AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 2005
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 1-14362
[COMPANY NAME IN CHINESE]
(Exact name of Registrant as specified in its charter)
GUANGSHEN RAILWAY COMPANY LIMITED
(Translation of Registrant's name into English)
PEOPLE'S REPUBLIC OF CHINA
(Jurisdiction of incorporation or organization)
NO. 1052 HEPING ROAD, SHENZHEN, PEOPLE'S REPUBLIC OF CHINA 518010
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH LISTED ------------------- ------------------------------------- American Depositary Shares, each representing 50 Class H ordinary shares New York Stock Exchange, Inc. Class H ordinary shares, nominal value RMB 1.00 per share The Stock Exchange of Hong Kong Limited |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the Registrant's classes of
capital or common stock as of December 31, 2004:
Domestic shares, par value RMB1.00 per share .................................................... 2,904,250,000 H shares, par value RMB1.00 per share ........................................................... 1,431,300,000 (including 243,129,050 H shares in the form of American Depositary Shares) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 [ ] Item 18 [X]
TABLE OF CONTENTS
Pages
-----
Forward-Looking Statements....................................................................................... 1
Certain Terms and Conventions.................................................................................... 1
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.......................................... 3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE........................................................ 3
ITEM 3. KEY INFORMATION................................................................................ 3
Item 3A. Selected Consolidated Financial and Other Data................................................. 3
Item 3B. Capitalization and Indebtedness................................................................ 5
Item 3C. Reasons for the Offer and Use of Proceeds...................................................... 5
Item 3D. Risk Factors................................................................................... 5
ITEM 4. INFORMATION ON THE COMPANY..................................................................... 13
Item 4A. History and Development of the Company......................................................... 13
Item 4B. Business Overview.............................................................................. 16
Item 4C. Organizational Structure....................................................................... 29
Item 4D. Property, Plant and Equipment.................................................................. 30
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................................... 32
Item 5A. Results of Operations.......................................................................... 34
Item 5B. Liquidity and Capital Resources................................................................ 46
Item 5C. Research and Development, Patents and Licences, etc............................................ 48
Item 5D. Trend Information.............................................................................. 49
Item 5E. Off-Balance Sheet Arrangements................................................................. 49
Item 5F. Tabular Disclosure of Contractual Obligations.................................................. 49
Item 5G. Additional Information......................................................................... 50
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..................................................... 52
Item 6A. Directors and Senior Management................................................................ 52
Item 6B. Board Compensation............................................................................. 57
Item 6C. Board Practices................................................................................ 58
Item 6D. Employees...................................................................................... 60
Item 6E. Share Ownership................................................................................ 61
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............................................. 62
Item 7A. Major Shareholders............................................................................. 62
Item 7B. Related Party Transactions..................................................................... 63
Item 7C. Interests of Experts and Counsel............................................................... 67
ITEM 8. FINANCIAL INFORMATION.......................................................................... 68
Item 8A. Consolidated Statements and Other Financial Information........................................ 68
Item 8B. Significant Changes............................................................................ 69
ITEM 9. THE OFFER AND LISTING.......................................................................... 70
Item 9A. The Offer and Listing Details.................................................................. 70
Item 9B. Plan of Distribution........................................................................... 71
Item 9C. Markets........................................................................................ 71
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Item 9D. Selling Shareholders.......................................................................... 71
Item 9E. Dilution...................................................................................... 71
Item 9F. Expenses of the Issue......................................................................... 71
ITEM 10. ADDITIONAL INFORMATION........................................................................ 72
Item 10A. Share Capital................................................................................. 72
Item 10B. Memorandum and Articles of Association........................................................ 72
Item 10C. Material Contracts............................................................................ 82
Item 10D. Exchange Controls............................................................................. 82
Item 10E. Taxation...................................................................................... 83
Item 10F. Dividends and Paying Agents................................................................... 91
Item 10G. Statement by Experts.......................................................................... 91
Item 10H. Documents on Display.......................................................................... 91
Item 10I. Subsidiary Information........................................................................ 92
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................... 93
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........................................ 95
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................................... 96
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.................. 96
ITEM 15. CONTROLS AND PROCEDURES....................................................................... 96
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.............................................................. 97
ITEM 16B. CODE OF ETHICS................................................................................ 97
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................................ 97
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.................................... 98
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS........................ 98
PART III
ITEM 17. FINANCIAL STATEMENTS.......................................................................... 99
ITEM 18. FINANCIAL STATEMENTS.......................................................................... 99
ITEM 19. EXHIBITS...................................................................................... 99
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FORWARD-LOOKING STATEMENTS
Certain information contained in this annual report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements can be identified by the use of words or phrases such as "is expected to", "will", "is anticipated", "plan to", "estimate", "believe," "may," "intend," "should" or similar expressions, or the negative forms of these words, phrases or expressions, or by discussions of strategy. Such statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results and those presently anticipated or projected. You are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date on which such statements were made. Among the factors that could cause our actual results in the future to differ materially from any opinions or statements expressed with respect to future periods include changes in the economic policies of the PRC government, an economic slowdown in the Pearl River Delta region and elsewhere in mainland China, increased competition from other means of transportation, delays in major development projects, a reoccurrence of the Severe Acute Respiratory Syndrome epidemic in Hong Kong or China, foreign currency fluctuations and other factors beyond our control.
When considering such forward-looking statements, you should keep in mind the factors described in "Item 3E. Risk Factors" and other cautionary statements appearing in "ITEM 5. Operating and Financial Review and Prospects" of this annual report. Such risk factors and statements describe circumstances which could cause actual results to differ materially from those contained in any forward-looking statement.
CERTAIN TERMS AND CONVENTIONS
Solely for the convenience of the reader, this annual report contains translations of amounts from renminbi into U.S. dollars and vice versa at the rate of RMB8.30 to US$1.00, which was the noon buying rate in the New York City for cable transfers in renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2004, except where we specify that a different rate has been used. You should not construe these translations as representations that the renminbi amounts actually represent U.S. dollar amounts or could be converted into U.S. dollars at that rate or at all. See "Item 3A. Selected Consolidated Financial Data -- Exchange Rate Information" for information regarding the noon buying rates for U.S. dollar/renminbi conversions from January 1, 2000 through June 17, 2005.
We prepare and publish our consolidated financial statements in renminbi.
Various amounts and percentages set out in this document have been rounded and, accordingly, are not the exact figures and may not total.
Unless the context otherwise requires or otherwise specified:
- "China" or "PRC" means the People's Republic of China.
- "CEPA" means the Closer Economic Partnership Arrangement between Hong Kong and Chinese Mainland entered into on October 27, 2004.
- "GEDC" means Guangzhou Railway (Group) Guangshen Railway Enterprise Development Company, a wholly owned subsidiary of our Parent Company.
- "GRGC" or "Parent Company" means Guangzhou Railway (Group) Company, our parent company.
- "Guangshen Railway", "Company", "we", "our" or "us" means Guangshen Railway Company Limited, a joint stock limited company incorporated in China with limited liability, and its subsidiaries on a consolidated basis.
- "Hong Kong" means the Hong Kong Special Administrative Region of the
PRC.
- "Macau" means the Macau Special Administrative Region of the PRC.
- "MOR" means the Ministry of Railways.
- "Pearl River Delta" means the area in and adjacent to the southern part of Guangdong Province, PRC, surrounding the mouth of the Pearl River and its lower reaches.
- "restructuring" means the restructuring conducted in connection with our initial public offering in 1996 during which we succeeded to the railroad and certain other businesses of our predecessor company and certain assets and liabilities of our Parent Company.
- "ton" means metric ton; and one ton is approximately 2,205 pounds in weight.
- "Yangcheng Railway Company" means Guangzhou Railway Group Yangcheng Railway Company, a wholly-owned subsidiary of our Parent Company.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
ITEM 3A. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated data relating to our consolidated balance sheets as of December 31, 2003 and 2004, and our consolidated statements of income, changes in equity and cash flows for each of the years ended December 31, 2002, 2003 and 2004 are derived from and are qualified by reference to our audited consolidated financial statements included elsewhere in this annual report and should be read in conjunction with "ITEM 5. Operating and Financial Review and Prospects". The following selected consolidated data relating to our consolidated balance sheets as of December 31, 2000, 2001 and 2002, and our consolidated statements of income, changes in equity and cash flows for each of the years ended December 31, 2000 and 2001 are derived from our previously published audited consolidated financial statements that are not included in this annual report.
The audited consolidated financial statements from which the selected consolidated financial data set forth below have been derived were prepared in accordance with International Financial Reporting Standards, or IFRS, and the information set forth below under "US GAAP data" have been reconciled to generally accepted accounting principles in the United States, or US GAAP, which differ in some material respects from IFRS. For a discussion of the principal differences between IFRS and US GAAP, see "Item 5G. Additional Information-Principal Differences between IFRS and US GAAP" and Note 31 to our audited consolidated financial statements included elsewhere in this annual report.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
---------- ---------- ---------- ---------- ---------- ----------
RMB RMB RMB RMB RMB US$(1)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
IFRS INCOME STATEMENT DATA:
Revenues(2) from railroad businesses
- Passenger......................... 1,278,213 1,471,895 1,903,782 1,790,204 2,259,671 272,250
- Freight........................... 567,176 585,616 530,776 526,382 611,807 73,712
---------- ---------- ---------- ---------- ---------- ----------
Subtotal............................ 1,845,389 2,057,511 2,434,558 2,316,586 2,871,478 345,962
Revenues(2) from other businesses..... 198,352 167,064 166,266 151,596 166,671 20,081
---------- ---------- ---------- ---------- ---------- ----------
Total revenues(2)..................... 2,043,741 2,224,575 2,600,824 2,468,182 3,038,149 366,043
Railroad operating expenses........... (1,355,870) (1,524,854) (1,809,215) (1,755,855) (2,241,821) 270,098
Other businesses operating expenses... (168,466) (145,610) (169,112) (149,614) (166,155) 20,020
---------- ---------- ---------- ---------- ---------- ----------
Profit from operations................ 519,405 554,111 622,497 562,713 630,173 75,925
Net profit............................ 492,089 533,495 557,083 511,762 567,484 68,373
Earnings per share.................... 0.11 0.12 0.13 0.12 0.13 0.016
Dividends declared per share.......... 0.12 0.10 0.10 0.10 0.105 0.01
Earnings per ADS ..................... 5.68 6.15 6.42 5.90 6.54 0.788
Diluted net income per share ......... - - - - - -
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YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
---------- ---- ---- ---- ---- ----------
RMB RMB RMB RMB RMB US$(1)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
IFRS BALANCE SHEET DATA (AT PERIOD END):
Working capital (excluding due from
and due to Parent Company)........... 1,463,073 1,581,054 1,592,040 1,935,979 2,076,207 250,145
Due from Parent Company................ 80,604 29,499 39,374 - - -
Due to Parent Company.................. - - - 37,230 24,617 2,966
Fixed assets........................... 7,074,907 7,031,040 6,798,280 6,952,878 6,973,279 840,154
Leasehold land payments................ 695,231 673,746 656,998 652,083 636,379 76,672
Total assets........................... 10,917,564 10,997,216 11,257,594 11,073,953 11,409,051 1,374,584
Equity................................. 10,020,683 10,120,623 10,244,151 10,322,358 10,420,574 1,255,491
Share capital, issued and outstanding,
RMB1.00 per value,
domestic shares - 2,904,250,000... 2,904,250 2,904,250 2,904,250 2,904,250 2,904,250 349,910
H shares - 1,431,300,000.......... 1,431,300 1,431,300 1,431,300 1,431,300 1,431,300 172,446
IFRS CASH FLOW STATEMENT DATA:
Net cash provided by operating
activities........................... 729,189 886,016 1,157,177 798,449 1,236,579 148,985
Net cash provided by/(used in)
investing activities................. (458,087) (430,425) 251,003 (375,469) (1,000,639) (120,559)
Net cash provided by/(used in)
financing activities................. (520,453) (420,137) (360,643) (433,666) (469,044) (56,511)
Purchase of fixed assets and payment
for construction-in-progress......... 564,759 551,508 553,337 339,208 310,179 37,371
Dividends paid to shareholders of the
Company.............................. 520,266 419,957 356,490 433,561 455,009 54,820
OTHER IFRS DATA:
Railroad transportation operating
income............................. 489,519 532,657 625,343 560,731 629,657 75,862
Other businesses operating income...... 29,886 21,454 (2,846) 1,982 516 62
CERTAIN US GAAP DATA
Operating income....................... 519,405 554,111 622,497 562,713 630,173 75,925
Net income............................. 533,248 574,654 598,242 544,528 600,250 72,320
Earnings per share(3).................. 0.12 0.13 0.14 0.13 0.14 0.017
Earnings per ADS....................... 6.15 6.63 6.90 6.28 6.92 0.834
Equity................................. 8,951,259 9,092,358 9,257,045 9,368,018 9,499,000 1,144,458
Fixed assets........................... 5,816,762 5,821,317 5,636,979 5,830,125 5,889,074 709,527
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(2) To better conform to "International Accounting Standards (IAS) 18 -- Revenue", our revenues stated in this annual report are stated before the deduction of business tax, although our revenues as presented in previously filed annual reports were stated after the deduction of business tax.
(3) The calculation of earnings per share is based on the net profit for the period attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the year.
We derive a majority of our revenue and incur most of our expenses in renminbi. In addition, we maintain our books and records in renminbi and our financial statements are prepared and expressed in renminbi. Solely for the convenience of the reader, this annual report contains translations of certain renminbi amounts into U.S. dollars and vice versa at RMB8.30 = US$1.00, the noon buying rate in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2004. These translations should not be construed as representations that the renminbi amounts could have been or could be converted into U.S. dollars at such rate or at all.
The noon buying rates for renminbi in New York City for cable transfers as
certified for customs purposes by the Federal Reserve Bank of New York were RMB
8.30 = US$1.00 on June 17, 2005.
The following table sets forth information concerning the noon buying rate in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York for the renminbi, expressed in renminbi per U.S. dollar, for the periods indicated:
NOON BUYING RATE
-------------------------------------------------------
PERIOD AVERAGE (1) HIGH LOW
------ ----------- ---- ------
(RENMINBI PER U.S. DOLLAR)
2000..................................... 8.2784 8.2799 8.2768
2001..................................... 8.2770 8.2786 8.2676
2002..................................... 8.2766 8.2800 8.2700
2003..................................... 8.2771 8.2800 8.2765
2004..................................... 8.2768 8.2774 8.2764
January 2005............................. 8.2765 8.2765 8.2765
February 2005............................ 8.2765 8.2765 8.2765
March 2005............................... 8.2765 8.2765 8.2765
April 2005............................... 8.2765 8.2765 8.2765
May 2005................................. 8.2765 8.2765 8.2765
June 2005 (through June17)............... 8.2765 8.2765 8.2765
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DIVIDENDS
On March 17, 2005, our board of directors approved a final dividend of RMB0.11 per share to our shareholders for the year ended December 31, 2004.
In accordance with our articles of associations, dividends for our domestic shares will be paid in renminbi while dividends for our H shares will be calculated in renminbi and paid in Hong Kong dollars. The exchange rate will be based on the average of the closing exchange rates for renminbi to Hong Kong dollars as announced by the People's Bank of China during the calendar week preceding the date on which the dividend is to be distributed. Dividends paid on our H shares for the year ended December 31, 2004 were converted at a rate of RMB1.00 = HK$0.94.
ITEM 3B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
ITEM 3C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
ITEM 3D. RISK FACTORS
RISKS RELATING TO OUR BUSINESS
WE FACE INCREASING COMPETITION, WHICH MAY ADVERSELY AFFECT OUR BUSINESS
GROWTH AND RESULTS OF OPERATIONS.
Our passenger and freight transportation businesses face intense competition from other means of road, air and water transportation. In our passenger transportation business, we
compete with the bus and ferry services operating within Hong Kong, Guangzhou, Shenzhen and elsewhere in our service region. We compete for passengers with bus and ferry services in terms of price, comfort, reliability, convenience, service quality, frequency of service and safety. In our freight transportation business, we primarily compete with water, truck and air transportation services operating within our service region. We compete for freight business with truck operators, shipping companies and airline companies on the basis of price, reliability, capacity, convenience, frequency of service, service quality, and safety. In addition, as the PRC government lifts its restrictions and control over foreign investments in China following China's entry into the World Trade Organization, or the WTO, for example, by allowing foreign participation and investment in railway operations, we may lose the monopoly status we currently enjoy in our service territory. Furthermore, the completion of the Wuhan-Guangzhou express railway, which is under construction, and the proposed high-speed Guangzhou-Shenzhen-Hong Kong express railway, may further increase the competition we face. Increased competition against us may adversely affect our revenues and results of operations. "See Item 4B. Business Overview--Competition" for additional information regarding our competition.
ANY SIGNIFICANT DECREASE IN THE OVERALL LEVELS OF BUSINESS, INDUSTRIAL, MANUFACTURING AND TOURISM ACTIVITIES WITHIN THE PEARL RIVER DELTA REGION AND ELSEWHERE IN CHINA, WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES AND RESULTS OF OPERATIONS.
The volume of freight and the number of passengers we transport are affected by the overall levels of business, industrial, manufacturing and tourism activities within the Pearl River Delta region, which is our main service region, and elsewhere in China, which is in turn affected by many factors beyond our control, such as applicable policies and regulations of the PRC government, perceptions regarding the attractiveness of investing or operating a business within our service region, consumer confidence levels and interest rate levels. Any significant decrease in the overall levels of passenger travel or freight transportation, whether due to an economic slowdown or other reasons, such as a natural disaster or a recurrence of the SARS epidemic, will have a material adverse effect on our revenues and results of operations. Following China's accession to the WTO, the policy advantages that Shenzhen currently enjoys due to its status as a special economic zone may be phased out, and its economic growth rate may not be sustained in the long run. Other coastal regions and ports in China may develop at a faster pace and become more competitive than Shenzhen. As a result, part of the freight currently imported or exported through ports in Hong Kong, Shenzhen or Guangzhou may be shipped through other ports in China, which will adversely affect our freight transportation business.
CHANGES IN FREIGHT COMPOSITION IN OUR FREIGHT TRANSPORTATION BUSINESS MAY
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Historically, our freight transportation revenue was derived mainly from the transportation of high-volume products, such as coal, iron ore, oil and steel, in which our railroad transportation services have an advantage over road transportation services, such as truck operators. As infrastructure and technology in the PRC improves, there is an increasing demand for more advanced technological products, such as computer components, which tend to be smaller and lighter. As many new technology products are compact and can be shipped by road or air, we face significant competition in the transportation of such low-volume, high-value
products. Changes in freight composition will affect the usage volume and pricing of our freight transportation services and may adversely affect our results of operations.
OUR RAILROADS CONNECT WITH THE RAILROADS OF OTHER OPERATORS AND ANY DISRUPTION IN THE OPERATION OF THOSE RAILROADS, OR OUR COOPERATION WITH OTHER OPERATORS, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATIONS.
Our railroads are an integral part of the PRC national railway network. Our railroads connect with the Beijing-Guangzhou line in the north, the Shenzhen-Kowloon rail line in the south, the Guangzhou-Maoming rail line in the west, and the Guangzhou-Meizhou-Shantou rail line in the east, all of which are owned and operated by other operators. See "Item 4A. History and Development of the Company - Service Territory" for additional information. Our train services use these other railroads to carry passengers and freight to locations outside of our service territory. The performance of our domestic long distance trains services and our Hong Kong through trains depends on the smooth operation of these railroads and our cooperation with the operators of these railroads. Any disruption in the operation of these railroads, or our cooperation with any one of these railroad operators, for any reason could have a material adverse effect on our business and results of operations.
ANY MATERIAL ADVERSE CHANGE TO OUR PREFERENTIAL INCOME TAX STATUS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
As a company located in the Shenzhen Special Economic Zone, we enjoy a preferential income tax rate of 15%, rather than the 33% income tax rate generally applicable to domestic companies in the PRC. Any material adverse change to our preferential income tax status could have a material adverse effect on our results of operations.
ANY CHANGES IN OUR RIGHT TO OWN AND OPERATE OUR BUSINESS AND ASSETS, OUR RIGHT TO PROFIT AND OUR RIGHT OF ASSET DISPOSAL AS PREVIOUSLY GRANTED BY THE MOR AND THE SATE COUNCIL OF THE PRC MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
We were granted certain rights by the MOR and the State Council of the PRC, or the State Council, with respect to certain aspects of our railroad businesses and operations, and also received legal clarification and confirmation of our asset ownership, corporate powers and relationships with service providers and other entities in the national railway system, in connection with our restructuring. These rights include the right to own and operate our business and assets, the right to profit and the right of asset disposal. Although these rights were granted to us indefinitely, we cannot assure you that these rights will not be affected by future changes in PRC governmental policies or regulation or that other railway operators will not be granted similar rights within our service region. If another railway operator is granted similar rights within our service region, the level of competition we face will increase significantly.
WE ARE CONTROLLED BY GUANGZHOU RAILWAY (GROUP) COMPANY, WHICH HAS
INTERESTS THAT MAY CONFLICT WITH THE BEST INTERESTS OF OUR OTHER SHAREHOLDERS.
Guangzhou Railway (Group) Company, or GRGC, owns approximately 67% of our issued share capital. This ownership percentage enables GRGC to elect our entire board of
directors without the concurrence of any of our other shareholders. Accordingly, GRGC is in a position to: (1) control our policies, management and affairs; (2) subject to applicable PRC laws and regulations and provisions of our articles of association, determine the timing and amount of dividend payments and adopt amendments to certain of the provisions of our articles of association; and (3) otherwise determine the outcome of most corporate actions and, subject to the requirements of the HKSE Listing Rules, cause us to effect corporate transactions without the approval of minority shareholders.
GRGC's interests may sometimes conflict with those of some or all of our minority shareholders. We cannot assure you that GRGC, as the controlling shareholder, will always vote its shares in a way that benefits our minority shareholders. In addition to its relationship with us as our controlling shareholder, GRGC by itself or through its affiliates, such as Yang Cheng Railway Company, GEDC, and Guang Mei Shan Railway Co., Ltd., also provides us with certain services, for which we have limited alternative sources of supply. The interests of GRGC and its affiliates as providers of these services to us may conflict with our interests. We have entered into service agreements, and our transactions with GRGC and its affiliates over the past three years have been conducted on open, fair and competitive commercial terms. However, we have only limited leverage in negotiating with GRGC and its affiliates over the specific terms of the agreements for the provision of these services as there are no alternate suppliers. See "Item 4B. Business Overview -- Suppliers and Service Providers" and "Item 7B. Related Party Transactions" for additional information regarding the services provided to us by our Parent Company and its subsidiaries.
WE HAVE VERY LIMITED INSURANCE COVERAGE.
We do not maintain any insurance coverage against third party liabilities. In addition, we do not maintain any insurance coverage for most of our property, for business interruption nor for environmental damage arising from accidents that occur in the course of our operations. As a result, we have to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our results of operations and financial condition.
WE COULD INCUR SIGNIFICANT COSTS FOR VIOLATIONS OF APPLICABLE
ENVIRONMENTAL LAWS AND REGULATION.
Our railroad operations and real estate ownership are subject to extensive national and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters, disposal of waste and noise control. Environmental liabilities may arise from claims asserted by adjacent landowners or other third parties. We may be required to incur significant expenses to remediate any violation of any violation of applicable environmental law and regulation.
RISKS RELATING TO OUR PROPOSED ACQUISITION AND A SHARE ISSUE
On November 15, 2004, we entered into an assets purchase agreement, or the Acquisition Agreement, with Yangcheng Railway Company to acquire the railway transportation business between Guangzhou and Pingshi and related assets, or the Acquisition. In order to finance such
acquisition, we have applied to the relevant PRC authorities for approval to allot no more than 2.75 billion A shares to be listed in China, or the A Share Issue. The proposed amount of the issuance represents approximately 63.43% of our existing issued share capital and approximately 38.81% of our issued share capital as enlarged by the issuance of A shares. Upon completion of the A Share Issue, our Parent Company will own approximately 41% of our issued and outstanding common shares, all of which are A shares, while institutional and public shareholders will own approximately 59% of our issued and outstanding common shares, including A shares, H shares and ADSs. See "ITEM 5. Operating and Financial Review and Prospects--Overview--Proposed Issue of A Shares, Very Substantial Acquisition and Continuing Connected Transactions" for additional information.
OUR PROPOSED ACQUISITION MAY NOT BE COMPLETED, AND A FAILURE TO COMPLETE THIS TRANSACTION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
The proposed Acquisition is conditioned upon the fulfillment of the following conditions:
- the formal approvals of relevant authorities or bodies in relation to the A Share Issue have been obtained;
- the A Share Issue has been completed and an amount of not less than 65% of the consideration for the Acquisition has been raised;
- the approvals of relevant government bodies responsible for the supervision and management of state-owned assets in relation to Yangcheng Railway Company's proposal on disposal of its state-owned assets have been obtained; and
- the approval of the National Development and Reform Committee in relation to the price determination for passenger and freight railway transportation services between Guangzhou and Pingshi has been obtained.
Except for the second condition listed above, which can be waived by us, none of the above conditions can be waived. If the above conditions are not fulfilled by November 15, 2006, the Acquisition Agreement will lapse and no party to the Acquisition Agreement will have any liability thereunder. We cannot assure you that the relevant PRC authorities would approve our proposed A Share Issue nor that we would be able to raise proceeds amounting to not less than 65% of the consideration for the Acquisition from such offering. Failure to complete the proposed Acquisition may have a material adverse effect on our business and operations.
WE CANNOT ASSURE YOU THAT THE PROPOSED ACQUISITION, IF CONSUMMATED, WILL
BENEFIT OUR BUSINESS AND RESULTS OF OPERATIONS AS WE EXPECTED.
We cannot assure you that the proposed Acquisition, if consummated, will benefit our business and results of operations as we expect. Upon completion of the proposed Acquisition, our railway will be extended from 147 kilometers to 481.2 kilometers. The proposed Acquisition will result in greater administrative burdens and operating costs and, to the extent financed with
debt, additional interest costs. We cannot assure you that we will be able to mange or integrate the acquired business successfully. The process of combining the business and railway related assets of Yangcheng Railway Company into our operation may be disruptive to our business and may cause an interruption of, or a loss of momentum in, our business as a result of the following factors, among others:
- loss of key employees or customers of the acquired business;
- possible inconsistencies in standards, controls, procedures and policies between us and acquired business and the need to implement company-wide financial, accounting, information and other systems;
- failure to maintain the quality of services that we have historically provided;
- the need to coordinate geographically diverse organizations; and
- the diversion of management's attention from our day-to-day business as a result of the need to deal with any disruptions and difficulties and the need to add management resources to do so.
These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, revenue enhancement and other benefits that we currently expect to result from the acquisition and the integration and may cause material adverse short- and long-term effects on our operating results and financial conditions.
GRGC MAY LOSE ITS CONTROLLING SHAREHOLDER STATUS, WHICH MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Upon completion of the proposed A Share Issue, GRGC's interests in our issued and outstanding common shares will decrease from 67% to no less than 41%. As a result, GRGC may lose its controlling shareholder status and may not be able to control our board of directors. Our current directors are all appointed by our GRGC. Change in our board of directors and related changes in our management may have a material adverse effect in our business and results of operations.
RISKS RELATING TO THE RAILWAY TRANSPORTATION INDUSTRY IN CHINA
EXTENSIVE GOVERNMENT REGULATION OF THE RAILWAY TRANSPORTATION INDUSTRY MAY LIMIT OUR FLEXIBILITY IN RESPONDING TO MARKET CONDITIONS, COMPETITION OR CHANGES IN OUR COST STRUCTURE.
We are subject to extensive PRC laws and regulations relating to the railway transportation industry. The MOR and other Chinese governmental authorities regulate pricing, speed, train routes, new railway construction projects, and foreign investment in the railway transportation industry. Any significant change in the relevant regulations of the PRC government is likely to have a material impact on our business and results of operations. In addition, our ability to respond to changes in our market conditions may be limited by those regulations set by the MOR and other Chinese governmental authorities.
RISKS RELATING TO THE PEOPLE'S REPUBLIC OF CHINA
Substantially all of our assets are located in China and substantially all of our revenue is derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China.
CHINA'S ECONOMIC, POLITICAL AND SOCIAL CONDITIONS, AS WELL AS GOVERNMENT
POLICIES, COULD AFFECT OUR BUSINESS.
As we are established, and operate substantially all of our businesses, in China, any changes in the political, economic and social conditions of the PRC or any changes in PRC governmental policies or regulations, including a change in the PRC government's economic or monetary policies or railway or other transportation regulations, may have a material adverse effect on our business and operations and our results of operations. The economic environment in the PRC differs significantly from the United States and many Western European countries in terms of its structure, stage of development, capital reinvestment, growth rate, level of government involvement, resource allocation, self-sufficiency, rate of inflation and balance of payments position. The PRC government's economic reform policies since 1978 have resulted in a gradual reduction in state planning in the allocation of resources, pricing and management of assets, and a shift towards the utilization of market forces. Although the PRC government is expected to continue its reforms, many of its economic and monetary policies are still being developed and refined. We cannot assure you that future changes in governmental policies or regulation will not have a material adverse effect on our business, operations or results of operations.
GOVERNMENT CONTROL OF CURRENCY CONVERSION MAY ADVERSELY AFFECT OUR
OPERATIONS AND FINANCIAL RESULTS.
Our books and records are maintained and our financial statements are prepared and presented in renminbi, which is not a freely convertible currency. All foreign exchange transactions involving renminbi must be transacted through banks and other institutions authorised by the People's Bank of China, or PBOC. The PBOC sets the exchange rates for renminbi in foreign exchange transactions. We receive substantially all of our revenues in renminbi. We need to convert a portion of our revenues into other currencies to meet our foreign currency obligations such as payment of dividends on our H shares and overseas equipment purchases. In addition, the existing foreign exchange limitations under PRC law could affect our ability to obtain foreign currencies through debt financing, or to obtain foreign currencies for capital expenditures or for distribution of dividends on our H shares.
FLUCTUATION OF THE RENMINBI COULD MATERIALLY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The value of the renminbi fluctuates and is subject to changes in China's political and economic conditions. Since 1994, the conversion of renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been based on rates set by the PBOC, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets. We receive our revenues from through train services in Hong Kong
dollars and receive other revenues in renminbi. Fluctuations in exchange rates may adversely affect the value, translated or converted into United States dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends payable on our H shares in foreign currency terms. Our financial condition and results of operations may also be affected by changes in the value of certain currencies other than the renminbi, in which our obligations are denominated. In particular, a devaluation of the renminbi is likely to increase the portion of our cash flow required to satisfy our foreign currency-denominated obligations. For further information on our foreign exchange risks and certain exchange rates, see "Item 3A. Selected Financial Data -- Exchange Rate Information" and "ITEM 11. Quantitative and Qualitative Disclosure About Market Risk -- Foreign Exchange Rate Risk." We cannot assure you that any future movements in the exchange rate of renminbi against the United Sates dollar or other foreign currencies will not adversely affect our results of operations and financial condition.
THE PRC LEGAL SYSTEM HAS INHERENT UNCERTAINTIES THAT COULD LIMIT THE LEGAL
PROTECTIONS AVAILABLE TO YOU.
As PRC laws and regulations dealing with business and economic matters are relatively new and still evolving, and because of the limited volume of published judicial interpretations and the non-binding nature of prior court decisions, the interpretation and enforcement of these law and regulations involve some uncertainty. In addition, because the PRC Company Law is different in certain important aspects from company laws in Hong Kong, United States and other common law countries and regions and because the PRC securities laws are still at an early state of development, you may not enjoy shareholder protections to which you may be entitled in Hong Kong, the United States or other jurisdictions.
ANY FUTURE OUTBREAK OF SEVERE ACUTE RESPIRATORY SYNDROME OR SIMILAR ADVERSE PUBLIC HEALTH DEVELOPMENTS IN MAINLAND CHINA MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In late 2002 and the first half of 2003, mainland China and certain other countries and regions experienced an outbreak of severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been contained. However, new individual cases of SARS have been reported after that in China and other countries and regions in Asia. Any future outbreak of SARS or similar adverse public health developments, such as Avian Flu, may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, an outbreak may severely restrict the level of economic activity in affected areas, which may in turn materially and adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of SARS or similar adverse public health developments would not have a material adverse effect on our financial condition and results of operations.
ITEM 4. INFORMATION ON THE COMPANY
ITEM 4A. HISTORY AND DEVELOPMENT OF THE COMPANY
OVERVIEW
We were established as a joint stock limited company under the Company Law of the PRC on March 6, 1996. Our legal name is [COMPANY NAME IN CHINESE], and its English translation is Guangshen Railway Company Limited. Our registered office is located at No. 1052 Heping Road, Shenzhen, Guangdong Province, The People's Republic of China, 518010. Our telephone number is (86-755) 2558-7920 or 2558-8146 and our fax number is (86-755) 2559-1480.
We are mainly engaged in the railway passenger and freight transportation business between Guangzhou and Shenzhen and certain long-distance passenger transportation services. We provide consolidated services relating to railway facilities and technology. We also engage in other businesses that are ancillary to our transportation business, such as retail sales of food, beverages and merchandise aboard our trains and in our stations, advertising, tourism and property leasing.
We operate the sole railroad, 147 kilometers long, between Guangzhou, the capital city of Guangdong Province, and Shenzhen, one of the original special economic zones of the PRC. The Guangzhou to Shenzhen railroad, which includes one regular speed rail line and two high speed rail lines, is an important component of the transportation infrastructure of southern China, and we are a leading provider of passenger and freight transportation services on the Guangzhou-Shenzhen route. Our railroad connects with the railroad from Shenzhen to Hong Kong, and we operate jointly with Kowloon-Canton Railway Corporation, or the KCR, passenger train services between Hong Kong and Guangzhou.
Our railroad is an integral part of the PRC national railroad system, with links to the other parts of the national railroad system as well as local railroad systems in southern China, including the Beijing-Guangzhou, Beijing-Jiujiang, Guangzhou-Maoming, Pinghu-Nantou, Pinghu-Yantian, and Kowloon-Guangzhou lines. Moreover, our railroad connects with the Huangpu and Xinsha ports in Guangzhou, and with the Yantian, Shekou, Chiwan and Mawan ports in Shenzhen. We are well equipped with various freight facilities and can effectively satisfy a wide range of different customer needs, including the transportation of whole and partial carload cargo, containers, special and regular cargo. We believe that railway transportation offers many advantages compared to other types of transportation in transporting medium and long-distance freight from southern China to other inland regions within mainland China.
Our railroad system is currently one of the most modern railroads in the PRC. It is equipped with state-of-the-art equipment and facilities, including high-speed electric trains. Several aspects of our technical performance have reached or are approaching international standards. Ours is one of the few rail lines in the PRC that operate high-speed passenger trains with speeds up to 200 kilometers per hour.
BACKGROUND AND RESTRUCTURING
The railroad system between Guangzhou and Shenzhen was part of the original "Canton-Kowloon" railroad, which began operation in 1911. In 1949, following the founding of the PRC, the railroad was divided into two sections, with the first linking Guangzhou and Shenzhen, and the second, across the Hong Kong border and separately owned, linking Luohu and the Kowloon peninsula in Hong Kong. The Guangzhou to Shenzhen railroad has been operated since 1949 by a sub-division of the Guangzhou Railway Administration, a predecessor to our Parent Company.
In 1979, our predecessor, in conjunction with the KCR, was engaged in the joint operation of through train passenger services between Guangzhou and Hong Kong.
In 1984, to exploit the rapid growth in the Pearl River Delta, the Guangshen Railway Company, our predecessor, was formed pursuant to the approval of the State Council as a state-owned enterprise administered by the Guangzhou Railway Administration. At that time, Guangshen Railway Company had only a single-line railroad. Since then, large capital expenditures have been made to expand and upgrade its facilities and services. In 1987, a second line was completed. In 1991, Guangshen Railway Company began the construction of a high-speed rail line and purchased high-speed locomotives and passenger coaches, which can provide passenger train services at speeds of more than 160 or more kilometers per hour. Guangshen Railway Company high-speed line was the first of its kind in China. Commercial operation of the high-speed trains commenced in December 1994.
We were established as a joint stock limited company on March 6, 1996 following the restructuring that was carried out to reorganize the railroad assets and related businesses of Guangshen Railway Company and certain of its subsidiaries. As part of the restructuring, 2,904,250,000 state legal person shares, par value RMB1.00 per share of Guangshen Railway were issued to our Parent Company, a state-owned enterprise under the MOR of the PRC. Under PRC law, these state legal person shares are deemed to be domestic shares which may be owned by or transferred to PRC entities or persons only.
We completed our initial public offering in May 1996. In this offering, we issued a total of 1,431,300,000 class H ordinary shares, par value RMB1.00 per share, or H shares. Our H shares are listed for trading on the Stock Exchange of Hong Kong Limited and our American depositary shares, or ADSs, each representing 50 H shares, are listed for trading on the New York Stock Exchange. As of December 31, 2004, approximately 67% of our issued and outstanding common shares were owned by our Parent Company, and the remaining 33% were owned by public shareholders. The Parent Company currently owns all of our issued and outstanding domestic shares. Our public shareholders own only H shares or ADSs, which may not be purchased or owned by domestic investors in the PRC.
GEDC, a state-owned enterprise established in the restructuring undertaken in connection with our initial public offering, assumed the operations and assets of the Guangshen Railway Company that were not transferred to us in the restructuring, such as employee housing, hospitals, schools and public security, and provides related services to us on a contractual basis since the 1996 restructuring. In the second half of 2004, all of the hospitals and schools originally vested in GEDC were transferred to the local government pursuant to applicable PRC
policies. As a result, GEDC no longer provides any education and hospital services to us under the contractual arrangements made upon our restructuring.
Since April 1, 1996, we have been able to set our own prices for our high-speed train services and to charge a premium over average national prices for our other passenger and freight train services. See "Item 4B. Regulatory Overview - Pricing" for a more detailed description of our pricing scheme.
SERVICE TERRITORY
Our rail line traverses the Pearl River Delta, an area which benefited early from the PRC economic reform policies that began in late 1970s. Throughout the 1980s and early 1990s, the economy of the Pearl River Delta, fueled by foreign investments, grew rapidly. It is currently one of the most affluent and fastest growing areas in China.
As of December 31, 2004, there were 26 stations situated on our rail line, providing passenger and freight transportation services for cities, towns and ports situated between Guangzhou and Shenzhen in the Guangzhou-Shenzhen corridor and Hong Kong (which we service in conjunction with the KCR). In addition to our Hong Kong passenger through train services in conjunction with the KCR, we also allow Hong Kong-bound freight trains of KCR to use our Guangzhou-Shenzhen railroad.
The Guangzhou-Shenzhen railroad is an integral component of the PRC national railway network, and provides nationwide access to passenger and freight traffic from southern China to other regions of mainland China as described below:
Northbound. In Guangzhou, our rail line connects with the Beijing-Guangzhou line, which is one of the major trunk lines linking southern China with Beijing and northern China. Another trunk line connecting northern and southern China, the Beijing-Hong Kong rail line, includes the section of our line from Dongguan to Shenzhen.
Southbound. Our line connects at Shenzhen with the rail line owned by the KCR that runs to Kowloon, Hong Kong.
Westbound. Our line connects with the Guangzhou-Maoming rail line operated by Sanmao Railway Company, a joint venture railroad of our Parent Company and the Guangdong provincial government that runs through the western part of Guangdong Province, connecting with other rail lines that continue on into the Guangxi Zhuang Autonomous Region, which provides access to southwestern China.
Eastbound. Our rail line intersects at Dongguan with the Guangzhou-Meizhou-Shantou rail line operated by Guangmeishan Railway Company, a company jointly established by our Parent Company, the Guangdong provincial government and other public investors. A section of this line forms, along with our Dongguan to Shenzhen segment, a part of the Beijing-Hong Kong rail line, which terminates in Kowloon, Hong Kong.
At Pinghu, our rail line connects with two local port lines: one of them, Pingnan Railway, principally services three ports located in western Shenzhen -- Shekou, Chiwan and Mawan --
and the other, Pingyan Railway, services Yantian port, an international deepwater port located in eastern Shenzhen. At the Huangpu and Xiayuan stations in Guangzhou, our line connects with Huangpu port and Xinsha port. Our rail line also connects with certain industrial districts, commercial districts and the facilities of many of our customers through spur lines, which are rail lines running off the main line that are used and typically financed by a freight customer or a group of freight customers and maintained by us for a fee. We believe that the customers connected to these spur lines and customers with goods that must be shipped through these regional ports are likely to utilize our services on a long-term basis.
ITEM 4B. BUSINESS OVERVIEW
BUSINESS OPERATIONS
Our principal businesses are railroad passenger and freight transportation, which generated 94.5% of our total revenues and 99.9% of our total operating income in 2004. In 2004, passenger transportation accounted for 74.4% of our total revenues, while freight transportation accounted for 20.1%. Our other businesses, which include the sale of food, beverages and merchandise aboard trains and in stations, accounted for 5.5% of our total revenues.
In 2004, due to continuous and rapid growth in the PRC economy, the expansion of regional economic cooperation in the Pearl River Delta and its adjacent areas, the gradual implementation of CEPA and the implementation of the "Relaxed Individual Travel" program for PRC tourists from the mainland to Hong Kong and Macau, there was strong demand for passenger and freight transportation services in our service region, which provided us with excellent development opportunities.
In 2004, our total revenues were RMB3,038.1 million, representing an increase of 23.1% from RMB2,468.2 million in 2003. Our revenues from passenger transportation service, freight transportation service and other businesses were RMB2,259.7 million, RMB611.8 million and RMB166.7 million respectively, accounting for approximately 74.4%, 20.1% and 5.5%, respectively, of our total revenues in 2004. In 2004, our profit attributable to shareholders was RMB567.5 million, representing an increase of 10.9% from RMB511.8 million in 2003.
The table below summarizes our railroad transportation revenues and volumes of traffic in each of the five years ended December 31, 2004:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
PASSENGER TRANSPORTATION
Total passenger revenues(1) (RMB millions)..... 1,278.21 1,471.90 1,903.78 1,790.20 2,259.67
Total passengers (millions).................... 34.95 38.84 39.78 37.86 46.01
Revenues(1) per passenger (RMB)(2)............. 36.57 37.90 47.86 47.28 49.11
Total passenger-kilometers (millions).......... 3,051.7 3,257.9 3,453.2 3,295.5 4,200.2
Revenues(1) per passenger-kilometer (RMB)(3)... 0.42 0.45 0.55 0.54 0.54
FREIGHT TRANSPORTATION
Total freight revenues(1) (RMB millions)....... 567.18 585.62 530.78 526.38 611.81
Total freight tons (millions).................. 28.73 29.01 27.58 27.58 34.20
Revenues(1) per ton (RMB)(4)................... 19.74 20.19 19.25 19.08 17.89
Total ton-kilometers (millions)................ 2,071.6 2,082.5 1,926.0 1,978.9 2,489.5
Revenues(1) per ton-kilometer (RMB)(5)......... 0.27 0.28 0.28 0.27 0.25
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(2) Revenues per passenger is calculated by dividing total passenger revenue by total passengers. Management believes that revenues per passenger is a useful measure for assessing the revenue levels of our passenger transportation business.
(3) Revenues per passenger-kilometer is calculated by dividing total passenger revenue by total passenger-kilometers. Management believes that revenues per passenger is a useful measure for assessing the revenue levels of our passenger transportation business.
(4) Revenues per tons is calculated by dividing total freight revenue by total freight tons. Management believes that revenues per tons is a useful measure for assessing the revenue levels of our freight transportation business.
(5) Revenues per ton-kilometer is calculated by dividing total freight revenue by total ton-kilometers. Management believes that revenues per ton-kilometer is a useful measure for assessing the revenue levels of our freight transportation business.
On November 15, 2004, we entered into an assets purchase agreement with Yangcheng Railway Company to acquire the railway transportation business between Guangzhou and Pingshi and related assets. In order to finance such acquisition, we have applied to the relevant PRC authorities for approval to allot no more than 2.75 billion A shares to be listed in China. The proposed amount of the issuance represents approximately 63.43% of our existing issued share capital and approximately 38.81% of our issued share capital as enlarged by the issuance of A shares. Under PRC law, these A shares will be deemed to be domestic shares which may be owned by or transferred to PRC entities or persons only. Upon completion of the proposed issue of 2.75 billion A shares, our Parent Company will own approximately 41% of our issued and outstanding common shares, all of which are A shares, while institutional and public shareholders will own approximately 59% of our issued and outstanding common shares, including A shares, H shares and ADSs. See "ITEM 5. Operating and Financial Review and Prospects--Overview--Proposed Issue of A Shares, Very Substantial Acquisition and Continuing Connected Transactions" for additional information.
PASSENGER TRANSPORTATION
Passenger transportation is our largest business segment, and accounted for 74.4% of our total revenues, and 78.7% of our railroad transportation revenues, in 2004. Our passenger train services can be categorized as follows:
- intercity high-speed express trains and regular-speed passenger trains between Guangzhou and Shenzhen;
- through trains between Hong Kong and Guangzhou; and
- domestic long-distance trains.
As of December 31, 2004, we operated 117 pairs of passenger trains per day (each pair of trains meaning trains making one round-trip between two points) of which:
- 64 pairs were high-speed express passenger trains operating between Guangzhou and Shenzhen (eight of which are standby, which means that such trains will only operate from Friday to Monday);
- two pairs were regular-speed passenger trains operating between Guangzhou and Shenzhen;
- 13 pairs were Hong Kong through-trains (including 11 pair of Hong Kong through-trains, one pair of through-train between Zhaoqing and Kowloon, and one through train that operates on alternating days either on the Beijing-Kowloon line or the Shanghai-Kowloon line); and
- 38 pairs were domestic long-distance passenger trains (including two pairs of long-distance passenger trains between Shenzhen and Yueyang and between Shenzhen and Beijing, respectively, and 36 pairs of domestic long-distance trains, operated by other operators but passed-through, originated or terminated on our Guangzhou-Shenzhen railroad).
The table below sets out passenger revenues and volumes for our Hong Kong through trains and domestic trains in each of 2002, 2003 and 2004:
PASSENGER REVENUES(1) PASSENGER VOLUME REVENUE(1) PER PASSENGER
------------------------ --------------------- ------------------------
2002 2003 2004 2002 2003 2004 2002 2003 2004
----- ---- ----- ---- ---- ---- ----- ---- ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(RMB MILLIONS) (MILLIONS) (RMB MILLIONS)
Guangzhou-Shenzhen Trains........... 1,005.8 913.4 1,152.5 17.3 16.0 20.3 58.1 57.0 56.9
Hong Kong through trains............ 344.0 322.4 436.9 2.2 2.0 2.9 156.4 160.0 151.2
Long-distance trains ............... 554.0 554.4 670.3 20.3 19.8 22.9 27.3 28.0 29.3
Combined passenger operations....... 1,903.8 1,790.2 2,259.7 39.8 37.9 46.0 47.8 47.3 49.1
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Guangzhou-Shenzhen Trains. In 2004, our passenger transportation services on the trains between Guangzhou and Shenzhen contributed most to our railroad passenger transportation revenues.
We divide our regular-speed train services and high-speed train services into different types based on the number of stops made by the train and the class of seating. Our train fares are determined on the basis of the types of services and the transportation distance.
The number of passengers travelling on our Guangzhou-Shenzhen trains increased by 26.5% from 16.0 million in 2003 to 20.3 million in 2004. The number of passengers travelling on our high-speed passenger trains between Guangzhou and Shenzhen increased by 29.4% from 15.2 million in 2003 to 19.6 million in 2004; while the number of passengers travelling on our regular-speed passenger trains between Guangzhou and Shenzhen decreased by 25.4% from 0.9 million in 2003 to 0.6 million in 2004. The revenues from our Guangzhou-Shenzhen trains increased by 26.2% from RMB913.4 million in 2003 to RMB1,152.5 million in 2004.
Through-Trains. We currently operate jointly with the KCR 11 pairs of high-speed through trains between Hong Kong and Guangzhou. We provide the trains and personnel for eight pairs of these train services, which KCR provide for three pairs. The through train services beyond Guangzhou to Foshan, Zhaoqing, Beijing and Shanghai are provided by Guangzhou Railway (Group) Company, Beijing Railway Administration and Shanghai Railway Administration. Revenues from these through trains on the Guangzhou-Hong Kong section are shared between KCR and us, in proportion to our track mileage for the through train services, with 81.2% accruing to us and 18.8% to KCR. In addition, we share all related costs with KCR at the same rate for the through train services.
Most of the passengers taking our Hong Kong through trains are from Hong Kong, Macau, Taiwan and foreign countries, and many are business travellers. As a result of the prices for our Hong Kong through train services, which are higher than the prices charged for our domestic train services, these through train services produce higher per-passenger revenues than our other passenger train services.
In 2004, approximately 2.9 million passengers travelled on the Hong Kong through trains, representing an increase of 43.4% from approximately 2.0 million in 2003. Our revenue from the operation of the Hong Kong through trains for 2004 was RMB436.9 million, representing a 35.6% increase from RMB322.3 million for 2003.
Domestic Long-distance Trains. As of December 31, 2004, we operated on a daily basis 38 pairs of domestic long-distance passenger trains on our rail line to cities in Guangdong, Hunan, Hubei, Jiangxi, Anhui, Liaoning, Shanxi, Fujian, Heilongjiang, Jilin, Zhejiang, Hebei, Henan, Guangxi and Shandong Provinces as well as cities to the north, such as Shanghai, Beijing and Tianjin. Since April 20, 2004, we have been operating a new "five fixed" (fixed location, fixed line, fixed time, fixed price and fixed schedule) train service from Shenzhen to Chengdu. In 2004, the number of passengers travelling on our long-distance trains were 22.9 million, representing an increase of 15.3% from 19.8 million in 2003. Revenues from our long-distance trains increased by 20.9% from RMB554.4 million in 2003 to RMB670.2 million in 2004.
High-Speed Trains. As of December 31, 2004, we operated on average a total of 64 pairs of inter-city high-speed passenger trains between Guangzhou and Shenzhen daily. Our high-speed trains are capable of running at 160 to 200 kilometers per hour, 33% to 67% faster than our regular-speed trains, which typically run at 120 kilometers per hour.
Our fleet of high-speed electric trains currently consists of one X-2000 high-speed passenger train, and eight leased, domestically-made "Blue Arrow" high-speed electric trains known in China as "Xin Shi Su," . The X-2000 train is an electric tilting train built in Sweden that can travel at speeds of up to 200 kilometers per hour.
MAJOR STATIONS. The following are the major train stations owned and operated by us as of December 31, 2004:
Guangzhou East Station. Our Guangzhou East Station services our train services between Guangzhou and Shenzhen and between Guangzhou and Hong Kong and provides a hub for long-distance trains to different locations within China. Our Guangzhou East Station is
connected to Lines 1 and 2 of the Guangzhou municipal subway. We believe that this connection has boosted and, with the anticipated operation of Line 3 of the subway system in the near future, will continue to promote, our passenger transportation business. As of December 31, 2004, the Guangzhou East Station handled on a daily basis 11 pairs of Hong Kong through trains, 66 pairs of Guangzhou-Shenzhen trains, 12 pairs of long-distance passenger trains between the Guangzhou East Station and other locations in China, including Beijing, Shanghai, Jiujiang, Shantou, Bengbu, Tianjin, Taiyuan, Nanchang, Wuhan, Yingtan, Harbin, Xiangfan, Qingdao, Xiamen, Shenyang and Macheng, and 17 pairs of passenger trains passing through the Guangzhou East Station. In 2004, the number of passengers travelling from Guangdong East Station was 12.3 million, while the number of passengers arriving at Guangdong East Station was 11.2 million.
Dongguan Station. Our intermediate station at Dongguan is the point of connection between our line and the neighboring Dongguan-Meizhou-Shantou rail line, and is also the point where our line intersects with the Beijing-Hong Kong rail line. Dongguan Station, by connecting our rail line to the Beijing-Hong Kong line, also facilitates passenger service between Kowloon and Zhaoqing. As of December 31, 2004, this station handled on a daily basis the transfer service for eight pairs of domestic long-distance passenger trains, 28 pairs of Guangzhou-Shenzhen high-speed passenger trains and two pairs of Guangzhou-Shenzhen regular-speed trains. Dongguan municipality is an area that has received substantial foreign investment. In 2004, the number of passengers travelling from Dongguan Station was 2.7 million, while the number of passengers arriving at Dongguan Station was 3.2 million.
Shenzhen Station. Our Shenzhen Station is located in the Shenzhen Special Economic Zone, close to the Luohu Station on the Guangzhou-Kowloon rail line. As this station is connected to the Shenzhen's subway system, which commenced operations on December 28, 2004, we believe that it will have a high utilization rate. In 2002, we introduced China's first computerized ticket hall in our Shenzhen Station. As of December 31, 2004, our Shenzhen Station handled on a daily basis 66 pairs of Guangzhou-Shenzhen passenger trains (including eight backup pairs) and 18 pairs of domestic long-distance passenger trains between Shenzhen and other locations in China, including Beijing, Changsha, Shaoguan, Wuchang, Meizhou, Shantou, Maoming East, Huangchuan, Zhengzhou, Fuzhou, Hankou, Shenyang, Huaihua and Jinjiang. In 2004, the number of passengers travelling from Shenzhen Station was 13.4 million, while the number of passengers arriving at Shenzhen Station was 13.0 million.
FREIGHT TRANSPORTATION
Revenue from our freight transportation accounted for 20.1% of our total revenues and 21.3% of our railroad transportation revenues in 2004. Our principal market for freight is domestic long-haul freight, originating and/or terminating outside the Guangzhou-Shenzhen corridor.
The majority of the freight we transport is high-volume, medium- to long-distance freight received from and/or transferred to other rail lines. Only a small percentage of the freight we transport both originates and terminates in the Guangzhou-Shenzhen corridor. We classify our freight business into three categories:
- inbound freight, which is primarily freight bound for the Pearl River Delta region unloaded at freight stations and spur lines connected to ports on our rail line or in Hong Kong;
- outbound freight, which is primarily northbound freight loaded at our train stations and spur lines connected to ports on our rail line or in Hong Kong; and
- pass-through freight, which refers to freight that travels on our rail line, but which do not originate or terminate from our rail line.
The total tonnage of freight we transported in 2004 was 34.2 million tonnes, representing an increase of 24.0% from 27.6 million tonnes in 2003. Revenues from freight transportation business in 2004 were RMB611.8 million, representing an increase of 16.2% from RMB526.4 million in 2003. Our outbound freight revenues increased by 28.8% in 2004, while our inbound freight revenues increased by 20.6% in 2004.
We serve a broad customer base and ship a wide range of goods in our freight transportation business. We are not dependent upon any particular customers or industries.
Freight Composition. We transport a broad range of goods, which can generally be classified as follows: construction materials, energy products, food products, chemicals, manufactured goods, containers and other goods. The majority of our inbound freight consists of raw materials and essential production inputs for manufacturing, industrial and construction activities, while the majority of our outbound freight consists of imported mineral ores as well as coal and goods produced or processed within our service territory, for customers throughout China and abroad.
The following table shows the composition of our freight volume by percentage for the three years ended December 31, 2004 (based on tons transported).
OUTBOUND FREIGHT INBOUND (AND PASS-THROUGH) FREIGHT
------------------------------------------ -----------------------------------
2002 2003 2004 2002 2003 2004
--------- ---- ------- ----- ---- ----
AS A PERCENTAGE OF TOTAL OUTBOUND FREIGHT AS A PERCENTAGE OF TOTAL INBOUND
(AND PASS-THROUGH) FREIGHT
Construction materials....... 33% 30% 23% 39% 37% 44%
Energy products.............. 32% 43% 50% 14% 14% 12%
Food products................ 6% 4% 5% 21% 21% 20%
Chemicals.................... 7% 6% 4% 10% 9% 10%
Manufactured goods........... 7% 4% 2% 5% 3% 3%
Containers................... 12% 10% 12% 7% 8% 8%
Other goods.................. 3% 3% 4% 4% 8% 3%
--- --- --- --- --- ---
Total........................ 100% 100% 100% 100% 100% 100%
=== === === === === ===
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Freight Yards, Container Yards and Warehouses. We own freight yards, container yards and warehouses, most of which are located at our Shenzhen North, Xiayuan, Huangpu, Zhangmutou, Dongguan, Shipai, Jishan, Pinghu South and Guangzhou East Stations. Of the freight yards that we own and operate, three handled freight exceeding 1.0 million tons in 2004. Our freight yard at Huangpu Station handled approximately 2.8 million tons, while Xiayuan Station handled approximately 6.7 million tons and Shenzhen North Station handled approximately 1.6 million tons, respectively, in 2004. In 2004, revenues from the operation of
our warehouses (including loading and unloading charges) and miscellaneous items amounted to RMB175.3 million, which accounted for 28.6% of our freight revenues for the year.
OTHER BUSINESSES
We engage in other businesses principally related to our railroad transportation business, including:
- sales of food, beverages, newspapers, magazines and other merchandise aboard our trains and in our stations;
- services in our stations, including operating restaurants, operating a travel agency and a hotel in our Shenzhen Station, providing kiosks and advertising boards in our stations for commercial advertising and leasing space to independent retailers; and
- other businesses, principally railroad-related construction.
Revenues from our other businesses in 2004 were RMB166.7 million, representing an increase of 9.9% from RMB151.6 million in 2003. Such increase was mainly due to the increase in passenger volume, which led to an increase in of revenues from sales of goods, food and beverages in our train stations and on board our trains.
The table below sets out the revenues for our other businesses, by categories of activity, in each of 2002, 2003 and 2004:
AS A PERCENTAGE OF TOTAL
REVENUES(1) REVENUES(1) FROM OTHER BUSINESSES
------------------------------- ---------------------------------
2002 2003 2004 2002 2003 2004
----- ----- ----- ---- ---- ----
(UNAUDITED) (UNAUDITED)
(RMB MILLIONS)
On-board and station sales............. 43.1 39.2 48.5 26% 26% 29%
Station services....................... 46.2 41.6 45.2 28% 28% 27%
Tourism, advertising and others........ 77.0 70.8 73.0 46% 46% 44%
----- ----- ----- ---- ---- ----
Total.............................. 166.3 151.6 166.7 100% 100% 100%
===== ===== ===== ==== ==== ====
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SEASONALITY OF OUR RAILWAY TRANSPORTATION BUSINESS
We do not experience any significant seasonality in our businesses. Historically, the first quarter of each year typically contributes the highest portion of our annual revenues, mainly because it coincides with the Spring Festival holidays when the Chinese people customarily travel from all over the country back to their hometowns. In addition, the New Year holidays, the Labour Day holidays and the National Day holidays in China are also high travel seasons. During these holidays, we usually operate additional passenger trains to meet the increased transportation demand and increase the fares of our passenger trains.
SALES
PASSENGER TRANSPORTATION
Our passenger tickets are currently sold primarily at ticket counters located in our train stations. Additionally, our tickets are sold in Hong Kong and major cities in the Guangdong Province through ticket agents, travel agents and hotels, at our usual prices plus nominal commissions. Substantially all of our ticket sales are made in cash.
On January 1, 2001, the MOR implemented a new settlement method for passenger transportation. This settlement method stipulates that all revenues from passenger train services (including revenues generated from luggage and parcel services) are considered passenger transportation revenues and belongs to the railway administration that operates that train. The railway administration in turn pays other railway administrations fees for the use of their rail lines, hauling services, in-station passenger services, water supply, electricity for electric locomotives and contact wire use fees, etc. This change in settlement method did not have a material impact on our passenger transportation revenues.
The implementation of the settlement method in 2001 changed the settlement of our revenues from all of our long-distance passenger train services, other than the Beijing-Hong Kong and Shanghai-Hong Kong trains. Since the implementation of this settlement method in 2001, the railway administrations operating the long-distance train services affected by the new settlement method pay us the following fees: (1) revenues from ticket prices that are higher than the PRC national railway standards due to our special pricing standards; and (2) other fees including those for railroad line usage, in-station passenger service, haulage service, power supply for electric locomotives, usage fees of contact wires and water supply. The settlement method implemented in 2001 did not affect the settlement of our revenues from the passenger trains between Guangzhou and Shenzhen, between Beijing and Hong Kong, between Shanghai and Hong Kong, between Zhaoqing and Hong Kong and the Hong Kong through trains.
Hong Kong through train tickets are sold in Guangdong Province through our own ticket outlets, as well as through various hotels and travel agents. In Hong Kong, these tickets are sold exclusively by the KCR. As KCR's sales network for these tickets is relatively limited, KCR has engaged the China Travel Service (HK) Ltd., or CTS, as the primary agent for such sales on a non-exclusive basis. CTS also operates bus services from Hong Kong to Guangzhou. In 2003, we established an online ticket sales system with KCR for the Hong Kong through trains.
FREIGHT TRANSPORTATION
Generally, we collect payment for our freight service directly from our customers. For inbound freight, we collect transportation fees incurred on our line from the receiving party prior to the release of the freight. For outbound freight, we collect the total transportation fees from the dispatching party, retain the portion allocated to us and remit the remainder to the other railroad operators on a monthly basis either directly or through a national settlement procedure administered by the MOR. These collection procedures also apply to freight transported to or from Hong Kong. Substantially all payments for inbound and outbound freight are settled in cash.
For pass-through freight, payments are collected at the originating stations, and allocated portions for the use of our rail line are remitted to us through the national settlement procedure administered by the MOR. We generally receive such funds within a month after the service is provided.
Freight customers in the Guangzhou-Shenzhen area deal directly with us or use shipping agents. In general, freight cars must be booked as part of the national ordering process which requires the booking to be made approximately one month in advance. As a practical matter, we have been able to meet demands for outbound freight transportation services on a shorter notice.
In January 2005, the MOR modified the settlement method on the income from railway freight transportation. Pursuant to the new settlement methods, starting from January 1, 2005, all freight transportation fees relating to post parcels and luggage, containers and special goods shall be collected by Zhongtie Parcels Courier Company Limited, Zhongtie Container Transportation Company Limited and Zhongtie Special Goods Transportation Company Limited, or collectively the Professional Transportation Companies. The Professional Transportation Companies shall pay railway usage fees to relevant railway companies, including us. Prior to January 1, 2005, we charged freight transportation fees for these post parcels and luggage based on the categories of goods and distance of transportation; while after January 1, 2005, we collect railway usage fees from the Professional Transportation Companies. Although the modifications in the settlement method will change our structure of freight transportation income, we believe that the modifications will not affect our revenues from freight transportation significantly.
COMPETITION
We are the sole railway service provider on the Guangzhou-Shenzhen corridor; therefore, we do not face any direct competition from other railway service providers within our service territory. However, in areas where our railroad connects with lines of other railway companies, such as in the Guangzhou area, where our railroad connects with the Beijing-Guangzhou Line, and in the Dongguan area, where our railroad connects with the Guangzhou-Meizhou-Shantou Line, we face competition from the railway companies operating in these areas. We also face competition from the providers of a variety of other means of transportation within our service region.
With respect to passenger transportation, we face competition from bus services, which are conveniently available between Guangzhou and Hong Kong and between Guangzhou and Shenzhen. Bus fares are lower than the fares for our high-speed passenger train services. Furthermore, buses can offer added convenience to passengers by departing from or arriving at locations outside their central terminals, such as hotels. However, train services generally offer greater speed, safety and reliability than bus services. In addition, since the implementation of our "As-Frequent-As-Buses" Train Project in October 2001, our high-speed train services and through train services have enabled us to compete more effectively with bus operators in terms of speed and frequency. We also compete to a lesser extent with commercial air and sea hovercraft passenger transportation services operating between Guangzhou and Hong Kong.
With respect to freight transportation, we face significant competition from trucks transportation in the medium- and short-distance freight transportation market as the expressway and highway networks in our service region and neighboring areas have increasingly improved. By comparison, in the long-distance freight transportation market, we offer many advantages compared to truck transportation due to the higher cost of truck transportation, susceptibility of truck transportation to traffic conditions and a scarcity of heavy duty trucks. Our freight transportation also compete with water transportation. Although water transportation is competitive in terms of price, we believe that water transportation subjects goods to greater risks of loss and damage due to the multiple handling processes required. In addition, our freight transportation is more competitive in terms of speed compared to water transportation. As air freight is very expensive, we consider that market to be very different from the ones in which we compete. Most long-distance freight in China is still transported by rail.
EQUIPMENT, TRACKS AND MAINTENANCE
As of December 31, 2004, we owned 12 diesel high-speed locomotives, five high-speed electric locomotives, 18 shunting locomotives, one high-speed electric passenger train, 84 semi-high-speed passenger coaches, 41 regular-speed passenger coaches and 112 long-distance express passenger train coaches.
The freight cars we use are all leased from the MOR, to which we pay uniform rental fees and depreciation fees based on the national standards set by the MOR. The amounts of such usage fees and depreciation charges we paid to the MOR in 2002, 2003 and 2004 were approximately RMB57.3 million, RMB58.9 million and RMB65.5 million, respectively.
From September 2000, we began to lease eight "Blue Arrow" high-speed electric train-sets from Guangzhou Zhongche Railway Rolling Stock Sales and Service Company Limited, or Guangzhou Zhongche, to facilitate the development of our "As-Frequent-As-Buses" Train Project. We paid the lessor RMB104.2 million, RMB104.2 million and RMB103.2 million in 2002, 2003 and 2004, respectively, under the lease. This lease agreement is due to expire in March 2006. We plan to purchase new high-speed electric train-sets in 2005. We will decide whether to renew the lease agreement with Zhongche based on the progress of our plans to purchase new trains. We did not purchase or lease any new material equipment in 2004.
Our repair and maintenance facility, located near our Shipai passenger vehicle maintenance facility near Guangzhou East Station, services the high-speed passenger coaches and locomotives we own or lease. This facility currently performs general maintenance and routine repairs on our equipment. Major repairs and overhauls are performed by manufacturers or qualified railway administrations or plants.
We believe that our existing tracks and equipment meet the needs of our current business and operations. Most of the rails and ties on our main lines have been installed within the last seven years, and are maintained and upgraded on an ongoing basis as required. In 2002, we replaced 27 sets of wooden movable center switches with 19 sets of cement movable center switches to improve safety and stability. In 2003, we replaced a whole section of steel rail amounting to 38 kilometers, 29 sets of wooden moveable center switches with 23 sets of cement moveable center switches, 1042 meters of separate steel bars and 1926 pieces of separate
wooden crossties to sustain safety and stability of our railway. In 2004, we replaced 77 kilometers of heavily worn-out tracks and upgraded 88 kilometers of electrified catenary network. In addition to that, we upgraded some power projects in the Shenzhen North Station to accommodate changes to our train routes and speed acceleration projects.
SUPPLIERS AND SERVICE PROVIDERS
We purchase our coaches and locomotives, as well as most other railway
equipment, directly from China Northern Locomotive & Rolling Stock Industry
(Group) Corporation, China Southern Locomotive & Rolling Stock Industry (Group)
Corporation and China Railway Materials and Supplies Corporation, all of which
are also state-owned enterprises. We may also purchase equipment from foreign
vendors or other domestic suppliers. We are not materially dependent upon any
overseas suppliers.
We lease from our Parent Company locomotives and rolling stock that are used in our transportation operations. Our Parent Company also services these locomotives and rolling stock under contracts which stipulate fees based on a cost plus profit formula. The profit portion is fixed for a 10-year term of the relevant contract at 8% of costs. Costs include all actual costs related to providing and servicing the locomotives and rolling stock. Because such costs are affected by inflation, we are subject to inflationary risks in connection with our payment obligations under these contracts. Our Parent Company and some of its subsidiaries, such as Yangcheng Railway Company and Guangmeishan Railway Company, have similar agreements with us to provide services and assistance with respect to our railroad operations. In addition, GEDC provides medical and health care services, public security, education and housing for our employees and their families under a contract and in exchange for fee payments. In the second half of 2004, all of the hospitals and schools originally vested in GEDC were transferred to the local government pursuant to applicable PRC policies. As a result, GEDC no longer provides any education and hospital services to us under the contractual arrangements made upon our restructuring. In 2004, the total amount of these payments we made to our Parent Company and its subsidiaries accounted for 6.62% of our railroad business operating costs for the year. See " Item 7B. Related Party Transactions."
Under the Rules Governing the Listing of Securities on the Hong Kong Exchange, or the HKSE Listing Rules, transactions between us and our connected persons constitute connected transactions and such transactions are normally subject to reporting, announcement and/or shareholders' approval unless otherwise waived by the Stock Exchange of Hong Kong. Under certain waivers granted by the Stock Exchange of Hong Kong in connection with our original listing of H shares in May 1996, our independent non-executive directors review and certify annually that these contracts are entered into on normal commercial terms that are fair and reasonable to us. The above transactions are exempted from the strict compliance of the requirements under the HKSE Listing Rules in relation to connected transactions, subject to certain conditions set forth in the waiver letter issued by the Stock Exchange of Hong Kong.
The electricity we use, including electricity used for our lines, is supplied through various entities under the jurisdiction of the Guangdong provincial power bureau on normal commercial terms. In 2003 and 2004, we paid approximately RMB89.9 million and RMB106.9 million, respectively, in electricity charges.
Our five largest customers accounted for less than 30% of our revenue and our five largest suppliers accounted for less than 30% of our purchases in 2004.
REGULATORY OVERVIEW
As a joint stock limited company with publicly traded shares, we are subject to regulation by the PRC securities regulatory authorities with respect to our compliance with PRC securities laws and regulations. We are also subject to industry regulation by the MOR within the overall framework of the PRC national railway system.
NATIONAL RAILWAY SYSTEM
Railroads in the PRC fall largely into three categories: state-owned railroads, jointly owned railroads and local railroads. State-owned railroads are invested by the central government of the PRC and are managed directly by the MOR. The state-owned railway system comprises over 70% of all rail lines, including all trunk lines. Jointly owned railroads are jointly invested and operated by the central government of the PRC, the local government and other foreign or domestic investors. Local railroads consist of regional lines usually within provincial or municipal boundaries that have been constructed under the sponsorship of local governments or local enterprises to serve local needs. The state-owned railway system operates as a nationwide integrated system under the supervision and management of the MOR. Although the MOR does not operate other railroads, it provides guidance, coordination, supervision and assistance with respect to industry matters to such other railroads. The MOR's responsibilities include the centralized coordination of train routing and scheduling nationwide, planning of freight shipments and freight car allocations, overseeing equipment standardization and maintenance requirements, and financial oversight and revenue clearing throughout the national railway system.
Prior to March 18, 2005, the MOR divided the national railway system into 15 regions, each overseen and operated by a separate railway administration, or group companies. Ten of these 15 administrations were further subdivided on a geographical basis into 41 railway sub-administrations, or general companies. On March 18, 2005, the MOR issued a notice under which all general companies were dissolved and three new group companies were established. As a result, the number of group companies increased to 18. Group companies are directly responsible for the coordination and supervision of operations carried out by train stations.
TRANSPORT OPERATIONS
The transport operations of the PRC national railway system are organized under the centralized control and management of the MOR. In order to promote efficient utilization of the railroad network nationwide, the MOR directly manages and coordinates traffic flow on national trunk lines and through any connection points, where two rail lines operated by different companies connect to each other, in the system. Based on route capacity, available equipment and national priorities, the MOR allocates to the 18 group companies authority to make routings on trunk lines, allocates numbers and types of freight cars to the group companies and specifies requirements to dispatch empty freight cars to designated locations in order to facilitate freight car circulation within the national railway system. Within the allocations set by the MOR, each group companies manages and coordinates traffic within its own jurisdiction.
Our passenger and freight operations that involve long-distance routing beyond our own lines, such as the routing of freight trains to Shanghai, are conducted, in general, pursuant to quota allocations from our Parent Company based on the quota allocations our Parent Company received from the MOR. The plans and schedules for our passenger and freight services that are conducted solely on our own lines are determined by ourselves; while our passenger and freight services that run beyond our own lines are subject to overall planning and scheduling of our Parent Company and/ or the MOR.
Since March 1996, the MOR and our Parent Company have accorded us substantially greater latitude in our transportation operations. In particular, we were granted sufficient autonomy over passenger services on our own line, including autonomy over speed, frequency and train car mix. Pursuant to this authority, we have implemented a strategy of scheduling more high-speed trains, running shorter passenger trains more frequently, and adjusting the train schedules on our line to meet consumer demand. On October 21, 2004, we successfully launched our "As-Frequent-As-Buses" Train Project, which provides intercity express train services. As of December 31, 2004, the total number of intercity express trains running daily between Guangzhou and Shenzhen increased from 63 pairs in 2003 to 64 pairs, while the total number of regular speed passenger trains was reduced from three pairs in 2003 to two pairs. We currently have 38 pairs of long-distance trains and 13 pairs of through trains.
Where our service runs beyond our own line, clearance by and coordination with our Parent Company is necessary. To the extent that we operate long-distance services beyond our Parent Company's jurisdiction, they are subject to coordination and clearance by the MOR. In addition, in order to enable our Parent Company and the MOR to allocate freight cars and control traffic going through connection points, we are required to provide our Parent Company with prior written notice, on a monthly basis, of the number and types of freight cars we will require, as well as the number of our freight trains that will go through particular connection points. Furthermore, we must still carry out special shipping tasks, such as emergency aid and military and diplomatic transport, as directed by the MOR or our Parent Company. Revenues from military and diplomatic transport generally account for less than 1% of our total transportation revenues. Emergency aid transport is required only during periods of rare natural disasters declared by the PRC government, and is provided free of charge.
PRICING
In general, the MOR is responsible for preparing a proposal for the baseline pricing standards for the nationwide railway system with respect to freight and passenger transportation. Such proposed pricing standards will take effect after being approved by and/or filed with relevant PRC government authorities.
Pursuant to relevant approvals from the MOR and other relevant PRC government authorities, we have broad discretion to adjust and determine our service price. With respect to our freight transportation services within our own lines, we may set our prices within a range between 50% to 150% of national price levels. With respect to our passenger transportation services, we may set the prices for our regular speed Guangzhou-Shenzhen trains within a range
between 25% to 225% of national price levels, and may freely determine the prices for our high-speed express trains between Guangzhou and Shenzhen. In addition, we set the prices for our Hong Kong through trains in consultation with KCR, our business partner.
ENVIRONMENTAL PROTECTION
We believe that we are in material compliance with all applicable PRC national and local environmental protection laws and regulations. We have not been fined or cited for any activities that have caused environmental damages. We have six wastewater treatment facilities used for purposes of treating wastewater generated from cleaning of special cargo freight cars, locomotives, coaches and from residential use. We pay regular fees to local authorities for the discharge of waste substances. In 2004, our environmental protection-related expenses were approximately RMB 0.49 million.
INSURANCE
Pursuant to applicable PRC regulations, we are liable for the compensation to passengers for body injury arising from accidents to the limit of RMB 60,000/person, including transportation business liability compensation amounting to RMB 40,000/person. With respect to loss of or damage to baggage, parcels and freight, our customers may elect to purchase insurance administered by the Ministry of Railways for up to their declared value. Passengers who do not elect to purchase insurance in respect of their baggage and/or parcels may nevertheless recover up to RMB15 for each kilogram of damaged baggage and/or parcels. Similarly, freight transport customers who elect not to purchase insurance may recover up to RMB2,000 for each ton of damaged freight if insured by weight.
We do not currently maintain any insurance coverage with third party carriers against third party liabilities. Consistent with what we believe to be the customary practice among railway operators in the PRC, we do not maintain insurance coverage for our property and facilities (other than for our automobiles), for business interruption or for environmental damage arising from accidents on our property or relating to our operations. As a result, in the event of an accident or other event causing loss, destruction or damage to our property or facilities, causing interruption to our normal operations or causing liability for environmental damage or clean-up, we will have to cover losses and damages out of our own pockets.
We maintain retirement insurances and medical insurances for our employees in accordance with applicable insurance laws and regulations in Guangzhou and Shenzhen, as applicable. In addition, we have taken out work-related personal injury insurance policies and child-bearing insurances for our employees.
ITEM 4C. ORGANIZATIONAL STRUCTURE
The following table lists the significant subsidiaries of Guangshen Railway Company Limited as of June 15, 2005:
COUNTRY OF PERCENTAGE OF INTEREST
NAME INCORPORATION HELD BY GUANGSHEN RAILWAY
----------------------------------------------------------- ------------- -------------------------
DIRECTLY HELD BY THE COMPANY
Guangzhou East Station Dongqun Trade and Commerce Service PRC 100%
Company
Shenzhen Fu Yuan Enterprise Development Company PRC 100%
Shenzhen Guangshen Railway Civil Engineering Company PRC 100%
Shenzhen Guangshen Railway Travel Service Ltd. PRC 100%
Shenzhen Jian Kai Trade Company PRC 100%
Shenzhen Jing Ming Industrial & Commercial Company Limited PRC 100%
Shenzhen Railway Station Travel Service Company(i) PRC 75%
Shenzhen Longgang Pinghu Qun Yi Railway Store Loading and
Unloading Company PRC 55%
Dongguan Changsheng Enterprise Company PRC 51%
Shenzhen Guangshen Railway Electric Section Service Limited PRC 100%
Shenzhen Railway Station Passenger Services Company Limited PRC 100%
INDIRECTLY HELD BY THE COMPANY
Shenzhen Nantie Construction Supervision Company PRC 100%
Shenzhen Guangshen Railway Economic and Trade Enterprise
Company PRC 100%
Shenzhen Railway Property Management Company Limited PRC 100%
Shenzhen Yuezheng Enterprise Company Limited PRC 100%
Shenzhen Road Multi-modal Transportation Company Limited PRC 60%
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ITEM 4D. PROPERTY, PLANT AND EQUIPMENT
We occupy a total area of approximately 11.2 million square meters.
We own all of the buildings and facilities on our premises in Guangdong Province. We have freely transferable land use rights for terms ranging from 36.5 to 50 years, terminating between 2031 and 2045, in respect of the land upon which our buildings, facilities and rail line are located. Pursuant to relevant PRC regulations currently in effect, these land use rights are renewable at the end of their terms upon execution of relevant documentation and payment of applicable fees.
Railroad operators typically require substantial land use rights for track, freight and maintenance yards, stations and related facilities. The availability of convenient rail transportation generally enhances the value of land along a rail line. We have not engaged and do not have any current plans to engage in commercial development of any of our land use rights for use other than in connection with our existing businesses. We do not at present intend to contribute capital to engage in any land development projects in the future. However, we may contribute land use rights not otherwise being fully utilized by us for equity stakes in these projects if we believe these opportunities are economically viable. Any development projects will require approval from PRC government authorities responsible for regulating land development.
We have 26 train stations, of which the Guangzhou East Station is the largest, occupying an area of 402,400 square meters.
For additional information regarding our property, plant and equipment, see "Item 4B. Business Overview-Equipment and Track Maintenance" and Note 13 to our audited financial statements included elsewhere in this annual report.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
This discussion and analysis should be read in conjunction with our consolidated financial statements contained elsewhere in this annual report. The revenues provided in this part are set out the deduction of business tax. Our audited consolidated financial statements are prepared in accordance with International Financial Reporting Standards, which differ in certain material respects from United States Generally Accepted Accounting Principles. For a discussion of the differences that affect Guangshen Railway, see Note 31 to our audited consolidated financial statements.
OVERVIEW
Our principal businesses are railroad passenger and freight transportation between Guangzhou and Shenzhen and certain long-distance passenger transportation services. We also operate the Hong Kong through trains under a cooperative arrangement with the KCR in Hong Kong. Our key strategic focus in recent years has been the provision of high-speed passenger train services in the Guangzhou-Shenzhen corridor. In addition to our core railroad transportation business, we also engage in other businesses that complement our core businesses, including on-board and station sales, restaurant services, as well as advertising and tourism.
In 2004, there was a significant increase in both passenger travel and freight transportation in our service region due to (i) continuing economic growth in the PRC, including in the Guangdong Province and Hong Kong, (ii) the ongoing implementation of CEPA, (iii) the implementation of the "Relaxed Individual Travel" program for PRC tourists from the mainland to Hong Kong and Macau and (iv) our continuous improvement in our "As-Frequent-As-Buses" train services and seasonable increase, in our train stops and service frequency. Our results of operations for the full year achieved overall growth from 2003.
For the year ended December 31, 2004, our total revenues were RMB3,038.1 million, profit attributable to shareholders was RMB567.5 million, and earnings per share were RMB0.13. Railroad business revenues accounted for 93.6%, 93.9% and 94.5% of our total revenues in 2002, 2003 and 2004, respectively.
Passenger transportation business is our most important business. In 2004, we continued to enhance the operation of the Guangzhou-Shenzhen high speed passenger trains and The Canton-Kowloon through trains, improve our transportation capacity, increase the operation of standby trains during holidays, increase the frequency of stopping at intermediary stations, refurbish our passenger stations for the convenience of passengers, and enhance our service quality to attract more passengers. In 2004, the total number of passengers was 46.0 million, representing an increase of 21.5% from 2003; passenger transportation revenues were RMB2,259.7 million, representing an increase of 26.2% from 2003.
During 2004, our freight transportation business achieved overall growth due to (i) a substantial increase in demand for fuel and raw materials as a result of significant growth in the PRC economy, (ii) an increase in overall demand for transportation services, (iii) the Chinese government's large-scale crackdown on oversize and overloaded trucks on highways, (iv) the implementation of the New Road Traffic Safety Law, (v) the enhanced marketing measures in
our freight transportation business, and (vi) the increase in our transportation capacity. We transported a total of 34.2 million tonnes of freight in 2004, representing an increase of 24.0% from 2003. Freight transportation revenues in 2004 were RMB611.8 million, representing an increase of 16.2% compared to 2003.
Revenues from our other businesses were RMB166.7 million in 2004, representing an increase of 9.9% from 2003.
In 2004, in order to enhance the management of our contracts, we implemented the Measures of Contract Management. Pursuant to certain amendments to the HKSE Listing Rules and in accordance with the relevant requirements of the U.S. Sarbanes-Oxley Act of 2002, we amended our Audit Committee Charter. To regulate the corporate actions and professional ethics of our senior management, we adopted the Code of Ethics for the Senior officers. To meet applicable securities regulations in the PRC relating to our proposed application for the issuance of A shares, we amended certain articles in our Articles of Association, and formulated the Working Regulations for Independent Directors, the Decision Making System Concerning Connected Transactions, and the System for Shareholders' General Meeting System. Such amendments and rules will take effect if the proposed issuance and listing of our A shares are completed.
PROPOSED ISSUE OF A SHARES, VERY SUBSTANTIAL ACQUISITION AND CONTINUING CONNECTED TRANSACTIONS
On November 15, 2004, we entered into the Acquisition Agreement with Yangcheng Railway Company for the acquisition by us of the railway transportation business between Guangzhou and Pingshi, a city on the border between Guangdong Province and Hunan Province, currently operated by Yangcheng Railway Company and the assets and liabilities relating to such business. The consideration of the Acquisition will be RMB10,264,120,700, subject to certain adjustments stipulated in the Acquisition Agreement. In order to finance the Acquisition, we intend to issue and allot up to 2.75 billion A shares and use the proceeds from the A Share Issue to pay the consideration of the Acquisition. We have submitted relevant application documents to relevant authorities for approval of the A Share Issue. Pursuant to the HKSE Listing Rules, the Acquisition constitutes a very substantial acquisition. As Yangcheng Railway Company is a wholly-owned subsidiary of our Parent Company, the Acquisition also constitutes a connected transaction. In anticipation of the A Share Issue and the Acquisition, we entered into various agreements with each of Yangcheng Railway Company and our Parent Company in respect of certain continuing connected transactions. Such agreements will take effect upon the completion of the Acquisition and will thereafter replace all existing connected transaction agreements relating to the same categories of transactions.
We made an announcement in respect of the above matters on November 15, 2004 and also sent a circular to our shareholders on December 5, 2004. The circular contained details relating to the A Share Issue, the proposed amendments to the Articles of Association, the Acquisition and the continuing connected transactions, a letter from our independent board committee to our independent shareholders containing their recommendation, and a letter from our independent financial adviser to our independent board committee and our independent shareholders containing its advice, etc. We held our domestic shareholders' class meeting, H shares shareholders' class meeting and extraordinary general meeting on December 30, 2004 to
approve related matters. We submitted our application proposal relating to the A Share Issue to the China Securities Regulatory Commission, or CSRC, on December 31, 2004.
The Acquisition Agreement is conditioned upon the fulfillment of, among other things, the following conditions:
1. the formal approvals of relevant authorities or bodies in relation to the A Share Issue have been obtained;
2. the A Share Issue has been completed and an amount of not less than 65% of the consideration of the Acquisition has been raised;
3. the approvals of relevant government bodies responsible for the supervision and management of state-owned assets in relation to Yangcheng Railway Company's proposal on disposal of its state-owned assets have been obtained; and
4. the approval of the National Development and Reform Committee in relation to the price determination for passenger and freight railway transportation services between Guangzhou and Pingshi has been obtained.
Save for the condition numbered 2 above, which can be waived by us, none of the above conditions can be waived. If the above conditions are not fulfilled within two years from the date of signing of the Acquisition Agreement, November 15, 2004, the Acquisition Agreement will lapse and no party will have any liability thereunder. In the event that any party rescinds the Acquisition Agreement for whatever reason after the A Share Issue has been completed, we will retain the proceeds from the A Share Issue as general working capital. See Exhibit 4.1 to this report for additional information.
As of the date of this report, none of the above conditions have been fulfilled or waived. It is difficult to estimate when the A Share Issue will be completed as it is subject to the market conditions and policies of the CSRC.
ITEM 5A. RESULTS OF OPERATIONS
PRINCIPAL FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Economic Development in the Pearl River Delta Region and the PRC. Our passenger transportation services on the trains between Guangzhou and Shenzhen contribute the majority of our passenger transportation revenue. Accordingly our results of operations relating to passenger transportation are closely and directly affected by the performance of our passenger transportation services between Guangzhou and Shenzhen, which is influenced by the economic development in the Pearl River Delta region. The level of economic activities in the Pearl River Delta region, including the economic cooperation among Hong Kong, Macau and mainland China, affects the number of business people travelling in this region. In addition, the average income levels of residents in this region and elsewhere in the PRC affects the number of the tourists departing from or arriving at our train stations. The majority of the freight we transport is large-volume, medium- to long-distance freight received from and/or transferred to other railway lines. Economic development in the PRC, including but not limited to the Pearl River Delta region, determines the market demand for such goods as coal, iron ore, steel and therefore indirectly affects the market demand of freight train transportation service.
Economic Cooperation between Hong Kong and Mainland China. The second most important source of our passenger transportation revenue is the through trains services between Shenzhen and Hong Kong. As the prices for our Hong Kong through trains are higher than the prices charged for our domestic train services, these through trains services produce higher per-passenger revenues than our other passenger train services. Most of our passengers taking our Hong Kong through trains are from Hong Kong and Macau, and many are business travellers. The economic cooperation between Hong Kong and mainland China affects the number of our through train passengers and will impact our results of operations.
Competitive Pressure from other Means of Transportation. Sales for our passenger transportation services are also affected by the competitive pressure from other means of transportation, such as the automobile, bus, ferry and airplane services. For example, the fast growth in the number of privately owned vehicles and a higher penetration of bus services affect the number of train passengers travelling short distances; and any significant decrease in the air transportation prices affects the number of train passengers travelling long distances. Our sales of the freight transportation services are also affected by the competition from other means of transportation, such as water, truck and freight air transportation services. The Chinese government's large-scale crackdown on oversize and overloaded trucks on highways and the implementation of the New Road Traffic Safety Law in 2004 led to the increase of the cost in the truck transportation and thus enhanced our competitiveness.
PRC Policies. We enjoy certain preferential policies granted by the PRC government. For example, as a company located in the Shenzhen Special Economic Zone, we enjoy a preferential income tax rate of 15%, rather than the 33% income tax rate generally applicable to domestic companies in the PRC. In addition, we are allowed to be more flexible in setting the price for both the passenger transportation and the freight transportation as compared to other domestic railroad operators. Material changes in the policies of the PRC government that affect such preferential treatments will impact our results of operations.
REVENUES
In 2004, our total revenues were RMB3,038.1 million, representing an increase of 23.1% from RMB2,468.2 million in 2003. Revenues from our passenger transportation service, our freight transportation service and our other businesses accounted for 74.4%, 20.1% and 5.5%, respectively, of our total revenues in 2004. Revenues from our passenger transportation service and our freight transportation service accounted for 78.7% and 21.3%, respectively, of our revenues from our railroad transportation businesses in 2004.
Passenger transportation service. Passenger transportation remains our most important business. As of December 31, 2004, we operated 117 pairs of passenger trains daily, representing an increase of five pairs from the number in operation as of December 31, 2003. There were 64 pairs of high-speed passenger trains between Guangzhou and Shenzhen, representing an increase of one pair compared to 2003; two pairs of regular-speed passenger trains between Guangzhou and Shenzhen, representing a decrease of one pair compared to 2003; 13 pairs of Hong Kong Through Trains, representing an increase of two pairs and 38 pairs of long-distance passenger trains, an increase of three pairs compared to 2003.
In 2004, our total number of passengers was 46.0 million, representing an increase of 21.5% from 37.9 million in 2003. Our revenue from passenger transportation was RMB2,259.7 million, representing an increase of 26.2% from RMB1,790.2 million in 2003.
The following table sets forth our revenues from passenger transportation and the number of our passengers for the three years ended December 31, 2004:
YEAR ENDED DECEMBER 31, CHANGE IN 2004 FROM
---------------------------------- -------------------
2002 2003 2004 2003
--------- --------- --------- ----
Revenue from passenger
transportation (RMB thousands)............ 1,903,782 1,790,204 2,259,671 26.2%
Total passengers (thousands).................. 39,776 37,861 46,012 21.5%
Revenue per passenger (RMB)................... 47.86 47.28 49.11 3.9%
Total passenger-kilometers (millions)......... 3,453.20 3,295.50 4,200.2 27.5%
Revenue per passenger-kilometer (RMB)......... 0.55 0.54 0.54 -
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In 2004, we made the following adjustments to the prices of our passenger transportation services: (1) during the Spring Festival, we adjusted the passenger fares of different classes of our long-distance domestic train services; and (2)during the New Year holidays, the Spring Festival holidays, the Labour Day holidays and the National Day holidays, we increased the fares of our high-speed passenger trains and regular-speed passenger trains between Guangzhou and Shenzhen by RMB5 per trip journey.
Freight transportation. The total tonnage of freight transported by us in 2004 was 34.2 million tonnes, representing an increase of 24.0% from 27.6 million tonnes in 2003. In 2004, in order to attract more freight resources, we continued to offer price discounts for freight transportation of steel, coal, corn, beverage, container, rice and plastic as in 2003. Our revenues from freight transportation business were RMB611.8 million, representing an increase of 16.2% from RMB526.4 million in 2003.
- In 2004, our outbound freight tonnage was 8.2 million tonnes, representing an increase of 27.5% from 6.5 million tonnes in 2003. Our outbound freight revenues were RMB113.4 million, representing an increase of 28.8% from RMB88.0 million in 2003. The increase in outbound freight tonnages in 2004 was mainly due to (i) the economic growth in mainland China which increased the demand for energy and raw materials, such as coal, ore and petroleum imports, etc, and in turn led to greater demand for freight transportation services; (ii) the severe crackdown on oversize and overloaded trucks on highways by the PRC government in 2004, and the implementation of the Road Traffic Safety Law, which led to an increase in the costs of road transportation; as a result, part of the freight previously transported by road shifted to railway transportation; (iii) the operation of additional container trains from Dongguan to Kowloon and the "5 fixed" (fixed locations, fixed line, fixed time, fixed price and fixed schedule) freight trains, from Pinghu South to Chengdu East and other locations led to a significant increase in the number of container transported by us; and (iv) the end of the SARS epidemic, which adversely affected the freight transportation business last year.
- In 2004, our inbound and pass-through freight tonnages were 26.0 million tonnes, representing an increase of 22.9% from 21.1 million tonnes in 2003. Our inbound and pass-through freight revenues were RMB323.1 million in 2004, representing an increase of 20.6% from RMB267.8 million in 2003. The increase in inbound and pass-through
freight tonnages was mainly due to (i) the rapid economic growth in the PRC, including the Pearl River Delta region, which created great demand for raw materials, such as steel and cement; (ii) the recovery of the Hong Kong economy, and the increased volume of Chinese exports, which led to a large increase in the demand for freight transportation; and (iii) the Chinese government's crackdown on oversize and overloaded trucks on highways, which led to a shift of part of truck freight to railway transportation.
- In 2004, our revenues from storage, loading and unloading and other miscellaneous items were RMB175.3 million, representing an increase of 2.8% from RMB170.5 million in 2003. The increase was mainly due to the significant increase in the total tonnage of freight we transported, which offset the effects of certain downward adjustments of fares for some of our customers and some categories of freight, which we implemented to attract more business.
The following table sets forth our revenues from freight transportation and the volumes of commodities we shipped for the three years ended December 31, 2004:
YEAR ENDED DECEMBER 31, CHANGE IN 2004 FROM
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2002 2003 2004 2003
------- ------- ------- ----
Revenue(1) from freight transportation
(RMB thousands)............................ 530,776 526,382 611,807 16.2%
Total freight tons (thousands of tons)........... 27,583 27,584 34,199 24.0%
-Revenues from outbound freight transportation... 97,178 88,042 113,421 28.8%
-Revenues from inbound and
pass-through transportation................ 255,777 267,844 323,108 20.6%
-Revenues from storage, loading and unloading
and other miscellaneous items............. 177,821 170,496 175,278 2.8%
Revenue(1) per ton (RMB)......................... 19.24 19.08 17.89 (6.2%)
-Outbound freight tonnage........................ 7,266 6,466 8,241 27.5%
-Inbound and pass-through freight tonnage........ 20,317 21,118 29,958 22.9%
Total ton-kilometers (millions).................. 1,926.0 1,978.9 2,489.5 25.8%
Revenue(1) per ton-kilometer (RMB)............... 0.28 0.27 0.25 (7.4%)
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In 2004, we made the following adjustments to the prices of our freight transportation services: (1) in accordance with the slight increase in the national price levels for railway fright transportation, we increased the prices of our freight transportation services slightly; and (2) we offered certain price discounts to some categories of freight to maintain existing business and attract new freight business.
Other Businesses. Our other businesses mainly consist of sales of goods and food, advertising and tourism services on board and in stations. Revenues from other businesses in 2004 were RMB166.7 million, representing an increase of 9.9% from RMB151.6 million in 2003. Such increase was mainly due to the increase in passenger volume, which in turn increased revenues from sales of goods, food and beverages in our train stations and on board our trains.
The table below sets forth a breakdown of our revenues from the different categories of other businesses for the three years ended December 31, 2004:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2003 2004
------- ------- -------
(RMB THOUSANDS)
On-board and station sales(1)............................. 43,112 39,217 48,496
Station services(1)....................................... 46,212 41,610 45,206
Tourism, advertising and others(1)........................ 76,942 70,769 72,969
------- ------- -------
Total(1)............................................. 166,266 151,596 166,671
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(1) To better conform to "International Accounting Standards (IAS) 18 -- Revenue", our revenues stated in this annual report are stated before the deduction of business tax, although our revenues as presented in previously filed annual reports were stated after the deduction of business tax.
OPERATING EXPENSES
In 2004, our total operating expenses were RMB2,408.0 million, representing an increase of 26.4% from RMB1,905.5 million in 2003. The following table sets forth, as a percentage of our railroad revenues, the principal operating expenses associated with our railroad businesses for 2002, 2003 and 2004:
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2003 2004
------- ------- -------
Railroad businesses revenues(1) (RMB millions)............... 2,434.6 2,316.6 2,871.5
Labor and benefits........................................... 15% 15% 17%
Equipment leases and services................................ 18% 19% 16%
Materials and supplies....................................... 8% 10% 9%
Repair costs, excluding materials and supplies............... 4% 4% 8%
Depreciation (and amortization of leasehold land payments)... 16% 13% 12%
General and administrative expenses.......................... 5% 6% 7%
Fee for social services...................................... 2% 3% 3%
Others....................................................... 4% 5% 4%
Operating ratio(2)........................................... 73% 75% 78%
Railroad businesses operating margin......................... 27% 25% 22%
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(2) Total railroad operating expenses as a percentage of railroad businesses revenues.
Railway Operating Expenses. Our total railway operating expenses increased by 27.7% from RMB1,755.9 million in 2003 to RMB2,241.8 million in 2004, as follows:
- Business tax. Our business tax in 2004 was RMB83.7 million, representing an increase of 76.0% from RMB47.6 million in 2003. The increase was mainly due to the substantial increase in revenues from passenger and freight transportation in 2004. In addition, we were granted an exemption from business tax on our revenue from passenger transportation between May 1, 2003 and September 30, 2003 due to a special measure implemented by the PRC government in 2003 as a result of the SARS epidemic, which significantly reduced our business tax in 2003.
- Labor and benefits. In 2004, our labor and benefits expenses amounted to RMB492.6 million, representing an increase of 41.7% from RMB347.6 million in 2003. The increase was mainly due to the increase in our passenger and freight volume, which led to a corresponding increase in the number of our employees, and related salaries and welfare expenses. Our employees' salaries and welfare expenses were lower than usual in 2003 due to the decrease in the number of employees and the average salary of our employees resulted from the impact of the SARS epidemic.
- Materials and supplies. Our materials and supplies expenses consist mainly of fuel, water and electricity expenses. In 2004, our materials and supplies expenses amounted to RMB245.5 million, representing an increase of 13.2% from RMB217.0 million in 2003. The increase was mainly due to: (i) increases in the prices of oil and electricity, which increased the costs of the fuels and electricity used by our locomotives and vehicles; and (ii) increased consumption of materials and supplies due to the operation of additional high-speed passenger trains between Guangzhou and Shenzhen, the Hong Kong through trains and additional passenger trains during the Spring Festival.
- Depreciation. Our depreciation expenses of fixed assets increased by 15.3% from RMB290.0 million in 2003 to RMB334.5 million in 2004, mainly due to an increase in our fixed assets.
- Repair. Our repair expenses increased by 141.3% from RMB89.6 million in 2003 to RMB216.3 million in 2004, primarily due to (i) the replacement of worn-out high-speed rails; (ii) an increase in the number of trains and vehicles that needed overhaul; and (iii) the further refurbishment of our Guangzhou East Station, our Shenzhen Station and a number of passenger stations along our line.
- Equipment leases and services. Our expenses on equipment leases and services mainly consist of railway line usage fees, train hauling fees and train leasing fees paid to other railway administrations. In 2004, our expenses relating to equipment leases and services amounted to RMB452.2 million, representing an increase of 3.3% from RMB437.7 million in 2003. This was mainly due to the operation of additional high-speed passenger trains and Hong Kong through trains, and the operation of additional long-distance passenger trains during peak travel seasons, such as the Spring Festival holidays and Golden Week holidays, which resulted in an increase in railway line usage fees and train hauling fees. Leasing fees paid by us to the MOR for transportation trucks also increased due to the increase in the volume of freight we transported.
- Social services. Our social services fees in 2004 were RMB84.6 million, representing an increase of 35.3% from RMB62.6 million in 2003. The increase was mainly due to the subsidies amounting to RMB 12.19 million which was paid to GEDC pursuant to relevant PRC government policies when the hospitals and schools owned and operated by GEDC were transferred to local government in the second half of 2004. As a result, GEDC no longer provides any education and hospital services to us under the contractual arrangements made upon our restructuring.
- General and administrative. Our general and administration expenses increased by 41.3% from RMB134.7 million in 2003 to RMB190.3 million in 2004. This was mainly due to: (i) the payment of medical insurance fees for all of our employees, and a one-time payment of medical insurance premium for our retired employees, in accordance with certain government policies implemented to reform the medical insurance system in the PRC; and (ii) an increase in our provision for bad debt associated with our deposit held by Zeng Cheng City Li Cheng Credit Cooperative, or Li Cheng, which was overdue and not recovered.
- Other expenses. Our other expenses in 2004 were RMB126.3 million, representing an increase of 11.4% from RMB113.4 million in 2003. This was mainly due to an increase in communication services fees and various surcharges for production.
PROFIT FROM OPERATIONS
Our profit from operations increased by 12.0% from RMB562.7 million in 2003 to RMB630.2 million in 2004 due to the increase in our total revenues.
TAXATION
As we are registered and established in the Shenzhen Special Economic Zone, our railroad businesses are subject to income tax at a rate of 15%. According to relevant tax regulations, our other businesses and our subsidiaries are subject to income tax at the rate of either 15% or 33%, depending on the location of incorporation. In addition, a member of our subsidiaries engaged in other businesses are Sino-foreign joint ventures which are entitled to full exemption from the PRC income tax for two years and a 50% reduction in the next three years starting from the first profit-making year, after offsetting available tax losses carried forward from prior years. Our income tax expense was RMB98.4 million in 2004, representing an effective tax rate of 14.8% (compared to 15.4% in 2003) and an increase of RMB5.0 million compared to RMB93.4 million in 2003.
NET PROFIT
Our consolidated net profit increased by 10.9% from RMB511.8 million in 2003 to RMB567.5 million in 2004.
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
REVENUES
In 2003, our total revenues were RMB2,468.2 million, representing a decrease of 5.1% from RMB2,600.8 million in 2002. Revenues from our passenger transportation service, our freight transportation service and our other businesses accounted for 72.6%, 21.3% and 6.1% of our total revenues in 2003 respectively. Revenues from our passenger transportation service and our freight transportation service accounted for 77.3% and 22.7%, respectively, of our revenues from our railroad transportation businesses in 2003.
Passenger transportation service. Due to the impact from the SARS epidemic, our revenues from passenger transportation declined during the first half of 2003. We operated more trains and increased the frequency of stopping at intermediary stations to attract more passengers following the end of the SARS epidemic. We also worked on the integrated refurbishment of our passenger stations, such as Guangzhou East Station, Shenzhen Station and Dongguan Station, to improve our public image. Furthermore, we expanded our ticket network by opening more ticket offices at Guangzhou Station and other stations along the Guangzhou-Shenzhen route. We also made slight adjustments to our fares during peak periods and took other steps to improve our service quality and enhance our market efforts. In 2003, the total number of our passengers was 37.9 million, representing a decrease of 4.8% when compared to that of 2002; our passenger transportation revenues were RMB1,790.2 million, representing a decrease of 6.0% from that of 2002.
Freight transportation. During 2003, despite the impact from SARS on our freight transportation business and competition from other means of transportation such as highway and water transportation, we transported a total of 27.6 million tonnes of freight, representing an increase of 1,000 tonnes when compared to that of 2002. We believe that this increase resulted from our marketing efforts in our freight transportation business and our relationships with ports, mines and other corporates, which enabled us to maintain existing large volume freight and capture new freight transportation business. Our freight transportation revenues in 2003 were RMB526.4 million, representing a slight increase of 0.1% when compared to that of 2002.
- Our outbound freight revenues decreased by 9.4% from RMB97.18 million in 2002 to RMB88.04 million in 2003. This decrease in outbound freight transportation revenue was mainly due to the influence of SARS, which led to a decrease in the supply of some categories of goods (such as aero-fuel etc.) that accounted for large proportions of our outbound freight. Improvements in the road and water transportation networks and the increasing number of Chinese ports opening to countries outside China also reduced the amount of freight transported by rail. Following the end of the SARS epidemic, we enhanced marketing efforts on our freight transportation business and offered discounts to certain major customers and some categories of freight to maintain existing and attract new freight business. Following the end of the SARS epidemic, the Chinese economy recovered rapidly and demands for energy and raw material increased significantly. Increased charges for water and road transportation also contributed partly to a recovery in railway freight transportation business. All of these factors reduced the overall decrease of our outbound freight business in 2003.
- Our inbound and pass-through freight revenues increased by 4.7% from RMB255.8 million in 2002 to RMB267.8 million in 2003. This increase was mainly due to the growth in demand for railway transportation resulting from the growth of the PRC economy and increased charges for road and water transportation, which offset of the adverse influence of SARS in 2003. Furthermore, the completion of the construction of the second railway track between Beijing and Jiujiang led to a resumption of the inbound and pass-through freight previously interrupted by the construction.
- Our revenues from storage, loading and unloading and other miscellaneous freight services decreased by 4.1% from RMB177.8 million in 2002 to RMB170.5 million in 2003. This decrease was mainly due to a decrease in outbound freight, the discounts that
we offered to certain customers and for some categories of freight to enhance the competitiveness of our freight transportation services, and reduced charges for our storage, loading and unloading services.
Other Businesses. Our other businesses mainly consist of sales of goods and food, advertising and tourism services on board our trains and in our stations. Our revenues from other businesses in 2003 were RMB151.6 million, representing a decrease of 8.8% from RMB166.3 million in 2002. This decrease was mainly due to a decrease in our passenger volume and in consumption by passengers on board our trains and in our stations due to the SARS epidemic. In addition, revenues from our leases and advertising decreased due to the refurbishment of our passenger stations such as Guangzhou East Station, Shenzhen Station and Dongguan Station.
OPERATING EXPENSES
In 2003, our total operating expenses were RMB1,905.5 million, representing a decrease of 3.7% from RMB1,978.3 million in 2002.
Railway Operating Expenses. Our total railway operating expenses decreased by 2.9% from RMB1,809.2 million in 2002 to RMB1,755.9 million in 2003, as follows:
- Business Tax. Our business tax in 2003 was RMB47.6 million, representing a decrease of 35.6% from RMB73.9 million in 2002. The decrease was partly due to the decrease in revenues from passenger transportation in 2003 as a result of the impact of the SARS epidemic. In addition, we were granted an exemption from business tax on our revenue from passenger transportation between May 1, 2003 and September 30, 2003 due to a special measure implemented by the PRC government in 2003 as a result of the SARS epidemic, which significantly reduced our business tax in 2003.
- Labor and benefits. In 2003, our labor and benefits expenses amounted to RMB347.6 million, representing a decrease of 7.0% from RMB373.8 million in 2002. This decrease in our labor and benefits expenses was mainly due to a decrease in the bonuses we pay based on our results of operations. The decrease in such bonuses also led to a decrease in the overall costs of our welfare benefits.
- Materials and supplies. Our materials and supplies expenses consist mainly of fuel, water and electricity expenses. In 2003, our material and supplies expenses amounted to RMB217.0 million, representing an increase of 13.0% from RMB192.1 million in 2002. This increase was mainly due to an increase in the prices of diesel oil and other fuels used by locomotives, which was caused by a rise in the prices of petroleum products. Our consumption of water and electricity also increased significantly because of the additional ventilation systems and disinfection equipments we installed in our stations and on board our trains and an increase in the frequency of the cleaning and disinfecting of public areas during the SARS period. In addition, the operation of the additional Hong Kong through-trains and the high-speed passenger trains between Guangzhou and Shenzhen also increased our consumption of materials, water and electricity.
- Depreciation. In 2003, depreciation expenses relating to our fixed assets were RMB290.0 million, representing a decrease of 13.6% from RMB335.5 million in 2002. This decrease was mainly due to an extension of the estimated useful life of a portion of our fixed assets. We re-estimated the useful life and the depreciation rate of part of its fixed assets in 2003 based on the experience and maintenance program established by our management and engineering personnel, which decreased depreciation expenses relating to our fixed assets in 2003.
- Repair. In 2003, our repair expenses were RMB89.6 million, representing a decrease of 12.5% from RMB102.4 million in 2002. This decrease was mainly due to a decrease in the repair expenses relating to our buildings in 2003. We also undertook the repair work of some locomotives and vehicles formerly outsourced to other factories. Completion of the improvement work at passenger stations along the Guangzhou Shenzhen route in 2002 also contributed to a decrease in our related expenses in 2003.
- Equipment leases and services. Our expenses on equipment leases and services mainly consist of railway line usage fees, train hauling fees and train leasing fees paid to other railway administrations. In 2003, our expenses on equipment leases and services were RMB437.7 million, representing an increase of 0.9% from RMB433.9 million in 2002. This increase was mainly due to the operation of additional Hong Kong through-trains and the high-speed passenger trains between Guangzhou and Shenzhen in 2003. We also leased more trucks from the MOR in 2003, resulting in an increase in the leasing fees we paid to the MOR.
- Social services. These fees relate to services provided to our employees, including health care and education and to services relating to passenger safety and security. In 2003, our fees for social services were RMB62.6 million, representing an increase of 9.0% from RMB57.4 million in 2002. This increase was mainly due to the additional medical and sterilization services we implemented during the SARS epidemic.
- General and administrative. Our general and administration expenses were RMB134.7 million in 2003, representing an increase of 8.8% from RMB123.8 million in 2002. This increase was mainly due to a growth in payment for pensions. The pensions were calculated based on the aggregate amount of our employees' salaries for the previous year. As the aggregate amount of our employees' salaries in 2002 was higher than those in 2001, our expenses for pensions in 2003 increased.
- Other expenses. In 2003, our other expenses amounted to RMB113.4 million, representing an increase of 11.9% from RMB101.3 million in 2002.
PROFIT FROM OPERATIONS
Our profit from operations decreased by 9.6% from RMB622.5 million in 2002 to RMB562.7 million in 2003 due to a decrease in our total revenues.
TAXATION
Our income tax expense was RMB93.3 million in 2003, representing an effective tax rate of 15.4% and a decrease of RMB11.0 million compared to RMB104.3 million in 2002. The main reason for the decrease is an exemption from business tax granted by the PRC government on our revenue from passenger transportation between May 1, 2003 and September 30, 2003 pursuant to a special measure implemented as a result of the SARS epidemic.
NET PROFIT
Our consolidated net profit decreased by 8.1% from RMB557.1 million in 2002 to RMB511.8 million in 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our audited consolidated financial statements have been prepared in accordance with IFRS. Our principal accounting policies are set out in Note 2 to our audited consolidated financial statements. IFRS requires that we adopt the accounting policies and estimation techniques that are most appropriate in the circumstances for the purpose of giving a true and fair view of our results and financial condition. We based our estimates and judgments on historical experience and on various other assumptions we deem reasonable under relevant circumstances. However, different policies, estimation techniques and assumptions in critical areas could lead to materially different results, in particular, with respect to fixed assets, receivables, provision and impairments discussed in the following paragraphs.
FIXED ASSETS
The railway industry is capital intensive. Under IFRS, fixed assets are initially recorded at cost less accumulated depreciation and impairment loss. Cost represents the purchase price of the asset and other costs incurred to bring the asset into existing use, and subsequent to the initial recognition, fixed assets are stated at cost or valuation less accumulated depreciation and impairment losses. Independent valuations, on a market value basis or depreciated replacement cost basis when there is no evidence of market value for such an item, are performed at least every five years or sooner if considered necessary by the directors. In the intervening years, the directors review the carrying values of the fixed assets and an adjustment is made where there has been a material change. Repairs and maintenance are charged to our income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset.
Estimation of the useful lives of assets that are long-lived as well as their salvage value requires significant management judgments. Depreciation is calculated using the straight-line method to write off the cost or revalued amount, after taking into account the estimated residual value of 4% to 10% of cost, of each asset over its estimated useful life.
Our management reassessed the estimated useful lives and depreciation rates of fixed assets periodically. The assessment was based on the experience and maintenance program established by our management and engineering personnel, current operations and potential changes in technology, personnel, estimated salvage value of the assets, and industry regulations. The estimated useful lives of our fixed assets are as follows:
Buildings 25 to 40 years Leasehold improvements over the lease terms Track, bridges and service roads 55 to 100 years Locomotives and rolling stock 20 years Communications and signaling systems 8 to 20 years Other machinery and equipment 7 to 25 years |
Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.
RECEIVABLES
Receivables are carried at original invoice amount less the provision made for impairment of these receivables. A provision for impairment of receivables is established when there is an objective evidence that we will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers.
Other receivables are also assessed for incollectibility when the circumstances indicate that we might not be able to collect all amounts due according to the original terms of receivables.
IMPAIRMENTS
If circumstances indicate that the net book value of an asset or investment may not be recoverable, this asset may be considered "impaired", and an impairment loss may be recognized in accordance with IFRS 36 "Impairment of Assets". We review the carrying amounts of long-lived assets periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. We test these assets for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the estimated recoverable amount. The amount of impairment loss is the difference between the carrying amount of the asset before the reduction and the estimated recoverable amount. The recoverable amount is the greater of the estimated net selling price and the value in use. It is difficult to precisely estimate selling prices because quoted market prices for our assets are often not readily available. In determining the value in use, we discount cash flows that we expect the asset to generate to their present value. Determining cash flows that we expect an asset to generate requires significant judgment relating to the expected level of sales volume, selling prices and the amount of operating costs.
CONTINGENCY
An accrual for a loss contingency is established if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred or an asset has been impaired. Judgment is necessary in assessing the likelihood that a pending claim will succeed or a liability will arise. The estimates of whether an accrual is necessary have been developed in consultation with outside counsel, based upon an analysis of potential results.
ACCOUNTING TREATMENT REGARDING THE DIFFERENCES BETWEEN THE SELLING PRICES AND COSTS OF EMPLOYEES' HOUSING
We had constructed and purchased new residential properties for our employees in the past to improve their living conditions. Under a housing benefit scheme implemented by the PRC government, we sold these residential properties to our employees at a price approved by the PRC government. For the purpose of preparing our consolidated financial statements for the year ended December 31, 2004, we estimated that our losses from the sales of completed staff quarters and the sales of premises under construction for which future services could be reasonably estimated was approximately RMB226.4 million. Such losses were amortized on a straight line basis over the estimated remaining average service period of our employees (15 years) from the time of such sales. During the year ended December 31, 2004, the amortization charged as deferred labour costs to our consolidated income statement was RMB15.1 million and the accumulated amortization amounted to RMB75.5 million.
As of December 31, 2004, unamortized deferred losses, which were recorded as deferred staff costs on our balance sheet, were RMB150.9 million.
ITEM 5B. LIQUIDITY AND CAPITAL RESOURCES
Our principal source of capital has been cash flow from operations, and our principal uses of capital are to fund capital expenditures, investment and payment of taxes and dividends.
We generated approximately RMB1,236.6 million of net cash flow from operating activities in 2004. Substantially all of our revenues were received in cash, with accounts receivable arising primarily from long-distance passenger train services provided and pass-through freight transactions originating from other railway companies whose lines connect to our railroad. Similarly, some accounts payable arise from payments for railroad transportation services that we collect on behalf of other railroad companies. Accounts receivable and payable were generally settled either quarterly or monthly between us and the other railroad companies. Most of our revenues generated from other businesses were received in cash. We also have accounts payable associated with the purchase of materials and supplies in our other businesses.
In 2004, other than operating expenses, our cash outflow mainly related to the following:
- capital expenditures of approximately RMB326.5 million as described below, representing an increase of 6.7% from RMB306.0 million in 2003; and
- payment of dividends of approximately RMB455.0 million.
Our capital expenditures for 2004 consisted primarily of the following projects:
1. expanding our Guangzhou-Shenzhen Line (Guangzhou to Pinghu link);
2. upgrading locomotives and passenger coaches;
3. building a Technical Support and Maintenance Depot for Passenger Vehicles at Shenzhen North Station and a passenger station, station houses and ancillary facilities for long-distance passenger travel to Buji;
4. upgrading station rooms at Shilong Station;
5. building station rooms and ancillary facilities and upgrading certain facilities at our Shenzhen Station;
6. partially renovating our Guangzhou East Station; and
7. building ancillary facilities at our Guangzhou East Station.
Funds not required for immediate use are kept in short and medium-term investments and bank deposits. We had temporary cash investments of approximately RMB1,379.3 million and cash equivalents of RMB1,169.3 million as of December 31, 2004.
As of December 31, 2004, we had an overdue time deposit in the amount of approximately RMB31.4 million held by Li Cheng, which we were unable to recover upon the expiry of the fixed deposit term in 1998. In March 1999, we instituted legal proceedings against Li Cheng to recover the deposit and the related interest. Under a court verdict dated October 12, 1999, Li Cheng was ordered to repay the deposit principal and the related interest to us. Li Cheng failed to comply with the court ruling, and we further applied to the court for compulsory enforcement of the court order. In July 2000, Li Cheng filed a court petition for winding up. On November 9, 2000, the court ordered the suspension of execution of the court ruling dated October 12 , 1999 during the winding-up of Li Cheng. On November 23, 2000, we applied to the Guangdong Provincial Government for an allocation of funds by the government to Li Cheng for the repayment of our deposit principal. The provincial government accepted our petition and requested the municipal government to follow up on our case. In 2002, we reclassified such amount from temporary cash investment to other receivables, and accounted for 50% provision pursuant to our management's estimates. The amount of the fixed deposit remains unpaid to date. Based on our management's estimates in 2004, we have made full provision for such amount in our audited consolidated financial statements.
Except for such overdue time deposit, we have no other overdue time deposit that has not been repaid. We have not encountered any difficulty in withdrawing deposits. We have placed most of our deposits with other state-owned commercial banks in the PRC and the Railway Deposit-taking Centre.
As of December 31, 2004, we did not have any bank loans or guarantees outstanding nor any trust deposits placed with any financial institutions in the PRC.
CASH FLOW
Our cash and cash equivalents in 2004 decreased by approximately RMB233.1 million over 2003. The table below sets forth certain items in our consolidated cash flow statements for 2003 and 2004, and the percentage change in these items from 2003 to 2004.
YEAR ENDED DECEMBER 31,
------------------------- CHANGE
2003 2004 FROM 2003
-------- ---------- ---------
(RMB THOUSANDS)
Net cash generated from operating
activities................................ 798,449 1,236,579 54.9%
Net cash from/(used in) investing activities... (375,469) (1,000,639) 166.5%
Net cash (used in) financing activities........ (433,666) (469,044) 8.2%
-------- ---------- --------
Net increase/(decrease) of cash and
cash equivalents.......................... (10,686) (233,104) 2081.4%
======== ========== ========
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Our principal source of capital was revenues generated from operating activities. In 2004, the net cash inflow from our operations was RMB1,236.6 million, representing an increase of RMB438.2 million from RMB798.4 million in 2003. The increase in net cash inflow from our operating activities was mainly due to the increase in revenues from our passenger and freight transportation businesses.
Our working capital was mainly used for temporary cash investments, capital expenditures, operating expenses and payment of taxes and dividends. In 2004, our temporary cash investments increased by RMB751.9 million. Our expenses for the purchase of fixed assets and payments for construction-in-progress were RMB310.2 million. In addition, we paid RMB84.2 million for income taxes and approximately RMB455.0 million for dividends.
We believe that we have sufficient working capital to meet our current operational and development requirements.
ITEM 5C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENCES, ETC.
We do not generally conduct our own research and development with respect to major capital projects. In the past, in connection with our high-speed train and electrification projects, our predecessor relied upon the engineering and technical services of various research and design institutes under the MOR. More recently, we conduct limited research and development activities in connection with the implementation of automated ticket sales, including the development of related computer software.
We do not anticipate a significant need for research and development services in the foreseeable future, and do not expect to require any such services in connection with our other businesses. To the extent that these services are needed, we expect to contract outside service providers to satisfy this need. In connection with major engineering and construction projects, as well as major equipment acquisitions, we intend to conduct technical research and feasibility studies with relevant engineering service organizations, so as to ensure the cost-effectiveness of our capital expenditures.
ITEM 5D. TREND INFORMATION
The Pearl River Delta has been one of China's fastest growing economic regions. We believe that various factors, including the increasing economic cooperation within the Pearl River Delta region and its adjacent areas , the "Relaxed Individual Travel" program, the commencement of operation of the Shenzhen Subway and the opening of Disneyland in Hong Kong in 2005, will continue to increase passenger travel and freight transportation within our service region. We expect the PRC government's current economic, import and export, foreign investment and infrastructure policies to generate additional demand for transportation services generally. These policies and measures may have both positive and negative effects on our business development. They are expected to promote economic growth and create new demand for our transportation services. At the same time, however, with the improvement of highway and waterway transportation facilities, we anticipate additional competition. In 2004 and the first half of 2005, the PRC government implemented economic measures to manage the growth of the PRC economy, including imposing lending restrictions in certain sectors. Such measures are expected to slow the pace of economic growth in China, and may have an adverse impact on our business and results of operations in 2005. Due to the SARS epidemic, we experienced a significant decrease in passenger traffic in the first half of 2003. A similar outbreak of SARS or other epidemic in the future is likely to have a material adverse effect on our results of operations and financial condition.
We believe that while the PRC government is in the progress of lessening restrictions on foreign investment following China's entry into the WTO, the opening up of domestic railway transportation will be gradual and we expect competition from foreign and domestic railway to be limited in the short term. However, China's entry into the WTO may increase other Chinese coastal cities' significance in trading. As a result, part of the freight currently transferred through ports in Hong Kong and Shenzhen may be divested to other ports in the PRC, which will adversely affect our railway freight business. In addition, as the PRC government lifts control over foreign investments, including allowing foreign participation in railway construction, our railway monopoly position in our service region may be challenged by foreign strategic investment. We believe that we are prepared for the challenges as well as the opportunities that have arose or will arise with China's accession to the WTO.
ITEM 5E. OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 5F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations, capital commitments and operating lease commitments as of December 31, 2004 for the periods indicated.
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS PAYMENT DUE BY PERIOD
(RMB IN THOUSANDS)
2010 AND
TOTAL 2005 2006 2007 2008 2009 THEREAFTER
Long-Term Debt Obligations - - - - - - -
Capital (Finance) Lease Obligations - - - - - - -
Operating Lease Obligations 183,375 108,000 75,375 - - - -
Purchase Obligations - - - - - - -
Other Long-Term Liabilities Reflected on
the Company's Balance Sheet under IFRS - - - - - - -
Total 183,375 108,000 75,375 - - - -
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Based on the current progresses of our new projects, we estimate that our capital expenditures for 2005 will amount to approximately RMB1.7 billion, which consists primarily of the following projects:
1. expanding our Guangzhou-Shenzhen Line (Guangzhou to Pinghu link);
2. building ancillary facilities at our Guangzhou East Station;
3. building a Technical Support and Maintenance Depot for Passenger Vehicles at Shenzhen North Station and a passenger station, station houses and ancillary facilities for long-distance passenger travel to Buji (including the construction of the connecting line from Pinghu to Shenzhen);
4. purchasing additional locomotives;
5. upgrading ancillary facilities to station rooms at Shenzhen Station;
6. building the computerized ticketing system for our "As-Frequent-As-Buses" Train Project between Guangzhou and Shenzhen; and
7. second phase comprehensive upgrading of Shenzhen Station.
We may be unable to obtain sufficient financing to fund our substantial capital requirements, which could limit our growth potential. Our actual capital requirements may be greater. We may not be able to obtain sufficient funds on commercially acceptable terms. If adequate capital is not available, our planned capital expenditure and business prospects could be adversely affected.
ITEM 5G. ADDITIONAL INFORMATION
PRINCIPAL DIFFERENCES BETWEEN IFRS AND US GAAP
Our audited consolidated financial statements conform to IFRS, which differ in certain respects from those prepared under US GAAP. A major difference between IFRS and US
GAAP, which has a significant effect on our consolidated net profit and consolidated net assets is set out below:
REVALUATION OF FIXED ASSETS
In connection with the restructuring undertaken for our initial public offering, we revalued our fixed assets on March 6, 1996 and we recorded a revaluation surplus of fixed assets amounting to approximately RMB1.5 billion. We carried out a further revaluation as of September 30, 2002, which did not result in a material difference from the carrying amounts and no revaluation surplus or deficit was recorded. See Note 13 to our audited financial statements included elsewhere in this annual report.
Under IFRS, revaluation of fixed assets is permitted and depreciation is based on the revalued amount. Additional depreciation arising from the revaluation surplus was approximately RMB38.5 million for the year ended December 31, 2004 compared to approximately RMB38.5 million in 2003.
Under US GAAP, fixed assets are required to be stated at their original cost. Hence, no additional depreciation from revaluation will be recognized under US GAAP. However, a deferred tax asset related to the revaluation surplus amounting to approximately RMB223.8 million was created under US GAAP with a corresponding increase in equity since the revaluation resulted in a higher tax base which will be realized through additional depreciation for PRC tax purposes.
The effects on our consolidated net profit resulting from the significant differences between IFRS and US GAAP are summarized below:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2002 2003 2004 2004
------- ------- ------- ---------
RMB RMB RMB US$(1)
UNAUDITED
Net profit under IFRS (in thousands)........... 557,083 511,762 567,484 68,373
US GAAP adjustments:
Reversal of additional depreciation charges
arising from the revaluation surplus on
fixed assets (in thousands)............ 48,422 38,548 38,548 4,644
Effect of US GAAP adjustment on taxation
(in thousands).......................... (7,263) (5,782) (5,782) (697)
------- ------- ------- ---------
Consolidated net profit under US GAAP (in
thousands).................................. 598,242 544,528 600,250 72,320
======= ======= ======= =========
Earnings per share under US GAAP............... 0.14 0.13 0.14 0.017
======= ======= ======= =========
Earnings per equivalent ADS under
US GAAP.................................... 6.90 6.28 6.92 0.834
======= ======= ======= =========
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The effects on our consolidated net assets resulting from the significant differences between IFRS and US GAAP are summarized below:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2004 2004
---------- ---------- ----------
RMB IN RMB IN US$(1) IN
THOUSANDS THOUSANDS THOUSANDS
UNAUDITED
Consolidated net assets under IFRS.......................... 10,322,358 10,420,574 1,255,491
US GAAP adjustments:
Reversal of the revaluation surplus on fixed assets..... (1,492,185) (1,492,185) (179,781)
Reversal of additional depreciation charges arising from
the revaluation surplus on fixed assets............... 369,432 407,980 49,154
Reversal of deferred tax assets ........................ 168,413 162,631 19,594
---------- ---------- ----------
Consolidated net assets under US GAAP....................... 9,368,018 9,499,000 1,144,458
========== ========== ==========
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There are no significant differences between IFRS and US GAAP that would affect the classification in the balance sheet and the income statement that would not also affect our net income or shareholders' equity.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 6A. DIRECTORS AND SENIOR MANAGEMENT
DIRECTORS
All of our directors were duly elected at meetings of our shareholders. All of our current directors were elected at our general shareholders' meeting held on May 12, 2005. The business address of each of our directors is No. 1052 Heping Road, Shenzhen, People's Republic of China 518010.
The table below sets forth the information relating to our directors as of June 27, 2005:
DATE FIRST
ELECTED OR
NAME AGE POSITION APPOINTED
------------------- --- ---------------------------------- ----------
Wu Junguang 56 Chairman of the Board of Directors 2003
Li Kelie 57 Director and General Manager 2004
Hu Lingling 41 Director 2003
Wu Houhui 56 Director 1999
Wen Weiming 42 Director 2003
Yang Jinzhong 53 Director 2005
Chang Loong Cheong 59 Independent Director 1996
Deborah Kong 45 Independent Director 1996
Wilton Chau Chi Wai 43 Independent Director 2004
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Wu Junguang, age 56, was elected the chairman of the board of directors of Guangshen Railway on June 10, 2003. Mr. Wu graduated from South China Normal University. Since 1964, Mr. Wu has served in various managerial positions including general manager of Yangcheng Railway Company and our predecessor, Guangzhou Railway Sub-administration.
Mr. Wu has served as the general manager of our Parent Company since April 2002 and as the chairman of our Parent Company since June 2003.
Li Kelie, age 57, was elected a director and the General Manager of the Company. Mr. Li is a member of Chinese Writers' Association and a vice chairman of Guangzhou Writers' Association. Since 1994, Mr. Li has held various senior positions within Guangzhou Railway (Group) Company and its subsidiaries. Before he joined the Company, he was the Chairman and the General Manager of Sanmao Railway Company Limited. He is currently a member of the senior management of our Parent Company.
Hu Lingling, age 41, was elected a director of Guangshen Railway in 2003. Mr. Hu is an engineer and graduated from Changsha Railway Institute. Mr. Hu has served as the deputy chief engineer, the deputy stationmaster of Shaoguan Railway station of Yangcheng Railway Company, the deputy chief engineer, the deputy general manager of Yangcheng Railway Company and the director of the transportation department of our Parent Company Chronologically. Presently he serves as the deputy general manager of our Parent Company.
Wu Houhui, age 56, was elected a director of Guangshen Railway in 1999. He is a graduate of Dalian Railway College and a senior economist. Mr. Wu served in various managerial position, including the position of director of the Enterprise Management Office, at our Parent Company from 1984 to 2000. Since November 2001, Mr. Wu has served as the deputy chief economist of our Parent Company.
Wen Weiming, age 42, was elected a director of Guangshen Railway in 2003. Mr. Wen is an accountant and graduated from Guangzhou Railway Workers' College. He has over 10 years experience in the railway industry, and has served as the director of the accounting and finance department, the chief accountant of the diversified businesses sub-section, and the director of the finance sub-section of Yangcheng Railway Company. Since May 2001, Mr. Wen has served as the deputy director of the finance department of our Parent Company.
Yang Jinzhong, aged 53, was elected a director of Guangshen Railway in 2005. Mr. Yang is an engineer and graduated from Harbin Electrician Institute. He has over 30 years experience in the railway industry and has served in various managerial positions in Wuhan Railway Sub-administration. Since August 2000, he has served as the manager of the Transportation Business Department of Guangshen Railway and the Stationmaster of Shenzhen Station. He is currently the acting chairman of the Labour Union of the Company.
Chang Loong Cheong, age 59, was elected an independent non-executive director of Guangshen Railway in 1996. He holds a management certificate from the Hong Kong Management Association and is an independent non-executive director of Guangshen Railway. Mr. Chang is also a director of Shanghai Xinhua Iron & Steel Company Limited and Orient International (Shanghai) Limited. Mr. Chang has acted as a manager of Cathay Restaurant in Lagos, Nigeria, a member of the senior management of Island Navigation Corporation International Limited and Orient Overseas Container Line Limited in West Africa, and the general manager and a director of Noble Ascent Company Limited.
Deborah Kong, age 45, was elected an independent non-executive director of Guangshen Railway in 1996. Ms. Kong is currently an executive director of Centennial Resources Holding Company Limited. Ms. Kong holds a bachelor of arts degree from Sydney University and a one-year master degree course of finance degree from Macquarie University in Australia. She is a member of the Standing Committee of the People's Political Consultative Conference of Shandong Province in the PRC.
Wilton Chau Chi Wai, age 43, was elected an independent non-executive director of Guangshen Railway in 2004. Mr. Chau holds a bachelor degree in applied mathematics from University of Hong Kong, a LLB degree from University of Wolverhampton and a Master of Business Administration from the University of Wales. Mr. Chau is a fellow member of the Association of Chartered Certified Accountants, a member of Singapore Institute of Arbitrators and Council member of Hong Kong Biotechnology Association. Since 1987, Mr. Chau has served several financial institutions in various senior positions overseeing investment and development in railway, road and airport infrastructure projects. Mr. Chau is currently the chairman of Qleap Venture Limited.
SUPERVISORS
The table below sets forth the information relating to our supervisors:
DATE FIRST ELECTED
NAME AGE POSITION OR APPOINTED
------------- --- ---------- ------------------
Yao Muming 51 Supervisor 1999
Tang Dinghong 56 Supervisor 2004
Chen Yongbao 53 Supervisor 2002
Li Zhiming 44 Supervisor 2005
Chen Yunzhong 52 Supervisor 2001
Wang Jianping 41 Supervisor 2005
Lu Ximei 49 Supervisor 2005
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Yao Muming, age 51, was appointed as a Supervisor of Guangshen Railway in 1999. Mr. Yao graduated from South China Normal University and previously served as the Deputy Director of the Guangzhou and Zhuhai Animal and Plant Quarantine Bureaus. From 1997 to 2003, he was a member of the senior management of the Company. Since July 2003, Mr. Yao has been a member of the senior management of our Parent Company. Since July 2003, he has served the chairman of the supervisory board.
Tang Dinghong, age 56, was appointed as a supervisor of Guangshen Railway in 2004. Mr. Tang graduated from Zhongshan University. He started to work in the railway industry since 1969 and had served in various senior managerial positions of Guangzhou Railway (Group) Company. Mr. Tang joined us in July 2003.
Chen Yongbao, age 53, was appointed as a supervisor of Guangshen Railway in 2002. Mr. Chen graduated from Zhuzhou Railway Mechanical School. Since 1975, he has served in various managerial positions in Guangzhou Railway Company and Yangcheng Railway Company. From 1997 to 2001, Mr. Chen served in the administration supervisory position at our
Parent Company. Since May 2001, Mr. Chen has served as the chief of the supervision department of our Parent Company.
Li Zhiming, age 44, was appointed as a supervisor of Guangshen Railway in 2005. Mr. Li graduated from the Party School of the CPC majoring in economics and management and is an accountant. Since 1981, he has served in various managerial positions in Hengyang Railway Sub-administration and Changsha Railway Company. Mr. Li is currently the director of the Finance Office of Guangzhou Railway (Group) Company Changsha Railway Office.
Chen Yunzhong, age 52, was appointed as a supervisor of Guangshen Railway in 2001. Mr. Chen graduated from Guangzhou Railway Driver's School, Guangdong Jinan University and the Central Administration Academy. He was a member of the senior management of Hainan Railway Company. Mr. Chen joined us in May 2000.
Wang Jianping, age 41, was appointed a supervisor of the Company in 2005. Mr. Wang graduated from the Party School of the CPC majoring in economics and management. Since 1983, Mr. Wang has served in various managerial positions in Guangzhou Railway Sub-administration and Guangzhou Railway (Group) Limited. Mr. Wang joined the Company in 2003 and is currently a member of our senior management.
Lu Ximei, age 49, was appointed a supervisor of the Company in 2005. Ms.
Lu graduated from Changsha Railway Institute majoring in railway traffic
management. Since 1972., Ms. Lu has served in various managerial positions in
the passenger transportation division of Yangcheng Railway Company. Ms. Lu was
appointed section chief of the Guangzhou-Hong Kong Passenger Transportation
Section of the Company in January 1999.
SENIOR MANAGEMENT
The table below sets forth information relating to our senior management:
DATE FIRST
ELECTED OR
NAME AGE POSITION APPOINTED
---- --- -------- ---------
Li Qingyun 41 Deputy General Manager 2000
Wu Weimin 47 Deputy General Manager 2004
Han Dong 43 Deputy General Manager 2004
Yao Xiaocong 51 Chief Accountant 1997
Guo Xiangdong 39 Company Secretary 2004
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Li Qingyun, age 41, joined the Company in September 1999 and is a Deputy General Manger of the Company. Mr. Li graduated from Northern Jiaotong University majoring in railway transportation and organization and has obtained a master's degree. Before joining the Company, Mr. Li has served in various managerial positions in the technical and transportation departments under our Parent Company from 1989 to August of 1999.
Wu Weimin, age 47, joined the Company in January 2004 and is a Deputy General Manager of the Company. Mr. Wu graduated from Guangdong Radio & TV University and is an engineer. Since 1984, he had served in various managerial positions in the Material and
Equipment Department, the Planning and Statistic Department and the Labour and Wage Department of Yangcheng Railway Company. He also had served as an engineer in the Material and Equipment Section, the Director of the Planning and Statistic Sub-department of Yangcheng Railway Company. Mr. Wu was the Director of Labour and Wage Sub-department and Director of Social Insurance Centre of Yangcheng Railway Company before joining the Company as a Deputy General Manager in January 2004.
Han Dong, age 43, joined the Company in May 2000 and is a Deputy General Manager of the Company. Mr. Han graduated from Party School of the CPC, majored in economics and management, and is an engineer. Mr. Han joined the Company in August 1985 and had served in various managerial positions in the Material and Equipment Department, the Planning and Statistic Department, Passenger and Freight Transportation Marketing Department. Mr. Han was director of each of the Passenger and Freight Management Department and Equipment and Property Department of the Company.
Yao Xiaocong, age 51, is the Chief Accountant of the Company. Mr. Yao graduated from Party School of the CPC, majored in economics and management. Since 1975, Mr. Yao has served in the Financial Accounting Department in railway departments and has acquired nearly 30-year experience in financial accounting. Mr. Yao was a member of the senior management of the Company from June 1997 to January 2004. Mr Yao was the Director of the Accounting Department of Guangzhou Railway (Group) Company before he was appointed as the Chief Accountant of the Company in August 2004.
Guo Xiangdong, age 39, is the Company Secretary and the Director of Secretariat of the Board of Directors. Mr. Guo graduated from the Central China Normal University with a Bachelor of Laws degree and is an economist. He joined the Company in 1991, and previously served as the Deputy Section Chief, Deputy Director and the Director of Secretariat of the Board of Directors of Guangshen Railway. Mr. Guo has been as the Company Secretary since January 2004.
There are no family relationships between any director or executive officer and any other director or executive officer. Of the members of the board of directors, our chairman, Mr. Wu Junguang, is both the chairman and the general manager of our Parent Company.
Mr. Li Kelie is a member of the senior management of our Parent Company. Mr. Wu Houhui is the director of Guangmeishan Railway Company, Sanmao Railway Company and Shichang Railway Company. Mr. Hu Lingling is a director of Nanhai Saiyanqiao Railway Freight Yard and Storage Company, Sanmao Railway Company and Guangdong Railway Youth Travel Service Co., Ltd.. Mr. Wen Weiming is a supervisor of Guangzhou Railway Engineering (Group) Company and Guangdong Railway Youth Travel Service Co., Ltd.. The lines operated by Guangmeishan Railway Company, Sanmao Railway Company and Shichang Railway Company are local railroads. Guangzhou Tiecheng Industrial Company is our joint venture partner. We are currently involved in certain litigation proceedings relating to this joint venture. See "Item 8A.7 Legal Proceedings" for additional information. We have business relationships relating to railroad transportation with Guangmeishan Railway Company and Sanmao Railway Company.
ITEM 6B. BOARD COMPENSATION
DIRECTORS AND SENIOR MANAGEMENT
Total remuneration of our directors, supervisors and senior officers during 2004 included wages and bonuses. Directors or supervisors who are also officers and employees of Guangshen Railway receive certain other benefits in kind from our Parent Company, GEDC or us, such as subsidized or free health care services, housing and transportation, as customarily provided by companies in the PRC to their employees. In the second half of 2004, all of the hospitals and schools originally vested in GEDC were transferred to the local government pursuant to applicable PRC policies. As a result, GEDC no longer provides any education and hospital services to us under the contractual arrangements made upon our restructuring.
The aggregate amount of cash remuneration paid by Guangshen Railway in 2004 to all individuals who are currently our directors, supervisors and senior officers was approximately RMB2.76 million, of which approximately RMB1.74 million was paid to directors and supervisors and approximately HK$0.31 million was paid to the three independent non-executive directors.
The aggregate amount of cash remuneration we paid during the year ended December 31, 2004 for pension and retirement benefits to all individuals who are currently our directors, supervisors and senior officers was approximately RMB155,000.
INTERESTS OF OUR DIRECTORS, SUPERVISORS AND OTHER SENIOR MANAGEMENT IN OUR SHARE CAPITAL
As of December 31, 2004, there was no record of interests or short positions (including the interests or short positions which were taken or deemed to have under the provisions of the Hong Kong Securities and Futures Ordinance) held by our directors or supervisors in our shares, debentures or other securities, or securities of any of our associated corporation (within the meaning of the Hong Kong Securities and Futures Ordinance) in the register required to be kept under section 352 of the Hong Kong Securities and Futures Ordinance. We had not received notification of any interests or short positions from any of our directors or supervisors required to be made to us and the Hong Kong Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies in Appendix 10 to the HKSE Listing Rules. We have not granted any of our directors or supervisors, or any of their respective spouses or children under the age of 18, any right to subscribe for any of our shares or debentures.
SERVICE CONTRACTS OF OUR DIRECTORS AND SUPERVISORS
Each of our directors and supervisors has entered into a service agreement with us. Save as disclosed, no other service contract has been entered into between any of our subsidiaries or us on one hand, and any of our directors or supervisors on the others, that cannot be terminated by us within one year without payment of compensation (other than statutory compensation).
CONTRACTS ENTERED INTO BY OUR DIRECTORS AND SUPERVISORS
None of our directors or supervisors had any direct or indirect material interests in any contract of significance subsisting during the year ended on December 31, 2004 or at December 31, 2004 to which we or any of our subsidiaries was a party.
REMUNERATION OF OUR DIRECTORS AND SUPERVISORS
The level of remuneration of our directors and supervisors was determined by reference to various factors, including the going rates of remuneration in Shenzhen, where we are located, and the job nature of each of our directors and supervisors. The remuneration standard for our directors and supervisors is determined by our shareholders.
ITEM 6C. BOARD PRACTICES
BOARD OF DIRECTORS
In accordance with our currently valid Articles of Association, our board of directors consists of nine directors, one of whom is the chairman. Directors are appointed at our general shareholders' meeting through voting, and serve for terms of three years. Upon the expiration of the term of their office, they can serve consecutive terms if re-appointed at the general shareholders' meeting. The service contracts that we have entered into with our directors do not provide for any payment of compensation upon termination.
SUPERVISORY COMMITTEE
We have a supervisory committee consisting of five to seven supervisors. Supervisors serve a term of three years. Upon the expiration of their terms of office, they may be re-appointed to serve consecutive terms. The supervisory committee is presided over by a chairman who may be elected or removed with the consent of two-thirds or more of the members of the supervisory committee. The term of office of the chairman is three years, renewable upon re-election. Our supervisory committee was appointed at the general shareholders' meeting held on May 12, 2005 and consists of five representatives of the shareholders who may be elected or removed by our shareholders and two representative of our employees who may be elected or removed by our employees. Members of our supervisory committee may also observe meetings of the board of directors. The current members of our supervisory committee are: Yao Muming, Tang Dinghong, Chen Yongbao, Li Zhiming, Chen Yunzhong, Wang Jianping and Lu Ximei. The term of this supervisory committee will expire in 2008. Our supervisory committee held four meetings during the year ended December 31, 2004, at which resolutions concerning identified key issues were passed and notified to our board of directors. Our supervisors attended all meetings of our board of directors and other important meetings concerning our operation during the year ended December 31, 2004. Our supervisory committee had carefully reviewed the report of our directors, the financial report and proposed profit distribution presented by our board of directors at the annual general meeting held on May 12, 2005.
Supervisors attend board meetings as non-voting members. The supervisory committee is responsible to our shareholders and has the follow duties and responsibilities:
- to supervise our handling of our financial matters;
- to supervise our directors, general manager, deputy general manager and other senior officers for compliance with laws, administrative regulations or our articles of association;
- to regulate any acts of directors, the general manager, deputy general manager and other senior officers that are detrimental to the interests of Guangshen Railway;
- to verify such financial information as financial reports, business reports and profit distribution plans submitted by the board of directors to the general shareholders' meeting, and arrange certified public accounts and auditors to verify issues;
- to convene interim general shareholders' meetings as requested; and
- to initiate legal proceedings against directors on behalf of Guangshen Railway.
AUDIT COMMITTEE
We have an audit committee consisting of three independent non-executive directors. The current members of our audit committee, appointed by the board of directors, are: Mr. Chang Loong Cheong, Ms. Deborah Kong and Mr. Wilton Chau Chi Wai. Mr. Chang, Ms. Kong and Mr. Chau are "independent directors" of our Company as defined in Section 303A.02 of the New York Stock Exchange's Listed Company Manual. The audit committee must convene at least four meetings each year, and may invite the executive directors, persons in charge of the financial and audit departments and our independent auditors. The audit committee must convene at least one meeting with the auditors each year without any executive directors present. The duties of our audit committee include:
- reviewing the reports prepared by the board of directors, the annual and interim reports on our results of operations, the annual financial report and public announcements of our results of operations;
- reviewing our financial reports and the reports prepared by our independent auditor and its supporting documents, including the review of our internal controls and disclosure controls and procedures, and to discuss with the auditor our annual audit plan and solutions to problems in the previous year;
- reviewing and approving the selection of and remuneration paid to our independent auditor; and
- reviewing audit matters specifically identified by the board of directors, and determining whether such projects are in compliance with industrial practices and
market rules, and performing statutory duties and safeguarding our interests and the interests of our shareholders.
ITEM 6D. EMPLOYEES
As of December 31, 2002, 2003 and 2004, we had approximately 9,258, 9,029 and 8,964 employees, respectively. The following chart sets forth the number of our employees by function as of December 31, 2004:
FUNCTION EMPLOYEES Passenger transportation personnel (1)......... 1,525 Coordination personnel (2)..................... 972 Freight transportation personnel (3)........... 414 Mechanical personnel (4)....................... 433 Power and water supply personnel (5)........... 478 Vehicle personnel (6).......................... 685 Maintenance personnel (7)...................... 876 Power service personnel (8).................... 428 Transportation supporting personnel (9)........ 542 Diversified businesses and other supporting personnel (10)............................... 1,168 Technical and administrative personnel (11).... 1,166 Other personnel (12)........................... 277 Total.......................................... 8,964 |
(2) Coordination personnel means those people responsible for train coordination.
(3) Freight transportation personnel means those people responsible for organization of freight transportation.
(4) Mechanical personnel means those people responsible for train operation and overhaul.
(5) Power and water supply personnel means those people responsible for contact network operation and overhaul as well as power and water consumption maintenance.
(6) Vehicle personnel means those people responsible for vehicle operation and overhaul.
(7) Maintenance personnel means those people responsible for station track and railroad switch maintenance.
(8) Power service personnel means those people responsible for signal equipment maintenance.
(9) Transportation supporting personnel means the supporting personnel of trains, machinery, works, power and vehicle organizations.
(10) Diversified businesses and other supporting personnel means all personnel involved in diversified businesses.
(11) Technical and administrative personnel means all managerial personnel other than the personnel of diversified businesses.
(12) Other personnel means all personnel who have been sick, studying or retired for a long time.
All of our employees are located in Guangzhou, Shenzhen and the area adjacent to our Guagnzhou-Shenzhen line. The number of our employees decreased by 65 in 2004, which we consider is a normal change occurred in the ordinary course of our business.
We have established a trade union to protect employees' rights, assist in the fulfillment of their economic objectives, encourage employee participation in management decisions and assist in mediating disputes between the management and union members. Each of our train stations has a separate branch of the trade union. Most of our employees belong to the trade union. We have not experienced to any strikes or other labor disturbances that have interfered with our operations in the past, and we believe that our relations with our employees are good.
We have implemented a salary policy which links our employees' salaries with results of operations, labor efficiency and individual performance. Employees' salaries distribution is subject to macro-control and is based on their performance records and reviews. We paid approximately RMB492.6 million in salaries and benefits for our railroad businesses in 2004.
Pursuant to applicable government policies and regulations, we set aside statutory fund for our employees and also maintain various insurance policies for the benefits of our employees as set forth in the following table:
AS A PERCENTAGE OF THE AGGREGATE SALARIES OF OUR EMPLOYEES
IN 2004
----------------------------------------------------------
EMPLOYEES RESIDING IN
GUANGZHOU AREA OR ALONG THE EMPLOYEES RESIDING IN
EMPLOYEE BENEFITS GUANGZHOU-SHENZHEN ROUTE SHENZHEN
----------------- --------------------------- ---------------------
Housing Fund.............................. 7% 13%
Retirement Insurance ..................... 18% 18%
Supplemental Retirement Insurance......... 5% 5%
Basic Medical Insurance................... 8% 6%
Supplemental Medical Insurance............ 1% 0.5%
Child-bearing Medical Insurance........... 0.4% 0.5%
Other Welfare Contributions............... 6% 8%
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Details of our statutory welfare fund and retirement benefits are set out in Notes 22 and 23 to the financial statement.
ITEM 6E. SHARE OWNERSHIP
As of June 27, 2005, none of our directors, supervisors or senior management own any interest in any shares or options to purchase our shares.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 7A. MAJOR SHAREHOLDERS
We are a joint stock company organized under the laws of the PRC in March 1996. The Parent Company, a state-owned enterprise under the administration of the MOR owns 67% of our outstanding common shares. The Parent Company is the sole shareholder of all of our domestic shares in the form of state legal person shares and is entitled to exercise all rights as our controlling shareholder according to the relevant laws, rules and regulations. The Parent Company has substantial influence over our operations, not only in its capacity as controlling shareholder, but also because of its role as an administrative agent of the MOR that controls and coordinates railway operations in Guangdong Province, Hunan Province and Hainan Province. As an instrumentality of the MOR, our Parent Company performs direct regulatory oversight functions with respect to us, including determining and enforcing technical standards and implementing special transportation directives.
The following table sets forth information regarding ownership of our issued and outstanding capital stock as of December 31, 2004. Note that it includes all persons who are known by us to own, either as beneficial owners or holders of record, five percent or more of our capital stock.
TITLE OF CLASS IDENTITY OF PERSON OR GROUP AMOUNT OWNED PERCENT OF CAPITAL
-------------- --------------------------- ---------------- ------------------
(THOUSAND SHARES)
Common Shares (Domestic Shares) The Parent Company 2,904,250 67.0%
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The following table sets forth all persons who are known by us to own, as holders of record, five percent or more of our issued and outstanding H shares as of December 31, 2004.
PERCENT OF TOTAL PERCENTAGE OF
TITLE OF CLASS IDENTITY OF PERSON OR GROUP AMOUNT OWNED CAPITAL CLASS OF SHARES
-------------- --------------------------- ----------------- ---------------- ---------------
(THOUSAND SHARES)
Common Shares (H Shares) Sumitomo Life Insurance 128,916 3.0% 9.0%
Company (1)
Common Shares (H Shares) Sumitomo Mitsui Asset 128,916 3.0% 9.0%
Management Company, Limited
Common Shares (H Shares) Mondrian Investment Partners 71,818.5 1.7% 5.0%
Ltd (formerly known as
Delaware International
AdvisersLimited)
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As of the date of this report, we are not aware of any arrangement that may at a subsequent date result in a change of control of Guangshen Railway.
As an owner of at least 30% of our issued and outstanding shares, our Parent Company is deemed a controlling shareholder (defined in Item 10 below), and therefore may not exercise our
voting rights with respect to various matters in a manner prejudicial to the interests of our other shareholders. See "Item 10B. Memorandum and Articles of Association -- Restrictions on Controlling Shareholders". In accordance with our articles of association, each share of our capital stock has one vote and the shares of the same class have the same rights. Other than the restrictions noted in the first sentence of this paragraph, the voting rights of our major holders of domestic shares are identical to those of any other holders of our domestic shares, and the voting rights of our major holders of H shares are identical to those of our other holders of H shares. Holders of domestic shares and H shares are deemed to be shareholders of different classes for some matters, which may affect their respective interests. Holders of H shares and domestic shares are entitled to the same voting rights.
ITEM 7B. RELATED PARTY TRANSACTIONS
As part of the restructuring carried out in 1996 in preparation for our initial public offering, we assumed from Guangshen Railway Company, our predecessor, Guangzhou Railway (Group) Company, our Parent Company, assets and liabilities that relate to the businesses now conducted by us, including the high-speed passenger train project and equity interests in subsidiaries and joint ventures engaged in the operation of warehouses or freight yards. We also assumed from Yangcheng Railway certain assets, including 14 shunting locomotives and passenger coaches that Yangcheng Railway had previously leased to us. Our predecessor company retained the assets, liabilities and businesses not assumed by us, including units providing staff quarters and social services such as health care, educational and public security services and other ancillary services, as well as subsidiaries or joint ventures whose businesses do not relate to railroad operations and do not compete with our businesses. As part of our restructuring, our predecessor was renamed Guangzhou Railway (Group) Guangshen Railway Enterprise Development Company, or GEDC.
The Parent Company and GEDC on the one hand and us on the other have agreed to certain mutual indemnities arising from or in respect of the various assets and liabilities transferred to or retained by the parties. The purpose of the indemnities is to ensure that none of Guangshen Railway, our Parent Company or GEDC will bear liabilities that it has not agreed to assume, even in cases where third parties have not consented to the division of liabilities among them and continue to make claims against an entity that has not assumed the relevant liability. The Parent Company and GEDC have agreed to indemnify Guangshen Railway against any claims arising from facts or events prior to the restructuring as well as any claims against Guangshen Railway in respect of assets and liabilities retained by them in the restructuring.
As a result of the restructuring, GEDC, Yangcheng Railway and our Parent Company (together with some of its subsidiaries) continue to provide social services to Guangshen Railway on a contractual basis. These services include medical care for our employees and their family members, kindergarten, elementary and secondary school education for the children of employees, room and board for our employees traveling on business, employee housing management and maintenance and public security in our stations and on-board our trains. GEDC provides most of these services through its facilities in Shenzhen. The Parent Company and Yangcheng Railway provide to Guangshen Railway in Guangzhou other services, including health care, employee training and childcare. For the services rendered, Guangshen Railway pays our Parent Company, Yangcheng Railway or GEDC, as the case may be, reasonable, arms-length fees.
In the second half of 2004, all of the hospitals and schools originally vested in GEDC were transferred to the local government pursuant to applicable PRC policies. As a result, GEDC no longer provides any education and hospital services to us under the contractual arrangements made upon our restructuring.
Some transactions between Guangshen Railway and our Parent Company and its subsidiaries have continued after the restructuring, in the form of a cross-provision of goods and services. The principal goods and services provided by our Parent Company and some of its subsidiaries (including Yangcheng Railway and GEDC) to Guangshen Railway include the following:
- locomotives, railcars and operating personnel;
- leasing of passenger coaches;
- maintenance services for locomotives and passenger coaches;
- railroad transportation related services;
- fuel for the operation of locomotives;
- railway related materials;
- overhaul and emergency repair of our track and bridges;
- medical and health care services, which were terminated in August, 2004;
- public security;
- educational services, which were terminated in August, 2004; and
- employee housing.
The aggregate costs to us of these goods and services in 2002, 2003 and 2004 were RMB153.4 million, RMB167.2 million and RMB214.5 million, respectively.
The principal goods and services provided by us to our Parent Company and its subsidiaries include railroad transportation related services, sale of duty free goods on-board of our Hong Kong through trains and at Guangzhou station and advertising space at our Shenzhen station.
Under an agreement with Yangcheng Railway, Yangcheng Railway and Guangshen Railway provide each other and their passengers with services at Guangzhou Station, including, among other things, passenger boarding, ticket collection and on-board water supply.
The prices at which these goods and services are provided are different in each case. In general:
- prices for railroad transportation-related services are determined in accordance with the actual costs incurred in providing these services plus a profit margin of 8% of aggregate chargeable costs (fuel expenses, asset depreciation and water utility fees are not counted as chargeable costs for purposes of this calculation), which amount, Guangshen Railway believes, is consistent with that which would be charged in an arm's-length transaction;
- the rental amounts for the high-speed passenger coaches leased to Guangshen Railway by our Parent Company equal 6% of our Parent Company's purchase price for the coaches, approximating our Parent Company's depreciation expenses for the coaches; Guangshen Railway also bears all costs of maintenance and overhaul of these coaches;
- the prices for social and related services provided by Yangcheng Railway (i.e., educational) and GEDC (i.e., security, medical, educational and housing) are determined based on the actual cost of providing these services;
- the prices for social and related services provided by our Parent Company are determined on the following basis:
- medical services : in accordance with the relevant local standards, subject to a 20% discount (except in respect of medicine and registration fees);
- educational services : in accordance with the standards set by our Parent Company;
- child care services : in accordance with the actual cost incurred for providing such services;
- newspaper supply services : at an agreed cost of approximately RMB25 per year per copy of newspaper supplied, which cost may change based on cost changes to our Parent Company;
The medical services and educational services were terminated in the second half of 2004 when the hospitals and schools were transferred by GEDC to local government.
- the prices for the supply of railroad transportation related materials are determined in accordance with the relevant regulations issued by our Parent Company (which regulations are applicable to other railroads under the jurisdiction of our Parent Company);
- the prices for the provision of overhaul and large scale maintenance services for our track and bridges are based on the relevant approved estimates plus a profit margin of 8%, and the prices for other maintenance services are to be agreed by the parties on a case-by-case basis; and
- Guangshen Railway is entitled to 45% of the profits derived from the advertising businesses at its Shenzhen station.
Beginning from 2001, we implemented the measures for the settlement of railway networks promulgated by the MOR. As such measures are more rational and scientific than the past measures, the implementation of such measures does not have a material impact on our revenues from and cost for our passenger and freight transportation business but has a certain positive impact on our results of operations.
The agreement with Yangcheng Railway was revised on March 6, 1996 and provides for a 10-year lease period starting from 1996. The lease with the MOR is renewable annually. Substantially all the above transactions will continue in the future, although not necessarily on the same terms.
The chart below sets forth a breakdown by category of the material transactions between our Parent Company and its affiliates and us in 2002, 2003 and 2004.
2002 2003 2004
DESCRIPTION OF TRANSACTION ---- ---- ----
-------------------------- (RMB THOUSANDS)
Lease of locomotives and related services from Yangcheng Railway(i).............. 42,047 40,882 48,179
Provision of trains and related services from Guangmeishan Railway Company, a
subsidiary of our Parent Company(ii)........................................... 4,864 5,305 6,066
Purchase of materials and supplies from Guangzhou Railway Material Supply
Company, a subsidiary of our Parent Company(iii)............................... 33,074 50,687 65,998
Social services (employee housing, health care, educational and public security
services and other ancillary services) provided by our Parent Company and
affiliates (including GEDC)(ii)................................................ 66,744 68,079 94,246
Operating lease rentals paid to the MOR(i)....................................... 57,298 58,904 65,485
Provision of trains and related services by the Ministry of Railway(i)........... 211,667 201,870 209,503
Train use fees and related service fees paid to Guangzhou Railway (Group)
Passenger Transportation Company, a subsidiary of our Parent Company(i)........ 6,681 2,207 -
Interest expenses paid to our Parent Company(iv)................................. 2,443 2,037 553
Interest received from the MOR' Railroad Deposit-taking Center(v)................ 3,239 3,516 6,111
Interest received from Pingnan Railway, an affiliate of our Parent Company(iv)... 806 827 527
Interest received from Guangmeishan Railway Company(iv).......................... 1,884 901 109
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(ii) The services are provided at the contractual prices based on cost and reasonable margin.
(iii) The prices are based on market price.
(iv) The interest was resulted from the long-distance transportation services, which was calculated based on the average balances due from/to related parties on a quarterly basis, at the prevailing interest rates of six-month bank loans.
(v) See Note 10(b) and 24(b) to our audited consolidated financial statements included elsewhere in this annual report.
As of December 31, 2004, we had the following material balances with our related parties:
31 December,
------------------------------------------------------
2002 2003 2004
---- ---------------- ----
RMB in thousands
Temporary cash investments in the
MOR's Railroad Deposit-taking
Center(i) 168,000 168,000 168,000
Bank deposits in the MOR's railroad
Deposit-taking Center 206,452 321,985 862,508
Due from Parent Company(ii) 39,374 - -
Due to Parent Company - (37,230) (24,617)
Due from related parties 267,885 199,921 56,064
- Trading balance(iii) 54,425 10,608 36,531
- Non-trading balance(ii) 213,460 189,313 19,533
Due to related parties (158,199) (120,605) (172,121)
- Trading balance(iii) (125,847) (60,128) (83,492)
- Non-trading balance(iv) (32,352) (60,477) (88,629)
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(i) See Note 10(b) to our audited consolidated financial statements included elsewhere in this annual report.
(ii) As of 31 December, 2004, the balance with the Parent Company, which is non-trading in nature, and the non-trading balance due from related parties mainly represented the Company's payment on behalf of related parties, who were required to make settlements to the Parent Company in respect of their provision of long-distance transportation services. Interests arose from the balance due from the related parties are disclosed in Notes 24(a)(iv) to our audited consolidated financial statements included elsewhere in this annual report.
(iii) The balances with related parties, which are of trading in nature, all aged within one year.
(iv) As of 31 December, 2004, the non-trading balance due to related parties mainly represented the Company's collection of railroad revenue on behalf of the related parties.
As of 31 December, 2004, the balances with the MOR, the Parent Company and related parties are unsecured, non-interest bearing and repayable on demand, except for those disclosed in Notes 10(b) and 24(a) to the audited financial statements included elsewhere in this annual report and bank deposits in MOR's railroad Deposit-taking centre. These balances resulted from transactions between our related parties and us in the ordinary course of business. The balances with our Parent Company are all non-trading in nature. The balances with our related parties, which are trading in nature, are all due within one year.
Our related party transactions have been carried out on usual terms according to the conditions and waiver granted by The Stock Exchange of Hong Kong Limited and the contracts entered into between our related parties and us. Except for the Acquisition Agreement and connected transaction agreements as discussed in "ITEM 5. Operating and Financial Review and Prospects--Overview--Proposed Issue of A Shares, Very Substantial Acquisition and Continuing Connected Transactions", no new related party transaction were entered into in 2004. Our independent non-executive directors confirmed that, except for the proposed Acquisition as contemplated in the Acquisition Agreement, these transactions (which are "connected transactions" as defined in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited) entered into by us during 2004 were entered into in the ordinary and usual course of our business on normal commercial terms or on terms that were fair and reasonable so far as our shareholders were concerned, or in accordance with the terms of an agreement governing such transactions or, where there was no such agreement, on terms no less favorable than those offered to (or from) independent third parties.
ITEM 7C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
ITEM 8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
ITEM 8A.1 - ITEM 8.A.6:
See pages F-1 to F-41 following ITEM 19.
ITEM 8A.7 LEGAL PROCEEDINGS
As of December 31, 2004, our interest in an associated company, Guangzhou Tiecheng Enterprise Company Limited, or Tiecheng, amounted to approximately RMB140 million. In 1996, Tiecheng and a Hong Kong incorporated company jointly established Guangzhou Guantian Real Estate Company Limited, or Guangzhou Guantian, a sino-foreign cooperative joint venture to develop certain properties near a railway station owned and operated by us.
On October 27, 2000, Guangzhou Guantian together with Guangzhou Guanhua Real Estate Company Limited, or Guangzhou Guanhua, and Guangzhou Guanyi Real Estate Company Limited, or Guangzhou Guanyi, agreed to act as joint guarantors, or, collectively, the Guarantors, of certain payables of Guangdong Guangcheng Real Estate Company Limited, or Guangdong Guancheng, owned to an independent third party. The Guarantors, Guangdong Guancheng were related companies with a common chairman. Guangdong Guancheng failed to repay these payables, and the Guarantors were found liable under a court verdict made on November 4, 2001 to pay the independent third party an amount of approximately RMB257 million plus interest.
On December 15, 2003, Guangzhou Guantian applied to the High People's Court of Guangdong Province, or the Court, to discharge the aforesaid guarantee, which application was heard by the court on March 18, 2004. The Court has yet to complete the procedures for its reassessment of the previous court verdict. If Guangzhou Guantian were held responsible for the guarantee, we may need to provide for impairment on our interest in Tiecheng. However, based on counsel's advice, the directors are of the opinion that the guarantee arrangement is invalid under the relevant PRC rules and regulations. Accordingly, the directors consider that the chance of Guangzhou Guantian to settle the above claim is remote and no provision for impairment on the interests in Tiecheng was made in the accounts. In order to avoid any loss arising from any of the above legal proceedings, we have obtained a letter of undertakings from our Parent Company, whereby our Parent Company undertakes that it shall resolve or assume any loss arising from the above legal proceedings so as to ensure that our interests in the investment in Tiecheng will not be affected by the above legal proceedings.
Except as disclosed, we are not a party to any material legal proceeding and no material legal proceeding is known to us to be pending against us or with respect to our properties.
ITEM 8A.8 DIVIDEND DISTRIBUTIONS
We make decisions concerning the payment of dividends on an annual basis. Any dividends are paid at the discretion of our board of directors, which makes a recommendation in this regard that must be confirmed at our annual general shareholders' meeting. Our articles of
association permit us to distribute dividends from profits more than once a year. The amount of these interim dividends cannot exceed 50% of our distributable income as stated in our interim profit statements. In accordance with our articles of association, the amounts available for the purpose of paying dividends will be deemed to be the lesser of:
- net after-tax income determined in accordance with PRC accounting standards and regulations; and
- net after-tax income determined in accordance with either international accounting standards or the accounting standards of the countries in which our shares are listed.
See "Item 10E. Taxation" for a discussion of the tax consequences related to the receipt of dividends.
Our articles of association prohibit us from distributing dividends without first making up for cumulative losses from prior periods (determined in accordance with PRC accounting standards) and making all tax and other payments required by law. Further, prior to the payment of dividends, our profits are subject to deductions such as allocations to a statutory common reserve fund and into a public welfare fund. The common reserve fund may be used to make up losses or be converted into share capital or reinvested.
Our articles of association require that cash dividends in respect of H shares be declared in renminbi and paid in Hong Kong dollars at the average of the People's Bank of China rate for each day of the calendar week preceding the date of the dividend declaration. To the extent that we are unable to pay dividends in Hong Kong dollars from our own foreign exchange resources, we will have to obtain Hong Kong dollars through the interbank system or by other permitted means. Hong Kong dollar dividend payments will be converted by the depositary and distributed to holders of ADSs in U.S. dollars.
On March 17, 2005, the Board proposed a final dividend distribution of RMB0.11 per share to our shareholders for the year ended December 31, 2004. The final dividend payment has been approved by the shareholders at our 2004 annual general meeting held on May 12, 2005.
ITEM 8B. SIGNIFICANT CHANGES
Other than events already mentioned in this annual report, there have been no significant changes since December 31, 2004.
ITEM 9. THE OFFER AND LISTING
ITEM 9A. THE OFFER AND LISTING DETAILS
PRICE RANGE OF OUR H SHARES AND ADSS
As of December 31, 2004 and June 17, 2005, there were 1,431.3 million H shares issued and outstanding. As of December 31, 2004 and June 17, 2005, there were, respectively, 4,233,001 and 3,877,621 ADSs outstanding held by 183 and 185 registered holders. Since a percentage of the ADSs are held by nominees, these numbers may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons. The depositary for the ADSs is JPMorgan Chase Bank.
The Stock Exchange of Hong Kong is the principal non-US trading market for our H shares. The ADSs, each representing 50 H shares, have been issued by the JPMorgan Chase Bank as depositary and are listed on the New York Stock Exchange. The following table sets forth, for the periods indicated, the reported high and low closing sales prices for our securities on each of these two stock exchanges:
NEW YORK STOCK EXCHANGE STOCK EXCHANGE OF HONG KONG
----------------------- ---------------------------
CALENDAR PERIOD HIGH LOW HIGH LOW
--------------- ---- --- ---- ---
(US$ PER ADS) (HK$ PER H SHARE)
------------- -----------------
1999................................................ 7.625 4.8125 1.19 0.72
2000................................................ 7.625 4.5625 1.23 0.7
2001................................................ 10.48 6.19 1.76 0.90
2002................................................ 10.24 8.05 1.58 1.27
2003
January to March................................. 9.4 8.69 1.47 1.32
April to June.................................... 9.68 8.20 1.48 1.26
July to September................................ 13.7 9.15 2.125 1.42
October to December.............................. 14.84 12.88 2.25 1.95
2004
January to March................................. 17.25 13.95 2.65 2.15
April to June.................................... 15.54 11.77 2.45 1.77
July to September................................ 14.70 13.23 2.325 2.075
October to December.............................. 20.62 13.60 3.25 2.125
2005
January.......................................... 20.20 17.91 3.20 2.80
February......................................... 19.80 18.45 3.125 2.875
March............................................ 18.92 17.76 3.05 2.80
April............................................ 18.63 15.35 2.925 2.45
May.............................................. 17.94 16.20 2.825 2.50
June (through June 17th )........................ 17.42 16.42 2.775 2.55
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During the year ended December 31, 2004, we did not purchase, sell or redeem any of our shares.
ITEM 9B. PLAN OF DISTRIBUTION
Not applicable.
ITEM 9C. MARKETS
Our H shares are listed on the Stock Exchange of Hong Kong under the stock code "0525" and American Depositary Shares representing our H shares are listed on the New York Stock Exchange under the stock code "GSH".
ITEM 9D. SELLING SHAREHOLDERS
Not applicable.
ITEM 9E. DILUTION
Not applicable.
ITEM 9F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
We were established as a joint stock limited company under the Company Law of the PRC on March 6, 1996. Our legal name is [COMPANY NAME IN CHINESE], and its English translation is Guangshen Railway Company Limited.
ITEM 10A. SHARE CAPITAL
As of December 31, 2004, our share capital consisted of:
NUMBER PERCENTAGE
OF SHARES OF SHARE
TYPE OF SHARE CAPITAL ('000) (%)
State-owned legal person shares 2,904,250 66.99
H Shares 1,431,300 33.01
--------- ------
Total 4,335,550 100.00
--------- ------
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There was no change in our share capital during 2004.
PUBLIC FLOAT
As at March 17, 2005, at least 25% of our total issued share capital was held by the public, as required under the HKSE Listing Rules.
PRE-EMPTIVE RIGHTS
There is no provision in our Articles of Association or under the laws of the PRC which provides for pre-emptive rights of our shareholders.
ITEM 10B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Described below is a summary of the significant provisions of our articles of association as currently in effect. As this is a summary, it does not contain all the information that may be important to you. A copy of our complete articles of association as amended on the annual general meeting held on May 12, 2005 is attached hereto as Exhibit 1.1.
Our shareholders have approved a number of proposed amendments to our Articles of Association, which will take effect only upon the completion of our proposed A Share Issue. See "Item 5. Operating and Financial Review and Prospects--Proposed Issue of A Shares, Very Substantial Acquisition and Continuing Connected Transactions" and "--Recent Amendments to our Articles of Association" below.
GENERAL
We are a joint stock limited company established in accordance with the Company Law of China, the State Council's special regulations regarding the issue of shares overseas and the listing of shares overseas by companies limited by shares and other relevant laws and regulations
of the PRC. Guangshen Railway was established by way of promotion with approval evidenced by the document "Ti Gai Sheng" [1995] No.151 of the PRC's State Commission For Restructuring The Economic System. We were registered with and obtained a business licence from the Administration Bureau of Industry And Commerce of Shenzhen, Guangdong Province on March 6, 1996. The number of our business licence is Shen Si Zhi N12183. Article 12 of our articles of association states that our object is to carry on the business of railway transportation.
SIGNIFICANT DIFFERENCES BETWEEN H SHARES AND DOMESTIC SHARES
Holders of H shares and domestic shares, with minor exceptions, are entitled to the same economic and voting rights. However, our articles of association provide that holders of H shares will receive dividends in Hong Kong dollars while holders of domestic shares will receive dividends in renminbi. Other differences between the rights of holders of H shares and domestic shares relate primarily to ownership and transferability. H shares may only be subscribed for and owned by legal and natural persons of Taiwan, Hong Kong, Macau or any country other than the PRC, and must be subscribed for, transferred and traded in a foreign currency. Other than the limitation on ownership, H shares are freely transferable in accordance with our articles of association. Domestic shares may only be subscribed for and owned by legal or natural persons in the PRC, and must be subscribed for and traded in renminbi. Transfers of domestic shares are subject to restrictions set forth under PRC rules and regulations, which are not applicable to H shares, and also to restrictions on transfers of shares owned by the PRC government, and by our directors or employees. Domestic shares and H shares are also distinguished by differences in administration and procedure, including provisions relating to notices and financial reports to be sent to shareholders, dispute resolution, registration of shares on different parts of the register of shareholders, the method of share transfer and appointment of dividend receiving agents.
RESTRICTIONS ON TRANSFERABILITY
H shares may be traded only among foreign investors, and may not be sold to PRC investors (except investors from Hong Kong, Macau and Taiwan). PRC investors (except investors from Hong Kong, Macau and Taiwan) are not entitled to be registered as holders of H shares. Under our articles of association, we may refuse to register a transfer of H shares unless:
- relevant transfer fees are paid, if any;
- the instrument of transfer only involves H shares;
- the stamp duty chargeable on the instrument of transfer has been paid;
- the relevant share certificate and, upon the reasonable request of the board of directors, any evidence in relation to the right of the transferor to transfer the shares have been submitted;
- if the shares are being transferred to joint owners, the maximum number of joint owners does not exceed four; and
- we do not have any lien on the relevant shares.
DIVIDENDS
Unless otherwise resolved by a general shareholders' meeting, we may distribute dividends more than once a year, provided that the amount of interim dividends distributed shall not exceed 50% of the distributable income as stated in our interim profit statement. In accordance with our articles of association, our net income for the purpose of income distribution will be deemed to be the least of the amounts determined in accordance with:
- PRC accounting standards and regulations,
- international accounting standards; and
- the accounting standards of the countries in which our shares are listed.
The articles of association allow for distributions of cash dividends or shares. Dividends may only be distributed, however, after allowance has been made for:
- making up losses, if any, for prior years;
- allocations to the statutory common reserve fund;
- allocations to the statutory public welfare fund; and
- allocations to a discretionary common reserve if approved by the shareholders.
Our articles of association require us to appoint on behalf of the holders of H shares receiving agents to receive on behalf of these shareholders dividends declared and all other moneys owing by us in respect of the H shares. The receiving agent appointed shall be a company that is registered as a trust company under the Trustee Ordinance of Hong Kong. Our articles of association require that cash dividends in respect of H shares be declared in renminbi and paid by us in Hong Kong dollars. If we record no profit for the year, we may not normally distribute dividends for the year.
VOTING RIGHTS AND SHAREHOLDER MEETINGS
General shareholders' meetings can be annual general shareholders' meetings or extraordinary general meetings. Shareholders' meetings shall be convened by the board of directors. The board of directors shall convene an annual shareholders' meeting within six months of the end of each financial year. The shareholders provide us with principal authority at general meetings. We exercise our functions and powers in compliance with our articles of association and our by-laws.
We shall not enter into any contract with any person other than a director, supervisor, general manager or other senior officer of Guangshen Railway whereby the management and administration of the whole or any substantial part of any business of Guangshen Railway is to be handed over to such person without the prior approval of the shareholders in a general meeting.
The board of directors shall convene an extraordinary shareholders' meeting within two months if any one of the following circumstances occurs:
- the number of directors falls short of the number stipulated in our by-laws or is below two-thirds of the number required in our articles of association;
- our accrued losses amount to one-third of our total share capital;
- shareholders holding not less than 10% of our issued shares carrying the right to vote make a request in writing to convene an extraordinary general meeting; or
- the board of directors considers it necessary or the supervisory committee proposes to convene such a meeting.
Where we convene a general shareholders' meeting (when we have more than one shareholder), we shall, not less than 45 days before the meeting, issue a written notice to all shareholders whose names appear in the share register of the items to be considered and the date and venue of the meeting. Any shareholder intending to attend the general shareholders' meeting shall give us a written reply stating his or her intention to attend the meeting 20 days prior to the date of the meeting.
Where we convene an annual general meeting, shareholders holding not less than five percent of our total shares shall be entitled to submit new motions in writing to us. We shall include in the agenda of the meeting all items in the motion that fall within the scope of the general shareholders' meeting. An extraordinary shareholders' meeting shall not decide on matters that are not specified in the notice.
Based on the written replies received by us 20 days before a general shareholders' meeting, we shall calculate the number of voting shares represented by shareholders who have indicated their intention to attend the meeting. Where the number of voting shares represented by those shareholders reaches half of our total number of shares, we may convene the general shareholders' meeting. Otherwise, we shall, within five days, inform the shareholders again of the motions to be considered, the date and the venue of the meeting by way of a public announcement. After making the announcement, the general shareholders' meeting may be convened.
A notice of meeting of shareholders shall:
- be in writing;
- specify the place, day and the time of the meeting;
- state the motions to be discussed at the meeting;
- provide such information and explanations as are necessary for the shareholders to exercise an informed judgment on the proposals before them. Without limiting the generality of the foregoing, where a proposal is made to amalgamate Guangshen Railway with another entity, to repurchase the shares of Guangshen Railway, to reorganize its share capital or to restructure Guangshen Railway in any other way, the terms of the proposed transaction must be provided in detail, together with copies of the proposed agreement, if any, and the cause and effect of the proposal must be properly explained;
- contain disclosure of the nature and extent, if any, of material interests of any director, supervisor, general manager or other senior officer of Guangshen Railway in the transaction proposed and the effect of the proposed transaction on them in their capacity as shareholders in so far as it is different from the effect on the interests of shareholders of the same class;
- contain the text of any special resolution proposed to be moved at the meeting;
- contain conspicuously a statement that a shareholder entitled to attend and vote is entitled to appoint one or more proxies to attend and vote instead of him or her and that a proxy need not also be a shareholder; and
- state the time within which and the address to which the relevant instruments appointing the proxies for the meeting are to be delivered.
Notice of general meetings of shareholders shall be served on each shareholder whether or not entitled to vote at that meeting, by personal delivery or prepaid mail to the address of the shareholder as shown in the share register. For the benefit of holders of domestic shares, notice of general meetings of shareholders may also be given by way of public announcement by publication in one or more newspapers specified by the securities regulatory authorities on any day within 45 to 50 days prior to the meeting. This public announcement shall be deemed receipt by each holder of domestic shares of notice of the relevant meeting. The accidental omission to give notice of a meeting to, or the non-receipt of notice of a meeting by any person entitled to receive notice shall not invalidate the meeting and the resolutions adopted. Where we convene an annual general meeting, we shall include in the notice of the meeting any resolutions submitted by shareholders (including proxies) who hold five percent or more of the total number of shares, provided that these resolutions fall within the scope of a general shareholders' meeting.
The following matters shall be resolved by way of ordinary resolution of the general shareholders' meeting:
- work reports of the board of directors and the supervisory committee;
- profit distribution proposals and loss recovery proposals formulated by the board of directors;
- appointment and removal of members of the board of directors and the supervisory committee, their remuneration and methods of payment;
- our annual financial budget, final accounts, balance sheet, profit and loss account and other financial statements; and
- matters other than those that are required by laws, administrative regulations or our articles of association to be adopted by way of special resolution.
The following matters shall be resolved by way of special resolution of the general shareholders' meeting:
- increase or reduction of our share capital and the issuance of shares of any class, warrants and other similar securities;
- issuance of company debentures;
- division, merger, dissolution and liquidation of Guangshen Railway;
- amendment to our articles of association; and
- any other matter that, according to an ordinary resolution of the shareholders meeting, may have a significant impact on Guangshen Railway and requires adoption by way of a special resolution.
Shareholders have the right to attend general meetings of shareholders and to exercise their voting rights, in person or by proxy, in relation to the amount of voting shares they represent. Each share carries the right to one vote.
At any meeting of shareholders a resolution shall be decided by a show of hands unless a poll is demanded before or after any vote by show of hands:
- by the chairman of the meeting;
- by at least two shareholders who possess the right to vote, present in person or by proxy; or
- by one or more shareholders (including proxies) representing either separately or in aggregate, not less than one-tenth of all shares having the right to vote at the meeting.
Unless a poll is demanded, a declaration by the chairman of the meeting that a resolution has on a show of hands been carried and an entry to that effect in the minutes of the meeting shall be conclusive evidence of the fact, without proof of the number or proportion of the votes recorded in favor of or against that resolution, that the resolution has been carried. A demand for a poll may be withdrawn. A poll demanded on the election of the chairman, or on a question of adjournment, shall be taken. A poll demanded on any other question shall be taken at such time
as the chairman of the meeting directs, and any business other than that on which the poll has been demanded may be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. On a poll taken at a meeting, a shareholder entitled to two or more votes need not cast all his or her votes in the same way. In the case of a tie, the chairman of the meeting shall be entitled to one additional vote.
BOARD OF DIRECTORS
Where a director is interested in any resolution proposed at a board meeting, the director shall not be present and shall not have a right to vote. That director shall also not be counted in the quorum of the relevant meeting.
Our directors' compensation is determined by resolutions approved at the general shareholders' meeting. Our directors have no power to decide their own compensations.
Our directors are not required to hold shares of our Company. There is no age limit requirement with respect to retirement or non-retirement of our directors.
LIQUIDATION RIGHTS
In the event of the termination or liquidation of Guangshen Railway, ordinary shareholders of Guangshen Railway shall have the right to participate in the distribution of surplus assets of Guangshen Railway in accordance with the number of shares held by those shareholders.
LIABILITY OF SHAREHOLDERS
The liability of holders of our shares for our losses or liabilities is limited to their capital contributions in Guangshen Railway.
INCREASES IN SHARE CAPITAL AND PREEMPTIVE RIGHTS
Our articles of association require that approval by a special resolution of the shareholders and by special resolution of holders of domestic shares and H shares at separate shareholder class meetings be obtained prior to authorizing, allotting, issuing or granting shares, securities convertible into shares or options, warrants or similar rights to subscribe for any shares or convertible securities. No approval is required if, but only to the extent that, Guangshen Railway issues domestic shares and H shares, either separately or concurrently, in numbers not exceeding 20% of the number of domestic shares and H shares then in issue, respectively, in any 12 month period, as approved by a special resolution of the shareholders. New issues of shares must also be approved by relevant PRC authorities.
REDUCTION OF SHARE CAPITAL AND PURCHASE BY US OF OUR SHARES
We may reduce our registered share capital. In the following circumstances, we may repurchase shares, that we issued in the market, subject to a resolution passed in accordance with the provisions of our articles of association and approval by the securities regulatory authorities:
- to cancel shares by way of reduction of capital;
- to merge with another company that holds our shares; or
- other circumstances permitted by laws and regulations.
Subject to approval by PRC securities regulatory authorities and compliance with applicable law, we may carry out a share repurchase by one of the following methods:
- under a general offer;
- on a stock exchange; or
- by off-market contract.
We may, with the prior approval of shareholders in general meeting obtained in accordance with our articles of association, repurchase our shares by an off-market contract, and we may rescind or vary such a contract or waive any of our rights under the contract with the prior approval of shareholders obtained in the same manner. A contract to repurchase shares includes (without limitation) an agreement to become obliged to repurchase and an agreement to acquire the right to repurchase our shares. We shall not assign a contract to repurchase our own shares or any rights provided thereunder.
Shares repurchased by us shall be canceled and the amount of our registered capital shall be reduced by the par value of those shares. To the extent that shares are repurchased out of an amount deducted from our distributable profits, the amount of our registered capital so reduced shall be transferred to our share common reserve account.
Unless we are in the process of liquidation:
- where we repurchase our shares at par value, the amount of the total par value shall be deducted from our distributable profits or out of the proceeds of a new issue of shares made for that purpose; and
- where Guangshen Railway repurchases its shares at a premium, an amount equivalent to their total par value shall be deducted from our distributable profits or the proceeds of a fresh issue of shares made for that purpose. Payment of the portion in excess of their face value shall be effected as follows:
- if the shares being repurchased were issued at par value, payment shall be made out of our distributable profits; and
- if the shares being repurchased were issued at a premium, payment shall be made out of our distributable profits or out of proceeds of a new issue of shares made for that purpose, provided that the amount paid out of the proceeds of the new issue may not exceed the lesser of the aggregate of
premiums received by us on the issue of the shares repurchased or the current balance of our capital common reserve account (inclusive of the premiums from the fresh issue).
Payment by us in consideration for:
- the acquisition of rights to repurchase our shares; the variation of any contract to repurchase our shares; or
- the release of any of our obligations under any contract to repurchase our shares; shall be made out of our distributable profits.
RESTRICTIONS ON CONTROLLING SHAREHOLDERS
In addition to obligations imposed by law or required by the stock exchanges on which our shares are listed, a controlling shareholder (as defined below) shall not exercise his or her voting rights in respect of the following matters in a manner prejudicial to the interests of the shareholders generally or of our other shareholders:
- to relieve a director or supervisor of his or her duty to act honestly in our best interests;
- to approve the expropriation, by a director or supervisor (for his or her own benefit or for the benefit of another person), in any guise, of our assets, including without limitation opportunities advantageous to us; or
- to approve the expropriation by a director or supervisor (for his or her own benefit or for the benefit of another person) of the individual rights of other shareholders, including without limitation rights to distributions and voting rights, save and except where it was done pursuant to a restructuring submitted to and approved by our shareholders in accordance with our articles of association.
"Controlling shareholder" means a person or a group of persons who satisfies one or more of the following conditions:
- he or she alone or the group acting in concert has the power to elect more than half the board of directors;
- he or she alone or acting in concert with others has the power to exercise or to control the exercise of 30% or more of our voting rights;
- he or she alone or acting in concert with others holds 30% or more of our issued and outstanding shares; or
- he or she alone or acting in concert with others in any other manner controls us in fact.
CHANGING RIGHTS OF A CLASS OF SHAREHOLDERS
Rights conferred on any class of shareholders in the capacity of shareholders may not be varied or abrogated unless approved by a special resolution of shareholders at a general meeting and by holders of shares of that class at a separate meeting conducted in accordance with our articles of association.
DUTIES OF DIRECTORS, SUPERVISORS AND OTHER SENIOR OFFICERS IN INTERESTED TRANSACTIONS
Where a director, supervisor or other senior officer (or an associate thereof) of ours is in any way materially interested in a contract or transaction or proposed contract or transaction with us (other than his or her contract of service with us), he or she shall declare the nature and extent of his or her interest to the board of directors at the earliest opportunity, whether or not the contract, transaction or proposal is subject to the approval of the board of directors.
Unless the interested director, supervisor or other senior officer discloses his or her interests and the contract or transaction is approved by the board of directors at a meeting in which the interested director, supervisor or other senior officer is not counted in the quorum and refrains from voting, a contract or transaction in which that director, supervisor or other senior officer is materially interested is voidable by us except as against a bona fide party to the contract or transaction acting without notice of the breach of duty by the interested director or supervisor or other senior officer.
We shall not make a loan to or provide any guarantees in connection with a loan to a director, supervisor or other senior officer of Guangshen Railway or any of their respective associates. However, the following transactions are not subject to this prohibition:
- the provision by us of a loan or a guarantee of a loan to one of our subsidiaries;
- the provision by us of a loan or a guarantee in connection with a loan or any other funds to any of our directors, supervisors or other senior officers to pay expenditures incurred or to be incurred on our behalf by him or her or for the purpose of enabling him or her to perform his or her duties properly, in accordance with the terms of a service contract approved by the shareholders at a general meeting; and
- the provision by us of a loan or a guarantee in connection with a loan to any of our directors, supervisors or other senior officers or their respective associates in the ordinary course of our business on normal commercial terms, provided that the ordinary course of business includes the lending of money or the giving of guarantees.
RECENT AMENDMENTS TO OUR ARTICLES OF ASSOCIATION
In connection with our proposed Acquisition and A Share Issue, we made a conditional amendment to our articles of association in December 2004 to meet applicable PRC regulatory
requirements, in particular, the Mandatory Provisions for the Articles of Association of Companies to be Listed Outside China. The proposed amendment to our articles of association was furnished to the SEC as Exhibit 1.1 -- Appendix IX IX to the Form 6-K filed on December 8, 2004. The proposed amendment will take effect only if our proposed A Share Issue is completed. In May 2004, we made further amendments to our then effective articles of association, which changed the number of our directors from ten to nine. This amendment to our article of association was furnished to the SEC as Exhibit 1.1 to the Form 6-K filed on May 13, 2005.
ITEM 10C. MATERIAL CONTRACTS
Except for the Acquisition Agreement and the connected transaction
agreements we entered into with Yangcheng Railway Company as discussed in "ITEM
5. Operating and Financial Review and Prospects(pound)-Overview(pound)-Proposed
Issue of A Shares, Very Substantial Acquisition and Continuing Connected
Transactions", all other material contracts we entered into during the fiscal
year of 2003 and 2004 were all made in the ordinary course of business.
ITEM 10D. EXCHANGE CONTROLS
The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of renminbi into foreign exchange and through restrictions on foreign trade. Effective January 1, 1994, the dual foreign exchange system in China was abolished in accordance with the notice of the People's Bank of China concerning future reform of the foreign currency control system issued December 1993. The conversion of renminbi into U.S. dollars in China currently must be based on the People's Bank of China rate. The People's Bank of China rate is set based on the previous day's Chinese interbank foreign exchange market rate and with reference to current exchange rates on the world financial markets.
Any future devaluation of the renminbi against the U.S. dollar (whether due to a decrease in the foreign currency reserves held by the PRC government or any other reason) will have an adverse effect upon the U.S. dollar equivalent and Hong Kong dollar equivalent of our net income and increase the effective cost of foreign equipment and the amount of foreign currency expenses and liabilities. We have no plans to hedge our currency exposure in the future. No assurance can be given that the Hong Kong dollar to U.S. dollar exchange rate link will be maintained in the future, or, therefore, that the Hong Kong dollar revenues of Guangshen Railway will insulate Guangshen Railway from changes in the renminbi-U.S. dollar and renminbi-HK dollar exchange rates. Furthermore, any change in exchange rates that has a negative effect on the market for the H shares in either the United States or Hong Kong is likely to result in a similar negative effect on the other market.
We have been, and will continue to be, affected by changes in exchange rates in connection with our ability to meet our foreign currency obligations and will be affected by such changes in connection with our ability to pay dividends on H shares in Hong Kong dollars and on ADSs in U.S. dollars. As of December 31, 2004, we maintained the equivalent of approximately RMB934.8 million in U.S. dollar or Hong Kong dollar-denominated balances for purposes of satisfying our foreign currency obligations (e.g., to purchase foreign equipment) and
paying dividends to our overseas shareholders. See Note 32 to our audited consolidated financial statements. Guangshen Railway believes that it has or will be able to obtain sufficient foreign exchange to continue to satisfy these obligations. Guangshen Railway does not engage in any financial contract or other arrangement to hedge its currency exposure.
We are not aware of any other PRC laws, decrees or regulations that restrict the export or import of capital or that affect the remittance of dividends, interest or other payments to non-resident holders.
ITEM 10E. TAXATION
PRC TAXATION
TAX BASIS OF ASSETS
As of June 30, 1995, our assets were valued in conjunction with the restructuring. This valuation, which was confirmed by the State Assets Administration Bureau, establishes the tax basis for these assets.
INCOME TAX
Since January 1, 1994, income tax payable by PRC domestic enterprises, including state-owned enterprises and joint stock companies, has been governed by the PRC Enterprise Income Tax Provisional Regulations and its implementation measures, or EIT regulations, which provide for an income tax rate of 33%, unless a lower rate is provided by law, administrative regulations or State Council regulations. Guangshen Railway is generally subject to tax at a rate of 33% pursuant to the EIT Regulations. However, as a result of our incorporation in the Shenzhen Special Economic Zone, our corporate income tax rate is reduced to 15%. Pursuant to an approval from the Shenzhen Local Tax Bureau dated November 12, 1997, Guangshen Railway was also entitled to a 50% further reduction of income tax arising from our high-speed train services in 1997, 1998 and 1999. To the extent that Guangshen Railway engages in other businesses through subsidiaries, those other companies are subject to corporate income tax rates of either 15% or 33% (applicable to places other than Shenzhen), depending mainly on their places of incorporation.
VALUE ADDED TAX
Pursuant to the Provisional Regulations of the PRC Concerning Value Added Tax effective from January 1, 1994 and the related implementing rules, our passenger and freight transportation businesses are is not subject to value added tax, while our other businesses, such as retail sales of food, beverages and merchandise aboard our trains and in our stations, and some of the businesses conducted by our subsidiaries are subject to value added tax at the rate of either 6% or 17%, depending on the scale and nature of the businesses.
BUSINESS TAX
Pursuant to the Provisional Regulations of the PRC Concerning Business Tax effective from January 1, 1994 and its implementing rules, business tax is imposed on enterprises that
provide transportation services in the PRC. Business tax is levied at a rate of 3% on the transport of passengers and goods in or out of the PRC.
TAX ON DIVIDENDS
For an Individual Investor. According to the Provisional Regulations of the PRC Concerning Questions of Taxation on Enterprises Experimenting with the Share System promulgated on June 12, 1992, referred to herein as the provisional regulations, an income tax of 20% shall be withheld in accordance with the Individual Income Tax Law of the PRC on dividend payments from such enterprises to an individual. For a foreign individual who is not a resident of the PRC, the receipt of dividends from a company in the PRC is normally subject to this 20% PRC withholding tax unless reduced by an applicable double-taxation treaty. However, on July 21, 1993, the PRC State Tax Bureau issued a Notice Concerning the Taxation of Gains on Transfers and Dividends from Shares (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals, referred to herein as the tax notice, which stipulates that dividends from a PRC company on shares listed on an overseas stock exchange, or overseas shares, such as H shares (including H shares represented by ADSs), would not for the time being be subject to PRC withholding tax. The relevant tax authority has thus far not collected any withholding tax on dividend payments on overseas shares.
Amendments to the Individual Income Tax Law of the PRC were promulgated on October 31, 1993 and became effective on January 1, 1994. These amendments stipulate that any provisions of prior administrative regulations concerning individual income tax that contradict the amendments shall be superseded by the amendments. The amendments and the amended Individual Income Tax Law may be interpreted as meaning that foreign individuals will be subject to a withholding tax on dividends received from a company in the PRC at a rate of 20% unless such income is specifically exempted from individual income tax by the financial authority of the State Council.
However, in a letter dated July 26, 1994 to the State Commission for Restructuring the Economic System, the State Securities Commission and the China Securities Regulatory Commission regarding "Relevant Tax Issues on Dividends Received by Foreigners Who Hold Shares of Listed PRC Companies," the State Tax Bureau reiterated the temporary tax exemption stated in the Tax Notice for dividends received from a PRC company listed overseas. As long as this letter is in effect, foreign individual investors will not be subject to the 20% withholding tax on dividends received from such a company.
For an Enterprise. When a foreign enterprise with no establishment or office in the PRC receives dividends from a company in the PRC, the foreign enterprise is normally subject to PRC withholding tax of 20% under the Income Tax Law of the PRC Concerning Enterprises with Foreign Investment and Foreign Enterprises. With respect to dividends paid by a company incorporated in the Shenzhen Special Economic Zone (such as Guangshen Railway), the withholding tax rate is 10%. However, according to the Tax Notice, a foreign enterprise without an establishment in the PRC receiving a dividend payment on overseas shares, such as H shares or ADSs, will not be subject to withholding tax on the dividend payment.
CAPITAL GAINS TAX
For An Individual Investor. Although the Provisions of Implementation of Individual Income Tax Law of the PRC, issued on January 28, 1994, stipulate that gains realized on the sale of shares by an individual would be subject to income tax at a rate of 20% and empower the Ministry of Finance to draft detailed rules on the mechanism of collecting this tax, the Tax Notice provides that gains realized by holders (both individuals and enterprises) of H shares or ADSs will not be subject to income tax.
For An Enterprise. A foreign enterprise with no establishment or office in the PRC is generally subject to a 20% tax on capital gains from the sale of shares in a company in the PRC. However, we believe that the tax exemption on capital gains enjoyed by foreign enterprises pursuant to the Tax Notice continues to be valid.
TAX TREATIES
Foreign enterprises with no establishment in the PRC and individuals not resident in the PRC and who are resident in countries that have entered into double taxation treaties with the PRC may be entitled to a reduction of any withholding tax imposed on the payment of dividends from a PRC company. The PRC currently has double taxation treaties with a number of countries, including Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.
The Agreement Between the Government of the United States of America and the PRC Government for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, together with related protocols, referred to herein as the US-PRC tax treaty, currently limit the rate of PRC withholding tax upon dividends paid by Guangshen Railway to a United States holder who is a United States resident for purposes of the US-PRC tax treaty to 10%. It is uncertain if the US-PRC tax treaty exempts from PRC tax the capital gains of a U.S. holder arising from the sale or disposition of H shares or ADSs. U.S. holders are advised to consult their tax advisors with respect to these matters.
UNITED STATES FEDERAL INCOME TAXATION
The following is a general discussion of the material United States federal income tax consequences of purchasing, owning and disposing of the H shares or ADSs if you are a U.S. holder, as defined below, and hold the H shares or ADSs as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This discussion does not address all of the tax consequences relating to the purchase, ownership and disposition of the H shares or ADSs, and does not take into account U.S. holders who may be subject to special rules including:
- tax-exempt entities;
- certain insurance companies;
- broker-dealers;
- traders in securities that elect to mark to market;
- U.S. holders liable for alternative minimum tax;
- U.S. holders that own 10% or more of our voting stock;
- U.S. holders that hold the H shares or ADSs as part of a straddle or a hedging or conversion transaction; or
- U.S. holders whose functional currency is not the U.S. dollar.
This discussion is based on the Code, its legislative history, final, temporary and proposed United States Treasury regulations promulgated thereunder, published rulings and court decisions as in effect on the date hereof, all of which are subject to change, or changes in interpretation, possibly with retroactive effect. In addition, this discussion is based in part upon representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreements will be performed according to its terms.
You are a "U.S holder" if you are:
- a citizen or resident of the United States for United States federal income tax purposes;
- a corporation, or other entity treated as a corporation for United States federal income tax purposes, created or organized under the laws of the United States or any political subdivision thereof;
- an estate the income of which is subject to United States federal income tax without regard to its source; or
- a trust:
- subject to the primary supervision of a United States court and the control of one or more United States persons; or
- that has elected to be treated as a United States person under applicable United States Treasury regulations.
If a partnership holds the H shares or ADSs, the tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. If you are a partner of a partnership that holds the H shares or ADSs, we urge you to consult your tax advisors regarding the consequences of the purchase, ownership and disposition of the H shares or ADSs.
This discussion does not address any aspects of United States taxation other than federal income taxation.
WE URGE YOU TO CONSULT YOUR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE H SHARES OR ADSS.
In general, if you hold ADRs evidencing ADSs, you will be treated as the owner of the H shares represented by the ADSs. The following discussion assumes that we are not a passive foreign investment company, or PFIC, as discussed under "PFIC Rules" below.
DISTRIBUTIONS ON THE H SHARES OR ADSS
The gross amount of any distribution (without reduction for any PRC tax withheld) we make on the H shares or ADSs out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) will be includible in your gross income as dividend income when the distribution is actually or constructively received by you, in the case of the H shares, or by the depositary in the case of ADSs. Subject to certain limitations, dividends paid to non-corporate U.S. holders, including individuals, may be eligible for a reduced rate of taxation if we are deemed to be a "qualified foreign corporation" for U.S. federal income tax purposes. A qualified foreign corporation includes:
- a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States that includes an exchange of information program; and
- a foreign corporation if its stock with respect to which a dividend is paid (or ADSs backed by such stock) is readily tradable on an established securities market within the United States,
but does not include an otherwise qualified foreign corporation that is a PFIC. We believe that we will be a qualified foreign corporation so long as we are not a PFIC and we are considered eligible for the benefits of the Agreement between the Government of the United States of America and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the Treaty. Our status as a qualified foreign corporation, however, may change.
Distributions that exceed our current and accumulated earnings and profits will be treated as a return of capital to you to the extent of your basis in the H shares or ADSs and thereafter as capital gain. Any dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from United States corporations. The amount of any distribution of property other than cash will be the fair market value of such property on the date of such distribution.
If we make a distribution paid in HK dollars, you will be considered to receive the U.S. dollar value of the distribution determined at the spot HK dollar/U.S. dollar rate on the date such distribution is received by you or by the depositary, regardless of whether you or the depositary convert the distribution into U.S. dollars. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is includible in your income to
the date you or the depositary convert the distribution into U.S. dollars will be treated as United States source ordinary income or loss for foreign tax credit limitation purposes.
Subject to various limitations, any PRC tax withheld from distributions in
accordance with PRC law, as limited by the Treaty, will be deductible or
creditable against your United States federal income tax liability. For foreign
tax credit limitation purposes, dividends paid on the H shares or ADSs will be
foreign source income, and for taxable years beginning on or before December 31,
2006, generally will be treated as "passive income" or, in the case of some U.S.
holders, "financial services income." For taxable years beginning after December
31, 2006, such dividends generally will be treated as "passive category income"
or, in the case of some U.S. holders, "general category income." You may not be
able to claim a foreign tax credit (and instead may claim a deduction) for
non-United States taxes imposed on dividends paid on the H Shares or ADSs if you
(i) have held the H Shares or ADSs for less than a specified minimum period
during which you are not protected from risk of loss with respect to such
shares, or (ii) are obligated to make payments related to the dividends (for
example, pursuant to a short sale).
SALE, EXCHANGE OR OTHER DISPOSITION
Upon a sale, exchange or other disposition of the H shares or ADSs, you will recognize a capital gain or loss for United States federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and your tax basis, determined in U.S. dollars, in such H shares or ADSs. Any gain or loss will generally be United States source gain or loss for foreign tax credit limitation purposes. Capital gain of certain non-corporate U.S. holders, including individuals, is generally taxed at a maximum rate of 15% where the property has been held more than one year. Your ability to deduct capital losses is subject to limitations.
If you are paid in a currency other than U.S. dollars, any gain or loss resulting from currency exchange fluctuations during the period from the date of the payment resulting from sale, exchange or other disposition to the date you convert the payment into U.S. dollars will be treated as United States source ordinary income or loss for foreign tax credit limitation purposes.
PFIC RULES
In general, a foreign corporation is a PFIC for any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries:
- 75% or more of its gross income consists of passive income, such as dividends, interest, rents and royalties; or
- 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income.
We believe that we will not meet either of the PFIC tests in the current or subsequent taxable years and therefore will not be treated as a PFIC for such periods. However, there can be no assurance that we will not be a PFIC in the current or subsequent taxable years.
If we were a PFIC in any taxable year that you held the H shares or ADSs, you generally would be subject to special rules with respect to "excess distributions" made by us on the H shares or ADSs and with respect to gain from your disposition of the H shares or ADSs. An "excess distribution" generally is defined as the excess of the distributions you receive with respect to the H shares or ADSs in any taxable year over 125% of the average annual distributions you have received from us during the shorter of the three preceding years, or your holding period for the H shares or ADSs. Generally, you would be required to allocate any excess distribution or gain from the disposition of the H shares or ADSs ratably over your holding period for the H shares or ADSs. The portion of the excess distribution or gain allocated to a prior taxable year, other than a year prior to the first year in which we became a PFIC, would be taxed at the highest United States federal income tax rate on ordinary income in effect for such taxable year, and you would be subject to an interest charge on the resulting tax liability, determined as if the tax liability had been due with respect to such particular taxable years. The portion of the excess distribution or gain that is not allocated to prior taxable years, together with the portion allocated to the years prior to the first year in which we became a PFIC, would be included in your gross income for the taxable year of the excess distribution or disposition and taxed as ordinary income.
The foregoing rules with respect to excess distributions and dispositions may be avoided or reduced if you are eligible for and timely make a valid "mark-to-market" election. If your H shares or ADSs were treated as shares regularly traded on a "qualified exchange" for United States federal income tax purposes and a valid mark-to-market election was made, in calculating your taxable income for each taxable year you generally would be required to take into account as ordinary income or loss the difference, if any, between the fair market value and the adjusted tax basis of your H shares or ADSs at the end of your taxable year. However, the amount of loss you would be allowed is limited to the extent of the net amount of previously included income as a result of the mark-to-market election. The New York Stock Exchange on which the ADSs are traded is a qualified exchange for United States federal income tax purposes.
Alternatively, a timely election to treat us as a qualified electing fund under Section 1295 of the Code could be made to avoid the foregoing rules with respect to excess distributions and dispositions. You should be aware, however, that if we become a PFIC, we do not intend to satisfy record keeping requirements that would permit you to make a qualified electing fund election.
If you own the H shares or ADSs during any year that we are a PFIC, you must file Internal Revenue Service, or IRS, Form 8621. We encourage you to consult your own tax advisor concerning the United States federal income tax consequences of holding the H shares or ADSs that would arise if we were considered a PFIC.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to dividends in respect of the H shares or ADSs or the proceeds of the sale, exchange, or redemption of the H shares or ADSs paid within the United States, and in some cases, outside of the United States, other than to various exempt recipients, including corporations. In addition, you may, under some circumstances, be subject to "backup withholding" with respect to dividends paid on the H
shares or ADSs or the proceeds of any sale, exchange or transfer of the H shares or ADSs, unless you
- are a corporation or fall within various other exempt categories, and, when required, demonstrate this fact; or
- provide a correct taxpayer identification number on a properly completed IRS Form W-9 or a substitute form, certify that you are exempt from backup withholding and otherwise comply with applicable requirements of the backup withholding rules.
Any amount withheld under the backup withholding rules generally will be creditable against your United States federal income tax liability provided that you furnish the required information to the IRS in a timely manner. If you do not provide a correct taxpayer identification number you may be subject to penalties imposed by the IRS.
HONG KONG TAXATION
The following discussion summarizes the material Hong Kong tax provisions relating to the ownership of H shares or ADSs held by you.
DIVIDENDS
No tax will be payable by you in Hong Kong in respect of dividends paid by us.
TAXATION OF CAPITAL GAINS
No capital gain tax is generally imposed in Hong Kong in respect of capital gains from the sale of property (such as the H Shares). However, if trading gains from the sale of property by persons as part of profit making are regarded as carrying on a trade, profession or business in Hong Kong, where such gains are derived from or arise in Hong Kong from such trade, profession or business, such trading gains will be chargeable to Hong Kong profits tax, which is currently imposed at the rate of 17.5% on corporations and at a maximum rate of 16% on individuals. Amendments to increase the Hong Kong profits tax to 17.5% for corporations and 15.5% for individuals have been proposed by the Financial Secretary. However, as of the date of this annual report, such proposals have not yet been adopted. Gains from sales of the H Shares effected on the Hong Kong Stock Exchange will be considered to be derived from or arise in Hong Kong. Liability for Hong Kong profits tax would thus arise in respect of trading gains from sales of H shares realized by persons carrying on a business of trading or dealing in Hong Kong in securities.
There will be no liability for Hong Kong profits tax in respect of profits from the sale of ADSs (i.e., the profits derived abroad), where purchases and sales of ADSs are effected outside Hong Kong, e.g. on the New York Stock Exchange.
HONG KONG STAMP DUTY
Hong Kong stamp duty will be payable by each of the seller and the purchaser for every sale and purchase, respectively, of the H shares. An ad valorem duty is charged at the rate of 0.2% of the value of the H shares transferred and the relevant contract notes shall be stamped (the buyer and seller each paying half of such stamp duty). In addition, a fixed duty of HK$5 is currently payable on an instrument of transfer of H shares.
The withdrawal of H shares when ADSs are surrendered, and the issuance of ADSs when H shares are deposited, may be subject to Hong Kong stamp duty at the rate described above for sale and purchase transactions, if the withdrawal or deposit results in a change of legal and beneficial ownership under Hong Kong law. The issuance of ADSs for deposited H shares issued directly to the depositary or for the account of the depositary should not lead to a Hong Kong stamp duty liability. You are not liable for the Hong Kong stamp duty payable on transfers of ADSs outside of Hong Kong.
HONG KONG ESTATE DUTY
Estate duty is levied on the value of property situated in Hong Kong passing or deemed passing on the death of a person. H shares are regarded as property situated in Hong Kong for estate duty purposes. Currently, for persons dying on or after April 1, 1998, Hong Kong estate duty is imposed on the principal value of a deceased's estate at graduated rates from 5% to 15%. No estate duty is payable where the principal value of the dutiable estate does not exceed HK$7.5 million; the maximum rate of 15% applies where the principal value exceeds HK$10.5 million.
ITEM 10F. DIVIDENDS AND PAYING AGENTS
Not applicable.
ITEM 10G. STATEMENT BY EXPERTS
Not applicable.
ITEM 10H. DOCUMENTS ON DISPLAY
We filed with SEC in Washington, D.C. a registration statement on Form F-1 (Registration No.333-3382) under the Securities Act in connection with our global offering of American depositary shares in May 1996. The registration statement contains exhibits and schedules. For further information with respect to Guangshen Railway and our American depositary shares, please refer to the registration statement and to the exhibits and schedules filed with the registration statement.
Additionally, we are subject to the informational requirements of the Exchange Act, and, in accordance with the Exchange Act, we file annual reports on Form 20-F within six months of our fiscal year end, and we will submit other reports and information under cover of Form 6-K with the SEC. You may review a copy of the registration statement and other information without charge at the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. You may also inspect the registration statement and its exhibits and schedules at the office of the New York Stock Exchange, 11 Wall Street, New York, New York 10005. You may also get copies, upon payment of a prescribed fee, of all or a portion of the registration statement from the SEC's public reference room or by calling the SEC on 1-800-SEC-0330 or visiting the SEC's website at www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements to shareholders.
ITEM 10I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following paragraphs describe the various market risks to which we were exposed as of December 31, 2004.
CURRENCY RISKS
As approved by the PRC foreign exchange administration, Hong Kong dollar-denominated income from our through train service may be deposited by us in Hong Kong dollars up to an amount equal to US$ 18.5 million and need not be converted into renminbi. If necessary, we had U.S. dollar denominated payment of Hong Kong dollar-denominated and U.S. dollar-denominated dividends on our H shares and ADSs, respectively, in excess of the foregoing limit have to be made after reconverting renminbi at the then applicable People's Bank of China rate into the relevant foreign currency. Some of our vendor contracts and equipment leases for the provision of equipment, parts and services, particularly with respect to the high-speed project, are paid by us in foreign currencies. As of December 31, 2004, U.S. dollar denominated time deposits with maturities of more than three months in an amount equivalent to RMB830.5 million, and Hong Kong dollar denominated time deposits with maturation of more than three months in an amount equivalent to RMB83.0 million. Our cash, bank deposits and time deposits with maturities of no more than three months consist of deposits denominated in U.S. dollar in a amount equivalent to RMB8.7 million, and deposits denominated in Hong Kong dollar in a amount equivalent to RMB12.6 million. While our foreign currency deposits are relatively stable, they are insufficient to pay all dividends and operating expenses, therefore, we bear the risk of exchange rate fluctuations when we convert renminbi to pay foreign-currency denominated dividends and operating expenses. However, our management believes that these contingent exposures relating to foreign exchange rate fluctuations have not had and are not likely to have a material effect on our financial position. As a result, we do not enter into any hedging transactions with respect to our exposure to foreign currency movements. Furthermore, we are not aware of any effective financial hedging products that serve as protection against a possible renminbi devaluation.
INTEREST RATE RISKS
Funds that we do not need in the short term are generally kept as temporary cash deposits in state-owned commercial banks and in the MOR Deposit-Taking Center in the form of demand or time deposits. We do not hold any market risk-sensitive instruments for trading purposes. As of December 31, 2004, we had no loans outstanding. Accordingly, we are not exposed to any material interest rate risks.
As of December 31, 2004, our balances denominated in Hong Kong dollars and U.S. dollars were translated into renminbi at the applicable market exchange rates as of that date and amounted to approximately RMB934.8 million. If the applicable market exchange rates were to change by 10%, this would result in a change in fair value of approximately RMB93.5 million in these balances. For the year ended December 31, 2004, the interest income derived from our cash balances at banks and temporary cash investments amounted to approximately RMB47.0 million. A 10% change in interest rates would have resulted in a change in interest income of
approximately RMB4.7 million.
Except as described above and in Notes 26 and 27 to our audited consolidated financial statements herein, our management believes that as of the end of December 31, 2004, at present and in our normal course of business, we are not subject to any other market-related risks.
CREDIT RISKS
See "ITEM 8A.7 Legal Proceedings" for a discussion of our potential loss in our interests in Tiecheng resulting from a litigation. See "Item 5B. Liquidity and Capital Resources" for a discussion of the overdue time deposit held by Li Cheng.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our Chairman of the Board, our General Manager, and our Chief Accountant, after evaluating the effectiveness of our disclosure controls and procedures (as defined in US Exchange Act Rules 13a-15(e)) as of the end of the period covered by this Form 20-F, have concluded that, as of such date, our disclosure controls and procedures were effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
HOME COUNTRY PRACTICES
Under the NYSE's corporate governance listing standards, we are required to disclose any significant ways in which our governance practices differ from those followed by US domestic companies under the NYSE listing standards. There are no significant differences in our corporate governance practices compared to those followed by a U.S. domestic company under the NYSE listing standards, except for the following:
- according to our Audit Committee Charter, the members of our audit committee, who are all non-executive independent directors, shall meet at least four times a year pursuant to the schedule determined by our audit committee.
- we do not have a nominating committee or a corporate governance committee similar to that required for U.S. domestic companies;
- we do not have a compensation committee similar to that required for U.S. domestic companies. Under the Corporate Governance Code implemented by the HKSE in January 2005, there is a mandatory requirement for a company listed on the HKSE to have a remuneration committee composed of a majority of independent non-executive directors;
- we do not have formal corporate governance guidelines similar to those required for U.S. domestic companies. However, in accordance with applicable PRC laws and regulations and the HKSE Listing Rules, we have adopted the Articles of Association, the General Meeting System, the Working Ordinance for the Board of Directors, the Working Ordinance for the Board of Supervisors, the Working Ordinance for the General Manager, the Capital Management Measures, the Investment Management Measures, the Code of Ethics for Senior Officers and the Audit Committee Charter that contain provisions addressing (1) director qualification standards and responsibilities; (2) key board committee responsibilities; (3) director access to management and, as necessary and appropriate, independent advisors; (4) director compensation; (5)management succession; and (6)director orientation and continuing education;
- as a company listed on the HKSE, we are required to comply with applicable corporate governance and other related requirements of the HKSE Listing Rules, including the Corporate Governance Code, unless an exemption is available.
- we have not adopted a code of business conduct and ethics for our directors, officers and employees similar to that required for U.S. domestic companies. We have implemented code of business conduct and ethics for senior management, including our General Manager, Deputy General Manager, Chief Accountant, Chief Engineer and Company Secretary. In addition, our directors are required to comply with the Model Code for Securities Transactions by Directors of Listed Companies set out in the HKSE Listing Rules, which sets out standards with which directors are required to comply with respect to transactions involving our securities.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Wilton Chau Chi Wai is an "audit committee financial expert" as defined in Item 16A of Form 20-F. Mr. Chau and each of the other members of the Audit Committee is an "independent director" as defined in Section 303A.02 of the New York Stock Exchange's Listed Company Manual.
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to our Chief Executive Officer, President, Chief Financial Officer and other senior officers on April 20, 2004. A copy of this code of ethics was filed with the SEC as Exhibit 11.1 to the annual report on Form 20-F for the fiscal year ended December 31, 2003.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Resolutions to appoint PricewaterhouseCoopers (certified public accountants in Hong Kong), or PwC, as our international auditors for 2004 have been approved at the annual general meeting of Guangshen Railway held on June 10, 2004.
PwC was our international auditors for 2003 and 2002.
The following table presents the aggregate fees for professional services and other services rendered by PwC to us in 2004 and 2003.
2004 2003
---- ----
(RMB MILLIONS)
Audit Fees 2.0 2.0
Audit-related Fees - -
Tax Fees - -
All Other Fees - -
--- ---
Total 2.0 2.0
=== ===
|
Other than the audits performed on our financial statements, PwC did not provide any services to us in 2004 and 2003. The Audit Committee Charter, which was adopted by our board of directors on August 12, 2004 based on the applicable guidelines set forth in the HKSE Listing Rules and U.S. Sarbanes-Oxley Act of 2002, provides that our audit committee is responsible for, among other matters, supervising the audit of our Company, including the assessment and evaluation of the nature, quality and scope of work and the fees of our external auditors. Pursuant to paragraph (c)(7)(i)(A) of Rule 2-01 of Regulation S-X, the engagement of PwC to perform these audit services were approved by our audit committee and our board of directors.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
During the year ended December 31, 2004, there was no purchase, sale or redemption of our equity securities by us, or any of our subsidiaries.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide the financial statements and related information specified in ITEM 18 in lieu of ITEM 17.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 to F-47 following ITEM 19.
ITEM 19. EXHIBITS
(a) See pages F-1 to F-47 following this item.
(b) Index of Exhibits
Documents filed as exhibits to this annual report:
Exhibit
Number Description
------- -----------
1.1 Articles of Association
4.1 Railway Business Related Assets Purchase Agreement dated November
15, 2004 between Guangshen Railway Company Limited and Guangzhou
Railway Group Yangcheng Railway Company
4.2 Land Lease Agreement dated November 15, 2004 between Guangshen
Railway Company Limited and Guangzhou Railway (Group) Company
4.3 Comprehensive Services Agreement dated November 15, 2004 between
Guangshen Railway Company Limited and Guangzhou Railway (Group)
Company
4.4 Comprehensive Services Agreement dated November 15, 2004 between
Guangshen Railway Company Limited and Guangzhou Railway Group
Yangcheng Railway Company
7.1 Statements explaining how certain ratios are calculated in this
annual report
8.1 List of significant subsidiaries of Guangshen Railway Company
Limited as of December 31, 2004
12.1 Section 302 principal executive officers' and principal financial
officer's certifications
|
13.1 Certifications of principal executive officers and principal
financial officer pursuant to 18 U.S.C. Section 1350, as enacted
pursuant to Section 906 of the U.S. Sarbanes-Oxley Act of 2002.
|
INDEX TO FINANCIAL STATEMENTS
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Income Statements for the years ended 31 December, 2002, 2003 and 2004 F-3
Consolidated Balance Sheets as of 31 December, 2003 and 2004 F-4
Consolidated Cash Flow Statements for the years ended 31 December 2002, 2003 and
2004 F-5
Consolidated Statements of Changes in Equity for the years ended 31 December 2002,
2003 and 2004 F-6
Notes to the Consolidated Financial Statements F-7
|
[PRICEWATERHOUSECOOPERS LOGO]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Guangshen Railway Company Limited:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and changes in shareholders' equity present fairly, in all material respects, the financial position of Guangshen Railway Company Limited (the "Company") and its subsidiaries (established in the People's Republic of China) at 31 December, 2003 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended 31 December, 2004, in conformity with International Financial Reporting Standards. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with International Standards on Auditing issued by the International Federation of Accountants and 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
International Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 31 to the consolidated financial statements.
PRICEWATERHOUSECOOPERS
Hong Kong
June 27, 2005
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED 31 DECEMBER, 2002, 2003 AND 2004
(Amounts in thousands, except per share and per ADS data)
Years ended 31 December,
---------------------------------------------------
Notes 2002 2003 2004 2004
----- ---------- ----------- ---------- --------
RMB RMB RMB US$*
Revenues from railroad businesses
Passenger 1,903,782 1,790,204 2,259,671 272,250
Freight 530,776 526,382 611,807 73,712
---------- ----------- ---------- --------
Sub-total 2,434,558 2,316,586 2,871,478 345,962
Revenues from other businesses 166,266 151,596 166,671 20,081
---------- ----------- ---------- --------
Total revenues 2,600,824 2,468,182 3,038,149 366,043
---------- ----------- ---------- --------
Operating expenses
Railroad businesses
Business tax (73,923) (47,569) (83,732) (10,088)
Labour and benefits (373,781) (347,649) (492,581) (59,347)
Equipment leases and services (433,918) (437,739) (452,204) (54,482)
Materials and supplies (192,141) (216,993) (245,534) (29,582)
Repair costs, excluding materials and
supplies (102,377) (89,640) (216,294) (26,060)
Depreciation (335,508) (290,014) (334,501) (40,301)
Amortisation of leasehold land payments (15,131) (15,602) (15,704) (1,892)
Fees for social services (57,385) (62,579) (84,643) (10,198)
General and administrative expenses 4 (123,800) (134,688) (190,290) (22,927)
Others (101,251) (113,382) (126,338) (15,221)
---------- ----------- ---------- --------
Sub-total (1,809,215) (1,755,855) (2,241,821) (270,098)
---------- ----------- ---------- --------
Other businesses
Business tax (9,373) (7,226) (7,840) (945)
Materials and supplies (124,602) (112,677) (95,637) (11,523)
General and administrative expenses 4 (35,137) (29,711) (62,678) (7,552)
---------- ----------- ---------- --------
Sub-total (169,112) (149,614) (166,155) (20,020)
---------- ----------- ---------- --------
Total operating expenses (1,978,327) (1,905,469) (2,407,976) (290,118)
---------- ----------- ---------- --------
Profit from operations 622,497 562,713 630,173 75,925
Other income 5 6,575 17,586 5,809 700
Interest income, net 6 32,712 27,287 41,248 4,970
Share of losses of associates 16 (323) (2,508) (12,119) (1,460)
---------- ----------- ---------- --------
Profit before tax 661,461 605,078 665,111 80,135
Income tax expense 7 (104,265) (93,348) (98,373) (11,852)
Minority interests (113) 32 746 90
---------- ----------- ---------- --------
Profit attributable to shareholders 557,083 511,762 567,484 68,373
========== =========== ========== ========
Dividends 433,555 455,233 476,911 57,459
Earnings per share
- Basic 8 RMB0.13 RMB0.12 RMB0.13 USD0.016
========== =========== ========== ========
- Diluted 8 N/A N/A N/A N/A
========== =========== ========== ========
Earnings per equivalent ADS
- Basic 8 RMB6.42 RMB5.90 RMB6.54 USD0.788
========== =========== ========== ========
- Diluted 8 N/A N/A N/A N/A
========== =========== ========== ========
|
The accompanying notes are an integral part of these consolidated financial statements.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF 31 DECEMBER, 2003 AND 2004
(Amounts in thousands)
31 December,
-------------------------------------------
Notes 2003 2004 2004
----- ---------- ------------ ---------
RMB RMB US$*
ASSETS
Current assets
Cash and cash equivalents 1,402,359 1,169,255 140,874
Temporary cash investments 10 627,440 1,379,309 166,182
Interest receivables 25,497 10,513 1,267
Trade receivables, net 11 80,614 106,652 12,850
Materials and supplies, at cost 38,692 60,602 7,300
Prepayments and other receivables, net 12 223,463 206,060 24,827
Due from related parties 199,921 56,064 6,755
---------- ---------- ---------
Total current assets 2,597,986 2,988,455 360,055
Fixed assets 13 6,952,878 6,973,279 840,154
Construction-in-progress 14 390,393 345,313 41,604
Leasehold land payments 15 652,083 636,379 76,672
Interests in associates 16 140,494 128,346 15,463
Available-for-sale investments 17 167,962 167,962 20,236
Deferred tax assets 18 6,154 18,406 2,218
Deferred staff costs 19 166,003 150,911 18,182
---------- ---------- ---------
Total assets 11,073,953 11,409,051 1,374,584
========== ========== =========
LIABILITIES AND EQUITY
Current liabilities
Trade payables 34,625 56,272 6,780
Payables for construction of fixed assets 148,258 164,591 19,830
Accrued expenses and other payables 20 358,287 518,808 62,507
Due to Parent Company 37,230 24,617 2,966
Due to related parties 120,605 172,121 20,737
Dividend payable 232 456 55
---------- ---------- ---------
Total current liabilities 699,237 936,865 112,875
---------- ---------- ---------
Minority interests 52,358 51,612 6,218
---------- ---------- ---------
Commitments and contingencies 28,30 - - -
---------- ---------- ---------
Equity
Common stock, par value RMB1.00 per share,
4,335,550 shares authorized and outstanding 21 4,335,550 4,335,550 522,355
Additional paid-in capital 3,984,135 3,970,100 478,325
Dedicated capital 1,368,627 1,369,711 165,026
Retained earnings 634,046 745,213 89,785
---------- ---------- ---------
Total equity 10,322,358 10,420,574 1,255,491
---------- ---------- ---------
Total liabilities and equity 11,073,953 11,409,051 1,374,584
========== ========== =========
|
The accompanying notes are an integral part of these consolidated financial statements.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER, 2002, 2003 AND 2004
(Amounts in thousands)
Year ended 31 December,
------------------------------------------------------
2002 2003 2004 2004
--------- --------- ---------- --------
RMB RMB RMB US$*
CASH FLOWS FROM OPERATING ACTIVITIES:
Profit attributable to shareholders 557,083 511,762 567,484 68,373
Adjustments for:
Minority interests 113 (32) (746) (90)
Income tax expense 104,265 93,348 98,373 11,852
Depreciation 337,797 291,653 336,089 40,493
Amortisation of leasehold land payments 15,131 15,602 15,704 1,892
Loss on disposals of fixed assets 29,339 16,935 234 28
Amortisation of deferred staff costs 15,092 15,092 15,092 1,818
Share of losses of associates 323 2,508 12,119 1,460
Provision for doubtful accounts 4,598 172 18,750 2,259
Interest expense 4,064 2,359 1,030 124
Interest income (36,920) (29,755) (42,384) (5,107)
Decrease / (increase) in current assets
Trade receivables 24,064 (28,621) (26,038) (3,137)
Materials and supplies 86 (4,587) (21,910) (2,640)
Prepayments and other receivables 87,676 17,320 3,998 482
Due from Parent Company (9,875) - - -
Due from associated companies 29 3
Due from related parties 8,128 66,179 143,857 17,332
Increase / (decrease) in current liabilities
Trade payables (27,314) (7,109) 21,647 2,608
Due to Parent Company - (13,821) (12,613) (1,520)
Due to related parties 99,549 (37,594) 51,516 6,207
Accrued expenses and other payables 48,529 (10,924) 139,619 16,822
Interest paid (4,064) (2,359) (1,030) (124)
Tax paid (100,487) (99,679) (84,241) (10,150)
--------- --------- ---------- --------
Net cash provided by operating activities 1,157,177 798,449 1,236,579 148,985
--------- --------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets and payments for
construction-in-progress, net of related
payables (553,337) (339,208) (310,179) (37,371)
Proceeds from sale of fixed assets 12,369 1,105 4,041 487
Increase in interests in associates (4,761) (374) - -
Decrease / (increase) in temporary cash
investments 777,898 (60,101) (751,869) (90,587)
Purchase of available-for-sale investments (14,108) - - -
Interest received 32,942 23,109 57,368 6,912
--------- --------- ---------- --------
Net cash from (used in) investing activities 251,003 (375,469) (1,000,639) (120,559)
--------- --------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Share issuance costs - - (14,035) (1,691)
Dividends paid to Company's shareholders (356,490) (433,561) (455,009) (54,820)
Dividends paid to minority interests (4,153) (105) - -
--------- --------- ---------- --------
Net cash used in financing activities (360,643) (433,666) (469,044) (56,511)
--------- --------- ---------- --------
Net increase / (decrease) in cash and cash equivalents 1,047,537 (10,686) (233,104) (28,085)
Cash and cash equivalents, beginning of year 365,508 1,413,045 1,402,359 168,959
--------- --------- ---------- --------
Cash and cash equivalents, end of year* 1,413,045 1,402,359 1,169,255 140,874
========= ========= ========== ========
|
* Analysis of the balances of cash and cash equivalents
Year ended 31 December,
----------------------------------------------------
2002 2003 2004 2004
--------- --------- --------- -------
RMB RMB RMB US$*
Cash and bank deposits 1,413,045 1,402,359 1,169,255 140,874
========= ========= ========= =======
|
The accompanying notes are an integral part of these consolidated financial statements.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED 31 DECEMBER, 2002, 2003 AND 2004
(Amounts in thousands)
Dedicated capital
-----------------------------------
Share Statutory
capital/ Additional Statutory public Discretionary
common paid-in surplus welfare surplus Retained
Note stock Capital reserve fund reserve earnings Total
---- --------- ---------- --------- --------- ------------- --------- ----------
RMB RMB RMB RMB RMB RMB RMB
Balances at 1 January, 2002 4,335,550 3,984,135 432,108 424,568 341,659 602,603 10,120,623
Profit attributable to
shareholders - - - - - 557,083 557,083
Appropriation from retained
earnings 22 - - 59,301 29,734 - (89,035) -
Dividends relating to 2001 - - - - - (433,555) (433,555)
--------- --------- --------- ------- -------- -------- ----------
Balances at 1 January, 2003 4,335,550 3,984,135 491,409 454,302 341,659 637,096 10,244,151
Profit attributable to
shareholders - - - - - 511,762 511,762
Appropriation from retained
earnings 22 - - 54,165 27,092 - (81,257) -
Dividends relating to 2002 - - - - - (433,555) (433,555)
--------- --------- --------- ------- -------- -------- ----------
Balances at 1 January, 2004 4,335,550 3,984,135 545,574 481,394 341,659 634,046 10,322,358
Profit attributable to
shareholders - - - - - 567,484 567,484
Share issuance costs - (14,035) - - - - (14,035)
Appropriation from retained
earnings 22 - - 59,771 29,900 - (89,671) -
Dividends relating to 2003 9 - - - - - (455,233) (455,233)
--------- --------- --------- ------- -------- -------- ----------
Balances at 31 December,
2004 4,335,550 3,970,100 605,345 511,294 341,659 656,626 10,420,574
========= ========= ========= ======= ======== ======== ==========
|
The accompanying notes are an integral part of these consolidated financial statements.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES
Guangshen Railway Company Limited (the "Company") was established as a joint stock limited company in the People's Republic of China (the "PRC") on 6 March, 1996 to take over and operate certain railroad and other businesses (the "Businesses").
Prior to the formation of the Company, the Businesses were carried on by the Company's predecessor, Guangshen Railway Company (the "Predecessor"), and certain of its subsidiaries, and in certain cases, by Guangzhou Railway (Group) Company (the "Parent Company") and certain of its subsidiaries, which were all under the common control and jurisdiction of the PRC Ministry of Railways (the "MOR"). The Predecessor was controlled by and under the administration of the Parent Company. Pursuant to a restructuring agreement entered into among the Parent Company, the Predecessor and the Company on 8 March, 1996 and with effect from 6 March, 1996 (the "Restructuring Agreement"), the Company issued to the Parent Company 100% of its equity interest in the form of 2,904,250,000 ordinary shares (the "State-owned Domestic Shares") in exchange for the assets and liabilities of the Businesses (the "Restructuring").
In May 1996, the Company issued 1,431,300,000 shares, represented by 217,812,000 H Shares ("H Shares") and 24,269,760 American Depositary Shares ("ADSs", one ADS represents 50 H Shares) in a global public offering for cash of approximately RMB4,214,000,000 to finance the capital expenditures and working capital requirements of the Company and its subsidiaries (the "Group").
The principal activities of the Group are railroad passenger and freight transportation. The Group also operates certain other businesses, principally services in the stations and sales of food, beverages and merchandise aboard the trains and in the stations.
The directors of the Company considered Guangzhou Railway (Group) Company, a state-owned enterprise established in the PRC, to be the ultimate holding company.
The Group conducts its operations in the PRC and accordingly is subject to special considerations and significant risks not typically associated with investments in equity securities of North American and Western European companies. These include risks associated with, among others, the political, economic and legal environments, foreign currency exchange, government regulation of the railway system, development and competition in the transportation industry, insurance, entry by the PRC with the World Trade Organisation (the "WTO"), and the ability to obtain sufficient financing. These are described further in the following paragraphs:
(a) Political environment
The operating results of the Group may be adversely affected by changes in the political and social conditions in the PRC and by changes in governmental policies with respect to laws and regulations, inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. While the PRC's government is expected to continue its economic reform policies, many of the reforms are new or experimental and may be refined or changed. It is also possible that a change in the PRC's leadership could lead to changes in economic policy.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES (CONT'D)
(b) Economic environment
The economy of the PRC differs significantly from the economies in the North America and Western Europe in many respects, including its structure, levels of development and capital reinvestment, growth rate, government involvement, resource allocation, self-sufficiency, rate of inflation and balance of payments position. The adoption of economic reform policies since 1978 has resulted in a gradual reduction in the role of state economic plans in the allocation of resources, pricing and management of such assets, and increased emphasis on the utilization of market forces, and rapid growth in the PRC's economy. However, such growth has been uneven among various regions of the country and among various sectors of the economy.
The central government has from time to time adopted various measures designed to stabilize the economy, regulate growth and contain inflation. All such economic events and measures could adversely affect the results of operations and expansion plans of the Group.
(c) Legal environment
The PRC legal system is based on written statutes under which prior court decisions may be cited as authority but do not have binding precedential effect. The PRC's legal system is relatively new, and the government is still in the process of developing a comprehensive system of laws, a process that has been ongoing since 1979. Considerable progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. Such legislation has significantly enhanced the protection afforded to foreign investors. However, experience with respect to the implementation, interpretation and enforcement of such laws is limited.
(d) Foreign currency exchange
A major portion of the Company's revenues is denominated in RMB. A portion of such revenues will need to be converted into other currencies to meet foreign currency obligations such as payment of any dividends declared. The existing foreign exchange limitations under PRC law could affect the Group's ability to obtain foreign exchange through debt financing, or to obtain foreign exchange for capital expenditures or for distribution of dividends on H shares and ADSs.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES (CONT'D)
(e) Government regulation of the railway system
The PRC's national railway system is principally state-owned and operated as a single unified system, and is subject to operational and regulatory control by the MOR and, with respect to price setting for transport services, by the State Council of the PRC (the "State Council"). Prior to the Restructuring, the Company operated substantially within this system in which the MOR exercised overall authority over transportation operations, equipment and materials procurement, engineering and construction, revenue and expenditure controls, as well as other aspects of railroad operations.
In connection with the Restructuring, the Company was granted special flexibility and autonomy in areas such as obtaining freight cars, scheduling services and determining the mix of passenger seat classes within its own line, routing trains through bottlenecks and dispatching empty freight cars to destinations beyond its rail line. In addition, in February 1996, the State Council granted the Company, with effect from 1 April, 1996, increased flexibility and autonomy with respect to the setting of passenger fares and freight tariffs. This regulatory flexibility and autonomy allows the Company a greater degree of control over its operations and the ability to adjust its services to meet market demand. Further, in preparation for the offering in 1996, the Company received legal clarification and confirmation of its asset ownership, corporate powers and relationships with service providers and other entities in the national railway system.
Although the operating flexibility and autonomy were granted to the Company without a fixed time limit, there can be no assurance that these will not be changed in the future or that other railway operators will not be granted similar treatment. Apart from the special dispensations granted in connection with the Restructuring, the Company, as a part of the national railway system, is generally subject to industry regulation by the MOR and must coordinate as required with other entities in the railway system.
PRC government regulation has a significant impact on the Group' businesses. The price of railway transportation in particular is an important factor and has a substantial impact on the Group' business income. The regulatory framework with respect to the pricing of railway services may limit the Group's flexibility to respond to market conditions, competition or changes in the Group's cost structure.
(f) Development and competition in the transportation industry
As the industrial structure in the PRC is increasingly upgraded, advanced technological products, such as computer components, will gradually replace traditional industrial products as the principal goods in the Group's freight transportation business. These changes will affect the variety, volume and price of the Group's freight transportation and could have an adverse effect on the Group's results of operations.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES (CONT'D)
(f) Development and competition in the transportation industry (Cont'd)
Intensifying competition from other forms of transportation may affect the Group's profitability and growth. With the gradual implementation of the PRC government's policies of supporting infrastructure industries, the railway transportation sector, particularly the passenger transportation business, is facing increasing competition from other means of surface, air and water transportation. The Group, in particular, faces significant competition from bus services operating in the Pearl River Delta.
(g) Insurance
The Company does not currently maintain any insurance coverage with third party carriers against third party liabilities. Pursuant to applicable PRC regulations and the practice of national railway companies, the Company is liable for (i) personal injury to or death our passengers in the case of accidents for up to RMB20 per passenger and (ii) personal injury to or death of passengers for fault for up to RMB60 per passenger. With respect to loss of or damage to baggage, parcels and freight, the Company's customers may elect to purchase insurance administered by the MOR for up to their declared value. Passengers who do not elect to purchase insurance in respect of their baggage and/or parcels may nevertheless recover up to RMB0.03 for each 10-kilogram of damaged baggage and/or parcels. Similarly, freight transport customers who elect not to purchase insurance may recover up to RMB0.1 for each ton of damaged freight.
Consistent with what it believes to be the customary practice among railway operators in the PRC, the Company does not maintain insurance coverage for its property and facilities (other than for its automobiles), for business interruption or for environmental damage arising from accidents on Company property or relating to Company operations. As a consequence, in the event of an accident or other event causing loss, destruction or damage to the Company's property or facilities, causing interruption to the Company's normal operations or causing liability for environmental damage or clean-up, the Company will be reliant on its own resources to cover losses and damages.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES (CONT'D)
(g) Insurance (Con'd)
Before November of 2004, the Company does not maintain medical insurance or disability insurance with any third party insurance carriers. The Company adopted internal rules to provide for medical and disability benefits to its employees, consistent with MOR regulations and practices and relevant regulations of the Shenzhen municipality. The Company entered into service agreements with the Parent Company and Guangzhou Railway (Group) Guangshen Railway Enterprise Development Company ("GEDC"), a wholly-owned subsidiary of the Parent Company, pursuant to which the health care facilities owned by these entities provide medical services to the Company's employees and their families. After November of 2004, with the medical insurance reform, the Company entered the social insurance system organized by the government. Under the new medical insurance system, the Group's contributions to the medical insurance for the Group's employees in the PRC are made monthly to a government agency. The government agency is responsible for the medical liabilities relating to these employees. The Group accounts for these contributions on an accrual basis and the costs of the benefits are recognised as an expense in the period in which they are incurred.
(h) Entry by the PRC with the WTO
Entry by the PRC with the WTO, may increase competition for the Group's business. With the PRC's entry into the WTO, other Chinese coastal cities' significance in trading will be enhanced. Part of the freight currently transferred through ports in Hong Kong and Shenzhen will be shipped to other ports in the PRC, which will adversely affect the Group's railway freight business. In addition, as the PRC government lifts control over foreign investments, including allowing foreign participation in railway construction, the Company's railway monopoly position in its region may be challenged by foreign strategic investment, and potential competitors may arise in the Pearl River Delta.
(i) Ability to obtain sufficient financing
The Company may be unable to obtain sufficient financing to fund its substantial capital requirements, which could limit its growth potential. The Company estimates that it will require approximately RMB3,360,692 for capital expenditures in 2005, mainly for financing the construction of its fourth track between Guangzhou and Shenzhen, the improvement of eastern station of Guangzhou, the purchase of additional locomotives and trains. The Company's actual capital requirements may be greater. The Company may not be able to obtain sufficient funds on commercially acceptable terms. If adequate capital is not available, the Company's planned capital expenditure and business prospects could be adversely affected.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies adopted in preparing the financial statements of the Group are as follows:
(a) Basis of presentation
The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). This basis of accounting differs in certain material respects from that used in the preparation of the Group's statutory accounts in the PRC, which have been prepared in accordance with generally accepted principles and relevant financial regulations in the PRC ("PRC GAAP"). In preparing these financial statements, appropriate adjustments have been made to the Group's statutory accounts to conform with IFRS. Differences arising from the adjustments are not incorporated in the accounting records of the Group.
The principal adjustments made to conform to IFRS include the following:
- Additional depreciation charges on fixed assets;
- Write-down of reclaimed rails to realisable value;
- Difference in the recognition policy on housing benefits to the employees;
- Reversal of amortisation of deferred renovation expenses;
- Difference in depreciation charges on fixed assets resulting from reclassification;
- Recognition of government grants by deducting the carrying value of fixed assets; and
- Recording of the share issuance costs to the reserves.
The financial statements have been prepared under the historical cost convention except that, as disclosed in the accounting policies below, certain fixed assets are stated at valuation less accumulated depreciation and impairment losses.
The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current event and actions, actual results ultimately may differ from those estimates.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(a) Basis of presentation (Cont'd)
In 2003, there was a change of accounting estimate in respect of the useful lives of certain fixed assets. The financial effects of the change of accounting estimate were reported in the previous year's consolidated financial statements.
The consolidated financial statements reflect certain reclassification and additional disclosures to conform more closely to presentations customary in filings with the Securities and Exchange Commission of the United States of America.
Differences between IFRS and generally accepted accounting principles in the United States of America ("US GAAP") as applicable to the group are set forth in Note 31.
Translation of amounts from RMB into US$ for the convenience of the reader has been made at the Noon Buying Rate on 31 December, 2004 of US$1.00=RMB8.3 as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on 31 December, 2004.
(b) Group accounting
The consolidated financial statements include those of the Company and its subsidiaries and also incorporate the Group's interest in associates on the basis as set out in Note 2(c) and 2(d) below. The equity and net income attributable to minority shareholders' interests are shown separately in the consolidated balance sheet and consolidated income statement, respectively.
All significant intercompany balances and transactions, including intercompany profits and unrealised profits and losses are eliminated on consolidation; unrealised losses are also eliminated unless cost cannot be recovered. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances.
(c) Subsidiaries
Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies are consolidated.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(d) Associates
Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control.
Investments in associates are accounted for by the equity method of accounting. Under this method the Company's share of the post-acquisition profits or losses of associates is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group's share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates.
(e) Foreign currency transactions
The Group maintains its books and records in RMB.
Foreign currency transactions are translated into RMB using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement in the period in which they arise. Translation differences on monetary assets measured at fair value are recognised in foreign exchange gains and losses.
The Group did not enter into any hedge contracts during any of the periods presented.
No foreign currency exchange gains or losses were capitalised for any periods presented.
(f) Financial instruments
Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, temporary cash investments, trade receivables and payables, other receivables and payables and available-for-sale investments. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies.
The Group had no derivative financial instruments in any of the years presented.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(g) Fixed assets
Fixed assets are initially recorded at cost less accumulated depreciation and impairment loss. Cost represents the purchase price of the asset and other costs incurred to bring the asset into existing use.
Subsequent to the initial recognition, fixed assets are stated at cost or valuation less accumulated depreciation and impairment losses (see Note 13). Independent valuations, on a market value basis or depreciated replacement cost basis when there is no evidence of market value for such an item, are performed at least every five years or sooner if considered necessary by the directors. In the intervening years, the directors review the carrying values of the fixed assets and adjustment is made where there has been a material change. Increases in valuation are credited to the revaluation reserve.
Decreases in valuation of fixed assets are first offset against increases from earlier valuations in respect of the same asset and are thereafter charged to the income statement. Any subsequent increases are credited to the income statement up to the amount previously charged. Upon the disposal of the fixed assets, the relevant portion of the realised revaluation reserve of previous valuations is transferred from the revaluation reserve to retained earnings and is shown as a movement in reserves.
Depreciation is calculated using the straight-line method to write off the cost or revalued amount, after taking into account the estimated residual value of not more than 4% of cost, of each asset over its estimated useful life. The estimated useful lives are as follows:
Buildings 25 to 40 years Leasehold improvements over the lease terms Track, bridges and service roads 55 to 100 years Locomotives and rolling stock 20 years Communications and signaling systems 8 to 20 years Other machinery and equipment 7 to 25 years |
Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(g) Fixed assets (Cont'd)
Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement. When revalued assets are sold, the amounts included in fair value and other reserves are transferred to retained earnings.
Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset.
(h) Construction-in-progress
Construction-in-progress represents plant and facilities, including railroad stations and maintenance facilities under construction and machinery pending for installation. This includes the costs of construction and acquisition. No depreciation is provided on construction in progress until the asset is completed and ready for use.
(i) Leasehold land payments
All land in the PRC is state-owned and no individual land ownership right exists. The Group acquired the right to use certain land for its rail line, stations and other businesses. The premium paid for such leasehold land payments represents pre-paid lease payments, which are amortised over the lease terms of 36.5 to 50 years using the straight-line method.
(j) Impairment of long lived assets
Fixed assets and other non-current assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset's net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(k) Available-for-sale investments
Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for sale investments; these are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. All purchases and sales of available-for-sale investments are recognised on the date that the transaction is effective. Cost of purchase includes transaction costs. Available-for-sale investments are not subsequently fair-valued because they do not have quoted market prices in active markets and whose fair values cannot be reliably measured. These investments are carried at cost, and are subject to review for impairments.
(l) Deferred staff costs
The Group have finalised a scheme for selling staff quarters to its staff in 2000. Under the scheme, the Group sold certain staff quarters to their employees at preferential prices as housing benefits to the employees. The total housing benefits, which represented the difference between the net book value of the staff quarters sold and the proceeds collected from the employees, are expected to benefit the Group over 15 years, which is the estimated remaining average service lives of the employees participating in the scheme. Upon the sales of staff quarters to the employees, the housing benefits incurred are recorded as deferred staff costs and amortised over the remaining average service lives of the employees participating in the scheme.
(m) Operating leases
Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.
(n) Materials and supplies
Materials and supplies consist mainly of items for repair and maintenance of track, and are stated at lower of cost and net realisable value. Materials and supplies are expensed when used.
(o) Receivables
Receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(p) Temporary cash investments
Temporary cash investments represent short-term deposits with original maturities ranging from three months to one year, which are held for investment purpose and are stated at amortised cost.
(q) Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks and other financial institutions, other short-term highly liquid investments with original maturities of three months or less.
(r) Income tax expense
The Group provides for income tax expense on the basis of the results for the year as adjusted for items which are not assessable or deductible for income tax purposes. Taxation of the Group is determined in accordance with the relevant tax rules and regulations applicable to enterprises established/incorporated in the PRC.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
(s) Employee benefits
Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for the Group's local staff are to be made monthly to a government agency based on 26% of the standard salary set by the provincial government, of which 18% is borne by the Company or its subsidiaries and the remainder 8% is borne by the staff. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Group accounts for these contributions on an accrual basis and charges the related contributions to income in the year to which the contributions relate.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(t) Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to the purchase of fixed assets are deducted against the carrying amount of the fixed assets and are credited to the income statement on a straight-line basis over the useful lives of the fixed assets.
(u) Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.
(v) Revenue recognition
Provided it is probable that the economic benefits associated with a transaction will flow to the Group and the revenues and costs, if applicable, can be measured reliably, revenue is recognised on the following bases:
(i) Rendering of services and sales of goods
Railroad revenues are recognised when services are performed. Revenues from other businesses include sales aboard the trains and in the stations of food, beverages and other merchandise and revenues from operating restaurants in major stations. Revenues from operating restaurants are recognised when services are rendered.
Sales aboard the trains and in the stations of food, beverages and merchandise are recognised upon delivery, when the significant risks and rewards of ownership of these goods have been transferred to the buyers.
(ii) Interest income
Interest income from bank deposits is recognised on a time proportion basis, taking into account the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group.
(iii) Dividend income
Dividend income is recognised when the right to receive payment is established.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(w) Dividends
Dividends are recorded in the Group's financial statements in the period in which they are approved by the Company's shareholders.
(x) Segments
Business segments: for management purposes the Group is organised into railroad transportation and other business operations. The divisions are the basis upon which the Group reports their primary segment information. Financial information on business segments is presented in Note 3.
Inter-segment transactions: segment revenues, segment expenses and segment performance include transfers between business segments. Those transfers are eliminated on consolidation.
(y) Comparatives
Certain amounts reported in previous years have been reclassified to conform with current year presentation.
3. SEGMENTAL INFORMATION
(a) Business segments
The Group conducts the majority of its business activities in railroad and other business operations (see Note 1). These segments are determined primarily because the senior management makes key operating decisions and assesses performance of the segments separately. The accounting policies of the Group's segments are the same as those described in the principal accounting policies in Note 2. The Group evaluates performance based on profit from operations. Segment assets consist primarily of fixed assets, materials and supplies, receivables and operating cash, and mainly exclude deferred tax assets and interests in associates. Segment liabilities comprise operating liabilities and exclude taxes payable. Capital expenditure comprises additions to fixed assets (see Note 13) and construction-in-progress (see Note 14).
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
3. SEGMENTAL INFORMATION
(a) Business segments (Cont'd)
An analysis by business segment is as follows:
Railroad businesses Other businesses Unallocated
----------------------------------- ------------------------ -----------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
----------- ----------- ----------- ------- ------- -------- ------- ------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Revenues
- External 2,871,478 2,316,586 2,434,558 166,671 151,596 166,266 - - -
- Inter-segment - - - 58,727 52,172 75,188 - - -
---------- ---------- ---------- ------- ------- ------- ------ ------ ------
2,871,478 2,316,586 2,434,558 225,398 203,768 241,454 - - -
========== ========== ========== ======= ======= ======= ====== ====== ======
Segment result 629,657 560,731 625,343 516 1,982 (2,846) - - -
Other income 5,175 16,809 1,411 634 777 5,164 - - -
Interest income 41,850 29,349 36,281 534 406 639 - - -
Finance costs - - - - - - (1,136) (2,468) (4,208)
Share of losses of associates (12,119) (2,508) (323) - - - - - -
Income tax expense
Minority interests
Profit attributable to shareholders
Other information
Segment assets 11,046,722 10,082,637 10,147,098 215,577 844,668 962,077 - - -
Deferred tax assets - - - - - - 18,406 6,154 7,577
Interests in associates 128,346 140,494 139,972 - - 870 - - -
Total assets
Segment liabilities 757,510 429,123 678,303 103,477 220,620 251,719 - - -
Taxes payable - - - - - - 75,878 49,494 71,844
Total liabilities
Capital expenditure 315,035 298,890 526,700 11,477 7,103 8,330 - - -
Non-cash expenses - Depreciation 334,501 290,014 335,508 1,588 1,639 2,289 - - -
- Amortisation of
leasehold land payments 15,704 15,602 15,131 - - - - - -
- Provision for doubtful
accounts 18,668 123 4,257 82 49 341 - - -
- Amortisation of deferred
staff costs 15,092 15,092 15,092 - - - - - -
|
Consolidation Total
-------------------------- -----------------------------------
2004 2003 2002 2004 2003 2002
-------- -------- -------- ----------- ----------- -----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Revenues
- External - - - 3,038,149 2,468,182 2,600,824
- Inter-segment (58,727) (52,172) (75,188) - - -
------- ------- ------- ---------- ---------- ----------
(58,727) (52,172) (75,188) 3,038,149 2,468,182 2,600,824
======= ======= ======= ========== ========== ==========
Segment result - - - 630,173 562,713 622,497
Other income - - - 5,809 17,586 6,575
Interest income - - - 42,384 29,755 36,920
Finance costs - - - (1,136) (2,468) (4,208)
Share of losses of associates - - - (12,119) (2,508) (323)
Income tax expense (98,373) (93,348) (104,265)
Minority interests 746 32 (113)
---------- ---------- ----------
Profit attributable to shareholders 567,484 511,762 557,083
========== ========== ==========
Other information
Segment assets - - - 11,262,299 10,927,305 11,109,175
Deferred tax assets - - - 18,406 6,154 7,577
Interests in associates - - - 128,346 140,494 140,843
---------- ---------- ----------
Total assets 11,409,051 11,073,953 11,257,594
========== ========== ==========
Segment liabilities - - - 860,987 649,743 930,022
Taxes payable - - - 75,878 49,494 71,844
---------- ---------- ----------
Total liabilities 936,865 699,237 1,001,866
========== ========== ==========
Capital expenditure - - - 326,512 305,993 535,030
========== ========== ==========
Non-cash expenses - Depreciation - - - 336,089 291,653 337,797
========== ========== ==========
- Amortisation of
leasehold land payments - - - 15,704 15,602 15,131
========== ========== ==========
- Provision for doubtful
accounts - - - 18,750 172 4,598
========== ========== ==========
- Amortisation of deferred
staff costs - - - 15,092 15,092 15,092
========== ========== ==========
|
For the years ended 31 December, 2002, 2003 and 2004, no revenues from a single customer accounted for 10 percent or more of the Group's total revenues.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
3. SEGMENTAL INFORMATION (CONT'D)
(b) Geographic segments
For the year ended 31 December, 2004, all of the Group's business operations are conducted in the PRC.
4. GENERAL AND ADMINISTRATIVE EXPENSES
Year ended 31 December,
---------------------------------
2002 2003 2004
------- ------- -------
RMB RMB RMB
Wages and bonus 16,226 14,936 46,043
Retirement and employee benefits 49,722 58,778 100,659
Utility expenses 195 219 138
Office expenses 15,538 15,414 15,131
Construction duty, land use fees and other duties 3,761 3,539 1,683
Depreciation 1,625 1,693 1,589
Amortisation of deferred staff costs 15,092 15,091 15,092
Provision for doubtful accounts 4,598 172 18,750
Others 52,180 54,557 53,883
------- ------- -------
158,937 164,399 252,968
======= ======= =======
Attributable to:
Railroad businesses 123,800 134,688 190,290
Other businesses 35,137 29,711 62,678
------- ------- -------
158,937 164,399 252,968
======= ======= =======
|
5. OTHER INCOME
Year ended 31 December,
--------------------------
2002 2003 2004
----- ------- ------
RMB RMB RMB
Exchange losses /(gain) 799 (1,356) (363)
Others 5,776 18,942 6,172
----- ------ -----
6,575 17,586 5,809
===== ====== =====
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
6. INTEREST INCOME, NET
Year ended 31 December,
---------------------------
2002 2003 2004
------- ------- -------
RMB RMB RMB
Finance costs (4,208) (2,468) (1,136)
Interest income 36,920 29,755 42,384
------ ------ ------
32,712 27,287 41,248
====== ====== ======
|
7. INCOME TAX EXPENSE
Enterprises established in Shenzhen Special Economic Zone are subject to income tax at a reduced rate of 15% as compared with the standard income tax rate for PRC companies of 33%. The Shenzhen Municipal Tax Bureau confirmed in 1996 that the Company is subject to a reduced income tax rate of 15% starting from the same year. The income tax rate of the Company for the year ended 31 December, 2004 is 15%.
According to the relevant income tax laws, other businesses of the Group are subject to income tax rates of 15% or 33%, depending mainly on their places of incorporation/establishment. Furthermore, certain subsidiaries engaged in other businesses are Sino-foreign joint ventures which are entitled to full exemption from the PRC income tax for two years and a 50% reduction in the next three years starting from the first profit-making year, after offsetting available tax losses carried forward from prior years.
Save as described above, the directors of the Company are not being informed of any change in the enterprise income tax treatment applicable to the Group.
Details of taxation charged to the consolidated income statement during the year were as follows:
Year ended 31 December,
----------------------------
2002 2003 2004
-------- ------ --------
RMB RMB RMB
Provision for PRC income tax 106,649 91,925 110,625
Deferred tax benefits resulting from recognition of bad debts
aging over three years - - (9,404)
Deferred tax (benefit) / charge resulting from provision for
doubtful accounts (1,173) 316 (2,813)
Deferred tax (benefit) / charge resulting from loss on the
disposals of fixed assets (1,211) 1,107 (35)
------- ------ -------
104,265 93,348 98,373
======= ====== =======
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
7. INCOME TAX EXPENSE (CONT'D)
The tax on the Group's profit before tax differs from the theoretical amount that would arise using the applicable tax rate of the Company as follows:
2002 2003 2004
---------- ---------- ----------
Percentage Percentage Percentage
Weighted average statutory tax rate 15.0% 15.0% 15.0%
Tax effect of expenses that are not deductible in determining
taxable profit:
- Amortisation of deferred staff costs 0.3% 0.4% 0.3%
- Share of loss of associate - - 0.3%
- Entertainment expenses over deductible limits 0.3%
Effect of different tax rates for certain subsidiaries 0.4% - 0.3%
Deferred tax benefits resulting from recognition of bad
debts aging over three years (1.4%)
---- ---- ----
Effective income tax rate 15.7% 15.4% 14.8%
==== ==== ====
|
8. EARNINGS PER SHARE AND PER EQUIVALENT ADS
The calculation of basic earnings per share and per equivalent ADS were based on the profit attributable to shareholders for the year attributable to ordinary shareholders of RMB567,484 (2003: RMB511,762), divided by the weighted average number of ordinary shares and equivalent ADS outstanding during the year of 4,335,550,000 and 86,711,000 respectively (2003: 4,335,550,000 and 86,711,000 respectively). No diluted earnings per share and per equivalent ADS were presented as there were no dilutive potential ordinary shares as of year end.
9. DIVIDENDS
2003 2004
------- -------
RMB'000 RMB'000
Final, proposed, of RMB0.11 (2003: RMB0.105) per ordinary share 455,233 476,911
======= =======
|
At a meeting held on 17 March, 2005, the directors proposed a final dividend of RMB0.11 per ordinary share. This proposed dividend is not reflected as a dividend payable in these accounts, but will be reflected as an appropriation of retained earnings for the year ending 31, December 2005.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
10. TEMPORARY CASH INVESTMENTS
31 December,
---------------------
Note 2003 2004
---- ------- ---------
RMB RMB
Time deposits with maturities over three months in banks (a) 459,440 1,211,309
Time deposits with maturities over three months in the
MOR's Railway Deposits-taking Center (b) 168,000 168,000
------- ---------
627,440 1,379,309
======= =========
|
(a) Time deposits with maturities over three months in banks consist of short-term deposits denominated in RMB, Hong Kong dollars ("HK$"), and US dollars ("USD") (2003: RMB and USD) with original maturities ranging from six months to one year, placed with banks in the PRC. The annual interest rate of RMB deposits ranged from 1.71% to 2.07% in 2004 (2003: 1.98%), the annual interest rate of HK$ deposit was 1.2% (2003: 1.13%), and the annual interest rates of USD deposits were LIBOR plus a floating rate ranging from -0.2% to 0% (2003: LIBOR plus a floating rate ranging from -0.2% to 0%). Total interest earned from such deposits amounted to approximately RMB 15,015 for the year (2003: approximately RMB 11,868).
(b) Time deposits with maturities over three months in the MOR's Railroad Deposit-taking Center consist of short-term deposits denominated in RMB (2003: RMB) with original maturities of one year (2003: one year). The annual interest rate of RMB deposits was 1.98% in 2004 (2003: 1.98%). Total interest earned from such deposits amounted to approximately RMB 3,098 (2003: approximately RMB 3,326) for the year (see Note 24(b)).
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
11. TRADE RECEIVABLES, NET
31 December,
---------------------
2003 2004
-------- --------
RMB RMB
Trade receivables 96,037 122,075
Less: Provision for doubtful accounts (15,423) (15,423)
------- -------
80,614 106,652
======= =======
|
The credit terms of trade receivables are within one year. The aging analysis of trade receivables, net was as follows:
31 December,
------------------
2003 2004
------ -------
RMB RMB
Within 1 year 75,674 99,297
Over 1 year but within 2 years 4,719 7,332
Over 2 years but within 3 years 221 23
80,614 106,652
====== =======
|
Concentrations of credit risk with respect to trade receivables are limited due to the Group's large number of customers, who are widely dispersed. Due to this factor, management believes that no additional credit risk beyond amounts provided for collection losses is inherent in the Group's trade receivables.
Movements of provision for doubtful accounts:
Year ended 31 December,
-----------------------
2003 2004
------- ------
RMB RMB
At beginning of year 15,959 15,423
Reversal during the year (536) -
------ ------
At end of year 15,423 15,423
====== ======
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
12. PREPAYMENTS AND OTHER RECEIVABLES, NET
31 December,
-----------------------
2003 2004
-------- --------
RMB RMB
Other receivables 157,690 200,555
Less: Provision for doubtful accounts (38,288) (57,038)
------- -------
Other receivables, net 119,402 143,517
Prepayments 104,061 62,543
------- -------
223,463 206,060
======= =======
|
Movements of provision for doubtful accounts:
Year ended 31 December,
-----------------------
2003 2004
------- ------
RMB RMB
At beginning of year 39,898 38,288
Addition of provision during the year 172 18,750
Reversal during the year (1,782) -
------ ------
At end of year 38,288 57,038
====== ======
|
As of 31 December, 2004 and 2003, the Company had fixed deposit with the principal amount of approximately RMB31.365 million in Zeng Cheng City Li Cheng Credit Cooperative ("Li Cheng"). The Company had not been able to recover the principal from Li Cheng upon the expiry of the fixed deposit term. In March 1999, the Company instituted legal proceedings against Li Cheng to recover the deposit and the related interest. According to the court verdict dated 12 October, 1999, Li Cheng was required to repay the deposit principal and the related interest to the Company. As Li Cheng failed to execute the court ruling, the Company further applied to the court for compulsory enforcement of the court order. In July 2000, Li Cheng filed a petition to the court for winding up. On 9 November, 2000, the court ordered the suspension of execution of the court ruling dated 12 October, 1999, while Li Cheng was undergoing a winding-up. On 23 November, 2000, the Company applied to the Guangdong Provincial Government for allocation of special funds by the government to Li Cheng for repayment of the Company's deposit principal. The provincial government accepted the petition and requested the municipal government to follow up on the case. In 2002, the Company reclassified such amount from temporary cash investment and accounted for 50% provision pursuant to management's estimates. As of the date of this report, the fixed deposit has not yet been collected. Based on the management's current estimates, the Company accounted for full provision in 2004.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
13. FIXED ASSETS, NET
Track,
bridges Locomotives Communications Other
and and and machinery
Leasehold service rolling signalling and
Buildings improvement roads stock systems equipment Total
--------- ----------- ---------- ----------- -------------- ---------- ---------
RMB RMB RMB RMB RMB RMB RMB
Cost/valuation
At 1 January, 2003 1,941,156 38,500 4,245,546 1,026,205 297,106 1,585,712 9,134,225
Additions 260 - - 21,679 916 32,823 55,678
Transfer from
construction-in-progress 209,479 - 123,832 - 720 198,718 532,749
Government grants (17,000) - - - - - (17,000)
Reclassification (154,024) - (37,113) - 5,936 185,201 -
Disposals (92,503) - (16,560) (4,992) (4,600) (33,116) (151,771)
--------- ------ --------- --------- ------- --------- ---------
At 31 December, 2003 1,887,368 38,500 4,315,705 1,042,892 300,078 1,969,338 9,553,881
Additions 22,644 15,232 3,379 355 41,610
Transfer from
construction-in-progress 229,261 26,851 17,905 55,965 329,982
Reclassification* 171,753 (21,878) 21,992 (171,867) -
Disposals (15,216) (3,600) (1,260) (18,311) (38,387)
--------- ------ --------- --------- ------- --------- ---------
At 31 December, 2004 2,295,810 38,500 4,317,078 1,058,124 342,094 1,835,480 9,887,086
--------- ------ --------- --------- ------- --------- ---------
Representing:
At cost 457,122 38,500 187,339 37,781 68,116 325,136 1,113,994
At 2002 professional valuation 1,838,688 - 4,129,739 1,020,343 273,978 1,510,344 8,773,092
--------- ------ --------- --------- ------- --------- ---------
2,295,810 38,500 4,317,078 1,058,124 342,094 1,835,480 9,887,086
--------- ------ --------- --------- ------- --------- ---------
Accumulated depreciation
At 1 January, 2003 376,192 13,475 1,037,553 271,152 178,397 459,176 2,335,945
Charges for the year 54,399 7,700 46,476 47,648 34,144 101,286 291,653
Reclassification* - - (16,682) - 563 16,119 -
Disposals (921) - (2,550) (4,992) (4,417) (13,715) (26,595)
--------- ------ --------- --------- ------- --------- ---------
At 31 December, 2003 429,670 21,175 1,064,797 313,808 208,687 562,866 2,601,003
Charges for the year 75,363 7,700 51,103 44,126 35,609 122,188 336,089
Reclassification 9,226 - 77 - 777 (10,080) -
Disposals (1,915) - (3,240) - (1,248) (16,882) (23,285)
--------- ------ --------- --------- ------- --------- ---------
At 31 December, 2004 512,344 28,875 1,112,737 357,934 243,825 658,092 2,913,807
--------- ------ --------- --------- ------- --------- ---------
Net book value
At 31 December, 2004 1,783,466 9,625 3,204,341 700,190 98,269 1,177,388 6,973,279
========= ====== ========= ========= ======= ========= =========
At 1 January, 2004 1,457,698 17,325 3,250,908 729,084 91,391 1,406,472 6,952,878
========= ====== ========= ========= ======= ========= =========
Had the fixed assets been carried at cost less accumulated depreciation, the
carrying amounts at 31 December, 2004 would have been:
Cost 1,595,705 38,500 3,667,016 1,038,319 316,272 1,739,089 8,394,901
Accumulated depreciation 265,812 28,875 736,830 314,177 222,916 582,978 2,151,588
--------- ------ --------- --------- ------- --------- ---------
1,329,893 9,625 2,930,186 724,142 93,356 1,156,111 6,243,313
========= ====== ========= ========= ======= ========= =========
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
13. FIXED ASSETS, NET (CONT'D)
* During the year ended 31 December, 2004, based on the construction completion reports, the directors reclassified certain fixed assets to appropriate categories. Accordingly, the carrying amounts of the aforesaid fixed assets are depreciated over their remaining useful lives under the respective categories.
On 6 March, 1996, the fixed assets of the Group were revalued by Vigers Hong Kong Limited (the "Valuer"), a qualified independent valuer in Hong Kong, using a replacement cost approach and open market value approach. The replacement cost approach considers the cost to replace in new condition the assets appraised for similar assets, and includes purchase price, delivery charge and installation cost. The purchase price is based on the open market value. The Valuer assumed that the assets will be used for the purposes for which they are presently used and did not consider alternative uses. The total revalued amount based on the aforesaid 1996 revaluation was RMB 5,318,202,000. The revaluation surplus of fixed assets amounting to approximately RMB1,492,185,000 was recorded by the Group as of 6 March, 1996, and depreciation on the increment to fixed assets commenced on that date. Upon the Restructuring, the revaluation surplus was converted to shares allotted to the Parent Company.
On 30 September, 2002, the fixed assets were revalued by Pan-China (Schinda) Certified Public Accountants, a qualified independent valuer registered in the PRC, on a replacement cost approach and open market value approach, where applicable. These fixed assets were stated at their revalued amounts in the financial statements as of 30 September, 2002.
The directors of the Company are of the opinion that the carrying values of fixed assets as of 31 December, 2004 approximated to their fair values.
14. CONSTRUCTION-IN-PROGRESS
31 December,
-----------------------
2003 2004
--------- ---------
RMB RMB
At 1 January 672,827 390,393
Additions 250,315 284,902
Transfer to fixed assets (532,749) (329,982)
-------- --------
At 31 December 390,393 345,313
======== ========
|
As of 31 December, 2004, there was no interest capitalised in the construction-in-progress as the Group had no bank borrowings.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
15. LEASEHOLD LAND PAYMENTS
Year ended 31 December,
--------------------------
2003 2004
------- -------
RMB RMB
Cost
At 1 January 760,087 770,774
Additions 10,687 -
Disposals - -
------- -------
At 31 December 770,774 770,774
------- -------
Accumulated amortisation
At 1 January 103,089 118,691
Charges for the year 15,602 15,704
Disposals - -
------- -------
At 31 December 118,691 134,395
------- -------
Net book value
At 31 December 652,083 636,379
======= =======
At 1 January 656,998 652,083
======= =======
|
16. INTERESTS IN ASSOCIATES
31 December,
--------------------------
2003 2004
------- -------
RMB'000 RMB'000
Share of net assets, at 1 January 136,574 134,066
Share of losses (2,508) (12,119)
------- -------
Share of net assets, at 31 December 134,066 121,947
Due from associates 48,437 48,402
Due to associates (8) (2)
------- -------
182,495 170,347
Less: Provision for impairment in value (29,689) (29,689)
Provision for doubtful accounts (12,312) (12,312)
------- -------
140,494 128,346
======= =======
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
16. INTERESTS IN ASSOCIATES (CONT'D)
Analysis of share of net assets of the associates is as follows:
2003 2004
RMB '000 RMB '000
At 1 January 136,574 134,066
Share of losses before tax (2,417) (12,070)
Share of taxation (91) (49)
------- -------
At 31 December 134,066 121,947
======= =======
|
The amounts due from/to associates were unsecured, interest free and had no fixed repayment terms. The provision for impairment in value and provision for doubtful accounts were provided for Zengcheng Lihua Stock Company Limited ("Zengcheng Lihua") as Zengcheng Lihua is in financial difficulty.
Movements of provision for impairment in value and for doubtful accounts are as follows:
Year ended 31 December,
------------------------
2003 2004
------ ------
RMB RMB
Beginning of year 43,787 42,001
Utilisation during the year (1,786) -
------ ------
End of year 42,001 42,001
====== ======
|
As of 31 December, 2004, the Company had direct or indirect interests in the following companies which were incorporated/established and are operating in the PRC:
Percentage of
Date of equity interest
incorporation / attributable to
Name of the entity establishment the Company Paid-up capital Principal activities
--------------------------------------- ----------------- --------------- --------------- -------------------------
Directly held by the Company
Guangzhou Tiecheng Enterprise Company 2 May, 1995 49% RMB245,000,000 Properties management and
Limited trading of merchandise
Zengcheng Lihua Stock Company 30 July, 1992 27% RMB100,000,000 Real estate, warehousing,
Limited cargo loading and
unloading
Indirectly held by the Company
Guangzhou Tielian Economy Development 27 December, 1994 34% RMB1,000,000 Warehousing and freight
Company Limited transport agency
Guangzhou Huangpu Yuehua Freight 20 July, 1990 33.3% RMB6,610,000 Cargo loading and
Transportation Joint Venture Company unloading, warehousing,
Limited freight transport agency
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
17. AVAILABLE-FOR-SALE INVESTMENTS
31 December,
------------------
Name of the investee company 2003 2004
--------------------------------------------------- ------- -------
RMB'000 RMB'000
China Railway Communication Company Limited ("China
Railcom")* 121,854 121,854
Shenzhen Innovation Technology Investment Company
Limited 30,000 30,000
China Railway Express Company Limited 13,608 13,608
Shenzhen Huatie Enterprise Company Limited 2,000 2,000
Zhongtie Information Company Limited 500 500
------- -------
167,962 167,962
======= =======
|
The Company's share of equity interests in each of the respective companies is not more than 10%. No quoted market prices are available for the above unlisted companies as of year end.
* China Railcom has confirmed in writing that the Company is entitled to the 0.69% equity interest in China Railcom as of 31 December, 2003. The relevant legal registration procedures have not been completed in 2004. Taking into account of a legal opinion, the directors believe that as at 31 December, 2004, the Company's equity investment in China Railcom is valid.
Pursuant to Tiezhengfa (2004) No. 6 jointly issued by MOR and State-owned Assets Supervision and Administration Commissions, the Company is required to dispose its investment in China Railcom. For fulfilling such requirement, the Company has been negotiating with the Parent Company, which would buy the Company's investment in China Railcom. The management expected that the consideration will be no less than the carrying book value of the Company's investment in China Railcom as at 31 December, 2004.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
18. DEFERRED TAX ASSETS
31 December,
---------------------
2003 2004
----- ------
RMB RMB
Deferred tax assets:
- Provision for doubtful accounts 2,699 14,916
- Loss on disposals of fixed assets 3,455 3,490
----- ------
6,154 18,406
===== ======
|
The movements of deferred taxation during the years are as follows:
Year ended 31 December,
------------------------
2003 2004
------ ------
RMB RMB
At beginning of year 7,577 6,154
(Debit) / credit to consolidated profit during the years (1,423) 12,252
------ ------
At end of year 6,154 18,406
====== ======
|
19. DEFERRED STAFF COSTS
31 December,
---------------------
2003 2004
------- -------
RMB'000 RMB'000
Cost, at 1 January and 31 December 226,369 226,369
------- -------
Accumulated amortisation
At 1 January (45,274) (60,366)
Charges for the year (15,092) (15,092)
------- -------
At 31 December (60,366) (75,458)
------- -------
Net book amount
At 31 December 166,003 150,911
======= =======
At 1 January 181,095 166,003
======= =======
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
20. ACCRUED EXPENSES AND OTHER PAYABLES
31 December,
----------------------
2003 2004
------- -------
RMB RMB
Advances from customers 89,840 127,411
Accrued expenses 24,000 74,173
Salary and welfare payables 15,138 24,257
Taxes payables 49,494 75,878
Other payables 179,815 217,089
------- -------
358,287 518,808
======= =======
|
Other payables mainly represented various payables and deposits for daily operation of business.
Pursuant to Caishui [2004] No. 36 and Caishui [2003] No. 149 issued by MOF and State Administration of Taxation, the Group is exempted from certain real estate taxes amounting to approximately RMB14,000,000 for the year ended 31 December 2004 (2003: approximately RMB12,000,000). The grant of such exemption is subject to the acknowledgement of relevant authorities that the Company is a transportation company under the MOR. The directors believe that the Group is qualified for such exemption and is in the process of seeking the acknowledgement from the relevant authorities. Accordingly, such real estate taxes have not been accrued for in the accompanying financial statements.
21. SHARE CAPITAL
As of 31 December, 2004, the authorised capital of the Company consisted of ordinary shares of par value RMB1.00 per share:
Percentage
Number of of capital
shares Nominal value stock
--------- ------------- ----------
'000 RMB
Authorised, issued and fully paid:
State-owned Domestic Shares 2,904,250 2,904,250 67%
H Shares 1,431,300 1,431,300 33%
--------- --------- ---
4,335,550 4,335,550 100%
========= ========= ===
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
22. DISTRIBUTION OF INCOME
According to the articles of association of the Company, when distributing profit attributable to shareholders of each year, the Company shall set aside 10% of its profit attributable to shareholders after tax based on the Company's local statutory accounts for the statutory surplus reserve (except where the reserve has reached 50% of the Company's registered share capital) and 5% to 10% for the statutory public welfare fund at a percentage determined by the directors. The Company may make appropriation from its profit attributable to shareholders to the discretionary surplus reserve provided it is approved by a resolution of a shareholders' general meeting. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends without prior approval from a shareholders' general meeting under certain conditions.
When the statutory surplus reserve is not sufficient to make good for any losses of the Company from previous years, current year profit attributable to shareholders shall be used to make good the losses before allocations are set aside for the statutory surplus reserve or the statutory public welfare fund.
The statutory public welfare fund is used to build or acquire capital items, such as dormitories and other facilities for the Company's employees and cannot be used to pay for welfare expenses. Title of these capital items will remain with the Company.
The statutory surplus reserve, the discretionary surplus reserve and the share premium may be converted into share capital provided it is approved by a resolution at a shareholders' general meeting and the balance of the statutory surplus reserve does not fall below 25% of the registered capital stock. The Company may either distribute new shares in proportion to the number of shares held by shareholders, or increase the par value of each share.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
22. DISTRIBUTION OF INCOME (CONT'D)
In accordance with the articles of association of the Company, dividends are
determined based on the least of retained earnings determined in accordance with
(a) PRC GAAP, (b) IFRS and (c) the accounting standards of the countries in
which its shares are listed. As the statutory accounts have been prepared in
accordance with PRC GAAP, the retained earnings as reported in the statutory
accounts may be different from the amount reported in the accompanying statement
of changes in shareholders' equity.
As of 31 December, 2004, the reserve of the Company available for distribution was approximately RMB694,086,000 (2003: approximately RMB656,893,000).
23. RETIREMENT BENEFITS
All the full-time staff of the Group are covered by a defined-contribution pension scheme. Pursuant to a circular dated 24 October, 1995 issued by the Parent Company, the Company is required to pay to the Parent Company an amount equivalent to 19% of the salary and certain amount of bonus of the staff for pension benefits, and the Parent Company is responsible for the ultimate pension liability to the staff. Starting from December 2000, the percentage borne by the Company changed to 18% pursuant to another circular dated 21 December, 2000 issued by the Parent Company.
Starting from April 2002, the ultimate pension liability is under the management of local government authority. For administrative purpose, during the transition period from April 2002 to November 2004, the Group continued to pay such contributions to the Parent Company, which in turn paid such amounts to the relevant government authority. Since November 2004, the Group has paid all such contributions directly to the relevant government authority.
The retirement benefits borne by the Company in 2002, 2003 and 2004 were RMB 31,858, RMB39,999 and RMB42,950 respectively. As of 31 December, 2004, payable for pension obligations due to the Parent Company was nil (2003: nil).
24. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.
(a) During the year, the Group had the following material transactions with related parties:
Recurring transactions
A significant portion of transactions undertaken by the Group during the year was with related PRC state-owned enterprises and on such terms as determined by the relevant PRC authorities and/or stipulated in the related agreements entered into with these parties. The following is a summary of significant recurring transactions carried out in the ordinary course of business by the Group with its related parties during the year:
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
24. RELATED PARTY TRANSACTIONS (CONT'D)
Recurring transactions (Cont'd)
Year ended 31 December,
-----------------------------------------------
2002 2003 2004
------- ------- -------
RMB RMB RMB
Expense
Lease of locomotives and related services from Guangzhou Railway Group
Yang Cheng Railway Company, a subsidiary of the Parent Company(i) 42,047 40,882 48,179
Provision of trains and related services from Guangmeishan Railway
Company Limited, a subsidiary of the Parent Company (ii) 4,864 5,305 6,066
Purchases of materials and supplies from Guangzhou Railway
Material Supply Company, a subsidiary of the Parent Company(iii) 33,074 50,687 65,998
Social services (employee housing, health care, educational and public
security services and other ancillary services) provided by the
Parent Company and related parties (including Guangzhou Railway
(Group) Guangshen Railway Enterprise Development Company) (ii) 66,744 68,079 94,246
Operating lease rentals paid to the MOR(i) 57,298 58,904 65,485
Provision of trains and related service through MOR(i) 211,667 201,870 209,503
Provision of trains usage and related services from Guangzhou Railway
(Group) Passenger Transportation Company, a subsidiary of the
Parent Company(i) 6,681 2,207 -
Interest expenses paid to the Parent Company (iv) 2,443 2,037 553
Income
Interest received from the MOR's Railroad Deposit-taking Centre
(see Note 10(b) and 24(b)) 3,239 3,516 6,111
Interest received from Pingnan Railway Company Limited, an
associate of the Parent Company (iv) 806 827 527
Interest received from Guangmeishan Railway Company Limited (iv) 1,884 901 109
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
24. RELATED PARTY TRANSACTIONS (CONT'D)
Non-recurring transactions
2002 2003 2004
------- ------- -------
RMB'000 RMB'000 RMB'000
Expense
Provision of repair and maintenance services from Guangzhou Railway
Engineer Construction Enterprise Development Company, a subsidiary
of the Parent Company (i) - - 46,588
Provision of repair and maintenance services from
Guangzhou Guangtie Huake Technology Service Company,
a subsidiary of the Parent Company(i) - - 12,320
Provision of management services for construction of
fixed assets from the Parent Company (v) - - 5,300
======= ======= =======
|
(i) The services are based on the pricing scheme set by the MOR.
(ii) The services are based on the contractual prices determined at cost plus reasonable margin.
(iii) The prices of materials and supplies are based on market price.
(iv) The interest arose from the long-distance transportation services, which was calculated based on the average balances due from/to related parties on a quarterly basis, at the prevailing interest rates of six-month bank loans.
(v) In 2004, the Company entered into certain management agreements and supplementary agreements (collectively, the "Management Agreements") with the Parent Company. Pursuant to the Management Agreements, the Parent Company, on behalf of the Company, provided monitoring and supervision to the sub-contractors, who are responsible for construction of certain railway and stations to the Company. The management service fees are based on the pricing scheme set by MOR.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
24. RELATED PARTY TRANSACTIONS (CONT'D)
(b) As of 31 December, 2002, the Group had the following material balances with related parties:
31 December,
------------------------------
2003 2004
------- -------
RMB RMB
Temporary cash investments in the MOR's Railroad Deposit-taking Center (see
Note 10(b)) 168,000 168,000
Bank deposits in the MOR's railroad Deposit-taking Center 321,985 862,508
Due to Parent Company (vi) (37,230) (24,617)
Due from related parties 199,921 56,064
-------- --------
- Trading balance (vii) 10,608 36,531
- Non-trading balance (vi) 189,313 19,533
-------- --------
Due to related parties (120,605) (172,121)
-------- --------
- Trading balance (vii) (60,128) (83,492)
- Non-trading balance (viii) (60,477) (88,629)
-------- --------
|
(vi) As of 31 December, 2004, the balance with the Parent Company, which is non-trading in nature, and the non-trading balance due from related parties mainly represented the Company's payment on behalf of related parties, who were required to make settlements to the Parent Company in respect of their provision of long-distance transportation services. Interest arose from the balance due from the related parties is disclosed in Notes 24 (a) (iv).
(vii) The balances with related parties, which are of trading in nature, all aged within one year.
(viii) As of 31 December, 2004, the non-trading balance due to related parties mainly represented the Company's collection of railroad revenue on behalf of the related parties.
As of 31 December, 2004, the balances with the MOR, the Parent Company and related parties are unsecured, non-interest bearing and repayable on demand, except for those disclosed in Notes 10(b), 24(a). The trading balances are resulted from transactions carried out by the Group with related parties in the ordinary course of business, and/or in accordance with the bases as set out in Note 24(a)(i), (ii) and (iii).
25. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
Non-cash transactions
During the year ended 31 December, 2004, the Group disposed certain staff quarters of approximately RMB11 million (2003: approximately RMB92 million) to their employees pursuant to its housing benefit scheme.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
26. FINANCIAL INSTRUMENTS
The carrying amounts of the cash and cash equivalents, temporary cash investments and accounts receivable and payables of the Group approximate their fair values because of the short maturity of those instruments. Cash and cash equivalents and temporary cash investments denominated in foreign currencies have been translated at the applicable market exchange rates prevailing at the balance sheet date. The Company has not had and does not believe it will have any difficulty in exchanging its foreign currency cash and cash equivalents for RMB.
As of 31 December, 2004, cash and cash equivalents and temporary cash investments were mainly maintained with commercial banks in the PRC and the MOR's Railroad Deposit-taking Centre.
As of 31 December, 2004, balances denominated in USD and HK$ have been translated into RMB at the applicable market exchange rates as of that date.
27. CONCENTRATION OF RISKS
(a) Credit risk
The carrying amount of cash and cash equivalents, accounts receivable and other receivables, and due from related parties and other current assets except for prepayments and deferred tax assets, represent the Group's maximum exposure to credit risk in relation to financial assets.
The majority of the Group's accounts receivable relate to the rendering of services or sales of products to third party customers. The Group performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral on accounts receivable. The Group maintains a provision for doubtful accounts and actual losses have been within management's expectation.
No other financial assets carry a significant exposure to credit risk.
(b) Interest rate risk
The directors of the Group believe that the exposure to interest rate risk of financial assets and liabilities as of 31 December, 2004 was minimum since their deviation from their respective fair values was not significant.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
27. CONCENTRATION OF RISKS (CONT'D)
(c) Currency risk
Substantially all of the revenue-generating operations of the Group are transacted in Renminbi, which is not freely convertible into foreign currencies. On 1 January, 1994, the Mainland China government abolished the dual rate system and introduced single rate of exchange as quoted by the PBOC. However, the unification of the exchange rate does not imply free convertibility of Renminbi into foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorised to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institution requires submitting a payment application form together with suppliers' invoices, shipping documents and signed contracts.
28. COMMITMENTS
(a) Capital commitments
As of 31 December, 2004, the Group had the following capital commitments which are authorized but not contracted for and contracted but not provided for:
31 December,
----------------------------------
2003 2004
---- -------
RMB RMB
Authorised but not contracted for - 451,500
Contracted but not provided for - 693,828
==== =======
|
(b) Operating lease commitments
Total future minimum lease payments under non-cancelable operating leases were as follows:
31 December,
-----------------------------------
2003 2004
------- -------
RMB RMB
Machinery and equipment
- not more than one year 108,000 108,000
- more than one year but not more than two years 108,000 75,375
- more than two years but not more than three years 75,375 -
------- -------
291,375 183,375
======= =======
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
28. COMMITMENTS (CONT'D)
(c) Commitment under a conditional acquisition agreement
See Note 29.
29. PROPOSED ACQUISITION OF A RAILWAY BUSINESS
On 15 November, 2004 the Company and Guangzhou Railway Group Yangcheng Railway Company (The "Vendor"), a wholly owned subsidiary of the Parent Company, have entered into an agreement for the acquisition of the railway transportation business between Guangzhou and Pingshi (currently operated by the Vendor) and the assets and liabilities relating to such business (the "Acquisition Agreement"). The consideration for the Acquisition was determined to be RMB 10,264,120,700, subject to confirmation from the relevant PRC authorities and certain adjustments to be made as per the Acquisition Agreement.
The Company intends to finance the payment of the Consideration with the proceeds of an A share issue with any shortfall being financed by internal resources / bank borrowings etc. These shares will be listed on the Shanghai Stock Exchange.
In this regard, the Company has applied to the relevant authorities in China for the issue and allotment of not more than 2.75 billion A shares. The Company submitted its application proposal relating to the A Share Issue to the China Securities Regulatory Commission (the "CSRC") on 31 December, 2004.
Pursuant to the requirements of the Listing Rules of Hong Kong, the proposed Acquisition will be deemed to be a very substantial acquisition by the Company. As the vendor is a wholly-owned subsidiary of the Parent Company, the controlling shareholder of the Company, the proposed Acquisition will also be considered a connected transaction of the Company.
In addition to the Acquisition Agreement, the Company has entered into various agreements in respect of leasing agreement and services agreement with the parent company or the vendor. Such agreements shall take effect upon the completion of the Acquisition and shall replace all existing connected transaction agreements relating to the same categories of transactions.
On 5 December, 2004, the Company issued a circular to its shareholders in respect of the proposed A share issue, the proposed very substantial acquisition and ongoing connected transaction, and the proposed ongoing connected transactions. On 30 December, 2004, the Company held its domestic shareholders' class meeting, H shares shareholders' class meeting and extraordinary general meetings that approved the proposed A share issue, the proposed acquisition and the proposed ongoing connected transactions.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
29. PROPOSED ACQUISITION OF A RAILWAY BUSINESS (CONT'D)
The Acquisition Agreement is conditional upon the fulfillment of, among other
things, the following remaining conditions: (1) the formal approval of the
relevant authorities or bodies in relation to the A Share Issue being obtained;
(2) the A Share Issue having completed and raised an amount of not less than 65%
of the consideration; (3) the approval of the relevant government bodies
responsible for the supervision and management of state owned assets in relation
to the vendor's proposal on disposal of state-owned assets being obtained; and
(4) the approval of the National Development and Reform Committee in relation to
the price determination for passenger and freight railway transportation
services between Guangzhou and Pingshi being obtained. As of the date of this
report, none of the conditions are fulfilled.
Save for condition (2) which can be waived by the Company, none of the above conditions can be waived. If the above conditions are not fulfilled within 2 years from the date of signing of the Acquisition Agreement, 15 November, 2004, the Acquisition Agreement shall lapse and no party shall have any liability thereunder. In the event that any party rescinds the Acquisition Agreement for whatever reason after the A Share Issue has been completed, it is expected that the Company will retain the proceeds from the A Share Issue as general working capital.
The Company believes that the A Share Issue will be completed by the end of 2005, subject to the market conditions and policies of the CSRC.
30. CONTINGENCY
As of 31 December, 2004, the Company's interest in an associated company, Guangzhou Tiecheng Enterprise Company Limited ("Tiecheng"), amounted to approximately RMB140,000,000. In 1996, Tiecheng entered into an agreement with a Hong Kong incorporated company to establish Guangzhou Guantian Real Estate Company ("Guangzhou Guantian"), a sino-foreign contractual joint venture to develop certain properties near a railway station operated by the Group.
On 27 October, 2000, Guangzhou Guantian together with Guangzhou Guanhua Real Estate Company Limited ("Guangzhou Guanhua") and Guangzhou Guanyi Real Estate Company Limited ("Guangzhou Guanyi") agreed to act as joint guarantors (the "Guarantors") of certain payables of Guangdong Guancheng Real Estate Company Limited ("Guangdong Guancheng") to an independent third party.
Guangzhou Guantian, Guangzhou Guanhua, Guangzhou Guanyi and Guangdong Guancheng were related companies with a common chairman. As Guangdong Guancheng failed to repay the payables, according to a court verdict on 4 November, 2001, Guangzhou Guantian, Guangzhou Guanhua and Guangzhou Guanyi were liable to the independent third party to recover an amount of approximately RMB257,000,000 plus interest from Guangdong Guancheng.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
30. CONTINGENCY (CONT'D)
As stated above, if Guangzhou Guantian were held responsible for the guarantee, the Company may need to provide for impairment on its interests in Tiecheng. Having consulted with a PRC lawyer, the directors are of the opinion that the guarantee arrangement should be invalid according to the relevant PRC rules and regulations. Tiecheng is now in the process to apply to the court for discharging the obligation of Guangzhou Guangtian in relation to the guarantee. Accordingly, the directors consider that as of the date of this report, the chance of Guangzhou Guantian to settle the above claim is remote and no provision for impairment on the interests in Tiecheng has been made in the financial statements.
To avoid the possible loss resulting from the litigation, the Company has obtained a letter of undertaking issued by the Parent Company. The Parent Company undertakes to resolve through relevant channels or to take up the responsibilities so that the equity interest of the Company in Tiecheng will not be affected by the litigation.
31. DIFFERENCE BETWEEN IFRS AND US GAAP
The accompanying financial statements conform to IFRS which differ in certain respects from those prepared under Generally Accepted Accounting Principles in the United States of America ("US GAAP"). A major difference between IFRS and US GAAP, which has a significant effect on consolidated profit attributable to shareholders and consolidated net assets, is set out below:
Revaluation of fixed assets
The Group revalued their fixed assets on 6 March, 1996. The revaluation surplus of fixed assets amounting to approximately RMB1,492,185,000 was recorded by the Group on that date. The revaluation as of 30 September, 2002 did not result in a material difference from the carrying amounts and no revaluation surplus or deficit was recorded.
Under IFRS, revaluation of fixed assets is permitted and depreciation is based on the revalued amount. Additional depreciation arising from the revaluation surplus was approximately RMB38,548,000 for the year ended 31 December, 2004 (2003: approximately RMB38,548,000).
Under US GAAP, fixed assets are required to be stated at original cost. Hence, no additional depreciation from revaluation will be recognised under US GAAP. However, a deferred tax asset related to the revaluation surplus amounting to approximately RMB223,828,000 was created under US GAAP with a corresponding increase in equity since the revaluation resulted in a higher tax base which will be realised through additional depreciation for PRC tax purposes.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
31. DIFFERENCE BETWEEN IFRS AND US GAAP (CONT'D)
Revaluation of fixed assets (Cont'd)
Effects on the consolidated profit attributable to shareholders of significant differences between IFRS and US GAAP are summarised below:
Year ended 31 December,
---------------------------------------------------------------
2002 2003 2004 2004
------- ------- ------- --------
RMB RMB RMB US$
Consolidated profit attributable to shareholders under
IFRS 557,083 511,762 567,484 68,373
US GAAP adjustments:
Reversal of additional depreciation charges arising
from the revaluation surplus on fixed assets 48,422 38,548 38,548 4,644
Effect of US GAAP adjustment on deferred tax
provision (7,263) (5,782) (5,782) (697)
------- ------- ------- --------
Consolidated profit attributable to shareholders under
US GAAP 598,242 544,528 600,250 72,320
======= ======= ======= ========
Earnings per share under US GAAP RMB0.14 RMB0.13 RMB0.14 USD0.017
======= ======= ======= ========
Earnings per equivalent ADS under
US GAAP RMB6.90 RMB6.28 RMB6.92 USD0.834
======= ======= ======= ========
|
Effects on consolidated net assets of significant differences between IFRS and US GAAP are summarised below:
Year ended 31 December,
--------------------------------------------------
2003 2004 2004
---------- ---------- ---------
RMB RMB US$
Consolidated net assets under IFRS 10,322,358 10,420,574 1,255,491
US GAAP adjustments:
Reversal of the revaluation surplus on fixed assets (1,492,185) (1,492,185) (179,781)
Reversal of accumulated depreciation on the revaluation surplus on
fixed assets 369,432 407,980 49,154
Deferred tax assets related to net revaluation surplus 168,413 162,631 19,594
---------- ---------- ---------
Consolidated net assets under US GAAP 9,368,018 9,499,000 1,144,458
========== ========== =========
|
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
31. DIFFERENCE BETWEEN IFRS AND US GAAP (CONT'D)
Revaluation of fixed assets (Cont'd)
There are no significant differences between IFRS and US GAAP which affect classification in the balance sheet and the income statement but do not affect net income or shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (the "FASB") issued Financial Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities" and in December 2003 issued a revised interpretation FIN 46R. Under these interpretations, certain entities known as variable interest entities must be consolidated by the primary beneficiary of the entity. The adoption of FIN 46 did not have any material impact on the Group's financial statements.
In November, 2004, the FASB issued FASB Statement No. 151, "Inventory Costs -- an amendment of ARB No. 43, Chapter 4" (FAS 151), which is the result of its efforts to converge U.S. accounting standards for inventories with International Financial Reporting Standards. This statement requires abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS 151 will be effective for inventory costs incurred during fiscal years beginning after 15 June, 2005. The adoption of this standard will not have a material impact on the Group's consolidated financial statements.
In December 2004, the FASB issued FASB Statement No. 153, "Exchanges of Non-monetary Assets" (FAS 153), which amends APB Opinion No. 29, "Accounting for Non-monetary Transactions", to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. Under FAS 153, exchanges of non-monetary assets, except for exchanges of non-monetary assets that do not have commercial substance, should be measured based on the fair value of the assets exchanged. The provisions of this Statement shall be effective for non-monetary asset exchanges occurring in fiscal periods beginning after 15 June, 2005. The Group is currently assessing the impact of the standard on its consolidated financial statements.
32. FOREIGN CURRENCY EXCHANGE
The books and records of the Group are maintained in RMB, their functional currency. RMB is not freely convertible into foreign currencies. All foreign exchange transactions involving RMB must take place through the banks and other institutions authorised by the PBOC to buy and sell foreign currencies. The applicable market exchange rates used for the transactions are administered by the PBOC. Enterprises can deal with an approved bank for foreign exchange on recurring items and approved capital items.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and per ADS data and unless otherwise stated)
33. APPROVAL OF ACCOUNTS
The financial statements were approved by the Board of Directors on June 27, 2005.
SIGNATURE
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.
GUANGSHEN RAILWAY COMPANY LIMITED
Date: June 27, 2005 By: /s/ Wu Junguang
----------------------------------
Wu Junguang
Chairman of the Board of Directors
|
EXHIBIT 1.1
ARTICLES OF ASSOCIATION
OF
GUANGSHEN RAILWAY COMPANY LIMITED
(Approved by Special Resolution passed by the shareholder's general meeting held on March 14, 1996) (Amended by Special Resolution Adopted at the Shareholders' General Meeting Held on June 24, 1997) (Amended by Special Resolution Adopted at the Interim Shareholders' General Meeting Held on February 8, 2001) (Amended by Special Resolution Adopted at the Shareholders' General Meeting Held on June 28,2002) (Amended by Special Resolution Adopted at the Shareholders' General Meeting Held on June 10, 2004) (Amended by Special Resolution Adopted at the Interim Shareholders' General Meeting Held on December 30, 2004) (Amended by Special Resolution Adopted at the Shareholders' General Meeting Held on May 12, 2004)
March 14, 1996
Table of Contents
Page
----
CHAPTER 1: GENERAL PROVISIONS............................................................................... 1
CHAPTER 2: PURPOSES AND SCOPE OF BUSINESS................................................................... 2
CHAPTER 3: SHARES AND REGISTERED CAPITAL.................................................................... 3
CHAPTER 4: REDUCTION OF CAPITAL AND REPURCHASE OF SHARES.................................................... 5
CHAPTER 5: FINANCIAL ASSISTANCE FOR ACQUISITION OF the company's SHARES..................................... 7
CHAPTER 6: SHARE CERTIFICATES AND REGISTER OF SHAREHOLDERS.................................................. 8
CHAPTER 7: SHAREHOLDERS' RIGHTS AND OBLIGATIONS............................................................. 12
CHAPTER 8: SHAREHOLDERS' GENERAL MEETINGS................................................................... 15
CHAPTER 9: SPECIAL PROCEDURES FOR VOTING BY A CLASS OF SHAREHOLDERS......................................... 23
CHAPTER 10: BOARD OF DIRECTORS............................................................................... 25
CHAPTER 11: SECRETARY OF THE BOARD OF DIRECTORS.............................................................. 29
CHAPTER 12: GENERAL MANAGER.................................................................................. 29
CHAPTER 13: SUPERVISORY COMMITTEE............................................................................ 30
CHAPTER 14: THE QUALIFICATIONS AND DUTIES OF THE DIRECTORS, SUPERVISORS, GENERAL MANAGER, DEPUTY GENERAL
MANAGERS AND OTHER SENIOR ADMINISTRATIVE OFFICERS OF THE COMPANY................................. 32
CHAPTER 15: FINANCIAL AND ACCOUNTING SYSTEMS AND PROFIT DISTRIBUTION......................................... 39
CHAPTER 16: APPOINTMENT OF ACCOUNTING FIRM................................................................... 42
CHAPTER 17: INSURANCE........................................................................................ 45
CHAPTER 18: LABOUR AND PERSONNEL MANAGEMENT SYSTEMS.......................................................... 45
CHAPTER 19: TRADE UNION...................................................................................... 45
CHAPTER 20: MERGER AND DIVISION OF THE COMPANY............................................................... 45
CHAPTER 21: DISSOLUTION AND LIQUIDATION...................................................................... 47
CHAPTER 22: PROCEDURES FOR AMENDMENT OF THE COMPANY'S ARTICLES OF ASSOCIATION................................ 49
CHAPTER 23: SETTLEMENT OF DISPUTES........................................................................... 49
CHAPTER 24: SUPPLEMENTARY.................................................................................... 51
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ARTICLES OF ASSOCIATION OF
GUANGSHEN RAILWAY COMPANY LIMITED
(Approved by Special Resolution passed by the shareholders' general meeting held on March 14, 1996) (Amended by Special Resolution Adopted at the Shareholders' General Meeting Held on June 24, 1997) (Amended by Special Resolution Adopted at the Interim Shareholders' General Meeting Held on February 8, 2001) (Amended by Special Resolution Adopted at the Shareholders' General Meeting Held on June 28,2002) (Amended by Special Resolution Adopted at the Shareholders' General Meeting Held on June 10, 2004) (Amended by Special Resolution Adopted at the Interim Shareholders' General Meeting Held on December 30, 2004) (Amended by Special Resolution Adopted at the Shareholders' General Meeting Held on May 12, 2004)
CHAPTER 1: GENERAL PROVISIONS
Article 1. The Company is a joint stock limited company established in accordance with the "Company Law of the People's Republic of China" (the "Company Law"), "State Council's Special Regulations Regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Shares" (the "Special Regulations") and other relevant laws and regulations of the State.
The Company was established by way of promotion with the approval under the document "Ti Gai Sheng" [1995] No.151 of the Peoples' Republic of China's State Commission for Restructuring the Economic System. It is registered with and has obtained a business licence from the Administration Bureau of Industry and Commerce of Shenzhen, Guangdong Province, the PRC on the sixth (6) day of March 1996. The number of the Company's business licence is Shen Si Zi N12183.
The promoter of the Company is Guangzhou Railway (Group) Company.
Article 2. The Company's registered name in Chinese is [CHINESE NAME] and
in English is: GUANGSHEN RAILWAY COMPANY LIMITED
Article 3. The Company's address : No. 1052, Heping Road, Shenzhen, China
Zip Code : 518010
Telephone : (0755) 25584891
Facsimile : (0755) 25591480
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Article 4. The Company's legal representative is the Chairman of the board of directors of the Company.
Article 5. The Company is a joint stock limited company in perpetual existence.
Article 6. In accordance with the Company Law, the Special Regulations, "Mandatory Provisions for the Articles of Association of Companies to be Listed Outside China" (the "Mandatory Provisions") and other relevant laws and administrative regulations of the State, the Company held a shareholders' general meeting on 14 March 1996 to amend the Company's articles of association which were approved by shareholders' general meeting on 22 January 1996 (the "Original Articles of Association") and to formulate these articles of association of the Company.
Article 7. The Original Articles of Association have taken effect since the completion of registration formalities with the Administration Bureau of Industry and Commerce of Shenzhen, Guangdong Province, the PRC.
These articles of association of the Company will take effect after it is approved by the Securities Committee of the State Council and the companies approving department authorized by the State Council. The Original Articles of Association of the Company will be replaced by these articles of association of the Company when the latter take effect.
The Company shall, within the period stipulated by laws or administrative regulations, process the registration of changing of mandatory registered items due to the amendment of the Original Articles of Association.
Article 8. From the date of these articles of association becoming effective, these articles of association constitute a legally binding document regulating the Company's organisation and activities, and the rights and obligations between the Company and each shareholder and among the shareholders inter se.
Article 9. These articles of association are binding on the Company and its shareholders, directors, supervisors, general manager, deputy general managers and other senior administrative officers of the Company; all of whom are entitled to claim rights concerning the affairs of the Company in accordance with these articles of association.
These articles of association are actionable by a shareholder against the Company and vice versa, by shareholders against each other and by a shareholder against the directors, supervisors, general manager, deputy general managers and other senior administrative officers of the Company.
The actions referred to in the preceding paragraph include court proceedings and arbitration proceedings.
Article 10. The Company may invest in other limited liability companies or joint stock limited companies. The Company's liabilities to an investee company shall be limited to the amount of its capital contribution to the investee company.
Upon approval of the companies approving department authorized by the State Council, the Company may, according to its need of operation and management, operate as a holding company as prescribed in the second paragraph of Article 12 of the Company Law.
Article 11. On condition of compliance with applicable laws and administrative regulations of the People's Republic of China ("PRC"), the Company has the power to raise and borrow money which power includes without limitation the issue of debentures, the charging or pledging of part or whole of the Company's business or properties and other rights permitted by PRC laws and administrative regulations.
CHAPTER 2: PURPOSES AND SCOPE OF BUSINESS
Article 12. The business purposes of the Company are: to utilise the public funding in and outside the country for the purpose of improving the Company's standard of technology, the standard of the equipment, the quality of the service, to improve the Company's market competitiveness, to ensure the safety of railway
transportation, to accelerate the development of the railway transportation business, to become a first class international railway transportation enterprise and to let the shareholders have a reasonable financial benefit as well as a satisfactory return on capital.
Article 13. The scope of business of the Company shall comply with those items approved by the companies registration authority. The scope of business of the Company includes railway passenger and freight transportation services; technical services for railway facilities; engaging in domestic commercial activities, materials supply (not including monopolized commodities), establishing various enterprises (specific items to be reported separately).
Article 14. The Company may, according to its ability to develop, and upon the approval by special resolution adopted by the shareholders' general meeting and the approval of the relevant state governing authority, adjust its scope of business or investment orientation and method etc.
CHAPTER 3: SHARES AND REGISTERED CAPITAL
Article 15. There must, at all times, be ordinary shares in the Company. Subject to the approval of the companies approving department authorized by the State Council, the Company may, according to its requirements, create other classes of shares.
Article 16. The shares issued by the Company shall have a par value of Renminbi one yuan.
The Renminbi referred to in the preceding paragraph is the legal currency of the People's Republic of China.
Article 17. Subject to the approval of the securities authority of the State Council, the Company may issue and offer shares to domestic investors or foreign investors for subscription.
Foreign investors referred to in the preceding paragraph mean those investors of foreign countries and regions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the Company. Domestic investors means those investors within the territory of the PRC (excluding investors of the regions referred to in the preceding sentence) who subscribe for shares issued by the Company.
Article 18. Shares issued by the Company to domestic investors for subscription in Renminbi shall be referred to as "Domestic-Invested Shares". Shares issued by the Company to foreign investors for subscription in foreign currencies shall be referred to as "Foreign-Invested Shares". Foreign-Invested Shares which are listed overseas are called "Overseas-Listed Foreign-Invested Shares".
The foreign currencies referred to in the preceding paragraph mean the legal currencies (apart from Renminbi) of other countries or districts which are recognized by the foreign exchange control authority of the State and can be used to pay the Company for the share price.
Article 19. Overseas-Listed Foreign-Invested Shares issued by the Company and listed in Hong Kong shall be called "H Shares". H Shares are shares which have been
admitted for listing on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"), the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars.
Article 20. Subject to the approval of companies approving department authorized by the State Council, the Company may issue 2,904,250,000 shares to Guangzhou Railway (Group) Company (the "Promoter") on the establishment of the Company.
Article 21. The Company made its first increase of capital after its incorporation by issuing 1,431,300,000 H shares, including those by the exercise of over-allotment options.
Upon the increase of capital by issuing shares as referred to in the preceding paragraph, the share capital structure of the Company is: 4,335,550,000 ordinary shares, out of which 2,904,250,000 shares are held by the Promoter, representing 66.99% of the total ordinary shares, and 1,431,300,000 shares are held by holders of H Share, representing 33.01% of the total ordinary shares.
Article 22. Upon approval by the securities governing authority of the State Council of the proposal to issue Overseas-Listed Foreign-Invested Shares and Domestic-Invested Shares, the Company's board of directors may make implementing arrangements for separate issues.
The Company's proposal to issue separately Overseas-Listed
Foreign-Invested Shares, and Domestic-Invested Shares pursuant
to the preceding paragraph may be implemented within fifteen
(15) months from the date of the approval of Securities
Committee of the State Council.
Article 23. In respect of the total number of shares as stated in a shares issuing proposal, where the Company shall separately issue Overseas-Listed Foreign-Invested Shares and Domestic-Invested Shares, these respective shares shall be fully subscribed for at their respective offerings. If the shares cannot be fully subscribed for at their offerings due to some special circumstances, then subject to the approval of the Securities Committee of the State Council the shares may be issued by installments.
Article 24. The Company's registered capital is Renminbi 4,335,550,000.
Article 25. The Company may, based on its requirements for operation and development and in accordance with the relevant provisions of these articles of association, approve an increase of capital.
The Company may increase its capital in the following ways:
(1) offering new shares to non-specially-designated investors for subscription;
(2) placing new shares to its existing shareholders;
(3) distributing new shares to its existing shareholders;
(4) any other ways permitted by laws and administrative regulations.
The Company's increase of capital by issuing new shares shall, after being approved in accordance with the provisions of these articles of association, be conducted in accordance with the procedures stipulated by relevant laws and administrative regulations of the State.
Article 26. Unless otherwise provided by law or administrative regulation, shares in the Company are freely transferable and are not subject to any lien.
CHAPTER 4: REDUCTION OF CAPITAL AND REPURCHASE OF SHARES
Article 27. In accordance with the provisions of these articles of association, the Company may reduce its registered capital.
Article 28. When the Company reduces its registered capital, it must draw up a balance sheet and an inventory of assets.
The Company shall notify its creditors within ten (10) days of the date of the Company's resolution for reduction of capital and shall publish a notice in a newspaper at least three times within thirty (30) days of the date of such resolution. A creditor has the right within thirty (30) days of receiving the notice from the Company or, in the case of a creditor who does not receive the notice, within ninety (90) days of the date of the first public notice, to demand the Company to repay its debts or provide a corresponding guarantee for such debt.
The Company's registered capital after reduction shall not be less than the statutory minimum amount.
Article 29. The Company may, with approval according to the procedures provided in these articles of association and subject to the approval of the relevant governing authority of the State, repurchase its issued shares under the following circumstances:
(1) cancellation of shares for the reduction of its capital;
(2) merging with another company that holds shares in the Company;
(3) other circumstances permitted by laws and administrative regulations.
Article 30. The Company may, with the approval of the relevant State governing authority for repurchasing its shares, conduct the repurchase in one of the following ways:
(1) making a pro rata general offer of repurchase to all its shareholders;
(2) repurchasing shares through public dealing on a stock exchange;
(3) repurchase by an off-market agreement.
Article 31. Where the Company repurchases its shares by an off-market agreement, the prior sanction of shareholders' general meeting shall be obtained in accordance with these articles of association. The Company may release or vary a contract so entered into by the Company or waive its rights therein with the prior approval of shareholders' general meeting obtained in the same manner.
A contract to repurchase shares referred to in the preceding paragraph includes (without limitation) an agreement to become obliged to repurchase or an acquisition of the right to repurchase shares of the Company.
The Company shall not assign the contract for repurchasing its shares or any rights therein.
Article 32. Shares repurchased in accordance with law by the Company shall be cancelled within the period prescribed by laws and administrative regulations, and the Company shall apply to the original companies registration authority for registration of the change of its registered capital.
The amount of the Company's registered capital shall be reduced by the aggregate par value of those cancelled shares.
Article 33. Unless the Company is in the course of liquidation, it must comply with the following provisions in relation to repurchase of its outstanding shares:
(1) where the Company repurchases shares of the Company at par value, payment shall be made out of book surplus distributable profits of the Company or out of proceeds of a fresh issue of shares made for that purpose;
(2) where the Company repurchases shares of the Company at a premium to its par value, payment up to the par value may be made out of the book surplus distributable profits of the Company or out of the proceeds of a fresh issue of shares made for that purpose. Payment of the portion in excess of the par value shall be effected as follows:
(i) if the shares being repurchased were issued at par value, payment shall be made out of the book surplus distributable profits of the Company;
(ii) if the shares being repurchased were issued at a premium to its par value, payment shall be made out of the book surplus distributable profits of the Company or out of the proceeds of a fresh issue of shares made for that purpose, provided that the amount paid out of the proceeds of the fresh issue shall not exceed the aggregate of premiums received by the Company on the issue of the shares repurchased nor the current amount of the Company's capital common reserve fund account (including the premiums on the fresh issue) at the time of the repurchase;
(3) payment by the Company in consideration of the following shall be made out of the Company's distributable profits:
(i) acquisition of rights to repurchase shares of the Company;
(ii) variation of any contract to repurchase shares of the Company;
(iii) release of any of the Company's obligations under any contract to repurchase shares of the Company;
(4) after the Company's registered capital has been reduced by the total par value of the cancelled shares in accordance with the relevant provisions, the amount deducted from the distributable profits of the Company for paying up the par-value portion of the shares repurchased shall be transferred to the Company's capital common reserve fund account.
CHAPTER 5: FINANCIAL ASSISTANCE FOR ACQUISITION OF THE COMPANY'S SHARES
Article 34. The Company and its subsidiaries shall not, by any means at any time, provide any kind of financial assistance to a person who is acquiring or is proposing to acquire shares in the Company. The said acquirer of shares of the Company includes a person who directly or indirectly incurs any obligations due to the acquisition of shares in the Company.
The Company and its subsidiaries shall not, by any means at any time, provide financial assistance to the said obligor as referred to in the preceding paragraph for the purpose of reducing or discharging the obligations assumed by that person.
This Article shall not apply to the circumstances specified in Article 36 of this Chapter.
Article 35. For the purpose of this Chapter, "financial assistance" includes (without limitation) the following meanings:
(1) gift;
(2) guarantee (including the assumption of liability by the guarantor or the provision of assets by the guarantor to secure the performance of obligations by the obligor), or compensation (other than compensation in respect of the Company's own default) or release or waiver of any rights;
(3) provision of loan or any other agreement under which the obligations of the Company are to be fulfilled before the obligations of another party or the novation of the parties to, or the assignment of rights arising under, such loan or agreement;
(4) any other form of financial assistance given by the Company when the Company is insolvent or has no net assets or when its net assets would thereby be reduced to a material extent.
For the purpose of this Chapter, "incurring any obligations" includes the incurring of obligations by the obligor through changing of the obligor's financial position by way of contract or the making of arrangement (whether enforceable or not, and whether made on its own account or with any other person), or by any other means.
Article 36. The following, shall not be deemed to be activities prohibited by Article 34 of this Chapter.
(1) the provision of financial assistance by the Company where the financial assistance is given in good faith in the interests of the Company, and the principal purpose in giving the financial assistance is not for the acquisition of shares in the Company, or the giving of the financial assistance is an incidental part of some overall plan of the Company;
(2) the lawful distribution of the Company's assets by way of dividend;
(3) the allotment of bonus shares as dividends;
(4) a reduction of registered capital, a repurchase of shares of the Company or a reorganization of the share capital structure of the Company effected in accordance with these articles of association;
(5) the lending of money by the Company within its scope of business for its normal business activities (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of distributable profits of the Company);
(6) the provision of money by the Company for contributions to staff and workers' shares schemes (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of distributable profits of the Company).
CHAPTER 6: SHARE CERTIFICATES AND REGISTER OF SHAREHOLDERS
Article 37. Share certificates of the Company shall be in registered form.
The following items shall be stated on the share certificate of the Company:
(1) the Company's name;
(2) the date of registration of the Company;
(3) the class of the share certificate, the par value and the number of shares represented by the share certificate;
(4) the serial number of the share certificate;
(5) other items required to be stated by the stock exchange on which the Company's shares are listed.
Article 38. Share certificates of the Company shall be signed by the Chairman of the Company's board of directors. Where the stock exchange on which the Company's shares are listed requires other senior administrative officer(s) of the Company to sign on the share certificates, the share certificates shall also be signed by such senior administrative officer(s). The share certificates shall take effect after being sealed or printed with the special seal for securities of the Company. The share certificates shall only be sealed with the Company's special seal for securities under the authorization of the board of directors. The signatures of the Chairman of board of directors or other senior administrative officer(s) of the Company may be printed in mechanical form.
Article 39. The Company shall keep a register of its shareholders and enter in the register the following particulars:
(1) the name (title) and address (residence), the occupation or nature of each shareholder;
(2) the class and quantity of shares held by each shareholder;
(3) the amount paid or payable on the shares of each shareholder;
(4) the share certificate numbers of the shares held by each shareholder;
(5) the date on which each person was entered in the register as a shareholder;
(6) the date on which any shareholder ceased to be a shareholder.
Unless contrary evidence is shown, the register of shareholders shall be sufficient evidence of the shareholders' shareholdings in the Company.
Article 40. The Company may, in accordance with the mutual understanding and agreements between the securities governing authority of the State Council and overseas securities regulatory organizations; maintain the register of shareholders of Overseas-Listed Foreign-Invested Shares overseas and appoint overseas agent(s) to manage such share register.
The original share register for holders of H Shares shall be maintained in Hong Kong.
A duplicate of the share register for holders of Overseas-Listed Foreign-Invested Shares shall be maintained at the Company's address. The appointed overseas agent(s) shall at all times ensure the consistency between the original and the duplicate of the share register.
If there is any inconsistency between the original and the duplicate of the share register for holders of Overseas-Listed Foreign-Invested Shares, the original shall prevail.
Article 41. The Company shall have a complete register of shareholders which shall comprise the following:
(1) a part of the shareholders' register maintained at the Company's address other than those parts mentioned in sub-paragraphs (2) and (3) of this Article;
(2) a part of the shareholders' register in respect of the holders of Overseas-Listed Foreign-Invested Shares of the Company maintained in the place of the overseas stock exchange on which the shares are listed; and
(3) any other parts of the shareholders' register maintained at such other places as the board of directors may consider necessary for the purpose of listing the shares of the Company.
Article 42. Different parts of the shareholders' register shall not overlap. No transfer of any shares registered in any part of the register shall, during the continuance of that registration, be registered in any other part of the register.
All the fully paid-up H Shares can be freely transferred in accordance with these articles of association. However, the board of directors may refuse to recognise any instrument of transfer without giving any reason, unless:
(1) a fee (for each instrument of transfer) of two dollars and fifty cents Hong Kong dollars or any higher fee as agreed by the Stock Exchange has been paid to the Company for registration of any transfer instrument or any other document which is related to or will affect ownership of the shares;
(2) the instrument of transfer only involves H Shares;
(3) the stamp duty chargeable on the instrument of transfer has been paid;
(4) the relevant share certificate and upon the reasonable request of the board of directors any evidence in relation to the right of the transferor to transfer the shares have been submitted;
(5) if it is intended to transfer the shares to joint owners, then the maximum number of joint owners shall not exceed four (4);
(6) the Company does not have any lien on the relevant shares.
The alteration and rectification of each part of the shareholders' register shall be carried out in accordance with the laws of the place where the register is maintained.
If the Company refuses to register, any transfer of shares, the Company shall within two months of the formal application for the transfer provide the transferor and the transferee with a notice of refusal to register such transfer.
Article 43. No changes in the shareholders' register due to the transfer of shares may be made within thirty (30) days before the date of a shareholder' general meeting or within five (5) days before the record date for the Company's distribution of dividends.
Article 44. Where the Company decides to convene a shareholders' general meeting distribute dividends, liquidate or carry out other activities which would require
the determination of shareholdings, the board of directors shall fix a record date for the purpose of determining shareholdings. A person who is registered in the register as shareholders of the Company at the end of the record date shall be a shareholder of the Company.
Article 45. Any person aggrieved and claiming to be entitled to have his name (title) to be entered in or removed from the register of shareholders may apply to a court of competent jurisdiction for rectification of the register.
Article 46. Any person who is a registered shareholder on the register
of shareholders or who claims to be entitled to have his name
(title) entered into the register of shareholders in respect
of shares in the Company may, if his share certificate (the
"original certificate") relating to the shares is lost, apply
to the Company for a replacement new share certificate in
respect of such shares (the "Relevant Shares").
If a shareholder of Domestic-Invested Shares loses his share certificate and applies for a replacement new certificate, it shall be dealt with in accordance with article 150 of the Company Law.
If a shareholder of Overseas-Listed Foreign-Shares loses his share certificate and applies for a replacement new share certificate, it may be dealt with in accordance with the law of the place where the original register of holders of Overseas-Listed Foreign-Invested Shares is maintained, rules of the stock exchange or other relevant regulations.
If a shareholder of H Shares loses his share certificate, the issue of a replacement new share certificate shall comply with the following requirements:
(1) The applicant shall submit an application in a standard form prescribed by the Company and accompanied by a notarial certificate or a statutory declaration (i) stating the grounds upon which the application is made and the circumstances and the evidence of the loss of share certificate; and (ii) declaring that no other person is entitled to have his name entered in respect of the Relevant Shares.
(2) Before the Company decides to issue the replacement new share certificate, no statement made by any person other than the applicant declaring that his name shall be entered in the register of shareholders in respect of such shares has been received.
(3) The Company shall, if it intends to issue a replacement new share certificate to the applicant, publish a notice of its intention at least once every thirty (30) days in a period of ninety (90) consecutive days in such newspapers as may be prescribed by the board of directors.
(4) The Company shall have, prior to publication of its intention to issue a replacement new share certificate, delivered to the stock exchange on which its shares are listed a copy of the notice to be published and may publish the notice upon receiving confirmation from such stock exchange that the notice has been exhibited in the premises of the stock exchange. Such notice shall be exhibited in the premises of Stock Exchange for a period of 90 days.
In the case of an application made without the consent of the registered holder of the Relevant Shares, the Company shall deliver by mail to such registered shareholder a copy of the notice to be published;
(5) If, by the expiration of the 90-day period referred to in paragraphs (3) and (4) of this Article, the Company shall not have received from any person notice of any disagreement to such application, the Company may issue a replacement new share certificate to the applicant accordingly.
(6) Where the Company issues a replacement new share certificate under this Article, it shall forthwith cancel the original share certificate and enter the cancellation and issue in the register of shareholders accordingly.
(7) All expenses relating to the cancellation of an original share certificate and the issue of a replacement new share certificate by the Company shall be borne by the applicant and the Company is entitled to refuse to take any action until reasonable security is provided by the applicant.
Article 47. Where the Company issues a replacement new share certificate pursuant to these articles of association, the name (title) of a bona fide purchaser gaining possession of such new share certificate or the person who is subsequently entered in the register of shareholders as holder of such shares (if he is a bona fide purchaser) shall not be removed from the register of shareholders.
Article 48. The Company shall not be liable for any damages sustained by any person by reason of the cancellation of the original share certificate or the issue of the new share certificate, unless the claimant proves that the Company has acted deceitfully.
CHAPTER 7: SHAREHOLDERS' RIGHTS AND OBLIGATIONS
Article 49. A shareholder of the Company is a person who lawfully holds shares in the Company and whose name (title) is entered in the register of shareholders.
A shareholder shall enjoy rights and bear obligations according to the class and proportion of the shares held by him; shareholders who hold shares of the same class shall enjoy the same rights and bear the same obligations.
Article 50. The ordinary shareholders of the Company shall enjoy the following rights:
(1) the right to dividends and other distributions in proportion to number of shares held;
(2) the right to attend or appoint a proxy to attend shareholders' general meetings and to vote thereat;
(3) the right of supervisory management over the Company's business operations, and the right to present proposals or enquiries;
(4) the right to transfer shares in accordance with laws, administrative regulations and provisions of these articles of association;
(5) the right to obtain relevant information in accordance with the provisions of these articles of association, including:
(i) the right to obtain a copy of these articles of association, subject to payment of the cost of such copy;
(ii) the right to inspect and copy, subject to payment of a reasonable charge:
(a) all parts of the register of shareholders;
(b) personal particulars of each of the Company's directors, supervisors, general manager, deputy general managers and other senior administrative officers, inclining:
(aa) present name and alias and any former name or alias;
(bb) principal address (residence);
(cc) nationality;
(dd) primary and all other part-time occupations and duties;
(ee) identification document and its number;
(c) state of the Company's share capital;
(d) reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of last accounting year and the aggregate amount paid by the Company for this purpose; and
(e) minutes of shareholders' general meetings;
(6) in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held;
(7) other rights conferred by laws, administrative regulations and these articles of association.
Article 51. The ordinary shareholders of the Company shall assume the following obligations:
(1) to abide by these articles of association;
(2) to pay subscription monies according to the number of shares subscribed and the method of subscription;
(3) other obligations imposed by laws, administrative regulations and these articles of association.
Shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription.
Article 52. In addition to the obligations imposed by laws and administrative regulations or required by the listing rules of the stock exchange on which shares of the Company are listed, a controlling shareholder shall not exercise his voting rights in respect of the following matters in a manner prejudicial to the interests of the shareholders generally or of some of the shareholders of the Company:
(1) to relieve a director or supervisor of his duty to act honestly in the best interests of the Company;
(2) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person), in any guise, of the Company's assets, including (without limitation) opportunities beneficial to the Company;
(3) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person) of the individual rights of other shareholders including (without limitation) rights to distributions and voting rights save pursuant to a restructuring submitted to the shareholders' general meeting for approval in accordance with these articles of association.
Article 53. For the purpose of the foregoing Article, a "controlling shareholder" means a person who satisfies any one of the following conditions:
(1) he alone or acting in concert with others has the power to elect more than half of the board of directors;
(2) he alone or acting in concert with others has the power to exercise or to control the exercise of 30 per cent or more of the voting rights in the Company;
(3) he alone or acting in concert with others holds 30 per cent or more of the outstanding shares of the Company;
(4) he alone or acting in concert with others in any other manner controls the Company in fact.
Article 54. Subject to the compliance of relevant laws, regulations and rules, where the Company intends to issue preference shares, the rights and obligations of holders of such shares shall be resolved upon by the shareholders in general meeting.
CHAPTER 8: SHAREHOLDERS' GENERAL MEETINGS
Article 55. The shareholders' general meeting is the organ of authority of the Company and shall exercise its functions and powers in accordance with law.
Article 56. The shareholders' general meeting shall have the following functions and powers:
(1) to decide on the Company's operational policies and investment plans;
(2) to elect and replace directors and decide on matters relating to the remuneration of directors;
(3) to elect and replace the supervisors who are representatives of shareholders and decide on matters relating to the remuneration of supervisors;
(4) to examine and approve reports of the board of directors;
(5) to examine and approve reports of the supervisory committee;
(6) to examine and approve the Company's proposed annual preliminary and final financial budgets;
(7) to examine and approve the Company's profit distribution plans and plans for making up losses;
(8) to decide on increases or reductions in the Company's registered capital;
(9) to decide on matters such as merger, division, dissolution and liquidation of the Company;
(10) to decide on the issue of debentures by the Company;
(11) to decide on the appointment, dismissal and disengagement of the accounting firm of the Company;
(12) to amend these articles of association;
(13) to consider motions raised by shareholders who represent 5 per cent or more of the total shares of the Company carrying the right to vote;
(14) to decide on other matters which require resolutions of the shareholders in general meeting according to relevant laws, administrative regulations and provisions of these articles of association;
(15) to decide on matters which the board of directors may be delegated or authorized to deal with by the shareholders in general meeting.
Article 57. The Company shall not, without the prior approval of shareholders in general meeting, enter into any contract with any person other than a director, supervisor; general manager, deputy general manager or other senior administrative officer whereby the management and administration of the whole or any substantial part of the business of the Company is to be handed over to such person.
Article 58. Shareholders' general meetings are divided into annual general meetings and interim general meetings. Shareholders' general meetings shall be convened by the board of directors. Annual general meetings are held once every year and within six (6) months from the end of the preceding financial year.
Under any of the following circumstances, the board of
directors shall convene an interim general meeting within two
(2) months:
(1) when the number of directors is less than the number of directors required by the Company law or two-thirds of the number of directors specified in these articles of association;
(2) when the unrecovered losses of the Company amount to one third of the total amount of its share capital;
(3) when the shareholder(s) holding 10 per cent or more of the Company's outstanding shares carrying voting rights request(s) in writing the convening of an interim general meeting;
(4) when deemed necessary by the board of directors or as requested by the supervisory committee.
Article 59. When the company convenes a shareholders' general meeting, written notice of the meeting shall be given forty-five (45) days before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and the place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to the Company twenty (20) days before the date of the meeting.
Article 60. When the Company convenes a shareholders' annual general meeting, shareholders holding 5 per cent or more of the total voting shares of the Company shall have the right to propose new motions in writing, and the Company shall place those matters in the proposed motions within the scope of functions and powers of the shareholders' general meeting on the agenda.
Article 61. The Company shall, based on the written replies received
twenty (20) days before the date of the shareholders' general
meeting from the shareholders, calculate the number of voting
shares represented by the shareholders who intend to attend
the meeting. If the number of voting shares represented by the
shareholders who intend to attend the meeting reaches one half
or more of the Company's total voting shares, the Company may
hold the meeting; if not, then the Company shall within five
(5) days notify the shareholders again by public notice of the
matters to be considered, the place and date for, the meeting.
The Company may then hold the meeting after such publication
of notice.
A shareholders' interim general meeting shall not decide on any matter not stated in the notice of meeting.
Article 62. A notice of meeting of shareholders shall meet the following requirements:
(1) be in writing;
(2) specify the place, the date and time of the meeting;
(3) state the matters to be discussed at the meeting;
(4) provide such information and explanation as are necessary for the shareholders to make an informed decision on the proposals put before them. Without limiting the generality of the foregoing, where a proposal is made to amalgamate the Company with another, to repurchase shares, to reorganize the share capital, or to restructure the Company in any other way, the terms of the proposed transaction must be provided in detail together with copies of the proposed agreement, if any, and the cause and effect of such proposal must be properly explained;
(5) contain a disclosure of the nature and extent, if any, of the material interests of any director, supervisor, general manager, deputy general manager or other senior administrative officer in the proposed transaction and the effect of the proposed transaction on them in their capacity as shareholders in so far as it is different from the effect on the interests of the shareholders of the same class;
(6) contain the full text of any special resolution to be proposed at the meeting;
(7) contain conspicuously a statement that a shareholder entitled to attend and vote is entitled to appoint one or more proxies to attend and vote instead of him and that a proxy need not be a shareholder;
(8) specify the time and place for lodging proxy forms for the relevant meeting.
Article 63. Notice of shareholders' general meeting shall be served on the shareholders (whether or not entitled to vote at the meeting) by delivery or prepaid airmail to their addresses as shown in the register of shareholders. For the holders of Domestic-Invested Shares, notice of the meetings may be issued by way of public notice.
The public notice referred to in the preceding paragraph shall be published in one or more newspapers designated by the securities governing authority of the State Council within the interval between forty-five (45) days and fifty (50) days before the date of the meeting; after the publication of notice, the holders of Domestic-Invested Shares shall be deemed to have received the notice of the relevant shareholders' general meeting.
Article 64. The accidental omission to give notice of a meeting to, or the failure to receive the notice of a meeting by, any person entitled to receive notice shall not invalidate the meeting and the resolutions made at that meeting.
Article 65. Any shareholder entitled to attend and vote at the shareholders' general meeting shall be entitled to appoint one or more other persons (whether a shareholder or not) as his proxies to attend and vote on his behalf, and a proxy so appointed
shall be entitled to exercise the following rights pursuant to the authorization from that shareholder:
(1) the shareholder's right to speak at the meeting;
(2) the right to demand or join in demanding a poll;
(3) the right to vote by hand or on a poll, but a proxy of a shareholder who has appointed more than one proxy may only vote on a poll.
Article 66. The instrument appointing a proxy shall be in writing under the hand of the appointer or his attorney duly authorized in writing, or if the appointer is a legal entity, either under seal or under the hand of a director or attorney duly authorized.
Article 67. The instrument appointing a voting proxy and, if such instrument is signed by a person under a power of attorney or other authority on behalf of the appointer, a notarially certified copy of that power of attorney or other authority shall be deposited at the address of the Company or at such other place as is specified for that purpose in the notice convening the meeting, not less than twenty-four (24) hours before the time for holding the meeting at which the proxy propose to vote or the time appointed for the passing of the resolution.
If the appointor is a legal person, its legal representative or such person as is authorized by resolution of its board of directors or other governing body may attend at any meeting of shareholders of the Company as a representative of the appointor.
Article 68. Any form issued to a shareholder by the board of directors of the Company for use by him for appointing a proxy shall be such as to enable the shareholder, according to his free will, to instruct the proxy to vote in favour of or against the motions, such instructions being given in respect of each individual matter to be voted on at the meeting. Such a form shall contain a statement that in the absence of instructions by the shareholder the proxy may vote as he thinks fit.
Article 69. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the death or loss of capacity of the appointor or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the shares in respect of which the proxy is given, provided that no notice in writing of such death, incapacity, revocation or transfer as aforesaid shall have been received by the Company before the commencement of the meeting at which the proxy is used.
Article 70. A proxy who attends a shareholders' general meeting on behalf of a shareholder shall present his identification document.
If a shareholder who is a legal person appoints its legal representative to attend the meeting, the legal representative shall present his own identification document and a notarially certified copy of the resolution or letter of authorization of the board of directors or other governing body of the appointor appointing such legal representative.
Article 71. Resolutions of shareholders' general meetings shall be divided into ordinary resolutions and special resolutions.
To adopt an ordinary resolution, votes representing more than one half of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favour of the resolution in order for it to be passed.
To adopt a special resolution, votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favour of the resolution in order for it to be passed.
The shareholders (including proxies) present at the meeting shall expressly state their agreement with or objection to every matter to be determined by voting. If a shareholder abstains from voting or casts an abstention vote, the Company shall disregard such vote as a voting share when counting the result of voting.
Article 72. When shareholders (including proxies) vote at the shareholders' general meeting, they shall exercise their voting rights according to the number of voting shares that they represent. Each share shall carry one voting right.
Where any shareholder is , under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, required to abstain from voting on a particular resolution or restricted to voting only in favour of or against any particular resolution, any votes cast by or on behalf of such shareholder in contravention of such requirement or restriction shall not be counted.
Article 73. At any general meeting of shareholders, a resolution shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded:
(1) by the chairman of the meeting;
(2) by at least two shareholders entitled to vote present in person or by proxy;
(3) by one or more shareholders present in person or by proxy and individually or collectively representing 10 per cent or more of all shares carrying the right to vote at the meeting.
Unless a poll be so demanded, a declaration by the chairman that a resolution has on a show of hands been carried unanimously, and, an entry to that effect in the minutes of the meeting shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against such resolution.
The demand for a poll may be withdrawn by the person who makes such demand.
Article 74. A poll demanded on the election of the chairman of the meeting, or on a question of adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded.
Article 75. On a poll taken at a meeting, a shareholder (including proxy) entitled to two or more votes need not cast all his votes in the same way.
Article 76. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded shall be entitled to one additional vote.
Article 77. The following matters shall be resolved by an ordinary resolution at a shareholders' general meeting:
(1) work reports of the board of directors and the supervisory committee;
(2) plans formulated by the board of directors for distribution of profits and for making up losses;
(3) removal of the members of the board of directors and members of the supervisory committee, their remuneration and method of payment;
(4) annual preliminary and final budgets, balance sheets and profit and loss statements and other financial statements of the Company;
(5) matters other than those required by the laws and administrative regulations or by these articles of association to be adopted by special resolutions.
Article 78. The following matters shall be resolved by a special resolution at a shareholders' general meeting:
(1) the increase or reduction in share capital and the issue of shares of any class, warrants and other similar securities;
(2) the issue of debentures of the Company;
(3) the division, merger, dissolution and liquidation of the Company;
(4) amendments to these Articles of Association;
(5) any other matters considered by the shareholders' general meeting, by way of an ordinary resolution, to be of a nature which may have a material impact on the Company and should be adopted by a special resolution.
Article 79. Shareholders requisitioning the convening of interim general meetings of shareholders or class meetings shall abide by the following procedures:
(1) Two or more shareholders holding in aggregate 10 per cent or more of the shares carrying the right to vote at the meeting sought to be held shall sign one or more counterpart requisitions stating the object of the meeting and requiring the board of directors to convene a shareholders' interim general meeting or a class meeting thereof. The board of directors shall as soon as possible proceed to convene the interim general meeting of shareholders or a class meeting thereof after receiving the requisition.
The amount of shareholders referred to above shall be calculated as at the date of the deposit of the requisition.
(2) If the board of directors fails to issue a notice of such a meeting within thirty (30) days from the date of the receipt of the requisition, the requisitionists may themselves convene such a meeting in a manner as similar as possible as that in which shareholders' meetings are to be convened by the board of directors within four (4) months from the date of receipt of the requisition by the board of directors.
Any reasonable expenses incurred by the requisitionists by reason of the failure of the board of directors to duly convene a meeting shall be repaid to the requisitionists by the Company and any sum so repaid shall be set off against sums owed by the Company to the directors in default.
Article 80. The Chairman of the board of directors shall convene and take the chair of every shareholders' general meeting. If the Chairman is unable to attend the meeting for any reason, the vice-chairman of the board of directors shall convene and take the chair of the meeting. If both the Chairman and vice chairman of the board of directors are unable to attend the meeting, then the board of directors may designate a director of the Company to convene and take the chair of the meeting. If no chairman of the meeting has been so designated, shareholders present shall choose one person to be the chairman of the meeting. If for any reason, the shareholders shall fail to elect a chairman, then the shareholder (including proxy) present in person or by proxy and holding the largest number of shares carrying the right to vote thereat shall be the chairman of the meeting.
Article 81. The chairman of the meeting shall be responsible for the determination of whether a resolution is passed. His decision, which is final and conclusive, shall be announced at the meeting and recorded in the minute book.
Article 82. If the chairman of the meeting has any doubt as to the result of a resolution put to the vote of the meeting, he may have the votes counted. If the chairman of the meeting fails to have the votes counted, any shareholder who is present in person or by proxy and who objects to the result announced by the chairman of the meeting may demand that the votes be counted immediately after the declaration of the result, the chairman of the meeting shall have the votes counted immediately.
Article 83. If votes are counted at a shareholder' general meeting, the result of the count shall be recorded in the minute book.
Article 84. Minutes shall be made in respect of all resolutions passed at a shareholders' general meeting and signed by directors present at the meeting. The minutes, shareholders' attendance lists and proxy forms shall be kept at the Company's legal address.
Article 85. Copies of the minutes of proceedings of any shareholders' general meeting shall, during business hours of the Company, be open for inspection by any shareholder without charge. If a shareholder demands from the Company a copy of such minutes, the Company shall send a copy of such minutes to him within seven (7) days after having received reasonable charges.
CHAPTER 9 : SPECIAL PROCEDURES FOR VOTING BY A CLASS OF SHAREHOLDERS
Article 86. Those shareholders who hold different types of shares are different classes of shareholders.
Apart from the holders of other classes of shares, the holders of the Domestic-Invested Shares and holders of Overseas-Listed Foreign-Invested Shares shall be deemed to be shareholders of different classes.
A class of shareholders shall, in accordance with laws, administrative regulations and these articles of association, enjoy rights and bear obligations.
Article 87. Rights conferred on any class of shareholders in the capacity of shareholders ("class rights") may not be varied or abrogated unless approved by a special resolution of shareholders in general meeting and by holders of shares of that class at a separate meeting conducted in accordance with Articles 89 to 93.
Article 88. The following circumstances shall be deemed to be variation or abrogation of the class rights of a class:
(1) to increase or decrease the number of shares of such class, or increase or decrease the number of shares of a class having voting or equity rights or other privileges equal or superior to those of the shares of such class;
(2) to effect an exchange of all or part of the shares of such class into shares of another class or to effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such class;
(3) to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of such class;
(4) to reduce or remove a dividend preference or a liquidation preference attached to shares of such class;
(5) to add, remove or reduce conversion privileges, options, voting rights, transfer or pre-emptive rights, or rights to acquire securities of the Company attached to shares of such class;
(6) to remove or reduce rights to receive payment payable by the Company in particular currencies attached to shares of such class;
(7) to create a new class of shares having voting or equity right or other privileges equal or superior to those of the shares of such class;
(8) to restrict the transfer or ownership of the shares of such class or add to such restriction;
(9) to allot and issue rights to subscribe for, or convert into, shares in the Company of such class or another class;
(10) to increase the rights and privileges of shares of another class;
(11) to restructure the Company where the proposed restructuring will result in different classes of shareholders bearing a disproportionate burden of such proposed restructuring;
(12) to vary or abrogate the provisions of this Chapter.
Article 89. Shareholders of the affected class, whether or not otherwise having the right to vote at shareholders' general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 88, but interested shareholder(s) shall not be entitled to vote at class meetings.
The meaning of "interested shareholder(s)" as mentioned in the preceding paragraph is:
(1) in the case of a repurchase of shares by offers to all shareholders or public dealing on a stock exchange under Article 30, a "controlling shareholder" within the meaning of Article 53;
(2) in the case of a repurchase of share by an off-market contract under Article 30, a holder of the shares to which the proposed contract relates;
(3) in the case of a restructuring of the Company, a shareholder within a class who bears less than a proportionate obligation imposed on that class under the proposed restructuring or who has an interest different from the interest of shareholders of that class.
Article 90. Resolutions of a class meeting of shareholders shall be passed only by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting in accordance with Article 89.
Where any shareholder is, under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, required to abstain from voting on a particular resolution in a class meeting or restricted to voting only in favour of or against any particular resolution in a class meeting, any votes cast by or on behalf of such shareholder in contravention of such requirement or restriction shall not be counted.
Article 91. Written notice of a class meeting shall be given forty-five
(45) days before the date of the class meeting to notify all
of the shareholders in the share register of the class of the
matters to be considered, the date and the place of the class
meeting. A shareholder who intends to attend the class meeting
shall deliver his written reply concerning attendance at the
class meeting to the Company twenty (20) days before the date
of the class meeting.
If the number of shares carrying voting rights at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one half of the voting shares at the class meeting, the Company may hold the class meeting; if not, the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the date and the place for the class meeting. The Company may then hold the class meeting after such publication of notice.
Article 92. Notice of class meetings need only be served on shareholders entitled to vote thereat.
Meetings of any class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders. The provisions of these articles of association relating to the manner to conduct any shareholders' general meeting shall apply to any meeting of a class of shareholders.
Article 93. The special procedures for voting at a class of shareholders shall not apply to the following circumstances:
(1) where the Company issues, upon the approval by a special resolution of its shareholders in general meeting, either separately or concurrently once every twelve months, not more than 20 per cent of each of its outstanding Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares;
(2) where the Company's plan to issue Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares at the time of its establishment is carried out within fifteen (15) months from the date of approval of the Securities Committee of the State Council.
CHAPTER 10 : BOARD OF DIRECTORS
Article 94. The Company shall establish a board of directors. The board shall consist of 9 directors. The board shall have one Chairman.
Article 95. Directors shall be elected at the shareholders' general meeting and serve a term of 3 years. A director may serve consecutive terms if re-elected upon the expiration of his term.
The written notice of an intention to nominate a candidate of director and that of a willingness to accept the nomination by the candidate shall be delivered no earlier than the day after the dispatch of the notice of the meeting for election of the relevant director and end no later than 7 days prior to the date of such meeting.
The Chairman of the board shall be elected and removed by the approval of more than half of all the directors of the board. The Chairman of the board shall serve a term of 3 years and may serve consecutive terms if re-elected upon the expiration of his term.
Subject to compliance with relevant laws and regulations, any director may be removed by ordinary resolution before the expiration of his term of office(but without prejudice to any claim for damages under any contract).
The directors shall not be required to hold shares of the Company.
Article 96. The board of directors is responsible to the shareholders' general meeting and exercises the following powers:
(1) to be responsible for the convening of the shareholders' general meeting and to report on its work to the shareholders' general meeting;
(2) to implement the resolutions of the shareholders' general meetings;
(3) to decide on the Company's business plans and investment plans;
(4) to formulate the Company's annual preliminary and final financial budgets;
(5) to formulate the Company's profit distribution plans and plan for making up losses;
(6) to formulate proposals for increases or reductions in the Company's registered capital and the issue of debentures of the Company;
(7) to draw up plans for the merger, division or dissolution of the Company;
(8) to decide on the establishment of the Company's internal management structure;
(9) to appoint or dismiss the Company's general manager, and pursuant to the general manager's nominations to appoint or dismiss the deputy general manager and other senior administrative officer (including the financial officer) of the Company and decide on their remuneration;
(10) to establish the Company's basic management system;
(11) to formulate proposals for any amendments of the Company's articles of association;
(12) to exercise any other powers conferred by these Articles of Association or the shareholders' general meetings.
Except the board of directors' resolutions in respect of the matters specified in sub-paragraphs (6), (7) and (11) of this Article which shall be passed by more than two-thirds of the directors, the board of directors' resolutions in respect of all other matters may be passed by more than one half of the directors.
The board of directors may formulate rules governing decision making in respect of the financial and investment management of the Company, the formulation of or amendment to such rules shall be passed by more than two-thirds of the directors (at least one of them shall be a non-executive director).
Article 97. The board of directors shall not, without the prior approval of shareholders in a general meeting, dispose or agree to dispose of any fixed assets of the Company where the aggregate of the amount or value of the consideration for the proposed disposition, and the amount or value of the consideration for any such disposition of any fixed assets of the Company that has been completed in the period of four (4) months immediately preceding the proposed disposition, exceeds 33 per cent
of the value of the Company's fixed assets as shown in the last balance sheet placed before the shareholders in general meeting.
For the purpose of this Article, disposition includes an act involving the transfer of an interest in assets but does not include the provision of fixed asset by way of security.
The validity of a disposition of fixed assets by the Company shall not be affected by the breach of the first paragraph of this Article.
Article 98. The board of directors shall carry out its duties in compliance with the laws, administrative regulations, these articles of association and resolutions of the shareholders' general meetings.
Article 99. The Chairman of the board of directors shall exercise the following powers:
(1) to preside over shareholders' general meetings and to convene and preside over meetings of the board of directors;
(2) to check on the implementation of resolutions of the board of directors;
(3) to sign the securities certificates issued by the Company;
(4) to exercise other powers conferred by the board of directors.
When the Chairman is unable to exercise his powers, the Chairman may designate a director to exercise such powers on the Chairman's behalf.
Article 100. Meetings of the board of directors shall be held at least twice every year and convened by the Chairman of the board of directors. Notice of the meeting shall be served on all of the directors ten (10) days before the date of the meeting. In case of any urgent matters, upon requisition by the Chairman or more than three directors or by the general manager, an extraordinary meeting of the board of directors may be held.
Article 101. Meetings of the board of directors shall be notified in the following ways:
(1) No notice of the regular meeting of the board of directors shall be required, if the time and place of regular meetings of the board of directors have been fixed by the board of directors in advance.
(2) Notice of the time and place of a meeting of the board of directors for which the time and place have not otherwise been set in advance by the board of directors shall be sent by the Chairman to each of the directors by telex, telegram, facsimile, EMS, registered mail or personal delivery not less than ten (10) days before such meeting.
(3) Notice shall be written in Chinese and, where necessary, in English also and shall include an agenda of the relevant meeting of the board of directors. Any director may waive his right to receive notice of any meeting of the board of directors.
Article 102. Notice of a meeting of the board of directors shall be deemed to have been given to any director who attends the meeting without protesting against, before or at its commencement, any lack of notice.
Article 103. Any regular or extraordinary meeting of the board of directors may be held by means of conference telephone or similar communication equipment. So long as all directors participating in such meeting can clearly hear and communicate with each other, all such directors shall be deemed to be present in person at such meeting.
Article 104. A meeting of the board of directors shall be held only if more than half of the directors (including any director present by proxy as stipulated in Article 105 below) are present.
Each director shall have one vote. Unless otherwise provided for in these articles of association, a resolution of the board of directors must be passed by more than half of all the directors.
Where there is a tie vote regarding a resolution , the Chairman of the board of directors shall have a casting vote.
Where a director is interested in any resolution proposed at a board meeting, such director shall not be present at such meeting and shall not have the right to vote. Such director shall not be counted in the quorum of such meeting.
Article 105. Directors shall attend the meetings of the board of directors in person. Where a director is unable to attend a meeting for any reason, he may make another director his proxy at the meeting by a written power of attorney. The power of attorney shall set out the scope of the authority.
A director acting as the proxy of another director to attend the meeting shall exercise the rights of a director within the scope of authority conferred by the appointing director. Where a director is unable to attend a meeting of the board of directors and has not appointed a representative to attend the meeting on his behalf, he shall be deemed to have waived his right to vote at the meeting.
In respect of any matter requiring the resolution of any extraordinary meeting of the board of directors, a resolution approved in writing by at least such number of directors as may be required pursuant to Article 96 of these articles of association after the proposed resolution has been reduced into writing and delivered to all directors, shall be deemed to be a valid resolution and a board meeting shall be dispensed with.
Article 106. The board of directors shall keep minutes of resolutions on matters discussed at meetings. The minutes shall be signed by the directors present at the meeting and the person who recorded the minutes. The directors shall be liable for the resolutions of the board of directors. If a resolution of the board of directors violates the law, administrative regulations or these articles of association and results in the Company sustaining serious losses, the directors participating in the adoption of such resolution shall be liable for compensating the Company. However, if it can be proven that a director expressly objected to such resolution when such resolution was voted on, and that such objection is recorded in the minutes of the meeting, such director may be released from such liability.
CHAPTER 11: SECRETARY OF THE BOARD OF DIRECTORS
Article 107. The Company shall have a secretary of the board of directors who shall be a senior administrative officer of the Company.
Article 108. The secretary of the Company's board of directors shall be a natural person who has the requisite professional knowledge and experience, and shall be appointed by the board of directors. His primary responsibilities are to ensure that:
(1) the Company has complete organizational documents and records;
(2) the Company prepares and delivers in accordance with law those reports and documents required by competent authorities entitled thereto;
(3) the Company's registers of shareholders are properly maintained, and that persons entitled to the Company's records and documents are furnished with such records and documents without delay.
Article 109. A director or other senior administrative officer of the Company may hold the officer of the secretary of the board of directors concurrently. The accountant(s) of the certified public accounting firm retained by the Company shall not act as the secretary of the board of directors.
Provided that where the office of secretary is held concurrently by a director, and an act shall be done by a director and a secretary separately, the person who holds the office of director and secretary may not perform the act in dual capacity.
CHAPTER 12: GENERAL MANAGER
Article 110. The Company shall have one general manager, who shall be appointed and dismissed by the board of directors. The Company shall have a number of deputy general managers who should assist the general manager in his work. The term of office of the general manager and deputy general managers is three (3) years and renewable upon re-election and reappointment.
Article 111. The general manager shall be accountable to the board of directors and exercise the following functions and powers:
(1) to be in charge of the Company's production, operation and management and to organize the implementation of the resolutions of the board of directors;
(2) to organize the implementation of the Company's annual business plan and investment plan;
(3) to draft plans for the establishment of the Company's internal management structure;
(4) to establish the Company's basic management system;
(5) to formulate basic rules and regulations of the Company;
(6) to propose the appointment or dismissal of the Company's deputy general manager(s) and other senior administrative officers (including the financial officer);
(7) to appoint or dismiss management personnel other than those required to be appointed or dismissed by the board of directors;
(8) to determine rewards and punishments, promotion and demotion, increase and decrease of salaries, recruitment, appointment, termination of employment and dismissal of the staff and workers of the Company;
(9) other powers conferred by these articles of association and the board of directors.
Article 112. The general manager and deputy general managers shall be present at meetings of the board of directors. However, the general manager and the deputy general manager shall have no voting rights at the meetings unless they are also directors.
Article 113. The general manager and deputy general managers shall not, in exercising their powers, vary the resolutions of shareholders' general meetings and those of the board of directors or exceed the scope of their authorities.
Article 114. The general manager and deputy general managers, in performing their functions and powers shall act honestly and, diligently and in accordance with laws, administrative regulations and these articles of association.
CHAPTER 13: SUPERVISORY COMMITTEE
Article 115. The Company shall have a supervisory committee.
Article 116. The supervisory committee shall be composed of 5 to 7
supervisors. The term of office of supervisors shall be three
(3) years renewable upon re-election and re-appointment.
The supervisory committee shall have one chairman who is subject to election or removal with the consent of two thirds or more of the members of the supervisory committee. The term of office of the chairman shall be three (3) years renewable upon re-election and re-appointment.
Article 117. The supervisory committee shall comprise of 5 representatives of shareholders who shall be elected or removed by the shareholders in general meeting and 2 representatives of staff and workers of the Company who shall be elected or removed democratically by the staff and workers.
Article 118. The directors, general manager, deputy general managers and financial controller shall not act concurrently as supervisors.
Article 119. Meetings of the supervisory committee shall be held at least once a year, and shall be convened by the chairman of the supervisory committee.
Article 120. The supervisory committee shall be accountable to the shareholders' general meeting and exercise the following powers in accordance with law:
(1) to examine the Company's financial situation;
(2) to supervise the directors, general manager, deputy general managers and other senior administrative officers to see whether their performance of duties in the Company violates any laws, administrative regulations or these articles of association;
(3) to demand rectification from a director, the manager or any other senior administrative officer when the acts of such persons are harmful to the Company's interest;
(4) to check the financial information such as the financial reports, business reports and plans for distribution of profits to be submitted by the board of directors to the shareholders' general meetings and, should any queries arise, to authorize, in the name of the Company, a reexamination by the public certified accountants and practising auditors of the Company;
(5) to propose to convene a shareholders' interim general meeting;
(6) to represent the Company in negotiation with or bringing an action against a director;
(7) other functions and powers specified in these articles of association.
Members of the supervisory committee shall be present at meetings of the board of directors.
Article 121. Resolutions of the supervisory committee shall be passed by two-thirds or more of all of its members.
Article 122. All reasonable fees incurred in respect of the engagement of professionals such as lawyers, certified public accountants or practising auditors as are required by the supervisory committee in exercising its functions and powers shall be borne by the Company.
Article 123. A supervisor shall carry out his duties honestly and faithfully in accordance with laws, administrative regulations and these articles of association.
CHAPTER 14: THE QUALIFICATIONS AND DUTIES OF THE DIRECTORS, SUPERVISORS,
GENERAL MANAGER, DEPUTY GENERAL MANAGERS AND OTHER SENIOR
ADMINISTRATIVE OFFICERS OF THE COMPANY
Article 124. A person may not serve as the director, supervisor, general manager, deputy general manager or any other senior administrative officer of the Company if any of the following circumstances apply:
(1) a person without capacity for civil conduct or with restricted capacity for civil conduct;
(2) a person who has committed an offence of corruption, bribery, infringement of property, misappropriation of property or sabotaging the social economic order and has received a sentence because of committing such offence; or who has been deprived of his political rights because of committing an offence, in each case where less than five (5) years have elapsed since the date of the completion of implementation of his sentence;
(3) a person who was previously the director, factory manager or manager of a company or enterprise which entered into insolvent liquidation because of mismanagement and was personally liable for the insolvency of such company or enterprise, where less than three (3) years have elapsed since the date of the completion of the insolvency and liquidation of such company or enterprise;
(4) a person who was previously the legal representative of a company or enterprise which had its business licence revoked due to a violation of the law and who was personally liable for the revocation, where less than three (3) years have elapsed since the date of the revocation of the business licence;
(5) a person who has a relatively large amount of debts due and outstanding;
(6) a person who is under criminal investigation or prosecution by judicial organs for violation of the criminal law which is not yet concluded;
(7) a person who is not eligible for enterprise leadership according to laws and administrative regulations;
(8) a non-natural person;
(9) a person who is convicted of contravention of provisions of relevant securities regulations by a relevant competent authority, and such conviction involves a finding that he has acted fraudulently or dishonestly, where less than five (5) years has elapsed since the date of the conviction.
Article 125. The validity of an act of the director, general manager, deputy general manager or other senior administrative officer on behalf of the Company is not, vis-a-vis a bona fide third party, affected by any irregularity in his office, election or any defect in his qualification.
Article 126. In addition to the obligations imposed by laws, administrative regulations or required by the listing rules of the stock exchange on which shares of the Company are listed, each of the Company's directors, supervisors, general manager, deputy general other senior administrative offices owes the following obligations to each shareholder, in the exercise of the functions and powers the Company conferred on him:
(1) not to cause the Company to exceed the scope of business stipulated in its business licence;
(2) to act honestly in the best interest of the Company;
(3) not to expropriate in any guise the Company's property, including (without limitation) usurpation of opportunities advantageous to the Company;
(4) not to expropriate the individual rights of shareholders, including (without limitation) rights to distribution and voting rights, save pursuant to a restructuring of the Company submitted to shareholders for approval in accordance with these articles of association.
Article 127. Each of the Company's directors, supervisors, general manager, deputy general manager and other senior administrative officers owes a duty, in the exercise of his powers and discharge of his duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Article 128. Each of the Company's directors, supervisors, general manager, deputy general manager and other senior administrative officers shall exercise his powers or carry on his duties in accordance with the principle of fiduciary; and shall not put himself in a position where his duty and his interest may conflict. This principle includes (without limitation) discharging the following obligations:
(1) to act honestly in the best interests of the Company;
(2) to exercise powers within the scope of his powers and not to exceed those powers;
(3) to exercise the discretion vested in him personally and not to allow himself to act under the control of another and, unless and to the extent permitted by laws, administrative regulations or with the informed consent of shareholders given in general meeting, not to delegate the exercise of his discretion;
(4) to treat shareholders of the same class equally and to treat shareholders of different classes fairly;
(5) except in accordance with these articles of association or with the informed consent of shareholders given in general meeting, not to enter into any contract, transaction or arrangement with the Company;
(6) without the informed consent of shareholders given in general meeting, not to use the Company's property for his own benefit;
(7) not to exploit his position to accept bribes or other illegal income or expropriate the Company's property by any means, including (without limitation) opportunities advantageous to the Company;
(8) without the informed consent of shareholders given in general meeting, not to accept commissions in connection with the Company's transactions;
(9) to abide by these articles of association, execute his official duties faithfully and protect the Company's interests, and not to exploit his position and power in the Company to advance his own private interests;
(10) not to compete with the Company in any way unless with the informed consent of shareholders given in general meeting;
(11) not to misappropriate the Company's funds or lend such funds to others, not to open accounts in his own name or other names for the deposit of the Company's assets and not to provide a guarantee for debts of a shareholder of the Company or other individual(s) with the Company's assets;
(12) unless otherwise permitted by informed shareholders in general meeting, to keep in confidence information acquired by him in the course of and during his tenure and not to use the information other than in furtherance of the interests of the Company, save that disclosure of such information to the court or other governmental authorities is permitted if:
(i) disclosure is made under compulsion of law;
(ii) the interests of the public require disclosure;
(iii) the interests of the relevant director, supervisor, general manager, deputy general manager or other senior administrative officer require disclosure.
Article 129. Each director, supervisor, general manager, deputy general manager or other senior administrative officer of the Company shall not cause the following persons or institutions ("associates") to do what he is prohibited from doing:
(1) the spouse or minor child of that director, supervisor, general manager, deputy general manager or other senior administrative officer;
(2) a person acting in the capacity of trustee of that director, supervisor, general manager, deputy general manager or other senior administrative officer or any person referred to in the preceding sub-paragraph (1);
(3) a person acting in the capacity of partner of that director, supervisor, general manager, deputy general manager or other senior administrative officer or any person referred to in sub-paragraphs (1) and (2) of this Article;
(4) a company in which that director, supervisor, general manager, deputy general manager or other senior administrative officer, alone or jointly with one or more persons referred to in sub-paragraphs (1), (2) and (3) of this Article and other directors, supervisors, general manager, deputy general managers and other senior administrative officers have a de facto controlling interest;
(5) the directors, supervisors, general manager, deputy general managers and other senior administrative officers of the controlled company referred to in the preceding sub-paragraph (4); and
(6) any associates as defined in the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong limited.
Article 130. The fiduciary duties of the directors, supervisors, general manager, deputy general managers and other senior administrative officers of the Company do not necessarily cease with the termination of their tenure. The duty of confidence in relation to trade secrets of the Company survives the termination of their tenure. Other duties may continue for such period as fairness may require depending on the time lapse between the termination and the act concerned and the circumstances under which the relationships between them and the Company are terminated.
Article 131. Subject to Article 52, a director, supervisor, general manager, deputy general manager or other senior administrative officer of the Company may be relieved of liability for specific breaches of his duty by the informed consent of shareholders given at a general meeting.
Article 132. Where a director, supervisor, general manager, deputy general manager or other senior administrative officer of the Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the board of directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal therefor is otherwise subject to the approval of the board of directors.
Unless the interested director, supervisor, general manager, deputy general manager or other senior administrative officer discloses his interests in accordance with the preceding paragraph of this Article and the contract, transaction or arrangement is approved by the board of directors at a meeting in which the interested director, supervisor, general manager, deputy general manager or other senior administrative officer is not counted in the quorum and refrains from voting, a contract, transaction or arrangement in which that director, supervisor, general manager, deputy general manager or other senior administrative officer is materially interested is voidable at the instance of the Company except as against a bona fide party thereto acting without notice of the breach of duty by the interested director, supervisor, general manager, deputy general manager or other senior administrative officer.
For the purposes of this Article, a director, supervisor, general manager, deputy general manager or other senior administrative officer of the Company is deemed to be interested in a contract, transaction or arrangement in which an associate of him is interested.
Article 133. Where a director, supervisor, general manager, deputy general manager or other senior administrative officer of the Company gives to the board of directors a general notice in writing stating that, by reason of the facts specified in the notice, he is interested in contracts, transactions or arrangements of any description which may subsequently be made by the Company, that notice shall be deemed for the purposes of the preceding Article to be a sufficient declaration of his interests, so far as the content stated in such notice is concerned, provided that such general notice shall have been given before the date on which the question of entering into the relevant contract, transaction or arrangement is first taken into consideration on behalf of the Company.
Article 134. The Company shall not in any manner pay taxes for or on behalf of a director, supervisor, general manager, deputy general manager or other senior administrative officer.
Article 135. The Company shall not directly or indirectly make a loan to or provide any guarantee in connection with the making of a loan to a director, supervisor, general manager, deputy general manager or other senior administrative officer of the Company or of the Company's holding company or any of their respective associates. However, the following transactions are not subject to such prohibition:
(1) the provision by the Company of a loan or a guarantee of a loan to a company which is a subsidiary of the Company;
(2) the provision by the Company of a loan or a guarantee in connection with the making of a loan or any other funds to any of its directors, supervisors, general manager, deputy general managers and other senior administrative officers to meet expenditure incurred or to be incurred by him for the purposes of the Company or for the purpose of enabling him to perform his duties properly, in accordance with the terms of a service contract approved by the shareholders in general meeting;
(3) the Company may make a loan to or provide a guarantee in connection with the making of a loan to any of the relevant directors, supervisors, general manager, deputy general managers and other senior administrative officers or their respective associates in the ordinary course of its business on normal commercial terms, provided that the ordinary course of business of the Company includes the lending of money or the giving of guarantees.
Article 136. A loan made by the Company in breach of the preceding Article shall be forthwith repayable by the recipient of the loan regardless of the terms of the loan.
Article 137. A guarantee for repayment of loan provided by the Company in breach of Article 135 shall not be enforceable against the Company, unless:
(1) when providing the guarantee in connection with a loan to an associate of any of the directors, supervisors, general manager, deputy general managers and other senior administrative officers of the Company or of the Company's holding company, the lender did not know the relevant circumstances; or
(2) the collateral provided by the Company has been lawfully disposed of by the lender to a bona fide purchaser.
Article 138. For the purposes of the foregoing provisions of this Chapter, a "guarantee" includes an undertaking or property provided to secure the performance of obligations by the obligor.
Article 139. In addition to any rights and remedies provided by the laws and administrative regulations, where a director, supervisor, general manager, deputy general manager or other senior administrative officer of the Company is in breach of his duties to the Company, the Company has a right to:
(1) claim damages from the director, supervisor, general manager, deputy general manager or other senior administrative officer in compensation for losses sustained by the Company as a result of such breach;
(2) rescind any contract or transaction entered into by the Company with the director, supervisor, general manager, deputy general manager or other senior administrative officer or with a third party (where such third party knows or should know that there is such a breach of duties by such director, supervisor, general manager, deputy general manager or other senior administrative officer);
(3) demand the surrender of the profits made by the director, supervisor, general manager, deputy general manager or other senior administrative officer in breach of his duties;
(4) recover any monies received by the director, supervisor, general manager, deputy general manager or other senior administrative officer which should have been received by the Company, including (without limitation) commissions; and
(5) demand a refund of the interest earned or which may have been earned by the director, supervisor, general manager, deputy general manager or other senior administrative officer on the monies that should have been paid to the Company.
Article 140. The Company shall, with the prior approval of shareholders in general meeting, enter into a contract in writing with a director or supervisor wherein his emoluments are stipulated. The aforesaid emoluments include:
(1) emoluments in respect of his service as director, supervisor or senior administrative officer of the Company;
(2) emoluments in respect of his service as director, supervisor or senior administrative officer of any subsidiary of the Company;
(3) emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries;
(4) payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.
Except under a contract entered into in accordance with the foregoing, no proceedings may be brought by a director or supervisor against the Company for any benefit due to him in respect of the matters mentioned in this Article.
Article 141. The contract concerning the emoluments of the directors or supervisors of the Company between the Company and its directors or supervisors should provide that in the event of a takeover of the Company, the Company's directors and supervisors shall, subject to the prior approval of the shareholders in general meeting, have the right to receive compensation or other payment in respect of his loss of office or retirement. A takeover of the Company referred to in this paragraph means any of the following:
(1) an offer made by any person to the general body of shareholders;
(2) an offer made by any person with a view to the offeror becoming a "controlling shareholder" as stipulated in Article 53.
If the relevant director or supervisor does not comply with this Article, any sum so received by him shall belong to those persons who have sold their shares as a result of the said offer made. The expenses incurred in distributing that sum pro rata amongst those persons shall be borne by the relevant director or supervisor and not paid out of that sum.
CHAPTER 15: FINANCIAL AND ACCOUNTING SYSTEMS AND PROFIT DISTRIBUTION
Article 142. The Company shall establish its financial and accounting systems and internal audit system in accordance with laws, administrative regulations and PRC accounting standards formulated by the finance regulatory department of the State Council.
Article 143. At the end of each fiscal year, the Company shall prepare financial reports which shall be examined and verified as provided by law.
The Company's financial reports shall include the following accounting statements and schedules:
(1) balance sheet;
(2) profit and loss statement;
(3) statement of financial changes;
(4) explanation of financial conditions;
(5) profit distribution statement.
Article 144. The board of directors of the Company shall place before the shareholders at every annual general meeting such financial reports as are required by any laws, administrative regulations or directives promulgated by competent regional and central governmental authorities to be prepared by the Company.
Article 145. The Company's financial reports shall be made available for shareholders' inspection at the Company twenty (20) days before the date of every shareholders' annual general meeting. Each shareholder shall be entitled to obtain a copy of the financial reports referred to in this Chapter.
The Company shall deliver or send to each shareholder of Overseas-Listed Foreign-Invested Shares by prepaid mail at the address registered in the register of shareholders the said reports not later than twenty-one (21) days before the date of every annual general meeting of shareholders.
Article 146. The financial statements of the Company shall, in addition to being prepared in accordance with PRC accounting standards and regulations, be prepared in accordance with either international accounting standards, or that of the place outside the PRC where the Company's shares are listed. If there is any material difference between the financial statements prepared respectively in accordance with the two accounting standards, such difference shall be stated in the financial statements. When the Company is to distribute its after-tax profits, the lower of the after-tax profits as shown in the two financial statements shall be applied.
Article 147. Any interim results or financial information published or disclosed by the Company must also be prepared and presented in accordance with PRC accounting standards and regulations, and also in accordance with either international accounting standards or that of the overseas place where the Company's shares are listed.
Article 148. The Company shall publish its financial reports twice every fiscal year, that is, the interim financial report shall be published within sixty (60) days after the expiration of the first six (6) months of each fiscal year; the annual financial report shall be published within one hundred and twenty (120) days after the expiration of each fiscal year.
Article 149. The Company shall not keep accounts other than those provided by law.
Article 150. The Company shall implement an internal auditing system, and establish an internal auditing organization or provide internal auditing personnel to undertake the internal auditing and supervision over the Company's income and expenses and other economic activities under the leadership of the supervisory committee.
Article 151. The Company's after-tax profit shall be allocated in accordance with the following order:
(1) making up for losses;
(2) allocation to the statutory common reserve fund;
(3) allocation to the statutory common welfare fund;
(4) allocation to the discretionary common reserve fund upon approval by resolution of the shareholders' general meeting;
(5) payment of dividends in respect of ordinary shares.
The board of directors shall, in accordance with the laws and administrative regulations of the State (if any) and the Company's operation and development requirements, determine the detail proportions of profit distributions in items (2) to (5) above and submit its determination to the shareholders' general meeting for approval.
Article 152. Capital common reserve fund includes the following items:
(1) premium on shares issued at a premium price;
(2) any other income designated for the capital common reserve fund by the regulations of the finance regulatory department of the State Council.
Article 153. The common reserve fund of the Company shall be applied to the following purposes:
(1) making up losses;
(2) expansion of the Company's production and operation;
(3) transfer or increase of capital.
When the Company converts its common reserve fund into its capital upon a resolution adopted in shareholders' general meeting, the Company shall either distribute new shares to each shareholder in proportion to the number of shares currently held by each shareholder, or increase the par value of each share, provided, however, that when the statutory common reserve fund is converted to capital, the balance of the statutory common reserve fund may not fall below 25 per cent of the registered capital.
Article 154. The Company's statutory common welfare fund is used for the collective welfare of the Company's staff and workers.
Article 155. The Company shall not declare dividend before making up its losses and allocating funds to the statutory common reserve fund and statutory common welfare fund.
Article 156. Dividends shall be distributed in accordance with the proportion of shares held by shareholders.
Unless otherwise resolved by the shareholders' general meeting, the Company apart from distributing annual dividends, may by its board of directors acting under the power conferred by the shareholders' general meeting, distribute interim dividends. Unless otherwise stipulated by laws or administrative regulations, the amount of interim dividends distributed shall not exceed 50 per cent of the distributable profits as stated in the interim profits statement of the Company.
Article 157. The Company may distribute dividends in the following forms:
(1) cash;
(2) shares.
Article 158. Dividends or other payments declared by the Company to be payable to holders of Domestic-Invested Shares shall be declared and calculated in Renminbi, and paid in Renminbi; and those payable to holders of Overseas-Listed Foreign-Invested Shares shall be declared and calculated in Renminbi, and paid in the local currency at the place where such Foreign-Invested Shares are listed (if there is more than one place of listing, then the principal place of listing as determined by the board of directors).
Foreign currency required by the Company for payment of dividends or other sums to holders of Foreign-Invested Shares shall be handled in accordance with the relevant foreign exchange control regulations of the State. If there is no applicable regulation, the applicable exchange rate shall be the average closing rate for the relevant foreign currency announced by the Peoples' Bank of China for the week prior to the announcement of the payment of dividend or other sums.
Article 159. The Company shall, in accordance with the People's Republic of China's tax law, withhold and make payments on behalf of shareholders in respect of their tax payable on their dividends income.
Article 160. The Company shall appoint on behalf of the holders of the Overseas-Listed Foreign-Invested shares receiving agents to receive on behalf of such shareholders dividends declared and all other monies owed by the Company in respect of their shares.
The receiving agents appointed by the Company shall comply with the relevant requirements of the law of the place and relevant regulations of the stock exchange where the Company's shares are listed.
The receiving agents appointed on behalf of holders of H Shares shall be a company registered as a trust company under the Trustee Ordinance of Hong Kong.
CHAPTER 16: APPOINTMENT OF ACCOUNTING FIRM
Article 161. The Company shall engage an independent accounting firm which is qualified under the relevant regulations of the State to audit the Company's annual financial report and review the Company's other financial reports.
The first accounting firm of the Company may be engaged by the inaugural meeting of the Company before the first annual general meeting of shareholders and the accounting firm so appointed shall hold office until the conclusion of the first annual general meeting of shareholders.
If the inaugural meeting fails to exercise its powers under the preceding paragraph, those powers shall be exercised by the board of directors.
Article 162. The accounting firm engaged by the Company shall hold office from the conclusion of the annual general meeting of shareholders at which it is engaged until the conclusion of the next annual general meeting of shareholders.
Article 163. The accounting firm appointed by the Company shall have the following rights:
(1) A right of access at any time to the books and records and vouchers of the Company, and shall be entitled to require from the directors, general manager, deputy general managers and other senior administrative officers of the Company any relevant information and explanation;
(2) A right to require the Company to take all reasonable steps to obtain from its subsidiaries such information and explanation as are necessary for the purposes of discharging its duties;
(3) A right to attend shareholders' general meetings and to receive all notices of, and other communications relating to, any shareholders' general meeting which any shareholder is entitled to receive, and to speak at any shareholders' general meeting in relation to matters concerning its role as the Company's accounting firm.
Article 164. Before the convening of the shareholders' general meeting, the board of directors may fill any casual vacancy in the office of an accounting firm, but while any such vacancy continues, the surviving or continuing firms, if any, may act.
Article 165. The shareholders in general meeting may by ordinary resolution remove an accounting firm before the expiration of its term of office, notwithstanding the stipulations in the contract between the Company and the firm, but without prejudice to the firm's right to claim, if any, for damages in respect of such removal.
Article 166. The remuneration of an accounting firm or the manner in which such firm is to be remunerated shall be determined by the shareholders in general meeting. The remuneration of an accounting firms appointed by the board of directors shall be determined by the board of directors.
Article 167. The Company's appointment of, removal of and non reappointment of an accounting firm shall be resolved upon by shareholders in general meeting. The resolution of the shareholders' general meeting shall be filed with the securities governing authority of the State Council.
Where it is proposed that any resolution be passed at a shareholders' general meeting concerning the appointment of an accounting firm which is not an incumbent firm to fill a casual vacancy in the office of the accounting firm; re appointment of a retiring accounting firm which was appointed by the board of directors of the Company to fill a casual vacancy; or removal of the accounting firm before the expiration of its term of office, the following provisions shall be complied with:
(1) A copy of the proposal shall be sent before notice of meeting is given to the shareholders to the firm proposed to be engaged or proposing to leave its post or which has left its post in the relevant fiscal year (leaving includes leaving by removal, resignation and retirement).
(2) If the firm leaving its post makes representations in writing and requests the Company to notify the shareholders of such representations, the Company shall, unless the representations are received too late:
(i) in any notice of the resolution given to shareholders, state the fact of the representations having been made; and
(ii) attach a copy of the representations to the notice and deliver it to the shareholders in the manner stipulated in these articles of association.
(3) If the firm's representations are not sent in accordance with the preceding sub-paragraph (2), the relevant firm may (in addition to its right to be heard) require that the representations be read out at the shareholders' general meeting.
(4) An accounting firm which is leaving its post shall be entitled to attend:
(i) the shareholders' general meeting at which its term of office would otherwise have expired;
(ii) the shareholders' general meeting held for the purpose of filling the vacancy caused by its removal; and
(iii) the shareholders' general meeting convened due to its resignation;
and to receive all notices of, and other communications relating to, any such meetings, and to speak at any such meeting in relation to matters concerning its role as the former accounting firm of the Company.
Article 168. Prior to the removal or the non-renewal of the appointment of the accounting firm, notice of such removal or non-renewal shall be given to the accounting firm and such firm shall be entitled to make representation at the shareholders' general meeting. Where the accounting firm proposes resigning its post, it shall make clear to the shareholders' general meeting whether there has been any impropriety on the part of the Company.
An accounting firm may resign its office by depositing at the Company's legal residence a written resignation notice which shall become effective on the date of such deposit or on such later date as may be stipulated in such notice and such notice shall include the following:
(1) a statement to the effect that there are no circumstances connected with its resignation which it considers should be accounted for to the shareholders or creditors of the Company;
(2) a statement of any such circumstances.
Where a written notice is deposited as provided for in the preceding subparagraph, the Company shall within fourteen (14) days thereof send a copy of the notice to the relevant governing authority. If the notice contains a statement under the preceding subparagraph (2), copies of such statement shall be placed at the Company for shareholders' inspection. The Company shall also send a copy
of such statement by prepaid mail to every holder of Overseas-Listed Foreign-Invested Shares who is entitled to receive the issuer's financial status report at the address registered in the register of shareholders.
Where the accounting firm's notice of resignation contains a statement of any circumstances which shall be accounted for to the shareholders or creditors of the Company, it may require the board of directors to convene a shareholders' interim general meeting for the purpose of receiving its explanation of the circumstances connected with its resignation.
CHAPTER 17: INSURANCE
Article 169. The effecting, types of coverage, the insured amounts and periods of the Company's insurance shall be decided at a meeting of the board of directors based on the circumstances of the Company and the practices of similar industries in other countries and the practice and legal requirements in China.
CHAPTER 18: LABOUR AND PERSONNEL MANAGEMENT SYSTEMS
Article 170. The Company shall, in accordance with the relevant provisions of the Labour Law of the People's Republic of China and other relevant laws or regulations of the State, formulate its labour and personnel management systems which shall be appropriate to its particular circumstances.
CHAPTER 19: TRADE UNION
Article 171. The Company shall establish trade union organizations and organise staff and workers to carry out trade union activities in accordance with the Trade Union Law of the People's Republic of China.
The Company shall allocate funds to the trade union in accordance with the Trade Union Law of the People's Republic of China. Such fund shall be used by the trade union of the Company in accordance with the "Measures for the Management of Trade Union Funds" formulated by the All China Federation of Trade Unions.
CHAPTER 20: MERGER AND DIVISION OF THE COMPANY
Article 172. In the event of the merger or division of the Company, a plan shall be presented by the Company's board of directors and shall be approved in accordance with the procedures stipulated in these articles of association and then the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger or division to acquire that dissenting shareholder's shareholding at a fair price.
The contents of the resolution for merger or division of the Company shall be made into special documents for shareholders' inspection. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares.
Article 173. The merger of the Company may take the form of either merger by absorption or merger by the establishment of a new company.
In the event of a merger, the merging parties shall execute a merger agreement and prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within ten (10) days of the date of the Company's resolution to merge and shall publish a public notice in a newspaper at least three times within thirty (30) days of the date of the Company's resolution to merge. A creditor has the right within thirty (30) days of receiving such notice from the Company or, it fails to receive the notice, within ninety (90) days of the date of the first public notice, to demand that the Company pay off the debts owed to it or provide a corresponding guarantee therefor. Where the company fails to pay off its debts or provide corresponding guarantees therefor as demanded by its creditors, it may not be merged.
Following the merger, rights in relation to debtors and indebtedness of each of the merged parties shall be assumed by the company which survives the merger or the newly established company.
Article 174. When the Company is divided, its assets shall be split up accordingly.
In the event of division of the Company, the parties to such division shall execute a division agreement and prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within ten (10) days of the date of the Company's resolution to divide and shall publish a public notice in a newspaper at least three times within thirty (30) days of the date of the Company's resolution to divide. A creditor has the right within thirty (30) days of receiving such notice from the Company or, if it fails to receive the notice, within ninety (90) days of the date of the first public notice to demand that the Company pay off the debts owed to that creditor or provide a corresponding guarantee therefor. Where the Company fails to pay off its debts or provide corresponding guarantees therefor as demanded by its creditors, it may not be divided.
Debts of the Company prior to division are assumed by the post-division companies in accordance with the agreements entered into.
Article 175. Where there is a change in any of the registered items of the Company as result of its merger or division, the Company shall carry out procedures necessary for changing its registered items with the companies registration authority in accordance with the law. In case of dissolution, the Company shall cancel its registration in accordance with the law. When a new company is established, its establishment shall be registered in accordance with the law.
CHAPTER 21: DISSOLUTION AND LIQUIDATION
Article 176. The Company shall be dissolved and liquidated in accordance with the law upon the occurrence of any of the following events:
(1) a resolution for dissolution is passed by shareholders at a general meeting;
(2) dissolution is necessary due to a merger or division of the Company;
(3) the Company is legally declared insolvent due to its failure to repay debts due; and
(4) the Company is ordered to close down in accordance with the law because of its violation of laws and administrative regulations.
Article 177. A liquidation group shall be set up within fifteen (15) days of the resolution for dissolution of the Company passed by shareholders at a general meeting pursuant to sub-paragraph (1) of the preceding Article, and the composition of the liquidation group of the Company shall be determined by an ordinary resolution of shareholders at a general meeting. If a liquidation group to carry out liquidation procedures is not set up within the specified time limit, the creditors may apply to the People's Court to designate relevant persons to form a liquidation group in order to carry out liquidation procedures.
Where the Company is dissolved under sub-paragraph (3) of the preceding Article, the People's Court shall in accordance with provisions of relevant laws organise the shareholders, relevant organizations and relevant professional personnel to establish a liquidation group to carry out liquidation procedures.
Where the Company is dissolved under sub-paragraph (4) of the preceding Article, the relevant governing authorities shall organise the shareholders, relevant organisations and professional personnel to establish a liquidation group to carry out liquidation procedures.
Article 178. Where the board of directors proposes to liquidate the Company due to causes other than where the Company has declared that it is insolvent, the board shall include a statement in its notice of the shareholders' general meeting to consider the proposal to the effect that, after making full inquiry into the status of the Company, the board of directors is of the opinion that the Company will be able to pay off its debts within twelve (12) months from the commencement of the liquidation.
Except where the Company has declared that it is insolvent, the liquidation group shall be appointed or dismissed by ordinary resolution of shareholders at a general meeting.
Upon the passing of the resolution by the shareholders at a general meeting for the liquidation of the Company, all functions and powers of the board of directors shall forthwith cease.
The liquidation group shall act in accordance with the instructions of the shareholders' general meeting to make a report at least once every year to the shareholders' general meeting on its receipts and payments, the business of the Company and the progress of the liquidation; and to present a final report to the shareholders' general meeting on completion of the liquidation.
Article 179. The liquidation group shall within ten (10) days of its
establishment send notices to creditors, and within sixty (60)
days of its establishment publish a public notice in a newspaper
at least three times. A creditor shall within thirty (30) days of
receiving notice, or it fails to receive notice, within ninety
(90) days of the date of the first public notice, declare its
creditors' rights to the liquidation group.
When declaring creditors' rights, the creditor shall provide an explanation of matters relevant to the creditor's rights and shall provide materials as evidence. The liquidation group shall carry out registration of creditors' rights.
Article 180. During the liquidation period, the liquidation group shall exercise the following functions and powers:
(1) to sort out the Company's assets and prepare a balance sheet and an inventory of assets respectively;
(2) to send notices to creditors or notify them by public notice;
(3) to handle any relevant unfinished business matters of the Company relating to the liquidation;
(4) to pay off all outstanding taxes;
(5) to settle claims and debts;
(6) to dispose of the assets remaining after the Company's debts have been repaid;
(7) to represent the Company in any civil litigation proceedings.
Article 181. After having sort out the Company's assets and prepared the balance sheet and an inventory of assets, the liquidation group shall formulate a liquidation plan and present it to a shareholders' general meeting or to the relevant governing authority for confirmation.
To the extent that the Company's assets are sufficient to pay off its debts, they shall be used to pay all liquidation expenses, wages of staff and workers, labour insurance fees and outstanding taxes, and the Company's debts.
The assets of the Company remaining after its debts have been repaid in accordance with the provisions of the preceding paragraph shall be distributed to its shareholders according to the class and proportion of their shareholdings.
During the liquidation period, the Company shall not commence any new operational activities.
Article 182. If after putting the Company's assets in order and preparing a balance sheet and an inventory of assets in connection with the liquidation of the Company
resulting from dissolution, the liquidation group discovers that the Company's assets are insufficient to repay the Company's debts in full, the liquidation group shall immediately apply to the People's Court for a declaration of insolvency.
After a Company is declared insolvent by a ruling of the People's Court, the liquidation group shall turn over liquidation matters to the People's Court.
Article 183. Following the completion of liquidation, the liquidation group shall present a report on liquidation and prepare a statement of the receipts and payments during the period of liquidation and financial books and records which shall be audited by Chinese registered accountant and submitted to the shareholders' general meeting or the relevant governing authority for confirmation.
The liquidation group shall also within thirty (30) days after such confirmation, submit the documents referred to in the preceding paragraph to the companies registration authority and apply for cancellation of registration of the Company, and publish a public notice relating to the termination of the Company.
CHAPTER 22 : PROCEDURES FOR AMENDMENT OF THE COMPANY'S ARTICLES OF ASSOCIATION
Article 184. The Company may amend its articles of association in accordance with the requirements of law, administrative regulation and its articles of association.
Article 185. For the amendment of the Company's articles of association, the following procedures shall be followed:
(1) the board of directors shall, in accordance with provisions of these articles of association, adopt a resolution to propose the shareholders' general meeting to amend the Company's articles of association, and formulate the draft amendments to the articles of association;
(2) notice of the draft amendments to these articles of association referred to in the preceding sub-paragraph shall be sent to the Company's shareholders, and a shareholders' general meeting shall be convened to vote on the contents of the amendments;
(3) subject to the compliance of the relevant regulations of these articles of association and the Mandatory Provisions, a special resolution for approval of the draft amendments to these articles of association shall be passed by shareholders at a general meeting.
Article 186. The amendments to the Company's articles of association involving the contents of the Mandatory Provisions shall become effective upon approvals by the Securities Committee of the State Council and the companies approving department authorized by the State Council. If there is any change relating to the registered particulars of the Company, application shall be made for registration of the changes in accordance with law.
CHAPTER 23: SETTLEMENT OF DISPUTES
Article 187. The Company shall act according to the following principles to settle disputes:
(1) Whenever any disputes or claims arising between: holders of the Overseas-Listed Foreign-Invested Shares and the Company; holders of the Overseas-Listed Foreign-Invested Shares and the Company's directors, supervisors, general manager, deputy general managers or other senior administrative officers; or holders of the Overseas-Listed Foreign-Invested Shares and holders of Domestic-Invested Shares, based on these articles of association or any rights or obligations conferred or imposed by the Company Law or any other relevant laws and administrative regulations concerning the affairs of the Company, such disputes or claims shall be referred by the relevant parties to arbitration.
Where a dispute or claim of rights referred to in the preceding paragraph is referred to arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, shall abide by the arbitration provided that such person is the Company or the Company's shareholder, director, supervisor, general manager, deputy general manager or other senior administrative officer. Disputes in relation to the definition of shareholders and disputes in relation to the shareholders' register need not be resolved by arbitration.
(2) A claimant may elect arbitration at either the China International Economic and Trade Arbitration Commission in accordance with its Rules or the Hong Kong International Arbitration Centre in accordance with its Securities Arbitration Rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant.
If a claimant elects arbitration at Hong Kong International Arbitration Centre, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Centre.
(3) If any disputes or claims of rights are settled by way of arbitration in accordance with sub-paragraph (1) of this Article, the laws of the People's Republic of China shall apply, save as otherwise provided in laws and administrative regulations.
(4) The award of an arbitration body shall be final and conclusive and binding on all parties.
CHAPTER 24: SUPPLEMENTARY
Article 188. Any reference in these articles of association to the publication of public notices in a newspaper shall be interpreted as requiring publication in such newspaper as designated or required in accordance with relevant laws, administrative regulations or rules and, if the relevant notice is required to be given to holder of H Shares, as also requiring the relevant notice to be published in such newspapers as may be required by the term "published in the newspapers" (as defined in the Rules Governing the Listing of Securities on the Stock Exchange).
Article 189. In these articles of association, the meaning of an accounting firm is the same as that of "auditors".
RAILWAY BUSINESS RELATED ASSETS
PURCHASE AGREEMENT
between
GUANGSHEN RAILWAY COMPANY LIMITED
and
GUANGZHOU RAILWAY GROUP YANGCHENG RAILWAY COMPANY
NOVEMBER 15, 2004
TABLE OF CONTENTS
ARTICLE 1 BASIC INTRODUCTION OF THE PARTIES
ARTICLE 2 SCOPE OF PURCHASE
ARTICLE 3 PURCHASE PRINCIPLES AND EMPLOYEE SETTLEMENT
ARTICLE 4 CREDITORS' RIGHTS AND LIABILITIES AND SETTLEMENT OF CONTRACTS UNDER
PERFORMANCE
ARTICLE 5 METHOD AND PRICE OF PURCHASE
ARTICLE 6 IMPLEMENTATION OF PURCHASE
ARTICLE 7 ALLOCATION OF EXPENSES INCURRED WITH THE PURCHASE
ARTICLE 8 REPRESENTATIONS AND WARRANTIES
ARTICLE 9 MATTERS FOLLOWING THE CUT-OFF DATE
ARTICLE 10 MATERIAL OPERATION MATTERS
ARTICLE 11 LIABILITY FOR BREACH
ARTICLE 12 AMENDMENT, CANCELLATION AND TRANSFER OF THE AGREEMENT
ARTICLE 13 FORCE MAJEURE
ARTICLE 14 APPLICABLE LAWS AND DISPUTE RESOLUTION
ARTICLE 15 CONDITIONS PRECENDENT TO THE EFFECTIVENESS OF THIS AGREEMENT
ARTICLE 16 MISCELLANEOUS
2
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This RAILWAY BUSINESS RELATED ASSETS PURCHASE AGREEMENT (this "Agreement") is
made by and between the following parties:
TRANSFEROR: Guangzhou Railway Group Yangcheng Railway Company ("Party A")
TRANSFEREE: Guangshen Railway Company Limited ("Party B")
WHEREAS:
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1. Party A is an enterprise owned by the whole people, which is engaged in the railway transportation business from Guangzhou to Pingshi and owns the relevant railway business related assets ("Railway Business Related Assets");
2. Party A's industrial competent authority and title unit, Guangzhou Railway (Group) Company, has agreed to the transfer of the Railway Business Related Assets by Party A to Party B pursuant to the terms and conditions set forth herein;
3. Party B intends to launch the initial public offering of its A shares, and acquire the Railway Business Related Assets from Party A by the funds raised and other legal sources of funds pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, after negotiation, the parties hereby agree as follows:
ARTICLE 1 BASIC INTRODUCTION OF THE PARTIES
1. Party A
Name: Guangzhou Railway Group Yangcheng Railway Company
Address: 28 Baiyun Road, Guangzhou
Legal representative: An Guodong
Registered capital: RMB7,260,000,000
Date of establishment: February 24, 1993
2. Party B
Name: Guangshen Railway Company Limited
Address: 1052 Heping Road, Shenzhen
Legal representative: Wu Junguang
Registered capital: RMB4,335,550,000
Date of establishment: March 6, 1996
ARTICLE 2 SCOPE OF PURCHASE
Party B intends to purchase (the "Purchase") from Party A the Railway Business Related Assets in connection with the railway transportation from Guangzhou to Pingshi (Exhibit I: Rail Line Map), including the railway transportation related assets ("Assets") and the business conducted based on the Assets ("Business"). The Assets shall include, but not limited to, houses, buildings, projects under construction, railway roads, locomotives, vehicles, equipment, investment rights and interests, contract rights and interests and liabilities and creditors' rights occurred in the course of transportation business operation. The Business shall mean the railway transportation business currently conducted by Party A, including railway passenger transportation, railway freight transportation and the business in connection therewith.
The specific scope of the Purchase shall be subject to the scope specified in the Asset Appraisal Report set forth in Article 5.
ARTICLE 3 PURCHASE PRINCIPLE AND EMPLOYEE SETTLEMENT
The parties agree to implement the Purchase contemplated hereby in
accordance with the principle of "the assets and employees shall be transferred
to the extent that they are related to the business", i.e.: (i) all of Party A's
assets related to the railway transportation shall be transferred to Party B;
(ii) the employees listed in Party A's employee list and related to the railway
transportation business transferred shall be transferred to Party B; and (iii)
the employees listed in Party A's employee list and unrelated to the railway
transportation business transferred shall be settled by Party A in its sole
discretion.
ARTICLE 4 CREDITORS' RIGHTS AND LIABILITIES AND
SETTLEMENT OF CONTRACTS UNDER PERFORMANCE
In accordance with this Agreement, Party A's creditors' rights and liabilities and rights and obligations under contracts being performed relating to the railway transportation business shall be included in the assets to be purchased and assumed by Party B. As of the appraisal cut-off date set forth in Article 5 (the "Cut-off Date"), the liabilities included in the scope of the Purchase shall be RMB1,401,482,255.46, and the creditors' rights shall be RMB358,510,786.24, in each case subject to the confirmation by the Asset Appraisal Report set forth in Article 5.
Party A shall notify the obligors of its creditors' rights included in the scope of the Purchase. Party A shall notify the creditors of its liabilities included in the scope of the Purchase and obtain a letter of undertaking from the creditors, stating their consent to Party B's assumption. With respect to the contracts to be performed by Party B following the Purchase, Party A shall notify other parties to such contracts and obtain a letter of undertaking from such parties, stating their consent to the performance of such contracts by Party B. Party A shall notify the relevant creditors, obligors and the other parties to the relevant contracts within ten (10) days from the adoption of Party B's board resolutions and the approval by the relevant State-owned assets administration authority, and obtain the relevant undertaking or confirmation letters within thirty (30) days.
While making the notification as described above, Party A shall expressly notify the creditors, obligors and other parties to the contracts that the transfer of the relevant creditors' rights, liabilities and contracts shall be subject to the effectiveness of this Agreement.
ARTICLE 5 METHOD AND PRICE OF PURCHASE
1. Method of Purchase: The parties agree that Party B shall purchase all of Party A's assets and businesses related to the railway transportation at one time;
2. Price of Purchase: The parties agree that Beijing Pan-China Assets Appraisal Co., Ltd. shall be engaged to appraise the purchased assets in accordance with the principles and scope specified in the "Asset Restructuring Proposal of Yangcheng Railway Company" confirmed by the parties, and that the basic price of the Purchase shall be determined based on the valuation specified in the Asset Appraisal Report filed with the relevant State-owned assets administration authority. The Cut-off Date shall be June 30, 2004 or such other date as reselected later according to the
revaluation of such assets pursuant to other working requirements, such as the progress of Party B's issuance of A shares. With respect to the business attached to the assets, the parties agree not to make evaluation or appraise the value thereof.
According to the results of the Asset Appraisal Report issued by Beijing Pan-China Assets Appraisal Co., Ltd. with June 30, 2004 as the Cut-off Date that has not been filed with the relevant State-owned assets administration authority, the appraised value of the purchased assets shall be RB10,264,120,700.
The base price set forth above shall be adjusted pursuant to Article 9 hereof while implementing the Purchase, and the purchase price shall be determined based on the amount adjusted ("Acquisition Price", and the payment determined based on such price being the "Purchase Price").
ARTICLE 6 IMPLEMENTATION OF PURCHASE
1. The commencement date of implementation of the Purchase contemplated hereby shall be the date on which Party B launches its initial public offering of A shares and all funds raised have been remitted to Party B's bank account and a domestic accounting firm has issued a capital verification report following its verification ("Purchase Commencement Date").
2. Within five (5) days of the Purchase Commencement Date, Party A shall deliver to Party B the complete asset list and the relevant title certificates, the Purchase certificates, certificates of creditors' rights and liabilities, contracts and all licenses, approval documents, permits in connection with the business and go through the procedures for the handover of assets and businesses. In the event that it is required to go through the amendment and transfer procedures for the relevant assets and businesses by law, Party A shall provide relevant documents and materials to assist Party B in going through such procedures in accordance with such requirements. Party A shall complete the asset and business hand-over procedures for the delivery to Party B within fifteen (15) days of the Purchase Commencement Date, verify the content of the actually delivered assets and businesses as set forth in this Agreement and the Asset Appraisal Report, and execute the written hand-over certificate with Party B.
3. Party B shall pay 51% of the amount as determined in the Asset Appraisal Report as part of the Purchase Price to Party A within five (5) days of the Purchase Commencement Date.
4. Within fifteen (15) days of the execution of the written hand-over certificate by the parties and the completion of the audit set forth in Article 9, Party B shall pay
the remaining part of the Purchase Price to Party A at one time. However, if the funds raised by Party B's issuance of A shares (after deduction of all issuance expenses, including, but not limited to, evaluation, audit, underwriting, legal and public relationship expenses) are not sufficient for full payment of the Purchase Price, Party B shall only pay the amount of the funds raised to Party A as part of the Purchase Price within fifteen (15) days as set forth above, and the shortfall shall be raised by Party B from other legal sources of funds and paid by Party B to Party A within six (6) months from the execution of the written hand-over certificate by the parties and the completion of the audit set forth in Article 9.
5. Following the date hereof and prior to the execution of the written hand-over certificate by the parties, Party A shall ensure the proper operation of the businesses. In the event of any losses or damages in respect of houses, buildings, projects under construction, railway roads, locomotives, vehicles, equipment incurred in the ordinary course of use thereof, Party A shall be liable to repair, replace and maintain such houses, buildings, projects under construction, railway roads, locomotives, vehicles and equipment, in order to ensure that there be no substantial change to the assets and businesses during such period.
6. The title or right and risks under the purchased assets shall be transferred upon the parties' hand-over and execution of the written hand-over certificate; provided, however, that, with respect to the purchased assets for which the amendment and transfer procedures shall be gone through, the title or right and risks thereunder shall be transferred upon such amendment and transfer.
ARTICLE 7 ALLOCATION OF EXPENSES INCURRED WITH THE PURCHASE
1. The parties agree that the taxes and expenses incurred in the course of the Purchase shall be born pursuant to the tax laws and other relevant laws and regulations or the relevant approval documents of the government. The taxes and expenses for which there are no express provisions under law shall be equally born by the parties.
2. Unless otherwise provided herein, the costs and expenses incurred in connection with drafting, execution and implementation of this Agreement shall be born by the party incurring such costs and expenses.
3. The appraisal costs set forth in Article 5 hereof shall be born by Party B.
ARTICLE 8 REPRESENTATIONS AND WARRANTIES
With respect to the matters as of the Cut-off Date (as defined in Article
9) in connection with the Purchase contemplated hereby, Party A hereby
represents and warrants to Party B as follows:
1. ACCOUNTING MATTERS
Party A's accounting report:
(i) presents truly and fairly Party A's assets, liabilities (including potential and contingent liabilities) and the profits for the accounting period;
(ii) is in compliance with the requirements under the laws and regulations;
(iii) has no reservations and will not be affected by other matters, unless expressly disclosed in such report;
(iv) reflects Party A's financial conditions fully, completely and accurately;
(v) All of Party A's financial accounts, statements or other accounting records are under Party A's control and reflect Party A's financial conditions truly and fairly.
2. FINANCIAL MATTERS
(i) From the Cut-off Date to the audit base date, Party A has not paid or distributed any profit, or made any similar decision or arrangement;
(ii) Party A has no other outstanding liabilities (including contingent liabilities), unless disclosed in the accounting report and incurred in the ordinary course of business;
(iii) The reimbursement of creditors' rights set forth in the accounting report shall be paid no less than the amount listed therein;
(iv) Unless disclosed in the accounting report, Party A has not entered into any agreement with respect to any guarantee for any third party or any agreement with a nature of subrogation, and the assets transferred are free and clear of any mortgage, lien or any other third party right.
3. TAX MATTERS
(i) Sufficient reserve has been allocated in the accounting report for the taxes payable by Party A;
(ii) All accounting statements prepared by Party A for tax purposes or any calculation and payment made in connection therewith, have been
prepared or made correctly during the period as provided under the relevant tax regulations and are in compliance with the requirements of the taxation authority;
(iii) Party A has withheld the taxes payable by its employees in accordance with law.
4. ASSETS
(i) The lawful certificates or evidence certifying the title of houses, buildings, projects under construction, railway roads, locomotives, vehicles, equipment included in the scope of the Purchase have been obtained, and possessed or controlled by Party A;
(ii) The houses, buildings, projects under construction, railway roads, locomotives, vehicles, equipment included in the scope of the Purchase are free and clear of any mortgage or any other third party right or interest.
5. LABOR MATTERS
(i) Party A has made all payments for its employees with respect to any pension, medical insurance, work-related injury insurance in accordance with the relevant laws and regulations;
(ii) Party A has complied with the relevant national and local labor regulations in accordance with law. Party A has not violated any national or local labor regulations, nor shall Party A be jointly liable for any violation of any labor regulation by any other person.
Party A shall indemnity and hold harmless Party B against any losses or obligations incurred by Party B with respect to any damages to Party B's interests or any claim by any third party seeking damages or recovery from Party B, resulting from Party A's breach of the representations or warranties described above.
ARTICLE 9 MATTERS FOLLOWING THE CUT-OFF DATE
In the event that there is any change in the assets included in the scope of the Purchase and specified in the Asset Appraisal Report as a result of Party A's business operation or any other reason, the Acquisition Price as determined pursuant to the Asset Appraisal Report shall be adjusted based on the effects that such change might have on the acquirer's interest. The parties agree, within five (5) days of the Purchase Commencement Date, to engage Pan-China Schinda Certified Public
Accountants ("PSCPA") to conduct a special audit of the change in the purchased assets from the Cut-off Date to the audit base date pursuant to the enterprise accounting rules and Enterprise Accounting System, and determine the effects of such change on the Acquisition price in accordance with the report issued and based on which adjust the Acquisition Price. The principles of adjustment shall be as follows:
1. In the event that the depreciation shall be provided for with respect to the calculation of the fixed assets included in the scope of the Purchase for the period from the Cut-off Date to the audit base date pursuant to the relevant laws and accounting rules, the total amount of such depreciation shall be deducted form the Purchase Price;
2. From the Cut-off Date to the audit base date, in the event that there is any loss, destruction or deduction in the assets included in the scope of the Purchase, the determined value of such loss, destruction or deduction with respect to the assets shall be deducted from the Purchase Price;
3. From the Cut-off Date to the audit base date, in the event that there is any increase in the assets within the normal budge of Party A (including the additional assets increased as a result of the subsequent construction of any project under construction included in the scope of the Purchase and the valuation of which has been determined in the Asset Appraisal Report), upon audit by PSCPA and confirmation by Party B, the Purchase Price shall be increased accordingly;
4. From the Cut-off Date to the audit base date, in the event that Party A has to build more railway network facilities, such as group stations and connection links, as required by the State or the Ministry of Railways for the unified planning of railway network construction, such facilities shall be purchased by Party B and the method and price of the Purchase shall be determined in a separate supplemental agreement between the parties;
5. In the event that, pursuant to the domestic enterprise accounting rules and Enterprise Accounting System, there are other matters that are subject to adjustment but not addressed in the principles described above, such other matters shall be handled pursuant to such accounting rules and Enterprise Accounting System.
The special audit described herein shall be completed within sixty (60) days. The audit base date shall be determined in accordance with the following principles:
1. If the Purchase Commencement Date is prior to the Fifteenth (15) calendar day of the current month (inclusive), the audit base date shall be the end of last month;
2. If the Purchase Commencement Date is after the Fifteenth (15) calendar
day of the current month (not inclusive), the audit base date shall be the end of current month.
In the event that, according to the audit results, the difference between the Acquisition Price and RMB10,264,120,700 is less than "+" or "-" 10%, the parties shall continue to perform this Agreement based on the amount of actual purchase as adjusted. In the event that the difference between the Acquisition Price and RMB10,264,120,700 is more than "+" or "-" 10%, the parties shall negotiate separately on whether to continue the performance of this Agreement. If the parties cannot reach an agreement, either party shall be entitled to terminate this Agreement. For the avoidance of doubt, the Acquisition Price determined based on June 30, 2004 or such other base date as reselected shall be subject to the adjustment of "+" or "-" 10% between the Acquisition Price and RMB10,264,120,700 set forth above.
Party A shall be entitled to or be liable for any profit and loss incurred in the on-going course of operation of the purchased assets and businesses from the Cut-off Date to the audit base date; and Party B shall be entitled to or be liable for any profit and loss incurred thereafter.
ARTICLE 10 MATERIAL OPERATION MATTERS
1. From the date hereof, Party A shall promptly notify Party B of any proposed material asset disposition or acquisition with a value of more than five million Renminbi (RMB5,000,000) or any material operation matters such as proposed material transaction contract or proposed financing with a value of more than five million Renminbi (RMB5,000,000), and shall not implement such proposed arrangement without the consent of Party B. If Party B believes that any such material operation matter might have an impact on Party A's performance of its obligations hereunder or result in the frustration of the purpose of Party B's purchase in whole or in part, Party B may request Party A not to pursue such material operation matters in writing.
2. If Party A fails to disclose any material operation matter or comply with Party B's written request, and continues to conduct the material operation that has an adverse impact on Party B's interests, Party B shall be entitled to request Party A to indemnify it against the losses or terminate this Agreement.
ARTICLE 11 LIABILITY FOR BREACH
1. The parties shall perform their respective obligations hereunder in good faith. In the event that this Agreement cannot be performed, in whole or in part, as a result of either party's breach, the breaching party shall be liable for such breach; and in the event that both parties breach this Agreement, the parties shall be liable for their respective breaches according to their respective actual faults; provided, however, that such liability shall not preclude the right of the non-breaching party from requesting the breaching party to continue to perform.
2. In the event that Party B delays the payment of the Purchase Price as provided herein, it shall pay liquidated damages in an amount equal to 0.03% of the shortfall each day.
3. In the event that the purchased assets are subject to any claim by any third party or cannot be delivered for use, or no title transfer procedures can be gone therefor, as a result of lack of lawful title certificates or existence of any third party rights such as mortgage and pledge, Party B may request Party A to continue to perform or refuse to accept such assets and deduct the payment of such assets from the Purchase Price payable. Party B may also request Party A to indemnify it against all losses resulting therefrom, including, but not limited to, losses of expected profits.
4. In the event that Party B cannot conduct the business or its conduct of business is limited following the Purchase as Party A has not obtained the relevant licenses, approval documents, permits with respect to the purchased businesses, Party B may request Party A to indemnify it against all losses as a result thereof, including, but not limited to, losses of expected profits.
ARTICLE 12 AMENDMENT, CANCELLATION AND TRANSFER OF
THE AGREEMENT
1. This Agreement may not be amended or cancelled without the written consent of the parties.
2. Neither party may transfer any rights or obligations hereunder to any third party in any way without the express written consent of the other party.
3. Notwithstanding the foregoing, if the conditions precedent to the effectiveness as set forth in Article 15 hereof are not fully satisfied
within two (2) years from the date hereof, this Agreement shall be terminated automatically.
ARTICLE 13 FORCE MAJEURE
1. Should a party be prevented from performing its obligations under this Agreement pursuant to the terms as provided herein directly by the occurrence of an event of force majeure, such party shall notify the other party by telephone without delay and, within fifteen (15) days, provide the other party with information explaining the reasons for its inability to perform, or for its delay in performance of, all or part of its obligations under this Agreement and effective supporting documents. Based on the effect of such event on this Agreement, the parties shall decide on the performance hereof through negotiation, and decide whether to release the affected part's legal liability to perform this Agreement.
2. "FORCE MAJEURE" described above shall mean any event which is unforeseeable by the parties and not due to the parties' faults or negligence and the occurrence and consequences of which cannot be prevented or are unavoidable, including (without limitation) war, earthquake, fire, flood or any other event caused by similar natural force.
ARTICLE 14 APPLICABLE LAWS AND DISPUTE RESOLUTION
1. The formation of this Agreement, its validity, interpretation, implementation, and settlement of any disputes arising hereunder shall be governed by the laws of the People's Republic of China.
2. If a dispute arises in connection with the interpretation or implementation of this Agreement, the parties shall attempt to resolve such dispute through friendly consultations or mediation.
3. If the dispute is not resolved through friendly consultations within ninety (90) days from the occurrence of the dispute, then any party may bring an action to the competent People's Court.
ARTICLE 15 CONDITIONS PRECENDENT TO THE
EFFECTIVENESS OF THIS AGREEMENT
The conditions precedent to the effectiveness of this Agreement are as follows:
1. This Agreement has been signed by the legal representatives or authorized representatives of the parties and sealed with the parties' corporate seals;
2. Party B has complied with the voting procedures of affiliated transactions pursuant to its articles of association and the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited, and obtained the approval of the Purchase hereunder by independent shareholders;
3. Party B has complied with the voting procedures of affiliated transactions pursuant to its articles of association and the Listing Rules of the Hong Kong Stock Exchange, and obtained the approval of the possible affiliated transactions with its controlling shareholders or any subsidiaries thereof following the completion of the Purchase hereunder by independent shareholders;
4. Party A's State-owned assets disposition proposal has been approved by the relevant State-owned assets administration authority;
5. Other legal procedures as required by the relevant provisions under the laws and regulations have been gone through;
6. Party B's domestic initial public offering of A shares has been approved and all funds raised have been remitted to Party B's bank account, the amount of which is no less than 65% of the Acquisition Price;
7. Party B has obtained the National Development and Reform Commission's approval of the pricing for the freight transportation from Guangzhou to Pingshi.
Party A and Party B agree that Party B shall be entitled to the waiver of the condition precedent set forth in Item 6 above.
ARTICLE 16 MISCELLANEOUS
1. All notices, consents or acknowledgements hereunder shall be in writing.
2. Following the effectiveness of this Agreement, if either party's economic interest has been materially adversely affected by the promulgation or implementation of any new law, regulation or decree or the modification or new interpretation of any law, regulation or decree, the parties shall promptly negotiate and make necessary adjustment to protect the benefit to the parties hereunder; provided, however, that the parties may terminate this Agreement through negotiation if such promulgation, implementation, modification or interpretation will cause substantial damages to either party's interest after such adjustment.
3. The "day" or "calendar day" referred to herein shall mean any working day, excluding weekend and lawful holiday.
4. This Agreement is executed in eight (8) copies with equal legal validity, with each party holding two (2) copies and the remaining copies to be filed with or approved by the competent authority or the relevant State-owned assets administration authority
PARTY A: Guangzhou Railway Group Yangcheng Railway Company
LEGAL REPRESENTATIVE OR ITS AUTHORIZED REPRESENTATIVE:
PARTY B: Guangshen Railway Company Limited
LEGAL REPRESENTATIVE OR ITS AUTHORIZED REPRESENTATIVE:
EXHIBIT 4.2
TO ANNUAL REPORT
ON FORM 20-F
LAND LEASE AGREEMENT
between
Guangzhou Railway (Group) Company
(the Lessor)
&
Guangshen Railway Company Limited
(the Lessee)
Date: November 15, 2004
TABLE OF CONTENTS
Clause Heading ------ ------- 1. Land for Lease 2. Lease Term 3. Rent and Payment of Rent 4. Facilities to the Land 5. Delivery of the Leased Land 6. Rights and Obligations of the Lessor 7. Rights and Obligations of the Lessee 8. Representations and Warranties of the Lessor 9. Termination of the Agreement 10. Breach of the Agreement 11. Force Majeure 12. Governing Law 13. Dispute Resolution 14. Registration and Expenses 15. Effectiveness and Miscellaneous |
THIS AGREEMENT is made on November 15, 2004 in Shenzhen
BETWEEN
(1) Guangzhou Railway (Group) Company (the "Lessor"); and
(2) Guangshen Railway Co., Ltd. (the "Lessee")
WHEREAS:
1. The Lessor is a state owned enterprise incorporated in the People's Republic of China ("PRC") with its registered address at No. 151 Zhongshan Yilu, Guangzhou, PRC, and the business license number 4400001007908.
2. According to the approval and authorization from the State Council and the Ministry of Land and Resources, the Lessor has acquired the right to use the land set forth in Schedule One ("Schedule One Land") to this Agreement in the manner of operating under the government authorization and transfer of the right to use state-owned land;
3. The Lessee is a company incorporated in PRC with its registered address at No. 1052 Hepinglu, Shenzhen, PRC, and the business license number 19241166-3.
4. The Lessor hereby agrees to lease and the Lessee agrees to accept the right to use the Schedule One Land.
NOW IT IS HEREBY AGREED as follows:
1 LAND FOR LEASE
1.1 The land for lease is the land listed in Schedule One with altogether 200 pieces of land and the overall area of 28,194,642.31 square meters.
1.2 In case of any increase or decrease of the leased land during the lease term, the two parties shall enter into a supplementary agreement regarding the changes.
2 LEASE TERM
2.1 The lease term shall be twenty (20) years, which will start upon the effective date of this Agreement.
2.2 Unless otherwise for the reasons of force majeure events which are unanticipated, unavoidable or uncontrollable, when the lease term expires, the Lessee is entitled to renew the
lease term in accordance with the terms and conditions under this Agreement and the Lessor shall not refuse the Lessee's request of renewal.
3 RENT AND PAYMENT OF RENT
3.1 In accordance with the negotiation between the two parties and with reference to the value of the right to use the land determined in the Report on the Evaluation of the Land Assets given by the Beijing Pan-China Assets Appraisal Co., Ltd, the rent shall be amortized within fifty (50) years. The rent shall not be more than RMB 74 million per year.
3.2 The Lessor shall pay the rent in quarter within fifteen (15) days before the end of the prior quarter without prior notification.
3.3 Except the rent under this Agreement and expenses resulting from breach of this Agreement by the Lessee, the Lessor undertakes that the Lessee shall not be liable for any other fees for any reasons (including any taxes which shall be paid by the Lessor), unless otherwise provided by law.
4 FACILITIES TO THE LAND
4.1 Within the lease term, the Lessor shall be liable for the maintenance of all the facilities to the land.
5 DELIVERY OF THE LEASED LAND
5.1 The Lessor shall finish all the formalities relating to getting the permission of leasing the Schedule One Land no later than the commencement date of the lease term provided herein, and deliver such land to the Lessee.
6 RIGHTS AND OBLIGATIONS OF THE LESSOR
6.1 The Lessor is entitled to the following rights:
6.1.1 Claiming rent under the term provided herein;
6.1.2 Supervise the use of the land by the Lessee to ensure the Lessee makes rational use of the land pursuant to law and the provisions under this Agreement. The Lessee shall actively cooperate the Lessor in its supervision.
6.2 The Lessor shall assume the following obligations:
6.2.1 Dispose formalities with respect to acquiring permission of leasing the land in accordance with provisions under this Agreement;
6.2.2 Assume all taxes, levies in relation to the right to use the land occurred during the lease term, unless otherwise provided by law;
6.2.3 Fully perform its obligations under the land use agreement;
6.2.4 If necessary, the Lessor shall provide the Lessee with the relevant certificate documents for the use of the Schedule One Land by the Lessee, such as projects of construction and installation.
6.2.5 The title of the buildings constructed by the Lessee on the Schedule One Land during the lease term shall belong to the Lessee, and the Lessor shall assist the Lessee in the disposal of the relevant certificates or license.
6.2.6 During the lease term, the Lessor shall not transfer, lease or mortgage the Schedule One Land to a third party, or establish any third party interest on such land to limit or affect the Lessee's use of the land.
6.2.7 Provide relevant materials to the Lessee and assist the Lessee to dispose the formalities of registering the title of the buildings on the Schedule One Land or change of such registration with the relevant authorities.
7 THE RIGHTS AND OBLIGATIONS OF THE LESSEE
7.1 The Lessee is entitled to the following rights:
7.1.1 to use the land in compliance with the terms and conditions of this Agreement;
7.1.2 build various buildings pursuant to the provided purpose for the land use;
7.1.3 the Lessee is entitled to lease, mortgage and transfer the buildings it constructs on the Schedule One Land and is also entitled to receive proceeds generated from such disposal.
7.2 The Lessee shall assume the following obligations:
7.2.1 The Lessor shall pay the rent on time in accordance with this Agreement. In case of overdue payment, the Lessee shall pay the Lessor a daily liquidated compensation equivalent to 0.03% of the rent payable.
7.2.2 All construction and other activities the Lessee conducts on the Schedule One Land shall be in compliance with laws and regulations of the People's Republic of China;
7.2.3 In the event of laying down various pipelines through the Schedule One Land for public interests, the government shall obtain consent from the Lessee, and the Lessee shall not refuse without any reasons, but the entity carrying out such construction shall make reasonable compensation to the Lessee. If such construction act damages seeded strips, passageway or pipelines, the entity cutting through the land shall be liable for the repair of such damage. The cutting through by various pipelines laid down for public interests shall not impede the construction and the finished buildings.
7.2.4 The Lessee shall ensure that the management personnel, policemen, firemen ambulancemen and the relevant equipments and vehicles of the government or the Lessor may enter the Schedule One Land and the buildings thereto without any trouble to conduct public affairs or emergency services;
7.2.5 In the event that the construction or operation activities of the Lessee damages the surrounding environment and the underground facilities, which makes the state, enterprises or individuals suffer losses, the Lessee shall be liable for the compensation.
7.2.6 The Lessee shall not develop, dug or occupy any other land outside the Schedule One Land without authorization. In case of provisional use of the land or road outside the Schedule One Land, the Lessee must obtain the approval from the competent government authorities or the user of such land or road, and make necessary payment.
8 REPRESENTATIONS AND WARRANTIES OF THE LESSOR
8.1 The Lessor hereby provides representations, warranties and undertakings to the Lessee as follows:
8.1.1 The Lessor has the right to use the state owned Schedule One Land and has met the conditions of leasing such land;
8.1.2 By and upon the execution date of this Agreement, the Lessor has not put any mortgage or any other restrictions to limit the right to use the Schedule One Land.
8.2 The Lessor shall fully indemnify the Lessor for any losses or expenses incurred to the Lessee arising from any untruth, misleading or violation of such statements, warranties and undertakings.
9 TERMINATION OF THE AGREEMENT
9.1 The Agreement shall be terminated if any of the following events occur:
9.1.1 The lease term expires and the Lessee does not renew the Agreement;
9.1.2 The Lessee terminates this Agreement before the expiration of the lease term (including dissolution, insolvency of the Lessee);
9.1.3 The two parties to this Agreement agree to terminate before the expiration of the lease term;
9.1.4 Upon the expiration of the lease Agreement, the Agreement is not renewed not for the reason of the Lessor;
9.2 After the termination of this Agreement, the Lessee shall return the Schedule One Land to the Lessor after disposing all the buildings, affiliated articles, equipments and facilities on the land.
9.3 If the Lessee is not liable for the termination of this Agreement before the expiration of the lease term and the Lessor takes back the Schedule One Land, the Lessor shall compensate a fee equivalent to the left value with deduction of the depreciation charges to all the buildings, affiliated articles, equipments and facilities.
10 BREACH OF THE AGREEMENT
10.1 The Lessor shall be regarded as breach of this Agreement in case of
10.1.1 not delivering the Schedule One Land to the Lessee upon the time provided in this Agreement;
10.1.2 any other violation of any terms under this Agreement;
10.2 The Lessee shall be regarded as breach of this Agreement in case of
10.2.1 not paying the rent upon the time provided in this Agreement;
10.2.2 any other violation of any terms under this Agreement.
10.3 The breaching party shall pay liquidated damages to the other party in accordance with the provisions under this Agreement. In case of the liquidated damages cannot cover the losses suffered by the party who does not breach the Agreement, the breaching party shall indemnify the actual losses resulting from such breach of Agreement.
11 FORCE MAJEURE
11.1 In case of inability of one party or both parities to perform this Agreement because of force majeure events during the enforcement of this Agreement, the party unable to perform its obligations shall not be liable for the breach of Agreement, but such party affected by the force majeure events shall immediately notify the other party and provide the relevant proving documents notarized by the local notary agency where the force majeure events occur.
12 GOVERNING LAW
12.1 The establishment, effectiveness, interpretation, performance and dispute resolution of this Agreement shall all be in accordance with the laws of the People's Republic of China.
13 DISPUTE RESOLUTION
13.1 During the performance of this Agreement, in case of any disputes arising, the parties shall first resolve the dispute by negotiation. Should the dispute not be resolved by
negotiation, either party might seek litigation to the People's Court where the Schedule One Land locates.
14 REGISTRATION AND EXPENSES
14.1 The two parties shall dispose the registration formalities for land lease with the competent authority of land and resources within thirty (30) days as of the effective date of this Agreement.
14.2 The registration fee shall be paid in accordance with the relevant regulations.
15 EFFECTIVENESS AND MISCELLANEOUS
15.1 This Agreement shall become effective after satisfying the following conditions:
(1) Legal or authorized representatives from both parties execute on this Agreement;
(2) The Lessee has performed the voting procedure for affiliated transaction and obtained permission to this Agreement from the shareholders or exemption to the transactions involved in this Agreement from the Hong Kong Stock Exchanges;
(3) The domestic initial issuing of A shares has been approved and all the funds raised have been remitted to the account of the Lessees;
(4) The Agreement for the Sale and Purchase of the Railway Operation Assets between Guangshen Co., Ltd and Guangzhou Railway Yangcheng Railway Company has come into effect and the act of purchasing the assets and operation has begun.
15.2 The "day" herein in this Agreement means business day, excluding Saturday, Sunday and public holidays.
15.3 The schedule to this Agreement is an integral part to this Agreement and has the same legal effect as this Agreement.
15.4 As for matters not included in this Agreement, the two parties shall enter into a supplementary agreement after negotiation. The supplementary agreement must be registered with the local competent land authority.
15.5 This Agreement shall be executed on five counterparts, and each counterpart is original. Each party holds two counterparts and the other one shall be filed with the land administrative authority.
LESSOR: Guangzhou Railway (Group) Company
LEGAL OR AUTHORIZED REPRESENTATIVE:
LESSEE: Guangshen Railway Co., Ltd.
LEGAL OR AUTHORIZED REPRESENTATIVE:
EXHIBIT 4.3
TO ANNUAL REPORT
ON FORM 20-F
COMPREHENSIVE SERVICES AGREEMENT
BY AND BETWEEN
GUANGZHOU RAILWAY (GROUP) COMPANY
AND
GUANGSHEN RAILWAY COMPANY LIMITED
DATED AS OF NOVEMBER 15, 2004
TABLE OF CONTENTS
Article 1 Scope of the Comprehensive Services...............................3 Article 2 Undertakings and Warranties.......................................4 Article 3 Transportation Services...........................................6 Article 4 Rail Line Maintenance Services...................................12 Article 5 Car Repair in Depot and Wheel Repair Services....................14 Article 6 Railway Materials Procurement Agency.............................17 Article 7 Settlement Services by the Railway Settlement Center.............18 Article 8 Hygienic and Anti-Epidemic and Convalescence Services............19 Article 9 Nursery and Kindergarten Services................................21 Article 10 Liabilities for Breach of Contract...............................22 Article 11 Miscellaneous Provisions.........................................22 |
This Comprehensive Services Agreement (this "Agreement") is entered into this 15th day of November 2004 in Shenzhen by and between:
(1) GUANGZHOU RAILWAY (GROUP) COMPANY (hereinafter referred to as "Party A"), a group company registered in Guangzhou of Guangdong Province with its enterprise legal person business license number being 4400001007908 and its legal address being at No. 151 First Zhongshan Road, Guangzhou; and
(2) GUANGSHEN RAILWAY COMPANY LIMITED (hereinafter referred to as "Party B"), a joint-stock limited company registered in Shenzhen of Guangdong Province with its publicly-held shares being listed on Hong Kong Stock Exchange, its enterprise legal person business registration number being 19241166-3 and its legal address being at No. 1052 Heping Road, Shenzhen.
For the purpose of the better provision of such services to Party B as transportation, rail line maintenance and repairs, materials procurement, medical care and epidemic prevention, accounts settlement, nurseries and kindergartens and any other related services so as to ensure the normal operation of Party B's transportation business, Party A and Party B hereby reach the following agreement after consultations and by adhering to the principle of equality:
ARTICLE 1 SCOPE OF THE COMPREHENSIVE SERVICES
1.1 The services to be provided to Party B by Party A hereunder shall include transportation, rail line maintenance and repairs, locomotives and cars repair in depot, materials procurement on behalf of Party B, accounts settlement, hygienic and anti-epidemic services, nursery and kindergarten services and any other services that are consistent with the purposes of this Agreement (hereinafter referred to as the
"Comprehensive Services").
1.2 For purposes of this Agreement, unless otherwise expressly provided herein, references to "Party A" shall include Party A itself, and any company, entity and department (other than Guangshen Railway Enterprise Development Company, Guangzhou Railway Group Yangcheng Railway Company and any companies, entities or departments controlled or managed by it) that are owned, controlled, managed or used by Party A during the term of this Agreement, including any institutions, equipment, facilities, premises, buildings and employees that are owned, controlled, managed or used by such company, entity or department.
ARTICLE 2 UNDERTAKINGS AND WARRANTIES
2.1 Party A agrees to provide the Comprehensive Services to Party B and its employees pursuant to this Agreement and hereby undertakes and warrants to Party B as follows:
(a) Party A shall have complete and unrestricted ownership, control, management rights and use rights to any entity subordinate to it and that its rights, control, management and use, or the size, scope, quality or quantity of any of such entity shall not be reduced during the term hereof.
(b) The quality, quantity and contents of any Comprehensive Services to be provided hereunder shall not be inferior to the standard of the same type of services, enjoyed by Party A itself and its employees prior to the date hereof and after the effectiveness hereof (if applicable), or provided to any third party by Party A after the effectiveness hereof.
(c) Party A shall guarantee the quality of any Comprehensive Services to be
provided to Party B hereunder and provide the Comprehensive Services to Party B at the most competitive quality and price then available.
(d) All fees received from Party B as specified herein for the Comprehensive Services provided hereunder shall not be used for any purpose other than the benefit of the entities that have actually provided the Comprehensive Services hereunder.
2.2 Party B agrees to receive the Comprehensive Services from Party A pursuant to this Agreement and hereby undertakes and warrants to Party A as follows:
(a) Party B shall pay Party A the fees actually incurred by Party A in the provision of the Comprehensive Services as specified hereunder.
(b) Subject to any contrary provisions herein, any and all of the fees payable by Party B shall be prepaid by Party B by the month and settled by the quarter. Party B warrants that it shall pay Party A the fees payable by it at the payment date and in the amount specified herein and shall pay delay payment interest for any payment overdue at a rate of 0.03% for each day of delay.
2.3 With respect to any fees that shall be settled by the month, the annual aggregate thereof shall be the total of the monthly payment for 12 months and the quarterly aggregate thereof shall be the total of the monthly payment for three months.
In case Party B provides any services to Party A and shall receive any fees from Party A therefor, the above undertakings and warranties of one party to the other in respect of payment shall be equally applicable to both parties.
2.4 References to "expenses", "complete costs" or "costs" shall mean costs inclusive of taxes and be composed of the "expenses" or "costs" set forth in the audited
financial statements and the taxes and charges payable by the service provider for the service fees received by it. Such taxes and charges shall include business tax at a rate of 5%, urban construction tax at a rate of 7%, education surcharge at a rate of 3% and anti-flood dam building charge at a rate of 1.3-0/00.
The party receiving services may, subject to a 30-day's prior notice to the party providing services, in conjunction with the party providing services, retain an accounting firm to audit the said costs and expenses, and the result of such audit shall be the conclusive evidence for the determination of the said costs and expenses.
2.5 In order to ensure the effective, timely and full implementation of this Agreement, both parties shall cooperate with the other party and provide conveniences to the other party. Where there is any change to the circumstances under which the Comprehensive Services are provided, Party A shall promptly notify Party B thereof. Party B shall also have the right to make reasonable inquiries into Party A's specific entities or institutions who provide the relevant services.
2.6 Both parties agree that this Agreement shall be valid for three years commencing from the effective date hereof.
ARTICLE 3 TRANSPORTATION SERVICES
3.1 The transportation services to be provided by Party A to Party B hereunder shall include production coordination, safety management, dispatch and lease of passenger and freight trains.
(a) Party A warrants that it shall:
(i) provide Party B with the correctly prepared working diagrams for scheduled trains and locomotives;
(ii) work closely with and coordinate the efforts of relevant train
operation departments and organize the balanced operation of trains and ensure the supply of trains and locomotives;
(iii) utilize trains and locomotives economically and rationally, accelerate the turnover of trains and locomotives, enhance the utilization efficiency of trains and locomotives and ensure the safe transportation; and
(iv) promptly and correctly handle relevant issues arising from the daily transportation operations so as to ensure the normal use of trains and locomotives and provide other dispatch services.
(b) Both parties undertake and warrant that they will duly perform the formation plans, working diagrams, transportation proposals and daily shift working plans for trains and locomotives, accept the dispatch instructions and perform their respective work in the joint operation and cooperation between themselves according to the railway network.
(c) All of the passenger and freight trains leased to Party B by Party A must be well-equipped and of a high quality, satisfy the conditions for operation, comply with the Railway Technical Procedures, the Technical Procedures for the Use of Passenger Trains, the Detailed Rules for Air-conditioned Passenger Trains and provisions in relevant rules and regulations of the Ministry of Railway as well as Party B's technical standards and requirements.
(d) The rental payable by Party B to Party A for the lease of passenger and freight train from Party A shall be treated in accordance with the settlement methods published by the Ministry of Railway. The fees payable by Party B to Party A for the operation coordination, safety
management and dispatch services shall be calculated according to the following formula:
fees payable by Party B to Party A for the operation coordination, safety management and dispatch services for any given year = settlement unit price for converted turnover volume x converted turnover volume accomplished by Party B for such given year, whereof, the "converted turnover volume" refers to the volume of passengers and freight accomplished by Party B calculated on the basis of the weight and the mileage of the freight carried by Party B and the number and mileage of passengers carried by Party B. The settlement unit price for the converted turnover volume is RMB 40/10,000 converted ton-kilometer.
Where any unusual circumstances occur that cause material changes to the fees to be charged by Party A for its transportation operation coordination, safety management, dispatch services, the settlement unit price shall be adjusted subject to mutual agreement between the parties.
3.2 Party A's such wholly-owned subsidiaries as Huaihua Railway Company and Changsha Railway Company, and such controlled subsidiaries as Sanmao Railway Company, Guangmeishan Railway Co., Ld., Shichang Railway Co., Ltd. and Yuehai Railway Co., Ltd., will provide Party B with the transportation services including (but not limited to) the following and Party B will provide the same services to such subsidiaries of Party A:
(a) passenger transportation services at railway stations including directing passengers' entrance into railway stations, departure waiting at railway stations, ticket verification and train boarding, and water supply services to incoming and outgoing trains;
(b) use rights to rail lines;
(c) tractor services for both passenger and freight trains;
(d) passenger trains (including air-conditioned cars, non-air-conditioned cars, buffet cars, power generation cars and luggage cars), car inspection conductors, and power generation and gas supply services for air-conditioned cars;
(e) train maintenance services;
(f) ticket sales agency;
(g) any other services related to passenger and freight train transportation.
3.3 Party A hereby undertakes that the above-mentioned transportation services provided to Party B by its above-listed wholly-owned subsidiaries including Huaihua Railway Company and Changsha Railway Company, and above-listed controlled subsidiaries including Sanmao Railway Company, Guangmeishan Railway Co., Ld., Shichang Railway Co., Ltd. and Yuehai Railway Co., Ltd., must comply with the relevant technical standards and requirements set by the Ministry of Railway; provided that where no such technical standards or requirements are available, such services must reach the service standards regularly applied in the railway industry.
3.4 The rate of the fees payable for the services to be provided to Party B by Party A's wholly-owned subsidiaries including Huaihua Railway Company and Changsha Railway Company, and controlled subsidiaries including Sanmao Railway Company, Guangmeishan Railway Co., Ld., Shichang Railway Co., Ltd. and Yuehai Railway Co., Ltd. and for the services to be provided to such subsidiaries of Party A by Party B shall be determined according to the following order of priority:
(a) with respect to any item of services for which there is a prevailing market
price, the rate of the fees payable for such item of services shall be determined by and among the relevant parties based on such prevailing market price;
(b) with respect to any item of services for which there is no prevailing market price but the Ministry of Railway has formulated settlement methods or set a uniform guiding price, the rate of the fees payable for such item of services shall be determined pursuant to such settlement methods or guiding price;
(c) with respect to any item of services that cannot be determined pursuant to items (a) and (b) above, the rate of the fees for such item of services shall be equal to: complete costs of such item of services x (1+8% rate of profit).
3.5 Party B agrees that Party A's controlled company, Guangdong Railway Youth Travel Service Co., Ltd. ("GRYTS"), shall contract to provide train conductor services to portion of the passenger trains operated by Party B. The specific train runs contracted to GRYTS shall be determined by and between such Party B and GRYTS on a case-by-case basis.
3.6 The scope of the conductor services contracted to GRYTS shall include but not limited to the sale of tickets for, and operation of buffet business and sale of train commodities related to the relevant contracted passenger train runs.
3.7 Revenues made by GRYTS from its sale and make-up sale of tickets for the relevant contracted passenger train runs shall be vested in Party B; revenues made by GRYTS from its sale of commodities and operation of buffet business on trains shall be vested in GRYTS. Expenses for the use and maintenance and repair of the contracted trains and the train expenses stipulated by the Ministry of Railway for such trains shall be
paid by Party B. The train conductor services for the contracted trains shall be performed by GRYTS and the salaries of the conductors and any and all of the expenses incurred in the provision of the contracted conductor services for the contracted trains shall be paid by GRYTS; provided that, liabilities for bodily injury or death of any passenger on any of the contracted trains not attributable to GRYTS, shall be assumed by Party B.
3.8 Party A hereby warrants that it will cause GRYTS to achieve the contracted ticket sales revenue target on the basis of safe transportation and observance of railway code of ethics. The contracted ticket sales revenue target shall be determined by Party B and GRYTS subject to mutual agreement on the basis of the specific train runs contracted to GRYTS. In case the actual ticket sales revenues made by GRYTS exceed the contracted ticket sales revenue target, the payment to GRYTS for its provision of the contracted conductor services hereunder shall be increased in proportion to the amount of the actual ticket sales revenue in excess of the ticket sales revenue target. On the contrary, in case the actual ticket sales revenues made by GRYTS fail to reach the contracted ticket sales revenue target, the payment to GRYTS for its provision of the contracted conductor services hereunder shall be reduced in proportion to the difference between the actual ticket sales revenue and the ticket sales revenue target. In case a force majeure event occurs during the term of the operation by GRYTS of the contracted conductor services and the ticket sales revenue for the contracted trains is materially and adversely affected thereby, the ticket sales revenue target may be reviewed and re-determined by and between Party B and GRYTS subject to mutual agreement between them after consultations.
3.9 For the contracted conductor services and related train services provided by GRYTS, GRYTS shall receive from Party B service fees and a share of the revenue from the make-up sale of tickets. The fees for the provision of the conductor services and related services contracted to GRYTS hereunder shall be calculated on the basis of the
conductor services/1000 train-kilometer (excluding the power generation cars), and shall be RMB 800/1000 train-kilometer for each passenger train conductor for the air-conditioned cars and RMB 400/1000 train-kilometer for each passenger train conductor for the non-air-conditioned cars. GRYTS shall be entitled to receive 30% of the revenue from the make-up sale of tickets as its share. The above fees shall be settled by the quarter and Party B and GRYTS shall confirm the settlement amount within 15 days as of the end of each quarter. Upon confirmation of the settlement amount, Party B shall pay the same within 10 days as of its receipt of the formal invoice from GRYTS.
ARTICLE 4 RAIL LINE MAINTENANCE SERVICES
4.1 Party A shall, upon entrustment of Party B, provide such services to Party B as main line repair and maintenance services (track lifting, track lining, tamping and dynamic stabilization) with large-sized track maintenance machinery, track replacement overhaul for jointless lines, track overhaul cleaning and other services including overhaul of track bridge equipment.
4.2 During the period when Party A is performing the said rail line repair and maintenance services for Party B, Party B shall, at the expense of Party A, provide Party A with detailed basic technical materials about the relevant track bridge equipment, places for the storage of the camping vehicles and the communications equipment used by Party A's relevant employees and shall supply water and power to Party A's relevant employees required for their everyday life. In addition to that, Party B shall coordinate the efforts of each of its dispatch, track maintenance, telecommunication and signaling, station and public security departments involved in Party A's implementation of relevant projects as part of the entrusted services as so ensure the successful completion of relevant projects, the time period required for the closing for project implementation and the punctual operation of Party A's engineering trains and commuter buses.
4.3 The fees for the main line repair and maintenance services with large-sized track maintenance machinery to be provided by Party A to Party B shall be equal to the complete costs for any given service project x (1+8% rate of profit).
For purposes of 2005, the complete costs for track tamping shall be temporarily deemed as RMB 7,100/kilometer, and for switch tamping, shall be temporarily deemed as RMB 7,600/pair; and the complete costs for rail grinding shall be temporarily deemed as RMB 12,000/kilometer. Party A hereby warrants to Party B that the rate of service fees applied by Party A against Party B hereunder shall not be higher than the rate of service fees applied by Party A against any of Party A's affiliates or any independent third party. Otherwise, Party B shall have the right to entrust a third party to perform the services to be provided by Party A hereunder.
4.4 Party A shall ensure any and all of Party B's lines to which it has performed repair and maintenance services hereunder must be able to be operated safely and soundly and free from error. Party A shall compensate Party B for its direct economic loss arising from Party A's repair and maintenance services or any accident occurring during Party A's implementation of the service projects immediately after it is determined that Party A shall be responsible for such accident.
4.5 Party B shall be solely responsible for any loss arising from its failure to comply with the standards required by the relevant quality standards. Party B shall compensate Party A for any economic loss incurred by Party A due to Party A's inability to implement a service project, whether in whole or in part, caused by any reason on the part of Party B.
4.6 The fees for such services to be provided by Party A to Party B hereunder as track replacement overhaul for jointless lines, track overhaul cleaning and other services including overhaul of track bridge equipment shall be determined by Party A and Party B
through consultations by referring to the standard of fees for such services published by the Ministry of Railway. Where there is no such a standard of fees available, such fees shall be calculated according to the following formula:
Total amount of fees payable = repair and maintenance costs x (1+8% rate of profit)
4.7 The track replacement overhaul for jointless lines, track overhaul cleaning and other services including overhaul of track bridge equipment specified in this Article may also be provided by an entity selected through bidding based on the actual situation. In case Party A is the winning bidder, the specific items of services and rate of service fees shall be determined by Party A and Party B pursuant to the contents of the bidding documents and conditions for bid winning and shall not be subject to any limit set forth in Items from 4.1 to 4.6 above.
ARTICLE 5 CAR REPAIR IN DEPOT AND WHEEL REPAIR SERVICES
5.1 Party B shall entrust Party A with the performance of the car repair in depot on Party B's trains in operation on the basis of the actual situation and its own needs. Such repair services shall include but not be limited to:
(a) disassembly, inspection, repair and replacement of bogies(including the brake system);
(b) inspection and repair of air conditioners, diesel engines and power generators;
(c) inspection and repair of electrical systems (control cabinets);
(d) inspection and repair of car interior furnishings;
(e) inspection and maintenance of car exterior furnishings; and
(f) inspection and repair of hook and buffer zones (ends).
Subject to mutual agreement after consultations, Party A may accept other train repair services not covered in the above scope of car repair in depot.
5.2 Materials, parts and instruments required for car repair in depot shall be provide by Party A in the course of the repair services where the train to be repaired is of a model fixed by the Ministry of Railway, or by Party B with its own effort where the train is not of a model fixed by the Ministry of Railway, or purchased or processed by Party A at the request and entrustment of Party B.
5.3 Party A shall provide all of the repair and maintenance services to Party B pursuant to the Procedures for Train Repair in Depot, the Procedures for Railway Technical Management, the Procedures for Car Inspection and Repair and documents, rules, drawings, circulars and other materials concerning technical standards for car repair in depot. Where any car to be repaired in depot is not of a model fixed by the Ministry of Railway, Party B shall provide Party A with complete technical materials concerning such car prior to the commencement of the repair.
5.4 Party A shall conduct a self-test of the cars repaired by it in depot after having completed all of the required repair services, and will not deliver the same to Party B for test and acceptance until after having verified that the quality of each of the parts on the cars so repaired meet the relevant standards. Party A's technical materials for and conclusions on quality re-test of the cars repaired by Party A in depot shall be complete and accurate and be promptly delivered to Party B for operational analysis and appraisal.
5.5 The rate of fees payable to Party A for car repair in depot performed by Party A shall be determined by Party A and Party B through consultations on the basis of the actual conditions of the cars to be repaired, the specific items of services performed during car repair in depot and the degree of difficulty of the repair services and by referring to the
standard of fees for repair in depot of trains in operation. Where for any item of repair in depot there is no such a standard of fees, the fees for such item of repair in depot shall be calculated according to the following formula:
Total amount of fees payable = repair and maintenance costs x (1+8% rate of profit)
5.6 After having completed the car repair in depot entrusted to it by Party B, Party A will request Party B to settle the bills for the fees therefor on the basis of the price mutually agreed between them. Party B shall pay such fees within 10 days as of its receipt of, and verification of the correctness of, the bills for such fees submitted by Party A.
5.7 Party A shall ensure any and all of Party B's trains to which it has performed car repair in depot hereunder must be able to be operated safely and soundly and free from latent quality defect. In case Party A fails to perform any car repair in depot in compliance with the standards required by the quality standards for car repair in depot, Party A shall repay the fees paid to it for such car repair in depot or re-perform the car repair in depot till the quality of the cars repaired by it reach the relevant quality standards. Party B shall compensate Party A for any economic loss incurred by Party A due to Party A's inability to punctually complete the car repair in depot or any adverse impact on the car repair depot, caused by any reason on the part of Party B.
5.8 The car repair in depot specified in this Article may also be performed by an entity selected through bidding based on the actual situation. In case Party A is the winning bidder, the specific items of services and rate of service fees shall be determined by Party A and Party B pursuant to the contents of the bidding documents and conditions for bid winning and shall not be subject to any limit set forth in Items from 5.1 to 5.7 above.
5.9 The train wheel factory subordinate to Party B may provide wheel repair
services to any of Party A's subsidiaries or controlled entity at the request thereof and the fees for such services shall be equal to repair service costs x (1+8% rate of profit).
ARTICLE 6 RAILWAY MATERIALS PROCUREMENT AGENCY
6.1 In case Party B entrusts Party A with the procurement of portion of the railway materials, the quantity and categories of such railway material shall be set forth in a list provided to Party A by Party B and shall not become valid until after being confirmed by both parties.
6.2 The quality of any of the materials procured by Party A on behalf of Party B must be good and reach the standards set by the State, the relevant ministry or relevant enterprises.
6.3 In the course of the arrangement for the procurement of materials for Party B, Party A shall select sources for such materials at the preferential price and conditions offered by Party A to other relevant railway entities and the price of any materials supplied to Party B may not be higher than the price of such materials offered to any of Party A's subsidiaries, controlled entities or any independent third parties under the same conditions.
6.4 The specific schedule and terms of the payment of the consideration for the materials to be procured by Party A shall be determined by Party A and Party B after consultations subject to the actual situation of the relevant batch of materials.
6.5 Subject to the provisions set forth in Clause 6.3, for any materials procured by Party A for Party B, Party B shall pay service fees to Party A which shall be equal to a certain percentage of the consideration for such materials. Such percentage shall be determined as follows depending on the actual category of the materials procured by Party A for Party B:
(a) 1.5% of the consideration for the procured materials, for the procurement
of diesel, steel rails, tires, axles, steel grinding wheels, lubricating oil (fat) for use for special purposes;
(b) 5% of the consideration for the procured materials, for the procurement of any category of materials other than the categories as listed in (a) above.
Such service fees shall be settled by the quarter and paid to Party A by Party B in the amount as confirmed by Party A and Party B within 15 days as of the beginning of the forthcoming quarter.
ARTICLE 7 SETTLEMENT SERVICES BY THE RAILWAY SETTLEMENT CENTER
7.1 In order to increase Party B's capital gains and reduce settlement fees and financing costs, Party B hereby agrees that the Guangzhou Railway Settlement Center under the management of Party A shall provide the relevant settlement services to Party B, which shall cover:
(a) accounts settlement between Party B and Party A and any other enterprises subordinate to the Ministry of Railway;
(b) the provision of necessary assistance and convenience to Party B in its depositing of fixed-term and current deposits according to the negotiated preferential deposit interest agreed between Guangzhou Railway Settlement Center and banks; and
(c) the provision of financing conditions to Party B in accordance with the rules of Guangzhou Railway Settlement Center for allocation of internal funds.
7.2 Party A hereby undertakes to Party B that Guangzhou Railway Settlement Center under its management shall:
(a) ensure the safety and intactness of Party B's funds in its accounts opened
with Guanghzhou Railway Settlement Center;
(b) accounts settlement between Party B and Party A and any other enterprise subordinate to the Ministry of Railway shall be conducted in accordance with the relevant rules of the Ministry of Railway. With respect to any settlement service that is not expressly stipulated by the Ministry of Railway, Party B shall not be charged any settlement service fees therefor. With respect to any settlement service that falls into the category of paid services, the rate of fees charged therefor shall not be higher than the rate of fees for the same category of services applied by banks;
(c) the rate of interest on Party B's current and fixed-term deposits placed in the cooperative bank under Guangzhou Railway Settlement Center shall be no lower than the deposit interest rate for the same period as published by the People's Bank of China.
(d) In the case of any allocated funds obtained by Party B through the internally allocated funds Guangzhou Railway Settlement Center, the rate of fees for the occupancy of such allocated funds payable by Party B may not be higher than the loan interest rate for the same period as published by the People's Bank of China.
ARTICLE 8 HYGIENIC AND ANTI-EPIDEMIC AND CONVALESCENCE SERVICES
8.1 Party A hereby agrees to provide Party B, its employees and their family members with planned immunization, occupational disease prevention and treatment, environmental monitoring, disease control, recuperation and convalescence as well as other related services through its disease control centers, hygienic supervision institutions, convalescence and recuperation houses and other related entities. Party A must ensure
that it shall:
(a) make arrangements for Party B's employees and their family members to enjoy timely convalescences and recuperation;
(b) put diseases under strict control and provide technical hygienic services in a timely manner;
(c) monitor various hygienic practices, environmental protection, and prevention and treatment of occupational diseases and tuberculosis in accordance with law to make sure that all of such work is performed strictly in compliance with relevant laws and regulations; and
(d) give health education to Party B's employees.
8.2 Party B agrees to pay Party A's disease control centers and hygiene monitoring stations the fees incurred by Party A in Party A's provision of the hygienic and anti-epidemic services to Party B.
The fees incurred by Party A in its provision of the convalescence and recuperation services to Party B shall be calculated according to the following formula:
Fees payable by Party B for any given year for the convalescence and recuperation services = actual expenses incurred by Party A's convalescence and recuperation houses / number of persons convalescing or recuperating therein x number of Party B's personnel convalescing or recuperating therein (including the number of Party B's personnel convalescing or recuperating in the convalescence or recuperation houses of other railway administrations as an exchange).
8.3 Should Party B suffer from an unexpected accident or natural disaster and need relevant departments under Party A to provide additional hygienic and anti-epidemic services, Party A shall actively provide such services and Party B shall pay Party A the fees
for such services at the amount actually incurred by Party A.
ARTICLE 9 NURSERY AND KINDERGARTEN SERVICES
9.1 Party A agrees to provide Party B's employees with nursery and kindergarten services through its own nurseries and kindergartens and ensure that:
(a) children of Party B's employees can go to the nurseries and kindergartens as close to them as possible;
(b) quality of education and facilities in Party A's nurseries and kindergartens shall be no less than the same in the other local nurseries and kindergartens of the same level; and
(c) children of Party B's employees can enjoy the equal treatment in Party A's nurseries and kindergartens as other children therein.
9.2 Fees for nursery and kindergarten services provided to Party B by party A shall be calculated according to the following formula:
fees payable by Party B for nursery and kindergarten services = total expenses (costs) incurred by Party A's nurseries and kindergartens / number of all of the children therein x number of children of Party B's employees therein.
9.3 Any and all other miscellaneous expenses charged by nurseries and kindergartens against certain children therein for personal purposes in accordance with relevant local regulations shall be paid by Party B's individual employees whose children enter nurseries or kindergartens. Party A shall not charge Party B's employees any kind of so-called "education development fees" or any other fees of the same nature or for the same purpose.
ARTICLE 10 LIABILITIES FOR BREACH OF CONTRACT
10.1 Both parties shall perform their respective obligations hereunder voluntarily and in good faith. Should this Agreement be rendered unable to be performed either in whole or in part due to any breach of either party, the breaching party shall assume the liabilities for such breach. Should both parties breach this Agreement, each of the parties shall assume its respective liabilities in proportion to its own fault; provided that, the assumption of the liabilities for breach of contract shall not prejudice the right of the non-breaching party to request the breaching party to continue to perform its obligations.
10.2 In the event that any of Party A's wholly-owned or controlled subsidiaries or controlled entities who performs any of Party A's obligations hereunder pursuant to this Agreement or any supplementary agreement hereto commits a breach, such subsidiary or entity shall assume its respective liabilities for such breach and Party A shall assume joint liabilities therefor.
10.3 For any fees payable by Party B to Party A or any of its wholly-owned or controlled subsidiaries or controlled entities hereunder, invoices or receipts shall be issued to Party B in accordance with PRC tax laws or other relevant laws or regulations. Party A or any of its wholly-owned or controlled subsidiaries or controlled entities shall fully indemnify Party B against any loss arising from any penalty imposed upon or any claim brought against Party B due to the violation by any of Party A or its wholly-owned or controlled subsidiaries or controlled entities of any relevant stipulations.
ARTICLE 11 MISCELLANEOUS PROVISIONS
11.1 This Agreement shall come into effect upon:
(a) execution and affixture with the company seals by the legal or authorized representatives of both parties;
(b) Party B's carrying out of the resolution procedures for affiliated transactions, receipt of the approval to this Agreement from its independent shareholders or the exemption from Hong Kong Stock Exchange to the affiliated transactions involved herein in accordance with Party B's Articles of Association and the Listing Rules of the Hong Kong Stock Exchange;
(c) Party B's receipt of the approval to its proposed initial public offering of A shares inside the PRC and the entrance of all of the funds raised through such offering into Party B's account; and
(d) The effectiveness of the Railway Operating Assets Purchase Agreement By and Between Guangzhou Railway (Group) Company and Guangzhou Railway Group Yangcheng Railway Company and the consummation of the acquisition of assets and business contemplated thereunder.
11.2 This Agreement, upon becoming effective, shall supercede any and all of the agreements or arrangements in respect of the Comprehensive Services hereunder prior to the effective date hereof by and between Party A or any of Party A's wholly-owned or controlled subsidiaries or other controlled entities or companies (other than Guangzhou Railway Group Yangcheng Railway Company and Guangzhou Railway (Group) Guangshen Railway Enterprise Development Company) and Party B.
11.3 Provisions of this Agreement may be amended by the parties hereto after consultations if required by the changes to the actual circumstances, provided that such amendment shall be made in writing. Neither Party A nor Party B may add any provision to, delete any provision from or otherwise amendment this Agreement, unless by mutual agreement between them in writing.
11.4 Headings used herein are inserted only for purpose of convenience and shall
not impair the meaning of this Agreement or any provision herein.
11.5 Any documents referred to herein shall be incorporated into this Agreement by such reference.
11.6 In the event that either Party A or Party B intends to assign an of its rights or obligations hereunder to any of its wholly-owned or controlled subsidiaries or other controlled entities or companies, it shall notify the other party thereof, and the party who makes such assignment shall assume joint liabilities for the performance of this Agreement by the assignee. Except in such case, neither Party A nor Party B may assign any of its interests hereunder to any third party at its own discretion without prior written consent from the other party.
11.7 In case either party breaches any of its obligations hereunder and causes any economic loss to the other party, the other party shall have the right to request the breaching party to make a remedy within a specified time limit, perform relevant obligations pursuant hereto or make compensation for various losses, and may rescind any relevant portion of this Agreement or this Agreement in whole when necessary, except when such breach is caused by a force majeure event.
11.8 The execution, effect, interpretation, performance of, and resolution of any dispute arising from, this Agreement shall be governed and protected by the laws of the People's Republic of China. Any dispute arising from the performance of this Agreement shall be resolved between the parties through consultations. Should any dispute fail to be resolved through such consultations, such dispute shall be submitted to any competent court for resolution.
11.9 This Agreement shall be a framework agreement between Party A and Party B in respect of the matters regarding the Comprehensive Services. Party B and Party A or any of its wholly-owned or controlled subsidiaries or other controlled entities or companies
may execute supplementary agreements for any specific items of services on the basis of the principles set forth herein; provided that, such supplementary agreements may not materially conflict with this Agreement in respect of the major provisions and Party B shall perform its obligations for the disclosure of such supplementary agreements or obtain the required exemption in accordance with the provisions of the regulatory authorities in the jurisdictions in which Party B's securities are listed. Such supplementary agreements shall constitute an integral part of this Agreement and shall have the equal legal effect as this Agreement.
11.10 For purposes of this Agreement, "day" shall refer to a business day other than weekends and public holidays in the PRC.
11.11 This Agreement shall be executed in four copies with each of Party A and Party B to hold two.
PARTY A: GUANGZHOU RAILWAY (GROUP) COMPANY (company seal)
Legal or authorized representative: ____________________
PARTY B: GUANGZHOU RAILWAY (GROUP) COMPANY (company seal)
Legal or authorized representative: ____________________
EXHIBIT 4.4
TO ANNUAL REPORT
ON FORM 20-F
COMPREHENSIVE SERVICES AGREEMENT
BY AND BETWEEN
GUANGZHOU RAILWAY GROUP YANGCHENG RAILWAY COMPANY
AND
GUANGSHEN RAILWAY COMPANY LIMITED
DATED AS OF NOVEMBER 15, 2004
TABLE OF CONTENTS
Article 1 Scope of the Comprehensive Services............................3 Article 2 Undertakings and Warranties....................................4 Article 3 Security Services..............................................7 Article 4 Hygienic and Anti-Epidemic Services............................8 Article 5 Nursery and Kindergarten Services..............................9 Article 6 Contracted Train Conductor Services............................9 Article 7 Other Services................................................13 Article 8 Liabilities for Breach of Contract............................14 Article 9 Miscellaneous Provisions......................................15 |
This Comprehensive Services Agreement (this "Agreement") is entered into by and between:
(1) GUANGZHOU RAILWAY GROUP YANGCHENG RAILWAY COMPANY ("Party A")
Legal address: No. 28 Baiyun Road, Guangzhou; and
(2) GUANGSHEN RAILWAY COMPANY LIMITED ("Party B")
Legal address: No. 1052 Heping Road, Shenzhen
Whereas:
(1) Party A is a comprehensive rail services provider duly existing with the independent legal person capacity after its rail transportation assets and business are purchased by Party B, and has the requisite power for contract performance;
(2) Party B is a rail transportation operator and intends to retain Party A to provide it with various kinds of services related to Party B's business after its acquisition of Party A's rail transportation assets and business;
Now, therefore, in accordance with the Contract Law of the People's Republic of China (the "PRC") and other relevant PRC laws and regulations, Party A and Party B, after consultations and by adhering to the principle of equality and free will, hereby reach the following agreement regarding Party A's provision of the Comprehensive Services to Party B:
ARTICLE 1 SCOPE OF THE COMPREHENSIVE SERVICES
1.1 The services to be provided to Party B by Party A hereunder shall include security services, hygienic and anti-epidemic services, nursery and kindergarten services, property management, buildings maintenance and repair, and any other services that are consistent
with the purposes of this Agreement (hereinafter referred to as the "Comprehensive Services"). The property management services shall include the management of the employee dormitories and apartments.
1.2 For purposes of this Agreement, unless otherwise expressly provided herein, references to "Party A" shall include Party A itself, and any company, entity and department that are owned, controlled, managed or used by Party A during the term of this Agreement, including any institutions, equipment, facilities, premises, buildings and employees that are owned, controlled, managed or used by such company, entity or department.
ARTICLE 2 UNDERTAKINGS AND WARRANTIES
2.1 Party A agrees to provide the Comprehensive Services to Party B pursuant to this Agreement and hereby undertakes and warrants to Party B as follows:
2.1.1 Party A shall, and shall cause the companies, entities and departments that are owned, controlled, managed or used by it to, provide the Comprehensive Services to Party B pursuant to the provisions contained herein.
2.1.2 Unless otherwise provided herein, Party A shall have complete and unrestricted ownership, control, management rights and use rights to any entity subordinate to it; and that its rights, control, management and use, or the size, scope, quality or quantity of any of such entity shall not be reduced during the term hereof.
2.1.3 The quality, quantity and contents of any Comprehensive Services to be provided hereunder shall not be inferior to the standard of the same type of services provided by Party A within its own organization prior
to the date hereof, or provided to any third party by Party A after the effectiveness hereof.
2.1.4 In the provision of the Comprehensive Services hereunder, Party A may not discriminate against Party B or deliberately make things difficult for Party B to do or otherwise unfairly treat Party B, and shall provide the Comprehensive Services to Party B as a top priority and at the most competitive quality and price if practicable.
2.1.5 All fees received from Party B as specified herein for the Comprehensive Services provided hereunder shall not be used for any purpose other than the benefit of the entities that have actually provided the Comprehensive Services hereunder.
2.2 Party B agrees to receive the Comprehensive Services from Party A pursuant to this Agreement and hereby undertakes and warrants to Party A as follows:
2.2.1 Party B shall pay Party A the agreed fees for the Comprehensive Services provided by Party A hereunder.
2.2.2 Subject to any contrary provisions herein, any and all of the service fees payable by Party B for each year shall be prepaid by Party B in 12 installments with one installment of an agreed amount for each month. After the effectiveness of this Agreement, the installment of the service fees for each month shall be paid to an account designated by Party A within the first five days (which shall be extended accordingly if any holiday falls within such five days) of such month. Where any portion of any installment becomes overdue, delay payment interest shall accrue thereon at a rate of 0.03% for each day of delay.
2.2.3 In case Party B provides any services to Party A and shall receive any fees from Party A therefor, the above undertakings and warranties of one party to the other in respect of payment shall be equally applicable to both parties.
2.3 Standard for Settlement of Service Fees
2.3.1 The rate of fees for hygienic and anti-epidemic services and security services shall remain unchanged during the term hereof and the settlement base amount of such fees shall be determined according to the following formula:
fees for hygienic and anti-epidemic services and security services for any given year = {[Party B's converted turnover volume in such given year / (arithmetic average of Party B's converted turnover volumes during the period from 2002 to 2004)] x 50% + [Party B's operating revenue during such given year / (arithmetic average of Party B's operating revenues during the period from 2002 to 2004)] x 50%} x Party A's expenses for the provision of the hygienic and anti-epidemic services and security services in 2004,
whereof, the "converted turnover volume" refers to the volume of passengers and freight accomplished by Party B calculated on the basis of the weight and the mileage of the freight carried by Party B and the number and mileage of passengers carried by Party B.
Party B's converted turnover volume and operating revenues as set forth above shall be calculated on the basis of Party B's business model after its acquisition of Party A's rail transportation assets and business.
2.3.2 Fees for nursery and kindergarten services provided to Party B by Party A shall be calculated according to the following formula:
fees payable by Party B for nursery and kindergarten services = total expenses (costs) incurred by Party A's nurseries and kindergartens / number of all of the children therein x number of children of Party B's employees therein.
2.3.3 Fees payable to Party A for its provision of the property management and buildings maintenance and repair services shall be equal to the complete costs of such item of services x (1+8% rate of profit).
2.4 In case of any change to the above scope of the Comprehensive Services, both parties agree to determine the rate of fees for any item of services on the basis of the above principles.
2.5 References to "expenses", "complete costs" or "costs" shall mean costs inclusive of taxes and be composed of the "expenses" or "costs" set forth in the audited financial statements and the taxes and charges payable by the service provider for the service fees received by it. Such taxes and charges shall include business tax at a rate of 5%, urban construction tax at a rate of 7%, education surcharge at a rate of 3% and anti-flood dam building charge at a rate of 1.3-0/00.
The party receiving services may, subject to a 30-day's prior notice to the party providing services, in conjunction with the party providing services, retain an accounting firm to audit the said costs and expenses, and the result of such audit shall be the conclusive evidence for the determination of the said costs and expenses.
ARTICLE 3 SECURITY SERVICES
3.1 Party A agrees to provide Party B with security services through those
railway public security departments, railway procuratorates and railway courts subordinate to Party A, including but not limited to the duty of guarding, railway stations and trains during Party B's daily operation and spring-festival operation, maintaining the public order and security when passengers buy tickets, board or get off trains, enter or leave railway stations and when owners of goods receive, consign or transport the goods, following up and investigating and handling such offenses as striking trains with stones, placing obstacles on tracks and stealing railway materials, assisting Party B in handling such disasters and accidents as rail line bodily injury or death and traffic accidents caused by motor vehicles, supervising railway fire-fighting work and preventing fire and explosion.
3.2 Party A shall ensure that those railway public security departments, railway procuratorates and railway courts subordinate to it shall diligently perform the services set forth in 3.1 above for Party B to protect Party B's legal interests.
ARTICLE 4 HYGIENIC AND ANTI-EPIDEMIC SERVICES
4.1 Party A hereby agrees to provide Party B, its employees and their family members with planned immunization, occupational disease prevention and treatment, environmental monitoring, disease control, recuperation and convalescence as well as other related services through its hygienic and anti-epidemic institutions and entities. Party A must ensure that it shall:
(a) put diseases under strict control and provide technical hygienic services in a timely manner;
(b) monitor various hygienic practices, environmental protection, and prevention and treatment of occupational diseases and tuberculosis in accordance with law to make sure that all of such work is performed strictly in compliance with relevant laws and regulations; and
(c) give health education to Party B's employees.
4.2 Should Party B suffer from an unexpected accident or natural disaster and need relevant departments under Party A to provide additional hygienic and anti-epidemic services, Party A shall actively provide such services and Party B shall pay Party A the fees for such services at the amount actually incurred by Party A.
ARTICLE 5 NURSERY AND KINDERGARTEN SERVICES
5.1 Party A agrees to provide Party B's employees with nursery and kindergarten services through its own nurseries and kindergartens and ensure that:
(a) children of Party B's employees can go to the nurseries and kindergartens as close to them as possible;
(b) quality of education and facilities in Party A's nurseries and kindergartens shall be no inferior than that in the other local nurseries and kindergartens of the same level; and
(c) children of Party B's employees can enjoy the equal treatment in Party A's nurseries and kindergartens as other children therein.
5.2 Any and all other miscellaneous expenses charged by nurseries and kindergartens against certain children therein for personal purposes in accordance with relevant local regulations shall be paid by Party B's individual employees whose children enter nurseries or kindergartens. Party A shall not charge Party B's employees any kind of so-called "education development fees" or any other fees of the same nature or for the same purpose.
ARTICLE 6 CONTRACTED TRAIN CONDUCTOR SERVICES
6.1 Party B agrees that Party A's subsidiary companies, Guangdong Railway Youth Travel Service Co., Ltd. ("GRYTS") and Shaoguan Labor Service Company
("SGLS"), shall contract to provide train conductor services to portion of the passenger trains operated by Party B. The specific train runs contracted to GRYTS and SGLS and the related contracting fees shall be determined by and between such Party B and GRYTS and SGLS on a case-by-case basis.
6.2 The scope of the conductor services contracted to GRYTS and SGLS shall include but not limited to the sale of tickets for, and operation of buffet business and sale of train commodities related to the relevant contracted passenger train runs.
6.3 Revenues received by GRYTS and SGLS from their sale and make-up sale of tickets for the relevant contracted passenger train runs shall be vested in Party B; revenues received by GRYTS and SGLS from their sale of commodities and operation of buffet business on trains shall be vested in GRYTS and SGLS. The expenses for the use and maintenance and repair of the contracted trains and the train expenses stipulated by the Ministry of Railway for such trains shall be paid by Party B. The train conductor services for the contracted trains shall be performed by GRYTS and SGLS and the salary of the conductors and any and all of the expenses incurred in the provision of the contracted conductor services for the contracted trains shall be paid by GRYTS and SGLS; provided that, liabilities for bodily injury or death of any passenger on any of the contracted trains not attributable to GRYTS or SGLS, shall be assumed by Party B.
6.4 Party A hereby warrants that it will cause GRYTS and SGLS to achieve their respective contracted ticket sales revenue targets on the basis of safe transportation and observance of railway code of ethics. The contracted ticket sales revenue targets shall be determined by Party B and GRYTS and SGLS subject to mutual agreement on the basis of the specific train runs contracted to GRYTS and SGLS. In case the actual ticket sales revenues made by GRYTS or SGLS exceed its respective contracted ticket sales revenue target, the payment to GRYTS or SGLS for its provision of the contracted conductor
services hereunder shall be increased in proportion to the amount of the actual ticket sales revenue made by it in excess of its respective ticket sales revenue target. On the contrary, in case the actual ticket sales revenues made by GRYTS or SGLS fail to reach its respective contracted ticket sales revenue target, the payment to GRYTS or SGLS for its provision of the contracted conductor services hereunder shall be reduced in proportion to the difference between the actual ticket sales revenue made by it and its respective ticket sales revenue target. In case a force majeure event occurs during the term of the operation by GRYTS and SGLS of the contracted conductor services and the ticket sales revenues for the contracted trains are materially and adversely affected thereby, the ticket sales revenue targets may be reviewed and re-determined by and between Party B and GRYTS and SGLS subject to mutual agreement between them after consultations.
6.5 For the contracted conductor services and related train services provided by GRYTS and SGLS, each of GRYTS and SGLS shall receive from Party B service fees and a share of the revenue from the make-up sale of tickets. The fees for the provision of the conductor services and related services contracted to GRYTS and SGLS hereunder shall be calculated on the basis of the conductor services/1000 train-kilometer (excluding the power generation cars), and shall be RMB 800/1000 train-kilometer for each passenger train conductor for the air-conditioned cars and RMB 400/1000 train-kilometer for each passenger train conductor for the non-air-conditioned cars. GRYTS and SGLS shall each be entitled to receive 30% of the revenue from its make-up sale of tickets as its share. The above fees shall be settled by the quarter and Party B and GRYTS and SGLS shall confirm the settlement amount within 15 days as of the end of each quarter. Upon confirmation of the settlement amount, Party B shall pay the same to GRYTS or SGLS (as the case may be) within 10 days as of its receipt of the formal invoice from GRYTS or SGLS (as the case may be).
6.6 Fees involved herein shall not be included in the settlement fees set forth in Clause 2.3.
6.7 GRYTS and SGLS shall have use rights only and not ownership to the trains contracted to them. Neither of them may sublease or transfer any of the trains contracted to them, or add or remove any part from any of such trains without prior consent from Party B.
6.8 Neither of GRYTS and SGLS may use any of the trains contracted to them for illegal operation and the scope of business activities conducted by each of GRYTS and SGLS may not exceed their respective scope of business set forth on their business license or the scope of the business contracted to it hereunder.
6.9 Both GRYTS and SGLS shall protect the facilities of the trains contracted to them and shall be responsible for maintaining the facilities of the trains contracted to them safe and intact; provided that GRYTS and SGLS shall not be held liable if any train is substantially damaged or destroyed due to the occurrence of a force maejure event. In case any contracted train is substantially damaged or destroyed due to the occurrence of a force majeure event, either GRYTS or SGLS (as the case may be) shall promptly notify Party B thereof. In case of the failure of GRYTS or SGLS (as the case may be) to give such notice and any economic loss is caused thereby, such economic loss shall be assumed by GRYTS and SGLS (as the case may be).
6.10 GRYTS and SGLS shall be liable for any accident relating to transportation safety and any incident relating to railway code of ethics occurring to or in any contracted train and any loss resulted therefrom during the term of the operation by GRYTS and SGLS of the contracted business hereunder, unless the Ministry of Railway determines that such accident and incident shall not be attributable to GRYTS or SGLS and the persons liable for such accident and incident have been identified. In case of any such accident or
incident, GRYTS and SGLS shall assist Party B in bringing a claim against the persons held liable for therefor.
ARTICLE 7 OTHER SERVICES
7.1 Party B hereby retains Party A to provide property management and related services to Party B's bachelor dormitories and other housing including but not limited to housing repair, maintenance and management, and related daily water and electrical power supply, greening, cleaning, fire-prevention, theft-prevention, road maintenance and public lighting.
7.2 The housing property management and related services provided by Party A to Party B's employees shall be at least of the same level (same management fees, same service standards and opportunities) as the same services provided by Party B to employees of Guangzhou Railway (Group) Company and other group companies.
7.3 Party B may, based on its actual needs, retain Party A to provide it with building repair and maintenance services. Such repair and maintenance services must comply with the regulatory standards set by the State or the relevant industry and Party B's own technical and quality requirements.
7.4 Subject to mutual agreement between Party A and Party B after consultations, Party A and Party B may execute separate lease contracts regarding Party A's lease of property such as office buildings and residential buildings to Party B; provided that the rate of rental for such lease shall be no higher than the prevailing market price or the rate of rental offered to any third party by Party A.
7.5 Any and all of the house purchase contracts executed by Party A with any employees transferred from Party A to Party B as a result of the assets and business acquisition by Party B, shall be continued to be performed by Party A, including both rights and obligations under such contracts.
7.6 Any of Party A's existing land planned for residential building
construction for which Party A has executed a contract shall be vested in Party
A. After the completion of the building on such land, the building shall first
be divided between Party A and Party B in proportion to the number of employees
of each party residing in the area where the building is located. Each of Party
A and Party B shall then allocate among its own employees the portion of houses
in such building distributed to it. The difference between the expenses required
by the construction of such building and the proceeds from the sale of houses in
such building to the employees of Party A and Party B pursuant to relevant
regulations of the local government, shall be apportioned between Party A and
Party B according to the number of houses distributed to it.
7.7 To the extent that both the price and quality are appropriate, Party B will purchase steel crossties from Party A's subsidiary company, Lechang Anjie Rail Crossties and Tracks Co., Ltd., based on Party B's business needs and such transactions shall be conducted on the basis of the market price or industrial guiding price.
7.8 Any and all of the fees paid to Party A or any of Party A's subsidiary companies pursuant to clauses 7.4, 7.6 or 7.7 shall not be included in the settlement fees set forth in Clause 2.3 hereinabove.
ARTICLE 8 LIABILITIES FOR BREACH OF CONTRACT
8.1 Both parties shall perform their respective obligations hereunder voluntarily and in good faith. Should this Agreement be rendered unable to be performed either in whole or in part due to any breach of either party, the breaching party shall assume the liabilities for such breach. Should both parties breach this Agreement, each of the parties shall assume its respective liabilities in proportion to its own fault; provided that, the assumption of the liabilities for breach of contract shall not prejudice the right of the non-breaching party to request the breaching party to continue to perform its obligations.
8.2 In the event that any of Party A's wholly-owned or controlled subsidiaries or controlled entities who performs any of Party A's obligations hereunder pursuant to this Agreement or any supplementary agreement hereto commits a breach, such subsidiary or entity shall assume its respective liabilities for such breach and Party A shall assume joint liabilities therefor.
8.3 For any fees payable by Party B to Party A or any of its wholly-owned or controlled subsidiaries or other controlled entities hereunder, invoices or receipts shall be issued to Party B in accordance with PRC tax laws or other relevant laws or regulations. Party A or any of its wholly-owned or controlled subsidiaries or other controlled entities shall fully indemnify Party B against any loss arising from any penalty imposed upon or any claim brought against Party B due to the violation by any of Party A or its wholly-owned or controlled subsidiaries or controlled entities of any relevant stipulations.
ARTICLE 9 MISCELLANEOUS PROVISIONS
9.1 This Agreement shall come into effect upon:
9.1.1 execution and affixture with the company seals by the legal or authorized representatives of both parties;
9.1.2 Party B's carrying out of the resolution procedures for affiliated transactions, receipt of the approval to this Agreement from its independent shareholders or the exemption from Hong Kong Stock Exchange to the affiliated transactions involved herein in accordance with Party B's Articles of Association and the Listing Rules of the Hong Kong Stock Exchange;
9.1.3 Party B's receipt of the approval to its proposed initial public offering of A shares inside the PRC and the entrance of all of the funds raised
through such offering into Party B's account; and
9.1.4 The effectiveness of the Railway Operating Assets Purchase Agreement By and Between Guangzhou Railway (Group) Company and Guangzhou Railway Group Yangcheng Railway Company and the consummation of the acquisition of assets and business contemplated thereunder.
This Agreement, upon becoming effective, shall supercede any and all of the agreements or arrangements by and between Party A and Party B in respect of the Comprehensive Services hereunder prior to the effective date hereof.
9.2 Headings used herein are inserted only for purpose of convenience and shall not impair the meaning of this Agreement or any provision herein.
9.3 Neither Party A nor Party B may assign any of its interests hereunder to any third party at its own discretion without prior written consent from the other party. This Agreement shall be binding upon the permitted assignees of both Party A and Party B and the successors of the rights and obligations of each of Party A and Party B resulted from the division, consolidation or any other kind of legal person change of each of Party A and Party B. For purposes of this Article, the companies and entities controlled, managed or otherwise under the regulation by either Party A or Party B shall not be considered a "third party".
9.4 In case either party breaches any of its obligations hereunder and causes any economic loss to the other party, the other party shall have the right to request the breaching party to provide a remedy within a specified time limit, continue to perform this Agreement or make compensation for various losses, and may rescind any relevant portion of this Agreement or this Agreement in whole when necessary.
9.5 The execution, effect, interpretation, performance of, and resolution of any dispute arising from, this Agreement shall be governed and protected by the laws of the People's Republic of China.
9.6 Where after the effectiveness of this Agreement, the economic interests of either Party A or Party B are materially adversely affected by the enactment of any new law, regulation or order, or any amendment made to any existing law, regulation or order, or any new interpretation of any existing law, regulation or order, Party A and Party B shall immediately conduct negotiations on any necessary amendment to this Agreement to ensure that each party will receive the originally intended benefits hereunder. Where either party's interests are still subject to substantial damage even after such amendment to this Agreement, this Agreement may be terminated by agreement between Party A and Party B after consultations.
9.7 Party A and Party B may execute supplementary agreements for any specific items of services on the basis of the principles set forth herein. Such supplementary agreements shall constitute an integral part of this Agreement and shall have the equal legal effect as this Agreement. In case of any discrepancy between any of such supplementary agreements and this Agreement, this Agreement shall prevail, unless otherwise provided in such supplementary agreement.
9.8 This Agreement shall be valid for three years commencing from the effective date hereof.
9.9 For purposes of this Agreement, "day" shall refer to a business day other than weekends and public holidays in the PRC.
9.10 This Agreement shall be executed in five copies with each of Party A and Party B to hold two and one copy to be submitted to Guangzhou Railway (Group) Company. Each of the copies shall have equal legal effect.
PARTY A: (company seal)
Legal or authorized representative: ____________________
PARTY B: (company seal)
Legal or authorized representative: ____________________
EXHIBIT 7.1
TO ANNUAL REPORT
ON FORM 20-F
STATEMENT EXPLAINING HOW CERTAIN RATIOS WERE CALCULATED IN ANNUAL REPORT
1. The operating ratio of Guangshen Railway is the percentage of its total railway operating expenses in 2004 (in the amount of RMB2,241.8 million, as opposed to RMB1,755.9 million in 2003) to Guangshen Railway's total railway revenues in 2004 (in the amount of RMB2,871.5 million, as opposed to RMB2,316.6 million in 2003).
2. Guangshen Railway's total railway operating income ratio is 1 minus the operating ratio.
3. Guangshen Railway's overall operating income ratio is 1 minus the percentage of its operating costs in 2004 (in the amount of RMB2,408.0 million, as opposed to RMB1,905.5 million in 2003) to the business revenues in 2004 (in the amount of RMB3,038.1 million, as opposed to RMB2,468.2 million in 2003).
EXHIBIT 8.1
TO ANNUAL REPORT
ON FORM 20-F
LIST OF SIGNIFICANT SUBSIDIARIES OF GUANGSHEN RAILWAY COMPANY LIMITED
The following table lists information concerning the significant subsidiaries of Guangshen Railway Company Limited as of December 31, 2004:
COUNTRY OF PERCENTAGE OF INTEREST
NAME INCORPORATION HELD BY GUANGSHEN RAILWAY
---- ------------- -------------------------
DIRECTLY HELD BY THE COMPANY
Guangzhou East Station Dongqun Trade and Commerce Service PRC 100%
Company
Shenzhen Fu Yuan Enterprise Development Company PRC 100%
Shenzhen Guangshen Railway Civil Engineering Company PRC 100%
Shenzhen Guangshen Railway Travel Service Ltd. PRC 100%
Shenzhen Jian Kai Trade Company PRC 100%
Shenzhen Jing Ming Industrial & Commercial Company Limited PRC 100%
Shenzhen Railway Station Travel Service Company(i) PRC 75%
Shenzhen Longgang Pinghu Qun Yi Railway Store Loading and
Unloading Company PRC 55%
Dongguan Changsheng Enterprise Company PRC 51%
Shenzhen Guangshen Railway Electric Section Service Limited PRC 100%
Shenzhen Railway Station Passenger Services Company Limited PRC 100%
INDIRECTLY HELD BY THE COMPANY
Shenzhen Nantie Construction Supervision Company PRC 100%
Shenzhen Guangshen Railway Economic and Trade Enterprise
Company PRC 100%
Shenzhen Railway Property Management Company Limited PRC 100%
Shenzhen Yuezheng Enterprise Company Limited PRC 100%
Shenzhen Road Multi-modal Transportation Company Limited PRC 60%
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EXHIBIT 12.1
TO ANNUAL REPORT
ON FORM 20-F
CERTIFICATION OF CO-PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Wu Junguang, co-principal executive officer of Guangshen Railway Company Limited, or Guangshen, certify that:
1. I have reviewed this annual report on Form 20-F of Guangshen;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Guangshen as of, and for, the periods presented in this annual report;
4. Guangshen's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Guangshen and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. Guangshen's other certifying officers and I have disclosed, based on our most recent evaluation, to Guangshen's auditors and the audit committee of Guangshen's board of directors (or persons performing the equivalent function):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting; and
6. Guangshen's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 27, 2005 By: /s/ Wu Junguang
----------------------------------
Wu Junguang
Chairman of the Board of Directors
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CERTIFICATION OF CO-PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Li Kelie, co-principal executive officer of Guangshen Railway Company Limited, or Guangshen, certify that:
1. I have reviewed this annual report on Form 20-F of Guangshen;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Guangshen as of, and for, the periods presented in this annual report;
4. Guangshen's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Guangshen and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. Guangshen's other certifying officers and I have disclosed, based on our most recent evaluation, to Guangshen's auditors and the audit committee of Guangshen's board of directors (or persons performing the equivalent function):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting; and
6. Guangshen's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 27, 2005 By: /s/ Li Kelie
----------------
Li Kelie
General Manager
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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Yao Xiaocong, principal financial officer of Guangshen Railway Company Limited, or Guangshen, certify that:
1. I have reviewed this annual report on Form 20-F of Guangshen;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Guangshen as of, and for, the periods presented in this annual report;
4. Guangshen's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Guangshen and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. Guangshen's other certifying officers and I have disclosed, based on our most recent evaluation, to Guangshen's auditors and the audit committee of Guangshen's board of directors (or persons performing the equivalent function):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting; and
6. Guangshen's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 27, 2005 By: /s/ Yao Xiaocong
-----------------
Yao Xiaocong
Chief Accountant
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EXHIBIT 13.1
TO ANNUAL REPORT
ON FORM 20-F
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Guangshen Railway Company Limited, or the Company, on Form 20-F for the period ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof, or the Report, the undersigned hereby certify that to the best of our knowledge:
1. the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 27, 2005 By: /s/ Wu Junguang
----------------------------------
Wu Junguang
Chairman of the Board of Directors
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A signed original of this written statement required by Section 906 has been provided to Guangshen Railway Company Limited and will be retained by Guangshen Railway Company Limited and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Guangshen Railway Company Limited, or the Company, on Form 20-F for the period ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof, or the Report, the undersigned hereby certify that to the best of our knowledge:
1. the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 27, 2005 By: /s/ Li Kelie
----------------
Li Kelie
General Manager
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A signed original of this written statement required by Section 906 has been provided to Guangshen Railway Company Limited and will be retained by Guangshen Railway Company Limited and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Guangshen Railway Company Limited, or the Company, on Form 20-F for the period ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof, or the Report, the undersigned hereby certify that to the best of our knowledge:
1. the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 27, 2005 By: /s/ Yao Xiaocong
----------------
Yao Xiaocong
Chief Accountant
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A signed original of this written statement required by Section 906 has been provided to Guangshen Railway Company Limited and will be retained by Guangshen Railway Company Limited and furnished to the Securities and Exchange Commission or its staff upon request.