Pursue Excellence, Create Value, Cultivate Harmony. The corporate mission of Zhejiang Expressway is to pursue excellence as our premises and to create value as our goal. In pursuing excellence in many varied aspects, we also take creating optimal value for various stakeholders as a starting point as well as an objective. We believe that only through creating the best value for various stakeholders including shareholders, customers, employees, business partners and the community at large - and cultivating co-dependent, harmonious relationships with them - will the Company achieve sustainable, long-term success. ZHEJIANG EXPRESSWAY CO., LTD. Contents 2 Definition of Terms 4 Company Profile 28 Corporate Governance 33 Directors, Supervisors and 6 Major Corporate Events Senior Management Profiles 7 8 Particulars of Major Road Projects 38 Report of the Directors Financial and Operating Highlights 46 Report of the Supervisory Committee 10 Chairman’s Statement 47 Report of the International Auditors 14 Management Discussion 90 Corporate Information and Analysis 92 Location Map of Expressways 24 Frequently Asked Questions Operated by the Group 2004 ANNUAL REPORT Definition of Terms 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 Z h e j i a n g C o m m u n i c a t i o n s I n v e s t m e n t G r o u p C o . , L t d . （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 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 Jiaxing Co Huajian Transportation Economic Development Center, a State-owned enterprise Zhejiang Jiaxing Expressway Co., Ltd., a 99.9995% owned subsidiary of the Company 2 ZHEJIANG EXPRESSWAY CO., LTD. Definition of Terms JoinHands Technology JoinHands Technology Co., Ltd., a 27.582% owned associate of the Company Jiashao Co Listing Rules Period Petroleum Co PRC Rmb Services Co Shangsan Co Shareholders Shida Co Zhejiang Jiashao Expressway Co., Ltd., a 35% owned associate of the Company the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited the period from January 1, 2004 to December 31, 2004 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 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 2004 ANNUAL REPORT 3 Company Profile The Ministry of Communications of the PRC announced a long-term national expressway plan in 2004, calling for the construction of more than 50,000km expressways, in addition to the 34,000km expressways already in operation. The newly announced plan includes an addition of 3,500km expressways to be constructed in Zhejiang Province in the next 15 years. The Company intends to grasp the opportunities in project investments and acquisitions presented by the newly announced expressway construction plan, with a view to achieving the Group’s vision of becoming a leading company investing in and operating infrastructure businesses with an emphasis on expressways, in the PRC by 2010. Zhejiang Expressway Co., Ltd. is an infrastructure company principally engaged in investing in, constructing and managing high grade roads. The Company and its subsidiaries also carry out certain ancillary businesses such as automobile servicing and operations of gas stations and billboard advertising along expressways. The Company was incorporated on March 1, 1997 as the main vehicle of the Zhejiang Provincial Government for investing in, constructing and operating expressways and Class 1 roads in Zhejiang Province. The H Shares of the Company, which represent approximately 33% of the issued share capital of the Company, were listed on the Hong Kong Stock Exchange in May 15, 1997, and subsequently obtained a secondary listing on the London Stock Exchange in May 5, 2000. On February 14, 2002, a Level I American Depositary Receipt program sponsored by the Company in respect of its H Shares, with the Bank of New York as depositary, was established in the United States and became effective. 4 ZHEJIANG EXPRESSWAY CO., LTD. Company Profile 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 73.625% 51% 99.9995% 51% 50% 50% 27.582% 35% Shangsan Co Development Co Jiaxing Co Yuhang Co Petroleum Co Shida Co JoinHands Technology Jiashao Co 100% 100% Shangsan Expressway 142.0 km 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 Shanghai - Hangzhou Expressway 102.6 km Hangzhou - Ningbo Expressway 145.0 km Operation of gas station and sale of petroleum related products Development, operation, and management of Shida Road Development and application of computer technologies Development and operation of Jiashao Expressway subsidiary associate jointly-controlled entity 2004 ANNUAL REPORT 5 Major Corporate Events MARCH 15, 2004 OCTOBER 12, 2004 The Company announced its annual results for the year ended December 31, 2003 in Hong Kong. The Company convened an extraordinary general meeting at which the proposal relating to the payment of interim dividend for 2004 was approved. NOVEMBER 26, 2004 The Company entered into an agreement to invest a total of Rmb1,145,375,000 for a 35% shareholders’ interest in Zhejiang Jiashao Expressway Co., Ltd. that was established for the development and operation of Jiashao Expressway, a proposed 69km expressway connecting the Shangsan Expressway with the Zajiasu Expressway across the Qiantang River. MAY 21, 2004 The Company convened an annual general meeting at which, amongst others, the payment of final dividend for the year ended December 31, 2003 was approved. JUNE 20, 2004 The Company made arrangements to join the nationwide campaign initiated by relevant PRC authorities in curbing the widespread practice of overloading trucks on the roads. AUGUST 16, 2004 The Company announced its interim results for the six months ended June 30, 2004 in Hong Kong. OCTOBER 8, 2004 The third and final phase of the project to widen the Shanghai-Hangzhou-Ningbo Expressway from four lanes to eight lanes commenced construction along the Guzhu- Duantang section. 6 ZHEJIANG EXPRESSWAY CO., LTD. Particulars of Major Road Projects Percentage of Ownership Length in Kilometers Number of Number of Lanes Toll Stations Service Areas Number of Start of Operation Remaining Years 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 1998 0 1995 – 1998 0 1 1995 1995 1 1992 – 1996 3 2000 24 24 24 23 23 26 2004 ANNUAL REPORT 7 Financial and Operating Highlights RESULTS Turnover Profit Before Tax Tax Minority Interests Net Profit From Ordinary Activities Attributable To Shareholders Earnings Per Share (EPS) RETURN ON EQUITY (ROE) ROE 2000 Rmb’000 Year ended December 31, 2001 Rmb’000 2002 Rmb’000 2003 Rmb’000 2004 Rmb’000 1,188,604 1,722,517 2,168,078 2,471,805 3,131,993 879,752 1,235,540 1,394,471 1,593,189 1,910,981 (186,391) (363,970) (400,952) (497,166) (554,524) (57,360) (110,957) (103,067) (87,231) (130,758) 636,001 760,613 890,452 1,008,792 1,225,699 14.64 cents 17.51 cents 20.50 cents 23.23 cents 28.22 cents 2000 7.10% 2001 8.19% 2002 9.18% 2003 9.94% 2004 11.43% MONTHLY AVERAGE DAILY FULL TRIP TRAFFIC VOLUME Shanghai-Hangzhou-Ningbo Expressway Shangsan Expressway January February March April May June July August September October November December Average 2005 20,441 21,465 20,864 2003 26,036 23,240 27,286 27,003 21,253 26,471 28,190 29,405 31,370 32,198 30,790 31,735 27,938 2004 29,335 31,310 33,344 35,483 33,936 33,873 33,365 32,673 35,356 36,357 34,432 32,579 33,525 2005 33,955 31,171 36,342 2003 14,448 13,613 14,039 13,963 11,691 13,944 14,939 15,815 16,690 17,120 16,749 17,020 15,011 2004 18,750 18,990 18,499 19,645 19,207 18,849 19,874 19,051 20,659 21,043 19,656 18,590 19,401 8 ZHEJIANG EXPRESSWAY CO., LTD. Financial and Operating Highlights 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 3 1 , 3 2 7 4 , 2 8 6 1 , 2 3 2 7 , 1 9 8 1 , 1 6 2 2 , 1 9 0 0 , 1 0 9 8 1 6 7 6 3 6 1400 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 E P S ( R M B C E N T S ) R O E ( % ) 2 2 . 8 2 3 2 . 3 2 0 5 . 0 2 1 5 . 7 1 4 6 . 4 1 2000 2001 2002 2003 2004 12 10 8 6 4 2 0 3 4 . 1 1 4 9 . 9 8 1 . 9 9 1 . 8 0 1 . 7 2000 2001 2002 2003 2004 MONTHLY AVERAGE DAILY FULL TRIP TRAFFIC VOLUME OF SHANGHAI-HANGZHOU-NINGBO EXPRESSWAY MONTHLY AVERAGE DAILY FULL TRIP TRAFFIC VOLUME OF SHANGSAN EXPRESSWAY 25,000 20,000 15,000 10,000 5,000 0 Full Trips JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 3500 3000 2500 2000 1500 1000 500 0 30 25 20 15 10 50 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Full Trips 2003 2004 2005 2003 2004 2005 2004 ANNUAL REPORT 9 Chairman’s Statement Geng Xiaoping In 2004, the Company benefited from a positive macro-economic environment: a recovery of the world economy, continued growth of China’s economy and a strong performance of the regional economy. Given such advantages, and with the management and staff’s hard work, the Company has achieved outstanding results, sustained growth and harmonious developments during 2004. Such results are by no means accidental. It is an outcome of the Company’s persistence on the strategic goal of creating value and its cultivation of harmony as a cornerstone of the company culture ever since its establishment in 1997. There are many elements that may contribute to a customers, returns for our shareholders, welfare for our company’s continued success. But I believe harmony is staff, and well-being for the society. one of the most important elements. Harmony is a means to success, and is also a goal in itself. The guru of the Harmony for customers means being close to customer game of Go, Mr. Wu Qingyuan, believes that the essence needs. It means providing customers good-value-for- of the game for the last century was to win, but for the money with our superior service. Superior service refers 21st century, the key is to create integration, balance and to smooth, safe and comfortable travel conditions; an harmony. He said, “The ultimate objective of the Go game efficient toll collection system; timely information and is not to win, but to create integration and balance.” The emergency services; well-equipped and customer-oriented world-renowned golf player Mr Tiger Wood was once service areas, and so forth. Superior service also means asked to use a word to describe his most profound listening to our customers and knowing their needs, and experience in playing golf, the word he chose was applying up-to-date technological means to satisfy varied, harmony. Harmony is indeed the key: whether it is for increasingly demanding customer needs. playing Go or golf, living our life or operating a business. Harmony for shareholders means creating good and What does harmony mean to our company? The way I reliable financial returns for them as well as maintaining see it, it is that kind of pro-active, sustainable, balanced good investor relations. Shareholders are our focus, and and amicable relationships between the Company and naturally creating value for them is the Company’s its various stakeholders including road users, shareholders, ultimate goal. The value for shareholders stems from a staff, business partners and the society. The basis of growth in traffic volume and cash flows, as well as low harmony is value. We emphasize creating value for our capital costs, and as such one of our most important tasks 10 ZHEJIANG EXPRESSWAY CO., LTD. Chairman’s Statement is to ensure that such growth will sustain. Furthermore, realize that the construction of an expressway, as well as we are also obliged to ensure that the Company’s value the development of the associated automobile industry, will be fully reflected in the market share price through will to a certain extent affect the natural environment. propagating the Company’s corporate mission and values This is a price that social progress must pay. However, as as well as building investor understanding and trust, which an expressway operator, we strive to compensate this by are in turn achieved through active communication with accommodating more environmental considerations in our shareholders and investors. development work. Harmony for staff means good employer-employee Going forward, we are very optimistic toward the future relations, as well as providing a superb working of the expressway industry. In January 2005, China’s environment, good career training and satisfactory Ministry of Communications proclaimed the “National remunerations and benefits. More importantly, the Expressway Network Plan”, pursuant to which a national Company should become a “stage” for demonstrating trunk network totaling 85,000 kilometers radiating from staff’s professional skills and astute abilities. It is important major cities to connect the east-west and the north-south that as the Company is growing, our staff also grow with sections of the country, namely the network of “7-9-18” the Company. (7 trunks radiating from Beijing, 9 north-south trunks and 18 east-west trunks), will be developed in the next 30 Harmony also means win-win for all parties involved in years. Concurrently, according to the long-term transport competition or cooperation. This is especially true for the plan of Zhejiang Province, an expressway network of “2- expressway industry in which there are no real longitudinal, 2-horizontal, 18-connecting, 3-circulating competitors. Between industry peers and colleagues, there and 3-trunks” totaling 5,000 kilometers will be built by are always cooperative relationships to a certain extent. 2020. Indeed, the expressway industry is becoming a Similarly, with strategic partners, we stress the cultivation typical “emerging”, high-growth industry. The industry’s of long-term win-win cooperative relations. development trends toward network formation, computerization, market orientation and systematization Harmony also means responsibilities to the society. Indeed, present enduring growth opportunities to the Company, our obligations extend beyond those of a taxpayer. While and at the same time place great demands on us for an expressway provides immeasurable social benefits in enhancing our core competencies and competitive terms of promoting the economy in its vicinity, we also advantages. 2004 ANNUAL REPORT 11 Chairman’s Statement In this regard, we will need to be even more pro-active than before in embracing the promising future. Our future strategies will be “attaining effectiveness through quality, creating value through growth”. While adhering to the expressway operations as our core business, we will cultivate our core competitiveness and enhance our service quality through a scientific management, with a view to further strengthening the brand name of Zhejiang Expressway. Meanwhile, we will endeavor to develop other businesses that are related to expressway operations and will create synergies with the operations, as well as to seek advances beyond geographical restrictions. In a nutshell, we aim to provide sustainable growth in returns for our shareholders through continued “internal” strengthening (on our expressway business) and “external” extrapolating for further opportunities. Such endeavors will call for all of our staff’s continued commitment to our corporate values of “harmony, openness, integrity and pro-activeness”. Geng Xiaoping Chairman March 29, 2005 12 ZHEJIANG EXPRESSWAY CO., LTD. Chairman’s Statement Shareholders Shareholders are our focus, and naturally creating value for them is the Company’s ultimate goal...we are also obliged to ensure that the Company’s value will be fully reflected in the market share price through propagating the Company’s corporate mission and values as well as building investor understanding and trust, which are in turn achieved through active communication with shareholders and investors. 25030095（浙江滬杭甬 p.13） 2004 ANNUAL REPORT 13 2004 ANNUAL REPORT 13 Management Discussion and Analysis Fang Yunti A detailed breakdown in turnover for the Group during the Period is set out below: Year ended December 31, 2004 2003 Rmb’000 Rmb’000 % Change Toll income 3,066,954 2,458,726 24.7% Shanghai-Hangzhou- Ningbo Expressway 2,327,733 1,908,764 Shangsan Expressway 739,221 549,962 Other income Service areas Advertising 183,637 117,205 41,159 26,138 21.9% 34.4% 56.7% 57.5% Road maintenance 7,244 2,669 171.4% 3,298,994 2,604,738 26.7% Revenue taxes (167,001) (132,933 ) 25.6% Turnover 3,131,993 2,471,805 26.7% TOLL ROAD OPERATIONS The operation of the two toll roads, namely the Shanghai- Hangzhou-Ningbo Expressway and the Shangsan Expressway, continued to be the mainstay of the Group, together contributing 92.8% of the Group’s total turnover. BUSINESS REVIEW Economic growth in the PRC was brought to a steadier pace in 2004 with the introduction of a series of macro economic control measures by the government at the start of the year. Amid a favorable economic environment in Zhejiang Province, the ongoing process of rapid industrialization and urbanization continued to generate a strong demand for road transport, which was met with a rapidly expanding expressway network and growing number of vehicle sales, both for passenger cars and trucks. In contrast to an estimated 14.3% GDP growth rate in Zhejiang Province during the Period, traffic volumes on the two expressways operated by the Group grew more than 20% and 30%, respectively, while expressway-related business operations, such as the operation of service areas, advertising and vehicle servicing along the expressways, grew at an even higher rate of more than 50%. Growth Rates in Traffic Volume vs GDP (%) 30 25 20 15 10 5 0 8 . 8 2 1 . 2 2 7 . 9 1 9 . 5 1 1 . 0 1 0 . 0 1 0 . 1 1 5 . 0 1 6 . 1 2 9 . 9 1 4 . 2 1 3 . 4 1 0 . 4 1 5 . 1 1 1998 1999 2000 2001 2002 2003 2004 GDP growth rate in Zhejiang Province Traffic volume growth rate at Shanghai-Hangzhou-Ningbo Expressway 14 ZHEJIANG EXPRESSWAY CO., LTD. Management Discussion and Analysis In its sixth year of operation since full completion and opening to traffic in late 1998, the 248km Shanghai- Hangzhou-Ningbo Expressway recorded an average daily traffic volume in full-trip equivalents of 33,525, generating a toll income of Rmb2,327.7 million during 2004, representing growth rates of approximately 20.3% and 21.9% over 2003, respectively. The 142km Shangsan Expressway, on the other hand, was in its fourth year of operation since its full completion and opening to traffic in late 2000. Average daily traffic volume in full-trip equivalents during 2004 was 19,401 while toll income was Rmb739.2 million, representing growth rates of approximately 29.9% and 34.4% over 2003, respectively. Percentage of Class 4 & 5 Vehicles in Shanghai- Hangzhou-Ningbo Expressway in 2004 (%) 7 6 5 4 3 2 1 0 Class 4 Vehicles Class 5 Vehicles JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC The growth rates in traffic volume in 2004 for the two expressways were amplified by a lower-than-usual comparison basis in 2003, especially for the Shanghai- Hangzhou-Ningbo Expressway where traffic diversions by a local city ring road as well as a short-term disruption brought about by the outbreak of SARS had dampened traffic volume growth in 2003. Traveling conditions on the Shanghai-Hangzhou-Ningbo Expressway also improved substantially following the conclusion of the major road surface-overlaying project in 2004. Initiated in 2002, the project incurred a total cost of approximately Rmb411.1 million during the three- year span, amongst which Rmb95.4 million was incurred in 2004. Coordinated actions taken by the relevant PRC authorities starting from mid 2004 to curb the widespread practice of overloading trucks on the roads had effectively increased the proportion of heavy trucks amongst the traffic mix, aside from creating a safer traveling environment on the roads. As a result, the two expressways had higher growth rates in toll income than traffic volume growth rates during the second half of 2004. Phase II of the ongoing project to widen the Shanghai- Hangzhou-Ningbo Expressway from four lanes to eight lanes proceeded as scheduled in 2004 without causing any significant impact on the normal traffic flow along the Dajing-Fengjing section between Shanghai and Hangzhou. Phase III of the widening project, to be carried out along the Guzhou-Duantang section between Hangzhou and Ningbo, commenced construction in October 2004, and is targeted for completion by the end of 2007. 2004 ANNUAL REPORT 15 Management Discussion and Analysis During the Period, the Company assessed the status of expressway assets along the section of Shanghai- Hangzhou-Ningbo Expressway under widening, and disposed of the remaining value of demolished expressway assets that amounted to Rmb202.4 million, thus reducing the net profit attributable to shareholders by Rmb139.1 million. EXPRESSWAY-RELATED BUSINESS OPERATIONS The Group’s expressway-related business operations, such as the operation of service areas, advertising and vehicle servicing along the expressways, were carried out by Zhejiang Expressway Investment Development Co., Ltd. (the “Development Co”), a 51% owned subsidiary of the Company. Benefiting from growing traffic volumes on the expressways, improved quality of service provided to passing travelers and expanded facilities at the service areas, the expressway-related business operations enjoyed a strong across-the-board growth in 2004. Turnover for Development Co grew 55.2% during the Period to reach Rmb218.5 million, while net profit realized was Rmb38.7 million, representing a growth of 58.9% over 2003 on a pro forma basis. LONG-TERM INVESTMENTS The retail gas station business, operated by Zhejiang Expressway Petroleum Development Co., Ltd. (a 50% owned associate of the Company) within Zhejiang Province, encountered growing demand as well as increasing competition. While turnover for the associate company grew 27.5% in 2004, net profit realized during the Period was Rmb16.0 million, representing a decrease of 24.7% over 2003. Digital printing business and network equipment business, both carried out by JoinHands Technology Co., Ltd. (a 27.58% owned associate of the Company), experienced both rising costs and increasing market competition in 2004. Net profit realized by the associate company was Rmb3.8 million, representing a decrease of 43.7% over 2003. PROJECT INVESTMENT On October 25, 2004, Development Co invested Rmb9 million to acquire a 45% equity interest in a newly established company, Zhejiang Concord Property Investment Company, with the remaining 55% being owned by World Trade Center Zhejiang Real Estate Development Co., Ltd. Zhejiang Concord Property Investment Company is principally involved in real estate development and management, as well as sales in related building materials. Networking effect had a greater impact on the 9.45km Shida Road due to its proximity to Hangzhou City Ring Road. Owned and operated by Hangzhou Shida Highway Co., Ltd. (a 50% owned jointly-controlled entity of the Company), Shida Road saw its traffic volume grow 64.9% whereas its toll income grow 67.4% over 2003. Net profit realized by the jointly-controlled entity during the Period was Rmb39.2 million, representing an increase of 120.5% over 2003. On November 26, 2004, the Company entered into an agreement to invest a total of Rmb1,145,375,000 for a 35% shareholders’ interest in Zhejiang Jiashao Expressway Co., Ltd. that was established for the development and operation of Jiashao Expressway, a proposed 69km expressway connecting the Shangsan Expressway with the Zajiasu Expressway across the Qiantang River. Details of the investment were set out in a circular of the Company dated December 20, 2004. 16 ZHEJIANG EXPRESSWAY CO., LTD. Management Discussion and Analysis Customers Providing customers good-value-for- money with our superior service. Superior service refers to smooth, safe and comfortable travel conditions; an efficient toll collection system...well-equipped and customer-oriented service areas, and so forth...to satisfy varied, increasingly demanding customer needs. 25030095（浙江滬杭甬 p.17） 2004 ANNUAL REPORT 17 2004 ANNUAL REPORT 17 Management Discussion and Analysis HUMAN RESOURCES To better equip frontline staff of the Group to deal with heavy demand and workload as a result of the higher than anticipated traffic volume growth on the expressways operated by the Group, the Company placed greater emphasis on providing adequate training and improved remunerations for the staff working in the fields of toll collection, maintenance, as well as monitoring and controls during the Period. As at December 31, 2004, there were a total of 2,744 employees under the Group, amongst whom 205 were administrative staff, 419 were engineering technicians, and 2,120 were staff working in the fields of toll collection, maintenance and service areas. Total remunerations for the Period amounted to Rmb118.0 million. FINANCIAL ANALYSIS The Group adopts a financial policy that is both prudent and active in realizing its long-term strategic goal of maximizing shareholders’ wealth. During the Period, turnover and net profit attributable to shareholders for the Group were approximately Rmb3,132.0 million and Rmb1,225.7 million, respectively, representing increases of 26.7% and 21.5% over 2003, respectively; earnings per share increased by 21.5% to Rmb28.22 cents, while return on equity for the Period increased from 9.9% to 11.4%. PROFITABILITY With compound annual growth rates of 17.8% and 12.6% in earnings per share and return on equity, respectively, the investor’s share of profits generated by the Group represents a steady growth in the last five years. Details are as follows: Year ended December 31, 2000 2001 2002 2003 2004 EPS (Rmb cents) 14.64 17.51 20.50 23.23 Growth rate 16. 0% 19.6% 17.1% 13.3% ROE 7.1% 8.2% 9.2% Growth rate 10.9% 15.5% 12.2% 9.9% 7.6% 28.22 21.5% 11.4% 15.2% The high rate of growth in earnings per share and ROE reflected both the profitability and growth potentials of the expressways operated by the Group. To ensure our shareholders receive a substantial return from the Group’s earnings, the management follows a steady dividend policy with a high payout ratio. During the period, the dividend payout ratio reached 67.3%. Details of dividends in the last five years are as follows: Year ended December 31, 2000 2001 2002 2003 2004 Dividends (Rmb’000) 390,880 434,311 564,604 651,467 825,191 Dividend payout ratio 61.5% 57.1% 63.4% 64.6% 67.3% LIQUIDITY AND FINANCIAL RESOURCES Liquidity As at December 31, 2004, the total current assets held by the Group amounted to Rmb1,894.2 million, of which 21.9% were account receivables, other receivables and inventories. Due to the nature of its core business operations, the Group had adequate net cash inflows from operating activities, which amounted to Rmb1,497.8 million as at the end of the Period. As an indication of the Group’s ability to meet short-term debt obligations, the current ratio was 1.2 as at December 31, 2004, representing a high level of financial liquidity for the Group. 18 ZHEJIANG EXPRESSWAY CO., LTD. Management Discussion and Analysis Financial Resources BORROWINGS AND SOLVENCY As at December 31, 2004, the Group held Rmb722.0 million in cash and cash equivalents, Rmb81.7 million in time deposits and Rmb676.4 million in short-term investments, totaling Rmb1,480.1 million. Details are as follows: As at December 31, 2004 2003 Rmb’000 Rmb’000 721,999 717,559 4,434 – 6 81,740 81,740 – – – 567,195 565,251 1,393 59 492 251,600 251,598 – – 2 Cash and cash equivalents Rmb US$ in Rmb equivalents Euro in Rmb equivalents HK$ in Rmb equivalents Time deposits Rmb US$ in Rmb equivalents Euro in Rmb equivalents HK$ in Rmb equivalents As at December 31, 2004, the Group had total interest- bearing borrowings of Rmb2,443.5 million, representing a decrease of 10.2% since the beginning of the year. Of the Rmb2,443.5 million total interest-bearing borrowings, short-term interest-bearing borrowings decreased by 19.3% to Rmb787.9 million by the end of the year, while long-term interest-bearing borrowings decreased by 5.1% to Rmb1,655.6 million. Details are as follows: Maturity Profiles Gross amount Rmb’000 Within 1 year Rmb’000 2-5 years inclusive Rmb’000 Beyond 5 year Rmb’000 Floating rates World Bank loan 800,862 157,892 365,826 277,144 Fixed rates Commercial bank loans 570,000 570,000 Corporate bonds 1,000,000 – – – – 1,000,000 Short-term investments 676,447 1,104,266 Government loans 72,600 60,000 12,020 580 Rmb Total Rmb 676,447 1,104,266 Total as at 1,480,186 1,923,061 December 31, 2004 2,443,462 787,892 377,846 1,277,724 1,475,746 1,921,115 Total as at US$ in Rmb equivalents Euro in Rmb equivalents HK$ in Rmb equivalents 4,434 – 6 1,393 59 494 Amongst the total short-term investments of Rmb676.4 million held by the Group during the Period, approximately 91.3% were treasury bonds, with the remaining being close-ended security investment funds. The Company intends to further reduce the size of its short-term investments by the end of 2005 to meet its capital expenditure needs. The Directors believe that the Group has sufficient financial resources to meet its operational as well as capital expenditure needs in the foreseeable future. December 31, 2003 2,720,126 975,950 365,211 1,378,965 During the Period, the interest rate of the Group’s semi- annual borrowings was 4.536%, whereas the interest rates of the Group’s annual borrowings were 4.779%, 5.045%, and 5.310%, corresponding to 50.0%, 37.5%, and 12.5% of the total annual borrowings, respectively. The floating rates of the Group’s Rmb800.9 million World Bank loans, denominated in US dollars, varied from 4.850% to 3.800% during the Period, averaging at approximately 4.325%. The interest rate of government loans in Renminbi remained at 3.000%, the same as that applicable as at December 31, 2003. The annual coupon rate for the Rmb1 billion corporate bonds issued by the Company for a term of 10 years was fixed at 4.290%, with interests payable annually. 2004 ANNUAL REPORT 19 Management Discussion and Analysis Due to further reduction in the borrowings from domestic commercial banks and reduction in interest rates on the World Bank loans, interest expenses of the Group for the Period decreased by 27.3% to Rmb103.5 million. With profit before interest and tax at approximately Rmb2,014.4 million, the Group’s interest cover ratio (profit before interest and tax over interest expenses) for the Period was 19.5 (2003: 12.2), representing the Group’s strong ability to meet its interest obligations. 2004 Rmb’000 2003 Rmb’000 Profit before tax and interest 2,014,438 1,735,492 Interest expenses Interest cover ratio 103,457 142,303 19.5x 12.2x Furthermore, the asset-liability ratio, which is the proportion of the Group’s assets that are financed through debt, was 23.6% during the Period, representing strong solvency of the Group. CAPITAL STRUCTURE As at December 31, 2004, the Group’s capital structure comprised Rmb10,720.2 million in shareholders’ equity, Rmb1,642.6 million in fixed rate liabilities, Rmb800.9 million in floating rate liabilities and Rmb2,297.8 million in interest-free liabilities and minority interests, representing approximately 69.3%, 10.6%, 5.2% and 14.9%, respectively, of the Group’s total capital. With long-term interest bearing liabilities at approximately Rmb1,655.6 million, the Group’s gearing ratio (total amount of the long-term interest-bearing liabilities vs. the shareholders’ equity) as at December 31, 2004 was 15.4% (2003: 17.2%). As at December 31, 2004 As at December 31, 2003 Rmb’000 % Rmb’000 % Shareholders’ equity 10,720,211 69.3% 10,145,979 67.3% Fixed rate liabilities 1,642,600 10.6% 1,872,600 12.4% Floating rate liabilities 800,862 5.2% 847,526 5.6% Interest-free liabilities 2,297,766 14.9% 2,202,582 14.6% Total 15,461,439 100.0% 15,068,687 100.0% Long-term interest- bearing liabilities 1,655,570 10.7% 1,744,176 11.6% Gearing ratio 1 Gearing ratio 2 Asset-liability ratio 44.2% 15.4% 23.6% 48.5% 17.2% 26.0% 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. CAPITAL EXPENDITURE COMMITMENTS AND UTILIZATION During the Period, capital expenditure incurred by the Group amounted to approximately Rmb994.5 million, while capital expenditure incurred by the Company amounted to approximately Rmb322.6 million. Amongst the total amount of the Group’s capital expenditure, Rmb890.0 million was used on the project to widen the Shanghai-Hangzhou-Ningbo Expressway. Capital expenditure commitments for the Group and the Company as at December 31, 2004 amounted to Rmb5,377.1 million and Rmb3,786.3 million, respectively. Amongst the capital expenditure that will be spent by the Group for 2005 and beyond, 67.4% will be used on the expressway-widening project, while 21.3% will be used toward construction of the Jiaxing-Shaoxing Expressway. 20 ZHEJIANG EXPRESSWAY CO., LTD. Management Discussion and Analysis As at December 31, 2004 Commitments Rmb’000 Group Utilization Rmb’000 Balance Commitments Rmb’000 Rmb’000 Company Utilization Rmb’000 Balance Rmb’000 Expressway Widening Project From Dajing to Fengjing 2,508,190 991,626 1,516,564 – – – From Guzhu to Duantang 2,300,000 194,034 2,105,966 2,300,000 194,034 2,105,966 Acquisition of additional 18.4% equity interest in Shangsan Co Renovation of Service Area Remaining construction works of the Shangsan Expressway Purchase of machinery Decoration of office 485,000 1,371 47,667 72,459 5,489 – – – – 2,796 485,000 485,000 1,371 47,667 72,459 2,693 – – 47,224 5,489 – – – – 2,796 485,000 – – 47,224 2,693 Jiashao Expressway Project 1,145,375 – 1,145,375 1,145,375 – 1,145,375 Total 6,565,551 1,188,456 5,377,095 3,983,088 196,830 3,786,258 The aforementioned capital expenditure of the Group will firstly be funded with its internal financial resources, with a preference for debt financing in meeting any shortfalls. CONTINGENT LIABILITIES AND PLEDGE OF ASSETS As at December 31, 2004, the Group did not have any contingent liabilities nor any pledge of assets. FOREIGN EXCHANGE EXPOSURE The Group has a World Bank loan of approximately Rmb800.9 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 status of the 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. 2004 ANNUAL REPORT 21 Management Discussion and Analysis OUTLOOK FOR 2005 First introduced in 2004, the macro economic control measures will continue into 2005. With a series of structural adjustments that are expected to take place as well as a growing emphasis on sustainability and equitability in the process of economic development, the general consensus on the PRC economic prospects for 2005 points to continued strong growth, although the growth has slowed down. Taking advantage of economic growth in the Yangtze River Delta Region, which is the most economically robust region in China and Zhejiang Province in particular, is expected to continue with its double-digit growth in 2005 amid an ongoing process of rapid industrialization and urbanization in the region. As an integral part of the effort to reinforce the rules and regulations against the practice of overloading trucks and to ease the financial burden on truck operators for not overloading, toll rates for heavy trucks of above 10 tons were lowered by varying degrees across roadways in the PRC, including the two expressways operated by the Group, starting from January 1, 2005. The measure has proven to be both effective and positive for expressway operators, as the resulting higher truck traffic volume has led to a higher growth rate in toll income that has more than compensated the impact brought about by lowered toll rates. More importantly, it has provided a safer traveling environment and led to lower maintenance costs in the long run. Following completion of Phase I of the ongoing project to widen the Shanghai-Hangzhou-Ningbo Expressway from four lanes to eight lanes by the end of 2003, Phase II of the project is expected to be fully completed by the end of 2005, thereby substantially increasing the carrying capacity while improving traveling conditions between Shanghai and Hangzhou. To accommodate the growing economy and the demand generated on road transport, the Ministry of Communications of the PRC has recently announced a long-term national expressway plan, calling for the construction of more than 50,000km expressways, in addition to the 34,000km expressways already in operation. The newly announced plan includes an addition of 3,500km expressways to be constructed in Zhejiang Province in the next 15 years. This should provide more investment and acquisition opportunities for the Company, in addition to the sustained impetus for continued traffic growth on the existing expressways through networking effect for many more years to come. 22 ZHEJIANG EXPRESSWAY CO., LTD. Frequently Asked Questions Staff Providing a superb working environment, good career training and satisfactory remunerations and benefits...as the Company is growing, our staff also grow with the Company. 2004 ANNUAL REPORT 2004 ANNUAL REPORT 23 23 Frequently Asked Questions WHAT KIND OF IMPACT DID TOLL RATE REDUCTIONS FOR HEAVY TRUCKS HAVE UPON THE COMPANY SINCE JANUARY 1, 2005? Assuming the percentages of five classes of vehicles ARE THERE ANY PLANS TO CHANGE THE TOLL FEE CHARGING BASIS FOR EXPRESSWAYS OPERATED BY THE GROUP FROM CARRYING CAPACITIES TO ACTUAL WEIGHTS IN ZHEJIANG PROVINCE? remain the same as in 2004, toll rate reductions for A number of provinces in the PRC have switched trucks of above 10 tons would have resulted in a the basis for charging trucks from carrying capacities decrease in toll revenue by 2.5%~3% for the two to actual weights over the past few years in an effort expressways operated by the Group. However, the percentages of the five classes of vehicles have been changing noticeably since June 2004, when the relevant authorities initiated to tackle the problem of truck overloading practices. The relevant transport authorities in Zhejiang Province have been studying the issue very closely, but no decision has been made so far. coordinated efforts to crack down on truck The question that has yet to be answered definitively overloading practices. As a result, more trucks would is whether the shift from a system based on carrying be needed to transport the same amount of cargo capacity to a system based on actual weight has been without overloading. With the relative percentage of trucks above 10 tons nearly doubled in the first quarter of 2005 compared to the same period in 2004, toll revenues have been growing at a rate higher than the rate of traffic volume growth by approximately 3.8 percentage points. More importantly, less overloading practices have created a safer traveling environment, as well as leading to reduced maintenance costs over the long run. This is exactly what the crackdown measure was intended for in the first place. effective in stopping the truck overloading practices. For toll road operators, a further question that needs to be answered is whether it is economically beneficial to charge extra fees for overloaded trucks when the damage these trucks do to the roads and bridges remain difficult to assess. The above uncertainties and other issues, as well as the recent success of the government measures in cracking down on truck overloading practices, make it unlikely that Zhejiang Province would switch from a carrying capacity based system to an actual weight based system in the near future. 24 ZHEJIANG EXPRESSWAY CO., LTD. Frequently Asked Questions HOW HAS THE CONSTRUCTION WORKS TO WIDEN THE SHANGHAI-HANGZHOU-NINGBO EXPRESSWAY AFFECTED THE NORMAL TRAFFIC FLOW ON THE EXPRESSWAY? Construction works to widen the Shanghai- Hangzhou-Ningbo Expressway from four lanes to WHAT CAN BE EXPECTED TO HAPPEN TO THE COMPANY’s SHORT-TERM INVESTMENTS? As part of its cash management measures, the Company has always set aside a substantial amount of funds in the form of short-term investments as a means to accommodate any unforeseen capital need eight lanes has been underway since October 2000, on short notice. with final completion targeted by the end of 2007. Extensive measures were taken to minimize the impact to the normal traffic flow on the expressway, including breaking down the works into smaller segments, limiting the works off the traveled lanes to the two sides, and when the job requires the closure of one side of the traveled lanes, works will be carried out overnight to minimize congestions. At times, the travel speed along the affected sections had to be slowed down for safety concerns, but over the entire period of the past four and a half years, all four lanes of the Shanghai-Hangzhou-Ningbo Expressway were closed for once only, and only for However, faced with growing capital expenditure needs as well as poor forecasted returns for short- term investments in 2004, the Company reduced its holdings in short-term investments from Rmb1,104.3 million at the beginning of the year to Rmb676.4 million by the end of the year, amongst which 91.3% were treasury bonds, with the remaining balance being close-ended security investment funds. Due to continued strong demand on capital expenditure needs in the next few years, the overall size of the Company’s short-term investments can be expected to be further reduced, depending on the maturity profiles of the treasury bonds held and 17 hours, due to the widening works. the prevailing market conditions. Thanks to the extensive measures taken and the cooperation from expressway users, the Shanghai- Hangzhou-Ningbo Expressway was kept open for almost the entire construction period, with the impact upon normal traffic flow reduced to negligible. Experience gained over the past four and a half years is expected to enable the management to carry out the remaining works on the Shanghai-Hangzhou- Ningbo Expressway with minimum impact upon normal traffic flow until full completion by the end of 2007. 2004 ANNUAL REPORT 25 Frequently Asked Questions WHAT WILL THE GROUP’s CAPITAL EXPENDITURES BE LIKE IN THE NEXT FEW YEARS? HOW WILL THE COMPANY FUND ITS FUTURE ACQUISITIONS/INVESTMENTS? While the Group had capital commitments that Due to its relatively low gearing ratio, standing at amounted to Rmb5,377.1 million as at December 23.6% as at December 31, 2004 in terms of total 31, 2004, major capital expenditures for the next liability over total assets, the Company intends to three years starting from 2005 are as follows: take every opportunity in future acquisitions and/or Capital expenditures in Rmb millions Projects 2005 2006 2007 Widening project 1,470 Jiaxing-Shaoxing Expressway* 330 920 330 500 330 * Due to uncertainties associated with the timetable on the construction of the project, the above figures given are estimates only. investments to increase its gearing ratio with a preference for debt financing over equity financing, including bank borrowings and/or bond issues, etc. when circumstances permit. A more desirable gearing ratio for the Company would be 50%~60%. WHAT IS THE COMPANY’s DIVIDEND POLICY? Over the years, the Company has formulated a long- term dividend policy that amounts to annual dividend payout ratio of approximately 60%~70% of net profit attributable to shareholders, to be paid out in interim and final dividends, each and every year unless changes in circumstances demand otherwise. 26 ZHEJIANG EXPRESSWAY CO., LTD. Corporate Governance Cooperating Partners For the expressway industry...between industry peers and colleagues, there are always cooperative relationships to a certain extent. Similarly, with strategic partners, we stress the cultivation of long- term win-win cooperative relations. 25030095（浙江滬杭甬 p.27） 2004 ANNUAL REPORT 27 27 2004 ANNUAL REPORT Corporate Governance During the 2004 fiscal year (the “Year”), the board of Within the Board of Directors, the chairman is an executive directors of the Company (the “Board of Directors”) held director and is responsible for leading the formulation of a total of four meetings, two of which were regular important guiding principles and policies of the Company. meetings. Ten days prior to the convening of the regular The general manager is another executive director and is meetings or seven days prior to the convening of the ad responsible for implementing such guiding principles and hoc meetings, the Company issued notices of the policies. The division of duties and responsibilities between meetings to all directors, supervisors and other attendees, the chairman and the general manager is clearly defined so that they could reasonably arrange their schedule to and set out in writing. attend the meetings. The members of the Board of Directors are extensively All directors might at any time and for any matter knowledgeable about and experienced in developing (including matters relating to the application and strategies, financial affairs, and the legal aspects of the implementation of corporate governance principles) Company’s business. The Board of Directors comprises consult the Company Secretary for opinions and request nine members, including four executive directors and the for his services. The Company Secretary keeps for the remaining five non-executive directors, three of whom inspection by any directors during office hours a full set are independent non-executive directors, representing of minutes of the meetings of the Board of Directors and one-third of the membership of the Board of Directors. its committees under the Board of Directors. The minutes Non-executive directors comprise over half of the of the Board of Directors and its committees contain membership of the Board of Directors and they are sufficiently detailed records of the matters discussed by extensively experienced in business, financial affairs and the directors present at the meetings and the decisions legal matters. Their opinions are significant in the decision- reached by them, including any misgivings or oppositions making process of the Board of Directors. expressed by any directors. In the event that the interests of any substantial shareholders in any matter to be discussed are, in the opinion of the Board of Directors, in significant conflict with the Company’s interests, the Board of Directors will refer the matter to a full physical meeting of the Board of Directors instead of resolving the matter by document or passing the matter down to its committees. The Company has undertaken appropriate insurance arrangements to protect its directors against any legal actions that they may face. The non-executive directors of the Company regularly attended the meetings of the Board of Directors and the Audit Committee, and actively participated in the handling of their affairs, contributing positively to the Company with their independent, constructive and well-founded opinions. 28 ZHEJIANG EXPRESSWAY CO., LTD. Corporate Governance During the Year, the Company Secretary submitted the During the Year, the chairman attended the annual meeting agenda and sufficient, appropriate relevant general meeting and extraordinary general meetings, and meeting documents to the directors two days prior to the motioned individual resolutions on materially independent convening of each meeting of the Board of Directors, so matters. that the directors might make informed decisions and perform their duties and responsibilities. In the notice of general meeting issued by the Company to the shareholders, the proceedings on passing A disclosure on the remunerations of the directors and resolutions by way of a poll are set out, which is in supervisors was made by the Company in the 2003 Annual conformity with the provisions of the Listing Rules and Report, which was published on April 29, 2004. The the Articles of Association of the Company. Company had a set of regular procedures in place to implement the policies on the remunerations of the executive directors and to determine the remuneration of each director. In order to effect good corporate governance, the Company has formulated and implemented its “Guidelines on Corporate Governance”, “Working Rules of the Audit Committee” and “Working Rules of the At the meetings of the Board of Directors convened during Nomination and Remuneration Committee” in accordance the Year, the directors considered financial information with the relevant laws and regulations. on the Company’s performance and prospects, including the financial statements, the plan for profit distribution DIRECTORS’ SECURITIES TRANSACTIONS and dividend distribution, the implementation report on the 2003 proposed budget, the proposed financial budget for 2004, results announcements, the annual report and the interim report. Since the Company formulated its “Code on Securities Transactions” on March 13, 2002, each of the directors of the Company had been implementing it strictly. After amendments were made to the Listing Rules by the Hong The Board of Directors has put in place formal Kong Stock Exchange on March 31, 2004, the Company arrangements regarding how to apply the principles on made corresponding amendments to its “Code on financial reporting and internal monitoring principles and Securities Transactions”, which are then on terms no less how to maintain a proper relationship with the Company’s exacting than those set out in the “Model Code for auditors. The terms of reference of the Company’s Audit Securities Transactions by Directors of Listed Issuers” (the Committee have been well-defined. “Model Code”) set out in Appendix 10 of the Listing Rules. The Company has put in place a formal forward plan which sets out the matters which require specific decisions by the Board of Directors. For the matters set out in the forward plan, the management shall, before making any decision or enter into any agreement on behalf of the Company, give an account to the Board of Directors for approval. During the Year, pursuant to specific enquiries made with all directors, all directors confirmed that they met the standards of the Model Code regarding the securities transactions by the directors and the “Code on Securities Transactions” of the Company. THE BOARD OF DIRECTORS The committees under the Board of Directors of the Company have in place specific terms of reference in writing, which clearly set out their functions, powers, and During the Year, the third session of the Board of Directors of the Company comprised nine members, four of whom were executive directors, namely Mr. Geng Xiaoping (the responsibilities of the committees. 2004 ANNUAL REPORT 29 Corporate Governance Chairman), Mr. Fang Yunti, Mr. Zhang Jingzhong and Mr. The Board of Directors has appointed three independent Xuan Daoguang; two were non-executive directors, non-executive directors, at least one of whom possesses namely Ms. Zhang Luyun and Ms. Zhang Yang; and three appropriate professional qualifications or accounting or independent non-executive directors, namely Mr. Tung related financial management expertise, in compliance Chee Chen, Mr. Zhang Junsheng and Mr. Zhang Liping. with the relevant stipulations of the Rules 3.10(1) and (2) During the Year, the Board of Directors of the Company held four meetings. Set out below are the attendance rates of the directors of the Company at meetings of the Board of Directors during of the Listing Rules. Pursuant to specific enquiries made with all independent non-executive directors, all such directors confirmed that they met the criteria of Rule 3.13 of the Listing Rules regarding the guidelines for the assessment of independence. the Year: Members of the Board of Directors Geng Xiaoping (chairman) Fang Yunti Zhang Jingzhong Xuan Daoguang Zhang Luyun Zhang Yang Tung Chee Chen Zhang Junsheng Zhang Liping Attendance Rate The members of the Board of Directors of the Company 4/4 4/4 4/4 4/4 4/4 4/4 4/4 4/4 4/4 (including the chairman and the general manager) are unrelated to the financial affairs, business affairs and matters of their family members. CHAIRMAN AND THE GENERAL MANAGER The roles of the chairman and the general manager of the Company have been separated and taken up by Mr. Geng Xiaoping and Mr. Fang Yunti respectively. The Board of Directors holds meetings periodically. Regular meetings are normally held every six months, and, if NON-EXECUTIVE DIRECTORS necessary, ad hoc meetings of the Board of Directors will The term of office of the non-executive directors of the be arranged. The Company Secretary is responsible for third session of the Board of Directors is three years, giving notice of meeting 10 days prior to a regular meeting commencing on March 1, 2003 and expiring on February of the Board of Directors, and issuing detailed documents 28, 2006. to the directors two days before convening the meeting, so as to ensure that the directors may make informed NOMINATION AND REMUNERATION OF DIRECTORS decision on the matters to be discussed. All directors have access to the Company Secretary. The Company Secretary is responsible for ensuring compliance of the rules of proceedings of the meetings of the Board of Directors. The Board of Directors and the management shall make decisions on the matters of the Company within their respective terms of reference (for details, please see article 92 and article 105 under the Articles Association of the Company). The Board of Directors of the Company has a nomination and remuneration committee (the “Nomination and Remuneration Committee”), which is principally responsible for making studies and proposals on the criteria and procedures for selecting directors, general manager and other senior management staff; identifying and assessing qualified candidates and making suggestions thereon; formulating, monitoring and auditing the remuneration policies for directors and senior management of the Company. 30 ZHEJIANG EXPRESSWAY CO., LTD. Corporate Governance Members of the Audit Committee Tung Chee Chen (chairman) Zhang Junsheng Zhang Liping Zhang Luyun Zhang Yang Attendance Rate 2/2 2/2 2/2 2/2 2/2 On March 15, 2004, the third meeting of the second session of the Audit Committee of the Company was held, at which the Company’s audited financial statement for the year 2003, the re-appointment of the domestic and international auditors, the 2003 internal audit work report, the 2004 internal audit plan, the appointment of deputy director of the internal auditing department and other matters were considered. On August 16, 2004, the fourth meeting of the second session of the Audit Committee of the Company was convened, at which the 2004 interim financial statement, the 2004 interim internal audit work report and other matters were considered. During the Year, the Company was in compliance with the provisions of Rule 3.21 of the Listing Rules regarding the Audit Committee. SHAREHOLDING INTERESTS OF SENIOR MANAGEMENT STAFF Owing to the restrictions of the laws and regulations of China and the relevant policies, senior management staff of the Company do not hold any equity interests in the Company. For Development Co, a 51% owned subsidiary of the Company, the senior management staff of the Company holds part of the equity interests. For details, please refer to the section headed “Report of Directors – Directors’, Supervisors’ and chief executive’s interests in shares and underlying shares” below. The Nomination and Remuneration Committee of the Company comprises three independent non-executive directors, namely Mr. Tung Chee Chen, the chairman, Mr. Zhang Junsheng and Mr. Zhang Liping. REMUNERATION OF AUDITORS During the Year, a remuneration of US$160,000, equivalent to approximately Rmb1,325,000, was paid to Ernst & Young (international auditors) for the audit services it provided to the Group in 2003; and a remuneration of Rmb800,000 was paid to Zhejiang Pan-China Certified Public Accountant (PRC auditors) for the audit services it provided to the Group in 2003. The two remuneration payments totaled Rmb2,125,000. During the Year, a non-audit remuneration of Rmb80,000 was paid to Zhejiang Pan-China Certified Public Accountants for the special audit it conducted relating to the service areas business of the Group during the period from January to May 2003 (inclusive). AUDIT COMMITTEE The Board of Directors of the Company has an audit committee (the “Audit Committee”), which is responsible for reviewing and supervising the procedures of the Company for financial reporting and internal control. The Audit Committee comprises five non-executive directors of the Company, two of whom are non-executive directors, namely Ms. Zhang Luyun and Ms. Zhang Yang, and the remaining three are independent non-executive directors, namely Mr. Tung Chee Chen, Mr. Zhang Junsheng and Mr. Zhang Liping. The chairman of the Audit Committee is Mr. Tung Chee Chen. During the Year, the Audit Committee of the Company held a total of two meetings. Following are the attendance rates of the members of the Company’s Audit Committee at meetings during the Year: 2004 ANNUAL REPORT 31 Corporate Governance SHAREHOLDERS’ RIGHTS Pursuant to the Articles of Association of the Company, the procedures for shareholders to convene an extraordinary general meeting are: two or more On May 21, 2004 upon approval at the annual general meeting of the Company, amendments were made to parts of the Articles of Association. For details, please see the part of 2003 Annual Report on Corporate Governance. shareholders who hold an aggregate of shares in the The shares of the Company comprise domestic shares and Company representing 10% or more (with 10%) of the H Shares. Of the domestic shares, Communications voting rights which can be exercised at the intended Investment Group and Huajian own 2,432,500,000 shares meeting may sign and submit to the Board of Directors and 476,760,000 shares respectively, representing 56% one or several written requests (in the same format and and 11% of the entire equity interests respectively. The H content) to request the Board of Directors to convene an Shares are owned respectively by Hong Kong and overseas extraordinary general meeting and to lay down the agenda investors in a total shareholding of 1,433,854,500 shares, items for consideration at the meeting. Upon receipt of representing 33% of the entire equity interests. the abovementioned written request, the Board of Directors shall promptly convene an extraordinary general meeting. INVESTOR RELATIONS During the year, the latest general meeting was held on October 12, 2004 at the conference room on the 18th Floor, Zhejiang World Trade Centre, 122 Shuguang Road, Hangzhou, Zhejiang Province. At the meeting, the The principal mission of our investor relations program is shareholders’ proxies considered the matter of the no different from that of other activities carried out by the distribution to shareholders by the Company of an interim Company, which is striving to serve the interests of our dividend of Rmb0.04 for the year 2004, and adopted the investors, large or small, with excellence. In this regard, we resolution with 3,427,287,419 affirmative votes spare no effort to stress the importance of communication (representing 100% of the voting right held by between the investment community and the management shareholders present at the meeting). of the Company, with the belief that transparency serves the best interests of our investors and ourselves. On May 23, 2005, the Company will convene an annual general meeting at which the financial statement for the In addition to making regular disclosures of corporate year 2004, profit distribution and dividend distribution information through press releases, announcements, and plan for the year 2004, the financial budget for the year issue of corporate documents to keep the investment 2005 and other matters will be considered. community informed, the Company also actively participated in investor conferences during the Year, and routinely organized roadshows to make itself more As at December 31, 2004, the market capitalization of the shares of the Company in public hands was valued at accessible to investors, with direct participation by senior HK$7,671,121,575. members of the management of the Company. In doing so, we hope to have presented to the investment community a clear picture on the operational status as well as the future prospects of the Company, and to have made the management more responsive to the needs and concerns of its investors at the same time, allowing for a constructive two-way interaction to take place that is beneficial to all parties concerned. MANAGEMENT FUNCTIONS Article 92 and article 105 of the Articles of Association of the Company set out the management functions of the Board of Directors and the management separately. Details of the Company’s Articles of Association may be obtained under “Corporate Governance” in the Company’s website zjec.com.cn. 32 ZHEJIANG EXPRESSWAY CO., LTD. Directors, Supervisors and Senior Management Profiles DIRECTORS Executive Directors 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 Mr. GENG Xiaoping, born in 1948, is the Chairman of Divisions of the Zhejiang Provincial Expressway Executive the Company. Mr. Geng graduated from the East China Commission, where his responsibilities included operation College of Political Science and Law in 1984. From 1979 management and equipment management in relation to to 1991, he held various positions at the People’s the Shanghai-Hangzhou-Ningbo Expressway. Mr. Fang Procuratorate of Zhejiang Province including Secretary, was an Executive Director and the Deputy General Division Chief and Deputy Procurator. In 1991, he was Manager of the Company from March 1997 to March appointed as Deputy Director of the Zhejiang Provincial 2002. Since March 2002, he has been an Executive Expressway Executive Commission where he was Director and the General Manager of the Company. responsible for the business operation and administration of the expressway system in Zhejiang Province. Mr. Geng Mr. ZHANG Jingzhong, born in 1963, is a senior lawyer, was the General Manager and Chairman of the Company an Executive Director and Company Secretary of the from March 1997 to March 2002. Since December 2001, Company. Mr. Zhang graduated from Zhejiang University he has been appointed as a director and General Manager (previously known as Hangzhou University) in July 1984 of the Communications Investment Group. He resigned with a bachelor’s degree in law. In 1984, he joined the from the office of the General Manager of the Company Zhejiang Provincial Political Science and Law Policy in March 2002. Research Unit. From 1988 to 1994, he was the Associate Director of Hangzhou Municipal Foreign Economic Law Mr. FANG Yunti, born in 1950, is a senior engineer, an Firm. In 1992, he obtained the qualifications required by Executive Director and the General Manager of the the regulatory authorities in China to practise securities Company responsible for the overall management of the law. In January 1994, Mr. Zhang became a Senior Partner Company. Mr. Fang graduated from Qing Hua University at T&C Law Firm in Hangzhou. Mr. Zhang has been an in 1976 with a major in automotive engineering. From Executive Director of the Company since April 1997, and 1983 to 1988, he was the Deputy General Manager of was the Deputy General Manager until February 2003. Zhejiang Province Automobile Transport Company. From Since March 2003, he has been the Secretary of the Board. 2004 ANNUAL REPORT 33 Directors, Supervisors and Senior Management Profiles Mr. XUAN Daoguang, born in 1944, is a senior engineer, the Central Party School. From 1987 to 1994, she worked an Executive Director and Deputy General Manager of for the Ministry of Aviation. Ms. Zhang is currently a non- the Company. Mr. Xuan graduated from Tong Ji University executive director of Shenzhen Expressway Company in 1960 with a degree in engineering, specialising in the Limited and Sichuan Expressway Company Limited. construction and design of bridges and tunnels. Mr. Xuan has 44 years of experience in engineering maintenance Independent non-executive Directors and has held positions such as Section Head and Head of the Road Administrative Division of Jinhua City and Head Mr. TUNG Chee Chen, born in 1942, is the Chairman of of the Engineering Maintenance Department of the Orient Overseas (International) Limited, an independent Zhejiang Provincial Expressway Executive Commission. Mr. non-executive Director and the Chairman of the Audit Xuan has been an Executive Director of the Company Committee of the Company. Mr. Tung was educated at since March 1997. He has been the Deputy General the University of Liverpool, England, where he received Manager of the Company since March 2000. his bachelor’s degree in science. He later obtained a master’s degree in mechanical engineering at the Non-executive Directors Massachusetts Institute of Technology in the United States. Ms. ZHANG Luyun, born in 1961, is a director and State of California. Mr. Tung has been an independent Deputy General Manager of the Communications non-executive Director of the Company since March 1997. He is currently a registered Professional Engineer in the Investment Group. Ms. Zhang graduated from Zhejiang University, majoring in administration and management. Mr. ZHANG Junsheng, born in 1936, is a professor, an From 1985 to 1997, she served as the Secretary, Deputy independent non-executive Director and a member of the Chief and Chief in the Office of Hangzhou City Audit Committee and the Nomination and Remuneration Government. In 1997, she was the Deputy President of Committee of the Company. Mr. Zhang graduated from Hangzhou Broadcasting and TV College and received the Zhejiang University in 1958, and was a lecturer, an title of the Assistant Researcher in college-teaching. She associate professor, and an advising professor at Zhejiang joined the Communications Investment Group in University. He was also a professor concurrently at, December 2001 and has been a director and Deputy amongst other universities, Zhongshan University. In 1980, General Manager of the Communications Investment he became the Deputy General Secretary of Zhejiang Group since then. University. In 1983, Mr. Zhang served as the Deputy General Secretary in the Hangzhou City Government. In Ms. ZHANG Yang, born in 1964, is the general assistant 1985, he began to work for the Xinhua News Agency, manager and the manager of the Securities Department Hong Kong Branch, and became its Deputy Director in of Huajian Transportation Economic Development Center. 1987. Since September 1998, Mr. Zhang has taken up In 1987, she graduated from Lanzhou University with a the position of General Secretary of Zhejiang University. bachelor’s degree in economics. In 2001, she completed In addition, Mr. Zhang is currently a Special Advisor to the postgraduate studies in economics management in the Zhejiang Provincial Government, a Director to the 34 ZHEJIANG EXPRESSWAY CO., LTD. Directors, Supervisors and Senior Management Profiles Zhejiang Province Economic Development Consultation and the Plumbing and Electricity Section of Shanghai Committee, a Chairman of Zhejiang University Railway Bureau, Hangzhou Branch. Mr. Ma was in charge Development Committee and an Honorary Doctor of of the Planning and Finance Division at the Zhejiang Local Science of the City University of Hong Kong. Mr. Zhang Railway Company, and in 1993 became the Deputy has been an independent non-executive Director of the Division Chief and Division Chief of Zhejiang Jinwen Company since March 2000. Railway Executive Commission responsible for materials Mr. ZHANG Liping, born in 1958, is a head of China Secretary of Zhejiang Construction and Investment region and a managing director of Investment Banking Company in March 1999, and is currently the Assistant Division of Credit Suisse First Boston (Hong Kong) Limited. General Manager of the Communications Investment supply. Mr. Ma took up the post of Deputy General He is an independent non-executive Director, a member Group. of the Audit Committee and the Chairman of the Nomination and Remuneration Committee of the Supervisor representing employees Company. He obtained a master’s degree in international affairs and international laws from St. John’s University. Mr. FANG Zhexing, born in 1965, is a senior engineer, After joining Merrill Lynch & Co., Inc. in 1989, he engaged the manager of the human resources department of the in the business of investment banking and was a director Company. He is also the chairman of Hangzhou Shida of the investment banking division of Merrill Lynch Co. & Expressway Co., Ltd. Mr. Fang graduated from Zhejiang Inc. From 1996 he took up the post of Chairman, director University in engineering where he received a master’s and General Manager of Seapower Corporate Finance degree. From 1986 to 1988 he was the assistant engineer Limited and was an executive director in Seapower in the project management office of the Electric Power Holdings Ltd. In 1998, he moved to Dresdner Kleinwort and Water Conservancy Bureau in Taizhou. From 1991 Benson and assumed the post of Chairman, director, and until 1997, he was the engineer in the project General Manager of the Greater China region. Mr. Zhang management office of Zhejiang Provincial Expressway has been an independent non-executive Director of the Executive Commission, where he participated in the Company since March 2003. project management of Shanghai-Hangzhou-Ningbo SUPERVISORS 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- Supervisor representing shareholders development department of the Company. Mr. MA Kehua, born in 1952, is a senior economist, the Independent supervisors Chairman and non-executive member of the Supervisory Committee. Mr. Ma graduated from Shanghai Railway Mr. ZHENG Qihua, born in 1963, is a senior accountant Institute in 1977, after which he worked as an engineer and an independent non-executive member of the at Shanghai Railway Bureau No. 1 Construction Company Supervisory Committee. He is a guest professor at the 2004 ANNUAL REPORT 35 Directors, Supervisors and Senior Management Profiles Zhejiang Finance and Economics Institute. Mr. Zheng was Management Department of Zhejiang University. He is among the first batch of Chinese registered accountants currently the Deputy General Accountant of Zhejiang who obtained qualifications required for practising University. accountancy involving securities in 1992. He has working and training experience in Hong Kong and Singapore, OTHER SENIOR MANAGEMENT MEMBERS and he worked with the Listing Division of the China Securities Regulatory Commission during 1997 and 1998. Mr. JIANG Wenyao, born in 1966, an engineer, and is He is currently the Deputy General Manager of Zhejiang the Deputy General Manager of the Company. Mr. Jiang Pan-China Certified Public Accountants. graduated from Zhejiang University, majoring in industrial automation and manufacturing mechanics, and obtained Mr. SUN Xiaoxia, born in 1963, is a professor and an a Master degree in engineering. From March, 1991 to independent non-executive member of the Supervisory February, 1997, he worked in the Engineering Division, Committee. Mr. Sun graduated from China Academy of and Planning and Finance Division of the Zhejiang Social Sciences with a doctor’s degree in law. He worked Provincial Expressway Executive Commission. He joined as Assistant Lecturer, Lecturer, Assistant Professor, the Company since March, 1997, and has served as Professor and Tutor for graduate students at School of Deputy Manager of the General Department, Manager Law, Hangzhou University. Mr. Sun is currently the Deputy of the Equipment Department, Manager of the Operation Dean of the School of Law and the Dean of the Department, Assistant of the General Manager and Department of Law, Zhejiang University. In addition, Mr. Secretary of the Board. Sun is a lawyer with Zhejiang Zheda Law Firm, a standing member of China Jurisprudence Research Society, a Ms. HUANG Qiuxia, born in 1956, an economist, and is standing member of China WTO Legal Research Society, the Deputy General Manager of the Company. Ms. Huang a member of the International Society for Philosophy of graduated from Hangzhou Technology University in 1988. Law and Social Philosophy (“IVR”), and a member of the From 1976 to 1991, she was the Deputy Chief of Labor IVR’s China Branch. Division of Hangzhou Clock and Watch Factory. She joined the Zhejiang Provincial Expressway Executive Commission Mr. JIANG Shaozhong, born in 1946, is a professor. in August, 1991, and was involved in matters related to Mr. Jiang graduated from the Management Department labor wages, personnel, external affairs etc. During the of Zhejiang University with a master’s degree. From 1982 period from March, 1997 to February, 2003, she has been he worked in the Management Department of Zhejiang the Deputy Manager and Manager of General Department University as Lecturer, Assistant Professor, Professor, Dean of the Company. of research office and Deputy Dean of the Department. From 1984 to 1985 he was a visiting scholar in Stanford Mr. PAN Jiaxiang, born in 1951, an engineer, and is the University. From 1991 to 1998 he was the Deputy General Deputy General Manager of the Company. Mr. Pan Economist, the Chief of the Financial Division, the Chief graduated from Hangzhou University, majoring in of the Teaching Division and the Deputy Manager of the economic management. From 1987 to 1992, he was the 36 ZHEJIANG EXPRESSWAY CO., LTD. Directors, Supervisors and Senior Management Profiles 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 of Party Committee of Shangyu City 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. 2004 ANNUAL REPORT 37 Report of the Directors The Directors of the Company present their report and RESULTS AND DIVIDENDS the audited financial statements of the Company and the Group for the year ended December 31, 2004. PRINCIPAL ACTIVITIES 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 The Group’s profit for the year ended December 31, 2004 and the state of affairs of the Group and the Company at that date are set out in the financial statements on pages 48 to 89. An interim dividend of Rmb0.04 per share (approximately HK$0.038) was paid on November 9, 2004. The Directors recommend the payment of a final dividend of Rmb0.15 per share (approximately HK$0.141) in respect of the year, to shareholders on the register of members on April 28, 2005. 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 the dividends are set out in note 12 to During the year, the entire turnover and contribution to the financial statements. 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 analysis of the Group’s turnover and contribution to profit from operating activities by principal activity for the year ended December 31, 2004 is set out in note 4 to the financial statements. 38 ZHEJIANG EXPRESSWAY CO., LTD. Report of the Directors FIVE YEAR 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, 2004 Rmb’000 2003 Rmb’000 2002 Rmb’000 2001 Rmb’000 2000 Rmb’000 3,131,993 2,471,805 2,168,078 1,722,517 1,188,604 (845,875) (731,451) (561,918) (392,535) (248,429) 2,286,118 1,740,354 1,606,160 1,329,982 41,646 127,285 (109,986) (114,629) (243,823) (54,243) 66,457 (95,209) (33,109) 216,690 (88,487) (18,236) 940,175 242,888 (64,978) (75,317) Profit from operating activities 1,973,955 1,698,767 1,544,299 1,439,949 1,042,768 Finance costs (103,457) (132,801) (163,224) (215,346) (197,083) Share of profits of associates 15,016 17,394 11,719 12,396 40,584 Share of profit/(loss) of a jointly-controlled entity Profit before tax Tax 25,467 9,829 1,677 (1,459) (6,517) 1,910,981 1,593,189 1,394,471 1,235,540 879,752 (554,524) (497,166) (400,952) (363,970) (186,391) Profit before minority interests 1,356,457 1,096,023 993,519 871,570 Minority interests (130,758) (87,231) (103,067) (110,957) 693,361 (57,360) Net profit from ordinary activities attributable to shareholders 1,225,699 1,008,792 890,452 760,613 636,001 Earnings per share - basic 28.22 cents 23.23 cent 20.50 cent 17.51 cents 14.64 cents Assets, liabilities and minority interests 2004 Rmb’000 2003 Rmb’000 2002 Rmb’000 2001 Rmb’000 2000 Rmb’000 As at December 31, Total assets Total liabilities Minority interests Net assets 15,461,439 15,068,687 14,505,834 14,477,538 14,586,420 (3,648,933) (3,910,291) (3,826,254) (3,685,828) (4,128,921) (1,092,295) (1,012,417) (977,789) (1,502,629) (1,495,364) 10,720,211 10,145,979 9,701,791 9,289,081 8,962,135 2004 ANNUAL REPORT 39 Report of the Directors Notes: RESERVES 1. The consolidated results of the Group for the four years ended December 31, 2003 have been extracted from the Company’s 2003 annual report dated March 15, 2004, while those of the year ended December 31, 2004 were prepared based on the consolidated income statement as Details of movements in the reserves of the Company and the Group during the year are set out in note 32 to the financial statements. set out on page 48 of the financial statements. DISTRIBUTABLE RESERVES 2. The 2004 earnings per share is based on the net profit As at December 31, 2004, before the proposed final from ordinary activities attributable to shareholders for the year ended December 31, 2004 of Rmb1,225,699,000 (2003: Rmb1,008,792,000) and the 4,343,114,500 ordinary shares (2003: 4,343,114,500 ordinary shares) in issue during the year. MAJOR CUSTOMERS AND SUPPLIERS dividend, the Company’s reserves available for distribution by way of cash or in kind, as determined based on the lower of the amount determined under PRC accounting standards and the amount determined under generally accepted accounting principles in Hong Kong, amounted to Rmb745,953,000. In addition, in accordance with the Company Law of the PRC, the amount of approximately In the year under review, the five largest customers and Rmb3,638,000,000 standing to the credit of the suppliers of the Group accounted for less than 30% of Company’s share premium account as prepared in the total turnover and purchases, respectively. accordance with the PRC accounting standards was None of the directors of the Company or any of their associates or any shareholders (which, to the best knowledge of the directors, own more than 5% of the Company’s issued share capital) had any beneficial interest in the Group’s five largest customers. CONNECTED TRANSACTIONS The Company carried out connected transactions during the year with its one of its subsidiaries and one of its fellow subsidiaries, further details of which are set out in note 38 to the financial statements. 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, 2004 are set out in note 34 to the financial statements. available for distribution by way of capitalisation issues. SUBSTANTIAL SHAREHOLDERS’ INTERESTS IN SHARES AND UNDERLYING SHARES As at December 31, 2004, 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”): Name Zhejiang Communications Percentage of share capital (domestic shares) Number of shares Investment Group Co., Ltd. 2,432,500,000 83.61% Huajian Transportation Economic Development Center 476,760,000 16.39% Name Number of shares Aberdeen Asset Management Asia Sumitomo Life Insurance Company Capital Group UBS AG 176,523,000 100,482,000 88,432,000 84,631,240 Percentage of share capital (H shares) 12.31% 7.01% 6.17% 5.90% 40 ZHEJIANG EXPRESSWAY CO., LTD. Report of the Directors Save as disclosed above, as at December 31, 2004, no Independent non-executive Directors person had registered an interest or short position in the Mr. Tung Chee Chen shares or underlying shares of the Company that was Mr. Zhang Junsheng required to be recorded pursuant to Section 336 of the Mr. Zhang Liping SFO. PURCHASE, REDEMPTION OR SALE OF THE LISTED SECURITIES OF THE COMPANY Neither the Company nor any of its subsidiaries purchased, The Company has received annual confirmations of independence from Mr. Tung Chee Chen, Mr. Zhang Junsheng and Mr. Zhang Liping, and as at the date of this report still considers them to be independent. redeemed or sold any of the Company’s listed securities DIRECTORS’ AND SENIOR MANAGEMENT’S during the year. TRUST DEPOSITS BIOGRAPHIES Biographical details of the Directors of the Company and the senior management of the Group are set out in the As at December 31, 2004, other than the deposits of Company’s annual report. Rmb90,565,000 placed in non-bank financial institutions in the PRC, of which Rmb65,166,000 was subsequently DIRECTORS’ AND SUPERVISORS’ SERVICE withdrawn in January 2005, the Group did not have any CONTRACTS 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 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. Save as disclosed above, none of the Directors and Supervisors has entered into any service contract with the Company which is not terminable by the Company within one year without payment of compensation, other than statutory compensation. DIRECTORS’ AND SUPERVISORS’ INTERESTS IN CONTRACTS As at December 31, 2004 or during the year, none of the directors or supervisors had a material interest, either directly or indirectly, in any contract of significance to the business of the Group to which the Company, its holding company, or any of its subsidiaries or fellow subsidiaries was a party. 2004 ANNUAL REPORT 41 Report of the Directors DIRECTORS, SUPERVISORS AND CHIEF meaning of Part XV of the SFO), as recorded in the register EXECUTIVE’S INTERESTS IN SHARES AND required to be kept by the Company pursuant to Section UNDERLYING SHARES As at December 31, 2004, the interests of the Directors, Supervisors and chief executives in the share capital of the Company’s associated corporations (within the Long positions in shares of Development Co 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 Issuers were as follows: Name Mr. Geng Xiaoping Position Chairman Contribution of registered capital (Rmb) Interest Equity interest 2,400,000 Nature of interest Directly beneficially owned Mr. Fang Yunti Director/General Same as above 1,920,000 Same as above Mr. Zhang Jingzhong Mr. Xuan Daoguang Mr. Fang Zhexing manager Director Director Supervisor Same as above 550,000 Same as above Same as above 1,100,000 Same as above 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 Save as disclosed above, as at December 31, 2004, none Company, its holding company, or any of its subsidiaries of the Directors, Supervisors and chief executives had or fellow subsidiaries a party to any arrangement to enable registered an interest or short position in the shares, any such persons to acquire such rights in any other body underlying shares or debentures of the Company or any corporate. of its associated corporations (within the meaning of Part XV of the SFO), or as be recorded pursuant to Section PENSION SCHEME 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 Issuers. DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE’S RIGHTS TO SUBSCRIBE FOR SHARES OR DEBENTURES 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 At no time during the year were rights to acquire benefits required to make contributions to local social security by means of the acquisition of shares in or debentures of authorities at rates ranging from 20% to 22.5% of the the Company granted to any Director, Supervisor and chief average basic salaries of the employees of the previous executive or their respective spouse or minor children, or year within the geographical area where the employees were any such rights exercised by them; or was the are under employment with the Group. The Group has 42 ZHEJIANG EXPRESSWAY CO., LTD. Report of the Directors no obligation for the payment of pension benefits beyond and wages of the employees at an average rate of 10%. such annual contributions to the registered insurance There are no further obligations beyond the contributions companies. When an employee leaves the scheme, the to the accommodation fund organised by the local social Group is not entitled to a refund of any contributions security authorities. that it has previously made. Hence, no forfeited contribution was used by the Group to reduce the level SHARE CAPITAL of its contributions during the year. During the year, contributions to registered insurance companies made by the Group plans the defined contribution retirement s c h e m e a m o u n t e d t o R m b 1 1 , 2 2 8 , 0 0 0 ( 2 0 0 3 : Rmb13,880,000). 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 There were no movements in the Company’s issued share capital during the year. PRE-EMPTIVE RIGHTS There is no provision for pre-emptive rights in the Company’s articles of association or the laws of the PRC which would require the Company to offer new shares on a pro rata basis to existing shareholders. UNITED KINGDOM TAXATION The following paragraphs are intended as a general guide only and are based on current legislation and HM Revenue & Customs practice. If you are in any doubt as to your tax position, you should consult an appropriate professional adviser without delay. from 4% to 11%. Up to December 31, 2004, certain Individual holders of H Shares who are resident and entities of the Group had enrolled in these compulsory domiciled in the United Kingdom (the “UK”) will, in schemes. The Group plans to have all of its subsidiaries general, be liable to UK income tax on dividends received participating in this medical insurance scheme in the near from the Company. Where such an individual receives future. Judging from the arrangements of the schemes, dividends from the Company without withholding of taxes the Directors do not anticipate any significant impact of in the PRC, the amount included as income for the purpose its participation in the scheme on the Group’s financial of computing his or her UK tax liability is the gross amount standing, specifically its consolidated income statement of the dividend and this is taxed at the appropriate and consolidated balance sheet. marginal rate (currently 10% up to the basic rate unit and 32.5% above the basic rate unit). Where tax is ACCOMMODATION BENEFITS FOR EMPLOYEES withheld from the dividend, the individual will be entitled 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 to claim 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 2004 ANNUAL REPORT 43 Report of the Directors Taxation Agreement provides that the maximum AUDITORS withholding tax on dividends from Chinese resident companies paid to UK residents is 10% of the gross dividend. Ernst & Young will retire and a resolution for the appointment of international auditors of the Company will be proposed at a general meeting of the Company to Individual holders of H Shares who are resident but not be announced in due course. domiciled in the UK will only be liable to income tax on a dividend from the Company to the extent that the ON BEHALF OF THE BOARD 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 Geng Xiaoping Chairman discussed here), a holder of H Shares which is a UK tax Hangzhou, Zhejiang Province, the PRC resident company may be entitled to relief for March 29, 2005 “underlying” tax paid by the Company or its subsidiaries. CODE OF BEST PRACTICE In the opinion of the Directors, the Company has throughout the year ended December 31, 2004 complied with the Code of Best Practice as set out in Appendix 14 of the Listing Rules throughout the accounting period covered by the annual report. AUDIT COMMITTEE The Company has an audit committee which was established in compliance with Rule 3.21 of the Listing Rules 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 of the Company. 44 ZHEJIANG EXPRESSWAY CO., LTD. Report of the Directors Society W h i l e a n e x p r e s s w a y p r o v i d e s immeasurable social benefits in terms of promoting the economy in its vicinity, we also realize that the construction of an expressway, as well as the development of the associated automobile industry, will to a certain extent affect the natural environment...we strive to compensate t h i s b y a c c o m m o d a t i n g m o r e environmental considerations in our development work. 25030095（浙江滬杭甬 p.45） 2004 ANNUAL REPORT 45 2004 ANNUAL REPORT 45 Report of the Supervisory Committee 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 2004 were to assess and supervise the legality and appropriateness of the activities of the Directors, General The Supervisory Committee has reviewed the financial statements of the Company for 2004 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 2004, and complied with the relevant laws, regulations and the Company’s Articles of Association. In 2004, the Company maintained a high dividend yield, providing satisfactory return in cash to the shareholders. Manager and other senior management of the Company During the course of the Company’s business operations, in their business decision-making and daily management the members of the Board, General Manager and other processes, through a combination of actions including senior management of the Company have complied with holding meetings of the Supervisory Committee, attending their fiduciary duties and worked in good faith while meetings of the Board, and participating in major exercising their powers when discharging their duties. corporate events. The Supervisory Committee carefully There were no incidents of abuse of power or infringement examined the operating results and the financial standing of the interests of shareholders and employees. of the Company, and discussed and reviewed the financial statements 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 2004. 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. 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 Hangzhou, Zhejiang Province, the PRC Efforts made by the Board of Directors and the March 28, 2005 management in corporate governance have won recognition and affirmation from investors, and have consolidated the Company’s reputation in the overseas markets. 46 ZHEJIANG EXPRESSWAY CO., LTD. Report of the International Auditors To the members In our opinion, the financial statements give a true and Zhejiang Expressway Co., Ltd. fair view of the state of affairs of the Company and of (Established in the People’s Republic of China with limited the Group as at December 31, 2004 and of the profit liability) and cash flows of the Group for the year then ended in accordance with the accounting principles generally We have audited the financial statements on pages 48 to accepted in Hong Kong and have been properly prepared 89 which have been prepared in accordance with in accordance with the disclosure requirements of the accounting principles generally accepted in Hong Kong. Hong Kong Companies Ordinance. 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 Ernst & Young other purpose. We do not assume responsibility towards Certified Public Accountants Hong Kong March 29, 2005 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. 2004 ANNUAL REPORT 47 Consolidated Income Statement Year ended December 31, 2004 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 2004 Rmb’000 2003 Rmb’000 5 5 6 7 8 9 12 3,131,993 2,471,805 (845,875) (731,451) 2,286,118 1,740,354 41,646 (109,986) (243,823) 127,285 (114,629) (54,243) 1,973,955 1,698,767 (103,457) (132,801) 15,016 25,467 17,394 9,829 1,910,981 1,593,189 (554,524) (497,166) 1,356,457 1,096,023 (130,758) (87,231) 1,225,699 1,008,792 (173,724) (651,467) (173,724) (477,743) (825,191) (651,467) EARNINGS PER SHARE 13 28.22 cents 23.23 cents 48 ZHEJIANG EXPRESSWAY CO., LTD. Consolidated Balance Statement As at December 31, 2004 NON-CURRENT ASSETS Fixed assets Interest in a jointly-controlled entity Interests in associates Expressway operating rights Long term investments Goodwill Deferred tax assets 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 Notes 2004 Rmb’000 2003 Rmb’000 14 16 17 18 19 20 30 19 21 22 23 24 25 26 12,988,659 12,537,616 79,812 176,744 197,245 1,000 85,472 38,319 62,554 164,498 205,945 1,000 97,717 – 13,567,251 13,069,330 676,447 6,416 26,569 381,017 803,739 1,104,266 3,056 21,771 51,469 818,795 1,894,188 1,999,357 297,213 185,482 24,343 294,786 787,892 19,070 367,521 189,848 27,946 260,077 975,950 19,070 1,608,786 1,840,412 285,402 158,945 2004 ANNUAL REPORT 49 Consolidated Balance Statement TOTAL ASSETS LESS CURRENT LIABILITIES 13,852,653 13,228,275 Notes 2004 Rmb’000 2003 Rmb’000 NON-CURRENT LIABILITIES Interest-bearing bank and other loans Long term bonds Deferred tax liabilities MINORITY INTERESTS CAPITAL AND RESERVES Issued capital Reserves Proposed final dividend 26 27 30 31 32 12 655,570 1,000,000 384,577 744,176 1,000,000 325,703 2,040,147 2,069,879 1,092,295 1,012,417 10,720,211 10,145,979 4,343,115 5,725,629 651,467 4,343,115 5,325,121 477,743 10,720,211 10,145,979 Geng Xiaoping Director Fang Yunti Director 50 ZHEJIANG EXPRESSWAY CO., LTD. Consolidated Summary Statement of Changes in Equity Year ended December 31, 2004 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 2004 Rmb’000 10,145,979 1,225,699 2003 Rmb’000 9,701,791 1,008,792 (651,467) (564,604) 10,720,211 10,145,979 2004 ANNUAL REPORT 51 Consolidated Cash Flow Statement Year ended December 31, 2004 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 Acquisition of associates Dividends from an associate Proceeds from disposal of fixed assets Proceeds from disposal of long term investment Decrease in time deposits Decrease/(increase) in investments Notes 33 2004 Rmb’000 2003 Rmb’000 1,497,788 1,670,344 12,514 (72,265) (898,148) – (12,000) 6,919 2,541 – 169,860 426,606 12,593 (37,537) (622,532) (58,042) – 7,851 686 2,800 31,179 (247,411) Net cash outflow from investing activities (363,973) (910,413) 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 INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR 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 (651,467) (52,350) 970,000 – (545,534) (38,101) 2,490,000 1,000,000 (1,246,664) (3,605,792) – 1,470 (200,000) 40,400 (979,011) (859,027) 154,804 567,195 721,999 538,079 183,920 721,999 (99,096) 666,291 567,195 527,814 39,381 567,195 52 ZHEJIANG EXPRESSWAY CO., LTD. Balance Statement As at December 31, 2004 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 TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Long term bonds Deferred tax liabilities CAPITAL AND RESERVES Issued capital Reserves Proposed final dividend Notes 2004 Rmb’000 2003 Rmb’000 14 15 16 17 18 19 21 22 23 24 25 26 27 30 31 32 12 5,342,738 4,475,605 60,887 127,375 154,842 10,161,447 617,381 2,700 16,160 346,433 351,948 1,334,622 153,455 88,179 7,513 164,874 300,000 19,070 733,091 601,531 5,263,165 4,177,381 63,251 127,375 161,776 9,792,948 1,049,372 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 10,762,978 10,453,317 1,000,000 177,343 1,177,343 9,585,635 4,343,115 4,591,053 651,467 9,585,635 1,000,000 154,203 1,154,203 9,299,114 4,343,115 4,478,256 477,743 9,299,114 Geng Xiaoping Director Fang Yunti Director 2004 ANNUAL REPORT 53 Notes to the Financial Statements December 31, 2004 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. 54 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 2. IMPACT OF RECENTLY ISSUED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) The following HKFRSs are effective for the first time for the current year’s financial statements: – – – HKFRS 1 “First-time Adoption of Hong Kong Financial Reporting Standards” SSAP 36 “Agriculture” Interpretation 22 “The Appropriate Policies for Infrastructure Facilities” The above recently issued HKFRSs have no material impact on the Group’s financial statements for the year ended December 31, 2004. In addition, the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) has issued a number of new Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards, herein collectively referred to as the new HKFRSs, which are generally effective for accounting periods beginning on or after January 1, 2005. The Group has not early adopted these new HKFRSs in the financial statements for the year ended December 31, 2004. The Group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (which also include Statements of Standard Accounting Practice and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, and accounting principles generally accepted in Hong Kong (collectively referred to as “HK GAAP”) 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, 2004. 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 within the Group are eliminated on consolidation. Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries. 2004 ANNUAL REPORT 55 Notes to the Financial Statements 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. The results of subsidiaries are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s interests in subsidiaries are stated at cost less any impairment losses. Jointly-controlled entities A jointly-controlled entity is a joint venture company which is subject to joint control, resulting in none of the participating parties having unilateral control over the economic activity of the jointly-controlled entity. The Group’s share of the post-acquisition results and reserves of jointly-controlled entities is included in the consolidated income statement and consolidated reserves, respectively. The Group’s interests in jointly-controlled entities are stated in the consolidated balance sheet at the Group’s share of net assets under the equity method of accounting less any impairment losses. The results of jointly-controlled entities are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s interests in jointly-controlled entities are treated as long term assets and are stated at cost less any impairment losses. Associates An associate is a company, not being a subsidiary or a joint-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. 56 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Goodwill on acquisitions subsequent to the adoption of the SSAP is treated according to the SSAP 30 goodwill accounting policy above. On disposal of subsidiaries, associates or jointly-controlled entities, the gain or loss on disposal is calculated by reference to the net assets at the date of disposal, including the attributable amount of goodwill which remains unamortised and any relevant reserves, as appropriate. Any attributable goodwill previously eliminated against 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. 2004 ANNUAL REPORT 57 Notes to the Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. With effect from January 1, 2004, depreciation of communications and signalling equipment is calculated to write off their cost less directors’ estimate of their residual values (3% of cost) on the straight-line basis over their estimated useful lives of five years. In prior years, depreciation of communications and signalling equipment was calculated to write off their cost less directors’ estimate of their residual values (3% of cost) on the straight-line basis over their estimated useful lives of 10 years. This represents a change in accounting estimate and is accounted for prospectively. The consolidated net book value of fixed assets as at December 31, 2004 has been decreased by Rmb51,336,000 in the form of an increase in the depreciation charge for the year as a result of this change. Accordingly, the consolidated net profit from ordinary activities attributable to shareholders for the year then ended has been decreased by Rmb33,165,000. 58 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fixed assets and depreciation (Continued) With the above change in accounting estimate, depreciation of fixed assets, other than expressways, bridges and land, is provided on the straight-line basis to write off the cost of the assets, less their estimated residual values, being 3% of the cost, over their estimated useful lives. The principal annual rates used for this purpose are as follows: Toll stations and ancillary facilities Communications and signalling equipment Motor vehicles Machinery and equipment Estimated useful life Annual depreciation rate 30 years 5 years 8 years 3.2% 19.4% 12.1% 5-8 years 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. 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. 2004 ANNUAL REPORT 59 Notes to the Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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. 60 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue recognition Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: (a) 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. 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. 2004 ANNUAL REPORT 61 Notes to the Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income tax (Continued) 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. 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. 62 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management. For the purpose of the balance sheet, cash and cash equivalents comprise cash on hand and at banks, including term deposits and assets similar in nature to cash, which are not restricted as to use. 2004 ANNUAL REPORT 63 Notes to the Financial Statements 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 geographical segment information is presented. Business segments The Group’s operating businesses are structured 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. 64 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 4. SEGMENT INFORMATION (Continued) Toll operation Service area businesses Advertising business Road maintenance Others Consolidated 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Group Segment revenue: Turnover, net of revenue taxes 2,906,473 2,330,122 179,563 114,343 Other revenue 30,549 110,931 9,522 14,207 38,864 1,575 24,687 1,611 Total revenue Segment results Finance costs 2,937,022 2,441,053 189,085 128,550 40,439 26,298 1,925,656 1,663,748 38,000 29,463 15,465 7,833 (5,166 ) (2,277 ) 7,093 – 7,093 2,653 536 3,189 – – – – – – – – – 3,131,993 2,471,805 41,646 127,285 3,173,639 2,599,090 1,973,955 1,698,767 (103,457 ) (132,801 ) Share of profits of associates – – 13,877 15,431 Share of profit of a jointly-controlled entity 25,467 9,829 – – – – – – – – – – 1,139 1,963 15,016 17,394 – – 25,467 9,829 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 Deferred tax assets 1,910,981 1,593,189 (554,524 ) (497,166 ) 1,356,457 1,096,023 (130,758 ) (87,231 ) 1,225,699 1,008,792 14,773,348 14,532,875 – 79,812 85,472 38,319 – 62,554 97,717 – 175,910 144,120 115,681 144,923 – – – – – – 60,005 45,287 71,829 50,075 – – 15,081,092 14,743,918 – – – – – – – – – – – – – – – – 32,624 19,575 176,744 164,498 – – – – – – 79,812 85,472 38,319 62,554 97,717 – Total assets 14,976,951 14,693,146 320,030 260,604 60,005 45,287 71,829 50,075 32,624 19,575 15,461,439 15,068,687 Segment liabilities Deferred tax liabilities 3,119,225 3,509,014 83,472 42,667 28,081 19,188 33,578 13,719 384,577 325,703 – – – – – – Total liabilities 3,503,802 3,834,717 83,472 42,667 28,081 19,188 33,578 13,719 Other segment information: Capital expenditure Depreciation and amortisation Write-off of bad debts 903,959 331,193 – 786,016 268,219 537 Loss on disposal of fixed assets 205,095 13,935 63,007 5,060 – 49 5,461 2,351 – 6,833 14,215 4,069 – 117 7,007 2,961 – – 1,325 4,284 – – 3,417 5,207 – – – – – – – – – – – – – – – – 3,264,356 3,584,588 384,577 325,703 3,648,933 3,910,291 982,506 344,606 – 801,901 278,738 537 205,261 20,768 2004 ANNUAL REPORT 65 Notes to the Financial Statements 5. TURNOVER AND REVENUE Turnover mainly represents toll income from the operation of expressways, the value of service area business, 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 operation income Service area businesses income Advertising business income Road maintenance income Less: Revenue taxes Turnover Income/(loss) on investments Interest income Rental income Trailer income Exchange gains, net Subsidy income Others Other revenue 2004 Rmb’000 3,066,954 183,637 41,159 7,244 2003 Rmb’000 2,458,726 117,205 26,138 2,669 3,298,994 2,604,738 (167,001) (132,933) 3,131,993 2,471,805 (36,158) 12,514 22,941 18,352 220 – 23,777 41,646 53,838 12,593 21,343 11,162 2,282 17,394 8,673 127,285 3,173,639 2,599,090 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. 66 ZHEJIANG EXPRESSWAY CO., LTD. 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 Loss on disposal of fixed assets Unrealised loss on revaluation of short term listed investments Net rental income Exchange gains, net Interest income (Income)/loss from investments Notes to the Financial Statements 2004 Rmb’000 323,661 – 2,167 117,979 11,228 8,700 12,245 – 205,261 1,213 (22,941) (220) (12,514) 34,945 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) * The amortisation of expressway operating rights for the year is included in “Administrative expenses” in the consolidated income statement. ** The amortisation of goodwill for the year is included in “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 2004 Rmb’000 50,253 11,804 41,400 – 103,457 – 2003 Rmb’000 68,977 17,700 46,626 9,000 142,303 (9,502) 103,457 132,801 2004 ANNUAL REPORT 67 Notes to the Financial Statements 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 31 Share of tax attributable to associates Share of tax attributable to a jointly-controlled entity Share of deferred tax attributable to an associate Share of deferred tax attributable to a jointly-controlled entity 2004 Rmb’000 2003 Rmb’000 556,566 (34,372) 522,194 20,555 542,749 6,081 4,964 (151) 881 439,812 (33,249) 406,563 84,783 491,346 5,791 – (906) 935 Tax charge for the year 554,524 497,166 During the year, according to the approvals from the Zhejiang Provincial Local Tax Bureau, Zhejiang Shangsan Expressway Co., Ltd. (“Shangsan Co”), one of the Company’s subsidiaries, was entitled to a 30% CIT exemption for the two years ended December 31, 2004 under the category of “Enterprises providing employment opportunities to redundant workers with a minimum of three-year employment term” as defined in the relevant national tax rules. As a result, the tax refund received by Shangsan Co in 2004 for the year ended December 31, 2003 amounted to Rmb27,004,000 and a tax exemption for the year ended December 31, 2004 amounted to Rmb36,914,000, respectively (2003: 50% CIT for the year ended December 31, 2002 amounting to Rmb33,249,000 was refunded under the category of “New enterprises providing employment opportunities to redundant urban workers” as defined in the relevant national tax rules). During the year, according to the approvals from the Zhejiang Provincial National Tax Bureau, Zhejiang Expressway Investment Development Co., Ltd. (“Development Co”) and Zhejiang Expressway Vehicle Towing and Rescue Service Co., Ltd. (“Service Co”), two of the Company’s subsidiaries, were entitled to a 100% CIT exemption for the year ended December 31, 2003 and accordingly received tax refund amounting to Rmb6,554,000 and Rmb814,000, respectively, under the category of “New enterprises providing employment opportunities to redundant urban workers” as defined in the relevant national tax rules. 68 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 8. TAX (Continued) 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: Profit before tax Tax at the statutory tax rate Tax refunded Tax exemption of a subsidiary Income not subject to tax Expenses not deductible for tax Tax charge at the Group’s effective rate 2004 Rmb’000 1,910,981 630,624 (34,372) (36,914) (13,451) 8,637 554,524 % Rmb’000 % 2003 1,593,189 525,752 (33,249) – (10,451) 15,114 497,166 33.0 (1.8) (1.9) (0.7) 0.4 29.0 33.0 (2.1) – (0.7) 1.0 31.2 9. NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS The net profit from ordinary activities attributable to shareholders for the year ended December 31, 2004 dealt with in the financial statements of the Company was Rmb937,988,000 (2003: Rmb855,995,000) (note 33). 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 2004 Rmb’000 – 1,856 660 28 2,544 2003 Rmb’000 – 1,725 588 39 2,352 Salaries, allowances and benefits in kind include HK$151,600 (2003: HK$150,000), HK$151,600 (2003: HK$150,000) and Rmb33,200 (2003: Rmb30,000) payable to the three (2003: three) independent non-executive directors, respectively. There were no other emoluments payable to the independent non-executive directors during the year (2003: Nil). 2004 ANNUAL REPORT 69 Notes to the Financial Statements 10. DIRECTORS AND SUPERVISORS’ REMUNERATION (Continued) 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 2004 11 2003 11 There was no arrangement under which a Director or a Supervisor waived or agreed to waive any remuneration during the year. 11. FIVE HIGHEST PAID EMPLOYEES Salaries, allowances and benefits in kind Bonuses paid and payable Pension scheme contributions 2004 Rmb’000 1,747 765 39 2,551 2003 Rmb’000 1,712 734 49 2,495 The five highest paid employees during the year included four (2003: 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 Interim Proposed final 2004 Per ordinary share Rmb 0.04 0.15 0.19 2003 Rmb 0.04 0.11 0.15 2004 2003 Rmb’000 173,724 651,467 825,191 Rmb’000 173,724 477,743 651,467 The proposed final dividend for the year is subject to the approval of the Company’s shareholders at the forthcoming annual general meeting. 70 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 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 Rmb1,225,699,000 (2003: Rmb1,008,792,000) and the 4,343,114,500 ordinary shares (2003: 4,343,114,500 ordinary shares) in issue during the year. Diluted earnings per share amounts for the years ended December 31, 2004 and 2003 have not been calculated as no diluting event existed during these years. 14. FIXED ASSETS Group Cost: Land Rmb’000 Expressways and bridges 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 11,686,549 357,428 213,511 Additions Transfers Reclassifications Disposals 12,950 – – 5,123 40,041 – 5,808 15,608 – 17,532 57,515 42,132 (333 ) (212,607 ) (4,029 ) (7,938 ) (1,945 ) 107,833 17,685 189,860 18,405 543,267 13,630,258 905,003 982,506 – – 399 (113,563 ) (42,132 ) (2,387 ) – (49 ) – – (229,288 ) At December 31, 2004 544,427 11,519,106 374,815 322,752 123,573 164,145 1,334,658 14,383,476 Accumulated depreciation: At beginning of year 105,464 719,723 53,795 87,142 58,678 67,840 Depreciation provided during the year Reclassifications Disposals 17,779 174,256 12,103 – – – (15,833 ) – (351 ) 93,702 10,319 (2,320 ) 11,244 – (1,576 ) 14,577 (10,319 ) (1,406 ) At December 31, 2004 123,243 878,146 65,547 188,843 68,346 70,692 – – – – – 1,092,642 323,661 – (21,486 ) 1,394,817 Net book value: At December 31, 2004 421,184 10,640,960 309,268 133,909 At December 31, 2003 426,346 10,966,826 303,633 126,369 55,227 49,155 93,453 1,334,658 12,988,659 122,020 543,267 12,537,616 2004 ANNUAL REPORT 71 Notes to the Financial Statements 14. FIXED ASSETS (Continued) Land Rmb’000 Expressways and bridges 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 Company Cost: At January 1, 2004 348,430 5,162,956 130,167 Additions Transfers Transfers to subsidiaries Disposals – – – – 4,925 40,041 – 3,773 4,759 – (78,015 ) (3,063 ) 126,328 3,840 – – – 56,595 13,866 – – 62,422 6,129 – – (931 ) (2,264 ) 17,962 5,904,860 290,097 322,630 (44,800 ) (8,090 ) – – (8,090 ) (84,273 ) At December 31, 2004 348,430 5,129,907 135,636 130,168 69,530 66,287 255,169 6,135,127 Accumulated depreciation: At January 1, 2004 Provided during the year Transfers to subsidiaries Disposals 75,913 11,604 – – 411,604 86,499 – (8,105 ) 19,065 5,299 – (352 ) 65,142 49,240 – – 36,848 6,339 – (818 ) 33,123 2,330 – (1,342 ) At December 31, 2004 87,517 489,998 24,012 114,382 42,369 34,111 – – – – – 641,695 161,311 – (10,617 ) 792,389 Net book value: At December 31, 2004 260,913 4,639,909 111,624 At December 31, 2003 272,517 4,751,352 111,102 15,786 61,186 27,161 19,747 32,176 29,299 255,169 5,342,738 17,962 5,263,165 The fixed assets are mainly located in the PRC. The Group’s land included above is held under a long term lease. 72 ZHEJIANG EXPRESSWAY CO., LTD. 15. INTERESTS IN SUBSIDIARIES Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Notes to the Financial Statements Company 2004 Rmb’000 2003 Rmb’000 4,436,627 4,436,627 43,004 (4,026) 105,226 (364,472) 4,475,605 4,177,381 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 Direct Indirect Principal activities Zhejiang Yuhang Note 1 75,223,000 51 – 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”) Zhejiang Shangsan Expressway Co., Ltd. (“Shangsan Co”) Zhejiang Expressway Investment Development Co., Ltd. (“Development Co”) Note 3 2,400,000,000 73.625 Note 4 80,000,000 51 – – management of the Jiaxing Section of the Shanghai-Hangzhou Expressway Construction and management of the Shangsan Expressway Operation of service areas as well as roadside advertising along the expressways operated by the Group Zhejiang Expressway Note 5 1,000,000 Advertising Co., Ltd. (“Advertising Co”) Zhejiang Expressway Vehicle Towing and Rescue Service Co., Ltd. (“Service Co”) Hangzhou Roadtone Advertising Co., Ltd. (“Roadtone Co”) Note 6 8,000,000 Note 7 3,000,000 – – – *35.7 Provision of advertising services *43.35 Provision of vehicle towing, repair and emergency rescue service *26.01 Provision of advertising services 2004 ANNUAL REPORT 73 Notes to the Financial Statements 15. INTERESTS IN SUBSIDIARIES (Continued) * These three 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. Note 7: Roadtone Co was established on July 27, 2004 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 2004 Rmb’000 – 83,925 (4,113) 79,812 2003 Rmb’000 – 64,303 (1,749) 62,554 2004 Rmb’000 65,000 – (4,113) 60,887 2003 Rmb’000 65,000 – (1,749) 63,251 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 Place of registration and operations Business structure Percentage of Ownership interest Hangzhou Shida Corporate The PRC 50 Expressway Co., Ltd. Voting power 50 Profit sharing Principal activities 50 Construction and operation of Shiqiao-Dajing Road 74 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 17. INTERESTS IN ASSOCIATES Unlisted shares, at cost Share of net assets other than goodwill Amount due (to)/from an associate Group Company 2004 Rmb’000 – 178,654 (1,910) 176,744 2003 Rmb’000 – 164,487 11 164,498 2004 Rmb’000 126,500 – 875 2003 Rmb’000 126,500 – 875 127,375 127,375 The amount due (to) from 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, 2004 was Rmb40,154,000 (2003: Rmb37,987,000). Particulars of the associates 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. 2004 50 2003 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. Zhejiang Concord Property Corporate The PRC 22.95 Investment Co., Ltd. Hangzhou Yuhang Corporate The PRC 15.3 Communication Time Plaza Co., Ltd. and anti-counterfeiting systems in the PRC Investment and construction on real estates Investment and construction on real estates – – 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. 2004 ANNUAL REPORT 75 Notes to the Financial Statements 18. EXPRESSWAY OPERATING RIGHTS Cost: At January 1, 2004 and December 31, 2004 261,000 208,000 Group Rmb’000 Company Rmb’000 Accumulated amortisation: At January 1, 2004 Provided during the year At December 31, 2004 Net book value: At December 31, 2004 At December 31, 2003 55,055 8,700 63,755 197,245 205,945 46,224 6,934 53,158 154,842 161,776 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 Short term investments Listed in the PRC, at market value: Government bonds Close-end equity funds Equity interests Group 2004 Rmb’000 1,000 2003 Rmb’000 1,000 Group Company 2003 Rmb’000 2004 Rmb’000 2003 Rmb’000 1,016,510 617,381 1,011,510 62,229 25,527 – – 16,973 20,889 2004 Rmb’000 617,381 59,066 – 676,447 1,104,266 617,381 1,049,372 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 Rmb691,751,000 and Rmb635,501,000, respectively. 76 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 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, 2004 and at December 31, 2004 Accumulated amortisation: At January 1, 2004 Provided during the year At December 31, 2004 Net book value: At December 31, 2004 At December 31, 2003 Group Rmb’000 126,593 28,876 12,245 41,121 85,472 97,717 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, 2004 (2003: 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 2004 Rmb’000 25,636 933 – 26,569 2003 Rmb’000 19,116 54 2,601 21,771 2004 Rmb’000 16,160 – – 16,160 2003 Rmb’000 6,978 – 2,601 9,579 2004 ANNUAL REPORT 77 Notes to the Financial Statements 22. OTHER RECEIVABLES Notes Prepayments Entrusted loan to a related party 39 Entrusted loan to a third party Deposits and other debtors 23. CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits with original maturity of Group Company 2004 Rmb’000 26,989 260,000 10,000 84,028 381,017 2003 Rmb’000 26,810 – – 24,659 51,469 2004 Rmb’000 206 260,000 10,000 76,227 346,433 2003 Rmb’000 287 – – 22,206 22,493 Group Company 2004 Rmb’000 538,079 2003 Rmb’000 527,814 2004 Rmb’000 263,445 2003 Rmb’000 208,192 less than three months when acquired 183,920 39,381 59,503 381 Time deposits with original maturity over three months when acquired 24. ACCOUNTS PAYABLE 81,740 803,739 251,600 818,795 29,000 351,948 68,002 276,575 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 Group Company 2004 Rmb’000 262,085 10,037 20,930 4,161 2003 Rmb’000 318,116 44,844 2,218 2,343 2004 Rmb’000 143,152 9,508 109 686 2003 Rmb’000 202,554 10,498 365 31 297,213 367,521 153,455 213,448 78 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 25. OTHER PAYABLES AND ACCRUALS Notes Accruals Other liabilities Amounts due to related parties Amount due to the holding company 29 30 Group Company 2004 Rmb’000 82,022 198,014 12,151 2,599 294,786 2003 Rmb’000 82,640 162,687 12,151 2,599 260,077 2004 Rmb’000 55,658 97,065 12,151 – 2003 Rmb’000 54,144 90,996 12,151 – 164,874 157,291 26. INTEREST-BEARING BANK AND OTHER LOANS Bank loans, unsecured Other loans, unsecured Bank loans repayable: Within one year Other loans repayable: Within one year In the second year In the third to fifth years, inclusive Beyond five years Group Company 2004 Rmb’000 570,000 873,462 2003 Rmb’000 800,000 920,126 2004 Rmb’000 300,000 – 2003 Rmb’000 250,000 – 1,443,462 1,720,126 300,000 250,000 570,000 800,000 300,000 250,000 217,892 89,943 287,904 277,723 873,462 175,950 88,567 276,644 378,965 920,126 1,443,462 1,720,126 – – – – – – – – – – 300,000 (300,000) 250,000 (250,000) Portion classified as current liabilities (787,892) (975,950) Long term portion 655,570 744,176 – – The bank loans are unsecured and bear interest at rates ranging from 4.54% to 5.31% per annum. The other loans are unsecured and bear interest at rates ranging from 3.00% to 4.85% per annum. 2004 ANNUAL REPORT 79 Notes to the Financial Statements 27. LONG TERM BONDS Group Company 2004 Rmb’000 2003 Rmb’000 2004 Rmb’000 2003 Rmb’000 Long term bonds 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 The bonds are unsecured, bear interest at a rate of 4.29% per annum and are repayable in 2013 upon maturity. 28. AMOUNTS DUE TO RELATED PARTIES The amounts due to related parties are unsecured, interest-free and have no fixed terms of repayment. 29. 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. 30. DEFERRED TAX The movement in deferred tax liabilities during the year is as follows: Deferred tax assets: Group At January 1, 2004 Deferred tax charged to the income statement during the year At December 31, 2004 Non-deductible disposal of fixed assets Rmb’000 – 38,319 38,319 80 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 30. DEFERRED TAX (Continued) The movement in deferred tax liabilities during the year is as follows: Deferred tax liabilities: Group At January 1, 2003 Deferred tax charged to the income statement during the year – note 8 At December 31, 2003 Deferred tax charged to the income statement during the year – note 8 At December 31, 2004 Company At January 1, 2003 Deferred tax charged to the income statement during the year At December 31, 2003 Deferred tax charged to the income statement during the year At December 31, 2004 Restatement of short term investments Rmb’000 Straight-line method tax depreciation Rmb’000 Total Rmb’000 3,158 237,762 240,920 5,241 8,399 79,542 317,304 (12,609) 71,483 (4,210) 388,787 Restatement of short term investments Rmb’000 Straight-line method tax depreciation Rmb’000 84,783 325,703 58,874 384,577 Total Rmb’000 4,249 113,071 117,320 3,005 7,254 (9,559) (2,305) 33,878 146,949 32,699 179,648 36,883 154,203 23,140 177,343 The Group and the Company have no significant potential deferred tax liabilities for which provision has not been made. As at December 31, 2004, there was no significant unrecognised deferred tax liability (2003: 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. 2004 ANNUAL REPORT 81 Notes to the Financial Statements 31. SHARE CAPITAL 2004 Number of shares 2003 Number of shares 2004 Rmb’000 2003 Rmb’000 Registered, issued and fully paid: Domestic shares of Rmb1.00 each 2,909,260,000 2,909,260,000 H Shares of Rmb1.00 each 1,433,854,500 1,433,854,500 2,909,260 1,433,855 2,909,260 1,433,855 4,343,114,500 4,343,114,500 4,343,115 4,343,115 The domestic shares are not currently listed on any stock exchange. The H Shares have been listed on the Stock Exchange 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 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 32. 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, 2003 3,645,726 (352,860) 533,815 251,880 889,235 4,967,796 Interim dividend – note 12 Net profit for the year Transfer to reserves Proposed final dividend – note 12 At December 31, 2003 and – – – – – – – – – – – – (173,724) (173,724) 1,008,792 1,008,792 176,682 88,341 (265,023) – – – (477,743) (477,743) beginning of year 3,645,726 (352,860) 710,497 340,221 981,537 5,325,121 Interim dividend – note 12 Net profit for the year Transfer to reserves Proposed final dividend – note 12 – – – – – – – – – – – – (173,724) (173,724) 1,225,699 1,225,699 182,454 91,227 – – (273,681) (651,467) – (651,467) At December 31, 2004 3,645,726 (352,860) 892,951 431,448 1,108,364 5,725,629 Reserves retained by: Company and subsidiaries 3,645,082 (350,331) 879,608 424,776 1,067,415 5,666,550 Jointly-controlled entity Associates – 644 – (2,529) 949 12,394 475 6,197 17,501 23,448 18,925 40,154 At December 31, 2004 3,645,726 (352,860) 892,951 431,448 1,108,364 5,725,629 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 – 5,536 (697) 23,264 (697) 37,987 At December 31, 2003 3,645,726 (352,860) 710,497 340,221 981,537 5,325,121 Company At January 1, 2003 3,645,082 Interim dividend – note 12 Net profit for the year Transfer to reserves Proposed final dividend – note 12 At December 31, 2003 and – – – – beginning of year 3,645,082 Interim dividend – note 12 Net profit for the year Transfer to reserves Proposed final dividend – note 12 – – – – At December 31, 2004 3,645,082 – – – – – – – – – – – 345,906 172,953 109,787 4,273,728 – – 100,634 – – – 50,317 – (173,724 ) 855,995 (150,951 ) (477,743 ) (173,724) 855,995 – (477,743) 446,540 223,270 163,364 4,478,256 – – 121,117 – – – 60,558 – (173,724 ) 937,988 (181,675 ) (651,467 ) (173,724) 937,988 – (651,467) 567,657 283,828 94,486 4,591,053 2004 ANNUAL REPORT 83 Notes to the Financial Statements 32. 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 Rmb121,117,000 (2003: Rmb100,634,000) and Rmb60,558,000 (2003: Rmb50,317,000) to the SSR and the PWF, respectively. These represent 10% (2003: 10%) and 5% (2003: 5%), respectively, of the Company’s profit after tax of Rmb1,211,170,000 (2003: Rmb1,006,342,000) determined in accordance with the PRC accounting standards and financial regulations. 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 financial regulations and the amount determined under HK GAAP. As at December 31, 2004, before the proposed final dividend, the Company had reserves of approximately Rm745,953,000 (2003: Rmb641,107,000) available for distribution by way of cash or in kind. As at December 31, 2004, in accordance with the Company Law of the PRC, the amount of approximately Rmb3,638,000,000 (2003: Rmb3,640,000,000) standing to the credit of the Company’s share premium account was available for distribution by way of capitalisation issues. 84 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 33. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT Reconciliation of profit before tax to net cash inflow from operating activities: Profit before tax Adjustments for: Share of profit 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 Increase in inventories Increase in accounts receivable (Increase)/decrease in other receivables (Increase)/decrease in an amount due from an associate Increase/(decrease) in accounts payable 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 2004 Rmb’000 2003 Rmb’000 1,910,981 1,593,189 6 6 6 6 5 7 6 5 6 (25,467) (15,016) 323,661 8,700 12,245 – (12,514) 103,457 1,213 (220) 205,261 – (3,360) (4,798) (329,548) 1,921 (82,401) (3,603) 35,547 8,165 2,364 (112,240) (526,560) (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) Net cash inflow from operating activities 1,497,788 1,670,344 2004 ANNUAL REPORT 85 Notes to the Financial Statements 34. COMMITMENTS (a) Capital commitments Contracted, but not provided for: – Construction of expressways – Purchase of machinery – Proposed investments in Shangsan Co – Decoration of office – Renovation of a service area Authorised, but not contracted for: – Purchase of machinery – Construction of expressways Group Company 2004 Rmb’000 2003 Rmb’000 2004 Rmb’000 2,078,001 1,098,777 1,436,024 – 485,000 2,693 1,371 5,697 485,000 – 5,893 – 485,000 2,693 – 2003 Rmb’000 2,371 5,697 485,000 – 4,950 2,567,065 1,595,367 1,923,717 498,018 72,459 70,500 1,592,196 3,386,840 47,224 669,942 60,000 2,403,369 4,231,720 5,052,707 2,640,883 2,961,387 (b) On November 26, 2004, the Company entered into an agreement with Jiaxing Jiashao Expressway Investment and Development Limited Company (“Jiaxing Jiashao”) and Shaoxing Communication and Investment Limited (“Shaoxing Communication”) to set up the joint-venture company, Zhejiang Jiashao Expressway Co., Ltd. (the “JV Co”), for the purpose of the development and operation of the Jiaxing-Shaoxing Expressway (“Jiashao Expressway”). The Company, Jiaxing Jiashao and Shaoxing Communication will hold 35%, 35% and 30% of the share capital of the JV Co, respectively. The total capital contribution of the JV Co of Rmb3,272,500,000 shall be contributed by the Company, Jiaxing Jiashao and Shaoxing Communication in accordance with their respective equity interests in the JV Co. Accordingly, the Company shall contribute in cash Rmb1,145,375,000. The project is still in a preliminary stage and has not been approved by the relevant PRC government authorities. 35. CONTINGENT LIABILITIES At the balance sheet date, contingent liabilities not provided for in the financial statements were as follows: Guarantees provided to banks in connection with facilities granted to: – A subsidiary – A jointly-controlled entity Group Company 2004 Rmb’000 2003 Rmb’000 2004 Rmb’000 2003 Rmb’000 – – – – 30,000 30,000 220,000 – 220,000 550,000 30,000 580,000 86 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 36. OPERATING LEASE ARRANGEMENTS 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, 2004, 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 2004 Rmb’000 8,912 13,764 30,162 52,838 2003 Rmb’000 8,833 18,419 31,819 59,071 2004 Rmb’000 1,312 6,114 30,162 37,588 2003 Rmb’000 1,233 5,769 31,819 38,821 37. DIFFERENCES IN FINANCIAL STATEMENTS PREPARED UNDER PRC GAAP AND HK GAAP As reported in the statutory financial statements of the Group prepared in accordance with PRC GAAP HK GAAP adjustments: (a) Goodwill (b) Depreciation provided, net of deferred tax (c) Deferred tax assets on disposal of fixed assets (d) Difference in the share premium account (e) (f) during establishment Profits tax refundable Restatement of short term investments in securities at market value, net of deferred tax (g) General provision on accounts receivable and other debts (h) (i) Impairment loss, net of deferred tax Provision for impairment of an unlisted equity investment (j) Others Net profit before minority interests Net assets as at December 31, 2004 Rmb’000 2003 Rmb’000 2004 Rmb’000 2003 Rmb’000 1,329,577 1,103,632 10,977,094 10,436,426 33,726 (28,527) 38,319 – – 33,722 (43,907) – – – (111,841) (199,888) 38,319 11,923 (3,686) (145,568) (175,143) – 11,923 (3,686) (14,971) 458 4,110 18,772 (145) – – (1,522) 561 (556) 1,351 762 1,607 – – 2,573 310 – 689 2,256 As restated in the financial statements 1,356,457 1,096,023 10,720,211 10,145,979 2004 ANNUAL REPORT 87 Notes to the Financial Statements 38. 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) On August 16, 2004, the board of directors resolved that the Company entered into two guarantees to be dated August 18, 2004 in favour of two independent financial institutions in the PRC, namely, Industrial and Commercial Bank of China (Zhejiang Province Branch) and Shanghai Pudong Development Bank, in respect of loan facilities with a principal amount of Rmb280,000,000 and Rmb80,000,000, respectively, granted to Shangsan Co under the respective Facility Agreements. The purpose of the facilities under the Facility Agreements is to re-finance the existing bank term loans of Shangsan Co of Rmb360,000,000 (approximately HK$339,623,000) in total and with similar interest rates and maturity periods of the new facilities under the Facility Agreements. The loans under the Facility Agreements are unsecured and the interest rates will be subject to the rates applicable to loans with maturity periods within one year as announced by the Bank of China from time to time. Each guarantee shall take effect until the expiration of two years from the repayment date of each loan to be drawn down under the respective Facility Agreement. No consideration is receivable by the Company for the provision of the financial assistance under each guarantee. Shangsan Co is a connected person of the Company as Huajian Translation Economic Development Centre, a substantial shareholder of the Company, owns more than 10% equity interest in Shangsan Co, which is also owned as to 73.625% by the Company. As at December 31, 2004, the amount of the above loan facilities utilised by Shangsan Co was Rmb220,000,000. b) On October 25, 2004, the Company entered into a loan agreement with Zhejiang Jinji Property Co., Ltd. (“Jinji Co”), a subsidiary of Zhejiang Communications Investment Group Co., Ltd. (“Communication Group”), through Bank of Communications (the “Bank”), whereby the Company agreed to provide Jinji Co a loan through the Bank with a principal amount of Rmb260,000,000 at an annual interest rate of 6.31% and with a term of one year. The loan is being provided to Jinji Co for use as general working capital. Jinji Co is a connected person of the Company as it is a 90% subsidiary of Communications Group, which in turn is a substantial shareholder of the Company, holding approximately 56% of the shares in the Company. Communication Group has provided a guarantee in favour of the Company and the Bank in respect of the obligations of Jinji Co in the loan agreement. 88 ZHEJIANG EXPRESSWAY CO., LTD. Notes to the Financial Statements 38. RELATED PARTY TRANSACTIONS (Continued) c) In 2004, 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 five oil stations to Petroleum Co. In 2004, the Group recorded a total rental income of Rmb8,900,000 from Petroleum Co (2003: Rmb7,496,000). The rental income was based on negotiations between the Group and Petroleum Co. 39. POST BALANCE SHEET EVENTS Zhejiang Jiashao Expressway Co., Ltd., as mentioned in Note 34 (b) above, was subsequently established on February 4, 2005. 40. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved and authorized for issue by the Board of Directors on March 29, 2004. 2004 ANNUAL REPORT 89 Corporate Information 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 90 ZHEJIANG EXPRESSWAY CO., LTD. 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 Hangda Road Hangzhou, Zhejiang PRC 310007 Corporate Information 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 AUDITORS AND REPORTING ACCOUNTANTS Ernst & Young Certified Public Accountants 15th Floor Hutchison House 10 Harcourt Road, Central Hong Kong CORPORATE BROKER IN THE UNITED KINGDOM & FINANCIAL ADVISOR Cazenove Asia Limited 5001 One Exchange Square 8 Connanght Place Central Hong Kong Tel: 852-2526 4211 Fax: 852-2530 9492 INVESTOR RELATIONS CONSULTANT Rikes Communications Limited Room 1312, Wing On Centre 111 Connaught Road Central Hong Kong Tel: 852-2520 2201 Fax: 852-2520 2241 PRINCIPAL BANKERS 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 46th Floor, Hopewell Centre 183 Queen’s Road East Hong Kong 2004 ANNUAL REPORT 91 Location Map of Expressways Operated by the Group 92 ZHEJIANG EXPRESSWAY CO., LTD.