ITEM 19. EXHIBITS. Exhibits to this Annual Report:
1.1 | | Memorandum of Association of China Yuchai International Limited (the “Registrant”) (incorporated herein by reference to the Registration Statement on Form F-1, filed by the Registrant on November 9, 1994 (File No. 33-86162) (the “Form F-1”)). | | 1.2 | | Bye-laws of the Registrant (incorporated herein by reference to the Form F-1). | | 3.1 | | Subscription and Shareholders’ Agreement of Diesel Machinery (BVI) Limited, dated November 9, 1994, among Diesel Machinery (BVI) Limited, Hong Leong Asia Ltd. (“HLA”) and China Everbright Holdings Company Limited (“EB Holdings”) (incorporated herein by reference to the Form F-1). | | 3.2 | | Supplemental Subscription and Shareholders Agreement, dated January 21, 2002, between EB Holdings and HLA (incorporated herein by reference to the Annual Report on Form 20-F for fiscal year ended December 31, 2001, filed by the Registrant on June 25, 2002 (the “Form 20-F FY 2001”). | | 3.3 | | Second Supplemental Subscription and Shareholders Agreement, dated May 17, 2002, between EB Holdings and HLA (incorporated herein by reference to the Form 20-F FY 2001). | | 4.1 | | Contract for the Subscription of Foreign Common Shares in Guangxi Yuchai Machinery Company Limited (“Yuchai”) and Conversion from a Joint Stock Limited Company into a Sino-Foreign Joint Stock Limited Company, dated April 1, 1993, among Yuchai, Guangxi Yuchai Machinery Holdings Company, Hong Leong Technology Systems (BVI) Ltd., Cathay |
66
| | Clemente Diesel Holdings Limited, Goldman Sachs Guangxi Holdings (BVI) Ltd., Tsang & Ong Nominees (BVI) Ltd. and Youngstar Holdings Limited, with amendments, dated May 27, 1994 and October 10, 1994 (incorporated herein by reference to the Form F-1). | | 4.2 | | Subscription and Transfer Agreement (with Shareholders’ Agreement), dated April 1993, among Cathay Clemente (Holdings) Limited, GS Capital Partners L.P., Sun Yuan Overseas Pte Ltd., HL Technology Systems Pte Ltd. and Coomber Investments Limited (incorporated herein by reference to the Form F-1). | | 4.3 | | Amended and Restated Shareholders’ Agreement, dated as of November 9, 1994 among the Cathay Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems Pte. Ltd., Coomber Investments Limited, owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd., and the Registrant (incorporated herein by reference to the Form F-1). | | 4.4 | | Form of Amended and Restated Registration Right Agreement, dated as of November 9, 1994, among the Cathay Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems Pte. Ltd., Coomber Investments Limited, owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd., and the Registrant (incorporated herein by reference to the Form F-1). | | 4.5 | | Form of Subscription Agreement between the Registrant, its wholly-owned subsidiaries named therein and Yuchai (incorporated herein by reference to the Form F-1). | | 4.6 | | Form of Term Loan Agreement between the Registrant and Yuchai (incorporated herein by reference to the Form F-1). | | 4.7 | | Share Purchase and Subscription Agreement, dated as of November 9, 1994, between (i) the Registrant, (ii) China Everbright Holdings Company Limited and (iii) Coomber Investments Limited (incorporated herein by reference to the Form F-1). | | 4.8 | | Investment and Shareholders’ Agreement between CACG Limited IV and Guangxi Yuchai Machinery Company Limited, dated July 14, 1994, with a First Amendment dated September 5, 1994 (incorporated herein by reference to the Form F-1). | | 4.9 | | Employment Agreement, dated September 5, 2003, between Yuchai and Wang Jianming (incorporated herein by reference to the Annual Report on Form 20-F for fiscal year ended December 31, 2003, filed by the Registrant on June 29, 2004 (the “Form 20-F FY 2003”). | | 4.10 | | Form of indemnification agreement entered into by the Company with each of Wrixon Frank Gasteen, Gao Jia Lin, Gan Khai Choon, Raymond C. K. Ho, Kwek Leng Peck, Liu Chee Ming, Wong Hong Ren, Philip Ting Sii Tien, Lim Poh Lea, Sheila Murugasu, Teo Tong Kooi, Neo Poh Kiat and Tan Aik-Leang (incorporated herein by reference to the Form 20-F FY 2003). | | 4.11 | | Agreement between the Company and Yuchai, dated July 19, 2003 (incorporated herein by reference to the Form 20-F FY 2003). | | 4.12 | | Reorganization Agreement between the Company, Coomber and Yuchai, dated April 7, 2005 (incorporated herein by reference to the Form 6-K filed by the Company on April 7, 2005). | | 4.13 | | Reorganization Agreement Amendment (No. 1) between the Company, Coomber and Yuchai, dated December 2, 2005 (incorporated herein by reference to the Form 6-K filed by the Company on December 6, 2005). | | 8.1 | | Subsidiaries of the Registrant. | | 12.1 | | Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act. | | 13.1 | | Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. | | 14.1 | | Consent of Independent Registered Public Accounting Firm.EXHIBITS. |
The Company has not included as exhibits certain instruments with respect to its long-term debt, the total amount of debt authorized under each of which does not exceed 10% of its total consolidated assets. The Company agrees to furnish a copy of any such instrument to the SEC upon request.
67
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | CHINA YUCHAI INTERNATIONAL LIMITEDExhibits to this Annual Report: | | | | | | | | By: | | /s/ Philip Ting Sii Tien | | | | | | | | | | Name: Philip TING Sii Tien | | | | | Title: Chief Financial Officer and Director |
Date: August 4, 2006
68
Exhibit Index
| | | Exhibit Number | | Description of Exhibit | 1.1 | | Memorandum of Association of China Yuchai International Limited (“or the Registrant”)Registrant (incorporated herein by reference to Amendment No. 1 to the Registration Statement on Form F-1, filed by the Registrant on November 9,December 8, 1994 (File No. 33-86162) (the “Form F-1”)), or the Form F-1). | | | | 1.2 | | Bye-laws of the Registrant (incorporated herein by reference to the Form F-1). | | | | 3.1 | | Subscription and Shareholders’Shareholders Agreement of Diesel Machinery (BVI) Limited, dated November 9, 1994, among Diesel Machinery (BVI) Limited, Hong Leong Asia Ltd. (“HLA”), or Hong Leong Asia, and China Everbright Holdings Company Limited, (“EB Holdings”)or China Everbright Holdings (incorporated herein by reference to Amendment no. 2 to the Registration Statement on Form F-1)F-1, filed by the Registrant on December 14, 1994 (File No. 33-86162)). | | | | 3.2 | | Supplemental Subscription and Shareholders Agreement, dated January 21, 2002, between EBChina Everbright Holdings and HLAHong Leong Asia (incorporated herein by reference to the Annual Report on Form 20-F FY 2001)for fiscal year ended December 31, 2001, filed by the Registrant on June 25, 2002 (File No. 001-013522), or Form 20-F FY2001). | | | | 3.3 | | Second Supplemental Subscription and Shareholders Agreement, dated May 17, 2002, between EBChina Everbright Holdings and HLAHong Leong Asia (incorporated herein by reference to the Form 20-F FY 2001)FY2001). | | | | 4.1 | | Contract for the Subscription of Foreign Common shares in Guangxi Yuchai Machinery Company Limited, (“Yuchai”)or Yuchai, and Conversion from a Joint Stock Limited Company into a Sino-Foreign Joint Stock Limited Company, dated April 1, 1993, among Yuchai, Guangxi Yuchai Machinery Holdings Company, Hong Leong Technology Systems (BVI) Ltd., Cathay Clemente Diesel Holdings Limited, Goldman Sachs Guangxi Holdings (BVI) Ltd., Tsang & Ong Nominees (BVI) Ltd. and Youngstar Holdings Limited with amendments, dated May 27, 1994 and October 10, 1994 (incorporated herein by reference to the Form F-1). | | | | 4.2 | | Subscription and Transfer Agreement (with Shareholders’ Agreement), dated April 1993, among Cathay Clemente (Holdings) Limited, GS Capital Partners L.P., Sun Yuan Overseas Pte Ltd., HL Technology Systems Pte Ltd.Ltd and Coomber Investments Limited (incorporated herein by reference to the Registration Statement on Form F-1)F-1, filed by the Registrant on November 9, 1994 (File No. 33-86162)). | | | | 4.3 | | Amended and Restated Shareholders’ Agreement, dated as of November 9, 1994 among The Cathay Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems Pte.Pte Ltd, Hong Leong Asia Ltd., Coomber Investments Limited, China Everbright Holdings Company Limited, Diesel Machinery (BVI) Limited, owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd. and the Registrant (incorporated herein by reference to the Form F-1). | | | | 4.4 | | Form of Amended and Restated Registration Right Agreement, dated as of November 9, 1994, among The Cathay Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems Pte. Ltd.,Pte Ltd, Coomber Investments Limited, owners of shares |
79
| | | | | formerly held by Sun Yuan Overseas (BVI) Ltd. and the Registrant (incorporated herein by reference to Amendment No. 3 to the Registration Statement on Form F-1)F-1, filed by the Registrant on December 15, 1994 (File No. 33-86162)). | | | | 4.5 | | Form of Subscription Agreement between the Registrant and its wholly-owned subsidiaries named therein and Yuchai (incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form F-1)F-1, filed by the Registrant on December 14, 1994 (File no. 33-86162)). | | | | 4.6 | | Form of Term Loan Agreement between the Registrant and Yuchai (incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form F-1)F-1, filed by the Registrant on December 14, 1994 (File No. 33-86162)). | | | | 4.7 | | Share Purchase and Subscription Agreement, dated as of November 9, 1994, between (i) the Registrant, (ii) China Everbright Holdings Company Limited and (iii) Coomber Investments Limited (incorporated herein by reference to the Form F-1). | | | | 4.8 | | InvestmentForm of indemnification agreement entered into by the Registrant with its officers and Shareholders’ Agreement between CACG Limited IV and Guangxi Yuchai Machinery Company Limited, dated July 14, 1994 with a First Amendment dated September 5, 1994 (incorporated herein by reference to the Form F-1). | | | | 4.9 | | Employment Agreement, dated September 5, 2003, between Yuchai and Wang Jianmingdirectors (incorporated herein by reference to the Annual Report on Form 20-F for fiscal year ended December 31, 2003, filed by the Registrant on June 29, 2004, (the “Form 20-F FY 2003”). |
69
| | | Exhibit Number | | Description of Exhibit | 4.10 | | Form of indemnification agreement entered into by the Company with each of Wrixon Frank Gasteen, Gao Jia Lin, Gan Khai Choon, Raymond C. K. Ho, Kwek Leng Peck, Liu Chee Ming, Wong Hong Ren, Philip Ting Sii Tien, Lim Poh Lea, Sheila Murugasu, Teo Tong Kooi, Neo Poh Kiat and Tan Aik-Leang (incorporated herein by reference to theor Form 20-F FY 2003)FY2003). | | | | 4.114.9 | | Agreement between the CompanyRegistrant and Yuchai, dated July 19, 2003 (incorporated herein by reference to the Form 20-F FY 2003)FY2003). | | | | 4.124.10 | | Reorganization Agreement between the Company, Coomber and Yuchai, dated April 7, 2005 (incorporated herein by reference to the Current Report on Form 6-K filed by the CompanyRegistrant on April 7, 2005)2005 (File No. 001-13522)). | | | | 4.134.11 | | Reorganization Agreement Amendment (No. 1) between the Company,Registrant, Coomber and Yuchai, dated December 2, 2005 (incorporated herein by reference to the Current Report on Form 6-K filed by the CompanyRegistrant on December 6, 2005)2005 (File No. 001-13522)). | | | | 4.12 | | Reorganization Agreement Amendment (No. 2) between the Registrant, Coomber and Yuchai, dated November 30, 2006 (incorporated herein by reference to the Current Report on Form 6-K filed by the Registrant on November 30, 2006 (File No. 001-13522)). | | | | 4.13 | | Cooperation Agreement among the Registrant, Yuchai, Coomber and Guangxi Yuchai Machinery Group Company Limited, dated June 30, 2007 (incorporated herein by reference to the Current Report on Form 6-K filed by the Registrant on July 5, 2007 (File No. 001-13522)). | | | | 8.1 | | Subsidiaries of the Registrant. (Filed herewith) | | | | 12.1 | | Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act. (Filed herewith) | | | | 13.1 | | Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. | | | | 14.1 | | Consent of Independent Registered Public Accounting Firm. (Filed herewith) |
The Company has not included as exhibits certain instruments with respect to its long-term debt, the total amount of debt authorized under each of which does not exceed 10% of its total consolidated assets. We agreeThe Company agrees to furnish a copy of any such instrument to the SEC upon request. 7080
SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf. | | | | | | CHINA YUCHAI INTERNATIONAL LIMITED
| | | By: | /s/ Teo Tong Kooi | | | Name: | Teo Tong Kooi | | | Title: | President and Director | | | | | | | Date: January 30, 2009 | | | | |
81
Exhibit Index | | | Exhibit | | | Number | | Description of Exhibit | | | | 1.1 | | Memorandum of Association of China Yuchai International Limited or the Registrant (incorporated herein by reference to Amendment No. 1 to the Registration Statement on Form F-1, filed by the Registrant on December 8, 1994 (File No. 33-86162), or the Form F-1). | | | | 1.2 | | Bye-laws of the Registrant (incorporated herein by reference to the Form F-1). | | | | 3.1 | | Subscription and Shareholders Agreement of Diesel Machinery (BVI) Limited, dated November 9, 1994, among Diesel Machinery (BVI) Limited, Hong Leong Asia Ltd., or Hong Leong Asia, and China Everbright Holdings Company Limited, or China Everbright Holdings (incorporated herein by reference to Amendment no. 2 to the Registration Statement on Form F-1, filed by the Registrant on December 14, 1994 (File No. 33-86162)). | | | | 3.2 | | Supplemental Subscription and Shareholders Agreement, dated January 21, 2002, between China Everbright Holdings and Hong Leong Asia (incorporated herein by reference to the Annual Report on Form 20-F for fiscal year ended December 31, 2001, filed by the Registrant on June 25, 2002 (File No. 001-013522), or Form 20-F FY2001). | | | | 3.3 | | Second Supplemental Subscription and Shareholders Agreement, dated May 17, 2002, between China Everbright Holdings and Hong Leong Asia (incorporated herein by reference to the Form 20-F FY2001). | | | | 4.1 | | Contract for the Subscription of Foreign Common shares in Guangxi Yuchai Machinery Company Limited, or Yuchai, and Conversion from a Joint Stock Limited Company into a Sino-Foreign Joint Stock Limited Company, dated April 1, 1993, among Yuchai, Guangxi Yuchai Machinery Holdings Company, Hong Leong Technology Systems (BVI) Ltd., Cathay Clemente Diesel Holdings Limited, Goldman Sachs Guangxi Holdings (BVI) Ltd., Tsang & Ong Nominees (BVI) Ltd. and Youngstar Holdings Limited with amendments, dated May 27, 1994 and October 10, 1994 (incorporated herein by reference to the Form F-1). | | | | 4.2 | | Subscription and Transfer Agreement (with Shareholders’ Agreement), dated April 1993, among Cathay Clemente (Holdings) Limited, GS Capital Partners L.P., Sun Yuan Overseas Pte Ltd., HL Technology Systems Pte Ltd and Coomber Investments Limited (incorporated herein by reference to the Registration Statement on Form F-1, filed by the Registrant on November 9, 1994 (File No. 33-86162)). | | | | 4.3 | | Amended and Restated Shareholders’ Agreement, dated as of November 9, 1994 among The Cathay Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems Pte Ltd, Hong Leong Asia Ltd., Coomber Investments Limited, China Everbright Holdings Company Limited, Diesel Machinery (BVI) Limited, owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd. and the Registrant (incorporated herein by reference to the Form F-1). | | | | 4.4 | | Form of Amended and Restated Registration Right Agreement, dated as of November 9, 1994, among The Cathay Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems Pte Ltd, Coomber Investments Limited, owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd. and the Registrant (incorporated herein by reference to Amendment No. 3 to the Registration Statement on Form F-1, filed by the Registrant on December 15, 1994 (File No. 33-86162)). | | | | 4.5 | | Form of Subscription Agreement between the Registrant and its wholly-owned subsidiaries named therein and Yuchai (incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form F-1, filed by the Registrant on December 14, 1994 (File no. 33-86162)). | | | | 4.6 | | Form of Term Loan Agreement between the Registrant and Yuchai (incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form F-1, filed by the Registrant on December 14, 1994 (File No. 33-86162)). | | | | 4.7 | | Share Purchase and Subscription Agreement, dated as of November 9, 1994, between the Registrant, China Everbright Holdings Company Limited and Coomber Investments Limited (incorporated herein by reference to the Form F-1). | | | | 4.8 | | Form of indemnification agreement entered into by the Registrant with its officers and directors (incorporated herein by reference to the Annual Report on Form 20-F for fiscal year ended December 31, 2003, filed by the Registrant on June 29, 2004, or Form 20-F FY2003). | | | | 4.9 | | Agreement between the Registrant and Yuchai, dated July 19, 2003 (incorporated herein by reference to the Form 20-F FY2003). |
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| | | Exhibit | | | Number | | Description of Exhibit | | | | 4.10 | | Reorganization Agreement between the Company, Coomber and Yuchai, dated April 7, 2005 (incorporated herein by reference to the Current Report on Form 6-K filed by the Registrant on April 7, 2005 (File No. 001-13522)). | | | | 4.11 | | Reorganization Agreement Amendment (No. 1) between the Registrant, Coomber and Yuchai, dated December 2, 2005 (incorporated herein by reference to the Current Report on Form 6-K filed by the Registrant on December 6, 2005 (File No. 001-13522)). | | | | 4.12 | | Reorganization Agreement Amendment (No. 2) between the Registrant, Coomber and Yuchai, dated November 30, 2006 (incorporated herein by reference to the Current Report on Form 6-K filed by the Registrant on November 30, 2006 (File No. 001-13522)). | | | | 4.13 | | Cooperation Agreement among the Registrant, Yuchai, Coomber and Guangxi Yuchai Machinery Group Company Limited, dated June 30, 2007 (incorporated herein by reference to the Current Report on Form 6-K filed by the Registrant on July 5, 2007 (File No. 001-13522)). | | | | 8.1 | | Subsidiaries of the Registrant. (Filed herewith) | | | | 12.1 | | Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act. (Filed herewith) | | | | 13.1 | | Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. (Filed herewith) |
The Company has not included as exhibits certain instruments with respect to its long-term debt, the total amount of debt authorized under each of which does not exceed 10% of its total consolidated assets. The Company agrees to furnish a copy of any such instrument to the SEC upon request. 83
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 20042005, 2006 AND 2005 (With Report of Independent Registered Public Accounting Firm)2007
Index to Financial Statements China Yuchai International Limited | | | | | | | | | F – | 2 | | | | | | | | | F-2 | | | | F – | 3 | | | | | | | | | F-5 | | | | F – | 5 | | | | | | | | | F-6 | | | | F – | 7 | | | | | | | | | F-8 | | | | F – | 8 | | | | | | | | | F-10 | | | | F – | 12 | | F-12 | |
F - 1F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders China Yuchai International Limited: We have audited China Yuchai International Limited’s internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). China Yuchai International Limited’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Assessment of Internal Control Over Financial Reporting.Our responsibility is to express an opinion on China Yuchai International Limited’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Certain material weaknesses have been identified and included in management’s assessment related to China Yuchai International Limited’s (1) insufficient U.S. GAAP knowledge and resources, (2) equity method accounting, (3) financial statement closing process, (4) related party transactions, (5) inventory data maintenance, (6) selling price maintenance, (7) information technology, (8) provision for warranty costs and (9) approvals and authorizations. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of China Yuchai International Limited as of December 31, 2006 and 2007 and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the years then ended. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 consolidated financial statements, and this report does not affect our report dated January 30, 2009, which expressed an unqualified opinion on those consolidated financial statements. In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, China Yuchai International Limited has not maintained effective internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control-Integrated Frameworkissued by COSO. We do not express an opinion or any other form of assurance on management’s statements referring to remediation measures to address material weaknesses in internal control over financial reporting. /s/ KPMG LLP Singapore January 30, 2009 F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To theThe Board of Directors and Stockholders Shareholders
China Yuchai International Limited We have audited the accompanying consolidated balance sheets of China Yuchai International Limited (the “Company”) and subsidiaries as of December 31, 20042006 and 2005,2007, and the related consolidated statements of income,operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, all expressed in Renminbi.then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Yuchai International Limited and subsidiaries as of December 31, 20042006 and 2005,2007, and the results of their operations and their cash flows for each of the years in the three-year periodthen ended, December 31, 2005 in conformity with U.S. generally accepted accounting principles. As more fully described in Note 5 and Note 34 to the consolidated financial statements, on December 25, 2007 a subsidiary of the Company recognizedpurchased a provision for uncollectible100% equity interest in Guangxi Yulin Hotel Company Ltd (“Yulin Hotel Company”) from certain related parties in contemplation of the settlement of loans todue from Yuchai Marketing Company Limited (YMCL), which is also a related partyparty. The recoverability of the loans due from YMCL was previously considered impaired and a loss provision and corresponding valuation allowance in the amount of Rmb205Rmb 203 million was recognized during the year ended December 31, 2005. Although management of the Company has concluded the subsidiary of the Company is the legal owner of the shares in Yulin Hotel Company and the subsidiary also bears the risks and rewards of ownership in the corresponding operations of Yulin Hotel Company as of December 25, 2007, the transfer of the equity interest was subject to the approval of the appropriate government regulatory agency in the People’s Republic of China. Consequently, no recovery for the previously recorded impairment loss on the loans due from YMCL has been recognized in the Company’s consolidated financial statements as of December 31, 2005. Further, as described in Note 34, the Company entered into certain material transactions subsequent to December 31, 2005.2007. The approval was subsequently obtained on January 13, 2009. The accompanying consolidated financial statements as of and for the year ended December 31, 20052007 have been translated into U.S. dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in Renminbi have been translated into U.S. dollars on the basis set forth in Note 3(i) to the consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China Yuchai International Limited’s internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated January 30, 2009, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. /s/ KPMG LLP CertifiedSingapore
January 30, 2009 F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders China Yuchai International Limited We have audited the accompanying consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows of China Yuchai International Limited and subsidiaries for the year ended December 31, 2005. These consolidated financial statements 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 the standards of the Public Accountants Company Accounting Oversight Board (United States). 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 management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of China Yuchai International Limited and subsidiaries for the year ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. As further described in Note 2(b) to the consolidated financial statements, the consolidated financial statements of the Company for the year ended December 31, 2005 were restated for the correction of certain accounting errors. As described in Note 5 to the consolidated financial statements, the Company recognized a provision for uncollectible loans to a related party in the amount of Rmb203 million as of December 31, 2005. /s/ KPMG Hong Kong August 4, 2006, except as to Note 2(b) which is as of May 15, 2008 F-2
F-4
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME OPERATIONS FOR YEARS ENDED DECEMBER 31, 2003, 20042005, 2006 AND 20052007
(Rmb and US$ amounts expressed in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | Note | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | | | | | | | | | | | | | | | | | | | | | | Revenues, net(a) | | | 3(k), 27, 28, 33 | | | | 4,569,950 | | | | 5,582,095 | | | | 5,829,431 | | | | 722,340 | | | | | | | | | | | | | | | | | | | | | | | Cost of goods sold(a) | | | 4, 27 | | | | (3,192,794 | ) | | | (4,006,886 | ) | | | (4,527,046 | ) | | | (560,958 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | | | | | 1,377,156 | | | | 1,575,209 | | | | 1,302,385 | | | | 161,382 | | | | | | | | | | | | | | | | | | | | | | | Research and development costs | | | 3(m) | | | | (94,594 | ) | | | (136,960 | ) | | | (123,876 | ) | | | (15,350 | ) | | | | | | | | | | | | | | | | | | | | | | Selling, general and administrative expenses(a) | | | 3(m), 4, 14, 27 | | | | (561,151 | ) | | | (658,320 | ) | | | (807,350 | ) | | | (100,041 | ) | | | | | | | | | | | | | | | | | | | | | | Provision for uncollectible loans to a related party | | | 5 | | | | — | | | | — | | | | (205,000 | ) | | | (25,402 | ) | | | | | | | | | | | | | | | | | | | | | | Gain on transfer of lease prepayment to a related party | | | 27 | | | | — | | | | — | | | | 2,533 | | | | 314 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | | | | | | 721,411 | | | | 779,929 | | | | 168,692 | | | | 20,903 | | | | | | | | | | | | | | | | | | | | | | | Interest expense | | | 3(s), 6, 28 | | | | (23,624 | ) | | | (31,757 | ) | | | (70,527 | ) | | | (8,739 | ) | | | | | | | | | | | | | | | | | | | | | | Equity in losses of affiliates | | | | | | | — | | | | — | | | | (5,106 | ) | | | (633 | ) | | | | | | | | | | | | | | | | | | | | | | Other (expenses)/income, net(a) | | | 7 | | | | (881 | ) | | | 5,682 | | | | 24,183 | | | | 2,997 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income before income taxes and minority interests | | | | | | | 696,906 | | | | 753,854 | | | | 117,242 | | | | 14,528 | | | | | | | | | | | | | | | | | | | | | | | Income taxes | | | 8 | | | | (112,924 | ) | | | (105,165 | ) | | | (20,875 | ) | | | (2,587 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income before minority interests | | | | | | | 583,982 | | | | 648,689 | | | | 96,367 | | | | 11,941 | | | | | | | | | | | | | | | | | | | | | | | Minority interests in income of consolidated subsidiaries | | | | | | | (145,800 | ) | | | (157,292 | ) | | | (27,880 | ) | | | (3,455 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | 438,182 | | | | 491,397 | | | | 68,487 | | | | 8,486 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F - 3
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES | | | | | | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | Note | | 2005 | | 2006 | | 2007 | | 2007 | | | | | | | Rmb | | Rmb | | Rmb | | US$ | Revenues, net(a) | | | 3(k),27,28,33 | (a) | | | 5,816,740 | | | | 6,920,528 | | | | 9,556,303 | | | | 1,398,224 | | Cost of goods sold(a) | | | 4, 27 | | | | (4,673,357 | ) | | | (5,648,407 | ) | | | (7,611,585 | ) | | | (1,113,684 | ) | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | | | | | 1,143,383 | | | | 1,272,121 | | | | 1,944,718 | | | | 284,540 | | Research and development costs | | | 3(m) | | | | (123,793 | ) | | | (167,653 | ) | | | (153,146 | ) | | | (22,407 | ) | Selling, general and administrative expenses (a) | | | 3(m),4,14,27 | | | | (793,153 | ) | | | (801,830 | ) | | | (951,589 | ) | | | (139,231 | ) | Provision for uncollectible loans to a related party | | | 5 | | | | (202,950 | ) | | | — | | | | — | | | | — | | Gain on transfer of land use rights to a related party | | | 27 | | | | 2,533 | | | | 1,841 | | | | 1,573 | | | | 230 | | | | | | | | | | | | | | | | | | | | | | | Operating income | | | | | | | 26,020 | | | | 304,479 | | | | 841,556 | | | | 123,132 | | Interest expense | | | 6, 28 | | | | (70,527 | ) | | | (117,491 | ) | | | (125,244 | ) | | | (18,325 | ) | Equity in net income/(loss),net of affiliates | | | 17 | | | | (6,032 | ) | | | (22,449 | ) | | | 14,048 | | | | 2,055 | | Other income, net(a) | | | 7,27 | | | | 25,449 | | | | 38,856 | | | | 53,554 | | | | 7,836 | | | | | | | | | | | | | | | | | | | | | | | Earnings/(loss) before income taxes and minority interests | | | | | | | (25,090 | ) | | | 203,395 | | | | 783,914 | | | | 114,698 | | Income taxes | | | 8 | | | | (10,148 | ) | | | (30,466 | ) | | | (68,518 | ) | | | (10,025 | ) | | | | | | | | | | | | | | | | | | | | | | Income/(loss) before minority interests | | | | | | | (35,238 | ) | | | 172,929 | | | | 715,396 | | | | 104,673 | | Minority interests in (income)/loss of consolidated subsidiaries | | | | | | | 2,947 | | | | (61,645 | ) | | | (189,927 | ) | | | (27,789 | ) | | | | | | | | | | | | | | | | | | | | | | Net income/(loss) | | | | | | | (32,291 | ) | | | 111,284 | | | | 525,469 | | | | 76,884 | | | | | | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | Note | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | Net earnings per common share | | | | | | | | | | | | | | | | | | | | | Basic | | | 3 | (l) | | | 12.40 | | | | 13.90 | | | | 1.88 | | | | 0.23 | | | | | | | | | | | | | | | | | | | | Diluted | | | 3 | (l) | | | 12.40 | | | | 13.90 | | | | 1.88 | | | | 0.23 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 3 | (l) | | | 35,340,000 | | | | 35,340,000 | | | | 36,459,635 | | | | 36,459,635 | | | | | | | | | | | | | | | | | | | | Diluted | | | 3 | (l) | | | 35,340,000 | | | | 35,340,000 | | | | 36,459,635 | | | | 36,459,635 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | Note | | 2005 | | 2006 | | 2007 | | 2007 | | | | | | | Rmb | | Rmb | | Rmb | | US$ | Earnings/ (loss) per common share | | | | | | | | | | | | | | | | | | | | | Basic | | | 3 | (l) | | | (0.89 | ) | | | 2.99 | | | | 14.10 | | | | 2.06 | | | | | | | | | | | | | | | | | | | | | | | Diluted | | | 3 | (l) | | | (0.89 | ) | | | 2.99 | | | | 14.10 | | | | 2.06 | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of shares | | | | | | | | | | | | | | | | | | | | | Basic | | | 3 | (l) | | | 36,459,635 | | | | 37,267,673 | | | | 37,267,673 | | | | 37,267,673 | | | | | | | | | | | | | | | | | | | | | | | Diluted | | | 3 | (l) | | | 36,459,635 | | | | 37,267,673 | | | | 37,267,673 | | | | 37,267,673 | | | | | | | | | | | | | | | | | | | | | | |
(a) | | Includes the following income and expenses resulting from transactions with related parties in addition to those indicated above (see NoteNotes 5 and 27) |
| | | | | | | | | | | | | | | | | | | | 2003 | | 2004 | | 2005 | | 2005 | | | | | | | | | | | | | | | | | | | | Rmb | | Rmb | | Rmb | | US$ | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Revenues, net | | 24,957 | | 4,537 | | 7,646 | | 947 | | | 7,646 | | 86,652 | | 94,901 | | 13,885 | | | | | Cost of goods sold | | | (93,056 | ) | | | (250,549 | ) | | | (417,816 | ) | | | (51,772 | ) | | | (417,816 | ) | | | (592,535 | ) | | | (573,926 | ) | | | (83,974 | ) | | | | Selling, general and administrative expenses | | | (97,240 | ) | | | (90,790 | ) | | | (186,759 | ) | | | (23,141 | ) | | | (186,759 | ) | | | (124,376 | ) | | | (149,964 | ) | | | (21,942 | ) | | | | Other (expenses)/income, net | | — | | — | | 11,922 | | 1,477 | | | | | | | | | | | | | | Other income, net | | | 11,922 | | 10,622 | | 11,664 | | 1,707 | |
See accompanying notes to consolidated financial statements. F - 4F-5
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 20042006 AND 20052007
(Rmb and US$ amounts expressed in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | | | As of December 31, | | | Note | | 2004 | | 2005 | | 2005 | | | Note | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | | | Rmb | | Rmb | | US$ | ASSETS | | | | | | Current assets | | | Cash and cash equivalents | | 722,672 | | 736,195 | | 91,224 | | | | 33(g) | | | 745,933 | | 520,945 | | 76,222 | | Trade accounts receivable, net | | | 9, 18(a) | | | 875,565 | | 1,146,227 | | 142,032 | | | Trade accounts and bills receivable, net | | | 9 | | 1,480,918 | | 3,107,785 | | 454,714 | | Amounts due from related parties | | 10, 27 | | 85,614 | | 233,188 | | 28,895 | | | 10, 27 | | 158,512 | | 143,652 | | 21,018 | | Loans to a related party | | 5 | | 205,000 | | — | | — | | | Loans receivable from a related party, net | | | 5 | | 2,050 | | 2,050 | | 300 | | Loans to customers, net | | 11 | | — | | 7,904 | | 979 | | | 11 | | 11,486 | | 3,361 | | 492 | | Inventories, net | | 12 | | 1,346,545 | | 1,636,283 | | 202,756 | | | Prepaid expenses, net | | 58,565 | | 138,322 | | 17,140 | | | Inventories | | | 12 | | 1,565,183 | | 1,647,025 | | 240,983 | | Prepaid expenses | | | 93,977 | | 31,752 | | 4,646 | | Other receivables, net | | 13 | | 115,414 | | 140,203 | | 17,373 | | | 13 | | 140,069 | | 97,074 | | 14,203 | | Income taxes recoverable | | — | | 43,526 | | 5,394 | | | 10,750 | | 27,990 | | 4,095 | | Deferred income taxes | | 8 | | 69,704 | | 88,783 | | 11,001 | | | 8 | | 112,779 | | 114,361 | | 16,733 | | | | | | | | | | | | | | | | | | | | Total current assets | | 3,479,079 | | 4,170,631 | | 516,794 | | | 4,321,657 | | 5,695,995 | | 833,406 | | | | | Property, plant and equipment, net | | | 14, 18(a) | | | 1,158,931 | | 1,442,515 | | 178,746 | | | 14, 34 | | 1,795,405 | | 2,158,246 | | 315,782 | | Construction in progress | | 15 | | 379,035 | | 459,902 | | 56,988 | | | 15 | | 288,559 | | 184,921 | | 27,057 | | Lease prepayments, net | | 16 | | 74,767 | | 70,608 | | 8,749 | | | Investments | | 17 | | 7,053 | | 191,974 | | 23,788 | | | Lease prepayments | | | 16, 34 | | 124,944 | | 168,002 | | 24,581 | | Investments in affiliates | | | 17 | | 508,246 | | 505,009 | | 73,890 | | Other investments | | | 17 | | 640,192 | | 615,201 | | 90,013 | | Goodwill | | 212,636 | | 212,636 | | 26,348 | | | | 3(n) | | | 212,636 | | 218,311 | | 31,942 | | Deferred income taxes | | 8 | | 72,747 | | 65,519 | | 8,119 | | | 8 | | 69,718 | | 33,499 | | 4,901 | | | | | | | | | | | | | | | | | | | | Total assets | | 5,384,248 | | 6,613,785 | | 819,532 | | | 7,961,357 | | 9,579,184 | | 1,401,572 | | | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY | | | | | | Current liabilities | | | Short-term bank loans | | | 18(a) | | | 430,000 | | 812,835 | | 100,721 | | | | 18(a) | | | 1,009,134 | | 819,164 | | 119,855 | | Current instalments of long-term bank loans | | | 18(b) | | | — | | 100,000 | | 12,391 | | | Amount due to the holding company | | 27 | | 4,143 | | 4,301 | | 533 | | | Amounts due to the holding company | | | 27 | | 3,226 | | 5,278 | | 772 | | Amounts due to related parties | | 10, 27 | | 42,686 | | 75,189 | | 9,317 | | | 5, 10, 27 | | 77,911 | | 380,521 | | 55,676 | | Trade accounts payable | | 1,089,717 | | 1,642,980 | | 203,586 | | | 2,132,798 | | 2,509,962 | | 367,243 | | Income taxes payable | | 25,387 | | 4,208 | | 521 | | | 1,789 | | 5,663 | | 829 | | Accrued expenses and other liabilities | | 20 | | 484,920 | | 571,717 | | 70,843 | | | 20 | | 639,350 | | 946,675 | | 138,512 | | | | | | | | | | | | | | | | | Total current liabilities | | | 3,864,208 | | 4,667,263 | | 682,887 | | Long-term bank loans, excluding current installments | | | | 18(b) | | | 675,454 | | 767,929 | | 112,359 | | | | | | | | | | | Total current liabilities | | 2,076,853 | | 3,211,230 | | 397,912 | | | Total liabilities | | | 4,539,662 | | 5,435,192 | | 795,246 | | | | | | | | | | | Long-term bank loans, excluding current instalments | | | 18(b) | | | 100,000 | | 50,000 | | 6,196 | | | | | | | | | | | | | | | Total liabilities carried forward | | 2,176,853 | | 3,261,230 | | 404,108 | | | | | | | | | | | | | | |
F - 5F-6
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER, 31, 20042006 AND 20052007 (CONTINUED) (Rmb and US$ amounts expressed in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | | | | | Note | | 2004 | | 2005 | | 2005 | | | As of December 31, | | | Rmb | | Rmb | | US$ | | | Note | | 2006 | | 2007 | | 2007 | | | | | | | | | | | | | | | | | | | Rmb | | Rmb | | US$ | Total liabilities brought forward | | | | | | | 2,176,853 | | | | 3,261,230 | | | | 404,108 | | | 4,539,662 | | 5,435,192 | | 795,246 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Minority interests | | | | | | | 724,311 | | | | 685,514 | | | | 84,944 | | | 693,296 | | 849,527 | | 124,299 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stockholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common stock | | | | | | | 30,349 | | | | 31,945 | | | | 3,958 | | | 31,945 | | 31,945 | | 4,674 | | Ordinary shares US$0.10 par value: authorized 100,000,000 shares; issued and outstanding 37,267,673 shares at December 31, 2005 (December 31, 2004: 35,340,000 shares) | | | | | | | | | | | | | | | | | | Special share US$0.10 par value: authorized 1 share; issued and outstanding 1 share at December 31, 2004 and 2005 | | | | | | | — | | | | — | | | — | | Ordinary shares US$0.10 par value: authorized 100,000,000 shares; issued and outstanding 37,267,673 shares at December 31, 2006 and 2007 | | | Special share US$0.10 par value: authorized 1 share; issued and outstanding 1 share at December 31, 2006 and 2007 | | | — | | — | | — | | Contributed surplus | | | | | | | 1,486,934 | | | | 1,692,251 | | | | 209,691 | | | 1,692,251 | | 1,692,251 | | 247,601 | | Statutory reserves | | | 22 | | | | 266,229 | | | | 269,017 | | | | 33,335 | | | 22 | | 267,586 | | 270,339 | | 39,555 | | Accumulated other comprehensive income | | | | | | | — | | | | 28,851 | | | | 3,575 | | | Accumulated other comprehensive income, net | | | 85,643 | | 154,580 | | 22,617 | | Retained earnings | | | | | | | 699,572 | | | | 644,977 | | | | 79,921 | | | 650,974 | | 1,145,350 | | 167,580 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total stockholders’ equity | | | | | | | 2,483,084 | | | | 2,667,041 | | | | 330,480 | | | 2,728,399 | | 3,294,465 | | 482,027 | | | | | | | | | | | | | | | | | | | | Commitments and contingencies | | 23, 24 | | | | | | | | | | | | | | | 5, 23, 24 | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities, minority interests and stockholders’ equity | | | 7,961,357 | | 9,579,184 | | 1,401,572 | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | | | | | | 5,384,248 | | | | 6,613,785 | | | | 819,532 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements. F - 6F-7
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOMEINCOME/(LOSS) FOR YEARS ENDED DECEMBER 31, 2003, 20042005, 2006 AND 20052007
(Rmb and US$ amounts expressed in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | Accumulated | | | | | other | | Total | | | other | | Total | | | Common | | Contributed | | Statutory | | Retained | | comprehensive | | stockholders’ | | | Common | | Contributed | | Statutory | | Retained | | comprehensive | | stockholders’ | | | Note | | stock | | surplus | | reserves | | earnings | | income | | equity | | | Note | | stock | | surplus | | reserves | | earnings | | income | | equity | | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | Balance at January 1, 2005 | | | 30,349 | | 1,486,934 | | 266,229 | | 699,572 | | — | | 2,483,084 | | | | | | | | | | | | | | | | | Balance at January 1, 2003 | | 30,349 | | 1,486,934 | | 170,806 | | 473,814 | | — | | 2,161,903 | | | 2005 | | | Net loss | | | — | | — | | — | | | (32,291 | ) | | — | | | (32,291 | ) | | | Net unrealized gains on investment securities held by an affiliate, net of nil tax | | | — | | — | | — | | — | | 38,869 | | 38,869 | | Foreign currency translation adjustments, net of nil tax | | | — | | — | | — | | — | | | (10,018 | ) | | | (10,018 | ) | | | | | | Comprehensive loss | | | | (3,440 | ) | | | | | | Transfer to statutory reserves | | | 22 | | — | | — | | 357 | | | (357 | ) | | — | | — | | Shares issued in connection with | | | — Conversion of convertible debt into 1,927,673 common shares | | | 19 | | 1,596 | | 205,317 | | — | | — | | — | | 206,913 | | Dividend declared (US$0.39 per share) | | | — | | — | | — | | | (120,294 | ) | | — | | | (120,294 | ) | | | | | | | | | | | | | | | | Balance at December 31, 2005 | | | 31,945 | | 1,692,251 | | 266,586 | | 546,630 | | 28,851 | | 2,566,263 | | 2006 | | | Net income | | — | | — | | — | | 438,182 | | — | | 438,182 | | | — | | — | | — | | 111,284 | | — | | 111,284 | | Transfer to statutory reserves | | 22 | | — | | — | | 59,114 | | | (59,114 | ) | | — | | — | | | Dividend declared (US$2.08 per share) | | — | | — | | — | | | (608,398 | ) | | — | | | (608,398 | ) | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2003 | | 30,349 | | 1,486,934 | | 229,920 | | 244,484 | | — | | 1,991,687 | | | | | | Net income | | — | | — | | — | | 491,397 | | — | | 491,397 | | | Transfer to statutory reserves | | 22 | | — | | — | | 36,309 | | | (36,309 | ) | | — | | — | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2004 | | 30,349 | | 1,486,934 | | 266,229 | | 699,572 | | — | | 2,483,084 | | | | | | Net income | | — | | — | | — | | 68,487 | | — | | 68,487 | | | Net unrealized appreciation in fair value of investment securities held by an affiliate, net of nil tax | | — | | — | | — | | — | | 38,869 | | 38,869 | | | Foreign currency translation adjustment, net of nil tax | | — | | — | | — | | — | | | (10,018 | ) | | | (10,018 | ) | | Net unrealized gains on investment securities, net of nil tax and reclassification adjustments(a) | | | — | | — | | — | | — | | 56,840 | | 56,840 | | Net unrealized gains on investment securities held by an affiliate, net of nil tax | | | — | | — | | — | | — | | 3,201 | | 3,201 | | Foreign currency translation adjustments, net of nil tax | | | — | | — | | — | | — | | | (3,249 | ) | | | (3,249 | ) | | | | | | | | Comprehensive income | | 97,338 | | | 168,076 | | | | | | | Transfer to statutory reserves | | 22 | | — | | — | | 2,788 | | | (2,788 | ) | | — | | — | | | 22 | | — | | — | | 1,000 | | | (1,000 | ) | | — | | — | | Shares issued in connection with | | — Conversion of 2% convertible debt, 1,927,673 shares | | 19 | | 1,596 | | 205,317 | | — | | — | | — | | 206,913 | | | Dividend declared (US$0.39 per share) | | — | | — | | — | | | (120,294 | ) | | — | | | (120,294 | ) | | Dividend declared (US$0.02 per share) | | | — | | — | | — | | | (5,940 | ) | | — | | | (5,940 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2005 | | 31,945 | | 1,692,251 | | 269,017 | | 644,977 | | 28,851 | | 2,667,041 | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2005 (in US$) | | 3,958 | | 209,691 | | 33,335 | | 79,921 | | 3,575 | | 330,480 | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2006 | | | 31,945 | | 1,692,251 | | 267,586 | | 650,974 | | 85,643 | | 2,728,399 | |
F-8
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME/(LOSS) FOR YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007 (Rmb and US$ amounts expressed in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | | other | | Total | | | | | | | Common | | Contributed | | Statutory | | Retained | | comprehensive | | stockholders’ | | | Note | | stock | | surplus | | reserves | | earnings | | income | | equity | | | | | | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | — | | | | — | | | | — | | | | 525,469 | | | | — | | | | 525,469 | | Net unrealized gains on investment securities, net of nil tax(a) | | | | | | | — | | | | — | | | | — | | | | — | | | | 80,612 | | | | 80,612 | | Net unrealized gains on investment securities held by an affiliate, net of nil tax | | | | | | | — | | | | — | | | | — | | | | — | | | | 13,283 | | | | 13,283 | | Foreign currency translation adjustments, net of nil tax | | | | | | | — | | | | — | | | | — | | | | — | | | | (24,958 | ) | | | (24,958 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 594,406 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Transfer to statutory reserves | | | 22 | | | | — | | | | — | | | | 2,753 | | | | (2,753 | ) | | | — | | | | — | | Dividend declared (US$0.10 per share) | | | | | | | — | | | | — | | | | — | | | | (28,340 | ) | | | — | | | | (28,340 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2007 | | | | | | | 31,945 | | | | 1,692,251 | | | | 270,339 | | | | 1,145,350 | | | | 154,580 | | | | 3,294,465 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2007 (in US$) | | | | | | | 4,674 | | | | 247,601 | | | | 39,555 | | | | 167,580 | | | | 22,617 | | | | 482,027 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (a) Components of net unrealized gains on investment securities: | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | | 2007 | | Unrealized holdings gains arising during the year | | | | | | | | | | | | | | | | | | | | | | | 97,332 | | | | 98,090 | | Redemption of investment securities in an affiliate taken to net income | | | | | | | | | | | | | | | | | | | | | | | (19,550 | ) | | | (17,478 | ) | Investment in affiliate upon conversion (Note 17 (b)(i)) | | | | | | | | | | | | | | | | | | | | | | | (20,942 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net unrealized gains on investment securities | | | | | | | | | | | | | | | | | | | | | | | 56,840 | | | | 80,612 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements. F - 7F-9
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 2003, 20042005, 2006 AND 20052007
(Rmb and US$ amounts expressed in thousands) | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | | | | | | | | | | | | | | | | | | Cash provided by operating activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | 438,182 | | | | 491,397 | | | | 68,487 | | | | 8,486 | | | | | | | | | | | | | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | — Depreciation and amortization of property, plant and equipment, and lease prepayments | | | 125,519 | | | | 132,789 | | | | 139,720 | | | | 17,313 | | — Provision for uncollectible loans to a related party | | | — | | | | — | | | | 205,000 | | | | 25,402 | | — Impairment of property, plant and equipment | | | 12,405 | | | | — | | | | — | | | | — | | — Loss on disposal of property, plant and equipment | | | 3,359 | | | | 12,998 | | | | 10,474 | | | | 1,298 | | — Gain on transfer of land use rights to a related party | | | — | | | | — | | | | (2,533 | ) | | | (314 | ) | — Deferred income taxes | | | 6,253 | | | | 1,116 | | | | (11,851 | ) | | | (1,468 | ) | — Provision for losses on guarantees | | | — | | | | — | | | | 12,318 | | | | 1,526 | | — Equity in losses of affiliates | | | — | | | | — | | | | 5,106 | | | | 633 | | — Dividend received from an affiliated company | | | — | | | | — | | | | 7,815 | | | | 968 | | — Minority interests | | | 145,800 | | | | 157,292 | | | | 27,880 | | | | 3,455 | | | | | | | | | | | | | | | | | | | (Increase)/decrease in assets | | | | | | | | | | | | | | | | | — Inventories, net | | | (34,105 | ) | | | (469,211 | ) | | | (289,738 | ) | | | (35,902 | ) | — Amounts due from related parties, net | | | (36,446 | ) | | | (5,534 | ) | | | (115,071 | ) | | | (14,259 | ) | — Trade accounts receivable, net | | | 153,524 | | | | (25,954 | ) | | | (270,662 | ) | | | (33,538 | ) | — Prepaid expenses, net | | | 64,752 | | | | (21,069 | ) | | | (79,757 | ) | | | (9,883 | ) | — Other receivables, net | | | 9,885 | | | | (106,581 | ) | | | (24,789 | ) | | | (3,072 | ) |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Cash provided by operating activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income/ (loss) | | | (32,291 | ) | | | 111,284 | | | | 525,469 | | | | 76,884 | | | | | | | | | | | | | | | | | | | Adjustments to reconcile net income/ (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | | | | — Depreciation and amortization of property, plant and equipment | | | 141,333 | | | | 142,860 | | | | 223,304 | | | | 32,673 | | — Lease prepayment charged to expense | | | 3,339 | | | | 3,328 | | | | 4,702 | | | | 688 | | — Provision for uncollectible loans to a related party | | | 202,950 | | | | — | | | | — | | | | — | | — Impairment of property, plant and equipment | | | — | | | | 2,346 | | | | 781 | | | | 114 | | — Loss on disposal of property, plant and equipment | | | 10,474 | | | | 1,598 | | | | 5,926 | | | | 867 | | — Gain on transfer of land use rights to a related party | | | (2,533 | ) | | | (1,841 | ) | | | (1,573 | ) | | | (230 | ) | — Deferred income tax expense/(benefit) | | | (20,050 | ) | | | (19,996 | ) | | | 34,637 | | | | 5,068 | | — Provision for losses/(recoveries) on guarantees | | | 12,318 | | | | (7,410 | ) | | | (4,237 | ) | | | (620 | ) | — Equity in losses/(income) of affiliates, net | | | 6,032 | | | | 21,261 | | | | (14,048 | ) | | | (2,055 | ) | — Dividend received from other investments | | | 7,815 | | | | — | | | | — | | | | — | | — Minority interests | | | (2,947 | ) | | | 61,645 | | | | 189,927 | | | | 27,789 | | — Gain on redemption of other investments | | | — | | | | (28,457 | ) | | | (17,478 | ) | | | (2,557 | ) | — Loss on dilution of investments in affiliates | | | — | | | | 1,188 | | | | 2,591 | | | | 378 | | — Net loss/(gain) on changes in fair value of embedded derivatives | | | — | | | | 3,617 | | | | (6,139 | ) | | | (898 | ) | — Exchange loss on financing activities | | | — | | | | 38,388 | | | | 38,622 | | | | 5,651 | | — Bad debt expense/(credit) | | | 25,587 | | | | 21,582 | | | | (11,008 | ) | | | (1,611 | ) | | | | | | | | | | | | | | | | | | (Increase)/decrease in assets | | | | | | | | | | | | | | | | | — Inventories | | | (321,890 | ) | | | 103,252 | | | | (81,842 | ) | | | (11,975 | ) | — Amounts due from related parties, net | | | (115,074 | ) | | | 77,401 | | | | 52,088 | | | | 7,621 | | — Trade accounts and bills receivable | | | (328,875 | ) | | | (323,647 | ) | | | (1,615,859 | ) | | | (236,423 | ) | — Prepaid expenses | | | (79,757 | ) | | | 44,345 | | | | 62,225 | | | | 9,104 | | — Other receivables, net | | | (20,237 | ) | | | (4,417 | ) | | | 50,804 | | | | 7,433 | | — Loans to customers, net | | | (7,904 | ) | | | (3,582 | ) | | | 8,125 | | | | 1,189 | | | | | | | | | | | | | | | | | | | — Income taxes recoverable/(payable), net | | | (67,232 | ) | | | 32,885 | | | | (13,366 | ) | | | (1,956 | ) | | | | | | | | | | | | | | | | | | Increase/(decrease) in liabilities | | | | | | | | | | | | | | | | | — Trade accounts payable | | | 710,726 | | | | 332,355 | | | | 377,164 | | | | 55,185 | | — Accrued expenses and other liabilities | | | 112,828 | | | | 25,236 | | | | 271,687 | | | | 39,752 | | — Amount due to holding company | | | 158 | | | | (1,075 | ) | | | 2,052 | | | | 300 | | | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | | 234,770 | | | | 634,146 | | | | 84,554 | | | | 12,371 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flow from investing activities | | | | | | | | | | | | | | | | | Purchase of property, plant and equipment and construction in progress (includes interest capitalized) | | | (515,359 | ) | | | (323,781 | ) | | | (265,258 | ) | | | (38,811 | ) | Proceeds from disposal of property, plant and equipment | | | 3,826 | | | | 2,134 | | | | 5,236 | | | | 766 | | Proceeds from disposal of land use rights | | | 3,580 | | | | 2,394 | | | | 2,125 | | | | 311 | | Repayment of loans by a related party | | | 205,000 | | | | — | | | | — | | | | — | | Loans to a related party | | | (205,000 | ) | | | — | | | | — | | | | — | | Purchase of investments | | | (161,358 | ) | | | (923,101 | ) | | | — | | | | — | | Proceeds from disposal of other investments | | | — | | | | — | | | | 773 | | | | 113 | | Prepayments for land use right | | | — | | | | (59,497 | ) | | | (31 | ) | | | (4 | ) | Proceeds from redemption of investment securities | | | — | | | | 11,907 | | | | 88,652 | | | | 12,971 | | | | | | | | | | | | | | | | | | | Net cash used in investing activities | | | (669,311 | ) | | | (1,289,944 | ) | | | (168,503 | ) | | | (24,654 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flow from financing activities | | | | | | | | | | | | | | | | | Proceeds from short-term bank loans | | | 1,188,178 | | | | 974,978 | | | | 649,164 | | | | 94,982 | |
F - 8F-10
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Proceeds from long-term bank loans | | | 50,000 | | | | 687,473 | | | | 197,044 | | | | 28,830 | | Proceeds from issuance of convertible debt | | | 206,913 | | | | — | | | | — | | | | — | | Repayments of short-term and long term bank loans | | | (805,343 | ) | | | (962,835 | ) | | | (933,533 | ) | | | (136,589 | ) | Dividends paid by subsidiaries to minority stockholders | | | (66,677 | ) | | | (23,036 | ) | | | (22,316 | ) | | | (3,265 | ) | Dividends paid to stockholders | | | (120,294 | ) | | | (5,940 | ) | | | (28,340 | ) | | | (4,147 | ) | Capital contributions from minority interests | | | — | | | | — | | | | 2,920 | | | | 427 | | | | | | | | | | | | | | | | | | | Net cash provided by/(used in) financing activities | | | 452,777 | | | | 670,640 | | | | (135,061 | ) | | | (19,762 | ) | | | | | | | | | | | | | | | | | | Effect of foreign currency exchange on cash and cash equivalents | | | (4,713 | ) | | | (5,104 | ) | | | (5,978 | ) | | | (874 | ) | Net increase/(decrease) in cash and cash equivalents | | | 13,523 | | | | 9,738 | | | | (224,988 | ) | | | (32,919 | ) | Cash and cash equivalents at beginning of year | | | 722,672 | | | | 736,195 | | | | 745,933 | | | | 109,141 | | | | | | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | | 736,195 | | | | 745,933 | | | | 520,945 | | | | 76,222 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Supplemental disclosures of cash flow information | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash paid during the year for: | | | | | | | | | | | | | | | | | — Interest, net of amount capitalized | | | 70,527 | | | | 117,491 | | | | 125,860 | | | | 18,415 | | — Income taxes | | | 97,431 | | | | 21,012 | | | | 47,247 | | | | 6,913 | | | | | | | | | | | | | | | | | | |
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIESSignificant non-cash investing and financing transactions
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBERDuring 2005, the convertible debt issued was converted to 1,927,673 ordinary shares of the Company (see Note 19).
During 2006, the Company settled the amounts payable for the acquisitions of certain new debt and equity securities issued by an affiliated company and the amounts receivable from redemption of its existing investment in debt securities of the same affiliated company with a net cash payment of S$5.3 million by the Company (see Note 17(b)). On December 25, 2007, the Company acquired a 100% equity ownership interest in Yulin Hotel Company from a related party for Rmb245.6 million. As of December 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb2007, the related purchase consideration had not yet been settled (see Notes 5 and US$ amounts expressed in thousands) | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | | | | | | | | | | | | | | | | | | Increase/(decrease) in liabilities | | | | | | | | | | | | | | | | | — Trade accounts payable | | | 103,065 | | | | 357,751 | | | | 553,263 | | | | 68,556 | | — Income taxes payable | | | (11,181 | ) | | | (21,842 | ) | | | (64,705 | ) | | | (8,018 | ) | — Accrued expenses and other liabilities | | | 90,154 | | | | 88,521 | | | | 71,559 | | | | 8,867 | | — Amount due to holding company | | | 4,108 | | | | (2,065 | ) | | | 158 | | | | 20 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | | 1,075,274 | | | | 589,608 | | | | 242,674 | | | | 30,070 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flow from investing activities | | | | | | | | | | | | | | | | | Purchase of property, plant and equipment, lease prepayments and construction in progress | | | (372,775 | ) | | | (552,902 | ) | | | (515,359 | ) | | | (63,860 | ) | Proceeds from disposal of property, plant and equipment | | | 402 | | | | 5,883 | | | | 3,826 | | | | 474 | | Proceeds from disposal of land use rights | | | — | | | | — | | | | 3,580 | | | | 444 | | Repayment of loans by a related party | | | — | | | | — | | | | 205,000 | | | | 25,402 | | Loans to a related party | | | — | | | | (205,000 | ) | | | (205,000 | ) | | | (25,402 | ) | Loans to customers, net | | | — | | | | — | | | | (7,904 | ) | | | (979 | ) | Purchase of investments | | | — | | | | (1,348 | ) | | | (161,358 | ) | | | (19,994 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash used in investing activities | | | (372,373 | ) | | | (753,367 | ) | | | (677,215 | ) | | | (83,915 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flow from financing activities | | | | | | | | | | | | | | | | | Proceeds from short-term bank loans | | | 230,000 | | | | 330,000 | | | | 1,188,178 | | | | 147,230 | | Proceeds from short-term borrowing from a related party | | | 8,000 | | | | — | | | | — | | | | — | |
F - 9
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands)
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | | | | | | | | | | | | | | | | | | Proceeds from long-term bank loans | | | — | | | | 100,000 | | | | 50,000 | | | | 6,196 | | Proceeds from 2% convertible bonds | | | — | | | | — | | | | 206,913 | | | | 25,639 | | Repayment of short-term bank loans | | | (125,000 | ) | | | (190,000 | ) | | | (805,343 | ) | | | (99,792 | ) | Repayment of long-term bank loans | | | (130,000 | ) | | | — | | | | — | | | | — | | Repayment of short-term borrowing from a related party | | | — | | | | (8,000 | ) | | | — | | | | — | | Capital contribution from minority stockholders | | | — | | | | 31,000 | | | | — | | | | — | | Dividend paid by subsidiaries to minority stockholders | | | (88,765 | ) | | | (8,507 | ) | | | (66,677 | ) | | | (8,262 | ) | Dividend paid to stockholders | | | (608,398 | ) | | | — | | | | (120,294 | ) | | | (14,906 | ) | | | | | | | | | | | | | | | Net cash (used in)/provided by financing activities | | | (714,163 | ) | | | 254,493 | | | | 452,777 | | | | 56,105 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of foreign currency exchange on cash and cash equivalents | | | — | | | | — | | | | (4,713 | ) | | | (584 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net (decrease)/increase in cash and cash equivalents | | | (11,262 | ) | | | 90,734 | | | | 13,523 | | | | 1,676 | | | | | | | | | | | | | | | | | | | Cash and cash equivalents at beginning of year | | | 643,200 | | | | 631,938 | | | | 722,672 | | | | 89,548 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | | 631,938 | | | | 722,672 | | | | 736,195 | | | | 91,224 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F - 10
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands)
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | | Supplemental disclosures of cash flow information | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash paid during the year for: | | | | | | | | | | | | | | | | | — Interest, net of amount capitalized | | | 23,624 | | | | 31,757 | | | | 70,527 | | | | 8,739 | | — Income taxes | | | 117,852 | | | | 125,891 | | | | 97,431 | | | | 12,073 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
34).See accompanying notes to consolidated financial statements. F - 11F-11
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 20042005, 2006 AND 20052007
(Rmb and US$ amounts expressed in thousands, except per share data) | | | 1 | | Background and principal activities | |
| | China Yuchai International Limited (the “Company”) was incorporated under the laws of Bermuda on April 29, 1993. The Company was established to acquire a controlling financial interest in Guangxi Yuchai Machinery Company Limited (“Yuchai”), a Sino-foreign joint stock company which manufactures, assembles and sells diesel engines in the People’s Republic of China (the “PRC”). The principal markets for Yuchai’s diesel engines are truck manufacturers in the PRC. | | | | The Company owns, through six wholly-owned subsidiaries, 361,420,150 shares or 76.41% of the issued share capital of Yuchai (“Foreign Shares of Yuchai”). Guangxi Yuchai Machinery Group Company Limited (“State Holding Company”), a state-owned enterprise, owns 22.09% of the issued share capital of Yuchai (“State Shares of Yuchai”). | | | | In December 1994, the Company issued a special share (the “Special Share”) at par value of US$0.10 to Diesel Machinery (BVI) Limited (“DML”), a company controlled by Hong Leong Corporation Limited, now known as Hong Leong (China) Limited (“HLC”). The Special Share entitles its holder to designate the majority of the Company’s Board of Directors (six of eleven). The Special Share is not transferable except to Hong Leong Asia Ltd. (“HLA”), the holding company of HLC, or any of its affiliates. During 2002, DML transferred the Special Share to HL Technology Systems Pte Ltd (“HLT”), a subsidiary of HLC. | | | | Yuchai established three direct subsidiaries, Yuchai Machinery Monopoly Company Limited (“YMMC”), Guangxi Yulin Yuchai Accessories Manufacturing Company Limited (“YAMC”) (previously known Guangxi Yulin Yuchai Machinery Spare Parts Manufacturing Company Limited (“GYSPM”)Limited) and Yuchai Express Guarantee Company LimitedCo., Ltd (“YEGCL”). YMMC and GYSPMYAMC were established in 2000, and are involved in the manufacture and sale of spare parts and components for diesel engines in the PRC. YEGCL was established in 2004, and is involved in the provision of financial guarantees to mortgage loan applicants in favourfavor of banks in connection with the applicants’ purchase of automobiles equipped with diesel engines produced by Yuchai. In 2006, YEGCL ceased granting new guarantees with the aim of servicing the remaining outstanding guarantee commitments to completion, expected to be in 2009. As at December 31, 2005,2007, Yuchai held an equity interest of 71.83%, 97.14% and 76.92% respectively in these companies. As at December 31, 2005,2006 and 2007, YMMC had direct controlling interests in twenty-one (2004: twenty-one)and twenty-five subsidiaries respectively, which are involved in the trading and distribution of spare parts of diesel engines and automobiles, all of which are established in the PRC. In December 2007, Yuchai purchased a fourth subsidiary, Guangxi Yulin Hotel Company Ltd (“Yulin Hotel Company”) (see Note 34). | | | | In March 2005, the Company acquired 14.99% of the common stockordinary shares of Thakral Corporation LimitedLtd (“TCL”). TCL is a company listed on the main board of the Singapore Exchange Securities Trading Limited (the “Singapore Exchange”) and is involved in the manufacture, assembly and distribution of high-end consumer electronic products and home entertainment products in the PRC. Three directors out of teneleven directors on the board of TCL are appointed by the Company. Based on the Company’s shareholdings and representation in the board of directors of TCL, management has concluded that the companyCompany has the ability to exercise significant influence over the operating and financial policies of TCL. Consequently, the Company’s consolidated financial statements includedinclude the Company’s share of the results of TCL, accounted for anunder the equity basis since acquisition.method. The Company acquired an additional 1.00% of the common stockordinary shares of TCL in September 2005. As a result of the rights issue of 87,260,288 rights shares on February 16, 2006, the Company’s equity interest in TCL increased to 19.36%. On August 15, 2006, the Company exercised its right to convert all of its 52,933,440 convertible bonds into 529,334,400 new ordinary shares in the capital of TCL. Upon the issue of the new shares, the Company’s interest in TCL has increased to 36.61% of the total issued and outstanding ordinary shares. During the year ended December 31, 2007, the Company did not acquire new shares in TCL. However, as a result of conversion of convertible bonds into new ordinary shares by TCL’s third party bondholders, the Company’s interest in TCL was diluted to 34.42%. | | | | On February 7, 2006, the Company acquired 29.13% of the ordinary shares of HL Global Enterprises Limited (formerly known as HLG Enterprise Limited (“HLGE”). HLGE is a public company listed on the main board of the Singapore Exchange. HLGE is primarily engaged in investment holding, and through its group companies, invests in rental property, hospitality and property developments in Asia. On November 15, 2006, the Company exercised its right to convert all of its 196,201,374 non-redeemable convertible cumulative preference shares into 196,201,374 new ordinary shares in the capital of HLGE. Upon the issue of the new shares, the Company’s equity interest in HLGE has increased to 45.42% of the enlarged total number of ordinary shares in issue. Three directors out of seven directors on the board of HLGE are appointed by the Company. Based on the Company’s shareholdings and representation in the board of directors of HLGE, management has concluded that the Company has the ability to exercise significant influence over the operating and financial policies of HLGE. Consequently, the Company’s consolidated financial statements include the Company’s share of the results of HLGE, accounted for under the equity method. During the year ended December 31, 2007, the Company did not acquire new shares in HLGE. However, new ordinary shares were issued by HLGE arising from the third party’s conversion of non-redeemable convertible cumulative preference shares, and the Company’s interest in HLGE was diluted to 45.39%. |
F - 12F-12
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
(a) | | Basis of presentation | | | | The accompanying consolidated financial statements are prepared in accordance with U.S.United States of America generally accepted accounting principles (“U.S. GAAP”). This basis |
| | | (b) | | Restatement of 2005 consolidated financial statements |
| | The Company’s consolidated financial statements for the year ended December 31, 2005 were previously restated on May 30, 2008 to reflect certain adjustments to correct accounting differs from that used inerrors for such period. The most significant adjustment was to correct accounting errors for the statutoryunderstatement of accounts payable of Rmb167.8 million by Yuchai at December 31, 2005. The accompanying 2005 consolidated financial statements reflect those previously restated financial statements of Yuchai, which are prepared in accordance with the Accounting Standards for Business EnterprisesCompany and the Accounting Regulations for Business Enterprises issued by the Ministry of Finance of the PRC (“PRC GAAP”).its subsidiaries. |
| | | 3 | | Summary of significant accounting policies and practices | |
(a) | | Principles of consolidation | | | | The consolidated financial statements include the financial statements of the Company, its majority-owned subsidiaries and those entities that the Company has determined that it has a direct or indirect controlling financial interests.interest in (collectively, referred to as the “Group”). All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Company evaluates itsthe Group’s relationships with other entities to identify whether they are variable interest entities as defined by the Financial Accounting Standard Board (the “FASB”) Interpretation (“FIN”) No. 46 (R), “Consolidation of Variable Interest Entities” (“FIN 46(R)”) and to assess whether it is the primary beneficiary of such entities. If the determination is made that the CompanyGroup is the primary beneficiary, then that entity is included in the consolidated financial statements in accordance with FIN 46(R). The CompanyGroup was not the primary beneficiary of any variable interest entities during the three years ended December 31, 2005.2007. |
| | | (b) | | Cash and cash equivalents | |
| | Cash includes cash on hand and demand deposits with banks. For purposes of the consolidated statementstatements of cash flows, the Company consideredmanagement considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. None of the Company’sGroup’s cash is restricted as to withdrawal. See Note 29 for discussion of restrictions on the Renminbi. |
| | | (c) | | Trade accounts receivable, loans receivable and bills receivable, net | |
| | Trade accounts receivable are recorded at the invoiced value of goods sold after deduction of trade discounts and allowances, if any. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statement of cash flows. The allowance for doubtful accounts is the Company’smanagement’s best estimate of the amount of probable credit losses in the Company’s existingGroup’s accounts receivable. The CompanyManagement determines the allowance based on specific account identification and historical write-off experience by industry and national economic data. |
F - 13
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 | | Summary of significant accounting policies and practices (continued) | | (c) | | Trade accounts receivable (continued) | | | | The CompanyManagement reviews itsthe Group’s allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility.collectability. All other balances are reviewed on a pooled basis by aging of such balances. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The CompanyGroup does not have any off-balance-sheet credit exposure related to its customers, except for outstanding bills discounted with banks (see Note 24(e)) and off-balance-sheet credit exposure of YEGCL (see Note 24(d)), that are subject to recourse for non-payment. | | | | The Group sells trade accounts and bills receivable to banks on an ongoing basis. The buyer is responsible for servicing the receivables upon maturity of the trade accounts receivable. Sales of the trade accounts receivable are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. Accordingly, trade accounts and bills receivable are derecognized, and a discount equal to the difference between the carrying value of the trade accounts and bills receivable and cash received is recorded. The Group received proceeds from the sales of the trade accounts and bills receivable of Rmb3,423,296, Rmb4,485,221 and Rmb4,403,828 (US$644,343), for the years ended December 31, 2005, 2006 and 2007, respectively. The Group has recorded discounts totaling Rmb44,362, Rmb54,720 and Rmb75,193 (US$11,002) in respect of sold trade accounts and bills receivable for the years ended December 31, 2005, 2006 and 2007, respectively, which has been included in interest expense. | | | | Loans receivables primarily relate to initial working capital financing provided to Yuchai Marketing Company Limited (“YMCL”), a related party (see Note 5). The allowance for doubtful accounts is management’s best estimate of the amount of credit losses in these existing loans. A loan is considered impaired pursuant to FASB Statement No.114, “Accounting by Creditors for Impairment of a Loan”. A loan is impaired if it is probable that the Company will not collect all principal and interest contractually due. The Company does not accrue interest when a loan is considered impaired. The Company has elected to recognize interest income on a cash basis. |
F-13
| | Inventories are stated at the lower of cost and market. Cost is determined using the weighted average cost method. Cost of work in progress and finished goods comprises direct materials, direct labor and an attributable portion of production overheads. Management routinely reviews its inventory for salability and indications of obsolescence to determine if inventory carrying values are higher than market values. If market conditions or future product enhancements and developments change, inventories would be written down to reflect the estimated realizable value. |
| | | (e) | | Property, plant and equipment, net | |
| | Property, plant and equipment, including leasehold improvements, are stated at cost. Depreciation is calculated onusing the straight-line method over thetheir estimated useful lives of the assets, taking into account thetheir estimated residual value. The estimated useful lives are as follows: |
| | | | | Buildings | | | 30 to 40 years | | Machinery and equipment | | | 5 to 15 years | Office and computer equipment | | 4 to 5 years | Leasehold improvements | | shorter of estimated useful life or remaining lease terms |
(f) | | ConstructionThe Group capitalizes interest with respect to major assets under installation or construction based on the average cost of the Group’s borrowings. Repairs and maintenance of a routine nature are expensed while those that extend the life of assets are capitalized. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheets and any gain or loss is included in progressthe consolidated statements of operations. | | | | Construction in progress represents factories under construction and machinery and equipment pending installation. All direct costs relating to the acquisition or construction of buildings and machinery and equipment, including interest charges on borrowings, are capitalized as construction in progress. No depreciation is provided in respect of construction in progress. | | | | Construction of plant is considered to be completecompleted on the date when the plant is substantially ready for its intended use notwithstanding whether the plant is capable of producing saleable output in commercial quantities. |
| | Lease prepayments represent land use rights paidpayments to the PRC land bureau. Landbureau for land use rights, which are carried at cost and amortizedcharged to expense on a straight-line basis over the respective periods of the rights which are in the range of 15 to 50 years. |
F - 14
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 | | SummaryThe fair value of significant accounting policiesa guarantee provided by the Group for the obligation of others is recognized at fair value at inception as a liability in accordance with FIN No. 45, “Guarantor’s Accounting and practices (continued)Disclosure Requirements for Guarantees including Indirect Guarantees of Indebtedness of Others”. If the guarantee was issued in a stand-alone transaction for a fee, the fair value of the liability recognized generally would offset the cash received by the Group, which is included in “Accrued expenses and other liabilities” and amortized to revenue over the period of guarantee. | | | | After initial measurement and recognition of the liability for obligations under the guarantee, management periodically evaluates outstanding guarantees and accounts for potential loss contingencies associated with the guarantees based on estimated losses from default in accordance with SFAS No. 5, “Accounting for Contingencies,” under which the liability is adjusted for further loss that is probable and when the amount of the loss can be reasonably estimated. |
| | Affiliates | | | | An affiliated companyaffiliate is an entity in which the Company or the Group has the ability to exercise significant influence in its financial and operating policy decisions, but does not have a controlling financial interest. Investments in affiliates are accounted for byusing the equity method. The Group’s share of earnings and losses of affiliate, adjusted to eliminate intercompany gains and losses and to account for the difference between the cost of investment and the underlying equity in net assets of the affiliates, is included in the consolidated results. | | | | Management assesses impairment of its investments in affiliates when adverse events or changes in circumstances indicate that the carrying amounts may not be recoverable. A loss in value of investments in affiliate which is considered other than a temporary decline is recognized as an impairment charge. |
F-14
| | Other investments | | | | Investments in available-for-sale equity securities, including convertible preference shares of an affiliate that are recordedmandatorily redeemable, are carried at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported asincluded in accumulated other comprehensive income/(loss), a separate component of other comprehensive income/(loss)stockholders’ equity, until realized. Realized gains and losses from the saledisposal of available-for-sale equity securities are determined on a specific-identification basis. However, equity securities | | | | Investments in convertible preference shares of an affiliate that are neither mandatorily redeemable by the issuer nor redeemable at the option of the investor, and that do not traded in an active market and whosehave a readily determinable fair values cannot be reliably estimatedvalue are accounted for at their acquisition cost.under the cost method. | | | | The CompanyGroup recognizes an impairment loss when the decline in fair value below the carrying value of an available-for-sale or cost method investment is considered other than temporary. In determining whether a decline in fair value is other than temporary, management considers various factors including market price of underlying holdings when available, investment ratings, the financial conditions and near term prospect of the investees, the length of time and the extent to which the fair value has been less than cost and the Group’s intent and ability to hold the investment for a reasonable period of time sufficient to allow for any anticipated recovery of the fair value. | | | | Equity derivatives embedded in the available-for-sale debt securities are recorded at fair values through income. |
| | | (i) | | Foreign currency transactions and translation | |
| | The Company’s functional currency is the US dollar. The functional currency of the Company’s subsidiaries and certain of its affiliated companies located in the PRC is the Renminbi. Transactions denominated in currencies other than Renminbi are translated into Renminbirecorded based on exchange rates at the time such transactions arise, such as the Renminbi exchange rates quotesquoted by the People’s Bank of China (the “PBOC”) prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Renminbithe functional currency using the applicable exchange quoted by PBOCrates at the balance sheet dates. The resulting exchange differences are recorded in the consolidated statements of incomeoperations as part of the related transaction amounts.“Other income, net”. | | | | DuringThe Company’s reporting currency is the year ended December 31, 2005, the exchange rate regime of Renminbi was reformed by moving into a managed floating exchange regime based on market supply and demand with reference to a basket of foreign currencies from the unified controlled exchange rate based on market supply and demand. | | | | Renminbi. Assets and liabilities of foreignthe Company and its subsidiaries and affiliates whose functional currency is not the Renminbi are translated into Renminbi using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the year. The gains and losses resulting from translation of financial statements of foreign subsidiaries and affiliates are recorded as a separate component ofin accumulated other comprehensive income/(loss), a separate component within stockholders’ equity. Cumulative translation adjustments are recognized as income or expenseexpenses upon disposal or liquidation of a foreign subsidiarysubsidiaries and affiliate. |
F - 15
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 | | Summary of significant accounting policies and practices (continued) | | (i) | | Foreign currency transactions and translation (continued)affiliates. | | | | For the U.S.US dollar convenience translation amounts included in the accompanying consolidated financial statements, the Renminbi equivalent amounts werehave been translated into U.S. dollars at the exchange rate on the balance sheet date which isof Rmb 6.8346 = US$1.00, = Rmb8.0702, the rate quoted by the PBOC at the close of business on December 30, 2005.31, 2008. No representation is made that the Renminbi amounts could have been, or could be, converted into U.S. dollars at that rate or at any other certain rate prevailing on December 30, 200531, 2008 or at any other date. |
| | Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets are reduced by a valuation allowance to the extent the Companymanagement concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates, if any, is recognized in the statements of incomeoperations in the financial yearperiod that includes the enactment date. | | | | Beginning with the adoption of FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1, 2007, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained. | | | | The Company records interest related to unrecognized tax benefits in interest expense, and penalties in selling, general and administrative expenses in the consolidated statements of operations. |
| | Revenue is recognized in accordance with U.S. GAAP as described in the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). SAB 104 generally requires that, among other conditions, four basic criteria be met before revenue can be recognized: |
F-15
| | (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectibilitycollectability is reasonably assured; and (iv) product delivery has occurred. For the Company,Group, these criteria are generally considered to be met upon delivery and acceptance of products at the customer site. | |
| | Product sales represent the invoiced value of goods, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. Yuchai and its subsidiaries are subject to VAT which is levied on the majority of their products at the rate of 17% of the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales. VAT paid by Yuchai and its subsidiaries on its purchases of materials and supplies is recoverable out of VAT collected from sales to their customers. |
F - 16
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 | (ii) | | Summary of significant accounting policies and practices (continued) | | (k) | | Revenue recognition (continued) | | | | (ii) Guarantee fee income | |
| | Guarantee fees received or receivable for a guarantee issued are recorded in “Accrued expenses and other liabilities” based upon the estimated fair value at the inception of guarantysuch guarantee obligations, and are amortized intorecognized as revenue on a straight line basis over the respective terms of the guarantees. The Company will record an adjustment to the carrying amount of its obligations through a charge to earnings if it determines that it is probable that the Company will be required to perform under the guaranty. |
| | | (iii) Rental income | | | | Rental income receivable under operating lease is recognized in the consolidated statements of income in equal instalments over the period covered by the lease term. | | (l) | | EarningsEarnings/(loss) per share | |
| | Basic earningsearnings/(loss) per share (“EPS”) is computed by dividing incomeincome/(loss) attributable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings/(loss) per share is calculated by dividing net earnings/(loss) by the weighted average number of common shares outstanding and the number of additional common shares that would be outstanding if any potential common shares that are dilutive are issued. For 2005, the convertible debt issued by the Company was outstanding and no adjustment has been made as the effect would have been anti-dilutive. | | | | The reconciliation of the Company’s EPS isbasic and diluted earnings/(loss) per share are as follows: |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | Rmb | | | Rmb | | | Rmb | | | US$ | | Net income attributable to common shares | | | 438,182 | | | | 491,397 | | | | 68,487 | | | | 8,486 | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | | | | | | | | | | | | | | | | — Weighted average common shares outstanding during the year | | | 35,340,000 | | | | 35,340,000 | | | | 36,459,635 | | | | 36,459,635 | | | | | | | | | | | | | | | | | | | | | — Basic earnings per share of common shares | | | 12.40 | | | | 13.90 | | | | 1.88 | | | | 0.23 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | | 2005 | | 2006 | | 2007 | | 2007 | | | | | Rmb | | Rmb | | Rmb | | US$ | Net income/(loss) attributable to common shares | | | (32,291 | ) | | | 111,284 | | | | 525,469 | | | | 76,884 | | | | | | | | | | | | | | | | | | | Earnings/(loss) per share | | | | | | | | | | | | | | | | | — Weighted average common shares outstanding during the year | | | | | | | | | | | | | | | | | Basic | | | 36,459,635 | | | | 37,267,673 | | | | 37,267,673 | | | | 37,267,673 | | Diluted | | | 36,459,635 | | | | 37,267,673 | | | | 37,267,673 | | | | 37,267,673 | | | | | | | | | | | | | | | | | | | — Earnings/(loss) per common share | | | | | | | | | | | | | | | | | Basic | | | (0.89 | ) | | | 2.99 | | | | 14.10 | | | | 2.06 | | Diluted | | | (0.89 | ) | | | 2.99 | | | | 14.10 | | | | 2.06 | | | | | | | | | | | | | | | | | | |
| | There were no potentially dilutive securities outstanding as ofcommon shares during the years ended December 31, 2003, 20042006 and 2005.2007. |
F - 17
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 | | Summary of significant accounting policies and practices (continued) | | (m) | | Advertising, research and development costs | |
| | Advertising, research and development costs are expensed as incurred. Advertising costcosts included in “Selling, general and administrative expenses”, amounted to Rmb40,961, Rmb48,725Rmb45,291, Rmb42,636 and Rmb45,291Rmb17,248 (US$5,612)2,524) respectively, for the years ended December 31, 2003, 20042005, 2006 and 2005.2007. | | | | Research and development expenses are shown net of a government subsidysubsidies of Rmb5,915, Rmb7,858 and Rmb4,730 (US$733) for the year ended December 31, 2005. No such government subsidy was received692) for the years ended December 31, 20032005, 2006 and 2004.2007, respectively. |
| | Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill is not amortized, but instead is tested for impairment at least annually and whenor whenever certain circumstances indicate a possible impairment may exist. The CompanyManagement evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level at the end of each year. In the first step, the fair value of the reporting unit is compared to its carrying value including goodwill. The fair value of the reporting unit is determined based upon discounted future cash flows. In the case that the fair value of the reporting unit is less than its carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the book value of the goodwill. In determining the implied fair value of the reporting unit goodwill, the fair values of the tangible net assets and recognized and unrecognized intangible assets isare deducted from the fair value of the reporting unit. If the implied fair value of reporting unitunit’s goodwill is lower than its carrying amount, goodwill is considered |
F-16
| | impaired and is written down to its implied fair value. The results of the impairment testing in 2003, 20042005, 2006 and 20052007 did not result in any impairment of goodwill. |
| | The Company provides,Group recognizes a liability at the time the product is sold, for the estimated future costs to be incurred under the lower of a warranty period or warranty mileage on various engine models, on which the CompanyGroup provides free repair and replacement. Warranties generally extend for a duration (12(generally 12 months to 1824 months) or mileage (80,000 kilometres(generally 80,000 kilometers to 180,000 kilometres)250,000 kilometers), whichever is the lower. Provisions for warranty are primarily determined based on historical warranty cost per unit of engines sold adjusted for specific conditions that may arise and the number of engines under warranty at each financial year-end.year. In previous years, warranty claims have typically not been higher than the relevant provisions made in our consolidated balance sheet. If the nature, frequency and average cost of warranty claims change, the accrued liability for product warranty will be adjusted accordingly. |
F - 18
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 | | Summary of significant accounting policies and practices (continued) | | (p) | | Use of estimates | |
| | The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management of the CompanyGroup to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount of long-lived assets including goodwill;goodwill, estimated fair value of investments and other financial instruments, realizable values for inventories;inventories, valuation allowances for receivables;receivables and loans to related parties, obligations for warranty costs.costs, and probable losses on loan guarantees of YEGCL. Actual results could differ from those estimates. |
| | | (q) | | Impairment of long-lived assets, other than goodwill | |
| | Long-lived assets to be held and used, such as property, plant and equipment and construction in progress and lease prepayments, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized byin the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheetsheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. |
F - 19
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 | | Summary of significant accounting policies and practices (continued) | | (r) | | Commitments and contingencies | |
| | Liabilities for loss contingencies, arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that an obligation has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. |
| | | (s) | | Sales of trade accounts receivableDefined contribution plans | |
| | The Company sells trade accounts and bills receivable to banks on an ongoing basis. The buyer is responsible for servicingGroup participates in the receivables upon maturitynational pension schemes as defined by the laws of the trade accounts receivable. Salescountries in which it has operations. Yuchai and its subsidiaries make contributions to the defined contribution retirement plans, organized by the Guangxi Regional Government and Beijing City Government, at a fixed proportion of the trade accounts receivable are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. Accordingly, trade accounts and bills receivable are derecognized, and the Company records a discount equal to the difference between the carrying valuebasic salary of the trade accounts and bills receivable and cash received. The Company has received proceeds forstaff. Contributions are recognized as compensation expense in the sales ofperiod in which the trade accounts and bills receivable of Rmb1,730,627, Rmb2,380,569 and Rmb3,423,296 (US$424,190), for the years ended December 31, 2003, 2004 and 2005, respectively. The Company has recorded discounts totalled of Rmb22,042, Rmb31,709 and Rmb44,362 (US$5,497) in respect of sold trade accounts and bills receivable for the years ended December 31, 2003, 2004 and 2005, respectively, which have been included in interest expense.related services are performed. |
| | Where the Company has the use of assets under operating leases, payments made under the leases are recognized in the consolidated statement of operations on a straight-line basis over the term of the lease. Lease incentives received are recognized in the consolidated statement of operations as an integral part of the total lease payments made. Contingent rentals are charged to the consolidated statement of operations in the accounting period in which they are incurred. |
| | | (u) | | Comparative information |
| | Certain immaterial presentation corrections have been made to prior year’s financial statements to conform to presentation used in the current year. These include re-presentation of summarized financial statements for an affiliate. |
F-17
| | | (v) | | Recently issued accounting standards |
| | In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expenses disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. In February 2008, the FASB Staff Position, or FSP, SFAS No. 157-1, “Application of FASB SFAS No. 157 to SFAS No. 13 and its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP SFAS No. 157-2, “Effective Date of SFAS No. 157.” FSP SFAS No. 157-1 excludes from the scope of SFAS No.157 certain leasing transactions accounted for under SFAS No. 13, “Accounting for Leases”. FSP SFAS No. 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all non financial assets and non financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of SFAS No. 157 will be applied prospectively to fair value measurements and disclosures for financial assets and financial liabilities and non financial assets and non financial liabilities recognized or disclosed at fair value in the financial statements on at least an annual basis beginning in the first quarter of 2008. Management does not believe the adoption of SFAS No. 157 will have a material impact on the consolidated financial statements at this time and will monitor any additional implementation guidance that may be issued. | | | | In December 2004,February 2007, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment”, which addresses the accountingNo. 159, “Fair Value Option for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. This statement is a revision toFinancial Assets and Financial Liabilities”. Under SFAS No. 123159, entities will be permitted to measure various financial instruments and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”,certain other assets and its related implementation guidance. This statement will require measurement of the cost of employee services received in exchange for stock compensation based on the grant-dateliabilities at fair value of the employee stock options. Incremental compensation costs arising from subsequent modifications of awardson an instrument-by-instrument basis (the fair value option). SFAS No. 159 is effective for financial statements issued for fiscal years beginning after the grant date must be recognized.November 15, 2007. The Company willhas elected not to adopt this statement on January 1, 2006 under the modified prospective method of application. Under that method, the Company will recognize compensation costs for new grants of share-based awards, awards modified after the effect date, and the remaining portion of the fair value option for the eligible items as of January 1, 2008. | | | | In June 2007, the unvested awards atFASB ratified EITF Issue No.07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. The EITF requires non-refundable advance payments to acquire goods or pay for services that will be consumed or performed in a future period in conducting R&D activities should be recorded as an asset and recognized as an expense when the adoption date.R&D activities are performed. The initialEITF is to be applied prospectively to new contractual arrangements entered into beginning in fiscal 2009. The Company currently recognizes these non-refundable advanced payments, if any, as an expense upon payment. The adoption of this statement willEITF 07-3 is not expected to have anya significant effect on the Company’s 2006 consolidated financial statements. |
F - 20
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 | | Summaryposition or results of significant accounting policies and practices (continued) | | (t) | | Recently issued accounting standards (continued)operations. | | | | In December 2004,2007, the FASB issued SFAS No. 151, “Inventory Costs”141 (revised 2007), or SFAS No. 141R, “Business Combination” which clarifiesreplaces SFAS No. 141. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the accounting for abnormal amounts of idle facility expense, freight, handling costs,identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and wasted material (spoilage). Under this statement, such itemsthe goodwill acquired. The Statement also establishes disclosure requirements which will be recognized as current-period charges. In addition,enable users to evaluate the statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacitynature and financial effects of the production facilities.business combination. This statement will beStatement is effective foras of the Company for inventory costs incurred on orbeginning of an entity’s first fiscal year beginning after January 1, 2006.December 15, 2008. The initialimpact of the adoption of this statement will not have a significant effectSFAS No. 141R on the Company’s 2006 consolidated financial statements.positions and consolidated results of operations is dependent upon the specific terms of any applicable future business combinations. | | | | In December 2004,2007, the FASB issued SFAS No. 153, “Exchanges160, “Non Controlling Interests in Consolidated Financial Statements—Amendments of Nonmonetary Assets”, which eliminates an exception in APB OpinionARB No. 29, “Accounting51”. SFAS No. 160 states that accounting and reporting for Nonmonetary Transactions”, for recognizing nonmonetary exchanges of similar productive assets at fair value and replaces it with an exception for recognizing exchanges of nonmonetary assets at fair value that do not have commercial substance. This statementminority interests will be effectiverecharacterised as non controlling interests and classified as a component of equity. The statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non controlling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. The Company is required to adopt this statement in the first quarter of fiscal year 2009 and management is currently assessing the impact of adopting SFAS No. 160. Earlier adoption is prohibited. This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the Companypresentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for nonmonetary asset exchanges occurring on or after January 1, 2006. The adoptionall periods presented. Management is presently evaluating the impact of this statement will not have a significant effect on the Company’s 2006 consolidated financial statements.newly required disclosures. | |
F-18
| | In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 clarifies that an entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by this interpretation are those for which an entity has a legal obligation to perform an asset retirement activity, however the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ended after December 15, 2005. The initial adoption of FIN 47 did not have an impact on the Company’s financial condition and consolidated statements of income. | | | | In September 2005, the EITF issued EITF 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty”. EITF 04-13 provides guidance as to when purchases and sales of inventory with the same counterparty should be accounted for as a single exchange transaction. EITF 04-13 also provides guidance as to when a nonmonetary exchange of inventory should be accounted for at fair value. EITF 04-13 will be applied to new arrangements entered into, and modifications or renewals of existing arrangements beginning in the first interim or annual reporting beginning after March 15, 2006. The application of EITF 04-13 is not expected to have a significant impact on the Company’s consolidated financial statements. | | | | In February 2006,2008, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”. This statement amends SFAS No. 133, “Accounting for161, “Disclosures about Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “ApplicationStatement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement 133applies to Beneficial Interests in Securitized Financial Assets”. This statement will beall entities and is effective for thefinancial statements issued for fiscal years and interim periods beginning after SeptemberNovember 15, 2006.2008, with early application encouraged. The Company is currently evaluatingintends to provide the impact of the statement to the Company’s consolidated financial statements. | | | | In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASBadditional disclosures under this Statement No. 140”. This statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The statement requires an entity to recognize a servicing asset or servicing liability each timein fiscal 2009 if it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations and requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The statement also provides guidelines to classification, disclosure and subsequent measurement of servicing assets and servicing liabilities. This statement will be effective for the fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact of the statement to the Company’s consolidated financial statements.applies. | | | | In June 2006,2008, the FASB issued FIN No. 48, “Accounting for UncertaintyFASB Staff Position (“FSP”) no. EITF 03-6-1, “Determining Whether Instruments Granted in Income Taxes” (“FIN 48”)Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FIN 48EITF 03-6-1 clarifies the accounting for uncertaintywhether instruments granted in income taxes recognizedshare-based payment transactions should be included in the Company’scomputation of EPS using the two-class method prior to vesting. The Company is in the process of analyzing the impact of FSP EITF03-6-1, which is effective for financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attributesissued for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for the fiscal years beginning after December 15, 2006.2008. The Company is currently evaluatingdoes not expect the initial adoption of FSP EITF 03-6-1 to have a material impact of the provisions of FIN 48 to the Company’s consolidatedon its 2009 financial statements. |
F - 21
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
| 4 | | Depreciation and amortization, sales commissions, and shipping and handling expenses | | | | Depreciation and amortization of property, plant and equipment and amortization of lease prepayments are included in the following captions: |
| | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | | | | | | | | | | | | | | | | 2003 | | 2004 | | 2005 | | 2005 | | Years ended December 31, | | | Rmb | | Rmb | | Rmb | | US$ | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Cost of goods sold | | 88,737 | | 84,907 | | 86,491 | | 10,717 | | | 90,354 | | 94,215 | | 163,909 | | 23,982 | | Selling, general and administrative expenses | | 36,782 | | 47,882 | | 53,229 | | 6,596 | | | 50,979 | | 48,645 | | 59,395 | | 8,691 | | | | | | | | | | | | | | | | | | | | | | | 141,333 | | 142,860 | | 223,304 | | 32,673 | | | | 125,519 | | 132,789 | | 139,720 | | 17,313 | | | | | | | | | | | | | | | | | | | | | | | |
| | Sales commissions to sales agents are included in the following caption: |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | Rmb | | | Rmb | | | Rmb | | | US$ | | Selling, general and administrative expenses | | | 16,724 | | | | 11,564 | | | | 39,372 | | | | 4,879 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Selling, general and administrative expenses | | | 39,372 | | | | 32,172 | | | | 58,719 | | | | 8,591 | | | | | | | | | | | | | | | | | | |
| | Sales related shipping and handling expenses not separately billed to customers are included in the following caption: |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | Rmb | | | Rmb | | | Rmb | | | US$ | | Selling, general and administrative expenses | | | 64,991 | | | | 86,163 | | | | 126,813 | | | | 15,714 | | | | | | | | | | | | | | | | | | | |
F - 22
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)(Rmb and US$ amounts expressed in thousands, except per share data) | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Selling, general and administrative expenses | | | 126,813 | | | | 116,570 | | | | 154,807 | | | | 22,650 | | | | | | | | | | | | | | | | | | |
5 | | Provision for uncollectible loans to a related party and subsequent contingent recovery | | | | The amount represents the recognition of specific doubtful debtimpairment provisions totaling Rmb205,000 (US$25,402)Rmb202,950 on the loans with an aggregate principal amount of Rmb205 million due from Yuchai Marketing and Logistic Company Limited (“YMLC”YMCL”) as of December 31, 2005. YMLCYMCL is wholly owned by Coomber Investment Limited (“Coomber”), a shareholder of the Company and State Holding Company (collectively, the “Chinese Shareholders”). |
| | | In March and May 2004, Yuchai granted interest-free advances to YMLCYMCL at the request of the Yuchai’s PRC directors to provide YMLCYMCL with initial working capital for its start-up activities. YMLCYMCL was set up with the intention of offering a complementary range of services including spare parts distribution, insurance, vehicle financing and warranty servicing. These advances were provided with the approval of the previous Chairman of Yuchai but without the prior approval by the majority of the shareholders of Yuchai. |
| | | On December 2, 2004, these advances were converted into formal loans and written agreements and were executed between Yuchai and YMLCYMCL through an authorized financial institution in the PRC. Under the terms of the loan agreements, the loans were payable in their entirety on December 2, 2005 and interest, at the rate of 5.58% per annum, was payable on a monthly basis. Further, the loans were secured by guarantees given by the Chinese Shareholders. Interest income of Rmb11,922, Rmb10,512 and Rmb11,548 (US$1,477)1,690) was received and recognized in 2005, 2006 and 2007, respectively (see Note 7). |
F-19
| | Because the loans had already been disbursed, the Chinese Shareholders had issued guarantees for these loans, and the Company’s relationship with the Chinese Shareholders was improving, the Directors of Yuchai believed that it was in the Company’s and Yuchai’s best interest to ratify the loans. Consequently, the loans were ratified by the Board of Directors of Yuchai in April 2005. |
| | | In 2005, the Company discussed with the Chinese Shareholders the possibility of converting the loans into an equity investment in YMLC,YMCL, subject to the Yuchai board’s approval. This potential alternative was incorporated within the terms of the reorganization agreement entered into by the Company with Yuchai and Coomber on April 7, 2005 (“Reorganization Agreement”). |
| | | When the loans became due in December 2005, Yuchai was requested to extend the maturity date for the loans. However, the Company and Yuchai had been unable to access the financial statements of YMLC.YMCL. Consequently, the Directors from the Company’s and Yuchai’s boards had doubts about YMLC’sYMCL’s ability to repay the loans. However, the Company’s and Yuchai’s board of directors considered the request to extend the loans based on representations received from the Chinese Shareholders and management of YMLCYMCL concerning their respective abilities and intentions to repay the loans and honor their guarantees, and therefore agreed to extend the repayment date of the loans for an additional year. The extension of the loans was approved by the Board of Directors of Yuchai on December 2, 2005. An agency bank was appointed under PRC requirements to administer the Rmb205,000Rmb205 million loans and the legal method requires such loans to be repaid and the funds re-disbursed. The new loans carry the same terms, including scheduled maturity on December 1, 2006. New guarantees were also granted by the Chinese Shareholders for these loans. The maturity date of the loans was subsequently extended to June 1, 2007 and further extended to May 30, 2008. |
| | Later in December 2005, after it was agreed to extend the loans, based on mutual understandings between YMLC, the Chinese Shareholders and Yuchai, access to financial records of YMLC were made available. The Company conducted a due diligence review, learned that YMLC was not profitable, and concluded that YMLC’s future prospects were dim. The Company therefore decided not to pursue the conversion of loans into an equity investment in YMLC and also concluded that YMLC will probably not have the financial resources to repay the loans when they become due in December 2006. |
| | The Company discussed this matter with the Chinese Shareholders and management of YMLCYMCL and also considered the financial position and financial resources of the State Holding Company and Coomber. CYI management has made an assessment of the future cash flows of the State Holding Company and Coomber and concluded that it iswas likely they will not be able to honor their respective guarantees in the event YMLCYMCL is unable to repay the loans when they become due. |
| | | Consequently, at that time, CYI management has identified a number of possible courses of action in the event YMLCYMCL is unable to repay the loans when they become due. These actions include:included: |
| • | | Taking actions to force YMLCYMCL to liquidate; | | | • | | Retaining portions of future dividends declared by Yuchai and payable to State Holding Company until the guarantee obligations are fulfilled; and | | | • | | Commencing legal action against YMLCYMCL and possibly the Chinese Shareholders. |
| | The Company’s management has ruled out any form of legal or other enforcement action against the Chinese Shareholders as management believesbelieved that Yuchai may not be the first preferred creditor entitled to receive payment of the judgment debt. Moreover, management believesbelieved that the process for enforcement of a judgment in China is complex and not as effective when compared with other jurisdictions. In addition, management believesbelieved that the commencement of legal or other enforcement actions willwould likely lead to a deterioration in relations with the Chinese Shareholders which could have a materially adverse impact on the Company’s investment in Yuchai and could lead to the impairment of shareholder value of the Company. Consequently, management believesbelieved that it is currentlywas beneficial to the Company’s shareholders for management to continue their dialogue and seek other possible arrangements with YMLC,YMCL, Coomber and State Holding Company to resolve the repayment of the Rmb205,000 (US$25,402)Rmb205 million loans rather than for it to resort to legal and enforcement actions described above. However, considering | | | | In July 2007, Yuchai’s Board of Directors agreed in principle to a proposal by the financial condition and management’s assessmentState Holding Company to settle the loans due from YMCL, along with various other accounts receivable from YMCL (collectively, the “receivables”), by forgiving the receivables in exchange for the transfer of 100% of the future prospects of YMLCequity ownership in a hotel in Yulin, PRC and management’s intention to not seek legal or enforcement actions pertainingYMCL’s central office building in Guilin, PRC. On December 25, 2007, Yuchai, pursuant to the execution of a share transfer contract with YMCL, Coomber and State Holding Company, acquired all the outstanding share capital of Guangxi Yulin Hotel Company Ltd (“Yulin Hotel Company”) for Rmb245.6 million. As of December 31, 2007 the purchase consideration for this acquisition had not been settled and is included in “Amounts due to related parties” on the consolidated balance sheet. Agreements were entered into by Yuchai on March 31, 2008 to effect the repayment of the Rmb205 million loans against the liability of Rmb245.6 million arising from the purchase of 100% equity interest in Yulin Hotel Company with the balance settled through offset of certain trade receivables due from YMCL, the Guarantors and other related guarantees, management currently believes that it is probable it will be unable to recover any portionparties. Under the terms of these loans.agreements, Yuchai’s purchase price obligation of Rmb245.6 million was legally extinguished through the offsetting of this liability. |
F - 23F-20
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
| | As of December 31, 2007, the transfer of the 100% equity interest in Yulin Hotel Company was subject to approval from the provincial government regulatory agency in charge of state-owned assets administration in China. Yuchai’s Board of Directors and shareholders had approved an extension of time for obtaining of approval from November 30, 2008 to June 30, 2009 failing which, Yuchai would have had the right to sell to the State Holding Company, who would have been obligated to buy, 100% of the equity in Yulin Hotel Company at the original purchase price of Rmb245.6 million. This condition is contained in a guarantee letter provided by the original shareholders of Yulin Hotel Company. However, management of the Company was uncertain whether State Holding Company had the financial ability to purchase Yulin Hotel Company for the full contractual amount of Rmb245.6 million. Consequently, no recovery of the previously recorded impairment loss on the loans due from YMCL has been recognized in the Company’s consolidated financial statements as of December 31, 2007. Such recovery will only be recognized in the Company’s consolidated financial statements in the period when a) approval is obtained from the provincial government regulatory agency in charge of state-owned assets administration in China for its acquisition of the 100% equity interest in Yulin Hotel Company, or b) the Company is able to resolve the uncertainty about the recovery through other means. On January 13, 2009, Yuchai received approval from the provincial government regulatory agency in charge of state-owned assets administration in China for its acquisition of the 100% equity interest in Yulin Hotel Company. | | | | An analysis of the allowance for doubtful loans for 2005, 2006 and 2007 is as follows: |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Balance at beginning of year | | | — | | | | 202,950 | | | | 202,950 | | | | 29,695 | | Add: Charge to consolidated statements of operations | | | 202,950 | | | | — | | | | — | | | | — | | Less: Write-offs | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Balance at end of year | | | 202,950 | | | | 202,950 | | | | 202,950 | | | | 29,695 | | | | | | | | | | | | | | | | | | |
6 | | Interest cost | | | | The CompanyGroup capitalizes interest charges as a component of the cost of construction in progress. The following is a summary of interest cost incurred during 2003, 20042005, 2006 and 2005:2007: |
| | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | | | | | | | | | | | | | | | | 2003 | | 2004 | | 2005 | | 2005 | | Years ended December 31, | | | Rmb | | Rmb | | Rmb | | US$ | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Interest cost capitalized | | 12,146 | | 19,701 | | 20,991 | | 2,601 | | | 20,991 | | 18,057 | | 12,367 | | 1,809 | | Interest cost charged to consolidated statements of income | | 23,624 | | 31,757 | | 70,527 | | 8,739 | | | | | | | | | | | | | | Interest cost charged to consolidated statements of operations | | | 70,527 | | 117,491 | | 125,244 | | 18,325 | | | | | | | | | | | | Total interest cost incurred | | 35,770 | | 51,458 | | 91,518 | | 11,340 | | | 91,518 | | 135,548 | | 137,611 | | 20,134 | | | | | | | | | | | | | | | | | | | | | | |
7 | | Other (expenses)/income, net | | | | Other (expenses)/income, net consistconsists of: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | Years ended December 31, | | | 2003 | | 2004 | | 2005 | | 2005 | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | | Rmb | | Rmb | | Rmb | | US$ | Interest income (see Note 5) | | 3,587 | | 3,286 | | 21,744 | | 2,695 | | | Foreign exchange (loss)/gain, net | | | (27 | ) | | | (38 | ) | | 607 | | 75 | | | Interest income | | | 21,744 | | 47,124 | | 54,205 | | 7,931 | | Foreign exchange gain/(loss), net | | | 607 | | | (41,940 | ) | | | (37,172 | ) | | | (5,438 | ) | Dividend income from other investments | | — | | 4,591 | | — | | — | | | 7,815 | | — | | 4,897 | | 717 | | Rental income | | — | | — | | 6,078 | | 753 | | | 6,078 | | 1,766 | | 1,499 | | 219 | | Loss on dilution of equity interests in affiliates | | | — | | | (1,188 | ) | | | (2,591 | ) | | | (379 | ) | Gain on redemption of other investments (Note 17(b)(ii)) | | | — | | 28,457 | | 17,478 | | 2,557 | | Net gain/(loss) on changes in fair value of embedded derivatives (Note 17(b)) | | | — | | | (3,617 | ) | | 6,139 | | 898 | | Others, net | | | (4,441 | ) | | | (2,157 | ) | | | (4,246 | ) | | | (526 | ) | | | (10,795 | ) | | 8,254 | | 9,099 | | 1,331 | | | | | | | | | | | | | | | | | | | | | | | | (881 | ) | | 5,682 | | 24,183 | | 2,997 | | | 25,449 | | 38,856 | | 53,554 | | 7,836 | | | | | | | | | | | | | | | | | | | | |
8 | | Income taxes | | | | Bermuda tax | | | | The Company is incorporated under the laws of Bermuda and, under the current Bermuda laws, is not subject to tax on income or capital gains. | | | | The Company has received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Act, 1966, which exempts the Company and its stockholders, other than stockholders ordinarily |
F-21
| | resident in Bermuda, from any Bermuda taxes computed on profit, income or any capital assets, gain or appreciation, or any tax in the nature of estate duty or inheritance tax at least until the year 2016. | | | | PRC income tax | | | | As Yuchai is a sino-foreign enterprise in the Western Region of the PRC that is engaged in an encouraged industry, its PRC statutory income tax rate is 15% in 2003, 20042005, 2006 and 20052007 under the relevant PRC income tax laws. | | | | The PRC income tax rates of Yuchai’s subsidiaries under the relevant PRC income tax laws are 15% to 33% in 2003, 20042005, 2006 and 2005. |
F - 24
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
8 | | Income taxes (continued)2007. | | | | Pursuant to the income tax law of the PRC concerning foreign investment and foreign enterprises (the “FEIT Law”), the applicable income tax rate through December 31, 2007 of Yuchai was 15%. Since January 1, 2002, Yuchai was subject to tax at a rate of 15% so long as it continued to qualify as a foreign-invested enterprise eligible for tax reductions under PRC income tax law. | | | | In 2007, the National People’s Congress approved and promulgated a new tax law, China’s Unified Enterprise Income Tax Law (“CIT law”), which became effective January 1, 2008. Under the CIT law, foreign invested enterprises and domestic companies are subject to a uniform tax rate of 25%. The CIT law provides a five-year transition period from its effective date for those enterprises which were established before the promulgation date of the CIT law and which were entitled to a preferential lower tax rate under the then-effective tax laws or regulations. In accordance with a grandfathering provision, the CIT law also provides for a graduated tax rate increase over a five-year period from an existing reduced tax rate to the uniform tax rate of 25%. | | | | In 2008, Yuchai has continued to fulfill the requirements to qualify for an extension to the reduced tax rate of 15% which will continue to 2010 in accordance with transitional arrangements in the CIT law. Subsequent to this, Yuchai can apply for other programs which may be available to provide a reduced rate. In the event that Yuchai is ineligible for either an extension to the existing tax rate reduction or the transitional graduated rates noted above, Yuchai would be subject to tax at a rate of 25%. For all of Yuchai’s subsidiaries that were previously subjected to tax at a rate of 33%, the rate has been lowered to 25% following the CIT law. | | | | The CIT law also provides for a tax of 10% to be withheld from dividends paid to foreign investors of PRC enterprises. This withholding tax provision does not apply to dividends paid out of profits earned prior to January 1, 2008. Beginning on January 1, 2008, a 10% withholding tax will be imposed on dividends paid to CYI, a non-PRC resident enterprise, unless an applicable tax treaty provides for a lower tax rate and the Company will recognize withholding taxes payable for profits accumulated after December 31, 2007 as the Company does not plan to indefinitely reinvest these earnings. | | | | Earnings/(loss) before income taxes and minority interests comprise the following: |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | PRC | | | 17,942 | | | | 292,359 | | | | 845,239 | | | | 123,671 | | Non-PRC | | | (43,032 | ) | | | (88,964 | ) | | | (61,325 | ) | | | (8,973 | ) | | | | | | | | | | | | | | | | | | Total | | | (25,090 | ) | | | 203,395 | | | | 783,914 | | | | 114,698 | | | | | | | | | | | | | | | | | | |
| | Income tax expense in the consolidated statements of incomeoperations consists of: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | Years ended December 31, | | | 2003 | | 2004 | | 2005 | | 2005 | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | | Rmb | | Rmb | | Rmb | | US$ | | | PRC | | | Current tax expense | | 106,671 | | 104,049 | | 32,726 | | 4,055 | | | 30,198 | | 50,462 | | 33,881 | | 4,958 | | Deferred tax expense/(benefit) | | 6,253 | | 1,116 | | | (11,851 | ) | | | (1,468 | ) | | | (20,050 | ) | | | (19,996 | ) | | 34,637 | | 5,067 | | | | | | | | | | | | | | | | | | | | | | | 10,148 | | 30,466 | | 68,518 | | 10,025 | | | | 112,924 | | 105,165 | | 20,875 | | 2,587 | | | | | | | | | | | | | | | | | | | | | | | |
F-22
| | Income tax expense reported in the consolidated statements of incomeoperations differs from the amount computed by applying the PRC income tax rate of 15% for the three years ended December 31, 20052007 for the following reasons: |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | Rmb | | | Rmb | | | Rmb | | | US$ | | Computed “expected” tax expense | | | 104,536 | | | | 113,078 | | | | 17,586 | | | | 2,179 | | Adjustments resulting from: | | | | | | | | | | | | | | | | | — Non-deductible expenses | | | 1,232 | | | | 471 | | | | 5,703 | | | | 707 | | — Tax credits (see Note (i)) | | | — | | | | (16,184 | ) | | | (43,535 | ) | | | (5,395 | ) | — Change in valuation allowance | | | — | | | | — | | | | 45,231 | | | | 5,605 | | — Rate differential of subsidiaries | | | 7,156 | | | | 7,800 | | | | (4,110 | ) | | | (509 | ) | | | | | | | | | | | | | | | | | | | Total tax expense | | | 112,924 | | | | 105,165 | | | | 20,875 | | | | 2,587 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Computed “expected” tax expense/(benefit) | | | (3,764 | ) | | | 30,509 | | | | 117,587 | | | | 17,205 | | Adjustments resulting from: | | | | | | | | | | | | | | | | | — Non-deductible expenses related to errors correction (see Note (ii)) | | | 10,623 | | | | 7,795 | | | | — | | | | — | | — Non-deductible expenses | | | 5,703 | | | | 4,053 | | | | 8,411 | | | | 1,231 | | — Effect of change in tax law on allowance for doubtful loans to a related party (see Note (iii)) | | | — | | | | — | | | | 27,650 | | | | 4,045 | | — Tax credits on purchase of property, plant and equipment (see Note (i)) | | | (43,535 | ) | | | (6,895 | ) | | | (70,877 | ) | | | (10,370 | ) | — Tax credits on purchase of property, plant and equipment forfeited | | | — | | | | — | | | | 8,861 | | | | 1,296 | | — Tax credits for R& D expense (see Note (i)) | | | — | | | | (10,386 | ) | | | (11,877 | ) | | | (1,738 | ) | — Change in valuation allowance | | | 45,231 | | | | (6,492 | ) | | | (34,699 | ) | | | (5,077 | ) | — Tax rate differential | | | (4,110 | ) | | | 11,882 | | | | 18,314 | | | | 2,680 | | — Other | | | — | | | | — | | | | 5,148 | | | | 753 | | | | | | | | | | | | | | | | | | | Actual tax expense | | | 10,148 | | | | 30,466 | | | | 68,518 | | | | 10,025 | | | | | | | | | | | | | | | | | | |
| | | Notes: | | | | (i) | | Amounts mainly representsrepresent tax credits relating to the purchase of domestic equipment for technological improvement and thefor approved research and development costs. | | (ii) | | All taxable income and income tax expenseAmount relates to non-deductible permanent differences from the restatement of the Company’s 2005 financial statements as at May 15, 2008 as such expenses are fromnot expected to be deductible in accordance with PRC sources. |
F - 25
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
8 | | Income taxes (continued)regulations. | | (iii) | | Amount pertains to the elimination of the deferred tax asset previously recognized on a loan loss provision to a related party (see Note 5), which is no longer considered to be a deductible temporary difference due to a change in CIT law in 2007. |
| | The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 20042006 and 20052007 are presented below: |
| | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | 2004 | | 2005 | | 2005 | | December 31, | | | Rmb | | Rmb | | US$ | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Trade accounts receivable | | 26,006 | | 22,900 | | 2,838 | | | 36,806 | | 31,836 | | 4,658 | | Inventories | | 6,678 | | 8,336 | | 1,033 | | | 23,251 | | 19,124 | | 2,798 | | Property, plant and equipment | | 69,247 | | 49,436 | | 6,126 | | | 26,982 | | 31,407 | | 4,595 | | Accrued expenses and other liabilities | | 37,020 | | 32,961 | | 4,084 | | | 49,384 | | 68,381 | | 10,005 | | Tax losses carried forward | | 3,500 | | 11,615 | | 1,439 | | | 5,075 | | 1,152 | | 169 | | Tax credits | | — | | 43,535 | | 5,395 | | | 50,434 | | — | | — | | Loans to a related party | | — | | 30,750 | | 3,810 | | | 29,304 | | — | | — | | | | | | | | | | | | | | | | | Total gross deferred tax assets | | | 221,236 | | 151,900 | | 22,225 | | | | | | | | | | Total gross deferred tax assets | | 142,451 | | 199,533 | | 24,725 | | | Less: Valuation allowance | | — | | 45,231 | | 5,605 | | | Less: Valuation allowance (see Note (i)) | | | 38,739 | | 4,040 | | 591 | | | | | | | | | | | | | | | | | Net deferred tax assets | | 142,451 | | 154,302 | | 19,120 | | | 182,497 | | 147,860 | | 21,634 | | | | | | | | | | | | | | | | | | |
| | | Note: | | (i) | | An analysis of the valuation allowance for 2006 and 2007 is as follows: |
| | | | | | | | | | | | | | | December 31 | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | | | | | | | | | | | | | | Balance at beginning of year | | | 45,231 | | | | 38,739 | | | | 5,668 | | Less: | | | | | | | | | | | | |
F-23
| | | | | | | | | | | | | | | December 31 | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Reduction in valuation allowance for forfeited unused tax credits | | | — | | | | (8,861 | ) | | | (1,297 | ) | Realization of deferred tax assets in the current year | | | — | | | | (25,838 | ) | | | (3,780 | ) | Reduction in valuation allowance for changes in circumstances that caused a change in judgment about the realizability of deferred tax assets | | | (6,492 | ) | | | — | | | | — | | | | | | | | | | | | | | | Balance at end of year | | | 38,739 | | | | 4,040 | | | | 591 | | | | | | | | | | | | | | |
| | The following table represents the classification of the Company’sGroup’s net deferred tax assets: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | December 31 | | | 2004 | | 2005 | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | | Rmb | | Rmb | | US$ | | | Net deferred tax assets comprise of: | | | Net deferred tax assets comprise: | | | Current portion | | 69,704 | | 88,783 | | 11,001 | | | 112,779 | | 114,361 | | 16,733 | | Non-current portion | | 72,747 | | 65,519 | | 8,119 | | | 69,718 | | 33,499 | | 4,901 | | | | | | | | | | | | | | | | | | | 182,497 | | 147,860 | | 21,634 | | | | 142,451 | | 154,302 | | 19,120 | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2005, a subsidiary of the Company2007, Yuchai was granted with tax credits amountedamounting to Rmb43,535Rmb11,877 (US$5,395)1,738) in relation to approved research and development costs and Rmb70,877 (US$10,370) relating to the purchase of domestically produced equipment of which Rmb12,502 (US$1,549) would expire in 2008 and the remaining amount would expire in 2009.certain domestic equipment. According to the relevant laws and regulations in the PRC prior to the new CIT law, the amount of credits relating to the purchase of certain domestic equipment entitled for deduction each year is limited to the incremental current income tax expense of the subsidiary for the year compared to the current income tax expense of the subsidiary in the year beforeimmediately prior to the year the credit was approved. All the approved tax credits, including credits of Rmb50,434 (US$7,379) relating to the purchase of certain domestic equipment carried over from prior years, were fully utilized against current income taxes in 2007, except for Rmb8,861 (US$1,296) that have been forfeited as of December 31, 2007 due to provisions of the equipment.new CIT law, which no longer allows such tax credits to be accrued and existing credits unused as of December 31, 2007 are not permitted to be carried forward. |
F - 26
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
8 Income taxes (continued)
| | | CertainAs at December 31, 2007, one of the subsidiaries of the Company had net operatingtax loss carryforwardscarry forwards for PRC income tax purposes of Rmb47,182Rmb4,608 (US$5,846)674), which are available to offset future taxable income, if any. Of which, Rmb13,328, Rmb13,630any, and Rmb20,224 wouldwill expire in 2008, 2009 and 2010, respectively. |
| | In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The management considered that it is more likely than not that tax credits totalling Rmb33,834 (US$4,193) relating to the purchase of domestic equipment cannot be fully utilized as the amount entitled for deduction each year is limited to the incremental current income tax expense of theif unused by 2010. This subsidiary compared to the current tax of the subsidiary for the years 2003 and 2004, when the related domestic equipment was purchased and the management forecasted future taxable income of the subsidiary will not be sufficient to fully utilize the tax credits. In addition, one of the subsidiaries has been loss making since its commencement of operations in 2004 and based onmanagement deems it more likely than not that the deferred tax assets relating to the tax loss carry forwards as well as other deductible temporary differences of this managementsubsidiary will not be realized. A total valuation allowance of Rmb4,040 (US$591) has determinedbeen provided for all of its deferred tax assets as at December 31, 2007. The reduction in valuation allowance in 2007 primarily arises from the reversal of a valuation allowance for tax credits of Rmb18,241 carried forward from 2005 that have been utilized in 2007 due to unforseeable positive results actually achieved during the current year, for unused tax credits of Rmb8,861 that were forfeited as of December 31, 2007, and for deferred tax assets of other subsidiaries that were previously loss making but have now become profitable. Management believes that it is more likely than not that the results of future operations in the next four years will generate sufficient taxable income to allow the realization of the tax benefit of the deferred tax assets in this entity totalling Rmb11,397 (US$1,412)at December 31, 2007. | | | | The Company and its subsidiaries adopted the provisions of FIN 48 on January 1, 2007, and there was no material effect on the consolidated financial statements. As a result, the Company and its subsidiaries did not record any cumulative effect adjustment related to adopting FIN 48. | | | | As of January 1, 2007, and for the 12-month period ended December 31, 2007, the Company and its subsidiaries did not have any material unrecognized tax benefits and thus, no significant interest and penalties related to unrecognized tax benefits were recognized. In addition, the Company and its subsidiaries do not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months. | | | | In the event of under-reporting of taxable income as a result of filing method, that is based on management accounts instead of the audited financial statements, the tax bureau can claw back the underpaid taxes within three years and impose late payment surcharges. If the accumulative underpaid tax would be more than Rmb100, the claw back period could be extended to five years. | | | | In 2006, the provincial tax bureau completed an examination of Yuchai’s PRC income tax returns for 2001 through 2005. The tax bureau did not be realized.make any adjustment to Yuchai’s tax positions, and no surcharge or penalty was imposed. The income tax returns of Yuchai for the years ended December 31, 2005 through 2007 remain subject to examination by the PRC tax authorities. For all other PRC subsidiaries, the income tax returns for the years ended December 31, 2003 through 2007 are open to examination. |
F - 27F-24
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
9 Trade accounts receivable, net
9 | | Trade accounts and bills receivable, net | | | | Trade accounts and bills receivable, net comprise: |
| | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | 2004 | | 2005 | | 2005 | | December 31, | | | Rmb | | Rmb | | US$ | | 2006 | | 2007 | | 2007 | | | | Rmb | | Rmb | | US$ | Trade accounts receivable | | 504,429 | | 574,018 | | 71,128 | | | 517,130 | | 732,682 | | 107,203 | | Less: Allowance for doubtful accounts | | 107,457 | | 69,047 | | 8,556 | | | 90,365 | | 64,893 | | 9,495 | | | | | | | | | | | | | | | | | | | | 426,765 | | 667,789 | | 97,708 | | | | 396,972 | | 504,971 | | 62,572 | | | Bills receivable | | 478,593 | | 641,256 | | 79,460 | | | 1,054,153 | | 2,439,996 | | 357,006 | | | | | | | | | | | | | | | | | | | | 1,480,918 | | 3,107,785 | | 454,714 | | | | 875,565 | | 1,146,227 | | 142,032 | | | | | | | | | | | | | | | | | | | | | | | |
| | An analysis of the allowance for doubtful accounts for 2003, 20042005, 2006 and 20052007 is as follows: |
| | | | | | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | | | | | 2003 | | 2004 | | 2005 | | 2005 | | December 31, | | | Rmb | | Rmb | | Rmb | | US$ | | 2005 | | 2006 | | 2007 | | 2007 | | | | Rmb | | Rmb | | Rmb | | US$ | Balance at beginning of year | | 158,075 | | 94,423 | | 107,457 | | 13,315 | | | 107,457 | | 69,047 | | 90,365 | | 13,222 | | Add: | | | Charge to consolidated statements of income | | — | | 13,034 | | 25,587 | | 3,171 | | | Charge (credit) to consolidated statements of operations | | | 25,587 | | 21,582 | | (11,008 | ) | | (1,611 | ) | Less: | | | Written back to consolidated statements of income | | 493 | | — | | — | | — | | | Doubtful debts written off | | 63,159 | | — | | 63,997 | | 7,930 | | | | | | | | | | | | | | Written off | | | (63,997 | ) | | (264 | ) | | (14,464 | ) | | (2,116 | ) | | | | | | | | | | | | Balance at end of year | | 94,423 | | 107,457 | | 69,047 | | 8,556 | | | 69,047 | | 90,365 | | 64,893 | | 9,495 | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 20042006 and 2005,2007, gross trade accounts receivable due from a major customer, Dongfeng Automobile Company and its affiliates (“the Dongfeng companies”), were Rmb142,788Rmb121,336 and Rmb161,930Rmb117,728 (US$20,065)17,225), respectively. See Note 3333(a) for further discussion of businesscustomer concentration risk. |
| | | As of December 31, 2005, certain2006 and 2007, no trade accounts receivable totalling Rmb42,835 (US$5,308) werewas pledged as security under certain loan arrangements (see Note 18(a)). |
F - 28
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
| 10 | | Amounts due from/to(to) related parties | | | | | | Amounts due from related parties comprise: |
| | | | | | | | | | | | | | | December 31, | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | US$ | | | Due within one year | | | 85,614 | | | | 233,188 | | | | 28,895 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Amounts due from: | | | | | | | | | | | | | | | | | | | | | | | | | | SHC & subsidiaries | | | 54,987 | | | | 88,207 | | | | 12,906 | | YMCL & subsidiaries | | | 96,547 | | | | 27,459 | | | | 4,018 | | Others | | | 6,978 | | | | 27,986 | | | | 4,094 | | | | | | | | | | | | | | | Due within one year | | | 158,512 | | | | 143,652 | | | | 21,018 | | | | | | | | | | | | | | |
| | AmountsAn analysis of the allowance for doubtful accounts due tofrom related parties comprise:for 2005, 2006 and 2007 is as follows: |
| | | | | | | | | | | | | | | December 31, | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | US$ | | | Due within one year | | | 42,686 | | | | 75,189 | | | | 9,317 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Balance at beginning of year | | | — | | | | — | | | | 33,170 | | | | 4,853 | | Add: | | | | | | | | | | | | | | | | | Charge to consolidated statements of operations in current year | | | — | | | | 33,170 | | | | — | | | | — | | Less: | | | | | | | | | | | | | | | | | Written off | | | — | | | | — | | | | (3,863 | ) | | | (565 | ) | | | | | | | | | | | | | | | | | | Balance at end of year | | | — | | | | 33,170 | | | | 29,307 | | | | 4,288 | | | | | | | | | | | | | | | | | | |
F-25
| | | | | | | | | | | | | | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Amounts due to: | | | | | | | | | | | | | SHC & subsidiaries | | | 64,761 | | | | 183,595 | | | | 26,863 | | YMCL & subsidiaries | | | 3,863 | | | | 191,184 | | | | 27,973 | | HLMS | | | 9,287 | | | | 5,742 | | | | 840 | | | | | | | | | | | | | | | Due within one year | | | 77,911 | | | | 380,521 | | | | 55,676 | | | | | | | | | | | | | | |
| | Related parties include Guangxi Yuchai Mechanical and Electronics Company (“GYMEC”), Hong Leong Management Services Pte, Limited, YMLC,Pte. Ltd. (“HLMS”), TCL, HLGE, YMCL (excluding YMCL loans disclosed in Note 5), State Holding Company (“SHC”) and their subsidiaries and affiliates. At December 31, 2005,2007, the amounts due from/to related parties are unsecured, interest free and arose principally from transactions as disclosed in Note 27.27 and from the purchase of all of the share capital of Yulin Hotel Company (see Note 34). All amounts due from/to related parties are payable on demand. | | | | In June 2006, YMLCYMCL and State Holding Company entered into an agreement with Yuchai to enable Yuchai and its subsidiaries to settle the amounts due from/to YMLC,YMCL, State Holding Company and their subsidiaries on a net basis, i.e. the balance due from/to YMLC,YMCL, State Holding Company, their subsidiaries and affiliates as of December 31, 20052006 and 2007 were offset.offset for settlement purposes only. |
F - 29
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
| 11 | | Loans to customers, net |
| | | Loans to customers, net referrefers to the designated loans lent by the CompanyYEGCL through financial institutions to customers. The terms of the loan agreements were designated by the Company.Group. The financial institutions assist the CompanyGroup to release the principal to the borrowers and collect the repayment on behalf of the CompanyGroup without bearing the risk of default by customers, if any. The loans carried interest rates rangedranging from 5.31% to 5.85%7.49% per annum and wereare repayable in instalmentsinstallments within one year. The loans are secured and guaranteed by independent third parties. |
| | | Inventories comprise:are comprised of: |
| | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | 2004 | | 2005 | | 2005 | | December 31 | | | Rmb | | Rmb | | US$ | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Raw materials | | 699,132 | | 1,027,733 | | 127,349 | | | 1,058,619 | | 942,798 | | 137,945 | | Work in progress | | 141,659 | | 33,057 | | 4,096 | | | 24,251 | | 17,647 | | 2,581 | | Finished goods | | 505,754 | | 575,493 | | 71,311 | | | 482,313 | | 686,580 | | 100,457 | | | | | | | | | | | | | | | | | | | 1,565,183 | | 1,647,025 | | 240,983 | | | | 1,346,545 | | 1,636,283 | | 202,756 | | | | | | | | | | | | | | | | | | | |
F-26
13 | | Other receivables, net |
| | Other receivables, net comprise: |
| | | | | | | | | | | | | | | December 31, | | | | 2004 | | | | 2005 | | | | 2005 | | | | Rmb | | | | Rmb | | | | US$ | | VAT recoverable (see Note (i)) | | | 91,977 | | | | 96,151 | | | | 11,914 | | Staff loans | | | 8,476 | | | | 18,075 | | | | 2,240 | | Staff advances | | | 3,306 | | | | 1,726 | | | | 214 | | Receivable for factoring (see Note (ii)) | | | 6,845 | | | | — | | | | — | | Others | | | 4,810 | | | | 24,251 | | | | 3,005 | | | | | | | | | | | | | | | | | | | 115,414 | | | | 140,203 | | | | 17,373 | | | | | | | | | | | | | | | |
| | | Notes: | | | | (i) | | The VAT recoverable mainly represents a delay in the input VAT approval by the local tax bureau, totalling Rmb58,872 (US$7,295). The amount was subsequently settled in January 2006. |
F - 30
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
13 | | Other receivables, net (continued) |
| | | | Notes: (continued) | | (ii) | | In December 2004, Yuchai sold trade accounts receivable of Rmb64,827 to a commercial bank. The balance represented 10% of the sales amount withheld by the bank that would be released to the Company upon the settlement of the trade accounts receivable. The amount withheld represented the full amounts which might be claimed by the bank pursuant to recourse provisions. The amount was fully settled in 2005. |
| | | | | | | | | | | | | | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | VAT recoverable | | | 66,005 | | | | 8,063 | | | | 1,180 | | Staff loans | | | 6,602 | | | | 3,406 | | | | 498 | | Staff advances | | | 4,803 | | | | 4,665 | | | | 682 | | Amounts due under guarantee contracts, net (see Note 24(d)) | | | 15,189 | | | | 10,440 | | | | 1,528 | | Land deposit | | | 5,000 | | | | 5,000 | | | | 732 | | Interest receivable from affiliates | | | 19,658 | | | | 50,599 | | | | 7,403 | | Others | | | 22,812 | | | | 14,901 | | | | 2,180 | | | | | | | | | | | | | | | | | | 140,069 | | | | 97,074 | | | | 14,203 | | | | | | | | | | | | | | |
14 | | Property, plant and equipment, net | | | |
| | Property, plant and equipment, net comprise: |
| | | | | | | | | | | | | | | December 31, | | | | 2004 | | | | 2005 | | | | 2005 | | | | Rmb | | | | Rmb | | | | US$ | | Buildings | | | 634,544 | | | | 709,643 | | | | 87,934 | | Machinery and equipment | | | 1,547,112 | | | | 1,888,567 | | | | 234,017 | | | | | | | | | | | | | | | | | | | 2,181,656 | | | | 2,598,210 | | | | 321,951 | | Less: Accumulated depreciation | | | 1,022,725 | | | | 1,155,695 | | | | 143,205 | | | | | | | | | | | | | | | | Net property, plant and equipment | | | 1,158,931 | | | | 1,442,515 | | | | 178,746 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Buildings, including leasehold improvements | | | 854,241 | | | | 1,096,622 | | | | 160,452 | | Machinery and equipment | | | 2,119,912 | | | | 2,426,938 | | | | 355,096 | | Office and computer equipment | | | 97,342 | | | | 106,995 | | | | 15,654 | | | | | | | | | | | | | | | | | | 3,071,495 | | | | 3,630,555 | | | | 531,202 | | Less: Accumulated depreciation and amortization | | | 1,276,090 | | | | 1,472,309 | | | | 215,420 | | | | | | | | | | | | | | | Property, plant and equipment, net | | | 1,795,405 | | | | 2,158,246 | | | | 315,782 | | | | | | | | | | | | | | |
| | In 2003, management determined that certain property, plant and equipment would no longer be used in production due to the introduction of new environmental regulations in 2003. These changes required an impairment analysis to be performed in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The estimated undiscounted future cash flows generated from such property, plant and equipment were less than their carrying value. The carrying value of such assets was therefore reduced to their estimated fair value. Impairment loss of Rmb12,405 has been included in “Selling, general and administrative expenses” in 2003. Management has conducted an impairment review on the conditions of the property, plant and equipment in 2004 and 2005 and considered no impairment loss was deemed necessary in 2004 and 2005. | | | | All of Yuchai and its subsidiaries’ buildings are located in the PRC. | | | | As of December 31, 2004, certain plant and equipment of Yuchai with an aggregate carrying amount of Rmb172,630, was pledged as security under certain loan arrangements (see Note 18(a)). The security was released in 2005. |
F - 31
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
14 | | Property, plant and equipment, net (continued) | | | | | | Loss on disposal of property, plant and equipment for the years ended December 31, 2003, 20042005, 2006 and 20052007 is included in “Selling, general and administrative expenses” as follows: |
| | | | | | | | | | | | | | | | | | | December 31, | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | | Loss on disposal of property, plant and equipment | | | 3,359 | | | | 12,998 | | | | 10,474 | | | | 1,298 | | | | | | | | | | | | | | | | | | | |
| | The Company has several non-cancellable operating leases, primarily for offices and warehouses that expire over the next four years. These leases generally contain renewal options for periods ranging from one year to four years. | | | | Future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2005 are: |
| | | | | | | | | | | Rmb | | | US$ | | | 2006 | | | 2,766 | | | | 343 | | 2007 | | | 2,019 | | | | 250 | | 2008 | | | 1,084 | | | | 134 | | 2009 | | | 541 | | | | 67 | | | | | | | | | | | | | | | 6,410 | | | | 794 | | | | | | | | | | | |
| | | | | | | | Rental expense for operating leases is included in “Selling, general and administrative expenses” as follows: |
| | | | | | | | | | | | | | | | | | | December 31, | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | | Rental expense | | | 5,159 | | | | 9,232 | | | | 8,726 | | | | 1,081 | | | | | | | | | | | | | | | | | | | |
F - 32
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)(Rmb and US$ amounts expressed in thousands, except per share data) | | | | | | | | | | | | | | | | | | | December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Loss on disposal of property, plant and equipment | | | 10,474 | | | | 1,598 | | | | 5,926 | | | | 867 | | | | | | | | | | | | | | | | | | |
15 | | Construction in progress |
| | Construction in progress comprisesconsists of capital expenditures and capitalized interest charges relating to the following construction of facilities and assembly lines projects:projects as follows: |
| | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | 2004 | | 2005 | | 2005 | | December 31, | | | Rmb | | Rmb | | US$ | | 2006 | | 2007 | | 2007 | | | | Rmb | | Rmb | | US$ | Diesel engine production line and facilities projects | | 211,418 | | 286,050 | | 35,445 | | | 172,278 | | 86,543 | | 12,662 | | Factories auxiliary facilities | | 86,134 | | 95,230 | | 11,800 | | | 47,680 | | 47,068 | | 6,887 | | Second foundry | | 29,570 | | 26,047 | | 3,228 | | | 8,704 | | 12,034 | | 1,761 | | Others | | 51,913 | | 52,575 | | 6,515 | | | 59,897 | | 39,276 | | 5,747 | | | | | | | | | | | | | | | | | | | 288,559 | | 184,921 | | 27,057 | | | | 379,035 | | 459,902 | | 56,988 | | | | | | | | | | | | | | | | | | | | |
F-27
| | | | | | | | | | | | | | | December 31, | | | 2004 | | 2005 | | 2005 | | | Rmb | | Rmb | | US$ | | | | | | | | | | | | | | Lease prepayments | | | 99,111 | | | | 98,157 | | | | 12,163 | | Less: Accumulated amortization | | | 24,344 | | | | 27,549 | | | | 3,414 | | | | | | | | | | | | | | | | Lease prepayments, net | | | 74,767 | | | | 70,608 | | | | 8,749 | | | | | | | | | | | | | | | |
| | The lease prepayments are summarized as follows: |
| | | | | | | | | | | | | | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Gross payments for land use rights | | | 155,596 | | | | 203,127 | | | | 29,721 | | Less: Amounts charged to expense | | | 30,652 | | | | 35,125 | | | | 5,140 | | | | | | | | | | | | | | | Lease prepayments | | | 124,944 | | | | 168,002 | | | | 24,581 | | | | | | | | | | | | | | |
| | The land on which the Company’sGroup’s buildings are erected is owned by the PRC Government. Yuchai and its subsidiaries are granted the land use rights of 15 to 50 years in respect of such land. Lease prepayment represents those amounts paid for land use rights to the PRC government. The prepayments are charged ratably to expense over the term of the land use agreement. In the event that land use rights are sold or transferred, the remaining balance of the prepayment is derecognized and any resulting gain or loss is recorded. Lease prepayments charged to expense were Rmb3,339, Rmb3,328 and Rmb4,702 (US$688) for the years ended December 31, 2005, 2006 and 2007, respectively. |
F - 33
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
(a) | | Investments as of December 31, 20042006 and 20052007 are summarized as follows: |
| | | | | | | | | | | | | | | December 31, | | | | 2004 | | | | 2005 | | | | 2005 | | | | Rmb | | | Rmb | | | US$ | | | Available-for-sale equity securities (see Note) | | | 6,405 | | | | 6,355 | | | | 787 | | Investments in affiliated companies | | | 648 | | | | 185,619 | | | | 23,001 | | | | | | | | | | | | | | | | | | | 7,053 | | | | 191,974 | | | | 23,788 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Investments in affiliates under the equity method | | | 508,246 | | | | 505,009 | | | | 73,890 | | Other investments in debt and equity securities of affiliates(see Note 17 (e)) | | | 640,192 | | | | 615,201 | | | | 90,013 | | | | | | | | | | | | | | | | | | 1,148,438 | | | | 1,120,210 | | | | 163,903 | | | | | | | | | | | | | | |
| | | Note: | | Available-for-sale equity securities are non-marketable equity securities and stated at cost due to the lack of information to determine the fair value. The Company did not observe any event or change in circumstances that would have result in the fair value being significantly less than its carrying amount. |
(b) | | Investments in affiliated companiesaffiliates accounted for using the equity method as of December 31, 20042006 and 20052007 are as follows: |
| | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | 2004 | | 2005 | | 2005 | | | December 31, | | | Rmb | | Rmb | | US$ | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Listed: | | | | | TCL (see Note (i)) | | — | | 185,021 | | 22,927 | | | 385,583 | | 387,930 | | 56,760 | | | | | | HLGE (see Note (ii)) | | | 117,360 | | 112,648 | | 16,482 | | Unlisted: | | | | | Others (see Note (ii)) | | 648 | | 598 | | 74 | | | Others (see Note (iii)) | | | 5,303 | | 4,431 | | 648 | | | | | | | | | | | | | | | | | | | 508,246 | | 505,009 | | 73,890 | | | | 648 | | 185,619 | | 23,001 | | | | | | | | | | | | | | | | | | | |
The retained earnings of the Company included accumulated losses of Rmb28,555 and Rmb17,098 (US$2,502) attributable from affiliates as of December 31, 2006 and 2007, respectively. (i) | | The Company acquired 264,000,000 shares and 17,795,664 shares of TCL’s ordinary shares on March 23, 2005 and September 5, 2005, representing 14.99% and 1.00% interests of the enlarged share capital of TCL at a consideration of Singapore dollars (“S$”) 30,880,000 (equivalent to Rmb152,133)(Rmb152,133) and S$1,400,000 (equivalent to Rmb6,890)(Rmb6,890) respectively. As a result, the Company held a 15.99% stakeequity interest in TCL as of December 31, 2005. Among the 17,795,664 ordinary shares purchased in September 2005, 6,715,196 ordinary shares held by the Company as of December 31, 2005 are subject to a call option which is exercisable by certain members of the Thakral family (“Thakral Family Members”), who are stockholders of TCL. |
F - 34
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
17 | | Investments (continued) |
(b) | | Investments in affiliated companies accounted for using the equity method as of December 31, 2004 and 2005 are as follows: (continued) |
| | | | Notes: (continued) | | | | The option was granted onlyIn February 2006, the Company acquired an additional 3.37% interest in TCL and S$52,933,440 principal amount of convertible bonds of TCL pursuant to Thakral Family Membersa rights issue by the participating creditors in connection with a schemeTCL for an aggregate cash consideration of arrangement dated October 24, 2001 in relation to TCL sanctioned by the High Court of Singapore on November 2, 2001 (“the Scheme”)S$49.4 million (Rmb243,230). The total purchase consideration has been allocated to the ordinary shares, the bond host instrument and the embedded conversion option price payable per TCL share under the call option isbased on their respective fair values of S$0.25 plus an interest of Singapore Interbank offer rate plus 0.5% from March 27, 2002 until the completion of the sale7 million (Rmb34,626), S$33.3 million (Rmb163,924) and purchase of the shares pursuant to an exercise of the call option.S$9.1 million (Rmb44,680). The Company has assessedseparately accounted for the conversion option as an embedded derivative instrument subject to fair value adjustment through earnings. The remaining host instrument of the convertible bonds has been accounted for as an available-for-sale debt security through August 2006, at which time the Company exercised its option and converted the bonds into 529,334,400 ordinary shares of TCL. |
F-28
| | Immediately prior to the conversion, the fair value of the optionsbond host instrument had increased by S$3.3 million (Rmb20,942), which was reclassified from “Accumulated other comprehensive income/(loss)” and determined thatincluded as a part of the cost of the additional equity interest in TCL acquired as a result of the conversion. The decrease in fair value was not material.of the embedded conversion option of S$1.2 million (Rmb5,662) has been recorded as a charge in the 2006 consolidated statement of operations. The 6,715,196 sharesfair value of the embedded conversion option immediately prior to the conversion of S$7.9 million (Rmb39,984) has also been included in the cost of the additional interest in TCL. The conversion resulted in CYI increasing its interest in TCL were held by a share escrow account on trust for the Company pending release to the Company as of December 31, 2005, subject to the call option. Assuming that the call option is not exercised by the Thakral Family Members, all the 6,715,196 shares of TCL will be released by the share escrow agent to the Company by August 31, 2006.further 17.25%. As of December 31, 2005,2006, the call optionCompany’s equity interest in TCL was 36.61%. | | | | During the year ended 2007, the Company did not acquire new shares in TCL. However, as a result of the conversion of convertible bonds into new ordinary shares by TCL’s third party bondholders, the Company’s interest in TCL has not been exercised.diluted to 34.42%. The loss in dilution was Rmb2,591 (US$379). As of December 31, 2007, the Company held 898,990,352 shares (2006: 898,990,352 shares) of TCL’s ordinary shares. | | | | As of December 31, 2006 and 2007, the Company’s underlying equity in net assets of TCL exceeded the carrying amount of its investment in TCL by Rmb64,897 and Rmb66,063 (US$9,666), respectively, primarily related to the differences between the fair value and book value of certain assets of TCL at the time of the respective acquisitions. | | | | The fair value, based on the quoted market price, of the TCL shares held by the Company was Rmb109,434 (US$13,560)S$80.9 million (Rmb405,560) and S$49.4 million (Rmb 235,047) as of December 31, 2005. Management considers2007 and December 31, 2008 respectively. It is reasonably possible that in 2008 the decline in fair value below the carrying valueCompany will need to be notrecognize an other than temporary as the Company has the ability and intentimpairment charge pertaining to hold its investment in TCLTCL. | | (ii) | | On February 3, 2006, the Company acquired a portfolio of debt and equity securities of HLGE for a period that should allow it to recover its carrying value.an aggregate purchase consideration of approximately S$132 million (Rmb653,178) from several unrelated parties. The portfolio consisted of: |
| • | | 191,413,465 ordinary shares, representing 29.13% of the total issued and outstanding ordinary shares of HLGE; | | | (ii)• | | Others representS$129,428,256 in principal amount of secured bonds (the “Secured Bonds”); | | | • | | 15,376,318 Series A mandatorily redeemable convertible preference shares of par value S$0.05 each (“RCPS A”); and | | | • | | 107,634,237 Series B redeemable convertible preference shares of par value S$0.05 each (“RCPS B”). |
| | With the investments in the ordinary shares of HLGE, the Company is able to exercise significant influence over the operating and financing policies of HLGE. The investment in the ordinary shares of HLGE has been accounted for under the equity method. | | | | The Secured Bonds were accounted for as available-for-sale securities. The Secured Bonds were due to mature in March 2010, and the interest payable on the bonds was calculated based on the actual net cashflows derived from the assets on which the bonds are secured. The secured bonds were redeemed on July 4, 2006, as described below. | | | | The RCPS A are mandatorily redeemable by HLGE and are more akin to a debt instrument. As such, the conversion option is not clearly and closely related to the host instrument and is therefore accounted for separately as an embedded derivative instrument, subject to the fair value adjustment through earnings. The RCPS A host instrument, other than the embedded conversion option, has been accounted for as an available-for-sale debt security. | | | | RCPS A is redeemable upon the disposal of certain properties and upon any new issue of HLGE ordinary shares with the purpose of raising funds for the redemption of RCPS A. Any outstanding RCPS A will be mandatorily redeemed in March 2015. RCPS A can also be converted into ordinary shares at the conversion ratio of 1:1 upon the passing of a special resolution at a meeting of the holders of the RCPS A any time prior to March 2015. | | | | The RCPS B are neither mandatorily redeemable nor redeemable at the option of the Company and are akin to an equity instrument. The embedded conversion option is deemed to be clearly and closely related to the host instrument and as the RCPS B’s fair value is not readily determinable, the instrument in its entirety has been accounted for under the cost method. | | | | RCPS B is redeemable upon the disposal of certain properties and upon any new issue of HLGE ordinary shares with the purpose of raising funds for the redemption of RCPS B. RCPS B which are not redeemed prior to March 2010, shall be mandatorily converted to ordinary shares at the conversion ratio of 1:1 in March 2010. RCPS B can also be converted into ordinary shares at the conversion ratio of 1:1 upon the passing of a special resolution at a meeting of the holders of the RCPS B any time prior to March 2010. |
F-29
| | The aggregate purchase consideration of S$132 million was allocated to the above instruments based on their respective fair values as follows: |
| | | | | | | Fair value | | | S$’000 | Secured bonds | | | 109,543 | | RCPS A | | | 1,948 | | RCPS A—Embedded equity derivatives | | | 137 | | RCPS B | | | 7,221 | | Ordinary shares | | | 12,766 | | | | | | | | | | 131,615 | | | | | | |
| | In June and December of 2006, HLGE partially redeemed a portion of RCPS A and RCPS B as required by the terms of the preference share agreement as a result of the disposals of certain assets. The proceeds from the partial redemptions amounted to S$2.4 million (Rmb11,907), resulting in a gain of S$1.7 million (Rmb8,907). | | | | On February 28, 2006, HLGE announced a proposed renounceable rights issue of zero coupon unsecured non-convertible bonds due in July 2009 (the “New Bonds”) and non-redeemable convertible cumulative preference shares in the capital of HLGE (the “NCCPS”) to raise funds for the purpose of redeeming existing Secured Bonds and for working capital purposes. On July 4, 2006, in connection with the rights issue, the Company was allotted 196,201,374 of NCCPS and S$130,800,917 in principal amount of the New Bonds at a total consideration of S$135 million (Rmb677,010). In conjunction with the allotment, the Secured Bonds were redeemed at their principal value of S$129.4 million. | | | | At the date of settlement, the fair value of the newly acquired NCCPS and New Bonds was S$8 million and S$109.3 million, respectively, the sum of which exceeded the aggregate of the S$5.3 million cash payment by the Company and the fair value of the Secured Bonds of S$109 million, resulting in a net gain of approximately S$3 million. The gain primarily related to an unrealized gain of S$2.3 million (Rmb19,550) immediately prior to the redemption of the Secured Bonds, which had been included in “Accumulated other comprehensive income/ (loss)” and was reclassified and included in “Other income, net” upon redemption. | | | | The New Bonds have been accounted for as available-for-sale debt securities. The investment in NCCPS, which does not have a readily determinable fair value, was accounted for using the cost method. On November 15, 2006, the Company exercised its right to convert all of its 196,201,374 NCCPS into 196,201,374 new ordinary shares of HLGE. As a result of the conversion of the NCCPS, the Company’s interest in HLGE increased to 45.42% of the total issued and outstanding ordinary shares of HLGE. | | | | On June 19, 2007, HLGE partially redeemed the New Bonds. The proceeds from the partial redemption amounted to S$18.7 million (Rmb88,652), resulting in a gain of Rmb17,478 (US$2,557), from the reclassification into earnings of previously unrealized gains that were included in Accumulated Other Comprehensive Income. The principal amount of the New Bonds was S$130,800,917 before redemption and S$112,886,727 after redemption. | | | | During the year ended 2007, the Company did not acquire new shares in HLGE. However, new ordinary shares were issued by HLGE arising from the third party’s conversion of the NCCPS, and the Company’s interest in HLGE has been diluted to 45.39% (2006: 45.42%). There was an insignificant loss recognized in earnings in 2007 resulting from this dilution. As of December 31, 2007, the Company held 387,614,839 shares (2006: 387,614,839 shares) of HLGE’s ordinary shares. Assuming full conversion of the existing Preference Shares held by the Company which would trigger the full conversion of the existing preference shares held by the other holders, and assuming that none of the other holders of the NCCPS convert their NCCPS, the Company’s equity interest in HLGE would increase from 45.39% to 51.68%. | | | | As of December 31, 2006 and 2007, the Company’s carrying value of its investments in HLGE exceeded its underlying equity in HLGE’s net assets by Rmb148,145 and Rmb139,937 (US$20,475), respectively, primarily related to the differences between the fair value and book value of the certain assets and liabilities of HLGE. These differences will be amortized over the respective periods consistent with the manner in which the underlying assets and liabilities are depreciated or otherwise accreted to HLGE’s earnings, as adjustments to the Company’s share of earnings or loss of HLGE. | | | | The fair value, based on the quoted market price, of the HLGE ordinary shares held by the Company was S$89.2 million (Rmb446,874) and S$21.3 million (Rmb101,344) as of December 31, 2007 and December 31, 2008 respectively. The fair values of its other debt and equity investments in HLGE at December 31, 2008 have not yet been determined. | | | | It is reasonably possible that in 2008 the Company will need to recognize an other than temporary impairment charge pertaining to its investments in HLGE. |
F-30
(iii) | | Represents the Company’s interests in certain entities in the PRC in which the Company has the ability to exercise significant influence in its financial and operating policy decisions, but doesdo not have the controlling financial interests. |
F - 35
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
17 | | Investments (continued) The Company’s equity in net loss of these PRC entities amounts to Rmb198 (US$29). |
(c) | | Summarized consolidated financial information regardingof TCL as of December 31, 20052006 and for2007, and the period from March 23, 2005 toyears ended December 31, 20052006 and 2007 is as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | December 31, | | December 31, | | December 31, | | | December 31, 2005 | | December 31, 2005 | | | 2006 | | 2007 | | 2007 | | | Rmb | | US$ | | | Rmb | | Rmb | | US$ | Financial position | | | | | Current assets | | 932,008 | | 115,488 | | | 979,767 | | 941,398 | | 137,740 | | Property, plant and equipment, net | | 173,266 | | 21,470 | | | 113,457 | | 96,405 | | 14,105 | | Other assets | | 453,327 | | 56,173 | | | 369,498 | | 407,627 | | 59,642 | | | | | | | | | | | | | | | | | Total assets | | 1,558,601 | | 193,131 | | | 1,462,722 | | 1,445,430 | | 211,487 | | | | | | | | | | | | | | | | | Current liabilities | | 337,971 | | 41,879 | | | 139,208 | | 102,736 | | 15,032 | | Non-current liabilities | | 1,034 | | 128 | | | Long term debts | | 32,076 | | 3,975 | | | | | | | | | | Long term debt | | | 65,497 | | 1,549 | | 227 | | | | | | | | | | Total liabilities | | 371,081 | | 45,982 | | | 204,705 | | 104,285 | | 15,259 | | | | | | | | | | | | | Minority interests | | 30,416 | | 3,769 | | | 27,256 | | 22,165 | | 3,243 | | | | | | | | | | | | | | | | | | | Stockholders’ equity | | 1,157,104 | | 143,380 | | | 1,230,761 | | 1,318,980 | | 192,985 | | | | | | | | | | Total liabilities, minority interests and stockholders’ equity | | | 1,462,722 | | 1,445,430 | | 211,487 | | | | | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | 1,558,601 | | 193,131 | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year ended | | Year ended | | Year ended | | | December 31, 2006 | | December 31, 2007 | | December 31, 2007 | | | Rmb | | Rmb | | US$ | Statement of operations | | | | | | | | | | | | | Revenue | | | 1,225,028 | | | | 1,451,188 | | | | 212,330 | | Gross profit | | | 62,796 | | | | 88,446 | | | | 12,941 | | Operating profit/(loss) | | | (97,426 | ) | | | 25,915 | | | | 3,792 | | Income tax credit/(expense) | | | 9,089 | | | | (9,011 | ) | | | (1,319 | ) | | | | | | | | | | | | | | Income/(loss) before minority interest | | | (88,337 | ) | | | 16,904 | | | | 2,473 | | Minority interests in income of consolidated subsidiaries | | | 4,997 | | | | 2,367 | | | | 346 | | | | | | | | | | | | | | | Net income/(loss) | | | (83,340 | ) | | | 14,537 | | | | 2,127 | | | | | | | | | | | | | | | The Company’s equity in income/(loss) of TCL | | | (23,923 | ) | | | 5,925 | | | | 867 | | | | | | | | | | | | | | |
The Company’s equity in income/(loss) of TCL, net of nil tax, is determined as follows: |
| | | | | | | | | | | | | | | Year ended | | Year ended | | Year ended | | | December 31, 2006 | | December 31, 2007 | | December 31, 2007 | | | Rmb | | Rmb | | US$ | Based on the respective equity interest | | | (24,448 | ) | | | 4,997 | | | | 731 | | Adjustment to account for the basis difference | | | 525 | | | | 928 | | | | 136 | | | | | | | | | | | | | | | | | | (23,923 | ) | | | 5,925 | | | | 867 | | | | | | | | | | | | | | |
F - 36F-31
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
17 Investments (continued)
(c)(d) | | Summarized consolidated financial information regarding TCLof HLGE as of December 31, 20052006 and 2007 and for the period from March 23, 2005February 3, 2006 to December 31, 20052006 and the year ended December 31, 2007 is as follows: (continued) |
| | | | | | | | | | | Period from | | | Period from | | | | March 23, 2005 | | | March 23, 2005 | | | | to December 31, | | | to December 31, | | | | 2005 | | | 2005 | | | | Rmb | | | US$ | | Results of operations | | | | | | | | | | | | | | | | | | Net sales | | | | | | | | | Supply chain management | | | 1,531,913 | | | | 189,823 | | Others | | | 109,526 | | | | 13,572 | | | | | | | | | | | | | | | | | | | | | | | 1,641,439 | | | | 203,395 | | Cost of goods sold | | | (1,508,247 | ) | | | (186,890 | ) | | | | | | | | | | | Gross profit | | | 133,192 | | | | 16,505 | | Selling, general and administrative expenses | | | (191,161 | ) | | | (23,688 | ) | | | | | | | | | | | Operating loss | | | (57,969 | ) | | | (7,183 | ) | Finance cost | | | (9,338 | ) | | | (1,157 | ) | Other income | | | 34,906 | | | | 4,325 | | Equity in profit of affiliates | | | 281 | | | | 35 | | | | | | | | | | | | | | | | | | | | Loss before income taxes and minority interests | | | (32,120 | ) | | | (3,980 | ) | Income tax expense | | | (6,086 | ) | | | (754 | ) | | | | | | | | | | | | | | | | | | | Loss before minority interests | | | (38,206 | ) | | | (4,734 | ) | Minority interests in income of consolidated subsidiaries | | | 6,232 | | | | 772 | | | | | | | | | | | | | | | | | | | | Net loss | | | (31,974 | ) | | | (3,962 | ) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, | | December 31, | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Financial position | | | | | | | | | | | | | | | | | | | | | | | | | | Current assets | | | 371,762 | | | | 356,135 | | | | 52,108 | | Property, plant and equipment, net | | | 92,278 | | | | 86,331 | | | | 12,632 | | Other assets | | | 347,807 | | | | 303,193 | | | | 44,361 | | | | | Total assets | | | 811,847 | | | | 745,659 | | | | 109,101 | | | | | Current liabilities | | | 62,065 | | | | 51,850 | | | | 7,586 | | Non-current liabilities | | | 817,560 | | | | 753,930 | | | | 110,311 | | | | | Total liabilities | | | 879,625 | | | | 805,780 | | | | 117,897 | | | | | Stockholders’ deficit | | | (67,778 | ) | | | (60,121 | ) | | | (8,796 | ) | | | | Total liabilities and stockholders’ deficit | | | 811,847 | | | | 745,659 | | | | 109,101 | | | | | | | | |
| | | | | | | | | Other financial information: | | | | | | | | | — Interest revenue | | | 5,703 | | | | 707 | | — Interest expenses | | | 9,338 | | | | 1,157 | | — Depreciation and amortisation | | | 10,576 | | | | 1,311 | | — Significant non-cash transactions: | | | | | | | | | Bad debt expense | | | 11,629 | | | | 1,441 | | Provision for inventory write-down | | | 33,493 | | | | 4,150 | | Impairment loss to property, plant and equipment | | | 16,031 | | | | 1,986 | |
| | | | | | | | | | | | | | | Period from | | | | | | | February 3, 2006 to | | Year ended | | Year ended | | | December 31, 2006 | | December 31, 2007 | | December 31, 2007 | | | Rmb | | Rmb | | US$ | Statement of operations | | | | | | | | | | | | | Revenue | | | 37,110 | | | | 30,065 | | | | 4,399 | | Gross profit | | | 19,133 | | | | 18,009 | | | | 2,635 | | Operating profit | | | (2,556 | ) | | | 22,502 | | | | 3,293 | | Income tax expense | | | (265 | ) | | | (2,376 | ) | | | (348 | ) | | | | | | | | | | | | | | Income before minority interest | | | (2,821 | ) | | | 20,126 | | | | 2,945 | | Equity in net income/(loss), net of affiliates | | | (18,853 | ) | | | 8,751 | | | | 1,280 | | | | | | | | | | | | | | | Profit/(loss) from continuing operations | | | (21,674 | ) | | | 28,877 | | | | 4,225 | | Income from discontinued operations | | | 44,213 | | | | — | | | | — | | | | | | | | | | | | | | | Net income | | | 22,539 | | | | 28,877 | | | | 4,225 | | | | | | | | | | | | | | | The Company’s equity in income of HLGE | | | 1,395 | | | | 8,321 | | | | 1,218 | | | | | | | | | | | | | | |
| | The Company’s equity in income of HLGE, net of nil tax, is determined as follows: |
| | | | | | | | | | | | | | | Period from | | | | | | | February 3, 2006 | | Year ended | | Year ended | | | to December 31, | | December 31, | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Based on the respective equity interest | | | 6,865 | | | | 11,716 | | | | 1,715 | | Adjustment to account for the basis difference | | | (5,470 | ) | | | (3,395 | ) | | | (497 | ) | | | | | | | | | | | | | | | | | 1,395 | | | | 8,321 | | | | 1,218 | | | | | | | | | | | | | | |
F-32 F - 37
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES(e) | | Other investments as of December 31, 2006 and 2007 not described above are summarized as follows: |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)(Rmb and US$ amounts expressed in thousands, except per share data) | | | | | | | | | | | | | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Available for sale securities, at fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | Unsecured bonds | | | 589,637 | | | | 558,852 | | | | 81,768 | | | | | | | | | | | | | | | RCPS A | | | 10,646 | | | | 12,736 | | | | 1,864 | | | | | | | | | | | | | | | Embedded derivatives | | | | | | | | | | | | | | | | | | | | | | | | | | RCPS A — Embedded equity derivatives | | | 1,505 | | | | 7,383 | | | | 1,080 | | | | | | | | | | | | | | | Investment securities, at cost: | | | | | | | | | | | | | | | | | | | | | | | | | | Unquoted equity securities | | | 6,355 | | | | 6,255 | | | | 915 | | | | | | | | | | | | | | | RCPS B | | | 32,049 | | | | 29,975 | | | | 4,386 | | | | | | | | | | | | | | | | | | 640,192 | | | | 615,201 | | | | 90,013 | | | | | | | | | | | | | | |
| | The maximum loss that would be incurred arising from all financial instruments in the event that HLGE failed to perform according to terms of the contracts, would be represented by their fair values of Rmb608,946 (US$89,097) (2006: Rmb633,837). | | | | Initial fair value, gross unrealized holding gain, and period-end fair value of available-for-sale securities as of December 31, 2007, were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | Gross unrealized | | Carrying value | | Carrying value | | | Initial fair value | | holding gains | | (Fair value) | | (Fair value) | | | Rmb | | Rmb | | Rmb | | US$ | Unsecured bonds of HLGE | | | 461,645 | | | | 97,207 | | | | 558,852 | | | | 81,768 | | | | | | | | | | | | | | | | | | | RCPS A of HLGE | | | 8,513 | | | | 4,223 | | | | 12,736 | | | | 1,864 | | | | | | | | | | | | | | | | | | | | | | 470,158 | | | | 101,430 | | | | 571,588 | | | | 83,632 | | | | | | | | | | | | | | | | | | |
| | The fair values of available-for-sale securities are estimated using the discounted cash flow methodology. | | | | Maturities of securities classified as available-for-sale were as follows as of December 31, 2006 and 2007: |
| | | | | | | | | | | | | | | December 31, | | December 31, | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Due after one year through five years | | | 589,637 | | | | 558,852 | | | | 81,768 | | Due after five years through ten years | | | 10,646 | | | | 12,736 | | | | 1,864 | |
(a) | | Short-term bank loans |
| | | Short-term bank loans wereare denominated in Renminbi as follows: |
| | | | | | | | | | | | | | | December 31, | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | US$ | | | Renminbi denominated loans | | | 430,000 | | | | 812,835 | | | | 100,721 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Renminbi denominated loans | | | 806,506 | | | | 819,164 | | | | 119,855 | | Singapore dollars denominated loans | | | 202,628 | | | | — | | | | — | | | | | | | | | | | | | | | | | | 1,009,134 | | | | 819,164 | | | | 119,855 | | | | | | | | | | | | | | |
| | The weighted average interest rate of short-term bank loans at December 31, 20042006 and 20052007 was 5.28%4.05% and 5.52%4.03% per annum, respectively. | | | | As of December 31, 2004,2006, short-term bank loans consist of Rmb50,000, were secured by the pledgeunsecured loans of certainRmb512,628 (US$74,737) and unsecured bonds of Yuchai’s plant and equipment (see Note 14)Rmb496,506 (US$72,386). The amount was fully repaid in 2005. | | | | As of December 31, 2005,2007, short-term bank loans consist of Rmb42,835unsecured loans of Rmb170,000 (US$5,308), were secured by the pledge24,873) and unsecured bonds of certain Yuchai’s trade accounts receivable (see Note 9)Rmb649,164 (US$94,982). |
F-33
| | Yuchai’s long-termLong-term bank loans comprise: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate | | | | Interest rate | | | | | at December 31, | | December 31, | | at December 31, | | December 31, | | | 2005 | | 2004 | | 2005 | | 2005 | | | 2007 | | 2006 | | 2007 | | 2007 | | | (per annum) | | Rmb | | Rmb | | US$ | | | (per annum) | | Rmb | | Rmb | | US$ | Renminbi denominated loans: | | | — due in 2006 | | | 4.94% - 5.49 | % | | 100,000 | | 100,000 | | 12,391 | | | — due in 2007 | | | 5.85 | % | | — | | 50,000 | | 6,196 | | | US$ denominated loans (unless otherwise stated): | | | Due in 2008 (multi-currency) | | | | 3.01% - 3.24% | | 575,454 | | | 457,787 | (a),(c)&(d) | | 66,981 | | Due in 2010 (multi-currency) | | | | 2.68% - 3.01% | | — | | | 225,142 | (e) | | 32,941 | | Due in 2010 (RMB denominated loans) | | | | 5.85% | | 100,000 | | 85,000 | | 12,437 | | | | | | | | | | | | | | | | | | | Total long-term bank loans outstanding | | 100,000 | | 150,000 | | 18,587 | | | 675,454 | | 767,929 | | 112,359 | | Less: Amounts due within one year included under current liabilities | | — | | 100,000 | | 12,391 | | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | Amounts due after one year | | 100,000 | | 50,000 | | 6,196 | | | 675,454 | | 767,929 | | 112,359 | | | | | | | | | | | | | | | | | | | | |
| | All long-term bank loans were unsecuredare unsecured. The carrying amount of long-term bank loans approximates their fair value based on the borrowing rates currently available for bank loans with similar terms and average maturities. |
| | | Notes: | | (a) | | The debt is classified as oflong term because the Company has entered into a financing agreement that clearly permits the Company to refinance the short-term obligation on a long term basis. | | (b) | | Unused commitments for total bank facilities was Rmb2,658,071 (US$388,914) as at December 31, 2004 and 2005.2007. The commitment fee incurred was Rmb191 (US$28). | | (c) | | US$50.0 million credit facility with Sumitomo Mitsui Banking Corporation, Singapore Branch (“Sumitomo”): | |
On September 7, 2005, in order to fund its business expansion plans, the Company entered into a revolving credit facility agreement with Sumitomo with a committed aggregate value of US$50.0 million for a three years duration. Among other things, the terms of the facility require that Hong Leong Asia Ltd. (“HLA”) retains ownership of the Company’s special share and that the Company remains a consolidated subsidiary of HLA. The terms of the facility also include certain financial covenants with respect to the Company’s tangible net worth (as defined in the agreement) as at June 30 and December 31 of each year not being less than US$120,000 and the ratio of the Company’s total net debt (as defined in the agreement) to tangible net worth as at June 30 and December 31 of each year not exceeding 2.0 times, as well as negative pledge provisions and customary drawdown requirements. At all times during the year ended December 31, 2007, the Company was in compliance with these financial covenants. The Company has also undertaken to make available to Sumitomo, within 180 days after the end of its financial year (beginning with financial year 2005), copies of its audited consolidated accounts as at the end of and for that financial year. A waiver from compliance with this undertaking in relation to the production of the 2006 and 2007 audited consolidated accounts has been received from Sumitomo granting an extension of time until July 18, 2008 and September 30, 2008 respectively. On September 6, 2008, this credit facility with Sumitomo expired and the bridging loan as stated in note 35(b) was used to partially refinance this facility which was fully repaid. | | | | (d) | | US$25.0 million credit facility with Bank of Tokyo-Mitsubishi, UFJ Ltd, Singapore Branch (“BOTM”): | |
On March 23, 2005, in furtherance of its business expansion plans, the Company entered into a revolving credit facility agreement with the BOTM with a committed aggregate value of US$25.0 million for a three years duration. Among other things, the terms of the facility require that HLA retains ownership of the Company’s special share and that the Company remains a consolidated subsidiary of HLA. The terms of the facility also include certain financial covenants with respect to the Company’s tangible net worth (as defined in the agreement) as at June 30 and December 31 of each year not being less than US$120,000 and the ratio of the Company’s total net debt (as defined in the agreement) to tangible net worth as at June 30 and December 31 of each year not exceeding 2.0 times, as well as negative pledge provisions and customary drawdown requirements. At all times during the year ended December 31, 2007, the Company was in compliance with these financial covenants. On March 20, 2008, this credit facility expired and the new facility with same bank as stated in note 35(a) was used to refinance this facility which was fully repaid. F - 38F-34
| | | (e) | | US$40.0 million credit facility with Sumitomo: | |
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBEROn March 30, 2007, the Company entered into an unsecured multi-currency revolving credit facility agreement with Sumitomo for an aggregate of US$40.0 million to refinance the S$60.0 million facility with OCBC that was due to mature on July 26, 2007. The facility is available for three years from the date of the facility agreement and will be utilized by the Company to finance its long-term general working capital requirements. The terms of the facility require, among other things, that HLA retains ownership of the special share and that the Company remains a principal subsidiary (as defined in the facility agreement) of HLA. The terms of the facility also include certain financial covenants with respect to the Company’s tangible net worth (as defined in the agreement) as at June 30 and December 31 2003, 2004 AND 2005(CONTINUED)
(Rmbof each year not being less than US$120 million and US$ amounts expressedthe ratio of our total net debt (as defined in thousands, except perthe agreement) to tangible net worth as at June 30 and December 31 of each year not exceeding 2.0 times, as well as negative pledge provisions and customary drawdown requirements. The Company has also undertaken to make available to the bank, within 180 days after the end of its financial year (beginning with financial year 2007), copies of its audited consolidated accounts as at the end of and for that financial year. A waiver from compliance with this undertaking in relation to the production of the 2007 audited consolidated accounts has been received from the bank granting an extension of time until February 28, 2009.
| | | | (f) | | S$60.0 million credit facility with Oversea-Chinese Banking Corporation Limited (“OCBC”): | |
On January 26, 2006, in furtherance of its acquisitions and business expansion plans, the Company entered into a revolving credit facility agreement with OCBC with a committed aggregate value of S$60.0 million for a period of 18 months. Among other terms, the terms of the facility require that HLA retains ownership of the Company’s special share data)and that the Company remains a consolidated subsidiary of HLA. The terms of the facility also include certain financial covenants with respect to the Company’s tangible net worth (as defined in the agreement) as at 30 June and 31 December of each year not being less than US$120,000, and the ratio of the Company’s total net debt (as defined in the agreement) to tangible net worth as at 30 June and 31 December of each year not exceeding 2.0 times, as well as negative pledge provisions and customary drawdown requirements. At all times during the period from January 1, 2007 to July 26, 2007, the Company was in compliance with these financial covenants. The loan has been fully repaid as at December 31, 2007. | | On February 23, 2005, the Company issued US$25,000 (Rmb206,913) in principal amount of convertible debt (the “Convertible Debt”) on a private placement basis. The Convertible Debt bearconvertible debt bore an interest rate of 2% per annum and was due to mature in 2012, unless redeemed earlier in accordance with the terms of the Convertible Debt.convertible debt. The Convertible Debt were fully exercised andconvertible debt was converted to 1,927,673 ordinary shares on June 3, 2005, thereby increasing the Company’s issued and outstanding shares from 35,340,000 ordinary shares to 37,267,673 ordinary shares. |
| | | 20 | | Accrued expenses and other liabilities |
| | Accrued expenses and other liabilities comprise: |
| | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | 2004 | | 2005 | | 2005 | | | December 31, | | | Rmb | | Rmb | | US$ | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Deposits from customers | | 54,165 | | 96,936 | | 12,012 | | | 57,577 | | 32,951 | | 4,821 | | Staff welfare payable (see Note) | | 15,041 | | 15,041 | | 1,864 | | | Staff welfare payable (see Note (i)) | | | 15,041 | | 15,041 | | 2,201 | | Accrued product warranty (see Note 21) | | 126,114 | | 142,126 | | 17,611 | | | 163,701 | | 194,898 | | 28,516 | | Wages payable | | 110,577 | | 98,732 | | 12,234 | | | 127,382 | | 153,270 | | 22,426 | | Management bonus payable | | 36,574 | | 19,092 | | 2,366 | | | Management bonus payable (see Note (ii)) | | | 15,035 | | 94,312 | | 13,799 | | Payable for construction in progress | | 39,139 | | 39,330 | | 4,873 | | | 49,147 | | 67,707 | | 9,907 | | Accrued research and development expenses | | 16,472 | | 24,952 | | 3,092 | | | 26,947 | | 8,559 | | 1,252 | | Accrued advertising expense | | 7,225 | | 3,817 | | 473 | | | 4,165 | | 13,096 | | 1,916 | | Accrued legal fee and other professional fees | | 2,762 | | 5,050 | | 626 | | | 3,421 | | 14,298 | | 2,092 | | Accrued expenses for litigation and guarantees (see Notes 24(c) and (d)) | | 15,268 | | 18,921 | | 2,344 | | | 7,849 | | 7,102 | | 1,039 | | Individual income tax withholding | | 8,161 | | 10,250 | | 1,270 | | | 3,890 | | 10,124 | | 1,481 | | Other accruals and liabilities | | 53,422 | | 97,470 | | 12,078 | | | | | | | | | | | | | | | | 484,920 | | 571,717 | | 70,843 | | | | | | | | | | | | | | VAT payable | | | — | | 13,816 | | 2,021 | | Guarantee deposit | | | — | | 10,000 | | 1,463 | | Accrued sales discount | | | 59,769 | | 94,055 | | 13,762 | | Accrued interest | | | 2,749 | | 2,133 | | 312 | | Other payables | | | 20,764 | | 628 | | 92 | |
F-35
| | | | | | | | | | | | | | | December 31, | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Accrued retirement benefits | | | 5,747 | | | | 5,747 | | | | 841 | | Other accruals and liabilities | | | 76,166 | | | | 208,938 | | | | 30,571 | | | | | | | | | | | | | | | | | | 639,350 | | | | 946,675 | | | | 138,512 | | | | | | | | | | | | | | |
| | | Note:Note (i): | | Staff welfare payable is determined by Yuchai’s Board of Directors. The payable can be applied towards the payment of special bonuses or collective welfare benefits to staff and workers of Yuchai, such as staff dormitories and staff welfare facilities. | | (ii): | | Yuchai has a management bonus plan for its executives under which annual incentive bonuses in an aggregate amount of 3.5% to 10% of Yuchai’s after-tax profit will be paid upon Yuchai achieving the required budgeted after-tax profit as approved by Yuchai’s Board of Directors. There are no benefits provided to the directors of the Company or Yuchai upon their termination of employment. |
F - 39F-36
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
| | | 21 | | Accrued product warranty |
| | An analysis of the accrued product warranty for 2003, 20042005, 2006 and 20052007 is as follows: |
| | | | | | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | | | | | 2003 | | 2004 | | 2005 | | 2005 | | December 31, | | | Rmb | | Rmb | | Rmb | | US$ | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Balance at beginning of year | | 66,864 | | 101,215 | | 126,114 | | 15,627 | | | 126,114 | | 142,126 | | 163,701 | | 23,952 | | Allowance charged to consolidated statements of income | | 162,369 | | 190,205 | | 179,184 | | 22,203 | | | Less: Allowance utilized | | | (128,018 | ) | | | (165,306 | ) | | | (163,172 | ) | | | (20,219 | ) | | | | | | | | | | | | | Allowance charged to consolidated statements of operations | | | 179,184 | | 200,892 | | 233,838 | | 34,214 | | Less: Amounts utilized | | | | (163,172 | ) | | | (179,317 | ) | | | (202,641 | ) | | | (29,650 | ) | | | | | | | | | | | Balance at end of year | | 101,215 | | 126,114 | | 142,126 | | 17,611 | | | 142,126 | | 163,701 | | 194,898 | | 28,516 | | | | | | | | | | | | | | | | | | | | | | |
| | The Company’s attributable share in the statutory reserves of Yuchai and its subsidiaries for the three years ended December 31, 20052007 is as follows: |
| | | | | | | | | | | | | | | | | | | December 31, | | | | 2003 | | | | 2004 | | | | 2005 | | | | 2005 | | | | Rmb | | | | Rmb | | | | Rmb | | | | US$ | | Statutory general reserve (see Note (ii)) | | | | | | | | | | | | | | | | | | Balance at January 1 | | | 116,702 | | | | 156,111 | | | | 170,041 | | | | 21,070 | | Transfer from consolidated statements of income | | | 39,409 | | | | 13,930 | | | | 239 | | | | 30 | | | | | | | | | | | | | | | | | | | | Balance at December 31 | | | 156,111 | | | | 170,041 | | | | 170,280 | | | | 21,100 | | | | | | | | | | | | | | | | | | | | Statutory public welfare fund (see Note (iii)) | | | | | | | | | | | | | | | | | | Balance at January 1 | | | 28,398 | | | | 48,103 | | | | 70,482 | | | | 8,734 | | Transfer from consolidated statements of income | | | 19,705 | | | | 22,379 | | | | 2,549 | | | | 316 | | | | | | | | | | | | | | | | | | | | Balance at December 31 | | | 48,103 | | | | 70,482 | | | | 73,031 | | | | 9,050 | | | | | | | | | | | | | | | | | | | | General surplus reserve | | | | | | | | | | | | | | | | | | Balance at January 1 and December 31 | | | 25,706 | | | | 25,706 | | | | 25,706 | | | | 3,185 | | | | | | | | | | | | | | | | | | | | | Total | | | 229,920 | | | | 266,229 | | | | 269,017 | | | | 33,335 | | | | | | | | | | | | | | | | | | | |
F - 40
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
22 | | Statutory reserves (continued) |
| | | | | | | | | | | | | | | | | | | December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Statutory general reserve (see Note (ii)) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at January 1 | | | 170,041 | | | | 170,280 | | | | 171,280 | | | | 25,061 | | Transfer from retained earnings | | | 239 | | | | 1,000 | | | | 2,753 | | | | 403 | | | | | | | | | | | | | | | | | | | Balance at December 31 | | | 170,280 | | | | 171,280 | | | | 174,033 | | | | 25,464 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Statutory public welfare fund (see Note (iii)) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at January 1 | | | 70,482 | | | | 70,600 | | | | 70,600 | | | | 10,330 | | Transfer from retained earnings | | | 118 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Balance at December 31 | | | 70,600 | | | | 70,600 | | | | 70,600 | | | | 10,330 | | | | | | | | | | | | | | | | | | | General surplus reserve | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at January 1 and December 31 | | | 25,706 | | | | 25,706 | | | | 25,706 | | | | 3,761 | | | | | | | | | | | | | | | | | | | Total | | | 266,586 | | | | 267,586 | | | | 270,339 | | | | 39,555 | | | | | | | | | | | | | | | | | | |
| | | | | Notes: | | | | | (i) | | In accordance with the relevant regulations in the PRC, Yuchai and its subsidiaries are required to provide certain statutory reserves which are designated for specific purposes based on the net income reported in the PRC GAAP financial statements. The reserves are not distributable in the form of cash dividends (see Note 30). | | | (ii) | | In accordance with the relevant regulations in the PRC, a 10% appropriation to the statutory general reserve based on the net income reported in the PRC financial statements is required until the balance reaches 50% of the authorized share capital of Yuchai and its subsidiaries. Statutory general reserve can be used to make good previous years’ losses, if any, and may be converted into share capital by the issue of new shares to stockholders in proportion to their existing shareholdings, or by increasing the par value of the shares currently held by them, provided that the reserve balance after such issue is not less than 25% of the authorized share capital. | | | (iii) | | Yuchai and its subsidiaries shall determine to transfer 5% to 10% of its net income reported in the PRC financial statements to the statutory public welfare fund. There is no limit on the amount that may be allocated to this fund. This fund can only be utilized on capital expenditure for the collective welfare of Yuchai and its subsidiaries’ employees, such as the construction of dormitories, canteen and other welfare facilities, and cannot be utilized to pay staff welfare expenses. The transfer to this fund must be made before the distribution of a dividend to stockholders. Since January 1, 2006, in accordance with the amended Company’s policy, the contribution to the fund ceased. |
F-37
| | At December 31, 2005, Yuchai2007, the Group had the following commitments: |
| | | | | | | | | | | December 31, | | | | 2005 | | | | 2005 | | | | Rmb | | | | US$ | Authorized and contracted for: | | | | | | | | | | Improvement to existing production facilities | | | 214,098 | | | | 26,529 | | | | | | | | | | | |
F - 41
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)(Rmb and US$ amounts expressed in thousands, except per share data) | | | | | | | | | | | December 31, | | | 2007 | | 2007 | | | Rmb | | US$ | Authorized and contracted for: | | | | | | | | | | | | | | | | | | Improvement to existing production facilities | | | 112,880 | | | | 16,516 | | | | | | | | | | |
| | The Group has several non-cancellable operating leases, primarily for offices and warehouses that expire over the next four years. These leases generally contain renewal options for periods ranging from one year to four years. | | | | Future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2007 are: |
| | | | | | | | | | | Rmb | | US$ | 2008 | | | 5,398 | | | | 790 | | 2009 | | | 3,338 | | | | 488 | | 2010 | | | 2,451 | | | | 359 | | 2011 | | | 866 | | | | 127 | | 2012 and thereafter | | | 24 | | | | 3 | | | | | | | | | | | | | | 12,077 | | | | 1,767 | | | | | | | | | | |
| | Rental expense for operating leases is included in “Selling, general and administrative expenses” as follows: |
| | | | | | | | | | | | | | | | | | | December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Rental expense | | | 8,726 | | | | 10,113 | | | | 10,780 | | | | 1,577 | | | | | | | | | | | | | | | | | | |
(a) | | Product liability | | | | The General Principles of the Civil Law of China and the Industrial Product Quality Liability Regulations imposes that manufacturers and sellers are liable for loss and injury caused by defective products. Yuchai and its subsidiaries do not carry product liability insurance. Yuchai and its subsidiaries have not had any significant product liability claims brought against them. |
| | | (b) | | Environmental liability |
| | China adopted its Environmental Protection Law in 1989, and the State Council and the State Environmental Protection Agency promulgate regulations as required from time to time. The Environmental Protection Law addresses issues relating to environmental quality, waste disposal and emissions, including air, water and noise emissions. Environmental regulations have not had a material impact on Yuchai’s results of operations. Yuchai delivers, on a regular basis, burned sand and certain other waste products to a waste disposal site approved by the local government and makes payments in respect thereof. Yuchai expects that environmental standards and their enforcement in China will, as in many other countries, become more stringent over time, especially as technical advances make achievement of higher standards more feasible. Yuchai has built an air filter system to reduce the level of dust and fumes resulting from its production of diesel engines. The PRC emission standard equivalent to Euro III is expected to be implemented progressively throughout China from 2008. Yuchai believes it will be able to comply with the new standard. | | | | The Group’s production is subject to certain environment protection laws and regulations in the PRC. In addition, the manufacture and sales of EUROEuro I engines in major urban area became unlawful after DecemberAugust 31, 2004. After that date, the engines equipped with EUROEuro I engines cannot be sold and used in major urban area. The Company considersmanufacture and sale of Euro II engines is expected to be progressively phased out starting June 30, 2008 and the PRC emission standard equivalent to Euro III has been implemented progressively throughout China from July 1, 2008. There can be no assurance that Yuchai will be able to comply with these emission standards or that the compliance with applicable environment protection lawsintroduction of these and other environmental regulations will not have anyresult in a material adverse impacteffect on our business, financial condition and results of operations. |
F-38
| | Yuchai is subject to Chinese national and local environmental protection regulations which currently impose fees for the discharge of waste substances, require the payment of fines for pollution, and provide for the closure by the Chinese government of any facility that fails to comply with orders requiring Yuchai to cease or improve upon certain activities causing environmental damage. Due to the nature of its business, Yuchai produces certain amounts of waste water, gas, and solid waste materials during the course of its subsidiaries.production. Yuchai believes its environmental protection facilities and systems are adequate for it to comply with the existing national, provincial and local environmental protection regulations. However, Chinese national, provincial or local authorities may impose additional or more stringent regulations which would require additional expenditure on environmental matters or changes in our processes or systems. |
| | | (c) | | Dispute with Bank of China | |
| | In 2003, the Yulin Branch of Bank of China (“BOC”) initiated legal proceedings to recover Rmb6,603 (US$818) from Yuchai based on an irrevocable letter of guarantee issued by Yuchai to the BOC in 1993 to secure a loan of US$550 to Great Wall Machinery Plant (“Great Wall”). At trial, a Yulin court ruled that if Great Wall could not pay the loan, Yuchai would be liable to pay the guaranteed sum to the BOC. Yuchai appealed unsuccessfully. | | | | In January 2004, the State Holding Company issued a letter of commitment confirming that it would reimburse Yuchai in the event that Yuchai was required to pay on this guarantee. | | | | Based on the advice from the Company’s Legal Counsel, the Company has recorded a loss contingency equal to the amount of the claim. The amounts due to the BOC and from the State Holding Company have been recorded in “Accrued expenses and other liabilities” and “Amounts due from related parties”, respectively. | | | | In 2005, 2006 and 2007, there were no new developments in this case. |
F - 42
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
24 | | Contingencies (continued) | | (d) | | Guarantees | |
| | YEGCL guaranteed borrowingsprovides guarantees of Rmb7,605 and Rmb178,480 (US$22,116)loans granted by commercial banks in the PRC to unrelated parties in 2004 and 2005, respectively. The borrowings are due in equal monthly or quarterly instalments through one to two years. The guarantees were made to individual personsthird-party individuals who applied for mortgagehave obtained the loans from commercial banks to purchase automobiles equipped with diesel engines produced by Yuchai. During the years ended December 31, 2005 and 2006, YEGCL guaranteed new borrowings of Rmb153,538 and Rmb88,991, respectively. YEGCL ceased issuing guarantees on new borrowings from late 2006. The guarantees cover the entire principal amount of the loan, which generally has a term of one to two years with equal monthly or quarterly installment payments by the borrower. The guarantees are forsecured by cash deposits from the entire amountindividual to YEGCL and termby the automobile. In the event of defaults on payment, YEGCL would be required under its guarantee to make payments to the banks on behalf of the borrowings. borrowers. | | | | In return for issuing the guarantee, YEGCL receives a premium fee amountedranging from 1% to 2% to 8%3% of the loan amount of borrowings. All guarantees are secured by automobiles at a net book value totalling Rmb11,693 and Rmb242,216 (US$30,014) atfor the years ending December 31, 20042005, 2006 and 2005, respectively. If2007, respectively, which is considered to be the individual defaults on payment, YEGCL would have to perform underfair value of YEGCL’s guarantee at its inception and is recorded as a liability in accordance with the guarantees. It is reasonably possible that YEGCL would be required to make payment under its guarantees. As of December 31, 2004 and 2005, the maximum amount of undiscounted payments that YEGCL would have to make in the event of default is Rmb7,422 and Rmb134,235 (US$16,633). Pursuant to the requirementsprovisions of FIN 45, the Company accrued Rmb22045. The Group received Rmb4,268, Rmb4,250 and Rmb16,811Rmb nil (US$2,083) related to its stand ready obligation under the guarantee arrangementnil) of premium fees in 20042005, 2006 and 2005, respectively. The amount2007, respectively, which are included in “Accrued expenses and other liabilities” and recognized during the year ended December 31, 2004 and 2005 includes premium received or receivable, which is amortizedas revenue on a straight line basis over the terms of the guarantees, of Rmb220respective guarantee. Guarantee fees recognized as revenue in 2005, 2006 and Rmb4,4932007 amounted to Rmb1,167, Rmb4,718 and Rmb2,176 (US$557)318), respectively. The amount of premium being amortized, which were recorded as revenue, for the year ended December 31, 2004 and 2005 were amounted to Rmb 14 and Rmb 1,167 (US$145), respectively. The remaining balance of Rmb 12,318 (US$1,526) asAs of December 31, 2005, represents the provision for loss contingency related2006 and 2007, deferred guarantee fee revenue amounted to the guarantees where payment by the Company was probable.Rmb3,326, Rmb2,858 and Rmb682 (US$100), respectively. | | (e) | | Outstanding bills discountedSubsequent to initial measurement and recognition of the liability for YEGCL’s obligations under with these loan guarantees, management evaluates YEGCL’s guarantee portfolio and accounts for potential loss contingencies associated with the guarantees based on the estimated losses resulting from known and expected defaults. Each guarantee is secured by a cash deposit from the borrower and a security interest in the automobile purchased by the borrower. As of December 31, 2006 and 2007, YEGCL had gross receivables of Rmb26,896 and Rmb20,162 (US$2,950), respectively, relating to payments made by YEGCL to the banks in conjunction with loans that had been defaulted and to be recovered from the individual borrowers. YEGCL recorded a bad debt allowance in the amount of Rmb12,467 and Rmb9,722 (US$1,422) for other receivables, and Rmb2,611 and Rmb1,119 for potential losses associated with the guarantee at December 31, 2006 and 2007 respectively. The net receivable amount of Rmb15,189 and Rmb10,440 (US$1,528), is included in “Other receivables, net ” in the accompanying consolidated balance sheets (See Note 13). | | | | As of December 31, 2005,2006 and 2007, the maximum potential amount future undiscounted payments YEGCL could be required to make under the guarantees was Rmb132,345 and Rmb43,701 (US$6,394), respectively. YEGCL held cash deposits of Rmb12,389 and Rmb9,999 as of December 31, 2006 and 2007 and security interests in automobiles with an aggregate initial purchase value of Rmb431,781 and Rmb380,080 as of December 31, 2006 and 2007, respectively. If, in the event of default the cash deposits and the amount of recoveries, if any, from repossession of the automobiles may not entirely mitigate YEGCL’s losses then, YEGCL accumulates the total expected risk against the total expected recoverable amount and provides for any expected shortfall. Accordingly, management recorded an accrual for potential losses associated with the guarantees in the amount of Rmb2,611 and Rmb1,119 (US$164) as of December 31, 2006 and 2007, respectively, included in “Accrued expenses and other liabilities”. |
F-39
| | An analysis of reserves for potential losses associated with the guarantees including amounts paid to banks in connection with guarantees issued by YEGCL is as follows: |
| | | | | | | | | | | | | | | December 31 | | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | US$ | Balance at beginning of year | | | 13,571 | | | | 15,078 | | | | 2,206 | | Charged/(credited) to consolidated statements of operations | | | 1,507 | | | | (4,237 | ) | | | (620 | ) | | | | | | | | | | | | | | Balance at end of year | | | 15,078 | | | | 10,841 | | | | 1,586 | | | | | | | | | | | | | | | Balance allocated to: | | | | | | | | | | | | | Allowance for uncollectible other receivables | | | 12,467 | | | | 9,722 | | | | 1,422 | | Potential losses associated with the guarantees | | | 2,611 | | | | 1,119 | | | | 164 | | | | | | | | | | | | | | | | | | 15,078 | | | | 10,841 | | | | 1,586 | | | | | | | | | | | | | | |
| | | (e) | | Outstanding bank bills discounted |
| | As of December 31, 2007, outstanding bills receivable discounted with banks for which the CompanyGroup has retained a recourse obligation totalled Rmb1,373,723totaled Rmb171,221 (US$170,222)25,052). Management has assessed the fair value of the recourse obligation arising from these discounted bank bills to be immaterial based on the Company’s default experience and the credit status of the issuing banks. |
| | | (f) | | Outstanding letters of credit | |
| | As of December 31, 2005,2007, the CompanyGroup issued irrevocable letters of credit totalled Rmb110,257totaling Rmb82,149 (US$13,662)12,020). |
| | | (g) | | Other outstanding litigation | |
| | In addition to the matters disclosed in Note 24(c), the CompanyGroup is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity. |
F - 43
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
| | | 25 | | Dispute with State Holding Company | |
| | The Company has from time to time in the period up to 20052006 encountered difficulties in obtaining the cooperation of the State Holding Company, and its former Chairman, MrMr. Wang Jianming, in the daily management and operation of Yuchai, including obtaining payments of the Company’s share of the final 2001 dividend declared in August 2002. MrMr. Wang Jianming ceased to serve as the Chairman, legal representative and chief executive officer of Yuchai, as well as the Chairman and legal representative of the State Holding Company, the principal Chinese shareholder of Yuchai with effect from October 28, 2005. The new Chairman and legal representative of these companies is MrMr. Yan Ping whose appointment was confirmed on December 2, 2005. | | | | The Chinese stakeholders had previously asserted that the transfer of ownership of shares with respect to Yuchai in November 1994, in connection with the Company’s initial public offering (“IPO”), was not validly approved by the Chinese authorities, and that as a result the Company’s exercise of control over Yuchai has been improper. | | | | As a result of a number of meetings between the parties, the Company and Yuchai entered into an agreement in July 2003 (the “July 2003 Agreement”) to work together in trying to jointly promote mutual plans to enhance the Company’s shareholder value. | | | | On April 7, 2005, the Company entered into a ReorganisationReorganization Agreement (“ReorganisationReorganization Agreement”) with Yuchai and Coomber in furtherance of the terms of the July 2003 Agreement, and the terms of this agreement were acknowledged and agreed to by the State Holding Company. The ReorganisationReorganization Agreement was extended to December 31, 2006 by way of the ReorganisationReorganization Agreement Amendment No.1 dated December 2, 2005. The Reorganisation2005 and then extended to June 30, 2007 by way of the Reorganization Agreement Amendment No.2 dated November 30, 2006. The Reorganization Agreement Amendments No.1 wasand No.2 were similarly acknowledged and agreed to by the State Holding Company. | | | | On June 30, 2007, the Company entered into the Cooperation Agreement with Yuchai, Coomber and the State Holding Company. The principalCooperation Agreement amends certain terms contained in the Reorganisation Agreement relating to governance related issues have been addressed by Yuchai. | | | | Yuchai has taken all necessary steps and submitted all necessary documents to enable the amended and restated Articles of Association of Yuchai as approved by its directors and shareholders in 1996 incorporating the corporate governance guidelines approved by its directors and shareholders on November 1, 2002 to be approved, formalized, endorsed, registered and filed with the relevant governmental authorities. The formal approval of these amended Articles of Association is awaited from the PRC Ministry of Commerce (“MOC”). | | | | Promptly upon receipt of the approval fromReorganization Agreement, as amended, among CYI, Yuchai and Coomber, and as so amended, incorporates the MOCterms of the Articles of Association, Yuchai would formalizeReorganization Agreement. The Reorganization Agreement was terminated on June 30, 2007. The Cooperation Agreement provides that the implementation of the corporate governance guidelines approved by its directorsparties will explore new business opportunities and shareholders on November 1, 2002 and establish an appropriate corporate governance structure conforming to international custom and practice. | | | | Yuchai has begun to implement the compliance programmeventures for the internal controls over financial reportinggrowth and expansion of Yuchai with respectYuchai’s existing businesses. Although the parties to section 404 of the Sarbanes-Oxley Act.Cooperation Agreement expect to work towards its implementation as expeditiously as possible, no assurance can be given as to when the transactions contemplated therein will be consummated. |
F - 44F-40
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
25 | | Dispute with State Holding Company (continued) | | | | Up to the date of this report: |
| (i) | | the board and shareholders of Yuchai have, at a duly convened board meeting held on April 21, 2005 and a duly convened shareholders meeting held on May 16, 2005, approved the following principal matters relating to the Reorganisation Agreement: |
| - | | the proposed capitalization of YMLC was varied by the board of directors of Yuchai at its meeting on April 21, 2005 and approved by its shareholders. Coomber has assumed the obligation to return Rmb165,400 (US$20,495) of the authorized Rmb205,000 (US$25,402) loan that was made by Yuchai to YMLC and which had been guaranteed by Coomber to Yuchai by December 6, 2005. The remaining Rmb39,600 (US$4,907) loan would remain as a loan by Yuchai to YMLC and would only be injected as share capital of YMLC after the successful spin-off of Yuchai in line with the terms of the Reorganisation Agreement; | | | - | | a dividend payment for the financial years ended December 31, 2003 and 2004 in the amount of Rmb302,713; | | | - | | the establishment and appointment of members of three sub-committees under the board, comprising the nominations committee, the remuneration committee and the audit committee; | | | - | | the establishment of a financial committee to approve all borrowings, guarantees, loans issuance of company debt and investment; | | | - | | the termination of the sales of the spare parts business of one of its subsidiaries; | | | - | | the payment of US$20,000 to the Company pursuant to the Reorganisation Agreement; | | | - | | the acceptance of the appointment of two independent directors of Yuchai and confirmation of the appointment of three directors appointed by holders of States Shares of Yuchai and six directors appointed by holders of Foreign Shares of Yuchai; and | | | - | | the appointment of one independent director nominated by the holders of State Shares of Yuchai, and three independent directors nominated by the holders of Foreign Shares of Yuchai. |
F - 45
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
25 | | Dispute with State Holding Company (continued) |
| (ii) | | an internationally reputable financial adviser had been engaged by Yuchai to assist Newco (as defined below) to apply for the listing of its shares on the NYSE and assist the Company with the implementation of spin-off. Pursuant to the Reorganization Agreement, a Bermuda corporation (“Newco”) will be formed where (a) the Company will contribute its 76.4% indirect interest in Yuchai to in exchange for a number of Newco shares equal to the number of outstanding shares of the Company as of April 7, 2005; (b) its board of directors would comprise of nominees from the Company and Yuchai in the same respective proportions to the nominees of the holders of Foreign Shares of Yuchai and the holders of State Shares of Yuchai on the Yuchai board of directors; and (c) its charter documents and officers would be mutually agreeable to the Company and Yuchai and on the completion date of the Restructuring Exercise (as described in the Reorganization Agreement) the Company shall have no appointees to its board of directors. The appointment of the financial adviser was subsequently terminated pending Yuchai’s ongoing review of the implementation of the corporate reorganization contemplated in the Reorganization Agreement; | | | (iii) | | the Yuchai board of directors subsequently directed a review of YMLC’s financial position and the implementation of the recapitalization plans for YMLC has been deferred pending the successful spin-off of Yuchai in line with the terms of the Reorganisation Agreement; | | | (iv) | | the Company has received payment of an advisory fee in the amount Rmb12,105 (US$1,500) from Yuchai as provided for under the Reorganisation Agreement; and | | | (v) | | the Company has received its share of the dividend declared and paid by Yuchai in respect of the financial years ended December 31, 2003 and 2004 on May 24, 2005 for amount of Rmb225,207 (US$27,906). |
F - 46
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
25 | | Dispute with State Holding Company (continued) | | | | The principal terms ofcontained in the ReorganisationReorganization Agreement AmendmentAmendments No.1 and No. 2 and the Co-operation Agreement relating to governance related issues are as follows:being adhered to by Yuchai. |
| (1) | | Clause 1.8 of the Reorganization Agreement was previously stated as: | | | | | “In consideration of CYI’s agreement to ensure that Coomber will under the terms of the share exchange described in clause 2.4 receive no less than 6,354,911 Newco shares, Yuchai shall, within 5 business days from the date that an unqualified audit report is issued on CYI’s financial statements in the form substantially similar to that of the unaudited financial statements filed by CYI in its Form 6K dated February 28, 2005, pay CYI an amount of US$20.0 million in cash into such bank account as CYI shall notify Yuchai in writing.” | | | | | was deleted and replaced with the following text: | | | | | “In consideration of CYI’s agreement to ensure that Coomber will under the terms of the share exchange in Clause 2.4 receive no less that 6,354,911 Newco shares, Yuchai shall on the earlier of (i) the date of the completion of the transactions described in Clause 2.6 and (ii) December 31, 2006 pay CYI an amount of US$20.0 million in cash to such bank account as CYI shall notify Yuchai in writing.” | | | (2) | | Clause 2.10 of the Reorganization Agreement, which was stated as: | | | | | “The parties acknowledge and accept that the CYI Group, as majority shareholders of Yuchai and with majority control of the Board of Directors of Yuchai, may cause the employment of Yuchai’s current Chief Executive Officer to be terminated in accordance with the terms of his employment agreement. CYI acknowledges and accepts, however, that the successful implementation of the Restructuring Exercise will require the continued uninterrupted involvement and participation of Yuchai’s current Chief Executive Officer on and subject to the terms (including remuneration) of his employment agreement. Accordingly, CYI agrees that it will not, and will procure that its appointees to the Board of Directors of Yuchai do not, take any action prior to the completion of the Restructuring Exercise that will interfere with, or cause the termination of, the employment of Yuchai’s current Chief Executive Officer except if he were to be prosecuted or convicted for any activities of a criminal nature.” | | | | | was deleted in its entirety with effect from October 27, 2005. | | | (3) | | The Clause 4 of the Reorganization Agreement was previously stated as: | | | | | “In the event that the parties are unable to complete the events described in each of clauses 2.1, 2.2, 2.4, 2.5 and 2.6 above (not due to the default of either party) by 5:00p.m. on December 31, 2005 (or if such day is not a business day in Hong Kong, the immediately succeeding business day)(or such other date to be mutually agreed between the parties), the provision of this Agreement shall terminate and in such event no party shall have any claim against any other party for any claims, damages, losses or other costs and expenses arising from such termination.” |
F - 47
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
25 | | Dispute with State Holding Company (continued) |
| (3) | | The Clause 4 of the Reorganization Agreement was previously stated as: (continued) | | | | | the date appearing in the third line of Clause 4 of the Reorganization Agreement was deleted and substituted with the words “December 31, 2006 or such other date as the parties may agree in writing” |
| | Yuchai, Coomber and the State Holding Company have at various times reaffirmed their respective intentions of working with the Company to carry out their respective obligations under the Reorganization Agreement. | | 26 | | Retirement and other postretirement benefits | |
| | As stipulated by the regulations of the PRC, Yuchai and its subsidiaries participate in defined contribution retirement plans organized by the Guangxi Regional Government and Beijing City Government for its staff. All staff are entitled to an annual pension equal to a fixed proportion of their final basic salary amount at their retirement date. For the years ended December 31, 2003, 20042005, 2006 and 2005,2007, Yuchai and its subsidiaries were required to make contributions to the retirement plan at a rate of 20.0% of the basic salary of their staff. The Guangxi Regional Government and Beijing City Government are responsible for the entire obligations of all Yuchai and its subsidiaries’ retirees. Expenses incurred in connection with the plan were Rmb24,101, Rmb29,868Rmb33,299, Rmb42,254 and Rmb33,299Rmb48,107 (US$4,126)7,039), respectively, for the years ended December 31, 2003, 20042005, 2006 and 2005.2007. | | | | Yuchai and its subsidiaries have no obligation for the payment of pension benefits or any other postretirement benefits beyond the annual contributions described above. |
F - 48
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
| | | 27 | | Other related party transactions | |
| | In addition to the loans to YMLCand interest income from YMCL and the purchase of 100% of the share capital of Yulin Hotel Company (as discussed in Note 5)5 and 34), the CompanyGroup has undertaken other significant business transactions with related parties during the three years ended December 31, 2005.2007. The following is a summary of these transactions: |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | Sales of trucks from customers to Guangxi Yuchai Mechanical and Electronics Company (“GYMEC”) (see Note (i)) | | | 1,346 | | | | 753 | | | | — | | | | — | | Sales of diesel engines to State Holding Company, its subsidiaries and affiliates (see Note (ii)) | | | 23,611 | | | | 3,784 | | | | 7,646 | | | | 947 | | Purchase of raw materials and supplies from subsidiaries and affiliates of State Holding Company (see Note (ii)) | | | (93,056 | ) | | | (142,829 | ) | | | (235,329 | ) | | | (29,160 | ) | Purchase of raw materials and supplies from YMLC (see Note (iii)) | | | — | | | | — | | | | (60,756 | ) | | | (7,528 | ) | Purchase of trucks from YMLC (see Note (iii)) | | | — | | | | (95,391 | ) | | | (77,324 | ) | | | (9,581 | ) | Processing fee to YMLC (see Note (iv)) | | | — | | | | (12,329 | ) | | | (44,407 | ) | | | (5,503 | ) | Delivery expense charged by a subsidiary of YMLC (see Note (iv)) | | | (62,206 | ) | | | (65,468 | ) | | | (126,028 | ) | | | (15,616 | ) | General and administrative expenses | | | | | | | | | | | | | | | | | — charged by State Holding Company (see Note (v)) | | | (30,607 | ) | | | (21,180 | ) | | | (25,931 | ) | | | (3,213 | ) | — charged by HLA (see Note (xii)) | | | (4,427 | ) | | | (4,142 | ) | | | (4,035 | ) | | | (500 | ) | — charged by an affiliate of HLA (see Note (vi)) | | | — | | | | — | | | | (30,765 | ) | | | (3,812 | ) |
F - 49
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Sales of diesel engines to State Holding Company, its subsidiaries and affiliates (see Note (i)) | | | 7,646 | | | | 20,923 | | | | 59,521 | | | | 8,709 | | | | | | | | | | | | | | | | | | | Sales of raw materials to YMCL (see Note (i)) | | | — | | | | 65,729 | | | | 35,380 | | | | 5,177 | | Purchase of raw materials and supplies from subsidiaries and affiliates of State Holding Company (see Note (i)) | | | (235,329 | ) | | | (377,129 | ) | | | (571,393 | ) | | | (83,603 | ) | Purchase of raw materials and supplies from YMCL (see Note (ii)) | | | (60,756 | ) | | | (201,802 | ) | | | — | | | | — | | Purchase of trucks from YMCL (see Note (ii)) | | | (77,324 | ) | | | — | | | | — | | | | — | | Processing fee to a subsidiary of YMCL (see Note (iii)) | | | (44,407 | ) | | | (13,604 | ) | | | (2,533 | ) | | | (371 | ) | Delivery expense charged by a subsidiary of YMCL (see Note (iii)) | | | (126,028 | ) | | | (90,840 | ) | | | (115,500 | ) | | | (16,899 | ) | General and administrative expenses | | | | | | | | | | | | | | | | | — charged by State Holding Company (see Note (iv)) | | | (25,931 | ) | | | (19,821 | ) | | | (21,447 | ) | | | (3,138 | ) | — charged by HLA (see Note (v)) | | | (4,035 | ) | | | (4,061 | ) | | | (12,471 | ) | | | (1,825 | ) | — charged by an affiliate of HLA (see Note (vi)) | | | (30,765 | ) | | | (9,654 | ) | | | (546 | ) | | | (80 | ) | Interest earned from balance due from an affiliate of HLA | | | 70 | | | | 110 | | | | 116 | | | | 17 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
27 | | Other related party transactions (continued) |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | 2003 | | | 2004 | | | 2005 | | | 2005 | | | | Rmb | | | Rmb | | | Rmb | | | US$ | | Gain on disposal of land use rights to a subsidiary of State Holding Company (See Note (vii)) | | | — | | | | — | | | | 2,533 | | | | 314 | | Loan from State Holding Company (see Note (viii)) | | | 8,000 | | | | — | | | | — | | | | — | | Assignment of debt to GYMEC (see Note (ix)) | | | 3,700 | | | | — | | | | — | | | | — | | Consultancy fee paid on behalf of Coomber (see Note (x)) | | | 13,347 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | Gain on disposal of land use rights to a subsidiary of State Holding Company (See Note (vii)) | | | 2,533 | | | | 1,841 | | | | 1,573 | | | | 230 | | | | | | | | | | | | | | | | | | |
| | | Notes: | | (i) | | Sales of diesel trucks to GYMEC | | | | GYMEC was formerly a subsidiary of State Holding Company. It became a subsidiary of YMLC following a share transfer from State Holding Company to YMLC in 2004. During 2003 and 2004, Yuchai received diesel trucks from certain customers as part of the settlement of their trade accounts receivable. Pursuant to an agreement between Yuchai and GYMEC, Yuchai sold such diesel trucks at cost to GYMEC, which owns a business license for selling diesel trucks in the PRC. Yuchai recorded a receivable from GYMEC in connection with the truck sales. The amount due from GYMEC is unsecured, interest free and repayable on demand. | | (ii) | | Sale and purchase of raw materials, supplies, scraps and diesel engines to/from State Holding Company, its subsidiaries and affiliates. | | | | Certain subsidiaries and affiliates of State Holding Company have acted as suppliers of raw materials and supplies to the Company and certain subsidiaries of State Holding Company have acted as sales agents of the Company.Group. The State Holding Company considers that these transactions were entered into inalso purchased scraps from the normal course of business and expects that these transactions will continue on normal commercial terms. |
F - 50
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
27 | | Other related party transactions (continued) | | | | Notes: (continued) |
| (iii) | | Purchase of raw materials, supplies and trucks from YMLC | | | | | Since July 2004, subsidiaries of YMMC have engaged in the sale of trucks which were mainly supplied by and purchased from YMLC. YMLC has also become a supplier of raw materials and supplies to the Company since 2005. The CompanyGroup. Management considers that these transactions were entered into in the normal course of business and expects that these transactions will continue on normal commercial terms. | | (ii) | (iv) | Purchase of raw materials, supplies and trucks from YMCL |
F-41
| | | | | From January 2005 to April 2006, subsidiaries of YMMC engaged in the sale of trucks which were mainly supplied by and purchased from YMCL. YMCL has also become a supplier of raw materials and supplies to the Group since 2005. Management considers that these transactions were entered into in the normal course of business. In April 2006, the above procurement and distribution arrangement between Yuchai and YMCL was stopped and YMCL sold the remaining inventory and some ancillary fixed assets back to YMMC. | | (iii) | | Processing fee and delivery expense charged by YMLCYMCL and its subsidiaries | | | | | The fee is for the packaging and deliveringdelivery of spare parts charged by YMLC,YMCL, which waswere recorded in “Cost of goods sold” and “Selling, general and administrative expenses” respectively. The CompanyManagement considers that these transactions were entered into in the normal course of business and expects that these transactions will continuecontinued on normal commercial terms. The packaging contract was terminated in April 2006. | | | (v)(iv) | | General and administrative expenses charged by State Holding Company | | | | | State Holding Company charges Yuchai for certain general and administrative expenses in respect of rental of certain office premises, property management services rendered by State Holding Company. The expenses are charged to Yuchai and its subsidiaries by State Holding Company on an actual incurred basis. The CompanyManagement believes that the expenses charged to Yuchai by State Holding Company would not have been materially different on a stand-alone basis because Yuchai could provide these services for itself at approximately the same amount. | | (v) | | General and administrative expenses charged by HLA | | | | This relates to management fee charged by HLA to the Company. | | (vi) | | Service fee toGeneral and administrative expenses charged by an affiliate of HLA | | | | | The fee was paid to Hong Leong Management Services Pte Ltd., an affiliate of HLA. ServiceIn 2006, there was service fee that includes Rmb9,167 (US$1,136)Rmb9,654 in relation to the consultancy services performed for the acquisition of interests in TCL during 2005 and LKN-Princefield Limited (“LKN”)HLGE in 2006 (see Note 34(a)).2006. The remaining amounts in 2006 were mainly in relation to securesecuring additional credit facilities and enterentering into the Reorganization Agreement. TheThese transactions were approved by the Board of Directors. The CompanyIn 2007, there was service fee of Rmb546 (US$80) in relation to administrative filings of the Company’s subsidiaries. Management considers that all of the above transactions were entered into in the normal course of business. | | | (vii) | | Gain on disposal of land use rights to a subsidiary of State Holding Company | | | | | The CompanyGroup has disposed of certain land use rights with net book value of Rmb1,047Rmb 1,047, Rmb552 and Rmb552 (US$130)81) to a subsidiary of SHCthe State Holding Company for a consideration of Rmb3,580, Rmb2,394 and Rmb2,125 (US$444). The Company considers that the transaction was entered into311) in the normal course of business. |
F - 51
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
27 | | Other related party transactions (continued)years ended December 31, 2005, 2006 and 2007 respectively. | | | | Notes: (continued) |
| (viii) | | Loan from State Holding Company | | | | | In 2003, GYSPM has entered into an agreement with State Holding Company for a borrowing of Rmb8,000 for its operating activities as of December 31, 2003. As of December 31, 2003, GYSPM pledged certain of its assets with net book value of Rmb17,132 against bank loan of Rmb8,000 borrowed by State Holding Company. The terms set out in the loan agreement entered into between State Holding Company and the bank and the loan agreement entered into between GYSPM and State Holding Company are identical. The loan proceeds from the bank borrowed by State Holding Company were solely lent to GYSPM. State Holding Company would make repayments to the bank upon receipt of loan repayment from GYSPM. The loan was fully repaid in 2004. | | | (ix) | | Assignment of debt to GYMEC | | | | | In 2003, the Company entered into a deed of assignment (“the Deed”) whereby one of the Company’s customers assigned all the rights and liabilities of the outstanding amount due to the Company totalling approximately Rmb15,000 to GYMEC. Pursuant to the Deed, GYMEC became one of the sales agents of this customer who is principally engaged in manufacturing and sales of motor vehicles. As of December 31, 2004, the outstanding balances due from GYMEC related to this assignment was Rmb3,700 and the amount was fully repaid in 2005. | | | (x) | | Consultancy fee paid on behalf of Coomber | | | | | In 2003, the Company entered into an agreement, totalling Rmb60,000 with a consultancy company in connection with the design of an information system for YMLC to be undertaken by Coomber pursuant to which Coomber has agreed to pay for all expenses incurred by the Company in respect of this project on or before 31 December 2004. In 2003, the Company incurred payments totalling Rmb13,347 in respect of the project, which have been recorded in amounts due from related parties. The amount was subsequently repaid in 2004. | | | (xi) | | Amounts due from/to related parties | | | | | Amounts due from/to related parties arise mainly from the transactions as stated above. | | | | | In addition to the above, Yuchai also entered into transactions with other PRC Government owned enterprises. The CompanyManagement considers that these transactions were entered into in the normal course of business and expects that these transactions will continue on normal commercial terms. Balances with other PRC entities are excluded from this caption. |
F - 52
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
27 | | Other related party transactions (continued) | | | | Notes: (continued) |
| (xii) | | Amount due to the holding company | | | | | AmountAmounts due to the holding company comprise mainly general and administrative expenses charged by the holding company in relation to the management, financial planning and control and other services provided to Yuchai. The balance is unsecured, interest free and repayable on demand. |
| | SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. | | | | The Company’s operating segments are Yuchai, TCL and TCLHLGE for the yearyears ended December 31, 2005.2006 and 2007. Prior to the purchase of TCL,HLGE, the Company’s only operating segment was Yuchai.segments were Yuchai and TCL. | | | | The segment result for Yuchai is based on incomeearnings before income taxes and minority interests. The segment result for TCL and HLGE is the Company’s equity in the net income or losses or TCL.of these affiliates. Segment assets for Yuchai are based on total |
F-42
| | assets of Yuchai. Segment assets for TCL and HLGE are based on the Company’s net investment in TCL.the affiliates. Substantially all of the Company’s operations including TCL are in the PRC. Consequentially no geographic information is presented. Further segment information about TCL and HLGE is included in Note 17(c) and Note 17(d). | |
| | Following is the segment information for the yearyears ended December 31, 2005:2005, 2006 and 2007: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | 2006 | | 2007 | | | Yuchai | | TCL | | | Yuchai | | TCL | | Yuchai | | TCL | | HLGE | | Yuchai | | TCL | | HLGE | | | Rmb | | Rmb | | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | | Rmb | Segment revenue from external customers | | 5,829,431 | | — | | | 5,816,740 | | — | | 6,920,528 | | — | | — | | 9,556,303 | | — | | — | | Interest revenue | | 21,744 | | — | | | Interest expenses | | 70,527 | | — | | | | | | Interest income | | | 21,744 | | — | | 16,329 | | — | | — | | 3,139 | | — | | — | | | | | Interest expense | | | 70,527 | | — | | 89,119 | | — | | — | | 99,504 | | — | | — | | Depreciation and amortization | | 139,720 | | — | | | 144,672 | | — | | 146,188 | | — | | — | | 227,960 | | — | | — | | Equity in losses of affiliates | | 50 | | — | | | Equity in income/(losses) of affiliates | | | 50 | | — | | 79 | | — | | — | | | (198 | ) | | — | | — | | Segment profit / (loss) | | 171,585 | | | (5,056 | ) | | 30,179 | | | (5,982 | ) | | | 292,359 | | | | (23,923 | ) | | 1,395 | | 845,239 | | 5,925 | | 8,321 | | Significant non-cash items: | | | | | | | — Provision for uncollectible loans to a related party | | 205,000 | | — | | | 202,950 | | — | | — | | — | | — | | — | | — | | — | | — Bad debt expense | | 25,587 | | — | | | — Provision for inventory write-down | | 15,990 | | — | | | — Provision for losses on guarantees | | 12,318 | | — | | | | | | — Other adjustments to provisions and allowances | | | 53,895 | | — | | 98,352 | | — | | — | | | 4,726 | | | — | | — | | Segment assets | | 6,168,814 | | 185,021 | | | 6,235,585 | | 184,095 | | 6,479,886 | | 385,583 | | 117,360 | | 7,843,056 | | 387,930 | | 112,648 | | Total expenditures for additions to long-lived assets | | 515,359 | | — | | | 515,359 | | — | | 323,781 | | — | | — | | 536,660 | | — | | — | |
| | The segment result for Yuchai for 2006 was corrected in the current year to exclude certain corporate expenses to conform with the current year’s presentation. The Company recorded a decrease in segment profit for Yuchai of Rmb2,423 and a corresponding increase in other corporate general and administrative expenses as compared with the amounts previously reported in the Company’s 2006 consolidated financial statements. | | | | Reconciliation of segment information to the consolidated financial statements for the years ended December 2003, 20042005, 2006 and 2005.2007. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2003 | | 2004 | | 2005 | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | | Rmb | | Rmb | | Rmb | | US$ | Total segment profit | | 722, 341 | | 773, 571 | | 166, 529 | | | 24,197 | | 269,831 | | 859,485 | | 125,755 | | | | | Service fee to an affiliate of HLA (see Note 27) | | — | | — | | | (30,765 | ) | | | (30,765 | ) | | | (9,654 | ) | | (546 | ) | | (80 | ) | Other corporate general and administrative expenses | | | (25,435 | ) | | | (19,717 | ) | | | (18,522 | ) | | | (18,522 | ) | | | (56,782 | ) | | | (75,025 | ) | | | (10,977 | ) | | | | | | | | | | | | | | | | | | | | | Consolidated income before income taxes and minority interests | | 696,906 | | 753,854 | | 117,242 | | | Consolidated earnings/(loss) before income taxes and minority interests | | | | (25,090 | ) | | 203,395 | | 783,914 | | 114,698 | | | | | | | | | | | | | | | | | | | | | | | | | Total assets for reportable segment | | 3,896,463 | | 5,268,660 | | 6,353,835 | | | Total segment assets | | | 6,419,680 | | 6,982,829 | | 8,343,634 | | 1,220,794 | | Corporate cash and cash equivalents | | 129,795 | | 108,514 | | 247,332 | | | 247,332 | | 100,990 | | 81,257 | | 11,889 | | Other corporate assets | | 7,374 | | 7,074 | | 12,618 | | | Other investments (long-term)(a) | | | — | | 633,837 | | 608,946 | | 89,098 | | Assets acquired from Yulin Hotel Company (Note 34) | | | — | | — | | 272,397 | | 39,856 | | Other corporate assets(b) | | | 12,618 | | 243,701 | | 272,950 | | 39,935 | | | | | | | | | | | | | | | | | | | | | | Consolidated total assets | | 4,033,632 | | 5,384,248 | | 6,613,785 | | | 6,679,630 | | 7,961,357 | | 9,579,184 | | 1,401,572 | | | | | | | | | | | | | | | | | | |
| | | Note (a): includes HLGE unsecured bonds (Rmb558,852), RCPS A (Rmb20,119), RCPS B (Rmb29,975) (see Note 17(e)). | Note (b): includes corporate’s property, plant and equipment, goodwill and other receivables. |
F - 53F-43
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
28 | | Segment information (continued) | Note (b): includes HLGE unsecured bonds (Rmb558,852), RCPS A (Rmb20,119), RCPS B (Rmb29,975) (See Note 17(e)). |
| | Revenues from external customers by product category are summarized as follows: |
| | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | | | | | | | | | | | | | | | | | 2003 | | 2004 | | 2005 | | 2005 | | | Years ended December 31, | | | Rmb | | Rmb | | Rmb | | US$ | | | 2005 | | 2006 | | 2007 | | 2007 | | | | Rmb | | Rmb | | Rmb | | US$ | Revenues, net | | | | | | 4F Light-Duty Diesel Engines | | | — | | 264,335 | | 380,601 | | 55,687 | | 4108 Light-Duty Diesel Engines | | 174,173 | | 325,242 | | 688,265 | | 85,285 | | | 634,532 | | 941,657 | | 1,218,838 | | 178,333 | | 4110 Light-Duty Diesel Engines | | 328,993 | | 544,297 | | 596,565 | | 73,922 | | | 595,239 | | 644,116 | | 1,189,995 | | 174,113 | | 4112 Light-Duty Diesel Engines | | 266,639 | | 314,453 | | 322,266 | | 39,933 | | | 321,548 | | 372,423 | | 469,015 | | 68,624 | | 6105 Medium-Duty Diesel Engines | | 911,190 | | 1,143,535 | | 1,748,847 | | 216,704 | | | 1,744,953 | | 1,705,399 | | 2,132,590 | | 312,029 | | 6108 Medium-Duty Diesel Engines | | 1,504,140 | | 1,372,073 | | 810,859 | | 100,475 | | | 809,054 | | 991,190 | | 1,424,391 | | 208,409 | | 6112 Heavy-Duty Diesel Engines | | 1,003,791 | | 1,203,558 | | 786,989 | | 97,518 | | | 785,236 | | 725,288 | | 643,373 | | 94,135 | | 6113 Heavy-Duty Diesel Engines | | 3,697 | | 97,368 | | 193,280 | | 23,950 | | | 192,850 | | 365,717 | | 877,177 | | 128,344 | | Diesel Engine Parts | | 228,500 | | 446,135 | | 489,480 | | 60,653 | | | 488,414 | | 875,453 | | 1,218,147 | | 178,232 | | Others * | | 148,827 | | 135,434 | | 192,880 | | 23,900 | | | Guarantee fees | | | 244,914 | | 34,950 | | 2,176 | | 318 | | | | | | | | | | | | | | | | | | | | | | | | 5,816,740 | | 6,920,528 | | 9,556,303 | | 1,398,224 | | | | 4,569,950 | | 5,582,095 | | 5,829,431 | | 722,340 | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues from customers based on their geographical location for the years ended December 31, 2005, 2006 and 2007 (in Rmb thousands) are as follows: |
| | | | | | | | | | | | | | | | | | | 2005 | | 2006 | | 2007 | | | Sales | | Sales | | | | | Revenue | | Revenue | | Sales Revenue | | | Rmb | | Rmb | | Rmb | | US$ | | | (in thousands) | | (in thousands) | | (in thousands) | | (in thousands) | | | | | | | | | | | | | | | | | | China | | | 5,703,360 | | | | 6,893,551 | | | | 9,533,767 | | | | 1,394,927 | | | | | | | | | | | | | | | | | | | Other countries | | | 113,380 | | | | 26,977 | | | | 22,536 | | | | 3,297 | | | | | | | | | | | | | | | | | | | | | | 5,816,740 | | | | 6,920,528 | | | | 9,556,303 | | | | 1,398,224 | | | | | | | | | | | | | | | | | | |
| | | * | | Others mainly represent the revenues earned through sales of motor vehicle chassis and power generators. |
29 | | Foreign currency exchange | |
| | The Renminbi is not fully convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the PBOC or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions areis the ratesrate of exchange quoted by the PBOC which are determined largely by supply and demand. | | | | Foreign currency payments, including the remittance of earnings outside of the PRC, must be arranged through banks authorized to conduct foreign exchange business. |
| | | 30 | | Distribution of profits | |
| | The Company’s sources of cash flow for the purposes of distribution of profits to its shareholders are its share of the dividends, if any, paid by Yuchai, HLGE and TCL to the Company. With respect to dividends by Yuchai, applicable PRC laws and regulations require that, before it can distribute profit to its stockholders it must satisfy all tax liabilities, recover losses in previous years and make contributions to certain statutory reserves as discussed in Note 22. Such dividends may be paid partly in Renminbi and partly in foreign currency. In the event that dividends are distributed in Renminbi, the dividends may be |
F-44
| | converted into foreign currency and remitted in accordance with relevant PRC laws, regulations and policies and to the extent permitted by PRC market conditions. Dividends of Yuchai are determined based on distributable profitprofits reported in its PRC GAAP financial statements, after appropriation to statutory reserves. Such distributable profits differ from the amounts reported under U.S. GAAP. No similar provisions were imposed with respect to dividends by TCL.TCL and HLGE. | | | | Under the Companies Act of 1981 of Bermuda (as amended), the Company’s contributed surplus is available for distribution to stockholders. |
| | | 31 | | Derivative instrument and hedging activities | |
| | For the periods presented, the Company and its subsidiaries did not enter into transactions with respect to derivative instruments. The Company and its subsidiaries do not hedge risk exposures or speculate using derivative instruments. |
F - 54
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
| | | 32 | | Fair value of financial instruments | |
| | The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amount of cash and cash equivalents, trade accounts receivable, bills receivable, short term amounts due from related parties, prepaid expenses, other receivables, short-term bank loans, current instalments of long-term bank loans, trade accounts payable, amount due to the holding company and amounts due to related parties approximates their fair value because of the short maturity of these instruments. It was not practicable for Yuchaimanagement to estimate the fair value of its equity investmentinvestments for which a quoted market price is not available because it has not yet obtained or developed the valuation model necessary to make the estimate, and the cost of obtaining an independent valuation appearsis considered excessive consideringin relation to the materialitysignificance of the equity investmentinvestments to Yuchai. Yuchaithe Group. Management does not believe the carrying value of the equity investmentinvestments will be significantly different from itstheir fair value. | | | | Cash and cash equivalents Management estimated the fair value of Yuchai and its subsidiaries denominated in foreign currencies have been translated atfinancial investments by obtaining an independent valuation of the balance sheet date into Renminbi at rates quotedinvestments by the PBOC. Yuchai does not have and does not believe it will have any difficulty in exchanging its foreign currency cash for Renminbi.a professional valuer. | | | | The carrying amount of long-term bank loans approximates their fair value based on the borrowing rates currently available for bank loans with similar terms and average maturities. |
| | | 33 | | Significant concentrations and risks | |
(a) | | Customer concentration | |
| | Substantially all of the Company’sGroup’s customers are located in the PRC. The following are the customers that individually comprise 10% or more of gross revenue in any of the relevant periods: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | Years ended December 31, | | | 2003 | | 2004 | | 2005 | | 2005 | | | 2005 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | US$ | | | Rmb | | Rmb | | Rmb | | US$ | Liuzhou Dongfeng Automobile (see Note (i)) | | 391,086 | | 830,018 | | 385,049 | | 47,712 | | | 385,049 | | 453,090 | | 658,585 | | 96,360 | | Hubei Dongfeng Automobile (see Note (ii)) | | 613,448 | | 344,910 | | 333,452 | | 41,319 | | | 333,452 | | 238,400 | | 333,612 | | 48,812 | | | | | | | | | | | | | | | | | | | | | | | |
| | | Notes: | | (i): | | Sales to Liuzhou Dongfeng Automobile for the year ended December 31, 2003, 20042005, 2006 and 20052007 was approximately 8.6%6.6%, 14.9%6.5% and 6.6%6.9% of total sales. | | (ii): | | Sales to Hubei Dongfeng Automobile for the year ended December 31, 2003, 20042005, 2006 and 20052007 was approximately 13.4%5.7%, 6.2%3.4% and 5.7%3.5% of total sales. |
F - 55
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
33 | | Significant concentrations and risks (continued) | | | | All the aboveBoth customers are controlled by or affiliated with Dongfeng Automobile Company. At December 31, 20042006 and 2005,2007, approximately 29%23.5% and 13%16.1% of gross trade accounts receivable, respectively, were due from these customers. The CompanyManagement considers its relationships with these major customers to be good; however, the loss of one or more of the Company’sGroup’s major customers would have a material adverse effect on the Company’s consolidated financial position, results of operations.operations and cash flows. |
| | See note 28 “Revenues from external customers by product category”. |
| | | (c) | | Supplier concentration |
| | Yuchai/ASIMCO Components Company Limited, or Yuchai/ASIMCO, is one of Yuchai’s principal suppliers of fuel injection pumps through two of its related companies. Yuchai/ASIMCO is a joint venture between Yuchai and a subsidiary of Asian |
F-45
| | Strategic Investments Corporation, or ASIMCO, that invests in factories in China that produce parts and components for diesel engines. ASIMCO is a joint venture among The Pacific Alliance Group Limited, Dean Witter Capital Corporation and TCW Capital Investment Corporation. |
| | | (d) | | Material supply concentration |
| | Yuchai manufactures engine blocks, cylinder heads, crankshaft, camshaft and certain other key parts. Third party suppliers provide the remaining engine parts. The production process involves the complete assembly and testing of the finished product. The key components for 6105, 6108 and 6112 are manufactured internally. A large portion of its engine blocks used in production were casted and molded internally, and contingent supply came from a long term domestic supplier. Raw materials, principally steel and cast iron, were purchased from domestic suppliers. |
| | During periods of economic expansion, the demand of trucks, construction machinery and other application of diesel engines generally increases. Conversely, during economic slowdowns the diesel engine industry is generally adversely affected by a decline in demand. As a result, the performance of Chinese economy will affect the Company’sGroup’s business and prospects byto a significant degree. |
| | | (c)(f) | | Transactions involving Yuchai'sYuchai’s Chinese shareholders | |
| | Although the Company has proper legal ownershipsownership over and a controlling financial interest of 76.41% interest in Yuchai, the Company has from time to time encountered difficulties in obtaining the cooperation of the State Holding Company and Coomber. As part of the terms of the Reorganization Agreement as described in Note 25, Yuchai and State Holding Company acknowledged and reaffirmed the Company’s continued rights as majority shareholder to direct the management and policies of Yuchai through Yuchai’s board of directors. However, no assurance can be given that disagreements or difficulties with Yuchai’s management of State Holding Company and Coomber will not recur. In addition, as described in Note 5, Yuchai has entered into transactions that involvesinvolved the Chinese Shareholders that have resulted in losses. No assurance can be given that future transactions involving the State Holding Company, Coomber and their related parties will be conducted on an arm-length basis or otherwise be beneficial to the Company. Consequently, such disagreements, or difficulties and transactions involving State Holding Company, Coomber and their related parties could have a material adverse impact on the Company’s consolidated financial position, operating results and cash flows. | | 34 | | Subsequent eventsOn June 30, 2007, we entered into the Cooperation Agreement with Yuchai, Coomber and the State Holding Company. The Cooperation Agreement amends certain terms of the Reorganization Agreement, as amended, among CYI, Yuchai and Coomber, and as so amended, incorporates the terms of the Reorganization Agreement. The Reorganization Agreement was terminated on June 30, 2007. | | | | The Cooperation Agreement provides that the parties will explore new business opportunities and ventures for the growth and expansion of Yuchai’s existing businesses. Although the parties to the Cooperation Agreement expect to work towards its implementation as expeditiously as possible, no assurance can be given as to when the transactions contemplated therein will be consummated. |
| | | (a)(g) | | Cash and cash equivalents |
| | Cash and cash equivalents denominated in various currencies are held in bank accounts in the following countries: |
| | | | | | | | | | | | | | | | | | | December 31 | | | 2006 | | 2006 | | 2007 | | 2007 | | | Rmb | | Rmb | | Rmb | | Rmb | | | PRC | | Singapore | | PRC | | Singapore | Rmb | | | 644,944 | | | | — | | | | 439,689 | | | | — | | USD | | | — | | | | 99,506 | | | | — | | | | 79,872 | | SGD | | | — | | | | 1,483 | | | | — | | | | 1,384 | | | | | | | | | | | | | | | | | | | | | | 644,944 | | | | 100,989 | | | | 439,689 | | | | 81,256 | | | | | | | | | | | | | | | | | | |
| | Acquisition of debt and equity in an investment-holding companyYulin Hotel Company | | | | In February 2006,As previously described in Note 5 to these consolidated financial statements, on December 25, 2007, Yuchai, pursuant to the execution of a share transfer contract with YMCL, Coomber and State Holding Company, acquired all the outstanding share capital of Yulin Hotel Company for Rmb245.6 million. On January 13, 2009, Yuchai received approval from the provincial government regulatory agency in charge of state owned assets administration in China for its acquisition of 100% equity in Yulin Hotel Company. Prior to this approval, management of the Company acquired S$129 million (equivalent to Rmb 626 million)has concluded that Yuchai is the legal owner of the shares in principal amountYulin Hotel Company and hence Yuchai also bears the risks and rewards of secured bonds (“the Bonds”), 123,010,555 redeemable convertible preference shares (the “Preference Shares”), and 191,413,465 ordinary shares (“ownership in the Ordinary Shares”) (collectively, “the Sale Securities”) issued by LKNcorresponding operations of Yulin Hotel Company as of December 25, 2007. Consequently, the acquisition has been accounted for an aggregate purchase consideration of approximately S$132 million (equivalent to approximately Rmb639 million) (“the Aggregate Purchase Consideration”) from certain banks, financial institutions, corporations and individuals (collectively “the Sellers”). Immediately followingunder the purchase method as of December 25, 2007. The results of operations and cash flows of Yulin Hotel Company were immaterial during the period December 25, 2007 to December 31, 2007, and therefore are not included in the Company’s consolidated statements of operations or cash flows. The Yulin Hotel Company hold 29.13% of the Ordinary Shares based on LKN’s total issued and outstanding Ordinary Shares or approximately 40.30% of the Ordinary Shares of LKN assuming full conversion of the 123,010,555 Preference Shares.will be included in Yuchai’s operating segment beginning in 2008. | | | | LKNAssets acquired and liabilities assumed have been recorded in the consolidated balance sheet at their estimated fair values as of December 25, 2007, and the Company recognized goodwill of Rmb 5,675. The principal assets of Yulin Hotel Company were the Yulin Hotel and YMCL’s central office building in Guilin. The Company is a company listed onin the Main Boardprocess of finalizing, through internal studies and third-party valuations, the fair values of the Singapore Exchange and is primarily engaged in the business of investment holding, including investing in rental property and hospitality business in Asia.equipment. Consequently, the purchase price allocation set forth below is preliminary and subject to adjustment as additional information is obtained. When the allocation process is completed, adjustments to recorded values may result. The following table summarizes the preliminary allocation of the purchase price assigned to the fair values of the assets acquired and liabilities assumed as of the date of acquisition: | |
| | | | | | | Fair values | | | | Rmb’000 | | Current assets | | | 7,809 | | Property and equipment | | | 210,502 | | Construction in progress | | | 130 | | Lease prepayments | | | 48,281 | | Goodwill | | | 5,675 | | | | | | Total assets acquired | | | 272,397 | | | | | | | Amounts due to related parties | | $ | 19,782 | | Other current liabilities | | | 7,015 | | | | | | Total liabilities assumed | | | 26,797 | | | | | | Net assets acquired | | $ | 245,600 | | | | | |
| | The Company initially intendsNo pro forma income statement has been provided because management believes the pro forma effects are immaterial to accountthe Company’s consolidated results of operations for the Ordinary Shares of LKN using equity methodyears ending December 31, 2006 and the Bonds and Preference Shares as available-for-sale securities.2007. |
F - 56F-46
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
34 | | | 35 | | Subsequent events (continued) |
| | | (b)(a) | | Right issue of LKNMulti-currency Revolving Credit Facility | |
| | On February 28, 2006, LKN announced a proposed renounceable rights issue of zero coupon unsecured non-convertible bonds due 2009 (the “New Bonds”) and non-redeemable convertible cumulative preference shares in the capital of LKN (the “New NCCPS”) (the “Rights Issue”). The purpose of the Rights Issue of LKN is to raise funds for redeeming the existing Bonds and for working capital purpose. The Company has provided LKN an irrevocable undertaking to subscribe in full and by way of excess application, all New Bonds and New NCCPS not taken up by other stockholders of LKN. | | | | On July 4, 2006, the Company was alloted 196,201,374 of New NCCPS and S$130,800,917 of New Bonds at a consideration of S$135 million (equivalent to approximately Rmb655 million). Assuming full conversion of the existing Preference Shares and New NCCPS, the Company’s equity interest in LKN would increase from 40.3% to 51.7%. In the event the Company obtains a controlling financial interest in LKN, then LKN would become a subsidiary of the Company and its financial statement would be included in the consolidated financial statements of the Company from that point forward. | | (c) | | Rights issue of TCL | | | | In January 2006, TCL conducted a renounceable non-underwritten rights issue of new shares (“Rights Shares”) at an issue price of S$0.08 (equivalent to approximately Rmb0.39) for each Rights Share; and a renounceable non-underwritten rights issue of unsecured 2% convertible bonds due 2009 (“Convertible Bonds”) in the denomination of S$0.8 (equivalent to approximately Rmb3.9) for each Convertible Bond. | | | | On February 16, 2006, the Company was allotted 87,860,288 Rights Shares and 52,933,440 Convertible Bonds in TCL for an aggregate cash consideration of S$49,400,000 (equivalent to approximately Rmb239,758). | | | | As a result of the rights issues, the Company’s equity interest in TCL increase from 15.99% to 19.36%, and would increase to 36.85% assuming full conversion of the Convertible Bonds held by the Company. |
F - 57
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
34 | | Subsequent events (continued) | | (d) | | New bank facility | | | | In January to March 2006,20, 2008, the Company entered into additionala new facility agreement with BOTM to re-finance the existing revolving credit facility. The new unsecured, multi-currency revolving credit facilitiesfacility has a committed aggregated value of S$21.5 million with certain banks for approximately S$170 million (equivalenta one year duration. The new facility will be used to approximately Rmb825 million). The facilities may only be utilized byfinance the Company in connection with certain limited circumstances relating to its business expansion activities. TheCompany’s long-term general working capital requirements. Among other things, the terms of the facilitiesfacility require among other things, that HLAHong Leong Asia Ltd. (“HLA”) retains ownership of the Company’s special share and that the Company remains a consolidated subsidiary of HLA. The terms of the facilitiesfacility also include certain financial covenants with respect to the Company’s tangible net worth (as defined in the agreement) as at June 30 and net gearingDecember 31 of each year not being less than US$120 million and the ratio throughout the tenor of the facility,Company’s total net debt (as defined in the agreement) to tangible net worth as at June 30 and December 31 of each year not exceeding 2.0 times, as well as negative pledge provisions and customary drawdown requirements and events of default.requirements. |
| | | (b) | | DBS S$50m bridging loan |
| | On August 28, 2008, the Company entered into a bridging loan agreement of up to S$50 million for a 12 months duration, with DBS Bank Ltd., (“DBS”) of Singapore, to partially re-finance the US$50m revolving credit facility with Sumitomo Mitsui Banking Corporation, Singapore Branch which expired on 6 September 2008. The new facility will also be used to finance the Company’s long-term general working capital requirements. The terms of the facility include certain financial covenants as well as negative pledge and default provisions. The Company has also undertaken to make available to DBS, within 180 days after the end of its financial year, copies of its audited consolidated accounts as at the end of each financial year. Compliance with this undertaking in relation to the production of the 2007 audited consolidated accounts will be no later than February 28, 2009. |
| | | (c) | | Repayment of Short Term Bonds of Rmb650 million by Yuchai |
| | On April 18, 2007, Yuchai issued the second tranche of short term bonds of Rmb 650.0 million (US$95.1 million) under approval given by PBOC on May 30, 2006 and the funds were used to pay off the short term loans from three local banks. The bonds were issued at discount and an amount totaling Rmb 633.0 million (US$92.6 million) was received by Yuchai. The bonds matured and were fully repaid in April, 2008. |
| | | (d) | | Partial Redemption of New Bonds by HLGE |
| | In June 2008, HLGE partially redeemed the New Bonds. The principal amount redeemed was approximately S$25.9 million (US$18.0 million) and resulted in a reduction in the principal amount of the New HLGE Bonds held by the Company from S$112.9 million (US$78.5 million) to S$87.0 million (US$60.5 million). The proceeds from the partial redemption amounted to S$28.5 million (US$19.8 million). |
| | | (e) | | IssuanceRCPS B Redemption by HLGE |
| | In April 2008, HLGE made an additional partial redemption of corporate bondsthe Existing HLGE RCPS B. The redemption amount we received amounted to approximately S$0.98 million (US$0.7 million) and resulted in a reduction in the number of Existing HLGE RCPS that held by Yuchaithe Company from 113,159,191 to 107,186,403. |
(f) | | Joint Venture Company with Geely and Yinlun | | | | In March 2006,December 2007, Yuchai appliedentered into an Equity Joint Venture Agreement with Geely and Yinlun to establish a joint venture company in Jining, Shandong Province to engage in the PBOCdevelopment, production and sales of a proprietary diesel engine and its parts for passenger vehicles. As of December 31, 2008, the joint venture company has been duly incorporated with registered capital of Rmb 150 million and paid-up capital of Rmb 45 million, out of which Yuchai has already contributed Rmb 23.4 million. | | (g) | | Joint Venture Company with Geely and Yinlun | | | | In December 2007, Yuchai entered into an Equity Joint Venture Agreement with Geely and Yinlun to issue short term bondsestablish a joint venture company in Tiantai, Zhejiang Province to engage in the development, production and sales of a proprietary diesel engine and its parts for passenger vehicles. And as of December 31, 2008, the joint venture company has been duly incorporated with a registered capital of Rmb 100 million and paid up to Rmb1,000,000 (US$123,912). The application was approved by PBOC on Maycapital of Rmb 30 2006 and the first tranchemillion, out of bonds of Rmb500,000 (US$61,956) was issued on June 12, 2006. The bonds were issued at a discount and an amount totalling Rmb488 million was received by Yuchai. The bonds mature on March 9, 2007 and the funds will be used to pay off existing bank loans.which Yuchai has already contributed Rmb 15.6 million. |
F - 58F-47
|