bengang steel plates co., ltd. annual report · pdf filee-mail: [email protected],...

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BENGANG STEEL PLATES CO., LTD.

Annual Report 2003

Table of Contents

Important Statements........................................................................................................................2

I. Company Profile ...........................................................................................................................2

II. Financial Highlights.....................................................................................................................3

III. Change of Share Capital and Shareholders.................................................................................6

IV. Particulars about the Directors, Supervisors, Senior Managements and the Employees. ...........9

V. Management Structure ............................................................................................................... 11

VI. The Shareholders’ General Meeting ......................................................................................... 11

VII. Report of the Board of Directors.............................................................................................12

VIII. Report of the Supervisory Committee ...................................................................................20

IX. Significant Events ....................................................................................................................21

X. Financial Report ........................................................................................................................29

XI. Documents for reference ..........................................................................................................29

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BENGANG STEEL PLATES CO., LTD.

Annual Report 2003

(Upon International Accounting Standard)

Important Statements

The Board of Directors and the directors of the Company guarantee that there are no significant omissions, fictitious or misleading statements carried in the Report and will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report.

I. Company Profile

1. Name of the Company in Chinese: 本钢板材股份有限公司 In English: BENGANG STEEL PLATES CO., LTD.

2. Legal Representative: Mr. Li Mohua

3. Secretary of the Board: Mr. Liang Guangde Liaison of stock affair: Mr. Sun Zhongzheng Address: No.16, Renmin Road, Pingshan District, Benxi City, Liaoning Province Tel: 0414－7827344 7828360 Fax: 0414－7827004 7828009 E-mail: [email protected], [email protected]

4. Registered address: No.16, Renmin Road, Pingshan District, Benxi City, Liaoning Province Post Code: 117000 E-mail: [email protected]

5. Information disclosure media stipulated by the company : China Security Daily, Security Times, Hong Kong Commercial Daily Annual reports also published online at: http://www.cninfo.com.cn Place where the annual report is prepared and ready for reference: Stock Affair Department, No.16, Renmin Road, Pingshan District, Benxi City, Liaoning Province

6. Stock listed in: Shenzhen Stock Exchange (1) Short Form of B-Shares: BENGANGBAN-B Stock Code: 200761 (2) Short Form of the Stock of A-Share: BENGANGBANCAI Stock Code: 000761

7. Misc. information: Business registration renewed on: April 28, 1999 Business registration renewed with: Liaoning Provincial Commerce & Industry Administration Bureau

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Business license number: 2100001049024 Taxation registration number: 210502242690243 Public accountant invited by the Company: Beijing Tianhua CPA Address: 17th Floor, Zhonghua Building, Fuxingmenwai Street, Beijing Ho and Ho & Company CPAs Address: Room 304, Leunfa Business Center, No. 2-12 Queen’s Road West, Hong Kong

II. Financial Highlights

1. Gross profit and formation

In RMB thousand

Gross profit 728,350.00

Net profit 473,511.00

Net profit deducted non-recurring gain/loss 461,564.00

Major business profit 914,614.00

Operation profit 804,080.00

Non-operation gain/loss (net) -3,364.00

Cash flow from business operation (net) 854,077.00

Increasing of cash and cash equivalents (net) 106,526.00

Note: non-recurring gain/loss is including

Gain/loss from disposal of fixed assets 2,346.00

Other non-operation expenditures after deducted impairment provision -1,916.00

Carry back from impairment provision 3,725.00

Impact of income tax for the above item 7,793.00

Total 11,948.00

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2. Accounting indices and data of previous 3 years (in RMB)

2002 2001 Items 2003

Adjusted Not adjusted Adjusted Not adjusted

Major business turnover 11,210,196.00 7,750,477.00 7,750,477.00 5,242,814.00 5,242,814.00

Net profit 73,512.00 346,120.00 346,120.00 266,131.00 266,131.00

Gross assets 7,398,116.00 7,319,306.00 6,997,687.00 6,060,014.00 5,574,148.00

Shareholders’ equity (exclude minority

shareholders’ equity) 4,646,385.00 4,172,874.00 4,172,874.00 4,026,747.00 4,026,747.00

Earnings per share (diluted) 0.42 0.30 0.30 0.23 0.23

Net asset per share 4.0901 3.6733 3.6733 3.5447 3.5447

Net asset per share (adjusted) 4.0867 3.6715 3.6715 3.5422 3.5422

Cash flow from business operation (net) 0.75 0.66 0.66 0.08 0.08

Net income / asset ratio (diluted) 10.19% 8.29% 8.29% 6.61% 6.61%

Net income / asset ratio deducted non-recurring gain/loss (diluted) 9.93% 8.80% 8.80% 6.61% 6.61%

3. Supplementary form of income statement

2003 2002

Net income / asset ratio % Earnings per share Net income / asset ratio % Earnings per share Profit of the term

Fully

diluted

Weighted

average

Fully

diluted

Weighted

average Fully diluted

Weighted

average Fully diluted

Weighted

average

Major business

profit 19.68% 20.74% 0.8051 0.8051 18.79% 18.67% 0.6901 0.6901

Operation profit 17.31% 18.23% 0.7078 0.7078 14.80% 14.71% 0.5437 0.5437

Net profit 10.19% 10.74% 0.4168 0.4168 8.29% 8.24% 0.3047 0.3047

Net profit

deducted

non-recurring

gain/loss 9.93% 10.47% 0.4063 0.4063 8.80% 8.75% 0.3234 0.3234

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4. Movement of reserves

Share

premium

Assets revaluation

reservesStatutory reserves

Retained profits Total

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

At 1st January 2002 1,072,187 632,895 245,429 940,236 2,890,747

Payment of 2001 final dividends - - - (199,993) (199,993)

Eliminated on disposal of property, plant and equipment - (13,969) - 13,969 -

Net profit for the year - - - 346,120 346,120

Transfer - - 57,737 (57,737) -

At 31st December 2002 and 1st January 2003 1,072,187 618,926 303,166 1,042,595 3,036,874


Net profit for the year - - - 473,512 473,512

Transfer - - 78,709 (78,709) -

At 31st December 2003 1,072,187 594,428 381,875 1,461,896 3,510,386

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III. Change of Share Capital and Shareholders

(I) Change of share capital

1. Change of share capital (at Dec. 31, 2003, in Shares)

Before Changed by (+,-) After

Shar

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Shar

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Sub-

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I. Non-current Shares

1. Promoters’ shares 616,000,000 616,000,000

Including:

State-owned shares 616,000,000 616,000,000

Domestic corporate shares

Foreign corporate shares

Others

2. Raised corporate shares

3. Employees’ shares 30,000 30,000

4. Preferred Shares or others

Total non-current shares 616,030,000 616,030,000

II. Current Shares

1. RMB common shares 119,970,000 119,970,000

2. Domestically listed foreign investment shares 400,000,000 400,000,000

3. Overseas listed foreign investment shares

4. Others

Total current shares 519,960,000 519,960,000

III. Total Shares 1,136,000,000 1,136,000,000

2. Share placing and listing

(1) Share placing and listing in the latest 3 years till the end of the report term The Company placed shares once in the period. At June 10th to 12th, 1997, the Company placed 400 million of foreign invested shares (B shares) at HKD2.38 each in Shenzhen Stock Exchange. The shares were listed at July 8th, 1997 and approved to put into circulation 400 million shares. On November 3rd, 1997, the Company placed another 120 million RMB common shares (A shares) at RMB5.40 each. The shares were listed on January 15th, 1998, and approved to put into circulation 108 million shares.

(2) Among the RMB common shares of 120 million shares offered to the public, there are 12 million of employees’ shares. These shares were placed on November 3rd, 1997 at RMB5.40 each. It was on July 16th, 1998, the employees’ shares were listed in the exchange. In the report year, 11.97 million shares were approved to be listed in the market. There are still 30 thousand shares held by senior executives under frozen.

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(II) Particulars about the shareholders

1. At December 31, 2002, the Company has 108,277 shareholders. Including 1 state-owned shareholder, 44035 B-share holders, and 64241 A-share holders.

2. The top-ten shareholders

Order Name of shareholders Shares held Portion in the total capital

share %

Share type

1 2 3 4 5 6 7 8 9

10

Benxi Steel (Group) Co., Ltd. DEUISCHE BANK AG LONDON DIAM CHINA OPEN MOTHER FUND Li Weiqin YULAN DANG DE FE Zhen Xinrong Zhang Zhukun Fang Yinjun Huang Liandi Zhang Yongqian

616,000,0006,991,3503,050,0712,579,3002,539,9682,207,5001,953,8001,785,7401,763,9241,570,000

54.23 0.615 0.268 0.227 0.224 0.19

0.172 0.157 0.155 0.138

state-ownedB share holderB share holderB share holderB share holderB share holderB share holderB share holderB share holderB share holder

Note:

(1) Benxi Steel (Group) Co., Ltd. is the controlling shareholder of the Company. The shares held is not placed in the stock market.

(2) Benxi Steel (Group) Co., Ltd., which is one of the top-ten shareholders, has no related relationship with any other shareholders in the list, nor “acting in concert” as stated in “Regulations of information disclosing about changing of shareholdings for public companies”. Related relationship is not found among other shareholders. None of the shareholders are regarded as “acting in concert” stated in “Regulations of information disclosing about changing of shareholdings for public companies”.

(3) Benxi Steel (Group) Co., Ltd. is the only shareholder who is holding more than 5% of the share capital of the Company. The shares are not changed during the report term, nor been pledged or frozen.

3. Particulars about the controlling shareholders of the Company Name of shareholder: Benxi Steel (Group) Co., Ltd. Legal representative: Zhang Yingfu Incorporated on: July 10, 1996 Registered capital: RMB4.7 billion Business property: sole state-operated, authorized operation Business range: smelt of steel and iron, mining, steel plate rolling, make of oxygen, making of pipes, power plant, coal chemistry, specialized steel, heating, supplying of water/electricity/air/gas, process of metal, maintaining and building of machinery and equipment, construction and installation, railway and road transportation, cross board trading, tourism, construction materials, fire-resistance materials, electronic instruments, material supplying, real-estate developing, science research, design, information service

4. There was not any legal person shareholder other than Benxi Steel (Group) Co., Ltd. who was holding more than 10% of the share capital.

5. Particulars about the top-10 current share holders (ended December 31, 2003).

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Order Name of the shareholders Shares held Share type

1 2 3 4 5 6 7 8 9

10

DEUISCHE BANK AG LONDON DIAM CHINA OPEN MOTHER FUND Li Weiqin YULAN DANG DE FE Zhen Xinrong Zhang Zhukun Fang Yinjun Huang Liandi Zhang Yongqian NTC/Municipal Employees Retirement System of Michigan

6,991,350 3,050,071 2,579,300 2,539,968 2,207,500 1,953,800 1,785,740 1,763,924 1,570,000 1,413,000

B share holder B share holder B share holder B share holder B share holder B share holder B share holder B share holder B share holder B share holder

Note: The relationship among the top 10 current share holders are unknown.

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IV. Particulars about the Directors, Supervisors, Senior Managements and the Employees.

(I) Brief of the directors, supervisors and senior managements

Name Gender Age Position Term Shares held at thebeginning of year

Shares held atthe end of year Notes

Li Mohua Male 54 Chairman/GM 2003.07.26-2006.07.26

Yu Tiancheng Male 50 Vice Chairman 2003.07.26-2006.07.26 10000 10000 Receive salary from the shareholder

Liang Guangde Male 48 Director Vice GM, Secretary of the Board 2003.07.26-2006.07.26 10000 10000

Li Yu Male 47 Director 2003.07.26-2006.07.26 Receive salary from the shareholder

Zhang Guiyu Male 42 Director 2003.07.26-2006.07.26

Guan Dianguo Male 56 Employees’ Representative Director 2003.07.26-2006.07.26

Zhong Tianli Female 47 Independent director 2003.07.26-2006.07.26

Xue Xiangxin Male 49 Independent director 2003.07.26-2006.07.26

Liu Junyou Male 50 Chairman of the Supervisory Committee 2003.07.26-2006.07.26

He Xusheng Male 52 Vice Chairman of the Supervisory Committee 2003.07.26-2006.07.26 Receive salary from the shareholder

Sun Xiao Male 58 Supervisor 2003.07.26-2006.07.26 Receive salary from the shareholder

Zhang Fuchen Male 53 Employees’ Representative Supervisor 2003.07.26-2006.07.26

Wu Wei Male 48 Employees’ Representative Supervisor 2003.07.26-2006.07.26 10000 10000

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Particulars about the directors and supervisors who take jobs in the shareholding party.

Name Position Job term Li Mohua Benxi Steel (Group) Co., Ltd. / director April 1996 till present

Yu Tiancheng

Benxi Steel (Group) Co., Ltd. / director, GM February 2001till present

Li Yu Benxi Steel (Group) Co., Ltd. / chief of accounting department February 2000 till present Liu

Junyou Benxi Steel (Group) Co., Ltd. / secretary of discipline committee August 2000 till present

He Xusheng

Benxi Steel (Group) Co., Ltd. / chief of planning department January 1998 till present

Sun Xiao Benxi Steel (Group) Co., Ltd. / former chief of auditing department May 1999 till present

(II) Annual payroll

1. In the report term, the directors, supervisors and senior managements that take salaries from the Company received their salaries monthly according to their levels respectively.

2. The annual payrolls of the directors, supervisors and senior managements are amounted to RMB292208 (including basic salary, bonus, welfare, allowance, housing allowance, and other allowances). The payrolls of top 3 senior managements are amounted to RMB190913.

3. Allowance for independent directors: RMB 20 thousand / year / people.

4. Currently the Company has altogether 13 directors, supervisors and senior managements. 6 of them take salaries from the Company (independent directors excluded), 2 of them are ranged between RMB15 thousand ~ RMB40 thousand; 3 of them are ranged between RMB40 thousand ~ RMB60 thousand, and 1 of them is ranged between RMB50 thousand – RMB100 thousand.

(III) Change of directors, supervisors, and senior management

Mr. Chen Jizhuang, Mr. Jie Houfu, Mr. Guo Yanchang, and Mr. Zhou Tianlai quit from the position of director due to change of job.

(IV) Employees

At December 31, 2003, the Company has 3680 employees in total.

1. Distribution on education levels Master 13 0.35% Bachelor 449 12.2% Associated Degree 779 21.16% Technical Certifications/high school 1060 28.8% Other 1379 20.6%

2. Distribution on professions Production 3040 82.6% Sales & marketing 51 1.39% Engineering & technical 294 8% Financial 40 1.1% Executive 225 6.9%

3. There are 1755 retired workers who need the Company to undertake their expenses.

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V. Management Structure

(I) Particulars about the management structure

Under the requirement of the Company Law, Security Law, Public Company Management Regulations, and “The instructional opinion on establishing of independent director system in public companies”, the company kept optimizing the management structure and operate the company in a standardized mean to ensure its healthy development. The controlling shareholder, Benxi Steel Group, is completely separate from the Company in aspects of personnel, accounting, and asset. The Company has its independent organization and business operation. In the report term, the Company produced and adopted “Investor Relationship Management System” and “Internal Control System”, which will strengthen the connection with the investors and enforce the internal management of the Company.

(II) Independent directors’ fulfilling of duties

As empowered by the relative laws, regulations and the Article of Association of the Company, in the report term, the independent directors were doing their jobs by presented the board meetings and played important role in protecting the legal benefit of the whole company and shareholders as well.

(III) Particulars about the separation of businesses, personnel, assets, organizations, and accounting from the controlling shareholder

1. In personnel: The labor management, personnel and salary management are operated independently out of the controlling shareholder. Tthe Chairman, GM, Vice GM, Secretary of the Board and other senior managements take salaries from the Company and none of them takes position other than director in the shareholding party.

2. In assets: The company owns the assets completely and runs its production, supplying and sales system independently.

3. In accounting: The company has its own independent accounting division, accounting system, bank account, and exercise its liability of taxation independently.

4. In organization: The company has a mature and independent organization structure, which completely separated from the controlling shareholder.

5. In the aspect of business: the company has its own purchasing, production and sales system with no connection with the controlling shareholder.

VI. The Shareholders’ General Meeting

The Shareholders’ General Meeting was held once during the year 2003.

(I) Announcing, calling and holding of the Shareholder’s General Meeting

The Board of Directors published the Announcement on Holding 2001 Shareholders’ General Meeting on June 26, 2003 issues of China Security Daily, Security Times and Hong Kong Commercial Daily.

On July 26th, 2003, the 2002 Shareholders’ General Meeting was held in Bengang Hotel, Benxi, Liaoning Province. 10 shareholders’ (or attorney) presented the meeting representing 618,354,136 shares, takes 54.43% of the capital share of the Company. Including 2 holders of B-shares representing 2,314,136 shares takes 0.58% of the total B-shares.

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(II) Publishing of the resolutions passed by the shareholders’ general meeting

The following proposals were adopted as resolutions through voting.

1. 2002 Annual Report of the Board of Directors 2. 2002 Annual Report and its Summary Version 3. 2002 Annual Report of the Supervisory Committee 4. 2002 Financial Settlement Report and Budget Report for Year 2003 5. Business Plan for the Year 2002 6. The proposal of electing Mr. Li Mohua, Yu Tiancheng, Liang Guangde, Li Yu, Zhang Guiyu, and

Guan Dianguo the directors of the 3rd term of Board 7. The proposal of electing Ms. Zhong Tianli, and Mr. Xue Xiangxin the independent directors of the

3rd term of Board 8. The proposal of electing Mr. Liu Junyou, He Xusheng, Sun Xiao, Zhang Fuchen, and Wu Wei the

supervisors of the 3rd term of Supervisory Committee. 9. 2002 Profit Distribution Preplan 10. The proposal of inviting PricewaterhouseCoopers Zhongtian CPA as the auditors for year 2003.

And the payment for the CPA. The above resolutions were published on the July 29th, 2003 issues of China Securities Journal, Security Times, and Hong Kong Commercial Daily.

(III) Electing and replacing of directors and supervisors

As passed by the shareholders’ general meeting, Mr. Li Mohua, Yu Tiancheng, Liang Guangde, Li Yu, Zhang Guiyu, and Guan Dianguo were elected the directors of the 3rd term of Board; Ms. Zhong Tianli, and Mr. Xue Xiangxin were elected the independent directors of the 3rd term of Board; Mr. Liu Junyou, He Xusheng, Sun Xiao, Zhang Fuchen, and Wu Wei were elected the supervisors of the 3rd term of Supervisory Committee.

VII. Report of the Board of Directors

(I) Analyzing business situations

In year 2003, the national economy was showing a rapid developing trend. Under this background, the lower industries of iron and steel industry were growing steadily, and brought up the requirement for steel products. That led to dramatic increasing of sales price. In the meantime, as effected by the increasing of overall productivity of domestic steel industry, the upper supplying of resources became tight though. That naturally led to continuous climbing up of raw material prices. Anyhow, the Company reached its business target in 2003 and achieved good result. The Company realized output of hot-rolling plate of 4.02 million ton, which was 25.63% over that of the pervious year, sales volume of hot-rolling plate of 4.14 million ton, which was 39% over that of the pervious year, business turnover of RMB11,210,200,000 which was 44.64% over that of the previous year; major business

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profit of RMB957,720,000, which was 15.64% over that of the previous year; net profit of RMB525,280,000, which was 36.47% over that of the previous year.

As proposed by the 16th convention of the CCP, the old industrial bases of Northeast area will be supported to speed up their reforming and adjustment. The Company is standing upon the long-term development strategy and keeps following with the national arrangement, put its target on building the Company into a base of fine-quality steel plate products, and modern enterprise and international competitor.

(II) Business operation in the report term

1. Major business and operation

(1) The Company is primarily involved in the business of steel smelting, plate rolling, and selling of relative products. Its terminal products are primarily hot-rolled plates and continuous casting billet.

(2) Business turnover and profit structure

Products Turnover Portion in

major turnoverMajor business

profit Portion in majorbusiness profit

Molten steel 193,769,800.20 1.73% -4,873,212.38 -0.51%Steel billet 2,372,426.62 0.02% -598,727.57 -0.06%Continuous casting billet 201,768,380.59 1.80% 6,156,666.95 0.64%Hot Plate 10,652,707,704.53 95.03% 967,339,952.89 101.00%Disposal of materials 67,919,233.31 0.61% -10,738,742.48 -1.12%Others 91,658,922.81 0.82% 429,716.92 0.04%Total 11,210,196,468.06 957,715,654.43 Incl. Related transactions 5,491,403,760.70 385,874,221.27 Molten steel 193,769,800.20 1.73% -4,873,212.38 -0.51%Hot plate 5,222,956,585.62 46.59% 391,584,517.22 40.89%Other 74,677,374.88 0.67% -837,083.67 -0.09%

(3) Geographic distribution of business turnover and profit structure

Region Turnover Portion in

major turnover Major business

profit Portion in majorbusiness profit

North 1,749,206,252.41 15.60% 149,439,148.14 15.60%

North-east 5,505,906,264.05 49.12% 470,383,604.41 49.12%

East 3,161,752,186.30 28.20% 270,116,547.27 28.20%

Mid-south 579,745,197.08 5.17% 49,529,109.72 5.17%

North-west 7,984,636.97 0.07% 682,147.89 0.07%

South-west 595,240.03 0.01% 50,852.87 0.01%

Exported 205,006,691.22 1.83% 17,514,244.11 1.83%

Total 11,210,196,468.06 957,715,654.41

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(4) Products distribution of business turnover and increase/decrease over the previous year

Region Turnover Increase /decrease

North 1,749,206,252.41 73.92%

North-east 5,505,906,264.05 16.49%

East 3,161,752,186.30 167.46%

Mid-south 579,745,197.08 181.14%

North-west 7,984,636.97 -46.06%

South-west 595,240.03 42.74%

Exported 205,006,691.22 -66.66%

Total 11,210,196,468.06

(5) Major products takes over 10% of the business turnover

Products Major business turnover Major business cost Gross profit ratio %

Hot plate 10,652,707,704.53 9,667,947,640.54 9.24%

Incl. Related transactions 5,222,956,585.62 4,822,831,095.86

Hot plate 5,222,956,585.62 4,822,831,095.86 7.66% Note: The gross profit rate decreased because of the increasing of raw material market price.

2. Major vendors and customers

Total of the supply from top 5 vendors

8,627,422,882.58

Portion in overall purchasing 96.09%

Total of the sales to top 5 buyers

4,646,903,084.17

Portion in overall sales 41.45%

3. Problems encountered in the operation and solutions

Major problem encountered in the report term is that the dramatic increasing of cost due to increasing of raw materials. Facing to this difficulty, the Company will take the following measures:

① Enforce the production organization and increase the output significantly. Along with emphasizing on equipment operation and reconstruction, fully develop the potential of the equipment by enforcing of scientific management system. Adopt a serial of effective measurements to motivate the employees. The target is set at 4.02 million ton of hot-rolling plate and 25.63% of increasing over the previous corresponding period.

② Following with the changing market position, enlarge the territory of the market. The Company will keep following with the direction of the market, continue to adjust the structure of clients and products. Emphasis will be laid on major direct clients and developing of special product market. The “double-high” products will be enforced in their researching and developing. Turn the production of the Company from conventional products over to high-surplus value products.

③ Deepen the implementing of cost-deducting strategy, improve the management standard. Fully

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develop the potential of the Company and enforce the tackling of key projects, to optimize the major technical economical indices. The targets are set at: combined energy consuming of 996kg / ton, decrease by 134 kg down from the previous corresponding period; rotate furnace energy consuming of 1089.7kg , decrease by 5.3kg down from the previous corresponding period.

(III) Investment

Utilization of fund raised:

The fund raised in share placing of year 2000 has already been used. The details have been disclosed in the interim report and annual report of 2000.

Utilization of non-raised fund:

In the report term, the Company has invested RMB96.94 million in the technical reforming projects with the fund of the Company itself.

1. 9#225 crane project: planned to invest RMB8.08 million, started in 2002, RMB0 occurred in 2003, accumulated to RMB7.17 million till the end of 2003, and will be completed in 2003.

2. Rolling collector project: planned to invest RMB5.67 million, started in 1999, RMB2.43 million occurred in 2003, accumulated to RMB4.85 million till the end of 2003, and will be completed in 2003.

3. Slurry transporting project: planned to invest RMB0.43 million, started in 2003, RMB0.42 million occurred in 2003, accumulated to RMB0.42 million till the end of 2003, and will be completed in 2003.

4. Dock crane project: planned to invest RMB1.52 million, started in 2003, RMB1.52 million occurred in 2003, accumulated to RMB1.52 million till the end of 2003, and will be completed in 2003.

5. Zero electric motor project: started in 2003, RMB0.34 million occurred in 2003, accumulated to RMB0.34 million till the end of 2003, and will be completed in 2003.

6. Molten iron pre-process project: planned to invest RMB29.64 million, started in 2003, RMB15.80 million occurred in 2003, accumulated to RMB15.80 million till the end of 2003, and will be completed in 2004.

7. 13 sector project: planned to invest RMB13.60 million, started in 2003, RMB12.11 million occurred in 2003, accumulated to RMB12.11 million till the end of 2003, and will be completed in 2004.

8. Roller polish workshop reconstruction project: planned to invest RMB60.31 million, started in 2003, RMB20.73 million occurred in 2003, accumulated to RMB20.73 million till the end of 2003, and will be completed in 2004.

9. 3# heating furnace project: planned to invest RMB78.00 million, started in 2003, RMB3.01 million occurred in 2003, accumulated to RMB4.91 million till the end of 2003, this project is in preparation stage.

10. 4# converter project: planned to invest RMB875.87 million, started in 2003, RMB9.34

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million occurred in 2003, accumulated to RMB9.34 million till the end of 2003, this project will be completed in 2005.

11. Furnace disassembling machine project: planned to invest RMB2.2 million, started in 2003, RMB1.66 million occurred in 2003, accumulated to RMB1.66 million till the end of 2003, this project is expected to be completed in 2004.

12. 3# heating furnace project: planned to invest RMB91.46 million, started in 2003, RMB0.11 million occurred in 2003, accumulated to RMB0.11 million till the end of 2003, this project will be completed at the end of 2005.

13. Supplementary reconstruction of continuous rolling project: planned to invest RMB210.93 million, started in 2002, RMB29.48 million occurred in 2003, accumulated to RMB29.49 million till the end of 2003, this project is in preparation stage.

(IV) Financial situations

Items 2003 2002 Increase/decrease

than previous year (%)

Gross asset 7,398,116.00 7,319,306.00 1.08%

Long-term liability 325,688.00 928,597.00 -64.93%

Reserves 4,646,385.00 4,172,874.00 11.35%

Net cash flow per share from business operation 0.75 0.66 13.64%

Note: causation of the movement

1. Increasing of gross asset – good sales in the year and lead to increasing of monetary fund and notes receivable.

2. Decreasing of total liability – returning of loans in the year.

3. Increasing of reserves – increasing of net profit realized in the year. 4. Increasing of net cash flow – the sales volume and price are higher than the previous year, leading to increasing of sales income and advances.

Items 2003 2002 Increase/decrease than

previous year (%) Revenue 11,210,196.00 7,750,477.00 44.64% Sales cost 10,295,582.00 6,966,569.00 47.79% Gross profit 914,614.00 783,908.00 16.67% Periodic expenses 187,823.00 206,510.00 -9.05%

Other business income / expenses -3,364.00 -31,582.00 -89.35% Net profit 473,512.00 346,120.00 36.81% Note: causation of the movement

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1. Increasing of revenue – increasing of sales volume and price over the previous year.

2. Increasing of sales cost – increasing of sales volume and raw material price.

3. Increasing of gross profit - increasing of sales volume and price over the previous year.

4. Decreasing of periodic expenses – decreasing of misc. port charge in export in the sales expenses.

5. Decreasing of other business income / expenses – no fixed asset impairment provision was drawn in the year.

6. Increasing of net profit – increasing of major business profit of the year over the previous year.

(V) No great changes of the producing and operating environment, the macro policy, the

laws and regulations, had affected, are affecting or will affect the company financial

condition and its performance greatly.

(VI) Major process of year 2004

2004 will be an important year for the national government to implement the strategy of promoting the reborn of old industrial bases in northeast region of China. The Company will go for the leader of the wave.

1. Through upgrading of production management and fully developing of potentials, the Company sets its goal unhesitatingly at 5.2 million ton of steel and 4.07 million ton of hot-rolled plate.

2. With closer observing of the market, the marketing strategies will be tuned flexibly with stress laid on domestic market. Focuses will be put on the regions of northeast, north, Shandong province, and manufacturing industries of automobile, home appliance, tube, and container. Developing of certain key types of products will also be on the important place. Under the integrated marketing strategy of fully adopting the advantages of the clients, the Company will continue to co-operate with its clients on developing of new steel products.

3. Technological reforming and researching of new products are also the key points of the Company in the coming year. The Company will do great effort to ensure the product line to be following with the requirement of the market, and the overall strategy of the national government. Attention will be concentrated on those “double-high” products which are badly needed in the domestic market and will bring the Company new growth point of profitability.

4. Targeting at the advanced managing technologies of the world, the Company is also wishing to increasing the business efficiency through adopting of adopting of mature management standards. In the coming year, the ISO9001:2000 quality management system will be practiced in every aspects of the Company’s business with viewing of greatly improve the quality control standard. Practices of assessment and control on process costs will be carried further into each process of production. The purpose is set at dramatically reducing the process costs in comparison with the previous year, and reaches the industrial average level in energy consuming. Facing with the severe condition of resource supplying market, the purchasing management will also be practically improved to reduce the costs in every possibility. In financial aspects, the Company will keep improving the capital structure and speed up the financial circle. Practically enforce the accounting management to reduce the controllable expenses by 10% at the basis of the previous year.

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(VII) Daily work of the Board of Directors

1. The Board of Directors held 5 meetings during the report term, the resolutions are as the followings:

1) On June 23rd, 2002, the 2nd term Board of Directors held its 13th meeting in the 3rd meeting room of the Bengang Hotel. The following resolutions were passed. (1) 2002 Annual Work Report of the Board; (2) Statement on the events that referred to by the auditors’ report with “unable to form an opinion” issue by PriceWaterHouseCoopers Zhongtian CPA; (3) 2002 Annual Report of the Company; (4) The 1st Quarterly Report of year 2003; (5) 2002 Financial Settlement and 2003 Budget Report; (6) 2003 Production and Business Plan; (7) The proposal of nominating the members of the 3rd term of Board; (8) The proposal of nominating the independent directors of the 3rd term of Board; (9) The proposal of not requesting the shareholders’ general meeting to extend the expire date of the issuing of new A shares; (10) The Profit Distribution Preplan of year 2002; (11) The proposal of extending the engagement with PriceWaterHouseCoopers Zhongtian as the auditor of the Company for year 2002; (12) The proposal of holding the 2002 Shareholders’ General Meeting; The above resolutions were published on the June 26th, 2003 issues of China Securities Journal, Security Times, and Hong Kong Commercial Daily.

2) The 1st meeting of the 3rd term Board of Directors was held on July 26th, 2002 in the 1st meeting room of the Group. Mr. Li Mohua and Mr. Yu Tiancheng were elected the Chairman and vice Chairman of the Board of Directors. The above resolutions were published on the July 29th, 2003 issues of China Securities Journal, Security Times, and Hong Kong Commercial Daily.

3) The 2nd meeting of the 3rd term Board of Directors was held on August 22nd, 2003 in the meeting room of the Company. The 2002 Semi-annual Report and its summary were examined and passed. The above resolution was published on the August 23rd, 2003 issues of China Security Daily, Security Times, and Hong Kong Commercial Daily.

4) The 3rd meeting of the 3rd term Board of Directors was held on October 26th, 2003 in the meeting room of the Company. The 3rd quarterly report of 2003 was examined and passed. The above resolution was published on the October 24th t, 2003 issues of China Security Daily, Security Times, and Hong Kong Commercial Daily.

5) The 4th meeting of the 3rd term Board of Directors was held on December 30th, 2003 in the meeting room of the Company. The following resolutions were passed: (1) The proposal on the reforming in according with the tour inspection of the Shenyang Office of China Securities Regulatory Commission. (2) The proposal on establishing of investors relationship management. The above resolution was published on the December 31st, 2003 issues of China Security Daily, Security Times, and Hong Kong Commercial Daily.

2. Executing of the resolutions of the Shareholders’ General Meeting

(1) Upon the resolutions of the 2002 shareholders’ general meeting, the Company continue to

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invite PriceWaterHouseCoopers Zhengtian CPA as the auditor of the Company for year 2003.

(2) As adopted by the 13th meeting of the 2nd term of Board, the resolution of not requesting the shareholders’ general meeting to extend the expire date of the issuing of new A shares

(VIII) Profit distribution preplan or capitalization of reserves for current term

As audited by Beijing Tianhua CPA, the Company has realized the net profit of RMB524,724,466.62 in year 2003. In accordance with the Article of Association of the Company, 10% of the net profit will be drawn as statutory surplus reserves, which is amounted to RMB52,472,446.66, and 5% of the net profit will be drawn as public welfare fund amounted to RMB26,236,223.33. After the drawing of the statutory surplus reserves and public welfare fund, the net profit distributable for year 2003 is amounted to RMB446,015,796.63, plus the distributable profit retained from the end of year 2002 amounted to RMB1,034,761,624.19, the total profit distributable for this time is amounted to RMB1,480,777,420.82. Therefore the profit distribution plan for year 2003 is as: upon the total capital share of 1,136,000,000 at December 31st, 2003, cash dividend of RMB2.00 (tax included) will be distributed to each 10 shares. Namely RMB227,200,000.00 will be distributed as common share dividend in total. The retained of RMB1,253,577,420.82 will be carried over to the next year as distributable profit.

(IX) Offering of external guarantee

In accordance with “The notification about the regulations of fund transaction with related parties and offering of external guarantee of listed companies” (Zheng-Jian-Fa [2003]56), the CPA of the Company issued the special statement on the situation of controlling related party and other related parties adopting of the Company’s fund as the following:

(1) The related transactions with the controlling related parties and other related parties have been put through the statutory procedure, and disclosed in public medias.

(2) The amount of the transactions has been disclosed in the 2003 Annual Report.

(3) Fund adopted by or from the related parties are for purpose of business operation.

There is no offering of external guarantee occurred in the report term.

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VIII. Report of the Supervisory Committee

(I) Meetings of the Committee

The Committee held 3 meetings in the report term.

1) On June 23rd, 2002, the 2nd term Committee held its 10th meeting in Bengang Hotel. The following resolutions were passed. (1) 2002 Annual Work Report of the Supervisory Committee; (2) Nominating of the members of the 3rd term of Committee; (3) 2002 Annual Report and its summary of the Company; (4) The 1st Quarterly Report of year 2003; (5) 2002 Financial Settlement and 2003 Budget Report; (6) 2003 Production and Business Plan; (7) The Profit Distribution Preplan of year 2002; (9) The proposal of not requesting the shareholders’ general meeting to extend the expire date of the issuing of new A shares; (10) The proposal of extending the engagement with PriceWaterHouseCoopers Zhongtian as the auditor of the Company for year 2002; (11) The proposal of holding the 2002 Shareholders’ General Meeting;

2) On July 26th, 2003, the 3rd term Committee held its 1st meeting in Bengang Hotel. Mr. Liu Junyou and Mr. He Xusheng were elected the Chairman and Vice Chairman of the 3rd term of Committee.

3) On August 22nd, 2003, the 3rd term Committee held its 2nd meeting in the meeting room of the Company. The 2003 Semi-annual Report and its summary were adopted by the meeting.

(II) Particulars about the duties of the Supervisory Committee

1. The directors, managers and senior executives were performing their duties in accordance with the relative regulations and the resolutions of the shareholders’ general meeting and the board of directors. They have being doing their job with spirit of hard working and responsible, therefore ensured the Company to fulfil its business targets and successfully build up its internal administrative system. None of the directors, managers and senior executives was found doing anything that is against the laws regulations and the Article of Association of the Company, or harming the benefit of the Company.

2. The Supervisory Committee performed serious inspection on the financial position of the Company, and thinks the financial report is frankly reflecting the financial position and business results of the year 2003. The supervisors thoughts the auditors’ report and “the special statement on the changing of accounting policy and accounting estimation, as well as the correction of significant error” issued by the CPA invited by the Company for year 2003 – Beijing Tianhua CPA, are basing on the basis of truth and with compliance with the Enterprise Accounting Standard and the Enterprise Accounting System.

3. The Company conducts no acquisition or placing of assets.

4. The related transactions of the Company was basing on the contracts or agreements and on a fair basis. They harmed no benefit of the Company.

5. The proposed investment on the reforming of 1700mm hot continuous rolling machine was regarded as absolutely necessary.

6. The modifications on the “Integrated Service Agreement” are fully reflecting the principle of market price, and is fair and reasonable.

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IX. Significant Events

(I) In the report period, the Company had no material lawsuits or arbitrations.

(II) In the report period, the Company had conducted no such activities as assets

acquisition, sales, absorption or consolidation.

Particulars about the placing and interchanging of assets:

The Company placed most of the equipment of primary rolling workshop and other scraped assets with purchase cost of RMB103,848,719.96 and net value of RMB26,669,500.96. These assets were sold at price of RMB12,878,707.18. For these part of assets were belong to the primary rolling workshop which are scraped. Since the continuous rolling system been built, the primary rolling technologies were out of date and these equipments are without value of use. After sold those which still usable, the rest are disassembled and disposed as scrap iron.

(III) Significant related transactions

1. Related parties

1) Controlling related parties (ended December 31, 2003)

Name of the party

Registered address

Major business

Relationship with the Company

Economic type

Legal representative

Bengang Group

Benxi, Liaoning

Steel and iron

Parent company State-owned Zhang Yingfu

2) Registered capital of the controlling related party, and its movement

Name of the party 2002.12.31

Increased this term

Decreased this term

2003.12.31

Bengang Group RMB4.7 billion RMB4.7 billion

3) Shares held by the controlling related party, and its movement

2002.12.31 Changed this term 2003.12.31 Name of the party Amount % Amount % Amount %

Bengang Group RMB613.44 million 54 RMB613.44 million 54

4) Related parties without controlling relationship

Name of the party Relationship with the CompanyBengang Group Machinery Factory Co., Ltd. Under the same parent company

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Bengang Group Truck Co., Ltd. Under the same parent companyBengang Group Tengda Holdings Co., Ltd. Under the same parent companyBengang Group Limestone Mine Under the same parent companyBengang Group International Trading Co., Ltd. (International Trading Co.,)

Under the same parent company

Bengang No. 2 Steel Factory Labour Service Team Under the same parent companyBengang No. 2 Furnace Construction Team Under the same parent companyBengang No. 2 Construction and Labour Service Team Under the same parent companyBenxi Steel Company Steel Rolling Equipment Plant Under the same parent companyBengang Gongyou Industrial Co. Under the same parent companyBenxi Economic Development District Bengang Jufeng Development Co., Ltd. (Jufeng Co.)


Bengang Group Iron Co., Ltd. Under the same parent companyBengang Group Special Steel Co., Ltd. Under the same parent companyTianjin Benchu Materials Trading Co., Ltd. Under the same parent companyGuangzhou Free Trading Zone Bengang Sales Co., Ltd. Under the same parent companyNanjing Bengang Iron and Steel Sales Co., Ltd. Under the same parent companyShanghai Bengang Iron and Steel Sales Co., Ltd. Under the same parent companyDalian Boluolue Steel Tube Co., Ltd. Under the same parent companyBengang Group Special Steel Electronic Installation Co., Ltd. (Installation Co.)


Haerbin Bengang Trading Co., Ltd. Under the same parent companyBengang Xi’an Materials Trading Co., Ltd. Under the same parent companyTianjin Bengang Iron & Steel Trading Co., Ltd. Under the same parent companyWuxi Bengang Iron & Steel Trading Co., Ltd. Under the same parent companyYantai Bengang Iron & Steel Trading Co., Ltd. Under the same parent companyXiamen Bengang Iron & Steel Trading Co., Ltd. Under the same parent companyShenyang North Bengang Iron & Steel Trading Co., Ltd. Under the same parent companyChangchun Bengang Iron & Steel Trading Co., Ltd. Under the same parent companyBengang Group Steel Processing and Logistics Co., Ltd. Under the same parent companyBengang Group Co., Ltd. Haerbin Branch Under the same parent companyBengang Construction Co. Under the same parent companyBengang Fire Resistance Co. Under the same parent companyBengang Metallurgy Residue Co. Under the same parent companyBengang Metallurgy Senior Technical School Under the same parent companyBengang Industrial & Development Co. Under the same parent companyBengang Construction Co. Under the same parent companyBengang International Trading Co., Shenyang Branch Under the same parent company

2. Related transaction agreements

1) It was on April 14th, 1997, the Company entered with Bengang Group the “Integrated Service Agreement”. The agreement became effective since the date when the Company was incorporated

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and last for 5 years. It’s including purchasing of raw materials, energy power, supplementary materials, spare parts and logistics services from Bengang Group. In accordance with the agreement, the molten iron is priced upon the market price of casting iron less the casting costs. The market price of casting iron refers to the weighted average of the prices on which the Group sold to its independent customers for the past 3 months. The casting cost refer to the processing cost of casting the molten iron into casting iron; The prices for energy power, supplementary materials, repairing and spare parts are on the entire cost plus national surplus tax, or the market price, or the purchase cost plus purchase expenses; The prices for trucking service are on market prices; Rail transportation prices are on the price stipulated by the national government and transportation department; In the meantime, according to the agreement, the Company shall pay the Group for trade-mark using right. It was on November 15, 2001, the Company entered with Bengang Group the supplementary agreement of the “Integrated Service Agreement”, which extended the expiration date to December 31st, 2006.

2) In accordance with the land price confirming document Liao-Tu-Pi-Zi (1997)No.6 issued by Liaoning Provincial Land Administrative Bureau on March 5th, 1997, the approving letter of land treatment, and the land using contract entered with Bengang Group on April 7th, 1997, the Company is authorized to lease the land where the buildings and plants are located on. The leasing contract will expire upon 50 years. By this mean, the Company shall pay Bengang Group RMB2,673,000 each year as the rent of the land. The rent is subject to adjustment upon 5 years since the beginning of leasing, and will be adjusted for each 3 years. The Company has entered with the Group the supplementary agreement on the land leasing contract, both of the parties consented that the rent will be kept on the same level until April 7th, 2005.

3. Related Transactions

Pricing policy: All of the transactions with the related parties of the Company are on the basis of relative agreements or normal market price.

1) Selling of products

A. Selling of products to controlling related parties in RMB

2003 2002 Name of the party Amount Portion in the

turnover Amount Portion in the

turnover Bengang Group 3,072,372,550 27% 2,617,347,648 33.77%

B. Selling of products to non-controlling related parties in RMB

2003 2002 Name of the party

Amount Portion in the

turnover


turnover

Bengang International Trading 90,068,047 0.80% 59,843,700 0.77%

Tianjin Benchu Materials Trading Co., Ltd. 23,415,428 0.21% 223,897,665 2.89%

Tianjing Bengang Steel & Iron Trading Co.,

Ltd. 603,162,516 5.38% 115,200,887 1.49%

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Haerbin Bengang Trading Co., Ltd. 119,403,986 1.07% 14,918,810 0.19%

Shanghai Bengang Sales Co., Ltd. 147,689,834 1.32% 24,760,109 0.32%

Nanjing Bengang Sales Co., Ltd. 273,166 0.00% 9,784,272 0.13%

Wuxi Bengang Sales Co., Ltd. 309,397,622 2.76% 43,756,830 0.56%

Guang Zhou Free Trade Zone Sales Co., Ltd. 151,592,599 1.35% 83,429,566 1.08%

Bengang Xi’an Materials Trading Co., Ltd. 7,984,637 0.07% 484,393 0.01%

Yantai Bengang Sales Co., Ltd. 440,542,158 3.93% 3,012,730 0.04%

Bengang Group Special Steel Co., Ltd. 159,638,050 1.42% 153,981,720 1.99%

Bengang Group Tengda Holdings Co., Ltd. 40,589,427 0.36% 8,849,337 0.11%

Shanghai Bengang Sales Co., Ltd. 26,306,638 0.23% 0.00 0.00

Xiamen Bengang Sales Co., Ltd. 111,940,689 1.00% 0.00 0.00

Shenyang North Bengang Sales Co., Ltd. 62,598,282 0.56% 0.00 0.00

Changchun Bengang Sales Co., Ltd. 4,292,459 0.04% 0.00 0.00

Dalian Boluole Steel Tube Co., Ltd. 94,281,509 0.84% 0.00 0.00

Bengang Group Steel Processing and

Logistics Co., Ltd. 32,433,322 0.29% 0.00

0.00

Total 2,464,311,313 21.98 741,920,019 9.57%

2) Purchasing of raw materials, supplementary materials and spare parts

A. Purchasing of raw materials, supplementary materials and spare parts from the controlling related parties In RMB



cost %


cost %

Bengang Group(raw materials) 6,086,959,698 59.48% 3,715,812,221 53.84%

Bengang Group(supplementary materials

and spare parts) 915,875,964 8.95% 1,174,970,113 17.02%

Total 7,002,835,662 68.43% 4,890,782,334 70.86%

B. Purchasing of goods from non-controlling related parties in RMB



cost %


cost %

Bengang Group Iron Co., Ltd. 1,321,043,495 12.91% 671,789,561 9.73%

Bengang Group Machinery Plant Co., Ltd. 73,713,473 0.72% 13,710,509 0.20%

Bengang Group Limestone Mine 88,878,625 0.87% 72,852,290 1.06%

Total 1,483,635,593 14.76% 758,352,360 10.99%

3) Other related transactions in RMB

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Items 2003 2002

With Bengang Group

Energy power 749,890,383 520,981,196

Logistics 65,047,397 91,124,189

Repairing 181,642,609 182,972,821

Trademark 25,200 25,200

Land rent 2,673,192.00 2,673,192

With Bengang Group Trucking Co., Ltd.

Logistics 16,550,138 14,176,684

Bengang Group International Trading Co., Ltd.

Export agent 3,111,352 0.00

Import agent 1,304,690 0.00

With Installation Co.

Repairing 1,383,916 3,764,315

With Yingkou Bengang International Logistics Co., Ltd.

Port fee 2,745,667 0.00

With Bengang Real-estate Co., Ltd.

Property management 209,130 0.00

With Jufeng Co.

Packaging 5,340,596.37 16,970,461

The pricing policy of the above transactions are on the same basis as the transactions with Bengang Group. (for details please refer to Note 6, 2(1))

4) Balances of account receivable and account payable due to related parties in RMB

Items Dec. 31, 2003 Dec. 31, 2002

Notes receivable

Bengang International Trading 0.00 950,000

Bengang Group Special Steel Co., Ltd. 7,000,000 7,000,000

Yantai Bengang Sales Co., Ltd. 13,500,000 0.00

Wuxi Bengang Sales Co., Ltd. 62,270,000 0.00

Bengang Group Steel Processing and Logistics Co., Ltd. 4,500,000 0.00

Tianjin Bengang Trading Co., Ltd. 16,260,000 0.00

Dalian Boluole Steel Tube Co., Ltd. 1,400,000 0.00

Total 104,930,000 7,950,000

Account receivable

Bengang Group Special Steel Co., Ltd. 53,494,842 40,084,382

Tianjin Benchu Materials Trading Co., Ltd. 24,436,060 0.00

Guangzhou Free Trade Zone Bengang Sales Co., Ltd. 6,711,719 0.00

Wuxi Bengang Sales Co., Ltd. 6,406,844 0.00

Xiamen Bengang Sales Co., Ltd. 6,367,585 0.00

Shanghai Bengang Steel Material Co., Ltd. 2,725,494 0.00

Total 100,142,544 40,084,382

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Account payable

Bengang No.2 Steel Factory Labour Service Team 0.00 3,138,115

Bengang Special Steel Electronic Installation Co. 0.00 6,848,671

Bengang No.2 Furnace Construction Team 0.00 1,259,385

Bengang No. 2 Construction Co., Construction Team 0.00 918,799

Bengang Group Steel Rolling Equipment Plant 0.00 807,652

Bengang Gongyou Industrial Co. 0.00 1,032,600

Installation Co. 7,567,853 0.00

Bengang Group 32,775,640 0.00

Bengang Group Construction Co. 39,787,830 0.00

Bengang Institution 1,067,000 0.00

Bengang Trucking Co. 3,771899 0.00

Bengang Electronic Co. 1,728,593 0.00

Bengang Slag Co. 5,620,695 0.00

Bengang Group Machinery Plant Co., Ltd. 8,852,609 0.00

Bengang Industrial & Development Co. 7,392,619 0.00

Bengang Construction Co. 66,879,047 0.00

Total 175,443,785 14,005,222

Advances paid

Bengang Group 1,507,452,774 1,403,015,162

Total 1,507,452,774 1,403,015,162

Advances received

Bengang Group 326,608,567 58,889,302

Bengang Group Tengda Holdings Co., Ltd. 6,620,166 6,789,663

Dalian Boluole Steel Tube Co., Ltd. 26,282,411 15,964,444

Shanghai Bengang Steel Material Co., Ltd. 0.00 2,904,456

Nanjing Bengang Sales Co., Ltd. 0.00 281,064

Wuxi Bengang Sales Co., Ltd. 0.00 2,548,233

Guangzhou Free Trade Zone Bengang Sales Co., Ltd. 0.00 13,454,798

Tianjing Bengang Steel & Iron Trading Co., Ltd. 108,679,718 0.00

Bengang Group Steel Processing and Logistics Co., Ltd. 28,685,365 0.00

Yantai Bengang Sales Co., Ltd. 27,456,234 0.00

Haerbin Bengang Trading Co., Ltd. 22,979,791 0.00

Shenyang North Bengang Sales Co., Ltd. 17,906,414 0.00

Changchun Bengang Sales Co., Ltd. 8,631,974 0.00

Bengang Xi’an Materials Trading Co., Ltd. 2,345,957 0.00

Bengang International Trading Shenyang Branch 397,751 0.00

Total 576,594,348 100,831,960

Other receivables

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Bengang Group Construction Co. 100,000 0.00

Bengang Group Fire Resistance Co. 42,375 0.00

Bengang International Trading Co. 2,440,000 0.00

Total 3,672,375 0.00

Other payables

Jufeng Co. 3,480,051 4,683,020

International Trading Co. 1,847,212 0.00


Bengang Steel Rolling Factory 107,396 0.00

Bengang Construction Co. 5,928,449 0.00

Bengang Metallurgy Senior Technical School 1,147,113 0.00

Total 25,503,207 4,683,020

(IV) Significant contracts and their execution

The execution of business contracts were in normal processing, not any dissension occurred during the report term.

1. In the report period, the Company had no material guarantees offered to external parties.

2. In the report period, the Company neither entrusted others to manage cash assets or loans.

3. There is no other material contract.

(V) There is not any commitment issues occurred or carried over to the report term by

the shareholder holding more than 5% of the Company’s shares.

(VI) Dismissing and Inviting of Certified Public Accountants

As adopted by the 5th meeting of the 3rd term of Board, the proposal of dismissing PriceWaterHouseCoopers Zhongtian CPA as the auditor of the Company, and the proposal of inviting Ho and Ho & Company CPAs and Beijing Tianhua CPA and the auditors of the Company for year 2003.

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(VI) Particulars about the Company was subject to penalty or criticism of China

Security Regulatory Commission and been condemned by the Stock Exchange.

1. Particulars about the executive penalty by China Securities Regulatory Commission

(1) On August 6th, 2003, the Company published the public notice on China Securities Journal, Security Times and Hong Kong Commercial Daily about the inspection letter issued by the Shenyang Inspection Office of China Securities Regulatory Commission about the overdue annual report of year 2002. The inspection was started on August 6th, 2003. Currently the business operation of the Company is in normal condition.

(2) On Jan 14th, 2004, the Company received the letter of penalty resolution titled Zheng-Jian-Fa-Zi [2004]1 issued by China Securities Regulatory Commission. ① The letter of penalty recognised the following facts about the Company that were against the regulations: As inspected, Bengang Bancai was scheduled at April 16th, 2003 to issue its annual report 2002. The auditors from the CPAs started working in the Company since February 9th, 2003. Then the auditors raised question about the account collected in advance amounted to RMB486 million occurred in 2001 and it’s accounting treatment, and request to perform retrospective auditing and extensive auditing. The Company didn’t negotiate with the CPA to find a proper solution on this issue promptly. Thus the Company failed to issue its annual report for year 2002 before May 1st, and been suspended in the stock exchange. The annual report 2002 wasn’t published until June 26th, 2003. From the point of China Securities Regulatory Committee, the Company has broken the Securities Law with its Article 61 “listed companies shall submit the annual report containing the following information to the regulatory organizations and the stock exchange before the ending of the 4th month after the ending of each fiscal year, and publish it….”, and forms the behaviour as stated by Article 177-2 “didn’t published its share placing documents or submit relative reports”. ② Penalty decision as stated in the letter In accordance with the Article 177-2 of the Securities Law, China Securities Regulatory Commission has decided to charge the Company RMB100 thousand as penalty.

2. Particulars about condemned by Shenzhen Stock Exchange

On May 24, 2003, Shenzhen Stock Exchange issued the “Resolution of Condemning Bengang Steel Plates Co., Ltd. and Relative Personnel” (the “Resolution”). The Resolution point out that the Company has not disclosed its 2002 Annual Report and the 1st Quarterly Report before April 30th, 2003. This has been regarded as violating the Article 4.1 and 6.1 of “Share Listing Rules of Shenzhen Stock Exchange” (the “Rules”), as well as “The notification of improving the work of 2002 Annual Report” and “The notification of improving the work of the 1st Quarterly Report 2003”. The directors of the Company Li Mohua, Yu Tiancheng, Chen Jizhuang, Jie Houfu, Liang Guangde, Li Yu, Guo Yanchang, Zhou Tianlai, Zhang Guiyu, Guan Dianguo, Zhong Tianli, Xue Xiangxin are obligated for the issue. On May 24, the Board of Directors issued an announcement with statement of “for the above problems encountered, the Company and the relative directors will take this as an serious lesson and apologise faithfully to the investors of the Company. We commit ourselves to keep following with the regulations of the Security Law, Company Law and the Rules of Share Listing. And information will be disclosed promptly, accurately, truthfully, and completely. The above mistake will not been made any more.

3. Particulars about the rectification of the problems pointed out by the Shenyang Office of China Securities Regulatory Commission.

In accordance with the relative terms of “Inspection Regulations of Quoted Companies” issued by China Securities Regulatory Commission, China Securities Regulatory Commission Shenyang Office undertook an itineration inspection on Bengang Steel Plates Co., Ltd. (“the Company”). The Office

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issued document No. Shen-zheng-jian-shang-shi-zi [2003]86 titled “Notification on the managerial rectifications for Bengang Steel Plates Co., Ltd.” (“the Notification”) on the problems discovered in the inspection. The Board of Directors and the management level paid great attention on this event and undertook rectification on the problems responding to the Notification within the stipulated period. The 3rd term Board of Directors held its 4th meeting on December 30, 2003 to examine the Report of Managerial Rectification in Responding to the Inspection of China Securities Regulatory Commission Shenyang Office.

The above report was published on the December 31, 2003 issues of China Securities Journal, Security Times, and Hong Kong Commercial Daily.

(VIII) There isn’t any other significant event in the report term hasn’t been disclosed

which should have.

X. Financial Report

1. Financial Statements (Enclosed)

2. Notes to Financial Statements

XI. Documents for reference

1. Accounting Statements with signatures and seals of the legal representative, Chief Accountant and person in charge of accounting affairs;

2. Original copy of the Auditors’ Report under the seal of the accounting firm and signed by and under the seal of certified accountants.

3. Originals of all documents and manuscripts of Public Notices of the Company disclosed in public in the newspapers as designated by China Securities Regulatory Commission.

Li Mohua

The Chairman of Board

Bengang Steel Plates Co., Ltd.

April 23rd, 2003

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REPORT OF THE AUDITORS To the shareholders of Bengang Steel Plates Co., Limited (incorporated in the People’s Republic of China with limited liability) We have audited the accompanying balance sheet of Bengang Steel Plates Co., Limited (the “Company”) as of 31st December 2003 and the related statements of income, cash flows and statement of changes in equity for the year then ended. These financial statements set out on pages 2 to 28 are the responsibility of the Company’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 as promulgated by the International Federation of Accountants. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the 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 financial statements present fairly, in all material respects, the financial position of the Company as of 31st December 2003, and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards promulgated by the International Accounting Standards Board.

Ho and Ho & Company Certified Public Accountants

20th April 2004, Hong Kong

Bengang Steel Plates Co., Limited

Financial statements for the year ended 31st December 2003

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Income statement for the year ended 31st December 2003 (Expressed in Renminbi Thousand Yuan) Note 2003 2002 RMB’000 RMB’000 Turnover 4 11,210,196 7,750,477Cost of sales (10,295,582) (6,966,569)

Gross profit 914,614 783,908Other operating income 5 5,479 -Selling expenses (61,346) (84,389)Administrative expenses (51,303) (50,293)Other operating expenses 6 (3,364) (31,582)

Profit from operations 7 804,080 617,644Net finance costs 8 (75,174) (71,828)

Profit before tax 728,906 545,816Income tax expenses 9 (255,394) (199,696)

Net profit for the year 473,512 346,120

Earnings per share- basic 10 RMB0.42 RMB0.30



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Balance sheet as at 31st December 2003

(Expressed in Renminbi Thousand Yuan)

Note 2003 2002

RMB’000 RMB’000

(Re-stated)

Assets

Non-current assets Property, plant and equipment 13 3,346,888 3,789,049 Construction in progress 14 94,149 11,513 Deferred tax assets 15 14,713 24,509

Total non-current assets 3,455,750 3,825,071

Current assets

Inventories 16 841,007 732,496 Amount due from related companies 17 1,742,177 1,713,779 Accounts receivable 18 17,265 2,324 Bills receivable 273,555 122,648 Prepaid expenses and other current assets 19 34,815 8,314 Prepaid tax 20 30,352 18,005 Bank balances and cash 1,003,195 896,669

Total current assets 3,942,366 3,494,235

Total assets 7,398,116 7,319,306



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Balance sheet as at 31st December 2003

(Expressed in Renminbi Thousand Yuan)

Note 2003 2002

RMB’000 RMB’000

(Re-stated)

Equity and Liabilities

Shareholders’ equity Share capital 22 1,136,000 1,136,000 Reserves 23 3,510,386 3,036,874

4,646,386 4,172,874

Non-current liabilities Bank loans – repayable after one year 24 325,688 928,597

Current liabilities Amount due to related companies 25 777,566 60,630 Accounts payable 26 109,403 110,714 Bills payable 20,756 - Other payable and accrued charges 27 70,392 107,711 Receipt in advance 834,542 1,260,661 Short-term bank loans 24 - 678,119 Bank loans- repayable within one year 24 613,383 -

Total current liabilities 2,426,042 2,217,835

Total liabilities 2,751,730 3,146,432

Total equity and liabilities

7 398 116 7 319 306

The financial statements on pages 2 to 28 were approved and authorized for issue by the Board of

Directors on 20th April 2004 and are signed on its behalf by:



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Statement of changes in equity for the year ended 31st December 2003 (Expressed in Renminbi Thousand Yuan) Total equity

RMB’000

Balance at 1st January 2002 4,026,747Payment of 2001 final dividends (199,993)Net profit for the year 346,120

Balance at 31st December 2002 and 1st January 2003 4,172,874Net profit for the year 473,512

Balance at 31st December 2003 4,646,386



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Cash flow statement for the year ended 31st December 2003 (Expressed in Renminbi Thousand Yuan)

2003 2002 RMB’000 RMB’000

Profit from operations 804,080 617,644 Adjustments for:

Depreciation on property, plant and equipment 455,762 420,594Impairment loss on property, plant and

equipment

- 25,620Impairment losses on property, plant and

equipment written back on disposal

(25,963) (7,157)Loss on disposal of property, plant and

equipment

23,615 10,131Unrealized exchange loss (20,062) (15,764)

Operating cash flows before movements in working capital

1,237,432 1,051,068

(Increase) decrease in inventories (108,511) 91,931Increase in amount due from related companies (28,398) (602,760)Increase in accounts receivable (14,941) (984)(Increase) decrease in bills receivable (150,907) 64,492Decrease in prepaid tax 55 117,221(Increase) decrease in pre-paid expenses and

other current assets

(26,501) 2,706Increase (decrease) in amount due to related

companies

716,936 (1,690)(Decrease) increase in account payable (1,311) 51,706Increased (decrease) in bills payable 20,756 (6,900)(Decrease) increase in receipt in advance (426,119) 300,084Increase (decrease) in other payable and

accrued charges

(37,319) (31,997) Cash generated from operations 1,181,172 1,034,877

Income tax paid (258,000) (198,000)Interest paid (67,389) (72,132)Bank charges paid (1,706) (518)

Net cash from operating activities 854,077 764,227



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Cash flow statement for the year ended 31st December 2003 (Expressed in Renminbi Thousand Yuan) 2003 2002 RMB’000 RMB’000 Net cash from operating activities 854,077 764,227

Investing activities

Receipt of interest income 13,983 4,191Proceeds from disposal of property, plant and equipment 5,598 6,966

Acquisition of property, plant and equipment (99,487) (145,360)Increase in fixed deposits with maturity more than three months (109,505) (465,111)

Net cash used in investing activities (189,411) (599,314) Financing activities

Dividends paid - (199,993)New bank loans - 662,056Repayment of bank loans (667,645) (278,738)

Net cash (used in) from financing activities (667,645) 183,325 (Decrease) increase in cash and cash equivalents (2,979) 348,238 Cash and cash equivalents at beginning of year 431,558 83,320 Cash and cash equivalents at end of year (note 21) 428,579 431,558



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Subsidiary Form of Asset Impairment Provision Ended December 31, 2003 In RMB

Beginning of year Current year Decreased in current year End of year Items

Line

Balance Increased Carried back Carried out Total Balance

I. Total of bad debt provision 1 33,753,003.24 -125,179.40 - - 33,627,823.84

Incl. Account receivable 2 32,328,746.00 -125,179.54 - 32,203,566.46

Other receivables 3 1,424,257.24 0.14 - 1,424,257.38

II. Total of short-term investment impairment provision 4 - - - - -

Incl. Stock investment 5 -

Bond investment 6 -

III. Total of inventory impairment provision 7 16,767,093.55 - 3,600,000.00 - 3,600,000.00 13,167,093.55

Incl. Merchandise inventory 8 - -

Raw materials 9 16,767,093.55 - 3,600,000.00 3,600,000.00 13,167,093.55

IV. Total of long-term investment impairment provision 10 - -0.00 - - -0.00

Incl. Long-term equity investment 11 -0.00 - -0.00

Long-term credit investment 12 - - -

V. Total of fixed asset impairment provision 13 25,960,663.00 - - 25,960,663.00 25,960,663.00 -

Incl. House & building 14 - -

Machinery equipment 15 25,960,663.00 25,960,663.00 25,960,663.00 -

VI. Total of intangible asset impairment provision 16 - - - - -

Incl. Patent 17 - - -

Trademark 18 - - -

VII. Construction in progress impairment provision 19 - - -

VIII. Consigned loan impairment provision 20 - -

IX. Total 21 76,480,759.79 -125,179.40 3,600,000.00 25,960,663.00 29,560,663.00 46,794,917.39



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Statement of Equity Movement In RMB Items December 31, 2003 December 31, 2002

I. Capital share

Initial balance 1,136,000,000.00 1,136,000,000.00

Increased this term

Incl. Carried in from capital reserves

Carried in from surplus reserves

Carried in from profit distribution

New capital shares

Decreased this term

Balance at the end of term 1,136,000,000.00 1,136,000,000.00

II. Capital reserves

Initial balance 1,396,933,943.30 1,396,933,943.30

Increased this term 1,684,708.11

Incl. Capital or share capital excessive value

Provision for accepting of non-cash donation

Cash donation accepted

Provision for equity investment

Government funding

Variation from foreign currency translating

Other capital reserves 1,684,708.11

Decreased this term

Incl. Carried over to capital or capital shares

Balance at the end of term 1,398,618,651.41 1,396,933,943.30

III. Statutory and optional surplus reserves

Initial balance 202,110,721.79 163,619,200.35

Increased this term 52,472,446.66 38,491,521.44

Incl. Drawn from net profit 52,472,446.66 38,491,521.44

Incl. Statutory surplus reserves 52,472,446.66 38,491,521.44

Optional surplus reserves

Carried in from statutory public welfare

Decreased this term

Incl. Covering of losses

Carried over to capital shares

Cash dividend distributed

Share dividend distributed

Balance at the end of term 254,583,168.45 202,110,721.79

Incl. Statutory surplus reserves 254,583,168.45 202,110,721.79



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Optional surplus reserves

IV. Statutory public welfare

Initial balance 101,055,360.39 81,809,599.67

Increased this term 26,236,223.33 19,245,760.72

Incl. Drawn from net profit 26,236,223.33 19,245,760.72

Decreased this term

Incl. Welfare paid

Balance at the end of term 127,291,583.72 101,055,360.39

V. Profit not distributed

Initial balance 1,034,761,624.19 907,577,291.91

Net profit (loss) of current term 524,724,466.62 384,915,214.44

Profit distribution of current term 78,708,669.99 257,730,882.16

Profit (net loss) not distributed at the end of term 1,480,777,420.82 1,034,761,624.19

Supplementary information

Item Accumulated this year Practical amount the previous year

1. Placing or disposing of department or invested

unit

2. Loss from nature force

3.Increase/decrease of total profit due to changing

of accounting policy

4.Increase/decrease of total profit due to changing

of accounting estimation

5. Loss from debt reconstruction

6.Others



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Notes to the financial statements for the year ended 31st december 2003 1. GENERAL INFORMATION

Bengang Steel Plates Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on 27th June 1997. The Company’s Domestically Listed Foreign Shares (“B shares”) and Domestic Shares (“A shares”) were listed on the Shenzhen Stock Exchange in July 1997 and November 1997 respectively.

The directors considered that Benxi Iron and Steel (Group) Limited (“the Parent Company”) is the ultimate parent company of the Company.

The Company is principally engaged in steel smelting, metallurgy, processing and distribution business of related products in the PRC. As at 31st December 2003, the Company has 3,678 (2002: 3,551) employee.

2. CORRECTION OF FUNDAMENTAL ERRORS

During the year ended 31st December 2002, the Company transferred part of advances received from its customers to the Parent Company. As such transfer of funds were mistakenly not reflected in the financial statements of the Company for the year ended 31st December 2002, the advances from customers and prepayment to the Parent Company as of 31st December 2002 were understated accordingly by approximately RMB321,619,000 and RMB321,619,000 respectively. These fundamental errors were identified and adjusted that the comparative figures of the financial statements for the year ended 31st December 2002 were restated accordingly. The correction of these fundamental errors did not have any impact on the net asset value of the Company as of 31st December 2002 and its operating results for the year then ended.

As at 31st December 2003, there has been no such fund transfer to the Parent Company and no outstanding balances on this respect.

3. PRINCIPAL ACCOUNTING POLICIES a) Statement of compliance

The financial statements of the Company have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board (“IASB”). IFRS includes International Accounting Standards (“IAS”) and related interpretations.



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The Company maintains its accounting records and prepares its statutory financial statements in accordance with the accounting principles and the PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises (“Statutory Financial Statements”).

The accounting policies and basis adopted to the preparation of the Statutory Financial Statements differ in certain respects from IFRS. The differences arising from the restatement of the results of operations and the net assets for compliance with IFRS are adjusted in financial statements but will not be taken up in the accounting records of the Company.

b) Basis of preparation

The financial statements have been prepared in Renminbi (“RMB”), the currency in which the majority of the Company’s transactions are denominated.

Except for certain property, plant and equipment which are stated at their revalued value, the financial statements have been prepared on the historical cost basis.

The accounting policies have been consistently applied by the Company and are consistent with those of the previous year.

The principal accounting policies adopted in this report are set out below: c) Foreign currency transactions

Transactions in foreign currencies are translated to RMB at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet dates are re-translated to RMB at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies, that are stated at historical cost are translated to RMB at the foreign exchange rate ruling at the date of the transaction.

d) Property, plant and equipment i) Owned assets

Property, plant and equipment are stated at cost or valuation (note 13b) less accumulated depreciation and impairment losses. The cost for self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads and borrowing costs.



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Where an item of property, plant and equipment comprises major components having difference 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, including inspection and overhead expenditure, is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property, plan and equipment. All other expenditure is recognized in the income statement as an expense as incurred.

iv) 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, and major components that are accounted for separately. The estimated useful lives are as follows:

Estimated useful life Plant and buildings 10－35 years Machinery and equipment 5－15 years Motor vehicles and office equipment 5－8 years

v) Disposals

Gains or losses arising from the retirement or disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated income statement on the date of retirement or disposal.

e) Construction in progress

Construction in progress represents properties under construction and is stated in the consolidated balance sheet at cost less impairment losses. Cost comprises direct cost of construction as well as interest charges and foreign exchange differences on related borrowing funds to the extent that they are regarded as an adjustment to interest charges during the period of construction.

Construction in progress is transferred to property, plant and equipment when the



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asset is substantially ready for its intended use. No depreciation is provided in respect of construction in progress. f) Impairment

The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value. The amount of the reduction is recognized as an expense in the consolidated income statement unless the asset is carried at revalued amount for which an impairment loss is recognized directly against any related revaluation reserve to the extent that the impairment loss does not exceed the amount held in the revaluation reserve for that the same asset.

The Company assesses at each balance sheet date whether there is any indication that an impairment loss recognized for an asset in prior years may no longer exist. An impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down or write-off cease to exist, is recognized as income unless the asset is carried at revalued amount. Reversal of an impairment loss on a revalued asset is credited to the revaluation reserve except for impairment loss which was previously recognized as an expense in the consolidated income statement; a reversal of such impairment loss is recognized as income; a reversal of such impairment loss is recognized as income. The reversal is reduced by the amount that would have been recognized as depreciation had the write-down or write-off not occurred.



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3. PRINCIPAL ACCOUNTING POLICIES (Continued)

g) 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 cost of completion and selling expenses.

The cost of inventories is calculated based on the weighted average costing 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.

h) Trade and other receivables

Trade and other receivables are stated at cost less allowance for doubtful accounts. An allowance for doubtful accounts is provided based upon the evaluation of the recoverability of these accounts at the balance sheet date.

i) Cash equivalents

Cash equivalents represent short-term, highly liquid investments that are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value.

j) Interest-bearing borrowings

Interest-bearing borrowings are recognized 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 recognized in the income statement over the period of the borrowings on an effective interest basis.

k) Trade and other payables

Trade and other payables are stated at their cost. l) Provisions

A provision is recognized in the balance sheet when the Company has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is



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material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risk specific to the liability.

m) Dividends

Dividends on ordinary shares are recognized as a liability in the period in which they are declared.

n) Revenue Revenue from the sale of goods is recognized in the income statement when the

significant risks and rewards of ownership have been transferred to the buyer.

o) Interest income

Interest income from bank deposits if accrued on a time-apportioned basis by reference to the principal outstanding and the rate applicable.

p) Expenses

i) Operating lease payments

Payments made under operating lease are recognized in the income statement on straight-line basis over the terms of the respective leases. Lease incentive received is recognized in the income statement as an integral part of the total lease expense. Contingent rental are charged to the income statement in the accounting period in which they are incurred.

ii) Net financing costs

Net financing costs comprise interest payable on borrowings, calculated using the effective interest rate method, interest receivable on funds invested and foreign exchange gains and losses.

Interest income is recognized in the income statement as it accrues, taking into account the effective yield on the assets.

Interest expenses are recognized in the income statement using the effective interest rate method.

iii) Borrowing costs



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Borrowing costs are expensed in the income statement in the period in which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale.

The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditures for the asset are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

q) Retirement benefits

The Company participates in retirement schemes operated by local authorities and the annual cost of providing retirement benefits is charged to the consolidated income statement according to the contribution determined by the relevant schemes. The Company has no further liability to the retirement schemes operated by the local authorities.

r) Income tax

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly to equity, in which case it is recognized 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 of 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. Initial recognition of assets or liabilities that affect neither accounting nor taxable profit is regarded as temporary difference which is not provided for. The amount of deferred tax provided is based on the expected manner of realization 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 recognized only to the extent that it is probable that future taxable profits will be available against which the asst can be utilized. Deferred



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tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

s) Segment reporting

A segment is a distinguishable component of the Company 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 segment.

4. TURNOVER

Turnover represents invoiced sales to customers less discounts and returns. The major revenue recognized for the year is as follows:

2003 2002 RMB’000 RMB’000

Hot plates 10,652,707 6,204,845Steel billets 204,141 1,205,114Molten steel 193,770 153,982Scrap material 67,919 96,067Others 91,659 90,469

11,210,196 7,750,477 5. OTHER OPERATING INCOME

2003 2002 RMB’000 RMB’000

Gains on debts restructuring 1,685 -Gain on disposal of property, plant and equipment 3,794 -

5,479 -



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6. OTHER OPERATING EXPENSES

2003 2002 RMB’000 RMB’000

Penalties 718 2,990Donations 1,198 -Loss on disposal of property, plant and equipment 27,409 10,131(Written back) provision of impairment loss on

property, plant and equipment (25,961) 18,461

3,364 31,582 7. PROFIT FROM OPERATIONS

Profit from operations has been stated after charging: 2003 2002 RMB’000 RMB’000

Staff costs - salaries and wages 90,279 74,248 - retirement benefits contribution 24,380 19,809 - other staff welfare 12,639 10,395 127,298 104,452 Depreciation on property, plant an equipment 455,762 420,594Impairment loss on property, plant and equipment - 25,620Written back of impairment loss on property, plant

and equipment on disposal (25,961) (7,157)Loss on disposal of property, plant and equipment 27,409 10,131Rental expenses for land use rights 2,673 2,673Written back of provision for loss in inventories (3,600) -Decrease in provision for bad debts (125) -



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8. NET FINANCE COSTS

2003 2002 RMB’000 RMB’000 Interest expenses 67,389 72,132Less: Amount capitalised in construction in progress - (12,395) 67,389 59,737Interest income (13,983) (4,191)Exchange loss 20,062 15,764Bank charges 1,706 518

75,174 71,828

9. INCOME TAX EXPENSES Income tax expenses in income statement represent:

2003 2002 RMB’000 RMB’000 PRC enterprise income tax Current year 245,598 205,162Deferred taxation (Note 14) 9,796 (5,466)

255,394 199,696

The income tax rate applicable to the Company is 33%. A reconciliation of the expected tax with the actual tax expense is as follows:-

2003 2002 RMB’000 RMB’000 Profit before tax 728,906 545,816 Expected PRC income tax expense at a statutory tax

rate of 33% 240,539 180,119Non-deductible expenses 14,855 19,577

255,394 199,696 10. EARNINGS PER SHARE



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The earnings per share for the year ended 31st December is calculated based on the net profit for the year of RMB473,512,000 (2002: RMB346,120,000) and the weighted average number of ordinary shares outstanding during the year of 1,136,000,000 shares (2002: 1,136,000,000 shares). The amount of diluted earning per share is not presented as there were no dilutive potential ordinary shares in expositing during the years presented.

11. DIVIDEND

Pursuant to a resolution passed at the Directors’ meeting on 20th April 2004, a final dividend of RMB0.2 (2002: NIL) per share totaling RMB227,200,000 (2002: NIL) was proposed for shareholders’ approval at the Annual General Meeting. Final dividend of RMB227,200,000 (2002: NIL) proposed after the balance sheet date has not been recognized as a liability at the balance sheet date.

12. EMPLOYEE BENEFIT PLAN

As stipulated by the regulation of the PRC, the Company participates in a defined contribution retirement plans organized by municipal and provincial government for its staff. The Company has no other material obligations for the payment of pension benefits associated with these plans beyond the annual contribution described above. The Company’s contribution to the defined contribution plans is recognized as an expense in the income statement as incurred. The Company’s contribution for the year was RMB24,380,000 (2002: RMB19,809,000)



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13. PROPERTY, PLANT AND EQUIPMENT

Plant and buildings

Machinery and

equipment

Motor vehicle and office equipment Total

RMB’000 RMB’000 RMB’000 RMB’000 Cost or valuation AT 1st January 2003 1,076,107 4,511,357 72,580 5,660,044 Reclassification (16,554) 68,261 (51,707) -Additions - 124 2,422 2,546Transfer from construction in

progress - 13,956 349 14,305Disposals (63,766) (40,020) (2,744) (106,530)

At 31st December 2003 995,787 4,553,678 20,900 5,570,365 Representing: Cost 65,696 1,379,999 512 1,446,207Valuation 930,091 3,173,679 20,388 4,124,158

995,787 4,553,678 20,900 5,570,365 Accumulated depreciation At 1st January 2003 328,291 1,496,881 19,860 1,845,032 Reclassification (459) 5,518 (5,059) -Charge for the year 37,044 417,498 1,220 455,762Written back on disposal (17,609) (51,583) (8,125) (77,317)

At 31st December 2003 347,267 1,868,314 7,896 2,223,477 Provision for impairment

losses At 1st January 2003 25,620 297 46 25,963 Eliminated on disposal (25,620) (297) (46) (25,963)

At 31st December 2003 - - - - Net book value

31st December 2003 648,520 2,685,364 13,004 3,346,888

31st December 2002 722,196 3,014,179 52,674 3,789,049

a) All of the buildings owned by the Company are located in the PRC under medium lease (lease periods of 20 years or more but less than 50 years).



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b) For the purpose of the group restructuring of the Parent Company, the Company

was established as a joint stock company in 1997. Part of business operations and certain assets and liabilities of the Parent Company were transferred to the Company. These assets and liabilities had been revalued an independent PRC qualified valuer on 16th March 1997 according to the relevant regulations and on such basis reflected in the Company’s financial statements.

On 15th April 2002, the property, plant equipment were revalued by an independent PRC qualified valuer on the market price basis. The surplus arising therefrom was transferred to the revaluation reserves.

14. CONSTRUCTION IN PROGRESS

2003 2002 RMB’000 RMB’000

At beginning of year 11,513 1,091,429Additions 96,941 365,200Transfer to property, plant and equipment (14,305) (1,445,116)

At end of year 94,149 11,513 15. DEFERRED TAX ASSETS

Deferred tax has been provided for using liabilities at the prevailing tax rate of 33% on the temporary differences. Movements in deferred tax assets during the year are as follows:

For the year ended 31st December 2002

At 1st January

2002

Recognised in income

statement

At 31st December

2002 RMB’000 RMB’000 RMB’000

Provision for bad debts 11,035 (626) 10,409Provision for loss in inventories 5,533 - 5,533Provision for impairment loss on

property, plant and equipment 2,475 6,092 8,567

19,043 5,466 24,509



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For the year ended 31st December 2003

At 1st January

2003

Recognised in income

statement

At31st December

2003 RMB’000 RMB’000 RMB’000

Provision for bad debts 10,409 (41) 10,368Provision for loss in inventories 5,533 (1,188) 4,345Provision for impairment loss on

property, plant and equipment 8,567 (8,567) -24,509 (9,796) 14,713

16. INVENTORIES

2003 2002 RMB’000 RMB’000

Raw materials 4,155 1,379Work in progress 368,512 224,470Finished goods 273,592 403,068Spare parts 207,915 120,346 854,174 749,263Less: Provision for loss (13,167) (16,767) 841,007 732,496

At 31st December 2003, inventories stated at net realisable value was RMB16,715,000 (2002: RMB34,291,000).



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17. AMOUNT DUE FROM RELATED COMPANIES

2003 2002 RMB’000 RMB’000

Parent Company 1,533,432 1,665,745Fellow subsidiaries

- 上海本鋼鋼鐵物資有限公司 2,725 -- 大連波羅勒鋼管有限公司 1,400 -- 天津本儲物資經銷有限公司 24,436 -- 天津本鋼鋼鐵貿易有限公司 16,260 -- 本溪鋼鐵（集團）特殊鋼有限責任公司 60,495 47,084- 本溪鋼鐵（集團）鋼材加工配送有限責任公司 4,500 -- 廈門本鋼鋼鐵銷售有限公司 6,368 -- 廣州保稅區本鋼銷售有限公司 6,712 -- 無錫本鋼鋼鐵銷售有限公司 68,677 -- 煙臺本鋼鋼鐵銷售有限公司 13,500 -- 本鋼國際貿易有限公司瀋陽分公司 - 950- 本鋼鋼集團國際經濟貿易有限公司 2,440 -- 其他 1,232 -

1,742,177 1,713,779 18. ACCOUNTS RECEIVABLE

2003 2002 RMB’000 RMB’000 Third parties 49,469 34,653Less: Provision for bad debts (32,204) (32,329)

17,265 2,324 19. PREPAID EXPENSES AND OTHER CURRENT ASSETS

2003 2002 RMB’000 RMB’000 Third parties 13,865 -Other receivable 20,554 7,638Pre-paid expenses 1,820 2,100

36,239 9,738Less: Provision for bad debts (1,424) (1,424)



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34,815 8,314 20. PREPAID TAX

At 31st December 2002 and 2003, the prepaid tax represents the enterprise income tax paid in advance. It can be utilized to offset the future tax payable.

21. CASH AND CASH EQUIVALENTS For the purpose of the cash flow statement, cash and cash equivalents represent:

2003 2002 RMB’000 RMB’000

Bank balance and cash 1,003,195 896,669Less: Fixed deposits with maturity more than 3

months (574,616) (465,111)

428,579 431,558

22. SHARE CAPITAL

2003 2002 RMB’000 RMB’000

Issued and fully paid: 616,000,000 state-owned A shares of RMB1 each 616,000 616,000120,000,000 public-owned A shares of RMB1 each 120,000 120,000400,000,000 public-owned B shares of RMB 1 each 400,000 400,000

1,136,000 1,136,000

A shares and B shares rank pari passu in all material respect. 23. RESERVES

Share

premium

Assets revaluation

reservesStatutory reserves

Retained profits Total

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

At 1st January 2002 1,072,187 632,895 245,429 940,236 2,890,747Payment of 2001 final dividends - - - (199,993) (199,993)



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Net profit for the year - - - 346,120 346,120Transfer - - 57,737 (57,737) -

At 31st December 2002 and 1st January 2003 1,072,187 618,926 303,166 1,042,595 3,036,874


Net profit for the year - - - 473,512 473,512Transfer - - 78,709 (78,709) -

At 31st December 2003 1,072,187 594,428 381,875 1,461,896 3,510,386

a) Share premium and assets revaluation reserve

Share premium represents net assets acquired from the Parent company in excess of par value of state shares issued and proceeds from the issuance of A shares and B shares in excess of their par value, net of expenses directly relating to the issue of the shares. Share premium may be converted into shares capital by the issue of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them

Assets revaluation reserve represents the surplus on revaluation of property, plant and equipment. Any decrease in valuation is first offset against an increase on earlier valuation in respect of the same asset and is thereafter charged to the income statement. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus is transferred to accumulated profits.

b) Statutory surplus reserve

According to the PRC Laws and the Company’s Articles of Association, the Company is to provide certain statutory reserves which are appropriated from the net profit as reported in the statutory accounts. Accordingly, the Company shall set aside 10% of its net profit for statutory reserves fund (except where the reserve balance has reached 50% of the Company’s registered share capital) and 5% to 10% for the statutory public welfare fund. The Company may make appropriations from its net profit to the discretionary common reserve funds upon approval by shareholders. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends without the prior approval by Shareholders under certain conditions.



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When the statutory reserve fund is not sufficient to cover the priors’ losses, the current year’s net profit will first be used to compensate the previous losses before the appropriations to the statutory common reserve fund and statutory public welfare fund.

The Directors propose, subject to Shareholders’ approval, the transfer of RMB78,709,000 (2002: RMB57,737,000) being 10% and 5% (2002: 10% and 5%) of the net profit for the year as showed in the Statutory financial statements.

e) Retained profits available for distribution

According to the Company’s Articles of Association, the amount of retained profits available for distribution to shareholders of the Company is the lower of the amount determined in accordance with the PRC Accounting g Rules and Regulations and the amount determined in accordance with IFRS. At 31st December 2003, the amount of retained profits available for distribution was RMB 1,480,777,000 (2002: RMB 1,034,762,000), being the amount determined in accordance with the PRC Accounting Rules and Regulations. Final dividend of RMB 227,200,000 (2002: NIL) proposed after the balance sheet date has not been recognized as a liability at the balance sheet date.

24. BANK LOANS a) Long-term bank loans

2003 2002 RMB’000 RMB’000

Guaranteed 679,561 541,616Unsecured or not guaranteed 259,510 386,981 939,071 928,597Less: Amount repayable within one year (613,383) - 325,688 928,597

The interest rates for long-term bank loans are from 2.1% to 5.76%（2002：2.94% to 6.21%）。The guaranteed is provided by the Parent Company (Note 30)

The maturity of the bank loans are as follows:



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2003 2002 RMB’000 RMB’000

Within one year 613,383 -In more than one but less than two years 212,492 581,235In more than two but less than five years 81,215 187,000More than five years 31,981 160,362 939,071 928,597Less: Amount repayable within one year (613,383) - 325,688 928,597

b) Short-term bank loans

2003 2002 RMB’000 RMB’000

Guaranteed - 237,400Unsecured or not guaranteed - 440,719 - 678,119

The interest rates for the short-term bank loans are 5.31% to 6.21%。The guarantee is provided by the Parent Company (Note 32).



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25. AMOUNT DUE TO RELATED COMPANIES

2003 2002 RMB’000 RMB’000 Parent company 369,542 -Fellow subsidiaires - 天津本鋼鋼鐵貿易有限公司 108,680 -- 本溪鋼鐵（集團）鋼材加工配送有限責任公司 28,685 -- 煙臺本鋼鋼鐵銷售有限公司 27,456 -- 大連波羅勒鋼管有限公司 26,282 15,964- 哈爾濱本鋼經濟貿易有限公司 22,980 -- 瀋陽北方本鋼鋼鐵銷售有限公司 17,907 -- 長春本鋼鋼鐵銷售有限公司 8,632 -- 本鋼特鋼機電安裝公司 7,568 6,849- 本溪鋼鐵（集團）騰達股份有限公司 6,620 6,790- 本鋼集團國際經濟貿易有限公司 5,080 -- 本溪經濟開發區本鋼聚豐發展有限公司 3,480 4,683- 本鋼西安物資銷售有限公司 2,346 -- 廣州保稅區本鋼銷售有限公司 - 13,455- 上海本鋼鋼鐵物資有限公司 - 2,904- 無錫本鋼鋼鐵銷售有限公司 - 2,548- 南京本鋼鋼鐵銷售有限公司 - 281- 其他 142,308 7,156

777,566 60,630

26. ACCOUNTS PAYABLE

2003 2002 RMB’000 RMB’000

Third parties 109,403 110,714



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27. OTHER PAYABLE AND ACCRUED CHARGES

2003 2002 RMB’000 RMB’000 Parent company and fellow subsidiaries Tax other than income tax 10,249 55,013Accrued salaries and welfare 5,538 3,407Other payable 54,605 49,291 70,392 107,711

28. FINANCIAL INSTRUMENTS

Financial assets of the Company include cash and cash equivalents, trade and other receivables and amounts due from related companies. Financial liabilities of the Company include bank loan loans, trade and other payables and amounts due to related companies. The Company has no derivative instruments that are designated and qualified as hedging instruments at 31st December 2003 and 2002. Exposure to credit, interest rate and currency risk arises in the normal course of the Company’s business.

a) Credit risk

The carrying amounts of cash and cash equivalents, trade and other receivables and other current assets, except for prepayment and deposits, represent the Company’s maximum exposure to credit risk in relation to financial assets. The majority of the Company’s trade account receivable relate to sales of steel plates to related parties and third parties. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade accounts receivable. The Company maintains an allowance for doubtful accounts and actual losses have been within management’s expectations. No other financial assets carry a significant exposure to credit risk.

b) Interest rate risk

The interest rates and term of repayment of the bank loans of the Company are disclosed in note 24.

c) Foreign currency risk

Substantially all of the revenue-generating operations of the Company are



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transacted in Renminbi, which is not fully convertible into foreign currencies. On 1st January 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted by the People’s Bank of China. However, the unification of the exchange rate does not imply convertibility of Renminbi into Hong Kong Dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form with suppliers’ invoice, shipping documents and signed contracts.

d) Fair value

The fair values of cash and cash equivalent, accounts and other receivables, accounts, amount due from related companies, accounts and other payables, and amount due to related companies approximate their carrying amounts due to the nature or short-term maturity of these instruments. The fair value of long-term bank loans is based on the market interest rates for the same period. At 31st December 2002 and 2003, there was insignificant difference between the market interest rates and the historical rates, therefore the re were no significant difference between their carrying value and fair value.

29. OPERATING LEASE COMMITMENT

The minimum lease payment under irrevocable operating leases is as follows:

2003 2002 RMB’000 RMB’000 Within one year 2,673 2,673More than one but less than five years 10,692 10,692More than five years 104,256 106,929 117,621 120,294



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30. CAPITAL COMMITMENT

At 31st December 2002 and 2003, there was capital commitment so far as not provided for in the financial statements:

2003 2002 RMB’000 RMB’000 Contracted - 1,243,974Authorised but not contracted - - - 1,243,974

On 21st April 2001, the Company concluded an Asset Acquisition Agreement with the Parent Company, pursuant to which, the Company had undertaken to acquire the assets and related business of two production plants from the Parent Company. Both the Company and the Parent Company agreed that the proposed acquisition of the production plants was subject to the successful issuance of not more than 400,000,000 shares of new A Shares by the Company.

The proposed acquisition of the production plants and issuance of new A Shares by the Company (the “proposed transactions”) were approved at the Company’s annual general meeting for fiscal year 2000 held on 25th May 2001 with an expiry period for completion of the proposed transactions of one year. On 28th May 2002, the expiry date of the proposed transactions was extended from 25th May 2002 to 25th May 2003 at the Company’s annual general meeting for fiscal year 2001.

According to the agreement, the purchase considerations are determined based on the results of an appraisal of the assts and liabilities of the production plants as of 31st December 2000 as conducted by a qualified PRC appraiser. According to the asset appraisal report Liao Hua Ping Bao Zi (2001) No. 001 issued by Liaoning Huachengxin Assets Appraisal Office on 16th May 2001, the net asset value of the two production plants as of 31st December 2000 was approximately RMB402,171,000 and RMB838,633,000 respectively. Pursuant to the asset appraisal report, the appraisal results mentioned above were valid until 31st December 2001. Had the proposed acquisitions taken place subsequent to 31st December 2001, a re-appraisal would be deemed necessary.

As at 31st December 2003, the proposed transactions have not been completed such that the agreement mentioned above become expired.



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31. CONTINGENT LIABILITIES

At 31st December 2002 and 2003, the Company had no material contingent liabilities. 32. RELATED PARTIES TRANSACTIONS

Companies are considered to be related if one company has ability, directly or indirectly, to control the other company or exercise significant influence over the other company in making financial and operating decisions. Companies are also considered to be related if they ate subject to common control or common significant influence.

The principal related party transactions with the Parent Company and follow subsidiaries, which were carried out in the ordinary course of business, are as follows:



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2003 2002 RMB’000 RMB’000 Sales of goods -Parent Company 3,027,092 2,617,348

-天津本鋼鋼鐵貿易有限公司 603,163 115,201-煙臺本鋼鋼鐵銷售有限公司 440,542 3,012 -無錫本鋼鋼鐵銷售有限公司 309,398 43,757 -本溪鋼鐵（集團）特殊鋼有限公司 198,339 153,982 -廣州保稅區本鋼銷售有限公司 151,593 83,430 -上海本鋼鋼鐵物資有限公司 147,690 24,760 -哈爾濱本鋼經濟貿易有限公司 119,404 14,919 -廈門本鋼鋼鐵銷售有限公司 111,941 --大連波羅勒鋼管有限公司 94,282 --本鋼（集團）國際經濟貿易有限公司 90,068 59,844 -瀋陽北方本鋼鋼鐵銷售有限公司 62,598 --本溪鋼鐵（集團）騰達股份有限公司 40,589 8,849 -本溪鋼鐵（集團）鋼材加工配送有限責任公司 32,433 --上海本鋼鋼鐵銷售有限公司 26,307 --天津本儲物資經銷有限公司 23,415 223,898 -本鋼西安物資銷售有限公司 7,985 484 -長春本鋼鋼鐵銷售有限公司 4,292 --南京本鋼鋼鐵銷售有限公司 273 9,784

5,491,404 3,359,268 Purchase of raw material

-Parent Company(i) 6,187,626 3,715,812-本溪鋼鐵（集團）鐵業有限責任公司 1,347,499 671,790

7,535,125 4,387,602



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32. RELATED PARTIES TRANSACTIONS (Continued)

2003 2002 RMB’000 RMB’000Purchase of power from Parent Company 755,181 520,981 Purchase of consumables and spare parts -Parent Company (i) 915,876 1,174,970

-本鋼機械有限公司 73,713 13,711-本溪鋼鐵（集團）石灰石礦 88,879 72,852

1,078,468 1,261,533Payment of repair and maintenance charges -Parent Company(i) 181,643 182,973

-本鋼特鋼機電安裝公司 1,384 3,764 183,027 186,737

支付運輸費用 -Parent Company(i) 65,956 91,124

-本鋼汽運有限公司 16,130 14,177 82,086 105,301

Payment of package expenses

-本溪經濟開發區本鋼聚豐發展有限公司 5,341 16,970

Payment of export handling charges -本鋼（集團）國際經濟貿易有限公司 (i) 4,416 -

Payment of harbour fee

-營口本鋼國貿物流有限公司 2,746 - Payment of renal

-Parent Company(ii) 2,673 2,673 Payment of property management fee

-本鋼集團房地產有限責任公司 209 - Payment of trade mark using rights fee

- Parent Company(i) 25 25



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32. RELATED PARTIES TRANSACTIONS (Continued) The transactions were entered into on normal commercial terms.

i) On 14th April 1997, the Company and the Parent Company entered into a Comprehensive Services Agreement governing, inter alia, the purchases of raw materials, energy and electric power and accessories and spare parts, provision of freight and maintenance services and etc., effective from the date of the incorporation of the Company with a term of five years. On 1st November 2001, the Company signed a Supplementary Agreement to Comprehensive Services Agreement with the Parent Company to extend the term to 31st December 2006.

ii) According to an approval document “Liao Tu Pi Zi (1997) No.6” issued by the

Land Bureau of Liaoning Province on 5 March 1997 regarding the valuation of land and the related arrangements, and the Land Use Right Lease Contract entered into between the Company and the Parent Company on 7 April 1997, the Company is authorized to lease the land on which its plants and buildings are located from the Parent Company at an agreed fee. The term of the lease contract is 50 years. The initial rent payable by the Company to the Parent Company was approximately RMB2,673,000 per annum. The rent will be adjusted after the first five years of the lease and subsequently at an interval of three years. On 6th April 2002, the Company signed a supplementary agreement to the Land Use Right Lease Contract with the Parent Company to maintain the same amount of rent until 7th April 2005.

As of 31st December 2003, the Company had loans amounting to RMB679,561,000 (2002:779,016,000) guaranteed by the Parent Company (note 24).

33. SEGMENT INFORMATION

The Company is engaged in steel industrial. As the Company operates in only one industry and in one location, no segment information is presented.

34. DIFFERENCES BETWEEN FINANCIAL STATEMENTS PREPARED UNDER

THE PRC ACCOUNTING RULES AND REGULATIONS AND IFRS

Other than the differences in the classifications of certain financial captions and the accounting for the items described below, there are no material differences between the Company’s financial statements prepared under the PRC Accounting Rules and Regulations and IFRS. The major differences are:

i) Depreciation on revalued assets



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Certain assets of the Company are stated at their revalued value in the financial statements prepared under IFRS while they are stated at cost in the financial statements prepared under the PRC Accounting Rules and Regulation. Accordingly, the depreciation charge of these assets under IFRS and the PRC Accounting Rules and Regulations is different.

ii) Provision for deferred tax

Under the PRC Accounting Rules and Regulation, the Company selected to adopted “Tax payable method” in accounting for the income tax expense. Under this method, tax expenses for the current period are the amount paid or payable for current period only. However, under IFRS, income tax expenses include not only tax for current period but also deferent taxation.

34. DIFFERENCES BETWEEN FINANCIAL STATEMENTS PREPARED UNDER

THE PRC ACCOUNTING RULES AND REGULATIONS AND IFRS (Continued)

iii) Gain from debt restructuring

Under the PRC Accounting Rules and Regulations, gain from debt restructuring should be credited to capital reserve. Under IFRS, gain from debt re-structuring should be recognized as income.

Effects of major differences between the PRC Accounting Rules and Regulations and IFRS on net profit are analyzed as follows:

Note 2003 2002

RMB’000 RMB’000 Net profit under the PRC Accounting

Rules and Regulations 524,724 384,915Adjustment: - Depreciation on revalued assets （i） (43,101) (44,261) - Deferred taxation （ii） (9,796) 5,466 - Gain on debt restructuring (iii) 1,685

(51,212) (38,795)

Net profit under IFRS 473,512 346,120

Effects of major differences between the PRC Accounting Rules and Regulations and IFRS on shareholders’ fund are analyzed as follows:



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Note 2003 2002 RMB’000 RMB’000Shareholders’ fund under the PRC

Accounting Rules and Regulations 4,397,271 3,870,862 Adjustments: - Depreciation on revalued assets （i） 321,764 321,764 - Deferred taxation （ii） (87,362) (44,261) - Gain on debt restructuring （iii） 14,713 24,509 249,115 302,012 Shareholders’ fund under IFRS 4,646,386 4,172,874