Annual Report 2003

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MANAGING DIRECTOR & CEO’s REVIEW

Annual Report 2003

11

Capitalising on Chinese wisdom and international expertise can help a firm to thrive amidintense global competition. CAO pursues this balance between the ancient and the present,

East and West. CAO seeks to apply the essence of Chinese wisdom and modern westernmanagement concepts simultaneously. Its track record demonstrates this marriage of

Eastern understanding and Western skill.

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Revenue / Segmental Breakdown

Group revenue for FY03 arising mainly from international oiltrading and jet fuel procurement operations was S$2.43 billion, a43.5% increase compared to the group revenue of S$1.69 billionfor FY02.

On a segmental basis, clean petroleum products accounted for59.1% of group revenue (FY02: 48.6%) or S$1.43 billion, blackpetroleum products for 22.3% (FY02: 33.9%) or S$540.6 million,and crude oil for 16.0% (FY02:16.5%) or S$388.8 million. Thebalance 2.6% (FY02: 1.0%) of S$62.9 million of group revenuecame from petrochemical and derivatives trading and otheractivities. Clean petroleum products included jet fuel, gasoil andnaphtha, while black petroleum products included fuel oil.

Profitability

The Group recorded consolidated profit before tax of S$67.1million for FY03, an increase of 22.8% over FY02’s S$54.6 million.Net profit after tax was S$54.3 million, an increase of 12.5%compared to S$48.2 million for FY02.

However, the FY02 results included exceptional items of S$12.7million, arising from the non-recurring write-back of unutilisedprovisions for management fees and staff bonuses in prior years.Excluding these exceptional items, pre-tax profit for FY03 rose60.0% over FY02.

Profit Drivers:

Group results included profit contributions from each of theGroup’s three business segments, namely strategic investments inoil-related infrastructure businesses and assets, international oiltrading and jet fuel procurement for import to China.

For FY03, contributions to profit from investments compriseddividends paid to CAO by 5%-held Compania Logistica deHidrocrburos S.A. (“CLH”) of Spain and a 33% share of theresults of associate company Shanghai Pudong InternationalAirport Aviation Fuel Supply Company Ltd (“Pudong”), accountedon the equity method. These respectively comprised threedividends from CLH totalling EUR 6.6 million (equivalentto S$13.1 million), and the pretax share of Pudong’s resultsamounting to S$34.5 million (FY02: S$20.4 million).

Total contribution to pre-tax profit by investments, net ofamortisation for goodwill, was therefore S$45.3 million (FY02:S$19.2 million, a 137% increase), comprising 68% of the Group’sconsolidated profit before tax. International oil trading and jetfuel procurement accounted for 32% of profits, or S$21.8 million .

Investments are expected to continue to be the main driver of theGroup’s bottom-line growth. However, FY03 was the first yearthat the Group has included the results of associate companyPudong on a full-year basis, and the contribution was less thanexpected. This was due to the Chinese authorities holding theresale price of jet fuel constant despite increases in internationaloil prices during part of the second half, in order to help thedomestic aviation industry through the SARS crisis. Pudong’s grossmargins are expected to stabilise in FY04.

Expense Drivers:

Operating expenses and finance costs rose by S$9.1 millioncompared to FY02, due largely to higher staff-related expenses onthe back of an increase in staff strength, a one-time credit facilityarranger fee and the amortisation of goodwill on a full-year basisarising from the investment in Pudong.

The increase in staff was in line with the expansion of the Group’sinternational oil trading division. This included skilled traders whoare in high demand and typically command higher remuneration.Additional support staff was also employed to adequately supportthe higher number of traders in international oil trading and jetfuel procurement.

In July 2003, the Group signed a US$160 million syndicated creditfacility. The arranger fee of US$1.6 million was paid in August2003, and this fee was treated as an expense.

Separately, CAO was awarded a five-year extension of its GlobalTrader Program membership, entitling it to a concessionary taxrate of 10% for qualifying transactions.

Earnings Per Share (“EPS”)

EPS for FY03 based on a weighted average of 691,199,999ordinary shares in issue and on a fully diluted basis was 7.9Singapore cents, compared to 7.0 cents for FY02.

Balance Sheet / Net Asset Value

Total net assets as at 31 December 2003 stood at S$225.2 million,an increase of 27.4% compared to S$176.7 million a yearpreviously.

Net asset value per ordinary share as at 31 December 2003 was32.6 Singapore cents based on 691,199,999 shares outstanding,compared to 30.7 cents on a base of 576,000,000 shares a yearago.

FINANCIAL REVIEW

Annual Report 2003

13

During FY03, CAO received from associate company Pudong adistribution of retained earnings of RMB 39.6 million accrued inyears prior to FY02, which was offset against the investmentpurchase price. In addition, there was a dividend of RMB 105.6million, which was paid out of FY02’s profit. These cash inflowsaugmented the Group’s balance sheet, but had no effect on theGroup’s earnings.

In July 2003, the Group signed a syndicated loan agreement withten international banks for a transferable term credit facility ofUS$160 million. The proceeds of the loan are to be used forworking capital and for the funding of investment opportunitiessuccessfully negotiated by the Group. As of the date of this report,this loan facility has not been drawn upon.

The board of directors is recommending a tax-exempt cashdividend of S$0.035 per ordinary share and a bonus issue (the“Bonus Issue”) on the basis of two new ordinary share (‘BonusShares”) of S$0.05 each credited as fully paid for every fiveexisting ordinary shares of S$0.05 each held in the capital of CAO.

If approved by shareholders at the annual general meeting, thebonus issue will entail the capitalisation of approximately S$13.8million from the Company’s share premium account to beapplied towards paying up in full for the bonus issue. The numberof bonus shares that will be issued pursuant to the bonus issue isapproximately 276,480,000, based on the issued capital of691,199,999 shares.

Annual Turnover ($’000) Profit before Tax ($’000)

Investment Income vs Trading and Other Income

1,689,624

1,051,037963,717

414,547

54,641

44,478

16,182

9,806

FY’99 FY’00 FY’01 FY’02 FY’03 FY’99 FY’00 FY’01 FY’02 FY’03

2001 2002 2003

2001 2002 20030% 35% 68%

100% 65% 32%

Investment Income

Trading and Other Income

2,425,092 67,097

14

Jia ChangbinBoard Chairman

Jia Changbin is the Chairman of our Board of Directors. He is also the President of our parent company China AviationOil Holding Company (“CAOHC”) and is responsible for making decisions in CAOHC. Mr Jia has been inthe jet fuel business for more than 29 years. He obtained his Masters degree in Economics from East China NormalUniversity in 1999. He joined the Shanghai Branch of CAAC as administrator in 1973. He was subsequently appointedin 1984 as a deputy director. In 1990, he became deputy general manager of China Aviation Oil Supply East China Co.He was responsible for the company’s strategic planning and business development and was later promoted to GeneralManager in 1997. In 1999, he became Vice President of China Aviation Oil Supply Corporation (“CAOSC”) overseeingbusiness development, operations and safety. In 2000, he was appointed as Chairman and Non-Executive Director ofour Company. In 2002, he was promoted to the President of CAOHC, a newly restructured state-owned aviation oilinfrastructure and supplies group.

Chen JiulinManaging Director and Chief Executive Officer

Chen Jiulin is the Managing Director and CEO of CAO and the Group. Mr Chen oversees all the day-to-day operationsof CAO from his office in Singapore and is responsible for charting the growth and future of the company. Mr Chengraduated in 1987 with a Bachelor of Arts Degree from Peking University, PRC. In 1996, he obtained his PostgraduateDiploma in Law from the China University of Political Science and Law in Beijing. Currently, he is pursuing his PhD inlaw at Tsinghua University. In early 2001, he obtained an Executive MBA degree from the National University ofSingapore. Mr Chen brings with him over a decade of proven management experience in the oil-related industry. He hashad extensive working experience with Air China. In 1993, Mr Chen joined CAOSC where he actively served as chiefnegotiator and project manager on various projects. Among his outstanding accomplishments was the establishment ofSouth China Bluesky Aviation Oil Co. Ltd, a Sino-foreign equity joint venture among CAOSC, BP and Fortune Oil.This was a major milestone, as it was the first regional and the largest joint-venture project within China’s civil aviationindustry, approved by the China’s State Council. In recognition of his achievements, the Chinese Central Governmenton 11 October 2002 promoted Mr Chen to Vice-President of CAOHC where he became one of only three. The keyappointment recognizes Mr Chen’s past contributions to the Group and is also an endorsement of his proven trackrecord at the helm of CAO, since his appointment in 1997. He is also a Director of the Singapore InternationalArbitration Center. In 2003, Mr Chen was named a Founding Member of the New Asian Leaders, an elite group ofmembers of the World Economic Forum.

BOARD OF DIRECTORS

Jia ChangbinBoard Chairman

Chen JiulinManaging Director and Chief Executive Officer

Annual Report 2003

15

Gu YanfeiNon-Executive Director

Ms Gu joined the Board in March 2003 and is currently Head of Enterprise Planning and Development Division withthe parent company, CAOHC, since 2002. She has been with the CAOSC Group since 1990 during which time sheheld several senior executive positions.

Li YongjiNon-Executive Director

Mr Li joined the Board in March 2003 and is currently Head of Assets and Financial Management Division with ourparent company, CAOHC, since 2002. He has been with the CAOSC Group since 1994 during which time he has heldseveral senior executive positions in the Finance Division.

Chen KaibinNon-Executive Director

Mr Chen joined the Board in March 2003 and is currently Technical Supervisor and Director of Safety & TechnologyDivision with the parent company, CAOHC, since 2002. He has been with the CAOSC Group since 1993 duringwhich time he held several senior executive positions, including the position of Vice General Manager at CAOSC NorthChina Branch.

Zhang LianxiNon-Executive Director

Mr Zhang joined the Board in March 2003 and is currently Deputy Director of Procurement Division with the parentcompany, CAOHC, since 2002. He has been with the CAOSC Group since 1992 during which time he has held several

Gu YanfeiNon-Executive Director

Li YongjiNon-Executive Director

Chen KaibinNon-Executive Director

Zhang LianxiNon-Executive Director

16

senior executive positions.

Tan Hui BoonIndependent Director

Mr Tan joined the Board in November 2001. He was Senior Vice President (Special Projects) in Singapore AirlinesLimited (SIA) from 1998 until he retired at end June 2000. Prior to this, Mr Tan was CEO of SATS Airport Services PteLtd from 1994 and SIA’s Director of Finance from 1989 to 1994. In 1984, he was appointed as CEO of SATS CateringPte Ltd, having first joined the Singapore Airport Terminal Services Limited (SATS) as Administration Manager in 1974and rose up the ranks to Divisional Manager in SATS Cargo in 1978 and General Manager of Administration in 1980.Following his sabbatical studies at London University from 1967-68 where he obtained a Postgraduate Diploma inChemical Engineering (University College) and a Masters of Science (Bio-Chemical Engineering) with Distinction,Mr Tan joined Singapore Institute of Standards in Research as an Assistant Director. He is currently serving as anindependent director for Changi International Airport Services Pte Ltd and CIAS (International) Pte Ltd.

Jerry Lee Kian EngIndependent Director

Mr Lee joined the Board in November 2001. He is a certified public accountant and a practising partner of Ng, Lee &Associates – DFK (formerly known as Tang Peng Yeu & Co.) since 1974, having first joined Tang Peng Yeu & Co in1973 as its Auditor & Tax Manager. Since 1989, he is concurrently a partner in Yeo Yong Poh & Co. He is also a memberof the Inquiry Committee of the Public Accountants Board, Singapore. An approved company auditor and liquidator,Mr Lee has since 1991, been a director, a member of the Executive Committee and the Vice President for the Asia-PacificRegion of DFK International, a major worldwide group of independent accounting firms and business advisors.

Dr Yan XuetongIndependent Director

Dr Yan joined the Board in November 2001 and is currently the Director of the Institute of International Studies,Tsinghua University. From 1993 to 2000, he served as the Director of Foreign Policy Centre of China Instituteof Contemporary International Relations. In 1998, Dr Yan was a visiting professor at the Monterey Institute ofInternational Studies and prior to this, at the Georgia Institute of Technology. From 1982 to 1987, he was involved inresearch work at China Institute of Contemporary International Relations. Dr Yan earned a Ph.D from the University ofCalifornia, Berkeley and a Masters in Arts from the Institute of International Relations. He is a member of China ArmsControl Association, a board member of China Asia-Pacific Association and an advisor of the Korean Journal of DefenceAnalysis, Journal of Chinese Political Science, World Affairs, and Southeast Asia Studies.

Tan Hui BoonIndependent Director

Jerry Lee Kian EngIndependent Director

Dr Yan XuetongIndependent Director

BOARD OF DIRECTORS

17

Gerard RigbyDeputy Head of Trading Division I

Mr Rigby is responsible for overseeing the jet fuel procure-ment activities in the Company. He has more than 10 yearsexperience in the oil trading industry including working stintswith Ampol in New South Wales, Australia; AustralianPetroleum, Caltex Australia and Caltex Trading, Singapore.He holds a Master of Commerce from University of NewSouth Wales in 1989.

Abdallah KharmaHead of Trading Division II

Mr Abdallah is responsible for overseeing all tradingactivities (other than jet fuel procurement) in the Company.He has more than 15 years experience in the oil tradingindustry coupled with two years of experience in industrialengineering and mining, gained from working stints inMiddle East, Europe, West Africa and the Far East. He holdsa Master of Science Degree in Engineering - Thermodynam-ics from the University of Birmingham, United Kingdom.

Cindy Chong Yoke LinHead of Banking Relations & Risk ManagementChairman of Risk Management Committee

Ms Chong is responsible for managing bank relationships andoverseeing the Risk Management Committee. She has morethan 16 years experience in the oil industry and spent over 14years with BHP Petroleum (an Australian oil & mineralconglomerate) including six years of expatriate assignment atthe Head Office in Melbourne. She joined the Company in2001 as the Head of Operations Division. She holds a degreeof Bachelor of Business (Transport/Logistics Management)from Royal Melbourne Institute of Technology, Australia.

Peter Lim Tiong SunHead of Finance

Mr Lim joined the Company in February 2002 as the Headof Finance Division. He is a certified public accountant withthe Institute of Certified Public Accountants of Singapore.Prior to his employment, Mr Lim was the Vice-President ofFinance of GATX Terminals Asia, which was the regionaloffice for Asia-Pacific of GATX Corporation, a corporationlisted in the USA. Since his graduation in 1981, he has haddiverse experience in taxation, banking, and accounting, withboth small and multinational companies.

William Chan WeiHead of Strategic Investment

Mr Chan’s main duties include strategic planning andinvestment. He has over 13 years of experience in the financeand investment industry including a working stint with DowChemical Pacific (Singapore) as a Finance Manager. In 1995,Mr Chan graduated with a Masters in Business Administrationfrom the National University of Singapore and subsequentlyobtained a Postgraduate Diploma in Commercial Law fromthe National University of Singapore in 1998.

Adrian Chang Choon SiewHead of Internal Audit & Investor Relations

Mr Chang had been the Head of the division since 2001.He oversees the implementation of an effective systemof internal controls and ensures an effective risk managementframework to continually identify, evaluate and managesignificant enterprise-wide risks for the Group. He holds aMBA (International Business) from Monash Universityand is a certified public accountant with the Instituteof Certified Public Accountants of Singapore and anAssociate Chartered Accountant of the Institute ofChartered Accountants, Australia.

John CaseyDeputy Head of Internal Audit & Investor Relations

Mr Casey is the Deputy Head of the division after nearly 15years’ experience in securities research. Prior to joining CAO,he was Regional Head of Infrastructure Research for DBSVickers Securities in Singapore. John has extensiveexperience in Asian securities research, including five years inSingapore with principal coverage of Asian transportand related stocks. The current position is his first inInvestor Relations, though the years of contact with IRrepresentatives from the perspective of a securities analyst givehim a solid understanding of the role and how it should behandled. John has an MBA from Boston University in theUnited States of America.

KEY EXECUTIVES