Zhejiang Expressway Co., Ltd
Annual Report 2003

Plain-text annual report

2 4 6 7 8 10 14 28 31 35 40 50 51 90 92 Definition of Terms Company Profile Major Corporate Events Particulars of Major Road Projects Financial and Operating Highlights Chairman’s Statement Management Discussion and Analysis Frequently Asked Questions Corporate Governance Directors, Supervisors and Senior Management Profiles Report of the Directors Report of the Supervisory Committee Report of the International Auditors Corporate Information Location Map of Expressways Operated by the Group C O N T E N T S 2 0 0 3 A N N U A L R E P O R T 1  D E F I N I T I O N O F T E R M S ADR(s) ADS(s) Advertising Co American Depositary Receipt(s) American Depositary Share(s) Zhejiang Expressway Advertising Co., Ltd., a 70% owned subsidiary of Development Co Audit Committee the audit committee of the Company Board Company Communications Investment Group Development Co Directors GDP Group H Shares the board of Directors of the Company 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 wholly State-owned enterprise established on December 29, 2001 Zhejiang Expressway Investment Development Co., Ltd., a 51% owned subsidiary of the Company established in the PRC on May 28, 2003 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 Stock Exchange of Hong Kong Limited and traded in Hong Kong dollars Hong Kong Stock Exchange The Stock Exchange of Hong Kong Limited Huajian Huajian Transportation Economic Development Center, a State-owned enterprise 2 Z H E J I A N G E X P R E S S WAY C O . , LT D . Jiaxing Co JoinHands Technology Listing Rules Period Petroleum Co PRC Rmb Services Co Shangsan Co Shareholders Shida Co Zhejiang Jiaxing Expressway Co., Ltd., a 99.9995% owned subsidiary of the Company JoinHands Technology Co., Ltd., a 27.582% 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, 2003 Zhejiang Expressway Petroleum Development Co., Ltd., a 50% owned associate of the Company the People’s Republic of China Renminbi, the lawful currency of the PRC Zhejiang Expressway Vehicle Towing and Rescue Services Co. Ltd., a 85% owned subsidiary of Development Co established in the PRC on July 31, 2003 Zhejiang Shangsan Expressway Co., Ltd., a 73.625% owned subsidiary of the Company the shareholders 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 2 0 0 3 A N N U A L R E P O R T 3  C O M P A N Y P R O F I L E Zhejiang Expressway Co., Ltd. is an infrastructure On February 14, 2002, a Level I American company principally engaged in investing in, Depositary Receipt program sponsored by the constructing and managing high grade roads. The Company in respect of its H Shares, with the Bank Company and its subsidiaries also carry out certain of New York as depositary, was established in the ancillary businesses such as automobile servicing United States and became effective. and operations of gas stations and billboard advertising along expressways. From January 24 to February 17, 2003, the Company issued Rmb1 billion of corporate bonds The Company was incorporated on March 1, 1997 to institutional and public investors in the PRC for as the main vehicle of the Zhejiang Provincial the financing of its expressway widening projects. Government for investing in, constructing and operating expressways and Class 1 roads in Zhejiang Province. The Company intends to grasp any opportunities in project investments and acquisitions, with a view to achieving the Group’s vision of becoming a The H Shares of the Company, which represent leading company investing in and operating approximately 33% of the issued share capital of infrastructure businesses, with an emphasis on the Company, were listed on the Hong Kong Stock expressways, in the PRC by 2010. Exchange in May 1997, and subsequently obtained a secondary listing on the London Stock Exchange in May 2000. 4 Z H E J I A N G E X P R E S S WAY C O . , LT D . Set out below is the corporate and business structure of the Group: Holders of H Shares Communications Investment Group Huajian 33% 56% 11% The Company 51% 99.9995% 51% 73.625% 50% 50% 27.582% Development Co Jiaxing Co Yuhang Co Shangsan Co Petroleum Co Shida Co JoinHands Technology 100% 100% Operation of service areas, roadside advertising and vehicle services businesses Jiaxing Section 88.1 km Yuhang Section 11.1 km Hangzhou Section 3.4 km Hangzhou - Ningbo Expressway 145.0 km Shangsan Expressway 142.0 km Shanghai - Hangzhou Expressway 102.6 km Operation of gas station and sale of petroleum related products Development, operation, and management of Shida Road Development and application of computer technologies subsidiary associate jointly-controlled entity 2 0 0 3 A N N U A L R E P O R T 5  M A J O R C O R P O R A T E E V E N T S JANUARY 24, 2003 MAY 23, 2003 From January 24 to February 17, 2003, the Company issued corporate bonds of RMB1 billion to domestic institutions and public investors. The Company convened the first general assembly of the first congress of staff representative at which 118 staff representatives were elected. FEBRUARY 11, 2003 The Company convened an extraordinary general meeting at which members of the third Board of Directors and Supervisory Committee were elected for a term of three years commencing from March 1, 2003. MARCH 1, 2003 The board of directors of Shangsan Co approved a resolution to put the Shangsan Expressway directly under the Company’s unified operation and management. MARCH 4, 2003 The Company announced its annual results for the year ended December 31, 2002 in Hong Kong. APRIL 30, 2003 The Company convened the 2002 annual general meeting at which several resolutions were approved, including one in respect of the widening project of the Shanghai-Hangzhou-Ningbo Expressway. MAY 8, 2003 The Company further acquired 2% of equity interests in Shangsan Co at a consideration of RMB57.6 million. MAY 28, 2003 The Company established Development Co for better development of ancillary businesses relating to expressways. JULY 29, 2003 Commencement ceremony of phase II of the expressway widening project of the Shanghai- Hangzhou-Ningbo Expressway was held in Jiaxing. AUGUST 18, 2003 The Company announced its interim results for the six months ended June 30, 2003 in Hong Kong. SEPTEMBER 12, 2003 The Company was awarded quality management system certificates by the United Kingdom Accreditation Service and China Classification Society Quality Assurance Ltd. OCTOBER 9, 2003 The Company convened an extraordinary general meeting at which the proposal relating to the interim dividends for 2003 was approved. 6 Z H E J I A N G E X P R E S S WAY C O . , LT D .  P A R T I C U L A R S O F M A J O R R O A D P R O J E C T S Percentage of Ownership Length in Kilometers Number of Lanes Number of Toll Stations Number of Service Areas Start of Operation Expressways Shanghai-Hangzhou Expressway – Jiaxing Section – Yuhang Section – Hangzhou Section Hangzhou-Ningbo Expressway – Hongken to Guzhu section – Other sections 99.9995% 51% 100% 100% 100% Shangsan Expressway 73.625% 88.1 11.1 3.4 44.0 101.0 142.0 4 4 4 8 4 4 6 2 0 4 8 11 1 0 0 1 1 3 1998 1995 – 1998 1995 1995 1992 – 1996 2000 Remaining Years of Operation 25 25 25 25 24 27 2 0 0 3 A N N U A L R E P O R T 7 F I N A N C I A L A N D O P E R A T I N G H I G H L I G H T S RESULTS Turnover Profit Before Tax Tax Minority Interests Year ended December 31 1999 Rmb’000 2000 Rmb’000 2001 Rmb’000 2002 Rmb’000 2003 Rmb’000 1,050,498 1,188,604 1,722,517 2,168,078 2,471,805 706,552 879,752 1,235,540 1,394,471 1,593,189 (71,810) (186,391) (363,970) (400,952) (497,166) (86,431) (57,360) (110,957) (103,067) (87,231) Net Profit From Ordinary Activities Attributable To Shareholders 548,311 636,001 760,613 890,452 1,008,792 Earnings Per Share (EPS) 12.62 cents 14.64 cents 17.51 cents 20.50 cents 23.23 cents RETURN ON EQUITY (ROE) ROE 1999 6.37% 2000 7.10% 2001 8.19% 2002 9.18% 2003 9.94% MONTHLY AVERAGE DAILY FULL TRIP TRAFFIC VOLUME Shanghai-Hangzhou-Ningbo Expressway Shangsan Expressway 2002 2003 2004 2002 2003 2004 18,750 18,990 18,499 21,804 20,952 24,830 25,541 24,900 24,044 24,573 26,203 27,471 27,094 26,884 26,048 26,036 23,240 27,286 27,003 21,253 26,471 28,190 29,405 31,370 32,198 30,790 31,735 29,335 31,310 33,344 9,699 11,057 11,288 11,300 11,254 10,852 11,282 12,161 12,769 12,764 12,773 12,315 14,448 13,613 14,039 13,963 11,691 13,944 14,939 15,815 16,690 17,120 16,749 17,020 25,048 27,938 11,634 15,011 January February March April May June July August September October November December Average 8 Z H E J I A N G E X P R E S S WAY C O . , LT D . T U R N O V E R ( R M B M I L L I O N ) N E T P R O F I T ( R M B M I L L I O N ) 2,472 2,168 1,723 3000 2500 2000 1500 1000 1,050 1,189 500 0 1200 1000 800 600 400 200 0 1,009 890 761 636 548 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 E P S ( R M B C E N T S ) R O E ( % ) 23.23 20.50 17.51 14.64 12.62 25 20 15 10 5 0 10 8 6 4 2 0 9.94 9.18 8.19 7.10 6.37 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 MONTHLY AVERAGE DAILY FULL TRIP TRAFFIC VOLUME OF SHANGHAI-HANGZHOU-NINGBO EXPRESSWAY MONTHLY AVERAGE DAILY FULL TRIP TRAFFIC VOLUME OF SHANGSAN EXPRESSWAY 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 20,000 16,000 12,000 8,000 4,000 0 Full Trips JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Full Trips JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 2002 2003 2004 2002 2003 2004 2 0 0 3 A N N U A L R E P O R T 9 C H A I R M A N ’ S S T A T E M E N T C H A I R M A N ’ S S T A T E M E N T Ever since its establishment, Zhejiang Expressway has never departed from its conviction that it operates a people business. We put relentless efforts in continuously enhancing the facilities of our expressways and their ancillary services, with a view to creating comfortable, safe and highly efficient travel conditions to our expressway users. 10 Z H E J I A N G E X P R E S S WAY C O . , LT D . 2003 was a year full of challenges. Nevertheless, the Group has once again achieved double-digit growth in both revenues and profits, continuing to demonstrate the strong growth momentum that has been sustained since the Company’s public listing in 1997. The challenges that the Group faced during 2003 included the outbreak of the Severe Acute Respiratory Syndrome (SARS), traffic diversion by the east section of Hangzhou City Ring Road, and efforts in accommodating construction works related to the widening project and the road surface-overlaying project on the Shanghai- 2 0 0 3 A N N U A L R E P O R T 11 C H A I R M A N ’ S S T A T E M E N T Hangzhou-Ningbo Expressway. In addition, the Group was faced with the challenge to ensure safe and smooth travel conditions under heavy traffic flow and the rampant problem of overloaded trucks. In tackling the above challenges and difficulties, the management has taken a prudent and perseverant approach, and with the committed and diligent efforts of all of our staff, achieved satisfactory operating results. On behalf of the Board of Directors, I would like to express my gratitude to all members of the management and to our staff as a whole. In 2003, apart from achieving sound operating results, the Company was also named by Forbes global as one of the 200 successful companies outside of the U.S. with annual sales below USD1 billion in its “Best Under a Billion” list for 2003. It was also named by Asiamoney as one of the “Top Ten Best Managed Companies in the PRC”, an honor that the Company has won for six consecutive years. The Company was nominated again by Finance Asia for the “Best Corporate Governance” awards for the China market. The outstanding operating results and the numerous awards did not come by without a good reason. First of all, the Company has been enjoying a good operating environment as a result of the strong and healthy economic development of China in general and the Yangtze River Delta region in particular. Secondly, the Company strives to continuously improve corporate governance, including the structure of the Board of Directors, a stable management team, the Company’s high degree of transparency and excellent investor relations. Thirdly, the management has implemented well the Company’s strategies, focusing on shareholder value and efficiency and effectiveness of operational management. The dedicated efforts of the management have brought forth solid and favorable return for shareholders. The Company has been delivering an annual return of 40.4% on average for the past five years. This has been the case even when the Company was subject to the negative impact of the Asian Financial Crisis, when the Company raised substantially the dividend payout ratio to maintain shareholder return. With the rapid economic development in the Yangtze River Delta region and acceleration in industrialization and urbanization in the region, the expressway network will continue to expand and vehicle consumption will rise, thereby bringing greater challenges and opportunities to the Company. To fulfill the need arising from continued rapid socio-economic developments, Zhejiang Province has laid down a long-term development plan to build an expressway network of 5,000 km in overall length by 2020. By 2010, it is expected that the province will have 3,400 km of expressways in operation. This development plan will present the Company with more investment or acquisition opportunities in the province. 12 Z H E J I A N G E X P R E S S WAY C O . , LT D . In order to create value for our shareholders, customers and the community, as we have always been doing, the Company will continue to focus on our expressway operations and related businesses, and will expand the Company’s earnings base through investigating opportunities to increase our investments and acquisitions. Meanwhile, the Company will further improve the Group’s structure, gradually implementing professional and market-oriented management in our toll road operations, repair and maintenance and ancillary services, with a view to building the “Zhejiang Expressway” brand in service quality. We have the belief that only through providing high-quality services to satisfy our expressway users’ needs will we be able to ensure continued growth of our business, thereby creating maximum value for our shareholders. In Zhejiang Expressway, the management and staff share the same value: Service as our mission, Excellence as our standard. Together, we work toward Creating Value for our expressway users, our business partners, our shareholders and our community. With such value and conviction, I am confident the Company is destined for a better tomorrow. Geng Xiaoping Chairman March 15, 2004 2 0 0 3 A N N U A L R E P O R T 13 M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S With anticipated growth in traffic on existing expressways, the Company has taken steps to increase service capacities at its service areas, in addition to continuing with its Phase II and Phase III of the Widening Project which is targeted for full completion by the end of 2007. 14 Z H E J I A N G E X P R E S S WAY C O . , LT D . BUSINESS REVIEW 2003 was a special year for the Company. Traffic volume on the Shanghai-Hangzhou-Ningbo Expressway grew at a rate that was approximately half the usual rate, primarily as a result of traffic diversion by the eastern section of Hangzhou City Ring Road subsequent to its opening to traffic since the beginning of the year. The outbreak of Severe Acute Respiratory Syndrome (“SARS”) in the second quarter of the year prompted local governments to adopt stringent measures to contain the disease, further reducing traffic volumes on the roads, including expressways throughout Zhejiang and neighboring cities and provinces. 2 0 0 3 A N N U A L R E P O R T 15 M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S But the phenomenal growth of China’s economy remained unabated in 2003, as the economy quickly recovered in the third quarter, leading to annual GDP growth rates of 9.1% for the country as a whole and 14.0% for Zhejiang Province, despite a dip in the second quarter as a result of SARS. Both of the above growth rates were the highest since the Asian Financial Crisis. G D P G ro w t h R a t e : P R C v s . Z h e j i a n g P ro v i n c e 10.00 7.10 11.00 8.00 10.50 7.30 12.30 8.00 PRC Zhejiang 14.00 9.10 15 12 9 6 3 0 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 Source: China National Statistics Bureau The strong economic growth, accompanied by exceptional growth in vehicle sales and further expansion in expressway networks, among others, resulted in continued growth in traffic volumes on the expressways operated by the Group that more than compensated the fall in traffic volumes due to local traffic diversions and temporary disruptions due to the occurrence of SARS. P ro d u c t i o n i n Ve h i c l e s a n d P a s s e n g e r C a r s i n t h e P R C Vehicles Passenger Cars 5,000 4,000 3,000 2,000 1,000 0 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 Source: Media Reportings 16 Z H E J I A N G E X P R E S S WAY C O . , LT D . Turnover for the Group grew by 14.0% during the Period to reach Rmb2,471.8 million, details of which are as follows: Year ended December 31 2003 Rmb’000 2002 Rmb’000 % Change 1,908,764 549,962 117,205 26,138 2,669 2,604,738 (132,933) 2,471,805 1,745,931 438,266 73,043 27,742 1,704 2,286,686 (118,608) 2,168,078 +9.3 +25.5 +60.5 -5.8 +56.6 +13.9 +12.1 +14.0 though a slight decrease from 95.5% in 2002 due to higher rates of growth in other business operations. Toll income Shanghai-Hangzhou- Ningbo Expressway Shangsan Expressway Other income Service areas Advertising Road maintenance Revenue taxes Turnover TOLL ROAD OPERATIONS Toll road operations remained the core business operation of the Group, as toll income contributed to 94.4% of the overall income for the Group, BREAKDOWN OF GROUP TURNOVER IN 2003 Road Maintenance 0.1% Advertising 1% Service Areas 4.5% Toll Income 94.4% 2 0 0 3 A N N U A L R E P O R T 17 M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S Amongst the two major expressways operated by the Group, daily average full-trip traffic volume for the Shanghai-Hangzhou-Ningbo Expressway in 2003 was 27,938, representing an increase of 11.5% over 2002. MONTHLY AVERAGE DAILY FULL-TRIP TRAFFIC VOLUME FOR SHANGHAI-HANGZHOU-NINGBO EXPRESSWAY 2002 2003 2004 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Full Trips J A N F E B M A R A P R M AY J U N J U L A U G S E P O C T N O V D E C A slower traffic volume growth rate on the Shanghai-Hangzhou-Ningbo Expressway was attained in 2003 compared to previous years. Apart from being a more mature expressway, the expressway was also subject to direct traffic diversion by the Hangzhou City Ring Road, as well as greater impact by measures taken to contain the spread of SARS in the second quarter of the year. Growth in traffic volume of the Shangsan Expressway in 2003 was much higher at 29.0% to reach 15,011 in daily average full-trip traffic volume. MONTHLY AVERAGE DAILY FULL-TRIP TRAFFIC VOLUME FOR SHANGSAN EXPRESSWAY 2002 2003 2004 20,000 16,000 12,000 8,000 4,000 0 Full Trips J A N F E B M A R A P R M AY J U N J U L A U G S E P O C T N O V D E C 18 Z H E J I A N G E X P R E S S WAY C O . , LT D . Apart from the fact that the Shangsan Expressway, being a newer expressway, was expected to undergo a higher rate of growth in traffic volume than the Shanghai-Hangzhou-Ningbo Expressway, the fact that it is situated entirely within Zhejiang Province as well as having a higher proportion in truck traffic had led to less negative impact on traffic volume due to the outbreak of SARS as compared to the Shanghai-Hangzhou-Ningbo Expressway. Having commenced in the second half of 2002, the road surface-overlaying project on the Shanghai-Hangzhou-Ningbo Expressway continued in 2003, with 126km renovated at a cost of Rmb159.7 million. Since having turned profitable for the first time in 2002, the 9.45km Shida Road, owned and operated by Hangzhou Shida Highway Co., Ltd., a 50% jointly-controlled entity of the Company, underwent 78.0% growth in traffic volume and 63.9% growth in toll income, realizing a net profit of Rmb17.8 million for the jointly-controlled entity during the Period (2002: Rmb1.4 million). OTHER BUSINESS OPERATIONS There are six pairs of service areas in operation along the expressways operated by the Group in 2003, as compared to five in 2002. Driven by strong growth in demand for restaurants, gas stations and vehicle services offered in these service areas, revenue from the service area operations grew by 60.5% to reach Rmb117.2 million in 2003. Income from advertising came mainly from the advertising business operated by Zhejiang Expressway Advertising Co., Ltd. (“Advertising Co”). Facing increasing competition as well as accommodating inconveniences brought by construction works relating to the Widening Project on the Shanghai-Hangzhou-Ningbo Expressway during the Period, Advertising Co realized a turnover of Rmb24.7 million during the Period, representing a slight decrease of 5.8% over the same period in 2002. Net profit realized was approximately Rmb5.0 million. 2 0 0 3 A N N U A L R E P O R T 19 M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S A separate business operation involving gas stations spanning across Zhejiang Province is conducted through Zhejiang Expressway Petroleum Development Co., Ltd., a 50% owned associate of the Company. Strong growth in retail sales during the Period helped to bring a 42.1% growth in revenue as compared to 2002, and a 30.6% growth in net profit which amounted to Rmb21.3 million. JoinHands Technology Co., Ltd. (a 27.58% owned associate of the Company) overcame a 10.3% decrease in turnover during the Period, primarily due to the disruption from SARS as well as increasing market competition for its products, and realized a net profit of Rmb6.76 million, representing a slight decrease of 0.6% over 2002. The Group reorganized its ancillary business operations with the establishment of Zhejiang Expressway Investment Development Co., Ltd. (“Development Co”) on May 28, 2003 and its subsidiary Services Co on July 31, 2003, with the aim of streamlining the structure for the operations of, ancillary businesses of the Group. Principal activities of Development Co include the operation of service areas, and the Group’s roadside advertising as well as vehicle towing and servicing operations along expressways through its 70% owned Advertising Co and 85% owned Services Co. PROJECT INVESTMENTS Phase I of the project to widen Shanghai- Hangzhou-Ningbo Expressway from four lanes to eight lanes (the “Widening Project”) was completed in December 2003. With a total investment of approximately Rmb550 million, Phase I covered a 44km section from Hongken to Guzhu, currently the section with the highest traffic flow. The opening to traffic of the eight- lane section substantially improved travel conditions. Construction works on Phase II of the Widening Project commenced in July 2003, and is targeted for completion by the end of 2005. To be widened to a standard six-lane expressway from Dajing to Shenshi (approximately 17km), and a standard eight-lane expressway from Shenshi to Fengjing (approximately 79km), leading into Shanghai, the 96km section’s construction works will involve a cost of approximately Rmb2,500 million. I L L U S T R AT I O N O N T H E W I D E N I N G P R O J E C T SHANGHAI Phase II HANGZHOU Phase III Phase I NINGBO TAIZHOU 20 Z H E J I A N G E X P R E S S WAY C O . , LT D . Phase III of the Widening Project is expected to commence construction in June 2004 for completion by the end of 2007. The 80km section from Guzhu to Duantang, leading into Ningbo, is also designed as a standard eight-lane expressway, with an estimated widening cost of approximately Rmb2,300 million. Other than the above projects, on May 8, 2003 the Company further acquired an additional 2% ownership interest in Zhejiang Shangsan Expressway Co., Ltd. (“Shangsan Co”), a subsidiary of the Company, from Xinchang County Transport Development Company (“Xinchang Transport”) for a cash consideration of Rmb57.6 million. As a result of the acquisition, the Company’s ownership interest in Shangsan Co increased from 71.625% to 73.625%, while Xinchang Transport’s ownership interest decreased from 2% to zero. HUMAN RESOURCES During the Period, the Group’s total number of employees increased by 746 to 2,744, among whom 509 were administrative staff, 393 were engineering technicians, and 1,842 were involved in toll collection, maintenance and service areas. The increase in employees during the Period was mainly due to a change in employment policies that changed the status of many seasonal and temporary workers to long-term contract workers of the Group in response to the growing demand for personnel in servicing ever increasing traffic flows on the two expressways operated by the Group, especially in the substantially expanded service area operations. The Company encourages competitive performance and improvement in professional skills amongst its employees through evaluation and training programs. In addition to basic salaries, overall remuneration of the employees include a bonus based on business performance of the Company, and for management team, a bonus based on share price performance of the Company. Total remuneration for the Period was Rmb89.7 million, representing an increase of 3.4% over 2002. INVESTOR RELATIONS In following through its commitment to maintaining a continuously open dialogue with shareholders and the investment community at large, the Company actively participated in meetings with investors and analysts through global roadshows, investor conferences, company visits and conference calls that amounted to more than 90 meetings held with more than 250 individual investors and analysts during the Period. Through these and other dialogues, the Company was able to project a clear picture of its business operations and growth prospects to the market, resulting in wide recognition amongst the market participants for its transparency and accessibility. 2 0 0 3 A N N U A L R E P O R T 21 M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S FINANCIAL ANALYSIS FINANCIAL RESOURCES AND LIQUIDITY As at December 31, 2003, net profit attributable to shareholders was approximately Rmb1,008.8 million, representing an increase of 13.3% over 2002; earnings per share increased 13.3% to Rmb23.23 cents, while return on equity for the Period increased from 9.2% to 9.9%. PROFITABILITY In the past five years, the Group was able to maintain double-digit growth in earnings per share, with a compound annual growth rate of 20.1%. Details are as follows: Year ended December 31 1999 2000 2001 2002 2003 EPS (Rmb cents) 12.62 14.64 17.51 20.50 23.23 Growth rate (%) 35.6 16.0 19.6 17.1 13.3 To enhance shareholder’s value, the Group follows a steady dividend policy with high payout ratio, while seeking continued growth in return on equity. During the Period, the Group’s return on equity (“ROE”) increased by 8.3% over the same period of the previous year to reach 9.9%. Details of dividends and ROEs in the past five years are as follows: Year ended December 31 1999 2000 2001 2002 2003 Dividends (Rmb’000) 238,871 390,880 434,311 564,604 651,467 Dividend payout ratio (%) ROE (%) 43.6 6.4 61.5 7.1 57.1 8.2 63.4 9.2 64.6 9.9 The high rate of growth in earnings per share and ROE reflected the profitability, as well as potentials for further growth, of the expressways operated by the Group. Financial Resources As at December 31, 2003, the Group held Rmb567.2 million in cash and cash equivalents, Rmb251.6 million in time deposits and Rmb1,104.3 million in short-term investments, totaling Rmb1,923.1 million. Details are as follows: As at December 31 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 2003 Rmb’000 567,195 565,251 1,393 59 492 251,600 251,598 — — 2 1,104,266 1,104,266 1,923,061 1,921,115 1,393 59 494 2002 Rmb’000 666,291 532,358 131,744 22 2,167 282,779 192,824 79,967 — 9,988 858,114 858,114 1,807,184 1,583,296 211,711 22 12,155 The steady large inflow of cash from expressway operations under the Group made it possible for the Group to hold a sizable amount in liquid assets. Due to the investment characteristics of the toll road industry, where a substantial amount of investment in cash may be needed in a short period of time, the Group chose to maintain such a sizable liquid assets as an adequate reserve for potential capital expenditures. 22 Z H E J I A N G E X P R E S S WAY C O . , LT D . As part of its cash management practice and an important constituent of its financial resources, a short-term investment portfolio is maintained by the Group with the aim of maximizing returns on cash that are temporarily idle while controlling relevant investment risks by choosing investment products with relative small risks. Amongst the short-term investments held by the Group during the Period, approximately 92.1% were treasury bonds, with the remaining being mostly close- ended security investment funds. With a total of Rmb1,923.1 million held in cash and cash equivalent, time deposits and highly liquid short-term investments, as well as an asset- liability ratio of only 26%, the Group has ample resources for debt financing. Cash Flow and Liquidity The Group had adequate net cash inflows from operating activities, which amounted to Rmb1,670.3 million as of the end of the Period. A measure of the Group’s cash flow is the cash to investment ratio, defined as the ratio of operating cash flows of the past five years to the sum of capital expenditure, increase in inventory and cash dividend in the past five years, was 0.77 as at December 31, 2003, an indication of the Group’s substantial self-sustaining fund and strong financial flexibility. The current assets held by the Group amounted to Rmb1,999.4 million as at December 31, 2003, amongst which account receivables, other receivables and inventories accounted for 3.8% (as at December 31, 2002: 7.4%); and the current ratio of the Group for the year ended December 31, 2003 was 1.09, representing adequate working capital held by the Group. As a result, the Directors believe that the Group has sufficient financial resources to meet its operational needs in the foreseeable future. BORROWINGS AND DEBT REPAYMENT ABILITY During the Period, total interest-bearing borrowings of the Group decreased from Rmb3,038.2 million at the beginning of the year to Rmb2,720.1 million by the end of the year, amongst which Rmb975.9 million were short-term interest-bearing liabilities, representing a decrease of 48.1% over 2002, and Rmb1,744.1 million were long-term interest-bearing liabilities, representing an increase of 50.8%. Details are as follows: Maturity Profiles Floating rates Gross amount Rmb’000 Within 1 year Rmb’000 2-5 years inclusive Rmb’000 Beyond 5 year Rmb’000 World Bank loan 847,526 127,950 341,191 378,385 Fixed rates Commercial bank loans 800,000 800,000 — Government loans 72,600 48,000 24,020 — 580 Corporate bonds 1,000,000 — — 1,000,000 Total as at December 31, 2003 2,720,126 975,950 365,211 1,378,965 Total as at December 31, 2002 3,038,200 1,881,553 681,064 475,583 The annual coupon rate on the Rmb1 billion corporate bonds for a term of 10 years issued by the Company at the beginning of the year was fixed at 4.29%, with interests payable annually. The floating rates of the Group’s Rmb847.5 million World Bank loans, denominated in US dollars, ranged between 5.02% and 4.62% during the Period, averaging approximately 4.80%. The interest rates on other borrowings of the Group, all in Rmb, were not materially different from those in 2002. 2 0 0 3 A N N U A L R E P O R T 23 M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S With interest expenses at approximately Rmb142.3 million and profit before interest and tax at approximately Rmb1,735.5 million, the Group’s interest cover ratio was 12.2 during the Period, representing a 28.4% increase over the same period last year. 2003 Rmb’000 2002 Rmb’000 Profit before tax and interest 1,735,492 1,557,695 Interest expenses Interest cover ratio 142,303 163,224 12.2 9.5 The Group’s asset-liability ratio had decreased gradually over the past three years due to continued strong net cash inflow from its operating activities that was more than sufficient in meeting its capital expenditure needs. Following the adjustment in the maturity profile of the Group’s interest-bearing borrowings in 2003, the match between current asset with current liability, and long-term asset with long- term liability and equity were improved markedly, further enhancing the debt-repayment capability of the Group. The Directors believe that the adjustment in the maturity profile of the Group’s interest-bearing borrowings during the Period is better suited to the Group’s present asset structure. CAPITAL STRUCTURE As at December 31, 2003, the Group’s capital structure comprised Rmb10,146.0 million in shareholders’ equity, Rmb1,872.6 million in fixed rate liabilities, Rmb847.5 million in floating rate liabilities and Rmb2,202.6 million in interest-free liabilities and minority interest, representing approximately 67.3%, 12.4%, 5.6% and 14.6%, respectively, of the Group’s total capital. As at December 31, 2003 As at December 31, 2002 Rmb’000 % Rmb’000 % Shareholders’ equity 10,145,979 67.3% 9,701,791 Fixed rate liabilities 1,872,600 12.4% 2,147,600 Floating rate liabilities 847,526 5.6% 890,600 66.9% 14.8% 6.1% Interest-free liabilities 2,202,582 14.6% 1,765,843 12.2% Long-term interest-bearing liabilities 1,744,176 11.6% 1,156,647 8.0% Total 15,068,687 100.0% 14,505,834 100.0% Gearing ratio 1 Gearing ratio 2 Asset-liability ratio 48.5% 17.2% 26.0% 49.5% 11.9% 26.4% Notes: Gearing ratio 1 represents the sum of fixed rate liabilities, floating rate liabilities, interest-free liabilities and minority interest vs. the shareholders’ equity; gearing ratio 2 represents the total amount of the long-term interest- bearing liabilities vs. the shareholders’ equity. 24 Z H E J I A N G E X P R E S S WAY C O . , LT D . CAPITAL EXPENDITURE COMMITMENTS AND UTILIZATION During the Period, the capital expenditure incurred by the Group was Rmb859.9 million, with corresponding capital expenditure for the Company amounting to Rmb271.3 million. Amongst the Rmb859.9 million capital expenditure incurred by the Group, Rmb605.4 million was utilized toward the Widening Project. As at December 31, 2003, the Group and the Company had capital expenditure commitments of Rmb5,052.7 million and Rmb2,961.4 million, respectively, for 2004 and beyond. In particular, approximately Rmb1,345.5 million capital expenditure will be spent by the Group in 2004, with approximately Rmb1,141.0 million spent on the Widening Project, Rmb50.5 million on equipment acquisition and Rmb154.0 million on expressway ancillary facilities. As at December 31, 2003 Commitments Rmb’000 Group Utilization Rmb’000 Balance Commitments Rmb’000 Rmb’000 Company Utilization Rmb’000 Balance Rmb’000 Expressway Widening Project From Hongken to Guzhu 553,129 447,389 105,740 553,129 447,389 105,740 From Dajing to Fengjing 2,508,190 472,660 2,035,530 — — — From Guzhu to Duantang 2,300,000 — 2,300,000 2,300,000 — 2,300,000 Acquisition of additional 18.4% equity interest in Shangsan Co Renovation of Service Area Remaining construction works of the Shangsan Expressway Purchase of machinery 485,000 5,893 43,754 76,197 Construction works under contract No.11 of the Shanghai-Hangzhou — — — — 485,000 485,000 5,893 4,950 43,754 76,197 — 65,697 Expressway 52,550 51,957 593 — — — — — — 485,000 4,950 — 65,697 — Total 6,024,713 972,006 5,052,707 3,408,776 447,389 2,961,387 The Group will fund the above capital expenditures with its internal financial resources, meeting any shortfall by utilizing other funding options, with a preference for debt financing. CONTINGENT LIABILITIES AND PLEDGE OF ASSETS Other than a loan guarantee of Rmb30 million provided in favor of Hangzhou Shida Highway Co., Ltd. (“Shida Co”), a jointly controlled entity, in respect of a commercial bank loan of the same amount extended to Shida Co from September 2001 to September 2009, the Group did not have any contingent liabilities as at December 31, 2003. In addition, the Group had no pledge of assets during the Period. FOREIGN EXCHANGE EXPOSURE The Group has a World Bank loan of approximately Rmb847.5 million, denominated in US Dollars and borrowed for the construction of the Shanghai- Hangzhou-Ningbo Expressway. In addition, dividends for H shares payable by the Company are settled in HK dollars. In view of the stable exchange rate between Renminbi and US dollars, the Directors do not foresee any material foreign exchange risk for the Group. However, there is no assurance that any foreign exchange exposure will not adversely affect the operating results of the Group in the future. 2 0 0 3 A N N U A L R E P O R T 25 M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S vehicles than ever, the prospects for continued strong traffic volume growth on the expressways operated by the Group are favorable. As more expressways are being completed and opened to traffic, and still more are being planned for Zhejiang Province, prospects for new project investment and acquisition are also improving. With anticipated growth in traffic on existing expressways, the Company has taken steps to increase service capacities at its service areas, in addition to continuing with its Phase II and Phase III of the Widening Project which is targeted for full completion by the end of 2007. The road surface-overlaying project on the Shanghai-Hangzhou-Ningbo Expressway will be concluded in 2004, covering approximately 47km of roadways, ramps, toll plazas and interchanges at an estimated cost of Rmb95.5 million. OUTLOOK FOR 2004 With China being on the verge of a new round of accelerated economic growth, according to many economic observers, the Yangtze River Delta region, including the city of Shanghai and the two provinces of Jiangsu and Zhejiang, will be the engine to power this next phase of economic expansion. Already a highly urbanized region, the Yangtze River Delta region will undergo further integration amongst its cities to accommodate a greater level of cooperation. An important aspect to the integration drive is the announcement by regional governments of more ambitious transportation plans that will result in the operational mileage of expressways in Zhejiang Province to be further extended by approximately 1,000km within the next four years. The newly planned expressways are intended to serve the anticipated growth in transportation demand in the region by alleviating the excess traffic burdens forecasted in the near future on existing expressway networks, including the corridor along the Hangzhou Bay, connecting the three major cities of Shanghai, Hangzhou and Ningbo. As such, the new expressways will present far more opportunities than challenges for the Group. Continued heavy investments in infrastructure in the region will help to sustain accelerated economic growth, which will in turn spur substantial growth in production and sales of vehicles, especially passenger cars for private consumption. Faced with a rapidly expanding expressway network that is making the transport system more easily accessible and efficient to more 26 Z H E J I A N G E X P R E S S WAY C O . , LT D . Due to the growing traffic volume that has made it increasingly difficult to perform road surface- overlaying works on a large scale during a relative short period of time without adversely affecting normal traffic flow, starting from 2005, the Group will be conducting these works on a smaller scale but with higher frequency, so that while the overall impact on normal traffic flow will be minimized, the annual cost will be more evenly distributed, and the average cost expected to be slightly lower than usual as a result of reduced routine maintenance costs relating to road surface. The Company intends to build upon its renewed emphasis on providing quality service to its customers, while in the process taking advantage of all the positive developments in the industry, creating value for its customers, employees, business partners, shareholders and the community at large. 2 0 0 3 A N N U A L R E P O R T 27 F R E Q U E N T L Y A S K E D Q U E S T I O N S Will the Widening Project on the Shanghai- Hangzhou-Ningbo Expressway adversely affect the normal traffic flow? The Widening Project on the Shanghai- Hangzhou-Ningbo Expressway is carried out on two sides of the existing expressway. In respect of Phase I of the Widening Project already completed, being the work from Hongken to Guzhu of approximately 44 kilometers, strict on-site supervision and a c o m p r e h e n s i v e p l a n h a v e b e e n implemented, including keeping other half lanes open to traffic, breaking the works into smaller sections and scheduling as much work at night as possible. Even though the speed of traffic flow was slower in certain sections during the construction, traffic flow of the expressway was smooth during the course of the widening works, and there were no significant impact to the continued growth in traffic volumes. Moreover, travel conditions at parallel roads were even less desirable, thus unable to divert any traffic away from our expressway. We believe that the experience gained from Phase I of the Widening Project will help us to minimise the impact on the normal traffic flow brought about by the construction works during the on going Phase II of the widening project, and Phase III to be commenced in 2004. How much impact does price increase in raw materials such as cement and reinforcing bars have on the costs of the Widening Project? The expressways we operate have very high elevations, such that most of the construction works involve the build-up of foundations. Only structures such as bridges, passageways and culverts make use of cement and reinforcing bars. The amount used is relatively small. Since October 2003, prices of cement and reinforcing bars have the increased significantly, but the prices have been decreasing recently. Should prices of raw material remain high, we will allow for price adjustments in accordance with relevant contracts and regulations in order to ensure the progress as the well as the quality of construction be maintained. Even so, we do not expect such price adjustments will have any material impact on the costs of Widening Project as a whole. 28 Z H E J I A N G E X P R E S S WAY C O . , LT D . Toll fees based on weight of trucks have been implemented in certain expressways in China. Will Zhejiang Expressway consider adopting this charging method? We have also noted this measure which aims to tackle the rampant problem of overloaded trucks and also consider it to be a more reasonable charging method as far as all parties are concerned. We will keep a close eye on the implementation of the relevant measure, though we think it is still too early to judge if the measures can be sustained. We are more in favour of banning the excessively loaded vehicles from entering own expressways, as the damage they cause to the road structures far out weigh the extra toll fees they pay. What are the major risks that the Company will face in the future? Although the traffic flow on most sections of the Shanghai-Hangzhou-Ningbo Expressway has room for further growth relative to the designed carrying capacity of the eight lanes upon completion of the W idening Project, given the rapid development and increasing integration of the economy of the Yangtze River Delta region, the existing expressway network is still far from sufficient to meet the growing demand for the local traffic for quite some time in the future. To alleviate future congestions, there will be new expressways constructed and opened to traffic in Zhejiang Province by the end of 2007 in areas surrounding the Shanghai-Hangzhou- Ningbo Expressway. The newly constructed expressways will on the one hand compliment the existing road networks and assure good road infrastructure to serve the need arising from further growth of the local economy, but will on the other hand cause a certain degree of traffic diversions from t h e S h a n g h a i - H a n g z h o u - N i n g b o Expressway in the short period immediately after the opening to traffic of these new expressways. Although our parent company will be taking up stakes, including controlling stakes, in these newly planned new expressways, we are also aware of the operating risks it will bring about in the short term, and consider these risks the most significant ones that the Company will face. 2 0 0 3 A N N U A L R E P O R T 29 F R E Q U E N T L Y A S K E D Q U E S T I O N S The Company has spent more than RMB300 million in respect of the large-scale road surface-overlaying project during the past two years. Will similar expenditures be incurred by the Company in the near future? The road surface-overlaying project of the Shanghai-Hangzhou-Ningbo Expressway that commenced in the second half of 2002 will be completed in 2004. It is expected that an additional cost of approximate RMB100 million will be incurred in 2004. Applying prudent accounting principles, costs of the road surface-overlaying project are included in maintenance costs in the year incurred. In view of the rapid growth in traffic volumes on the Shanghai-Hangzhou- Ningbo Expressway and the Shangsan Expressway, it will be difficult to implement a large-scale road surface-overlaying project a few years from now. Therefore, we will be implementing the road surface- overlaying project section by section, year by year starting from 2005, in order to minimise the impact of the construction works on traffic flow and to distribute more evenly the financial impact of related costs. According to this policy, we expect that the total expenditures on maintenance each year in the next few years will be maintained at approximately 8% of toll revenue. W h e n w i l l t h e C o m p a n y a p p l y f o r adjustments to toll fees again? Pursuant to a concession agreement entered into between the Company and the Zhejiang government, we may apply for adjustments to toll fees in April 2005. The agreement also provides that if the increase in toll fees that the Company applies for does not exceed the accumulated annual compound growth rate of the national retail price index for the past three years, the Zhejiang government will approve the relevant application. Therefore, whether the Company will apply for a price adjustment and to what extend will we adjust the fees depends on the growth of the national retail price index for the three years prior to 2005. Any decision on fee adjustment will also be subject to the outcome of a market sensitivity study. 30 Z H E J I A N G E X P R E S S WAY C O . , LT D . C O R P O R A T E G O V E R N A N C E SHAREHOLDERS GENERAL MEETINGS SUPERVISORY COMMITTEE The newly elected members of the Supervisory Committee of the Company comprise five supervisors, amongst whom one acts as shareholders’ representative, one as employees’ representative, and the remaining three are independent supervisors. Two meetings were held by the Supervisory Committee of the Company. In addition, the supervisors attended all Board meetings held during 2003. PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION As announced by the Company on March 16, 2004, the Company proposes to its shareholders to approve, in the annual general meeting to be held on May 21, 2004, certain amendments to its Articles of Association (“Articles”). The proposed amendments are made in accordance with the relevant requirements under the revised Listing Rules which came into effect on March 31, 2004. The following sets out in further details of the proposed amendments to the Articles. The shareholding structure of the Company remained unchanged in 2003, with Zhejiang Communications Investment Group Co., Ltd. holding 56.01% of (domestic) shares in the Company, and Huajian Transportation Economic Development Center holding 10.98% of (domestic) shares, while the remaining 33.01% were held by holders of H Shares of the Company. One annual general meeting and two extraordinary general meetings were held in 2003, approving, among others, the election of members of the third sessions of the Board of Directors of the Company and Supervisory Committee of the Company for a term of three years starting from March 1, 2003, as well as the Widening Project on the Shanghai-Hangzhou-Ningbo Expressway. BOARD OF DIRECTORS The third session of the Board of Directors of the Company comprises nine members, four of whom are executive directors, while the remaining five are non-executive directors, amongst whom three are independent directors. Three Board meetings were held by the Directors in 2003, two of which were attended by all nine members, one in the first half of the year, and the other in the second half of the year. In conjunction with the two fully attended Board meetings held, two meetings were held by the audit committee under the Board of Directors of the Company to review, among others, the financial statements of the Group and work reports of the Company’s internal audit department. 2 0 0 3 A N N U A L R E P O R T 31 C O R P O R A T E G O V E R N A N C E Article 40 — Fees for registration of securities title transfer documents The Listing Rules require the Articles to provide that any fees charged by the Company for the registration of transfer and other documents relating to or affecting title to any registered securities shall not exceed the maximum fees prescribed by the Stock Exchange from time to time in the Listing Rules. To reflect this requirement, the existing paragraph (1) of Article 40 is proposed to be deleted in its entirety and substituted therefor by the following: “(1) a fee of such amount as may be prescribed from time to time in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited for the registration of the transfer documents of the shares and other documents relating to or affecting the ownership of shares is paid;”. Article 48A — Rights attached to shares not impaired by failure to disclose interests The Listing Rules require the Articles to provide that no power shall be taken to freeze or otherwise impair any rights attaching to any share of the Company by reason only that the person(s) who are interested directly or indirectly therein have failed to disclose their interests to the Company. To reflect this requirement, a new Article 48A is proposed to be inserted after the existing Article 48 and before the existing Article 49 as follows: “Article 48A The Company shall not exercise any powers to freeze or otherwise impair any of the rights attaching to any share of the Company by reason only that the person or persons who are interested directly or indirectly therein have failed to disclose their interests to the Company.” Article 70 — Voting by poll The revised Listing Rules provide that, any vote of shareholders taken at a general meeting to approve (i) connected transactions; (ii) transactions that are subject to independent shareholders’ approval pursuant to the Listing Rules; (iii) granting of options to a substantial shareholder or an independent non-executive director or any of their respective associates; and (iv) any other transaction in which a shareholder has a material interest and is therefore required to abstain from voting, must be taken on a poll. To reflect this new requirement, the existing first paragraph of Article 70 is proposed to be deleted in its entirety and substituted therefor by the following: “Article 70 At any shareholders’ general meeting a resolution shall be passed by a show of hands, subject to any requirement in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, or unless a poll is demanded by the following persons (prior to or after a show of hands): (1) chairman of the meeting; (2) at least two shareholders or proxies having the right to vote; (3) a shareholder or shareholders (including proxy or proxies) representing 10% or more of the total voting rights of all the shareholders having the right to vote at such meeting.” 32 Z H E J I A N G E X P R E S S WAY C O . , LT D . Article 81A — Voting restrictions Under the revised Listing Rules, the Articles must provide that where any shareholder is subject to voting restrictions under the Listing Rules, any votes cast by or on behalf of such shareholder in contravention of such restriction shall not be counted. It is proposed that a new Article 81A be inserted after the existing Article 81 and before the existing Article 82 as follows: “Article 81A Where any shareholder of the Company is, under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited required to abstain from voting on any particular resolution or restricted to voting only for or only against any particular resolution, any votes cast by or on behalf of such shareholder in contravention of such requirement or restriction shall not be counted.” Article 91 — Notice period for appointment of Directors In accordance with the revised Listing Rules, it is proposed that the existing second paragraph of Article 91 be deleted in its entirety and substituted therefor by the following, to specify the period for lodgment of notices for the nomination of Directors by shareholders and the acceptance of nomination by the nominated directors shall not be less than 7 days, such period to commence no earlier than the day after the despatch of the notice of the meeting appointed for the election of the nominated Directors and end no later than 7 days prior to the date of such meeting: “The period during which a written notice of intention to propose a person for election as director and a written notice by that person of his willingness to be elected are to be given to the Company shall be at least 7 days, such period shall commence on the day after the date when the notice of the general meeting convened for such election is despatched and end no later than 7 days prior to the date of such meeting.” Articles 126, 127 and 133 — Disclosure of material interests by Directors etc. It is proposed that the existing second and third paragraphs of Article 126 be deleted in their entirety and substituted therefor by the following, in accordance with the revised Listing Rules requirements, to provide that Directors, Supervisors, managers and other officers of the Company shall disclose material interests of themselves or of their associates in transactions, and that the Directors shall not vote in such transactions: “Unless the director, supervisor, general manager and other officers of the Company so interested has disclosed such interest to the board of directors as required in this Article and the board of directors has approved the same in a meeting in which he has not been counted in the quorum and has refrained from voting, the Company shall have the right to revoke such contract, transaction or arrangement except as against a bona fide party without notice of the breach of the duty by the director, supervisor, general manager and other officers concerned. 2 0 0 3 A N N U A L R E P O R T 33 C O R P O R A T E G O V E R N A N C E If any connected person or any associate (as defined under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited) (“Associate”) of a director, supervisor, general manager or other officers of the Company is interested in certain contracts, transactions or arrangements, such director, supervisor, general manager or officers shall also be deemed as interested in the same.” To correspond with the proposed amendments to Article 126, it is proposed that the existing Articles 127 and 133 be deleted in their entirety and substituted therefor by the following: “Article 127 If, before the Company first considers the entering into of the relevant contract, transaction or arrangement, a director, supervisor, general manager and other officer of the Company gives written notice to the board of directors, stating that by reasons of the facts contained in the notice, he, or any of his Associates, is interested in such contract, transaction or arrangement to be entered into by the Company subsequently, such director, supervisor, general manager and other officers shall be deemed to have made such disclosure as stipulated in the preceding Article of this Chapter to the extent as stated in the notice.” “Article 133 Where a director, supervisor, general manager or other officer of the Company is in breach of his obligations to the Company, the Company shall apart from the various rights and remedies provided by laws and administrative regulations be entitled to take the following measures: (1) to demand the relevant director, supervisor, general manager or officer pay (2) (3) (4) (5) (6) damages for the losses sustained by the Company as a result of the dereliction of duties on his part; to revoke any contract or transaction made between the Company and the relevant director, supervisor, general manager or officer, or any Associate of such persons, and a contract or transaction made between the Company and a third party (if such third party knows or should have known that the director, supervisor, general manager or officer representing the Company are in breach of the obligations to the Company); to demand the relevant director, supervisor, general manager or officer account for the profits received by him as a result of the breach of the obligations; to recover from the relevant director, supervisor, general manager or officer the monies which should have been received by the Company including, but not limited to, commission received by them; to demand the relevant director, supervisor or officer return the interest earned or that may be earned from the monies which should have been payable to the Company; through legal proceedings, to demand a verdict that the properties which the relevant director, supervisor or officer received as a result of the breach of the obligations shall be the properties of the Company.” 34 Z H E J I A N G E X P R E S S WAY C O . , LT D . D I R E C T O R S , S U P E R V I S O R S A N D S E N I O R M A N A G E M E N T P R O F I L E S DIRECTORS Executive Directors Mr. GENG Xiaoping, born in 1948, 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 as Deputy Director of the Zhejiang Provincial Expressway Executive Commission where he was responsible for the business operation and administration of the expressway system in Zhejiang Province. Mr. Geng was the General Manager and Chairman of the Company from March 1997 to March 2002. Since December 2001, he has been appointed as a director and General Manager of the Communications Investment Group. He resigned from the office of the General Manager of the Company in March 2002. Mr. FANG Yunti, born in 1950, is a senior engineer, 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 in 1976 with a major in automotive engineering. 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 in relation to the Shanghai-Hangzhou-Ningbo Expressway. Mr. Fang was an Executive Director and the Deputy General Manager of the Company from March 1997 to March 2002. Since March 2002, he has been an Executive Director and the General Manager of the Company. Mr. ZHANG Jingzhong, born in 1963, is a senior lawyer, an Executive Director and Company Secretary of the Company. Mr. Zhang graduated from Zhejiang University (previously known as Hangzhou University) in July 1984 with 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 practise securities law. In January 1994, Mr. Zhang became a Senior Partner at T&C Law Firm in Hangzhou. Mr. Zhang has been an Executive Director of the Company since April 1997, and was the Deputy General Manager until February 2003. Since March 2003, he has been the Secretary of the Board. 2 0 0 3 A N N U A L R E P O R T 35 D I R E C T O R S , S U P E R V I S O R S A N D S E N I O R M A N A G E M E N T P R O F I L E S Mr. XUAN Daoguang, born in 1944, is a senior engineer, an Executive Director and Deputy General Manager of the Company. Mr. Xuan graduated from Tong Ji University in 1960 with a degree in engineering, specialising in the construction and design of bridges and tunnels. Mr. Xuan has 43 years of experience in engineering maintenance and has held positions such as Section Head and Head of the Road Administrative Division of Jinhua City and Head of the Engineering Maintenance Department of the Zhejiang Provincial Expressway Executive Commission. Mr. Xuan has been an Executive Director of the Company since March 1997. He has been the Deputy General Manager of the Company since March 2000. Non-executive Directors Ms. ZHANG Luyun, born in 1961, is a director a n d D e p u t y G e n e r a l M a n a g e r o f t h e Communications Investment Group. Ms. Zhang graduated from Zhejiang University, majoring in administration and management. From 1985 to 1997, she served as the Secretary, Deputy Chief and Chief in the Office of Hangzhou City Government. In 1997, she was the Deputy President of Hangzhou Broadcasting and TV College and received the title of the Assistant Researcher in college-teaching. She joined the Communications Investment Group in December 2001 and has been a director and Deputy General Manager of the Communications Investment Group since then. Ms. ZHANG Yang, born in 1964, is the general assistant manager and the manager of the Securities Department of Huajian Transportation Economic Development Center. In 1987, she graduated from Lanzhou University with a bachelor’s degree in economics. In 2001, she completed the postgraduate studies in economics management in the Central Party School. From 1987 to 1994, she worked for the Ministry of Aviation. Ms. Zhang is currently a non-executive director of Shenzhen Expressway Company Limited and Sichuan Expressway Company Limited. Independent non-executive Directors Mr. TUNG Chee Chen, born in 1942, is the Chairman of Orient Overseas (International) Limited, an independent non-executive Director and the Chairman of the Audit Committee and the Nomination and Remuneration Committee of the Company. Mr. Tung was educated at the University of Liverpool, England, where he received his bachelor’s degree in science. He later obtained 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 of the Company since March 1997. 36 Z H E J I A N G E X P R E S S WAY C O . , LT D . Mr. ZHANG Junsheng, born in 1936, is a professor, an independent non-executive Director and a member of the Audit Committee of the Company. Mr. Zhang graduated from Zhejiang University in 1958, and was a lecturer, an associate professor, and an advising professor at Zhejiang University. He was also a professor concurrently at, amongst other universities, Zhongshan University. In 1980, he became the Deputy General Secretary of Zhejiang University. In 1983, Mr. Zhang served as the Deputy General Secretary in 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. Since September 1998, Mr. Zhang has taken up the position of General Secretary of Zhejiang University. In addition, Mr. Zhang is currently a Special Advisor to the Zhejiang Provincial Government, a Director to the Zhejiang Province Enconomic Development Consultation Committee and an Honorary Doctor of Science of the City University of Hong Kong. Mr. Zhang has been an independent non-executive Director of the Company since March 2000. Mr. ZHANG Liping, born in 1958, is an executive director and the general manager of Pacific Concord Holdings Limited. He obtained a master’s degree in international affairs and international laws from St. John’s University. After joining Merrill Lynch & Co., Inc. in 1989, he engaged in the business of investment banking and was a director of the investment banking division of Merrill Lynch Co. & Inc. From 1996 he took up the post of Chairman, director and General Manager of Seapower Corporate Finance Limited and was an executive director in Seapower Holdings Ltd. In 1998, he moved to Dresdner Kleinwort Benson and assumed the post of Chairman, director, and General Manager of the Greater China region. He was also a member of the Asia Executive Committee of Dresdner Kleinwort Benson. He is currently an independent non-executive director of Anhui Expressway Co., Ltd. SUPERVISORS Supervisor representing shareholders Mr. MA Kehua, born in 1952, is a senior economist, 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 in 1993 became the Deputy Division Chief and Division Chief of Zhejiang Jinwen Railway Executive Commission responsible for materials supply. Mr. Ma took up the post of Deputy General Secretary of Zhejiang Construction and Investment Company in March 1999, and is currently the Assistant General Manager of the Communications Investment Group. 2 0 0 3 A N N U A L R E P O R T 37 D I R E C T O R S , S U P E R V I S O R S A N D S E N I O R M A N A G E M E N T P R O F I L E S Supervisor representing employees Mr. FANG Zhexing, born in 1965, is a senior engineer, the director of the internal audit department and the manager of the human resources department of the Company. He is also the chairman of Hangzhou Shida Expressway Co., Ltd. Mr. Fang graduated from Zhejiang University in engineering where he received a master’s degree. From 1986 to 1988 he was the assistant engineer in the project management office of the Electric Power and Water Conservancy Bureau in Taizhou. From 1991 until 1997, he was the engineer in the project management office of Zhejiang Provincial Expressway Executive Commission, where he participated in the project management of Shanghai-Hangzhou-Ningbo Expressway. Since March 1997, he has served as the deputy manager, the manager of the planning and development department and the manager of the project-development department of the Company. Independent supervisors Mr. ZHENG Qihua, born in 1963, is a senior accountant and an independent non-executive member of the Supervisory Committee. He is a guest professor at the Zhejiang Finance and Economics Institute. Mr. Zheng was among the first batch of Chinese registered accountants who obtained qualifications required for practising accountancy involving securities in 1992. He has working and training experience in Hong Kong and Singapore, and he worked with the Listing Division of the China Securities Regulatory Commission during 1997 and 1998. He is currently the Deputy General Manager of Zhejiang Pan- China Certified Public Accountants. Mr. SUN Xiaoxia, born in 1963, is a professor and an independent non-executive member of the Supervisory Committee. Mr. Sun graduated from China Academy of Social Sciences with a doctor’s degree in law. He worked as Assistant Lecturer, Lecturer, Assistant Professor, Professor and Tutor for graduate students at School of Law, Hangzhou University. Mr. Sun is currently the Deputy Dean of the School of Law and the 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. JIANG Shaozhong, born in 1946, is a professor. Mr. Jiang graduated from the Management Department of Zhejiang University with a master’s degree. From 1982 he worked in the Management Department of Zhejiang University as Lecturer, Assistant Professor, Professor, Dean of research office and Deputy Dean of the Department. From 1984 to 1985 he was a visiting scholar in Stanford University. From 1991 to 1998 he was the Deputy General Economist, the Chief of the Financial Division, the Chief of the Teaching Division and the Deputy Manager of the Management Department of Zhejiang University. He is currently the Deputy General Accountant of Zhejiang University. 38 Z H E J I A N G E X P R E S S WAY C O . , LT D . OTHER SENIOR MANAGEMENT MEMBERS Mr. JIANG Wenyao, born in 1966, an engineer, and is the Deputy General Manager of the Company. Mr. Jiang graduated from Zhejiang University, majoring in industrial automation and manufacturing mechanics, and obtained a Master degree in engineering. From March, 1991 to February, 1997, he worked in the Engineering Division, and Planning and Finance Division of the Zhejiang Provincial Expressway Executive Commission. He joined the Company since March, 1997, and has served as Deputy Manager of the General Department, Manager of the Equipment Department, Manager of the Operation Department, Assistant of the General Manager and Secretary of the Board. Ms. HUANG Qiuxia, born in 1956, an economist, and is the Deputy General Manager of the Company. Ms. Huang graduated from Hangzhou Technology University in 1988. From 1976 to 1991, she was the Deputy Chief of Labor Division of Hangzhou Clock and Watch Factory. She joined the Zhejiang Provincial Expressway Executive Commission in August, 1991, and was involved in matters related to labor wages, personnel, external affairs etc. During the period from March, 1997 to February, 2003, she has been the Deputy Manager and Manager of General Department of the Company. Mr. PAN Jiaxiang, born in 1951, an engineer, and is the Deputy General Manager of the Company. Mr. Pan graduated from Hangzhou University, majoring in economic management. From 1987 to 1992, he was the Deputy Director of the Office of Shangyu City People's Government, and at the same time served as the Director of the Executive Commission of the Shanghai-Hangzhou-Ningbo Expressway (Shangyu Section). From January, 1993 to April, 1996, he was the Director and the Secretary o f P a r t y C o m m i t t e e o f S h a n g y u C i t y Communications Bureau. He has worked in the Company since April, 1997, and served as Deputy Manager of Maintenance Department, Assistant of the General Manager and Director and Chief Supervisory Engineer of Widening Project Office, and General Manager of Shangsan Co. Mr. WU Junyi, born in 1969, a holder of master degree in accounting, and is the Chief Financial Officer of the Company. Mr. Wu graduated from Xi’an Communications University in 1996. From 1996 to 1997, he was with the China Investment Bank, Hangzhou Branch. He joined the Company in May, 1997, and has served as Manager of Securities Investment Department and Manager of Planning and Finance Department. 2 0 0 3 A N N U A L R E P O R T 39 R E P O R T O F T H E D I R E C T O R S R E P O R T O F T H E D I R E C T O R S The dedicated efforts of the management have brought forth solid and favorable return for shareholders. The Company has been delivering an annual return of 40.4% on average for the past five years. 40 Z H E J I A N G E X P R E S S WAY C O . , LT D . The Directors of the Company present their report and the audited financial statements of the Company and the Group for the year ended December 31, 2003. analysis of the Group’s turnover and contribution to profit from operating activities by principal activity for the year ended December 31, 2003 is set out in note 4 to the financial statements. PRINCIPAL ACTIVITIES RESULTS AND DIVIDENDS The principal activities of the Group comprise the design, construction, operation, maintenance and management of high grade roads, as well as the development and provision of certain ancillary services, such as technical consultation, advertising, automobile servicing and fuel facilities. There were no changes in the nature of the Group’s principal activities during the year. SEGMENT INFORMATION During the year, the entire turnover and contribution to profit from operating activities of the Group were derived from the Zhejiang Province in the People’s Republic of China (the “PRC”). Accordingly, a further analysis of the turnover and contribution to profit from operating activities by geographical area is not presented. However, an The Group’s profit for the year ended December 31, 2003 and the state of affairs of the Group and the Company at that date are set out in the financial statements on pages 52 to 89. An interim dividend of Rmb0.04 per share (approximately HK$0.038) was paid on November 6, 2003. The Directors recommend the payment of a final dividend of Rmb0.11 per share (approximately HK$0.10) in respect of the year, to shareholders on the register of members on April 26, 2004. This recommendation has been incorporated in the financial statements as an allocation of retained earnings within the capital and reserves section in the balance sheet. Further details of this accounting treatment are set out in note 12 to the financial statements. 2 0 0 3 A N N U A L R E P O R T 41 R E P O R T O F T H E D I R E C T O R S SUMMARY FINANCIAL INFORMATION The following is a summary of the published consolidated results, and of the assets, liabilities and minority interests of the Group prepared on the basis set out in the notes below: Results Turnover Operating costs Gross profit Other revenue Administrative expenses Other operating expenses Year ended December 31 2003 Rmb’000 2002 Rmb’000 2001 Rmb’000 2000 Rmb’000 1999 Rmb’000 2,471,805 2,168,078 1,722,517 1,188,604 1,050,498 (731,451) (561,918) (392,535) (248,429) (298,417) 1,740,354 1,606,160 1,329,982 127,285 66,457 216,690 (114,629) (54,243) (95,209) (33,109) (88,487) (18,236) 940,175 242,888 (64,978) (75,317) 752,081 167,528 (60,320) (2,374) Profit from operating activities 1,698,767 1,544,299 1,439,949 1,042,768 856,915 Finance costs (132,801) (163,224) (215,346) (197,083) (172,922) Share of profits of associates 17,394 11,719 12,396 40,584 22,559 Share of profit/(loss) of a jointly- controlled entity Profit before tax Tax 9,829 1,677 (1,459) (6,517) — 1,593,189 1,394,471 1,235,540 879,752 706,552 (497,166) (400,952) (363,970) (186,391) (71,810) Profit before minority interests 1,096,023 993,519 871,570 693,361 634,742 Minority interests (87,231) (103,067) (110,957) (57,360) (86,431) Net profit from ordinary activities attributable to shareholders 1,008,792 890,452 760,613 636,001 548,311 Earnings per share - basic 23.23 cents 20.50 cents 17.51 cents 14.64 cents 12.62 cents Assets, liabilities and minority interests Total assets Total liabilities Minority interests Net assets Notes: 15,068,687 14,505,834 14,477,538 14,586,420 13,925,688 (3,910,291) (3,826,254) (3,685,828) (4,128,921) (3,868,691) (1,012,417) (977,789) (1,502,629) (1,495,364) (1,449,432) 10,145,979 9,701,791 9,289,081 8,962,135 8,607,565 1. The consolidated results of the Group for the four years ended December 31, 2002 have been extracted from the Company’s 2002 annual report dated March 4, 2003, while those of the year ended December 31, 2003 prepared were based on the consolidated income statement as set out on page 52 of the financial statements. 2. The 2003 earnings per share is based on the net profit from ordinary activities attributable to shareholders for the year ended December 31, 2003 of Rmb1,008,792,000 (2002: Rmb890,452,000) and the 4,343,114,500 ordinary shares (2002: 4,343,114,500 ordinary shares) in issue during the year. 42 Z H E J I A N G E X P R E S S WAY C O . , LT D . MAJOR CUSTOMERS AND SUPPLIERS The five largest customers and suppliers contributed less than 30% of the total revenue and purchases, respectively, of the Group during the year. Accordingly, a corresponding analysis of major customers and suppliers is not presented. CONNECTED TRANSACTIONS Details of the connected transactions of the Group carried out during the year are set out in note 40 to the financial statements. The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) has granted the Company a waiver from compliance with Chapter 14 of the Listing Rules in respect of the undertakings and indeminities, as set out in paragraph (a) of note 40 to the financial statements, pursuant to its letter dated March 10, 2000 (the “Undertakings and Indemnities”). The independent non-executive Directors have reviewed the Undertakings and Indemnities, and confirmed that, during the year ended December 31, 2003, such transactions were carried out in accordance with the terms of the arrangements governing each respective transaction in question. Ernst & Young, the auditors of the Company (as required by the Stock Exchange in its letter dated 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 year ended December 31, 2003. In addition, the Group has also entered into other connection transactions as set out in paragraphs (b) to (f) of note 40 to the financial statements. In respect of the connected transactions relating to a restructuring of the Group as set out in paragraphs (b) to (e) of note 40 of the financial statements, the Directors expect that the Group structure can be streamlined following the establishment of Zhejiang Expressway Investment Development Co., Ltd. (“Development Co”) and its subsidiary, Zhejiang Expressway Vehicle Towing and Rescue Services Co., Ltd. (“Services Co”), and the related assets transfers, and that the management and operation of the ancillary businesses of the Group can become more specialized and efficient. However, the Directors are of the view that such Group restructuring will not lead to any change in the business model of the Group and will not have any significant impact on the earnings, assets and liabilities of the Group. For further details of such connected transaction, please refer to the Company’s announcement dated August 28, 2003. The 22 connected persons as mentioned in paragraph (b) of note 40 to the financial statements are 17 directors and/or supervisors of the Company and/or its subsidiaries, namely, Geng Xiaoping, Fang Yunti, Zhang Jingzhong, Xuan Daoguang, Jiang Wenyao, Huang Qiuxia, Pan Jiaxiang, Wu Junyi, Fang Zhexing, Zhan Huagang, Gong Zuxian, Ni Ciyun, Pan Santao, He Weiyang, Yang Yingzhi, Wang Yubing and Zhang Pubiao, who won in aggregate 17.825% of the equity interest in the registered capital of Development Co, and 3 directors of Development Co, namely, 2 0 0 3 A N N U A L R E P O R T 43 R E P O R T O F T H E D I R E C T O R S Ma Boliang, Lu Youfa and Hu Ronggen, and 2 supervisors of Development Co, namely, Sun Zhongfu and Zhou Jianrong, who in aggregate own 3.125% of the equity interest in the registered capital of Development Co. The 4 connected persons as mentioned in paragraph (d) of note 40 to the financial statements are 4 directors of Services Co, namely, Gong Zuxian, Chen Jianye, Xu Jianmin and Xu Guangmei, who invest in an aggregate of 3.75% of the equity interest in the registered capital of Services Co. FIXED ASSETS Details of movements in the fixed assets of the Company and the Group during the year 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, 2003 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 year are set out in note 34 to the financial statements. principles in Hong Kong, amounted to Rmb641,107,000. In addition, in accordance with the Company Law of the PRC, the amount of approximately Rmb3,640,000,000 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. SUBSTANTIAL SHAREHOLDERS’ INTERESTS IN SHARES AND UNDERLYING SHARES As at December 31, 2003, the following shareholders held 5% or more of the issued share capital of the Company according to the register of interests in shares required to be kept by the Company pursuant to Section 336 of the Securities and Futures Ordinance (the “SFO”): Percentage of share capital Name Number of shares (domestic shares) Zhejiang Communications Investment Group Co., Ltd. 2,432,500,000 83.61% Huajian Transportation Economic Development Center 476,760,000 16.39% Name Capital Group JP Morgan Chase Percentage of share capital Number of shares (H shares) 155,925,300 120,569,200 10.87% 8.41% 8.01% 6.01% 5.80% Aberdeen Asset Management Asia 114,906,000 State Street Corporation 86,129,500 Commonwealth Bank of Australia 83,133,000 DISTRIBUTABLE RESERVES Schroder Investment (Singapore) Limited 72,032,000 5.46% As at December 31, 2003, before taking into the account of the proposed final dividend, the Company’s reserves available for distribution by way of cash or in kind, as determined on the basis of the lower of the amount determined under PRC accounting standards and the amount determined under generally accepted accounting Save as disclosed above, no person had registered an interest or short position in the shares or underlying Shares of the Company that was recorded in the registrar kept pursuant to Section 336 of the SFO. 44 Z H E J I A N G E X P R E S S WAY C O . , LT D . PURCHASE, SALE OR REDEMPTION OF THE LISTED SECURITIES OF THE COMPANY Neither the Company nor any of its subsidiaries purchased, redeemed or sold any of the Company’s listed securities during the year. Independent non-executive Directors Mr. Tung Chee Chen Mr. Zhang Junsheng Dr. Hu Hung Lick, Henry (term expired on February 28, 2003) Mr. Zhang Liping (appointed on March 1, 2003) TRUST DEPOSITS As at December 31, 2003, other than the deposits of HK$355,000 (equivalent to Rmb378,000 approximately) and Rmb10,039,000 placed in non-bank financial institutions in Hong Kong and the PRC respectively, the Group did not have any trust deposits, nor any time deposits with any non- bank financial institution in the PRC. Nearly all of the Group’s deposits have been placed with commercial banks in the PRC and the Group has not encountered any difficulty in the withdrawal of funds. DIRECTORS The Directors of the Company during the year and up to the date of this report are: Executive Directors Mr. Geng Xiaoping Mr. Fang Yunti Mr. Zhang Jingzhong Mr. Xuan Daoguang Non-executive Directors Ms. Zhang Yang Ms. Zhang Luyun (re-appointed on March 1, 2003) Ms. Zhang Chunming (term expired on February 28, 2003) CHANGE IN DIRECTORS AND SENIOR MANAGEMENT Pursuant to an extraordinary general meeting held on February 11, 2003, the term of office for the existing Directors is three years, with effect from March 1, 2003. At the same meeting, Mr. Geng Xiaoping was re-elected as the Chairman of the Company, Mr. Tung Chee Chen was re-appointed as the Chairman of the Audit Committee and the Nomination and Remunerations Committee, and Mr. Fang Yunti was re-appointed as the General Manager of the Company. DIRECTORS AND SENIOR MANAGEMENT’S BIOGRAPHIES Biographical details of the Directors of the Company and the senior management of the Group are set out in pages 35 to 39 of the Company’s annual report. DIRECTORS AND SUPERVISORS’ SERVICE CONTRACTS Each of the Directors and supervisors (“Supervisors”) of the Company has entered into a service agreement with the Company, with effect from March 1, 2003, for a term of three years. 2 0 0 3 A N N U A L R E P O R T 45 R E P O R T O F T H E D I R E C T O R S 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 During the year, the Company entered into an investment agreement with the nominees representative, inter alia, four Directors and one Supervisor of the Company to establish Development Co, of which the four Directors and one Supervisor are beneficial owners (please refer to the section headed “Directors’, Supervisors’ and chief executives’ interests in shares and underlying shares” below for details), and Development Co’s subsidiary, Service Co, had respectively entered into contracts with the Company and its certain subsidiaries for acquisition of certain assets and Long positions in shares of Development Co equity interests. Further details of the transactions undertaken in connection therewith are included in note 40 to the financial statements. Save as disclosed above, no Director or Supervisor had a material interest, either direct or indirect, in any contract of significance to the business of the Group to which the Company, its holding company or any of its subsidiaries and fellow subsidiaries was a party during the year. DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVES INTERESTS IN SHARES AND UNDERLYING SHARES As at December 31, 2003, the interests of the Directors, Supervisors and chief executives in the share capital of the Company’s associated corporations (within the meaning of Part XV of the SFO), as recorded in the register required to be kept by the Company pursuant to Section 352 of the SFO were as follows: Name Mr. Geng Xiaoping Position Chairman Contribution of registered capital (Rmb) 2,400,000 Nature of interest Directly beneficially owned Interest Equity interest Mr. Fang Yunti Director/ Same as above 1,920,000 Same as above Mr. Zhang Jingzhong Mr. Xuan Daoguang Chief executive Director Director Same as above 550,000 Same as above Same as above 1,100,000 Same as above Mr. Fang Zhexing Supervisor Same as above 700,000 Same as above Percentage of the associated corporation’s registered capital 3.00 2.40 0.69 1.38 0.88 46 Z H E J I A N G E X P R E S S WAY C O . , LT D . Save as disclosed above, none of the Directors, Supervisors and chief executives had any interest or short position in the shares, underlying shares or debentures of the Company or any of its associated corporations that was recorded in the registrar required to be kept pursuant to Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, as at December 31, 2003. DIRECTORS AND SUPERVISORS’ RIGHTS TO SUBSCRIBE FOR SHARES OR DEBENTURES Except for the Development Co investment agreement as disclosed in section headed “Directors and Supervisors interests in contracts” above, at no time during the year were rights to acquire benefits by means of the acquisition of shares in or debentures of the Company granted to any Director or Supervisor or their respective spouse or minor children, or were any such rights exercised by them; or was the Company, its holding company, or any of its subsidiaries or fellow subsidiaries a party to any arrangement to enable any such persons to acquire such rights in any other body corporate. 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 required to make contributions to local social security authorities at rates ranging from 20% to 22.5% of the average basic salaries of the employees 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 a refund of any contributions that it has previously made. Hence, no forfeited contribution was used by the Group to reduce the level of its contributions during the year. During the year, contributions to registered insurance companies made by the Group under the defined contribution retirement scheme amounted to Rmb13,880,000 (2002: Rmb6,534,000). MEDICAL INSURANCE SCHEME Medical expenses for employees of the Group were accounted for as part of the benefits provided by the Group in accordance with relevant accounting rules and internal policies. Following the promulgation of employees’ basic medical schemes by local governments in the Zhejiang Province, subject to the local regulations of various areas of the province, starting from the second half of 2002, the Group is required to make contributions to local social security authorities, which are in proportion to the salaries and wages of the employees at rates ranging from 4% to 11%. Up to December 31, 2003, certain entities of the Group had enrolled in these compulsory schemes. The Group planned to have all of its subsidiaries participating in this medical insurance scheme in the near future. Judging from the arrangements of the schemes, the Directors do not anticipate any significant impact of its 2 0 0 3 A N N U A L R E P O R T 47 R E P O R T O F T H E D I R E C T O R S participation in the scheme on the Group’s financial standing, specially for its consolidated income statement and consolidated balance sheet. ACCOMMODATION BENEFITS FOR EMPLOYEES According to relevant rules and regulations in the PRC, the Group and its employees are all 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 10%. There are no further obligations beyond the contributions to the accommodation fund organised by the local social security authorities. SHARE CAPITAL There were no movements in the Company’s issued share capital during the Period. 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. UNITED KINGDOM TAXATION The following paragraphs are intended as a general guide only and are based on current legislation and Inland Revenue practice. If you are in any doubt as to your tax position, you should consult on appropriate professional adviser without delay. Individual holders of H Shares who are resident and domiciled in the United Kingdom (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 withholding of taxes in the PRC, the amount included as income for the purpose 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% for a basic rate taxpayer and 32.5% for a higher rate taxpayer). Where tax is withheld from the dividend, the individual will be entitled to claim resident credit 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. Individual holders of H Shares who are but not domiciled in the UK will only be liable to income tax on a dividend from the Company to the extent that the dividend is remitted to the UK. A UK tax resident corporate shareholder 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 to be 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. 48 Z H E J I A N G E X P R E S S WAY C O . , LT D . COMPLIANCE WITH THE CODE OF BEST PRACTICE In the opinion of the Directors, the Company has throughout the year ended December 31, 2003 complied with the Code of Best Practice as set out in Appendix 14 of the Listing Rules. AUDIT COMMITTEE The Company has an audit committee which was established in accordance with the requirements 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 the three independent non-executive Directors and the two non-executive Directors. AUDITORS Ernst & Young will retire and a resolution for their reappointment as international auditors of the Company will be proposed at the forthcoming annual general meeting. ON BEHALF OF THE BOARD Geng Xiaoping Chairman Hangzhou, Zhejiang Province, the PRC March 15, 2004 2 0 0 3 A N N U A L R E P O R T 49 R E P O R T O F T H E S U P E R V I S O R Y C O M M I T T E E The Supervisory Committee has reviewed the financial statements of the Company for 2003 prepared by the Board for submission to the general meeting of shareholders, and concluded that the financial statements accurately reflected the financial position of the Company in 2003, and complied with the relevant laws, regulations and the Company’s Articles of Association. In 2003, the Company maintained a high dividend yield, providing satisfactory return in cash to the shareholders. During the course of the Company’s business operations, the members of the Board, General Manager and other senior management of the Company have complied with their fiduciary duties and worked in good faith while exercising their powers when discharging their duties. There were no incidents of abuse of power or infringement of the interests of shareholders and employees. The Supervisory Committee is satisfied with the various results obtained by the Board and the management of the Company. By the order of the Supervisory Committee Ma Kehua Chairman of the Supervisory Committee March 12, 2004 Dear shareholders: In compliance with the Company Law of the PRC, the Company’s Articles of Association and Regulations of the Supervisory Committee, the Supervisory Committee duly performed its supervisory duties, and safeguarded the legitimate interests of the shareholders and the Company. Main tasks undertaken by the Supervisory Committee during 2003 were to assess and supervise the legality and appropriateness of the activities of the Directors, General Manager and other senior management of the Company in their business decision-making and daily management processes, through a combination of site visits, attendance of meetings of the Board, as well as participation in major corporate events. The Supervisory Committee carefully examined the operating results and financial standing of the Company, and discussed and reviewed the financial statements and dividend distribution proposals to be submitted by the Board to the general meeting. The Supervisory Committee concluded that the Directors, General Manager and other senior management of the Company have continued to adopt a steady operating strategy in 2003. Alongside with an emphasis on its principal operations, efforts were also put into developing ancillary business, with remarkable results achieved. Growth was again recorded for the operating results of the Company, providing attractive returns to shareholders. Efforts made by the Board of Directors and the management in the corporate governance have received recognition and affirmation from the investors, which consolidated its reputation in the domestic and overseas markets. 50 Z H E J I A N G E X P R E S S WAY C O . , LT D .  R E P O R T O F T H E I N T E R N A T I O N A L A U D I T O R S 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, 2003 and of the profit and cash flows of the Group for the year then ended in accordance with the accounting principles generally accepted in Hong Kong 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 15, 2004 To the members Zhejiang Expressway Co., Ltd. (Established in the People’s Republic of China with limited liability) We have audited the financial statements on pages 52 to 89 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. This report is made solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. 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 as to whether the financial statements are free from 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 the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. 2 0 0 3 A N N U A L R E P O R T 51  C O N S O L I D A T E D I N C O M E S T A T E M E N T Year ended December 31, 2003 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 profit of a jointly-controlled entity PROFIT BEFORE TAX Tax PROFIT BEFORE MINORITY INTERESTS Minority interests NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS DIVIDENDS Interim Proposed final Notes 2003 Rmb’000 2002 Rmb’000 5 5 6 7 8 9 12 2,471,805 2,168,078 (731,451) (561,918) 1,740,354 1,606,160 127,285 (114,629) (54,243) 66,457 (95,209) (33,109) 1,698,767 1,544,299 (132,801) (163,224) 17,394 9,829 11,719 1,677 1,593,189 1,394,471 (497,166) (400,952) 1,096,023 993,519 (87,231) (103,067) 1,008,792 890,452 (173,724) (477,743) (173,724) (390,880) (651,467) (564,604) EARNINGS PER SHARE 13 23.23 cents 20.50 cents 52 Z H E J I A N G E X P R E S S WAY C O . , LT D .  C O N S O L I D A T E D B A L A N C E S H E E T December 31, 2003 NON-CURRENT ASSETS Fixed assets Interest in a jointly-controlled entity Interests in associates Expressway operating rights Long term investments Goodwill CURRENT ASSETS Short term investments Inventories Accounts receivable Other receivables Cash and cash equivalents CURRENT LIABILITIES Accounts payable Profits tax payable Other taxes payable Other payables and accruals Interest-bearing bank and other loans Long-term bonds repayable within one year Dividend payable NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other loans Long term bonds Deferred tax liabilities MINORITY INTERESTS Notes 2003 Rmb’000 2002 Rmb’000 14 16 17 18 19 20 19 21 22 23 24 25 26 27 28 29 32 12,537,616 12,014,986 62,554 164,498 205,945 1,000 97,717 54,464 159,829 214,645 2,867 106,798 13,069,330 12,553,589 1,104,266 858,114 3,056 21,771 51,469 818,795 2,022 14,367 128,672 949,070 1,999,357 1,952,245 367,521 189,848 27,946 260,077 975,950 — 19,070 207,166 109,289 15,724 214,955 1,681,553 200,000 — 1,840,412 2,428,687 158,945 (476,442) 13,228,275 12,077,147 744,176 1,156,647 1,000,000 — 325,703 240,920 2,069,879 1,397,567 1,012,417 977,789 10,145,979 9,701,791 2 0 0 3 A N N U A L R E P O R T 53  C O N S O L I D A T E D B A L A N C E S H E E T (Continued) December 31, 2003 CAPITAL AND RESERVES Issued capital Reserves Proposed final dividend Geng Xiaoping Director Fang Yunti Director Notes 33 34 12 2003 Rmb’000 2002 Rmb’000 4,343,115 4,343,115 5,325,121 4,967,796 477,743 390,880 10,145,979 9,701,791 54 Z H E J I A N G E X P R E S S WAY C O . , LT D .  C O N S O L I D A T E D S U M M A R Y S T A T E M E N T O F C H A N G E S I N E Q U I T Y Year ended December 31, 2003 TOTAL EQUITY Balance at beginning of year Net profit from ordinary activities attributable to shareholders Dividends paid on ordinary shares Balance at end of year 2003 Rmb’000 2002 Rmb’000 9,701,791 9,289,081 1,008,792 890,452 (564,604) (477,742) 10,145,979 9,701,791 2 0 0 3 A N N U A L R E P O R T 55  C O N S O L I D A T E D C A S H F L O W S T A T E M E N T Year ended December 31, 2003 NET CASH INFLOW FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Interest received Additions to fixed assets Additions to construction in progress Acquisition of additional interests in existing subsidiaries Winding-up of a subsidiary Dividends from an associate Proceeds from disposal of fixed assets Proceeds from disposal of long term investment (Increase)/decrease in time deposits (Increase)/decrease in investments Net cash outflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid on ordinary shares Dividends paid to minority interests New bank and other loans Issue of bonds Repayment of bank and other loans Repayment of bonds Capital contribution by minority shareholders Net cash outflow from financing activities NET DECREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR 35(b) ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits with original maturity of less than three months when acquired 23 23 56 Z H E J I A N G E X P R E S S WAY C O . , LT D . Notes 35(a) 2003 Rmb’000 2002 Rmb’000 1,670,344 1,536,309 12,593 (37,537) (622,532) (58,042) — 7,851 686 2,800 14,483 (29,574) (286,935) (689,813) (145) 8,339 2,641 — 31,179 (203,679) (247,411) 82,812 (910,413) (1,101,871) (545,534) (477,742) (38,101) (40,643) 2,490,000 4,070,361 1,000,000 — (3,605,792) (4,060,049) (200,000) 40,400 — — (859,027) (508,073) (99,096) (73,635) 666,291 567,195 527,814 39,381 567,195 739,926 666,291 562,463 103,828 666,291  B A L A N C E S H E E T As at December 31, 2003 NON-CURRENT ASSETS Fixed assets Interests in subsidiaries Interest in a jointly-controlled entity Interests in associates Expressway operating rights CURRENT ASSETS Short term investments Inventories Accounts receivable Other receivables Cash and cash equivalents CURRENT LIABILITIES Accounts payable Profits tax payable Other taxes payable Other payables and accruals Interest-bearing bank and other loans Dividend payable NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other loans Long term bonds Deferred tax liabilities CAPITAL AND RESERVES Issued capital Reserves Proposed final dividend Geng Xiaoping Director Notes 2003 Rmb’000 2002 Rmb’000 14 15 16 17 18 19 21 22 23 24 25 26 28 29 32 33 34 12 5,263,165 4,177,381 63,251 127,375 161,776 5,208,083 4,127,294 64,055 126,500 168,710 9,792,948 9,694,642 1,049,372 569,787 1,140 9,579 22,493 276,575 1,359,159 213,448 49,832 9,149 157,291 250,000 19,070 698,790 660,369 844 7,891 43,024 357,959 979,505 162,641 32,849 6,752 121,862 895,000 — 1,219,104 (239,599) 10,453,317 9,455,043 — 330,000 1,000,000 154,203 1,154,203 — 117,320 447,320 9,299,114 9,007,723 4,343,115 4,478,256 477,743 4,343,115 4,273,728 390,880 9,299,114 9,007,723 Fang Yunti Director 2 0 0 3 A N N U A L R E P O R T 57  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 1. CORPORATE INFORMATION Zhejiang Expressway Co., Ltd. (the “Company”) 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 in the H Shares 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, the 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 the 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 the deposited H Shares of the Company effective. The registered office of the Company is located at 19/F, Zhejiang World Trade Centre, 122 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 provision of certain ancillary services such as technical consultation, advertising, 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. 2. IMPACT OF REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE (“SSAPS”) The following recently revised SSAPs are effective for the first time for the current year’s financial statements: SSAP 12 (Revised): “Income taxes” This SSAP prescribes new accounting measurement and disclosure practices. The major effects of adopting this SSAP on the Group’s accounting policies and on the disclosures in the financial statements are summarised as follows: SSAP 12 prescribes the accounting treatment for current income taxes payable or recoverable, arising from the taxable profit or loss for the current period; and deferred income taxes payable or recoverable in future periods, principally arising from taxable and deductible temporary differences and the carryforward of unused tax losses. 58 Z H E J I A N G E X P R E S S WAY C O . , LT D . 2. IMPACT OF REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE (“SSAPS”) (Continued) SSAP 12 (Revised): “Income taxes” (Continued) The principal impact of the revision of this SSAP on these financial statements is described below: Measurement and recognition: - - deferred tax assets and liabilities relating to the differences between capital allowances for tax purposes and depreciation for financial reporting purposes and other taxable and deductible temporary differences are generally fully provided for, whereas previously the deferred tax was recognised for timing differences only to the extent that it was probable that the deferred tax asset or liability would crystallise in the foreseeable future; deferred tax assets and liabilities have been recognised upon the restatement of short term investments at fair value on the basis of their quoted market prices at the balance sheet date; and Disclosures: - the related note disclosures are now more extensive than previously required. These disclosures are presented in notes 8 and 32 to the financial statements and include a reconciliation between the accounting profit and the tax expense for the year. Details of these changes are included in the accounting policy for income tax in note 3 and in note 32 to the financial statements. SSAP 35: “Accounting for government grants and disclosure of government assistance” SSAP 35 prescribes the accounting for government grants and other forms of government assistance. The adoption of this SSAP has had no significant impact for these financial statements on the amounts recorded for government grants and disclosure of government assistance. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation These financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, modified with respect to the measurement of investments in securities, as further explained below. Basis of consolidation The consolidated financial statements include the audited financial statements of the Company and its subsidiaries for the year ended December 31, 2003. 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. Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries. 2 0 0 3 A N N U A L R E P O R T 59  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 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. Investments 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-controlled entity, 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. Goodwill Goodwill arising on the 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 acquisition is recognised in the consolidated balance sheet as an asset and amortised on the straight-line basis over its estimated useful life of 10 years. In the case of associates and jointly-controlled entities, any unamortised goodwill is included in the carrying amount thereof, rather than as a separately identified asset on the consolidated balance sheet. Prior to the adoption of SSAP 30 “Business Combinations” in 2001, goodwill arising on acquisitions was eliminated against consolidated reserves in the year of acquisition. On the adoption of SSAP 30, the Group applied the transitional provision of the SSAP that permitted such goodwill to remain eliminated against consolidated reserves. 60 Z H E J I A N G E X P R E S S WAY C O . , LT D . 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Goodwill (Continued) 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 consolidated 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 consolidated 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. Fixed assets and depreciation Fixed assets, other than construction in 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 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 asset, the expenditure is capitalised as an additional cost of that fixed asset. Depreciation of expressway and bridge construction costs is calculated to write off the cost thereof over their estimated useful lives using a 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 construction costs of the expressways and bridges. The aforementioned average rates are based on the traffic volumes and forecast annual growth rates of the traffic volume over the 30-year expressway concession period. This method is more commonly referred to as the “unit-of-usage” method. 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 30 years 10 years 8 years 5-8 years Annual depreciation rate 3.2% 9.7% 12.1% 12.1-19.4% 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. 2 0 0 3 A N N U A L R E P O R T 61  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 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 capitalised 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. Long term investments Long term investments are non-trading investments in listed and unlisted securities intended to be held on a long term basis. Unlisted equity securities are stated at cost, less any provisions for impairment losses on an individual investment 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. 62 Z H E J I A N G E X P R E S S WAY C O . , LT D . 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Held-to-maturity securities 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 impairment losses on an individual investment 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. Government grants Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Revenue recognition Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: (a) toll revenue, net of any applicable revenue taxes, when received; (b) (c) 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; from the rendering of services, based on the percentage of completion basis, provided that the revenue 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; (f) dividend income, when the shareholders’ right to receive payment has been established; and (g) subsidy income, when there is reasonable assurance that the income will be received. 2 0 0 3 A N N U A L R E P O R T 63  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income tax Income tax comprises current and deferred tax. Income tax is recognised in the income statement or in equity if it relates to items that are recognised in the same or a different period, directly in equity. Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences: - - except where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax assets and unused tax losses can be utilised: - - except where the deferred tax asset relating to the deductible temporary difference arises from negative goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in jointly- controlled entities, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. 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. 64 Z H E J I A N G E X P R E S S WAY C O . , LT D . 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Capitalisation of borrowing costs Borrowing costs directly attributable to the construction of expressways, tunnels and bridges are capitalized as part of the cost of those assets. The capitalization of such borrowing costs ceases when the assets are substantially ready for their intended use. 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. 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 profits within the capital and reserves section 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. 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 subject to common control or common significant influence. Related parties may be individuals or corporate entities. Cash and 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 and cash equivalents represent assets similar in nature to cash, which are not restricted as to use. 2 0 0 3 A N N U A L R E P O R T 65  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 4. SEGMENT INFORMATION In accordance with the Group’s internal financial reporting, the Group has determined to use business segments as its primary segment reporting format. During the year, the entire turnover and contribution to profit from operating activities of the Group were derived from the Zhejiang Province in the PRC. Accordingly, no further by geographical segment information is 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 the collection of the expressway tolls. Service area businesses mainly represent the sale of food, restaurant servicing, automobile servicing, as well as the operation of oil stations. Advertising business represents the design and rental of advertising billboards along the expressways. Road maintenance represents the maintenance of expressways and roads, including the cleaning of the road surface, minor repairs to the lanes, the cleaning of the gutters and sewers, grass mowing, afforestation and the maintenance of buildings, equipment and facilities provided to third parties. 66 Z H E J I A N G E X P R E S S WAY C O . , LT D . 4. SEGMENT INFORMATION (Continued) Group Segment revenue: Toll operation Service area businesses Advertising Road maintenance Consolidated 2003 Rmb’000 2002 Rmb’000 2003 Rmb’000 2002 Rmb’000 2003 Rmb’000 2002 Rmb’000 2003 Rmb’000 2002 Rmb’000 2003 Rmb’000 2002 Rmb’000 Turnover, net of revenue taxes 2,330,122 2,069,060 114,343 Other revenue Total revenue Segment results Finance costs 110,931 57,623 14,207 2,441,053 2,126,683 128,550 1,663,748 1,518,584 29,463 71,131 3,505 74,636 14,457 Share of profits of associates — — 17,394 11,719 Share of profit 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 9,829 1,677 — — 14,532,875 14,039,204 — 62,554 97,717 — 54,464 106,798 115,681 164,498 73,862 159,829 — — — — 14,693,146 14,200,466 280,179 233,691 Segment liabilities 3,509,014 3,537,924 42,667 32,205 Deferred tax Total liabilities Other segment information: Capital expenditure Depreciation and amortisation Write-off of bad debts Loss on disposal of fixed assets 325,703 240,920 — — 3,834,717 3,778,844 42,667 32,205 19,188 786,016 268,219 537 13,935 200,014 239,282 794 1,040 5,461 2,351 — 6,833 1,455 2,706 — — 7,007 2,961 — — 24,687 1,611 26,298 7,833 — — 26,217 2,955 29,172 11,941 — — 2,653 536 3,189 1,670 2,374 4,044 2,471,805 2,168,078 127,285 66,457 2,599,090 2,234,535 (2,277 ) (683 ) 1,698,767 1,544,299 — — — — (132,801 ) (163,224 ) 17,394 11,719 9,829 1,677 1,593,189 1,394,471 (497,166 ) (400,952 ) 1,096,023 993,519 (87,231 ) (103,067 ) 1,008,792 890,452 45,287 25,717 50,075 45,960 14,743,918 14,184,743 — — — 45,287 19,188 — — — — 25,717 4,590 — 4,590 7,884 2,240 — — — — — 50,075 13,719 — — — — 164,498 159,829 62,554 97,717 54,464 106,798 45,960 15,068,687 14,505,834 10,615 3,584,588 3,585,334 — 325,703 240,920 13,719 10,615 3,910,291 3,826,254 3,417 5,207 — — 2,336 3,832 — — 801,901 211,689 278,738 248,060 537 20,768 794 1,040 2 0 0 3 A N N U A L R E P O R T 67  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 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 Services area income Advertising income Road maintenance income Less: Revenue taxes Turnover Income on investments Interest income Rental income Trailer income Exchange gains, net Subsidy income Others Other revenue 2003 Rmb’000 2002 Rmb’000 2,458,726 2,184,197 117,205 26,138 2,669 73,043 27,742 1,704 2,604,738 2,286,686 (132,933) (118,608) 2,471,805 2,168,078 53,838 12,593 21,343 11,162 2,282 17,394 8,673 127,285 18,448 17,063 14,457 10,192 1,121 — 5,176 66,457 2,599,090 2,234,535 The Company and its subsidiaries are subject to the business tax, levied at 5% on toll income and 3% to 5% on other services income. In addition, the subsidiaries are subject to the following types of revenue taxes and surcharge: — city development tax, levied at 1% to 7% of business tax; — education supplementary tax, levied at 3.5% to 4% of business tax; and — culture and education fees, levied at 3% on advertising income. 68 Z H E J I A N G E X P R E S S WAY C O . , LT D . 6. PROFIT FROM OPERATING ACTIVITIES The Group’s profit from operating activities is arrived at after charging/(crediting): Depreciation Operating lease rentals on land and buildings Auditors’ remuneration Staff costs: Wages and salaries Pension scheme contributions Amortisation of expressway operating rights* Amortisation of goodwill** Write-off of bad debts Impairment of a long term unlisted investment Loss on winding-up of a subsidiary Loss on disposal of fixed assets Unrealised loss on revaluation of short term listed investments Net rental income Exchange gains, net Interest income Income from investments 2003 Rmb’000 257,817 643 3,115 89,681 13,880 8,700 12,221 537 — — 20,768 1,259 (21,343) (2,282) (12,593) (55,097) 2002 Rmb’000 223,748 902 1,975 86,733 6,534 8,700 15,612 794 574 205 1,040 9,571 (14,457) (1,121) (17,063) (28,019) * The amortisation of expressway operating rights for the year is included as administrative expenses in the consolidated income statement. ** The amortisation of goodwill for the year is included as other operating expenses in the consolidated income statement. 7. FINANCE COSTS Interest on bank loans and other loans wholly repayable within five years Interest on other loans Interest on bonds Other borrowing costs Total interest Less: Interest capitalised 2003 Rmb’000 68,977 17,700 46,626 9,000 142,303 (9,502) 132,801 2002 Rmb’000 129,860 26,279 7,560 — 163,699 (475) 163,224 2 0 0 3 A N N U A L R E P O R T 69  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 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 corporate income tax (“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. Group: Tax charged Tax refunded 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 2003 Rmb’000 2002 Rmb’000 439,812 (33,249) 406,563 84,783 491,346 5,791 (906) 935 367,997 (79,133) 288,864 109,387 398,251 5,004 (3,294) 991 Tax charge for the year 497,166 400,952 During the year, according to an approval from the Zhejiang Provincial Local Tax Bureau, Zhejiang Shangsan Expressway Co., Ltd. (“Shangsan Co”), one of the Company’s subsidiaries, was entitled to a 50% CIT exemption for the year ended December 13, 2002 amounting to Rmb33,249,000 (2002: 50% CIT exemption for the year ended December 31, 2001 amounting to Rmb16,749,000) under the category of “Enterprise providing employment opportunities to redundant city and country workers” as defined in the relevant national tax rules. A reconciliation of the tax expense applicable to profit before tax using the statutory rates for the PRC in which the Company and its subsidiaries, jointly-controlled entity and associates are domiciled to the tax expense at the effective tax rates is as follows: Group Profit before tax Tax at the statutory tax rate Tax refunded Income not subject to tax Expenses not deductible for tax Write-off of non-refundable tax 2003 Rmb’000 2002 Rmb’000 1,593,189 1,394,471 525,752 (33,249) (10,451) 15,114 — 460,175 (79,133) (12,047) 18,118 13,839 Tax charge at the Group’s effective rate 497,166 400,952 70 Z H E J I A N G E X P R E S S WAY C O . , LT D . 9. NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS The net profit from ordinary activities attributable to shareholders for the year ended December 31, 2003 dealt with in the financial statements of the Company was Rmb855,995,000 (2002: Rmb484,128,000) (note 34). 10. DIRECTORS AND SUPERVISORS’ REMUNERATION Directors’ and Supervisors’ remuneration for the year disclosed pursuant to the Listing Rules and Section 161 of the Hong Kong Companies Ordinance is as follows: Fees Other emoluments: Salaries, allowances and benefits in kind Bonuses paid and payable Pension scheme contributions 2003 Rmb’000 — 1,725 588 39 2,352 2002 Rmb’000 — 1,784 608 9 2,401 Salaries, allowances and benefits in kind include HK$150,000 (2002: HK$152,000), HK$150,000 (2002: HK$150,000) and Rmb30,000 (2002: Rmb36,000) payable to the three (2002: three) independent non-executive Directors respectively. There were no other emoluments payable to the independent non-executive Directors during the year (2002: Nil). The number of Directors and Supervisors whose remuneration fell within the following band is as follows: Nil to HK$1,000,000 Number of Directors and Supervisors 2003 11 2002 10 There was no arrangement under which a Director or a Supervisor waived or agreed to waive any remuneration during the year. 2 0 0 3 A N N U A L R E P O R T 71  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 11. FIVE HIGHEST PAID EMPLOYEES Salaries, allowances and benefits in kind Bonuses paid and payable Pension scheme contributions 2003 Rmb’000 1,712 734 49 2,495 2002 Rmb’000 1,614 662 11 2,287 The five highest paid employees during the year included four (2002: four) 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. 12. DIVIDENDS Company Interim Proposed final 2003 2002 2003 2002 Per ordinary share Rmb 0.04 0.11 0.15 Rmb 0.04 0.09 0.13 Rmb’000 173,724 477,743 651,467 Rmb’000 173,724 390,880 564,604 The proposed final dividend for the year is subject to the approval of the Company’s shareholders at the forthcoming annual general meeting. 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 Rmb1,008,792,000 (2002: Rmb890,452,000) and the 4,343,114,500 ordinary shares (2002: 4,343,114,500 ordinary shares) in issue during the year. Diluted earnings per share amounts for the years ended December 31, 2003 and 2002 have not been calculated as no diluting event existed during these years. 72 Z H E J I A N G E X P R E S S WAY C O . , LT D . 14. FIXED ASSETS Group Cost: Expressways and bridges Rmb’000 Land Rmb’000 Toll stations and ancillary facilities Rmb’000 Communi- cations and signalling equipment Rmb’000 Motor vehicles Rmb’000 Machinery and equipment Rmb’000 Construction in progress Rmb’000 Total Rmb’000 At beginning of year 531,810 11,160,953 409,544 Additions Transfers Reclassifications Disposals — — — — 26,332 482,859 16,405 — 1,725 1,912 (47,192 ) (8,561 ) 202,676 12,019 — (429) (755) 95,752 11,850 — 1,015 (784 ) 104,387 347,424 12,852,546 34,290 21,136 30,201 715,685 801,901 (505,907) — — — (154) (13,935 ) (24,189 ) At December 31, 2003 531,810 11,686,549 357,428 213,511 107,833 189,860 543,267 13,630,258 Accumulated depreciation: At beginning of year 88,533 Depreciation provided during the year16,931 Reclassifications Disposals — — 561,044 156,601 2,078 — 39,321 20,038 (3,966 ) (1,598 ) 62,281 25,560 (336) (363) 44,539 14,724 100 (685 ) 41,842 23,963 2,124 (89) At December 31, 2003 105,464 719,723 53,795 87,142 58,678 67,840 — — — — — 837,560 257,817 — (2,735 ) 1,092,642 Net book value: At December 31, 2003 426,346 10,966,826 At December 31, 2002 443,277 10,599,909 303,633 370,223 126,369 140,395 49,155 51,213 122,020 543,267 12,537,616 62,545 347,424 12,014,986 Company Cost: At beginning of year 350,384 4,712,616 146,994 120,765 Additions Transfers Transfers to subsidiaries Disposals — — (1,954 ) — — 450,340 — — — 729 (9,491 ) (8,065 ) 5,563 — — — 54,189 9,026 — (5,836 ) (784 ) 55,410 5,225 2,453 (607) (59) 297,751 187,668 (453,522) — (13,935 ) 5,738,109 207,482 — (17,888 ) (22,843 ) At December 31, 2003 348,430 5,162,956 130,167 126,328 56,595 62,422 17,962 5,904,860 Accumulated depreciation: At beginning of year Provided during the year Transfers to subsidiaries Disposals 64,665 11,636 (388 ) — 338,748 72,856 — — 17,353 4,955 (1,670 ) (1,573 ) 49,464 15,678 — — 33,187 7,032 (2,686 ) (685 ) 26,609 6,807 (244) (49) At December 31, 2003 75,913 411,604 19,065 65,142 36,848 33,123 Net book value: — — — — — 530,026 118,964 (4,988 ) (2,307 ) 641,695 At December 31, 2003 272,517 4,751,352 At December 31, 2002 285,719 4,373,868 111,102 129,641 61,186 71,301 19,747 21,002 29,299 28,801 17,962 5,263,165 297,751 5,208,083 The fixed assets are mainly located in the PRC. The Group’s land included above is held under a long term lease. 2 0 0 3 A N N U A L R E P O R T 73  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 15. INTERESTS IN SUBSIDIARIES Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Company 2003 Rmb’000 2002 Rmb’000 4,436,627 4,338,486 105,226 4,587 (364,472) (215,779) 4,177,381 4,127,294 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 Date and place of registration Registered capital Rmb Percentage of equity attributable to the Company Principal activities Zhejiang Yuhang Note 1 75,223,000 Direct 51 Indirect — Construction and Expressway Co., Ltd. (“Yuhang Co”) management of the Yuhang Section of the Shanghai-Hangzhou Expressway Zhejiang Jiaxing Note 2 1,859,200,000 99.999454 — Construction and Expressway Co., Ltd. (“Jiaxing Co”) management of the Jiaxing Section of the Shanghai-Hangzhou Expressway Zhejiang Shangsan Note 3 2,400,000,000 73.625 — Construction and Expressway Co., Ltd. (“Shangsan Co”) Zhejiang Expressway Investment Development Co., Ltd. (“Development Co”) Note 4 80,000,000 51 — Operation of service management of the Shangsan Expressway areas as well as roadside advertising along the expressways operated by the Group Zhejiang Expressway Note 5 5,000,000 — *35.7 Provision of advertising services Advertising Co., Ltd. (“Advertising Co”) Zhejiang Expressway Vehicle Note 6 8,000,000 — *43.35 Provision of vehicle Towing and Rescue Service Co., Ltd. (“Service Co”) 74 Z H E J I A N G E X P R E S S WAY C O . , LT D . towing, repair and emergency rescue service. 15. INTERESTS IN SUBSIDIARIES (Continued) * These two companies are subsidiaries of Development Co, a non wholly-owned subsidiary of the Company and, accordingly, are accounted for as subsidiaries by virtue of the Company’s control over them. 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: Shangsan Co was established on January 1, 1998 in the PRC as a limited liability company. Note 4: Development Co was established on May 28, 2003 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. Note 6: Service Co was established on July 31, 2003 in the PRC as a limited liability company. All of the Company’s subsidiaries are operating in the PRC. 16. INTEREST IN A JOINTLY-CONTROLLED ENTITY Unlisted shares, at cost Share of net assets other than goodwill Amount due to a jointly-controlled entity Group Company 2003 Rmb’000 — 64,303 (1,749) 62,554 2002 Rmb’000 — 55,409 (945) 54,464 2003 Rmb’000 65,000 — (1,749) 63,251 2002 Rmb’000 65,000 — (945) 64,055 The amount due to a jointly-controlled entity is unsecured, interest-free and has no fixed terms 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 operations Ownership interest Percentage of Voting power Profit sharing Principal activities Hangzhou Shida Expressway Corporate The PRC 50 50 50 Construction and Co., Ltd. operation of Shiqiao-Dajing Road 2 0 0 3 A N N U A L R E P O R T 75  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 17. INTERESTS IN ASSOCIATES Unlisted shares, at cost 2003 Rmb’000 — 2002 Rmb’000 — Share of net assets other than goodwill 164,487 159,829 Amount due from an associate 11 — 2003 Rmb’000 126,500 — 875 2002 Rmb’000 126,500 — — Group Company 164,498 159,829 127,375 126,500 The amount due to an associate is unsecured, interest-free and has no fixed terms of repayment. The Group’s share of the post-acquisition accumulated reserves of the associates as at December 31, 2003 was Rmb37,987,000 (2002: Rmb33,329,000). 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 Principal activities Zhejiang Expressway Corporate The PRC Petroleum Development Co., Ltd. 2003 50 2002 50 Construction and operation of gas stations and the sale of petroleum products JoinHands Technology Corporate The PRC 27.58 27.58 Providing logistic management Co., Ltd. and anti-counterfeiting systems 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. 18. EXPRESSWAY OPERATING RIGHTS Cost: At January 1, 2003 and December 31, 2003 261,000 208,000 Group Rmb’000 Company Rmb’000 Accumulated amortisation: At January 1, 2003 Provided during the year At December 31, 2003 Net book value: At December 31, 2003 At December 31, 2002 76 Z H E J I A N G E X P R E S S WAY C O . , LT D . 46,355 8,700 55,055 205,945 214,645 39,290 6,934 46,224 161,776 168,710 18. EXPRESSWAY OPERATING RIGHTS (Continued) The above expressway operating rights were granted by the Zhejiang Provincial Government to the Group for a period of 30 years. During the 30-year expressway concession period, the Group has the rights of construction and management of Shanghai-Hangzhou-Ningbo Expressway and Shangsan Expressway and the toll-collection rights thereof. The Group is required to construct, maintain and operate the expressways in accordance with the regulations promulgated by the Ministry of Communication and relevant government authorities. 19. INVESTMENTS Long term investments Unlisted equity investments, at cost Provision for impairment of unlisted equity investments Short term investments Listed in the PRC, at amortised cost - Held-to-maturity securities Listed in the PRC, at market value - Government bonds - Close-end equity funds - Enterprise bonds - Equity interests Gruop 2003 Rmb’000 1,000 — 1,000 2002 Rmb’000 3,644 (777) 2,867 Group Company 2003 Rmb’000 2002 Rmb’000 2003 Rmb’000 2002 Rmb’000 — 30,000 — 30,000 1,016,510 726,764 1,011,510 62,229 — 25,527 1,104,266 1,104,266 51,754 10,000 39,596 828,114 858,114 16,973 — 20,889 1,049,372 1,049,372 504,104 18,169 — 17,514 539,787 569,787 The market values of the Group’s and the Company’s short term investments at the date of approval of these financial statements were approximately Rmb1,093,216,000 and Rmb1,036,303,000, respectively. 2 0 0 3 A N N U A L R E P O R T 77  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 20. GOODWILL The amounts of the goodwill capitalised as an asset or recognised in the consolidated balance sheet, arising from the acquisition of subsidiaries, are as follows: Cost: At January 1, 2003 Acquisition of additional interests in subsidiaries during the year At December 31, 2003 Accumulated amortisation: At January 1, 2003 Provided during the year At December 31, 2003 Net book value: At December 31, 2003 At December 31, 2002 Group Rmb’000 123,453 3,140 126,593 16,655 12,221 28,876 97,717 106,798 The Group has adopted the transitional provision of SSAP 30 which permits goodwill and negative goodwill in respect of acquisitions which occurred prior to the adoption of SSAP 30 to remain eliminated against consolidated reserves or credited to the capital reserve, respectively. The amount of goodwill remaining in consolidated reserves, arising from the acquisition of subsidiaries, was Rmb352,860,000 as at December 31, 2003 (2002: Rmb352,860,000). Such goodwill, which arose prior to the adoption of SSAP 30, is stated at cost. 21. ACCOUNTS RECEIVABLE An aged analysis of the accounts receivable as at the balance sheet date, based on invoice date, is as follows: Within 1 year 1 to 2 years Over 2 years Group Company 2003 Rmb’000 19,116 54 2,601 21,771 2002 Rmb’000 11,720 2,647 — 14,367 2003 Rmb’000 6,978 — 2,601 9,579 2002 Rmb’000 5,244 2,647 — 7,891 78 Z H E J I A N G E X P R E S S WAY C O . , LT D . 22. OTHER RECEIVABLES Prepayments Deposits and other debtors 23. CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits with original maturity of Group Company 2003 Rmb’000 26,810 24,659 51,469 2002 Rmb’000 1,830 126,842 128,672 2003 Rmb’000 287 22,206 22,493 2002 Rmb’000 294 42,730 43,024 Group Company 2003 Rmb’000 527,814 2002 Rmb’000 562,463 2003 Rmb’000 208,192 2002 Rmb’000 182,830 less than three months when acquired 39,381 103,828 381 43,742 Time deposits with original maturity over three months when acquired 24. ACCOUNTS PAYABLE 251,600 818,795 282,779 949,070 68,002 276,575 131,387 357,959 An aged analysis of the accounts payable as at the balance sheet date, based on invoice date, is as follows: Within 1 year 1 to 2 years 2 to 3 years Over 3 years 25. OTHER PAYABLES AND ACCRUALS Accruals Other liabilities Amounts due to related parties Amount due to the holding company Note 30 31 Group Company 2003 Rmb’000 318,116 44,844 2,218 2,343 2002 Rmb’000 200,181 4,863 1,901 221 2003 Rmb’000 202,554 10,498 365 31 2002 Rmb’000 158,859 2,778 1,004 — 367,521 207,166 213,448 162,641 Group Company 2003 Rmb’000 82,640 162,687 12,151 2,599 2002 Rmb’000 58,510 141,695 12,151 2,599 2003 Rmb’000 54,144 90,996 12,151 — 2002 Rmb’000 12,735 96,976 12,151 — 260,077 214,955 157,291 121,862 2 0 0 3 A N N U A L R E P O R T 79  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 26. INTEREST-BEARING BANK AND OTHER LOANS Current portion of bank and other loans 28 Note Group Company 2003 Rmb’000 975,950 2002 Rmb’000 1,681,553 2003 Rmb’000 250,000 2002 Rmb’000 895,000 27. LONG TERM BONDS PAYABLE WITHIN ONE YEAR Long term bonds 28. INTEREST-BEARING BANK AND OTHER LOANS Bank loans, unsecured Bank loans, secured Other loans, unsecured Bank loans repayable: Within one year Group Company 2003 Rmb’000 — 2002 Rmb’000 200,000 2003 Rmb’000 — 2002 Rmb’000 — Group Company 2003 Rmb’000 800,000 — 2002 Rmb’000 1,875,000 — 920,126 963,200 2003 Rmb’000 250,000 — — 2002 Rmb’000 1,075,000 150,000 — 1,720,126 2,838,200 250,000 1,225,000 In the third to fifth years, inclusive — 330,000 — 800,000 1,545,000 250,000 895,000 330,000 Other loans repayable: Within one year In the second year In the third to fifth years, inclusive Beyond five years 800,000 1,875,000 250,000 1,225,000 175,950 88,567 276,644 378,965 920,126 136,553 82,441 268,623 475,583 963,200 — — — — — — — — — — 1,720,126 2,838,200 250,000 1,225,000 Portion classified as current liabilities - note 26 (975,950) (1,681,553) (250,000) (895,000) Long term portion 744,176 1,156,647 — 330,000 The bank loans are unsecured and bear interest at rates ranging from 4.536% to 4.779% per annum. The other loans are unsecured and bear interest at rates ranging from 3.00% to 4.56% per annum. 80 Z H E J I A N G E X P R E S S WAY C O . , LT D . 29. LONG TERM BONDS Long term bonds Group Company 2003 Rmb’000 1,000,000 2002 Rmb’000 200,000 2003 Rmb’000 1,000,000 Classified as current liabilities - note 27 — (200,000) — 1,000,000 — 1,000,000 The bonds are unsecured, bear interest at a rate of 4.29% per annum and are repayable in 2012 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. 2002 Rmb’000 — — — 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 The movement in deferred tax liabilities during the year is as follows: Deferred tax liabilities: Group At January 1, 2002 Deferred tax charged/(credited) to the income statement during the year - note 8 At December 31, 2002 Deferred tax charged to the income statement during the year - note 8 At December 31, 2003 Company At January 1, 2002 Deferred tax charged to the income statement during the year At December 31, 2002 Deferred tax charged to the income statement during the year At December 31, 2003 Restatement of short term investments Rmb’000 Straight-line method tax depreciation Rmb’000 Total Rmb’000 4,144 127,389 131,533 (986) 3,158 5,241 8,399 110,373 237,762 79,542 317,304 Restatement of short term investments Rmb’000 Straight-line method tax depreciation Rmb’000 3,789 460 4,249 3,005 7,254 58,472 54,599 113,071 33,878 146,949 109,387 240,920 84,783 325,703 Total Rmb’000 62,261 55,059 117,320 36,883 154,203 2 0 0 3 A N N U A L R E P O R T 81  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 32. DEFERRED TAX (Continued) The Group and the Company have no significant potential deferred tax liabilities for which provision has not been made. As at December 31, 2003, there was no significant unrecognised deferred tax liability (2002: Nil) for taxes that would be payable on the unremitted earnings of certain of the Group’s subsidiaries, associates and a jointly-controlled entity as the Group had no liability to additional tax should such amounts be remitted. There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders. 33. SHARE CAPITAL Registered, issued and fully paid: 2003 Number of shares 2002 Number of shares 2003 Rmb’000 2002 Rmb’000 Domestic shares of Rmb1.00 each 2,909,260,000 2,909,260,000 2,909,260 2,909,260 H Shares of Rmb1.00 each 1,433,854,500 1,433,854,500 1,433,855 1,433,855 4,343,114,500 4,343,114,500 4,343,115 4,343,115 The domestic shares are not currently listed on any stock exchange. The H Shares have been listed on the Stock Exchange since May 15, 1997, and were admitted to the Official List on May 5, 2000. Dealings in the H Shares on the London Stock Exchange commenced on the same day. On February 27, 2001, the trading of the H Shares of the Company commenced on the Berlin Stock Exchange following a secondary listing on the Unofficial Regulated Market of the exchange. On February 14, 2002, the United States Securities and Exchange Commission, following the approval by the Board of Directors and the China Securities Regulatory Commission, declared the registration statement in respect of the ADSs evidenced by ADRs representing the deposited H Shares of the Company effective. All the domestic shares and H Shares rank pari passu with each other as to dividends and voting rights. 82 Z H E J I A N G E X P R E S S WAY C O . , LT D . 34. RESERVES Group Share premium account Rmb’000 Goodwill reserve Rmb’000 Statutory surplus reserve Rmb’000 Public welfare fund Rmb’000 Retained profits Rmb’000 Total Rmb’000 At January 1, 2002 3,645,726 (352,860) 415,298 190,764 743,020 4,641,948 Interim dividend - note 12 Net profit for the year Transfer from/(to) reserves Proposed final dividend - note 12 At December 31, 2002 and — — — — — — — — — — — — (173,724) (173,724) 890,452 890,452 118,517 61,116 (179,633) — — — (390,880) (390,880) beginning of year 3,645,726 (352,860) 533,815 251,880 889,235 4,967,796 Interim dividend - note 12 Net profit for the year Transfer from/(to) reserves Proposed final dividend - note 12 — — — — — — — — — — — — (173,724) (173,724) 1,008,792 1,008,792 176,682 88,341 (265,023) — — — (477,743) (477,743) At December 31, 2003 3,645,726 (352,860) 710,497 340,221 981,537 5,325,121 Reserves retained by: Company and subsidiaries 3,645,082 (350,331) 699,425 334,685 958,970 5,287,831 Jointly-controlled entity Associates — 644 — — (2,529) 11,072 At December 31, 2003 3,645,726 (352,860) 710,497 Company and subsidiaries 3,645,082 (350,331) 524,041 Jointly-controlled entity Associates — 644 — (2,529) — 9,774 — 5,536 340,221 246,993 — 4,887 (697) (697) 23,264 37,987 981,537 5,325,121 878,273 4,944,058 (9,591) 20,553 (9,591) 33,329 At December 31, 2002 3,645,726 (352,860) 533,815 251,880 889,235 4,967,796 Company At January 1, 2002 3,645,082 Interim dividend - note 12 Net profit for the year Transfer from/(to) reserves Proposed final dividend - note 12 At December 31, 2002 and — — — — beginning of year 3,645,082 Interim dividend - note 12 Net profit for the year Transfer from/(to) reserves Proposed final dividend - note 12 — — — — At December 31, 2003 3,645,082 — — — — — — — — — — — 252,408 126,204 330,510 4,354,204 — — — — (173,724) (173,724) 484,128 484,128 93,498 46,749 (140,247) — — — (390,880) (390,880) 345,906 172,953 109,787 4,273,728 — — 100,634 — — — 50,317 — (173,724 ) (173,724) 855,995 (150,951 ) (477,743 ) 855,995 — (477,743) 446,540 223,270 163,364 4,478,256 2 0 0 3 A N N U A L R E P O R T 83  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 34. RESERVES (Continued) 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 (collectively, 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. 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 the 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 the properties of the Entities. The Directors of the Company have proposed to transfer Rmb100,634,000 (2002: Rmb93,498,000) and Rmb50,317,000 (2002: Rmb46,749,000) to the SSR and the PWF, respectively. These represent 10% (2002: 10%) and 5% (2002: 5%), respectively, of the Company’s profit after tax of Rmb1,006,342,000 (2002: Rmb934,980,000) 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 generally accepted accounting principles in Hong Kong. As at December 31, 2003, before the proposed final dividend, the Company had reserves of approximately Rmb641,107,000 (2002: Rmb500,667,000) available for distribution by way of cash or in kind. As at December 31, 2003, in accordance with the Company Law of the PRC, the amount of approximately Rmb3,640,000,000 (2002: Rmb3,638,229,000) standing to the credit of the Company’s share premium account was available for distribution by way of capitalisation issues. 84 Z H E J I A N G E X P R E S S WAY C O . , LT D . 35. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of profit before tax to net cash inflow from operating activities: Profit before tax Share of profits of a jointly-controlled entity Share of profits of associates Depreciation Amortisation of expressway operating rights Amortisation of goodwill Write-off of bad debts Interest income Interest expense Unrealised loss on revaluation of short term listed investments Exchange gains, net Loss on disposal of fixed assets Gain on disposal of long term investment Loss on winding-up of a subsidiary Increase in inventories (Increase)/decrease in accounts receivables (Increase)/decrease in other receivables Increase in an amount due from an associate Increase in accounts payables Increase/(decrease) in other taxes payable Increase in other liabilities Increase in accruals Increase in an amount due to a jointly-controlled entity Interest paid Profits tax paid Notes 2003 Rmb’000 2002 Rmb’000 1,593,189 1,394,471 6 6 6 6 5 7 6 5 6 6 (9,829) (17,394) 257,817 8,700 12,221 537 (12,593) 132,801 1,259 (2,282) 20,768 (933) — (1,034) (7,941) 69,927 (11) 25,763 12,222 23,141 3,155 804 (113,939) (326,004) (1,677) (11,719) 223,748 8,700 15,612 794 (17,063) 163,224 9,571 (1,121) 1,040 — 205 (966) 39,058 (15,526) (1,250) 101,643 (7,495) 43,264 9,998 304 (166,447) (252,059) Net cash inflow from operating activities 1,670,344 1,536,309 2 0 0 3 A N N U A L R E P O R T 85  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 35. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (Continued) (b) Winding-up of a subsidiary Net assets disposed of: Fixed assets Cash and bank balances Inventories Other receivables Other payables Minority interests Loss on winding-up of a subsidiary 36. COMMITMENTS 2003 Rmb’000 2002 Rmb’000 — — — — — — — 286 145 218 1,186 (1,579) (51) 205 (a) On March 15, 2004, the Board of Directors approved an expense for the road surface-overlaying project in the amount of Rmb95,500,000 (2002: Rmb141,400,000) for the year ending December 31, 2004. (b) Capital commitments Contracted, but not provided for: - Construction of expressways - Purchase of machinery - Proposed investments in Shangsan Co - Renovation of a service area Authorised, but not contracted for: Group Company 2003 Rmb’000 2002 Rmb’000 2003 Rmb’000 2002 Rmb’000 1,098,777 5,697 485,000 5,893 1,595,367 177,730 37,423 485,000 14,000 714,153 2,371 5,697 485,000 4,950 498,018 63,775 10,719 485,000 14,000 573,494 - Purchase of machinery 70,500 — 60,000 — - Construction of expressways 3,386,840 4,739,237 2,403,369 4,419,367 5,052,707 5,453,390 2,961,387 4,992,861 86 Z H E J I A N G E X P R E S S WAY C O . , LT D . 37. CONTINGENT LIABILITIES At the balance sheet date, contingent liabilities not provided for in the financial statements were as follows: Guarantees provided in favor of the holders of the corporate bonds issued by a subsidiary Guarantees provided to banks in connection with facilities granted to: - A subsidiary - A jointly-controlled entity 38. OPERATING LEASE ARRANGEMETS Group Company 2003 Rmb’000 2002 Rmb’000 2003 Rmb’000 2002 Rmb’000 — — 30,000 30,000 — — 30,000 30,000 — 216,254 550,000 30,000 580,000 650,000 30,000 896,254 The Group and the Company lease their oil stations and cables under operating lease arrangements, with leases negotiated for terms ranging from five to twenty five years. As at December 31, 2003, the Group and the Company had total future minimum lease rental receivables under non- cancelable operating leases falling due as follows: Within one year In the second to fifth years, inclusive Beyond five years Group Company 2003 Rmb’000 8,833 18,419 31,819 59,071 2002 Rmb’000 8,159 25,674 33,397 67,230 2003 Rmb’000 1,233 5,769 31,819 38,821 2002 Rmb’000 5,660 19,424 33,397 58,481 2 0 0 3 A N N U A L R E P O R T 87  N O T E S T O F I N A N C I A L S T A T E M E N T S December 31, 2003 39. DIFFERENCES IN FINANCIAL STATEMENTS PREPARED UNDER PRC AND HONG KONG ACCOUNTING STANDARDS Net profit before minority interests Net assets as at 31 December 2003 Rmb’000 2002 Rmb’000 2003 Rmb’000 2002 Rmb’000 As reported in statutory accounts (restated) 1,103,632 1,070,902 10,436,426 9,992,136 HK SSAP adjustments: (a) (b) (c) (d) (e) Goodwill Depreciation provided, net of deferred tax Difference in share premium account during establishment Profits tax refundable Restatement of short term investments in securities 33,722 (43,907) — — 30,995 (70,811) — (22,745) (145,568) (175,143) (179,290) (137,004) 11,923 (3,686) 11,923 (3,686) at market value, net of deferred tax 458 (1,971) 18,772 16,440 (f) General provision on trade receivables and other debts (g) (h) Impairment loss, net of deferred tax Provision for impairment of an unlisted equity investment (j) Others 561 (556) 1,351 762 (1,439) (12,076) (574) 1,238 310 — 689 2,256 922 284 (689) 755 As restated in the financial statements 1,096,023 993,519 10,145,979 9,701,791 40. 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: a) b) Under the reorganisation agreement, Zhejiang Provincial High Class Highway Investment Company Limited (the name has been changed as “Zhejiang Communications Investment Group Co., Ltd”) 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. On May 20, 2003, the Company entered into the Development Co Investment Agreement with 11 individuals as nominees of 155 key employees of the Group (including 22 connected persons and 133 independent third parties) for the establishment of Development Co in the PRC, whereby the Company invests in 51% of and the 11 individuals invest in an aggregate of 49% of Development Co’s registered capital of Rmb80,000,000. 88 Z H E J I A N G E X P R E S S WAY C O . , LT D . 40. RELATED PARTY TRANSACTIONS (Continued) c) d) e) f) On May 30, 2003, Development Co entered into several acquisition agreements with the Company, Jiaxing Co and Shangsan Co, respectively, to acquire the assets and liabilities in respect of the service area businesses and the equity interest in Advertising Co (the “Acquired Assets”). The total consideration of the transactions was Rmb84,404,000, being the valuation amount of the Acquired Assets of Rmb87,794,000 as at December 31, 2002, plus the operating results of the Acquired Assets of Rmb13,935,000 for the five-month period ended May 31, 2003, and minus the net cash drawings from the Acquired Assets of Rmb17,325,000 during the said period. On July 24, 2003, Development Co entered into the Service Co Investment Agreement with one individual as nominee of 27 key employees of Services Co (including 4 connected persons and 23 independent third parties) for the establishment of Service Co, whereby Development Co invests in 85% of and the individual invests in 15% of Service Co’s registered capital of Rmb8,000,000. On August 26, 2003, Service Co entered into acquisition agreements with the Company and Shangsan Co, respectively, to acquire the assets and liabilities in respect of the vehicle services business at a total consideration of Rmb3,321,000. In 2003, the Group entered into several rental agreements with Zhejiang Expressway Petroleum Development Co., Ltd (“Petroleum Co”), an associate of the Company. Pursuant to the aforementioned agreements, the Group leased six oil stations to Petroleum Co. In 2003, the Group recorded a total rental income of Rmb7,496,000 from Petroleum Co (2002: Rmb6,550,000). The rental income was based on negotiations between the Group and Petroleum Co with reference to the market prices. Since the total consideration of the respective transactions (b) to (f) as above-mentioned represent less than 3% of the book value of the net tangible assets of the Company as disclosed in its latest published audited accounts, no shareholders’ approval is required under the Listing Rules. 41. COMPARATIVE AMOUNTS Certain comparative amounts have been reclassified to conform with the current year’s presentation. 42. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved and authorized for issue by the Board of Directors on March 15, 2004. 2 0 0 3 A N N U A L R E P O R T 89 C O R P O R A T E I N F O R M A T I O N EXECUTIVE DIRECTORS Geng Xiaoping Fang Yunti Zhang Jingzhong Xuan Daoguang NON-EXECUTIVE DIRECTORS Zhang Luyun Zhang Yang INDEPENDENT NON-EXECUTIVE DIRECTORS Tung Chee Chen Zhang Junsheng Zhang Liping SUPERVISORS Ma Kehua Fang Zhexing Sun Xiaoxia Zheng Qihua Jiang Shaozhong COMPANY SECRETARY Zhang Jingzhong AUTHORISED REPRESENTATIVES Geng Xiaoping Zhang Jingzhong STATUTORY ADDRESS 19/F, Zhejiang World Trade Centre 122 Shuguang Road Hangzhou City, Zhejiang Province PRC 310007 Tel: Fax: 86-571-8798 5588 86-571-8798 5599 REPRESENTATIVE OFFICE IN HONG KONG Suite 2910 29/F, Bank of America Tower 12 Harcourt Road Hong Kong Tel: Fax: 852-2537 4295 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 11/F, Block A Dragon Century Square 1 Hang da Road Hangzhou, Zhejiang PRC 310007 AUDITORS AND REPORTING ACCOUNTANTS Ernst & Young Certified Public Accountants 15th Floor Hutchison House 10 Harcourt Road, Central Hong Kong 90 Z H E J I A N G E X P R E S S WAY C O . , LT D . 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 ADR: H Shares 1:30 FINANCIAL ADVISOR & CORPORATE BROKER IN THE UNITED KINGDOM Cazenove & Co. Ltd 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 PRINCIPAL BANKERS Bank of China, Zhejiang Branch Industrial and Commercial Bank of China, Zhejiang Branch China Construction Bank, Zhejiang Branch Shanghai Pudong Development Bank, Hangzhou Branch H SHARE REGISTRAR AND TRANSFER OFFICE Hong Kong Registrars Limited Room 1901-1905 19th Floor, Hopewell Centre 183 Queen’s Road East Hong Kong 2 0 0 3 A N N U A L R E P O R T 91 L O C A T I O N M A P O F E X P R E S S W A Y S O P E R A T E D B Y T H E G R O U P 92 Z H E J I A N G E X P R E S S WAY C O . , LT D . 

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