shanghai highly (group) co., ltd. 2003 annual report · shanghai branch ----- 2,028,000 0.53...

SHANGHAI HIGHLY (GROUP) CO., LTD.

2003 ANNUAL REPORT

IMPORTANT NOTES

Members of the Company's board of directors hereby warrant that there is no false statement, misrepresentation, or material omission in this Report, and they shall be collectively and individually liable for the authenticity, accuracy, and completeness of the content of this Report. The annual financial report of the Company has been audited by Ernst & Young Da Hua Certified Public Accountants Co., Ltd. and KPMG according to domestic and international accounting standards respectively and both have issued standard audit reports that contain no qualifications.

Board of Directors Shanghai Highly (Group) Co., Ltd.

The Chairman, Mr. Gu Huilong, General Manager, Mr. Shen Jianfang and Financial Controller, Mr. Liu Huicheng hereby warrants the authenticity and completeness of the content of financial report in this Annual Report.

Contents CHAPTER I COMPANY BASIC INFORMATION …………………………………………………1 CHAPTER II SUMMARY OF ACCOUNTING AND BUSINESS

DATA……………………………2 CHAPTER III CHANGES IN STOCK & INFORMATION OF SHAREHOLDERS ………………5

CHAPTER IV INFORMATION OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT

AND MPLOYEES………………………………………………………………………7

CHAPTER V STRUCTURE OF CORPOTATE GOVERNANCE …………………………………10 CHAPTER VI BRIEF INTRODUCTION OF SHAREHOLDERS’ GENERAL

MEETING …………13 CHAPTER VII REPORT OF THE BOARD OF DIRECTORS ………………………………………14 CHAPTER VIII REPORT OF THE SUPERVISORY BOARD ………………. ………………………26

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CHAPTER IX IMPORTANT EVENTS ………………………………………………………………29 CHPATER X FINANCIAL REPORTS ………………………………………………………………33 CHAPTER XI INDEX OF DOCUMENTS FOR

INSPECTION………………………………………68

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CHAPTER I COMPANY BASIC INFORMATION

ⅠⅠⅠⅠ Legal Name in Chinese: 上海海立（集团）股份有限公司上海海立（集团）股份有限公司上海海立（集团）股份有限公司上海海立（集团）股份有限公司

Legal Name in English: SHANGHAI HIGHLY （（（（GROUP）））） CO., LTD.

Abbreviation of the Legal Name in English: HIGHLY

ⅡⅡⅡⅡ Legal Representative: Mr. Gu Huilong

ⅢⅢⅢⅢ Secretary of the Board of Directors: Ms. Zhong Lei

Contact Address: 2555 Chang Yang Road, Shanghai, P.R.C. Tel: (021) 6566 0000 Fax: (021) 6567 0941 E-mail: [email protected]

ⅣⅣⅣⅣ The Company's Registered Address: Plot 26, Jin Qiao Export Processing Zone,

Pudong New Area, Shanghai, P.R.C. Principal Business Address: 2555 Chang Yang Road, Shanghai, P.R.C. Zip Code: 200090 Website: http://www.highly.cc E-mail: [email protected]

ⅤⅤⅤⅤ Newspapers designated by the Company for information disclosure: Shanghai

Securities News and South China Morning Post (Hong Kong) The website selected by China Securities Regulatory Commission (the “CSRC”) for release of the Company’s Annual Report: http://www.sse.com.cn The Annual Report is available for inspection at the Company Office

ⅥⅥⅥⅥ Exchange: Shanghai Securities Exchange

Stock Name: Hai Li Gu Fen (A Share) Hai Li B Gu (B Share) Stock Code: 600619 (A Share) 900910 (B Share)

ⅦⅦⅦⅦ First Registration Date of the Company: June 20, 1992

Latest Registration Alteration: January 8, 2003 at The State Administration Bureau of Industry and Commerce of Shanghai Municipality Registration Number of the Company's Business License:

企股沪总字第企股沪总字第企股沪总字第企股沪总字第 019016 号号号号 (市局市局市局市局)

Tax Registration Number: 国税沪字国税沪字国税沪字国税沪字 310048607232705 号号号号

ⅧⅧⅧⅧ The names and addresses of Certified Public Accountants engaged by the Company

are as follows:

1) Ernst & Young Da Hua Certified Public Accountants Co., Ltd. ("E&Y Da Hua") Office Address: No. 146 Kun Shan Road, Shanghai

2) KPMG Office Address: 50/F. Plaza 66, No. 1266 Nanjing West Road, Shanghai

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CHAPTER II SUMMARY OF ACCOUNTING AND BUSINESS DATA

ⅠⅠⅠⅠ Main Accounting Data of 2003 (in RMB Yuan)

Total profit 90,624,701.01

Net profit 42,501,475.51 Net profit after non-recurring loss and income 35,749,729.44

Gross Profit from principal business 437,601,826.55 Profit from other business 22,786,772.52

Operating profit 91,017,141.91 Investment income -5,051,363.94

Subsidy income 1,726,542.00 Net non-operation income 2,932,381.04

Net cash flow generated from operating activities 559,814,508.22

Net increases in cash and cash equivalents 29,736,183.32

Deduction of non-recurring loss and income include the following:

Item Amount Reversal of inventory price decline reserve 1,951,887.98

Reversal of long-term investment depreciation reserve 89,592.38 Subsidy income 1,381,233.60

Non-operation income—reversal of assets depreciation reserve

5,169,641.67

Non-operation income—others -1,902,549.56 Disposal of long-term equity investment—equity recovery 61,940.00

Net profit after non-recurring loss and income 35,749,729.44

ⅡⅡⅡⅡ Explanation of Differences between International and Domestic Audit:

According to the audit made by E & Y Da Hua based on China’s Generally Accepted Accounting Principles (“China’s GAAP”), the Company's net profit after tax and deduction of minority shareholder interest is RMB42,501,000. As a result of the adjustment carried out by KPMG pursuant to the International Accounting Standards (the "IAS"), the Company's net profit after tax and deduction of minority shareholder interest becomes RMB43,830,000. The differences are described below:

(in RMB1,000 Yuan) In 2003 In 2002

As stated in accordance with PRC accounting standards 42,501 16,727

Difference in recognition of appropriations to staff and worker’s bonus and welfare fund of Shanghai Hitachi Electrical Appliance Co., Ltd.

(7,680) (14,567)

Pre-operating expenses (4,771) -

Difference in payroll accrual (8,316) -

Unrecognized investment losses (2,306) -

Difference in recognition and amortization of goodwill 7,687 4,718

Difference in recognition of interest capitalization under IAS 2,501 -

Difference in unrealized profit elimination 7,144 6,964

Depreciation of fixed assets incurred due to foreign exchange differences

2,543 2,546

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Government subsidy recognized as deferred income 5,600 1,394

Deferred tax recognized under IAS 467 3,809

Others (1,540) 39

As restated in conformity with IFRS 43,830 21,630

ⅢⅢⅢⅢ Accounting Data and Financial Indices for the Three Years to the End of 2003

(Consolidated Statement): (in RMB Yuan)

2002 2001 Item 2003 Before

djustment After

adjustment Before adjustment

After adjustment

Principal business revenue

2,692,628,110.96 2,132,275,656.36 2,141,827,994.16 2,558,683,838.68 2,558,683,838.68

Net profit 42,501,475.51 16,727,467.85 16,727,467.85 128,065,138.04 122,424,924.56

Total assets 3,375,006,381.34 3,288,768,694.05 3,308,142,144.52 3,287,778,294.18 3,270,031,388.55

Shareholders’ equity 1,072,964,099.95 989,187,780.59 989,187,780.59 997,136,681.60 987,027,408.59

Earnings per share 0.112 0.044 0.044 0.337 0.322

Net assets per share 2.82 2.60 2.60 2.62 2.59

The adjusted net assets per share

2.74 2.54 2.54 2.54 2.51

Net cash flows per share from operating activities

1.47 0.78 0.79 1.23 1.23

Net assets earning rate (%)

3.96 1.69 1.69 12.84 12.40

Net asset earning rate (weighted average) after deduction of non-recurring loss & income (%)

3.32 2.42 2.42 13.88 13.40

ⅣⅣⅣⅣ Changes of Shareholder Equity During the Report Period (in RMB Yuan)

Items Share Capital Capital Reserve

Surplus Reserve

Public Welfare

Fund

Undistributed Profit

Unrecognized Investment

Loss

Shareholder Equity

Year Beginning

380,520,000.00 368,592,409.34 224,699,260.90 60,178,668.49 15,376,110.35 - 989,187,780.59

Additions

- 50,421,300.00 30,011,121.52 5,952,697.66 42,501,475.51 1,466,290.53 121,467,606.50

Deductions

- - - - 37,691,287.14 - 37,691,287.14

Year End 380,520,000.00 419,013,709.34 254,710,382.42 66,131,366.14 20,186,298.72 1,466,290.53 1,072,964,099.95

Explanation of changes: Income in capital surplus is mainly due to the RMB50,050,000 government subsidy received by the parent company and the tax refund received by subsidiaries. Increase in the Company's surplus reserve fund and statutory public welfare fund is mainly due to the provision for the Company's statutory reserve funds and public welfare fund in 2003, and the provision for the reserve funds, enterprise expansion fund and staff bonus and welfare fund of the Company's subsidiaries, which are included in

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the Company's consolidated annual report. Increase in the Company's distributable profit is mainly due to the net profit realized in 2003. The deduction to the Company's distributable profit is mainly due to the provision for the Company's surplus reserve in 2002 and the provision for the reserve funds, enterprise expansion funds and staff bonus and welfare fund of the Company’s subsidiaries, which are included in the Company’s consolidated annual report. Unrecognized investment loss refers to losses of long-term investment recorded on equity basis that is not reflected on the financial statements. The increase of shareholder equity is caused by the above additions and deductions.

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CHAPTER III CHANGES IN STOCK & INFORMATION OF SHAREHOLDERS

ⅠⅠⅠⅠ Changes of Share Capital

1. Changes of share capital structure

Share number before change

Addition and deduction (＋＋＋＋,－－－－) Share

number after change

Right Issue

Dividends in share

Capital converted from corporate reserve

New share issuance

Others Sub-total

a.Non-tradable shares

1.Promoter shares:

State-owned shares 120,000,000 120,000,000

2.Legal Entity Shares

60,840,000 60,840,000

Total 180,840,000 180,840,000

b. Tradable shares

A shares 20,280,000 20,280,000

B shares 179,400,000 179,400,000

Total 199,680,000 199,680,000

c. Total Stock 380,520,000 380,520,000

2. Issuance and listing of shares:

(1) During the past three years to the end of the report period, the Company did not issue any new shares or derivative securities.

(2) During the report period, the Company did not have any new share issuance or the offering of share dividends. Nor did the Company increase its capital through conversion of capital surplus or retained earnings, or through any rights issue, new share issuance, acquisition, or issuance of convertible bonds. There is no capital reduction or listing of any shares held by employees. As a result, the Company's total share capital remains unchanged within the report period.

ⅡⅡⅡⅡ A Brief Introduction of the Company's Shareholders

1. As of the end of the report period, the total number of the Company's shareholders

was 39,291, of which 14,754 were A share shareholders, 24,537 were B share shareholders.

2. Information of shareholders holding over 5% of the Company's stock

Shanghai Light Industry Holding (Group) Company (the "Holding Shareholder") holds more than 5% of the Company's stock during the report period. As of

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December 31st, 2003, the Holding Shareholder held 120,000,000 shares, which constitutes 31.53% of the Company's total share capital. Within the report period, no change has occurred to the number of shares held by the Holding Shareholder, nor is the said stock subject to any pledge or freeze.

3. Information of top ten shareholders’ holding of the Company’s stock

Name of Shareholders Changes

during the year

Number of shares held at year end

Percentage (%)

Type of shares

Number of shares subject to pledge or

freeze

Nature of shareholde

r

Shanghai Light Industry Holding (Group) Company

------ 120,000,000 31.53

Non-tradable shares

------ State-owned

Shanghai Jiushi Corporation ------ 16,963,206

4.46

Non-tradable shares

------ Domestic

legal entity

Shanghai International Trust & Investment Corp.

------ 6,692,400 1.76 Non-tradable shares

------ Domestic

legal entity

Industrial and Commercial Bank of China, No. 2 Shanghai Branch

------ 5,772,702 1.52 Non-tradable shares ------

Domestic legal entity

Shanghai New Industry Union (Group) Co. Ltd.


------ Domestic

legal entity

Shanghai Shangli Industrial Development Cooperation Co.


------ Domestic

legal entity

Shanghai Electrical (Group) Co.


------ Domestic

legal entity

Shanghai Yiyang Enterprise Development Co. Ltd.


------ Domestic

legal entity

Industrial and Commercial Bank of China, Pudong Branch

------ 2,028,000 0.53 Non-tradable shares ------

Domestic legal entity

Bank of communications, Shanghai Branch


------ Domestic

legal entity

Among the top 10 shareholders, the Industrial and Commercial Bank of China, No. 2 Shanghai Branch and the Industrial and Commercial Bank of China, Pudong Branch are affiliated enterprises. And Shanghai Jiushi Corporation holds 20% of the capital stock of Shanghai International Trust & Investment Corp. There is no other affiliated relationship among the top ten shareholders, nor are there parties taking concerted action. 4. Information of top ten tradable share shareholders

Name of Shareholder Number of tradable

shares held at year end Class

TOYO SECURITIES ASIA LTD.A/C CLIENT 1650414 B share JTSB S/A DAIWA CHINA FUND 1071808 B share

MERRILL LYNCH FAR EAST LIMITED 844540 B share ZHUANG MING DAO 810570 B share

NAITO SECURITIES CO., LTD. 788100 B share CHEN TIAN MING 682819 B share

FEI BU QING 577880 B share SHENYIN WANGUO NOMINEES (H.K.) LTD. 518000 B share

DAIWA SECURITIES CO., LTD. TOKYO 484640 B share

XIAO MING XIE 441764 B share

The Company is not aware of any affiliated relationship between the top ten tradable share shareholders.

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5. Information of the Holding Shareholder

Corporate name: Shanghai Light Industry Holding (Group) Company Legal representative: Mr. Zhang Li Ping Date of establishment: March, 1996 Registered capital: RMB3,653,300,000 Corporate type: wholly state-owned limited liability company Business scope: operating and managing state-owned assets within its authorized scope granted by the State-owned Assets Supervision and Administration Commission of Shanghai Municipal Government, and making industrial investment and domestic trading.

6. There are no other legal entity shareholders holding over 10% of the Company’s

stock within the report period.

CHAPTER IV INFORMATION OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES

ⅠⅠⅠⅠ Information of directors, supervisors and senior management personnel.

1. Basic information of incumbent directors, supervisors and senior management

personnel

Name Position Sex Age Office term Number of

shares held at year beginning

Number of Shares held at year end

Change of the shares and reasons of changes

Gu Huilong

Chairman of Board of Directors Male 62 2002.5-2005.5 0 0

-

Zhu Shudong Vice Chairman of Board of Directors

Male 59 2002.5-2005.5 20,556 20,556 -

Shen Jianfang Director,General Manager

Male 48 2002.5-2005.5 4,056 4,056 -

Wang Fanghua

Independent Director

Male 56 2002.5-2005.5 0 0 -

Gu Gongyun Independent Director

Male 46 2002.5-2005.5 0 0 -

Luo Weide Independent Director

Male 47 2003.6-2005.5 0 0 -

Xu Hui Independent Director

Male 41 2003.6-2005.5 0 0 -

Li Fangfang Director Female 48 2002.5-2005.5 0 0 -

Zhang Jianwei

Director Male

49 2002.5-2005.5 0 0 -

Jia Chunrong Director Male 55 2002.5-2005.5 0 0 -

Huang Hui Director Male 38 2002.5-2005.5 0 0 -

Wu Fusheng Director Male 48 2002.5-2005.5 0 0 -

Pan Xiangsen Chairman of Supervisory Board

Male 61 2002.5-2005.5 16,700 16,700 -

Shi Yalong Supervisor Male 58 2002.5-2005.5 11,500 15,400 Purchased from

secondary market

Li Yijun Supervisor Male 34 2002.5-2005.5 0 0 -

Lu Kangchu Supervisor Male 49 2002.5-2005.5 0 0 -

Li Haibin Supervisor Male 40 2002.5-2005.5 0 0 -

Li Li Deputy General Manager

Male 41 2002.5-2005.5 11,000 11,000 -

Feng Guodong

Deputy General Manager

Male 44 2002.5-2005.5 21,856 21,856 -

Zhong Lei Board Secretary Female 47 2002.5-2005.5 12,900 12,900 -

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2. Directors and supervisors taking position in the Company's shareholders

Name Name of shareholder Position held at

shareholder Duration of Service

Gu Huilong Shanghai Light Industry Holding (Group) Company

Director 1998.11-Present

Li Fangfang Shanghai Light Industry Holding (Group) Company

Human Resource Manager 2001.01-Present

Zhang Jianwei Shanghai Jiushi Corporation Deputy General Manager 2002.12-Present

Jia Chunrong Shanghai Shangtou Investment Management Co., Ltd.

General Manager 2003.08-Present

Wu Fusheng Bank of Communications, Shanghai Branch Yangpu Sub-branch

President 2000.06-Present

Huang Hui Industrial & Commercial Bank of China, Pudong Branch

Vice President 2000.03-Present

Pan Xiangseng Shanghai Light Industry Holding (Group) Company

Appointed Special Supervisor

1999.05-Present

3. Annual remuneration of directors, supervisors and senior management

(1) Remunerations payable to the directors, supervisors and senior management are determined in compliance with the Company's Corporate Compensation

Policy and other related internal rules concerning payment and are based on the results of the Company’s 2002 performance appraisal to the said personnel. Within the report period, the sum of payment received by the incumbent directors, supervisors and senior management personnel from the Company is RMB1,644,700.

(2) The total payment to the three directors with the highest pay was RMB406,200

(there are only two directors who received payment from the Company). The total payment to the three senior management personnel with the highest pay was RMB560,200. Incumbent directors, supervisors and senior management’s remuneration range in 2003 is as follows: (in RMB Yuan)

Annual compensation range Number below 100,000 1 from 100,000 to 150,000 2 from 150,000 to 200,000 5 from 200,000 to 220,000 1

(3) The annual subsidy and traffic allowance paid to each independent director

was RMB40,000. (4) The directors, Mr. Gu Huilong, Mr. Wang Fanghua, Mr. Gu Gongyun, Mr.

Luo Weide, Mr. Xu Hui, Ms. Li Fangfang, Mr. Zhang Jianwei, Mr. Jia Chunrong, Mr. Huang Hui, Mr. Wu Fusheng and the supervisor, Mr. Pan XiangSen did not receive remuneration from the Company. The said personnel received payment from their respective enterprises for which they worked.

4. Changes of directors, supervisors and senior management personnel during the

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report period

(1) As reviewed and approved by an interim board meeting of the 3rd session of board of directors of the Company and approved by 2002 Annual General Meeting of Shareholders, article 15 of the Articles of Association of the Company was amended. After such amendment, the number of board directors was reduced from 13 to 12 whilst the number of independent directors sitting on the board of directors increased to 4.

As a result of resolution approved by 2002 Annual General Meeting of Shareholders, Mr. Luo Weide and Mr. Xu Hui were appointed as new independent directors of the 3rd session of the board of directors; and Mr. Feng Guodong, Mr. Dong Xiaoqing and Mr. Zheng Jiandong ceased to serve as directors of the 3rd session of board of directors of the Company.

(2) As reviewed and approved by an interim board meeting of the 3rd session of board of directors of the Company, the Company accepted the resignation of Mr. Sun Hualin as the chief accountant of the Company for personal reasons.

5. Appointment of general manager, deputy general manager, financial director and

board secretary of the Company within the report period According to the resolution adopted at an interim meeting of the 3rd session of board of directors, Mr. Shen Jianfang, the general manager of the Company, will serve as financial director of the Company before the appointment of the new chief accountant.

ⅡⅡⅡⅡ The Company's head count, professional constitution and educational background

and number of retired personnel

As of the end of 2003, there were 3,391 employees enrolled by the Company. 1,699 people worked for the production arm of the Company. 383 were engineering talents specializing in varied aspects. 138 were sales personnel. 46 were financial personnel. And 227 were administrative personnel. 698 employees received education equal to or higher than vocational college, including 34 people having master’s degree or doctorate degrees. By the end of the report period, the Company had a total of 1,131 retired personnel. All the retired personnel are beneficiaries of social insurance and enjoy treatments for retired personnel as provided by social insurance.

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CHAPTER V STRUCTURE OF CORPOTATE GOVERNANCE

ⅠⅠⅠⅠ Corporate Governance of the Company

According to Section 2 of Chapter VII provided in The Corporate Governance

Principles for Listed Companies, which is promulgated by CSRC, information about administration of the Company is as follows:

1. Members of the board of directors and the supervisory board

The board of directors of the Company now comprises 12 directors, including 4 independent directors and 4 outside directors. Members of the board of directors cover professionals specialized in various areas such as enterprise management and strategy research, law, accounting, finance, and etc. A well balanced composition of board of directors and their knowledge have laid down a solid foundation for the scientific and rational decision-making of the board of directors.

The supervisory board now has 5 supervisors, among whom 3 are shareholder’s representatives and 2 are employees’ representatives.

2. Please refer to Chapter VII, Working Report of the Board of Directors, and Chapter

VIII, Working Report of the Supervisory Board, of this report for details of the work of the board of directors and the supervisory board in 2003.

3. Performance of independent directors

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The Company introduced the independent director in 2000 and engaged 2 independent directors in the same year. The Company engaged two new independent directors through election at the shareholders’ general meeting in June 2003, so that the board of directors of the Company now has 4 independent directors, which is one third of the total number of board directors. During the report period, all independent directors were able to attend the meetings of the board of directors or the shareholders’ general meeting in person or by proxy. They read the relevant materials prior to each meeting so as to understand the Company’s performance in every respect and spoke up at the meeting. In particular, the independent directors have properly performed their duties as independent directors by proposing requirements for standard operation and providing valuable suggestions in terms of the Company’s outward investments and provision of guarantees. During the report period, the independent directors have provided their mandatorily required advices for issues regarding: (i) payment of audit fees for financial audits made in 2002 and the engagement of audit firms for audit work made in 2003; (ii) addition of independent directors and dismissal of directors; and (iii) Mr. Sun Hualin’s resignation from the position of chief accountant and the service of Mr. Shen Jianfang, the general manager, as financial director of the Company.

4. Current scenario of the Company's corporate governance

(1) During the report period, the composition of the board of directors was adjusted.

Not only was the proportion of independent directors in the board of directors increased to one-third, the composition of the board of directors also become more balanced. As a result, the operation of the board of directors is more efficient now.

(2) Due to the change of directors, some members of the strategy committee of the board of directors were replaced during the report period. Also, the board of directors established its audit committee. At present, the board of directors has four committees, which are strategy committee, nomination committee, remuneration and appraisal committee and audit committee. Most members of these committees are independent directors or outside directors, which enables the decisions made by the board of directors become more scientific and professional.

The nomination committee of the board of directors held a meeting on 20 May 2003. The meeting reviewed and examined the plan of adjusting the composition of board of directors and the qualifications of candidates for additional independent directors. The meeting also made the proposal of nominating the financial director. The results of such meeting were submitted to the interim meeting of the board of directors for discussions.

The strategy committee of the board of directors held its first meeting on 4 August 2003 for the purpose of discussing the development strategy of the Company. According to the situations of the Company, the Company’s development strategy was “expanding and enhancing principal business of compressors and promoting multi-industry development on the same technical basis”. On 27 October 2003 the strategy committee held a second meeting, at which the Proposal on Implementation of Automobile Starter Project Through Joint

Venture of the Company and Hitachi Ltd. of Japan was reviewed and approved. the above-mentioned development strategy and investment plan were submitted

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to the 6th and 7th meetings of 3rd session of the board of directors for discussions.

(3) During the report period, according to the requirements in the Notice Concerning

Enhancement of Management of Investor Relationship of Listed Companies issued by Listed Company Supervision Department of the CSRC, the Company formulated The Company’s Investor Relationship Management Policy for the purpose of systemize and standardize the management of investor relationship of the Company. The formulation and implementation of such policy will improve the communication of information between the Company and its investors or potential investors, and will help having a better understanding of and recognition to the Company among investors.

(4) In August 2003, the CSRC issued the Notice of Several Issues Regarding

Regulation of Capital Movement Between Listed Companies and Their Affiliates

and Outward Guarantees of Listed Companies (the “CSRC Regulation”). In compliance with such notice, the board of directors reviewed the self-examination report of the Company and required the Company to make sufficient adjustments accordingly. The board of directors also amended the Guarantee Management Rules of the Company in order to prevent risks from the Company’s provision of guarantees.

5. Any existing non-conformity with The Corporate Governance Principles for Listed

Companies and the Company's plans for improvement:

Further improvements are needed for appraising standards and procedures for performance of directors, supervisors and management personnel, as well as for incentive and restrictive policies for senior management.

ⅡⅡⅡⅡ Separation between the Company and its Holding Shareholder in areas such as

business, staff, assets, corporate structure and financial control. 1. In the business area, the Company's business operation is separate from that of its

Holding Shareholder. The Company has its own business separate to that of its controlling shareholder, an integral business structure, and an independent supply and procurement system. The Company's various operational decisions are the sole results of the Company's self-determination without any interference from the Holding Shareholder.

2. In the employee management area, the Company is solely independent in its labor administration as well as employee and payroll management. The Company's senior management personnel have full-time job within the Company and receive their pay from the Company. None of the senior management personnel holds other office in any shareholders.

3. The manufacturing lines, auxiliary production systems and support facilities for

compressor production are the assets of the Company’s subsidiaries and investees. The Company’s subsidiaries and investees have their own procurement and sales systems. As invested by varied foreign investors, the Company’s subsidiaries and investees have their own industrial property rights, trademarks, non-patent technologies and other intangible assets.

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4. In the corporate structure area, the Company has established a sound and complete internal organization system. The Company's board of directors, supervisory board and other internal organs are functioning independently. The Company’s internal departments are not subordinate to the internal organs of the Company’s controlling shareholder.

5. In the financial control area, the Company has an independent financial department

and its own team of financial talents. Meanwhile, the Company has set up its independent accounting system and financial control management, and possesses its own bank account. The Company is an individual entity for taxation purposes. Any usage of the Company's funds is subject to the decisions made by the Company's senior management or the board of directors based on the relevant internal rules, and there is no interference from the Holding Shareholder in this area.

ⅢⅢⅢⅢ Appraisal and incentives for senior management during the report period.

The Company made its appraisal to the senior management personnel in light of their fulfillment of business goals, profit gains, and management capabilities in administration, quality control, personal integrity and production safety. The Company awarded its senior management personnel based on the appraisal results.

CHAPTER VI BRIEF INTRODUCTION OF SHAREHOLDERS' GENERAL

MEETING

ⅠⅠⅠⅠ Notice, Summoning and Convention of Annual General Meeting and Interim

General Meeting of Shareholders in the Report Period

On 27 May 2003, the Company's board of directors made its Announcement on Shanghai Securities News and South China Morning Post (Hong Kong) concerning the convention of the Company's 2002 Annual General Meeting of Shareholders. The said meeting was held at Shanghai Ocean Hotel on 27 June 2003, in which 66 shareholders (or authorized representatives) participated and voted, representing 154,818,869 voting shares (including 1,011,012 B shares) and accounting for 40.69% of the Company's total share capital. The meeting is in compliance with the relevant provisions of The PRC's Company Law and the Company's Articles of Association. The Meeting was presided by Chairman Mr. Gu Huilong. The shareholders attending the meeting discussed the topics specified in the notice. After speeches made by shareholder representatives and the voting procedure, the meeting announced the voting result and the resolutions adopted at the meeting. Lawyers of Fangda Partners witnessed the meeting and issued a legal opinion thereafter.

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ⅡⅡⅡⅡ The Resolutions Adopted at the Annual General Meeting and Interim General

Meeting of Shareholders and Related Information Disclosure

The 2002 Annual General Meeting of Shareholders reviewed and adopted the following resolutions with disclosed ballots: The 2002 Work Report of the Board of

Directors, The 2002 Work Report of the Supervisory Board，，，，The 2002 Operation Report

of General Manager，，，，The 2002 Financial Statement and 2003 Financial Budget Report,

The 2002 Profit Distribution Plan, The Proposal on Subsidy Standard of Independent

Directors, The Proposal on Payment of 2002 Audit Fees and Extension of Engagement

of Audit Firm in 2003, The Proposal on Amendment to Articles of Association, and The

Proposal on Addition of Independent Directors and Dismissal of Certain Directors. All proposals were approved at the meeting. All the above resolutions were publicized on Shanghai Securities News and South China Morning Post (Hong Kong), dated 28 June 2003.

ⅢⅢⅢⅢ Election and removal of directors and supervisors within the report period

Please refer to Subsection 4 of Section I of Chapter IV in this report for detailed information.

CHAPTER VII REPORT OF THE BOARD OF DIRECTORS

ⅠⅠⅠⅠ The Discussion and Analysis of the Company's Overall Operation

2003 saw a revival in world economy, a booming global market and acceleration in economic growth. Despite of the impact of the outbreak of Severe Acute Respiratory Syndrome (“SARS”) and the occurrence of disasters of draught and flood, the economy of China maintained its fast growing trend, thanks to the state’s policies in pursuing proactive public finance, maintaining currency stability and boosting domestic demand and market expansion. Within such an economic environment, the Company made appropriate changes when facing varied challenges. In order to improve its profitability, the Company made continuous efforts in varied aspects such as strategy analysis, market exploration and sales team buildup, enhancement of internal control, so that the Company’s costs and expenses have been lowered and whilst its potentials further exploited. The Company remains as industry leader in terms of market share and technological advancement. And the Company started its expansion to other industries to bet on future growth in a market full of fierce competition.

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1. The Company's Principal Business and Business Review

(1) The principal business of the Company includes manufacturing and sales of air-conditioner compressors, refrigerator compressors and dehumidifier compressors. The Company is engaged in the industry of electrical machinery and equipment manufacturing.

During the report period, the Company's principal business and industrial structure remained unchanged, and its principal business income and profit were from its manufacturing and sales of compressors. In 2003 the Company realized a compressor manufacture volume of 7,838,800 units, including 7,674,700 units of air-conditioner compressors, which is a 63.76% increase over that of 2002. The Company realized a sales volume of 7,539,500 compressors, including 7,375,400 units of air-conditioner compressors, increased by 53.12% over that of 2002. The Company realized a principal business revenue of RMB2,692,630,000, which is a 25.72% increase over that of 2002. In 2003, the Company realized a total profit of RMB90,620,000, a net profit of RMB42,500,000, which is a 154.08% increase over that of 2002.

(2) Principal Business Revenue, Principal Business Profit and Principle Business Costs

Report by Industry Segregation

Principal Business Principal Business

Revenue Principal Business

Cost Gross Profit

Manufacturing 2,602,959,991.28 2,164,552,284.19 438,407,707.09

Real Estate 89,668,119.68 85,285,507.66 4,382,612.02

Report by Regional Segregation

Region Principal Business Revenue Principal Business Cost Gross Profit Domestic 2,449,030,590.13 2,037,860,255.90 2,037,860,255.90

Foreign 243,597,520.83 211,977,535.95 211,977,535.95

(3) The statistics provided by China Household Electrical Appliances Association showed that the Company's sales of air-conditioner compressors in 2003 accounted for 21.2% of the industry’s total sales of air-conditioner compressors in the domestic market, and the export of the Company, which was 562,600 units, accounted for 34.63% of the total export of the industry’s air-conditioner compressors.

(4) Explanations of change in the profitability of the Company’s principal business

in comparison with the previous period: The profitability of the principal business of the Company improved significantly comparing with the previous report period. It is mainly because that the sales volume of air-conditioner compressors increased by 53% over that of 2002 due to persistent high temperature weather and increase in export of air-conditioners in 2003, which caused a major increase in net profit of 2003 of the Company comparing with the previous year, although the prices of air-conditioner compressors in 2003 were still much lower than that in the first

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half year of 2002 and raw materials such as steel maintained their high prices. 2. The Business Review and Performance of Subsidiaries and Investees

(1) Shanghai Hitachi Electrical Appliance Co., Ltd. ("Shanghai Hitachi")

Shanghai Hitachi mainly engages in manufacture and sales of air-conditioner compressors, whose registered capital is US$159,040,000 (with a paid-in capital of US$147,770,000). The Company holds 75% of its equity interests. By the end of the report period, the total assets of Shanghai Hitachi had reached RMB2,333,170,000. Shanghai Hitachi realized an annual production of 5,947,800 units of air-conditioner compressors in 2003, which is a 58.78% increase over that of 2002, and a sales of 5,607,800 units, which is a 42.48% increase over that of 2002. The sales revenue of Shanghai Hitachi in 2003 was RMB2,207,330,000 and its net profit was RMB122,300,000.

(2) Shanghai Senlin Electrical Appliance Co., Ltd. ("Shanghai Senlin")

Shanghai Senlin mainly manufactures and sells air-conditioner compressors, refrigerator compressors and dehumidifier compressors. The Company currently holds 69% of its equity interest, The registered capital of Shanghai Senlin is US$60,000,000 and by the end of the report period, the total assets of Shanghai Senlin was RMB854,540,000. Shanghai Senlin realized an annual production of 1,891,000 units of compressors in 2003, which is increased by 81.70% over that of 2002, and a sales volume of 1,931,800 units, which is increased by 95.51% over that of 2002. Shanghai Senlin’s sales revenue in 2003 was RMB421,910,000 and net profit was RMB3,980,000. This was the second year that Shanghai Senlin makes profit after it recovered the previous years’ losses in 2001.

(3) Shanghai Zanussi Electromechanical Co., Ltd. ("Shanghai Zanussi")

The Company holds 35% of the equity interest in Shanghai Zanussi. Shanghai Zanussi is an enterprise manufacturing refrigerator compressors and has a registered capital of US$27,500,000. By the end of the report period, its total assets reached RMB582,370,000. Due to the intensified market competition as well as the lack of its competitiveness in pricing and high-ends products, Shanghai Zanussi’s market share decreased. In 2003 the manufacture volume of compressors was RMB1,687,800 units, increased by 1.91% over that of 2002 and the sales volume of compressors was RMB1,629,100, which is 4.48% lower than 2002. Due to the price cut by the rivals and the soaring in the price of raw materials, Shanghai Zanussi had a loss of RMB34,080,000 in 2003.

(4) Shanghai Highly Nakano Refrigerators Company Limited (“Highly Nakano”) Highly Nakano mainly manufactures and sells commercial use refreezing and

refrigerating display cabinets and has a registered capital of US$17,160,000. The Company holds 43% equity interest of Highly Nakano. As of the end of the report period, the total assets of Highly Nakano was RMB238,170,000. In 2003 Highly Nakano realized a manufacturing volume of 5,844 units of display cabinets, which is a 11.14% increase over that of 2002, a sales volume of 5,834 units, which is an 12.45% increase over 2002. And the Company realized a sales revenue of RMB161,500,000 and a net profit of RMB24,260,000. Highly Nakano recognized an investment gain of RMB9,400,000, which is calculated based on equity basis.

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(5) Shanghai Highly Foundry Co., Ltd. (“Highly Foundry”)

Highly Foundry’s business is mainly foundry and machine processing of compressor casts and has a registered capital of RMB24,700,000. The Company holds 80% of the equity interest in Highly Foundry. As of the end of the report period, the total assets of Highly Foundry was RMB98,260,000. In 2003, it realized a sales volume of foundry of 5,824 tons, which is a 15% increase over that of 2002, and a sales volume of machine processing of 15,680,000 units, which is a 74.7% increase over that of 2002. The annual sales revenue of Company in 2003 was RMB110,530,000 with a net profit of RMB5,950,000.

3. The Company's Principal Suppliers and Consumers

Within the report period, the Company's total purchase from the top five suppliers amounted to RMB666,030,000, which accounted for 41.35% of the Company's annual procurement amount.

Within the report period, the Company's total sales to the top five consumers amounted to RMB932,110,000, which accounted for 34.62% of the Company's annual sales amount.

4. Problems, Difficulties and Solutions in the Business Operation

In the first half year of 2003, the Company encountered many unfavorable situations that it had never experienced in its business operation. One of them is the significant decrease of sales price of air-conditioner compressors, which continued from the latter half year of 2002, and kept the sales price in the first quarter of 2003 at a low level. The other factor is the persistent high prices of raw materials such as steal and copper. Profit of principal business decreased dramatically. Another difficulty was the outbreak of SARS, which restrained sales volume from increase. In summer, due to the rare and continuous high temperature weather and limitation of productivity, demand in market exceeded supply in a time. The Company had taken active measures to deal with all these problems and difficulties encountered in its business operation: (i) After the unification of sales and purchase of Shanghai Hitachi and Shanghai Senlin, the Company further combined the technical research and transportation arms of the two subsidiaries in 2003, so that the resources could be put together for use and the costs were reduced; (ii) The Company adjusted its marketing structure by removing the responsibilities from representatives of large regions to client managers of smaller districts, so as to achieve faster response to client request and better satisfaction and recognition among clients; (iii) By improving the equipment working efficiency and the application of piece-rate remuneration policy and quality improvement programs such as QC and 3N, the Company achieved both annual and monthly record high output amount; (iv) Shanghai Senlin was active in the development of products catering for international market and achieved a second profitable year by doing well in export, which made up the adverse effects caused by sales decrease in the domestic mark. According to the statistic data, the Company’s sales of air-conditioner compressors in 2003 accounted for 21.2% of the sales in domestic market and a 15% share in the international market. The Company has the biggest market share in China and the third biggest market share in international market.

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ⅡⅡⅡⅡ The Company's Investment

1. Within the report period, no funds collected from publicly issued shares have been

used for project investment, nor is there any funds collected from previous years' share issuance carried down for use within the report period.

2. The project investment financed by funds other than funds collected from new share

issuance

(1) As reviewed and approved by the 3rd meeting of the 3rd session of the board of directors, the Company and Hitachi Ltd. of Japan increased their capital contributions to Shanghai Hitachi for the project of air-conditioner compressor technology improvement based on the new environment and energy standards of KU/MU series. The total investment in the project is US$44,300,000, for which both shareholders shall jointly make capital contribution of US$13,290,000 in proportion to their shareholding percentage. According to the schedule of the project, the capital increase would be made by the shareholders in two phases with the first phase at the amount of US$8,820,000, to which the Company should contribute US$6,615,000. The Company made its payment for the first phase on 20 March 2003. The installment and testing of the first phase of the project was completed in March of 2004.

(2) A total investment of RMB78,810,000 has been made in the project of

construction of Shanghai Hitachi Technology Building. The funds came from the enterprise expansion reserve made by Shanghai Hitachi. Construction of the building has begun and is expected to be completed in March of 2005.

(3) As reviewed and approved by the 6th meeting of the 3rd session of the board of

directors, the Company and Shanghai Zhongyu Investment Co., Ltd, co-invested and established Shanghai Highly (Group) Trading Co., Ltd. The new company has a registered capital of RMB5,000,000, with the Company and Shanghai Zhongyu Investment Co., Ltd, each holding 80% and 20% of its equity interest. The two shareholders made their capital contribution on 15 October 2003. Registration work of the new company with the administration bureau of industry and commerce was completed on 28 October 2003.

(4) As reviewed and approved by the 7th meeting of the 3rd session of the board of directors, the Company and Hitachi Ltd. of Japan entered into a joint venture contract on 20 November 2003 for the co-investment and establishment of Hitachi Highly Automobile Component (Shanghai) Co., Ltd., which will manufacture and sell automobile starters. The two shareholders were to contribute US$21,000,000 in two phases in US dollars. Hitachi Ltd. of Japan and the Company were to contribute respectively 66.7% and 33.3%. The first phase of investment had a total investment of US$26,250,000, to which the shareholders should contribute US$10,500,000 in total and the Company should contribute US$3,500,000. The capital contribution was made on 22 December 2003. The new company was duly established on 5 December 2003 and its business license was issued on 5 January 2004. The construction work commenced on 8 January 2004 and will be completed and put into production in January of 2005.

(5) As reviewed and approved by the 7th meeting of the 3rd session of the board of

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directors, the Company increased its capital contribution to Highly Foundry together with Highly Foundry's other shareholders for the project of technical renovation for foundry capacity enlargement to meet the demands for compressor casts. The project needs a total fund of RMB12,000,000, 50% of which, i.e. RMB6,000,000, was put in as capital contribution by shareholders, and the remaining 50% was to be financed by bank loans borrowed by Highly Foundry. The shareholders of Highly Foundry made the capital increase in proportion to their shareholding percentage. On 1 December, 2003, The Company made a contribution of RMB4,800,000 to the capital increase, accounting for 80% of the total increased capital. The project was completed in March of 2004 and would add 6,000 tons to the yearly output of Highly Foundry.

ⅢⅢⅢⅢ The Company's Financial Conditions

1. The Company’s total assets as of the end of 2003 was RMB3,375,010,000, which is a

very slight increase to the number of RMB3,308,140,000 as total assets of the previous year.

2. The Company's shareholder equity as of the end of 2003 was RMB1,072,960,000,

which is a 8.46% increase over the number of RMB989,190,000 as the shareholder equity of the previous year. Reasons causing such increase are stated in Section IV of Chapter II in this report.

3. The Company's principal business revenue in 2003 was RMB437,600,000, a 10.75%

reduction compared with the number of RMB490,290,000 as the principal business revenue of the previous year. Such reduction in principal business revenue is the result of varied elements working together: First, although we saw the price of compressors recovered a bit during the booming period of the market, the compressor price in 2003 is on average much lower than in 2002. Secondly, the costs of principal business remained high in 2003 due to high prices in raw materials.

4. The Company's net profit in 2003 was RMB42,500,000, increased by 154.08%

compared with the number of RMB16,730,000 as the net profit of the previous year, which was mainly due to the increase in sales volume of compressors and revenue of principal business and the reduction of expenses through a strengthened control over of operating costs, management costs and financing costs, as well as the reversal of provisions made in 2002 after the realization of the 2003 sales target.

5 In 2003 the Company has a net increase in cash and cash equivalents of

RMB29,740,000, whilst that of the previous year was RMB-221,830,000. The increase on cash and cash equivalents mainly came from a net operating cash in-flow due to the faster collection of receivables in sales of air-conditioner compressors.

ⅣⅣⅣⅣ Business Plan of this Year

1. Ensuring the Biggest Market Share in Compressor Industry

The Company has incorporated the resources of Shanghai Hitachi and Shanghai Senlin in terms of their sales systems, materials and technology as well as

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transportation. The result was encouraging. In 2003, the two subsidiaries manufactured 7,830,000 units and sold 7,530,000 units, both are record high in the company’s history. And such achievement is solely driven by the integration of existing resources with no expansion in manufacturing capacity. In 2004, the Company will make every effort to complete the integration of the two companies to further explore the potentials of the two subsidiaries. And the Company will complete the construction of the building of technical research center on schedule and accelerate the development and marketing of new products, in order to keep its advantage over rivals in respect of business scale and product technology and ensure its leading position in the air-conditioner compressor market based on the Company’s advantages of technology advancement.

2. Developing Automobile Component Industry through a Business Form Proved

successful in Household Electrical Appliance Industry

The Company and Hitachi Ltd. of Japan established a joint venture company manufacturing automobile starters, namely Hitachi Highly Automobile Components (Shanghai) Co., Ltd. The establishment of the new company is not only a milestone witnessing the Company’s expansion into the automobile component industry, but also a basis for further and extensive cooperation between the Company and Hitachi Ltd., in the automobile component industry. The Company will cooperate actively with its co-investor in Japan and to ensure the fulfillment of prospected target in project construction, product making and delivery and the quality of products. The new company shall be a good beginning of the cooperation of the Company and Hitachi Ltd., in the industry of automobile components. At the same time, the Company will seize the opportunity brought by the ownership reform and restructuring of state-owned enterprises in Shanghai and make efforts to join in the automobile component industry and thus became an active player within the industry.

3. Implementing Development Strategy of the Company and Deepening Internal

Restructuring With the proceeding of the ownership reform of state-owned enterprises, the Company will proceed on with its internal restructuring with the aim of integration of resources and improvement of efficiency. As a first step, in order to reverse the continued losses of Shanghai Zanussi, the Company will negotiate with other shareholders of Shanghai Zanussi and carry out an asset-restructuring plan. The Company wishes to renew the operation process of Shanghai Zanussi through asset-restructuring and help it recover from losses through the introduction of newest technology. Secondly, based on the reform guidance of Shanghai Municipal Government as “expanding large enterprises to lead the domestic industry and improving flexibility of medium-sized and small-sized enterprises”, the Company will restructure its subsidiaries and investees such as Shanghai Jin Xuan Real Estate Co., Ltd., Highly Foundry and Shanghai Haiyun Artificial Flowers Co., Ltd., under the guidance of the Company’s overall development strategy.

4. Building up the Highly Brand and the Corporate Culture

In 2004, the Company will be guided by the theory that “enterprise culture is the

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carrier for conceptual work of the enterprise” and promote the cultivation of enterprise culture through the process of building the “Highly” brand. With the management of brand name as a main task, the Company will establish, maintain and upgrade its own brand during the manufacturing of core parts, and increase the value of its brand and perfect the image of the Company based on its technology advancement and scale of economy.

ⅤⅤⅤⅤ Routine Business of the Board of Directors

1. Board meetings and resolutions passed during the report period.

Four board meetings were held within the report period. Details of and resolutions passed at the meetings are as follows

(1) The 4th meeting of the 3rd session of the board of directors was convened on 4

April 2003. The meeting passed the following resolutions: The 2002 Work Report

of the Board of Directors, The 2002 General Manager Work Report, The Proposal

on Provisions for Asset Depreciation Reserve in 2002; The 2002 Financial

Statement 2003 Financial Budget Report, The 2002 Profit Distribution Plan, The

2002 Annual Report and its Summary, The Proposal on Subsidy Standard of

Independent Directors, and The Proposal on the Purchase of the Equity Interest of

Shanghai Shichuang Plastic Products Co., Ltd. These resolutions were published on Shanghai Securities News and South China Morning Post (Hong Kong), dated 8 April 2003.

(2) The 5th meeting of the 3rd session of the board of directors was convened on 26

April 2003. The meeting passed the following resolutions: The 2003 First Quarter

Report and The Proposal on Payment of 2002 Audit Fees and Extension of

Engagement of Audit Firm in 2003. The resolutions were published on Shanghai

Securities News and South China Morning Post (Hong Kong), dated 29 April 2003.

(3) The 6th meeting of the 3rd session of the board of directors was convened on 8 August 2003. After hearing The General Manager's Work Report for the First Half

Year of 2003, the board of directors passed the following resolutions: The 2003

Semi-annual Report, The 2003 Semi-annual Report Summary, The Proposal on

Adjustment of Members of Special Committees of the Board of Directors, The

Development Strategy of the Company, The Proposal on The Co-investment and

Establishment of Shanghai Highly Industrial Trading Co., Ltd. with Shanghai

Zhongyu Investment Co., Ltd. and The Proposal on Adjustment of Director

Appointment to Shanghai Highly Nakano Refrigerators Co. Ltd. Members of the audit committee of the board of directors were also elected in this meeting. The resolutions were published on Shanghai Securities News and South China

Morning Post (Hong Kong), dated 12 August 2003.

(4) The 7th meeting of the 3rd session of the board of directors was convened on 28 October 2003. The meeting passed the following resolutions: The 2003 Third

Quarter Report, The Proposal on The Co-investment and Establishment of A Joint

Venture Company to Implement The Automobile Starter Project of the Company and

Hitachi Ltd. of Japan, The Proposal on Capital Increase of Shanghai Highly

Foundry Co., Ltd. for Implementation of Technical Renovation Project for Foundry

Capacity Enlargement, The Proposal on Capital Increase of Shanghai Highly

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Special Refrigerators Co., Ltd., The Proposal on Delegation of Authority by The

Board of Directors on Outward Investment, The Amendment to Company’s

Guarantee Management Rules, The Amendment to The Application Rules for Audit

Committee of the Board of Directors, and The Company’s Investor Relation

Management Policy. The resolutions were published on Shanghai Securities News and South China Morning Post (Hong Kong), dated 30 October 2003.

2. Interim meetings of the board of directors within the report period:

(1) An interim meeting was convened by the board of directors on 27 February 2003.

The meeting adopted the following resolutions by means of telecommunication: (i) Approved the Company to apply for a credit line of loans of RMB95,000,000 to China Minsheng Banking Corp., Ltd.; and (ii) delegation to Mr. Gu Huilong the authority of signing credit line contract and other documents on behalf of the Company.

(2) An interim meeting was convened by the board of directors on 23 May 2003. The

meeting reviewed and adopted the following resolutions by means of telecommunication: The Proposal on Amendment to The Company’s Articles of

Association, The Proposal on Addition of Independent Directors and Dismissal of

Certain Directors, The Proposal on Convention of 2002 Annual General Meeting of

Shareholders, and The Resignation of Chief Accountant. The resolutions were published on Shanghai Securities News and South China Morning Post (Hong Kong), dated 27 May 2003.

(3) An interim meeting was convened by the board of directors on 15 July 2003. The

meeting reviewed and adopted by means of telecommunication the resolution that the Company would provide guarantee for the purpose of extending a loan of RMB40,000,000 borrowed by Shanghai Zunussi. The term of the loan was extended to 30 December 2005.

(4) An interim meeting was convened by the board of directors on 29 December 2003.

The meeting reviewed and approved by means of telecommunication the Rectification Report of Shanghai Highly (Group) Co., Ltd. Concerning Problems

Discovered by Qingdao Special Office of CSRC in Inspection. The resolution of the meeting was published on Shanghai Securities News and South China Morning

Post (Hong Kong), dated 31 December 2003. 3. The board's implementation of the resolutions passed at the shareholder general

meeting:

(1) The 2002 Annual General Meeting of Shareholders of the Company convened on 27 June 2003 reviewed and approved the 2003 business plan of the Company. The board of directors has diligently implemented the resolutions adopted at the shareholders’ general meeting, and as a result, the Company’s performance in 2003 is better than planned and is a significant improvement over 2002.

(2) The 2000 Annual General Meeting of Shareholders of the Company convened on

28 June 2001 reviewed and approved the Company’s application for additional issuance of shares and authorized the board of directors to handle matters in relation to the new share issuance. However, due to the difficult situation of the

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domestic securities market and the air-conditioner compressor industry, the implementation of additional issuance of A shares of the Company was adversely affected and the lead underwriter withdrew from the CSRC its recommendation for the new share issuance. As a result, the Company made an announcement to cancel the additional issuance of its A shares in June of 2003.

ⅥⅥⅥⅥ Profit Distribution Plan/Plan for Capital Increase by Conversion of Capital Surplus

in 2003. 1 According to the result of the audit made by E & Y Da Hua to the financial and

accounting statements of the Company based on The Enterprise Accounting Rules, the Company's total profit in 2003 is RMB90,624,707.01 and the net profit after tax and minority shareholders' equity interest is RMB42,501,475.51. By adding back the undistributed profit of RMB15,376,110.35 accrued at year beginning, total distributable profit in 2003 is RMB57,877,585.86. After the provision of RMB24,058,423.87 as statutory reserve fund, RMB5,952,697.65 as public welfare fund, and RMB7,680,165.62 as staff and workers' bonus and welfare fund pursuant to the articles of association of the Company and its subsidiaries, the Company's profit available for distribution is RMB20,186,298.72. As the audit result provided by KPMG to the Company's financial report adjusted under the IAS, the Company's net profit is RMB43,830,000. After the provision of the above-mentioned statutory reserve fund, public welfare fund and staff and workers' bonus and welfare fund pursuant to the articles of association of the Company and its subsidiaries and adding back the undistributed profit accrued at year beginning that is RMB-22,660,000, the Company's profit available for distribution is RMB-7,030,000.

In accordance with The Detailed Rules on Implementation of Domestic Listing of the

foreign capital shares by stock company, profit shall be distributed according to the smaller account number computed under China’s GAAP and the IAS.

2 Plan for Capital Increase by Conversion of Capital Surplus in 2003

According to the plan for capital increase by conversion of capital surplus in 2003, with a total share capital of 380,520,274 shares as of 31 December 2003 (based on the data of China Securities Registration and Clearance Co., Ltd., Shanghai Branch), 2 shares will be distributed as share dividend for every 10 shares and a total of 76,104,055 shares will be added to the total share capital of the Company. The above resolutions will be implemented after approval of the shareholders’ general meeting.

ⅦⅦⅦⅦ Other Information Disclosure

1. Certified Public Accountants’ Special Statement on Use of Capital of the Company

by Controlling Shareholder and Affiliated Parties

To Shareholders of Shanghai Highly (Group) Co., Ltd.: As engaged by the Shanghai Highly (Group) Co., Ltd. (the “Company”), we audited the balance sheet and consolidated balance sheet dated 31 December 2003, profit and profit distribution statement and consolidated profit and profit distribution statement of 2003, and cash flow statement and consolidated cash flow statement of 2003 of the Company. After the audit, we issued an audit report containing no

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qualifications on 20 April 2004 (report No.: An Yong Da Hua Ye Zi [2004] 718). Our audit was carried out in accordance with the Independent Audit Rules for PRC

Certified Public Accountants promulgated by the Ministry of Finance of the PRC. Based on the 2003 accounts of the Company, we hereby make the following special statements with respect to the payment of costs and assumption of liabilities, as well as the occurrence of payables, receivables and prepayment between the Company, its controlling shareholder and other affiliated parties in 2003. It is the Company’s responsibility to disclose such information and to guarantee that such information is true, lawful and complete. All the following data and materials come from the 2003 financial and accounting materials of the Company. Except for the financial statement audit carried out for the issuance of the above-mentioned annual audit report, we did not have any other audit to the Company. (1) As of 31 December 2003, the balance amount and the accrued amount incurred

within the report period of the credit and liabilities between the Company, its controlling shareholder and other affiliated parties is as follows:

①①①① The Company’s receivables from its controlling shareholder and other

affiliates excluding those arising out of purchase and sale of commodities or labor services, or payment for its controlling shareholder or other affiliated parties on operating costs and expenses (which are covered under item of “other amounts receivable”):

Accrued amount in 2003

Name of Indebted Party

Relationship with the Company

Account Balance at year

beginning

Debit amount Credit amount

Amount of new funds employed

Balance at year end

Cause Remark

s

Hitachi Highly Automobile Component (Shanghai) Co., Ltd.

Jointly invested investee

Other receivables

0.00 449,404.00 0.00 449,404.00 449,404.00 Payment for investee’s or subsidiary’s expenses

Shanghai Qiujing Industry Co.

Subsidiary Other receivables

2,272,988.69 3,201.65 2,276,190.34 -2,272,988.69 0.00 Payment for investee’s or subsidiary’s expenses

Shanghai Highly Special Refrigerators Co., Ltd.

Subsidiary Other receivables

2,181,488.53 624,283.51 2,774,800.94 -2,150,517.43 30,971.10 Payment for investee’s or subsidiary’s expenses

Total 4,454,477.22 1,076,889.16 5,050,991.28 -3,974,102.12 480,375.10

②②②② Information of payables and receivables arising out of the Company’s

payment for the operating costs and expenses incurred by its controlling shareholder and other affiliated parties: No such information.

(2) New amounts of receivables and prepayments of the controlling shareholder and

other affiliated parties in 2003:

Please refer to the columns titled “name of indebted party”, “relationship with the Company”, “Debit amount in 2003” and “Cause” in the above table.

(3) Information of repayment and clearance of amounts receivable from or repaid

to the Company’s controlling shareholder or other affiliates in 2003 (excluding receivables from normal purchase or sale of commodities and labor services):

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Name of indebted party Account Amount repaid in

2003

Date of repayment

Payment method Remarks

Hitachi Highly Automobile Component (Shanghai) Co., Ltd.

Other receivables 0.00


Other receivables 46,288.27 Within 2003 Cash and cash

equivalents


Other receivables 1,105.60 2003.10 Non-cash assets

Shanghai Qiujing Industry Co. Other receivables 2,228,796.47 2003.12

Payment of expenses for the

Company

Cancelled as bad debt


Other receivables 2,564,800.94 Within 2003 Cash and cash

equivalents

Shanghai Highly Special Refrigerators Co., Ltd. Other receivables 30,000.00 2003.8

Set-off between payables and receivables


Other receivables 180,000.00 2003.8 Bank’s draft

Total 5,050,991.28

(4) There is no payment or assumption of liabilities between the Company, its

controlling shareholder and other affiliated parties.

Ernst & Young Da Hua Certified Public Accountants Co., Ltd. PRC Certified Public Accountants: Lu Yong Wei

Qin Wen Jun 2. Special Statement and Opinions of Independent Directors for the Company’s

Outward Guarantees

According to the CSRC Regulation, we conducted due diligence investigation to the outward guarantee status of Shanghai Highly (Group) Co., Ltd.

During the report period, the guarantees provided by the Company that violates the

CSRC Regulation are: ①①①① guarantees offered to its subsidiaries, namely Shanghai

Highly Special Refrigerator Co., Ltd. and Shanghai Senlin. The asset liability rates

of the two companies are over 70%; ②②②② guarantees for the investee Shanghai

Zanussi Electromechanical Co., Ltd., in which the Company held an equity share

less than 50%; and ③③③③ a total amount of outstanding guarantees of

RMB771,470,000 as of the end of the report period, accounting for 71.90% of the net assets of the Company.

Regarding the above-mentioned guarantee provided for Shanghai Highly Special Refrigerator Co., Ltd., the Company has already taken its corrective act. In March 2004, the asset liability ratio of Shanghai Highly Special Refrigerator Co., Ltd., came to be lower than 70% due to capital increase made by its shareholders, and the guarantee is now in compliance with the relevant regulations.

Shanghai Zanussi Electromechanical Co., Ltd. is a sino-foreign joint venture. According to its joint venture contract, the shareholders must provide guarantees for its loans in proportion to their contributions. At present the Company is under

27

negotiation with the other shareholders for solutions.

After the restructuring in recent years, Shanghai Senlin has begun to earn profits. The Company is planning an integration of Shanghai Senlin and Shanghai Hitachi which will improve the operation and financial condition of Shanghai Senlin. Therefore, the Company expects the restructuring to also solve the compliance problem in its guarantee to Shanghai Senlin. We are of the view that the current status of the Company’s outward guarantees are incurred due to historical reasons and shall be improved gradually. The decision-making and approval procedures for the Company’s guarantees are reasonable and with no compliance problems. The company’s guarantees did not harm the interests of non-majority shareholders.

3. Newspapers Designated by the Company for Information Disclosure

Shanghai Securities News and South China Morning Post (Hong Kong) are newspapers designated by the Company for information disclosure in 2003.

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CHAPTER VIII REPORT OF THE SUPERVISORY BOARD In 2003, the supervisory board, with the purpose of protecting rights and interests of shareholders and employee and pursuant to its duties provided in The PRC Company

Law and the Company's Articles of Association as well as the Company’s Procedural

Rules for Supervisory Board, supervised the resolutions adopted and the performance carried out by the Company's board of directors. The supervisory board has faithfully implemented its duties granted by the shareholders’ general meeting, and has effectively carried out its inspection work, which is beneficial to the interest of all shareholders, and thereby has promoted the standardization of the operation and management activities of the Company.

ⅠⅠⅠⅠ Meetings of the Supervisory Board

In 2003 the supervisory board of the Company convened 5 meetings. In the meetings

the supervisory board reviewed and approved The 2002 Annual Report and its

Summary, 2003 First Quarter Report, The 2003 Semi-annual Report and its Summary,

The Proposal on 2002 Provisions for Asset Depreciation Reserve, The 2002 Financial

Statement and 2003 Financial Budget Report, The 2003Third Quarter Report, The

Proposal on The Co-investment and Establishment of A Joint Venture Company to

Implement The Automobile Starter Project of the Company and Hitachi Ltd. of Japan, and The Proposal on Capital Increase of Shanghai Highly Special Refrigerators Co.,

Ltd. Members of the supervisory board attended each meeting of the board of directors, and the chairman of the supervisory board attended general manager’s management meetings. The supervisory board watched over the implementation by the board of directors of resolutions adopted at the shareholders’ general meeting and the compliance of decision-making procedures and rules of the board of directors.

II During the report period, the supervisory board watched over the following issues

and made their opinions as follows: 1. Legal Compliance of the Company’s Operation

According to The Corporate Governance Principles for Listed Companies and other relevant laws and regulations of China, the Company’s supervisory board has carried out its supervision and inspection work with regard to the meeting convention procedures and subject matters of the Company’s shareholders’ general meeting and board of directors meetings, the implementation of resolutions made by the shareholders’ general meeting, performance of senior management personnel of their duties, as well as the management system of the Company. The board of supervisors are of the opinion that the decision-making process of the Company is in compliance with the PRC Company Law and the Company’s Articles of Association, that the Company’s senior management personnel implemented resolutions of the

29

shareholders’ general meeting and the board of directors with due care and complied with relevant laws and regulations and protected the interests of the Company and the shareholders when performing their respective duties, and that the senior management personnel of the Company have not committed any violation to the laws and regulations or any infringement to the interests of the Company and the shareholders when performing their duties.

2. Financial Status

The supervisory board carefully reviewed the Company’s financial activities and status in 2003. Regarding the audit reports respectively prepared by E & Y Da Hua and KPMG, which contain no qualifications, the supervisory board has concluded that the audit reports have truly and objectively reflected the Company's financial status and business performance. The numbers and statements provided in the Company's 2003 financial report are true and accurate, and the report contains no unauthentic description, misleading representations or material omissions.

3. Investment Status In 2003, the Company co-invested and established Shanghai Highly (Group) Trading

Co., Ltd. with Shanghai Zhongyu Investment Co., Ltd., and established Hitachi Highly Automobile Components (Shanghai) Co., Ltd. in cooperation with Hitachi Ltd. of Japan, and increased the capital of Shanghai Hitachi, Highly Foundry and Shanghai Highly Special Refrigerator Co., Ltd. The supervisory board has watched over the whole process of the foregoing investments and did not find any act that might impair the interests of shareholders.

4. Affiliated Transactions of the Company Within the report period, there was no major affiliated transaction in connection

with purchase or sales of commodities or labor services, or transfer of assets or share equity.

Within the report period, according to the CSRC Regulation jointly promulgated by

the CSRC and the State-owned Assets Supervision and Administration Commission of the State Council, the supervisory board examined the guarantees provided by the Company and discovered that the guarantees provided to Shanghai Zanussi Electromechanical Co., Ltd., Shanghai Highly Special Refrigerator Co., Ltd., and Shanghai Senlin were in violation of the CSRC Regulation. The CSRC Regulation requests that the Company should not “directly provide guarantees for any entity with a asset liability ratio exceeding 70%”, and that the Company should not “provide guarantees for any affiliate in which it holds an shareholder equity of less than 50%, or any non legal person entities or individuals”. Such violations were caused by historical reasons or because of contractual commitments made in joint venture contract which required the Company to provide guarantees for the joint venture company in proportion to their capital contributions. Regarding these, the Company formulated its corrective acts plans as follows: to increase the capital of Shanghai Highly Special Refrigerator Co., Ltd. (which was completed in March 2004) so as to decrease its asset liability ratio; to expedite the integration of Shanghai

30

Senlin and Shanghai Hitachi, so as to improve the operation and financial status of Shanghai Senlin; and to discuss with other shareholders of Shanghai Zanussi Electromechanical Co., Ltd., to find solutions.

The supervisory board has witnessed that facing the unfavorable factors in 2003 such as continued low sales price and the soaring of raw material prices, the board of directors and management of the Company improved the product quality, enlarged output volume and decreased operating costs through adjustment to the marketing structure and the adoption of a piece-rate remuneration system, and thereby maintained the Company’s number one market share in the domestic air-conditioner compressor industry. In November of 2003 the Company successfully entered into a joint venture contract with Hitachi Ltd. of Japan to implement the automobile starter project, which can be remarked as a substantial progress of the Company in implementing its multi-industry development strategy and the Company’s expansion into the automobile component industry.

Regarding the plan for 2004, The supervisory board suggested the board of directors and the management of the Company to take the advantage of the Company’s scale of economy and mass production of key components, and meanwhile stick to the idea of “expanding into related industries on the same technical basis”, for the purpose of accelerating the implementation of multi-industry development strategy and maintaining a persistent growth of the Company.

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CHAPTER IX IMPORTANT EVENTS

ⅠⅠⅠⅠ. There was no major legal action or arbitration within the report period.

ⅡⅡⅡⅡ. There was no purchase of corporate assets or corporate merger or acquisition

during the report period.

ⅢⅢⅢⅢ There was no major affiliated transactions within the report period.

1. Within the report period, there was no major affiliated transaction arising out of the

purchase or sales of commodities or the provision of labor services. 2. Within the report period, there was no major affiliated transaction in connection

with the transfer of assets or shareholder equity. 3. The credit, debts and guarantees between the Company and its affiliates are as

follows:

(1) Major affiliated transactions arising out of credits or debts between the Company and its affiliates.

Within the report period, Shanghai Jin Xuan Real Estate Development Co. Ltd., a subsidiary of the Company, borrowed an amount of RMB41,400,000 from the Company to be used for the real estate development carried out by its subsidiary, Shanghai Highly Real Estate Development Co., Ltd., with an interest equal to the interest rate of bank loans. The balance of such loan at the end of 2003 was RMB30,900,000.

(2) Information of guarantees is available in Section IV of this Chapter.

ⅣⅣⅣⅣ Important Contracts and Their Performance

1. Within the report period, the Company has not been engaged as a trustee,

contractor or lessee of any assets of third party companies, nor was any assets of the Company being trusted, contracted or leased to any third party companies.

2. Important Guarantees:

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Guarantees provided by the Company in the previous years for Shanghai Shangling Electrical Appliance Joint Stock Company, Shanghai Shenda Joint Stock Company and Shanghai Industrial Fund came to their maturity in April of 2003. The outstanding sum of the foregoing guarantees at the end of 2003 was zero. Detailed information on the occurrence and performance of such guarantees were disclosed in the Company’s 2003 Semi-Annual Report publicized on 12 August 2003.

The following chart shows the status of guarantees furnished by the Company to other entities including its subsidiaries or investees during the report period.

(in RMB10,00)

Name of Guarantee Date Amount Type Guarantee Period Fulfilled

or not Whether

for affiliate

01/01/2003 300 Joint and

several 2003.01.01-2003.07.01 Yes Yes

30/04/2003 300 Joint and

several 2003.04.30-2004.04.29 No Yes

Shanghai Highly Special Refrigerator Co., Ltd. 29/09/2003 60

Joint and several

2003.09.29-2004.03.28 No Yes

10/09/1998 5500 Joint and

several 1998.09.10-2003.08.25 Yes Yes

27/09/2002 750 Joint and

several 2002.09.27-2003.05.26 Yes Yes

08/10/2003 1000 Joint and

several 2003.10.08-2004.04.08 No Yes

13/03/2002 2000 Joint and

several 2002.03.13-2003.05.10 Yes Yes

02/07/2002 6975 Joint and

several 2002.07.02-2003.12.19 Yes Yes

27/02/2003 4700 Joint and

several 2003.02.27-2004.06.18 No Yes

07/07/2003 4750 Joint and

several 2003.07.07-2004.12.10 No Yes

Shanghai Zanussi Electromechanical Co., Ltd.

30/06/2003 4000 Joint and

several 2003.06.30-2005.12.30 No Yes

23/05/2000 3900 Joint and

several 2000.05.23-2003.11.30 Yes Yes Shanghai Hitachi

Electrical Appliance Co., Ltd. 23/05/2000 1730

Joint and several

2000.05.23-2005.05.18 No Yes

21/12/2001 9500 Joint and

several 2001.12.21-2003.12.20 Yes Yes

09/04/2002 12000 Joint and

several 2002.04.09-2003.06.16 Yes Yes

09/07/2002 9500 Joint and

several 2002.07.09-2005.06.11 No Yes

26/07/2002 27222 Joint and

several 2002.07.26-2003.12.27 Yes Yes

21/01/2003 3000 Joint and

several 2003.01.21-2003.11.20 Yes Yes

28/02/2003 13166 Joint and

several 2003.02.28-2005.06.26 No Yes

07/08/2003 21073 Joint and

several 2003.08.07-2004.06.18 No Yes

Shanghai Senlin Electrical Appliance Co., Ltd.

24/07/2003 13928 Joint and

several 2003.07.24-2004.12.09 No Yes

Shanghai Highly Foundry Co., Ltd.

28/10/2002 500 Joint and

several 2002.10.28-2003.10.28 Yes Yes

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28/10/2002 1100 Joint and

several 2002.10.28-2005.10.28 No Yes

13/02/2003 1000 Joint and

several 2003.02.13-2004.06.30 No Yes

29/09/2003 500 Joint and

several 2003.09.29-2004.09.28 No Yes

China Economic Technology Investment Guarantee Co., Ltd., Shanghai Branch

29/09/2003 340 Joint and

several 2003.09.29-2004.03.28 No No

Total amount of guarantees 148,794

Total amount of outstanding guarantees at year end

77,147

Total amount of outstanding guarantees for affiliates at year end

76,807

Total amount of guarantees offered by the Company to subsidiaries

118,779

Total amount of guarantees in violation to the CSRC Regulation

72,477

Proportion of total amount of guarantees to the net asset of the Company

71.90%

The foregoing companies, mainly as subsidiaries or investees of the Company, borrowed money from banks for their business operation. According to relevant agreements, the Company must provide guarantees for such bank loans. With respect to the guarantees, the decisions-making and the approval procedures were made in compliance with the Company’s Articles of Association, Procedural Rules for

Board Meetings and Guarantee Management Rules. None of the above-mentioned guarantees was outstanding after the guarantee period or had adverse affect to the Company.

ⅤⅤⅤⅤ Within the report period, the Company and its shareholders holding more than 5%

of the Company's shares did not disclose any particularly committed information in the designated newspapers and the web site.

ⅥⅥⅥⅥ Engagement and Removal of Accounting Firms

The 2002 Annual General Meeting of Shareholders of the Company, which was convened on 27 June 2003, reviewed and approved The Proposal on Payment of 2002

Audit Fees and Extension of Engagement of Audit Firm in 2003. According to the proposal, the Company continued engaging E & Y Da Hua as the Company's auditor for domestic audit of the Company in 2003, and engaged KPMG for its overseas audit in 2003 for the purpose of convenience in the Company’s information disclosure and ensuring the independency of both the domestic audit and overseas audit of the Company. Also according to the proposal, the board of directors was authorized to determine the audit fees for 2003.

During the report period, the audit fees paid by the Company to E & Y Da Hua

were as follows: ①①①①an audit fee amounting to RMB550,000 for its audit work for the

Company and the Company’s subsidiaries (including travel expenses) in 2002. Due to a prepayment of RMB250,000 in 2002 and a payment of RMB230 000 in 2003,

there is RMB 70,000 remained unpaid; ②②②② an audit fee of RMB 26,000 for the

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special audit of cash in foreign exchange held by the Company and the Company’s

subsidiaries, in which RMB21,000 was paid and RMB5,000 remained unpaid; ③③③③an

advance payment of RMB250,000for audit work for the Company and the subsidiaries in 2003. In the previous report period, the Company paid to E & Y Da Hua audit fees in total of RMB530,000 (including travel expenses).

During the report period, the Company paid to Ernst & Young Shanghai an audit fee amounting to RMB510,000 (including traveling expenses) for its audit work in 2002. In the previous report period, a total amount of RMB450,000 (including traveling expenses) was paid to Ernst & Young Shanghai as auditing fees. E & Y Da Hua had provided its audit services to the Company for the past three consecutive years since 2001. 2003 was the first year that KPMG made overseas audit for the Company.

ⅦⅦⅦⅦ Information on Inspection and Administrative Punishment on the Company or Its

Board of Directors or Directors

Within the report period, the Company, its board of directors and board members had not been subject to any inspection, administrative punishment, and public censure from the CSRC and Shanghai Securities Exchange.

From 10 November to 14 November, 2003, Qingdao Special Office of the CSRC made its inspection to the Company. In light of the fact that the special committees of the board of directors of the Company did not convene any meeting in 2002 and certain improper accounting treatments, Shanghai Securities Supervision Office of the CSRC issued a Notice of Rectification within Limited Timeframe. In response to this event, the board of directors convened a special meeting. After careful study and discussion, the board of directors prepared a rectification report, which was publicized in Shanghai Securities News and South China Morning Post dated 30 December 2003. Details of meetings of the special committees of the board of directors in 2003 are provided in Chapter V of this report. The improper treatments in accounting have been corrected in the 2003 financial statement.

ⅧⅧⅧⅧ Other Important Events

1. Shanghai Hitachi was awarded the National May Day Labor Prize. 2. The Company’s general manager, Mr. Shen Jianfang was awarded as the

Annual Celebrity of Economic Contribution.

35

CHAPTER X FINANCIAL REPORTS

Report of the independent auditor to the shareholders of Shanghai Highly (Group) Co., Ltd.

(Established in the People’s Republic of China with Limited liability)

We have audited the accompanying consolidated balance sheet of Shanghai Highly (Group) Co., Ltd. and its subsidiaries (“the Group”) as of 31 December 2003 and the related consolidated statements of income, changes in equity and cash flows for the year then ended, set out on pages 2 to 36. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit

36

includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2003, and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. KPMG Huazhen Certified Public Accountants Shanghai, China 20 April 2004

Shanghai Highly (Group) Co., Ltd. Consolidated income statement

For the year ended 31 December 2003 (Expressed in Renminbi)

2003 2002

Note RMB’000 RMB’000

(Note 31) Revenue 2,750,044 2,150,743 Cost of sales (2,246,244) (1,679,693) Gross profit 503,800 471,050 Other operating income 3 30,812 16,537

37

Distribution expenses (155,498) (114,578) Administrative expenses (185,117) (179,321) Other operating expenses 4 (29,834) (38,466) Profit from operations 164,163 155,222 Net financing costs 6 (68,804) (82,539) Share of losses of associates (1,677) (3,727) Profit before tax 93,682 68,956 Income tax expenses 7 (23,358) (17,010) Profit after tax 70,324 51,946 Minority interests 18 (26,494) (30,316) Net profit for the year 43,830 21,630 Basic earnings per share 19 RMB0.115 RMB0.057 The consolidated income statement is to be read in conjunction with the notes to and forming part of the consolidated financial statements set out on pages 8 to 36.

Shanghai Highly (Group) Co., Ltd. Consolidated balance sheet

As at 31 December 2003 (Expressed in Renminbi)

2003 2002


(Note 31) ASSETS Property, plant and equipment 8 1,702,258 1,773,259 Lease prepayments 9 133,577 136,867 Intangible assets

38

Negative goodwill 10 (29,923) (34,168) Other intangible assets 10 2,922 3,511 Investments in associates 11 137,535 117,060 Other investments 12 16,969 17,365 Deferred tax assets 13 5,700 5,079 Total non-current assets 1,969,038 2,018,973 ------------------ ------------------ Inventories 14 489,656 440,796 Trade and other receivables 15 755,857 701,835 Cash and cash equivalents 16 170,171 132,733 Total current assets 1,415,684 1,275,364 ------------------ ------------------ Total assets 3,384,722 3,294,337 2003 2002


(Note 31) EQUITY Issued capital 380,520 380,520 Share premium 333,807 333,807 Reserves 340,502 312,295 Accumulated losses (7,033) (22,656) Total equity 17 1,047,796 1,003,966 ------------------ ------------------ The consolidated income statement is to be read in conjunction with the notes to and forming part of the consolidated financial statements set out on pages 8 to 36.

Shanghai Highly (Group) Co., Ltd. Consolidated balance sheet

As at 31 December 2003 (Expressed in Renminbi)

MINORITY INTERESTS 18 394,746 376,605 ------------------ ------------------ LIABILITIES Interest-bearing loans and borrowings 20 118,300 162,300 Deferred government grants 21 56,996 12,546 Total non-current liabilities 175,296 174,846 ------------------ ------------------

39

Interest-bearing loans and borrowings 20 928,600 1,100,603 Income tax payable 7 6,862 2,277 Trade and other payables 22 811,302 618,622 Provision for warranties 23 20,120 17,418 Total current liabilities 1,766,884 1,738,920 ------------------ ------------------ Total liabilities 1,942,180 1,913,766 ------------------ ------------------ Total equity, minority interests and liabilities 3,384,722 3,294,337 Authorised for issue by the Board of Directors on 20 April 2004. The consolidated income statement is to be read in conjunction with the notes to and forming part of the consolidated financial statements set out on pages 8 to 36.

37

Shanghai Highly (Group) Co., Ltd. Consolidated statement of changes in equity

For the year ended 31 December 2003 (Expressed in Renminbi)

Reserve

Statutory fund and Retained

Issued public enterprise earnings/

share Share Capital Statutory welfare expansion (Accumulated

capital premium reserve reserve fund fund losses) Total

RMB‘000 RMB‘000 RMB‘000 RMB‘000 RMB‘000 RMB‘000 RMB‘000 RMB‘000

Balance at 1 January 2002 380,520 333,807 84,185 58,097 57,320 64,854 37,800 1,016,583 Net profit for the year - - - - - - 21,630 21,630 Dividends - - - - - - (34,247) (34,247) Government grant - - 1,394 - - - (1,394) - Transfer to reserves - - - 3,703 3,702 39,040 (46,445) - Balance at 31 December 2002 380,520 333,807 85,579 61,800 61,022 103,894 (22,656) 1,003,966 Net profit for the year - - - - - - 43,830 43,830 Dividends - - - - - - - - Transfer to reserves - - - 6,566 6,565 15,076 (28,207) - Balance at 31 December 2003 380,520 333,807 85,579 68,366 67,587 118,970 (7,033) 1,047,796

The consolidated income statement is to be read in conjunction with the notes to and forming part of the consolidated financial statements set out on pages 8 to 36.

38

Shanghai Highly (Group) Co., Ltd. Consolidated statement of cash flows For the year ended 31 December 2003

(Expressed in Renminbi)

2003 2002

RMB’000 RMB’000

(Note 31)

Operating activities: Profit before tax 93,682 68,956 Adjustment for:

Depreciation 258,539 234,832 Amortisation of lease prepayments 3,290 3,210 Provision for impairment loss of property, plant and equipment 1,261 7,987 Gain on disposal of property, plant and equipment (8,443) (2,840) Amortisation of intangible assets 1,780 1,539 Amortisation of negative goodwill (4,245) (4,139) Amortisation of deferred government grants (5,600) (1,394) Interest expense 65,336 75,965 Interest income (1,555) (2,026) Share of losses of associates 1,677 3,727 Provision for impairment loss of other long-term investments 396 1,020 Gain on disposal of long-term investments - (672)

Cash flows from operating activities before changes in working capital 406,118 386,165

(Increase)/decrease in inventories (48,860) 156,765 Increase in trade and other receivables (40,892) (293,669) Increase in trade and other payables 250,440 92,570 Increase in provision for warranties 2,702 1,732

Cash generated from operations 569,508 343,563

Interest paid (68,746) (76,097) Income tax paid (18,548) (26,984)

Cash flows from operating activities 482,214 240,482 ------------------ ------------------

39

The consolidated income statement is to be read in conjunction with the notes to

and forming part of the consolidated financial statements set out on pages 8 to

36.

Shanghai Highly (Group) Co., Ltd. Consolidated statement of cash flows For the year ended 31 December 2003


2003 2002


(Note 31)

Cash flows from operating activities 482,214 240,482 ------------------ ------------------ Investing activities

Interest received 1,555 2,026 Acquisition of property, plant and equipment (196,371) (311,585) Lease prepayments - (6,102) Acquisition of intangible assets (1,191) - Proceeds from disposal of property, plant and equipment 6,221 7,267 Acquisition of additional interest in a subsidiary 2 (30,000) (82,519) Investments in associates (50,566) (34,948) Proceeds from disposal of other investments - 3,178 Decrease in time deposits with original maturity of over three months - 87,073

Cash flows from investing activities (270,352) (335,610) ------------------ ------------------ Financing activities

Dividends paid to shareholders (118) (33,040) Dividends paid to minority investors of subsidiaries 18 (29,632) (72,568) Proceeds from interest-bearing loans and borrowings 1,317,885 2,143,743 Repayment of interest-bearing loans and borrowings (1,533,888) (2,111,241) Proceeds from government grants 50,050 - Capital contribution from minority investors of subsidiaries 18 21,279 35,100

Cash flows from financing activities (174,424) (38,006) ------------------ ------------------

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36.

Shanghai Highly (Group) Co., Ltd.

Consolidated statement of cash flows For the year ended 31 December 2003


Net increase/(decrease) in cash and cash equivalents 37,438 (133,134) Cash and cash equivalents at 1 January 132,733 265,867 Cash and cash equivalents at 31 December 16 170,171 132,733

41



36.

Shanghai Highly (Group) Co., Ltd.

Notes to the consolidated financial statements (Expressed in Renminbi)

Significant accounting policies Shanghai Highly (Group) Co., Ltd. (“the Company”) is a company domiciled in Shanghai, the People’s Republic of China (“PRC”). The consolidated financial statements of the Company for the year ended 31 December 2003 comprise the Company and its subsidiaries (together referred to as the “Group”) and the Group’s interest in associates. (a) Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) adopted by the International Accounting Standards Board. The Group has also prepared a set of financial statements which comply with the accounting regulations in the PRC.

(b) Basis of preparation The consolidated financial statements have been prepared under the going concern concept on the basis that (i) the Group will be able to generate sufficient working capital and cash from its operations, and (ii) the bankers of the Group have granted additional facilities to the Group. The directors are of the opinion that the Group will continue to obtain support from its bankers and, upon request of the Group, the bank loans due in 2004 can be successfully renewed. The directors believe that if necessary, additional facilities can also be provided by the bankers for the foreseeable future to enable the Group to meet its day-to-day commitments as and when they fall due. The consolidated financial statements are presented in Renminbi, rounded to the nearest thousand. They are prepared on the historical cost basis. The accounting policies set out below have been consistently applied by the Group and are consistent with those used in the previous year. The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and

42

liabilities at the dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

(c) Basis of consolidation

(i) Subsidiaries

Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

(ii) Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associates.

(iii) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the entity against the investment in the associates. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

(d) Foreign currency transactions Transactions in foreign currencies are translated to Renminbi at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Renminbi at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities denominated in

43

foreign currencies that are stated at fair value are translated to Renminbi at the foreign exchange rate ruling at the dates the values were determined.

(e) Property, plant and equipment

(i) Owned assets

Items of property, plant and equipment are stated at cost less accumulated depreciation (refer below) and impairment losses (refer to accounting policy l). The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment.

(ii) Subsequent expenditure

Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditure, is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognised in the income statement as an expense as incurred.

(iii) Depreciation

Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment. The estimated useful lives are as follows: � Buildings 20 years � Machinery 10 years � Motor vehicles 5 years � Furniture, fixtures and equipment 5 years � Moulds and others 3-5 years

(f) Intangible assets

(i) Goodwill and negative goodwill

Goodwill (positive and negative) arising on an acquisition represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Positive goodwill is stated at cost less accumulated amortisation (refer below) and impairment losses (refer to accounting policy l).

44

To the extent that negative goodwill relates to an expectation of future losses and expenses that are identified in the plan of acquisition and can be measured reliably, but which have not yet been recognized, it is recognized in the income statement when the future losses and expenses are recognised. Any remaining negative goodwill, but not exceeding the fair values of the non-monetary assets acquired, is recognised in the income statement over the weighted average useful life of those assets that are depreciable/amortisable. Negative goodwill in excess of the fair values of the non-monetary assets acquired is recognised immediately in the income statement.

(ii) Research and development

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized if the product or process is technically and commercially feasible and the Group has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognized in the income statement as an expense as incurred.

(iii) Other intangible assets

Other intangible assets acquired by the Group, are stated at cost less accumulated amortisation (refer below) and impairment losses (refer to accounting policy l). Expenditure on internally generated goodwill and brands is recognized in the income statement as an expense as incurred.

(iv) Subsequent expenditure

Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

(v) Amortisation

Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible asset. Goodwill (positive and negative) is amortised from the date of initial recognition; other intangible assets are amortised from the date they are available for use. The estimated useful lives of intangible assets are as follows:

45

� patents and licences 7 years � positive goodwill 10 years � negative goodwill 10 years

(g) Investments

Other investments held by the Group are classified as being available-for-sale. These investments represent legal person shares of certain listed companies and participations in various unlisted companies in which the Group neither holds, directly or indirectly, 20% or more of the voting powers nor can exercise significant influence. Available-for-sale investments are stated at cost less impairment losses (refer to accounting policy l), and are recognised/derecognised by the Group at the date it commits to purchase/sell the investments. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to the income statement.

(h) Lease prepayments Lease prepayments represent land use rights paid to the PRC land bureau. Lease prepayments are stated at cost, less accumulated amortisation and any impairment losses (refer to accounting policy l). Amortisation is charged to income statement on a straight-line basis over the period of the rights of 50 years.

(i) Trade and other receivables Trade and other receivables are stated at their cost less impairment losses (refer to accounting policy l).

(j) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the weighted average method and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity.

(k) Cash and cash equivalents

Cash and cash equivalents comprises cash on hand and at bank balances, and cash balances with securities brokers, excluding time deposits with maturity over three months from the date of deposits.

46

(l) Impairment The carrying amounts of the Group’s assets, other than inventories (refer to accounting policy j) and deferred tax assets (refer to accounting policy u), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. (i) Calculation of recoverable amount

The recoverable amount of the Group’s receivables is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted. The recoverable amount of assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

(ii) Reversals of impairment

An impairment loss in respect of receivable is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An impairment loss in respect of goodwill is not reversed unless the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

47

(m) Dividends Dividends are recognised as a liability in the period in which they are declared.

(n) Interest-bearing borrowings Interest-bearing borrowings are recognised initially at cost, less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.

(o) Employee benefits Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred.

(p) Provision and contingent liabilities Provisions are recognised for liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation. Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(q) Provision for warranties A provision for warranties is recognised in the balance sheet when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.

(r) Trade and other payables Trade and other payables are stated at their cost.

(s) Revenue

(i) Goods sold

48

Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods.

(ii) Rental income

Rental income is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income to be received.

(iii) Government grants

A government grant is recognised in the balance sheet initially as deferred income when there is reasonable assurance that it will be received and that the Group will comply with the conditions attaching to it. Grants that compensate the Group for expenses incurred are recognised as revenue in the income statement on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are recognised in the income statement as revenue on a systematic basis over the useful life of the asset.

(t) Expenses

(i) Operating lease payments

Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

(ii) Net financing costs

Net financing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested, dividend income, foreign exchange gains and losses and bank charges. Financing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. Interest income is recognised in the income statement as it accrues, taking into account the effective yield on the asset. Dividend income is recognised in the income statement on the date that the dividend is declared.

(u) Income tax

49

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(v) Related parties If the Group has the ability, directly or indirectly, to control, jointly control or exercise significant influence over another party, or vice versa, or where the Group and one or more parties are subject to common control from another party, they are considered to be related parties. Related parties may be individuals or enterprises.

(w) Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

1. Segment reporting No analysis of the Group’s turnover and contribution to profit from operations by geographical segment or business segment has been presented as all the Group’s operating activities are carried out in the PRC and less than 10 per cent of the Group’s turnover and contribution to profit from operations were derived from activities outside the Group’s manufacturing and sales of compressors used in household air conditioners in the PRC. There is no other geographical or business segment with

50

segment assets equal to or greater than 10 per cent of the Group’s total assets.

2. Acquisition and disposal

Except for the below acquisition, there was no other acquisition or disposal of the Group’s equity interests in subsidiaries during 2002 and 2003. On 31 August 2002, the Group acquired from SDIC Machinery & Light Industries Co., Ltd. (“SDIC”) an additional 8% equity interest in Shanghai Hitachi Electrical Appliances Co., Ltd. (“Shanghai Hitachi”), a subsidiary the Company, at a cash consideration of RMB112,519 thousands, of which RMB82,519 thousands and RMB30,000 thousands were paid by the Group during 2002 and 2003 respectively. Shanghai Hitachi is principally engaged in manufacturing and sales of air-conditioner compressors. As a result of the acquisition, the Group’s interest in Shanghai Hitachi increased from 67% to 75%. The acquisition was accounted for using the purchase method of consolidation.

3. Other operating income

2003 2002


Rental income 5,058 5,125 Less: Direct operating expenses (1,643) (2,873) Net rental income 3,415 2,252 Release of unutilised provision for warranties 23 5,226 3,845 Amortisation of deferred government grants 21 5,600 1,394 Amortisation of negative goodwill 10 4,245 4,139 Gain on disposal of property, plant and equipment 8,443 2,840 Others 3,883 2,067 30,812 16,537

4. Other operating expenses 2003 2002


Research and development expenses 18,175 22,272 Provision for warranties 23 9,132 5,577 Provision for impairment loss of property, plant and equipment, net 8 1,261 7,987 Provision for impairment loss of other long-term investments 396 1,020 Amortisation of intangible assets 10 146 49

51

Others 724 1,561 29,834 38,466

5. Personnel expenses

2003 2002

RMB’000 RMB’000

Wages and salaries 127,971 114,944 Contributions to defined contribution plans 29,015 25,763 156,986 140,707 The number of employees as at 31 December 2003 was 3,391 (2002: 3,279). Contributions made by the Group to pension funds are dealt with in the income statement when incurred. According to the respective pension fund regulations, the Group contributes to pension funds based on 22.5% of the average salary level. The Group remits all pension fund contributions to the respective social security offices, which are responsible for the payments and liabilities relating to the pension funds. The Group has no obligation for the payment of retirement and other post-retirement benefits of employees other than the contributions described above.

6. Net financing costs 2003 2002

RMB’000 RMB’000

Interest expense on: - Bank loans 48,297 62,095 - Discount of bank notes 20,374 14,002 68,671 76,097 Less: Capitalised in construction in progress (3,335) (132) 65,336 75,965 Net foreign exchange loss and bank charges 5,507 9,377 Dividend income (484) (777) Interest income from bank deposits (1,555) (2,005) Interest income from associates - (21) Total finance costs 68,804 82,539 The borrowing cost have been capitalised at the following interest rate: Annual rate 3.50% 5.49%

7. Income tax expenses Recognised in the income statement

52

2003 2002

RMB’000 RMB’000

Current income tax:

Provision for PRC income tax for current year 23,133 22,089 Share of taxation of associates 846 -

23,979 22,089 Deferred tax income:

Origination and reversal of temporary differences (621) (5,079)

Total income tax expense in income statement 23,358 17,010 The Company was established in Jin Qiao Export Processing Zone of Shanghai Pudong New Area. Accordingly, the Company is subject to the PRC income tax at a preferential rate of 15%. In accordance with the relevant tax regulations and local income tax concession granted, the subsidiaries of the Company are subject to the PRC income tax rates ranging from 15% to 33% (2002: 10% to 33%).

Reconciliation of effective tax rate

2003 2002

RMB’000 % RMB’000 %

Profit before tax 93,682 100% 68,956 100% Income tax using the applicable preferential tax rate 14,052 15% 10,343 15% Rate differential on operations of subsidiaries and associates 1,372 2% (11,380) (16%) Tax losses not recognized as deferred tax assets 6,030 6% 6,935 10% Other temporary differences not recognized as deferred tax assets 737 1% 5,446 8% Non-deductible costs net of non-taxable income 1,167 1% 5,666 8% Income tax expenses 23,358 25% 17,010 25%

Tax payable in the consolidated balance sheet

2003 2002

RMB’000 RMB’000

Balance at 1 January 2,277 7,172 Provision for PRC income tax for the year 23,133 22,089

53

PRC income tax paid for the year (18,548) (26,984) Balance at 31 December 6,862 2,277

8. Property, plant and equipment

Furniture

fixtures Moulds

Motor and and Construction

Buildings Machinery vehicles equipment others in progress Total

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

Cost

Balance at 1 January 2003 373,816 2,077,216 39,986 169,443 86,162 270,128 3,016,751 Additions 4,218 31,759 4,307 5,856 13,520 139,734 199,394 Transfer to fixed assets 11,204 217,719 - 13,463 - (242,386) - Disposals (1,980) (25,935) (2,699) (4,751) - (2,858) (38,223) Balance at 31 December 2003 387,258 2,300,759 41,594 184,011 99,682 164,618 3,177,922 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------

Depreciation and impairment

Balance at 1 January 2003 109,300 925,617 24,341 91,987 70,830 21,417 1,243,492 Depreciation charge for the year 17,497 205,056 4,748 19,020 12,218 - 258,539 Impairment provided during the year - 362 - 6,010 - - 6,372 Reversal of impairment loss - - - (3,539) - (1,572) (5,111) Disposals (27) (18,424) (2,455) (4,154) - (2,568) (27,628) Balance at 31 December 2003 126,770 1,112,611 26,634 109,324 83,048 17,277 1,475,664 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------

Carrying amount

At 1 January 2003 264,516 1,151,599 15,645 77,456 15,332 248,711 1,773,259 At 31 December 2003 260,488 1,188,148 14,960 74,687 16,634 147,341 1,702,258

Security

Buildings with an aggregate carrying amount of RMB109,816 thousands (2002: RMB113,730 thousands) were pledged to secure bank loans as at 31 December 2003 (see note 20). Buildings

Buildings with an aggregate carrying amount of RMB4,775 thousands (2002: 6,506 thousands), as shown in the following table, are rented to a number of third parties under operating leases.

2003 2002

RMB’000 RMB’000

Cost 13,987 13,987

54

Accumulated depreciation (9,212) (7,481) Carrying amount 4,775 6,506 In the opinion of the directors, the fair values of the investment properties approximated their carrying amounts as at 31 December 2003.

9. Lease prepayments

2003 2002

RMB’000 RMB’000

Balances at 1 January 136,867 133,975 Additions - 6,102 Amortisation charge for the year (3,290) (3,210) Balances at 31 December 133,577 136,867 Land use rights with an aggregate carrying amount of RMB67,016 thousands (2002: RMB68,576 thousands) were pledged to secure bank loans as at 31 December 2003 (see note 20).

10. Intangible assets

Other intangible assets

Patents

Negative and

goodwill Goodwill licences Total

RMB’000 RMB’000 RMB’000 RMB’000

Cost

Balance at 1 January 2003 (42,446) 1,463 23,968 25,431 Addition - - 1,191 1,191 Balance at 31 December 2003 (42,446) 1,463 25,159 26,622 ------------------ ------------------ ------------------ ------------------ Amortisation

Balance at 1 January 2003 8,278 (49) (21,871) (21,920) Amortisation for the year 4,245 (146) (1,634) (1,780) Balance at 31 December 2003 12,523 (195) (23,505) (23,700) ------------------ ------------------ ------------------ ------------------ Carrying amount

At 1 January 2003 (34,168) 1,414 2,097 3,511 At 31 December 2003 (29,923) 1,268 1,654 2,922

Amortisation income and charge

55

The amortisation income of negative goodwill for the year is recognized in other operating income (see note 3). The amortisation charge of positive goodwill for the year is recognized in other operating expenses (see note 4). The amortisation charges of patents and licences are recognised in administrative expenses.

11. Investment in associates The Group has the following significant investments in associates which are all established in the PRC: Proportion of ownership interests held by the Group and the Company Shanghai Zanussi Elettromeccanica Co., Ltd. (“Zanussi”) 35%

Shanghai Highly Nakano Refrigerators Co., Ltd. (“Highly Nakano”) 43%

日立海立汽车部件日立海立汽车部件日立海立汽车部件日立海立汽车部件(上海上海上海上海)有限公司有限公司有限公司有限公司 33.33%

(Hitachi Highly Automobile Spare Parts (Shanghai) Co., Ltd.*) * Direct translation of their registered names in the PRC

The Group’s share of post-acquisition total recognized gains and losses in the above associates as at 31 December 2003 amounted to RMB36,103 thousands (2002: RMB33,580 thousands).

12. Other investments 2003 2002

RMB’000 RMB’000

Investments in listed companies 14,171 14,567 Unlisted investments 2,798 2,798 16,969 17,365 Investments in listed companies represent investments in legal person shares of joint stock limited companies. These shares are currently not allowed to be traded on any stock exchange in the PRC.

13. Deferred tax assets

Recognised deferred tax assets/(liabilities)

Deferred tax assets/(liabilities) are attributable to the following: 2003 2002

RMB’000 RMB’000

56

Provision for warranties 1,804 - Inventories provision 1,852 5,079 Bad debts provision 2,544 - Interest capitalisation (500) - 5,700 5,079 Unrecognised deferred tax assets

Deferred tax assets have not been recognised in respect of the following items: 2003 2002

RMB’000 RMB’000

Tax losses 63,186 71,595 Deductible temporary differences 16,067 15,330 79,253 86,925 Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the Group can utilize the benefits thereon. Movements in temporary differences during the year

1 January Recognised 31 December

2003 during the year 2003

RMB’000 RMB’000 RMB’000

Provision for warranties - 1,804 1,804 Inventories provision 5,079 (3,227) 1,852 Bad debts provision - 2,544 2,544 Interest capitalisation - (500) (500) 5,079 621 5,700

14. Inventories 2003 2002

RMB’000 RMB’000

Raw materials and consumables 167,255 121,164 Work-in-progress 24,119 19,308 Property under development - 79,479 Finished goods 298,282 220,845 489,656 440,796 Inventories stated at net realisable value 67,198 240,536

57

The cost of inventories recognised as an expenses (including in cost of sales) during the year is RMB2,246,244 thousands (2002: 1,679,693 thousands).

15. Trade and other receivables Note 2003 2002

RMB’000 RMB’000

Trade receivables 437,659 542,081 Notes receivable 240,503 118,832 Non-trade receivables 74,856 39,032 Receivables due from related parties 28 2,839 1,890 755,857 701,835

16. Cash and cash equivalents 2003 2002

RMB’000 RMB’000

Cash at bank and on hand 170,171 132,733

17. Capital and reserves Share capital

2003 2002

On issue at 31 December - fully paid A shares (in thousand of shares) 201,120 201,120 B shares (in thousand of shares) 179,400 179,400 380,520 380,520 All A and B shares have a par value of RMB1. The holders of all A and B shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All A and B shares rank equally with regard to the Company’s residual assets. Reserves

Distribution of statutory reserves and statutory public welfare fund were made in accordance with the relevant rules and regulations in the PRC and the Articles of Association of the Company and its subsidiaries and were approved by the respective boards of directors. Statutory reserve

According to the respective Articles of Association, the Company and certain of its subsidiaries are required to transfer 10% of its profit after

58

taxation, as determined under PRC accounting regulations, to the statutory reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before the distribution of dividends to shareholders or investors. Statutory reserve can be used to make good previous years’ losses, if any. In the case of the Company, the statutory reserve may also be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings. For those subsidiaries, the statutory reserves may be converted into paid-in capital in proportion to the existing equity interest of the subsidiaries’ investors. Statutory public welfare fund

According to the respective Articles of Association, the Company and certain of its subsidiaries are required to transfer 5% to 10% of its profit after taxation, as determined under PRC accounting regulations, to the statutory public welfare fund. The transfer to this fund must be made before the distribution of dividends to shareholders or investors. Statutory public welfare fund can only be used for the collective welfare of the Company’s and respective subsidiaries’ employees such as the construction of staff quarters. This fund is non-distributable other than in liquidation. Reserve fund and enterprise expansion fund

Certain of the Company’s subsidiaries are established as sino-foreign joint venture companies. According to the respective Articles of Association, these subsidiaries are required to transfer 10 per cent of their profit after taxation, as determined under PRC accounting regulations, to the reserve fund until the balance of the reserve fund is equal to 50 percent of their registered capital. Moreover, these subsidiaries are required to transfer a certain percentage of their profits after taxation, as determined under PRC accounting regulations, to the enterprise expansion fund. During the year, appropriations were made by these subsidiaries to the reserve fund and the enterprise expansion fund each at 10 per cent of their profits after taxation determined under PRC accounting regulations. The reserve fund can be used to make good previous years’ losses and to increase the paid-in capital of these subsidiaries while the enterprise expansion fund can be used to increase the paid-in capital of these subsidiaries and to acquire fixed assets.

Dividends

No dividends were approved during the year. Dividends in respect of the year ended 31 December 2001 of RMB 0.09 per share totaling RMB 34,247 thousands were approved in 2002 and substantially paid in 2002 and 2003.

18. Minority interests

59

2003 2002

RMB’000 RMB’000

Balance at 1 January 376,605 494,813 Acquisition of a subsidiary - (111,056) Capital contribution from minority interests 21,279 35,100 Dividends to minority interests (29,632) (72,568) Share of profit for the year 26,494 30,316 Balance at 31 December 394,746 376,605

19. Basic earnings per share The calculation of basic earnings per share is based on the net profit for the year of RMB43,830 thousands (2002: RMB21,630 thousands) and a weighted average number of shares outstanding during the year ended 31 December 2003 of 380,520 thousands shares (2002: 380,520 thousands shares). The Company had no diluted potential shares outstanding for 2003 and 2002.

20. Interest-bearing loans and borrowings

This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate risk and currency risk, refer to note 24. 2003 2002

RMB’000 RMB’000

Non-current liabilities

Unsecured bank loans 118,300 162,300

Current liabilities Secured bank loans 118,400 299,000 Unsecured bank loans 810,200 801,603

928,600 1,100,603

Terms and debt repayment schedule-2003

Total Under 1 year 1 to 2 years RMB’000 RMB’000 RMB’000 Secured bank loans

60

RMB-fixed rate ranging from 4.536%-5.49% 118,400 118,400 -

Unsecured bank loans:

RMB- fixed rate ranging from 4.032%-5.604% 796,900 678,600 118,300 USD- fixed rate ranging from 1.608%-3.187% 131,600 131,600 - Total 1,046,900 928,600 118,300

Terms and debt repayment schedule-2002

Total Under 1 year 1 to 2 years 2 to 5 years RMB’000 RMB’000 RMB’000 RMB’000 Secured bank loans RMB- fixed rate ranging from 4.536%-5.604% 299,000 299,000 - - Unsecured bank loans: RMB- fixed rate ranging from 4.536%-6.059% 917,550 755,250 44,000 118,300 USD- fixed rate ranging from 2.5%-3.187% 46,353 46,353 - - Total 1,262,903 1,100,603 44,000 118,300

The secured bank loans are secured over: i) Land use rights and buildings with an aggregate carrying amount of

RMB67,016 thousands and RMB109,816 thousands respectively as of 31 December 2003 (2002: RMB68,576 thousands and RMB 113,730 thousands respectively) (see notes 8 & 9).

ii) Notes receivable of RMB 16,733 thousands as of 31 December 2003

(2002: RMB nil).

21. Deferred government grants 2003 2002


Balance at 1 January 12,546 13,940 Proceeds received from government grants 50,050 - Amortisation of government grants 3 (5,600) (1,394)

61

Balance at 31 December 56,996 12,546

22. Trade and other payables

2003 2002

RMB’000 RMB’000

Trade payables 501,281 321,023 Dividends payable to shareholders 1,582 1,700 Bills payable 99,632 86,733 Non-trade payables and accrued expenses 208,807 209,166 811,302 618,622

23. Provision for warranties 2003 2002


Balance at 1 January 17,418 15,686 Provision made during the year 4 9,132 5,577 Provisions utilised during the year (1,204) - Provisions reversed during the year 3 (5,226) (3,845) Balance at 31 December 20,120 17,418

24. Financial instruments

Exposure to credit, interest rate and currency risks arises in the normal course of the Group’s business. Financial assets of the Group include cash and cash equivalents, trade and other receivables. Financial liabilities of the Group include interest-bearing loans, trade and other payables. (a) Interest risk

Details of the Group’s interest rates and repayment terms of interest-bearing loans are set out in note 20 to the financial statements.

(b) Credit risk Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. Cash is placed with a group of banks and financial institution with good credit ratings. Credit risk on trade and other receivables have already been taken into account as trade and other receivables are shown in the balance sheet net of impairment losses.

62

At balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.

(c) Foreign currency risk

The Group incurs foreign currency risk on sales, purchases, bank deposits and borrowings that are denominated in a currency other than Renminbi. The currencies giving rise to this risk are primarily United States Dollars and Japanese Yen. The carrying amounts of significant financial assets and liabilities approximate to their respective fair values as at 31 December 2003. Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place through the People’s Bank of China or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the People’s Bank of China that are determined largely by supply and demand.

(d) Fair value

Fair value estimates are made at a specific point in time and based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The following methods and assumptions were used to estimate the fair value for each class of financial instruments: (i) Cash and cash equivalents, trade and other receivables, trade

and other payables. The carrying values approximate fair value because of the short

maturities of these instruments. (ii) Bank loans The carrying amount of bank loans approximates their fair

value based on the borrowings rate currently available for bank loans with similar terms and maturity.

25. Operating lease

Leases as lessee

63

Non-cancellable operating lease rentals are payable as follows:

2003 2002

RMB’000 RMB’000

Less than one year 560 177 560 177 The Group leases a number of warehouses under operating lease. The leases typically run for an initial period of between one and six months, with an option to renew the lease after that date. Lease payments are usually increased annually to reflect market rentals. None of the leases includes contingent rentals. RMB 2,046 thousands was recognised as an expense in the income statement in respect of operating leases for the year ended 31 December 2003 (2002: RMB 4,131 thousands). Leases as lessor

The Group leases out certain of its properties under operating leases (see note 8). Non-cancellable operating lease rentals are receivable as follows: 2003 2002

RMB’000 RMB’000

Within one year 1,568 1,623 Between one and five years 3,575 2,121 More than five years - 478 5,143 4,222

26. Commitments (a) Investment commitments

Investment commitments outstanding at 31 December 2003 as approved by the board of directors not provided for in the financial statements of the Company were as follows: 2003 2002

RMB’000 RMB’000

Joint venture projects 28,679 216,930 Additional investments in subsidiaries 61,832 92,676 90,511 309,606

64

(b) Capital commitments

Capital commitments outstanding at 31 December 2003 not provided for in the financial statements were as follows: 2003 2002

RMB’000 RMB’000

Contracted for - Production line construction projects 33,401 26,490 - Research Centre construction project 33,719 - 67,120 26,490 ------------------ ------------------ Authorised but not contracted for - Production line construction project 75,175 543,923 - Research Centre construction project 33,494 - 108,669 543,923 ------------------ ------------------

175,789 570,413 27. Contingent liabilities

Contingent liabilities of the Group are summarized as follows: 2003 2002

RMB’000 RMB’000

Guarantees for bank loans and borrowings to an associate 134,500 152,250 Guarantees for bank loans and borrowings to third parties - 64,400 134,500 216,650

------------------ ------------------ Bills endorsed with recourse 800 - Bills discounted with recourse 12,576 - 13,376 -

------------------ ------------------ Total 147,876 216,650

28. Related party

Identity of related parties

65

The Group has a controlling related party relationship with its parent company Shanghai Light Industry Holding (Group) Co. (refer to note 29). The Group also has a related party relationship with its associates (refer to note 11) and with its directors and executive officers. Transactions with directors and executive officers

Total remuneration included in “personnel expenses” (refer to note 5): 2003 2002

RMB’000 RMB’000

Directors 406 712 Executive officers 1,239 1,124 1,645 1,836

Transactions with associates

During the year, the Group had the following major transactions with Zanussi. 2003 2002


Sales of goods 3,360 4,270 Purchases of good 12,061 - Provision of credit guarantees 27 134,500 152,250 In December 2002, the Company acquired 43% equity interest in Highly Nakano from Shanghai Refrigerator Co., Ltd., a wholly-owned subsidiary of Shanghai Light Industry Holding (Group) Co., at a consideration of RMB 69,896 thousands. The management is of the opinion that the above transactions were in the normal course of business and on commercial terms. Balances with related parties

2003 2002

Automobile Zanussi Automobile Zanussi

Trade receivables - 1,300 - 1,890 Other receivables 449 - - - Notes receivables - 1,090 - - Total 449 2,390 - 1,890

29. Group enterprises

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Control of the Group

The Company is a subsidiary of Shanghai Light Industry Holding (Group) Co., a state-owned industrial group corporation established, under the laws of the PRC. Significant subsidiaries

As of 31 December 2003, the Group had consolidated the following subsidiaries which all established and operating in the PRC:

Percentage of equity

Group’s Held by Held

Name of Place of effective the by

Subsidiaries incorporation holding Company subsidiary

Shanghai Hitachi Electrical Appliances Co., Ltd. PRC 75% 75% - Shanghai Senlin Electrical Appliances Co., Ltd. PRC 69% 69% -

上海金旋房地产开发经营公司上海金旋房地产开发经营公司上海金旋房地产开发经营公司上海金旋房地产开发经营公司 PRC 100% 100% -

(Jin Xuan Real Estate Development Company*)

上海海立铸造有限公司上海海立铸造有限公司上海海立铸造有限公司上海海立铸造有限公司 PRC 80% 80% -

(Shanghai Highly Foundry Co., Ltd.*) Shanghai Highly Automatic Electric Co., Ltd. PRC 60.42% 60.42% - (“Highly Automatic”)

上海海韵人造花有限公司上海海韵人造花有限公司上海海韵人造花有限公司上海海韵人造花有限公司 PRC 80% 80% -

(Shanghai Haiyun Art Flower Co., Ltd.*)

上海海立置业有限公司上海海立置业有限公司上海海立置业有限公司上海海立置业有限公司 PRC 80% - 80%

(Shanghai Highly Zhiye Co., Ltd.*)

上海海立集团贸易有限公司上海海立集团贸易有限公司上海海立集团贸易有限公司上海海立集团贸易有限公司 PRC 80% 80% -

(Shanghai Highly Trading Co., Ltd.*)

* Direct translation of their registered names in the PRC.

30. Subsequent events Subsequent to the balance sheet date, the registered capital of Shanghai Highly Zhiye Co., Ltd. (“Highly Zhiye”) was increased from RMB 10 million to RMB 28 million. Highly Zhiye is principally engaged in property development in the PRC. The increased capital of RMB18 million were contributed by the existing shareholders of Highly Zhiye and a new shareholder. As a result of the capital contribution from a new shareholder, the Group’s effective holding of equity interests in Highly Zhiye has been diluted from 80% at the balance sheet date to 30% immediately after the above capital contribution. At the balance sheet date, Highly Zhiye was still at pre-operating stage.

31. Comparative amounts Certain items in the consolidated financial statements for the year ended 31 December 2002 have been reclassified to conform with current year’s presentation.

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Impact of IFRS adjustments on net profit for the year and capital and reserves Net profit for the year Capital and reserves

2003 2002 2003 2002

RMB’000 RMB’000 RMB’000 RMB’000

As stated in accordance with PRC accounting regulations 42,501 16,727 1,072,964 989,188 Difference in recognition of appropriations to staff and worker’s bonus and welfare fund (7,680) (14,567) - - Difference in payroll accrual (8,316) - - 8,316 Difference in recognition and amortisation of goodwill 7,687 4,718 9,134 1,447 Difference in unrealised profit elimination 7,144 6,964 (9,680) (16,824) Difference in recognition of government grant 5,600 1,394 (56,996) (12,546) Difference in depreciation of property, plant and equipment due to foreign exchange differences 2,543 2,546 (14,387) (16,930) Unrealised exchange gain - - 45,921 45,921 Deferred tax assets recognition 467 3,809 4,276 3,809

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Pre-operating expenses (4,771) - (4,771) - Unrecognised investment losses (2,306) - (840) - Difference in recognition of interest capitalization 2,501 - 2,501 - Others (1,540) 39 (326) 1,585 As restated in conformity with IFRS 43,830 21,630 1,047,796 1,003,966

The above reconciliation is for the Group’s management reference only and is not appropriate for any other purpose.

CHAPTER XI INDEX OF DOCUMENTS FOR INSPECTION

1. The financial statements signed and sealed by the Company's legal

representative and financial director, and the head of the accounting institutions;

2. The original audit report signed and sealed by certified public accountants

and sealed by the accounting institutions; 3. Originals or original drafts of all the Company's documents and

announcements published on the newspapers designated by CSRC for information disclosure within the report period.

shanghai highly (group) co., ltd. 2003 annual report · shanghai branch ----- 2,028,000 0.53...

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