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CONTENTS 1

COMPANY BACKGROUND 2

FINANCIAL SUMMARY 4

CHAIRMANS STATEMENT 5

REPORTOFTHE DIRECTORS 10

NOTICETOAGM 20

AUDITORS REPORT 23

CONSOLIDATED PROFITANDLOSS ACCOUNTS 24

CONSOLIDATED BALANCE SHEET 25

BALANCE SHEET 27

CONSOLIDATED STATEMENTOF CASH FLOWS 28

NOTESTOFINANCIAL STATEMENTS 31

DIRECTORSANDSUPERVISORS 52

CORPORATE INFORMATION 54

CONTENTS

ANHUI CONCH CEMENT COMPANY LIMITEDANDSUBSIDIARIES


ANHUI CONCH CEMENT COMPANY LIMITED



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2

Anhui Conch Cement Company Limited (Anhui Conch or the Company) was established in 1997 and is

mainly engaged in the production and sale of high grade cement and clinker the margin for which is

higher than that for lower grade products. At present, the Group is the largest manufacturer of cement in

the PRC in terms of sales and production volumes as well as one of the major suppliers of high gradecement to Shanghai, Anhui Province, Jiangsu Province, Zhejiang Province, Fujian Province, Jiangxi

Province and other coastal provinces in southern China.

The principal products of the Company include standard Chinese grades #525 and #425 ordinary portland

cement, portland cement and portland blast furnace slag cement.

The Group is the largest supplier of grade #525 cement for Shanghai and has an average market share of

35% in the region for the past three years. The products of the Group are extensively used in a number of

large-scale construction and infrastructure projects in Shanghai.

The Group has two existing production plants, Ningguo Cement Plant and Baimashan Cement Plant,

which are respectively located in Ningguo City and Wuhu City of Anhui Province. In addition, the

Company has acquired 75% interest in Anhui Hailuo Cement Product Co. Ltd. in Ningguo City of Anhui

Province, which has a daily production capacity of 2,000 tonnes of clinkers and a 60% interest in of Ningbo

Hailuo Cement Co. Ltd., which operates a cement grinding mill with an annual production capacity of

700,000 tonnes.

The Group employs the dry process rotary kiln method in its production process to increase its overall

energy efficiency and to effectively control production costs, and through the economies of scale to

achieve a stronger competitive edge.

All cement and clinker products of the Company are sold under the Conch and Huangshan

trademarkes. The excellent quality of the Groups products is well-known in the PRC. The Group has

representative offices for marketing in Shanghai, Ningbo and Nanjing.

The shares of the Company became listed on The Stock Exchange of Hong Kong on 21 October 1997. As at

31 December 1997, the Group had 5,100 employees.

COMPANY BACKGROUND

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3

Organizational Chart:

100%

100%

75%

60%

40%

68.2%

Anhui Conch Cement Company Limited

Ningguo Cement Plant ShanghaiSales DivisionNingbo

Sales Division

NanjingSales Division

WenzhouSales Division

XiamenSales Division

TaizhouSales Division

JiujiangSales Division

NanchangSales Division

AnqingSales Division

FuzhouSales Division

SubeiSales Division

ChaoshanSales Division

Northern AnhuiSales Division

Baimashan Cement Plant

Anhui Hailuo CementProduct Co. Ltd

Ningbo HailuoCement Co. Ltd

Anhui ZhujiaqiaoCement Co. Ltd

Tongling Hailuo

Cement Co. Ltd

COMPANY BACKGROUND(continued)

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FINANCIAL SUMMARY

4

TURNOVER

0

200

400

600

800

627.9

716.1

761.8

674.5

19971996

19951994

0

50

100

150

200 181.1 169.1

170.1

139.6

19971996

19951994

RMB million

For the year ended 31 December

PROFIT AFTER MINORITY INTEREST

RMB million

For the year ended 31 December

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CHAIRMANS STATEMENT(continued)

I am pleased to present the audited annual

results of Anhui Conch Cement Company

Limited for the financial year ended 31

December 1997. The results were prepared inaccordance with International Accounting

Standards, and, on behalf of the staff, I

herewith extend our gratitude to all

shareholders.

Results and Profit Distribution

For the financial year ended 31 December

1997, the Company and its subsidiaries (the

Group) achieved a turnover of RMB761.789

million and a profit after minority interest ofRMB170.07 million which is 1.23% higher than

the forecast profit of RMB168 million stated in

the Companys prospectus dated 7 October

1997. Earnings per share were RMB0.24.

The board of directors and the supervisory committee of the Company jointly recommend a final dividend

of RMB0.02 per share, totalling RMB19.67 million, for the financial year ended 31 December 1997. Subject

to the approval of the shareholders at the annual general meeting to be held on Friday, 12 June 1998, and

the proposed final dividend will be paid on Friday, 12 June 1998 to the shareholders whose names appear

on the Register of Members of the Company on Monday, 11 May 1998.

Business review

The Company became listed in 1997 and continued to develop during 1997, despite unfavourable

business environment, the macroeconomic measures adopted by the PRC have had a continuing adverse

effect on the pace of public and private construction projects, and the Asian financial crisis have

dampened confidence and slowed investments.

During the year, the Group continued its strategy of maintaining low cost, high efficiency, high quality and

reasonable prices and, through the close co-ordination of its production, sales and delivery services, the

Group had been successful in achieving greater production and sales volumes than its competitors,

successfully implemented its business and expansion plans and set out in the Companys prospectus andestablished and fostered a strong corporate identity in the market. A Summary of various business

operations of the Group for the year is set out below.

Production of cement and clinker

As at 31 December, 1997, total cement production was 2,659,300 tonnes, a 7% increase over last years

production volume, and total clinker production was 2,631,100 tonnes, a 19% increase over last year. Both

the cement and clinker production volumes exceeded the previous records of the Group.

Mr. Guo Wansen, Chairman and General Manager of the Group

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Sale of cement and clinker

The export and domestic sales of cement

amounted to a total of 2,588,600 tonnes,

which marked an increase of 235,300 tonnes

or 10% from last years figure. The total

clinker sold was 410,000 tonnes, an increase

of 346,600 tonnes or 546% as compared

with last year.

The total of volume of 2,998,600 tonnes of

cement and clinker were sold during the

year represents a 23.9% increase over 1996.

Out of the total domestic sale volume,

2,353,300 tonnes were domestic sale, whichrepresents an increase of 331,200 tonnes or 16.4% from last years figure; and 76,300 tonnes were

domestic sale clinker, as compared with no significant domestic sale of clinker in 1996.

Exported cement amounted to 235,300 tonnes, which represented a decrease of 95,900 tonnes or 29% as

compared with last year; exported clinker amounted to 329,500 tonnes, which represented an increase of

269,800 tonnes or 550% over last years figure.

The Group expanded its domestic sales network during 1997. The

establishment of 10 sales divisions in northern Anhui, Wenzhou,

Taizhou, Nanchang, Fuzhou, Chaoshan, Anqing, Jiujiang, Xiamen

and Subei had boosted the total number of sales divisions to 13by the end of the year.

Control of costs

Electricity tariffs were raised in the PRC in 1997. Despite this, the

Group had successfully lowered the unit cost its electricity

consumption and minimised the impact of increased electricity

tariff on the Groups profit by making appropriate adjustments to

working hours to fully utilise off peak electricity and centrally

allocated electricity quotas. Moveover, through centralized

procurement of raw materials and fuels, the Group had

successfully controlled the cost of fuel by striving to obtain the

most favourable prices.

At the same time, the Group effectively reduced various costs and

expenses through measures such as an increase in production volume, the adjustment of product mix and

the trial implementation of a system of accountablility for achieving cost targets, all of which contributed

to a continual increase in the Groups profit.

Ningbuo Hailuo Cement Co., L td.

Constr uction- in -progress, the Baimashan dry

production line with annual production of 700,000

tonnes of clinker.

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Capital expenditures

The Group had implemented two technological improvement projects for its production lines during 1997.

One was the improvement of the bucket elevator technology of the raw material warehouse of Ningguo

Cement Plant. The second project was the improvement of the bulk cement despatch and delivery system

of Baimashan Cement Plant. In addition, on 7 November 1997, the Company completed its acquisition of

a 75% interest in Anhui Hailuo Cement Product Co. Ltd. (the Hailou Plant), whose clinker production

line has a daily production capacity of 2,000 tonnes, and on 20 November 1997, acquired a 60% interest in

Ningbo Hailuo Cement Co., Ltd., whose cement grinding mill has an annual production capacity of

700,000 tonnes. The Company also entered into a joint venture agreement with TCC Hong Kong Cement

(International) Limited to build a cement grinding mill with an annual production capacity of 700,000

tonnes at the Anhui Wuhu Zhujiaqiao Foreign Trade Pier of the PRC on 6 November 1997. The Company

will hold a 40% equity interest in the mill. Pursuant to the provisions of the share transfer agreement

dated 23 September 1997, the Company paid Anhui Conch Holdings Company Limited (the Holdings

Company) a 10% deposit for the acquisition of a 68.2% equity interest in Tongling Hailuo Cement Co.Ltd. (the Tongling Plant).

Construction underway includes the

construction of the Baimashan clinker

production line with an annual production

capacity of 700,000 tonnes, the construction of

which was commenced in June 1997 and

production is expected to commence in

October 1998.

All operations of the Group advancedsmoothly during 1997. The guidance of the

Directors and Supervisors and the

contributions of our staff were indispensable,

and I would also like to extend our gratitude

to all shareholders and all others for their

support and encouragement.

Outlook for the year 1998

Despite facing an unfavourable climate for its operations in 1997, the Group managed to achieve

satisfactory results. The Group has gained useful experience in its successful competition in theinternational market, and is fully confident of its future development.

Looking forward to 1998, gave the stable political environment in the PRC and the recent election of a

new cabinet, it is expected that the GDP growth rate will be maintained at a figure higher than 8% with the

inflation rate controlled at below 3%. The PRC government has also undertaken not to devaluate the

Renminbi. Faced with the impact of the financial crisis in Southeast Asia on export trading, the PRC

government will increase its investment in infrastructure construction, such as roads, water conservation

projects, railway, electricity, urban construction and environmental protection. At the same time, the

To be acquisited, the Tongling Hailuo Co. Ltd.

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proposed reform of the domestic housing

programme with spur construction of

residential properties and will benefit the

Group. These factors will directly result inthe demand for cement, especially

medium to high grade cement, being the

principal products of the Group, to

increase substantially.

One of the most significant challenges for

the PRC economy is the proposed

structural reform of its industries and

products. The cement industry is a focus

of such structural reform. The objectives

of these reforms are to increase the production quantity of high grade cement, to stop producing low

grade cement, and to close down small local cement plants which consume a large amount of energy and

heavily pollute the environment. 1998 with be a critical year for the structural reform of the cement

industry, and the Group expects to benefit from these reforms. Apart from the production and sale of high

grade cement, the Group will increase its annual production capacity to 2,000,000 tonnes of commodity

clinker (a semi finished clinker product), and supply its clinker products to cement plants which have

been instructed by the State to convert into cement grinding mills. Apart from assisting in the structual

reform of the cement industry, the sale of clinker will also have the effect of enlarging the Groups market

share.

Following the commencements of production of the cement clinker production line of Hailuo Plant (whichhas a daily production capacity of 2,000 tonnes) and the cement grinding mill of Ningbo Hailuo Cement

Co., Ltd. (which has a production capacity of 700,000 tonnes), completion of the acquisition of Tongling

Plant (which has a production capacity of 1,400,000 tonnes) as well as completion of the Baimashan

clinker production line (which has an annual production capacity of 700,000 tonnes), the production

capacity will be significantly increased by the end of 1998. The production of high value added high grade

cement will be doubled accordingly. The Group will respond to the market demand, fully utilises the

capacity of its facilities, and adjust its product mix to enhance its competitiveness.

The Group with the proactive steps to expand its market in the PRC market in 1998. Apart from focusing

on the sale of high grade bulk cement and cement products for dams and roads, the Group will continue

to develop its sales divisions and plans to set up silo terminals at at strategic rivers, coastal ports andcities (such as Xiamen, Shantou, Taizhou, Wenzhou and Nanjing) so as to increase the number of storage

and transportation points. The special task force formed by the Group has already completed data

collection, feasibility verification, research and planning in relation to the construction of silo terminals,

at Shantou, Taizhou, Wenzhou, Fuzhou and Hefei to enhance our competitive edge in the market.

The Group plans to implement two technological improvement projects during the year. The first one is to

improve the coolers of the production line of Ningguo Cement Plant, which has a daily production

capacity of 4,000 tonnes. The project, when completed will increase the daily production of the line from

4,000 tonnes to 4,500 tonnes, equivalent to an increase in annual increment of 150,000 tonnes of clinker.

The pier of Tongling Hailuo Cement Co., Ltd. wit h million-tonne handling capacity

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The other project is to change the wet process production of the Baimashan No.2 kiln into a dry process.

Upon completion of the project, the annual production capacity of the kiln will increase by 100,000

tonnes, energy consumption will be lowered and the unit cost of cement production will be further

reduced. The Group will continue to work on reducing production costs and fully implement a system ofaccountability for achieving cost targets for all principal departments of the Group so as to reduce

operational costs.

Construction of the joint venture cement grinding plant with an annual production capacity of 700,000

tonnes at Wuhu Foreign Trade Pier which the Group plans to build with TCC Hong Kong Cement

(International) Limited will commence in early 1998. It is planned that construction of the plant will be

completed and production will begin in the first half of 1999. In addition, subject to market demends and

policies of the PRC government, the Group intends to implement the second phase expansion of the

Tongling Plant. Apart from the acquisition of quality assets and expanding to the Groups production

capacities, the Group with the proactive steps to procure overseas capital and strategic investment to co-

develop the PRC cement industry.

As part of its longer term business strategy, the Group is actively formulating plans to develop down

stream cement products, production technology and a five-year environmental protection plan.

The PRC government forecast that the economy will grow at an average rate of 8% for the remaining three

years of this century. It is believed that the current policy of the state to selectively increase public

spending on basic agricultural construction, infrastructure facilities including water conservation projects,

roads and railway, environmental protection projects, high technology industries, technological reforms of

enterprises as well as residential housing programmes in for the purpose of achieving such growth rate.

Directors believe that the planned increased investment will help bring a substantial increase in thedemand for cement products, particularly the medium and high grade cement products of the Group.

Accordingly, the Directors are optimistic about the prospects and performance of the cement industry in

the current year. All members of the Company will demonstrate the enterprise spirit of being united,

creative, respectful of and dedicated to their occupation. We will work even harder so as to perform better

in respect of cost, quality, productivity and environmental protection to enhance our competitiveness and

achieve greater returns for all shareholders.

Guo Wensan

Chairman and General Manager

Wuhu City, Anhui, the PRC, 22 April 1998

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REPORTOFTHE DIRECTORS(continued)

10

The Directors of the Company are pleased

to present their report and the audited

financial statements of the Group for the

year ended 31 December 1997 to theshareholders.

1. PRINCIPAL ACTIVITIES

The Group is principally engaged in the

production and sale of grade #525 and

grade #425 ordinary portland cement,

portland cement and portland blast

furnace slag cement, the majority of

which are used in the construction

projects of high rise buildings and

infrastructures, such as hydroelectric power stations, dams, bridges, ports, airports and roads.

2. MAJOR WORK OF THE DIRECTORS IN 1997

Major work of the Directors in 1997 included incorporation of the Company on 1 September 1997 and

completion of the reorganisation between the Company and its holding company, Anhui Conch

Holdings Company Limited (Holdings Company) on that day. The listing of the Companys shares

on The Hong Kong Stock Exchange on 17 October 1997, the organization of extraordinary

shareholders meetings, the implementation of the resolutions passed by the extraordinary

shareholders meetings, the making of decisions on significant matters relating to the Companys

production and operation, as well as the review and approval of the annual production and business

plans and material construction projects of the Group.

3. RESULTS AND DIVIDENDS

The results of the Group for the year ended 31 December 1997 and the state of affairs of the Group as

at such date are set out in the accompanying financial statement on pages 24 to 51. Based on these

financial statements, which were prepared in accordance with the International Accounting

Standards, the profit after minority interest of the Group was RMB170.07 million. The Board of

Directors of the Company recommended to make allocations in respect of the shareholders equity

for the year ended 31 December 1997 as follows:

(1) pursuant to the Articles of Association of the Company, an allocation of 10% of the profit after

taxation, amounting to RMB9.527 million, was made to the statutory public reserve fund;

(2) pursuant to the Articles of Association of the Company, an allocation of 10% of the profit after

taxation, amounting to RMB9.527 million, was made to the statutory public welfare fund; and

(3) a final dividend of RMB0.02 per share shall be distributed. Subject to the approval of

shareholders at the forthcoming Annual General Meeting convented for Friday, 12 June 1998,

final dividend is expected to be distributed on Friday, 12 June 1998 to shareholders whose

names appear on the register of members on Monday, 11 May 1998.

The above recommendation on the distribution of dividends made by the Directors will be submitted

to the Annual General Meeting this year for approval.

The Board of Directors: (Front from right to left : Kang Woon, Guo Wensan, Wang

Yanmou, Li Shunan; Back from right to left : Guo Jingbin, Zhu Dejin, Yu Biao)

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4. FINANCIAL SUMMARY

1997 1996 1995 1994

(in RMB 000)

Income from principal operations 761,789 674,521 716,054 627,928

Net profit 170,070 139,571 169,113 181,146

5. DISCUSSION AND ANALYSIS REGARDING CHANGE IN PROFIT FOR THE YEAR 1997

In 1997, the PRC continued to implement moderately stringent macroeconomic policies and market

demands were weak, leading to a fall in the price of cement. During the year, the prices of cement and

clinker, the products of the Groups principal operations, fall 8% compared with 1996 and this had

adversely affected the profit of the Group.

While the product prices dropped, the prices of raw materials, fuels and auxiliary materials required

for the Groups production showed different percentages of decrease. In addition, by imposing strict

control over expenses, the Group had managed to its unit production costs. These factors have all

contributed to the growth in the Groups profits.

The Board of Directors believes that in 1998, given the impetus brought about by the governments

macroeconomic policies, the construction market will recover and the price of cement will stablise

and resume its rising trend. Together with the efforts being made by the Group to increases sales

volume by expanding productivity, the Directors expect satisfactory performance for the current year.

6. IMPACT OF CHANGES IN TAX RATE AND INTEREST RATE

Pursuant to the provisions of Anhui Provincial Department of Finance and No.432 Document of

Anhui Provincial Local Tax Bureau, the income tax payable by the Group for the year of 1997 was nil.

Interest rate was lowered from 10.08% to 8.64% during the year, which resulted in a reduction in the

interest expenses paid by the Group. Details of the changes in tax rate and interest rate applicable to

the Group for the year ended 31 December 1997 were set out in Notes 8 and 25 to the accompanying

financial statements.

7. MAJOR CUSTOMERS AND SUPPLIERS

For the financial year ended 31 December 1997, the aggregate sales attributable to the Groups five

largest customers represents 18% of the total sales of the Group while the aggregate purchases

attributable to the Groups five largest suppliers represents 44% of the total purchases of the Group.

None of the directors, the supervisors, the Holdings Company and its subsidiaries, or their respective

associates (as defined by the Listing Rules) had any interests in the five largest customers or

suppliers of the Group for the year ended 31 December 1997. All payments for the principal raw

materials and energy consumed by the Group were made in RMB.

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8. SALES AND PERCENTAGE OF SALES BY REGIONS

Four months ended 31 December 1997 Year ended 31 December 1997

Sales Sales Percentage Sales Sales Percentage

Volume (RMB in ten of Sales Volume (RMB in ten of Sales

Region (tonnes) thousand) (%) (tonnes) thousand) (%)

Shanghai 221,282.60 5,029.92 17.95% 582,682.54 14,374.56 18.74%

Jiangsu province 60,158.62 1,369.19 4.89% 130,746.79 3,286.68 4.28%

Zhejiang province 90,978.01 2,072.02 7.39% 117,052.59 2,796.32 3.65%

Fujian province 157,328.82 3,630.10 12.96% 216,785.01 5,332.87 6.95%

Jiangxi province 91,221.77 2,089.70 7.46% 159,672.48 3,976.26 5.18%

Guangdong province 23,491.61 552.35 1.97% 21,043.45 506.44 0.66%

Anhui province 414,646.66 9,788.27 34.93% 1,165,404.43 28,717.27 37.44%

Others 1,394.67 32.50 0.12% 36,203.25 664.77 0.87%

Foreign Trade 117,240.86 3,456.65 12.33% 564,748.48 17,055.33 22.23%

Total 1,177,743.62 28,020.70 100.00% 2,994,339.02 76,710.50 100.00%

SALES AND PERCENTAGE OF SALES BY PRODUCT TYPES

Four months ended 31 December 1997 Year ended 31 December 1997

Sales Sales Percentage Sales Sales Percentage

Volume (RMB in ten of Sales Volume (RMB in ten of Sales

Type (tonnes) thousand) (%) (tonnes) thousand) (%)

Ordinary portland cement

525 561,742.10 13,707.35 48.92% 1,642,119.27 41,882.62 54.60%

425 73,936.43 1,560.131 5.57% 184,866.05 4,085.149 5.33%

Portland cement

525R 87,509.10 2,518.469 8.99% 269,124.11 8,851.038 11.54%

Portland blast furnace slag cement

525 48,829.23 1,092.349 3.90% 80,258.71 1,830.83 2.39%

425 185,778.12 4,126.64 14.72% 412,235.64 9,496.602 12.38%

Clinker 219,948.64 5,015.761 17.90% 405,735.24 10,564.26 13.76%

Total 1,177,743.62 28,020.70 100.00% 2,994,339.02 76,710.50 100.00%

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Clinker 13.76%

#425 Cement 17.71%

#525 Cement 68.53%

SALES BY REGION

SALES BY PRODUCT TYPES

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9. CONNECTED TRANSACTIONS

Clay Supply Agreement

During the year ended 31 December 1997, the Group had purchased, as required in its ordinarycourse of business, all of the clay required for the production of its cement products from the

Holdings Company pursuant to the Clay Supply Agreement entered into between the Company and

the Holdings Company on 23 September 1997. The amount of charges borne by the Group have been

audited by the auditors, details of which are set out in note 27 to the financial statements.

Trademark Licensing Agreement and Import and Export Agency Contract

The Holdings Company has agreed to arrange export of cement products of the Group without charge

from 1 September 1997 to 31 December 1997, and to waive the royalty charge for the use of the

Conch and Huangshan trademarks, details of which are set out in note 27 to the financial

statements.

Composite Services Agreement

The Company and the Holdings Company have entered into

a composite services agreement for a term of 10 years

commencing from 1 September 1997, being the date of

incorporation of the Company. Under the agreement, the

Holdings Company has agreed to provide or arrange

services, facilities and supplies for the Group without

charge until 31 December 1997.

The service charges have been audited by the auditors,

details of which are set out in note 27 to the financial

statements.

Confirmation by the Independent Directors about the

Connected Transactions

During the year, all connected transactions of the Company

were conducted on normal commercial terms during its

ordinary course of business and have been reviewed by the

auditors. The connected transactions listed have all been approved by the non-executive directors of

the Company.

Shanghai Jingmao Tower used Conch Cement

for construction

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10. SHARE CAPITAL AND SHAREHOLDERS

(1) Share capital structure

The Groups H shares were listed on The Stock Exchange of Hong Kong Limited on 21 October1997 and thereafter, no other arrangement for new issue, placing and consolidation was made

during the year. As at 31 December 1997, the share capital structure of the Company was as

follows:

Percentage of the total

share capital of the

Number of shares Group (%)

A shares 622,480,000 63.3

H shares 361,000,000 36.7

Total share capital 983,480,000 100.0

Further details are set out in note 1 to the accompanying financial statements

(2) Summary of trading in the Shares of the Company during the year

H shares

HK$

Opening price on the first trading date 2.25

Closing price on the last trading date at year end 1.35

The Highest trading price during the year 2.25

The Lowest trading price during the year 0.99The total trading volume during the year (number of shares traded) 163,955,000 shares

As at 31 December 1997, the total number of shareholders of the Group numbered 535 among whom,

Anhui Conch Holdings Company Limited, on behalf of the State, held 622.48 million A shares,

representing 63.3% of the total issued share capital of the Company and HKSCC Nominees Limited

held 355.734 million H shares, representing 36.17% of the total issued share capital of the Company.

Save for the shares held by these two companies, as at 31 December 1997, the Group was not aware

of any interests held by any third party which were required to be disclosed pursuant to section 6(1)

of the Securities (Disclosure of Interests) Ordinance (Chapter 396 of the Laws of Hong Kong).

11. USE OF PROCEEDS

The proceeds from the H share offer by the Company, after deduction of listing expenses, amounted

to RMB 835,056,000 will be applied as follows:

(1) as to approximately RMB 206,758,000, for the acquisition of a 75% equity interest in Anhui

Hailuo Cement Co. Ltd. on 7 November 1997;

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(2) as to approximately RMB 43,450,000, as 10% deposit for the acquisition of a 68.2% equity

interest in Anhui Tongling Hailuo Cement Company Limited;

(3) as to approximately RMB 57,000,000, for the construction of a new production line at BaimashanCement Plant with an installed annual capacity to produce 700,000 tonnes of clinker.

(4) as to approximately RMB 7,450,000, for the establishment, with TCC Hong Kong Cement

(International) Limited, of Anhui Zhujiaqiao Cement Co., Ltd., a sino foreign-equity joint venture

for the construction and operation of a cement grinding station with an annual production

capacity of 700,000 tonnes of cement;

(5) as to approximately RMB 274,100,000, for investment in short-term PRC treasury bonds;

(6) as to approximately RMB 175,100,000, for the repayment of loans.

As 31 December 1997, a total of RMB 763,858,000 had been applied out of the net proceed of new

issue of the H shares proceeds. The application of these proceeds had been in accordance with the

plan set out in the prospectus of the Group. The balance of the net procceds as at the end of 1997

was RMB71,198,000. Such balance has been placed with banks in the PRC as short-term and long-

term deposits.

12. DIRECTORS AND SUPERVISORS SERVICE CONTRACTS, INTERESTS IN SHARE

CAPITAL AND CONTRACTS

There was no change in the directors or supervisors of the Company for the year. The qualifications of

the directors and supervisors are set out on page 52 and 53 of this annual report. Each of thedirectors and supervisors has entered into a service contract with the Group for a term of 3 years,

commencing from 1 September 1997. None of the directors, supervisors or their spouse or children

under 18 held any shares and debentures or other interests in the Group, or were granted any rights

to subscribe for shares or debentures of the Group nor exercised any such rights. During the year,

none of the directors or supervisors of the Group held any material interests in any contracts entered

into by the Group or its subsidiaries.

13. CODE OF BEST PRACTICE FOR THE DIRECTORS

As at 31 December 1997, the Group was not aware of any events which did not comply with the Code

of Best Practice set out in Appendix 14 of the Rules Governing the Listing of Securities on The StockExchange of Hong Kong Limited.

14. PURCHASE, SALE OR ALLOTMENT OF SHARES

Save for the allotment of A Shares to Anhui Conch Holdings Company Limited upon the Companys

incorporation on 1 September 1997 and the allotment of H shares pursuant to the Companys

prospectus dated 7 October 1997, neither the Group nor any of its subsidiaries had purchased, sold

or allotted any shares of the Group during the year ended 31 December 1997.

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15. REMUNERATION OF DIRECTORS AND SUPERVISORS

For the year ended 31 December 1997, the aggregate amount paid to the executive directors of the

Company was RMB172,000 and the aggregate amount paid to the supervisors was RMB75,000. The

remuneration paid to each director and supervisor was less than HK$1,000,000. Both the pension

schemes of the executive directors and supervisors have been organised under the employee pension

scheme of the Company, details of which are set out in Note 7 to the accompanying financial

statements on page 36 of this annual report. (All the remuneration of the two non-executive directors

of the Company was paid by their units.)

16. THE HIGHEST PAID INDIVIDUALS

The five highest paid individuals of the Group during the year were either directors or supervisors of

the Group. Details of their remuneration are set out in note 6 to the accompanying financial

statements.

17. RETIREMENT INSURANCE SCHEME

Details of the old-age pension are set out in note 7 to the accompanying financial statements. For

the year ended 31 December 1997, the old-age pension charged to the profit and loss account of the

Group amounted to RMB8,784,000.

18. STAFF ACCOMMODATION

The Group does not own any quarters for staff accommodation nor operate any scheme for the

provision of staff accommodation. Pursuant to applicable regulations of the PRC, the Group and its

staff are required to pay contributions to government authorities at a certain percentage of the

salaries of the staff towards a housing reserve fund. Apart from the payment of the Groups share of

such contributions, the Group has no other liability for the provision of housing or housing benefits

to its staff.

19. STAFF, REMUNERATION AND TRAINING

As at 31 December 1997, the Company had Group had a total of 5,100 employees. The aggregate

remuneration for staff for the year was RMB47,736,000. The Group organised different levels and

forms of training courses with the assistance of tertiary institutes for staff training for the longer term

benefit of the Group. The Group also arranged some of its employees to receive tuition and on-site

training abroad in preparation for the commencement of operations of the improvement project of

the Baimashan Cement Plant, which is capable of producing 700,000 tonnes of cement clinker

annually, as well as other infrastructure projects of the Group.

20. FIXED ASSETS

Details of movements in fixed assets of the Group during the year ended 31 December 1997 are set

out in note 12 to the accompanying financial statements prepared in accordance with International

Accounting Standards.

21. TOTAL ASSETS

As at 31 December 1997, the total assets of the Groupdetermined in accordance with PRC accounting

principles amounted to about RMB2,446,151,000.

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18

22. RESERVES

Details of movements in various reserves of the Group during the year ended 31 December 1997 are

set out in note 29 to the accompanying financial statements prepared in accordance with

International Accounting Standards.

23. LOANS AND CAPITALISATION OF INTEREST

Details of the loans of the Group for the year ended 31 December 1997 are set out in the note 25 to

the accompanying financial statements. The interest on construction-in-progress capitalised for the

year was RMB 1,437,000, details of which are set out in note 5 to the accompanying financial

statements.

24. MATERIAL LITIGATION

None of the Company, its subsidiaries or their respective directors, supervisors, senior officers had

been involved in any material litigation during the year ended 31 December 1997.

25. AUDITORS

The financial statements of the Group prepared in accordance with the PRC accounting principles

and those in accordance with International Accounting Standards were audited by Arthur Andersen

Hua Qiang Certified Public Accountants and Arthur Anderson & Co. respectively. The two

accountants firms will retire upon expiration of their term of appointment and have offered

themselves for re-appointment.

26. DISCLOSURE OF SIGNIFICANT EVENTS

On 1 September 1997, the Company are incorporated as a joint stock company pursuant to the PRC

Company Law. On the same day, it completed the reorganisation of its assets, liabilities and business

with its holding company, Anhui Conch Holdings Company Limited.

On 7 October 1997, the Company issued a proxy prospectus offering 361,000,000 H shares to the

public for subscription and placing at HK$2.28 per H share. The offering, which was sponsored and

managed by Jardine Fleming Securities Limited, was oversubscribed and a total of RMB835 million,

net of expenses, was raised. Listing of the H shares took place on 21 October 1997.

The currnt Articles of Association of the Company as amended pursuant to the PRC Company Law,

Special Regulations of the State Council on the Overseas Offering and Listing of Shares by JointStock Limited Companies, and Mandatory Provisions for the Articles of Association of Companies to

be Listed Overseas issued by the Securities Commission of the State Council and the State

Commission for Restructuring the Economic System of the PRC and Rules Governing the Listing of

Securities of The Stock Exchange of Hong Kong Limited were adopted by a special resolution passed

at the shareholders general meeting held on 1 September 1997 and came into effect on 10

September 1997 upon the approval by the State Commission for Restructuring the Economic System

of the PRC.

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The Company completed its acquisition of a 75%

equity interests in Hailuo Plant from the Holdings

Company on 7 November 1997 pursuant to an

agreement entered into on 23 September 1997between the Holdings Company and the Company.

The aggregate considertion for the acquisition paid

by the Company was RMB 206,800,000. Details of

this acquisition are set out in the prospectus of the

Company. As a result of the acquisition, the

Groups annual production capacity of clinker was

increased by about 600,000 tonnes (or 27%) to

2,800,000 tonnes.

The Company entered into a joint venture contract with TCC Hong Kong Cement (International)

Limited (a listed company on The Stock Exchange of Hong Kong Limited), on 6 November 1997 to

establish a sino foreign joint venture enterprise, Anhui Zhujiaqiao Cement Co., Ltd., for the

construction and operation of a cement grinding mill with an annual production capacity of 700,000

tonnes. The joint venture enterprise is located at Zhujiaqiao Pier in Wuhu, Anhui Province with a

convenient waterway through Changjiang to transport products to customers. The Company will

invest US$6,000,000 (approximately HK$46,800,000) in the joint venture, and will hold 40% of its

registered capital. As at 31 December 1997, the Company had paid US$900,000 towards the registered

capital of that enterprise.

The Company entered into an equity transfer agreement on 20 November 1997 and acquired a 60%

equity interest in Ningbo Hailuo Cement Co. Ltd. at a consideration of approximately RMB

99,825,000. Ningbo Hailuo Cement Co., Ltd. operates a powder grinding mill with an annual grinding

capacity of 700,000 tonnes of clinker in Ningbo, Zhejiang, the PRC. It also owns a pier that handles

1,200,000 tonnes of cement products per annum. The shareholding structure of that company before

and after the acquisition are as follows:

Before acquisition After acquisition

The Group 60%

Ningbo Economic Construction Investment Company 39.5% 15%

SDIC Building Materials & Chemical Industry Company 33.0% 15%

Ningbo Building Materials Industry Company 17.5% 10%

Ningbo Beilun Economic Construction

Development Company 5.0% Zhejiang Province Beilun Power Station Engineering

Construction Company 5.0%

100% 100%

By order of the Board

Guo Wansen

Chairman and General Manager

Wuhu City, Anhui, the PRC, 22 April 1998

The mil lion-tonne capacity pier of Beilun Company, N ingbo

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NOTICETO AGM(continued)

20

NOTICE IS HEREBY GIVEN that the Annual General Meeting of Anhui Conch Cement Company Limited

(the Company) in respect of the financial year ended 1997 will be held at the registered office of the

Company at 9:00 a.m. on Friday, 12 June 1998 for the following purposes:

1. to consider and approve the work report of the Board of Directors for the year 1997;

2. to consider and approve the work report of the Supervisory Committee for the year 1997;

3. to consider and approve the PRC and IAS audited financial statements for the year 1997;

4. to consider and approve the proposal for the distribution of profits for the year 1997;

5. to consider and approve the grant of a general manadate to the Board of Directors to declare the

payment and fix the amount of the interim dividends for the financial year ending 31 December 1998;

6. to consider and approve the appointment of the PRC and international auditors of the Company and

to authorise the Board of Directors to fix their remuneration;

7. to consider and approve the following resolution as a special resolution:

(a) That, subject to the limitations imposed by (c) and (d) below and in accordance with the Rules

Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and the

Company Law of the PRC (in each case as amended from time to time), a general unconditional

mandate be and it is hereby granted to the Board of Directors to exercise once or more than

once during the Relevant Period (as defined below) all the powers of the Company to allot andissue new shares on such terms and conditions the Board of Directors may determine and that,

in the exercise of their power to allot and issue shares, the authority of the Board of Directors

shall include (without limitation):

(i) the determination of the class and number of the shares to be issued;

(ii) the determination of the issue price of the new shares;

(iii) the determination of the launching and closing dates of the new issue;

(iv) the determination of the class and number of new shares (if any) to be issued to theexisting shareholders;

(v) the making and granting of offers, agreements and options as may be necessary in the

exercise of such powers; and

(vi) in the case of an offer or allotment of shares to the shareholders of the Company, excluding

shareholders who are resident outside the Peoples Republic of China or the Hong Kong

Special Administrative Region on account of prohibitions or requirements under overseas

laws or regulations or for some other reasons which the Board of Directors consider

expedient;

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21

(b) the approval in paragraph (a) shall authorise the Directors during the Relevant Period to make

and grant offers, agreement and options which might require the shares relating to the exercise

of the authority thereunder being allotted and issued after the expiry of the Relevant Period;

(c) the aggregate amount of domestic shares and overseas foreign listed share to be allotted or

conditionally or unconditionally agreed to be allotted (whether pursuant to the exercise of

options or otherwise) by the Board of Directors of the Company pursuant to the authority

granted under paragraph (a) above (excluding any shares allotted due to the conversion of the

capital reserve fund into capital in accordance with the Company Law of the PRC or the Articles

of Association of the Company) shall not exceed 20% of the respective aggregate amount of the

issued domestic shares and overseas foreign listed shares of the Company at the date of this

Resolution;

(d) the Board of Directors of the Company shall exercise the authority granted under in paragraph

(a) above (i) in accordance with the Company Law of the PRC and the Rules Governing the

Listing of Securities on The Stock Exchange of Hong Kong Limited (in each case as amended

from time to time) and (ii) subject to the approval of the China Securities Regulatory

Commission and relevant authorities of the PRC;

(e) for the purposes of this Resolution:

Relevant Period means the period from the date of the passing of this Resolution until

whichever is the earlier of:

(i) the conclusion of the next annual general meeting of the Company; and

(ii) the date on which the powers granted by this Resolution is revoked or varied by a special

resolution of the shareholders in general meeting;

(f) subject to the approval granted to the Board of Directors by relevant authorities and in

accordance with the Company Law of the PRC, to increase the Companys registered share

capital corresponding to the relevant amount of shares allotted in the event of an exercise of the

authority pursuant to paragraph (a) of this Resolution, provided that the registered share capital

of the Company shall not exceed RMB1,180.176 million.

(g) subject to the Listing Committee of The Stock Exchange of Hong Kong Limited granting listingof, and premission to deal in, the H shares of the Companys share capital proposed to be issued

by the Company and the approval of the China Securities Regulatory Commission for the issue

of such shares being granted, the Board of Directors be and they are hereby authorised to

amend, as they may deem appropriate and necessary, Articles 23, 24 and 27 of the Articles of

Association of the Company to reflect the change in the share capital structure of the Company

in the event of an exercise of the authority granted under paragraph (a) to allot and issue new

shares.;

8. any other matters

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22

Notes:

1. Persons entitled to attend

Holders of H shares whose names appear on the register of members of the Company maintained by HKSCC Registrars

Limited at 4:00 pm on Monday, 11 May 1998 are entitled to attend the Annual General Meeting after completing the

registration procedures for the meeting.

2. Registration for attendance at the Annual General Meeting

(1) H share holders who intend to attend the Annual General Meeting must complete the reply slip below and deposit the

same, together with photocopies of the transfers, share certificates or receipts of share transfer and their identity cards,

at the legal address of the Company by Saturday, 23 May 1998 (without prejudice to their right of attendance). If proxies

are appointed, shareholders shall also deposit the instrument for the appointment of the proxy and a photocopy of the

proxys identity card with the Company.

(2) Shareholders may deliver the documents required for registration to the registered office of the Company in person, bymail or by facsimile (+86 553 384 4550). Upon receipt of the requisite documents, the Company will complete the

registration procedures for attendance at the Annual General Meeting on behalf of the shareholder and send a duplicate

copy of the meeting attendance card to the shareholder by mail or facsimile. Shareholders attending the meeting must

produce the duplicate copy or facsimile copy of the meeting attendance cards and exchange them for formal meeting

attendance cards.

3. Appointment of proxies

(1) Every shareholder entitled to attend and vote at the Annual General Meeting is entitled to appoint in writing one or

more proxies (whether being a shareholder of the Company or not) to attend and vote at the meeting on his behalf.

(2) Proxies of the shareholders must be appointed in writing and the appointment must be signed by the shareholders or

their agents who have been duly authorised in writing. If the instrument of appointment is signed by an agent of the

shareholder, the power of attorney or other authority of the agent must be notarially certified. In order to be valid, the

notarially certified copy of such power of attorney or other authority, together with the instrument for the appointment of

the proxy, shall be deposited at the Companys registrar for H shares, HKSCC Registrars Limited at the address given in

Note 5 below, not less than 24 hours before the time appointed for holding of the Annual General Meeting.

(3) If a shareholder appoints more than one proxy, his proxies may only exercise his appointors voting rights if the

resolution concerned is to be decided by poll.

4. The Annual General Meeting is expected to take half a day. Shareholders or their proxies attending the meeting will bear their

own lodging and travelling costs.

5. The register of members of the Company will close from 4:00 p.m. on Monday, 11 May 1998 to Friday, 12 June 1998, both days

inclusive. In order to qualify for attendance at the Annual General Meeting and the proposed dividend of RMB0.02 per H share,

transfers accompanied by share certificates and other appropriate documents must be lodged with the Companys share

register and transfer office for H shares, HKSCC Registrars Limited at 2nd Floor, Vicwood Plaza, 199 Des Voeux Road Central,

Hong Kong, by 4:00 p.m. on Monday, 11 May, 1998.

By order of the Board

Guo Wensan

Chairman & General Manager

Wuhu City, Anhui, the PRC, 22 April, 1998

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23

AUDITORS REPORT

! "Arthur Andersen & Co

Certified Public Accountants

25/F., Wing On Centre

111 Connaught Road Central

Hong Kong

Auditors Report to the Shareholders of

ANHUI CONCH CEMENT COMPANY LIMITED

(incorporated in the Peoples Republic of China with limited liability)

We have audited the financial statements of Anhui Conch Cement Company Limited ( the Company)

and its subsidiaries ( hereinafter together with the Company referred to as the Group) on pages 24 to 51

which have been prepared in accordance with International Accounting Standards.

Respective responsibilities of directors and auditors

The Companys directors are responsible for the preparation of financial statements which give a true and

fair view. In preparing financial statements which give a true and fair view it is fundamental that

appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to

report our opinion to you.

Basis of opinion

We conducted our audit in accordance with International Standards on Auditing. An audit includesexamination, on a test basis, of evidence relevant to the amounts and disclosures in the financial

statements. It also includes an assessment of the significant estimates and judgements made by the

directors in the preparation of the financial statements, and of whether the accounting policies are

appropriate to the circumstances of the Company and of the Group, consistently applied and adequately

disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we

considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to

whether the financial statements are free from material misstatement. In forming our opinion we also

evaluated the overall adequacy of the presentation of information in the financial statements. We believe

that our audit provides a reasonable basis for our opinion.

OpinionIn our opinion the financial statements give a true and fair view of the state of affairs of the Company and

of the Group as at 31 December 1997, and of the profit and cash flows of the Group for the period from 1

September 1997 (date of incorporation) to 31 December 1997 and have been properly prepared in

accordance with International Accounting Standards and the disclosure requirements of the Hong Kong

Companies Ordinance.

ARTHUR ANDERSEN & CO.

Hong Kong, 22 April 1998

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24

From 1 September 1997 Pro forma

Notes to 31 December 1997 1997 1996

(Note 1) (Note 1)

Turnover, net 3 279,010 761,789 674,521

Profit before exceptional item 52,493 171,344 139,571

Exceptional item 4 83 83

Profit before taxation 5 52,576 171,427 139,571

Provision for income tax 8

Profit after taxation 9 52,576 171,427 139,571

Minority interest (1,357) (1,357)

Profit after minority interest 51,219 170,070 139,571

Transfer to reserves 29 (19,054)

Dividends 10,29 (19,670)

Unappropriated profit

for the period 29 12,495

Earnings per share 11 RMB 0.06 RMB 0.24 RMB 0.22

FOR THE PERIOD FROM 1 SEPTEMBER 1997 (DATE OF INCORPORATION) TO 31 DECEMBER 1997

(Amounts expressed in thousands of Renminbi (RMB) except for earnings per share)

CONSOLIDATED PROFITAND LOSS ACCOUNTSANHUI CONCH CEMENT COMPANY LIMITED AND SUBSIDIARIES

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25

Notes

FIXED ASSETS, net 12 1,269,694

CONSTRUCTION-IN-PROGRESS 13 93,741

INTANGIBLE ASSETS 14 40,701

DEFERRED ASSETS 15 21,283

INVESTMENTS IN ASSOCIATED

COMPANIES 17 48,452

CURRENT ASSETS:

Inventories 18 123,066

Prepayments and other receivables 19 49,546

Due from Holdings 20,27 6,110

Due from related companies 21,27 76,937

Trade receivables, net 22 289,908

Short-term investment 23 274,100

Cash and cash equivalents 24 134,037

953,704

CURRENT LIABILITIES:

Current portion of long-term loans 25 (b) 45,419Other payables and accruals 26 147,248

Dividends payable 10 19,670

Taxes payable 8 11,914

Due to related companies 21,27 31,261

Trade payables 60,883

Short-term bank loans 25 (a) 119,550

435,945

NET CURRENT ASSETS 517,759

TOTAL ASSETS LESS

CURRENT LIABILITIES 1,991,630

AS OF 31 DECEMBER 1997

(Amounts expressed in thousands of Renminbi)

CONSOLIDATED BALANCE SHEETANHUI CONCH CEMENT COMPANY LIMITED AND SUBSIDIARIES

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26



Notes

NON-CURRENT LIABILITIES

Long-term loans, net of current portion 25 (b) 116,549Minority interest 70,276

186,825

NET ASSETS 1,804,805

REPRESENTING:

SHARE CAPITAL 28 983,480

RESERVES 29 821,325

SHAREHOLDERS EQUITY 1,804,805

Approved by the Board of Directors on 22 April 1998:

GUO WENSAN

Chairman & General Manager

GUO JINBIN

Executive Director & Deputy General Manager

CONSOLIDATED BALANCE SHEET(continued)ANHUI CONCH CEMENT COMPANY LIMITED AND SUBSIDIARIES

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27



Notes

FIXED ASSETS, net 50

INVESTMENTS IN SUBSIDIARIES 16 1,258,799

INVESTMENTS IN

ASSOCIATED COMPANIES 17 48,452

CURRENT ASSETS:

Prepayments and other receivables 19 22,196

Due from Holdings 20,27 50,733

Due from related companies 21,27 5,548

Trade receivables, net 22 117,162

Short-term investment 23 274,100

Cash and cash equivalents 24 78,079

547,818

CURRENT LIABILITIES:

Other payables and accruals 7,249

Dividends payable 10 19,670

Taxes payable 8 375

Due to related companies 21,27 23,020

50,314

NET CURRENT ASSETS 497,504

NET ASSETS 1,804,805

REPRESENTING:

SHARE CAPITAL 28 983,480

RESERVES 29 821,325

SHAREHOLDERS EQUITY 1,804,805

BALANCE SHEETANHUI CONCH CEMENT COMPANY LIMITED

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Cash flows from operating activities

Profit before taxation 52,576

Adjustments for:

Investment income (3,824)

Interest income (6,488)

Interest expenses 10,516

Depreciation of fixed assets 27,761

Net loss on disposals of fixed assets 40

Amortisation of intangible assets 273

Amortisation of deferred assets 634

Provision for inventory obsolescence 112

Provision for bad and doubtful debts 2,375

(Increase) Decrease in operating assets

Inventories (10,025)

Prepayments and other receivables (12,544)

Due from Holdings (4,747)

Due from related companies 19,837

Trade receivables (115,621)

Increase (Decrease) in operating liabilities

Other payables and accruals 78,717

Taxes payable (8,849)

Due to related companies 19,204

Trade payables 3,059

Cash generated from operations 53,006

Returns on investments and

servicing of finance

Investment income received 349

Interest received 4,881

Interest paid (8,862)

Cash outflow from returns on

investment and servicing of finance (3,632)

CONSOLIDATED STATEMENTOF CASH FLOWSANHUI CONCH CEMENT COMPANY LIMITED AND SUBSIDIARIES

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Taxation

Income tax paid (20,573)

Income tax rebated 20,573

Net cash outflow from taxation

Cash flows from investing activities

Increase in short-term investment (274,100)

Increase in investments in

associated companies (48,452)

Purchase of fixed assets and

construction-in-progress (a) (482,425)

Payments for deferred assets (1,359)

Net cash outflow from investing

activities (806,336)

Cash flow from financing activities (b)

Additions of long-term loans 50,000

Repayments of long-term loans (20,000)

Additions of short-term bank loans,

net of repayments (80,750)

Net proceeds from issuance of

H shares 835,056

Proceeds from minority interest 68,919

Exchange gain on long-term loans (667)

Net cash inflow from financing

activities 852,558

Increase in cash and cash equivalents 95,596

Cash and cash equivalents,

beginning of period 38,441

Cash and cash equivalents,

end of period 134,037

CONSOLIDATED STATEMENTOF CASH FLOWS(continued)ANHUI CONCH CEMENT COMPANY LIMITED AND SUBSIDIARIES

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30



NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS

(a) Supplemental cash flow information

Increase in fixed assets and construction-in-progress 939,988

Less: Transfer from construction-in-progress (457,563)

482,425

(b) Analysis of changes in financing activities during the period from 1 September 1997 to 31 December

1997

Proceeds

fromShort-term Long-term H Share

bank loans loans issuance Total

Balance as at

1 September 1997 200,300 132,635 332,935

Proceeds from issuance

of H shares 880,943 880,943

Issuance costs for

H share offering (45,887) (45,887)

Additions of loans 74,350 50,000 124,350

Repayments of loans (155,100) (20,000) (175,100)

Translation adjustments (667) (667)

Balance as at

31 December 1997 119,550 161,968 835,056 1,116,574

The accompanying notes form an integral part of these financial statements.

CONSOLIDATED STATEMENTOF CASH FLOWS(continued)ANHUI CONCH CEMENT COMPANY LIMITED AND SUBSIDIARIES

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(Amounts expressed in thousands of Renminbi (RMB) unless otherwise stated)

NOTESTO FINANCIAL STATEMENTS(continued)ANHUI CONCH CEMENT COMPANY LIMITED AND SUBSIDIARIES

31

1. ORGANISATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

Anhui Conch Cement Company Limited (the Company) was incorporated in the Peoples Republic

of China (PRC) on 1 September 1997 as a joint stock limited company. The Company and its

subsidiaries are collectively referred to as the Group. The principal activities of the Group are themanufacture and sale of cement products.

Pursuant to a reorganisation on 1 September 1997, the Company acquired the assets and assumed

the liabilities of Ningguo Cement Plant and Baimashan Cement Plant, and the related cement

manufacturing business of Anhui Conch Holdings Company Limited (Holdings) by issuance of

622,480,000 State-owned shares (A shares) of the Company with a par value of RMB 1.00 each. The

Company subsequently issued 361,000,000 overseas public shares (H shares) on 17 October 1997,

which were listed on The Stock Exchange of Hong Kong Limited on 21 October 1997.

In accordance with the Reorganisation Agreement between the Company and Holdings, the

reorganisation was completed on 1 September 1997, the date of incorporation of the Company.

Accordingly, the results of operations of the cement business are included only for the period from 1September 1997 to 31 December 1997.

For comparison purposes, pro forma profit and loss accounts for the years ended 31 December 1997

and 1996 have been prepared as if the current structure had been in existence throughout the years

ended 31 December 1997 and 1996.

2. PRINCIPAL ACCOUNTING POLICIES

The financial statements have been prepared in accordance with International Accounting Standards

(IAS), and the disclosure requirements of the Hong Kong Companies Ordinance and the Rules

Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. This basis of

accounting differs from that used in the preparation of the Companys and of the Groups statutoryaccounts which are prepared in accordance with accounting principles and financial regulations

applicable to joint stock limited companies in the PRC (Statutory Accounts). The adjustments made

to conform the Statutory Accounts of the Group to IAS are shown in Note 30.

The principal accounting policies adopted in preparing financial statements of the Company and of

the Group which conform to IAS are summarised below:

(a) Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries.

Significant intra-group transactions and balances have been eliminated on consolidation.

A subsidiary is a company in which the Company (i) holds, directly and indirectly, more than 50

per cent of its issued voting share capital or equity interest as a long-term investment, or (ii) has

the power to cast the majority of votes at meetings of the management committee or the board

of directors.

(b) Associated companies

An associated company is a company, not being a subsidiary, in which the Company holds 20

per cent or more of its issued voting share capital or equity interest as a long-term investment

and is in a position to exercise significant influence over its management and its financial and

operating policy decisions. The results of associated companies are accounted for using the

equity method of accounting.

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32

2. PRINCIPAL ACCOUNTING POLICIES (continued)

(c) Fixed assets and depreciation

Fixed assets are stated at cost less accumulated depreciation. Major expenditures on

modifications and betterments of fixed assets which will result in future economic benefits are

capitalised; while expenditures on maintenance and repairs are expensed when occurred.

Depreciation of fixed assets is provided using the straight-line method over the estimated useful

lives of the fixed assets, after taken into consideration an estimated residual value of five per

cent. of the cost (no residual value is considered for land use right). The estimated useful lives

are as follows:

Land use right 50 years

Buildings 30 years

Plant and machinery 15 years

Furniture, fixtures and office equipment 5 years

Transportation equipment 5 years

Gain or loss on disposals of fixed assets is recognised in the profit and loss account based on

the net disposal proceeds less the carrying amount of the assets.

(d) Construction-in-progress

Construction-in-progress represents buildings and plant facilities under construction and

machinery and equipment under installation, and is stated at cost. This includes the

construction costs of plant facilities, the purchase and installation costs of machinery and

equipment and interest charges arising from borrowings used to finance these assets during the

period of construction and installation.

(e) Deferred assets

Deferred assets are stated at cost less accumulated amortisation. Amortisation of deferred

assets is provided using the straight-line method over five to ten years.

(f) Intangible assets

Intangible assets are stated at cost less accumulated amortisation. Amortisation of intangible

assets is provided using the straight-line method over twenty years.

(g) Inventories

Inventories are stated at the lower of cost and net realisable value. Costs of raw materials are

based on invoice price calculated using the weighted average costing method. Costs of work-in-

process and finished goods include direct materials, direct labour and an attributable proportion

of production overheads. Net realisable value is the price at which inventories can be sold in thenormal course of business after deducting all further costs of production, marketing, selling and

distribution. Provision is made for obsolete, slow-moving or defective items where appropriate.

(h) Foreign currency translation

The Company maintains its books and accounting records in Renminbi (RMB). Foreign

currency transactions are translated into RMB at the exchange rates quoted by the Peoples Bank

of China at the dates of the transactions. Monetary assets and liabilities denominated in foreign

currency are translated into RMB using the exchange rates prevailing at the balance sheet date.

The resulting differences are included in the determination of net profit.

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2. PRINCIPAL ACCOUNTING POLICIES (continued)

(i) Turnover

Turnover is recognised upon transfer of title which normally occurs upon delivery of goods tocustomers. Turnover represents revenues from the sale of manufactured finished goods, net of

sales discounts and returns, as well as miscellaneous income from delivery services.

(j) Repair and maintenance expenses

Repair and maintenance expenses are provided over the annual maintenance cycle for major

machinery and equipment.

(k) Research and development expenditures

Research and development expenditures are charged to expense as incurred.

(l) Taxation

The Group provides for taxation on the basis of its profit for financial reporting purposes,

adjusted for income and expense items which are not assessable or deductible for income tax

purposes.

Deferred taxation is provided under the liability method and relates to the tax effects of material

timing differences between profit as computed for taxation purposes and profit as stated in the

accompanying financial statements. Deferred tax assets are not recognised unless the related

benefits are expected to crystallise in the foreseeable future.

3. TURNOVER, netTurnover comprised:


to 31 December 1997 1997 1996

Gross sales less discounts

and returns 280,207 767,105 679,716

Less: Turnover taxes (1,197) (5,316) (5,195)

279,010 761,789 674,521

The Company is subject to Value-Added Tax (VAT), which is charged on the selling price at a general

rate of 17 per cent. An input credit is available whereby input VAT previously paid on purchases can

be used to offset the output VAT on sales to determine the net VAT payable. VAT is not included in

gross sales.

The Company is also subject to the following turnover taxes, which are recorded as deductions from

gross sales:

City Development Tax, levied at five to seven per cent. of net VAT payable.

Education Supplementary Tax, levied at three per cent. of net VAT payable.

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4. EXCEPTIONAL ITEM

Exceptional item represents bank interest income arising from the subscription money obtained

during the initial public offering of the Companys H shares in 1997.

5. PROFIT BEFORE TAXATION

Profit before taxation in the consolidated profit and loss account was determined after charging or

crediting the following items:


to 31 December 1997 1997 1996

After charging:

Interest expenses

on bank loans repayable withinfive years 9,559 24,659 14,918

on other loans repayable within

five years 957 3,361 4,996

10,516 28,020 19,914

Less: Amounts capitalised in

construction-in-progress

and fixed assets (1,437) (354)

Net interest expenses 10,516 26,583 19,560

Depreciation of fixed assets 27,761 50,690 30,138

Amortisation of deferred assets 634 701 150Amortisation of intangible assets 273 273

Provision for bad and doubtful debts 2,375 6,136 2,233

Provision for inventory obsolescence 112 112

Pensions (Note 7) 2,829 8,784 12,463

Provision for staff welfare and bonus 5,034 9,408 7,938

Repair and maintenance expenses 16,374 43,066 50,731

Research and development expenditures 51

Auditors remuneration 1,389 1,418 102

After crediting:

Interest income Bank deposits 4,881 5,899 2,176

Others (Note 27 (a)) 1,607 3,388

Investment income (Note 23) 3,824 3,824

Foreign exchange gain 90 402 1,134

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6. DIRECTORS, SUPERVISORS AND SENIOR EXECUTIVES EMOLUMENTS

(a) Details of directors and supervisors emoluments were:

From 1 September 1997 Pro formato 31 December 1997 1997 1996

Fees for executive directors

Fees for non-executive directors

Fees for supervisors

Other emoluments for executive directors

Basic salaries and allowances 47 140 129

Bonus * 9 27 25

Pension 2 5

Other emoluments for non-executive

directors

Other emoluments for supervisors 25 75 69

83 247 223

* Bonus is discretionary in nature

(b) Details of emoluments paid to the five highest paid individuals (including directors,

supervisors and employees) were:


to 31 December 1997 1997 1996

Basic salaries and allowances 47 140 148

Bonus * 9 27 8

Pension 2 5

58 172 156

Number of directors 5 5 4

Number of supervisors 1

5 5 5

* Bonus is discretionary in nature

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6. DIRECTORS, SUPERVISORS AND SENIOR EXECUTIVES EMOLUMENTS (continued)

All of the five highest paid individuals were directors, supervisors or senior executives of the

Company, and whose emoluments are included in Note 6 (a). The emoluments paid to each of

the five highest paid individuals (including directors, supervisors and employees) during theperiod from 1 September 1997 to 31 December 1997 were less than RMB 1,070,000 ( equivalent

of HK$ 1,000,000).

During the period, no emoluments were paid to the five highest paid individuals (including

directors, supervisors and employees) as an inducement to join the Group or as compensation

for loss of office.

7. PENSION SCHEME

All full-time employees in the Group are covered by a pension scheme. Pursuant to a notice dated 23

July, 1997 issued by Anhui Labour Bureau, the Group is required to make annual contributions toHoldings at a rate of 20 to 23 per cent. of the salary and certain amounts of bonuses of the staff for

pension benefits, and Holdings is responsible for the ultimate pension liability to the staff.

8. TAXATION

(a) Enterprise Income Tax


to 31 December 1997 1997 1996

Taxation

Current 20,573 60,465

Rebate (20,573) (60,465)

The Group is ordinarily subject to Enterprise Income Tax (EIT) levied at a rate of 33 per cent of

taxable income based on its audited accounts prepared in accordance with the laws and

regulations in the PRC. Pursuant to a notice (Cai Yu Zi [1997] No. 432) dated 20 June 1997 issued

by Anhui Finance Bureau, the Group was entitled to a full rebate of EIT for the year ended 31

December 1997. Thereafter, the Group will be entitled to a rebate of taxes from Anhui Finance

Bureau equal to 18 per cent. of the Groups taxable income in respect of EIT paid to Anhui Local

Taxation Bureau. No expiration date is stated in the notice. Accordingly, the Groups effective EIT

rate after 1 January 1998 will be 15 per cent. However, there is no assurance that the Group will

always be able to enjoy such preferential tax treatment.

Pursuant to another notice (Wan Di Shui Zi [1997] No. 291) dated 20 June 1997 issued by Anhui

Local Taxation Bureau and Anhui Finance Bureau and another notice (Shi Fu [1997] No. 99)

dated 26 June, 1997 issued by Wuhu City Government, the EIT for Ningguo Cement Plant and

Baimashan Cement Plant in 1996 was nil.

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8. TAXATION (continued)

There were no Hong Kong profits tax liabilities as the Group did not earn any income subject to

Hong Kong profits tax.

As at 31 December 1997, there were no material unprovided deferred tax liabilities.

(b) Value-Added Tax

The Group is subject to Value-Added Tax (VAT) on its sales and purchases, which is levied at 17

per cent on the gross turnover upon sale or purchase of merchandise. Input VAT paid on

purchases of raw materials, semi-finished products, and other direct inputs can be used to offset

the output VAT on sales.

Following the implementation of VAT, Ministry of Finance (MOF) and the State Administration

of Taxation (SAT) of the PRC directed enterprises to segregate from the inventory balance as at

1 January 1994, a deemed input VAT calculated at 14 per cent of the inventory balance as at 1January 1994. MOF and SAT also stipulated that this deemed input VAT, which was recorded as a

deferred asset as at 1 January 1994, could be offset against future output VAT under specific

circumstances. In April 1995, MOF and the SAT issued another directive to allow enterprises to

offset the unutilised balance of the deemed input VAT as of 1 January 1995 against their output

VAT over a period of five years.

During the period 1 September 1997 to 31 December 1997, the Group utilised approximately

RMB 1,375,000 of the deemed input VAT to offset output VAT.

9. PROFIT AFTER TAXATIONThe consolidated profit after taxation included a profit of approximately RMB 7,207,000 dealt with in

the financial statements of the Company before accounting for the results of subsidiaries and

associated companies using the equity method of accounting.

10. DIVIDENDS

In accordance with its articles of association, the Company declares dividends based on the lesser of

the consolidated unappropriated profit reported in the statutory accounts and that reported in the

consolidated financial statements prepared in accordance with IAS. As of 31 December 1997, profit

available for distribution to shareholders after transfers to reserves and the final dividend amounted

to RMB 11,607,000.

On 22 April 1998, the Board of Directors proposed a dividend of RMB 0.02 (HK$ 0.019) per share,

totalling RMB 19,670,000 for the period from 1 September 1997 to 31 December 1997. The proposed

dividend is subject to ratification by the shareholders, and has been recorded in the accompanying

financial statements.

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11. EARNINGS PER SHARE

The calculation of earnings per share was based on the profit after minority interest of

RMB51,219,000 divided by the weighted average number of 847,365,000 shares in issue during the

period from 1 September 1997 to 31 December 1997.

For comparative purposes, pro forma earnings per share for the full year of 1997 were calculated

based on the pro forma full year profit after minority interest of RMB170,070,000 and on the weighted

average number of 697,647,000 shares as if the A shares had been in issue during the full year of

1997. Pro forma earnings per share for the 1996 fiscal year were calculated based on the pro forma

profit after minority interest of RMB 139,571,000 and on 622,480,000 A shares as if they had been in

issue during the year of 1996.

12. FIXED ASSETS

GROUP

Movements in fixed assets were as follows:

Furniture,

fixture and Trans-

Land use Plant and office portation

rights buildings Machinery equipment equipment Total

Cost:

Balance as at

31 September 1997 189,778 471,586 779,457 69,534 28,020 1,538,375

Additions (including

transfers from

construction-in-progress) 11,221 129,379 298,940 35,691 4,310 479,541

Disposals (181) (181)

Balance as at

31 December 1997 200,999 600,965 1,078,397 105,044 32,330 2,017,735

Accumulated depreciation:

Balance as at

1 September 1997 155,403 496,041 54,831 14,146 720,421

Charge for the period 1,301 5,198 15,677 3,808 1,777 27,761

Write-back on disposals (141) (141)

Balance as at

31 December, 1997 1,301 160,601 511,718 58,498 15,923 748,041

Net book value:

Balance as at

31 December 1997 199,698 440,364 566,679 46,546 16,407 1,269,694

Balance as at

1 September 1997 189,778 316,183 283,416 14,703 13,874 817,954

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12. FIXED ASSETS (continued)

(a) Upon establishment of the Company, the fixed assets, land use rights and limestone mining

licence of Holdings were injected into the Company at an amount based on a valuation

performed jointly by Chesterton Petty Limited (the Valuer), a qualified valuer in Hong Kong,and China Consultants of Accounting and Financial Management. Inc. E!"#$%&'F,

an independent professional valuation firm in the PRC. The valuation was based on a

combination of open market value and replacement cost. The revalued amount was approved by

the State Assets Administration Bureau in the PRC. Fixed assets and land use rights which were

carried at a net book value of RMB285,551,000 as of 30 April 1997 were revalued at

RMB825,230,000, resulting in a surplus of approximately RMB539,679,000 which has been

recorded in the accompanying consolidated financial statements of the Group for the period

ended 31 December 1997.

(b) Provision of depreciation (excluding amortisation of land use right) for the period from 1

September 1997 to 31 December 1997 included additional depreciation of approximately RMB12,010,000 relating to the surplus arising from the revaluation of fixed assets. This additional

depreciation is not deductible for PRC EIT tax purposes. However, because the Group was not

subject to EIT in 1997, there was no effect on profit after taxation for the period.

(c) The land use rights are for a period of 50 years from the establishment of the Company in

September 1997 to September 2047.

13. CONSTRUCTION-IN-PROGRESS

GROUP

31 December 1997

Balance as at 1 September 1997 90,857

Additions 460,447

Transfer to fixed assets (457,563)

Balance as at 31 December 1997 93,741

Representing:

Cost of construction 93,524

Interest on borrowings capitalised 217

93,741

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14. INTANGIBLE ASSETS

GROUP

Limestone mining licences were revalued at RMB 40,974,000 ( See Note 12 (a) ) upon establishmentof the Company and will be amortised over a period of 20 years.

15. DEFERRED ASSETS

GROUP

31 December 1997

Deemed input VAT (see Note 8 (b)) 5,791

Utility expansion fee 10,440

Others 5,052

21,283

16. INVESTMENTS IN SUBSIDIARIES

COMPANY

31 December 1997

Unlisted investments, at cost 1,145,000

Share of post-acquisition profit 44,012

Amount due from subsidiaries 69,787

1,258,799

Detail of the Companys subsidiaries, which are consolidated in the Groups financial statements, as

at 31 December 1997 were as follows:

Country of

Name of Subsidiaries establishment and Groups Registered

date of establishment equity interest capital Principal activities

Ningguo Cement Plant PRC 100% RMB Manufacture and

!"#$%&'( 21 January 1985 (directly held) 422,260,000 sale of clinker and

cement products

Baimashan Cement Plant PRC 100% RMB Manufacture and

!"#$%&'() 22 April 1994 (directly held) 200,220,000 sale of clinker and

cement products

Anhui Hailuo Cement PRC 75% US$ Manufacture and

Product Co, Ltd (Hailuo) 23 June 1994 (directly held) 29,980,000 sale of clinker and

!"#$%&' cement products

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17. INVESTMENT IN ASSOCIATED COMPANIES

GROUP AND COMPANY

31 December 1997

Unlisted investments, at cost 48,452

Details of the Companys associated companies, all of which are limited liability companies, as at 31

December 1997, were as follows:

Country of

Name of associated establishment and Groups Registered

Comp

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