Leveraging Opportunities, Pursuing Growth As the economies of China and Zhejiang Province underwent solid recovery growth, Zhejiang Expressway’s operation also witnessed a healthy return to growth in year 2010. The toll road business has demonstrated its integral strengths and registered double-digit growth in revenue, while the securities business has been fast expanding and is now contributing a significant share of the Group’s profits. In 2011, we expect some uncertainties to remain, but we also see opportunities abound as China’s domestic economy is expected to continue its healthy growth. We believe that the two “pillar” businesses of the Group will grow from strength to strength, and more importantly, they will provide reliable support to our other business ventures in the future. Zhejiang Expressway will be actively leveraging opportunities amidst a dynamic market, seeking to build other suitable new businesses to pursue growth whilst strengthening our core business, with a view to bringing greater returns to our shareholders. Contents 2 Definition of Terms 4 Company Profile 6 Review of Major Corporate Events 7 8 Particulars of Major Road Projects Financial and Operating Highlights 10 Chairman’s Statement 14 Management Discussion and Analysis 26 Principal Risks and Uncertainties 28 Corporate Governance Report 36 Directors, Supervisors and Senior Management Profiles 41 Report of the Directors 47 Report of the Supervisory Committee 48 Independent Auditor’s Report 49 Consolidated Financial Statements & Notes 124 Corporate Information 126 Location Map of Expressways in Zhejiang Province Definition of Terms ADR(s) ADS(s) American Depositary Receipt(s) American Depositary Share(s) Advertising Co Zhejiang Expressway Advertising Co., Ltd.（浙江高速廣告有限責任公司）, a 70% owned subsidiary of Development Co Audit Committee the audit committee of the Company Board the board of directors of the Company Company or Zhejiang Expressway Co., Ltd., a joint stock limited company incorporated in Zhejiang Expressway the PRC with limited liability on March 1, 1997 Communications Group Zhejiang Communications Investment Group Co., Ltd.（浙江省交通投資集團 有限公司）, a wholly State-owned enterprise established on December 29, 2001 Development Co Zhejiang Expressway Investment Development Co., Ltd.（浙江高速投資發展 有限公司）, a 51% owned subsidiary of the Company Directors the directors of the Company GDP Group gross domestic product the Company and its subsidiaries H Shares the overseas listed foreign shares of Rmb1.00 each in the share capital of the Company which are primarily listed on the Hong Kong Stock Exchange and traded in Hong Kong dollars since May 15, 1997 Hong Kong Stock Exchange The Stock Exchange of Hong Kong Limited Huajian Huajian Transportation Economic Development Center（華建交通經濟開發中 心）, a State-owned enterprise 2 2010 ANNUAL REPORT Jiaxing Co Zhejiang Jiaxing Expressway Co., Ltd.（浙江嘉興高速公路有限責任公司）, a 99.9995% owned subsidiary of the Company Jinhua Co Zhejiang Jinhua Yongjin Expressway Co., Ltd.（浙江金華甬金高速公路有限公司） , a 23.45% owned associate of the Company JoinHands Technology JoinHands Technology Co., Ltd.（中囱世紀科技實業股份有限公司）, a 27.582% owned associate of the Company Listing Rules the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited Period the period from January 1, 2010 to December 31, 2010 Petroleum Co Zhejiang Expressway Petroleum Development Co., Ltd.（浙江高速石油發展 有限公司）, a 50% owned associate of the Company PRC Rmb the People’s Republic of China Renminbi, the lawful currency of the PRC Services Co Zhejiang Expressway Vehicle Towing and Rescue Services Co., Ltd.（浙江高 速公路清障施救服務有限公司）, a 85% owned subsidiary of Development Co Shangsan Co Zhejiang Shangsan Expressway Co., Ltd.（浙江上三高速公路有限公司）, a 73.625% owned subsidiary of the Company Shareholders the shareholders of the Company Supervisory Committee the supervisory committee of the Company Yuhang Co Zhejiang Yuhang Expressway Co., Ltd.（浙江余杭高速公路有限責任公司）, a 51% owned subsidiary of the Company Zheshang Securities Zheshang Securities Co., Ltd.（浙商證券有限責任公司）, a 70.46% owned subsidiary of the Shangsan Co ZHEJIANG EXPRESSWAY CO., LTD. 3 On Februar y 14, 2002, a Level I American Depositar y Receipt program sponsored by the Company in respect of its H Shares, with the Bank of New York as the depositary, was established in the United States and became effective. On August 12, 2005, a 10-year corporate bond of the Company, issued on January 24, 2003, was listed on the Shanghai Stock Exchange. With good performance on the Group’s existing expressway operations, the Company will capitalize on all opportunities of investment and acquisition of new projects, aiming to develop itself into a first-class expressway operator in China. In addition, the Company will also endeavor to enhance its core competitiveness in the secur ities business, expanding its operation network and increasing its profit contribution to the Group. Company Profile Zhejiang Expressway is an infrastructure company principally engaged in investing in, developing and operating high-grade roads. The Company and its subsidiaries also carry out certain ancillar y businesses such as automobile servicing, operation of gas stations and billboard advertising along expressways, as well as the securities business. Major assets under management of the Group include the 248km Shanghai-Hangzhou-Ningbo Expressway, the 142 km Shangsan Expressway, ancillary facilities along the two expressways, and Zheshang Securities. Both expressways are situated within Zhejiang Province in the PRC. As at December 31, 2010, total assets of the Company and its subsidiaries amounted to Rmb33,652.06 million. The Company was incorporated on March 1, 1997 as the main vehicle of the Zhejiang Provincial Gover nment for investing in, developing and operating expressways and Class 1 roads in Zhejiang Province. I n c o r p o r a t e d o n D e c e m b e r 2 9 , 2 0 0 1 , Communications Group, the controlling shareholder of the Company, is a provincial-level communications company which is wholly-owned by the State and established by the Zhejiang Provincial Government. It mainly operates a diversity of businesses, such as investment, operations, maintenance, toll collection and ancillary services of expressways; construction and building of transportation project, ocean and coastal transport; as well as real estates. As at December 31, 2010, consolidated assets of Communications Group totaled Rmb133,325.18 million. 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 on May 15, 1997, and the Company subsequently obtained a secondary listing on the London Stock Exchange on May 5, 2000. 4 2010 ANNUAL REPORT Set out below is the corporate and business structure of the Group as at December 31, 2010: ZHEJIANG EXPRESSWAY CO., LTD. 5 Review of Major Corporate Events 1. On March 14, 2010, the Company announced the 2009 annual results in Hong Kong, and thereafter conducted its annual results roadshow in Hong Kong, Singapore, the U.K. and the U.S.A. 2. At 00:00 on April 16, 2010, the toll-by-weight policy came into full effect for the Shanghai- Hangzhou-Ningbo Expressway and the Shangsan Expressway. The traditional toll standards for trucks whereby toll was collected according to truck classes would be changed to toll collected by truck weights. 3. On May 10, 2010, the Company held its 2009 annual general meeting. The meeting approved the distribution of a final dividend of RMB0.25 per share, the re-appointment of Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong as the inter national auditors of the Company, and the re-appointment of Pan-China Certified Public Accountants Ltd. as the PRC auditors of the Company. On the same day, the Company announced its 2010 first quarterly results. 4. O n M a y 2 0 , 2 0 1 0 , t h e C o m p a n y, C o m m u n i c a t i o n s G r o u p a n d Y i w u Communications Development Co., Ltd. entered into an agreement to further inject Rmb23.45 million into Jinhua Co. After the capital injection, the Company continued to hold 23.45% equity interests in Jinhua Co. 5. On July 2, 2010, Huajian, one of the major shareholders of the Company, transferred its 11% equity interests in the Company to the C o m p a n y ’s c o n t r o l l i n g s h a r e h o l d e r, Communications Group, at no consideration. After the share transfer, the equity interests held by Communications Group in the Company has increased to approximately 67%. 6. During the period between August 13 and October 20, 2010, the Company acquired a total of 49% equity interests in Zhejiang Expressway Investment Development Co, Ltd (“Development Co”) which was held by the Company’s middle- to-senior level management and staff. After the acquisition, Development Co became a wholly- owned subsidiary of the Company. 7. On August 29, 2010, the Company announced its 2010 interim results in Hong Kong, and thereafter conducted its inter im results roadshow in Hong Kong and Singapore. 8. On October 18, 2010, the Company held an extraordinary general meeting. The meeting elected Mr. DING Huikang as executive director of the Company and approved his remuneration and Mr. LIU Haisheng as super visor of the Company. Prior to the meeting, the Company had approved on August 28, 2010 the resignation of Ms ZHANG Yang from the office of non-executive director and the resignation of Mr. ZHENG Qihua from the office of supervisor. The meeting also approved the distribution of an interim dividend of RMB0.06 per share. 9. On October 20, 2010, Shangsan Co further injected Rmb861.65 million into Zheshang Securities. Upon completion of the capital injection, Shangsan Co will hold 70.83% equity interests in Zheshang Securities. 10. On November 19, 2010, the Company announced its 2010 third quarterly results. 6 2010 ANNUAL REPORT Particulars of Major Road Projects Expressway Shanghai-Hangzhou Expressway – Jiaxing Section – Yuhang Section – Hangzhou Section Hangzhou-Ningbo Expressway – Hangzhou to Hongken section – Hongken to Duantang section – Duantang to Dazhujia section Shangsan Expressway Percentage of Length in Ownership Kilometers Number of Lanes Number of Toll Stations Number of Service Remaining Years of Start of Areas Operation Operation 99.9995% 51% 100% 100% 100% 100% 73.625% 88.1 11.1 3.4 16.0 124.0 5.0 142.0 8 6 4 4 8 4 4 7 1 2 1 9 1 11 2 1998 0 1995-1998 1995 0 0 2 0 3 1992 1995 1996 2000 18 18 18 17 17 17 20 Current Toll rates on the Shanghai-Hangzhou-Ningbo Expressway 1. Passenger vehicle classification and toll rates Vehicle Class Classification Standard Entrance Fee (Rmb/vehicle) Mileage Fee (Rmb/vehicle/km) 1 2 3 4 5 Passenger vehicle with up to 20 seats Truck with tonnage of 2 tons or below Passenger vehicle with seats above 20 and up to 40 Truck with tonnage of above 2 tons and up to 5 tons Passenger vehicle with seats above 40 Truck with tonnage of above 5 tons and up to 10 tons Truck with tonnage above 10 tons and up to 15 tons Truck with tonnage above 15 tons 2. Toll rates on goods vehicles 5 10 15 15 20 0.45 0.80 1.20 1.40 1.60 Load Legally loaded Toll standards Up to 5 tons Above 5 tons and up to 15 tons Above 15 tons and up to 30 tons Over 30 tons Rmb0.09/ton per km Rmb0.09/ton per km x 1.5 is reduced in a linear manner to Rmb0.09/ton per km Rmb0.09/ton per km is reduced in a linear manner to Rmb0.06/ton per km Based on 30 tons Overloaded vehicle Overloaded below 10% Overloaded up to 30% Overloaded above 30% and up to 50% Calculation based on the basic fee standard for legally loaded The overloaded portion over 10% is calculated based on Rmb0.09/ton per km x 1.2; the remaining portion is calculated based on the fee standard of “Overloaded below 10%” The legally loaded portion and the overloaded portion up to 30% is calculated based on the fee standard of “Overloaded up to 30%”; the remaining portion is calculated based on Rmb0.09/ton per km x 2 Overloaded above The legally loaded portion and the overloaded portion up to 30% is 50% and up to 100% Overloaded over 100% calculated based on the fee standard of “Overloaded up to 30%”; the remaining portion is calculated based on Rmb0.09/ton per km x 3 The legally loaded portion and the overloaded portion up to 30% is calculated based on the fee standard of “Overloaded up to 30%”; the remaining portion is calculated based on Rmb0.09/ton per km x 4 * The mileage fee for Class 1 vehicle on the Shangsan Expressway is Rmb0.40/vehicle/km. The toll rates for other passenger vehicles and trucks are the same as those for the Shanghai-Hangzhou-Ningbo Expressway. ZHEJIANG EXPRESSWAY CO., LTD. 7 Financial and Operating Highlights RESULTS Year ended December 31, 2006 2007 2008 2009 2010 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Revenue Profit Before Tax 4,763,780 7,030,380 6,323,470 6,036,294 6,769,064 2,742,927 4,332,533 2,934,079 3,084,128 3,111,274 Income Tax Expense (884,036) (1,191,638) (668,928) (840,055) (798,785) Profit for the year Attributable to: 1,858,891 3,140,895 2,265,151 2,244,073 2,312,489 Owners of the Company 1,652,871 2,415,965 1,892,787 1,795,488 1,871,499 Non-controlling interests 206,020 724,930 372,364 448,585 440,990 Earnings Per Share (EPS) 38.06 cents 55.63 cents 43.58 cents 41.34 cents 43.09 cents RETURN ON EQUITY (ROE) ROE 13.90% 18.27% 13.83% 12.66% 12.71% 2006 2007 2008 2009 2010 MONTHLY AVERAGE DAILY FULL TRIP TRAFFIC VOLUME Shanghai-Hangzhou-Ningbo Expressway Shangsan Expressway 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 35,342 38,233 42,024 32,126 36,438 20,079 19,057 21,505 19,682 17,887 33,785 40,239 36,261 31,494 35,833 20,174 23,618 22,453 19,659 21,894 38,810 42,536 42,791 33,748 38,175 19,897 22,132 22,301 18,049 18,212 40,789 45,657 44,917 36,725 40,564 20,554 22,402 22,995 19,783 19,561 39,255 44,462 38,583 34,507 38,361 20,215 22,287 20,219 19,106 18,304 38,307 42,938 36,595 33,692 38,073 18,619 20,699 19,028 18,394 17,482 37,067 41,989 36,143 33,574 39,418 18,691 20,957 18,779 18,552 17,682 January February March April May June July August 38,716 43,112 35,856 34,181 38,916 19,379 21,485 18,919 18,720 15,895 September 40,870 44,646 38,146 36,275 40,666 20,542 22,312 19,853 19,905 16,586 October November December Average 40,342 45,037 35,864 36,191 42,200 20,717 22,738 18,732 19,238 17,189 39,486 44,238 32,792 33,623 38,772 19,428 21,503 17,043 16,724 15,725 39,375 42,840 32,251 34,596 37,761 19,136 20,833 16,493 17,277 14,974 38,536 43,001 37,688 34,241 38,765 19,783 21,652 19,895 18,751 17,616 8 2010 ANNUAL REPORT ZHEJIANG EXPRESSWAY CO., LTD. 9 Chairman’s Statement Chairman CHEN Jisong In 2010, the Company’s operation saw a healthy return to growth. In 2011, Under the leadership of the board of directors, we will be meticulous in our planning and innovative in our development endeavors, fully leveraging the strategic opportunities presented to the Company. Whilst steadily growing our toll road business and pro- actively expanding the securities business, Zhejiang Expressway will also actively search for opportunities to develop other new businesses so as to broaden the Group’s income base. 10 2010 ANNUAL REPORT Dear Shareholders, Gathering Strengths to Build Up Our Business Platform It is my pleasure to present to you the 2010 annual report of Zhejiang Expressway on behalf of the board of directors of the Company. Having overcome the negative impact brought by consecutive traffic diversions and the aftermath of the financial crisis that had plagued us during the past two years, the Company’s operation saw a healthy return to growth in year 2010. I am pleased to report that for the year ended 31 December 2010, the Group recorded a total revenue of Rmb 6,769.06 million, an increase of 12.1% over the same period of 2009, while net profit rose 4.2% year-on-year to Rmb1,871.5 million and earnings per share was Rmb43.09 cents (2009: Rmb41.34 cents). The fine operating results indicate that we are on a healthy track to re-climb from the declines that we have suffered since 2008. The improved performance demonstrates the resilient operational strengths of the Company and the earnings quality of its assets. More importantly, the confidence and support of our shareholders and the hard work of the entire management and staff have contributed to enhancing the profitability of the Company. The good work that we have done during the past year has indeed laid a solid foundation for building up a stronger business platform for the future. The current development focus of Zhejiang Expressway is still its toll road assets - assets that have generated satisfactor y retur ns to our shareholders year after year, and will continue to serve as our pillars for supporting our future growth. Both the Shanghai-Hangzhou-Ningbo Expressway and the Shangsan Expressway have been affected by traffic diversions from newly opened roads nearby since 2008. However, as the economy continues to grow healthily and partly owing to the strategic locations of the two expressways within the Yangzi River Delta region, organic traffic growth on the expressways has gradually outweighed the negative impact of traffic diversions caused by competing roads over the past two years. And as the expansion works along Shanghai Section of the Shanghai- Hangzhou-Ningbo Expressway was completed in early 2010, together with the implementation of the toll-by-weight policy, we witnessed the return of double-digit growth for the Shanghai-Hangzhou- Ningbo Expressway after two years of decline. Meanwhile, the decline of toll revenue generated on ZHEJIANG EXPRESSWAY CO., LTD. 11 Chairman’s Statement the Shangsan Expressway has narrowed to 2.3% in Five-year Plan, the Company is faced with an 2010, with the impact of traffic diversions due to excellent opportunity for building up its business Zhuyong Expressway having already stabilized. platform. Under the leadership of the board of Overall speaking, our toll road business looks set to directors, we will be meticulous in our planning and re-gather their strengths and will serve as a pivotal innovative in our development endeavors in 2011, support to the Group’s future business growth. fully leveraging the strategic opportunities presented Our securities business has become another pillar of Zhejiang Expressway, a pillar that we will also rely on for fueling future growth. Now contributing approximately 17% of the Group’s net profit, Zheshang Securities has grown from strength to strength all these years. Despite a turbulent stock market in year 2010, the securities company has achieved satisfactory operating results and has rolled out successful developments. With a total of 54 branches spreading across 48 primary cities in 13 to the Company. Whilst steadily growing our toll road business and pro-actively expanding the securities business, Zhejiang Expressway will also actively search for opportunities to develop other new businesses so as to broaden the Group’s income base. Relying on our parent company’s support, we will investigate possibilities in other infrastructure businesses. In order to meet any emerging funding needs once suitable projects are identified, we are also strengthening our internal capital operation so as to prepare ourselves well for various funding provinces, Zheshang Secur ities has further scenarios in the future. expanded its market share of the nation’s brokerage business. It has also made significant inroads in Harboring our strong toll road operations and building new operations in asset management, securities business as our two pillars, we believe that investment banking and futures, shoring up its the Group is now well poised for building up a competitive edges in offering diverse financial stronger business platform - a platform that will, services to a growing market. together with the concerted efforts of all our staff, take the Group much farther with greater success. With our toll road operations and securities business bur nishing their performance in recent years, CHEN Jisong Zhejiang Expressway looks toward the future with Chairman great confidence. With the rollout of the State’s 12th March 13, 2011 12 2010 ANNUAL REPORT Continuing to Strengthen the Toll Road Business While the toll road operations have re-climbed to strength in 2010, Zhejiang Expressway is by no means complacent about its core business. Faced with an ever-improving road network and growing competition within the industry, the Company will continue to develop new technologies on road maintenance and toll collection and to enhance service quality, with a view to maintaining its market leadership position and strengthening its core competitiveness. It will also strive to seek acquisitions of suitable assets or operate expressway projects entrusted by external parties, so as to further strengthen Zhejiang Expressway’s toll road business and pursue long-term development of the Company. Management Discussion and Analysis As a result of the overall economic recovery, Zhejiang Province also experienced stable and relatively fast development in 2010 and saw various sectors gradually returning to balanced developments. GDP in Zhejiang Province rose 11.8% during the Period as compared to the same period of the previous year. Director and General Manager ZHAN Xiaozhang As China’s domestic macro economy stabilized and improved, revenue from the Group’s overall operations grew during the Period compared to the same per iod of the previous year. However, performance varied across the different operations. During the Period, the Group realized a total income of Rmb6,979.57 million, representing an increase of 11.9% year-on-year; of which Rmb3,590.46 million was attributable to the two major expressways BUSINESS REVIEW In 2010, as the Government applied a number of operated by the Group, representing 51.4% of the initiatives to strengthen and improve macro- total income; Rmb1,731.07 million was attributable economic controls and accelerated economic to the Group’s toll road-related businesses such as restructuring, China has managed to consolidate and service area operations, gas stations, advertising expand the achievements in countering the impact business and so forth, representing 24.8% of the of the global financial crisis, thereby enabling the total income; and Rmb1,658.05 million was Chinese economy to operate well in general. In 2010, attributable to the securities business, representing China’s national GDP grew by 10.3% year-on-year. 23.8% of the total income. 14 2010 ANNUAL REPORT A breakdown of the Group’s income for the Period is set out below: Toll income Shanghai-Hangzhou-Ningbo Expressway Shangsan Expressway Other income Service areas Advertising Road maintenance Securities business income Commission Bank interest Subtotal Less: Revenue taxes Revenue TOLL ROAD OPERATIONS The Group saw a relatively high rate of organic growth in traffic volume along its two expressways during the Period, as a result of a number of favorable factors in 2010 such as the growth in cargo throughput on the highways, increasing automobile sales volume and resumed growth in exports in Zhejiang Province. 2010 Rmb’000 2009 Rmb’000 % Change 2,848,805 741,652 1,641,748 85,881 3,439 1,431,416 226,630 6,979,571 (210,507) 2,451,957 759,434 1,185,813 85,076 3,784 1,582,623 170,074 6,238,761 (202,467) 6,769,064 6,036,294 16.2% -2.3% 38.4% 0.9% -9.1% -9.6% 33.3% 11.9% 4.0% 12.1% Meanwhile, upon completion of the works on the Shanghai section of the Shanghai-Hangzhou Expressway on Januar y 1, 2010 and after the Company had stepped up various promotional activities, traffic volume along the Shanghai- Hangzhou section quickly returned to the level prior to traffic diversions. In addition, the World Expo held in Shanghai contributed to an increase in traffic volume of passenger vehicles traveling on the two expressways of the Group. The implementation of the toll-by-weight policy for trucks in April 2010 has effectively reduced excessive overloading of trucks and boosted toll income from trucks. It has also changed the past few years’ trend whereby the increase in toll income from the Group’s expressways had been lower than the increase in traffic volume, with the increase in toll income being approximately three percentage points higher than the increase in traffic volume in 2010. ZHEJIANG EXPRESSWAY CO., LTD. 15 Management Discussion and Analysis The dual-path identification system for expressways The official operation in February 2010 of the Shenjia in Zhejiang Province launched in mid-October 2009 Huhang Expressway adjacent to the Shanghai- led to a growth in traffic volume along the Shanghai- Hangzhou Expressway had a minor impact on the Hangzhou-Ningbo Expressway while having a traffic volume along the Group’s expressways. negative impact on the traffic volume along the However, the opening of the Zhuyong Expressway Group’s Shangsan Expressway. This was the major on July 22, 2010 had a more significant negative reason for a decline in toll income and traffic volume impact on the Shangsan Expressway, apart from along the Shangsan Expressway compared to the creating slight traffic diversions upon the Group’s same period of the previous year. However, the Shanghai-Hangzhou-Ningbo Expressway. implementation of the system during the Period had a slightly positive impact on toll income from the two expressways as a whole. In order to improve tolling efficiency and to facilitate the access by drivers and passengers to toll stations on expressways in a more efficient and convenient way, the Company has commenced full operation of eight electronic toll stations at the first stage in April 2010. Since its official operation, the electronic tolling system has accounted for 30% of the use of electronic toll collection on all expressways throughout the province, and the system was well- received by users. 16 2010 ANNUAL REPORT Consequently, the average daily traffic volume in full- trip equivalents along the Shanghai-Hangzhou- Ningbo Expressway was 38,784 during the Period, representing an increase of 13.3% year-on-year. In particular, the average daily traffic volume in full-trip equivalents along the Shanghai-Hangzhou section of the Shanghai- Hangzhou-Ningbo Expressway was 39,548, an increase of 19.7% year-on-year, and that along the Hangzhou-Ningbo section was 38,238, an increase of 8.9% year-on-year. The average daily traffic volume in full-trip equivalents along the Shangsan Expressway was 17,584 during the Period, representing a decrease of 6.2% year-on- year. Total toll income from the 248km Shanghai- Hangzhou-Ningbo Expressway and the 142km Shangsan Expressway amounted to Rmb3,590.46 million during the Period, representing an increase of 11.8% year-on-year. In respect of such income, toll income from the Shanghai-Hangzhou-Ningbo Expressway amounted to Rmb2,848.81 million, an increase of 16.2% year-on-year, while toll income from the Shangsan Expressway amounted to Rmb741.65 million, a decrease of 2.3% year-on- year. TOLL ROAD-RELATED BUSINESS OPERATIONS SECURITIES BUSINESS The domestic stock market in China remained The Company also operates certain toll road-related volatile and showed a falling trend in 2010, with a businesses along its expressways through its decrease in trading volume compared to the past. subsidiaries and associated companies, including Meanwhile, the establishment of additional operation gas stations, restaurants and shops in service areas, networks by various major domestic securities firms as well as roadside advertising and vehicle service had further intensified competition among securities businesses. firms, causing commission rates to continue to During the Period, the stabilization and recovery of decline. the macro economy, continued growth in vehicle Zheshang Securities has been taking a positive ownership in the province, and the hosting of the approach to cope with the intensely competitive Shanghai World Expo not only brought an increase environment and endeavoring to expand various in traffic volume along the Group’s two expressways, businesses, and consequently the market share of but also stimulated a rise in the spending will among its securities brokerage business and the total travelers in the service areas. A rebound in traffic number of customers continued to rise, and its volume, a substantial growth in sales of petroleum operation network increased to 54 branches. The products and a rise in the prices of petroleum asset management business grew substantially, products also brought income growth to gas stations, having been approved to launch five integrated asset resulting in a substantial increase in income from management plans in 2010 and ranked among the the service areas as well. Income from toll road- top domestic securities firms in terms of net related businesses amounted to Rmb1,742.12 operating income. Meanwhile, Zheshang Securities’ million during the Period, representing a year-on- investment banking and futures businesses achieved year increase of 35.5%. satisfactory growth as well. During the Period, Zheshang Securities realized an operating income of Rmb1,658.05 million, a decrease of 5.4% year-on-year. Of such income, brokerage commission income amounted to Rmb1,431.42 million, a year-on-year decrease of 9.6%; and bank interest income amounted to Rmb226.63 million, a year-on-year increase of 33.3%. In order to control risks, Zheshang Securities invested more than 70% of its proprietary securities business in bonds with relatively lower risks and as ZHEJIANG EXPRESSWAY CO., LTD. 17 Management Discussion and Analysis such, the securities investment income as accounted daily traffic volume of 9,277 in full-trip equivalents for in the consolidated statement of comprehensive during the Period, while toll income amounted to income amounted to Rmb119.91 million. Rmb189.95 million, an increase of 37.3% year-on- LONG-TERM INVESTMENTS year. Due to its heavy financial burden, the associate company still incurred a loss of Rmb68.45 million Zhejiang Expressway Petroleum Development Co., dur ing the Period but the loss is gradually Ltd. (a 50% owned associate company of the decreasing. JoinHands Technology Co., Ltd. (a 27.582% owned associate company of the Company) generated its income primarily from its printing operations and property leasing. During the Period, it did not show any improvement to its operations but had reduced the percentage of its shareholding in a subsidiary, and consequently it managed to realize a net profit of Rmb4.27 million during the Period. Company) was blessed by a rise in the retail prices of petroleum and a growth in petroleum sales during the Period, and consequently realized an income of Rmb3,551.90 million in 2010, representing an increase of 32.3% year-on-year. However, the opening of five new gas stations in 2010 resulted in increases in corresponding rental expenses, labor costs and repair expenses. During the Period, net profit of the associate company amounted to Rmb17.52 million, which remained at basically the same level as the previous year. The 69.7km Jinhua Section of the Ningbo-Jinhua Expressway, operated by Zhejiang Jinhua Yongjin Expressway Co., Ltd. (a 23.45% owned associate company of the Company), benefited from an increase in toll income in 2010 compared to a lower operating income base in 2009, as a result of the introduction of the toll-by-weight system and the introduction of the more accurately analyzed dual- path identification system. It recorded an average 18 2010 ANNUAL REPORT FINANCIAL ANALYSIS The Group adopts a prudent financial policy with an aim to provide shareholders with sound returns over the long-term. During the Period, net cash inflow generated from the Group’s operating activities amounted to Rmb2,550.50 million, representing a decrease of 14.8%. During the Period, profit attributable to owners of the Company for the year was approximately Rmb1,871.50 million, representing an increase of 4.2% year-on-year, while earnings per share for the Company was Rmb43.09 cents. LIQUIDITY AND FINANCIAL RESOURCES As at December 31, 2010, current assets of the Group amounted to Rmb19,673.10 million in aggregate (2009: Rmb17,903.78 million), of which The Directors do not expect the Company to experience any problem with liquidity and financial resources in the foreseeable future. As at December 31, 2010 2009 Rmb’000 Rmb’000 Cash and cash equivalent Rmb 5,674,173 5,018,914 US$ in Rmb equivalent HK$ in Rmb equivalent 2,616 5,264 25,423 4,666 bank balances and cash accounted for 30.5% (2009: 29.5%), bank balances held on behalf of customers Time deposits Rmb 301,286 228,452 accounted for 59.4% (2009: 64.4%), and held-for- US$ in Rmb equivalent 24,259 — trading investments accounted for 4.1% (2009: Held-for-trading 2.9%). Current ratio (current assets over current investments-Rmb 803,772 517,895 liabilities) as at December 31, 2010 was 1.3 (2009: Available-for-sale 1.3). Excluding the effect of customer deposits investments- Rmb 71,928 54,704 arising from the securities business, the resultant current ratio of the Group (current assets less bank balances held on behalf of customers over current liabilities less balance of accounts payable to customers arising from the securities dealing business) was 2.6 (2009: 2.6). Financial assets held under resale agreement- Rmb 80,163 — Total Rmb 6,963,461 5,850,054 6,931,322 5,819,965 US$ in Rmb equivalent 26,875 25,423 HK$ in Rmb equivalent 5,264 4,666 The amount for held-for-trading investments of the Group as at December 31, 2010 amounted to BORROWINGS AND SOLVENCY Rmb803.77 million (2009: Rmb517.90 million), of As at December 31, 2010, total liabilities of the Group which 74.7% was invested in corporate bonds, amounted to Rmb15,956.94 million, of which 11.4% 24.6% was invested in the stock market, and the was borrowings and 72.9% was accounts payable rest was invested in open-end equity funds. to customers arising from the securities dealing business. ZHEJIANG EXPRESSWAY CO., LTD. 19 Management Discussion and Analysis Total interest-bearing borrowings of the Group as at securities dealing business was fixed at 0.36%. The December 31, 2010 amounted to Rmb1,822.00 Group’s World Bank loans, denominated in US dollar, million, representing an increase of 12.3% over the of approximately Rmb422.38 million equivalent, have beginning of the year. The borrowings comprised been fully repaid during the Period. Total interest expense for the Period amounted to Rmb120.98 million, while profit before interest and tax amounted to Rmb3,232.25 million. The interest cover ratio (profit before interest and tax over interest expenses) stood at 26.7 (2009: 50.2). 2010 2009 Rmb’000 Rmb’000 Profit before tax and interest 3,232,253 3,146,852 Interest expenses Interest cover ratio 120,979 62,724 26.7 50.2 The asset-liability ratio (total liabilities over total assets) was 47.4% as at December 31, 2010 (December 31, 2009: 47.3%). Excluding the effect of customer deposits arising from the securities business, the resultant asset-liability ratio (total liabilities less balance of accounts payable to customers arising from the securities dealing business over total assets less bank balances held on behalf of customers) of the Group was 19.7% (December 31, 2009: 18.4%). outstanding balances of loans from domestic commercial banks totaling Rmb822.00 million, and corporate bonds amounting to Rmb1 billion that was issued by the Company in 2003 for a term of 10 years. Of the interest-bearing borrowings, 54.9% were not repayable within one year. Maturity Profiles Gross Within 2-5 years Beyond amount 1 year inclusive 5 years Rmb’000 Rmb’000 Rmb’000 Rmb’000 Floating rates Commercial bank loans 350,000 350,000 Fixed rates Commercial bank loans 472,000 472,000 — — Corporate bonds 1,000,000 — 1,000,000 Total as at December 31, 2010 1,822,000 822,000 1,000,000 Total as at December 31, 2009 1,622,384 478,055 1,144,329 — — — — — As at December 31, 2010, the Group’s loans from domestic commercial banks comprised half-year and 1-year short-term loans, of which Rmb472.00 million was fixed-rate loans with interest rates ranging from 5.10% to 5.81% per annum, Rmb350.00 million was floating-rate loans with interest rates ranging from 5.00% to 5.52% per annum. The annual coupon rate for corporate bonds was fixed at 4.29%, with interest payable annually. The annual interest rate for accounts payable to customer arising from the 20 2010 ANNUAL REPORT Pursuing a Steady Development of the Securities Business The securities business of Zhejiang Expressway has gradually grown to maturity and has become a significant player in the securities sector. Now counting 54 branches with operations spreading across 48 major cities in 13 provinces, Zheshang Securities endeavors to contin ue to expand its mar ket share and enhance its competitiveness. Whilst continuing to strengthen the new businesses that it has recently expanded into such as investment banking, asset management, futures and fixed income, Zheshang Securities will also focus on developing its human capital, with a view to becoming a market leader in the country’s securities and finance industry. ZHEJIANG EXPRESSWAY CO., LTD. 21 Management Discussion and Analysis CAPITAL STRUCTURE CAPITAL EXPENDITURE As at December 31, 2010, the Group had COMMITMENTS AND UTILIZATION Rmb17,695.12 million total equity, Rmb13,103.03 During the Period, capital expenditures of the Group million fixed-rate liabilities, Rmb350.00 million t o t a l e d R m b 4 6 1 . 8 2 m i l l i o n , w h i l e c a p i t a l floating-rate liabilities and Rmb2,503.91 million expenditures of the Company totaled Rmb169.16 interest-free liabilities, representing 52.6%, 38.9%, million. Amongst the total capital expenditures of the 1.0% and 7.5% of the Group’s total capital, Group, Rmb149.48 million was incurred for respectively. The gearing ratio, which was computed acquisition and constr uction of proper ties, by dividing the total liabilities less accounts payable Rmb133.48 million for purchase of equipment, to customers arising from the securities dealing Rmb97.09 million for the acquisition of 49% equity business by total equity, was 24.4% as at December interests in Zhejiang Expressway Investment 31, 2010 (December 31, 2009: 22.5%). Development Co., Ltd., Rmb23.45 million due to the As at As at December 31, 2010 December 31, 2009 Rmb’000 % Rmb’000 17,695,115 13,103,030 350,000 2,503,910 52.6% 17,064,853 38.9% 12,702,930 1.0% 7.5% 422,384 2,212,614 % 52.7% 39.2% 1.3% 6.8% Total equity Fixed rate liabilities Floating rate liabilities Interest-free liabilities further capital contribution into Zhejiang Jinhua Yongjin Expressway Co., Ltd., Rmb24.30 million for the road widening project between the Shaoxing- Zhuji hub and the Shaoxing-Jiaxing hub of the Shangsan Expressway and Rmb25.00 million for the establishment of Zheshang Fund Management Co.,Ltd.(a 25% owned associate of Zheshang Total 33,652,055 100.0% 32,402,781 100.0% Securities Co., Ltd.). Long-term interest-bearing liabilities 1,000,000 Gearing ratio 1 (Note) Gearing ratio 2 (Note) Asset-liability ratio 1 (Note) Asset-liability ratio 2 (Note) 1,144,329 3.5% 24.4% 5.7% 47.4% 19.7% 3.5% 22.5% 6.7% 47.3% 18.4% As at December 31, 2010, capital expenditures committed by the Group and the Company totaled Rmb765.66 million and Rmb226.72 million, respectively. Amongst the total capital expenditures committed by the Group, Rmb360.18 million will be Note: Gearing ratio 1 represents the total liabilities less used for acquisition and construction of properties, accounts payable to customers arising from the Rmb342.76 million for acquisition of equipment, securities dealing business to the total equity; gearing ratio 2 represents the total amount of the long-term interest-bearing liabilities to the total equity; Asset-liability ratio 1 represents total liabilities to total assets; Asset-liability ratio 2 represents the total liabilities less accounts payable to customers arising from the securities dealing business to the total assets less bank balances held on behalf of customers. 22 2010 ANNUAL REPORT Rmb46.62 million for the widening project between the Shaoxing-Zhuji hub and the Shaoxing-Jiaxing hub of the Shangsan Expressway, and Rmb16.10 million for service area renovation and expansion. The Group will finance its above mentioned capital The Company adopts a remuneration policy that aims expenditure commitments mainly with internally to be competitive for attracting and retaining talents. generated cash flow, with a preference for debt The overall remuneration package for employees financing to meet any shortfalls thereof. comprised mainly basic salaries, bonuses and benefits. CONTINGENT LIABILITIES AND performances, as well as business and share price Bonuses are designed to reflect individual job performances of the Group. Such bonuses are designed as short-term incentives, while a long-term incentive mechanism has yet to be established. Benefits for employees come in the for m of contributions made by the Group to various local social security agencies covering pension, medical and accommodation concerns that are calculated as a percentage of employees’ income and in accordance with relevant rules and regulations. The Company continued to implement the corporate annuity scheme during the Period, and total pension cost charged to the income statement during the Period amounted to Rmb44.86 million. The remuneration level fixed by the Company is sufficient to attract and retain the directors required for its successful operation. All the directors did not participate in determining their emoluments to avoid payment of excessive remuneration. PLEDGE OF ASSETS As at December 31, 2010, the Group did not have any contingent liabilities nor any pledge of assets or guarantees. FOREIGN EXCHANGE EXPOSURE Save for the dividend payments to overseas shareholders in Hong Kong dollars, the Group’s principal operations are transacted and booked in Renminbi. Therefore, the Group’s exposure to foreign exchange fluctuations is limited and the Group has not used financial instrument for hedging purposes. Although the Directors do not foresee any material foreign exchange risks for the Group, there is no assurance that foreign exchange risks will not affect the operating results of the Group in the future. HUMAN RESOURCES As at December 31, 2010, there were 5,827 employees within the Group, amongst whom 1,195 worked in the managerial, administrative and technical positions, while 4,632 worked in fields such as toll collection, maintenance, service areas, securities and futures business outlets. ZHEJIANG EXPRESSWAY CO., LTD. 23 Management Discussion and Analysis OUTLOOK The Chinese economy has improved in general despite encountering a highly complex domestic and international economic environments as well as multiple and frequent natural disasters. In Zhejiang P r ov i n c e, u n d e r t h e c u r r e n t e n v i r o n m e n t underpinned by a significant improvement in infrastructure developments and an increasing stimulation of the economy by consumption, foreign trade exports resumed high growth and automotive retail sales registered a continuous rapid increase. With the above favorable factors, the Group’s two expressways are expected to continue to undergo significant organic growth in traffic volume in 2011. However, the opening of the Zhuyong Expressway in July 2010 will continue to divert traffic flows from the Group’s Hangzhou-Ningbo Expressway and Shangsan Expressway. While the operation of the Shanghai-Hangzhou High-speed Railway on October 26, 2010 has a certain negative impact on passenger buses running between Hangzhou and Shanghai, it is not expected to have a major impact on the Group’s total toll income in 2011. As China is anticipated to further tighten liquidity in order to curb inflation, there will be increasing uncer tainties about the stock market in 2011. Coupled with the fact that fierce competition among securities firms has not shown any sign of subsiding, Zheshang Securities will continue to face intense competition. By making aggressive efforts to develop its core businesses such as investment banking, asset management and fixed income, Zheshang Securities will steadily expand its operation network and strive to deliver satisfactory operating results. 2011 will be the first year of the 12th Five-year Plan where the Company aims to upgrade its capabilities for business evolution. While endeavoring to become a market leader in its principal business of expressway operations, the Company will devote aggressive effor ts to cultivating management capabilities for diversified operations. We will make use of our good cash flow, continuing to seek suitable investments and acquisitions or operate other external expressway projects entrusted to the Group. Through various means such as debt and/or equity financing, we will fully leverage our existing financing capabilities to expand the room for business The implementation of the toll-by-weight policy for d eve l o p m e n t . U l t i m a t e l y, t h e C o m p a ny ’s trucks on April 16, 2010 has generated more management and staff will continue to strive for good satisfactory growth in the Group’s toll income. This operating results for the Company and create greater policy is anticipated to continue to have a more value for our shareholders. positive impact on the Group’s toll income in 2011. Coupled with this is the initial launch of an electronic tolling system for expressways in Zhejiang Province. After achieving a satisfactory result at the Stage- One launch of the system, Stage Two will be implemented at the end of 2011, which will cover all of the Group’s toll stations by 2015. 24 2010 ANNUAL REPORT Actively Seeking New Business Opportunities With its core expressway business and the securities business serving as the Company’s pillars, the Company is well poised for capturing any emerging business opportunities. We will look into possibilities in infrastructure related businesses such as ports and logistics, transportation and related property developments, both in Zhejiang Province and beyond. Leveraging our human and financial resources, Zhejiang Expressway will capitalize on its existing strong business foundation and aim to build an even stronger one. ZHEJIANG EXPRESSWAY CO., LTD. 25 Principal Risks and Uncertainties TOLL ROAD BUSINESS RISKS Economic environment Since complexities regarding the recovery of both the international and domestic economies still exist, coupled with the uncertainties regarding the recovery growth of Zhejiang Province’s internal and external trades, as well as possible new difficulties encountered by the macro-economy amid the current inflationary pressure, it is anticipated that traffic growth along the Group’s expressways remains uncertain in the future. The operations, financial position and operating results of the Group remain uncertain. Competition Although the Shenjia Huhang Expressway and the Zhuyong Expressway were successively opened in 2010, the future openings of nearby expressways such as the Jiaxing-Shaoxing Cross River Passage are expected to result in new traffic diversions for the Shangsan Expressway and certain sections of the Shanghai-Hangzhou-Ningbo Expressway. Therefore, we cannot be assured as to whether traffic volumes to be generated on the expressways under the Group will be at the same levels as before or will increase in the future, or whether the operating results of the Group will be affected. Concession period extension Since the expansion works of the Shanghai- Hangzhou-Ningbo Expressway has been completed, we plan to apply for the extension of the concession period for the construction, management and toll collection of the Shanghai-Hangzhou-Ningbo Expressway. We cannot be assured as to whether the Zhejiang Provincial Government will timely approve the application for extending the concession or whether material delays or serious difficulties will arise in the course of the application for extending the concession period, which may have an adverse impact on the operations, financial position and operating results of the Group. 26 2010 ANNUAL REPORT Toll policy Although Zhejiang Province has implemented the toll-by-weight policy for trucks in April 2010, local toll road policies in Hangzhou City are expected to change due to further inflation in prices of goods and an increase in petroleum product prices. It is also expected that toll standards for vehicle classes and toll calculation methods adopted by expressways in the province may be adjusted further. Changes in toll standards for expressways may arise and we cannot be assured as to whether this will adversely affect the toll income of the Group. SECURITIES BUSINESS RISKS Market Fluctuations Our securities business is susceptible to market fluctuations and may experience periods of high volatility accompanied by reduced liquidity. It may be materially affected by economic and other factors such as the global market conditions; the availability and cost of capital; the liquidity of the global markets; the level and volatility of stock prices, commodity prices and interest rates; currency values and other market indices; inflation; natural disasters; acts of war or terrorism; and investor sentiment and confidence in the financial markets. There is no assurance as to whether our securities business will be adversely affected by fluctuations in the market, or whether our securities business will continue to contribute to our overall profit margin. Regulation of Securities Business We are subject to extensive regulations in the PRC in which we conduct our securities business and we are regulated by the PRC regulatory authorities. We could be fined, prohibited from engaging in some of our business activities or subject to limitations or conditions on our business activities, among other things. Significant regulatory actions against us could have material adverse financial effects, cause us significant reputational harm, or harm our business prospects. New laws or regulations or changes in the enforcement of existing laws or regulations applicable to our clients may also adversely affect our business. FINANCIAL RISKS For financial risks and uncertainties of the Group, see notes 4, 5 and 6 to the Consolidated Financial Statements. RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS The directors of the Company duly confirm that, to the best of their knowledge: — the consolidated financial statements prepared in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants give a true and fair view of the assets, liabilities, financial position and profit of the Group, and covers the enter prises that have been consolidated into the Company; and — the “Management Discussion and Analysis” section included in this annual report includes a fair review of the development and performance of the business and the position of the Group, covers the enterprises that have been consolidated into the Company, and describes the principal risks and uncertainties that the Group faces. From the beginning of Year 2010 up to now, there have been no significant events that would have material impact on the normal operation of the Group. For and on behalf of the Board ZHANG Jingzhong Executive Director/Deputy General Manager Hangzhou, Zhejiang Province, the PRC March 13, 2011 ZHEJIANG EXPRESSWAY CO., LTD. 27 Corporate Governance Report CORPORATE GOVERNANCE PRACTICES BOARD OF DIRECTORS OF THE COMPANY (THE “BOARD”) The Company has adopted its own Guidelines on The executive directors of the Company during the Corporate Governance that closely followed the Period were: principles of good governance in Appendix 14 Mr. CHEN Jisong (Chairman) (“Appendix 14”) of the Rules Governing the Listing Mr. ZHAN Xiaozhang (General Manager) of Securities (the “Listing Rules”) on the Stock Mr. JIANG Wenyao Exchange of Hong Kong Limited (“Stock Exchange”). Mr. ZHANG Jingzhong During the financial year 2010 (the “Period”), the Company had met all provisions in the Code on Corporate Governance Practices (the “Code”) in Appendix 14, and adopted the recommended best practices contained in the Code whenever applicable. DIRECTORS’ SECURITIES TRANSACTIONS Mr. DING Huikang (Effective since October 18, 2010) The non-executive directors of the Company during the Period were: Ms. ZHANG Luyun Ms. ZHANG Yang (Resigned on August 28, 2010) The independent non-executive directors of the Company during the Period were: Mr. TUNG Chee Chen Mr. ZHANG Junsheng The Company has adopted the Rules on Securities Mr. ZHANG Liping Dealings (“Rules on Securities Dealings”) for the directors, supervisors, senior management personnel and other employees of the Company on terms no less exacting than the required standard set out in the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”) in Appendix 10 of the Listing Rules. Upon specific inquiries to all the directors of the Company (the “Directors”), the Directors have confirmed their respective compliance with the required standards for securities transactions by directors as set out in the Model Code and the Rules on Securities Dealings during the Period. 28 2010 ANNUAL REPORT During the Period, the Board held a total of four p r o p o s a l s w e r e u s u a l l y d e l e g a t e d t o t h e meetings. Individual attendances by the directors (as management. indicated by the numbers of meetings attended/ numbers of relevant meetings held) are as follows: Mr. CHEN Jisong (Chairman) Mr. ZHAN Xiaozhang (General Manager) Mr. JIANG Wenyao Mr. ZHANG Jingzhong Mr. DING Huikang Ms. ZHANG Luyun Ms. ZHANG Yang Mr. TUNG Chee Chen Mr. ZHANG Junsheng Mr. ZHANG Liping 4/4 4/4 4/4 4/4 1/1 4/4 3/3 4/4 4/4 4/4 The Company has complied with the requirements under Rules 3.10(1) and (2) of the Listing Rules regarding the appointment of independent non- executive directors, with three independent non- executive directors appointed, at least one of whom possessing the appropriate professional qualification or accounting or related financial management expertise. Pursuant to Rule 3.13 of the Listing Rules, the Company had specifically inquired all three independent non-executive directors and received their respective confirmation of independence during The Board is charged with duties as well as given the Period. The three independent non-executive powers that are expressly specified in the articles of directors have all confirmed their compliance with association of the Company, the scope of which requirements regarding independence under Rule includes, amongst others: to determine the business 3.13 of the Listing Rules. The Company still considers plans and investment proposals of the Company; to the independent non-executive directors to be prepare the financial budget and final accounts of independent. the Company; to determine the dividend policy of the Company; to appoint or dismiss senior managerial officers of the Company as well as to determine their remuneration; and to draw up proposals for any material acquisition or sale by the Company. To assist the Board to effectively discharge its duties, the Board has set up three special committees: the Audit Committee, the Nomination and Remuneration Committee, and the Strategic Committee. While the Board fully retains its power to decide on matters within its scope of duties and powers, relevant preparation and drawing up of plans or There were no financial, business, family or other material/relevant relationships between members of the Board, including that between the Chairman and the General Manager of the Company. CHAIRMAN AND GENERAL MANAGER During the Period, Mr. CHEN Jisong and Mr. ZHAN Xiaozhang were the Chairman and the General Manager of the Company, respectively. The roles of Chairman and General Manager are fully segregated as expressly set out in the articles of association of the Company. ZHEJIANG EXPRESSWAY CO., LTD. 29 Corporate Governance Report NON-EXECUTIVE DIRECTORS AUDITORS’ REMUNERATION The non-executive directors of the Company are Dur ing the Period, the Company had paid appointed for a period of three years, from March 1, HK$3,800,000 (approximately Rmb3,400,000 2009 to February 29, 2012. equivalent) and Rmb850,000 to Deloitte Touche NOMINATION AND REMUNERATION OF DIRECTORS Tohmatsu Certified Public Accountants (the Hong Kong auditors) and Pan-China Certified Public Accountants Ltd. (the PRC auditors) for audit The Board has a Nomination and Remuneration services conducted in 2009, respectively. The Committee, mainly responsible for reviewing and auditors did not provide non-audit services to the making recommendations for the selection standards Company. and procedures for Directors, General Manager and other senior management of the Company; AUDIT COMMITTEE identifying qualified candidates and making reviews and recommendations thereon; and determining, supervising and monitoring the implementation of the remuneration policies for the Directors and senior management personnel. For the details of its terms of reference, please refer to the “Cor porate Governance” section in the Company’s web site. The Nomination and Remuneration Committee comprised of non-executive directors, namely, Ms. ZHANG Luyun, Ms. ZHANG Yang (resigned on August 28, 2010), Mr. TUNG Chee Chen, Mr. ZHANG Junsheng, and Mr. ZHANG Liping, with Ms. ZHANG Luyun as the Chairwoman of the committee since March 1, 2009. D u r i n g t h e Pe r i o d , t h e N o m i n a t i o n a n d Remuneration Committee held two meetings through written communications to review and recommend candidates for the newly appointed director/deputy general manager and supervisor, including the recommended remunerations thereof. The Board has an Audit Committee which is mainly responsible for providing advice to the Board regarding the appointment, reappointment and removal of external auditors; the supervision of the integrity of the Company’s financial statements and annual reports and accounts, half-yearly and quar terly reports, and the review of important opinions in relation to financial reporting as set out in statements and reports, and the review of the Company’s financial control, internal control and risk management system. For the details of its terms of reference, please refer to the “Cor por ate Governance” section in the Company’s web site. The Audit Committee comprised of the non-executive directors, of whom Mr. TUNG Chee Chen, Mr. ZHANG Junsheng and Mr. ZHANG Liping are independent non-executive directors, Ms. ZHANG Luyun and Ms. ZHANG Yang (resigned on August 28, 2010) are non-executive directors, with Mr. TUNG Chee Chen as the Chairman of the committee. 30 2010 ANNUAL REPORT During the Period, the Audit Committee held a total During the Period, the Directors have all confirmed of four meetings. Individual attendances by the their responsibility for preparing the accounts, and members of the committee (as indicated by the that there were no events or conditions which would numbers of meetings attended/numbers of meetings have a material impact on the Company’s ability to held) are as follows: continue to operate as a going concern basis. Mr. TUNG Chee Chen Mr. ZHANG Junsheng Mr. ZHANG Liping Ms. ZHANG Luyun Ms. ZHANG Yang (Resigned on August 28, 2010) 4/4 4/4 4/4 4/4 3/3 In the meetings held during the Period, the Audit Committee conducted, amongst others, review of financial statements for the quarterly, interim and annual results, the effectiveness of the system of internal control and the reporting thereof to the Board, as well as recommendation on the re- appointment of external auditors. During the Period, the Company has complied with Rule 3.21 of the Listing Rules regarding the composition of the audit committee. DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE’S INTERESTS IN SHARES AND UNDERLYING SHARES OF THE COMPANY As at December 31, 2010, none of the Directors, Supervisors and Chief Executives had any interests or short positions in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept pursuant to Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code. ZHEJIANG EXPRESSWAY CO., LTD. 31 Corporate Governance Report INTERESTS AND SHORT POSITIONS OF OTHER PERSONS IN SHARES AND UNDERLYING SHARES OF THE COMPANY As at December 31, 2010, the interests and short positions of other persons in the shares and underlying shares of the Company according to the register required to be kept by the Company pursuant to Section 336 of the SFO, or as otherwise notified to the Company and the Stock Exchange are set out below: Percentage of Total interests the issued in number of share capital ordinary shares of the Company Substantial shareholders Capacity of the Company (domestic shares) Communications Group Beneficial owner 2,909,260,000 100% Percentage of Total interests the issued in number of share capital ordinary shares of the Company Substantial shareholders Capacity of the Company (H Shares) JP Morgan Chase & Co. Beneficial owner, investment manager and custodian corporation/ approved lending agent 184,584,607(L) 140,452,750(P) 12.87% 9.80% BlackRock, Inc. Interest of controlled corporations 143,654,140(L) 2,895,979(S) 10.02% 0.20% Invesco Hong Kong Limited Investment manager 127,952.860(L) 8.92% The letter “L” denotes a long position. The Letter “S” denotes a Short Position. The letter “P” denotes interest in a lending pool. Save as disclosed above, as at December 31, 2010, no other persons had any interests or short positions in the shares or underlying shares of the Company that was required to be recorded pursuant to Section 336 of the SFO, or as otherwise notified to the Company and the Stock Exchange. 32 2010 ANNUAL REPORT SHAREHOLDERS’ RIGHTS INVESTOR RELATIONS Pursuant to the Articles of Association of the The Company made the following changes to the Company, two or more shareholders who in articles of association during the extraordinary aggregate hold 10% or more of the voting rights of general meeting of the shareholders held on October all the shares of the Company having the right to 18, 2010: vote may write to the Board to request the convening of an extraordinary general meeting and specifying the agenda of the meeting. Upon receipt of the request in writing, the Board shall convene the extraordinary general meeting as soon as possible. Shareholders who hold in aggregate 5% or more of the voting rights of all the shares of the Company having the right to vote are entitled to propose additional motions in annual general meeting, provided that such motions are served on the Company within 30 days after the issue of the notice of annual general meeting. Written requests, proposals and enquiries may be sent to the Company at the following address: Zhejiang Expressway Co., Ltd. 12/F, Block A, Dragon Century Plaza 1 Hangda Road Hangzhou, Zhejiang 310007 The People’s Republic of China Attention: Company Secretary (1) Amended Article 19 of the Articles as follows: “After the establishment of the Company, 4,343,114,500 ordinary shares were issued of which 1,433,854,500 were issued as overseas listed foreign invested shares representing approximately 33% of the total number of ordinary shares which were issued by the Company. The shareholding structure of the Company comprises 4,343,114,500 ordinary shares of which 2,909,260,000 domestic invested shares are held by the promoter, Zhejiang Communications Investment Group Co., Ltd.（浙江 省交通投資集團有限公司）and 1,433,854,500 overseas listed foreign invested shares are held by holders of overseas listed foreign invested shares.” (2) Amended Article 90 of the Articles as follows: “The Company shall have a board of directors. The board of directors shall comprise nine directors, of whom five shall be executive directors and four shall be non-executive directors. Of the four non-executive directors, three shall be independent non-executive directors. The board of directors shall have one chairman and one vice-chairman.” ZHEJIANG EXPRESSWAY CO., LTD. 33 Corporate Governance Report During the Period, the last shareholders’ meeting of INTERNAL CONTROLS the Company took place at 3:00 p.m. on Monday, October 18, 2010 at 12/F, Block A, Dragon Century Plaza, 1 Hangda Road, Hangzhou, Zhejiang Province, the People’s Republic of China. Details of this extr aordinar y general meeting of the shareholders were set out in the announcement dated October 18, 2010 on resolutions passed at the extraordinary gener al meeting of the shareholders. The next annual general meeting of the Company is expected to be held on May 9, 2011 to consider the resolutions in respect of, among others, the reports of the directors and of the supervisory committee for 2010, the audited financial statements for 2010, a final dividend for 2010, the final report for 2010 and the financial budget for 2011, as well as the re- appointment of external auditors. The Company’s shares comprised of domestic shares and H shares. The domestic shares are held by Zhejiang Communications Investment Group Co., Ltd as to 2,909,260,000 shares, representing approximately 67% of the total issued capital of the Company. The remaining 1,433,854,500 shares are H shares, representing approximately 33% of the total issued capital of the Company. As at the date of this report, and to the best of the Directors’ knowledge, 100% of the H shares of the Company are held by the public. The Company has set up an internal monitoring system that aims to protect assets, preserve accounting and financial information, as well as to ensure the accuracy of financial statements, including the establishment of departments and units, setting out responsibilities, execution of management systems and quality control mechanisms. The system is capable of taking necessary steps to react to possible changes in our businesses as well as exter nal operating environments. Throughout the operating process, the Company’s various internal control measures are being continuously enhanced, fulfilled and are deemed effective. The Company’s Audit Committee is charged with the duties of reviewing internal controls, directing monitoring activities. Aside from reviewing the annual reporting by external auditors, the committee also reviews the effectiveness of internal control system and risk management mechanism through reviewing the internal special audit report on the Company’s various core businesses prepared by internal audit department on a quarterly basis. During the year, the Audit Committee focused on the compliance of regulatory guidelines by the Company’s securities business, as well as compliance with the Company’s important management systems. The internal audit 34 2010 ANNUAL REPORT department carried out specific audit into these MANAGEMENT FUNCTIONS compliance issues and monitored relev ant rectifications, ensuring the effectiveness of the Company’s management systems. During the Period, the directors of the Company had carried out a review on the effectiveness of the Company’s internal control system, covering all material aspects of internal control, including financial control, operational control, compliance control and risk management functions. There were no major breaches in the internal control system that may have had an impact to shareholders’ interests, and the internal control system was deemed to be effective and sufficient. The management functions of the Board and the management are expressly stipulated in the Articles of Association of the Company. Pursuant to the Ar ticles of Association of the Company, the management of the Company is assigned the functions to be in charge of the production and business operation of the Company and to organize the implementation of the resolutions of the board of directors, to organize the implementation of the annual business plan and investment program of the Company, to prepare plans for the establishment of the internal management structure of the Company, to prepare the basic management systems of the Company, and to formulate basic rules and regulations of the Company, etc. ZHEJIANG EXPRESSWAY CO., LTD. 35 Directors, Supervisors and Senior Management Profiles DIRECTORS EXECUTIVE DIRECTORS M r. C H E N J i s o n g , born in 1952, is a senior engineer with professional certification. Mr. CHEN has been appointed as the chair man of the Company since March 1, 2009. In 1978, Mr. CHEN graduated from Nanjing Institute of Technology. From 1978 to 1982, Mr. CHEN served as Deputy Chief then Chief of Division No. 1 under the Municipal Construction Department in Hangzhou, Zhejiang Province. From 1982 to 1990, he was Deputy Manager then Manager of the Municipal Construction Company in Hangzhou, Zhejiang Province. From 1990 to 1997, he was Deputy Director then Director of Urban and Suburban Construction Commission of Hangzhou, Zhejiang Province. From 1990 to 1993, he served as Deputy Director of Economic Development Zone in Hangzhou, Zhejiang Province. From 1997 to 2000, Mr. CHEN was Deputy Mayor of Hangzhou, Zhejiang Province. From 2000 to 2005, he became Director of the Bureau of Construction of Zhejiang Provincial Government. Mr. CHEN has been Chairman of Communications Group (the controlling shareholder of the Company) since 2005. Mr. ZHAN Xiaozhang, born in 1964, is a senior e c o n o m i s t w i t h a bachelor’s degree in law. In 2005, Mr. ZHAN obtained a master’s d e g r e e i n p u b l i c administration from the Business Institute of Zhejiang University. Mr. ZHAN has been appointed as an Executive Director and the General Manager of the Company since March 1, 2009. From 1985 to 1991, Mr. ZHAN worked as an officer at Transport Administrative Division under Waterway Transport Authority of Zhejiang Provincial Bureau of Construction. From 1991 to 1998, he served as 36 2010 ANNUAL REPORT Deputy Secretary then Secretary of the Communist Youth League Commission at Zhejiang Provincial Bureau of Communications. From 1998 to 2002, he was Deputy Director of Waterway Transport Authority u n d e r Z h e j i a n g P r o v i n c i a l B u r e a u o f Communications. From 2002 to 2003, he was Deputy Director of Human Resources Depar tment at Zhejiang Provincial Bureau of Communications. From 2003 to 2006, Mr. ZHAN was Chairman of Zhejiang Wenzhou Yongtaiwen Expressway Co., Ltd. From 2006 to 2008, he became Chairman of Zhejiang Jinji Property Co., Ltd. Mr. ZHAN has been Assistant to General Manager and Manager of Research and Development Department at Communications Group (the controlling shareholder of the Company) from 2006 to 2009. Mr. JIANG Wenyao, born in 1966, is an Executive Director and Deputy General M a n a g e r o f t h e Company. Mr. JIANG g r a d u a t e d f r o m Zhejiang University, majoring in industrial automation and manufacturing mechanics, and obtained a master’s degree in engineering. From March 1991 to February 1997, he worked in the Engineering Division, the Planning and Finance Division and the Equipment Division of the Zhejiang Provincial Expressway Executive Commission. He joined the Company since March 1997, and has served as Deputy Manager of the General Department, Manager of the Equipment Department, Manager of the Operation Department, Assistant to General Manager and Company Secretary. He has been serving as Deputy General Manager since March 2003 and Executive Director and Deputy General Manager since March 2006. Mr. JIANG also serves as Director and General Manager at Development Co., and Director at Yuhang Co., both subsidiaries of the Company. Engineering Construction Group. From 2000 to 2004, he was head of the management committee of Zhejiang Ningbo Yongtaiwen Expressway Second Phase Project. He has been Chairman of Zhejiang Ningbo Yongtaiwen Expressway Co., Ltd. and Zhejiang Zhoushan Cross-Sea Bridge Co., Ltd. since 2004 and 2006 respectively. NON-EXECUTIVE DIRECTORS Ms. ZHANG Luyun, born in 1961, is a senior economist and Director and Deputy General Manager of C o m m u n i c a t i o n s Group (the controlling shareholder of the Company) Ms. ZHANG graduated from the Department of Chinese Language at Zhejiang University, majoring in Chinese Language, and obtained an EMBA degree from China Europe International Business School in 2008. From 1983 to 1997, she served as Secretary, Deputy Chief and Chief of the Office of Hangzhou City Communist Party Committee. In 1997, she was Deputy President of Hangzhou Broadcasting and TV College. She joined Communications Group in December 2001 and has been Director and Deputy General Manager since then. Ms. ZHANG has been Non-executive Director of the Company since March 2003. Mr. ZHANG Jingzhong, born in 1963, is a senior lawyer, Executive Director and Company Secretary of the Company. Mr. ZHANG graduated from Zhejiang University (previously known as Hangzhou University) in July 1984 with a bachelor’s degree in law. In 1984, he joined the Zhejiang Provincial Political Science and Law Policy Research Unit. From 1988 to 1994, he was Associate Director of Hangzhou Municipal Foreign Economic Law Firm. In 1992, he obtained the qualifications required by the regulatory authorities in China to practice securities law. In January 1994, Mr. ZHANG became Senior Partner at T&C Law Firm in Hangzhou. Mr. ZHANG has been Executive Director and Company Secretary of the Company since March 1997, and was appointed Deputy General Manager in March 2002. He was re-appointed as Company Secretary in March 2003 and as Deputy General Manager in March 2006. Mr. ZHANG also serves as Director at Shangsan Co., Development Co., Petroleum Co., and Vice Chairman at Zheshang Securities. Mr. DING Huikang, bor n in 1955, is an E x e c u t i ve D i r e c t o r and Deputy General M a n a g e r o f t h e Company. Mr. DING f r o m g r a d u a t e d Zhejiang Institute of Communications majoring in Road and Bridge Engineering and Changsha Institute of Communications majoring in Economic Law. From 1980 to 1997, Mr. Ding successively held the positions of technician, assistant engineer, engineer, assistant team leader and team leader at No.1 Road Engineering Team of Zhejiang Province. From 1997 to 2000, he served as General Manager and senior engineer of No. 1 Transportation Engineering Co., Ltd. of Zhejiang Transportation ZHEJIANG EXPRESSWAY CO., LTD. 37 Directors, Supervisors and Senior Management Profiles INDEPENDENT NON-EXECUTIVE DIRECTORS Mr. TUNG Chee Chen, born in 1942, is Chairman (Chief Executive Officer) of Or ient Overseas (International) Limited. He is an Independent Non- executive Director, a member of the Nomination and Remuneration Committee and Chairman of the Audit Committee of the Company. Mr. TUNG was educated at the University of Liverpool, England, where he received his bachelor’s degree in science. He later obtained a master’s degree in mechanical engineering at the Massachusetts Institute of Technology in the United States. Mr. TUNG has been Independent Non-executive Director of the Company since March 1997. In addition, Mr. TUNG also holds directorships in the following listed public companies: Independent Non-executive Director of BOC Hong Kong (Holdings) Limited, Cathay Pacific Airways Limited, PetroChina Company Limited, Sing Tao News Corporate Limited, Wing Hang Bank Limited and U-Ming Marine Transport Corp. Mr. ZHANG Junsheng, b o r n i n 1 9 3 6 , i s a professor, Independent Non-executive Director and a member of the Audit Committee and the Nomination and Remuneration Committee of the Company. Mr. ZHANG graduated from Zhejiang University in 1958, and was Lecturer, Associate Professor, and Advising Professor at Zhejiang University. He was also Professor concurrently at, amongst other universities, Zhongshan University. In 1980, he became Deputy General Secretary of Zhejiang University. In 1983, Mr. ZHANG served as Deputy General Secretary in the Hangzhou City Communist Party Committee. In 1985, he began to work for the Xinhua News Agency, Hong Kong Branch, and had become its Deputy Director since July, 1987 and was Consultant to the Sichuan Provincial Government and Senior Consultant to the Shenzhen Municipal Government. Since September 1998, Mr. ZHANG has taken up the position of General Secretary of Zhejiang University. From 2003 to 2008, Mr. ZHANG served as Director of the Zhejiang Province Economic Development Consultation Committee and he is currently Special Advisor to the Zhejiang Provincial Government, Chairman of Zhejiang University Development Committee, Honorary Doctor of Science of City University of Hong Kong, Honorary Academician of Asian Knowledge Management Association and Honorary Professor of Canadian Char tered Institute of Business Administration. Mr. ZHANG has been Independent Non-executive Director of the Company since March 2000. Mr. ZHANG Liping, born in 1958, is C h i e f E xe c u t i ve Officer of Credit Suisse in China. He is Independent Non- executive Director, a member of the Audit Committee and Chairman of the Nomination and Remuneration Committee of the Company. Mr. ZHANG graduated from the University of International Business & Economics of Beijing and received a master’s degree in international affairs and international laws from St. John’s University in New York, the United States. He also attended New York University’s MBA program. Mr. ZHANG held a number of senior positions at other organizations, including Chief Executive Officer of Imagi International Holdings Limited, Managing Director of Pacific Concord Holdings Limited, Managing Director and Geographic Head - Greater China Region of Dresdner Banking Group, and Director of the Investment Banking Division and China Chief Representative of Merrill Lynch Co. & Inc. Mr. ZHANG has been Independent Non-executive Director of the Company since March 2003. 38 2010 ANNUAL REPORT has served as the Deputy Manager and the Manager of the Planning and Development Department, the Manager of the Project Development Department, the Director of Quality Management Office, the Director of Internal Audit Department of the Company and the Manager of the Human Resources Department. Mr. FANG is currently the Director of Disciplinary Committee and is also the Chairman of Jiaxing Co., and director of Jinhua Co.. INDEPENDENT SUPERVISORS Mr. JIANG Shaozhong, b o r n i n 1 9 4 6 , i s a professor. Mr. JIANG gr aduated from the M a n a g e m e n t Department of Zhejiang University with a master’s degree. In 1982, he worked in the Management Department of Zhejiang University as Lecturer, Assistant Professor, Professor, Dean of Research Office and Deputy Dean of the Department. From 1984 to 1985, he was Visiting Scholar at Stanford University in the United States. From 1991 to 1998 he was Deputy General Economist, Chief of the Financial Division, Chief of the Teaching Division and Standing Deputy Dean of the Management School of Zhejiang University. He is currently Deputy General Accountant of Zhejiang University. SUPERVISORS SUPERVISOR REPRESENTING SHAREHOLDERS Mr. MA Kehua, born in 1952, is a senior economist and Chair man of the Supervisory Committee. Mr. MA graduated from the Mechanics Department of Shanghai Railway Institute in 1977, after which he worked as an Engineer at Shanghai Railway Bureau No.1 Construction Company and the Plumbing and Electricity Section of Shanghai Railway Bureau, Hangzhou Branch. Mr. MA was in charge of the Planning and Finance Division at Zhejiang Local Railway Company, and in 1993 became Deputy Division Chief and Division Chief of Zhejiang Jinwen Railway Executive Commission responsible for materials supply. Mr. MA took up the post of Deputy General Manager of Zhejiang Provincial High Class Highway Investment Company Limited in June 1999, and is currently Deputy General Manager of Communications Group (the controlling shareholder of the Company). SUPERVISOR REPRESENTING EMPLOYEES Mr. FANG Zhexing, born in 1965, is a Senior Engineer, the Supervisor Representing Employees of the Company. Mr. FANG graduated from Zhejiang University where he received a master’s degree in engineering in 1991. From 1986 to 1988 he was the Assistant Engineer in the Project Management Office of the Electric Power and Water Conservancy Bureau in Taizhou. From 1991 until 1997, he was the Engineer in the Project Management Office of Zhejiang Provincial Expressway Executive Commission, where he participated in the project management of Shanghai- Hangzhou-Ningbo Expressway. Since March 1997, he ZHEJIANG EXPRESSWAY CO., LTD. 39 Directors, Supervisors and Senior Management Profiles main research fields include accounting for intangible assets, strategic cost management and economic theories. Mr. LIU is also independent director of Ningbo Thermal Power Co., Ltd, Zhejiang Qianjiang Motorcycle Co., Ltd and Zhejiang Enjoyor Electronics Co., Ltd. OTHER SENIOR MANAGEMENT MEMBER Mr. WU Junyi, born in 1969, a holder of master degree in accounting, a n d i s t h e C h i e f Financial Officer of the C o m p a n y. M r. W U 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. Mr. WU Yongmin, born in 1963, is an assistant p r o f e s s o r . M r. W U graduated from China University of Political Science and Law with a master’s degree in law in 1990. He was Deputy Dean of the Department of Law at Hangzhou University, Deputy Dean and Standing Deputy Dean of the Department of Law at Zhejiang University’s Law School, and Director of Zhejiang Zheda Law Firm. Mr. WU studied at Christian-Albrechts-Universit ät zu Kiel in 1996 as Visiting Scholar. He is currently Acting Dean of the Department of Law at the Law School of Zhejiang University, Super visor for master’s degree candidates in Business Law, member of China Business Law Research Council, Deputy Director of Zhejiang Tax Law Research Council, Arbitrator of Hangzhou Arbitration Committee, and Lawyer at Zhejiang Zeda Law Firm. Mr. LIU Haisheng, born in 1969, is a professor. He obtained a doctorate degree in Economics from Fudan University, a postdoctoral fellow in Accounting at Xiamen University. He is currently Professor in Accounting, a master student supervisor, a Certified Public Accountant (non-practicing) in the PRC, a member of the Expert Consultancy Committee of Accounting Standards in Zhejiang Province, an Assessment Expert on Financial Expenditures Performance of Zhejiang Province, an executive member of the Zhejiang Association of Certified Financial Officers and Independent Supervisor of the Company. He is currently a Vice Dean of the School of Finance and Accounting at Zhejiang Gongshang University. His 40 2010 ANNUAL REPORT Report of the Directors The Directors of the company hereby present their RESULTS AND DIVIDENDS report and the audited financial statements of the Company and the Group for the year ended December 31, 2010. The Group’s profit for the year ended December 31, 2010 and the state of financial position at that date are set out in the financial statements on pages 49 PRINCIPAL ACTIVITIES to 123. The principal activities of the Group comprise the operation, maintenance and management of high grade roads, development and operation of certain ancillary services, such as advertising, automobile servicing and fuel facilities, as well as provision of security broking service and proprietary securities trading. SEGMENT INFORMATION During the year, the entire revenue and segment profit of the Group were derived from the People’s Republic of China (“PRC”). Accordingly, a further analysis of the revenue and segment profit by geographical area is not presented. An analysis of the Group’s revenue and segment profit by principal activity for the year ended December 31, 2010 is set out in note 7 to the financial statements. An inter im dividend of Rmb0.06 per share (approximately HK$0.07) was paid on November 18, 2010. The Directors recommend the payment of a final dividend of Rmb0.25 (approximately HK$0.29) in respect of the year, to shareholders whose names appeared on the register of members of the Company on April 14, 2011. This recommendation has been incorporated in the financial statements as an allocation of retained earnings within the capital and reserves section in the consolidated statement of financial position. The dividend payout ratio reached 71.9% during the Period. Further details of the dividends are set out in note 16 to the financial statements. ZHEJIANG EXPRESSWAY CO., LTD. 41 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 non-controlling interests of the Group prepared on the basis set out in the notes below. Results Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Year ended December 31, 2010 2009 2008 2007 2006 REVENUE Operating costs Gross profit (Restated) (Restated) 6,769,064 6,036,294 6,323,470 7,030,380 4,763,780 (3,760,494 ) (3,145,294) (3,133,244) (3,089,133) (2,076,670) 3,008,570 2,891,000 3,190,226 3,941,247 2,687,110 Security investment income (loss) Other income 126,532 199,791 35,967 (316,213) 475,828 80,421 426,280 211,420 134,607 123,531 Administrative expenses (83,189 ) (69,845) (70,003) (81,089) (71,022) Other expenses Finance costs (21,904 ) (133,640) (38,947) (93,259) (32,901) (120,979 ) (62,724) (76,809) (60,552) (71,991) Share of profit (loss) of associates 2,453 (24,164) 10,659 (4,655) 4,435 Share of profit of a jointly controlled entity PROFIT BEFORE TAX INCOME TAX EXPENSE — 21,254 23,746 20,406 23,344 3,111,274 3,084,128 2,934,079 4,332,533 2,742,927 (798,785 ) (804,055) (668,928) (1,191,638) (884,036) PROFIT FOR THE YEAR 2,312,489 2,244,073 2,265,151 3,140,895 1,858,891 Attributable to: Owners of the Company Non-controlling interests 1,871,499 1,795,488 1,892,787 2,415,965 1,652,871 440,990 448,585 372,364 724,930 206,020 EARNINGS PER SHARE-BASIC 43.09 cents 41.34 cents 43.58 cents 55.63 cents 38.06 cents 42 2010 ANNUAL REPORT Assets and liabilities Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 As at December 31, 2010 2009 2008 2007 2006 Total assets Total liabilities Net assets Notes: (Restated) (Restated) 33,652,055 32,402,781 25,287,521 27,512,804 19,570,419 (15,956,940 ) (15,337,927) (8,990,253) (11,748,490) (6,217,967) 17,695,115 17,064,854 16,297,268 15,764,314 13,352,452 1. The consolidated results of the Group for the four years ended December 31, 2009 have been extracted from the Company’s 2009 annual report dated March 30, 2010, while those of the year ended December 31, 2010 were prepared based on the consolidated statement of comprehensive income as set out on page 49 of the financial statements. 2. The 2010 earnings per share is based on the profit attributable to owners of the Company for the year ended December 31, 2010 of Rmb1,871,499,000 (2009: Rmb1,795,488,000) and the 4,343,114,500 ordinary shares (2009: 4,343,114,500 ordinary shares) in issue during the year. 3. Differences in Financial Statements prepared under PRC GAAP and HKFRSs Profit for the year Net assets as at December 31, 2010 2009 2010 2009 Rmb’000 Rmb’000 Rmb’000 Rmb’000 As reported in the statutory financial statements of the Group prepared in accordance with PRC GAAP 2,321,359 2,257,855 17,926,462 17,287,330 HK GAAP adjustments: (a) Goodwill (b) Amortization provided, — — (199,769) (199,769) net of deferred tax (1,952) (13,709) (157,300) (155,348) (c) Assessment on impact of appreciation, net of deferred tax (d) Others (e) Non-controlling interests (3,677) — (3,241) (3,884) 3,719 92 70,427 7,228 48,067 74,104 7,228 51,309 As restated in the financial statements 2,312,489 2,244,073 17,695,115 17,064,854 ZHEJIANG EXPRESSWAY CO., LTD. 43 Report of the Directors MAJOR CUSTOMERS AND SUPPLIERS statement of changes in equity on page 52 to the financial statements. In the year under review, the five largest customers and suppliers of the Group accounted for less than DISTRIBUTABLE RESERVES 30% of the total turnover and purchases, As at December 31, 2010, before the proposed final respectively. 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. RELATED PARTY TRANSACTIONS During the year, details of the related par ty 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 deter mined under HK GAAP, amounted to Rmb1,868,794,000. In addition, in accordance with the Company Law of the PRC, the amount of approximately Rmb3,645,726,000 standing to the credit of the Company’s share premium account as prepared in accordance with the PRC accounting standards was available for distribution by way of transactions that the Company has entered into with capitalisation issues. its subsidiary and fellow subsidiary are set out in note 43 to the financial statements. TRUST DEPOSITS PROPERTY, PLANT AND EQUIPMENT Details of movements in proper ty, plant and equipment of the Group during the year are set out in note 18 to the financial statements. CAPITAL COMMITMENTS Details of the capital commitments of the Group as at December 31, 2010 are set out in note 41 to the financial statements. RESERVES Details of movements in the reserves of the Group during the year are set out in the consolidated 44 2010 ANNUAL REPORT As at December 31, 2010, the Group did not have any trust deposits with any non-bank financial institution in the PRC. 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. PURCHASE, REDEMPTION OR SALE OF THE LISTED SECURITIES OF THE COMPANY Neither the Company nor any of its subsidiaries purchased, redeemed or sold any of the Company’s listed securities during the year. DIRECTORS The Directors of the Company during the year and as at the date of this report are: EXECUTIVE DIRECTORS Mr. CHEN Jisong (Chairman) Mr. ZHAN Xiaozhang (General Manager) Mr. JIANG Wenyao Mr. ZHANG Jingzhong Mr. DING Huikang (Effective since October 18, 2010) NON-EXECUTIVE DIRECTORS Ms. ZHANG Luyun DIRECTORS’ AND SENIOR MANAGEMENT’S BIOGRAPHIES Biographical details of the Directors of the Company and the senior management of the Group are set out on page 36 in the Company’s annual report. DIRECTORS’ SERVICE CONTRACTS Each of the Directors of the Company has entered into a service agreement with the Company, with effect from March 1, 2009 or the date of appointment, to February 29 , 2012. Save as disclosed above, none of the Directors and Supervisors has entered into any service contract Ms. ZHANG Yang (Resigned on August 28, 2010) with the Company which is not terminable by the Company within one year without payment of INDEPENDENT NON-EXECUTIVE DIRECTORS compensation, other than statutory compensation. Mr. TUNG Chee Chen Mr. ZHANG Junsheng Mr. ZHANG Liping CHANGE IN DIRECTORS AND SENIOR MANAGEMENT DIRECTORS’ AND SUPERVISORS’ INTERESTS IN CONTRACTS As at December 31, 2010 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 At the board meeting held by the Company on the Company, its holding company, or any of its August 28, 2010, Ms. ZHANG Yang resigned from subsidiaries or fellow subsidiaries was a party. her position as Director of the Company due to changes in her job responsibilities. Mr. DING Huikang was nominated to be Director and Deputy General Manager of the Company. The appointment of Mr. DING Huikang’s Executive Directorship was DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE’S RIGHTS TO SUBSCRIBE FOR SHARES OR DEBENTURES subsequently approved by resolutions passed at the At no time during the year were there rights to acquire extraordinary general meeting of shareholders held benefits by means of the acquisition of shares in or on October 18, 2010. The ter m of Mr. DING Huikang’s Executive Directorship commenced on October 18, 2010 and expires on February 29, 2012. debentures of the Company granted to any Director, Supervisor and chief executive or their respective spouse or minor children, or were any such rights exercised by them; or was the Company, its holding company, or any of its subsidiaries or fellow ZHEJIANG EXPRESSWAY CO., LTD. 45 Administration of Taxation PRC (Guoshuihan [2008] No.897), when Chinese resident enterprises distribute annual dividends for the year 2008 and years thereafter to their H-Share holders who are overseas non-resident enterprises, the enterprise income tax shall be withheld at a uniform rate of 10%. Under current practice of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in respect of dividends paid by the Company. Shareholders are taxed or enjoy tax relief in accordance with the aforementioned regulations. AUDITORS Deloitte Touche Tohmatsu Cer tified Public Accountants Hong Kong, who had served as the Company’s Hong Kong auditors since 2005, will retire and a resolution for their reappointment as Hong Kong auditors of the Company will be proposed at the forthcoming annual general meeting. ON BEHALF OF THE BOARD CHEN Jisong Chairman Hangzhou, Zhejiang Province, the PRC March 13, 2011 Report of the Directors subsidiaries a party to any arrangement to enable any such persons to acquire such rights in any other body corporate. SHARE CAPITAL During the Period, one of the Company’s major shareholders, Huajian transferred its all shares to t h e C o m p a n y ’s m a j o r i t y s h a r e h o l d e r, Communications Group. Before the transfer, Huajian and Communications Group held respectively 11% (476,760,000 shares) and 56% (2,432,500,000 shares) shareholding of the Company. After the transfer, shareholding held by the Communications Group increased to 67% ( 2 , 9 0 9 , 2 6 0 , 0 0 0 s h a r e s ) . T h e r e m a i n i n g 1,433,854,500 Shares are H Shares, representing approximately 33% of the total issued share capital of the Company. PRE-EMPTIVE RIGHTS There is no provision for pre-emptive rights in the Company’s Articles of Association or the laws of the PRC which would require the Company to offer new shares on a pro rata basis to existing shareholders. TAXATION AND TAX RELIEF In accordance with the Notice on Taxation of Dividends and Stock (Options) Transfer Income Obtained by Foreign-invested Companies, Foreign Companies and Foreign Citizens (Guoshuifa [1993] No.045) published by the State Administration of Taxation, foreign individuals holding H Shares are exempted from paying personal income tax for dividends obtained from companies incorporated in PRC that issue H Shares. As stipulated by the Notice on Issues Relating to Enterprise Income Tax Withholding over Dividends Distributable to Their H-Share Holders Who are Overseas Non-resident Enterprises by Chinese Resident Enterprises published by the State 46 2010 ANNUAL REPORT Report of the Supervisory Committee During the financial year 2010 (the “Period”), the development of securities and futures business while Super visor y Committee duly perfor med its the core expressway business regained growth for supervisory duties, and safeguarded the legitimate the first time in three years, with timely initiated major interests of the shareholders and the Company in policy reforms in road maintenance and employee accordance with relevant rules and regulations under remunerations. the Company Law of the PRC, the Company’s Articles of Association and the Rules of the Supervisory Committee. The Super visory Committee has reviewed the financial statements of the Company for 2010 prepared by the Board for submission to the general Main tasks undertaken by the Supervisor y meeting of shareholders, and concluded that the Committee during the Period were to assess and financial statements accurately reflected the financial supervise lawfulness, legality and appropriateness position of the Company in 2010, and complied with of the activities of the Directors, General Manager the relevant laws, regulations and the Company’s and other senior management of the Company in Articles of Association. The Company kept absolute their business decision-making and daily dividend payment for the recent years unchanged management processes, through a combination of while its annual results recorded small single digit activities including holding meetings of the growth, thereby keeping the long term dividend Supervisory Committee and attending meetings of payout policy stable. shareholders and meetings of the Board. The Supervisory Committee has carefully examined the operating results and the financial standing of the Company, and discussed and reviewed the financial statements to be submitted by the Board to the general meeting. During the Period, the members of the Board, General Manager and other senior management of the Company have complied with their fiduciary duties and worked in good faith and diligence while carrying out their responsibilities. There was no incident of abuse of power or infringement of the During the Period, the Supervisory Committee held interests of shareholders or employees. two meetings of its own, and attended four meetings of the Board and two shareholders’ meeting. The Supervisory Committee is satisfied with the various results obtained by the Board and the The Supervisory Committee observes that during management of the Company. the Period, the Directors, General Manager and other senior management of the Company worked By the order of the Supervisory Committee strenuously in leading the staff to successfully MA Kehua implement major projects such as toll-by-weight for Chairman of the Supervisory Committee trucks and security measures for Shanghai World Hangzhou, Zhejiang Province, the PRC Expo; grasping opportunities and accelerated the March 11, 2011 ZHEJIANG EXPRESSWAY CO., LTD. 47 Independent Auditor’s Report TO THE MEMBERS OF ZHEJIANG EXPRESSWAY CO., LTD. 浙江滬杭甬高速公路股份有限公司 (Established in the People’s Republic of China with limited liability) We have audited the consolidated financial statements of Zhejiang Expressway Co., Ltd. (the “Company”) and its subsidiaries (collectively referred to as the “Group”) set out on pages 49 to 123, which comprise the consolidated statement of financial position as at December 31, 2010, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Directors’ Responsibility for the Consolidated Financial Statements The directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Group as at December 31, 2010, and of the Group’s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance. Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong March 13, 2011 48 2010 ANNUAL REPORT Consolidated Statement of Comprehensive Income For the Year ended December 31, 2010 Revenue Operating costs Gross profit Securities investment gains Other income Administrative expenses Other expenses Share of profit (loss) of associates Share of profit of a jointly controlled entity Finance costs Profit before tax Income tax expense Profit for the year Other comprehensive (loss) income Available-for-sale financial assets: – Fair value gain during the year – Reclassification adjustments for cumulative gain included in profit or loss upon disposal Income tax relating to components of other comprehensive income NOTES 2010 2009 7 8 9 10 11 12 13 Rmb’000 Rmb’000 6,769,064 6,036,294 (3,760,494) (3,145,294) 3,008,570 2,891,000 126,532 199,791 (83,189) (21,904) 2,453 — (120,979) 35,967 426,280 (69,845) (133,640) (24,164) 21,254 (62,724) 3,111,274 3,084,128 (798,785) (840,055) 2,312,489 2,244,073 14,342 34,234 (25,052) 2,678 (13,632) (5,150) Other comprehensive (loss) income for the year (net of tax) (8,032) 15,452 Total comprehensive income for the year 2,304,457 2,259,525 Profit for the year attributable to: Owners of the Company Non-controlling interests Total comprehensive income for the year attributable to: Owners of the Company Non-controlling interests 1,871,499 1,795,488 440,990 448,585 2,312,489 2,244,073 1,867,332 1,803,504 437,125 456,021 2,304,457 2,259,525 EARNINGS PER SHARE - Basic 17 Rmb 43.09 cents Rmb 41.34 cents ZHEJIANG EXPRESSWAY CO., LTD. 49 Consolidated Statement of Financial Position At December 31, 2010 NON-CURRENT ASSETS Property, plant and equipment Prepaid lease payments Expressway operating rights Goodwill Other intangible assets Interests in associates Available-for-sale investments CURRENT ASSETS Inventories Trade receivables Other receivables Prepaid lease payments Available-for-sale investments Held for trading investments Financial assets held under resale agreement Bank balances held on behalf of customers Bank balances and cash – Restricted bank balances – Time deposits with original maturity over three months – Cash and cash equivalents CURRENT LIABILITIES Accounts payable to customers arising from securities dealing business Trade payables Tax liabilities Other taxes payable Other payables and accruals Dividends payable Interest-bearing bank and other loans Provisions NET CURRENT ASSETS NOTES 2010 2009 Rmb’000 Rmb’000 18 19 20 21 22 24 25 26 27 19 25 28 29 30 31 31 31 32 33 34 35 36 1,120,626 1,035,628 71,035 30,342 12,071,497 12,755,338 86,867 155,020 472,910 1,000 86,867 154,819 435,007 1,000 13,978,955 14,499,001 17,715 50,768 953,153 2,052 71,928 803,772 80,163 17,342 50,570 451,167 1,421 54,704 517,895 — 11,685,951 11,532,284 — 325,545 5,682,053 942 228,452 5,049,003 19,673,100 17,903,780 11,631,030 11,502,930 548,695 450,708 51,002 1,049,301 120,319 822,000 21,238 647,373 512,551 30,492 637,665 18 478,055 122,477 14,694,293 13,931,561 4,978,807 3,972,219 TOTAL ASSETS LESS CURRENT LIABILITIES 18,957,762 18,471,220 50 2010 ANNUAL REPORT NON-CURRENT LIABILITIES Interest-bearing bank and other loans Long-term bonds Deferred tax liabilities CAPITAL AND RESERVES Share capital Reserves Equity attributable to owners of the Company Non-controlling interests NOTES 2010 2009 Rmb’000 Rmb’000 35 37 38 — 144,329 1,000,000 1,000,000 262,647 262,037 1,262,647 1,406,366 17,695,115 17,064,854 39 4,343,115 10,380,137 4,343,115 9,840,505 14,723,252 14,183,620 2,971,863 2,881,234 17,695,115 17,064,854 The consolidated financial statements on pages 49 to 123 were approved and authorised for issue by the Board of Directors on March 13, 2011 and are signed on its behalf by: CHEN Jisong DIRECTOR ZHAN Xiaozhang DIRECTOR ZHEJIANG EXPRESSWAY CO., LTD. 51 Consolidated Statement of Changes in Equity For the Year ended December 31, 2010 Attributable to owners of the Company Non-controlling Total Statutory Investment interests Share capital Share reserves revaluation Dividend premium (Note) reserve reserve Special reserve Retained profits Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 At January 1, 2009 4,343,115 3,645,726 2,116,529 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Dividend paid to non-controlling interests Interim dividend Final dividend Proposed final dividend Transfer to reserves At December 31, 2009 — — — — — — — — — — — — — — — — — — — — — — — 350,482 — — 8,016 8,016 — — — — — 1,042,347 — — — — — (1,042,347 ) 1,085,779 — and January 1, 2010 4,343,115 3,645,726 2,467,011 8,016 1,085,779 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Dividend paid to non-controlling interests Acquisition of additional interests in subsidiaries Interim dividend Final dividend Proposed final dividend Transfer to reserves — — — — — — — — — — — — — — — — — — — — — — — — — — 260,889 — (4,167 ) (4,167 ) — — — — — — — — — — — — (1,085,779 ) 1,085,779 — — — — 2,535,333 13,683,050 2,614,218 16,297,268 1,795,488 1,795,488 448,585 2,244,073 — 8,016 7,436 15,452 — 1,795,488 1,803,504 456,021 2,259,525 — — — — — — — — — — (189,005) (189,005 ) (260,587 ) (260,587 ) — (1,042,347 ) (1,085,779 ) (350,482 ) — — — — — — (260,587 ) (1,042,347 ) — — 2,633,973 14,183,620 2,881,234 17,064,854 1,871,499 1,871,499 440,990 2,312,489 — (4,167 ) (3,865) (8,032 ) — 1,871,499 1,867,332 437,125 2,304,457 — 18,666 — — — — — — — (228,950) (228,950 ) 18,666 (117,546) (98,880 ) (260,587 ) (260,587 ) — (1,085,779 ) (1,085,779 ) (260,889 ) — — — — — — (260,587 ) (1,085,779 ) — — At December 31, 2010 4,343,115 3,645,726 2,727,900 3,849 1,085,779 18,666 2,898,217 14,723,252 2,971,863 17,695,115 52 2010 ANNUAL REPORT Note: Statutory reserves comprise: (a) Statutory surplus reserve In accordance with the Company Law of the People’s Republic of China (the “PRC”) and the respective articles of association of the Company and its subsidiaries (collectively the “Entities”), the Entities are required to allocate 10% of the profit after tax, as determined in accordance with the PRC accounting standards and regulations applicable to the Entities, to the statutory surplus reserve until such reserve reaches 50% of the registered capital of the respective 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 statutory surplus reserve may be converted to increase the respective Entities’ capital. (b) General risk reserve In accordance with the Finance Regulation for Financial Enterprises, securities companies are required to allocate 10% of the profit after tax, as determined in accordance with the PRC accounting standards and regulations, to the general risk reserve. This general risk reserve may be used to cover potential losses on risk exposures. (c) Transaction risk reserve In accordance with the Securities Law of the PRC, securities companies are required to allocate not less than 10% of the profit after tax, as determined in accordance with the PRC accounting standards and regulations, to the transaction risk reserve. This transaction risk reserve may be used to cover potential losses on securities transactions. ZHEJIANG EXPRESSWAY CO., LTD. 53 Consolidated Statement of Cash Flows For the Year ended December 31, 2010 OPERATING ACTIVITIES Profit before tax Adjustments for: Finance costs Interest income Share of (profit) loss of associates Share of profit of a jointly controlled entity Depreciation of property, plant and equipment Amortisation of expressway operating rights Amortisation of prepaid lease payments Amortisation of other intangible assets Impairments loss on interest in an associate Gain on disposal of available-for-sale investments Gain on fair value changes on held for trading investments Loss on disposal of property, plant and equipment Loss on written off of expressway operating rights Gain on disposal of a jointly controlled entity 2010 2009 Rmb’000 Rmb’000 3,111,274 3,084,128 120,979 (56,414) (2,453) — 134,794 691,332 2,039 12,706 — (25,052) (101,480) 3,753 142 — 62,724 (30,727) 24,164 (21,254) 122,774 676,220 1,265 13,438 9,298 (13,632) (22,335) 33,072 — (274,494) Operating cash flows before movements in working capital 3,891,620 3,664,641 Increase in inventories (Increase) decrease in trade receivables Increase in other receivables Increase in held for trading investments Increase in bank balances held on behalf of customers Increase in accounts payable to customers arising from securities dealing business (Decrease) increase in trade payables Increase (decrease) in other taxes payable Increase in other payables and accruals (Decrease) increase in provisions Cash generated from operations Income taxes paid Interest paid (373) (198) (43,466) (1,039) 25,429 (23,129) (184,397) (247,973) (153,667) (5,889,092) 128,100 5,895,457 (98,678) 232,277 20,510 73,282 (101,239) (2,268) 99,903 88,613 3,531,494 3,842,819 (860,018) (120,979) (785,613) (62,724) NET CASH FROM OPERATING ACTIVITIES 2,550,497 2,994,482 54 2010 ANNUAL REPORT INVESTING ACTIVITIES Interest received Dividends received from associates Proceeds on disposal of property, plant and equipment Proceeds on disposal of a jointly controlled entity Repayment of entrusted loan from a related party Entrusted loans to a related party Entrusted loan to a third party Purchases of property, plant and equipment Prepaid lease payments for land use rights Addition in expressway operating rights Purchases of intangible assets (Increase) decrease in available-for-sale investments Increase in financial assets held under resale agreement Decrease in structured deposit (Increase) decrease in time deposits Decrease in restricted bank balances Investments in associates NOTE 2010 2009 Rmb’000 Rmb’000 37,894 13,000 27,043 — 120,000 31,694 42 3,834 252,000 — (500,000) (120,000) (60,000) — (250,588) (164,060) (43,363) (7,633) (12,907) (204) (80,163) (1,324) (507,581) (10,192) 2,381 — — 200,000 (97,093) 942 (48,450) 55,616 34,058 (4,249) NET CASH USED IN INVESTING ACTIVITIES (901,522) (227,781) FINANCING ACTIVITIES Acquisition of additional interest in subsidiaries Prepayment from non-controlling shareholders Dividends paid Dividends paid to non-controlling shareholders New bank loans raised Repayment of bank and other loans (98,880) 338,354 — — (1,226,065) (1,336,304) (228,950) (130,959) 822,000 200,000 (622,384) (187,380) NET CASH USED IN FINANCING ACTIVITIES (1,015,925) (1,454,643) NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 633,050 5,049,003 1,312,058 3,736,945 CASH AND CASH EQUIVALENTS AT END OF YEAR 31 5,682,053 5,049,003 ZHEJIANG EXPRESSWAY CO., LTD. 55 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 1. CORPORATE INFORMATION Zhejiang Expressway Co., Ltd. (the “Company”) was established in the People’s Republic of China (the “PRC”) with limited liability 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 PRC, the Company changed its business registration into a Sino-foreign joint stock limited company. 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 American Depositary Shares (“ADSs”) evidenced by the American Depositary Receipts (“ADRs”) representing the deposited H Shares of the Company effective. In the opinion of the directors, the immediate and ultimate holding company of the Company is Zhejiang Communications Investment Group Co., Ltd. (the “Communications Group”), a state-owned enterprise established in the PRC. The addresses of the registered office and principal place of business of the Company are disclosed in the corporate information section of the annual report. The consolidated financial statements are presented in Renminbi (“Rmb”), which is also the functional currency of the Company. The Company is an investment holding company. The Company and its subsidiaries (collectively referred as the “Group”) is involved in the following principal activities: (a) the operation, maintenance and management of high grade roads; (b) the development and provision of certain ancillary services such as advertising, automobile servicing and fuel facilities; and (c) the provision of securities broking services and proprietary trading. 56 2010 ANNUAL REPORT 2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) New and revised Standards and Interpretations applied in the current year In the current year, the Group has applied the following new and revised standards and interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). HKFRS 2 (Amendments) Group Cash-settled Share-based Payment Transactions HKFRS 3 (as revised in 2008) Business Combinations HKAS 27 (as revised in 2008) Consolidated and Separate Financial Statements HKAS 39 (Amendments) HKFRSs (Amendments) HKFRSs (Amendments) HK(IFRIC) - Int 17 HK - Int 5 Eligible Hedged Items Improvements to HKFRSs issued in 2009 Amendments to HKFRS 5 as part of Improvements to HKFRSs issued in 2008 Distributions of Non-cash Assets to Owners Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause Except as described below, the application of the new and revised standards and interpretations in the current year has had no material effect on the consolidated financial statements of the Group. Amendments to HKAS 17 Leases As part of Improvements to HKFRSs issued in 2009, HKAS 17 Leases has been amended in relation to the classification of leasehold land. Before the amendments to HKAS 17, the Group was required to classify leasehold land as operating leases and to present leasehold land as prepaid lease payments in the consolidated statement of financial position. The amendments to HKAS 17 have removed such a requirement. The amendments require that the classification of leasehold land should be based on the general principles set out in HKAS 17, that is, whether or not substantially all the risks and rewards incidental to ownership of a leased asset have been transferred to the lessee. In accordance with the transitional provisions set out in the amendments to HKAS 17, the Group reassessed the classification of unexpired leasehold land as at January 1, 2010 based on information that existed at the inception of the leases. The application of the amendments to HKAS 17 has had no impact on the consolidated financial statements of the Group and therefore no adjustment is required. ZHEJIANG EXPRESSWAY CO., LTD. 57 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) (Continued) HKAS 27 (as revised in 2008) Consolidated and Separate Financial Statements The Group has applied HKAS 27 (as revised in 2008) for changes in ownership interests in existing subsidiaries of the Group in the current year. Specifically, the revised Standard has affected the Group’s accounting policies regarding changes in the Group’s ownership interests in its subsidiaries that do not result in loss of control. Under HKAS 27 (as revised in 2008), all such increases or decreases are dealt with in equity, with no impact on goodwill or profit or loss. These changes have been applied prospectively from January 1, 2010 in accordance with the relevant transitional provisions. The application of the revised Standard has affected the accounting for the Group’s acquisition of additional equity interest in subsidiaries, Zhejiang Expressway Investment Development Co., Ltd. (“Development Co”) and Zhejiang Expressway Vehicle Towing and Rescue Service Co., Ltd. (“Service Co”), in the current year. The change in policy has resulted in the difference of Rmb18,666,000 between the consideration paid of Rmb98,880,000 and the non-controlling interests recognised of Rmb117,546,000 being recognised directly in equity, instead of in profit or loss. Therefore, the change in accounting policy has resulted in a decrease in the profit for the year of Rmb18,666,000 and a decrease in the basic earnings per share for the year of Rmb0.4 cents. In addition, the cash consideration paid in the current year of Rmb98,880,000 has been included in cash flows used in financing activities. New and revised Standards and Interpretations issued but not yet effective The Group has not early applied the following new and revised standards and interpretations that have been issued but are not yet effective: HKFRSs (Amendments) HKFRS 7 (Amendments) HKFRS 9 HKAS 12 (Amendments) HKAS 32 (Amendments) Improvements to HKFRSs issued in 20101 Disclosures – Transfers of Financial Assets3 Financial Instruments4 Deferred Tax: Recovery of Underlying Assets5 Classification of Rights Issues7 HK (IFRIC) - Int 14 (Amendments) Prepayments of a Minimum Funding Requirement6 HK (IFRIC) - Int 19 Extinguishing Financial Liabilities with Equity Instruments2 58 2010 ANNUAL REPORT 2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) (Continued) New and revised Standards and Interpretations issued but not yet effective (Continued) 1 2 3 4 5 6 7 Effective for annual periods beginning on or after July 1, 2010 or January 1, 2011, as appropriate. Effective for annual periods beginning on or after July 1, 2010. Effective for annual periods beginning on or after January 1, 2011. Effective for annual periods beginning on or after January 1, 2013. Effective for annual periods beginning on or after January 1, 2012. Effective for annual periods beginning on or after January 1, 2011. Effective for annual periods beginning on or after February 1, 2010. HKFRS 9 Financial Instruments (as issued in November 2009) introduces new requirements for the classification and measurement of financial assets. HKFRS 9 Financial Instruments (as revised in November 2010) adds requirements for financial liabilities and for derecognition. • Under HKFRS 9, all recognised financial assets that are within the scope of HKAS 39 Financial Instruments: Recognition and Measurement are subsequently measured at either amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods. • In relation to financial liabilities, the significant change relates to financial liabilities that are designated as at fair value through profit or loss. Specifically, under HKFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the presentation of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Previously, under HKAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was presented in profit or loss. ZHEJIANG EXPRESSWAY CO., LTD. 59 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) (Continued) New and revised Standards and Interpretations issued but not yet effective (Continued) HKFRS 9 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. The directors anticipate that HKFRS 9 will be adopted in the Group’s consolidated financial statements for financial year ending December 31, 2013 and that the application of the new Standard will affect the classification and measurement of the Group’s available-for-sale investments and may affect the classification and measurement of the Group’s other financial assets but not on the Group’s financial liabilities. 3. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards issued by the HKICPA. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance. The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments that are measured at fair values, as explained in the accounting policies set out below. Historical cost is generally based on the fair value of the consideration given in exchange for goods. The principal accounting policies are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. 60 2010 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Basis of consolidation (Continued) All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Non-controlling interests in subsidiaries are presented separately from the Group’s equity therein. Allocation of total comprehensive income to non-controlling interests Total comprehensive income and expense of a subsidiary is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Prior to January 1, 2010, losses applicable to the non-controlling interests in excess of the non-controlling interests in the subsidiary’s equity were allocated against the interests of the Group except to the extent that the non- controlling interests had a binding obligation and were able to make an additional investment to cover the losses. Changes in the Group’s ownership interests in existing subsidiaries Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company. Goodwill Goodwill arising on acquisitions prior to January 1, 2001 Goodwill arising on acquisitions of net assets and operations of another entity prior to January 1, 2001 continues to be held in reserves, and will be charged to the retained profits at the time when the business to which the goodwill relates is disposed of or when a cash-generating unit to which the goodwill relates becomes impaired. Goodwill arising on acquisitions on or after January 1, 2001 Goodwill arising on an acquisition of a business is carried at cost less any accumulated impairment losses, if any, and is presented separately in the consolidated statement of financial position. For the purposes of impairment testing, goodwill is allocated to each of the cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. ZHEJIANG EXPRESSWAY CO., LTD. 61 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Goodwill (Continued) A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently whenever there is indication that the unit may be impaired. For goodwill arising on an acquisition in a reporting period, the cash-generating unit to which goodwill has been allocated is tested for impairment before the end of that reporting period. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss in the consolidated statement of comprehensive income. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the amount of profit or loss on disposal. Investments in associates An associate is an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the associates. When the Group’s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate. Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate recognised at the date of acquisition is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. 62 2010 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments in associates (Continued) The requirements of HKAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with HKAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with HKAS 36 to the extent that the recoverable amount of the investment subsequently increases. When a group entity transacts with its associate, profits and losses resulting from the transactions with the associate are recognised in the Group’ consolidated financial statements only to the extent of interests in the associate that are not related to the Group. Investments in jointly controlled entities Joint venture arrangements that involve the establishment of a separate entity in which venturers have joint control over the economic activity of the entity are referred to as jointly controlled entities. The results and assets and liabilities of jointly controlled entities are incorporated in the consolidated financial statements using the equity method of accounting. Under the equity method, investments in jointly controlled entities are initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the jointly controlled entities. When the Group’s share of losses of a jointly controlled entity equals or exceeds its interest in that jointly controlled entity (which includes any long-term interests that, in substance, form part of the Group’s net investment in the jointly controlled entity), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that jointly controlled entity. Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of a jointly controlled entity recognised at the date of acquisition is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. ZHEJIANG EXPRESSWAY CO., LTD. 63 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments in jointly controlled entities (Continued) The requirements of HKAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in a jointly controlled entity. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with HKAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with HKAS 36 to the extent that the recoverable amount of the investment subsequently increases. When a group entity transacts with its jointly controlled entity, profits and losses resulting from the transactions with the jointly controlled entity are recognised in the Group’ consolidated financial statements only to the extent of interests in the jointly controlled entity that are not related to the Group. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods sold and services provided in the normal course of business, net of discounts and sales related taxes. Toll income from the operation of tolled roads is recognised when the tolls are received or become receivable. Revenue from sale of goods is recognised when goods are delivered and title has passed. Service income, including advertising income, is recognised when services are provided. Commission income from securities broking business is recognised on a trade date basis. Advisory and handling fee income are recognised when the relevant transactions have been provided or the relevant services have been rendered. Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition. Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. 64 2010 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Property, plant and equipment Property, plant and equipment including leasehold land and building held for use in supply of goods and services, or for administrative purposes (properties under construction as described below) are stated at cost less subsequent accumulated depreciation and accumulated impairment losses, if any. Depreciation is recognised so as to write off the cost of items of property, plant and equipment other than properties under construction less their residual values over their estimated useful lives, using the straight-line method, at the following rates per annum. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. Leasehold land and buildings Ancillary facilities Communications and signalling equipment Motor vehicles Machinery and equipment Annual Estimated depreciation useful life rate 30-50 years 1.9%-3.2% 10-30 years 3.2%-9% 5 years 19.4% 5-8 years 12.1%-19.4% 5-8 years 12.1%-19.4% Properties in the course of construction for production, supply or administrative purposes are carried at cost, less any recognised impairment loss. Costs include professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Such properties are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. ZHEJIANG EXPRESSWAY CO., LTD. 65 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Intangible assets Intangible assets acquired separately Intangible assets acquired separately and with finite useful lives are carried at costs less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is provided on a straight-line basis over their estimated useful lives. Alternatively, intangible assets with indefinite useful lives are carried at cost less any subsequent accumulated impairment losses (see the accounting policy in respect of impairment losses on tangible and intangible assets below). Gains or losses arising from derecognition of an intangible asset are measured at the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss in the period when the asset is derecognised. Intangible assets acquired in a business combination Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date. Subsequent to initial recognition, intangible assets with finite useful lives are carried at costs less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is provided on a straight-line basis over their estimated useful lives. Alternatively, intangible assets with indefinite useful lives are carried at cost less any subsequent accumulated impairment losses (see the accounting policy in respect of impairment losses on tangible and intangible assets below). Expressway operating rights under service concession arrangements When the Group has a right to charge for usage of concession infrastructure, it recognises concession intangible assets based on fair value of the consideration paid upon initial recognition. Subsequent costs incurred on expressway widening projects and upgrading services are recognised as additional costs of the expressway operating rights. The concession intangible assets representing expressway operating rights are carried at cost less accumulated amortisation and any accumulated impairment losses. The concession intangible assets are amortised to write-off their cost over their expected useful lives in the remaining concession period on a straight-line basis. Costs in relation to the day-to-day servicing, repair and maintenance of the expressway infrastructures are recognised as expenses in the periods in which they are incurred. 66 2010 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Impairment losses on tangible and intangible assets other than goodwill (see the accounting policy in respect of goodwill above) At the end of the reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that these assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. In addition, intangible assets with indefinite useful lives are tested for impairment annually, and whenever there is an indication that they may be impaired. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately. Inventories Inventories, representing merchandise held for resale, are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessor Rental income from operating leases is recognised in profit or loss on a straight-line basis over the term of the relevant lease. The Group as lessee Operating lease payments are recognised as expense on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis. ZHEJIANG EXPRESSWAY CO., LTD. 67 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Leasing (Continued) Leasehold land and building When a lease includes both land and building elements, the Group assesses the classification of each element as a finance or an operating lease separately based on the assessment as to whether substantially all the risks and rewards incidental to ownership of each element have been transferred to the Group. Specifically, the minimum lease payments (including any lump-sum upfront payments) are allocated between the land and the building elements in proportion to the relative fair values of the leasehold interests in the land element and building element of the lease at the inception of the lease. For a leasehold land which are classified as operating lease, whilst the building element is classified as finance lease, interest in the leasehold land is presented as “prepaid lease payments” in the consolidated statement of financial position and is amortised over the lease term on a straight-line basis to the extent the allocation of the lease payments can be made reliably. When the lease payments cannot be allocated reliably between the land and building elements, the entire lease is generally classified as a finance lease and accounted for as property, plant and equipment, unless it is clear that both elements are operating leases, in which case the entire lease is classified as an operating lease. Foreign currencies In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise. 68 2010 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. Retirement benefit costs Payments to state-managed retirement benefit schemes and corporate annuity scheme are charged as an expense when employees have rendered service entitling them to the contributions. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. ZHEJIANG EXPRESSWAY CO., LTD. 69 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Taxation (Continued) Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity respectively. Financial instruments Financial assets and financial liabilities are recognised in the consolidated statement of financial position when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets or financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. 70 2010 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial instruments (Continued) Financial assets The Group’s financial assets are classified into loans and receivables, financial assets at fair value through profit or loss (“FVTPL”) and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of financial assets are set out below. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition. Interest Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL, of which interest income is included in net gains or losses. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including trade receivables, other receivables, bank balances, financial assets held under resale agreement and balances held on behalf of customers) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment losses on financial assets below). Financial assets held under resale agreements are transactions where the Group acquires financial assets which will be resold at a predetermined price at a future date under resale agreements. The cash advanced is recognised as amounts held under agreements in the consolidated statement of financial position. Assets held under resale agreements are not recognised. The difference between the purchase and resale consideration is amortised over the period of the respective agreements using the effective interest method and is included in interest income. ZHEJIANG EXPRESSWAY CO., LTD. 71 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial instruments (Continued) Financial assets (Continued) Effective interest method (Continued) Financial assets at fair value through profit or loss Financial asset at FVTPL include financial assets held for trading and structured deposits with embedded derivatives. A financial asset is classified as held for trading if: • • • it has been acquired principally for the purpose of selling in the near future; or it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit taking; or it is a derivative that is not designated and effective as a hedging instrument. Financial assets at FVTPL are measured at fair value, with changes in fair value arising from remeasurement recognised directly in profit or loss in the period in which they arise. The net gain or loss in profit or loss includes any dividend or interest earned on the financial assets. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated or not classified as any of the categories of financial assets set out above. Available-for-sale financial assets are measured at fair value at the end of each reporting period. Changes in fair value are recognised in other comprehensive income and accumulated in investment revaluation reserve, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously accumulated in the investment revaluation reserve is reclassified to profit or loss (see accounting policy on impairment loss on financial assets below). For available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, they are measured at cost less any identified impairment losses at the end of the reporting period (see accounting policy on impairment loss on financial assets below). 72 2010 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial instruments (Continued) Financial assets (Continued) Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of the reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been affected. For an available-for sale equity investment, a significant or prolonged decline in the fair value of that investment below its cost is considered to be objective evidence of impairment. For all other financial assets, objective evidence of impairment could include: • • • significant financial difficulty of the issuer or counterparty; or default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organisation. For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss. ZHEJIANG EXPRESSWAY CO., LTD. 73 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial instruments (Continued) Financial assets (Continued) Impairment of financial assets (Continued) For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Impairment losses on available-for-sale equity investments will not be reversed in profit or loss in subsequent periods. Any increase in fair value subsequent to impairment loss is recognised directly in other comprehensive income and accumulated in investment revaluation reserve. Financial liabilities and equity Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Interest expense is recognised on an effective interest basis. Financial liabilities Financial liabilities including trade payables, accounts payable to customers arising from securities dealing business, other payables, dividends payable, interest-bearing bank and other loans, and long-term bonds are subsequently measured at amortised cost, using the effective interest method. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. 74 2010 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial instruments (Continued) Derecognition Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss. Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect is material). ZHEJIANG EXPRESSWAY CO., LTD. 75 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 4. KEY SOURCES OF ESTIMATION UNCERTAINTY The following is the key assumptions concerning the future, and key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Estimated impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating units and a suitable discount rate in order to calculate the present value. Where the actual future cash flows are less than expected, a material impairment loss may arise. As at December 31, 2010, the carrying amount of goodwill is Rmb86,867,000 (2009: Rmb86,867,000). Details of the recoverable amount calculation are disclosed in Note 23. Estimated impairment of intangible assets with indefinite useful lives Determining whether intangible assets with indefinite useful lives are impaired requires an estimation of the value in use of themselves or the cash-generating unit to which they belong. The value in use calculation requires the Group to estimate the future cash flows expected to arise from themselves or the cash-generating unit to which they belong and a suitable discount rate in order to calculate the present value. Where the actual future cash flows are less than expected, a material impairment loss may arise. As at December 31, 2010, the carrying amounts of intangible assets with indefinite useful lives were Rmb66,563,000 (2009: Rmb66,563,000). Details of the recoverable amount calculation are disclosed in Note 23. Provision against litigation and guarantees Measuring the provision against litigation and guarantees requires an estimation of the expenditure required to settle the obligation arising from the litigation and guarantees. The settlement amount depends on such factors as the totality of facts, interpretation and application of laws and regulation, and court rulings. Where the court rules differently than the Group has expected, the ultimate settlement amount may be materially different from the provision that has been made and affect the Group’s profit and loss in future periods. At December 31, 2010, the Group has made provision against litigation and guarantee of Rmb21,238,000 (2009: Rmb122,477,000). During the year ended December 31, 2010, the Group has reversed the overprovision in prior years amounted to Rmb13,426,000 (2009: nil). Details of the provision are disclosed in Note 36. 76 2010 ANNUAL REPORT 5. FINANCIAL INSTRUMENTS (a) Categories of financial instruments Financial assets Available-for-sale investments – at cost – at fair value Fair value through profit of loss Held for trading investments Loans and receivables 2010 2009 Rmb’000 Rmb’000 1,000 71,928 1,000 54,704 803,772 517,895 (including cash and cash equivalents) 18,724,410 17,257,635 Financial liabilities Amortised cost 14,505,097 14,223,057 (b) Financial risk management objectives and policies The Group’s major financial instruments include available-for-sale investments, held for trading investments, trade and other receivables, financial assets held under resale agreement, bank balances, bank balances held on behalf of customers, trade and other payables, accounts payable to customers arising from securities dealing business, interest-bearing bank and other loans and long-term bonds. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments include market risk (interest rate risk, currency risk and other price risk), credit risk and liquidity risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. ZHEJIANG EXPRESSWAY CO., LTD. 77 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 5. FINANCIAL INSTRUMENTS (Continued) (b) Financial risk management objectives and policies (Continued) Market risk (i) Interest rate risk The Group is exposed to fair value interest rate risk in relation to financial assets held under resale agreement, fixed-rate time deposits, and long-term bonds (see Notes 29, 31 and 37 for details). The Group is also exposed to cash flow interest rate risk in relation to variable-rate bank balances held on behalf of customers, bank balances and interest-bearing bank and other loans (see Notes 30, 31 and 35 for details). The Group currently does not have an interest rate risk hedging policy as the management consider the Group is not exposed to significant interest rate risk. The management will continue to monitor interest rate risk exposure and consider hedging against it should the need arises. The Group’s exposures to interest rates on financial liabilities are detailed in the liquidity risk management section of this note. Sensitivity analysis The sensitivity analyses below have been determined based on the exposure to interest rates for non-derivative instruments, comprising variable-rate bank balances and bank and other loans, at the end of the reporting period. The analysis was prepared assuming the balances outstanding at the end of the reporting period were outstanding for the whole year. A 30 basis point increase or decrease was used based on management’s assessment. If interest rates had been 30 basis points (2009: 30 basis points) higher/lower and all other variables were held constant, the Group’s post-tax profit for the year ended December 31, 2010 would increase/decrease by Rmb38,291,000 (2009: Rmb36,357,000). This was mainly attributable to the Group’s exposure to interest rates on its variable-rate bank balances. 78 2010 ANNUAL REPORT 5. FINANCIAL INSTRUMENTS (Continued) (b) Financial risk management objectives and policies (Continued) Market risk (Continued) (ii) Currency risk Several subsidiaries of the Company have foreign currency denominated monetary assets and liabilities, which expose the Group to foreign currency risk. The carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities at the end of the reporting period are as follows: Assets Liabilities 2010 2009 2010 2009 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Hong Kong dollar (“HKD”) United Sates dollar (“USD”) 20,180 85,383 18,954 81,650 14,947 58,718 14,288 478,611 The Group currently does not have a currency risk hedging policy as the management considers that the risk is not significant. The management will continue to monitor foreign currency risk exposure and consider hedging against it should the need arises. Sensitivity analysis The Group is mainly exposed to HKD and USD relative to Rmb. This sensitivity analysis details the Group’s sensitivity to a 5% (2009: 5%) increase and decrease in Rmb against HKD and USD. 5% (2009: 5%) is the sensitivity rate used when reporting foreign currency risk internally to key management personnel. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the year end for a 5% (2009: 5%) change in foreign currency rates. If Rmb had strengthened/weakened 5% against HKD, the Group’s post-tax profit for the year ended December 31, 2010 would have decreased/increased by Rmb196,000 (2009: Rmb175,000). If Rmb had strengthened/weakened 5% against USD, the Group’s post-tax profit for the year ended December 31, 2010 would have decreased/increased by Rmb1,000,000 (2009: increased/decreased by Rmb14,886,000). ZHEJIANG EXPRESSWAY CO., LTD. 79 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 5. FINANCIAL INSTRUMENTS (Continued) (b) Financial risk management objectives and policies (Continued) Market risk (Continued) (iii) Other price risk The Group is exposed to equity and debt security price risk in relation to its held for trading and available-for- sale listed investments. The Group currently does not have a price risk hedging policy as the management consider the Group is not exposed to significant price risk. The management will continue to monitor price risk exposure and consider hedging against it should the need arises. Sensitivity analysis The sensitivity analyses below have been determined based on the exposure to equity and debt security price risks at the end of the reporting period. If the prices of the respective equity and debt instruments had been 5% (2009: 5%) higher/lower, • • post-tax profit for the year ended December 31, 2010 would increase/decrease by Rmb30,141,000 (2009: Rmb19,421,000) as a result of the changes in fair value of held for trading investments; and investment valuation reserve would increase/decrease by Rmb2,697,000 (2009: Rmb2,051,000) as a result of the changes in fair value of available-for-sale listed investments. Credit risk As at December 31, 2010, the Group’s maximum exposure to credit risk which will cause a financial loss to the Group due to failure to discharge an obligation by the counterparties provided by the Group is arising from the carrying amount of the respective recognised financial assets as stated in the consolidated statement of financial position. The Group reviews the recoverable amount of each individual trade debt and entrusted loan receivables at the end of the reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. 80 2010 ANNUAL REPORT 5. FINANCIAL INSTRUMENTS (Continued) (b) Financial risk management objectives and policies (Continued) Credit risk (Continued) Other than the concentration of credit risk on certain trade receivables, entrusted loan receivables, corporate bonds and financial assets held under resale agreement amounting to Rmb48,232,000 (2009: Rmb45,140,000), Rmb560,000,000 (2009: Rmb120,000,000), Rmb600,735,000 (2009: Rmb511,344,000) and Rmb80,163,000 (2009: nil) as disclosed in Notes 26, 27, 28 and 29, respectively, the Group does not have any other significant concentration of credit risk. The Group’s concentration of credit risk by geographical location is mainly in the PRC. Liquidity risk Most of the bank balances and cash at December 31, 2010 were denominated in Rmb which is not a freely convertible currency in the international market. The exchange rate of Rmb is regulated by the PRC government and the remittance of these Rmb funds out of the PRC is subject to foreign exchange controls imposed by the PRC government. The Group closely monitors its cash position resulting from its operations and maintains a level of cash and cash equivalents deemed adequate by the management to enable the Group to meet in full its financial obligations as they fall due for the foreseeable future. The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities based on the agreed repayment terms. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate as at the end of the reporting period. ZHEJIANG EXPRESSWAY CO., LTD. 81 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 5. FINANCIAL INSTRUMENTS (Continued) (b) Financial risk management objectives and policies (Continued) Liquidity tables Weighted average Less than 3 months - interest rate 3 months 1 year 1 - 3 years Total Carrying undiscounted amount at 3 - 5 years +5 years cash flows 31/12/2010 % Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 — 166,438 382,257 — — — 548,695 548,695 0.36 11,641,498 — 503,372 — — 5.38 5.45 4.29 35,951 4,765 42,900 448,259 363,849 — — — — — — — — — 85,800 1,042,900 — — — — — 11,641,498 11,631,030 503,372 503,372 484,210 368,614 472,000 350,000 1,171,600 1,000,000 12,394,924 1,194,365 85,800 1,042,900 — 14,717,989 14,505,097 2010 Non-derivative financial liabilities Trade payables Accounts payable to customers arising from securities dealing business Other payables Bank and other loans – fixed rate – variable rate Long-term bonds 82 2010 ANNUAL REPORT 5. FINANCIAL INSTRUMENTS (Continued) (b) Financial risk management objectives and policies (Continued) Liquidity risk (Continued) Liquidity tables (Continued) Weighted average Less than 3 months - interest rate 3 months 1 year 1 - 3 years Total Carrying undiscounted amount at 3 - 5 years +5 years cash flows 31/12/2009 % Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 2009 Non-derivative financial liabilities Trade payables Accounts payable to customers arising from — 410,900 236,473 securities dealing business 0.36 11,513,283 Other payables Bank and other loans – fixed rate – variable rate Long-term bonds — 450,370 5.31 2.58 4.29 30,133 195,734 42,900 — — 176,770 87,475 — — — — 146,962 — — — — — — 647,373 647,373 — — — — — — 11,513,283 11,502,930 450,370 450,370 206,903 430,171 200,000 422,384 1,214,500 1,000,000 14,462,600 14,223,057 — 85,800 1,085,800 12,643,320 500,718 232,762 1,085,800 The amounts included above for variable interest rate instruments for non-derivative financial liabilities is subject to change if changes in variable interest rates differ to those estimates of the interest rates determined at the end of the reporting period. (c) Fair value The fair value of financial assets and financial liabilities are determined as follows: • • the fair value of financial assets with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market bid prices; and the fair value of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis. ZHEJIANG EXPRESSWAY CO., LTD. 83 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 5. FINANCIAL INSTRUMENTS (Continued) (c) Fair value (Continued) The directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate their fair values. Fair value measurements recognised in the statement of financial position The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. • • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active market for identical assets or liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Financial assets at FVTPL Non-derivative financial assets held for trading Available-for-sale financial assets Listed equity securities Total 31/12/2010 Level 1 Level 2 Level 3 Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 803,772 71,928 875,700 — — — — — — 803,772 71,928 875,700 84 2010 ANNUAL REPORT 5. FINANCIAL INSTRUMENTS (Continued) (c) Fair value (Continued) Financial assets at FVTPL Non-derivative financial assets held for trading Available-for-sale financial assets Listed equity securities Total 31/12/2009 Level 1 Level 2 Level 3 Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 517,895 54,704 572,599 — — — — — — 517,895 54,704 572,599 There were no transfers between Level 1 and 2 in the current and prior years. 6. CAPITAL RISK MANAGEMENT The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from prior year. The capital structure of the Group consists of debt, which includes the borrowings disclosed in Notes 35 and 37, equity attributable to owners of the Company, comprising issued share capital, reserves and retained profits. The directors of the Company review the capital structure on a regular basis. As part of this review, the directors consider the cost of capital and the risks associated with each class of capital. Based on recommendations of the directors, the Group will balance its overall capital structure through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt. ZHEJIANG EXPRESSWAY CO., LTD. 85 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 7. SEGMENT INFORMATION Information reported to the Chief Executive Officer of the Company, being the chief operating decision maker, for the purposes of resource allocation and assessment of segment performance focuses on types of goods or services delivered or provided. Specifically, the Group’s operating and reportable segments under HKFRS 8 are as follows: (i) Toll operation - the operation and management of high grade roads and the collection of the expressway tolls. (ii) Service area and advertising businesses - the sale of food, restaurant operation, automobile servicing, operation of petrol stations and design and rental of advertising billboards along the expressways. (iii) Securities operation - the securities broking and proprietary trading. Segment revenue and results The following is an analysis of the Group’s revenue and results by operating segment. For the year ended December 31, 2010 Service area and Toll advertising Securities Total operation businesses operation Segment Elimination Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Revenue External sales 3,475,319 1,715,064 1,578,681 6,769,064 — 6,769,064 Inter-segment sales — 5,798 — 5,798 (5,798) — Total 3,475,319 1,720,862 1,578,681 6,774,862 (5,798) 6,769,064 Segment profit 1,594,389 102,920 615,180 2,312,489 2,312,489 86 2010 ANNUAL REPORT 7. SEGMENT INFORMATION (Continued) Segment revenue and results (Continued) For the year ended December 31, 2009 Service area and Toll advertising Securities Total operation businesses operation Segment Elimination Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Revenue External sales 3,107,505 1,259,888 1,668,901 6,036,294 — 6,036,294 Inter-segment sales — 1,785 — 1,785 (1,785) — Total 3,107,505 1,261,673 1,668,901 6,038,079 (1,785) 6,036,294 Segment profit 1,557,013 69,902 617,158 2,244,073 2,244,073 The accounting policies of the operating segments are the same as the Group’s accounting policies described in Note 3. Segment profit represents the profit after tax of each operating segment. This is the measure reported to the chief operating decision maker, the Group’s Chief Executive Officer, for the purposes of resource allocation and performance assessment. Inter-segment sales are charged at prevailing market rates. ZHEJIANG EXPRESSWAY CO., LTD. 87 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 7. SEGMENT INFORMATION (Continued) Segment assets and liabilities The following is an analysis of the Group’s assets and liabilities by operating segment at the end of the reporting period: Segment assets Segment liabilities 2010 2009 2010 2009 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Toll operation 15,411,964 16,130,461 (3,098,340) (2,911,913) Service area and advertising businesses 890,656 752,089 (421,751) (353,202) Securities operation 17,262,568 15,433,364 (12,436,849) (12,072,812) Total segment assets (liabilities) 33,565,188 32,315,914 (15,956,940) (15,337,927) Goodwill 86,867 86,867 — — Consolidated assets (liabilities) 33,652,055 32,402,781 (15,956,940) (15,337,927) Segment assets and segment liabilities represent the assets and liabilities of the subsidiaries operating in the respective operating segment. 88 2010 ANNUAL REPORT 7. SEGMENT INFORMATION (Continued) Other segment information Amounts included in the measure of segment profit or loss or segment assets: Service area Toll and advertising Securities operation businesses Rmb’000 Rmb’000 operation Rmb’000 Total Rmb’000 553,871 32,218 107,210 214,253 (16,079) 6,620 208,067 739,955 25,865 24,196 13,769 235,298 24,415 — 11,930 29,137 219,049 — — 23,359 (5,883) 94,860 142,944 71,779 798,785 56,414 120,979 472,910 2,453 101,480 362,941 840,871 For the year ended December 31, 2010 Income tax expense Interest income Interest expense Interests in associates Share of result of associates Fair value changes on held for trading investments Addition to non-current assets (Note) Depreciation and amortisation Loss (gain) on disposal of property, plant and equipment 7,480 (3,130) (597) 3,753 For the year ended December 31, 2009 Income tax expense Interest income Interest expense Interests in associates Share of result of associates Share of result of jointly controlled entity Fair value changes on held for trading investments Addition to non-current assets (Note) Depreciation and amortisation Loss on disposal of property, 543,669 26,413 56,613 206,881 (27,164) 21,254 673 555,957 734,564 21,323 4,314 6,111 223,384 2,258 — — 37,743 29,750 275,063 840,055 — — 4,742 742 — 21,662 93,706 49,383 30,727 62,724 435,007 (24,164) 21,254 22,335 687,406 813,697 plant and equipment 21,119 689 11,264 33,072 Note: Non-current assets excluded financial instruments. ZHEJIANG EXPRESSWAY CO., LTD. 89 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 7. SEGMENT INFORMATION (Continued) Revenue from major services An analysis of the Group’s revenue, net of discounts and taxes, for the year is as follows: Toll operation revenue Service area businesses revenue Advertising business revenue Commission income from securities operation Interest income from securities operation Others 2010 2009 Rmb’000 Rmb’000 3,475,319 1,633,628 77,997 3,107,505 1,178,318 77,786 1,352,051 1,498,827 226,630 3,439 170,074 3,784 6,769,064 6,036,294 Geographical information The Group’s operations are located in the PRC (country of domicile). All non-current assets of the Group are located in the PRC. All of the Group’s revenue from external customers is attributed to the group entities’ country of domicile (i.e. the PRC). Information about major customers During the years ended December 31, 2009 and 2010, there are no individual customers with sales of 10% or more of the Group’s total sales. 90 2010 ANNUAL REPORT 8. SECURITIES INVESTMENT GAINS 2010 2009 Rmb’000 Rmb’000 Gain on fair value changes on held for trading investments 101,480 22,335 Cumulative gain reclassified from equity on disposal of available-for-sale investments 25,052 126,532 13,632 35,967 The above securities investment gains wholly contributed from listed investments in both years. 9. OTHER INCOME Interest income on bank balances and entrusted loan receivables Rental income Net exchange gain Handling fee income Towing income Gain on disposal of a jointly controlled entity (Note) Interest income from structured deposit Others 2010 2009 Rmb’000 Rmb’000 56,278 66,369 15,303 23,689 11,056 — 136 26,960 27,613 58,697 547 28,644 11,243 274,494 3,114 21,928 199,791 426,280 Note: On September 10, 2009, the Group entered into an agreement with Hangzhou Communications Group Co., Ltd (“Hangzhou Communications Group”), a state-owned enterprise, pursuant to which the Group agreed to sell, and Hangzhou Communications Group agreed to purchase, the entire 50% interest of the Group in Hangzhou Shida Expressway Co., Ltd. (“Shida JV”), which was to undertake the operation of Shiqiao-Dajing expressway, for a consideration of Rmb367,000,000. The disposal was completed in November 2009 and the gain on disposal of the jointly controlled entity of Rmb274,494,000 was recognised in the profit or loss for the year ended December 31, 2009. ZHEJIANG EXPRESSWAY CO., LTD. 91 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 10.FINANCE COSTS Interest expenses wholly repayable within 5 years: Bank loans Other loans Long-term bonds 11.PROFIT BEFORE TAX The Group’s profit before tax has been arrived at after charging (crediting): Depreciation of property, plant and equipment Amortisation of prepaid lease payments Amortisation of expressway operating rights (included in operating costs) Amortisation of other intangible assets (included in operating costs) 2010 2009 Rmb’000 Rmb’000 14,462 63,617 42,900 120,979 6,111 13,713 42,900 62,724 2010 2009 Rmb’000 Rmb’000 134,794 2,039 691,332 12,706 122,774 1,265 676,220 13,438 Total depreciation and amortisation 840,871 813,697 Staff costs (including directors and supervisors): – Wages and salaries – Pension scheme contributions Auditors’ remuneration Loss on disposal of property, plant and equipment Cost of inventories recognised as an expense Impairment loss on interest in an associate (included in other expenses) (Reversal of) provision for litigation (included in other expenses) 483,114 44,857 399,663 33,244 527,971 432,907 7,415 3,753 5,408 33,072 1,480,688 1,041,496 — (13,426) 9,298 95,660 92 2010 ANNUAL REPORT 12.INCOME TAX EXPENSE Current tax: PRC Enterprise Income Tax Deferred tax (Note 38) 2010 2009 Rmb’000 Rmb’000 794,590 4,195 841,722 (1,667) 798,785 840,055 Under the Law of the PRC on Enterprise Income Tax (the “EIT Law”) and Implementation Regulation of the EIT Law, the tax rate of the Group is 25% from January 1, 2008 onwards. No Hong Kong Profits Tax has been provided as the Group’s income neither arises in, nor is derived from Hong Kong during the year. The tax charge for the year can be reconciled to the profit per the consolidated statement of comprehensive income as follows: Profit before tax 2010 2009 Rmb’000 Rmb’000 3,111,274 3,084,128 Tax at the PRC enterprise income tax rate of 25% 777,819 771,032 Tax effect of share of (profit) loss of associates Tax effect of share of profit of a jointly controlled entity Tax effect of income not taxable for tax purposes Tax effect of expenses not deductible for tax purposes (613) — (12) 21,591 6,041 (5,314) (22) 68,318 Tax charge for the year 798,785 840,055 ZHEJIANG EXPRESSWAY CO., LTD. 93 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 13.OTHER COMPREHENSIVE (LOSS) INCOME Tax effect relating to other comprehensive (loss) income as follows: Year ended December 31, 2010 Year ended December 31, 2009 Tax Tax Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax amount benefit amount amount benefit amount Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Fair value gain on available- for-sale financial assets arising during the year 14,342 (3,585) 10,757 34,234 (8,558) 25,676 Reclassification adjustments for the cumulative gain included in profit or loss upon disposal of available- for-sale financial assets Total (25,052) (10,710) 6,263 2,678 (18,789) (13,632) 3,408 (10,224) (8,032) 20,602 (5,150) 15,452 94 2010 ANNUAL REPORT l a t o T # g n e h s a H i i # n m g n o Y # g n o h z o a h S # a u h Q i i # g n x e h Z # a u h e K * g n p L i i * g n e h s n u J * n e h C e e h C ^ g n a Y ^ n u y u L Φ g n a K u H i Φ i t n u Y i Φ g n p o a X i Φ o a y n e W Φ g n o h z g n J i Φ g n a h z o a X i Φ g n o s J i ) v e t o N ( ) v i e t o N ( ) i i i e t o N ( ) i i e t o N ( ) i e t o N ( ) i e t o N ( ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R ’ 0 0 0 B M R 0 1 0 2 U I L U W G N A I J G N E H Z G N A F A M G N A H Z G N A H Z G N U T G N A H Z G N A H Z G N D I G N A F G N E G G N A I J G N A H Z N A H Z N E H C : s w o l l o f s a e r a i s r o s v r e p u s ) 5 : 9 0 0 2 ( 6 d n a s r o t c e r i d ) 1 1 : 9 0 0 2 ( 0 1 e h t f o h c a e o t l e b a y a p r o i d a p s t n e m u o m e l e h T S T N E M U L O M E ’ I S R O S V R E P U S D N A ’ S R O T C E R D . 4 1 I d n a s e c n a w o l l a , s e i r a a S l 4 0 9 , 1 6 8 6 1 5 1 4 6 , 2 1 3 8 , 1 7 0 8 6 4 4 8 6 , 2 1 — — 1 — — — — 2 — — 2 2 — — 2 2 — — 2 3 — — 3 1 — — 1 3 — — 3 4 — — 4 4 — — 4 3 — — 3 3 — — 3 4 1 2 — — 4 1 2 2 2 2 — — 2 2 2 3 5 — — 3 5 4 5 — — 4 5 4 1 2 — — 4 1 2 2 2 2 — — 2 2 2 2 — — 2 4 — — 4 3 — — 3 4 — — 4 2 6 1 0 8 6 8 4 2 — — — — — — — — 6 7 7 3 3 — — — — 0 9 1 6 — 6 1 1 1 5 1 0 9 3 3 9 1 5 1 8 9 5 1 6 3 4 2 2 5 1 0 0 6 1 9 3 3 9 1 5 1 9 9 5 6 7 3 9 0 2 5 1 0 0 6 8 5 4 0 2 2 5 1 3 9 6 4 0 4 6 7 2 3 1 3 9 6 4 — — 4 3 — — 3 s n o i t u b i r t n o c e m e h c s n o s n e P i s t n e m u o m e l l a t o T 9 0 0 2 l e b a y a p d n a d a p s e s u n o B i i d n k n i s t i f e n e b s n o i t u b i r t n o c e m e h c s n o s n e P i s t n e m u o m e l l a t o T l e b a y a p d n a d a p s e s u n o B i i d n k n i s t i f e n e b d n a s e c n a w o l l a , s e i r a a S l s r o t c e r i d e v i t u c e x e - n o n t n e d n e p e d n I i s r o s v r e p u S s r o t c e r i d e v i t u c e x e - n o N s r o t c e r i d e v i t u c e x E Φ ^ * # ZHEJIANG EXPRESSWAY CO., LTD. 95 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 14.DIRECTORS’ AND SUPERVISORS’ EMOLUMENTS (Continued) Notes: (i) Resigned on February 28, 2009. (ii) Appointed on August 28, 2010. (iii) Resigned on August 28, 2010. (iv) Resigned on August 26, 2010. (v) Appointed on August 26, 2010. The emoluments of each of the directors and supervisors were below HK$1,000,000 (equivalent to Rmb850,900) in both years. Bonuses paid to directors and supervisors are determined by the Remuneration Committee of the Company, which comprises three independent non-executive directors. No directors or supervisors waived any emoluments and no incentive was paid to any directors or supervisors as an inducement to join the Company and no compensation for loss of office was paid to any directors, supervisors, past directors or past supervisors during both years. Bonuses are determined by reference to the individual performance of the directors. 15.EMPLOYEES’ EMOLUMENTS The emoluments of the five highest paid individuals in the Group are as follows: Salaries, allowances and benefits in kind Bonuses paid and payable (Note) Pension scheme contributions Incentive paid Compensation for loss of office 2010 2009 Rmb’000 Rmb’000 7,640 14,797 107 — — 10,426 658 57 2,500 — 22,544 13,641 Note: The bonuses paid and payable is determined by reference to the performance of the relevant business of the Group for the two years ended December 31, 2010 and 2009. 96 2010 ANNUAL REPORT 15.EMPLOYEES’ EMOLUMENTS (Continued) The five individuals with the highest emoluments in the Group during the year included no (2009: no) director, whose emoluments are set out in Note 14 above, and five (2009: five) non-director employees. Their emoluments are within the following bands: HK$2,000,001 to HK$2,500,000 (equivalent to Rmb1,702,001 to Rmb2,127,000) HK$2,500,001 to HK$3,000,000 (equivalent to Rmb2,127,001 to Rmb2,553,000) HK$3,500,001 to HK$4,000,000 (equivalent to Rmb2,978,001 to Rmb3,404,000) HK$4,000,001 to HK$4,500,000 (equivalent to Rmb3,404,001 to Rmb3,829,000) HK$4,500,001 to HK$5,000,000 (equivalent to Rmb3,829,001 to Rmb4,255,000) HK$5,000,001 to HK$5,500,000 (equivalent to Rmb4,255,001 to Rmb4,680,000) HK$8,000,001 to HK$8,500,000 (equivalent to Rmb6,807,001 to Rmb7,233,000) No. of individuals 2010 2009 — — 1 1 1 1 1 2 2 — — 1 — — ZHEJIANG EXPRESSWAY CO., LTD. 97 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 16.DIVIDENDS 2010 2009 Rmb’000 Rmb’000 Dividends recognised as distribution during the year: 2010 Interim - Rmb6 cents (2009: 2009 interim Rmb6 cents) per share 260,587 260,587 2009 Final - Rmb25 cents (2009: 2008 Final Rmb24 cents) per share 1,085,779 1,042,347 1,346,366 1,302,934 The final dividend of Rmb25 cents per share in respect of the year ended December 31, 2010 (2009: final dividend of Rmb25 cents per share in respect of the year ended December 31, 2009) has been proposed by the directors and is subject to approval by the shareholders in the annual general meeting. 17.EARNINGS PER SHARE The calculation of the basic earnings per share is based on profit for the year attributable to owners of the Company of Rmb1,871,499,000 (2009: Rmb1,795,488,000) and the 4,343,114,500 (2009: 4,343,114,500) ordinary shares in issue during the year. No diluted earnings per share has been presented as there were no potential ordinary shares outstanding for the years ended December 31, 2009 and 2010. 98 2010 ANNUAL REPORT 18.PROPERTY, PLANT AND EQUIPMENT Leasehold Communication Machinery land and Ancillary and signalling Motor and Construction buildings facilities equipment vehicles equipment in progress Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 COST At January 1, 2009 412,966 485,858 266,236 173,247 306,273 Additions Transfer Disposals At December 31, 2009 36,559 — 22,112 14,955 (12,491) (21,131) 39,936 11,007 45,580 8,502 8,866 1,653,082 164,060 — — — — (14,955) — (6,979) (35,233) — (75,834) and January 1, 2010 437,034 501,794 306,172 177,275 316,620 2,413 1,741,308 Additions Transfer Disposals 51,551 — — 1,052 473 28,669 21,653 64,672 82,991 250,588 — — 330 (36,242) (7,047) (3,585) (12,231) (803) — — (59,105) At December 31, 2010 488,585 467,077 327,794 195,343 369,391 84,601 1,932,791 DEPRECIATION At January 1, 2009 Provided for the year Disposals At December 31, 2009 and January 1, 2010 Provided for the year Disposals 42,561 17,500 47,575 29,962 118,512 187,372 110,924 162,465 24,163 36,635 (12,486) (15,727) — 14,396 (6,691) 30,080 (4,024) 126,948 224,007 118,629 188,521 22,156 — (11,364) 20,718 (5,442) 15,972 (3,422) 45,986 (8,081) At December 31, 2010 77,537 137,740 239,283 131,179 226,426 — — — — — — — 621,834 122,774 (38,928) 705,680 134,794 (28,309) 812,165 CARRYING VALUES At December 31, 2010 411,048 329,337 88,511 64,164 142,965 84,601 1,120,626 At December 31, 2009 389,459 374,846 82,165 58,646 128,099 2,413 1,035,628 The property, plant and equipment are mainly located in the PRC. ZHEJIANG EXPRESSWAY CO., LTD. 99 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 18.PROPERTY, PLANT AND EQUIPMENT (Continued) The carrying value of properties shown above comprises: Leasehold land and buildings in the PRC: Long lease Medium-term lease 19.PREPAID LEASE PAYMENTS Analysed for reporting purposes as: Current assets Non-current assets 2010 2009 Rmb’000 Rmb’000 25,314 385,734 25,976 363,483 411,048 389,459 2010 2009 Rmb’000 Rmb’000 2,052 71,035 73,087 1,421 30,342 31,763 The Group’s prepaid lease payments comprise leasehold land in the PRC under medium-term leases. The amount represents prepayment of rentals under operating leases for “land use rights” situated in the PRC. 100 2010 ANNUAL REPORT 20.EXPRESSWAY OPERATING RIGHTS COST At January 1, 2009 Addition At December 31, 2009 and January 1, 2010 Addition Written off At December 31, 2010 AMORTISATION At January 1, 2009 Charge for the year At December 31, 2009 and January 1, 2010 Charge for the year Written off At December 31, 2010 CARRYING VALUES At December 31, 2010 At December 31, 2009 Rmb’000 16,257,748 507,581 16,765,329 7,633 (260) 16,772,702 3,333,771 676,220 4,009,991 691,332 (118) 4,701,205 12,071,497 12,755,338 The above expressway operating rights were granted by the Zhejiang Provincial Government to the Group for 30 years. During the expressway concessionary period, the Group has the rights of operation and management of Shanghai-Hangzhou-Ningbo Expressway and Shangsan Expressway and the toll-collection rights thereof. The Group is required to manage and operate the expressways in accordance with the regulations promulgated by the Ministry of Communication and relevant government authorities. Upon the end of the respective concession service periods, the toll expressways and their toll station facilities will be returned to the grantors at zero consideration. 21.GOODWILL COST AND CARRYING VALUES At January 1, 2009, December 31, 2009, January 1, 2010 and December 31, 2010 86,867 Rmb’000 Particulars regarding impairment testing on goodwill are disclosed in Note 23. ZHEJIANG EXPRESSWAY CO., LTD. 101 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 22.OTHER INTANGIBLE ASSETS Securities/ Customer futures Trading Software bases firm licenses seats licenses Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 101,147 63,083 — — 101,147 63,083 — — 3,480 — 3,480 — 10,069 10,192 177,779 10,192 20,261 12,907 187,971 12,907 COST At January 1, 2009 Additions At December 31, 2009 and January 1, 2010 Additions At December 31, 2010 101,147 63,083 3,480 33,168 200,878 AMORTISATION At January 1, 2009 Charge for the year At December 31, 2009 and January 1, 2010 Charge for the year At December 31, 2010 CARRYING VALUES At December 31, 2010 18,446 8,650 27,096 8,253 35,349 — — — — — — — — — — 1,268 4,788 6,056 4,453 19,714 13,438 33,152 12,706 10,509 45,858 65,798 63,083 3,480 22,659 155,020 At December 31, 2009 74,051 63,083 3,480 14,205 154,819 The customer bases of Zheshang Securities Co., Ltd (“Zheshang Securities”) and Zheshang Futures Broker Co., Ltd (formerly known as Zhejiang Tianma Futures Broker Co., Ltd) (“Zheshang Futures”) are amortised on a straight-line basis over 15 years and 3 years, respectively. The securities/futures firm licenses of the securities operation are considered by the management of the Group to have an indefinite useful life because they can be renewed at minimal cost even though the current licenses are effective for three years. The trading seats of the securities operation is considered by the management of the Group to have an indefinite useful life because there is no economic or regulatory limit to their useful life. Software licenses are amortised on a straight-line basis over three to five years. Particulars of the impairment testing on intangible assets with indefinite useful lives are disclosed in Note 23. 102 2010 ANNUAL REPORT 23.IMPAIRMENT TESTING ON GOODWILL AND INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES For the purposes of impairment testing, goodwill and other intangible assets with indefinite useful lives set out in Notes 21 and 22 have been allocated to four individual cash generating units (“CGUs”), including two subsidiaries in toll operation segment and two subsidiaries in securities operation segment. The carrying amounts of goodwill and other intangible assets (net of accumulated impairment losses) as at December 31, 2010 and 2009 allocated to these units are as follows: Goodwill firm licenses Securities/futures Trading seats 2010 2009 2010 2009 2010 2009 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Toll operation – Zhejiang Jiaxing Expressway Co., Ltd. 75,137 75,137 — — — — (“Jiaxing Co”) – Zhejiang Shangsan Expressway Co., Ltd. (“Shangsan Co”) 10,335 10,335 — — — — Securities operation – Zheshang Securities – Zheshang Futures — 1,395 — 1,395 51,783 11,300 51,783 11,300 86,867 86,867 63,083 63,083 2,080 1,400 3,480 2,080 1,400 3,480 ZHEJIANG EXPRESSWAY CO., LTD. 103 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 23.IMPAIRMENT TESTING ON GOODWILL AND INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES (Continued) During the year ended December 31, 2010, the management of the Group determines that there are no impairment of any of its CGUs containing goodwill and other intangible assets with indefinite useful lives. The basis of the recoverable amounts of the above CGUs and their major underlying assumptions are summarised below: Jiaxing Co and Shangsan Co The recoverable amounts of Jiaxing Co and Shangsan Co are determined based on value in use calculations. The key assumptions for the value in use calculations relate to discount rates, growth rates, and expected changes in toll revenue and direct costs during the forecast period. Those calculations use cash flow projections based on financial budgets approved by management covering a five-year period and a discount rate of 15% (2009: 15%). No growth rate has been assumed beyond the five-year period up to the remaining toll road operating rights which are 18 years (2009: 19 years) and 20 years (2009: 21 years) for Jiaxing Co. and Shangsan Co., respectively. Zheshang Securities The recoverable amount of Zheshang Securities is determined based on value in use calculations. The key assumptions for the value in use calculations relate to the discount rate, growth rates and profit margin during the forecast period. Those calculations use cash flow projections based on financial budgets approved by management covering a five-year period and a discount rate of 18.01% (2009: 17.5%). Growth rate beyond the five-year period is assumed to be nil. Zheshang Futures The recoverable amount of Zheshang Futures is determined based on value in use calculations. The key assumptions for the value in use calculations relate to the discount rate, growth rates and profit margin during the forecast period. Those calculations use cash flow projections based on financial budgets approved by management covering a five-year period and a discount rate of 18.01% (2009: 17.5%). Growth rate beyond the five-year period is assumed to be nil. 104 2010 ANNUAL REPORT 24.INTERESTS IN ASSOCIATES Unlisted investments in associates, at cost Share of post-acquisition (loss) profits, net of dividends received 2010 2009 Rmb’000 Rmb’000 474,691 (1,781) 426,241 8,766 472,910 435,007 At December 31, 2010 and 2009, the Group had interests in the following associates: Name of entity Form of business structure Place of Percentage of equity registration interest attributable to and operation the Group Principal activities Zhejiang Expressway Petroleum Corporate The PRC Development Co., Ltd. (“Petroleum Co”) 2010 2009 % 50 % 50 Operation of petrol stations and sale of petroleum products JoinHands Technology Co., Ltd. Corporate The PRC 27.58 27.58 Provision of printing services and property leasing Zhejiang Concord Property Investment Corporate The PRC 45 22.95 Investment and Co., Ltd. real estate development Hangzhou Tianjun Industrial Co., Ltd Corporate The PRC 29.45 29.45 Investment and portfolio management Hangzhou Yuhang Communication Time Corporate The PRC 16.57 16.57 Investment and Plaza Co., Ltd. (“Time Plaza Co”) (Note i) real estate development Ningbo Expressway Advertising Co., Ltd. Corporate The PRC 24.5 12.5 Management of (“Ningbo Advertising Co”) (Note ii) advertising billboards along expressways Zhejiang Jinhua Yongjin Expressway Corporate The PRC 23.45 23.45 Management of the Jinhua Co., Ltd. (“Yongjin”) section of the Ningbo-Jinhua Expressway Zheshang Fund Management Corporate The PRC 12.97 — Asset fund management Co., Ltd. (“Zheshang Fund”) (Note iii) ZHEJIANG EXPRESSWAY CO., LTD. 105 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 24.INTERESTS IN ASSOCIATES (Continued) Notes: (i) The Group is able to exercise significant influence over Time Plaza Co because it has the power to appoint one out of five directors of that company under the provisions stated in the Articles of Association of that company. (ii) The Group is able to exercise significant influence over Ningbo Advertising Co because it has the power to appoint two out of five directors of that company under the provisions stated in the Articles of Association of that company. (iii) The Group is able to exercise significant influence over Zheshang Fund because it has the power to appoint one out of four directors of that company under the provisions stated in the Articles of Association of that company. During the year ended December 31, 2009, an impairment loss of Rmb9,298,000 in relation to interest in an associate, Yongjin, was recognised. The recoverable amounts of Yongjin are determined based on value in use calculations. The key assumptions for the value in use calculations relate to discount rates, growth rates, and expected changes in toll revenue and direct costs during the forecast period. Those calculations use cash flow projections based on financial budgets approved by management covering a twenty-year period and a discount rate of 8% (2009: 8%). The summarised financial information in respect of the Group’s associates at the end of the reporting period is set out below: Total assets Total liabilities Net assets Group’s share of net assets of associates, after impairment loss of Rmb9,298,000 (2009: Rmb9,298,000) Revenue Loss for the year Other comprehensive income Group’s share of results of associates for the year 106 2010 ANNUAL REPORT 2010 2009 Rmb’000 Rmb’000 6,304,394 4,754,409 (4,590,133) (3,265,061) 1,714,261 1,489,348 472,910 435,007 4,600,647 2,907,878 (7,822) (104,542) — — 2,453 (24,164) 25.AVAILABLE-FOR-SALE INVESTMENTS Available-for-sale investments comprise: 2010 2009 Rmb’000 Rmb’000 Non-current assets: Unlisted equity securities investments, at cost (Note i) 1,000 1,000 Current assets: Listed equity securities investments in the PRC, at fair value (Note ii) 71,928 72,928 54,704 55,704 Notes: (i) Unlisted equity securities investments represent investments in unlisted equity securities issued by private entities established in the PRC. They are measured at cost less impairment at the end of the reporting period because the range of reasonable fair value estimated is so significant that the directors of the Company are of the opinion that their fair values cannot be measured reliably. (ii) Listed equity investments represent equity securities subscribed through placement by listed issuers. They are measured at fair value. During the year ended December 31, 2010, the gain on change in fair value of the investments of Rmb14,342,000 (2009: Rmb34,234,000) has been recognised as other comprehensive income. During the year ended December 31, 2010, the Group disposed certain listed equity investments and recognised a gain on disposal of Rmb25,052,000 (2009: Rmb13,632,000). ZHEJIANG EXPRESSWAY CO., LTD. 107 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 26.TRADE RECEIVABLES The Group has no credit period granted to its trade customers of toll operation, service area businesses and securities operation. The following is an aged analysis of trade receivables presented based on the invoice date at the end of the reporting period. Within 3 months 3 months to 1 year 1 to 2 years Over 2 years 2010 2009 Rmb’000 Rmb’000 49,666 49,739 — 271 831 — 218 613 50,768 50,570 Included in the Group’s trade receivable balance aged within 3 months were tolls receivable from the Expressway Fee Settlement Centre of the Highway Administration Bureau of Zhejiang Province and Hangzhou Urban and Rural Construction Committee amounting to Rmb48,232,000 (2009: Rmb45,140,000) which has been settled subsequent to the end of the reporting period. The directors consider the credit risk of the balance to be minimal. The Group has not provided for impairment loss on the balances past due as set out above and does not hold any collateral over these balances. 27.OTHER RECEIVABLES Consideration receivable* (Note a) Entrusted loans receivables from a related party (Note 43(a)) Entrusted loan receivable from a third party (Note b) Dividend receivable from a former jointly controlled entity* Prepayments Others* * The amounts were unsecured, interest-free and repayable on demand. 108 2010 ANNUAL REPORT 2010 2009 Rmb’000 Rmb’000 115,000 500,000 60,000 53,000 53,223 115,000 120,000 — 53,000 54,783 171,930 108,384 953,153 451,167 27.OTHER RECEIVABLES (Continued) Notes: (a) The balance represented the receivable of the unsettled consideration of disposal of Shida JV during the year ended December 31, 2009 (Note 9). (b) Pursuant to the board resolutions of the Company on August 28, 2010, Shangsan Co, a subsidiary of the Company, and the entrusted loan contracts, Shangsan Co provided short-term entrusted loans during 2010 totalling Rmb60,000,000 with maturity date of December 22, 2011 to Taizhou State-Owned Asset Operations Co., Ltd. (“Taizhou Co”), a non-controlling shareholder of a subsidiary of Shangsan Co at a fixed interest rate of 5.56% per annum, via Industrial and Commercial Bank of China. Taizhou Co has pledged 30,000,000 shares in Zheshang Securities representing 1.42% equity interest in Zheshang Securities as collateral. 28.HELD FOR TRADING INVESTMENTS Held for trading investments include: Listed securities in the PRC, at fair value: Equity securities Open-end equity funds Corporate bonds with fixed interest ranging from 3.5% to 8.5% per annum and 2010 2009 Rmb’000 Rmb’000 197,592 5,445 293 6,258 maturity date from November 24, 2012 to December 17, 2020 600,735 511,344 803,772 517,895 ZHEJIANG EXPRESSWAY CO., LTD. 109 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 29.FINANCIAL ASSETS HELD UNDER RESALE AGREEMENT The amounts represent debt securities acquired by the Group which will be resold at a predetermined price on January 6, 2011 under resale agreements with a financial institution in the PRC during the year. The amounts carry interest at fixed rates ranging from 2.89% to 2.98% and have been subsequently settled in January 2011. The Group conducts resale agreement under usual and customary terms of placements and holds collateral for these transactions. The directors consider that the fair value of the collateral which are corporate bonds approximate the carrying amount of the financial assets held under resale agreement. As at December 31, 2010, the Group did not hold for resale agreement any collateral which it was permitted to sell or repledge in the absence of default for the transactions. 30.BANK BALANCES HELD ON BEHALF OF CUSTOMERS From the Group’s securities operation, the Group receives and holds money deposited by customers and other institutions. These customers’ money is maintained in one or more segregated bank accounts. The Group has recognised the corresponding accounts payable to respective customers and other institutions. Bank balances held on behalf of customers carry interest at market rates which range from 1.26% to 1.89% (2009: 1.26% to 1.80%) per annum. Bank balances held on behalf of customers that are denominated in currencies other than the functional currency of the respective group entities are set out below: HKD USD Rmb’000 Rmb’000 14,916 14,288 58,508 56,227 As at December 31, 2010 As at December 31, 2009 110 2010 ANNUAL REPORT 31.BANK BALANCES AND CASH Restricted bank balance (Note) 2010 2009 Rmb’000 Rmb’000 — 942 Time deposits with original maturity over three months 325,545 228,452 Unrestricted bank balances and cash Time deposits with original maturity of less than three months Cash and cash equivalents 2,650,053 3,032,000 4,819,503 229,500 5,682,053 5,049,003 6,007,598 5,278,397 Note: The restricted bank balance was frozen by China Securities Depository and Clearing Corporation Limited Shanghai Branch in connection with the guarantees issued by Zheshang Securities, in which the full amount of Rmb942,000 was released in January 2010. Bank balances carry interest at the market rate of 0.36% (2009: 0.36%) per annum. Time deposits carry interest at fixed rates ranging from 1.35% to 2.50% (2009: 1.35% to 2.25%) per annum. Bank balances and cash that are denominated in currencies other than the functional currency of the respective group entities are set out below: As at December 31, 2010 As at December 31, 2009 HKD USD Rmb’000 Rmb’000 5,264 4,666 26,875 25,423 ZHEJIANG EXPRESSWAY CO., LTD. 111 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 32.ACCOUNTS PAYABLE TO CUSTOMERS ARISING FROM SECURITIES DEALING BUSINESS The settlement terms of accounts payables arising from the securities dealing business are one day after the trade date. No aged analysis is disclosed as in the opinion of the directors an aged analysis does not give any additional value in view of the nature of the business. Accounts payable to customers arising from securities dealing business that are denominated in currencies other than the functional currency of the respective group entities are set out below: As at December 31, 2010 As at December 31, 2009 33.TRADE PAYABLES HKD USD Rmb’000 Rmb’000 14,947 14,288 58,718 56,227 Trade payables mainly represent the construction payables for the improvement projects of toll expressways. The following is an aged analysis of trade payables presented based on the payment due date at the end of the reporting period. 2010 2009 Rmb’000 Rmb’000 166,438 232,122 60,701 83,256 6,178 410,900 77,793 136,065 22,011 604 548,695 647,373 Within 3 months 3 months to 1 year 1 to 2 years 2 to 3 years Over 3 years 112 2010 ANNUAL REPORT 34.OTHER PAYABLES AND ACCRUALS Other liabilities: Accrued payroll and welfare Advance from customers Toll collected on behalf of other toll roads Prepayment from non-controlling shareholder of Zheshang Securities (Note) Others Accruals 2010 2009 Rmb’000 Rmb’000 386,033 67,102 33,630 338,354 182,365 1,007,484 41,817 341,870 62,589 36,149 — 154,475 595,083 42,582 1,049,301 637,665 Note: Amount represents prepayment for additional capital injection to Zheshang Securities from a non-controlling shareholder of Zheshang Securities. Such amount will be credited to non-controlling interest upon the approval of the relevant government authorities. 35.INTEREST-BEARING BANK AND OTHER LOANS Bank loans, unsecured Other loans, unsecured Carrying amount of bank loans repayable: Within one year Carrying amount of other loans repayable: Within one year More than one year, but not exceeding two years More than two year, but not exceeding five years 2010 2009 Rmb’000 Rmb’000 822,000 — 200,000 422,384 822,000 622,384 822,000 200,000 — — — — 278,055 87,016 57,313 422,384 822,000 622,384 Less: Amount due within one year shown under current liabilities (822,000) (478,055) — 144,329 ZHEJIANG EXPRESSWAY CO., LTD. 113 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 35.INTEREST-BEARING BANK AND OTHER LOANS (Continued) At December 31, 2010, the bank loans included a loan of Rmb472,000,000 (2009: Rmb200,000,000) carrying fixed rates ranging from 5.10% to 5.81% (2009: 5.31%). At December 31, 2010, the bank loans also included a loan of Rmb350,000,000 (2009: nil) carrying floating rates based on the China Central Bank benchmark interest rate ranging from 5.00% to 5.52%. The other loans mainly represent loans from the World Bank via municipal governments and carry a floating interest rate ranges from 7.54% to 7.80% (2009: 1.82% to 4.55%) per annum (both the effective interest rate and contracted interest rate). There is no (2009: Rmb422,384,000 (USD61,859,000)) bank and other loans for the Group that are denominated in currencies other than Rmb as at December 31, 2010. 36.PROVISIONS At January 1, 2009 Provision for the year Utilisation of provision Litigation Litigation on on public deposits interest claim and funds Rmb’000 Rmb’000 (note i) (note ii) Other litigation Rmb’000 (note iii) 21,683 — 12,181 — — 94,860 (7,047) 87,813 — (87,813) 800 — 12,981 (12,981) — — Total Rmb’000 33,864 95,660 (7,047) 122,477 (13,426) (87,813) 21,238 At December 31, 2009 and January 1, 2010 21,683 Overprovision in prior years Utilisation of provision (445) — At December 31, 2010 21,238 — 114 2010 ANNUAL REPORT 36.PROVISIONS (Continued) Notes: (i) The Group has received a claim from the customers under the state bond investment agency agreements and fund trust agreements for the additional interest compensation upon the settlement of the principal and interest at a rate of 2.7%. Based on the legal opinion, management considered that it is probable that the claim is ruled against the Group and accordingly, a provision for the interest compensation amounting to Rmb21,683,000 has been recognised in the profit and loss as at December 31, 2008. Based on the litigation process, overprovision in prior years of Rmb445,000 is recognised during the year ended December 31, 2010. The litigation is currently in process. (ii) Prior to the restructuring of Zheshang Securities by the Company, the original person-in-charge of one of the Sales Departments under Zheshang Securities illegally misappropriated customers’ deposits and funds, which caused a loss of approximately Rmb90,000,000 to the relevant customers. During the year ended December 31, 2009, clients who incurred losses due to the case have filed civil lawsuit against Zheshang Securities. Zheshang Securities made during the year ended December 31, 2009 a provision amounting to Rmb94,860,000 for the principal and related interest involved in the lawsuit, of which Rmb7,047,000 has been settled. During the year ended December 31, 2010, Zheshang Securities has fully settled the principal and interest to all customers. The obligation of Zheshang Securities was fully discharged as at December 31, 2010. (iii) Sinobase International Ltd. initiated a lawsuit against Zheshang Securities in November 2008 in respect of a dispute for asset management entrustment contract entered into with Zheshang Securities in September 2005 with a principal and default compensation in aggregate of Rmb12,181,000. Full provision of such claim was recognised in profit and loss during the year ended December 31, 2008. Taking into account of the current progress of the legal proceedings, an additional provision of Rmb800,000 had been made for such claim in 2009. Sinobase International Ltd. has withdrawn the legal proceeding against Zheshang Securities during the year ended December 31, 2010. The obligation of Zheshang Securities was fully discharged and the provision of Rmb12,981,000 is reversed accordingly as at December 31, 2010. 37.LONG-TERM BONDS Long-term bonds - listed in the PRC 2010 2009 Rmb’000 Rmb’000 1,000,000 1,000,000 The long-term bonds are unsecured, carry interest payable annually at a fixed rate of 4.29% per annum and are repayable in 2013 upon maturity. The quoted price of the listed long-term bonds as at December 31, 2010 is RMB1,000,000,000. ZHEJIANG EXPRESSWAY CO., LTD. 115 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 38.DEFERRED TAXATION The following are the major deferred tax liabilities and assets recognised and movements thereon during the current and prior years: Changes in fair value of Accelerated tax Impairment of available- for-sale held for trading depreciation Fair value and available- of property adjustment of for-sale plant and intangible investments Provisions investments equipment assets Others Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 At January 1, 2009 Charge (credit) to profit or loss (6,198) 6,198 Credit to other comprehensive income At December 31, 2009 and January 1, 2010 Charge (credit) to profit or loss Credit to other comprehensive income At December 31, 2010 — — — — — (8,466) (200) — (8,666) 3,356 — 2,473 19,292 (8,558) 13,207 26,277 (3,585) 252,788 (14,223) — 238,565 (10,004) — 38,916 (2,339) — 36,577 (2,339) — (7,251) (10,395) — (17,646) (13,095) — 272,262 (1,667) (8,558) 262,037 4,195 (3,585) (5,310) 35,899 228,561 34,238 (30,741) 262,647 39.SHARE CAPITAL Number of shares Share capital 2010 2009 2010 2009 Rmb’000 Rmb’000 Registered, issued and fully paid: Domestic shares of Rmb1.00 each 2,909,260,000 2,909,260,000 2,909,260 H Shares of Rmb1.00 each 1,433,854,500 1,433,854,500 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. The H Shares were admitted to the Official List on May 5, 2000 and their dealings on the London Stock Exchange commenced on the same day. 116 2010 ANNUAL REPORT 39.SHARE CAPITAL (Continued) 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. 40.RETIREMENT BENEFITS SCHEMES The employees of the Group are members of the state-managed retirement benefits scheme operated by the PRC government. To supplement this existing retirement benefits scheme, the Group adopted a corporate annuity scheme during the year in accordance with relevant rules and regulations. The Group is required to contribute a certain percentage of payroll costs to these retirement benefits schemes to fund the benefits. The only obligation of the Group with respect to these retirement benefits schemes is to make the specified contributions. No forfeited contributions are available to reduce the contribution payable in future years. 41.COMMITMENTS Contracted but not provided for in the consolidated financial statements: - Investments in expressways upgrade services — — 2010 2009 Rmb’000 Rmb’000 Authorised but not contracted for: - Investments in expressways upgrade services - Purchase of machinery - Renovation of service areas - Purchase of office buildings and its renovation work 46,620 342,757 16,100 360,180 50,000 128,000 30,000 216,000 765,657 424,000 ZHEJIANG EXPRESSWAY CO., LTD. 117 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 42.OPERATING LEASES The Group as lessee Minimum lease payments Contingent rental expenses 2010 2009 Rmb’000 Rmb’000 11,765 4,501 16,266 11,565 5,046 16,611 At the end of the reporting period, the Group had commitments for future minimum lease payments under non- cancellable operating leases which fall due as follows: Within one year In the second to fifth years inclusive Over five years 2010 2009 Rmb’000 Rmb’000 13,637 58,651 29,117 11,765 52,061 49,400 101,405 113,226 Operating lease payments represent rentals payable by the Group for certain service areas along expressways located in Zhejiang and Tianjin. They are negotiated for an average term of ten years and rentals contain both a fixed element and a contingent element linked to sales. 118 2010 ANNUAL REPORT 42.OPERATING LEASES (Continued) The Group as lessor The Group leased their service areas and communication ducts under operating lease arrangements. Leases are negotiated for terms ranging from 1 to 25 years and rentals are fixed annually. At the end of the reporting period, the Group had contracted with tenants for the following future minimum lease payments: Within one year In the second to fifth years inclusive After five years 2010 2009 Rmb’000 Rmb’000 28,010 40,113 19,183 87,306 34,421 35,139 23,481 93,041 43.RELATED PARTY TRANSACTIONS AND BALANCES The following is a summary of the related party transactions arising from the Group’s daily operating activities: (a) Pursuant to the resolutions of the shareholders’ meeting on September 15, 2009 of Development Co, a subsidiary of the Company, and the entrusted loan contracts, Development Co provided short-term entrusted loans during 2009 totalling Rmb120,000,000 with maturity date of September 24, 2010 to Hangzhou Concord Property Investment Co., Ltd.(“Hangzhou Concord Co”), a subsidiary of an associate of Development Co at a fixed interest rate of 12% per annum, via Industrial and Commercial Bank of China. The entrusted loan was fully repaid during 2010. Pursuant to the resolutions of the shareholders’ meeting on June 21, 2010 of Development Co, and the entrusted loan contracts, Development Co provided short-term entrusted loans during 2010 totalling Rmb270,000,000 with maturity date from July 11, 2011 to September 20, 2011 to Hangzhou Concord Co at a fixed interest rate of 12% per annum, via Industrial and Commercial Bank of China. Such entrusted loan is guaranteed by World Trade Center Zhejiang Real Estate Development Co., Ltd. (“World Trade Ltd”), a related party of Hangzhou Concord Co, in full. ZHEJIANG EXPRESSWAY CO., LTD. 119 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 43.RELATED PARTY TRANSACTIONS AND BALANCES (Continued) Pursuant to the resolutions of the shareholders’ meeting on July 8, 2010 of Zhejiang Expressway Advertising Co., Ltd. (“Advertising Co”), a subsidiary of Development Co, and the entrusted loan contracts, Advertising Co provided short-term entrusted loans during 2010 totalling Rmb30,000,000 with maturity date of July 11, 2011 to Hangzhou Concord Co at a fixed interest rate of 12% per annum, via Industrial and Commercial Bank of China. Such entrusted loan is guaranteed by World Trade Ltd, a related party of Hangzhou Concord Co, in full. Pursuant to the board resolutions of the Company on August 28, 2010, and the entrusted loan contracts, the Company provided short-term entrusted loans during 2010 totalling Rmb200,000,000 with maturity date of September 30, 2011 to Hangzhou Concord Co at a fixed interest rate of 12% per annum, via Industrial and Commercial Bank of China. Such entrusted loan is guaranteed by World Trade Ltd, a related party of Hangzhou Concord Co, in full. Interest income recognised in 2010 on the above transactions with Hangzhou Concord Co were Rmb26,432,000 (2009: Rmb3,700,000). (b) Pursuant to the operation management agreement entered into between Development Co and Petroleum Co in respect of the petrol stations in the service areas along the Shanghai-Hangzhou-Ningbo and Shangsan Expressways, Petroleum Co will with their expertise assist Development Co in running their petrol stations along the Shanghai-Hangzhou-Ningbo and Shangsan Expressways. Purchases of petroleum products from Petroleum Co during year ended December 31, 2010 amounted to Rmb1,358,463,000 (2009: Rmb922,280,000). (c) Pursuant to the capital injection agreement entered into between Yongjin and the Company on May 20, 2010, the Company agreed to further inject Rmb23,450,000 working capital in proportion to its equity interest in Yongjin. (d) Pursuant to the acquisition agreements entered into between the vendors of Development Co and the Company, the Company acquired 49% equity interest in Development Co (of which 3.9% are held by Mr. JIANG Wenyao and Mr. ZHANG Jingzhong, who are the directors of the Company, and Mr. FANG Zhexing, who is the supervisor of the Company). Upon completion of the acquisition, Development Co. became a wholly-owned subsidiary of the Company. 120 2010 ANNUAL REPORT 43.RELATED PARTY TRANSACTIONS AND BALANCES (Continued) Transactions and balances with other state-controlled entities in the PRC The Group operates in an economic environment currently predominated by entities directly or indirectly owned or controlled by the PRC government (“state-controlled entities”). In addition, the Group itself is part of a larger group of companies under the Communications Group which is controlled by the PRC government. Apart from the transactions with the Communications Group and parties under the common control of the Communications Group disclosed in Note 9, the Group also conducts business with other state-controlled entities. The directors consider those state-controlled entities are independent third parties so far as the Group’s business transactions with them are concerned. The Group has entered into various transactions, including deposit placements, borrowings and other general banking facilities, with certain banks and financial institutions which are state-controlled entities in its ordinary course of business. In view of the nature of those banking transactions, the directors are of the opinion that separate disclosure would not be meaningful. In addition, on September 10, 2009, the Group entered into an agreement with Hangzhou Communications Group, a state-owned enterprise, pursuant to which the Group agreed to sell, and Hangzhou Communications Group agreed to purchase, the entire 50% interest of the Group in Shida JV for a consideration of Rmb367,000,000. The disposal was completed in November 2009 and the gain on disposal of the jointly controlled entity of Rmb274,494,000 was recognised in the profit or loss for the year ended December 31, 2009. In respect of the Group’s toll road business, the directors are of the opinion that it is impracticable to ascertain the identity of counterparties and accordingly whether the transactions are with other state-controlled entities in the PRC. Compensation of directors, supervisors, and key management personnel Other than the directors, supervisors and key management personnel disclosed in Notes 14 and 15, the remuneration of other key management personnel during the year was approximately Rmb1,506,000 including retirement benefit scheme contribution of Rmb47,000 (2009: Rmb1,374,000 including retirement benefit scheme contribution of Rmb47,000) which is determined by the performance of the individuals and the market trends. ZHEJIANG EXPRESSWAY CO., LTD. 121 Notes to the Consolidated Financial Statements For the year ended December 31, 2010 44.PARTICULARS OF SUBSIDIARIES OF THE COMPANY Date and place Registered and Percentage of equity interest Name of subsidiary of registration paid-in capital attributable to the Company Principal activities Rmb Direct Indirect 2010 2009 2010 2009 Zhejiang Yuhang Note 1 75,223,000 Expressway Co., Ltd (“Yuhang Co”) % 51 % 51 Jiaxing Co Note 2 1,859,200,000 99.999454 99.999454 Shangsan Co Note 3 2,400,000,000 73.625 73.625 Development Co Note 4 120,000,000 100 51 Advertising Co Service Co Note 5 Note 6 3,500,000 8,000,000 Hangzhou Roadtone Note 7 3,000,000 Advertising Co., Ltd. (“Roadtone Co”) Zheshang Securities Zheshang Futures Note 8 Note 9 2,120,000,000 150,000,000 — — — — — — — — — — % — — — — % — Management of the Yuhang Section of the Shanghai -Hangzhou Expressway — Management of the Jiaxing — — Section of the Shanghai -Hangzhou Expressway Management of the Shangsan Expressway Operation of service areas as well as roadside advertising along he the expressways operated by the Group *70 *100 *35.7 Provision of advertising services *43.35 Provision of vehicle towing, repair and emergency rescue services *51 *26.01 Provision of advertising services **51.88 **51.88 Operation of securities business ***51.88 ***51.88 Operation of securities business 122 2010 ANNUAL REPORT 44.PARTICULARS OF SUBSIDIARIES OF THE COMPANY (Continued) * These three companies are subsidiaries of Development Co, a wholly-owned subsidiary of the Company, and, accordingly, are accounted for as subsidiaries by virtue of the Group’s control over them. ** The company is a subsidiary of Shangsan Co, a non-wholly-owned subsidiary of the Company, and, accordingly, is accounted for as a subsidiary by virtue of the Group’s control over it. *** The company is a subsidiary of Zheshang Securities, a non-wholly-owned subsidiary of Shangsan Co, and, accordingly, is accounted for as a subsidiary by virtue of the Group’s control over it. 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. The Company is able to control over Yuhang Co because it has the power to appoint five out of nine directors of that company and under the provisions stated in the Articles of Association of that company, the passing of ordinary resolutions at the board meetings required one-half of the directors attending the meetings. 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. Note 8: Zheshang Securities was established on May 9, 2002 in the PRC as a limited liability company. It was previously known as “Kinghing Securities Co., Ltd.” before being acquired by Shangsan Co. Note 9: Zheshang Futures was established on September 7, 1995 in the PRC as a limited liability Company. All of the Company’s subsidiaries are operating in the PRC. None of them had in issue any debt securities at the end of the year. ZHEJIANG EXPRESSWAY CO., LTD. 123 Corporate Information EXECUTIVE DIRECTORS CHEN Jisong (Chairman) REPRESENTATIVE OFFICE IN HONG KONG ZHAN Xiaozhang (General Manager) Suite 2910 29/F, Bank of America Tower 12 Harcourt Road Hong Kong Tel: 852-2537 4295 Fax: 852-2537 4293 LEGAL ADVISERS As to Hong Kong and US law: Herbert Smith 23rd Floor, Gloucester Tower 15 Queen’s Road Central Hong Kong As to English law: Herbert Smith LLP Exchange House Primrose Street London EC2A 2HS United Kingdom As to PRC law: T & C Law Firm 11/F, Block A, Dragon Century Plaza 1 Hangda Road Hangzhou City, Zhejiang Province PRC 310007 AUDITORS Deloitte Touche Tohmatsu 35/F, One Pacific Place 88 Queensway Hong Kong JIANG Wenyao ZHANG Jingzhong DING Huikang NON-EXECUTIVE DIRECTORS ZHANG Luyun INDEPENDENT NON-EXECUTIVE DIRECTORS TUNG Chee Chen ZHANG Junsheng ZHANG Liping SUPERVISORS MA Kehua FANG Zhexing JIANG Shaozhong WU Yongmin LIU Haiseng COMPANY SECRETARY ZHANG Jingzhong AUTHORIZED REPRESENTATIVES CHEN Jisong ZHANG Jingzhong STATUTORY ADDRESS 12/F, Block A, Dragon Century Plaza 1 Hangda Road Hangzhou City, Zhejiang Province PRC 310007 Tel: 86-571-8798 5588 Fax: 86-571-8798 5599 124 2010 ANNUAL REPORT LONDON STOCK EXCHANGE PLC Code: ZHEH ADRS INFORMATION US Exchange: OTC Symbol: ZHEXY CUSIP: 98951A100 ADR: H Shares 1:10 CORPORATE BOND LISTING INFORMATION The Shanghai Stock Exchange Symbol: 03 滬杭甬 Code: 120308 Website www.zjec.com.cn INVESTOR RELATIONS CONSULTANT Rikes Hill & Knowlton 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 Room 1712-1716, 17/F, Hopewell Centre 183 Queen’s Road East Hong Kong H SHARES LISTING INFORMATION The Stock Exchange of Hong Kong Limited Code: 0576 ZHEJIANG EXPRESSWAY CO., LTD. 125 Location Map of Expressways in Zhejiang Province 126 2010 ANNUAL REPORT