inflow from operating activities 1,603,180 1,040,303 100 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 35. Notes to the Cash Flow Statement (Continued) (b) Analysis of changes in financing during the year: Long term bonds RMB’000 Bank and other loans RMB’000 Minority interests RMB’000 — 3,159,897 1,449,432 200,000 86,701 Balance at January 1, 2000 Cash inflow from financing Arising from dilution of minority interests Dividends paid to minority shareholders Profit attributable to minority shareholders — — — — — — 176,381 (154,485) (33,324) 57,360 Balance at December 31, 2000 and January 1, 2001 Cash outflow from financing Arising from dilution of minority interests Dividends paid to minority interests Profit attributable to minority interests 200,000 3,246,598 1,495,364 — — — — (417,589) — — — — (72,515) (31,177) 110,957 Balance at December 31, 2001 200,000 2,829,009 1,502,629 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 101 Notes to Financial Statements (Cont’d) 36. Commitments Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 Capital commitments Contracted, but not provided for: — Construction of expressways 344,127 622,684 188,041 356,012 — Addition of machinery — Proposed investments in Shangsan Co. — Proposed investments in Jiaxin Co. — Purchase of a new building — Others Authorised, but not contracted for: — Construction 35,446 — — — 542,600 485,000 542,600 485,000 386,992 — 386,992 5,720 — — 1,886 5,720 — — — 1,886 1,314,885 1,109,570 1,123,353 842,898 of expressways 1,274,740 2,500,980 945,592 898,182 2,589,625 3,610,550 2,068,945 1,741,080 37. Contingent Liabilities At the balance sheet date, contingent liabilities not provided for in the financial statements were as follows: Group Company 2001 RMB’000 2000 RMB’000 2001 RMB’000 2000 RMB’000 Guarantees provided in connection with corporate bonds granted to — A subsidiary Guarantees provided to banks in connection with facilities granted to: — A subsidiary — A jointly-controlled entity 102 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 — — 208,694 201,134 — 30,000 30,000 — 30,000 565,000 30,000 — 30,000 30,000 803,694 231,134 38. Differences in Financial Statements Prepared under PRC and Hong Kong Accounting Standards Profit after tax 2001 RMB’000 2000 RMB’000 Net assets as at December 31 2001 RMB’000 2000 RMB’000 As reported in statutory accounts 928,132 642,023 9,218,047 8,881,679 HK SSAP adjustments: (a) Goodwill (b) Provision for deficit arising on 37,170 35,885 (214,452) (251,622) the disposal of staff quarters 4,626 — (c) Interest on subscription monies, of subscription, net of deferred tax (d) Depreciation provided, net of 760 (2,484) — — (15,300) 4,310 deferred tax (77,039) (26,241) (74,656) (14,733) (e) Difference in share premium (f) (g) during establishment Profits tax refundable Restatement of short term investments in securities at market value, net of deferred tax (h) Recognition of tax exemption (i) General provision on trade — 10,186 (20,224) — — 12,560 38,868 17,805 11,923 19,059 18,287 — 11,923 8,873 36,967 6,964 receivables and other debts (738) 5,548 2,187 3,450 (j) Impairment loss, net of deferred tax (1,307) (28,300) 6,443 (14,433) (k) CIT payment which was waived in prior years (10,064) (l) Proposed final dividend (m) Others As restated in the financial statements — — (2,303) — 304,018 (1,775) — 304,018 39 — 68 871,570 693,361 9,289,081 8,962,135 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 103 Notes to Financial Statements (Cont’d) 39. Related Party Transactions The following is a summary of the significant related party transactions carried out in the ordinary course of business between the Company, its subsidiaries and certain government bodies in the year. Under the reorganisation agreement, the Provincial Investment Co gave a number of undertakings to the Company, including a non-competition undertaking, a tax indemnity and an indemnity against losses incurred, which were not expressly transferred to the Company pursuant to the 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 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. Pursuant to a supplemental agreement dated April 18, 1997, the Company, the Provincial Investment Co, and the Executive Commission have agreed that the Company will take over the repayment responsibilities under the reorganisation agreement in respect of the World Bank financing. An appropriate agreement was entered into between the Company and the Executive Commission, pursuant to which the Company will be charged the same rate of interest as that charged to the Executive Commission. During the year, the Company repaid all the outstanding principal of the World Bank loan in advance, amounting to US$91,636,418 through the Executive Commission. The additional interest charges and exchange gains arising from the advance repayment charged to the Company were the same as those charged to the Executive Commission. 104 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 40. Post Balance Sheet Events The Company has entered into agreements (the “Agreements”) with the minority shareholders of Jiaxing Co and Shangsan Co to further acquire a 12.7% equity interest and a 2% equity interest in Jiaxing Co and Shangsan Co, respectively. The details are as follows: Date of agreement Jiaxing Co Minority shareholder Cash consideration RMB’000 % Date of acquisition December 27, 2001 Tongxiang 1.3% 38,671 January 1 Huatong Co., Ltd. 2002 December 27, 2001 Haining Hengtong 1.5% 44,621 January 1 Development Co., Ltd. 2002 January 18, 2002 Jiaxing Luqiao Construction Development Co., Ltd. 9.9% 303,700 January 18 2002 Total Shangsan Co 12.7% 386,992 December 27, 2001 Shenzhou Shangsan 2% 57,600 January 1 Development Co., Ltd. 2002 41. Comparative Amounts As explained in note 2 to the financial statements, due to the adoption of new/revised SSAPs during the current year, the presentation of the 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. The changes made are explained in note 2 to the financial statements. 42. Approval of Financial Statements The financial statements were approved by the board of directors on March 13, 2002. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 105 Notice of 2001 Annual General Meeting Notice of 2001 Annual General Meeting NOTICE IS HEREBY GIVEN that the 2001 Annual General Meeting (“AGM”) of Zhejiang Expressway Co., Ltd. (the “Company”) will be held at 10:00 a.m. on Tuesday, April 30, 2002 at 18th Floor, Zhejiang World Trade Center, 15 Shuguang Road, Hangzhou 310007, the People’s Republic of China (the “PRC”) for the conduct of the following business: A. To pass the following matters as ordinary resolutions: 1. 2. 3. 4. 5. 6. 7. To consider and approve the report of the directors of the Company for the year 2001; To consider and approve the report of the supervisory committee of the Company for the year 2001; To consider and approve the audited financial statements of the Company for the year 2001; To consider and approve the proposed distribution of profits and the final dividend of the Company for the year 2001; To consider and approve the budget plan of the Company for the year 2002; To consider and approve the re-appointment of Ernst & Young as the international auditors of the Company and Zhejiang Pan-China Certified Public Accountants （浙 江天健會計師事務所）as the PRC auditors of the Company and to authorize the board of directors of the Company to fix their remuneration; To consider and approve the resignation of Mr. Xia Linzhang as an external director of the Company and to consider and approve the appointment of Ms. Zhang Yang (see Appendix I) as an external director of the Company. B. To consider and, if thought fit, pass the following as special resolutions: 1. To amend paragraph 3 in article 1 of the Articles of Association of the Company as follows: “The promoter of the Company was Zhejiang Provincial High Class Highway Investment Company Limited（浙江省高等級公路投資有限公司). Pursuant to the document Zhe Zheng Fa [2001] No. 42, Zhejiang Provincial High Class Highway Investment Company Limited was replaced by Zhejiang Communications Investment Group Co., Ltd.（浙 江省交通投資集團有限公司）upon reorganization.” 2. To amend the article 11 of the Articles of Association of the Company as follows: “The scope of business of the Company shall be that as approved by the competent authority in charge of the Company’s registration. The scope of business of the Company is the construction, design, toll collection, maintenance, and management of and the provision of technical consultation and ancillary services to high-grade roads; ancillary services for high-grade roads such as gas station along the road, car rescue, car wash, warehousing, food and beverage, advertising (subject to the approval of the relevant department).” 106 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 3. To amend the article 18 of the Articles of Association as follows: “As approved by the examination and approval authority authorised by the State Council, the Company has issued a total of 4,343,114,500 ordinary shares. Upon the establishment of the Company, 2,909,260,000 domestic invested shares were issued to the promoter, Zhejiang Provincial High Class Highway Investment Company Limited (浙江省高等級公路投資有限公司) (subsequently reorganised as Zhejiang Communications Investment Group Co., Ltd. (浙江省交通投資集團有限公司)), representing approximately 67% of the total ordinary shares issued by the Company.” 4. To amend the article 19 of the Article of Association as follows: “After the establishment of the Company, 4,343,114,500 ordinary shares were issued of which 1,433,854,500 were issued as overseas listed foreign invested shares representing approximately 33% of the total number of ordinary shares which were issued by the Company. The shareholding structure of the Company comprises 4,343,114,500 ordinary shares of which 2,432,500,000 domestic invested shares are held by the promoter, Zhejiang Communications Investment Group Co., Ltd. (浙 江省交通投資集團有限公司), 476,760,000 domestic invested shares are held by Huajian Transportation Economic Development Center (華建交通經濟開發中心), and 1,433,854,500 overseas listed foreign invested shares are held by holders of overseas listed foreign invested shares.” 5. To authorize the board of directors of the Company (the “Board”) to issue additional shares not exceeding 20 per cent. of each of the existing issued domestic shares and overseas listed foreign shares of the Company. “THAT: (1) Subject to paragraphs (2) & (3) below, the exercise by the Board during the Relevant Period (as defined in paragraph (5) hereunder) of all the powers of the Company to allot, issue or otherwise deal with, either separately or concurrently, each of the existing issued domestic shares (“Domestic Shares”) and overseas listed foreign shares (“H Shares”) in the capital of the Company be and is hereby approved; (2) Subject to the approval as required under paragraph (1) above, the Board shall be authorised to allot or issue Domestic Share and/or H Shares, either separately or concurrently, of not more than 20 per cent. of each of the existing issued Domestic Shares and H Shares in the capital of the Company as at the date of passing this resolution; (3) Approval as required in paragraph (1) above is subject to the granting of approval from the China Securities Regulatory Commission; (4) Approval of paragraph (1) above includes the authorization of the Board to deal with the matters concerning the issue of A shares to the public (“A Share Issue”) in accordance with the resolutions in relation to the A Share Issue passed at the extraordinary general meeting of the Company held on March 22, 2001, including: (a) To determine the basic offer price, the price range of the issue, methods of the issue and the final issue price and the final number of shares to be issued; ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 107 Notice of 2001 Annual General Meeting (Cont’d) (b) To execute any material contracts in connection with the investment projects in relation to the A Share Issue; (c) To deal with other matters relating to the A Share Issue. (5) For the purpose of this resolution, “Relevant Period” means the period from the date upon which this resolution is passed until whichever is the earliest of:- (a) (b) (c) from the passing of this special resolution, until conclusion of the Company’s next annual general meeting; the expiry of the twelve month period from the date of the passing of this resolution; or the date of revocation or variation of the authority given under this resolution by a special resolution of the Company in general meeting. (6) The Board be authorised to make appropriate amendments to the relevant articles of the Articles of the Association of the Company after the completion of the allotment or issuance as provided in paragraph (1) above, to increase the share capital of the Company and reflect the new share capital structure of the Company, and to complete the related registration formalities at the relevant regulatory authorities of the government.” By Order of the Board Jiang Wenyao Company Secretary Hangzhou, Zhejiang Province, the PRC March 13, 2002 Notes: 1. Eligibility for attending the Annual General Meeting Holders of H Shares who intend to attend the Annual General Meeting must deliver all transfer instruments and the relevant share certificates to the share registrar for H Shares, Hong Kong Registrars Limited (the address of which is set out in paragraph 5 below), at or before 4:00 p.m. on March 30, 2002. 2. Registration procedures for attending the Annual General Meeting (1) Holders of H Shares and Domestic Shares intending to attend the Annual General Meeting should return the reply slip for attending the Annual General Meeting to the Company by post or by facsimile (address and facsimile numbers are shown in paragraph 5 below) such that the same shall be received by the Company on or before April 10, 2002. (2) A shareholder (“Shareholder”) or his/her/its proxy should produce proof of identity when attending the meeting. If a Shareholder appoints a legal representative to attend the meeting, such legal representative shall produce proof of identity and a copy of the resolution of the board of directors or other governing body of such Shareholder appointing such legal representative at the meeting. 108 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 3. Proxy (1) A Shareholder eligible to attend and vote at the Annual General Meeting is entitled to appoint, in written form, one or more proxies to attend and vote on his/her/its behalf. A proxy need not be a Shareholder. (2) A proxy should be appointed by a written instrument signed by the appointor or his/her/its attorney. If the appointor is a corporation, the same shall be affixed with its common seal or signed by its director(s) or duly authorized representative(s). If the form of proxy is signed by the attorney of the appointor, the power of attorney or other authorization document(s) of such attorney should be notarised. (3) To be valid, the power of attorney or any other authorization document(s) (which have been notarised) together with the completed form of proxy must be delivered, in the case of holders of Domestic Shares, to the Company at the address shown in paragraph 5 below and, in the case of holders of H Shares, to Hong Kong Registrars Limited at the address shown in paragraph 5 below, not less than 24 hours before the time designated for the holding of the Annual General Meeting. (4) A proxy may exercise the right to vote by a show of hands or by poll. However, if more than one proxy is appointed by a shareholder, such proxies shall only exercise the right to vote on a poll. 4. Closure of Register of Members The register of members of H Shares will be closed from March 31, 2002 to April 29, 2002 (both days inclusive). 5. Miscellaneous (1) The Annual General Meeting will not last for more than one day. Shareholders who attend shall bear their own travelling and accommodation expenses. (2) The address of the share registrar for H Shares, Hong Kong Registrars Limited, is at: 2/F, Vicwood Plaza 199 Des Voeux Road Central Hong Kong (3) The address of the Company is at: 19th Floor, Zhejiang World Trade Center 15 Shuguang Road, Hangzhou 310007 PRC Telephone No.: Facsimile No.: (86)-571-87987700 (86)-571-87950329 Appendix I — Biography of Proposed Director Ms. ZHANG Yang (張楊), aged 38, proposed director of the Company, is currently the assistant general manager and manager at the securities management department of Huajian Transportation Economic Development Centre. Ms. Zhang graduated from Lanzhou University （蘭州大學）in 1987 with a bachelor of science degree in economics. She worked at various posts at the Ministry of Aerospace Industries（航天工業部）from 1987 to 1994 when she joined Huajian. Ms. Zhang also serves as a director of Shenzhen Expressway Company Limited and Sichuan Expressway Company Limited. ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 109 Corporate Information Corporate Information Representative office in Hong Kong Suite 2910 29/F, Bank of America Tower 12 Harcourt Road Hong Kong Tel: 852-2537 4295 Fax: 852-2537 4293 Legal advisers As to Hong Kong law: Herbert Smith 23rd Floor, Gloucester Tower 11 Pedder Street, Central Hong Kong As to English and US law: Herbert Smith Exchange House Primrose Street London EC2A 2HS United Kingdom As to PRC law: T & C Law Firm 18/F, Block A 100 Moganshan Road Yaojiang International Building Hangzhou, Zhejiang PRC 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 Ma Kehua Ni Ciyun Lu Fan Sun Xiaoxia Zheng Qihua Company secretary Jiang Wenyao Authorised representatives Geng Xiaoping Zhang Jingzhong Statutory address 19/F, Zhejiang World Trade Centre 15 Shuguang Road Hangzhou City, Zhejiang Province PRC 310007 Tel: 86-571-8798 5588 Fax: 86-571-8798 5599 110 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 Auditors and reporting accountants Ernst & Young Certified Public Accountants 15th Floor Hutchison House 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, 10 Harcourt Road, Central Hangzhou Branch Hong Kong Financial advisor Credit Agricole Indosuez 44th Floor One Exchange Square, Central Hong Kong H Share registrar and transfer office Hong Kong Registrars Limited 2nd Floor, Vicwood Plaza 199 Des Voeux Road, Central Hong Kong Corporate broker in the United Kingdom Cazenove & Co. Ltd H Shares listing information The Stock Exchange of Hong Kong Limited Code: 0576 London Stock Exchange plc Code: ZHEH ADRs information US Exchange: OTC Symbol: ZHEXY CUSIP: 98951A100 DR: H Shares 1:30 12 Tokenhouse Yard London EC2R 7AN United Kingdom Investor relations consultant Rikes Communications Limited Room 701, Wanchai Central Building 89 Lockhart Road, Wanchai Hong Kong Tel: 852-2520 2201 Fax: 852-2520 2241 Paying agent for London listing Lloyds TSB Registrars The Causeway, Worthing West Sussex BN99 6DA United Kingdom ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 111 Location Map of Expressways Operated by The Group Shangsan Expressway Panlongling Tunnel No.1 & No.2 SHANGHAI - HANGZHOU EXPRESSWAY Location Map Shangsan Expressway Shanghai-Hangzhou Expressway Jiaxing Section SHANGSAN EXPRESSWAY Shanghai-Hangzhou-Ningbo Expressway Qianjiang er Qiao 112 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 ZHEJIANG EXPRESSWAY CO., LTD. ANNUAL REPORT 2001 113 

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