China Yuchai International Limited
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF
1934 |
OR
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number 1-13522
China Yuchai International Limited
(Exact Name of Registrant as Specified in Its Charter)
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N/A
(Translation of Registrants Name Into English)
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Bermuda
(Jurisdiction of Incorporation or Organization) |
16 Raffles Quay #26-00
Hong Leong Building
Singapore 048581
65-6220-8411
(Address and Telephone Number of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange
on Which Registered |
Common Stock, par value US$0.10 per share
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The New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report.
As of December 31, 2005, 37,267,673 shares of common stock, par value US$0.10 per share, and
one special share, par value US$0.10, were issued and outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes o No þ
Note Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under
those Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 þ
If this report is an annual report, indicate by check mark if the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
TABLE OF CONTENTS
CHINA YUCHAI INTERNATIONAL LIMITED
i
Certain Definitions and Supplemental Information
All references to China, PRC and the State in this Annual Report are references to the
Peoples Republic of China. Unless otherwise specified, all references in this Annual Report to
U.S. dollars, dollars, US$ or $ are to United States dollars; all references to Renminbi
or Rmb are to Renminbi, the legal tender currency of China; and all references to S$ are to
Singapore dollars, the legal tender of Singapore. Unless otherwise specified, translation of
amounts from Renminbi to U.S. dollars for the convenience of the reader has been made in this
Annual Report at the rate of Rmb 8.0702 = US$1.00, the rate quoted by the Peoples Bank of China on
December 30, 2005. No representation is made that the Renminbi amounts or Singapore dollar amounts
could have been, or could be, converted into U.S. dollars at rates specified herein or any other
rate.
The consolidated financial statements of China Yuchai International Limited, its subsidiaries
and affiliates are presented in Renminbi. All consolidated financial statements of the Company
presented herein have been prepared in conformity with accounting principles generally accepted in
the United States of America (US GAAP). Totals presented in this Annual Report may not correctly
total due to rounding of numbers.
As used in this Annual Report, unless the context otherwise requires, the terms the Company,
CYI, we, us, our and our company refer to China Yuchai International Limited, its
subsidiaries and affiliates. All references herein to Yuchai are to Guangxi Yuchai Machinery
Company Limited, its consolidated subsidiaries and affiliates and, prior to its incorporation in July 1992, to
the machinery business of its predecessor, Guangxi Yulin Diesel Engine Factory (Yulin Diesel),
which was founded in 1951 and became a state-owned enterprise in 1959. In the restructuring of
Yulin Diesel in July 1992, its other businesses were transferred to Guangxi Yuchai Machinery
Holdings Company, also sometimes referred to as Guangxi Yuchai Machinery Group Company Limited (the
State Holding Company), which became a shareholder of Yuchai. In addition, TCL refers to
Thakral Corporation Ltd and LKN refers to LKN-Primefield Limited, each of which are minority
investees of the Company.
As of December 31, 2005, 37,267,673 shares of common stock, par value US$0.10 per share of the
Company (Common Stock), and one special share, par value US$0.10, of the Company were issued and
outstanding. The weighted average common shares outstanding during the year is 36,459,635. Unless
otherwise indicated herein, all percentage share amounts with respect to the Company are based on
the weighted average number of shares of 36,459,635 for 2005.
Cautionary Statements with Respect to Forward-Looking Statements
The Company wishes to caution readers that the forward-looking statements contained in this
Annual Report, which include all statements which, at the time made, address future results of
operations, are based upon the Companys interpretation of factors affecting the business and
operations of the Company. The Company believes the following
important factors, among others, in some cases have affected, and in the future could affect, the
Companys actual consolidated results and could cause the Companys actual consolidated results for
2006, and beyond, to differ materially from those described in any forward-looking statements made
by, or on behalf of, the Company:
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political, economic and social conditions in China, including the Chinese governments
specific policies with respect to foreign investment, economic growth, inflation and the
availability of credit, particularly to the extent such current or future conditions and
policies affect the truck and diesel engine industries and markets in China, the Companys
diesel engine customers, the demand, sales volume and sales prices for the Companys diesel
engines and the Companys levels of accounts receivable; |
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the effects of competition in the diesel engine market on the demand, sales volume and
sales prices for the Companys diesel engines; |
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the Companys ability to collect and control its levels of accounts receivable; |
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the Companys dependence on the Dongfeng Automobile Company and other major diesel truck
manufacturers controlled by or affiliated with the Dongfeng Automobile Company; |
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the Companys ability to successfully manufacture and sell its 4108, 4110, 4110Q, 4110ZQ,
4112, 6105, 6108, 6112, 6L/6M (formerly referred to as 6113) heavy-duty diesel engines and
any new products; |
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the Companys ability to finance its working capital and capital expenditure
requirements, including obtaining any required external debt or other financing; |
1
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the effects of inflation on the Companys financial condition and results of operations,
including the effects on Yuchais costs of raw materials and parts and labor costs; |
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the Companys ability to successfully implement the reorganization agreement which it
entered into with Yuchai and Coomber Investments Limited (Coomber) on April 7, 2005 (the
Reorganization Agreement), as amended in December 2005, relating to the implementation of
the restructuring contemplated in the earlier agreement dated July 19, 2003 between the
Company and Yuchai with respect to the Companys investment in Yuchai (the July 2003
Agreement); |
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the Companys ability to control Yuchai and consolidate Yuchais financial results; |
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the effects of Chinas political, economic and social conditions on the Companys
financial condition, results of operations, business or prospects; |
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the effects of uncertainties in the Chinese legal system, which could limit the legal
protections available to foreign investors, including with respect to the enforcement of
foreign judgments in China; and |
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the impact on the Companys business and results of operations as a result of Chinas
membership with the World Trade Organization (WTO). |
Incorporation by Reference
This Annual Report on Form 20-F shall be deemed to be incorporated by reference in the
Prospectus, dated March 24, 2004, included in the Registration Statement (File No. 333-111106) on
Form F-3 of the Company and to be a part thereof from the date on which this Annual Report is
filed, to the extent it is not superseded by documents or reports subsequently filed or furnished.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not Applicable.
ITEM 3. KEY INFORMATION.
Selected Financial Data
The selected financial information set forth below should be read in conjunction with, and is
qualified in its entirety by reference to, Item 5. Operating and Financial Review and Prospects
and the Companys audited consolidated financial statements and the notes thereto
included in this Annual Report. The consolidated
financial statements of the Company are prepared in conformity with US GAAP.
The Companys main operating asset is its 76.4% ownership interest in Yuchai. As a result, the
Companys financial condition and results of operations depend primarily upon Yuchais financial
condition and results of operations, and the implementation of the Reorganization Agreement with
respect to the restructuring of the Companys investment in Yuchai, described elsewhere herein (see
Item 4. Information on the Company Recent Developments and Item 8. Financial Information
Legal Proceedings).
On February 7, 2005, the board of directors of the Company announced its approval of the
implementation of a business expansion and diversification plan by the Company. Pursuant to this
plan, the Company has looked for new business opportunities to seek to reduce its financial
dependence on Yuchai, which has historically been the Companys main operating asset.
In March 2005, the Company completed an acquisition of approximately 14.99% of TCL, a
China-focused electronics distribution company, for approximately S$30.9 million (approximately
$18.9 million, based on an exchange rate of S$1.637 to US$1.00). The Company subsequently
increased its minority stake in TCL, and as of December 31, 2005 the Companys shareholding in TCL
was
2
15.99%. The Company has also recently invested in LKN, a company primarily engaged in the
business of investment holding and hospitality-related businesses, pursuant to the Companys
business expansion and diversification plan.
In February 2006, the Company acquired debt and equity in LKN for an aggregate consideration
of approximately S$131.6 million (approximately $81.2 million, based on an exchange rate of S$1.62
to US$1.00), divided into 191,413,465 ordinary shares representing approximately 29.13% of the
total number of ordinary shares in issue; 123,010,555 redeemable convertible preference shares in
the capital of LKN; and approximately S$129.4 million
(approximately US$79.9 million, based on an exchange rate of
S$1.62 to US$1.00) in principal
amount of outstanding secured non-convertible bonds issued by LKN. For further information on the
TCL and LKN minority investments, see Item 4. Information on the Company History and Development
Minority Investments.
The selected balance sheet data as of December 31, 2004 and 2005 and the statement of income
data and cash flow statement data of the Company set forth below for the years ended December 31,
2003, 2004 and 2005 are derived from the consolidated financial statements of the Company included
in this Annual Report, which have been audited by KPMG, Independent Registered Public Accounting
Firm (the Consolidated Financial Statements). The selected balance sheet data of the Company set
forth below as of December 31, 2001, 2002 and 2003 and the statement of income data and cash flow
statement data for the years ended December 31, 2001 and 2002 are derived from the consolidated
financial statements of the Company, which have been audited by KPMG, but which are not included in
this Annual Report.
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As of and for the Year Ended December 31, |
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2001 |
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2002 |
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2003 |
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2004 |
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2005 |
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2005 |
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Rmb |
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Rmb |
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US$(3) |
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(in thousands) |
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Statement of Income Data: |
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Revenues, net |
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1,783,329 |
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3,513,047 |
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4,569,950 |
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5,582,095 |
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5,829,431 |
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722,340 |
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Gross profit |
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599,926 |
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1,141,967 |
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1,377,156 |
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1,575,209 |
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1,302,385 |
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161,382 |
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Research and development costs |
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(44,721 |
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(75,532 |
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(94,594 |
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(136,960 |
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(123,876 |
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(15,350 |
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Provision for uncollectible loans to a related party |
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(205,000 |
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(25,402 |
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Operating income |
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295,115 |
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640,307 |
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721,411 |
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779,929 |
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168,692 |
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20,903 |
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Income before income taxes and minority
interests |
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269,189 |
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625,450 |
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696,906 |
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753,854 |
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117,242 |
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14,528 |
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Income tax benefit/(expense) |
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63,584 |
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(83,242 |
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(112,924 |
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(105,165 |
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(20,875 |
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(2,587 |
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Income before minority interests |
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332,773 |
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542,208 |
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583,982 |
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648,689 |
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96,367 |
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11,941 |
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Minority interests in income of consolidated
subsidiaries |
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(82,386 |
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(129,775 |
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(145,800 |
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(157,292 |
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(27,880 |
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(3,455 |
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Net income |
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250,387 |
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412,433 |
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438,182 |
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491,397 |
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68,487 |
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8,486 |
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Basic and diluted earnings per common share |
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7.09 |
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11.67 |
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12.40 |
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13.90 |
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1.88 |
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0.23 |
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Weighted average number of shares |
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35,340 |
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35,340 |
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35,340 |
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35,340 |
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36,460 |
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36,460 |
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Balance Sheet Data (at year end): |
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Working capital(1) |
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1,100,462 |
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1,340,832 |
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1,031,830 |
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1,402,226 |
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959,401 |
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118,882 |
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Goodwill |
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212,636 |
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212,636 |
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212,636 |
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212,636 |
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212,636 |
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26,348 |
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Total assets |
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3,262,868 |
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3,985,459 |
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4,033,632 |
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5,384,248 |
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6,613,785 |
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819,532 |
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3
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As of and for the Year Ended December 31, |
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2001 |
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2002 |
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2003 |
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2004 |
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2005 |
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2005 |
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Rmb |
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Rmb |
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Rmb |
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Rmb |
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Rmb |
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US$(3) |
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(in thousands) |
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Long-term
bank loans, excluding current instalments |
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180,000 |
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50,000 |
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100,000 |
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50,000 |
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6,196 |
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Minority interests |
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420,545 |
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487,491 |
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544,526 |
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724,311 |
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685,514 |
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84,944 |
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Common stock |
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30,349 |
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30,349 |
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30,349 |
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30,349 |
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31,945 |
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3,958 |
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Stockholders equity |
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1,805,045 |
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2,161,903 |
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1,991,687 |
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2,483,084 |
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2,667,041 |
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330,480 |
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Statement of Cash Flows Data: |
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Net cash provided by operating activities |
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59,273 |
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659,500 |
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1,075,274 |
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589,608 |
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242,674 |
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30,070 |
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Capital expenditures(2) |
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43,043 |
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174,850 |
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372,775 |
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552,902 |
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515,359 |
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63,860 |
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Depreciation and amortization |
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113,680 |
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118,872 |
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125,519 |
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132,789 |
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139,720 |
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17,313 |
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(1) |
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Current assets (including cash) less current liabilities. |
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(2) |
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Purchase of property, plant and equipment, lease prepayment and payment for construction in
progress. |
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(3) |
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The Companys functional and reporting currency is Renminbi, and the translation of amounts
from Renminbi to U.S. dollars is solely for the convenience of the reader. Translation of
amounts from Renminbi to U.S. dollars has been made at the rate of Rmb 8.0702 = US$1.00, the
rate quoted by the Peoples Bank of China at the close of business on December 30, 2005. No
representation is made that the Renminbi amounts could have been, or could be, converted into
U.S. dollars at that rate or at any other rate prevailing on December 30, 2005 or any other
date. |
Dividends
The following table sets forth a five-year summary of dividends paid by the Company to its
shareholders and by Yuchai to the Company, respectively:
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Dividend paid by the Company |
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Dividend Paid by Yuchai |
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to its shareholders |
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to the Company(1) |
Period |
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(per share) |
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(in thousands) |
2001 |
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US$0.02 |
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Rmb 72,284 (US$8,720) |
2002 |
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US$0.19 |
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Rmb 245,766 (US$29,694)(2) |
2003 |
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US$2.08 |
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Rmb 61,433 (US$7,422) |
2004 |
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US$0.39 |
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Rmb 231,309 (US$27,906)(3) |
2005 |
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US$ Nil |
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Rmb
72,282 (US$8,957)(4) |
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(1) |
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Dividends paid by Yuchai to the Company, as well as to other shareholders of Yuchai, were
declared in Renminbi and paid in U.S. dollars (as shown in the parentheses) based on the
exchange rates at local designated foreign exchange banks on the respective payment dates. For
dividends paid for 2001, 2002, 2003, 2004 and 2005, the exchange rate used was Rmb 8.2894 =
US$1.00, Rmb 8.2767 = US$1.00, Rmb 8.2767 = US$1.00, Rmb 8.2765 = US$1.00 and Rmb 8.0702 =
US$1.00, respectively. |
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(2) |
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The dividends declared for 2002 by Yuchai were paid to the Company in 2003 following
execution of the July 2003 Agreement. |
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(3) |
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The dividends declared for 2004 by Yuchai were paid to the Company in 2005 following
execution of the Reorganization Agreement. |
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(4) |
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On June 26, 2006, Yuchai has declared dividends to all
shareholders in respect of the financial year ended December 31,
2005 and the amount attributable to the Company is Rmb 72.3 million
(US$9.0 million). This dividend was received by the Company on
July 28, 2006. |
Historical Exchange Rate Information
On June 30, 2006, the noon buying rate was Rmb 7.9943 = US$1.00.
4
The following tables set forth certain information concerning exchange rates between Renminbi
and U.S. dollars for the periods indicated:
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Noon Buying Rate(1) |
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(Rmb per US$1.00) |
Period |
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High |
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Low |
December 2005
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8.0808 |
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8.0702 |
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January 2006
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8.0702 |
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8.0596 |
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February 2006
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8.0616 |
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8.0415 |
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March 2006
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8.0505 |
|
|
|
8.0167 |
|
April 2006
|
|
|
8.0248 |
|
|
|
8.0040 |
|
May 2006
|
|
|
8.0300 |
|
|
|
8.0005 |
|
June 2006
|
|
|
8.0225 |
|
|
|
7.9943 |
|
July 2006
|
|
|
8.0018 |
|
|
|
7.9690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate(1) |
|
|
(Rmb per US$1.00) |
Period |
|
Period End |
|
Average |
|
High |
|
Low |
2001
|
|
|
8.2766 |
|
|
|
8.2772 |
|
|
|
8.2786 |
|
|
|
8.2763 |
|
2002
|
|
|
8.2800 |
|
|
|
8.2772 |
|
|
|
8.2800 |
|
|
|
8.2765 |
|
2003
|
|
|
8.2767 |
|
|
|
8.2771 |
|
|
|
8.2800 |
|
|
|
8.2765 |
|
2004
|
|
|
8.2765 |
|
|
|
8.2768 |
|
|
|
8.2774 |
|
|
|
8.2764 |
|
2005
|
|
|
8.0702 |
|
|
|
8.1734 |
|
|
|
8.2765 |
|
|
|
8.0702 |
|
2006
(through July 31, 2006)
|
|
|
7.9690 |
|
|
|
8.0200 |
|
|
|
8.0702 |
|
|
|
7.9690 |
|
|
|
|
(1) |
|
The noon buying rate in New York for cable transfers payable in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York. Since April 1994, the
noon buying rate has been based on the rate quoted by the Peoples Bank of China. As a result,
since April 1994, the noon buying rate and the Peoples Bank of China rate have been
substantially similar. The Peoples Bank of China rate at the end of 2005 was Rmb 8.0702,
compared with Rmb 8.1734 for the noon buying rate (average). |
|
(2) |
|
Determined by averaging the rates on the last business day of each month during the relevant
period. |
Risk Factors
Risks relating to our company and our business
Our financial condition, results of operations, business and prospects may be adversely affected
if we are unable to implement the Reorganization Agreement.
Our main operating asset is our ownership interest in Yuchai, and our primary source of cash
flow continues to be our share of the dividends, if any, paid by Yuchai and investment earnings
thereon. As a result of the agreement reached with Yuchai and its related parties pursuant to the
July 2003 Agreement, we discontinued legal and arbitration proceedings initiated by us in May 2003
relating to difficulties with respect to our investment in Yuchai. In furtherance of the terms of
the July 2003 Agreement, we, Yuchai and Coomber entered into the Reorganization Agreement in April
2005, as amended in December 2005, and agreed on a restructuring plan for our company intended to
be beneficial to our shareholders (see Item 4. Information on the Company Recent Developments).
No assurance can be given as to when the corporate governance requirements relating to Yuchai and
the restructuring plan in respect of our ownership of Yuchai, both as contemplated by the
Reorganization Agreement, will be fully implemented, or that implementation of the Reorganization
Agreement will effectively resolve all of the difficulties faced by us with respect to our
investment in Yuchai.
In addition, the Reorganization Agreement contemplates the continued implementation of our
business expansion and diversification plan adopted in February 2005. One of the goals of this
business expansion and diversification plan is to reduce our financial dependence on Yuchai. Thus
far, we have acquired strategic stakes in TCL and LKN (see Item 3. Key Information and Item 4.
Information on the Company Recent Developments). Nonetheless, no assurance can be given that we
will be able to successfully expand and diversify our business. We may also not be able to continue
to identify suitable acquisition opportunities, or secure funding to consummate such acquisitions
or successfully integrate such acquired businesses within our operations. Any failure
5
to implement the terms of the Reorganization Agreement, including our continued expansion and
diversification, could have a material adverse effect on our financial condition, results of
operations, business or prospects.
We
have and may continue to experience disagreements and difficulties
with the Chinese Shareholders in Yuchai.
Although we own 76.4% of Yuchais shares, and believe we have proper legal ownership of our
investment and a controlling financial interest in Yuchai, in the event there is a dispute with
Yuchais Chinese Shareholders regarding our investment in Yuchai we may have to rely on the Chinese
legal system for remedies. The Chinese legal system may not be as effective as compared to other
more developed countries such as the United States (see Risks relating to Mainland China The
Chinese legal system embodies uncertainties which could limit the legal protections available to
foreign investors). We have in the past experienced problems from time to time in obtaining
assistance and cooperation of Yuchais Chinese Shareholders in the daily management and operation
of Yuchai. We have in the past also experienced problems from time to time in obtaining the
assistance and cooperation of the State Holding Company in dealing with other various matters,
including the implementation of corporate governance procedures, the payment of dividends, the
holding of Yuchai board meetings and the resolution of employee-related matters. Examples of these
problems are described elsewhere in this Annual Report. The July 2003 Agreement and the
Reorganization Agreement are intended to resolve certain issues relating to our share ownership in
Yuchai and the continued corporate governance and other difficulties which we have had with respect
to Yuchai. As part of the terms of the Reorganization Agreement, Yuchai agreed that it would seek
the requisite shareholder approval prior to entering into any material transactions (including any
agreements or arrangements with parties related to Yuchai or any of its shareholders) and that it
would comply with its governance requirements. Yuchai also acknowledged and affirmed CYIs
continued rights as majority shareholder to direct the management and policies of Yuchai through
Yuchais board of directors. However, no assurance can be given
that disagreements and difficulties with Yuchais
management and/or Yuchais Chinese Shareholders will not recur, including implementation of the Reorganization Agreement, corporate governance matters or related party
transactions (such as, for example, the Rmb 205.0 million loan from Yuchai to Yuchai Marketing and
Logistics Company, see Note 5 to our companys Consolidated
Financial Statements appearing elsewhere herein). Such disagreements
and difficulties could ultimately have a material adverse impact on
the companys consolidated financial position, results of
operations and cash flows.
Our exposure to the Dongfeng Group has had, and could continue to have, a material adverse effect
on our business, financial condition and results of operation.
Our sales are concentrated among the Dongfeng Group, which includes the Dongfeng Automobile
Company, one of the largest state-owned automobile companies in China, and other major diesel truck
manufacturers controlled by or affiliated with the Dongfeng Automobile Company. In 2005, the
Dongfeng Group accounted for 19.8% of our gross sales, out of which sales to our two largest
customers, Liuzhou Dongfeng Automobile and Hubei Dongfeng Automobile, accounted for 12.3%.
Although we consider our relationships with the Dongfeng Group to be good, the loss of one or more
of the companies within the Dongfeng Group as a customer would have a material adverse effect on
our financial condition, results of operations, business or prospects.
In addition, we are dependent on the purchases made by the Dongfeng Group and have exposure to
their liquidity arising from the high level of accounts receivable from them. We cannot assure you
that the Dongfeng Group will be able to repay all the money they owe to us. In addition, the
Dongfeng Group may not be able to continue purchasing the same volume of products from our company,
which would reduce our overall sales volume.
The Dongfeng Group also competes with us in the diesel engine market in China. Although we
believe that the companies within the Dongfeng Group generally make independent purchasing
decisions based on end-user preferences, we cannot assure you that truck manufacturers affiliated
with the Dongfeng Automobile Company will not preferentially purchase diesel engines manufactured
by companies within the Dongfeng Group over those manufactured by us.
Competition in China from other diesel engine manufacturers may adversely affect our financial
condition, results of operations, business or prospects.
The diesel engine industry in China is highly competitive. We compete with many other domestic
companies, most of which are state-owned enterprises. Some of our competitors have formed joint
ventures with or have technology assistance relationships with foreign diesel engine manufacturers
or foreign engine design consulting firms and use foreign technology that is more advanced than
ours. We expect competition to intensify as a result of:
|
|
|
improvements in competitors products; |
6
|
|
|
increased production capacity of competitors; |
|
|
|
|
increased utilization of unused capacity by competitors; and |
|
|
|
|
price competition. |
In addition, if import restrictions on motor vehicles and motor vehicle parts are reduced,
foreign competition could increase significantly. See Risks relating to Mainland China The
admission of China into the WTO could lead to increased foreign competition.
In the medium-duty diesel engine market, our 6108 medium-duty engine, introduced in 1997, has
been competing with the 6110 medium-duty engine offered by our competitors. We cannot assure you,
however, that we will be able to maintain or improve our current market share or develop new
markets for our medium-duty diesel engines. Based on current industry trends, there is a perceived
shift in the market demand from medium-duty engines to heavy-duty diesel engines. Therefore, we
would expect declining sales volume of our 6108 medium-duty engines in the coming years. In 2005,
we experienced lower unit sales volume of 6108 medium-duty engines due principally to the effects
of the general credit tightening by banks in China.
In the heavy-duty diesel engine market, we introduced the 6112 heavy-duty engine in late 1999.
Due to a delay in the commercial production of the 6112 engine; however, we were not able to
benefit from the competitive advantages of an early entry into the domestic market for heavy-duty
engines. Moreover, the market for heavy-duty diesel engines in China is price-sensitive. We
commenced engine development of the 6L heavy-duty engine (formerly referred to as 6113) in 2003,
with a rated power ranging from 280 to 350 horsepower, and we also introduced the 6M heavy-duty
engine family for heavy-duty trucks and passenger buses, with a rated power ranging from 280 to 390
horsepower, in 2004. We had limited initial sales of 963 and 818 units of the 6L and 6M engines,
respectively, in 2004. We sold 782 units of the 6L engines and 3,471 units of the 6M engines in
2005. We cannot assure you that our 6112, 6L or 6M heavy-duty engines will be able to compete
successfully in the heavy-duty diesel engine market in China with the existing producers or any new
entrants.
In the light-duty diesel engine market, our 4108, 4110 and 4112 light-duty engines introduced
in 2000 were met with weak consumer demand due to strong competition and a high pricing structure.
The 4F diesel engine is a four-cylinder, four-stroke engines with a rated power ranging from 90 to
115 horsepower. Yuchais first sales of the 4F engines occurred in March 2005 and sold 4,510 units
in 2005. Yuchai expects growth of this new engine to strengthen over the few years and become a
significant contributor to sales growth for Yuchai. Yuchai produced 7,009 units of the 4F engines
in 2005 and embarked upon major capital expenditures to increase the production capacity to 50,000
units per year by 2007. The expansion is expected to enable Yuchai to enter into light duty diesel
engines market for light duty trucks and buses. Although there had been an increase in sales of
our 4-Series engines in 2003, 2004 and 2005, this has been primarily due to the average selling
price of the 4-Series engines being lower than the medium and heavy-duty diesel engines, thereby
making the 4-Series more affordable to the buyers especially due to the credit tightening by banks
in China. Accordingly, we cannot assure you that we will be able to continue to improve our market
share for light-duty diesel engines, and we may, in the future, decide to cease production of one
or more of the models we are currently producing.
Our long-term business prospects will depend largely upon our ability to develop and introduce
new or improved products at competitive prices. Our competitors in the diesel engine markets may be
able to introduce new or improved engine models that are more favorably received by customers.
Competition in the end-use markets, mainly the truck market, may also lead to technological
improvement and advances that render our current products obsolete at an earlier than expected
date, in which case we may have to depreciate or impair our production equipment more rapidly than
planned. Failure to introduce, or delays in the introduction of, new or improved products at
competitive prices could have a material adverse effect on our financial condition, results of
operations, business or prospects.
Our financial condition, results of operations, business or prospects may be adversely affected
to the extent we are unable to continue our sales growth or adequately manage our growth.
We have achieved consistent growth in net sales during the last four fiscal years, with net
sales increasing by 22.0% to Rmb 5,582.1 million in 2004 and by 4.4% to Rmb 5,829.4 million in
2005. We cannot assure you that we can continue to increase our net sales or maintain our present
level of net sales. For example, during 2005, we have increased production capacity to
approximately 290,000 units after the completion of our second foundry and the new 6L and 6M
heavy-duty engines lines, and we may not be able to increase our net sales commensurate with our
increased levels of production capacity. Moreover, our future growth is dependent in large part on
factors beyond our control, such as continued economic growth in China.
7
In addition, we cannot assure you that we will be able to properly manage any future growth,
including:
|
|
|
obtaining the necessary supplies; |
|
|
|
|
hiring and training skilled production workers and management personnel; |
|
|
|
|
manufacturing and delivering products for increased orders in a timely manner; |
|
|
|
|
maintaining quality standards and prices; and |
|
|
|
|
controlling production costs. |
Furthermore, we have acquired in the past, and may acquire in the future, equity interests in
engine parts suppliers and logistics and marketing companies. If we are unable to effectively
manage or assimilate these acquisitions, our financial condition, results of operations, business
or prospects could be adversely affected. See Item 4. Information on the Company Business
Overview Manufacturing.
The diesel engine business in China is dependent in large part on the performance of the Chinese
economy, as well as Chinese government policy. As a result, our financial condition, results of
operations, business and prospects could be adversely affected by slowdowns in the Chinese
economy, as well as Chinese government policies that de-emphasize the use of diesel engines.
During periods of economic expansion, the demand for trucks, construction machinery and other
applications of diesel engines generally increases. Conversely, during economic slowdowns the
diesel engine industry is generally adversely affected by a decline in demand. As a result, the
performance of the Chinese economy will likely affect, to a significant degree, our financial
condition, results of operations, business and prospects. For example, the various austerity
measures taken by the Chinese government from time to time to regulate economic growth and control
inflation have in prior periods significantly weakened demand for trucks in China, and may have a
similar effect in the future. In particular, austerity measures that restrict access to credit and
slow the rate of fixed investment (including infrastructure development) adversely affect demand
for, and production of, trucks and other commercial vehicles. These adverse market conditions,
together with increased competition in the diesel engine market, result in various degrees of
financial and marketing difficulties for diesel engine producers, including our company.
The business and prospects for the diesel engine industry, and thus the business and prospects
of our company, may also be adversely affected by Chinese government policy. For example, in 1998,
the Chinese government announced a major initiative to boost consumer demand through investments in
infrastructure projects and increased availability of bank credit. As a result, demand for trucks
and other commercial vehicles, and thus demand for diesel engines, continued to increase from 2002
to 2004. In 2005, truck and the commercial vehicles declined by approximately 1.0%. However, we
cannot assure you that the Chinese government will not change its policy in the future to
de-emphasize the use of diesel engines, and any such change will adversely affect our financial
condition, results of operations, business or prospects. For example, the Chinese government has
recently announced measures to avoid overheating in certain sectors of the economy, which may
include tight bank lending policies and increases in bank interest rates (see Risks relating to
Mainland China Adverse changes in the economic policies of the Chinese government could have a
material adverse effect on the overall economic growth of Mainland China, which could reduce the
demand for our products and adversely affect our competitive position).
If we are not able to continuously improve our existing engine products and develop new diesel
engine products, we may become less competitive, and our financial condition, results of
operations, business and prospects will be adversely affected.
As the Chinese automotive industry continues to develop, we will have to continuously improve
our existing engine products and develop new diesel engine products in order to remain competitive.
As a result, our long-term business prospects will largely depend upon our ability to develop and
introduce new or improved products at competitive prices. Future products may utilize different
technologies and may require knowledge of markets that we do not currently possess. Moreover, our
competitors may be able to introduce new or improved engine models that are more favorably received
by customers than our products. Any failure by our company to introduce, or any delays in the
introduction of, new or improved products at competitive prices could have a material adverse
effect on our financial condition, results of operations, business or prospects.
8
We may be unable to obtain sufficient financing to fund our capital requirements, which could
limit our growth potential.
We believe that our cash from operations, together with any necessary borrowings, will provide
sufficient financial resources to meet our projected capital and other expenditure requirements. If
we have underestimated our capital requirements or overestimated our future cash flows, additional
financing may be required. Financing may not be available to us on acceptable terms or at all. Our
ability to obtain external financing is subject to various uncertainties, including our
results of operations, financial condition and cash flow, economic, political and other conditions
in Mainland China, the Chinese governments policies relating to foreign currency borrowings and
the condition of the Chinese and international capital markets. If adequate capital is not
available, our financial condition, results of operations, business and prospects could be
adversely affected.
Our controlling shareholders interests may differ from those of our other shareholders.
Our parent company is Hong Leong Asia Ltd., or HLA, which indirectly owns 7,913,769, or 21.2%,
of the outstanding shares of our common stock, as well as a special share that entitles it to elect
a majority of our directors. HLA controls us through its wholly-owned subsidiary, Hong Leong
(China) Limited, or HLC, and through HL Technology Systems Pte Ltd, or HLT, a wholly-owned
subsidiary of HLC. HLT owns approximately 21.0% of the outstanding shares of our common stock and
is the registered holder of our special share since December 1994. HLA also owns through another
wholly-owned subsidiary, Well Summit Investments Limited, approximately 0.2% of the outstanding
shares of our common stock since May 2005. HLA is a member of the Hong Leong group of companies.
Prior to August 2002, we were controlled by Diesel Machinery (BVI) Limited, or DML, which, until
its dissolution, was a holding company controlled by HLC and was the prior owner of our special
share. Through HLTs stock ownership and various agreements among shareholders, HLA is able to
effect most corporate transactions without the concurrence of any of our other shareholders. See
Item 7. Major Shareholders and Related Party Transactions Related Party Transactions
Shareholders Agreement. In addition, our shareholders do not have cumulative voting rights. We
cannot assure you that HLAs actions will be in the best interests of our other shareholders. See
also Item 6. Directors, Senior Management and Employees Compensation Yuchai.
We may experience a change of control as a result of offerings of shares by our controlling
shareholders.
As described above, HLT, a subsidiary of HLA, owns 7,831,169 shares of our common stock, as
well as our special share. In March 2004, HLT and Coomber, each registered shares for offer and
sale from time to time on a shelf registration statement which we filed on their behalf pursuant to
a registration rights agreement. If HLT reduces its shareholding to less than 7,290,000 shares of
our common stock as a result of such offering, our Bye-Laws provide that the special share held by
HLT will cease to carry any rights, and HLA may as a result cease to have control over us. See
Item 7. Major Shareholders and Related Party Transactions Major Shareholders The Special
Share. We believe that our only other significant shareholder is Coomber. If HLT sells all of the
shares being registered for sale by HLT in such offering, HLT will cease to own any of our shares.
As a result, we cannot determine what control arrangements will arise as a result of such offering
(including changes in our management arising therefrom), or assess what effect those control
arrangements may have, if any, on our financial condition, results of operations, business,
prospects or share price.
We could be exposed to the impact of interest rates and foreign currency movements with respect
to our future borrowings. In addition, a devaluation of the Renminbi will increase the Renminbi
cost of repaying our foreign currency denominated indebtedness and, therefore, could adversely
affect our financial condition, results of operations, business or prospects.
We may use borrowings from time to time to supplement our working capital requirements and to
finance our business expansion and diversification plans (See also Item 5. Operating and Financial
Review and Prospects Liquidity and Capital Resources). A portion of our borrowings may be
structured on a floating rate basis and denominated in U.S. dollars or other foreign currencies. An
increase in interest rates, or fluctuations in exchange rates between the Renminbi and other
currencies, may increase our borrowing costs or the availability of funding and could affect our
financial condition, results of operations, business or prospects. In particular, our financial
condition, results of operations, business or prospects could be adversely affected by a
devaluation of the Renminbi.
The value of the Renminbi is subject to changes in Chinese government policies and to
international economic and political developments. Since 1994, the conversion of Renminbi into
foreign currencies, including U.S. dollars, has been based on rates set by the Peoples Bank of
China. The official exchange rate for the conversion of Renminbi into U.S. dollar has generally
been stable during the past ten years. On July 21, 2005, China reformed its foreign exchange regime
by moving into a managed floating exchange rate system based on market supply and demand with
reference to a basket of currencies. Renminbi would no longer be pegged to the U.S. dollar. From
that day to December 31, 2005, Renminbi appreciated about 2.5% against the U.S. dollar, and has
appreciated slightly further since then. Substantially all of our operating revenue is denominated
in Renminbi, while a major portion of our capital expenditures is denominated in U.S. dollars and
Euros. An appreciation of Renmimbi against the U.S. dollar and other currencies
9
would also result
in foreign currency translation losses for financial reporting purposes when we translate our U.S.
dollar or other foreign currency denominated financial assets into Renmimbi, as Renmimbi is our
reporting currency. Since we may not be able to hedge effectively against Renminbi devaluations,
future movements in the exchange rate of Renminbi and other currencies could have an adverse effect
on our financial condition and results of operations.
We may be adversely affected by environmental regulations.
We are subject to Chinese national and local environmental protection regulations which
currently impose fees for the discharge of waste substances, require the payment of fines for
pollution, and provide for the closure by the Chinese government of any facility that fails to
comply with orders requiring us to cease or improve upon certain activities causing environmental
damage. Due to the nature of our business, we produce certain amounts of waste water, gas, and
solid waste materials during the course of our production. We believe our environmental protection
facilities and systems are adequate for us to comply with the existing national, provincial, and
local environmental protection regulations. However, Chinese national, provincial, or local
authorities may impose additional or more stringent regulations which would require additional
expenditure on environmental matters or changes in our processes or systems.
Our insurance coverage may not be adequate to cover risks related to our production and other
operations.
The amount of our insurance coverage for our buildings and equipment is at cost which could be
less than replacement value, and we have no plans to increase the coverage. The amount of our
insurance coverage for our inventory is at book value which could be less than replacement value,
and we also have no plans to increase this coverage. In accordance with what we believe is
customary practice among industrial equipment manufacturers in China, we insure only high risk
assets, such as production property and equipment and certain inventory. However, our
underinsurance of other properties, facilities and inventory in accordance with this Chinese
practice exposes us to substantial risks so that in the event of a major accident, our insurance
recovery may be inadequate. We do not currently carry third party liability insurance to cover
claims in respect of bodily injury, property or environmental damage arising from accidents on our
property or relating to our operations. We also do not carry business interruption insurance as
such coverage is not customary in China. Losses incurred or payments required to be made by us
which are not fully insured could have a material adverse effect on our financial condition.
The market price for our common stock may be volatile.
In recent periods, there has been volatility in the market price for our common stock. The
market price could fluctuate substantially in the future in response to a number of factors,
including:
|
|
|
our interim operating results; |
|
|
|
|
the publics reaction to our press releases and announcements and our filings with the
Securities and Exchange Commission, or SEC; |
|
|
|
|
changes in financial estimates or recommendations by stock market analysts regarding us,
our competitors or other companies that investors may deem comparable; |
|
|
|
|
operating and stock price performance of our competitors or other companies that investors may deem comparable; |
|
|
|
|
changes in general economic conditions; |
|
|
|
|
future sales of our common stock in the public market, or the perception that such sales could occur; |
|
|
|
|
the announcement by us or our competitors of a significant acquisition; and |
|
|
|
|
increases in labor and other costs. |
Recent market activity of our stock price on the New York Stock Exchange, or NYSE, has been
unpredictable. See Item 9. The Offer and Listing below. We cannot assure you that such volatility
in the trading price and volume for our shares will stabilize in the future. In addition, in recent
years, the stock market in general has experienced extreme price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities issued by many companies
for reasons unrelated to their operating performance. These broad market fluctuations may
materially adversely affect our stock price.
10
Risks relating to Mainland China
Substantially all of our assets are located in Mainland China, and substantially all of our
revenue is derived from our operations in Mainland China. Accordingly, our financial condition,
results of operations, business or prospects are subject, to a significant degree, to economic,
political and legal developments in Mainland China. The economic system of Mainland China differs
from the economies of most developed countries in many respects, including government investment,
the level of development, control of capital investment, control of foreign exchange and allocation
of resources.
Adverse changes in the economic policies of the Chinese government could have a material adverse
effect on the overall economic growth of Mainland China, which could reduce the demand for our
products and adversely affect our competitive position.
Since the late 1970s, the Chinese government has been reforming the Chinese economic system
from a planned economy to a market-oriented economy. In recent years, the Chinese government has
implemented economic reform measures emphasizing decentralization, utilization of market forces in
the development of the Chinese economy and a higher level of management autonomy. These reforms
have resulted in significant economic growth and social progress, but the growth has been uneven
both geographically and among various sectors of the economy. Economic growth has also been
accompanied by periods of high inflation. The Chinese government has implemented various policies
from time to time to restrain the rate of such economic growth, control inflation and otherwise
regulate economic expansion. For example, the Chinese government has announced that it is
considering introducing measures on certain sectors to avoid overheating of the economy, which may
include tighter bank lending policies, increases in bank interest rates, and measures to curb
speculation. In addition, the Chinese government has also in the past attempted to control
inflation by controlling the prices of basic commodities. Severe measures or other actions by the
Chinese government, such as placing additional controls on the prices of diesel and diesel-using
products, could restrict our business operations and adversely affect our financial position.
Although we believe that the economic reforms and macroeconomic policies and measures adopted by
the Chinese government will continue to have a positive effect in the longer term on economic
development in Mainland China and that we will continue to benefit in the longer term from these
policies and measures, these policies and measures may, from time to time, be modified or reversed.
Adverse changes in economic and social conditions in Mainland China, in the policies of the Chinese
government or in the laws and regulations in Mainland China, could have a material adverse effect
on the overall economic growth of Mainland China and in infrastructure investment in Mainland
China. These developments could adversely affect our financial condition, results of operations and
business, by reducing the demand for our products, for example.
Adverse economic developments in China or elsewhere in the Asian region could have a material
adverse effect on our financial condition, results of operations, business or prospects.
Since the late 1990s, many Asian countries have experienced significant changes in economic
conditions, including, for example, substantial depreciation in currency exchange rates, increased
interest rates, reduced economic growth rates, corporate bankruptcies, volatility in the market
values of shares listed on stock exchanges, decreases in foreign currency turnover and
government-imposed austerity measures. To date, Chinas economy has generally been affected to a
lesser extent than most other major Asian countries. However, we cannot assure you that Chinas
economy will not suffer more serious difficulties in the future. Demand for trucks, construction
machinery and other applications of diesel engines generally increases during periods of economic
expansion and decreases during periods of economic slowdown. In the event that adverse economic
developments occur in China, our sales may decrease and our financial condition, results of
operations, business or prospects could therefore suffer.
The Chinese legal system embodies uncertainties which could limit the legal protections available
to foreign investors.
The Chinese legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential value. In 1979, the
Chinese government began to promulgate a comprehensive system of laws and regulations governing
economic matters in general including, for example, with respect to corporate organization and
governance, foreign investments, commerce, taxation and trade. Legislation over the past 25 years
has significantly enhanced the protections afforded to various forms of foreign investment in
Mainland China. However, these laws, regulations and legal requirements are relatively recent, and
their interpretation and enforcement involve uncertainties which may limit the legal protections
available to foreign investors.
At the National Peoples Congress held in March 2006, the Chinese government confirmed it
intends to continue to implement a prudent fiscal and monetary policy so as not to over stimulate
domestic demand. The Chinese government has also on various occasions reiterated its policy of
furthering reforms in the socialist market economy and to increase the wealth of the rural
population
11
through development and subsidies programs. No assurance can be given that these changes
will not have an adverse effect on business conditions in China generally or on our business in
particular.
We may not freely convert Renminbi into foreign currency, which could limit our ability to obtain
sufficient foreign currency to satisfy our foreign currency requirements or to pay dividends to
shareholders.
Substantially all of our revenues and operating expenses are generated by our Chinese
operating subsidiary and are denominated in Renminbi, while a portion of our capital expenditures
and indebtedness is, or in the future may be, denominated in U.S. dollars and other foreign
currencies. The Renminbi is currently freely convertible under the current account, which
includes dividends, trade and service-related foreign exchange transactions, but not under the
capital account, which includes foreign direct investment, except with the prior approval of the
State Administration for Foreign Exchange, or SAFE.
Our Chinese operating subsidiary, as a foreign invested enterprise, may purchase foreign
currency without the approval of SAFE for settlement of current account transactions, including
payment of dividends, by providing commercial documents evidencing these transactions. Our Chinese
operating subsidiary may also retain foreign exchange in its current account (subject to a cap
approved by SAFE) to satisfy foreign currency liabilities or to pay dividends. However, the
relevant Chinese government authorities may limit or eliminate our Chinese operating subsidiarys
ability to purchase and retain foreign currencies in the future. Our Chinese operating subsidiary,
therefore, may not be able to obtain sufficient foreign currency to satisfy its foreign currency
requirements to pay dividends to us for our use in making any future dividend payments or to
satisfy other foreign currency payment requirements. Foreign currency transactions under the
capital account are still subject to limitations and require approvals from SAFE. This could affect
our Chinese operating subsidiarys ability to obtain foreign currency through debt or equity
financing, including by means of loans or capital contributions from us.
The admission of China into the WTO could lead to increased foreign competition.
As a result of China becoming a member of the WTO, import restrictions on both motor vehicle
components, including diesel engines and motor vehicles, are expected to be gradually reduced. The
WTO also requires China to lower its import tariffs as a condition for membership. Reduced import
restrictions and/or lower tariffs may lead to increased imports of foreign diesel engines and
therefore lead to increased competition in the domestic diesel engine markets. Similarly, reduced
import restrictions and/or lower tariffs on automobiles may affect the competition in the end-use
markets of our customers and indirectly affect our sales to such customers. Currently, China is
encouraging foreign investments into the motor vehicle engine manufacturing industry.
Outbreaks of infectious diseases, such as severe acute respiratory syndrome (SARS) and the bird
flu, in various parts of China and other countries may materially and adversely affect our
business and operations, as well as our financial condition and results of operations.
In 2003, several countries, including China, experienced an outbreak of a highly contagious
form of atypical pneumonia known as severe acute respiratory syndrome, or SARS, which severely
restricted the level of economic activity in affected areas, including Beijing and Guangdong
Province. The SARS epidemic in China had an adverse impact on the sale of engines, particularly
during the second and third quarters in 2003. Although this SARS outbreak was brought under control
during 2003, there have been a number of cases reported in China and elsewhere in the Asia region
since that outbreak. Most recently, an infectious strain of influenza known as the bird flu has
also been reported from time to time in China, Hong Kong and other parts of Asia. Outbreaks of
infectious diseases such as these could adversely affect general commercial activity, which could
have a material adverse effect on our financial condition, results of operations, business or
prospects.
ITEM 4. INFORMATION ON THE COMPANY.
History and Development
The Company
The Company is a Bermuda holding company established in April 1993 to own a controlling
interest in Yuchai. The Company currently owns, through six wholly-owned subsidiaries, 76.4% of the
outstanding common shares of Yuchai (Yuchai Shares). The Company operates under The Companies Act
1981 of Bermuda. The principal executive office of the Company is located at 16 Raffles Quay
#26-00, Hong Leong Building, Singapore 048581. The Companys telephone number is (+65) 6220-8411.
12
Until August 2002, the Company was controlled by Diesel Machinery (BVI) Limited (DML), a
company that was 53.0% owned by Hong Leong Asia Ltd. (HLA) through its wholly-owned subsidiary,
Hong Leong (China) Limited (HLC). HLC owns HL Technology Systems Pte Ltd (HLT), which held
shares in the Company through DML. DML was also 47.0% owned by China Everbright Holdings Company
Limited (EB Holdings) through its wholly-owned subsidiary, Coomber Investments Ltd.
(Coomber). HLA, a company listed on the Singapore Exchange Securities Trading Limited
(Singapore Exchange) is part of the Hong Leong Group Singapore, which was founded in 1941 by the
Kwek family of Singapore and is one of the largest privately-controlled business groups in
Southeast Asia. EB Holdings is a state-owned enterprise of China. In 2002, EB Holdings and Coomber
gave notice to DML and its other shareholders of DML to effect a liquidation of DML. As a result of
the liquidation, HLA acquired the special share of the Company through HLT which entitles HLA to
elect a majority of the directors of the Company and veto any resolution of shareholders of the
Company. See Item 7. Major Shareholders and Related Party Transactions Major Shareholders. EB
Holdings sold its shareholding in Coomber, which held shares in the Company, in October 2002 to
Goldman Industrial Limited (Goldman), and EB Holdings is no longer a shareholder of the Company.
Goldman is a subsidiary of Zhong Lin Development Company Limited (Zhong Lin), an investment
vehicle of the city government of Yulin in Guangxi, China. See Item 7. Major Shareholders and
Related Party Transactions Major Shareholders.
Through the Company, HLA provides certain management, financial planning and other services to
Yuchai and has designated one financial controller to work full-time at Yuchais principal
manufacturing facilities in Yulin City as part of Yuchais day-to-day management team.
To the Companys knowledge, since January 1, 2005, there have not been any public takeover
offers by third parties in respect of the Companys shares, nor has the Company made any public
takeover offers in respect of the shares of other companies.
Minority Investments
The Companys main operating asset has historically been its ownership interest in Yuchai, and
its primary source of cash flow has historically been its share of the dividends, if any, paid by
Yuchai and investment interest thereon. However, on February 7, 2005, the board of directors of
the Company announced its approval of the implementation of a business expansion and
diversification plan by the Company. Pursuant to this plan, the Company has looked for new business
opportunities to seek to reduce its financial dependence on Yuchai.
TCL
The first step in implementing this plan occurred in March 2005, through the acquisition by
the Companys wholly-owned subsidiary, Venture Delta Limited (VDL), of an approximate 14.99%
stake comprising 264.0 million newly-issued shares in TCL, for approximately S$30.9 million
(approximately $18.9 million, based on an exchange rate of S$1.637 to $1.00).
On August 5, 2005, the Company through VDL agreed to acquire an additional 17.8 million shares
in TCL, representing approximately 1% stake in the total number of TCL shares in issue for
approximately S$1.4 million (approximately US$0.86 million based on an exchange rate of S$1.63).
This acquisition was completed on September 5, 2005.
A call option granted to certain members of the
Thakral family pursuant to a scheme of arrangement dated October 24, 2001 relating to TCL. The
call option granted to the Thakral family expired on March 26, 2006.
On February 16, 2006, pursuant to a right issue, the Company through VDL was allotted
87,860,288 newly issued TCL Shares and 52,933,440 convertible bonds in TCL, for an aggregate cash
consideration of S$49.4 million (US$30.2 million). With this acquisition, the Company has
increased its beneficial shareholding in TCL from its level then of 15.99% to 19.36% of the
enlarged TCL Shares in issue (assuming no conversion of bonds and exercise of share options of
TCL). The Company believes that through VDL it is currently the second largest shareholder in TCL.
Since February 16, 2006, there has been some conversion of bonds by other bondholders of TCL.
This resulted in a minor dilution of the Companys indirect interest in TCL from approximately
19.36% to 19.25%. As of June 30, 2006, the Company beneficially owns:
|
(a) |
|
an aggregate of 369,655,952 shares representing approximately 19.25% of the total number
of ordinary shares in issue in the capital of TCL; and |
13
|
(b) |
|
an aggregate of 52.9 million unsecured 2% convertible bonds due 2009 in the denomination
of S$0.80 each issued by TCL, which are capable of being converted into an aggregate of
529.3 million new TCL shares, representing approximately 20.2% of TCLs enlarged issued
share capital. |
If the Company exercises its right through VDL to convert the 52.9 million TCL bonds owned by
it into new TCL shares, this will result in an increase of the Companys effective shareholding in
TCL to an aggregate of 898.99 million shares, representing
approximately 34.4% of the total number of TCL shares outstanding following such conversion.
In such event, the Company would be required under the Singapore Code on Take-overs and Mergers to
make mandatory conditional cash offers for all the TCL bonds not already owned, controlled or
agreed to be acquired by the Company at the price of S$0.08 for each TCL share and S$0.80 for each
TCL bond. TCLs share price on the Singapore Exchange closed at S$0.08
on June 30, 2006.
TCLs principal businesses include trading and distribution of consumer electronics products
and accessories in China and Hong Kong; distribution of home entertainment products in China; and
assembly of electronic products and electronic manufacturing services in China. TCL is listed on
the Main Board of the Singapore Exchange. TCL has an established
presence in China and the Company believes that TCL is well placed to capitalize on Chinas
expanding economy. In addition, the Company believes that TCL could offer a platform to the Company
for further expansion in the consumer electronics sector in China and other parts of Asia, given
TCLs distribution and supply chain management business model in China.
TCL currently has ten directors
on its board, of which three directors were nominated by the
Company. The Company accounts for its investment in TCL using the
equity method beginning March 23, 2005
in view that the Company has a significant board representation in TCL and hence believes that it
has the ability to exercise significant influence over TCL.
LKN
In early February 2006, the Company through its following wholly-owned subsidiaries acquired
debt and equity in LKN for an aggregate consideration of approximately S$131.6 million
(approximately US$81.2 million, based on an exchange rate of
S$1.62 to US$1.00):
|
|
|
Grace Star Services Ltd. (Grace Star) acquired 191,413,465 ordinary shares representing
approximately 29.13% of the total number of ordinary shares in issue, and 123,010,555
redeemable convertible preference shares (the Existing LKN RCPS), in the capital of LKN;
and |
|
|
|
|
Venture Lewis Limited (Venture Lewis) acquired approximately S$129.4 million
(approximately US$79.9 million, based on an exchange rate of S$1.62 to US$1.00) in principal
amount of outstanding secured non-convertible bonds (the Existing LKN Bonds) issued by
LKN. |
On July 4, 2006, pursuant to a rights issue, the Company through its subsidiaries was allotted
196,201,374 non-redeemable convertible cumulative preference shares in the capital of LKN (the New
LKN NCCPS) and 130,800,917 zero coupon unsecured non-convertible bonds due 2009 in LKN, for an
aggregate consideration of approximately S$134.7 million (the New LKN Bonds). The consideration
was satisfied by offsetting against the money from the full redemption by LKN of the Existing LKN
Bonds and the balance by cash. LKN had also made partial redemption of the Existing LKN RCPS. As of
to date, the Company holds (i) 191,413,465 ordinary shares representing approximately 29.13% of the
total number of ordinary shares in issue; (ii) 114,366,772 Existing LKN RCPS; (iii) 196,201,374 New
LKN NCCPS; and (iv) 130,800,917 New LKN Bonds in LKN.
LKN is also listed on the Main Board of the Singapore Exchange.
LKN is primarily engaged in the business of investment holding, and the principal business
activities of LKNs subsidiaries are those of hospitality-related businesses in Asia. LKNs share
price on the Singapore Exchange closed at S$0.04 on June 30, 2006.
Assuming full conversion of (i) the Existing LKN RCPS and (ii) the New LKN NCCPS in LKN, the
Companys effective interest in LKN could be expected to increase from the current 29.1% to 51.7%.
The acquisition of the debt and equity in LKN by the Company is not expected to have any material
impact on the earnings per share and the net tangible assets of the Company and its subsidiaries.
14
In order to finance the acquisition of shares and bonds in TCL and LKN, as well as other
strategic acquisitions which the Company may consider from time to time as part of its business
diversification strategy, in February 2005, the Company issued $25.0 million in principal amount of
convertible bonds due 2012 in a private placement. Consequent upon the conversion of the
convertible bonds by the bondholders, 1,927,673 shares of common stock of US$0.10 per share of the
Company were issued in June 2005. In March 2005, September 2005, January 2006 and March 2006, the
Company also entered into credit facilities for $25.0 million, $50.0 million,
S$60.0 million (approximately $37.04 million, based on an
exchange rate of S$1.59 to US$1.00) and S$110.0 million (approximately $69.18
million, based on an
exchange rate of S$1.62 to US$1.00), respectively, with banks in Singapore. See Item 5. Operating and Financial Review and
Prospects Liquidity and Capital Resources.
Yuchai
Notwithstanding the Companys business expansion plans and minority investments described
above, the Companys main operating asset continues to be its ownership interest in Yuchai. The
following is primarily a discussion of the business of Yuchai.
Yuchai is one of the largest medium-duty diesel engine manufacturers in China and also
produces diesel power generators and diesel engine parts. Yuchai is located in Yulin City, Guangxi
Zhuang Autonomous Region in southern China, approximately 280 miles west of Hong Kong. With a
population of approximately 3.0 million, greater Yulin City is believed to be the sixth largest
city in Guangxi Zhuang Autonomous Region.
Yuchai was founded in 1951 and became a state-owned enterprise in 1959. Prior to 1984, Yuchai
was a small producer of low-power diesel engines for agricultural machinery. In 1984, Yuchai
introduced the earliest model of its 6105 medium-duty diesel engine for medium-duty trucks. In
1989, Yuchai became one of Chinas 500 largest industrial enterprises in terms of profitability and
tax contribution. In July 1992, in order to raise funds for further expansion, Yuchai became the
first state-owned enterprise in the Guangxi Zhuang Autonomous Region to be restructured into a
joint stock company.
As a result of this restructuring, Yuchai was incorporated as a joint stock company in July
1992 and succeeded to the machinery business of Yulin Diesel, and all of Yulin Diesels businesses,
other than its machinery business, as well as certain social service related operations, assets,
liabilities and employees (for example, cafeterias, cleaning and security services, a hotel and a
department store), were transferred to the State Holding Company. The State Holding Company also
became the majority shareholder of Yuchai through its ownership stake of approximately 104 million
shares of Yuchai (State Shares). The State Holding Company is owned by the Guangxi local
government. In connection with its incorporation, Yuchai also issued 7 million shares to various
Chinese institutional investors (Legal Person Shares).
In May 1993, in order to finance further expansion, Yuchai sold shares to the Company
(Foreign Shares) and became a Sino-foreign joint stock company.
The initial shareholders of the Company, consisting of HLT, Sun Yuan Overseas (BVI) Ltd. (Sun
Yuan BVI), the Cathay Investment Fund, Limited (Cathay), GS Capital Partners L.P. (GSCP) and
Coomber, then a wholly-owned subsidiary of EB Holdings and, thus, controlled by China Everbright
International Limited (China Everbright), made their initial investments in Yuchai in May 1993,
when their respective wholly-owned subsidiaries purchased for cash 200 million newly-issued shares
(51.3% of the then-outstanding Yuchai Shares). These shareholders exchanged with the Company their
shareholdings in their wholly-owned subsidiaries, six companies which held Foreign Shares of
Yuchai, for 20 million shares of the Companys Common Stock (after giving effect to a 10-for-1
stock split in July 1994 (the Stock Split)). In connection therewith, Yuchai became a
Sino-foreign joint stock company and became subject to the laws and regulations relating to joint
stock limited liability companies and Sino-foreign joint venture companies in China. Foreign Shares
may be held by and transferred to non-Chinese legal and natural persons, subject to approval of the
Ministry of Commerce (MOC), the successor entity of the Ministry of Foreign Trade and Economic
Cooperation of China (MOFTEC). Foreign Shares are entitled to the same economic rights as State
Shares and Legal Person Shares. State Shares are shares purchased with state assets by government
departments or organs authorized to represent state investment. Legal Person Shares are shares
purchased by Chinese legal persons or institutions or social groups with legal person status and
with assets authorized by the state for use in business.
In November 1994, the Company purchased from an affiliate of China Everbright 78,015,500
Foreign Shares in exchange for the issuance of 7,801,550 shares of Common Stock (after giving
effect to the Stock Split) (the China Everbright Purchase). The 78,015,500 Foreign Shares of
Yuchai held by Earnest Assets Ltd, a subsidiary of EB Holdings and China Everbright before its sale
to the Company, had been originally issued as Legal Person Shares and State Shares and were
converted to Foreign Shares, pursuant to approvals granted by MOFTEC. As a result, the Company
became the owner of each of these six companies: Hong Leong Technology
15
Systems (BVI) Ltd., Tsang &
Ong Nominees (BVI) Ltd., Cathay Diesel Holdings Ltd., Goldman Sachs Guangxi Holdings (BVI) Ltd.,
Youngstar Holdings Ltd. and Earnest Assets Ltd.
In December 1994, the Company sold 7,538,450 shares of Common Stock in its initial public
offering (IPO) and used substantially all of the proceeds to finance its six wholly-owned
subsidiaries purchase of 83,404,650 additional Foreign Shares from Yuchai.
In connection with the Companys purchase, through its six wholly-owned subsidiaries, of
additional Foreign Shares from Yuchai with proceeds of its IPO, Yuchai offered additional shares
pro rata to its other existing shareholders (30 shares for each 100 shares owned) in accordance
with such shareholders pre-emptive rights, and each of the Companys subsidiaries was able to
acquire these additional Yuchai Foreign Shares. Such pro rata offering (including the offering to
the Company) is referred to herein as the Yuchai Offering. Certain Legal Person shareholders
subscribed for additional shares in the Yuchai Offering. The State Holding Company informed Yuchai
at the time that it would not subscribe for any of its portion of Yuchai Shares (31,345,094 shares)
in the Yuchai Offering. In order to obtain MOFTEC approval of the Yuchai Offering, the State
Holding Company was given the right by Yuchais Board of Directors to subscribe for approximately
31 million shares of Yuchai at a price of Rmb 6.29 per share at any time prior to December 1998.
This was because provisional regulations of the State Administration Bureau of State Property
(SABSP) and the State Committee of Economic System Reform (SCESR), published in November 1994,
imposed on any holder of state-owned shares certain obligations to protect its interest in any
share offering. Under such regulations, the State Holding Company could have been required to
subscribe for Yuchai Shares in the Yuchai Offering. Yuchais shareholders subsequently agreed to
extend the duration of such subscription right to March 31, 2002 (the exercise of which would have
reduced the Companys ownership of Yuchai from 76.4% to 71.7%). The State Holding Company informed
the shareholders of Yuchai that it had determined not to subscribe for additional Yuchai Shares and
this determination was minuted by the Yuchai Board of Directors on November 1, 2002. However, given
the November 1994 provisional regulations of the SABSP and the SCESR, the SABSP, the SCESR and/or
the MOC may take action against the State Holding Company, and there can be no assurance that any
such action would not, directly or indirectly, have a material adverse effect on Yuchai or the
Company.
Recent Developments
On February 7, 2005, the board of directors of the Company announced its approval of the
implementation of a business expansion and diversification plan by the Company. Pursuant to this
plan, the Company has looked for new business opportunities to seek to reduce its financial
dependence on Yuchai, which has historically been the Companys main operating asset. The directors
of the Company believe that the Companys plans for expansion can be best met through acquisition
opportunities in the greater China region and elsewhere in Asia. The board believes that
acquisitions particularly in the greater China region can offer synergies with the Companys
existing Chinese operations. For description of the two minority investments made by the Company
to date under this business expansion and diversification plan. See Minority Investments.
On April 7, 2005, the Company entered into the Reorganization Agreement with Yuchai and
Coomber, which is intended to be in furtherance of the terms of the July 2003 Agreement. The terms
of the Reorganization Agreement have also been acknowledged and agreed to by the State Holding
Company. The Reorganization Agreement provides for the implementation of corporate governance
guidelines approved by the directors and shareholders of Yuchai in November 2002 and outlines steps
for the adoption of corporate governance practices at Yuchai conforming to international custom and
practice. Pursuant to the Reorganization Agreement, Yuchai also acknowledged and affirmed the
Companys continued rights as majority shareholder to direct the management and policies of Yuchai
through Yuchais board of directors.
The Reorganization Agreement outlines a broad framework for restructuring the Companys
ownership of Yuchai. The restructuring exercise contemplates the transfer of the Companys
approximate 76.4% interest in Yuchai to a new company to be organized under Bermuda law (Newco)
in exchange for shares of Newco and distribution of Newcos shares to the shareholders of the
Company, subject to the successful implementation of the business diversification plan by the
Company. No portion of the distribution is intended to be made in respect of the special share in
the Company held by HLA, and Newcos capital structure is not intended to provide for any special
share comparable to the existing special share in the Company. The Company is expected to be
recapitalized or restructured as may be necessary in order to maintain its listing on the NYSE.
Therefore, the Company has executed its business diversification plan to seek to acquire assets or
businesses of such size and sufficient historical operating results to permit such continued
listing.
The Reorganization Agreement also provides that the Company may, if necessary to maintain its
listing, retain up to 10 million Newco shares or approximately 22.0% of Newcos capital. If the
Company does retain such Newco shares, then, subject to any necessary approval by the shareholders
of the Company (i) the Company would grant to Coomber an irrevocable proxy to vote such
16
shares for
the election of directors to the board of Newco for such time as the Company owns those shares, and
(ii) Newco and the Company would enter into a registration rights agreement to permit the Company
to sell such shares to the public at such times as the Company determines that the sale of such
shares would not affect the listing of the Companys shares on the NYSE.
Subsequent
to the execution of the Reorganization Agreement (see Item 19.
Exhibits Exhibit 4.12), a number of steps have been taken
by the parties thereto towards its implementation. For example, Yuchais directors and shareholders
have confirmed that the amendments to Yuchais Articles of Association and corporate governance
guidelines required to be adopted by Yuchai pursuant to the Reorganization Agreement have been
ratified and implemented, and that steps are being taken to have such amendments and guidelines
approved by the relevant
Chinese authorities. Yuchai has also paid a consultancy fee of US$1.5 million to the Company.
Yuchai has also declared and paid dividends to its shareholders for profits earned in the financial
years ended December 31, 2003 and 2004, resulting in the Company receiving dividends of Rmb 231.3
million (US$27.9 million, based on an exchange rate of Rmb 8.29
to US$1.00), following which the Company declared dividends representing
approximately 50% of the amount of dividends paid to the Company by Yuchai, as contemplated in
Section 1.5(c) of the Reorganization Agreement. On June 26, 2006, Yuchai has declared dividends
payable to the Company of Rmb 72.3 million (US$9.0 million) in respect of the financial year ended
December 31, 2005 and this will be paid by July 31, 2006.
Pursuant to Clause 1.8 of the Reorganization Agreement, Yuchai is obligated to pay US$20.0
million within five business days of the issuance of the Companys audited consolidated financial
statements for the year ended December 31, 2004. The due date for such payment under the
Reorganization Agreement was June 24, 2005, which has been subsequently extended pursuant to the
Reorganization Agreement Amendment (No. 1) described below.
Completion of the transactions contemplated by the Reorganization Agreement is subject to
various conditions, including the receipt of all required regulatory and shareholder approvals. On
December 2, 2005, the Company entered into a Reorganization Agreement Amendment (No. 1) with Yuchai
and Coomber; the terms of which were acknowledged and agreed by the State Holding Company. The
Reorganization Agreement, as amended, includes an extension for the term of the Reorganization
Agreement from December 31, 2005 to December 31, 2006 and the date of payment by Yuchai of the
abovementioned US$20.0 million to the earlier of (i) the date of the completion of certain
transactions described in Clause 2.6 of the Reorganization Agreement; and (ii) December 31, 2006.
Given that the expiration date for the Reorganization Agreement has been extended through
December 31, 2006, Yuchai has advised the Company that it has notified Credit Suisse that the
appointment of Credit Suisse as financial advisor to Yuchai has been terminated pending Yuchais
ongoing review of the implementation of the corporate reorganization contemplated in the
Reorganization Agreement.
Business Overview
Product Development
Overview
The general market demand for trucks and buses has contributed to Yuchais significant growth
since 2001, with the continued expansion of the highways and toll roads in China. The Company
expects heavy-duty trucks to become an increasingly important means of freight transportation as
road conditions and infrastructure in China improve. Both medium-duty and heavy-duty trucks are
increasingly fitted with diesel engines because of their higher power, fuel efficiency and
reliability as compared to gasoline engines. In addition, the Chinese government had announced as a
policy objective in 1994 that motor vehicles weighing five tons or more should principally have
diesel engines after 2000.
To take advantage of anticipated growth in demand for diesel engines in China, Yuchai
substantially expanded its manufacturing facilities from their production capacity of 37,000 units
of medium-duty diesel engines in 1993 to approximately 120,000 units of light-duty diesel engines,
120,000 units of medium-duty diesel engines and 50,000 units of heavy-duty diesel engines in 2005.
In response to the introduction of high power medium-duty engines introduced by its competitors in
1995, Yuchai began commercial production of the 6108 medium-duty engine in the third quarter of
1997. In addition, Yuchai began trial production of its 4-Series engines (as defined in 4-Series
Light-Duty Diesel Engines below) in late 1999 and commenced commercial production of these engines
in 2000. Due to strong competition, quality defects and a high pricing structure, sales of the
4-Series engines were weak in 2000, but improved in following years with the total number of units
sold reaching 20,735 units, 46,022 units, 71,562 units and 103,598 units in 2002, 2003, 2004 and
2005, respectively. Yuchai also commenced trial marketing of the 6112 heavy-duty engine in early
1999 and began commercial production of these engines in the second half of 1999. The quality of
the 6112 engine has improved significantly due to the improvements made in the past five years,
which the Company believes has translated into higher sales. In
17
addition, continued economic growth
in China, together with the development of new highway infrastructure, has resulted in greater
demand for long-haul, heavy-duty trucks. As a result, sales of the 6112 engine increased from
15,371 units in 2002 to 20,472 units in 2003, 24,073 units in 2004 but declined to 14,788 units in
2005 due to shrinking demand arising from the Chinese Governments macroeconomic cooling-off
measures. The Company also commenced engine development work on its new heavy-duty 6L and 6M
engines in 2003. In 2003, 2004 and 2005, Yuchai sold 62 units, 963 units and 782 units of the 6L
engine, respectively. In addition, 818 units and 3,471 units of the 6M engine were sold in 2004 and
2005, respectively. Due mainly to the credit tightening by buyers in China, there are more
customers buying the 4-Series light-duty engines because the average selling price of the
light-duty diesel engine is lower than the medium and heavy-duty diesel engines.
6105 Medium-Duty Diesel Engines
The 6105 medium-duty engine was historically Yuchais primary product and was principally
installed in medium-duty trucks. However, in response to the introduction of high-power medium-duty
engines by its competitors in 1995, Yuchai has been increasing its production and sales efforts on
the 6108 medium-duty engine. In 2002, Yuchai produced 39,644 units of the 6105 engine representing
27.4% of Yuchais total production volume of 144,463 units for that year. Yuchai produced 43,325
units of the 6105 engine in 2003, representing 24.0% of total production volume of 180,423 units.
In 2004, Yuchai produced 55,910 units of the 6105 engine representing 24.4% of total production
volume of 229,210 units. In 2005, Yuchai produced 70,052 units of the 6105 engine representing
29.2% of total production volume of 240,061 units. A significant driver of these production
increases has been continuing demand for agricultural machinery equipment in China. See
Products Medium-Duty Diesel Engines 6105 Engines.
6108 Medium-Duty Diesel Engines
The 6108 medium-duty engine is an overall improvement over the 6105 medium-duty engine. In
particular, the Company expects the 6108 engine to enhance Yuchais competitiveness in the
medium-duty diesel engine market in China. In 2002, 2003 and 2004, unit sales of the 6108 engine
exceeded unit sales of the 6105 engine. However, unit sales of the 6108 engines was less than the
6105 engines in 2005 due to poor market demand for the 6108 engines, due mainly to increased
pricing arising from conversion to Euro III environmental standards. See Products Medium-Duty
Diesel Engines 6108 Engines.
Yuchai produced 61,950 units of the 6108 engine in 2002, representing 42.9% of Yuchais total
production volume of 144,463 units for the year. In 2003, Yuchai produced 64,054 units of the 6108
engine, representing 35.5% of Yuchais total production volume of 180,423 units. In 2004, Yuchai
produced 62,394 units of the 6108 engine, representing 27.2% of Yuchais total production volume of
229,210 units. In 2005, Yuchai produced 35,627 units of the 6108 engine, or 14.8% of Yuchais total
production volume of 240,061 units for the year.
6112 Heavy-Duty Diesel Engines
In 1992, Yuchai purchased from an affiliate of Ford Motor Company in Brazil the production
line machinery for manufacturing 6112 heavy-duty engines and moved the production line machinery to
a factory in China (the 6112 Engine Factory). The facilities were designed to have a production
capacity of approximately 50,000 units of the 6112 engine per year and could support production of
medium-duty engines when necessary. In addition, the facilities could also perform product testing,
production equipment repair and maintenance, factory automation and other support functions.
The 6112 Engine Factory was completed in 1995 and commercial production was scheduled to
commence in late 1997. However, primarily as a result of the unreliable quality of key engine
components supplied by domestic component manufacturers, the 6112 engine encountered significant
technical problems during initial road testing, and did not perform satisfactorily under harsh
environmental conditions. Yuchai was able to resolve these technical problems and commence trial
marketing of the 6112 engine in early 1999. Commercial production of these engines began in the
second half of 1999. Due to the delay in commencement of commercial production, however, Yuchai was
not able to benefit from the competitive advantages of an early entry into the domestic market for
heavy-duty engines. Consequently, the volume of sales of the 6112 engine had been lower than
previously expected. However, during 2002, sales of the 6112 engine had increased steadily to over
1,000 units per month, reaching 15,371 units in 2002. This higher level of customer acceptance of
the 6112 engine had led to unit sales of 20,472 engines in 2003 which was an increase of 33.2% over
2002. In 2004, Yuchai further sold 24,073 units, which represented an increase of 17.6% over 2003.
In 2005, Yuchai sold 14,788 units, which represented a decrease of 38.6% over 2004 due to shrinking
demand arising from the Chinese Governments macroeconomic cooling-off measures. See Products
Heavy-Duty Diesel Engines.
Yuchai produced 17,201 units of the 6112 engine in 2002, representing 11.9% of Yuchais total
production volume of 144,463 units for that year. In 2003, Yuchai produced 22,024 units of the 6112
engine, representing 12.2% of Yuchais total production
18
volume of 180,423 units. In 2004, Yuchai
produced 27,410 units of the 6112 engine, representing 12.0% of Yuchais total production volume of
229,210 units. In 2005, Yuchai produced 15,990 units of the 6112 engine, or 6.7% of total
production volume of 240,061 units for the year.
6L Heavy-Duty Diesel Engines
The 6L heavy-duty engine (formerly referred to as 6113) is a six-cylinder, four-stroke,
turbocharged intercooling engine, with a rated power ranging from 280 to 350 horsepower. The 6L
heavy-duty engine was co-developed with FEV, an independent German-owned engine development
institute for big passenger buses. Yuchais first sales of the 6L engine occurred in November 2003.
In 2003, 2004 and 2005, Yuchai sold 62 units, 963 units and 782 units of the 6L engine,
respectively.
6M Heavy-Duty Diesel Engines
The 6M heavy-duty engine family for heavy-duty trucks and passenger buses were developed based
on technologies from USA, Japan and Germany in accordance with FEV procedures. It has a 10 liter
displacement and power ranging from 280 to 390 horsepower. Yuchais first commercial sales of 6M
occurred in January 2004 with total sales of 818 units in 2004. In 2005, Yuchai sold 3,471 units,
which represented an increase of 324.3% over 2004.
4-Series Light-Duty Diesel Engines
The 4-Series light-duty engines comprise the 4F, 4108, 4110, 4110Q, 4110ZQ and 4112 engines
(collectively, the 4-Series engines). See Products Light-Duty Diesel Engines.
The 4110Q and 4110ZQ engines were developed to allow Yuchai to compete in the light-duty
diesel engine market. Trial production of the 4110 engines commenced in late 1999. Sales of the
4110 engines in 2000 were weak due to strong competition, minor technical problems and a high
pricing structure. Significant improvements to the technical specifications of the 4-Series
light-duty engines have resulted in higher customer acceptance resulting in higher unit sales in
2003, 2004 and 2005.
The 4108 engine was based on the 6105 and the 6108 engines. The 4108 engine is designed for
light trucks and passenger vehicles. Trial production of the 4108 engine started in the third
quarter of 2000, and commercial production of the 4108 engine began in 2001. The 4112 engine was
primarily based on the 6112 engine. The 4112 engine is designed for use in light- to medium-duty
cargo trucks and buses. The 4112 engine also features a low emission level that is compliant with
Euro II standards. Trial production of the 4112 engine started in early 2001 and commercial
production of the 4112 engine began in late 2001. Both the 4108 and 4112 engines have experienced
minor technical problems which have since been resolved, and are facing strong competition.
The 4F diesel engine is a four-cylinder, four-stroke engines with a rated power ranging from
90 to 115 horsepower. The 4F diesel engines were developed based on technologies from Germany and
Japan for mini buses, trucks and passenger cars. Trial production of 4F engines commenced in
mid-2004. Yuchai expects growth of these new engines to strengthen over the few years and become a
significant contributor to sales growth for Yuchai. Yuchai produced 7,009 units of 4F engines in
2005 and embarked upon a major capital expenditure to increase the production capacity to 50,000
units per year by 2007. The expansion is expected to enable Yuchai to enter into light duty diesel
engines market for light duty trucks, trucks and passenger cars.
In 2002, Yuchai produced 23,773 units of the 4-Series engines in 2002, representing 16.5% of
Yuchais total production volume of 144,463 units for that year. In 2003, Yuchai produced 50,264
units of the 4-Series engines, representing 27.9% of Yuchais total production volume of 180,423
units for that year. In 2004, Yuchai produced 79,498 units of the 4-Series engines, representing
34.7% of Yuchais total production volume of 229,210 units. In 2005, Yuchai produced 110,346 units
of 4-Series engines, or 46.0% of Yuchais total production volume of 240,061 units. The increase in
4108 engines in 2005 is mainly due to increase in demand for light trucks and agricultural
machineries.
Products
Yuchai primarily manufactures and sells diesel engines for medium-duty trucks in China.
Yuchais primary products are its 6105 and 6108 medium-duty engines, which are principally used in
medium-duty trucks with a load capacity of five to seven tons. In addition, Yuchai also offers the
4-Series light-duty engines and the 6112 heavy-duty engines. See Product Development. The
following table sets forth the technical specifications of the 4F engine, the 4110ZQ engine, the
6105 engine, the 6108 engine, the 6112 engine, the 6L engine and the 6M engine:
19
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Type and Technical |
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Specifications |
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4F Engine* |
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4110ZQ Engine |
|
6105 Engine |
|
6108 Engine |
|
6112 Engine |
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6L Engine* |
|
6M Engine* |
Type |
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4-stroke, |
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4-stroke, |
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4-stroke, |
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4-stroke, |
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4-stroke, |
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4-stroke, |
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4-stroke, |
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turbo-charged, |
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turbo-charged, |
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turbo-charged, |
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Water-cooling, |
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turbo-charged, |
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turbo-charged, |
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turbo-charged, |
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inner-cooling or |
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water-cooling, |
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water-cooling, |
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in-line vertical |
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inner-cooling, |
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inner-cooling or |
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inner-cooling or |
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water-cooling, |
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in-line vertical |
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in-line vertical |
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water-cooling, |
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water-cooling, |
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water-cooling, |
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in-line vertical |
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in-line vertical |
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4 valve per |
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4 valve per |
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cylinder in-line |
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cylinder in-line |
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vertical |
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vertical |
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Rated Power |
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115 horsepower |
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136 horsepower |
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230 horsepower |
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240 horsepower |
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270 horsepower |
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350 horsepower |
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390 horsepower |
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(66 85 kw) |
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(118 kw) |
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(170 kw) |
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(206 kw) |
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(221 kw) |
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(243 kw) |
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(288 kw) |
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Number of Cylinders |
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4 |
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4 |
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6 |
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6 |
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6 |
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6 |
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6 |
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Cylinder Displacement |
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2.66L |
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4.257L |
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6.494L |
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7.255L |
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7.8L |
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8.424L |
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9.84L |
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Rated Speed |
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3200 r/min |
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2800 r/min |
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2500 r/min |
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2300 r/min |
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2400 r/min |
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2200 r/min |
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2100 r/min |
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Maximum Torque |
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300 N.m |
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392 N.m |
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810 N.m |
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1100 N.m |
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980 N.m |
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1400 N.m |
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1680 N.m |
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Speed at Maximum Torque |
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2200 r/min |
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1600 r/min |
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1700 r/min |
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1600 r/min |
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1500 r/min |
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1400 r/min |
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1600 r/min |
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Bore x Stroke |
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92 x 100 mm |
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110 x 112 mm |
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105 x 125 mm |
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108 x 132 mm |
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112 x 132 mm |
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113 x 140 mm |
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120 x 145 mm |
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Minimum Fuel Consumption |
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£ 203 g/kw.h |
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< 200 g/kw.h |
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< 200 g/kw.h |
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< 196 g/kw.h |
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< 195 g/kw.h |
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< 198 g/kw.h |
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< 193 g/kw.h |
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Consumption Ratio of Oil to Fuel |
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£ 0.2% |
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< 0.5% |
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< 0.1% |
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< 0.15% |
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< 0.1% |
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< 0.1% |
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< 0.1% |
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Noise |
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£ 96 dB(A) |
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< 99 dB(A) |
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< 99 dB(A) |
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< 97 dB(A) |
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< 97 dB(A) |
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< 97 dB(A) |
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< 96 dB(A) |
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Smoke |
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£ 2 Bosch |
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< 3.5 Bosch |
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< 2.5 Bosch |
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< 2.5 Bosch |
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< 2.5 Bosch |
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< 2 Bosch |
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< 2 Bosch |
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Net Machine Weight |
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320 kg |
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350 kg |
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650 kg |
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600 kg |
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700 kg |
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750 kg |
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880 kg |
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Dimensions |
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800 x 576 x |
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950 x 600 x |
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1226 x 803 x |
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1234 x 800 x |
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1184 x 823 x |
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1330 x 800 x |
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1343 x 651 x |
(length x width x height) |
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767 mm |
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750 mm |
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1012 mm |
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1100 mm |
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1040 mm |
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1100 mm |
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1095 mm |
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* |
|
Yuchais 6L and 6M engines have a rated power ranging from 280 to 390 horsepower. |
Besides diesel engines, Yuchai also produces a limited number of diesel power generators
and diesel engine parts. The following table sets forth a breakdown of Yuchais sales by major
product category for each of the three years ended December 31, 2003, 2004 and 2005, respectively:
|
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2003 |
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2004 |
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2005 |
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% of |
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Units |
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% of |
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Units |
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% of |
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Units |
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Product |
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Revenues, net |
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Revenues, net |
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Sold |
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Revenues, net |
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|
Revenues, net |
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|
Sold |
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Revenues, net |
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Revenues, net |
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Sold |
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Rmb |
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Rmb |
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Rmb |
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(in thousands) |
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(in thousands) |
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(in thousands) |
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|
Diesel engines |
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6105 |
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911,190 |
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19.9 |
% |
|
|
44,131 |
|
|
|
1,143,535 |
|
|
|
20.5 |
% |
|
|
50,609 |
|
|
|
1,748,847 |
|
|
|
30.0 |
% |
|
|
69,379 |
|
6108 |
|
|
1,504,140 |
|
|
|
32.9 |
% |
|
|
61,361 |
|
|
|
1,372,073 |
|
|
|
24.6 |
% |
|
|
57,908 |
|
|
|
810,859 |
|
|
|
13.9 |
% |
|
|
37,560 |
|
6112 |
|
|
1,003,791 |
|
|
|
22.0 |
% |
|
|
20,472 |
|
|
|
1,203,558 |
|
|
|
21.6 |
% |
|
|
24,073 |
|
|
|
786,989 |
|
|
|
13.5 |
% |
|
|
14,788 |
|
6L |
|
|
3,697 |
|
|
|
0.1 |
% |
|
|
62 |
|
|
|
60,056 |
|
|
|
1.1 |
% |
|
|
963 |
|
|
|
46,603 |
|
|
|
0.8 |
% |
|
|
782 |
|
6M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,312 |
|
|
|
0.6 |
% |
|
|
818 |
|
|
|
146,677 |
|
|
|
2.5 |
% |
|
|
3,471 |
|
4-Series |
|
|
769,805 |
|
|
|
16.8 |
% |
|
|
46,022 |
|
|
|
1,183,992 |
|
|
|
21.2 |
% |
|
|
71,562 |
|
|
|
1,607,096 |
|
|
|
27.6 |
% |
|
|
103,598 |
|
Diesel power
generators &
others(1) |
|
|
377,327 |
|
|
|
8.3 |
% |
|
|
171 |
|
|
|
581,569 |
|
|
|
10.4 |
% |
|
|
695 |
|
|
|
682,360 |
|
|
|
11.7 |
% |
|
|
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,569,950 |
|
|
|
100.0 |
% |
|
|
172,219 |
|
|
|
5,582,095 |
|
|
|
100.0 |
% |
|
|
206,628 |
|
|
|
5,829,431 |
|
|
|
100.0 |
% |
|
|
230,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Units sold relate mainly to agricultural and industrial
engines. |
20
Medium-Duty Diesel Engines
6105 Engines
The 6105 medium-duty engine is a six-cylinder, four-stroke engine that offers up to 230
horsepower, and is principally installed in medium-duty trucks. Yuchai believes that its 6105
engine has a reputation for fuel efficiency, low noise levels, firm uphill traction and
reliability. Yuchai also believes that its manufacturing quality control and the design of its
engine blocks, which are thicker than those of its major domestic competitors as well as leading
international manufacturers, make its engines more durable.
In response to the introduction of high-power medium-duty engines by its competitors in 1995,
Yuchai began development of its 6108 medium-duty engine. Commercial production of the 6108 engine
began in the third quarter of 1997. In 2002, 2003 and 2004, unit sales of the 6108 engine exceeded
unit sales of the 6105 engine. However, unit sales of the 6108 engines was less than the 6105
engines in 2005 due to poor market demand for the 6108 engines. As a result of the more stringent
Euro III environmental compliance standards (see Item 3. Key Information Risk Factors Risks
relating to our company and our business We may be adversely affected by environmental
regulations), Yuchais 6108 diesel engines have experienced increased production costs making the
sales price more expensive.
6108 Engines
The 6108 engine offers improved overall performance compared to the 6105 engine, principally
because of greater horsepower, increased reliability and improved acceleration. Commencing in the
third quarter of 1997, Yuchai began offering the 6108 engine to its customers as a premium model,
along-side its standard 6105 engine, and plans to eventually replace the 6105 engine with the 6108
engine. Yuchais existing and planned production facilities for medium-duty diesel engines are
designed to be capable of producing 6108 engines without major modification.
Yuchai sells its 6108 engine to a similar customer base to that which previously bought its
6105 engines. Although the increased competition in the medium-duty diesel market and Yuchais
delay in commercially introducing the 6108 engine had adversely affected Yuchais market share,
through an aggressive marketing program which included brand building and enhancing corporate
image, Yuchai was able to increase its unit sales of the 6108 engine by 30.2% to 31,667 units in
2001 from 2000. Unit sales of the 6108 further increased to 58,042 units in 2002, representing an
increase of 83.3% over 2001. Due to the overall decline in the medium-duty truck market in China in
2003, medium-duty engines also decreased in unit quantity resulting in Yuchai achieving 61,361
units in 2003 as compared to 58,042 units in 2002, and sales of 57,908 units in 2004. In 2005, unit
sales of the 6108 engine decreased by 35.1% to 37,560 units as compared to 57,908 units in
2004. There can be no assurance, however, that Yuchai will be able to maintain or improve its
current market share or develop new markets for the 6108 engine.
Heavy-Duty Diesel Engines
The 6112 heavy-duty engine is a six-cylinder, four-stroke engine with a rated power ranging
from 190 to 270 horsepower. Primarily as a result of unreliable key engine components supplied by
domestic component manufacturers, the 6112 engine encountered significant technical problems during
initial road testing and failed to perform satisfactorily under harsh environmental conditions.
Although commercial production of the 6112 engine was delayed beyond the previously scheduled date,
Yuchai was able to resolve these technical problems and commence trial marketing of the engine in
early 1999. Commercial production of these engines began during the second half of 1999. In 2003,
2004 and 2005, Yuchai produced 22,024, 27,410 and 15,990 units of the 6112 engine, respectively.
See Item 5. Operating and Financial Review and Prospects Overview. With higher levels of
acceptance by customers, however, 6112 engine unit sales have decreased in 2005 as compared to 2004
due to poor market conditions generally attributable to the Chinese governments measures for the
tightening of credit supply within the banking sector in China to minimize overheating of the
economy.
The 6L and 6M heavy-duty diesel engine are six-cylinder, four-stroke engines with a rated
power ranging from 280 to 390 horsepower. Yuchais first sales of the 6L occurred in November 2003,
and Yuchai expects growth of these two new engines to strengthen over the next few years and become
a significant contributor to sales growth for Yuchai. Early in 2003, Yuchai embarked upon a major
capital expenditure program to increase the production capacity of heavy-duty engines by 20,000
units per year. The expansion is expected to enable Yuchai to enter the higher margin market for
engines over 300 horsepower, while eventually reducing its cost base by replacing imported engine
blocks and cylinder heads with production from Yuchais new foundry.
Light-Duty Diesel Engines
The 4-Series engines utilize much of the same technology as the 6112 heavy-duty engine,
modified to produce short-range and reduced cylinder engines for lightweight cars and trucks.
Despite their relatively small size (less than half the size of the 6112 engine), they have the
advantages of the 6112 engine, including reliability, high performance and a long life span. Due to
its versatility, the 4110Q engine is suitable for light vehicles and agricultural trucks. The
4110ZQ engine, with features such as a low emission level that is
compliant with Euro II standards
and low noise levels, is well-suited for light commercial vehicles and medium-size passenger
vehicles. Trial production of the 4-Series engines commenced in late 1999. In 2000, due to strong
competition in the light-duty diesel engine market, minor technical problems and the high pricing
structure of the 4-Series engines, only 1,175 of the 2,220 units which it produced were sold. In
2002, Yuchai achieved sales of 20,735 units, which is a significant increase compared to 2001. In
2003, sales of the 4-Series engines further increased to 46,022 units, representing an increase of
122.0% over 2002. In 2004, sales of the 4-Series engines increased to 71,562 units, representing an
increase of 55.0% over 2003. In 2005, sales of the 4-Series engines increased to 103,598 units,
representing an increase of 44.8% over 2004. The increase in 4108 engines in 2005 is mainly due to
increased in
21
demand for light trucks and agricultural machineries due to their lower pricing
relative to Yuchais other models, making them more affordable to customers.
An important part of Yuchais business strategy is to continually achieve higher standards of
quality in its diesel engines. Yuchai believes that its engines have an established reputation
among truck manufacturers and end-users for durability and quality. Due to poor road conditions,
lack of engine maintenance by end-users and the common practice of overloading trucks in China,
Yuchai believes that the reliability and durability of its engines are critical factors in
maintaining competitiveness. By further improving the
reliability and overall quality of its engines and controlling the costs of production, Yuchai
believes it can command higher prices for its engines than its competitors and remain competitive
in China.
Other Products
Diesel Power Generators
Yuchai produces diesel power generators which are primarily used in the construction and
mining industries. The diesel power generators offer a rated power of 12 kilowatts to 160
kilowatts. Yuchais diesel power generators use both the 6105 and 6108 medium-duty engines as their
power source.
Diesel Engine Parts
Yuchai supplies diesel engine parts to its nationwide chain of customer service stations.
Although sales of diesel engine parts do not constitute a major percentage of Yuchais net
revenues, the availability of such parts to its customers and to end-users through its nationwide
chain of customer service stations is an important part of Yuchais customer service program.
Sales, Marketing and Services
Sales and Marketing
Yuchai distributes most of its engines directly to auto plants and retailers from its primary
manufacturing facilities in Yulin City. In addition, Yuchai operates 31 regional sales offices in
major geographic regions in China. With a sales force of approximately 609 persons nationwide,
Yuchai provides a comprehensive range of services to its customers, including dispatching engineers
to provide on-site assistance to major customers in the resolution of technical problems.
Yuchai promotes its products primarily through television commercials, advertisements in
newspapers and industry journals. Since 1993, Yuchai has been sponsoring an annual program, User
Service Week, during which Yuchai provides its customer service stations with information
brochures, customer suggestion cards for the improvement of Yuchais service and small gifts for
end-users. In connection with this promotion, Yuchais customer service stations also perform minor
repairs on end-users diesel engines free of charge. Yuchai believes that its promotional efforts
are unusual for an automotive component company in China and lead to greater brand name recognition
among end-users.
Advertising expenses decreased by 7.0% to Rmb 45.3 million in 2005 from Rmb 48.7 million in
2004 due to lower spending on television and road signboard advertising in 2005. Sales commissions
increased to Rmb 39.4 million in 2005 compared to Rmb 11.6 million in 2004 due to higher commission
given to promote the sales of new products such as 6L and 6M heavy duty diesel engines.
Yuchai believes that proximity to its factories in Yulin City is an important factor in the
geographical make-up of its customers. Due in part to transportation and shipping costs, a
substantial majority of Yuchais engines are sold to customers in southern and central eastern
China. In addition, a very small percentage of Yuchais products are exported outside China, as the
following table indicates:
22
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
|
Sales Revenue |
|
|
% of Sales Revenue |
|
|
Unit Sales |
|
|
Sales Revenue |
|
|
% of Sales Revenue |
|
|
Unit Sales |
|
|
Sales Revenue |
|
|
% of Sales Revenue |
|
|
Unit Sales |
|
|
|
Rmb (000) |
|
|
|
|
|
|
|
|
|
|
Rmb (000) |
|
|
|
|
|
|
|
|
|
|
Rmb (000) |
|
|
|
|
|
|
|
|
|
Total Domestic Sales |
|
|
4,546,383 |
|
|
|
99.48 |
% |
|
|
171,769 |
|
|
|
5,518,582 |
|
|
|
98.86 |
% |
|
|
204,812 |
|
|
|
5,715,804 |
|
|
|
98.05 |
% |
|
|
226,073 |
|
Total Export Sales |
|
|
23,567 |
|
|
|
0.52 |
% |
|
|
450 |
|
|
|
63,513 |
|
|
|
1.14 |
% |
|
|
1,816 |
|
|
|
113,627 |
|
|
|
1.95 |
% |
|
|
4,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,569,950 |
|
|
|
100.0 |
% |
|
|
172,219 |
|
|
|
5,582,095 |
|
|
|
100.0 |
% |
|
|
206,628 |
|
|
|
5,829,431 |
|
|
|
100.0 |
% |
|
|
230,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vietnam, Saudi Arabia, Taiwan, Cuba and Kazakhstan (in descending order) represented
Yuchais top five export markets in 2005 in terms of number of units. In particular, Yuchai
exported 130, 510 and 339 diesel engine units to Cuba in 2003, 2004 and 2005, respectively. In
April 2006, Yuchai signed a memorandum of understanding with the Cuban government for
the export by Yuchai of approximately 20,000 diesel engines over the next four years. Yuchai does
not expect that sales pursuant to this memorandum of understanding will have a material impact
on its unit production or sales revenue.
Yuchais
sales are concentrated among the Dongfeng Group, one of the largest state-owned
automobile companies in China, and other major diesel truck manufacturers controlled by or
affiliated with the Dongfeng Group. Sales to the Dongfeng Group accounted for approximately 31.3%,
28.8% and 19.8% of Yuchais total net revenues in 2003, 2004 and
2005, respectively. The Dongfeng Group is
also a major competitor of Yuchai. See Competition.
Yuchai has been continuing its sales efforts to retailers and end-users of diesel engines.
Yuchai seeks to encourage end-users of gas engine trucks to replace their gas engines with Yuchai
diesel engines by advertising the advantages of diesel engines. Such sales of replacement engines
are generally made through customer service centers at a retail price, which is higher than the
sales price to truck manufacturers.
Customers orders with Yuchai can be cancelled either by Yuchai or its customers prior to
delivery in accordance with the sales contracts. As part of Yuchais credit procedures to control
and manage its trade accounts receivables, Yuchai would hold shipments for delivery if customers
credit position is not satisfactory or if customers have not made payments for earlier deliveries.
There can be no assurance that such cost-controlling measures will successfully control Yuchais
trade receivable balance, or that they will not adversely affect the future purchase decisions of
Yuchais customers. Yuchai had net trade accounts receivable of Rmb 875.6 million as of December
31, 2004, representing 25.2% of the Companys total current assets at the same date. As of December
31, 2005, Yuchai had net trade accounts receivable of Rmb 1,146.2 million, representing 27.5% of
the Companys total current assets as of the same date.
Customer Service
Yuchai believes that customer service is an important part of maintaining its market
competitiveness. In addition to various services provided initially at its sales offices, Yuchai
has a nationwide network of over 1,150 authorized service stations that provide repair and
maintenance services, spare parts, retrofitting services and training to Yuchais customers. To
ensure a consistently high level of service, Yuchai trains the technicians at each of these service
stations. In addition, Yuchai also owns and operates over 20 repair training centers. Any
warranty-related services or repairs will be borne by Yuchai. Other than above, all non-warranty
activities will be charged to customers.
Yuchais customer service program emphasizes a fast turnaround time on repair requests. As
part of this policy, Yuchai supplies authorized service stations with spare parts for repairs and
requires these service stations to provide on-site assistance at the customers place of business
within 12 to 24 hours, depending on the customers location.
Yuchai provides a repair and replacement warranty for all of its engines. Prior to 1993,
Yuchais warranty was for 12 months or 30,000 kilometers. In September 1993, Yuchai extended its
warranty to 18 months or 50,000 kilometers and, in September 1994, Yuchai further extended its
warranty from a period of 12 months or 120,000 kilometers to a period of 18 months or 180,000
kilometers, whichever is lower. For the years ended 2003, 2004 and 2005, warranty costs
represented approximately 3.6%, 3.4% and 3.1% of net revenues, respectively.
In March 2004, at the State Holding Companys initiative, Yuchai established a new company,
Yuchai Express Guarantee Company Limited (YEGCL), which provides credit guarantee, appraisal and
consulting services to Yuchais customers to purchase
23
trucks that are mounted with Yuchais diesel
engines. Yuchai has contributed Rmb 100.0 million for the establishment of this company, in return
for 76.9% of its share capital. YEGCL commenced operations in June 2004.
Also in March 2004, Coomber and the State Holding Company established a related company, YMLC,
to offer a complementary range of services with YEGCL. YMLC and YEGCL provide a range of
complementary services, such as insurance, financing, warranty servicing, administrative and
marketing services to independent Chinese truck operators. This was intended to facilitate sales
and servicing of Yuchai products. Yuchai loaned approximately Rmb 205.0 million to YMLC in May 2004
(see also Note 5 to the Companys Consolidated Financial
Statements appearing elsewhere herein).
Manufacturing
Yuchais primary manufacturing facilities are located in Yulin City in the Guangxi Zhuang
Autonomous Region. The principal production land area currently occupies approximately 960,900
square meters, including the existing production factory for the 6105 medium-duty engines, the
existing production factory for the 6108 medium-duty engine (the 6108 Engine Factory), the 6112
Engine Factory and various testing and supporting facilities. In 2004, the annual production
capacity of Yuchais manufacturing facilities was approximately 80,000 units of light-duty diesel
engines, 120,000 units of medium-duty diesel engines and 50,000 units of heavy diesel engines. In
2004, with the completion of the new second foundry and 6L and 6M heavy-duty diesel engines lines,
Yuchais total production capacity has increased to approximately 250,000 units at end 2004. Yuchai
operated at less than full capacity in 2004. Yuchais total production capacity increased to
approximately 290,000 units at end 2005, or 16% over 2004. The
current production capacity is adequate to meet expected higher
demand and unit sales from customers in the near future
arising from the continued government spending on new highways and other infrastructure development projects in
China.
Yuchais production process involves the manufacture of key components and the assembly of the
diesel engines from components and parts internally manufactured or purchased from third parties.
Yuchai manufactures a substantial portion of the key components of its diesel engines, including
the engine block, cylinder heads, crankshaft and camshaft. Yuchai cast and molded approximately
250,000 engine blocks in 2005, satisfying almost all of its engine block needs in 2005. When
necessary, Yuchai is able to purchase additional engine blocks from a domestic foundry under an
existing requirement contract. Yuchai/ASIMCO Components Company Limited (Yuchai/ASIMCO) is one of
Yuchais principal suppliers of fuel injection pumps through two of its related companies. Yuchai
purchases the remaining parts and components for its 6105 engines as well as raw materials,
principally steel and cast iron, from domestic suppliers. Yuchai does not believe that it is
dependent on any one supplier as it generally purchases supplies from at least two sources (except
with respect to engine blocks where Yuchai currently has a purchase arrangement only with the
domestic foundry referred to above). Yuchai manufactures internally the same key components for its
6108 engine as it does for the 6105 engine and purchases the remaining parts and components for its
6108 engine from domestic suppliers. The main parts for the 6112 heavy-duty engine, which are the
engine blocks, cylinder heads, crankshaft and fuel pumps, are imported from foreign suppliers and
the other parts are purchased from domestic suppliers. Yuchai expects to further reduce its
reliance on imported parts and components in 2006.
To ensure that its standards and specifications are met, Yuchai conducts routine checks at
each stage of the production process, tests each diesel engine prior to delivery to the customer,
and inspects all raw materials, parts and components purchased from suppliers to ensure that they
meet Yuchais requirements. To promote the safety of its workers, Yuchai has established a safety
department to supervise the proper use of equipment, prevent fire and explosions and promote safe
practices and procedures in the workplace.
Yuchai/ASIMCO is a joint venture between Yuchai and a subsidiary of Asian Strategic
Investments Corporation (ASIMCO) that invests in factories in China that produce parts and
components for diesel engines. ASIMCO is a joint venture among The Pacific Alliance Group Limited,
Dean Witter Capital Corporation and TCW Capital Investment Corporation. As of December 31, 2005,
Yuchai had contributed Rmb 5.7 million to Yuchai/ASIMCO and owned a 4.73% interest in the common
stock of Yuchai/ASIMCO.
During 2000, at the State Holding Companys initiative, Yuchai established two new companies
involved in the manufacture and sale of spare parts and components for diesel engines in China.
Yuchai contributed a total of Rmb 105.0 million in assets to the companies and received equity
interests of 71.8% and 97.0%, respectively, in the two companies. During 2002, Yuchai increased its
equity interest in Guangxi Yulin Yuchai Machinery Spare Parts Manufacturing Company Limited, the
subsidiary involved in the manufacture of spare parts, from 97.0% to 97.1% by an additional
contribution of Rmb 4.3 million. The State Holding Company owns the remaining equity interests in
these companies. Yuchai established these new companies to ensure access to a consistent and
quality supply of spare parts and components for its diesel engines and to improve the quality of
its customer service by maintaining a regular
24
supply of these spare parts. The establishment of
these companies by Yuchai was initially not made with the requisite corporate approvals, but was
subsequently ratified by the Board of Directors of Yuchai in October 2001.
Capital Expenditures
Capital expenditures for routine upgrades to, and replacement of, equipment, plant and
property were Rmb 372.8 million, Rmb 552.9 million and Rmb 515.4 million (US$63.9 million) in 2003,
2004 and 2005, respectively. The Company funded its capital expenditures primarily from funds
generated from operations and, when necessary, from bank loans obtained by Yuchai. The Company
incurred capital expenditures in 2003 relating to the completion of the second foundry as well as
for the production line of the 6L and 6M heavy-duty diesel engine. The Companys capital
expenditures for 2004 of Rmb 552.9 million were primarily used for the completion of the new
production line for 6L and 6M heavy-duty engines, the second foundry described above, production
capacity upgrading and the second stage of construction of Yuchai heavy-duty engine project. The
Companys capital expenditures for 2005 of Rmb 515.4 million (US$63.9 million) were primarily used for production capacity
upgrading, second stage construction of Yuchai heavy-duty engine project and the new 4F engine
project. The Company expects that it will be able to continue to fund its capital expenditures in
2006 in the same manner as in prior years, as described above and under Item 5. Operating and
Financial Review and Prospects Liquidity and Capital Resources.
Seasonality
Yuchais business generally is not seasonal. However, Yuchais results of operations in the
first and second quarters of recent calendar years have been marginally higher than in the third
and fourth quarters of the corresponding year, due to slightly better production and sales
performance in the first half compared to the second half of such calendar years. As a result, cash
generated from operations may also be subject to some seasonal variation (See also Item 5.
Operating and Financial Review and Prospects Liquidity and Capital Resources).
Trademarks
Yuchai owns and maintains Chinese trademark registrations of its principal trademarks. Yuchai
believes that its logo is well recognized as a quality brand in China. As Yuchai currently sells
most of its products in the domestic market, registration of its principal trademarks is not
maintained in countries outside China. Yuchai has not been involved in any material claim or
dispute in relation to trademarks or other intellectual property rights and, to the best of
Yuchais knowledge, no such claim or dispute is pending or threatened.
Competition
The diesel engine industry in China is highly competitive. Yuchai believes, based on internal
studies, that competition is based primarily on performance, quality, price and after-sales
service, and secondarily on noise, size and weight. Yuchai believes that its engines have a strong
reputation among truck manufacturers and consumers for leading performance and reliability. In
addition, Yuchai believes that its after-sales service to end-users of Yuchai engines, conducted
through a nationwide network of over 1,150 authorized service stations and 20 Yuchai-owned repair
training centers, gives Yuchai a competitive advantage over other diesel engine producers.
Most of Yuchais major domestic competitors are state-owned enterprises. The Dongfeng Group,
which is a major competitor of Yuchai and which controls two of Yuchais largest competitors, is
also one of Yuchais major customers and controls Yuchais other major customers, accounting in the
aggregate for approximately 19.8% of Yuchais total net revenues in 2005. Some of Yuchais
competitors have formed joint ventures with, or have technology assistance arrangements with,
foreign diesel engine manufacturers or engine design consulting firms, and use foreign technology
that is more advanced than Yuchais technology. The current
production capacity is adequate to meet expected higher demand and
unit sales from customers in the near future arising from the
continued government spending on new highways and other
infrastructure development projects in China. Yuchai expects competition to intensify as a
result of, among other things, improvements in competitors products, increased production capacity
of competitors, increased utilization of unused capacity by competitors and price competition.
In the medium-duty diesel engine market, Yuchais 6105 and 6108 engines compete primarily
against the 6110 engines produced by a number of Yuchais competitors. Initially, the introduction
of the 6110 engine in 1995 had put considerable pressure on Yuchais competitiveness in the
medium-duty diesel engine market because it offered greater horsepower than Yuchais 6105 engine.
However, the commercial introduction of the 6108 engine in 1997 by Yuchai, which offers
substantially the same horsepower as the 6110 engine, has allowed Yuchai to compete more
effectively in the medium-duty diesel engine market. In competing with the 6110 engine, Yuchai
focuses on the quality and price of, and the after-sales service on, the 6108 engine. In 2002,
2003 and 2004, unit sales of the
25
6108 engine exceeded unit sales of the 6105 engine. However, unit
sales of the 6108 engines was less than 6105 engines in 2005 due to poor market demand for the more
expensive 6108 engines. There can be no assurance, however, that Yuchai will be able to maintain or
improve its current market share or develop new markets for its medium-duty diesel engines.
In addition, Yuchai commenced trial marketing of its 6112 heavy-duty engine in early 1999, and
began commercial production of these engines in the second half of 1999. Due to the delay in
commercial production of the 6112 engine until 1999, however, Yuchai was not able to benefit from
the competitive advantages of an early entry into the domestic market for heavy-duty engines.
Moreover, the market for heavy-duty diesel engines in China is relatively price sensitive. Yuchai
will continue to manufacture its 6112 heavy-duty diesel engines although there has been a decline
in unit sales in 2005 mainly due to changes in customers demand to light-duty diesel engines. In
2005, the sales volume of the 6112 engine was 14,788 units, which was lower than 24,073 units in
2004, due to shrinking demand arising from the Chinese governments measures to tighten the credit
supply within the banking sector in China so as to minimize overheating of the economy. This
situation has led to more customers demand for the cheaper light-duty diesel engines as compared
to the more expensive heavy-duty diesel engines. There can be no assurance that Yuchai will be
able to compete
successfully in the heavy-duty diesel engine market in China with the existing producers (such
as Weichei Power Co., Ltd.) or any new entrants.
Yuchai also faces intense competition in the light-duty diesel engine market. In this market,
Yuchai competes primarily against Wuxi Diesel Engine Factory First Auto Group and Dalian Diesel
Engine Factory First Auto Group (collectively, the First Auto Group). As Yuchai is a late entrant
into the light-duty diesel engine market relative to the First Auto Group, Yuchai believes that it
could be difficult for Yuchai to become a major market leader in the short-term.
As the Chinese automotive industry develops, Yuchai will have to continuously improve its
existing engine products and develop new diesel engine products in order to remain competitive.
Consequently, Yuchais long-term business prospects will largely depend upon its ability to develop
and introduce new or improved products at competitive prices. Future products may utilize different
technologies and may require knowledge of markets that Yuchai does not currently possess.
Currently, Yuchai is heavily dependent on foreign engine design consulting firms and foreign engine
manufacturers for technological assistance in improving its products and developing new products,
and expects such dependency to continue. The introduction of new diesel engine products will also
require significant capital expenditures, such as purchases of foreign manufacturing equipment and
technologies. In addition, Yuchais competitors in the diesel engine markets may be able to
introduce new or improved models that are more favorably received by customers than Yuchais
products. Competition in the end-use markets, mainly the truck market, may also lead to
technological improvement and advances that render Yuchais current products obsolete at an earlier
than expected date, in which case Yuchai may have to depreciate or impair its production equipment
more rapidly than planned. Failure to introduce, or delays in the introduction of, new or improved
products at competitive prices could have a material adverse effect on the financial condition,
results of operations, business or prospects of Yuchai.
The admission of China into the WTO which regulates trading among its member states could lead
to increased foreign competition for Yuchai. As a result of China becoming a member of the WTO,
import restrictions on both motor vehicle components, including diesel engines, and motor vehicles
are expected to be reduced. China is also required to lower its import tariffs as a condition for
membership in the WTO. Reduced import restrictions and/or lower tariffs may lead to increased
imports of foreign diesel engines and, therefore, to increased competition in the domestic diesel
engine markets. Similarly, reduced import restrictions and/or lower tariffs on automobiles may
affect the competition in the end-use markets of Yuchais customers and indirectly affect Yuchais
sales to such customers. Currently, China is encouraging foreign investments into the motor vehicle
engine manufacturing industry. Yuchai has from time to time been in discussions with potential
foreign diesel engine manufacturers on a possible strategic joint venture to develop and
manufacture new diesel engines.
26
Organizational Structure
The following chart illustrates the organizational structure of the Company and Yuchai as of
June 30, 2006, and is based on information generally known to Company or otherwise disclosed in
filings made with the SEC (see also Item 7. Major Shareholders and Related Parties Major
Shareholders).
27
Regulatory and Related Matters
Governance, Operation and Dissolution of Yuchai
Governance, operation and dissolution of Yuchai are governed by laws and regulations of China
relating to Sino-foreign joint stock companies, as well as by Yuchais Articles of Association.
Yuchai is subject to the Sino-Foreign Equity Joint Venture Enterprise Labor Management
Regulations. Under these regulations, management may hire and discharge employees and make other
determinations with respect to wages, welfare, insurance and employee discipline.
Chinese laws and regulations applicable to a Sino-foreign joint stock company require that,
before Yuchai distributes profits, it must: (i) satisfy all tax liabilities; (ii) recover losses in
previous years; and (iii) make contributions to certain statutory reserve fund in an amount equal
to at least 10% of net income for the year determined in accordance with generally accepted
accounting principles in China (PRC GAAP). However, the allocation of statutory reserve fund
will not be further required once the accumulated amount of such fund reaches fifty per cent of the
registered capital of Yuchai.
Pursuant to Chinese law and Yuchais Articles of Association, Yuchai may be dissolved upon the
occurrence of certain events, including force majeure, severe losses, lack of supply of necessary
materials or other events that render Yuchai unable to continue its operations. Upon dissolution,
Yuchai will form a liquidation committee. Final dissolution is subject to government review and
approval.
During 2003, the Company believes affiliates of the State Holding Company caused various
Chinese government agencies to raise allegations of irregularities regarding the status of the
Companys ownership of and rights of control over Yuchai, which the Company believes was intended
to try to limit the Companys rights to exercise control over Yuchai. The Company further believes
that such allegations were based on an inaccurate understanding of the structure of the Companys
ownership of and rights of control over Yuchai. The Company also believes that Yuchais ownership
structure has been validly approved by the relevant Chinese authorities, and that the shares of
Yuchai held by the Companys six wholly-owned subsidiaries are legally and validly held under
Chinese law. The Company has obtained legal opinions from two Chinese law firms confirming these
matters (see the Form 6-K filed by the Company with the SEC in April 1, 2005). The Company has also
taken steps to communicate to the relevant Chinese government agencies the reasons for its position
with respect to these matters. The Company believes the July 2003 Agreement and the Reorganization
Agreement, as amended, when fully implemented will resolve the issues raised by the various Chinese
governmental agencies relating to its share ownership in Yuchai and the continued corporate
governance and other difficulties which the Company has had from time to time with respect to
Yuchai. Based upon the above-mentioned legal opinions, the Company believes that in the event of a
future dispute with the Chinese stakeholders at Yuchai, the Company expects to pursue as
appropriate legal remedies in appropriate jurisdictions to seek to enforce its legal rights as the
majority shareholder with a controlling financial interest in Yuchai to protect its investment for
the benefit of the Company and its shareholders. See also Item 3. Key Information Risk Factors.
Property, Plants and Equipment
Yuchais headquarters is located in Yulin City in the Guangxi Zhuang Autonomous Region. Yuchai
has the right to use approximately 1.5 million square meters of land, which is currently used
primarily for the production of diesel engines and employee housing. The principal production land
area for the manufacture of diesel engines currently occupies approximately 960,900 square meters,
including a building for the current 6105 manufacturing facilities and recently completed
facilities occupying approximately 620,000 square meters that comprise the 6108 Engine Factory, the
6112 Engine Factory, administrative offices and technical operations space. In addition, Yuchai
leases 31 regional sales offices in PRC. During 2005, Yuchai increased production capacity to
approximately 290,000 units after the completion of the second foundry and new 6L and 6M heavy-duty
engines lines.
Environmental Matters
China adopted its Environmental Protection Law in 1989, and the State Council and the State
Environmental Protection Agency promulgate regulations as required from time to time. The
Environmental Protection Law addresses issues relating to environmental quality, waste disposal and
emissions, including air, water and noise emissions. Environmental regulations have not had a
material impact on Yuchais results of operations. Yuchai delivers, on a regular basis, burned sand
and certain other waste products to a waste disposal site approved by the local government and
makes payments in respect thereof. Yuchai expects that environmental standards and their
enforcement in China will, as in many other countries, become more stringent over time, especially
as technical advances make achievement of higher standards more feasible. Yuchai has built an air
filter system to reduce the level of dust and fumes
28
resulting from its production of diesel engines. The PRC emission standard equivalent to Euro
III will take effect from January 1, 2007. Yuchai believes the Company will be able to comply with
the new standard.
ITEM 4A. UNRESOLVED STAFF COMMENTS.
As of the date of filing of this Annual Report, the Company has one unresolved written comment
letter from the SEC staff regarding the Companys periodic reports under the Securities Exchange
Act. The letter, dated June 14, 2006, requests information pertaining to exports (i) by the
Company to Cuba and (ii) by an affiliated entity (another Chinese subsidiary of HLA, the Companys
controlling shareholder) to North Korea. The Company intends to respond to this comment letter by providing historical export data and confirming that the amounts exported are de mininis
in nature and are therefore immaterial. Such information has also
been added to Item 4. Information on the Company
Business Overview Sales, Marketing and Services.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The following discussion and analysis should be read in conjunction with the consolidated
financial statements and notes thereto contained in this Annual Report. The consolidated financial
statements of the Company are prepared in conformity with US GAAP.
During the fiscal years
ended December 31, 2003, 2004 and 2005, the Companys main asset has been its 76.4% ownership interest in Yuchai. As a result, the Companys financial
condition and results of operations have depended primarily upon Yuchais financial condition and
results of operations. The Company acquired its initial 51.3% interest in Yuchai effective April 1,
1993, increased its interest to 71.4% in November 1994 through the China Everbright Purchase and
then to 76.4% in December 1994 by purchasing additional Yuchai Shares with the net proceeds of its
initial public offering. The Companys historical results of operations differ from those of
Yuchai, primarily as a result of amortization of goodwill prior to 2002 which arose in connection
with the three investments in Yuchais equity, additional operating expenses and the minority
interest of other Yuchai shareholders in Yuchais income. In future financial periods, the
Companys financial condition, results of operations, business and prospects may differ
significantly from Yuchai, depending upon, among other things, the implementation of the Companys
new business expansion and diversification plan and the consummation of the spin-off contemplated
in the Reorganization Agreement (see Item 4. Information on the Company Recent Developments).
For example, in March 2005, the Company through its wholly-owned subsidiary, VDL, acquired an
approximate 14.99% interest in TCL, VDL further acquired another 1.00% interest of the total number of TCL
Shares in issue. As a result, the Company held a 15.99% stake in TCL
as of December 31, 2005. The Company accounts for its investment
in TCL using the equity method and the Company has reflected its
proportionate share of TCLs losses in its consolidated
statement of income since March 2005.
Overview
The various austerity measures taken by the Chinese government over the last decade to
regulate economic growth and control inflation have at times dampened demand for trucks in China.
In particular, austerity measures that restricted access to credit and slowed the rate of fixed
investment (including infrastructure development) adversely affected demand for, and production of,
trucks and other commercial vehicles. Such market conditions, together with increased competition
in the diesel engine market, resulted in various degrees of financial and marketing difficulties
for diesel engine producers, including the Company. However, the Chinese government announced in
1998 a major initiative to boost consumer demand through investments in infrastructure projects,
including the construction of highways and tollways, and also through increased availability of
bank credit. As a result, demand for trucks and other commercial vehicles, and thus demand for
diesel engines has been increasing annually since 1999 to 2004.
Although demand for commercial vehicles in China declined by approximately 1.0% in 2005, the
Companys net revenues in 2005 increased by 4.4% to Rmb 5,829.4 million compared to Rmb 5,582.1
million in 2004. This increase was primarily a result of higher unit sales of the 4-Series
light-duty diesel and industrial engines. The Company had income before minority interests of Rmb
96.4 million in 2005 compared to income before minority interests of Rmb 648.7 million in 2004. The
decrease in income before minority interests was primarily due to reduced gross margins, higher
selling, general and administrative expenses, and compounded by the specific provision made of Rmb
205 million for loans (non-trade) to a related company (see also Note 5 to the Companys Consolidated Financial Statements appearing elsewhere herein). Sales of the 6108 medium-duty and 6112
29
heavy-duty engines accounted for 13.9% and 13.5%, respectively, of the Companys net revenues in
2005. Sales of the 6L and 6M heavy-duty diesel engines accounted for 0.8% and 2.5%, respectively, of the Companys net
revenues in 2005. Due mainly to the credit tightening by banks in China, there are more customers
buying the light-duty diesel engines and industrial engines because the coverage selling price of
these light-duty diesel and industrial engines are lower than the medium and heavy-duty engines.
In 2005, the Company continued its efforts to control production costs and operating expenses.
However, a large portion of the Companys costs and expenses relate to fixed costs incurred in
connection with the production of its diesel engines, which limits the Companys ability to
significantly reduce its costs and expenses. The Companys cost of goods sold mainly includes cost
of materials consumed, factory overhead, direct labor and depreciation. The Company analyzes its
cost of goods sold based on its cost of manufacturing for each period. Cost of manufacturing for
each period equals cost of goods sold for the period plus or minus the change in period end
finished goods inventory. In 2005, cost of materials consumed accounted for approximately 80.9% of
the cost of manufacturing. The Companys selling, general and administrative (SG&A) expenses
include advertising expenses, provision for doubtful accounts, salaries and wages, freight charges,
sales commission expenses and a large number of smaller expenses.
The
Company had effective income tax rates of 16.2%, 14.0% and 17.8% in 2003, 2004 and 2005,
respectively. Yuchai was subject to PRC income tax at a rate of 24.0% of its income determined in
accordance with PRC GAAP in 1993 prior to the restructuring. After becoming a Sino-foreign joint
stock company, it was exempt from PRC income tax in 1994 and 1995. Under current laws, Yuchai is
subject to PRC income tax at a rate of 7.5% for each of the three years from 1996 to 1998 and a
rate of 10.0% for each of the three years from 1999 to 2001. Since January 1, 2002, Yuchai is
subject to tax at a rate of 15.0% so long as it continues to qualify as a foreign-invested
enterprise eligible for tax reductions under PRC income tax law. In addition to the PRC income tax,
Yuchai has been subject to value-added taxes on its sales since January 1, 1994. Dividends received
by the Company from Yuchai can be remitted from China without any PRC taxation under current
Chinese law. See Item 10. Additional Information Taxation Peoples Republic of China
Taxation.
The Company commenced trial marketing of its 6112 heavy-duty engine in early 1999, and began
commercial production of these engines during the second half of 1999. Due to the delay in
commercial production of the 6112 engine until 1999, however, the Company was not able to benefit
from the competitive advantages of an early entry into the domestic market for heavy-duty engines.
Moreover, the market for heavy-duty diesel engines in China is relatively price sensitive. With
increasing customer acceptance of the 6112 engine in late 2001 through 2003, the sales volume of
the 6112 engine improved significantly. Yuchai intends to continue to manufacture its 6112
heavy-duty diesel engines although there has been a decline in unit sales in 2005 mainly due to
changes in customers demand to light-duty diesel engines. In 2005, the sales volume of the 6112
engine was 14,788 units, which was lower than 24,073 units in 2004, due to shrinking demand arising
from the Chinese governments measures to tighten the credit supply within the banking sector in
China as part of its efforts to minimize overheating of the economy.
This situation has led to Yuchais customers buying more of the
cheaper light-duty diesel engines as compared to the more expensive
heavy-duty diesel engines. There can be no assurance that Yuchai will be able to compete
successfully in the heavy-duty diesel engine market in China with the existing producers (such as
Weichei Power Co., Ltd.) or any new entrants.
The Companys future financial condition and results of operations could be adversely affected
as a result of Chinas admission into the WTO. See Item 3. Key Information Risk Factors Risks
relating to Mainland China The admission of China into the WTO could lead to increased foreign
competition. Currently, China is encouraging foreign investments into the motor vehicle engine
manufacturing industry. However, the Company believes that the possible adverse impact of foreign
competition as a result of China becoming a member of the WTO would likely be mitigated by a number
of factors, including, (i) foreign diesel engines are not generally price competitive in the
domestic China market, (ii) foreign producers do not have the sales and distribution network or
service and parts center infrastructure of Chinese producers and (iii) while Chinas import tariffs
on motor vehicle components may be lowered, China has indicated that it does not intend to
eliminate such tariffs.
The Companys future financial condition and results of operations could also be adversely
affected as a result of China macroeconomic policy changes recently announced by the Chinese
government. The Chinese government has announced that it is considering additional measures in
certain sectors to avoid overheating of the economy, including tightening bank lending policies and
increases in bank interest rates. The market demand for diesel engines in China may be adversely
affected by these measures, particularly if diesel engines are included in any specific economic
sectoral caps or attempts to slow down sectoral lending. See Item 3. Key Information Risk
Factors Risks relating to Mainland China Adverse changes in the economic policies of the
Chinese government could have a material adverse effect on the overall economic growth of Mainland
China, which could reduce the demand for our products and adversely affect our competitive
position and Item 3. Key Information Risk Factors Risks relating to our company and our
business The diesel engine business in China is dependent in large part on the performance of the
Chinese economy, as well as Chinese government policy. As a result, our financial condition,
results of operations, business and
30
prospects could be adversely affected by slowdowns in the
Chinese economy, as well as Chinese government policies that de-emphasize the use of diesel
engines.
Critical Accounting Policies
The preparation of financial statements in accordance with US GAAP require the Companys
management to make judgments, estimates and assumptions regarding uncertainties that affect the
reported amounts of the Companys assets and liabilities, disclosures of contingent liabilities and
the reported amounts of revenues and expenses. These judgments, assumptions and estimates are
reflected in the Companys accounting policies, which are more fully described in Note 3 to the
Companys Consolidated Financial Statements appearing elsewhere herein.
Certain of the Companys accounting policies are particularly important to the portrayal of
the Companys financial position and results of operations and require the application of
significant assumptions and estimates by the Companys management. The Company refers to these
accounting policies as its critical accounting policies. The Companys management uses its
historical experience and analyses, the terms of existing contracts, historical cost convention,
industry trends, information provided by its agents and information available from other outside
sources, as appropriate, when forming its assumptions and estimates. However, this task is inexact
because the Companys management is making assumptions and providing estimates on matters that are
inherently uncertain. On an ongoing basis, management evaluates its estimates. Actual results may
differ from those estimates under different assumptions and conditions.
While the Company believes that all aspects of its financial statements should be studied and
understood in assessing its current expected financial condition and results, the Company believes
that the following critical accounting policies involve a higher degree of judgment and estimation
and therefore warrant additional attention:
|
|
|
Allowances for doubtful accounts; |
|
|
|
|
Realization of the carrying value of inventories; |
|
|
|
|
Product warranty obligations; |
|
|
|
|
Realization of deferred tax assets; |
|
|
|
|
Impairment of long-lived assets other than goodwill; |
|
|
|
|
Provision for loss contingency for guarantee granted by YEGCL; and |
|
|
|
|
Recoverability of carrying value of investment in TCL. |
Allowances for doubtful accounts
Allowance for doubtful accounts is managements best estimate of the amount of probable credit
losses in the Companys existing accounts receivable. The Company determines the allowance based on
historical write-off experience by industry and national economic data. The Company reviews its
allowance for doubtful accounts monthly. In 2005, the Company has examined the debtors ageing
report and noted that there was a significant change in the amounts owing by one of its major
customers, Dongfeng Group. For the year ended December 31, 2004, the Dongfeng Group accounted for
about 28% of the trade debtors outstanding as compared to approximately 12% of the amount owing as
of December 31, 2005. Likewise, the top 20 non-Dongfeng Group customers had increased its
significance in our sales and accounted for about 44% of the gross debts outstanding at the end of
2005 from 38% at the end of 2004. The Company has noted the
customers trends, repayment patterns and ageing analysis in 2005 which confirmed that
the provision policy for doubtful accounts for the year ended
December 31, 2004 is no longer appropriate. Therefore, the Company
has changed its
accounting estimates on allowances for doubtful accounts, taking into account the changes in
customers mix. Past due balances over 90 days and over a specified amount are reviewed
individually for collectibility. All other balances are reviewed on a pooled basis by aging of
such balances. Account balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote.
31
Changes in the allowances for doubtful accounts for each of the years in the three-year period
ended December 31, 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Balance at beginning of year |
|
|
158,075 |
|
|
|
94,423 |
|
|
|
107,457 |
|
|
|
13,315 |
|
Add: Charged to consolidated statements of income |
|
|
|
|
|
|
13,034 |
|
|
|
25,587 |
|
|
|
3,171 |
|
Less: Written back to consolidated statements of income |
|
|
(493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful debts written off |
|
|
(63,159 |
) |
|
|
|
|
|
|
(63,997 |
) |
|
|
(7,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
94,423 |
|
|
|
107,457 |
|
|
|
69,047 |
|
|
|
8,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company believes that the present level of its allowance for doubtful debts
adequately reflects probable losses related to impaired accounts receivable. However, changes in
the assumptions used to assess the frequency and severity of doubtful accounts would have an impact
on the Companys allowance for doubtful debts. If economic or specific industry trends change, the
Company would adjust its allowances for doubtful accounts by recording additional expense or
benefit. Management studies show that a decrease or increase of 5% in historical write-off
experience would increase or decrease the provision for doubtful accounts by approximately Rmb 13.9
million (US$1.7 million).
Realization of the carrying value of inventories
The Companys inventories are valued at the lower of cost or net realizable value at the
balance sheet date. Net realizable value represents the estimated selling price less costs to be
incurred in selling the inventories. Net realizable value is estimated based on the age and market
condition of inventories.
If market conditions or future product enhancements and developments change, the Company would
adjust its provision for inventories by recording additional expense or benefit. In the preceding
three years, there were no significant differences or adjustments between the book cost and the net
realizable or market value. Management studies show that a decrease or increase of 5.0% in
historical charge experience would increase or decrease the provision for inventories by
approximately Rmb 5.9 million (US$0.7 million).
Product
warranty obligations
The
Company accrues a liability for estimated future costs to be incurred under a warranty period or
warranty mileage on various engine models, for which it provides free repair and replacement.
Warranties generally extend for a duration (12 months to 18 months) or mileage (80,000 kilometers
to 180,000 kilometers), whichever is the lower. Provisions for warranty are primarily determined
based on historical warranty cost per unit of engines sold adjusted for specific conditions that
may arise and the number of engines under warranty at each financial year-end.
Changes
in the accrued product warranty liability for each of the years in the three-year period
ended December 31, 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Balance at beginning of year |
|
|
66,864 |
|
|
|
101,215 |
|
|
|
126,114 |
|
|
|
15,627 |
|
Add: Provision charged to
consolidated statements of
income |
|
|
162,369 |
|
|
|
190,205 |
|
|
|
179,184 |
|
|
|
22,203 |
|
Less: Amounts utilized |
|
|
(128,018 |
) |
|
|
(165,306 |
) |
|
|
(163,172 |
) |
|
|
(20,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
101,215 |
|
|
|
126,114 |
|
|
|
142,126 |
|
|
|
17,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys estimate of its warranty obligations is evaluated on an annual basis. In
previous years, warranty claims have typically not been higher than the relevant provisions made in
the Companys balance sheet. If the nature, frequency and average cost of warranty claims change,
the Company would adjust its allowances for product warranty by recording additional expense or
benefit so as to seek to ensure that accruals will be adequate to meet expected future obligations.
Management studies show that a decrease or
32
increase of 5.0% in historical utilization experience
would increase or decrease the provision for product warranty by approximately Rmb 8.2 million
(US$1.0 million).
Realization of deferred tax assets
Deferred tax assets are reduced by a valuation allowance to the extent the Company concludes
it is more likely than not that the assets will not be realized. This valuation allowance is an
estimate of the difference between the actual existing and future realizable deferred tax assets.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible, tax credits and
tax losses carried forward utilized. Management considers the scheduled reversal of deferred tax
assets, projected future taxable income, and tax planning strategies in making this assessment.
Forecasted taxable income may significantly differ from actual taxable income in future years,
which may result in material revisions to the valuation allowance of deferred tax assets.
Differences in actual results from available evidence used in determining the valuation allowances
could result in future adjustments to the allowance. The realization of the deferred tax assets is subject to specific PRC tax regulations and not
solely dependent on generating future taxable income. For example, tax credits relating to the
purchase of domestic equipment may not be fully utilized as the amount entitled for deduction each
year is limited to the incremental current income tax expense of the subsidiary compared to the
income tax of the subsidiary for the year before the domestic equipment was purchased. Tax credit
may also have a validity period. It is therefore possible that a subsidiary has a taxable income
but unable to utilize the deferred tax benefit brought forward, if
any. Tax losses incurred by certain subsidiaries are not likely to be realized in the future in connection with the assessment for valuation allowance. Based on managements forecast of future
taxable income, the Company views the recoverability of the deferred tax assets, net of existing
valuation allowances, as more likely than not to be realizable. In addition, based upon the
results of prior years taxable income and projections for future taxable income over the next five
years in which the deferred tax assets are deductible and tax losses carried forward, management
believes the Company will realize the benefits of these deductible differences and tax losses
carried forward as of December 31, 2005. Deferred tax assets which were not probable to be
realized had been subjected to valuation allowance. For the years
ended December 31, 2003 and 2004, no deferred tax asset valuation
allowance was provided. For the year ended December 31, 2005,
management concluded that a deferred tax asset valuation allowance of
Rmb 45.2 million (US$5.6 million) was necessary. This valuation
allowance is primarily for tax credits that management believes will
expire unused.
Forecasted taxable income may significantly differ from actual taxable income in future years,
which may result in material adjustment to the valuation allowance for deferred tax assets.
Impairment of long-lived assets, other than goodwill
Long-lived assets, such as property, plant and equipment, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted
future cash flows, an impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
The Company has conducted a review on the conditions of the property, plant and equipment. In
2003, management identified that certain property, plant and equipment would no longer be used in
production due to the introduction of new environmental regulations in 2003. These changes required
an impairment analysis to be performed. The estimated undiscounted
future cash flows generated from such property, plant and equipment were less than their carrying
value. The carrying value of such assets was therefore reduced to estimated fair value. Since there
was no active second hand resale market for these items relating to property, plant and equipment,
management has adopted the discounted cash flow model to determine their fair value. Impairment
loss of Rmb 12.4 million (US$1.5 million) has been charged to income statements in 2003 under
selling, general and administrative expense. In 2004 and 2005, the Company has not identified
circumstances which indicate that the carrying value of the property, plant and equipment may not
be recoverable, hence no impairment loss was recognized.
If the estimates of cash flows and fair value of these long-lived assets change, management
studies show that a 5.0% variance in historical charge experience would not have any significant
impact to the Companys financial statements.
Provision
for loss contingency for guarantee granted by YEGCL
YEGCL guaranteed borrowings of Rmb 7.6 million and Rmb 178.5 million (US$22.1 million) granted
by commercial banks to unrelated parties in 2004 and 2005, respectively. The borrowings are due in
equal monthly or quarterly instalments through one to two years. The guarantees were made to
individual persons who applied for mortgage loans from commercial banks to purchase automobiles
equipped with diesel engines produced by Yuchai. The guarantees are for the entire amount and term
of the borrowings. In return, YEGCL receives a premium fee amounted to 2% to 8% of the amount of
borrowings. All guarantees are secured by automobiles at a net book value totaling Rmb 11.7
million and Rmb 242.2 million (US$30.0 million) as of December 31, 2004 and 2005, respectively. If
the individual defaults on payment, YEGCL would have to perform under the guarantees. It is
reasonably possible that YEGCL would be required to make payment under its guarantees. As of
December 31, 2004 and 2005, the maximum amount of undiscounted payments that YEGCL would have to
make in the event of default is Rmb 7.4 million and Rmb 134.2 million
33
(US$16.6 million). Pursuant to the requirements of FIN 45, the Company accrued Rmb 0.2 million and Rmb 16.8 million (US$2.1
million) related to its stand ready obligation under the guarantee arrangement in 2004 and 2005,
respectively. In assessing the contingent liability, management considered the probable
recoverable amount of the secured automobiles and the customers
deposits against its obligations to the banks for the defaulted
payments from the customers. The Company has assessed that there is a
risk exposure relating to default by customers on the expected future
payments and therefore such a provision for loss contingency is
required. The
amount recognized during the year ended December 31, 2004 and 2005 includes premium received or
receivable, which is amortized on a straight line basis over the terms of the guarantees, of Rmb
220.0 million and Rmb 4.5 million (US$0.6 million), respectively. The amount of premium being
amortized, which were recorded as revenue, for the year ended December 31, 2004 and 2005 were
amounted to Rmb 0.01 million and Rmb 1.2 million (US$0.1 million), respectively. The remaining
balance of Rmb 12.3 million (US$1.5 million) as of December 31, 2005 represents the provision for
loss contingency related to the guarantees where payment by the Company was probable.
34
Recoverability of carrying amount of investment in TCL
The Company acquired a 15.99% equity ownership interest in TCL in 2005 as part of its
diversification plan to include new businesses, other than Yuchai. The total purchase
consideration was S$32.3 million, which approximates S$0.12 per share. The market price of TCL shares
traded on the Singapore Exchange has fallen to S$0.08 on
December 31, 2005 and was S$0.085 per
share on July 31, 2006. Management of the Company has assessed and deemed the impairment to be
temporary in nature and the Company has the ability and intent to hold its investment in TCL for a
period that should allow it to recover its carrying value. Accordingly, no provision for
impairment is required.
Using
the quoted market price at December 31, 2005, the TCL investment was valued at S$22.5
million (Rmb 109.0 million based on an exchange rate of S$1.00
to Rmb 4.83), compared to our carrying value of S$38.3 million (Rmb
185.0 million based on an exchange rate of S$1.00 to Rmb 4.83). If the Companys management considered
such impairment to be other than temporary, an impairment provision would have been recognized and
income before income taxes and minority interest would have been
reduced by Rmb 76.0 million (US$9.4 million based on an
exchange rate of Rmb 8.0957 to US$1.00) for the year ended December 31, 2005.
Results of Operations
The following table sets forth the percentages of net revenues of certain income and expense
items of the Company for the last three fiscal years ended December 31, 2003, 2004 and 2005,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Net Revenues |
|
|
Year Ended December 31, |
|
|
2003 |
|
2004 |
|
2005 |
Revenues, net |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
69.9 |
% |
|
|
71.8 |
% |
|
|
77.7 |
% |
Gross profit |
|
|
30.1 |
% |
|
|
28.2 |
% |
|
|
22.3 |
% |
Research and
development costs |
|
|
2.1 |
% |
|
|
2.5 |
% |
|
|
2.1 |
% |
Selling,
general and administrative expenses |
|
|
12.3 |
% |
|
|
11.8 |
% |
|
|
13.8 |
% |
Provision for uncollectible loans to a related party |
|
|
|
|
|
|
|
|
|
|
3.5 |
% |
Operating income |
|
|
15.8 |
% |
|
|
14.0 |
% |
|
|
2.9 |
% |
Interest expense |
|
|
0.5 |
% |
|
|
0.6 |
% |
|
|
1.2 |
% |
Other (expenses)/income, net |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
0.4 |
% |
Income before income taxes and minority interests |
|
|
15.2 |
% |
|
|
13.5 |
% |
|
|
2.0 |
% |
Income taxes |
|
|
2.5 |
% |
|
|
1.9 |
% |
|
|
0.4 |
% |
Income before minority interests |
|
|
12.8 |
% |
|
|
11.6 |
% |
|
|
1.7 |
% |
Minority interests in income of consolidated subsidiaries |
|
|
3.2 |
% |
|
|
2.8 |
% |
|
|
0.5 |
% |
Net income |
|
|
9.6 |
% |
|
|
8.8 |
% |
|
|
1.2 |
% |
35
2005 Compared to 2004
Net revenue increased by 4.4% to Rmb 5,829.4 million (US$722.3 million) in 2005 compared to
Rmb 5,582.1 million in 2004. The increase in net revenue was primarily due to higher sales volume
arising from more aggressive marketing programs. Unit sales of diesel engines increased by 11.4%
to 230,228 units in 2005 from 206,628 units in 2004 and this unit sales increase came mainly from
higher sales of the 4-Series light-duty diesel engines and 6105 medium-duty diesel engines. In
2005, net revenues of the 4-Series light-duty diesel engines increased by approximately 35.7% and
net revenues of the 6105 medium-duty engines increased by approximately 52.9% as compared to 2004.
Cost
of goods sold increased by 13.0% to Rmb 4,527.0 million (US$561.0 million) in 2005 from
Rmb 4,006.9 million in 2004, and increased as a percentage of net revenues to 77.7% in 2005 from
71.8% in 2004. Cost of manufacturing increased by 14.5% to Rmb 4,371.1 million (US$541.6 million)
in 2005 from Rmb 3,816.7 million in 2004, and increased as a percentage of net revenue to 75.0%
from 68.4% in 2004. Cost of materials consumed in costs of manufacturing increased by 15.9% to Rmb
3,660.9 million (US$453.6 million) in 2005 from Rmb 3,159.9 million in 2004 (due to higher
production throughout during 2005, while cost of materials consumed as a percentage of net revenue
increased to 62.8% in 2005 from 56.6% in 2004. Factory overhead (which does not include
depreciation and salaries) included in cost of manufacturing decreased by 2.4% to Rmb 409.0 million
(US$50.7 million) in 2005 from Rmb 419.2 million in 2004, due to lower variable factory expenses.
Factory overhead as a percentage of net revenue decreased to 7.0% for 2005 and 7.5% for 2004.
Depreciation included in cost of manufacturing increased to Rmb 115.5 million (US$14.3 million)
from Rmb 84.9 million in 2004. Depreciation as a percentage of net revenue increased to 2.0% in
2005 from 1.5% in 2004.
Gross profit decreased by 17.3% to Rmb 1,302.4 million (US$161.4 million) in 2005 from Rmb
1,575.2 million in 2004. Gross profit margin (gross profit divided by net revenue) decreased to
22.3% in 2005 compared to 28.2% in 2004, reflecting a shift in the sales mix whereby the gross
margin for the 4-Series and industrial engines were lower than margins historically achieved for
both medium and heavy-duty engines.
SG&A expenses (excluding research and development) increased by 22.6% to Rmb 807.4 million
(US$100.0 million) in 2005 from Rmb 658.3 million in 2004 and increased as a percentage of net
revenue from 11.8% in 2004 to 13.8% in 2005. This increase in SG&A was primarily due to the
increase in sales, legal and professional costs and allowance for doubtful accounts on trade
accounts receivable. Research and development expenses decreased to Rmb 123.9 million (US$15.4
million) in 2005 from Rmb 137.0 million in 2004. Advertising expenses included in SG&A decreased by 7.0% to Rmb 45.3
million (US$5.6 million) in 2005 from Rmb 48.7 million in 2004. Advertising expenses as a
percentage of net revenue decreased to 0.8% in 2005 from 0.9% in 2004. Sales commission expenses
included in SG&A expenses increased by 239.7% to Rmb 39.4 million (US$4.9 million) in 2005 from Rmb
11.6 million in 2004. Sales commission expenses as a percentage
of net revenues increased to 0.7%
in 2005 from 0.2% in 2004. The decrease in advertising is mainly due to lower spending on
television and road signboard advertising. The increase in sales commissions is mainly due to higher
commission given to promote the sales of new products such as 6L and 6M heavy duty diesel engines.
Included in the 2005 income statement,
is a provision for uncollectible loans to related party of Rmb 205,000
(US$25,402). See Note 5 to the Companys Consolidated Financial
Statements appearing elsewhere herein. Salaries and wages as a percentage of net revenues
was 8.3% in 2005 and 7.4% in 2004. As a result of the foregoing, profits from operations
decreased to Rmb 168.7 million (US$20.9 million) in 2005
compared to Rmb 779.9 million in 2004.
Interest expenses increased by 122.1%
to Rmb 70.5 million (US$8.7 million) in 2005 from Rmb
31.8 million in 2004, primarily due to increase in bank borrowings.
Profit
before income taxes and minority interests in 2005 was Rmb
117.2 million (US$14.5
million), as compared to a profit of Rmb 753.9 million in 2004. Income tax expenses in 2005 was Rmb
20.9 million (US$2.6 million) compared to income tax expenses of Rmb 105.2 million in 2004. Yuchai
was subject to PRC income tax at a rate of 15.0% in both 2004 and
2005. The effective tax rates of Yuchai were 14.0% and 17.8% for 2004
and 2005 respectively. Effective tax rate for 2005 was primarily due
to additional non-deductible expenses for tax purposes.
As a result of the foregoing factors, the Company had profit before minority interests of Rmb
96.4 million (US$11.9 million) in 2005 compared to Rmb 648.7 million in 2004, and net income of Rmb
68.5 million (US$8.5 million) in 2005 compared to a net income of Rmb 491.4 million in 2004.
2004 Compared to 2003
Net revenue increased by 22.1% to Rmb 5,582.1 million (US$674.5 million) in 2004 compared to
Rmb 4,570.0 million in 2003. The increase in net revenue was primarily due to higher sales volume
arising from more aggressive marketing programs. Unit sales of diesel engines increased by 20.0% to
206,628 units in 2004 from 172,219 units in 2003 and this unit sales increase came mainly from
higher sales of the 4-Series light-duty diesel engines and 6112 heavy-duty diesel engines. In 2004,
net revenues of the 4-Series light-duty diesel engines increased by approximately 54% and net
revenues of the 6112 heavy-duty engines increased by approximately 20% as compared to 2003.
Cost of goods sold increased by 25.5% to Rmb 4,006.9 million (US$484.1 million) in 2004 from
Rmb 3,192.8 million in 2003, and increased as a percentage of net revenues to 71.8% in 2004 from
69.9% in 2003. Cost of manufacturing increased by 27.5% to Rmb 3,816.7 million (US$461.1 million)
in 2004 from Rmb 2,993.7 million in 2003, and increased as a percentage of net revenue to 68.4%
from 65.5% in 2003. Cost of materials consumed in costs of manufacturing increased by 27.4% to Rmb
3,159.9 million (US$381.8 million) in 2004 from Rmb 2,479.9 million in 2003 (due to higher
production throughput during 2004), while cost of materials consumed as a percentage of net revenue
increased to 56.6% in 2004 from 54.3% in 2003. Factory overhead (which does not include
depreciation and salaries) included in cost of manufacturing increased by 118.4% to Rmb 419.2
million (US$50.6 million) in 2004 from Rmb 191.9 million in 2003, due to higher variable factory
expenses (such as utilities) arising from higher diesel engine production in 2004. Factory overhead
as a percentage of net revenue similarly increased to 7.5% for 2004 and 4.2% for 2003. Depreciation
included in cost of manufacturing decreased to Rmb 84.9 million (US$10.3 million) from Rmb 88.7
million in 2003. Depreciation as a percentage of net revenue decreased to 1.5% in 2004 from 1.9% in
2003.
Gross profit increased by 14.4% to Rmb 1,575.2 million (US$190.3 million) in 2004 from Rmb
1,377.2 million in 2003. Gross profit margin (gross profit divided by net revenue) decreased to
28.2% in 2004 compared to 30.1% in 2003, reflecting a shift in the sales mix whereby the gross
margin for the 4-Series and industrial engines were lower than margins historically achieved for
both medium and heavy-duty engines.
36
SG&A expenses
(excluding research and development) increased by 17.3% to Rmb 658.3 million
(US$79.5 million) in 2004 from Rmb 561.2 million in 2003 and decreased as a percentage of net
revenue from 12.3% in 2003 to 11.8% in 2004. This increase in SG&A was primarily due to the
increase in sales. Research and development expenses increased to Rmb 137.0 million (US$16.5
million) in 2004 from Rmb 94.6 million in 2003. Such increased expenses were primarily due to the
development of the 6L engines and Euro II compliance. Advertising expenses included in SG&A
increased by 18.8% to Rmb 48.7 million (US$5.9 million) in 2004 from Rmb 41.0 million in 2003.
Advertising expenses as a percentage of net revenue decreased to 0.9% in 2004 from 0.90% in 2003.
Sales commission expenses included in SG&A expenses decreased by 30.5% to Rmb 11.6 million (US$1.4
million) in 2004 from Rmb 16.7 million in 2003. Sales commission expenses as a percentage of net
revenues decreased to 0.2% in 2004 from 0.4% in 2003. The increase in advertising and decrease in
sales commission expenses reflected primarily higher costs incurred for the promotion of the 6L and
6M engines in 2004 and the change in Yuchais promotion strategies by offering lower selling prices
to customers rather than through sales commission paid to its sales agents. Salaries and wages as a
percentage of net revenues was 7.4% in 2004 and 7.5% in 2003. In 2003, management identified that
certain property, plant and equipment were no longer used in production due to the introduction of
new environmental regulations in 2003. These changes required an impairment analysis to be
performed in accordance with SFAS No. 144. The estimated undiscounted future cash flows generated from such property,
plant and equipment were less than their carrying value. The carrying value of such assets was
therefore reduced to estimated fair value. Impairment loss of Rmb 12.4 million (US$1.5 million) has
been charged to income statements in 2003. In 2004, the Company has not identified circumstances
which indicate that the carrying value of the property, plant and equipment may not be recoverable,
hence no impairment loss was recognized. As a result of the foregoing, profits from operations
increased to Rmb 779.9 million (US$94.2 million) in 2004 compared to Rmb 721.4 million in 2003.
Interest expenses increased by 34.7% to Rmb 31.8 million (US$3.8 million) in 2004 from Rmb
23.6 million in 2003, primarily due to increase in bank borrowings.
Income before income taxes and minority interests in 2004 was Rmb 753.9 million (US$91.1
million), as compared to Rmb 696.9 million in 2003. Income tax expenses in 2004 was Rmb 105.2
million (US$12.7 million) compared to income tax expenses of Rmb 112.9 million in 2003. Yuchai was
subject to PRC income tax at a rate of 10.0% in 2000 and 2001, and 15.0% in 2002, 2003 and 2004.
As a result of the foregoing factors, the Company had income before minority interests of Rmb
648.7 million (US$78.4 million) in 2004 compared to Rmb 584.0 million in 2003, and net income of
Rmb 491.4 million (US$59.4 million) in 2004 compared to Rmb 438.2 million in 2003.
Inflation
The general annual inflation rate in China was approximately 1.2%, 3.9% and 1.8% in 2003, 2004
and 2005, respectively. The Companys results of operations may be affected by inflation,
particularly rising prices for parts and components, labor costs and other operating costs.
Liquidity and Capital Resources
The Companys primary
sources of cash are funds from operations generated by Yuchai, as well
as debt financing incurred by the Company. The Companys operations provided cash in 2003, 2004 and
2005. The acquisitions of TCL in 2005 and LKN in 2006 were funded from internal cash and external bank borrowings. In
2005, the Companys primary cash requirements were for working capital and capital expenditures to complete the expansion of production capacity.
The Company believes that its sources of liquidity are sufficient for its requirements over the next
year. Factors which may affect the Companys ability to generate funds from operations include
increased competition (including as a result of Chinas admission to the WTO), fluctuations in
customer demand for the Companys products, the Companys ability to collect and control its level
of accounts receivable, the status of the Companys investment in Yuchai under Chinese law and the
implementation of the Reorganization Agreement (see Item 4. Information on the Company Recent
Developments).
As
of December 31, 2005, the Company had approximately
Rmb 736.2 million (US$91.2 million) in cash on a
consolidated basis which the Company considers would be sufficient to meet the Companys
operational requirements at least for the next year. However, the Company believes that if the
Company is considered on a stand alone basis without its investment in Yuchai, the Company would
find it difficult to raise new capital (either debt or equity) on its own.
The following table summarizes the key elements of the Companys cash flows for the last three
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
(in thousands) |
|
Net cash provided by operating activities |
|
|
1,075,274 |
|
|
|
589,608 |
|
|
|
242,674 |
|
|
|
30,070 |
|
Net cash used in investing activities |
|
|
(372,373 |
) |
|
|
(753,367 |
) |
|
|
(677,215 |
) |
|
|
(83,915 |
) |
Net cash (used in)/provided by financing activities |
|
|
(714,163 |
) |
|
|
254,493 |
|
|
|
452,777 |
|
|
|
56,105 |
|
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
(4,713 |
) |
|
|
(584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents |
|
|
(11,262 |
) |
|
|
90,734 |
|
|
|
13,523 |
|
|
|
1,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flow provided by operating activities decreased by Rmb 346.9 millions. The
decrease was principally caused by an increase in inventories, net of Rmb 289.7 million, due to
stocking up at the end 2005 to meet expected higher sales in 2006. In addition,
37
the decrease in net
cash from operating activities was also partly attributed to increase
in trade accounts receivables, net
of Rmb 270.7 million and increased in amount due from related companies of Rmb 115.1 million. In
addition, there was an increased in trade accounts payable in 2005 of Rmb 553.3 million arising
from increased business activities from higher production. Net cash
used in investing activities decreased by Rmb 76.2 million in 2005, principally due to repayment of
Rmb 205.0 million of loans from a related company and increased in purchased of investments of Rmb
161.4 million. The Rmb 205.0 million loan repaid by the related company (YMLC) was subsequently
re-loaned to the same company (see also Note 5 to the Companys
Consolidated Financial Statements appearing elsewhere herein. Net cash provided by financing activities increased by Rmb 198.3
million in 2005, mainly due to net increase in net proceeds from bank terms loans of Rmb 432.8
million, proceeds from 2% convertible bonds of Rmb 206.9 million and offset by the dividend payment
of Rmb 120.3 million made in 2005.
Cash provided by
continuing operations is a major source of the Companys
liquidity. Other than with respect to the application of cash generated from operations for capital
expenditures and dividend payments (see Item 8. Financial Information Policy on Dividend
Distributions), the Company does not have a formal cash management policy.
The Company expects that cash generated from operations and credit collection arrangements
should provide the Company with sufficient financial flexibility to satisfy future bank
obligations, capital expenditures and projected working capital requirements. However, at certain
times cash generated from operations is subject to seasonal fluctuations. As a result, the Company
may use periodic borrowings to supplement its working capital requirements. Yuchai has established
banking relationships with a number of domestic Chinese banks, each of which will review Yuchais
loan applications on a case by case basis with reference to the loan limit approved by Yuchais
Board of Directors. Yuchai had outstanding borrowings of Rmb 962.8 million as of December 31, 2005.
The interest rate applicable to the amounts borrowed ranges from 4.94% and 5.85% per annum. During
its April 2006 board meeting, the Yuchai board of directors approved an increase in this borrowing
limit to Rmb 2,000 million. As of June 30, 2006, Yuchai had outstanding borrowings of Rmb 920
million. The Company believes that should there be a need for further loans from banks, Yuchai
could seek to drawdown additional amounts up to such limit from the Chinese domestic banks;
however, no assurance can be given that such additional borrowings would be approved by such banks.
The Companys working capital as of December 31, 2005 was Rmb 959.4 million compared to Rmb
1,402.2 million as of December 31, 2004. The decrease in working capital was primarily due to the
increase of accounts payable by 50.8% to Rmb 1,643.0 million, with higher volume of raw materials
and components purchased to meet expected higher sales in 2006. In addition, the increase in total
current liabilities was also partly due to increase in borrowings of
Rmb 432.8 million. As of December
31, 2005, the Company had long-term debt, including current installments, totaling Rmb 150.0
million, of which Rmb 100.0 million will mature in 2006. The
Company had current debt totaling
Rmb 812.8 million as of December 31, 2005.
The Companys capital expenditures were Rmb 515.4 million in 2005, Rmb 552.9 million in 2004
and Rmb 372.8 million in 2003. As of December 31, 2005, the Company had authorized and contracted
for capital expenditures for improvement to existing production facilities in the amount of Rmb
214.1 million. As the Companys business continues to grow, it will also require additional funds
for increased working capital requirements, including to finance increased accounts receivable.
The Company expects to fund its capital expenditures and working capital requirements primarily
from funds from operations generated by Yuchai and, to the extent that is insufficient, from bank
loans incurred by Yuchai and the Company. Yuchais ability to obtain financing is limited by
government regulation and a general shortage of debt and equity financing in China. Any additional
capital contribution by the Company to Yuchai would require, among other things, the approval of
the MOC, which has broad discretion with respect to such approval.
In
February 2005, the Company issued $25.0 million in principal amount of convertible bonds due
2012 in a private placement. The convertible bonds carried interest at 2.0% per annum and matured
in 2012, unless redeemed earlier in accordance with their terms. The bonds were convertible by
their holders into newly issued ordinary shares of the Company at a conversion price of $12.969 per
share, subject to customary adjustments. The bonds were fully converted by their holders in June
2005. Upon conversion, the Company issued 1,927,673 ordinary shares, representing approximately
5.45% and 5.17% of the then existing and enlarged issued share capital of the Company,
respectively. The Company received approximately $24.9 million in proceeds from the convertible
bond placement after deducting costs and expenses. The proceeds of the offering had been fully
utilized to finance the TCL share acquisitions described above.
As an additional source of funding for the Companys business expansion and diversification
related activities, the Company had in March 2005, September 2005, January 2006 and March 2006
entered into credit facilities for $25.0 million, $50.0 million, S$60.0 million (approximately
US$37.0 million, based on an exchange rate of S$1.62 to US$1.00) and S$110.0 million (approximately
US$69.2 million, based on an exchange rate of S$1.59 to US$1.00), respectively, with various banks
in Singapore. The Company has drawn down the first three facilities as of June 30, 2006 in
connection with its acquisition of shares and bonds in TCL and LKN described above. The purpose of
the fourth credit facility is to enable the Company to make further new acquisitions
38
as part of its diversification plans. These facilities aggregate approximately $181.2 million of which $112
million had been drawn down as of June 30, 2006. The terms of these facilities require, among
other things, that HLA retains ownership of CYIs Special Share and that CYI remains a consolidated
subsidiary of HLA. The terms of these facilities also include certain financial covenants
with respect to CYIs tangible net worth and net gearing ratio throughout the tenor of the
facility, as well as negative pledge provisions and customary drawdown requirements and events of
default.
As part of its business strategy, Yuchai seeks from time to time opportunities to invest in
domestic manufacturers of diesel engine parts and components, as well as in other related
automotive businesses, including truck manufacturers, and insurance, warranty servicing and credit
support for diesel engine customers. Yuchai may make such investments and acquisitions with funds
provided by operations, future debt or equity financings or a combination thereof. Subsequent to
December 31, 2005, Yuchai has lodged an application to the Peoples Bank of China for short-term
bonds issuing limit amounting to Rmb 1,000 million (US$124.5 million). The application was
approved on May 30, 2006 and is valid until the end of June 2007. Yuchai can issue the bonds in
multiple tranches at various dates during the validity period of the approval. Yuchai intends to
use these short-term bonds principally to refinance existing indebtedness relating to its working
capital requirements.
Yuchai issued the first tranche of Rmb 500 million short-term bonds on June 13, 2006 with a
maturity date on March 9, 2007.
The following table sets forth information on the Companys material contractual obligation
payments for the periods indicated as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
5 Years |
|
|
|
(in Rmb millions) |
|
Short-term debt |
|
|
913 |
|
|
|
913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
50 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
Purchase Obligations
regarding capital
expenditure |
|
|
214 |
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
Commitments |
|
|
6 |
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,183 |
|
|
|
1,130 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent
to December 31, 2005, the Company entered into a number of
contractual arrangement that result in additional cash obligations or
contingent cash obligations (see Note 34 to the Consolidated
Financial Statements).
Off-Balance Sheet Arrangements
The Company currently does not engage in any off-balance sheet arrangements.
Guarantee by YEGCL
YEGCL
guaranteed borrowings of Rmb 7.6 million and Rmb
178.5 million (US$22.1 million) granted by commercial
banks to unrelated parties in 2004 and 2005, respectively. The borrowings are due in equal monthly
or quarterly instalments through one to two years. The guarantees were made to individual persons
who applied for mortgage loans from commercial banks to purchase automobiles equipped with diesel
engines produced by Yuchai. The guarantees are for the entire amount and term of the borrowings.
In return, YEGCL receives a premium fee amounted to 2% to 8% of the amount of borrowings. All
guarantees are secured by automobiles at a net book value totaling
Rmb 11.7 million and Rmb 242.2 million
(US$30.0 million) at December 31, 2004 and 2005, respectively. If the individual defaults on payment,
YEGCL would have to perform under the guarantees. It is reasonably possible that YEGCL would be
required to make payment under its guarantees. As of December 31, 2004 and 2005, the maximum
amount of undiscounted payments that YEGCL would have to make in the
event of default is Rmb 7.4 million
and Rmb 134.2 million (US$16.6 million). Pursuant to the
requirements of FIN 45, the Company accrued Rmb 0.2 million
and Rmb 16.8 million (US$2.1 million) related to its stand ready obligation under the guarantee arrangement in
2004 and 2005, respectively. The amount recognized during the year ended December 31, 2004 and
2005 includes premium received or receivable, which is amortized on a straight line basis over the
terms of the guarantees, of Rmb 0.2 million and Rmb
4.5 million (US$0.6 million), respectively. The amount of premium
being amortized, which were recorded as revenue, for the year ended December 31, 2004 and 2005 were
amounted to Rmb 0.01 million and Rmb 1.2 million
(US$0.1 million), respectively. The remaining balance of Rmb
12.3 million
(US$1.5 million) as of December 31, 2005 represents the provision for loss contingency related to the
guarantees where payment by the Company was probable.
39
Outstanding bills discounted
As of December 31, 2004 and 2005, outstanding bills discounted with banks for which the
Company has retained a recourse obligation totaled Rmb 1,117.8 million and Rmb 1,373.7 million
(US$170.2 million), respectively.
Outstanding letter of credits
As of December 31, 2004 and 2005, the Company had issued irrevocable letter of credits of Rmb
165.9 million and Rmb 110.3 million (US$13.7 million), respectively.
Except for the above off-balance sheet arrangements, the Company has no other outstanding
derivative financial instruments, off-balance sheet arrangements or guarantees.
Recently Issued Accounting Standards
Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 47
In March 2005, the FASB issued FIN No. 47, Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for a
conditional asset retirement obligation if the fair value of the obligation can be reasonably
estimated. The types of asset retirement obligations that are covered by this interpretation are
those for which an entity has a legal obligation to perform an asset
retirement activity, however the timing and (or) method of settling the obligation are conditional on a future event that may or
may not be within the control of the entity. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset retirement obligation.
FIN 47 is effective no later than the end of fiscal years ended after December 15, 2005. The
initial adoption of FIN 47 did not have an impact on the Companys financial condition and
consolidated statements of income.
FIN
No. 48
In June 2005, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Companys
financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold
and measurement attributes for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for
the fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact
of the provisions of FIN 48 to the Companys consolidated financial statements.
Emerging Issues Task Force (EITF) 04-13
In September 2005, the EITF issued EITF 04-13, Accounting for Purchases and Sales of
Inventory with the Same Counterparty. EITF 04-13 provides guidance as to when purchases and sales
of inventory with the same counterparty should be accounted for as a single exchange transaction.
EITF 04-13 also provides guidance as to when a nonmonetary exchange of inventory should be
accounted for at fair value. EITF 04-13 will be applied to new arrangements entered into, and
modifications or renewals of existing arrangements beginning in the first interim or annual
reporting beginning after March 15, 2006. The application of EITF 04-13 is not expected to have a
significant impact on the Companys consolidated financial statements.
SFAS No. 151
In December 2004, the FASB issued SFAS No. 151, Inventory Costs, which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Under this statement, such items will be recognized as current-period
charges. In addition, the statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production facilities. This statement
will be effective for the Company for inventory costs incurred on or after January 1, 2006. The
initial adoption of this statement will not have a significant effect on the Companys 2006
consolidated financial statements.
SFAS No. 153
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which
eliminates an exception in Accounting Principles Board (APB) Opinion No. 29, Accounting for
Nonmonetary Transactions, for recognizing nonmonetary exchanges of similar productive assets at
fair value and replaces it with an exception for recognizing exchanges of nonmonetary assets at
fair value that do not have commercial substance. This statement will be effective for the Company
for nonmonetary asset exchanges occurring on or after January 1, 2006. The adoption of this
statement will not have a significant effect on the Companys 2006 consolidated financial
statements.
SFAS No. 155
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements No. 133 and 140. This statement amends SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This
statement resolves issues addressed in SFAS No 133 Implementation and Issue No. D1, Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets. This statement will be
effective for the fiscal years beginning after September 15, 2006. The Company is currently
evaluating the impact of the statement to the Companys consolidated financial statements.
SFAS
No. 156
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
an amendment of FASB Statement No. 140. This statement amends SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to
the accounting for separately recognized servicing assets and servicing liabilities. The statement
requires an entity to recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract in certain situations
and requires all separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable. The statement also provides guidelines to classification,
disclosure and subsequent measurement of servicing assets and servicing liabilities. This
statement will be effective for the fiscal years beginning after September 15, 2006. The Company
is currently evaluating the impact of the statement to the Companys consolidated financial
statements.
40
SFAS
No. 123 (revised 2004)
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which
addresses the accounting for transactions in which an entity exchanges its equity instruments for
goods or services, with a primary focus on transactions in which an entity obtains employee
services in share-based payment transactions. This statement is a revision to SFAS No. 123 and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This statement will require measurement of the cost of employee services
received in exchange for stock compensation based on the grant-date fair value of the employee
stock options. Incremental compensation costs arising from subsequent modifications of awards
after the grant date must be recognized. The Company will adopt this statement on January 1, 2006
under the modified prospective method of application. Under that method, the Company will
recognize compensation costs for new grants of share-based awards, awards modified after the effect
date, and the remaining portion of the fair value of the unvested awards at the adoption date. The
initial adoption of this statement will not have any effect on the Companys 2006 consolidated
financial statements.
Research and Development
The Company has committed substantial resources to continually improve the technology of its
products. The Companys internal development effort focuses primarily on improving manufacturing
processes and adapting foreign technology to the Chinese market. In addition, the Company plans to
continue to acquire advanced technology from Chinese research institutes, foreign engine design
consulting firms and foreign diesel engine and engine parts manufacturers. As of December 31, 2005,
the Company employed over 1,445 engineers, approximately 267 of whom were devoted to research and
development, product enhancement and new designs. In 2003, 2004 and 2005, the Company spent
approximately Rmb 94.6 million, Rmb 137.0 million and Rmb
123.9 million (US$15.4 million),
respectively, on research and development. The Company believes that it has been able to control to
some extent the increase of research and development expenses due to the relatively low salary
levels of engineers in China.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
Directors and Senior Management of the Company
The Board of Directors of the Company shall consist of up to eleven members. Currently, there
are nine members elected to and serving on the Companys Board of Directors, with two vacancies.
Pursuant to the rights afforded to the holder of the Companys Special Share, HLA has designated
Messrs. Teo Tong Kooi, Gan Khai Choon, Gao Jia Lin, Kwek Leng Peck, Wong Hong Ren and Philip Ting
Sii Tien as its directors.
The directors and executive officers of the Company as of June 30, 2006 are identified below.
|
|
|
|
|
|
|
|
|
Year First Elected or |
|
|
|
|
Appointed Director |
Name |
|
Position |
|
or Officer |
TEO Tong Kooi(1) |
|
President and Director |
|
2004 |
GAO Jia Lin(1) |
|
Vice President and Director |
|
1995 |
GAN Khai Choon |
|
Director |
|
1995 |
Raymond C. K. HO(1)(2)(3)(4)(6) |
|
Director |
|
2004 |
KWEK Leng Peck(1)(3) |
|
Director |
|
1994 |
NEO Poh Kiat(2)(3) |
|
Director |
|
2005(5) |
TAN Aik-Leang(1)(2)(4) |
|
Director |
|
2005(5) |
Philip TING Sii Tien(1) |
|
Director and Chief Financial Officer |
|
1994 |
WONG Hong Ren(1)(4) |
|
Director |
|
1994 |
Sheila MURUGASU |
|
General Counsel |
|
2003 |
Ira Stuart OUTERBRIDGE III |
|
Secretary |
|
2001 |
|
|
|
(1) |
|
Also a director of Yuchai. |
|
(2) |
|
Member of the Audit Committee. |
|
(3) |
|
Member of the Compensation Committee. |
|
(4) |
|
Member of the Special Committee. |
|
(5) |
|
Appointed as director in 2005. |
|
(6) |
|
Mr. Ho has notified the Company that he will not be seeking re-election at the Companys
forthcoming annual general meeting of shareholders. |
Mr. Teo Tong Kooi is the President of the Company and a Director of Yuchai. He is also a
Director and Chief Executive Officer of HLA as well as a Director of TCL, Henan Xinfei Electric
Group and various building materials companies within the Hong Leong Group Singapore. He is also an
Executive Director of Malaysia listed Tasek Corporation Berhad, which previously he held the
position of the Managing Director. Mr. Teo holds a Bachelor of Science degree in Marketing
Management and a Master of Business Administration (both from Golden Gate University, San
Francisco, California, USA). He has also completed the Executive Management Programme at the
Stanford University Graduate School of Business and has 19 years of corporate and commercial
banking experience with 13 years in senior management positions.
Mr. Gao Jia Lin is the Vice-President and a Director of the Company and Deputy Chairman and a
Director of Yuchai. He has a mechanical engineering degree from Qinghua University, and joined Hong
Leong (China) Limited in 1992. He is currently the Senior Vice President of HLA, China Operation.
Mr. Gan Khai Choon is a Director of the Company. He is currently the joint managing director
of Hong Leong International (Hong Kong) Limited. He holds a bachelors degree (economics honors)
from the University of Malaya.
41
Mr. Raymond C. K. Ho is a partner of Fred Kan & Co., a Hong Kong based law firm. He has been
in private practice as a solicitor since 1983 in Hong Kong, Mainland China and Canada. He has held
various public service positions with the Law Society of Hong Kong, Hong Kong Trade Development
Council and Hong Kong International Arbitration Centre. He is also currently the Chairman of the
Mainland Legal Affairs Committee of the Law Society of Hong Kong. During 2004, Fred Kan & Co.
rendered legal advice to the Company in connection with the implementation of the July 2003
Agreement, for which CYI paid approximately US$30,000. The Companys Board of Directors has
determined that Mr. Ho is independent within the meaning of NYSEs recently adopted corporate
governance standards, on the basis that the amount paid for the legal services provided by Fred Kan
& Co is not material to either the Company or Fred Kan & Co and that the Company has no other
relationship, direct or indirect, which is material with Mr. Ho. Mr. Ho has notified the Company that he will not be seeking re-election at the forthcoming
annual general meeting of the Company. Upon conclusion of that meeting, Mr. Ho will cease to be a
director of the Company and Yuchai, and will cease to serve on the Companys Audit Committee,
Compensation Committee and Special Committee.
Mr. Kwek Leng Peck is a Director of the Company. Mr. Kwek is a member of the Kwek family,
which controls the Hong Leong Group Singapore. Mr. Kwek serves as Executive Director of HLA, and
has over 25 years of experience in trading, manufacturing, property investment and development,
hotel operations, corporate finance and management. Mr. Kwek holds directorships on the boards of
several Hong Leong Group Singapore companies, including HLA, City Developments Limited, HLC, Hong
Leong Finance Limited, City e-Solutions Limited and Millennium & Copthorne Hotels plc.
Mr. Neo Poh Kiat is a Director of the Company. He is a Managing Director of Octagon Advisors
Pte Ltd, a financial advisory firm in Singapore. Between 1976 to January 2005, he has held senior
managerial positions with companies in the Development Bank of Singapore group and United Overseas
Bank Ltd, including as Country Officer (China), Head Corporate Banking (Greater China) at United
Overseas Bank Ltd. Mr. Neo is currently a director of Octagon Advisors (Shanghai) Co. Ltd.,
Singapore International School Foundation Ltd (Hong Kong), and Asia Airfreight Terminal Co Ltd. He
holds a Bachelor of Commerce degree from Nanyang University, Singapore. The Companys Board of
Directors has determined that Mr. Neo is independent within the meaning of NYSEs recently adopted
corporate governance standards, on the basis that the Company has no material relationship with
him.
Mr. Tan Aik-Leang is a Director of the Company. He is currently an independent Risk Management
Consultant to banks and other financial services institutions and is based in Hong Kong. Between
1973 and 2001, he has held various senior executive and managerial positions at the Dao Heng Bank
Group in Hong Kong, the National Australia Bank Group in Australia and Hong Kong and The Bank of
Nova Scotia in Canada. Mr. Tan is currently a Director of the Board of The Risk Management
Association, Hong Kong Chapter (headquartered in U.S.A.) and a Fellow member of the Hong Kong
Institute of Certified Public Accountants, CPA Australia, the Australasian Institute of Banking and
Finance and the Institute of Canadian Bankers. The Companys Board of Directors has determined that
Mr. Tan is independent within the meaning of NYSEs recently adopted corporate governance
standards, on the basis that the Company has no material relationship with him.
Mr. Philip Ting Sii Tien has been the Chief Financial Officer of the Company since 1994 and
became a Director in February 2004. He is also an alternate director to Mr. Teo Tong Kooi on the
Board of TCL. He was appointed Chief Financial Officer of HLC in 1994. In 2001, he became the
Group Chief Financial Officer for the HLA group of companies. Prior to joining the Hong Leong
Group Singapore, from 1993 to 1994, Mr. Ting served as Regional Controller of Quantum Asia Pacific,
Singapore, a leading disk drive manufacturer. Mr. Ting served as Regional Controller of Black &
Decker Asia Pacific Pte. Ltd. (Singapore) from 1990 to 1993 and as Controller of Deutsche Bank
(Singapore) from 1987 to 1989. Mr. Ting is an Associate Member of the Institute of Chartered
Accountants in England and Wales.
Mr. Wong Hong Ren has been a Director of the Company since 1994. He has also been a Director
of Yuchai since 1993. He is also the Chairman of LKN and a Director of TCL. Since 1988, he has
served as Group Investment Manager of Hong Leong Management Services Pte. Ltd. in Singapore. Prior
to his joining the Hong Leong Group in January 1988, Mr. Wong was Director and General Manager
(Investment and Property) of Haw Par Brothers International Ltd. and Director of Investment with
Royal Trust Asset Management Pte. Ltd. and First Capital Corporation Ltd., where he was actively
involved in management of the companies funds in international equities.
Ms. Sheila Murugasu is the Group Counsel of the Company. Ms. Murugasu has been the Group Legal
Counsel for the HLA group of companies since 1996. Ms. Murugasu is a qualified Singapore lawyer,
and prior to joining HLA, was in private legal practice in Singapore.
Mr. Ira Stuart Outerbridge III is the Secretary of the Company. Mr. Outerbridge is a graduate
of the University of North Carolina at Chapel Hill and is a Fellow of the Institute of Chartered
Secretaries and Administrators. He joined Codan Services Limited as a Corporate Manager in February
1996.
42
Audit Committee
The members of the Audit Committee are Messrs. Tan Aik-Leang (Chairman), Raymond C. K. Ho and
Neo Poh Kiat. The Audit Committee oversees the actions of the Companys independent public
accountants and reviews the Companys internal accounting procedures. The Board has designated Mr.
Tan Aik-Leang as the Companys Audit Committee Financial Expert. However, Mr. Ho has notified the
Company that he will not be seeking re-election at the forthcoming annual general meeting of the
Company. The Company is currently searching for a replacement independent director, and until such
person is appointed, the Companys Audit Committee will consist of only two independent members.
Compensation Committee
The members of the Compensation Committee are Messrs. Kwek Leng Peck (Chairman), Raymond C.K.
Ho and Neo Poh Kiat. The Compensation Committee reviews and approves executive appointments and
remuneration, and administers the Companys employee benefit plans, including the Companys stock
option plans, if any. See also Share Ownership Stock Option Plan.
Special Committee
The members of the Special Committee are Messrs. Wong Hong Ren (Chairman), Raymond C. K. Ho
and Tan Aik-Leang. The Special Committee was established in 2003 in response to the difficulties
which the Company faced with respect to its investment in Yuchai, and is not a permanent committee
of the Companys Board of Directors. Steps taken by the Special Committee included instituting
legal and arbitration proceedings against the Chinese shareholders of Yuchai in May 2003, and
subsequently discontinuing these proceedings following the execution of the July 2003 Agreement.
The Special Committees mandate has subsequently been further expanded to address issues relating
to the implementation of the July 2003 Agreement and the Reorganization Agreement, including the
business expansion and diversification plans, as well as to review and resolve any difficulties
which CYI may experience in obtaining the cooperation of the Chinese shareholders of Yuchai in the
management and operation of Yuchai, including if necessary the commencement of litigation and/or
arbitration. See also Item 8. Financial Information Legal Proceedings.
Directors and Executive Officers of Yuchai
The Board of Directors of Yuchai consists of thirteen members. Currently, there are thirteen
members elected to and serving on Yuchais Board of Directors. Yuchais Articles of Association
entitle the Company (as the indirect holder of the Foreign Shares) to designate nine directors and
entitle the Chinese shareholders to designate four directors. These nomination rights were
acknowledged and confirmed by Yuchai as part of the terms of the Reorganization Agreement. Pursuant
to and subject to the conditions in the Shareholders Agreement described under Item 7. Major
Shareholders and Related Party Transactions, and by virtue of the Special Share, HLA is entitled
to designate six of the nine Yuchai directors designated by the Company. The Company has designated
Messrs. Gao Jia Lin, Teo Tong Kooi, Raymond C. K. Ho, Kwek Leng Peck, Tan Aik-Leang, Philip Ting
Sii Tien, Wong Hong Ren, Qin Xiao Cong and Yuan Xu Cheng as Yuchais directors. Pursuant to the
Shareholders Agreement and the Bye-laws of the Company, the Yuchai directors designated by the
Company will vote as a block in accordance with the vote of the majority of such directors. As part
of the terms of the Reorganization Agreement, Yuchai affirmed the continued rights of the Company,
as Yuchais majority shareholder, to direct the management and policies of Yuchai through Yuchais
board of directors.
The directors and executive officers of Yuchai as of June 30, 2006 are identified below.
|
|
|
|
|
|
|
|
|
Year First Elected or |
|
|
|
|
Appointed Director |
Name |
|
Position |
|
Position or Officer |
YAN Ping |
|
Chairman of the Board of Directors |
|
2005 |
GAO Jia Lin(1) |
|
Deputy Chairman of the Board of Directors |
|
1995 |
Raymond C.K. HO(1)(2) |
|
Director |
|
2004 |
LI Tiansheng |
|
General Manager and Director |
|
2001 |
KWEK Leng Peck(1) |
|
Director |
|
2005 |
TAN Aik-Leang(1) |
|
Director |
|
2005 |
TEO Tong Kooi(1) |
|
Director |
|
2004 |
TING Sii Tien, Philip(1) |
|
Director |
|
2004 |
QIN Xiao Cong |
|
Director |
|
2003 |
SHAO Qihui |
|
Director |
|
2003 |
43
|
|
|
|
|
|
|
|
|
Year First Elected or |
|
|
|
|
Appointed Director |
Name |
|
Position |
|
Position or Officer |
WONG Hong Ren(1) |
|
Director |
|
1993 |
YUAN Xu Cheng |
|
Director |
|
2003 |
GU Tangsheng |
|
Assistant to Chairman and Director |
|
2005 |
GONG Hai |
|
Deputy General Manager |
|
2006 |
LIM Poh Lea |
|
Financial Controller |
|
2004 |
SHEN Jie |
|
Chief Engineer |
|
2002 |
WU Qiwei |
|
Deputy General Manager |
|
2006 |
YANG Weizhong |
|
Chief Accountant |
|
1992 |
|
|
|
(1) |
|
Also a Director of the Company. |
|
(2) |
|
Mr. Ho has advised Yuchai that he will resign as a director of Yuchai concurrent with his
resignation as a director of the Company. |
For information about Messrs. Gao Jia Lin, Teo Tong Kooi, Raymond C.K. Ho, Wong Hong Ren,
Philip Ting Sii Tien, Kwek Leng Peck and Tan Aik-Leang, see Directors and Senior Management of
the Company. For additional information regarding Mr. Wang Jianmings employment status with
Yuchai, see Compensation Yuchai and Item 8. Financial Information Legal Proceedings.
Mr. Yan Ping is the Chairman of the Board of Directors of Yuchai. Mr. Yan Ping has been the
Chairman of the State Holding Company since May 2005. The State Holding Company owns 22.1% of the
shares of Yuchai, and is owned by the Yulin City Government. Prior to becoming Chairman of the
State Holding Company, Mr. Yan Ping held various government related position, including most
recently as Deputy Secretary-General, Yulin Municipal Government and as Director, Yulin Municipal
Development and Reform Commission. Mr. Yan Ping holds a Bachelor of Engineering degree from Dalian
Railway College and a Master of Economics degree from the East-North Financial University.
Mr. Li Tiansheng is a Director and Deputy General Manager of Yuchai. He previously served as
the principal coordinator for liaison with Chinese government agencies, banks and tax department.
Mr. Qin Xiao Cong is a director of Yuchai and Coomber Investments Limited. He also serves as a
director and General Manager of Zhonglin Development Company Limited.
Mr. Shao Qihui is an independent director of Yuchai. He previously served as the Minister of
Machinery Industry Ministry. He is the Honorary President of China Machinery Association.
Mr. Yuan Xu Cheng is a director of Yuchai. He previously served as the director and Assistant
General Manager of Guijiang Enterprise Co.
Mr. Gu Tangsheng is a Director of Yuchai and Assistant to the Chairman of the State Holding
Company. He holds a PhD in physics from Zhongshan University.
Mr. Gong Hai serves as Deputy General Manager in charge of parts and supplies. Mr. Gong is a
graduate from Sichuan Science and Technology University majoring in foundry science and completed
his MBA program from Huazhong University of Science and Technology.
Mr. Lim Poh Lea is the Financial Controller assigned by the Company to assist in the financial
administration, budgeting and planning of Yuchais financial matters. Mr. Lim is a financial
controller employed by the Company. Mr. Lim is a Fellow of the Association of Chartered Certified
Accountants, United Kingdom and a Certified Public Accountant of Singapore.
Mr. Shen Jie is the Chief Engineer and is responsible for all matters relating to engine
design, testing and quality control. He joined Yuchai over 20 years ago as an engineer.
Mr. Wu Quwei is the Deputy General Manager and is in charge of sales and marketing. Mr. Wu
graduated from Hunan University majoring in internal-combustion engine, vehicle and mechanical
engineering. Mr. Wu had also completed his MBA program from the Huazhong University of Science and
Technology.
Mr. Yang Weizhong joined Yuchai in 1969. He has been the Chief Accountant since 1993. Prior
thereto, he served as Assistant Chief of Yuchais Finance Division.
44
Pursuant to Yuchais Articles of Association, Yuchais shareholders have authority over all
matters of importance relating to Yuchai, including: (i) the review and approval of reports
submitted by the Board of Directors of Yuchai; (ii) the approval of Yuchais plans for distribution
of profits and recovery of losses; (iii) the approval of Yuchais annual capital and operating
budget and year-end financial statements; (iv) the issuance of new common shares or other
securities, the increase in the scope of any subscription of shares and the transfer procedures for
Yuchais share certificates; (v) the nomination, election, dismissal and compensation of members of
the Board of Directors; and (vi) significant sales or purchases of assets, or any division, merger,
acquisition, termination, liquidation or other major corporate action of Yuchai. Yuchai
shareholders are entitled to preemptive rights to subscribe pro rata in accordance with their
ownership percentage for any new Yuchai shares or other equity interests offered by Yuchai at a
price and on terms at least equivalent to those offered to new subscribers.
Yuchais Board of Directors reports directly to the shareholders of Yuchai and is the
principal executive authority responsible for major decisions relating to Yuchai, including: (i)
the execution of resolutions adopted by the shareholders; (ii) the formulation and review of
Yuchais development plans; (iii) the review of Yuchais annual business plans; (iv) the review of
Yuchais financial budget, final accounts, dividend distribution plan, plans for issuances of
Yuchai Shares and plans for merger, division and transfer of assets; (v) the election and dismissal
of the Chief Executive Officer; (vi) the adoption of various corporate policies and rules; (vii)
the appointment and dismissal of senior executive officers as recommended by the Chief Executive
Officer; (viii) major external matters; (ix) sales, purchases, transfers and leases of material
assets with a value in excess of US$3 million and which are not contemplated in Yuchais approved
budgets; and (x) any other matters that may be determined by the Board of Directors in accordance
with Yuchais Articles of Association.
In order to further strengthen its level of corporate governance, the Company has continued to
seek to cause Yuchai to adopt comprehensive corporate governance guidelines, which seek to put
procedures in place to improve the management and corporate governance of Yuchai. Pursuant to the
Reorganization Agreement, as amended, Yuchai has agreed to implement the corporate governance
guidelines which had been approved by Yuchais Board of Directors in November 2002 but which had
subsequently not been submitted to the relevant Chinese governmental authorities for approval.
Yuchai has advised the Company that such submission has now been made, and that other steps are
currently being taken by Yuchai to put in place an appropriate corporate governance structure
conforming to international custom and practice at Yuchai.
The Company is also required to comply with the requirements of the Sarbanes-Oxley Act of
2002. Section 404 of that Act requires the Companys management to file an internal control report
which states that it is managements responsibility to establish and maintain an adequate internal
control structure and procedures and financial reporting. Management also needs to assess the
effectiveness of the internal control structure and procedures for financial reporting. External
auditors will be engaged to attest to managements assertion on the internal control report for the
financial year ending December 31, 2006. In November 2005, the Company employed an internal control
specialist to head the Companys Section 404 implementation project. The Company has also engaged
PricewaterhouseCoopers Singapore as the technical consultants for the project. Section 404
attestation work by external auditors is expected to commence in August 2006.
Pursuant to Yuchais Articles of Association, the Board of Directors of Yuchai consists of
13 directors appointed for three-year terms. So long as the present ratio of Foreign Shares
to the total number of State Shares and Legal Person Shares of Yuchai remains unchanged, a total of
nine directors shall be elected from nominees of holders of Foreign Shares and a total of four
directors shall be elected from nominees of holders of State Shares and Legal Person Shares.
Actions generally may be taken by a majority vote of the directors present at a meeting at which a
quorum is present. Attendance of at least seven directors (at least four representing holders of
Foreign Shares and at least three representing holders of State Shares or Legal Person Shares)
constitutes a quorum.
The Company is entitled under Yuchais Articles of Association to elect nine of Yuchais
13 directors, thereby entitling it to effect all major decisions relating to Yuchai. As part
of the terms of the Reorganization Agreement, Yuchai affirmed the continued rights of the Company,
as Yuchais majority shareholder, to direct the management and policies of Yuchai through Yuchais
board of directors. A two-thirds vote of the outstanding shares at a shareholders meeting at which
a quorum is present is required for major corporate actions, such as an amendment to Yuchais
Articles of Association, significant sales or purchases of assets or a division, merger,
acquisition or liquidation of Yuchai, or issuances of new common shares or other securities of
Yuchai. Attendance of shareholders representing at least two-thirds of the outstanding Yuchai
shares constitutes a quorum for shareholder meetings considering such major corporate actions.
However, although the Companys nominees constitute a majority of the Board of Directors of
Yuchai, there have on various occasions in the past been periods of time when no board meetings
have been held, despite Yuchais Articles of Association requiring the Board of Directors to meet
at least once every six months as well as repeated requests by the Company. Prior to execution of
the Reorganization Agreement, Yuchais Articles of Association contained stringent quorum
provisions, which required that, three of the
45
four directors elected by holders of State Shares or
Legal Person Shares had to attend, in order for quorum to be achieved, and as a result Board of
Directors meetings to be held. However, subsequent to execution of the Reorganization Agreement,
these quorum requirements have been amended to permit a meeting to occur in circumstances in which
a quorum for a Board of Directors meeting is not met on two occasions prior thereto.
Yuchais management consists of a Chairman, a General Manager and several Deputy General
Managers, other senior officers designated by the board of directors and one senior manager
designated by the Company. Yuchais management handles daily operations and implements the
corporate policies under the direction and guidance of the Board of Directors of the Company. In
November 2003, Mr. Wang Jianming entered into a new contract of employment with Yuchai, pursuant to
which he was appointed as Chief Executive Officer of Yuchai. Mr. Wang Jianming ceased to serve as
the chairman, legal representative and chief executive officer of Yuchai, as well as the chairman
and legal representative of the State Holding Company, the principal Chinese shareholder of
Yuchai with effect from October 28, 2005. The new chairman and legal representative of these
companies is Mr. Yan Ping whose appointment was confirmed on December 2, 2005.
Yuchais Board of Directors has established an Investment Review Committee, which is
responsible for reviewing the necessity and feasibility of investment projects and making
recommendations to the Board of Directors. Although significant investment decisions should be made
by a majority vote of the Board of Directors, not all investments undertaken by Yuchai have in the
past been submitted to this Committee for approval or have received this or other required
corporate approvals. For example, Yuchais loan of Rmb 205.0 million to YMLC, Yuchais appointment
of a consultant to advise on the formation of and Yuchais investment in a new logistics business,
the consultancy contract of Rmb 60.0 million, and the disbursement of funds to acquire headquarters
in Guilin for this new logistics company, each only received the requisite corporate approvals
subsequent to their occurrence. See also the formation of YEGCL, described under Item 4.
Information on the Company Business Overview Manufacturing, and the recent loans made by
Yuchai, described under Item 7. Major Shareholders and Related Party Transactions Related Party
Transactions Other Transactions.
As a general matter, the Company requires access to certain financial books and records of
Yuchai so as to be able to monitor its investment in Yuchai and to prepare the Companys
consolidated financial statements. In early 2004, Yuchai management temporarily denied the Company
such access. In response, the Company initiated dialogue with representatives of Yuchai and shortly
thereafter agreed with Yuchai management to re-allow the Company full access to the financial books
and records of Yuchai. Moreover, and as disclosed elsewhere in this Annual Report, the Company
requires the cooperation of Yuchai and its Chinese shareholders and from time to time experiences
certain problems in obtaining such cooperation. In response to such problems, the Company entered
into dialogue with representatives of Yuchai and its Chinese shareholders and thereafter executed
the Reorganization Agreement, which the Company believes addresses these problems. As part of the
terms of the Reorganization Agreement, Yuchai agreed that it would seek the requisite shareholder
approval prior to entering into any material transactions (including any agreements or arrangements
with parties related to Yuchai or any of its shareholders) and that it would comply with its
governance requirements. However, no assurances can be given regarding implementation of the terms
of the Reorganization Agreement (see also Item 3. Key Information Risk Factors Risks relating
to our company and our business Our financial condition, results of operations, business and
prospects may be adversely affected if we are unable to implement the Reorganization Agreement).
Compensation
Company
For 2005, HLA charged Yuchai a management fee of US$500,000 for management services, including
the services of the Companys President, Vice President and Chief Financial Officer, each of whom
are employees of HLA. In December 2005, HLA has seconded two senior managers to Yuchai for support
services in respect of internal audit and Sarbanes-Oxley Act implementation.
The Company paid an annual service fee for services rendered in 2005 of US$50,000 and
US$30,000 to each of the Companys independent and non-independent directors, respectively, and
US$20,000 to the Companys Group Counsel. The Company also paid an annual service fee of US$50,000
and US$30,000 to the Chairman and each of the members of the Special Committee, respectively. See
Item 7. Major Shareholders and Related Party Transactions.
Yuchai
The aggregate amount of compensation paid by Yuchai to all directors and executive officers of
Yuchai during 2005 was approximately Rmb 10.9 million (US$1.4 million). Yuchai has a management
bonus plan for its executive, mid-level and junior officers under which annual incentive bonuses in
an aggregate amount equal to 5.5% (3.5% for executive officers (allocated as 2.5%
46
for the Chairman
and 1.0% for other executive officers) and 2.0% for mid-level and junior officers and employees) of
Yuchais after-tax profit must be paid if Yuchai achieves the after-tax profit approved in the
annual budget by Yuchais board of directors or, in the case of certain bonuses, if Yuchai achieves
80.0% of such budgeted after-tax profit. In addition, Yuchais officers participate in an incentive
pay program which is available to all employees and is based on performance and productivity.
There are no benefits provided to the directors of the Company or Yuchai upon their
termination of employment.
Employees
As of December 31, 2005, Yuchai employed approximately 8,827 people nationwide, inclusive of a
sales force of 609 employees. Yuchai provides its employees with a fixed base salary and a bonus
that is determined by the employees performance and productivity. Yuchai also provides its
employees with housing and meal subsidies and medical insurance. In the year ended
December 31, 2005, the average annual base salary and bonus of an employee was approximately
Rmb 54,677 (US$6,775), a decrease of approximately 6.0% from the previous year. Yuchai has not
experienced any strikes or similar significant work stoppages. Yuchai believes that its employee
relations are good.
Share Ownership
Stock Option Plan
The Company had previously adopted a Stock Option Plan (the Plan) to award stock options to
key employees and outside directors. The Plan was administered by the Compensation Committee. The
maximum number of shares of the Companys Common Stock that could have been purchased pursuant to
stock options granted under the Plan was 750,000 shares. The Plan expired in 2004, without any
options being granted under the Plan. The Company has no outstanding stock options to purchase any
shares of the Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
Major Shareholders
The following table sets forth certain information regarding beneficial ownership of the
Companys shares of Common Stock as of June 30, 2006 by all persons who are known to the Company to
own five percent (5%) or more of the outstanding shares of Common Stock.
Beneficial ownership is determined in accordance with rules of the SEC, which generally
attribute beneficial ownership of securities to persons who possess sole or shared voting power or
investment power with respect to those securities and includes equity shares issuable pursuant to
the exercise of stock options or warrants that are immediately exercisable or exercisable within 60
days of June 30, 2006. These shares are deemed to be outstanding and to be beneficially owned by
the person holding those options or warrants for the purpose of computing the percentage ownership
of that person, but are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Unless otherwise indicated, all information with respect to the
beneficial ownership of any principal shareholder has been furnished by such shareholder and,
unless otherwise indicated, we believe that persons named in the table have sole voting and sole
investment power with respect to all the equity shares shown as beneficially owned. The share
numbers and percentages listed below are based on 37,267,673 common shares outstanding as of
June 30, 2006.
|
|
|
|
|
|
|
|
|
Identity of Person or Group |
|
Number |
|
|
Percentage (%) |
|
Hong Leong Asia Ltd.(1) |
|
|
7,913,769 |
|
|
|
21.2 |
% |
The Yulin City Government(2) |
|
|
8,601,550 |
|
|
|
23.1 |
% |
Tai Tak Industries Pte Ltd(3) |
|
|
1,927,673 |
|
|
|
5.2 |
% |
|
|
|
(1) |
|
Information based upon a report on Schedule 13D jointly filed by HLA and its wholly-owned
subsidiaries, HLC, HLT, Flite Technology Industries Pte Ltd and Lydale Pte Ltd, with the SEC
on July 19, 2002, as amended on September 10, 2003, October 7, 2003, October 15, 2003 and
December 1, 2003, and other information provided by HLA to the Company. |
|
(2) |
|
Information based on a report on Schedule 13D filed by Coomber, Goldman, Zhong Lin and the
State Holding Company, with the SEC on December 16, 2002, as amended on June 23, 2003, July 9,
2003, December 23, 2003, March 15, 2004, February 15, 2005 and April 18, 2005. Based on
Amendment No. 4 to the Schedule 13D filed by Coomber and others with the SEC on December 23,
2003, Coomber is a wholly-owned subsidiary of Goldman, which is indirectly owned and
controlled by Yulin City Municipal Government, or Yulin City Government, in Guangxi Zhuang
Autonomous Region, PRC. Accordingly, the Yulin City Government is the ultimate beneficial
owner of the 8,601,550 shares of the Companys Common Stock held of record by Coomber. Coomber
has advised the Company of the following information. Coomber has entered into forward sale
agreements with a financial institution as a counterparty, with respect to a total of |
47
|
|
|
|
|
1,900,000 shares of the Companys Common Stock. On the respective settlement dates of these
forward sales agreements, Coomber will have the option to settle the forward sales by delivery
of cash or the Companys Common Stock. The counterparty may borrow the pledged shares from
Coomber in connection with that partys hedging of its exposure under the forward sale
arrangements. Coomber will temporarily cease to have voting rights with respect to any common
stock borrowed by the counterparty but will reacquire such voting rights when the counterparty
returns the borrowed shares to Coomber. In the event Coomber elects to settle the forward sale
agreement or agreements entirely by delivering shares of the Companys Common Stock, its
beneficial ownership of the Companys Common Stock could, depending on the number of shares of
the Companys Common Stock delivered, decrease to 6,701,550 shares, or approximately 18.0% of
the Companys Common Stock, or to 4,601,550 shares, or approximately 12.3% of the Companys
Common Stock, if it sells 2,100,000 shares pursuant to the Companys prospectus dated March
24, 2004. |
|
(3) |
|
Information based on a report on Schedule 13G jointly filed by Tai Tak Industries Pte Ltd and
its affiliate, Tai Tak Securities Pte Ltd, with the SEC on March 7, 2005 and as amended on
June 20, 2005. |
HLA exercises control over and is the beneficial owner of 7,913,769 or approximately
21.2% of shares of the Companys Common Stock through its wholly-owned subsidiaries, HLT and Well
Summit Investments Limited. See Related Party Transactions Shareholders Agreement. Other
than as described under Item 3. Key Information Risk Factors Risks relating
to our company and our business We may experience a change of control as a result of
offerings of shares by our controlling shareholders and The Special Share below, the Company
is not aware of any arrangement which may, at a subsequent date, result in a change of control of
the Company.
On June 23, 2003, Coomber, Goldman, Zhong Lin, the State Holding Company and certain
individuals filed an amended Schedule 13D reporting beneficial ownership of 8,601,550 shares, or
24.3%, of the Company. This Schedule 13D amended and restated in its entirety the Schedule 13D
dated November 13, 2002 and filed December 16, 2002, which reported beneficial ownership by Coomber
and Goldman of 8,601,550 shares of the Company (the Coomber Shares). This Schedule 13D reports
beneficial ownership of the Coomber Shares by (i) Coomber, a wholly-owned subsidiary of Goldman,
and the record holder of such 8,601,550 shares of the Company; (ii) Goldman, a company owned by Qin
Xiao Cong, Zhu Guoxin and Yuan Xu Cheng, each of whom holds their respective shares in Goldman on
trust for the benefit Zhong Lin; (iii) Zhong Lin, a company owned by Qin Xiao Cong and Zhu Guoxin,
each of whom holds their respective shares in Zhong Lin on trust for the benefit of the Yulin City
Government; and (iv) the State Holding Company, which, acting under the direction of the Yulin City
Government, financed Goldmans purchase of the Coomber Shares from China Everbright in October
2002. Qin Xiao Cong, Zhu Guoxin and Yuan Xu Cheng reported but disclaimed beneficial ownership.
This Schedule 13D also reports that the ultimate beneficial owner of the Coomber Shares is the
Yulin City Government, and discloses certain financing and control arrangements with respect to the
Coomber Shares acquisition, as well as the Yulin City Governments intentions with respect to the
Company. This Schedule 13D was most recently amended on April 18, 2005.
As of the record date on June 30, 2006, there were 22,089,296 shares of Common Stock, or 59.3%
shares of Common Stock, held of record by 42 persons with registered addresses in the United
States.
The Special Share
The Special Share entitles the holder thereof to elect a majority of the directors of the
Company. In addition, no shareholders resolution may be passed without the affirmative vote of the
Special Share, including any resolution to amend the Memorandum of Association or Bye-laws of the
Company. The Special Share is not transferable except to HLA, HLC or any of its affiliates. In
1994, the Company issued the Special Share to DML, a holding company of the Company then controlled
by Hong Leong (China) Limited, or HLC. During 2002, following the decision of the shareholders of
DML to dissolve DML, DML redeemed all of the redeemable stock issued by it to its shareholders. Per
the DML Shareholders Agreement (defined below), DML transferred all its shares of the Company to its shareholders,
which included HLC and their wholly-owned subsidiaries. Because Coomber, an affiliate of China
Everbright, was the shareholder of DML which gave notice of the dissolution of DML, the Special
Share was transferred from DML to HLT, an affiliate of HLA, pursuant to the terms of the DML
Shareholders Agreement, as amended on January 21, 2002 and on May 17, 2002.
The Companys Bye-Laws provide that the Special Share shall cease to carry any rights in the
event that, if HLA and its affiliates own the Special Share, HLA and its affiliates cease to own,
directly or indirectly, at least 7,290,000 shares of Common Stock (or such equivalent number upon a
consolidation or subdivision of shares of Common Stock), or if China Everbright and its affiliates
own the Special Share, China Everbright and its affiliates cease to own, directly or indirectly, at
least 6,570,000 shares of Common Stock (or such equivalent number upon a consolidation or
subdivision of shares of Common Stock). The Bye-Laws also provide for circumstances in which DML
holds the Special Share; however, DML was dissolved in 2002. HLT, an affiliate of HLA, holds the
Special Share in addition to 7,831,169 shares of Common Stock, which is greater than the number
stipulated in the provisions of the Companys Bye-Laws set forth above.
48
Related Party Transactions
Shareholders Agreement
HLC, China Everbright, Cathay, GSCP, the Sun Yuan Shareholders (14 shareholders who initially
invested in the Company through Sun Yuan BVI) and the Company entered into an amended and restated
Shareholders Agreement (the Shareholders Agreement) in 1994, which provides for certain matters
relating to the management of the Company and Yuchai and the ownership of the Companys Common
Stock. The Shareholders Agreement provides that the Board of Directors of the Company will consist
of eleven directors, the Controlling Shareholder (as described below) will be entitled to designate
six directors, the Major Shareholder (as described below) will be entitled to designate two
directors, and each of Cathay and GSCP will be entitled to designate one director and the Chief
Executive Officer of Yuchai will initially be the other director. The Shareholders Agreement also
provides that the Controlling Shareholder will be entitled to designate five of the nine Yuchai
directors designated by the Company, the Major Shareholder will be entitled to designate two such
directors and each of Cathay and GSCP will be entitled to designate one such director. Under the
Shareholders Agreement, the nine Yuchai directors designated by the Company will vote as a block in
accordance with the vote of the majority of such nine directors. The Shareholders Agreement
provides that the Controlling Shareholder will be the person holding the Special Share, provided
that at all times the Controlling Shareholder will be either HLA or China Everbright, and
the other will be the Major Shareholder. Since the Companys initial public offering in 1994,
HLA has been the Controlling Shareholder and China Everbright has been the Major Shareholder.
However, in October 2002, China Everbright sold all of its shares in the Company to Goldman in
October 2002 and is no longer the Major Shareholder of the Company. The Shareholder Agreement
provides that if any shareholder (other than the Controlling Shareholder) ceases to own at least 4%
of the Companys Common Stock, such shareholder shall no longer be entitled to designate any
directors. Accordingly, China Everbright no longer has director designation rights. The
Shareholders Agreement also provides that, so long as HLA is the Controlling Shareholder, Yuchai or
the Company will pay HLA an annual management fee of not less than US$500,000 for management
services provided by HLA, including the services of the Companys President and Chief Financial
Officer. The Shareholders Agreement will terminate upon the occurrence of an event resulting in the
Special Share ceasing to carry any rights.
In addition to the Shareholders Agreement, HLA, China Everbright and DML had entered into a
Subscription and Shareholders Agreement (the DML Shareholders Agreement), which provided for
certain matters relating to the management of DML, the Company and Yuchai and the ownership of DML
stock. The DML Shareholders Agreement provided that HLA would control DML, provided, however, that
if HLA and its affiliates ceased to own directly or through DML at least 7,290,000 shares of Common
Stock when China Everbright and its affiliates own directly or through DML at least 6,570,000
shares of Common Stock, China Everbright would control DML. The DML Shareholders Agreement provided
that all rights of the Special Share held by DML would be exercised as directed by the shareholder
that controls DML. With the dissolution of DML and the sale by China Everbright of all of its
shares in the Company to Goldman in October 2002, the DML Shareholders Agreement no longer directly
affects the Company.
Registration Rights Agreement
Pursuant to a Registration Rights Agreement (the Registration Rights Agreement), the Company
has granted two demand registration rights to each of HLC, China Everbright, Cathay, GSCP and the
Sun Yuan Shareholders (the Selling Stockholders) requiring the Company, subject to certain
conditions, to use its best efforts to prepare and file a registration statement on behalf of such
shareholder under the Securities Act and to use its best efforts to qualify the shares for offer
and sale under any applicable U.S. state securities laws. Expenses incurred in connection with one
demand registration for each such shareholder will be borne by the Company, and the Company and
Yuchai will be required to indemnify the underwriters in connection with any demand registration.
The Registration Rights Agreement also grants each such shareholder certain piggyback
registration rights entitling each shareholder to sell Common Stock in any registered offerings of
equity securities of the Company, for the account of the Company or on behalf of its security
holders. China Everbright, Cathay, GSCP and the Sun Yuan shareholders are no longer shareholders of
the Company.
Pursuant to the demand registration rights, the Company filed a Registration Statement
(Registration No. 333-111106) on Form F-3 (the Registration Statement) with the SEC in December
2003, registering an aggregate of 9,931,169 shares of the Companys Common Stock for sale by the
Selling Stockholders from time to time, depending on market conditions and other factors, in one or
more transactions on the NYSE, in the over-the-counter market or otherwise, at market prices
prevailing at the time of sale, at negotiated prices or at fixed prices.
49
Reorganization Agreement
On April 7, 2005, the Company entered into the Reorganization Agreement with Yuchai and
Coomber, which is intended to be in furtherance of the terms of the July 2003 Agreement. On
December 2, 2005, certain provisions of the Reorganization Agreement were amended, including to
extend the implementation deadline to December 31, 2006. See Item 4. Information on the Company
Recent Developments.
Other Transactions
During each of 2003, 2004 and 2005, HLA charged Yuchai a management fee of US$500,000 per
annum for management, financial planning and control and other services, including the services of
the Companys President, Vice President and Chief Financial Officer, each of whom are employees of
HLA. Such charges represent HLAs estimated direct costs of providing these services. In December
2005, HLA has seconded two senior managers to Yuchai for support services in respect of internal
audit and Sarbanes-Oxley Act implementation.
During each of 2003, 2004 and 2005, the State Holding Company charged Yuchai Rmb 30.6 million,
Rmb 21.2 million and Rmb 25.9 million (US$3.2 million), respectively, for certain general and
administrative expenses on an actually incurred basis. The Company believes that the expenses
charged to Yuchai by the State Holding Company would not have been materially different on a
stand-alone basis because Yuchai could provide these services for itself at approximately the same
cost.
During 2004, Yuchai granted a loan of Rmb 205.0 million to YMLC, a subsidiary of Coomber, with
an interest rate of 5.58% for one year. The loans granted in 2004 matured in 2005, and subsequently
extended to YMLC with a maturity date of December 29, 2006 (see also Note 5 to the Companys Consolidated Financial Statements appearing elsewhere herein.)
In January 2006, the Board of Directors authorized the Company to pay fees amounting to
approximately S$6.1 million (approximately $3.8 million) to Hong Leong Management Services Pte.
Ltd. (an affiliate of the Company which provides management and other services to the members of
the Hong Leong Group Singapore) for work done on behalf of the Company. These fees have been
reported under SG&A expenses in the Companys financial statements. The work entails assisting the
Company to (a) secure credit facilities from various banks; (b) enter into the Reorganization
Agreement dated April 7, 2005 with Yuchai and Coomber; (c) implement CYIs business expansion and
diversification plans including the acquisition of debt and equity in TCL and LKN; and (d) issue
the US$25.0 million in principal amount of convertible bonds due 2012 in a private placement.
The Company has undertaken other significant business transactions with related parties during
the three years ended December 31, 2005, as set forth under Note 28 to the Companys Consolidated
Financial Statements.
ITEM 8. FINANCIAL INFORMATION.
Consolidated Financial Statements
See Item 18. Financial Statements.
Legal Proceedings
Other than as set forth below, neither the Company nor any of its consolidated subsidiaries is
currently involved in any material legal proceedings that the Company believes would, individually
or taken as whole, adversely affect the financial condition or results of operations of the
Company.
Proceedings with Yuchai
The Company has from time to time encountered difficulties in obtaining the cooperation of the
State Holding Company and Mr. Wang Jianming in the daily management and operation of Yuchai. The
State Holding Company is a minority shareholder of Yuchai and is wholly-owned by the municipal
government of Yulin City in the Guangxi Zhuang Autonomous Region. Until December 3, 2005, Mr. Wang
was previously the Chairman, legal representative and Chief Executive Officer of Yuchai, as well as
the Vice-Chairman and legal representative of the State Holding Company.
In response to earlier difficulties with respect to corporate governance measures and certain
dividends declared by Yuchai, the Company initiated legal and arbitration proceedings in New York,
London and Singapore against Yuchai, Mr. Wang and other related
50
parties in May 2003. The Company
subsequently discontinued these proceedings as a result of the execution of the July 2003
Agreement. Among other things, the July 2003 Agreement led to the resolution at that time of
previous disagreements with respect to the payment of dividends by Yuchai to the Company and the
re-appointment of Mr. Wang Jianming as Chief Executive Officer and Chairman of the Board of
Directors of Yuchai in September 2003. The Company and Yuchai also agreed to work together to
implement corporate governance procedures and to promote plans to enhance shareholder value.
However, from time to time, the Company has continued to face difficulties in obtaining the
cooperation of the Chinese shareholders of Yuchai in the daily management and operation of Yuchai
to fully exercise its controlling interest in Yuchai. Following the execution of the July 2003
Agreement, disagreements among the parties continued to recur. For example, representatives of the
Chinese shareholders of Yuchai alleged that resolutions passed by the Companys six wholly-owned
subsidiaries at Yuchai shareholders meeting in December 2004 were invalid; allegations with which
the Company disagreed (see the Companys Form 6-K filed with the SEC on April 1, 2005).
In April 2005, the Company, Yuchai and Coomber agreed steps relating to the adoption of
corporate governance practices at Yuchai and a broad framework for the restructuring of the
Companys ownership of Yuchai, and entered into the Reorganization Agreement. The Reorganization
Agreement is intended to be in furtherance of the July 2003 Agreement. See Item 4. Information on
the Company Recent Developments and Note 25 to the Companys Consolidated Financial Statements
for a detailed summary. In December 2005, the parties amended certain provisions of the
Reorganization Agreement, including to extend the implementation deadline to December 31, 2006.
Although the parties to the Reorganization Agreement expect to work towards its implementation as
expeditiously as possible, no assurance can be given as to when the transactions contemplated
therein will be fully consummated, or that implementation of the Reorganization Agreement will
effectively resolve all of the difficulties faced by the Company with respect to its investment in
Yuchai. In addition, Mr. Yan Ping has replaced Mr. Wang as Chairman of the Board of Directors of
Yuchai, effective December 2, 2005. Yuchai does not currently have a chief executive officer.
Other Legal Proceedings
In 2003, the Yulin Branch of Bank of China (BOC) initiated legal proceedings to recover Rmb
6.6 million (US$0.8 million) from Yuchai based on an irrevocable letter of guarantee issued by
Yuchai to BOC in 1993 to secure a loan of US$0.6 million to Great Wall Machinery Plant (Great
Wall). At trial, a Yulin court ruled that if Great Wall could not repay the loan Yuchai would be
liable to the BOC. Yuchai subsequently appealed, but lost the appeal. In January 2004, the State
Holding Company issued a letter of commitment confirming that it would reimburse Yuchai in the
event that Yuchai was required to pay on this guarantee. Based on the advice of its Chinese legal
counsel, the Company has recorded a loss contingency equal to the amount of the claim, which has
been offset by amounts to be reimbursed by the State Holding Company. The amount due to BOC and the
amount due from State Holding Company have been recorded in Accrued expenses and other
liabilities and Amounts due from related companies, respectively, as of December 31, 2003 and
2004. In 2005, there were no new developments in this case.
See also Note 25(c) to the Companys Consolidated Financial Statements included elsewhere
herein for a description of other legal claims which Yuchai is involved in.
Policy on Dividend Distributions
The Companys principal source of cash flow has historically been its share of the dividends,
if any, paid by Yuchai to the Company, as described under Item 5. Operating and Financial Review
and Prospects Liquidity and Capital Resources.
Chinese laws and regulations applicable to a Sino-foreign joint stock company require that
before Yuchai distributes profits, it must: (i) satisfy all tax liabilities; (ii) recover losses in
previous years; and (iii) make contributions to certain
statutory reserves in an amount not exceeding 15% of net income for
the year determined in accordance with PRC GAAP due to its maximum
ceiling limit.
Any determination by Yuchai to declare a dividend will be at the discretion of Yuchais
shareholders and will be dependent upon Yuchais financial condition, results of operations and
other relevant factors. Yuchais Articles of Association provide that dividends may be paid once a
year. To the extent Yuchai has foreign currency available, dividends declared by shareholders at a
shareholders meeting to be paid to holders of Foreign Shares (currently only the Company) will be
payable in foreign currency, and such shareholders will have priority thereto. If the foreign
currency available is insufficient to pay such dividends, such dividends may be payable partly in
Renminbi and partly in foreign currency. Dividends allocated to holders of Foreign Shares may be
remitted in accordance with the relevant Chinese laws and regulations. In the event that the
dividends are distributed in Renminbi, such dividends may be converted into foreign currency and
remitted in accordance with the relevant Chinese laws, regulations and policies.
51
ITEM 9. THE OFFER AND LISTING.
Since December 16, 1994, the Common Stock has been listed and traded on the NYSE under the
symbol CYD. The Common Stock is not listed on any other exchanges within or outside the United
States.
The high and low sales prices for shares of the Common Stock on the NYSE for the periods
indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
US$ |
|
US$ |
Period |
|
High |
|
Low |
2001 |
|
|
1.15 |
|
|
|
0.30 |
|
2002 |
|
|
5.95 |
|
|
|
0.95 |
|
2003 |
|
|
37.24 |
|
|
|
4.45 |
|
2004 |
|
|
34.00 |
|
|
|
9.85 |
|
2005 |
|
|
14.47 |
|
|
|
7.02 |
|
2006 (through July 31, 2006) |
|
|
10.00 |
|
|
|
4.64 |
|
|
|
|
|
|
|
|
|
|
|
|
US$ |
|
US$ |
Period |
|
High |
|
Low |
2003 First Quarter |
|
|
7.10 |
|
|
|
4.45 |
|
2003 Second Quarter |
|
|
9.20 |
|
|
|
5.60 |
|
2003 Third Quarter |
|
|
19.30 |
|
|
|
6.59 |
|
2003 Fourth Quarter |
|
|
37.24 |
|
|
|
17.00 |
|
2004 First Quarter |
|
|
32.22 |
|
|
|
18.53 |
|
2004 Second Quarter |
|
|
22.79 |
|
|
|
15.80 |
|
2004 Third Quarter |
|
|
18.75 |
|
|
|
9.85 |
|
2004 Fourth Quarter |
|
|
18.46 |
|
|
|
12.65 |
|
2005 First Quarter |
|
|
13.55 |
|
|
|
8.13 |
|
2005 Second Quarter |
|
|
13.89 |
|
|
|
7.02 |
|
2005 Third Quarter |
|
|
14.47 |
|
|
|
9.23 |
|
2005 Fourth Quarter |
|
|
10.40 |
|
|
|
7.26 |
|
2006 First Quarter |
|
|
9.81 |
|
|
|
6.81 |
|
2006 Second Quarter |
|
|
10.00 |
|
|
|
6.26 |
|
|
|
|
|
|
|
|
|
|
|
|
US$ |
|
US$ |
Period |
|
High |
|
Low |
December 2005
|
|
|
8.94 |
|
|
|
7.26 |
|
January 2006
|
|
|
8.36 |
|
|
|
7.55 |
|
February 2006
|
|
|
9.81 |
|
|
|
7.00 |
|
March 2006
|
|
|
7.88 |
|
|
|
6.81 |
|
April 2006
|
|
|
10.00 |
|
|
|
7.65 |
|
May 2006
|
|
|
9.00 |
|
|
|
7.07 |
|
June 2006
|
|
|
7.75 |
|
|
|
6.26 |
|
July 2006 |
|
|
7.42 |
|
|
|
4.64 |
|
ITEM 10. ADDITIONAL INFORMATION.
The Companys objects are to perform all the functions of a holding company and to coordinate
the policy and administration of any subsidiary company. See paragraphs 6 and 7 of the Companys
Memorandum of Association for further information on the objects and powers of the Company.
Memorandum of Association and Bye-Laws
Corporate Governance
The Company is an exempted company incorporated in Bermuda and is subject to the laws of that
jurisdiction. The legal framework in Bermuda which applies to exempted companies is flexible and
allows an exempted company to comply with the corporate governance regime of the relevant
jurisdiction in which the company operates or applicable listing standards. Under Bermuda law,
members of a board of directors owe a fiduciary duty to the company to act in good faith in their
dealings with or on
52
behalf of the company and to exercise their powers and fulfill the duties of
their office honestly. In addition, the Bermuda company legislation imposes a duty on directors and
officers of an exempted company to act honestly and in good faith with a view to the best
interests of the company and requires them to exercise the care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances. Bermuda legislation also
imposes certain specific duties and obligations on companies and directors, both directly and
indirectly, including duties and obligations with respect to matters such as (a) loans to directors
and related persons and (b) limits on indemnities for directors and officers. Bermuda law does not
impose specific obligations in respect of corporate governance, such as those prescribed by NYSE
listing standards, requiring a company to (i) appoint independent directors to their boards, (ii)
hold regular meetings of non-management directors; (iii) establish audit, nominating and governance
or compensation committees; (iv) have shareholders approve equity compensation plans; (v) adopt
corporate governance guidelines; or (vi) adopt a code of business conduct and ethics.
The Company is also subject to the NYSE listing standards, although, because it is a foreign
private issuer, those standards are considerably different from those applied to U.S. companies.
Under the NYSE rules, the Company need only (i) establish an independent audit committee that has
specified responsibilities as described in the following table; (ii) provide prompt certification
by its chief executive officer of any material non-compliance with any corporate governance rules;
(iii) provide periodic written affirmations to the NYSE with respect to its corporate governance
practices and (iv) provide a brief description of significant differences between its corporate
governance practices and those followed by U.S. companies.
The following table compares the Companys principal corporate governance practices to those
required of U.S. companies.
|
|
|
|
|
|
|
Standard for U.S. Domestic Listed Companies |
|
China Yuchai International Limiteds Practice |
Director Independence |
|
|
|
|
|
|
|
|
|
|
|
|
|
A majority of the board must consist of
independent directors.
|
|
|
|
Three of the Companys nine directors, Messrs.
Raymond C.K. Ho, Neo Poh Kiat, Tan Aik-Leang, are
independent within the meaning of the NYSE standards.
Mr. Ho has notified the Company that he will not be
seeking re-election at the forthcoming annual general
meeting of the Company. The Company is currently
searching for a replacement independent director and,
until such person is appointed, the Company will have
only two independent directors within the meaning of
the NYSE standards. |
|
|
|
|
|
|
|
|
|
Independence is defined by various
criteria including the absence of a
material relationship between director
and the listed company. Directors who
are employees, are immediate family of
the chief executive officer or receive
over $100,000 per year in direct
compensation from the listed company are
not independent. Directors who are
employees of or otherwise affiliated
through immediate family with the listed
companys independent auditor are also
not independent. |
|
|
|
|
|
|
|
|
|
|
|
|
|
The non-management directors of each
company must meet at regularly scheduled
executive sessions without management.
|
|
|
|
The Companys non-management directors do not
meet periodically without management directors. |
|
|
|
|
|
|
|
Audit Committee |
|
|
|
|
|
|
|
|
|
|
|
|
|
Listed companies must have an audit
committee that satisfies the requirements of
Rule 10A-3 under the Securities Exchange Act.
The rule requires that the audit committee (i)
be comprised entirely of independent directors;
(ii) be directly responsible for the
appointment, compensation and oversight of the
independent auditor; (iii) adopt procedures for
the receipt and treatment of complaints with
respect to accounting and auditing issues; (iv)
be authorized to engage independent
counsel and
|
|
|
|
The Companys audit committee meets the
requirements of Rule 10A-3 under the Securities
Exchange Act. |
53
|
|
|
|
|
|
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Standard for U.S. Domestic Listed Companies |
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China Yuchai International Limiteds Practice |
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other advisors it deems necessary in performing
its duties; and (v) be given sufficient
funding by the board of directors to compensate
the independent auditors and other advisors as
well as for the payment of ordinary
administrative expenses incurred by the
committee. |
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The audit committee must consist of at
least three members, and each member must be
independent within the meaning established by
the NYSE.
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The Companys audit committee currently
consists of three members, each of whom is independent
within the meaning established by the NYSE. However,
Mr. Ho has notified the Company that he will not be
seeking re-election at the forthcoming annual general
meeting of the Company. The Company is currently
searching for a replacement independent director and,
until such person is appointed, the Companys Audit
Committee will consist of only two independent
members. |
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The Companys audit committee must have
a written charter that addresses the
committees purpose and responsibilities.
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The audit committee has a charter outlining
the committees purpose and responsibilities, which
are similar in scope to those required of U.S.
companies. |
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At a minimum, the committees purpose
must be to assist the board in the
oversight of the integrity of the
companys financial statements, the
companys compliance with legal and
regulatory requirements, the independent
auditors qualifications and independence
and the performance of the companys
internal audit function and independent
auditors. |
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The audit committee is also required to
review the independent auditing firms
annual report, describing the firms
internal quality control procedures, any
material issues raised by the most recent
internal quality control review or peer
review of the firm and any steps taken to
address such issues. The audit committee
is also to assess the auditors
independence by reviewing all
relationships between the company and its
auditor. It must establish the companys
hiring guidelines for employees and
former employees of the independent
auditor. |
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The committee must also discuss the
companys annual audited financial
statements and quarterly financial
statements with management and the
independent auditors, the companys
earnings press releases, as well as
financial information and earnings
guidance provided to analysts and rating
agencies, and policies with respect to
risk assessment and risk management. It
must also meet periodically with the
internal auditors and the board of
directors. |
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Each listed company must have disclosed
whether their board of directors has identified
an Audit Committee Financial Expert, and if not
the reasons why the board has not done so.
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The Board of Directors has identified Mr. Tan
Aik-Leang as the Companys Audit Committee Financial
Expert. |
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Each listed company must have an
internal audit function.
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The Companys internal audit function is
provided by HLA. |
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Standard for U.S. Domestic Listed Companies |
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China Yuchai International Limiteds Practice |
Compensation Committee |
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Listed companies must have a
compensation committee composed entirely of
independent board members as defined by the
NYSE listing standards.
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The Companys compensation committee currently
has three members, two of whom are independent within
the meaning of the NYSE standards. Upon the
resignation of Mr. Ho, the Companys Compensation
Committee will only have one independent member. |
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The committee must have a written
charter that addresses its purpose and
responsibilities. |
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These responsibilities include (i)
reviewing and approving corporate goals and
objectives relevant to CEO compensation; (ii)
evaluating CEO performance and compensation in
light of such goals and objectives for the CEO;
(iii) based on such evaluation, reviewing and
approving CEO compensation levels; (iv)
recommending to the board non-CEO compensation,
incentive compensation plans and equity-based
plans; and (v) producing a report on executive
compensation as required by the SEC to be
included in the companys annual proxy
statement or annual report. The committee must
also conduct an annual performance
self-evaluation.
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The Companys compensation committee reviews
among other things the Companys general compensation
structure, and reviews, recommends or approves
executive appointments, compensation and benefits of
directors and executive officers, subject to
ratification by the Board of Directors, and supervises
the administration of the Companys employee benefit
plans, if any. |
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Nominating/Corporate Governance Committee |
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Listed companies must have a
nominating/corporate governance committee
composed entirely of independent board members.
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The Company does not have a
nominating/corporate governance committee. However,
certain responsibilities of this committee are
undertaken by the Compensation Committee of the
Company, such as the review and approval of executive
appointments. |
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The committee must have a written
charter that addresses its purpose and
responsibilities, which include (i) identifying
qualified individuals to become board member;
(ii) selecting, or recommending that the board
select, the director nominees for the next
annual meeting of shareholders; (iii)
developing and recommending to the board a set
of corporate governance principles applicable
to the company; (iv) overseeing the evaluation
of the board and management; and (v) conducting
an annual performance evaluation of the
committee. |
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Equity-Compensation Plans |
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Shareholders must be given the
opportunity to vote on all equity-compensation
plans and material revisions thereto, with
limited exceptions.
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The Company intends to have its shareholders
approve equity-compensation plans. |
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Corporate Governance Guidelines |
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Listed companies must adopt and
disclose corporate governance guidelines.
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The Company has formally adopted various
corporate governance guidelines, including Code of
Business Conduct and Ethics (described below); Audit
Committee Charter; Whistle-blowing Policy; Insider
Trading Policy; and Disclosure Controls and
Procedures. |
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Standard for U.S. Domestic Listed Companies |
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China Yuchai International Limiteds Practice |
Code of Business Conduct and Ethics |
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All listed companies, U.S. and foreign,
must adopt and disclose a code of business
conduct and ethics for directors, officers and
employees, and promptly disclose any waivers of
the code for directors or executive officers.
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The Company has adopted a Code of Business
Conduct and Ethics Policy, a copy of which is
available upon request from the Company. |
Directors
Director Interests and Voting
A Director of the Company cannot vote or be counted in the quorum with regard to any contract
or arrangement or any other proposal in which he has any interest or in respect of which he has any
duty which conflicts with his duty to the Company. The restriction from voting and being counted in
the quorum does not apply if the only interest the Director has is included in the following list:
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a resolution regarding granting any security or indemnity for any money lent or
obligation incurred by such Director at the request, or for the benefit, of the Company or
any of its subsidiaries (or a company of which the Company is a beneficially wholly-owned
subsidiary); |
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a resolution regarding granting any security or indemnity to any third party for a debt
or obligation which is owed by the Company or any of its subsidiaries (or a company of which
the Company is a beneficially wholly-owned subsidiary) to the third party, for which such
Director has assumed responsibility in whole or in part under a guarantee or indemnity; |
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a resolution about an offer of shares, debentures or other securities of the Company or
any of its subsidiaries (or a company of which the Company is a beneficially wholly-owned
subsidiary) for subscription or purchase in which such Director is to be a participant in
the underwriting or sub-underwriting of the offer; |
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a resolution about any proposal involving any other company in which such Director is
interested, whether directly or indirectly and whether as an officer or shareholder or
otherwise, provided that such Director is not the holder of, or directly or indirectly
beneficially interested in, 5% or more of (i) any class of the equity share capital of such
company or in any third company through which such Directors interest is derived or (ii)
the voting rights in that company; |
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any contract arrangement or proposal for the benefit of employees of the Company under
which such Director benefits in a similar manner as the employees and does not receive any
privileges or advantages not provided to the employees; or |
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any proposal in which such Director is interested in the same manner as other holders of shares or debentures or other securities of the Company or any of its subsidiaries by virtue
only of such Directors interest in shares or debentures or other securities of the Company
or any of its subsidiaries. |
If the Board of Directors of the Company is considering proposals about appointing two or more
Directors to positions with the Company or any company in which the Company is interested, each
such Director (if not disqualified from voting under proviso to item (d) above) can vote and be
included in the quorum for each resolution, except the one concerning such Director.
Remuneration and Pensions
The total fees paid to the Directors (other than Directors appointed to an executive office)
for performing their services as Directors must not exceed US$250,000 each year or such lesser
amount as the Board of Directors of the Company may determine. The Directors may decide the way in
which the total sum shall be divided among them, except that any Director holding office for less
than the whole of the relevant period for which the fees are paid will only receive part of the
amount in proportion to the amount of time he has been a Director. The shareholders of the Company
may by ordinary resolution increase the amount of the fees payable to the Directors. The
shareholders of the Company had at the annual general meeting of the Company held on July 22, 2005
approved the increase of the total Directors fees from US$250,000 to US$500,000 for the financial
year 2005.
The Board of Directors of the Company may grant special remuneration to any Director who shall
render any special or extra services to or at the request of the Company. Such special remuneration
may be paid to such Director in addition to or in substitution
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for his ordinary remuneration as a Director and may be payable by way of a lump sum,
participation in profits or as otherwise determined by the Board of Directors of the Company.
The Board of Directors of the Company may provide pensions or other benefits to any Director
or former Director, or any of their family members or dependants.
Borrowing Powers
The Board of Directors of the Company may exercise all the powers of the Company to borrow
money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof
and to issue debentures and other securities.
Qualification of Directors
No person is required to vacate office or is ineligible for re-election or re-appointment as a
Director, and no person is ineligible for appointment as a Director, by reason only of his having
attained any particular age. No Director is required to hold any shares of the Company.
Rights of Holders of shares of Common Stock
The holders of shares of Common Stock shall:
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be entitled, on a show of hands, to one vote and, on a poll, to one vote per share; |
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be entitled to such dividends as the Board of Directors of the Company may from time to time declare; |
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in the event of a winding-up or dissolution of the Company, whether voluntary or
involuntary or for the purpose of the reorganization or otherwise or upon any distribution
of capital, be entitled to a return of the amount paid up on the Common Stock and thereafter
to the surplus assets of the Company; and |
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generally, be entitled to enjoy all the rights attaching to shares. |
All unclaimed dividends or distributions out of contributed surplus account may be invested or
otherwise made use of by the Board of Directors of the Company for the benefit of the Company until
claimed. No dividend or distribution shall bear interest against the Company. Any dividend or
distribution which has remained unclaimed for a period of 12 years from the due date for payment
thereof shall at the expiration of that period be forfeited and shall belong to the Company
absolutely.
Rights of Holder of the Special Share
The holder of the Special Share shall be entitled to the following rights:
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to elect six Directors of the Company and to remove Directors so appointed; and |
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no shareholder resolution may be passed without the affirmative vote of the holder of the
Special Share, including any resolution to amend the Memorandum of Association or Bye-Laws
of the Company. |
The holder of the Special Share shall not be entitled to any dividends and in the event of a
winding up or dissolution of the Company, the holder of the Special Share shall be entitled only to
a return of the amount paid up on the Special Share.
The Special Share is not transferable except to HLA and its affiliates or to China Everbright
and its affiliates. The Special Share shall cease to carry any rights in the event that, if HLA and
its affiliates own the Special Share, HLA and its affiliates cease to own, directly or indirectly,
at least 7,290,000 shares of Common Stock (or such equivalent number upon a consolidation or
subdivision of shares of Common Stock), or if China Everbright and its affiliates own the Special
Share, China Everbright and its affiliates cease to own, directly or indirectly, at least 6,570,000
shares of Common Stock (or such equivalent number upon a consolidation or subdivision of shares of
Common Stock).
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Modification of Shareholders Rights
The rights attached to any class of shares (unless otherwise provided by the terms of issue of
the shares of that class) may be varied, modified or abrogated with the consent in writing of the
holders of not less than three-fourths of the issued shares of that class or with the sanction of
an ordinary resolution passed at a separate general meeting of the holders of the shares of the
class. The rights conferred upon the holders of the shares of any class issued with preferred or
other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of
that class, be deemed to be varied by the creation or issue of further shares ranking pari passu
therewith.
Annual General and Special General Meetings
The Company must hold an annual general meeting each year. The Directors of the Company decide
where and when it will be held. Not more than fifteen months may elapse between the date of one
annual general meeting and the next. At least 14 clear days written notice must be given for every
annual general meeting and for every special general meeting. The notice for any annual general
meeting must state the date, place and time at which the meeting is to be held, and the business to
be conducted at the meeting, including, if applicable, any election of Directors. The notice for
any special general meeting must state the time, place and the general nature of the business to be
considered at the meeting and shall state that a shareholder entitled to attend and vote is
entitled to appoint one or more proxies to attend and vote instead of him. In the case of a meeting
convened for passing a special resolution, the notice shall specify the intention to propose the
resolution as a special resolution.
Shareholders holding not less than one-tenth in value of the paid up share capital of the
Company and having the right to attend and vote at general meetings of the Company shall have the
right, by written request to the Chairman or President (as applicable), Deputy Chairman or Vice
President (as applicable) or Secretary of the Company, to require that a special general meeting be
convened by the Directors for the transaction of any business specified in the request. Such
meeting shall be held within two months after the request has been made. If within 21 days of such
deposit of the request, the Board fails to convene the meeting, the petitioners may convene the
meeting themselves in accordance with Section 74(3) of the Companies Act of Bermuda.
Limitations on Rights to Own Securities
There are no limitations under Bermuda law or the Companys Memorandum of Association and
Bye-Laws on the rights of non-Bermuda owners of shares of the Company to hold or vote their shares.
The Company is exempt from the laws of Bermuda which restrict the percentage of share capital
that may be held by non-Bermudians, but as an exempted company the Company may not participate in
certain business transactions, including: (i) the acquisition or holding of land in Bermuda (except
that required for its business held by way of lease or tenancy for a term not exceeding 50 years
or, with the consent of the Minister of Finance of Bermuda, land by way of lease or tenancy for a
term not exceeding 21 years in order to provide accommodation or recreational facilities for its
employees); (ii) the taking of mortgages on land in Bermuda to secure an amount in excess of 50,000
Bermuda dollars without the prior consent of the Minister of Finance of Bermuda; (iii) the
acquisition of any bonds or debentures secured by any land in Bermuda other than those issued by
the Government of Bermuda or a public authority; or (iv) the carrying on of business of any kind or
type whatsoever in Bermuda either along or in partnership or otherwise except, inter alia, carrying
on business with persons outside Bermuda, in furtherance of the business of the Company carried on
outside Bermuda or under a license granted by the Minister of Finance of Bermuda.
In accordance with the Companys Bye-Laws, share certificates are only issued to members of
the Company (i.e., persons registered in the register of members as holders of shares in the
Company). The Company is not bound to investigate or incur any responsibility in respect of the
proper administration or execution of any trust to which any of the Companys shares are subject.
The Company will take no notice of any trust applicable to any of its shares whether or not it had
notice of such trust.
Exchange Controls
Bermuda Exchange Controls
The Company has been designated as a non-resident for exchange control purposes by the Bermuda
Monetary Authority.
The Company has received the permission of the Bermuda Monetary Authority under the Exchange
Control Act of 1972 and regulations thereunder for the transfer of shares of Common Stock to and
between persons regarded as resident outside Bermuda for exchange control purposes and the issue of
shares within the existing authorized capital of the Company to such persons for so long as
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such shares are listed on the NYSE. The Bermuda Monetary Authority has also granted to all Bermuda
companies with voting shares listed on an appointed stock exchange (as defined in the Companies Act 1981 of Bermuda), a
general permission for the issue and subsequent transfer of any securities of such companies from
and to a non-resident of Bermuda. The NYSE is an appointed stock exchange under the Companies Act
1981 of Bermuda. Issues and transfers of shares involving any person regarded as resident in
Bermuda for exchange control purposes require specific prior approval under the Exchange Control
Act of 1972.
Because the Company has been designated as a non-resident for Bermuda exchange control
purposes, there are no restrictions on its ability to transfer funds in and out of Bermuda or to
pay dividends to United States residents who are holders of the shares of Common Stock, other than
in respect of local Bermuda currency.
China Exchange Controls
The Renminbi currently is not a freely convertible currency. The State Administration for
Foreign Exchange (the SAFE), under the authority of the Peoples Bank of China (the PBOC),
controls the conversion of Renminbi into foreign currency. Prior to January 1, 1994, Renminbi could
be converted to foreign currency through the Bank of China or other authorized institutions at
official rates fixed daily by the SAFE. Renminbi could also be converted at swap centers (Swap
Centers) open to Chinese enterprises and foreign invested enterprises (FIEs), subject to SAFE
approval of each foreign currency trade, at exchange rates negotiated by the parties for each
transaction. In the year ended December 31, 1993, as much as 80% by value of all foreign exchange
transactions in China took place through the Swap Centers. The exchange rate quoted by the Bank of
China differed substantially from that available in the Swap Centers. Effective January 1, 1994, a
unitary exchange rate system was introduced in China, replacing the dual-rate system previously in
effect. In connection with the creation of a unitary exchange system, the China Foreign Exchange
Trading System (CFETS) inter-bank foreign exchange market was established. Under the unitary
foreign exchange system, PBOC sets daily exchange rates (the PBOC Rates) for conversion of
Renminbi into U.S. dollars and other currencies based on the CFETS interbank market rates, and the
Bank of China and other authorized banks may engage in foreign exchange transactions at rates that
vary within a prescribed range above or below PBOC Rates.
Yuchai, as a FIE, is permitted to retain its foreign currency earnings and maintain foreign
currency accounts at designated foreign exchange banks. However, there can be no assurance that the
current authorizations for FIEs to retain their foreign exchange to satisfy foreign exchange
liabilities in the future will not be limited or eliminated or that Yuchai will be able to obtain
sufficient foreign exchange to satisfy their foreign exchange requirements. Foreign exchange
transactions under the capital account continue to be subject to limitations and require approvals
of the SAFE, which could affect the ability of the Yuchai to obtain foreign exchange through debt
or equity financing, including by means of loans or capital contributions from the Company.
In the event of shortages of foreign currencies, Yuchai may be unable to convert sufficient
Renminbi into foreign currency to meet its foreign currency obligations or to pay dividends in
foreign currency. Yuchai requires foreign currency to purchase a substantial portion of the
manufacturing equipment required for the planned expansion of its manufacturing facilities and to
meet foreign currency-denominated debt payment obligations. Yuchai will also require foreign
currency for payment of its imported engine components.
The value of the Renminbi is subject to changes in Chinese government policies and to
international economic and political developments. During the few years prior to 1994, the Renminbi
experienced a devaluation against most major currencies, and a devaluation of approximately 50% of
the Renminbi against the U.S. dollar occurred on January 3, 1994 in connection with the adoption of
the new unitary exchange rate system. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of certain foreign
currencies. From that day to December 31, 2005, this change in policy has resulted in an
approximately 2.5% appreciation of the Renminbi against the U.S. dollar. While the international
reaction to the Renminbi revaluation has generally been positive, there remains significant
international pressure on the PRC government to adopt an even more flexible currency policy, which
could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. Any
future devaluation of the Renminbi would increase the effective cost to Yuchai of foreign
manufactured equipment or components, and of satisfying any other foreign currency denominated
liabilities. In addition, any such devaluation would reduce the U.S. dollar value of any dividends
declared in Renminbi.
In addition, State Administration of Foreign Exchange issued a
public notice (October Notice) effective from November 1, 2005, which requires registration with
SAFE by the PRC resident shareholders of any foreign holding company of a PRC entity. Without
registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or
otherwise; however, it is uncertain how the October Notice will be interpreted or implemented
regarding specific documentation requirements for a foreign holding company formed prior to the
effective date of the October Notice, such as in our case. In addition,
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the October Notice requires that any monies remitted to PRC residents outside of the PRC be returned within 180 days; however,
there is no indication of what the penalty will be for failure to comply or if shareholder
non-compliance will be considered to be a violation of the October Notice by us or otherwise affect
us.
Taxation
Bermuda Taxation
There is no Bermuda income, corporation or profits tax, withholding tax, capital gains tax,
capital transfer tax, estate duty or inheritance tax payable by shareholders of the Company other
than by shareholders ordinarily resident in Bermuda. Neither the Company nor its shareholders
(other than shareholders ordinarily resident in Bermuda) are subject to stamp or other similar duty
on the issue, transfer or redemption of Common Stock. The Company has received from the Minister of
Finance of Bermuda under the Exempted Undertakings Tax Protection Act of 1966, as amended, an
assurance that, in the event that Bermuda enacts any legislation imposing any tax computed on
profits or income, or computed on any capital assets, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, the imposition of such tax shall not be applicable to the
Company or to any of its operations, shares, debentures or other obligations of the Company, until
March 28, 2016. This assurance does not, however, prevent the imposition of any such tax or duty on
such persons as are ordinarily resident in Bermuda and holding such shares, debentures or
obligations of the Company or on land in Bermuda leased or let to the Company.
As an exempted company, the Company is required to pay a registration fee in Bermuda based
upon its authorized share capital and the premium on the issue of its shares, at rates calculated
on a sliding scale not exceeding US$27,825 per annum.
Peoples Republic of China Taxation
The following discussion summarizes the taxes applicable to the Companys investment in Yuchai
and applicable to Yuchai under Chinese law.
Taxation of Dividends from Yuchai
Dividends distributed by Yuchai to the Company can be remitted from China without any Chinese
taxation. Although the Income Tax Law on Foreign Investment Enterprises and Foreign Enterprises
(the Foreign Investment Enterprise Tax Law) provides that certain remittances of foreign exchange
earnings from China are subject to Chinese withholding tax, dividends received by foreign investors
from a foreign investment enterprise are exempt from withholding tax. Yuchai is qualified as a
foreign investment enterprise and, as a result, withholding tax is not applicable to dividends
received by the Company from Yuchai.
Taxation of Disposition of Yuchai Shares
In the event the Company transfers any of its current holding of the Yuchai Shares, the amount
received in excess of its original capital contribution would be subject to Chinese withholding tax
at a rate of 10%.
In the event that Yuchai is liquidated, the portion of the balance of its net assets or
remaining property, after deducting undistributed profits, various funds and liquidation expenses,
that exceeds Yuchais paid-in capital would be subject to withholding tax at a rate of 10%.
Income Tax
Yuchai is subject to the Foreign Investment Enterprise Tax Law. Pursuant to this law,
Sino-foreign joint stock companies generally are subject to an income tax at a rate of 33%,
including a national tax of 30% and a local tax of 3%. If an enterprise is located in specially
designated regions, more favorable effective rates apply. The Foreign Investment Enterprise Tax Law
generally exempts Sino-foreign joint stock companies engaged in manufacturing with an operation
term of more than ten years from national and local income taxes for two years starting from the
first profitable year of operations, followed by a 50% exemption for the next three years. The
Detailed Rules for Performance of the Foreign Investment Enterprise Tax Law (the Detailed Rules)
and the Guangxi Zhuang Autonomous Region Foreign Joint Venture Tax Incentives Regulation (the
Guangxi Tax Regulation) generally provide a three-year extension of the 50% tax exemption if a
company meets the standards of an advanced technology enterprise as defined under the regulation
and will be or has been operating for at least ten years. The Foreign Investment Enterprise Tax Law
and the Detailed Rules and the Guangxi Tax Regulation also generally provide for a tax reduction to
a 15% tax rate for certain foreign-invested enterprises meeting the following criteria: (i) the
enterprise is in an industry involving energy, transportation, port or special knowledge or
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technology, (ii) the enterprise is located in a coastal special economic zone or (iii) the
enterprise has foreign investment exceeding US$30 million.
Under the tax law and regulations described above, Yuchai is qualified for the reduced tax
rate of 15%. As a Sino-foreign joint stock company, Yuchai was also exempt from Chinese income tax
for the years 1994 and 1995 and was entitled to a 50% tax exemption for each of the years 1996 to
1998. In addition, Yuchai has obtained approval to extend the 50% tax exemption for three
additional years from 1999 to 2001 based on its qualification as an advanced technology enterprise
as defined under the relevant local tax law and regulations. However, based on current
interpretations of the PRC income tax law, Yuchai will be subject to a minimum tax rate of 10%
during this three-year extension. As a result, under current laws, Yuchai was subject to tax at a
rate of 7.5% during the three years from 1996 through 1998 and a rate of 10% during the three years
from 1999 through 2001. Since January 1, 2002, Yuchai is subject to tax at a rate of 15% so long as
it continues to qualify as a foreign-invested enterprise eligible for such reduction.
Value-Added Tax
In addition to Chinese income tax, Yuchai is subject to tax on its sales. Effective January 1,
1994, the Value-Added Tax Provisional Regulations subject all goods produced or processed in China,
other than real property and goods produced or processed for export, to a value-added tax (VAT)
at each stage or sale in the process of manufacture, processing, distribution and sale to the
ultimate consumer. The basic VAT rate is 17% of the sale price of the item, although certain goods
are assessed at a preferential 13% VAT rate. The seller of the goods adds 17% to the sale price of
the item, which is separately invoiced (except in the case of retail sales), and collects the
applicable amount of VAT through the sale of the item. The amount of the sellers VAT liability to
the Taxation Bureau is calculated as the amount of sales multiplied by the applicable VAT rate. The
amount of the sellers VAT liability may be reduced by deducting the VAT included in the materials,
parts and other items purchased by the seller and used in producing the goods.
The Value-Added Tax Provisional Regulations do not permit the seller to deduct from its VAT
liability the amount of VAT included in the purchase price of fixed assets purchased by the seller.
Thus, although the book value of fixed assets, including plant and equipment, purchased by Yuchai
will be the depreciated cost (ordinarily the purchase price plus VAT in the case of non-real
property) of the fixed assets, Yuchai cannot deduct the amount of VAT paid at the time of such
purchase from its VAT liability in respect of products sold.
According to the Decision on the Use of Interim Regulations Concerning Value-Added Taxes,
Consumption Taxes and Business Taxes on Foreign-Funded Enterprises and Foreign Enterprises adopted
at the Fifth Meeting of the Eighth Standing Committee of the National Peoples Congress on December
29, 1993, the increased tax payment from the tax obligations arising from the levy of the VAT,
consumption taxes and business taxes will be refunded to foreign-funded enterprises established
prior to December 31, 1993 upon their application and the relevant tax offices approval, for a
period of no more than five years. In August 1994, the Ministry of Finance and State Tax Bureau
announced that the goods produced and directly exported by foreign-funded enterprises are exempt
from VAT and consumption tax, but the following goods are excepted: (i) crude oil, (ii) goods
prohibited from being exported by the state include natural bezoar, musk, bronze and acid bronze
alloy, platinum and (iii) sugar.
United States Federal Income Taxation
This section describes the material United States Federal income tax consequences of owning
shares of Common Stock. It applies to a U.S. Holder (as defined below) that holds the shares as
capital assets for tax purposes. This section does not apply to a U.S. Holder that is a member of a
special class of holders subject to special rules, including:
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a financial institution, |
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a dealer in securities, |
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a trader in securities that elects to use a mark-to-market method of accounting for its securities holdings, |
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a tax-exempt organization, |
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an insurance company, |
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a person liable for alternative minimum tax, |
61
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a person that actually or constructively owns 10% or more of the voting stock of the Company, |
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a person that owns shares through a partnership or other pass-through entity, |
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a person that holds shares as part of a straddle or a hedging or conversion transaction, or |
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a person whose functional currency is not the U.S. dollar. |
This section is based on the Internal Revenue Code of 1986, as amended, its legislative
history, existing and proposed regulations, published rulings and court decisions, all as currently
in effect. These laws are subject to change, possibly on a retroactive basis. There is currently no
comprehensive income tax treaty between the United States and Bermuda.
For purposes of this discussion, a U.S. Holder is a beneficial owner of shares that is:
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a citizen or resident of the United States, |
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a domestic corporation, |
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an estate the income of which is subject to United States federal income tax regardless of its source, or |
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a trust, if a United States court can exercise primary supervision over the trusts
administration and one or more United States persons are authorized to control all
substantial decisions of the trust. |
U.S. Holders should consult their own tax advisor regarding the United States federal, state
and local and other tax consequences of owning and disposing of shares in their particular
circumstances.
Taxation of Dividends
Under the United States federal income tax laws, and subject to the passive foreign investment
company (PFIC) rules discussed below, U.S. Holders will include in gross income the gross amount
of any dividend paid by the Company out of its current or accumulated earnings and profits (as
determined for United States federal income tax purposes). The dividend is ordinary income that the
U.S. Holder must include in income when the dividend is actually or constructively received. The
dividend will not be eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other United States corporations. The
amount of the dividend distribution includible in the income of a U.S. Holder will be the U.S.
dollar value of the Bermuda dollar payments made, determined at the spot Bermuda dollar/U.S. dollar
rate on the date the dividend distribution is includible in the income of the U.S. Holder,
regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or
loss resulting from currency exchange fluctuations during the period from the date the dividend
payment is includible in income to the date such payment is converted into U.S. dollars will be
treated as ordinary income or loss. Such gain or loss generally will be income or loss from sources
within the United States for foreign tax credit limitation purposes. Distributions in excess of
current and accumulated earnings and profits, as determined for United States federal income tax
purposes, will be treated as a non-taxable return of capital to the extent of the U.S. Holders
basis in the shares and thereafter as capital gain.
With respect to noncorporate taxpayers for taxable years beginning before January 1, 2011,
dividends may be taxed at the lower applicable capital gains rate provided that (1) the Common
Stock is readily tradable on an established securities market in the United States, (2) the Company
is not a passive foreign investment company (as discussed below) for either the Companys taxable
year in which the dividend was paid or the preceding taxable year, and (3) certain holding period
requirements are met. Common stock is considered for purposes of clause (1) above to be readily
tradable on an established securities market if it is listed on the New York Stock Exchange. U.S.
Holders should consult their tax advisors regarding the availably of the lower rate for dividends
paid with respect to the Companys Common Stock.
For foreign tax credit limitation purposes, the dividend will be income from sources outside
the United States, but generally will be treated separately, together with other items of passive
income or financial services income. For taxable years beginning after December 31, 2006, the
dividend would generally constitute passive category income but could, in the case of certain
U.S. Holders, constitute general category income.
62
Taxation of Capital Gains
Subject to the PFIC rules discussed below, upon the sale or other disposition of shares, a
U.S. Holder will recognize capital gain or loss for United States federal income tax purposes equal
to the difference between the U.S. Holders amount realized and the U.S. Holders tax basis in such
shares. If a U.S. Holder receives consideration for shares paid in a currency other than U.S.
dollars, the U.S. Holders amount realized will be the U.S. dollar value of the payment received.
In general, the U.S. dollar value of such a payment will be determined on the date of sale or
disposition. On the settlement date, a U.S. Holder may recognize U.S. source foreign currency gain
or loss (taxable as ordinary income or loss) equal to the difference (if any) between the U.S.
dollar value of the amount received based on the exchange rates in effect on the date of sale or
other disposition and the settlement date. However, if the shares are treated as traded on an
established securities market and the U.S. Holder is a cash basis taxpayer or an accrual basis
taxpayer who has made a special election, the U.S. dollar value of the amount realized in a foreign
currency is determined by translating the amount received at the spot rate of exchange on the
settlement date of the sale, and no exchange gain or loss would be recognized at that time.
Capital gain of a non-corporate U.S. Holder is generally taxed at a reduced rate where the property
is held more than one year. The gain or loss will generally be income or loss from sources within
the United States for foreign tax credit limitation purposes.
PFIC Rules
The Company believes that its shares should not be treated as stock of a PFIC for United
States federal income tax purposes for the taxable year that ended on December 31, 2005. The
Company may become a PFIC in 2006 or in future years, however, as a result of the implementation of
the Reorganization Agreement as amended in December 2005. U.S. Holders are strongly advised to
consult their own tax advisors regarding the possibility of the Company becoming a PFIC as a result
of the implementation of the Reorganization Agreement and the potential United States tax
consequences to them. If the Company were to be treated as a PFIC for any year during the U.S.
Holders holding period, unless a U.S. Holder elects to be taxed annually on a mark-to-market basis
with respect to the shares (which election may be made only if the Companys shares are marketable
stock), a U.S. Holder will be subject to special tax rules with respect to any excess
distribution received and any gain realized from a sale or other disposition (including a pledge)
of that holders shares. Distributions a U.S. Holder receives in a taxable year that are greater
than 125% of the average annual distributions received during the shorter of the three preceding
taxable years or the holders holding period for the shares will be treated as excess
distributions. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over the U.S. Holders holding
period for the shares; |
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the amount allocated to the current taxable year, and any taxable year prior to the first
taxable year in which the Company is treated as a PFIC, will be treated as ordinary income;
and |
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the amount allocated to each other year will be subject to tax at the highest tax rate in
effect for that year and the interest charge generally applicable to underpayments of tax
will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years prior to the year of disposition or excess
distribution cannot be offset by any net operating losses for such years, and gains (but not
losses) realized on the sale of the shares cannot be treated as capital, even the shares are held
as capital assets. If the Company were to be treated as a PFIC for any year during which a U.S.
Holder holds the shares, the Company generally would continue to be treated as a PFIC with respect
to that U.S. Holder for all succeeding years during which it owns the shares. If the Company were
to cease to be treated as a PFIC however, a U.S. Holder may avoid some of the adverse effects of
the PFIC regime by making a deemed sale election with respect to the shares.
If a U.S. Holder holds shares in any year in which the Company is a PFIC, that holder will be
required to file Internal Revenue Service Form 8621.
Documents on Display
It is possible to read and copy documents referred to in this annual report on Form 20-F that
have been filed with the SEC at the SECs public reference room located at 100 F Street, Room 1580,
Washington D.C., 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms and their copy charges. Additional information may also be obtained over the
Internet at the SECs website at http://www.sec.gov.
63
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is subject to market rate risks due to fluctuations in interest rates. The
majority of the Companys debt is variable rate short-term and long-term Renminbi denominated loans
obtained by Yuchai from banks in China. The interest rates of such loans are generally established
in accordance with directives announced from time to time by the PBOC, which are in turn affected
by various factors such as the general economic conditions in China and the monetary polices of the
Chinese government. There is no ready market in China for the Company to enter into interest rate
swaps or other instruments designed to mitigate its exposure to interest rate risks. In addition,
the Company also various bank facilities from banks in Singapore to fund the Companys business
expansion plan. Subsequent to December 31, 2005, the Company has drawn down various bank facilities
relating to its investments in TCL and LKN. As of June 30, 2006, the Company had outstanding loans
of RMB 1,705.9 million (US$213.4 million), equivalent to approximately S$339.3 million.
The Company is exposed to foreign currency risk as a result of having to obtain certain key
components used in the manufacturing of Yuchais heavy-duty engines from overseas suppliers. At
December 31, 2005, the Company did not have any loans that were denominated in a foreign currency.
The following table provides certain interest rate risk information regarding the Companys
short-term and long-term bank loans as of December 31, 2004 and 2005:
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As of December 31, 2005 |
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As of December 31, 2004 |
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Total carrying |
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Estimated |
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Total carrying |
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Estimated fair |
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Expected maturity dates |
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amount |
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fair value(2) |
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amount |
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value(2) |
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2006 |
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2007 |
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(Expressed in Rmb thousands, except interest rate) |
Floating rate debt: |
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(i) Short-term bank loans denominated in Rmb |
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812,835 |
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812,835 |
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812,835 |
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430,000 |
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430,000 |
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Weighted average interest rate(1) |
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5.53 |
% |
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5.53 |
% |
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5.28 |
% |
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(ii) Long-term bank loans denominated in Rmb |
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100,000 |
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50,000 |
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150,000 |
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150,000 |
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100,000 |
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100,000 |
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Weighted average interest rate(1) |
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5.22 |
% |
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5.85 |
% |
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5.43 |
% |
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5.22 |
% |
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(1) |
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Weighted average interest rate is calculated based on the interest rates applicable to
individual bank loans outstanding as of December 31, 2005 and 2004. |
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(2) |
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Fair value was estimated based on the floating interest rates applicable to similar loan
instruments. |
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
There has not been any dividend arrearage or other material delinquency with respect to
preferred stock of either the Company or Yuchai.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
Not Applicable.
ITEM 15. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its SEC reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to its management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can provide only a reasonable
level of assurance of achieving the desired control objectives, and, in reaching a reasonable level
of assurance,
64
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company has carried out an evaluation, under the
supervision and with the participation of its management, including its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report. Based on the foregoing,
the Companys Chief Executive Officer and Chief Financial Officer concluded that its disclosure
controls and procedures were effective at the reasonable assurance level, except as set forth below.
In connection with the Companys recent business expansion and diversification plan, the Company
has made minority equity investments in TCL and LKN, as described elsewhere in this Annual Report.
With respect to TCL, the Company has experienced delays in the timely collating and integration of
financial information from TCL management for use by the Company in
preparing its consolidated financial statements and related
disclosures. This situation has
primarily arisen from TCL managements lack of familiarity with US GAAP and SEC financial reporting requirements, as TCL maintains its financial statements in
accordance with Singapore Financial Reporting Standards. Further, the
Company did not have sufficient controls in place to detect timely
all deficiencies in the US GAAP information provided by TCL in order
for the Company to properly apply the equity method of accounting. The Company is pro-actively taking steps
to assist TCL management to develop improved systems and procedures
to enhance the quality and timeliness of the US GAAP information
provided to the Company. The Company has specifically informed TCL management the
importance that all significant matters must be communicated to the
Company on a timely basis. The Company will continue to hold regular
meetings with TCL management and review
closely with the TCL management to record and disclose information
received on a timely basis as appropriate. The Company will perform
analytical review on the balance sheet and profit and loss statements
received on a monthly basis to assess compliance with US GAAP
requirements.
Other
than with respect to the execution of the Reorganization Agreement
and implementation of the Companys business diversification
plan described elsewhere
in this Annual Report, there have been no significant changes in the Companys disclosure controls
and procedures or in other factors that could significantly affect its disclosure controls and
procedures during the period covered by this report nor have there been any significant changes
subsequent to the date the Company completed its evaluation.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the date of this report, the Companys Audit Committee members are Messrs. Tan Aik-Leang
(Chairman), Raymond C. K. Ho and Neo Poh Kiat. Please see Item 6. Directors, Senior Management and
Employees for their experience and qualifications. Pursuant to the SECs rules, the Board has
designated Mr. Tan Aik-Leang as the Companys Audit Committee Financial Expert.
ITEM 16B. CODE OF ETHICS.
The
Company adopted a Code of Business Conduct and Ethics Policy in May 2004 that is applicable to all its directors,
senior management and employees. The Code of Business Conduct and
Ethics Policy contains general guidelines for conducting the
business of the Company. The Company will make available a copy of
the Code of Business Conduct and Ethics Policy to any person
without charge, if a written request is made to the Companys executive office at 16 Raffles Quay
#26-00 Hong Leong Building, Singapore 048581. Since adoption of the
Companys Code of Business Conduct and Ethics Policy, the
Company has not granted any waivers or exemption therefrom.
ITEM 16C. PRINCIPAL ACCOUNTANTS FEES AND SERVICES.
The following table set forth the total remuneration that was paid by the Company and Yuchai
to its independent accountants, KPMG, in each of our previous two fiscal years:
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Audit fees |
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Audit-related fees |
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Tax fees |
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Others |
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Total |
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(Expressed in Rmb thousands) |
2004 |
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3,447 |
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331 |
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3,778 |
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2005 |
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4,404 |
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4,404 |
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Audit fees
Services provided primarily consist of professional services relating to the annual audits of
consolidated financial statements as well as statutory audits required by foreign jurisdictions and
quarterly reviews.
Audit-related fees
Services provided primarily consist of services connected with securities filing documents,
issuance of consents, accounting issues research and technical advice.
Tax fees
Services provided primarily consist of routine corporate tax advisory services and compilation
of corporate tax returns.
Others
Services provided primarily consist of provision of training and research materials.
65
The Companys Audit Committee has pre-approved the terms of KPMGs engagement by the Company
for services to be performed for the Company during 2006.
ITEM 16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Until May 2005, only two of the three members of the Companys Audit Committee qualified as
independent directors under NYSE rules, and the Company relied upon an exception from the NYSE rule
requiring that the Companys Audit Committee be comprised solely of independent directors. As of
May 26, 2005, the Company has changed the composition of its Audit Committee so that it is now fully
compliant with the new audit committee requirements promulgated by the SEC and NYSE.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Not Applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS.
The Company has elected to provide the financial statements and related information specified
in Item 18 in lieu of Item 17.
ITEM 18. FINANCIAL STATEMENTS.
Index to Financial Statements
China Yuchai International Limited
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Report of Independent Registered Public Accounting Firm |
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F2 |
Consolidated Statements of Income for Years Ended December 31, 2003, 2004 and 2005 |
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F3 |
Consolidated Balance Sheets as of December 31, 2004 and 2005 |
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F5 |
Consolidated Statements of Stockholders Equity for Years Ended December 31, 2003, 2004 and 2005 |
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F7 |
Consolidated Statements of Cash Flows for Years Ended December 31, 2003, 2004 and 2005 |
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F8 |
Notes to Consolidated Financial Statements |
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F12 |
ITEM 19. EXHIBITS.
Exhibits to this Annual Report:
1.1 |
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Memorandum of Association of China Yuchai International Limited (the Registrant)
(incorporated herein by reference to the Registration Statement on Form F-1, filed by the
Registrant on November 9, 1994 (File No. 33-86162) (the Form F-1)). |
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1.2 |
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Bye-laws of the Registrant (incorporated herein by reference to the Form F-1). |
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3.1 |
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Subscription and Shareholders Agreement of Diesel Machinery (BVI) Limited, dated November 9,
1994, among Diesel Machinery (BVI) Limited, Hong Leong Asia Ltd. (HLA) and China Everbright
Holdings Company Limited (EB Holdings) (incorporated herein by reference to the Form F-1). |
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3.2 |
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Supplemental Subscription and Shareholders Agreement, dated January 21, 2002, between EB
Holdings and HLA (incorporated herein by reference to the Annual Report on Form 20-F for
fiscal year ended December 31, 2001, filed by the Registrant on June 25, 2002 (the Form 20-F
FY 2001). |
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3.3 |
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Second Supplemental Subscription and Shareholders Agreement, dated May 17, 2002, between EB
Holdings and HLA (incorporated herein by reference to the Form 20-F FY 2001). |
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4.1 |
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Contract for the Subscription of Foreign Common Shares in Guangxi Yuchai Machinery Company
Limited (Yuchai) and Conversion from a Joint Stock Limited Company into a Sino-Foreign Joint
Stock Limited Company, dated April 1, 1993, among Yuchai, Guangxi Yuchai Machinery Holdings
Company, Hong Leong Technology Systems (BVI) Ltd., Cathay |
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Clemente Diesel Holdings Limited,
Goldman Sachs Guangxi Holdings (BVI) Ltd., Tsang & Ong Nominees (BVI) Ltd. and Youngstar
Holdings Limited, with amendments, dated May 27, 1994 and October 10, 1994 (incorporated
herein by reference to the Form F-1). |
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4.2 |
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Subscription and Transfer Agreement (with Shareholders Agreement), dated April 1993, among
Cathay Clemente (Holdings) Limited, GS Capital Partners L.P., Sun Yuan Overseas Pte Ltd., HL
Technology Systems Pte Ltd. and Coomber Investments Limited (incorporated herein by reference
to the Form F-1). |
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4.3 |
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Amended and Restated Shareholders Agreement, dated as of November 9, 1994 among the Cathay
Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems Pte. Ltd., Coomber
Investments Limited, owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd., and the
Registrant (incorporated herein by reference to the Form F-1). |
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4.4 |
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Form of Amended and Restated Registration Right Agreement, dated as of November 9, 1994,
among the Cathay Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems
Pte. Ltd., Coomber Investments Limited, owners of shares formerly held by Sun Yuan Overseas
(BVI) Ltd., and the Registrant (incorporated herein by reference to the Form F-1). |
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4.5 |
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Form of Subscription Agreement between the Registrant, its wholly-owned subsidiaries named
therein and Yuchai (incorporated herein by reference to the Form F-1). |
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4.6 |
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Form of Term Loan Agreement between the Registrant and Yuchai (incorporated herein by
reference to the Form F-1). |
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4.7 |
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Share Purchase and Subscription Agreement, dated as of November 9, 1994, between (i) the
Registrant, (ii) China Everbright Holdings Company Limited and (iii) Coomber Investments
Limited (incorporated herein by reference to the Form F-1). |
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4.8 |
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Investment and Shareholders Agreement between CACG Limited IV and Guangxi Yuchai Machinery
Company Limited, dated July 14, 1994, with a First Amendment dated September 5, 1994
(incorporated herein by reference to the Form F-1). |
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4.9 |
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Employment Agreement, dated September 5, 2003, between Yuchai and Wang Jianming (incorporated
herein by reference to the Annual Report on Form 20-F for fiscal year ended December 31, 2003,
filed by the Registrant on June 29, 2004 (the Form 20-F FY 2003). |
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4.10 |
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Form of indemnification agreement entered into by the Company with each of Wrixon Frank
Gasteen, Gao Jia Lin, Gan Khai Choon, Raymond C. K. Ho, Kwek Leng Peck, Liu Chee Ming, Wong
Hong Ren, Philip Ting Sii Tien, Lim Poh Lea, Sheila Murugasu, Teo Tong Kooi, Neo Poh Kiat and
Tan Aik-Leang (incorporated herein by reference to the Form 20-F FY 2003). |
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4.11 |
|
Agreement between the Company and Yuchai, dated July 19, 2003 (incorporated herein by
reference to the Form 20-F FY 2003). |
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4.12 |
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Reorganization Agreement between the Company, Coomber and Yuchai, dated April 7, 2005
(incorporated herein by reference to the Form 6-K filed by the Company on April 7, 2005). |
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4.13 |
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Reorganization Agreement Amendment (No. 1) between the Company, Coomber and Yuchai, dated
December 2, 2005 (incorporated herein by reference to the Form 6-K filed by the Company on
December 6, 2005). |
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8.1 |
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Subsidiaries of the Registrant. |
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12.1 |
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Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act. |
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13.1 |
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Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. |
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14.1 |
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Consent of Independent Registered Public Accounting Firm. |
The Company has not included as exhibits certain instruments with respect to its long-term
debt, the total amount of debt authorized under each of which does not exceed 10% of its total
consolidated assets. The Company agrees to furnish a copy of any such instrument to the SEC upon
request.
67
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly
caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CHINA YUCHAI INTERNATIONAL LIMITED |
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By: |
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/s/ Philip Ting Sii Tien |
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Name: Philip TING Sii Tien |
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Title: Chief Financial Officer and Director |
Date:
August 4, 2006
68
Exhibit Index
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Exhibit Number |
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Description of Exhibit |
1.1
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Memorandum of Association of China Yuchai International Limited (the
Registrant) (incorporated herein by reference to the Registration Statement
on Form F-1, filed by the Registrant on November 9, 1994 (File No. 33-86162)
(the Form F-1)). |
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|
|
1.2
|
|
Bye-laws of the Registrant (incorporated herein by reference to the Form F-1). |
|
|
|
3.1
|
|
Subscription and Shareholders Agreement of Diesel Machinery (BVI) Limited,
dated November 9, 1994, among Diesel Machinery (BVI) Limited, Hong Leong Asia
Ltd. (HLA) and China Everbright Holdings Company Limited (EB Holdings)
(incorporated herein by reference to the Form F-1). |
|
|
|
3.2
|
|
Supplemental Subscription and Shareholders Agreement, dated January 21, 2002,
between EB Holdings and HLA (incorporated herein by reference to the Form
20-F FY 2001). |
|
|
|
3.3
|
|
Second Supplemental Subscription and Shareholders Agreement, dated May 17,
2002, between EB Holdings and HLA (incorporated herein by reference to the
Form 20-F FY 2001). |
|
|
|
4.1
|
|
Contract for the Subscription of Foreign Common shares in Guangxi Yuchai
Machinery Company Limited (Yuchai) and Conversion from a Joint Stock
Limited Company into a Sino-Foreign Joint Stock Limited Company, dated April
1, 1993, among Yuchai, Guangxi Yuchai Machinery Holdings Company, Hong Leong
Technology Systems (BVI) Ltd., Cathay Clemente Diesel Holdings Limited,
Goldman Sachs Guangxi Holdings (BVI) Ltd., Tsang & Ong Nominees (BVI) Ltd.
and Youngstar Holdings Limited with amendments, dated May 27, 1994 and
October 10, 1994 (incorporated herein by reference to the Form F-1). |
|
|
|
4.2
|
|
Subscription and Transfer Agreement (with Shareholders Agreement), dated
April 1993, among Cathay Clemente (Holdings) Limited, GS Capital Partners
L.P., Sun Yuan Overseas Pte Ltd., HL Technology Systems Pte Ltd. and Coomber
Investments Limited (incorporated herein by reference to the Form F-1). |
|
|
|
4.3
|
|
Amended and Restated Shareholders Agreement, dated as of November 9, 1994
among The Cathay Investment Fund, Limited, GS Capital Partners L.P., HL
Technology Systems Pte. Ltd., Coomber Investments Limited, owners of shares
formerly held by Sun Yuan Overseas (BVI) Ltd. and the Registrant
(incorporated herein by reference to the Form F-1). |
|
|
|
4.4
|
|
Form of Amended and Restated Registration Right Agreement, dated as of
November 9, 1994, among The Cathay Investment Fund, Limited, GS Capital
Partners L.P., HL Technology Systems Pte. Ltd., Coomber Investments Limited,
owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd. and the
Registrant (incorporated herein by reference to the Form F-1). |
|
|
|
4.5
|
|
Form of Subscription Agreement between the Registrant and its wholly-owned
subsidiaries named therein and Yuchai (incorporated herein by reference to
the Form F-1). |
|
|
|
4.6
|
|
Form of Term Loan Agreement between the Registrant and Yuchai (incorporated
herein by reference to the Form F-1). |
|
|
|
4.7
|
|
Share Purchase and Subscription Agreement, dated as of November 9, 1994,
between (i) the Registrant, (ii) China Everbright Holdings Company Limited
and (iii) Coomber Investments Limited (incorporated herein by reference to
the Form F-1). |
|
|
|
4.8
|
|
Investment and Shareholders Agreement between CACG Limited IV and Guangxi
Yuchai Machinery Company Limited, dated July 14, 1994 with a First Amendment
dated September 5, 1994 (incorporated herein by reference to the Form F-1). |
|
|
|
4.9
|
|
Employment Agreement, dated September 5, 2003, between Yuchai and Wang
Jianming (incorporated herein by reference to the Annual Report on Form 20-F
for fiscal year ended December 31, 2003, filed by the Registrant on June 29,
2004 (the Form 20-F FY 2003). |
69
|
|
|
Exhibit Number |
|
Description of Exhibit |
4.10
|
|
Form of indemnification agreement entered into by the Company with each of
Wrixon Frank Gasteen, Gao Jia Lin, Gan Khai Choon, Raymond C. K. Ho, Kwek
Leng Peck, Liu Chee Ming, Wong Hong Ren, Philip Ting Sii Tien, Lim Poh Lea,
Sheila Murugasu, Teo Tong Kooi, Neo Poh Kiat and Tan Aik-Leang (incorporated
herein by reference to the Form 20-F FY 2003). |
|
|
|
4.11
|
|
Agreement between the Company and Yuchai, dated July 19, 2003 (incorporated
herein by reference to the Form 20-F FY 2003). |
|
|
|
4.12
|
|
Reorganization Agreement between the Company, Coomber and Yuchai, dated April
7, 2005 (incorporated herein by reference to the Form 6-K filed by the
Company on April 7, 2005). |
|
|
|
4.13
|
|
Reorganization Agreement Amendment (No. 1) between the Company, Coomber and
Yuchai, dated December 2, 2005 (incorporated herein by reference to the Form
6-K filed by the Company on December 6, 2005). |
|
|
|
8.1
|
|
Subsidiaries of the Registrant. |
|
|
|
12.1
|
|
Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act. |
|
|
|
13.1
|
|
Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. |
|
|
|
14.1
|
|
Consent of Independent Registered Public Accounting Firm. |
The Company has not included as exhibits certain instruments with respect to its long-term
debt, the total amount of debt authorized under each of which does not exceed 10% of its total
consolidated assets. We agree to furnish a copy of any such instrument to the SEC upon request.
70
CHINA YUCHAI INTERNATIONAL LIMITED
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2004 AND 2005
(With Report of Independent Registered Public Accounting Firm)
Index to Financial Statements
China Yuchai International Limited
|
|
|
|
|
|
|
|
|
F |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
F |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
F |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
F |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
F |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
F |
12 |
|
|
|
F - 1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
China Yuchai International Limited
We have audited the accompanying consolidated balance sheets of China Yuchai International Limited
(the Company) and subsidiaries as of December 31, 2004 and 2005, and the related consolidated
statements of income, stockholders equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2005, all expressed in Renminbi. These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of China Yuchai International Limited and subsidiaries as
of December 31, 2004 and 2005, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2005 in conformity with U.S. generally
accepted accounting principles.
As described in Note 5, the Company recognized a provision for uncollectible loans to a related
party in the amount of Rmb205 million as of December 31, 2005. Further, as described in Note 34,
the Company entered into certain material transactions subsequent to December 31, 2005.
The accompanying consolidated financial statements as of and for the year ended December 31, 2005
have been translated into U.S. dollars solely for the convenience of the reader. We have audited
the translation and, in our opinion, the consolidated financial statements expressed in Renminbi
have been translated into U.S. dollars on the basis set forth in Note 3(i) to the consolidated
financial statements.
/s/ KPMG
Certified Public Accountants
Hong Kong,
August 4, 2006
F-2
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Rmb and US$ amounts expressed in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
Note |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
|
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net (a) |
|
|
3(k), 27, 28, 33 |
|
|
|
4,569,950 |
|
|
|
5,582,095 |
|
|
|
5,829,431 |
|
|
|
722,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold (a) |
|
|
4, 27 |
|
|
|
(3,192,794 |
) |
|
|
(4,006,886 |
) |
|
|
(4,527,046 |
) |
|
|
(560,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
1,377,156 |
|
|
|
1,575,209 |
|
|
|
1,302,385 |
|
|
|
161,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development costs |
|
|
3(m) |
|
|
|
(94,594 |
) |
|
|
(136,960 |
) |
|
|
(123,876 |
) |
|
|
(15,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses(a) |
|
|
3(m), 4, 14, 27 |
|
|
|
(561,151 |
) |
|
|
(658,320 |
) |
|
|
(807,350 |
) |
|
|
(100,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for uncollectible loans to a related party |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
(205,000 |
) |
|
|
(25,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on transfer of
lease prepayment
to a related party |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
2,533 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
721,411 |
|
|
|
779,929 |
|
|
|
168,692 |
|
|
|
20,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
3(s), 6, 28 |
|
|
|
(23,624 |
) |
|
|
(31,757 |
) |
|
|
(70,527 |
) |
|
|
(8,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of
affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,106 |
) |
|
|
(633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses)/income,
net(a) |
|
|
7 |
|
|
|
(881 |
) |
|
|
5,682 |
|
|
|
24,183 |
|
|
|
2,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes and
minority interests |
|
|
|
|
|
|
696,906 |
|
|
|
753,854 |
|
|
|
117,242 |
|
|
|
14,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
8 |
|
|
|
(112,924 |
) |
|
|
(105,165 |
) |
|
|
(20,875 |
) |
|
|
(2,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority
interests |
|
|
|
|
|
|
583,982 |
|
|
|
648,689 |
|
|
|
96,367 |
|
|
|
11,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
in income of
consolidated
subsidiaries |
|
|
|
|
|
|
(145,800 |
) |
|
|
(157,292 |
) |
|
|
(27,880 |
) |
|
|
(3,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
438,182 |
|
|
|
491,397 |
|
|
|
68,487 |
|
|
|
8,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 3
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
Note |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
|
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Net earnings per
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
3 |
(l) |
|
|
12.40 |
|
|
|
13.90 |
|
|
|
1.88 |
|
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
3 |
(l) |
|
|
12.40 |
|
|
|
13.90 |
|
|
|
1.88 |
|
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
3 |
(l) |
|
|
35,340,000 |
|
|
|
35,340,000 |
|
|
|
36,459,635 |
|
|
|
36,459,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
3 |
(l) |
|
|
35,340,000 |
|
|
|
35,340,000 |
|
|
|
36,459,635 |
|
|
|
36,459,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
(a) |
|
Includes the following income and expenses resulting from transactions with related parties
in addition to those indicated above (see Note 5 and 27) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Revenues, net |
|
|
24,957 |
|
|
|
4,537 |
|
|
|
7,646 |
|
|
|
947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
(93,056 |
) |
|
|
(250,549 |
) |
|
|
(417,816 |
) |
|
|
(51,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
expenses |
|
|
(97,240 |
) |
|
|
(90,790 |
) |
|
|
(186,759 |
) |
|
|
(23,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses)/income,
net |
|
|
|
|
|
|
|
|
|
|
11,922 |
|
|
|
1,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 4
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
2004 AND 2005
(Rmb and US$ amounts expressed in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
Note |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
|
|
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
722,672 |
|
|
|
736,195 |
|
|
|
91,224 |
|
Trade accounts receivable, net |
|
|
9, 18(a) |
|
|
|
875,565 |
|
|
|
1,146,227 |
|
|
|
142,032 |
|
Amounts due from related parties |
|
|
10, 27 |
|
|
|
85,614 |
|
|
|
233,188 |
|
|
|
28,895 |
|
Loans to a related party |
|
|
5 |
|
|
|
205,000 |
|
|
|
|
|
|
|
|
|
Loans to customers, net |
|
|
11 |
|
|
|
|
|
|
|
7,904 |
|
|
|
979 |
|
Inventories, net |
|
|
12 |
|
|
|
1,346,545 |
|
|
|
1,636,283 |
|
|
|
202,756 |
|
Prepaid expenses, net |
|
|
|
|
|
|
58,565 |
|
|
|
138,322 |
|
|
|
17,140 |
|
Other receivables, net |
|
|
13 |
|
|
|
115,414 |
|
|
|
140,203 |
|
|
|
17,373 |
|
Income taxes recoverable |
|
|
|
|
|
|
|
|
|
|
43,526 |
|
|
|
5,394 |
|
Deferred income taxes |
|
|
8 |
|
|
|
69,704 |
|
|
|
88,783 |
|
|
|
11,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
3,479,079 |
|
|
|
4,170,631 |
|
|
|
516,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
14, 18(a) |
|
|
|
1,158,931 |
|
|
|
1,442,515 |
|
|
|
178,746 |
|
Construction in progress |
|
|
15 |
|
|
|
379,035 |
|
|
|
459,902 |
|
|
|
56,988 |
|
Lease prepayments, net |
|
|
16 |
|
|
|
74,767 |
|
|
|
70,608 |
|
|
|
8,749 |
|
Investments |
|
|
17 |
|
|
|
7,053 |
|
|
|
191,974 |
|
|
|
23,788 |
|
Goodwill |
|
|
|
|
|
|
212,636 |
|
|
|
212,636 |
|
|
|
26,348 |
|
Deferred income taxes |
|
|
8 |
|
|
|
72,747 |
|
|
|
65,519 |
|
|
|
8,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
|
5,384,248 |
|
|
|
6,613,785 |
|
|
|
819,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank loans |
|
|
18(a) |
|
|
|
430,000 |
|
|
|
812,835 |
|
|
|
100,721 |
|
Current instalments of long-term bank
loans |
|
|
18(b) |
|
|
|
|
|
|
|
100,000 |
|
|
|
12,391 |
|
Amount due to the holding company |
|
|
27 |
|
|
|
4,143 |
|
|
|
4,301 |
|
|
|
533 |
|
Amounts due to related parties |
|
|
10, 27 |
|
|
|
42,686 |
|
|
|
75,189 |
|
|
|
9,317 |
|
Trade accounts payable |
|
|
|
|
|
|
1,089,717 |
|
|
|
1,642,980 |
|
|
|
203,586 |
|
Income taxes payable |
|
|
|
|
|
|
25,387 |
|
|
|
4,208 |
|
|
|
521 |
|
Accrued expenses and other liabilities |
|
|
20 |
|
|
|
484,920 |
|
|
|
571,717 |
|
|
|
70,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
2,076,853 |
|
|
|
3,211,230 |
|
|
|
397,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank loans, excluding
current instalments |
|
|
18(b) |
|
|
|
100,000 |
|
|
|
50,000 |
|
|
|
6,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities carried forward |
|
|
|
|
|
|
2,176,853 |
|
|
|
3,261,230 |
|
|
|
404,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 5
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Note |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
|
|
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities brought forward
|
|
|
|
|
|
|
2,176,853 |
|
|
|
3,261,230 |
|
|
|
404,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
|
|
|
|
724,311 |
|
|
|
685,514 |
|
|
|
84,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
30,349 |
|
|
|
31,945 |
|
|
|
3,958 |
|
Ordinary
shares US$0.10 par value: authorized 100,000,000 shares;
issued and outstanding 37,267,673
shares at December 31, 2005
(December 31, 2004: 35,340,000
shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
share US$0.10 par value: authorized 1 share; issued and
outstanding 1 share at December 31,
2004 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed surplus
|
|
|
|
|
|
|
1,486,934 |
|
|
|
1,692,251 |
|
|
|
209,691 |
|
Statutory reserves
|
|
|
22 |
|
|
|
266,229 |
|
|
|
269,017 |
|
|
|
33,335 |
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
28,851 |
|
|
|
3,575 |
|
Retained earnings
|
|
|
|
|
|
|
699,572 |
|
|
|
644,977 |
|
|
|
79,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
|
|
|
|
2,483,084 |
|
|
|
2,667,041 |
|
|
|
330,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
23, 24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity
|
|
|
|
|
|
|
5,384,248 |
|
|
|
6,613,785 |
|
|
|
819,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F - 6
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Rmb and US$ amounts expressed in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
|
Total |
|
|
|
|
|
|
|
Common |
|
|
Contributed |
|
|
Statutory |
|
|
Retained |
|
|
comprehensive |
|
|
stockholders |
|
|
|
Note |
|
|
stock |
|
|
surplus |
|
|
reserves |
|
|
earnings |
|
|
income |
|
|
equity |
|
|
|
|
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January
1, 2003 |
|
|
|
|
|
|
30,349 |
|
|
|
1,486,934 |
|
|
|
170,806 |
|
|
|
473,814 |
|
|
|
|
|
|
|
2,161,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
438,182 |
|
|
|
|
|
|
|
438,182 |
|
Transfer to statutory
reserves |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
59,114 |
|
|
|
(59,114 |
) |
|
|
|
|
|
|
|
|
Dividend declared
(US$2.08 per
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(608,398 |
) |
|
|
|
|
|
|
(608,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2003 |
|
|
|
|
|
|
30,349 |
|
|
|
1,486,934 |
|
|
|
229,920 |
|
|
|
244,484 |
|
|
|
|
|
|
|
1,991,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
491,397 |
|
|
|
|
|
|
|
491,397 |
|
Transfer to statutory
reserves |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
36,309 |
|
|
|
(36,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2004 |
|
|
|
|
|
|
30,349 |
|
|
|
1,486,934 |
|
|
|
266,229 |
|
|
|
699,572 |
|
|
|
|
|
|
|
2,483,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,487 |
|
|
|
|
|
|
|
68,487 |
|
Net unrealized
appreciation in
fair value of
investment securities
held by an affiliate,
net of nil tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,869 |
|
|
|
38,869 |
|
Foreign currency
translation
adjustment, net of
nil tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,018 |
) |
|
|
(10,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,338 |
|
Transfer to statutory
reserves |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
2,788 |
|
|
|
(2,788 |
) |
|
|
|
|
|
|
|
|
Shares issued in
connection with |
Conversion of 2% convertible debt, 1,927,673 shares |
|
|
19 |
|
|
|
1,596 |
|
|
|
205,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,913 |
|
Dividend declared
(US$0.39 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120,294 |
) |
|
|
|
|
|
|
(120,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2005 |
|
|
|
|
|
|
31,945 |
|
|
|
1,692,251 |
|
|
|
269,017 |
|
|
|
644,977 |
|
|
|
28,851 |
|
|
|
2,667,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2005 (in US$) |
|
|
|
|
|
|
3,958 |
|
|
|
209,691 |
|
|
|
33,335 |
|
|
|
79,921 |
|
|
|
3,575 |
|
|
|
330,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F - 7
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Rmb and US$ amounts expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by
operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
438,182 |
|
|
|
491,397 |
|
|
|
68,487 |
|
|
|
8,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile
net income to net
cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization of
property, plant and
equipment, and lease
prepayments |
|
|
125,519 |
|
|
|
132,789 |
|
|
|
139,720 |
|
|
|
17,313 |
|
Provision
for uncollectible loans to a related party |
|
|
|
|
|
|
|
|
|
|
205,000 |
|
|
|
25,402 |
|
Impairment of property,
plant and equipment |
|
|
12,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of
property, plant and
equipment |
|
|
3,359 |
|
|
|
12,998 |
|
|
|
10,474 |
|
|
|
1,298 |
|
Gain on transfer of
land use rights
to a related party |
|
|
|
|
|
|
|
|
|
|
(2,533 |
) |
|
|
(314 |
) |
Deferred income taxes |
|
|
6,253 |
|
|
|
1,116 |
|
|
|
(11,851 |
) |
|
|
(1,468 |
) |
Provision for losses
on guarantees |
|
|
|
|
|
|
|
|
|
|
12,318 |
|
|
|
1,526 |
|
Equity in losses of
affiliates |
|
|
|
|
|
|
|
|
|
|
5,106 |
|
|
|
633 |
|
Dividend received from an affiliated company |
|
|
|
|
|
|
|
|
|
|
7,815 |
|
|
|
968 |
|
Minority interests |
|
|
145,800 |
|
|
|
157,292 |
|
|
|
27,880 |
|
|
|
3,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)/decrease in assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net |
|
|
(34,105 |
) |
|
|
(469,211 |
) |
|
|
(289,738 |
) |
|
|
(35,902 |
) |
Amounts due from related
parties, net |
|
|
(36,446 |
) |
|
|
(5,534 |
) |
|
|
(115,071 |
) |
|
|
(14,259 |
) |
Trade accounts receivable, net |
|
|
153,524 |
|
|
|
(25,954 |
) |
|
|
(270,662 |
) |
|
|
(33,538 |
) |
Prepaid expenses, net |
|
|
64,752 |
|
|
|
(21,069 |
) |
|
|
(79,757 |
) |
|
|
(9,883 |
) |
Other receivables, net |
|
|
9,885 |
|
|
|
(106,581 |
) |
|
|
(24,789 |
) |
|
|
(3,072 |
) |
F - 8
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
|
103,065 |
|
|
|
357,751 |
|
|
|
553,263 |
|
|
|
68,556 |
|
Income taxes payable |
|
|
(11,181 |
) |
|
|
(21,842 |
) |
|
|
(64,705 |
) |
|
|
(8,018 |
) |
Accrued expenses and
other liabilities |
|
|
90,154 |
|
|
|
88,521 |
|
|
|
71,559 |
|
|
|
8,867 |
|
Amount due to holding
company |
|
|
4,108 |
|
|
|
(2,065 |
) |
|
|
158 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities |
|
|
1,075,274 |
|
|
|
589,608 |
|
|
|
242,674 |
|
|
|
30,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing
activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and
equipment, lease prepayments
and construction in progress |
|
|
(372,775 |
) |
|
|
(552,902 |
) |
|
|
(515,359 |
) |
|
|
(63,860 |
) |
Proceeds from disposal of
property, plant and equipment |
|
|
402 |
|
|
|
5,883 |
|
|
|
3,826 |
|
|
|
474 |
|
Proceeds from disposal of
land use rights |
|
|
|
|
|
|
|
|
|
|
3,580 |
|
|
|
444 |
|
Repayment of loans by a
related party |
|
|
|
|
|
|
|
|
|
|
205,000 |
|
|
|
25,402 |
|
Loans to a related party |
|
|
|
|
|
|
(205,000 |
) |
|
|
(205,000 |
) |
|
|
(25,402 |
) |
Loans to customers, net |
|
|
|
|
|
|
|
|
|
|
(7,904 |
) |
|
|
(979 |
) |
Purchase of investments |
|
|
|
|
|
|
(1,348 |
) |
|
|
(161,358 |
) |
|
|
(19,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
|
(372,373 |
) |
|
|
(753,367 |
) |
|
|
(677,215 |
) |
|
|
(83,915 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing
activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term
bank loans |
|
|
230,000 |
|
|
|
330,000 |
|
|
|
1,188,178 |
|
|
|
147,230 |
|
Proceeds from short-term
borrowing from a related
party |
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 9
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term
bank loans |
|
|
|
|
|
|
100,000 |
|
|
|
50,000 |
|
|
|
6,196 |
|
Proceeds from 2% convertible
bonds |
|
|
|
|
|
|
|
|
|
|
206,913 |
|
|
|
25,639 |
|
Repayment of short-term
bank loans |
|
|
(125,000 |
) |
|
|
(190,000 |
) |
|
|
(805,343 |
) |
|
|
(99,792 |
) |
Repayment of long-term
bank loans |
|
|
(130,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of short-term
borrowing from
a related party |
|
|
|
|
|
|
(8,000 |
) |
|
|
|
|
|
|
|
|
Capital contribution from
minority stockholders |
|
|
|
|
|
|
31,000 |
|
|
|
|
|
|
|
|
|
Dividend paid by subsidiaries
to minority stockholders |
|
|
(88,765 |
) |
|
|
(8,507 |
) |
|
|
(66,677 |
) |
|
|
(8,262 |
) |
Dividend paid to stockholders |
|
|
(608,398 |
) |
|
|
|
|
|
|
(120,294 |
) |
|
|
(14,906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided
by financing activities |
|
|
(714,163 |
) |
|
|
254,493 |
|
|
|
452,777 |
|
|
|
56,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency
exchange on cash and
cash equivalents |
|
|
|
|
|
|
|
|
|
|
(4,713 |
) |
|
|
(584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase
in cash and cash
equivalents |
|
|
(11,262 |
) |
|
|
90,734 |
|
|
|
13,523 |
|
|
|
1,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
at beginning of year |
|
|
643,200 |
|
|
|
631,938 |
|
|
|
722,672 |
|
|
|
89,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
at end of year |
|
|
631,938 |
|
|
|
722,672 |
|
|
|
736,195 |
|
|
|
91,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 10
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Supplemental disclosures
of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year
for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of amount
capitalized |
|
|
23,624 |
|
|
|
31,757 |
|
|
|
70,527 |
|
|
|
8,739 |
|
Income taxes |
|
|
117,852 |
|
|
|
125,891 |
|
|
|
97,431 |
|
|
|
12,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F - 11
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Rmb and US$ amounts expressed in thousands, except per share data)
1 |
|
Background and principal activities |
|
|
|
China Yuchai International Limited (the Company) was incorporated under the laws of Bermuda
on April 29, 1993. The Company was established to acquire a controlling interest in Guangxi Yuchai
Machinery Company Limited (Yuchai), a Sino-foreign joint stock company which manufactures,
assembles and sells diesel engines in the Peoples Republic of China (the PRC). The principal
markets for Yuchais diesel engines are truck manufacturers in the PRC. |
|
|
|
The Company owns, through six wholly-owned subsidiaries, 361,420,150 shares or 76.41% of the issued
share capital of Yuchai (Foreign Shares of Yuchai). Guangxi Yuchai Machinery Group Company
Limited (State Holding Company), a state-owned enterprise, owns 22.09% of the issued share
capital of Yuchai (State Shares of Yuchai). |
|
|
|
In December 1994, the Company issued a special share (the Special Share) at par value of US$0.10
to Diesel Machinery (BVI) Limited (DML), a company controlled by Hong Leong Corporation Limited,
now known as Hong Leong (China) Limited (HLC). The Special Share entitles its holder to
designate the majority of the Companys Board of Directors (six of eleven). The Special Share is
not transferable except to Hong Leong Asia Ltd. (HLA), the holding company of HLC, or any of its
affiliates. During 2002, DML transferred the Special Share to HL Technology Systems Pte Ltd
(HLT), a subsidiary of HLC. |
|
|
|
Yuchai established three direct subsidiaries, Yuchai Machinery Monopoly Company Limited (YMMC),
Guangxi Yulin Yuchai Machinery Spare Parts Manufacturing Company Limited (GYSPM) and Yuchai
Express Guarantee Company Limited (YEGCL). YMMC and GYSPM were established in 2000, and are
involved in the manufacture and sale of spare parts and components for diesel engines in the PRC.
YEGCL, was established in 2004, and is involved in the provision of financial guarantees to
mortgage loan applicants in favour of banks in connection with the applicants purchase of
automobiles equipped with diesel engines produced by Yuchai. As at December 31, 2005, Yuchai held
an equity interest of 71.83%, 97.14% and 76.92% respectively in these companies. As at December
31, 2005, YMMC had direct controlling interests in twenty-one (2004: twenty-one) subsidiaries,
which are involved in the trading and distribution of spare parts of diesel engines and
automobiles, all of which are established in the PRC. |
|
|
|
In March 2005, the Company acquired 14.99% of the common stock of Thakral Corporation Limited (TCL).
TCL is a company listed on the main board of the Singapore Exchange Securities Trading Limited (the
Singapore Exchange) and is involved in the manufacture, assembly and distribution of high-end
consumer electronic products and home entertainment products in the PRC. Three directors out of ten directors on the board of TCL
are appointed by the Company. Based on the Companys shareholdings
and representation in the board of directors of TCL,
management has concluded that the company has the ability to exercise
significant influence over the operating and financial policies of TCL. Consequently,
the Companys consolidated financial statements included the
Companys share of the results of TCL, accounted for an equity
basis since acquisition. The Company acquired additional 1.00% of the
common stock of TCL in September 2005. |
F - 12
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
2 |
|
Basis of presentation |
|
|
|
The accompanying consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (U.S. GAAP). This basis of accounting differs from
that used in the statutory financial statements of Yuchai, which are prepared in accordance with
the Accounting Standards for Business Enterprises and the Accounting Regulations for Business
Enterprises issued by the Ministry of Finance of the PRC (PRC GAAP). |
|
|
3 |
|
Summary of significant accounting policies and practices |
|
(a) |
|
Principles of consolidation |
|
|
|
The consolidated financial statements include the financial statements of the Company, its
majority-owned subsidiaries and those entities that the Company has determined it has a direct or
indirect controlling financial interests. All significant intercompany balances and transactions
have been eliminated in consolidation. In addition, the Company evaluates its relationships with
other entities to identify whether they are variable interest entities as defined by the Financial
Accounting Standard Board (the FASB) Interpretation (FIN) No. 46 (R), Consolidation of
Variable Interest Entities (FIN 46(R)) and to assess whether it is the primary beneficiary of
such entities. If the determination is made that the Company is the primary beneficiary, then that
entity is included in the consolidated financial statements in accordance with FIN 46(R). The
Company was not the primary beneficiary of any variable interest entities during the three years
ended December 31, 2005. |
|
(b) |
|
Cash and cash equivalents |
|
|
|
Cash includes cash on hand and demand deposits with banks. For purposes of the consolidated
statement of cash flows, the Company considered all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. None of the Companys cash is
restricted as to withdrawal. See Note 29 for discussion of restrictions on the Renminbi. |
|
(c) |
|
Trade accounts receivable |
|
|
|
Trade accounts receivable are recorded at the invoiced value of goods sold after deduction of
trade discounts and allowances, if any. Amounts collected on trade accounts receivable are
included in net cash provided by operating activities in the consolidated statement of cash flows.
The allowance for doubtful accounts is the Companys best estimate of the amount of probable
credit losses in the Companys existing accounts receivable. The Company determines the allowance
based on historical write-off experience by industry and national economic data. |
F - 13
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 |
|
Summary of significant accounting policies and practices (continued) |
|
(c) |
|
Trade accounts receivable (continued) |
|
|
|
The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days
and over a specified amount are reviewed individually for collectibility. All other balances are
reviewed on a pooled basis by aging of such balances. Account balances are charged off against
the allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet credit exposure related to its
customers, except for outstanding bills discounted with banks (see
Note 24(e)), that are subject
to recourse for non-payment. |
|
(d) |
|
Inventories, net |
|
|
|
Inventories are stated at the lower of cost and market. Cost is determined using the weighted
average cost method. Cost of work in progress and finished goods comprises direct materials,
direct labor and an attributable portion of production overheads. |
|
(e) |
|
Property, plant and equipment |
|
|
|
Property, plant and equipment are stated at cost. Depreciation is calculated on the straight-line
method over the estimated useful lives of the assets, taking into account the estimated residual
value. The estimated useful lives are as follows: |
|
|
|
|
|
Buildings |
|
|
30 to 40 years |
|
Machinery and equipment |
|
|
5 to 15 years |
|
(f) |
|
Construction in progress |
|
|
|
Construction in progress represents factories under construction and machinery and equipment
pending installation. All direct costs relating to the acquisition or construction of buildings
and machinery and equipment, including interest charges on borrowings, are capitalized as
construction in progress. No depreciation is provided in respect of construction in progress. |
|
|
|
Construction of plant is considered to be complete on the date when the plant is substantially
ready for its intended use notwithstanding whether the plant is capable of producing saleable
output in commercial quantities. |
|
(g) |
|
Lease prepayments |
|
|
|
Lease prepayments represent land use rights paid to the PRC land bureau. Land use rights are
carried at cost and amortized on a straight-line basis over the respective periods of the rights
which are in the range of 15 to 50 years. |
F - 14
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 |
|
Summary of significant accounting policies and practices (continued) |
|
(h) |
|
Investments |
|
|
|
An affiliated company is an entity in which the Company has the ability to exercise significant
influence in its financial and operating policy decisions, but does not have a controlling
financial interest. Investments in affiliates are accounted for by equity method. |
|
|
|
Investments in available-for-sale equity securities are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of other comprehensive income/(loss) until
realized. Realized gains and losses from the sale of available-for-sale equity securities are
determined on a specific-identification basis. However, equity securities that are not traded in
an active market and whose fair values cannot be reliably estimated are accounted for at their
acquisition cost. |
|
|
|
The Company recognizes an impairment loss when the decline in fair value below the carrying value
of an investment is considered other than temporary. |
|
(i) |
|
Foreign currency transactions and translation |
|
|
|
Transactions denominated in currencies other than Renminbi are translated into Renminbi at the
exchange rates quotes by the Peoples Bank of China (the PBOC) prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies are translated
into Renminbi using the applicable exchange quoted by PBOC at the balance sheet dates. The
resulting exchange differences are recorded in the consolidated statements of income as part of the
related transaction amounts. |
|
|
|
During the year ended December 31, 2005, the exchange rate regime of Renminbi was reformed by
moving into a managed floating exchange regime based on market supply and demand with reference to
a basket of foreign currencies from the unified controlled exchange rate based on market supply and
demand. |
|
|
|
Assets and liabilities of foreign subsidiaries and affiliates whose functional currency is not
Renminbi are translated into Renminbi using the exchange rate on the balance sheet date. Revenues
and expenses are translated at average rates prevailing during the year. The gains and losses
resulting from translation of financial statements of foreign subsidiaries and affiliates are
recorded as a separate component of accumulated other comprehensive income/(loss) within
stockholders equity. Cumulative translation adjustments are recognized as income or expense upon
disposal or liquidation of a foreign subsidiary and affiliate. |
F - 15
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 |
|
Summary of significant accounting policies and practices (continued) |
|
(i) |
|
Foreign currency transactions and translation (continued) |
|
|
|
For the U.S. dollar convenience translation amounts included in the accompanying consolidated
financial statements, the Renminbi equivalent amounts were translated into U.S. dollars at the
exchange rate on the balance sheet date which is US$1.00 = Rmb8.0702, the rate quoted by the PBOC
at the close of business on December 30, 2005. No representation is made that the Renminbi amounts
could have been, or could be, converted into U.S. dollars at that rate or at any other certain rate
on December 30, 2005 or at any other date. |
|
(j) |
|
Income taxes |
|
|
|
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets are reduced by a
valuation allowance to the extent the Company concludes it is more likely than not that the assets
will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates, if any, is recognized in the statements of income in the financial year that includes the
enactment date. |
|
(k) |
|
Revenue recognition |
|
|
|
(i) Product sales |
|
|
|
Revenue is recognized in accordance with U.S. GAAP as described in the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104
generally requires that four basic criteria be met before revenue can be recognized: (i) persuasive
evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectibility is
reasonably assured; and (iv) product delivery has occurred. For the Company, these criteria are
generally considered to be met upon delivery and acceptance of products at the customer site. |
|
|
|
Product sales represent the invoiced value of goods, net of value added taxes (VAT), sales
returns, trade discounts and allowances. Yuchai and its subsidiaries are subject to VAT which is
levied on the majority of their products at the rate of 17% of the invoiced value of sales. Output
VAT is borne by customers in addition to the invoiced value of sales. VAT paid by Yuchai and its
subsidiaries on its purchases of materials and supplies is recoverable out of VAT collected from
sales to their customers. |
F - 16
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 |
|
Summary of significant accounting policies and practices (continued) |
|
(k) |
|
Revenue recognition (continued) |
|
|
|
(ii) Guarantee fee income |
|
|
|
Guarantee fees received or receivable for a guarantee issued are recorded in Accrued expenses and
other liabilities based upon the estimated fair value of guaranty obligations, and are amortized
into revenue on a straight line basis over the respective terms of the guarantees. The Company will
record an adjustment to the carrying amount of its obligations through a charge to earnings if it
determines that it is probable that the Company will be required to perform under the guaranty. |
|
|
|
(iii) Rental income |
|
|
|
Rental income receivable under operating lease is recognized in the consolidated statements of
income in equal instalments over the period covered by the lease term. |
|
(l) |
|
Earnings per share |
|
|
|
Basic earnings per share (EPS) is computed by dividing income attributable to common shares by
the weighted average number of common shares outstanding for the period. |
|
|
|
The reconciliation of the Companys EPS is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Net income attributable
to common shares |
|
|
438,182 |
|
|
|
491,397 |
|
|
|
68,487 |
|
|
|
8,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding
during the year |
|
|
35,340,000 |
|
|
|
35,340,000 |
|
|
|
36,459,635 |
|
|
|
36,459,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share of common shares |
|
|
12.40 |
|
|
|
13.90 |
|
|
|
1.88 |
|
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no potentially dilutive securities outstanding as of December 31, 2003, 2004 and 2005. |
F - 17
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 |
|
Summary of significant accounting policies and practices (continued) |
|
(m) |
|
Advertising, research and development costs |
|
|
|
Advertising, research and development costs are expensed as incurred. Advertising cost included in
Selling, general and administrative expenses, amounted to Rmb40,961, Rmb48,725 and Rmb45,291
(US$5,612) respectively, for the years ended December 31, 2003, 2004 and 2005. |
|
|
|
Research and development expenses are shown net of a government subsidy of Rmb5,915 (US$733) for
the year ended December 31, 2005. No such government subsidy was received for the years ended
December 31, 2003 and 2004. |
|
(n) |
|
Goodwill |
|
|
|
Goodwill represents the excess of costs over fair value of net assets of businesses acquired.
Goodwill is not amortized, but instead is tested for impairment at least annually and when certain
circumstances indicate a possible impairment may exist. The Company evaluates the recoverability
of goodwill using a two-step impairment test approach at the reporting unit level at the end of
each year. In the first step, the fair value of the reporting unit is compared to its carrying
value including goodwill. The fair value of the reporting unit is determined based upon discounted
future cash flows. In the case that the fair value of the reporting unit is less than its carrying
value, a second step is performed which compares the implied fair value of the reporting units
goodwill to the book value of the goodwill. In determining the implied fair value of the reporting
unit goodwill, the fair values of the tangible net assets and recognized and unrecognized
intangible assets is deducted from the fair value of the reporting unit. If the implied fair value
of reporting unit goodwill is lower than its carrying amount, goodwill is considered impaired and
is written down to its implied fair value. The results of the impairment testing in 2003, 2004 and
2005 did not result in any impairment of goodwill. |
|
(o) |
|
Product warranty |
|
|
|
The Company provides, at the time the product is sold, for the estimated future costs to be
incurred under a warranty period or warranty mileage on various engine models, which the Company
provides free repair and replacement. Warranties generally extend for a duration (12 months to 18
months) or mileage (80,000 kilometres to 180,000 kilometres), whichever is the lower. Provisions
for warranty are primarily determined based on historical warranty cost per unit of engines sold
adjusted for specific conditions that may arise and the number of engines under warranty at each
financial year-end. |
F - 18
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 |
|
Summary of significant accounting policies and practices (continued) |
|
(p) |
|
Use of estimates |
|
|
|
The preparation of the consolidated financial statements in accordance with U.S. GAAP requires
management of the Company to make a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses
during the period. Significant items subject to such estimates and assumptions include the
recoverability of the carrying amount of long-lived assets including goodwill; realizable values
for inventories; valuation allowances for receivables; and obligations for warranty costs. Actual
results could differ from those estimates. |
|
(q) |
|
Impairment of long-lived assets, other than goodwill |
|
|
|
Long-lived assets to be held and used, such as property, plant and equipment, construction in
progress and lease prepayments, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets
to be disposed of would be separately presented in the consolidated balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. |
F - 19
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 |
|
Summary of significant accounting policies and practices (continued) |
|
(r) |
|
Commitments and contingencies |
|
|
|
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines and
penalties and other sources are recorded when it is probable that an obligation has been incurred
and the amount of the assessment and/or remediation can be reasonably estimated. |
|
(s) |
|
Sales of trade accounts receivable |
|
|
|
The Company sells trade accounts and bills receivable to banks on an ongoing basis. The buyer is
responsible for servicing the receivables upon maturity of the trade accounts receivable. Sales of
the trade accounts receivable are accounted for under Statement of
Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. Accordingly, trade accounts and
bills receivable are derecognized, and the Company records a discount equal to the difference
between the carrying value of the trade accounts and bills receivable and cash received. The
Company has received proceeds for the sales of the trade accounts and bills receivable of
Rmb1,730,627, Rmb2,380,569 and Rmb3,423,296 (US$424,190), for the years ended December 31, 2003,
2004 and 2005, respectively. The Company has recorded discounts totalled of Rmb22,042, Rmb31,709
and Rmb44,362 (US$5,497) in respect of sold trade accounts and bills receivable for the years ended
December 31, 2003, 2004 and 2005, respectively, which have been included in interest expense. |
|
(t) |
|
Recently issued accounting standards |
|
|
|
In December 2004, the FASB issued SFAS No.123 (revised 2004), Share-Based Payment, which
addresses the accounting for transactions in which an entity exchanges its equity instruments for
goods or services, with a primary focus on transactions in which an entity obtains employee
services in share-based payment transactions. This statement is a revision to SFAS No. 123 and
supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. This statement will require measurement of
the cost of employee services received in exchange for stock compensation based on the grant-date
fair value of the employee stock options. Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be recognized. The Company will adopt this
statement on January 1, 2006 under the modified prospective method of application. Under that
method, the Company will recognize compensation costs for new grants of share-based awards, awards
modified after the effect date, and the remaining portion of the fair value of the unvested awards
at the adoption date. The initial adoption of this statement will not have any effect on the
Companys 2006 consolidated financial statements. |
F - 20
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
3 |
|
Summary of significant accounting policies and practices (continued) |
|
(t) |
|
Recently issued accounting standards (continued) |
|
|
|
In December 2004, the FASB issued SFAS No. 151, Inventory Costs, which clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Under this statement, such items will be recognized as current-period charges. In
addition, the statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This statement will be
effective for the Company for inventory costs incurred on or after January 1, 2006. The initial
adoption of this statement will not have a significant effect on the Companys 2006 consolidated
financial statements. |
|
|
|
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which eliminates
an exception in APB Opinion No. 29, Accounting for Nonmonetary Transactions, for recognizing
nonmonetary exchanges of similar productive assets at fair value and replaces it with an exception
for recognizing exchanges of nonmonetary assets at fair value that do not have commercial
substance. This statement will be effective for the Company for nonmonetary asset exchanges
occurring on or after January 1, 2006. The adoption of this statement will not have a significant
effect on the Companys 2006 consolidated financial statements. |
|
|
|
In March 2005, the FASB issued FIN No. 47, Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for a
conditional asset retirement obligation if the fair value of the obligation can be reasonably
estimated. The types of asset retirement obligations that are covered by this interpretation are
those for which an entity has a legal obligation to perform an asset retirement activity, however
the timing and (or) method of settling the obligation are conditional on a future event that may or
may not be within the control of the entity. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset retirement obligation.
FIN 47 is effective no later than the end of fiscal years ended after December 15, 2005. The
initial adoption of FIN 47 did not have an impact on the Companys financial condition and
consolidated statements of income. |
|
|
|
In September 2005, the EITF issued EITF 04-13, Accounting for Purchases and Sales of Inventory
with the Same Counterparty. EITF 04-13 provides guidance as to when purchases and sales of
inventory with the same counterparty should be accounted for as a single exchange transaction.
EITF 04-13 also provides guidance as to when a nonmonetary exchange of inventory should be
accounted for at fair value. EITF 04-13 will be applied to new arrangements entered into, and
modifications or renewals of existing arrangements beginning in the first interim or annual
reporting beginning after March 15, 2006. The application of EITF 04-13 is not expected to have a
significant impact on the Companys consolidated financial statements. |
|
|
|
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment
of FASB Statements No. 133 and 140. This statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues
addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.
This statement will be effective for the fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact of the statement to the
Companys consolidated financial statements. |
|
|
|
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140.
This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation
to service a financial asset by entering into a servicing contract in certain situations and requires all separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable. The statement also provides guidelines to classification, disclosure and subsequent measurement of servicing assets and servicing liabilities. This
statement will be effective for the fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact of the statement to the Companys consolidated financial statements. |
|
|
|
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in the Companys financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for the fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact of the provisions of FIN 48 to the Companys consolidated financial statements. |
F - 21
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
4 |
|
Depreciation, amortization, sales commissions, shipping and handling expenses |
|
|
|
Depreciation of property, plant and equipment and amortization of lease prepayments are included in
the following captions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Cost of goods sold |
|
|
88,737 |
|
|
|
84,907 |
|
|
|
86,491 |
|
|
|
10,717 |
|
Selling, general and
administrative expenses |
|
|
36,782 |
|
|
|
47,882 |
|
|
|
53,229 |
|
|
|
6,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,519 |
|
|
|
132,789 |
|
|
|
139,720 |
|
|
|
17,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales commissions to sales agents are included in the following caption: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Selling, general and
administrative expenses |
|
|
16,724 |
|
|
|
11,564 |
|
|
|
39,372 |
|
|
|
4,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales related shipping and handling expenses not separately billed to customers are included in
the following caption: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Selling, general and
administrative expenses |
|
|
64,991 |
|
|
|
86,163 |
|
|
|
126,813 |
|
|
|
15,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 22
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
5 |
|
Provision for uncollectible loans to a related party |
|
|
|
The amount represents the recognition of specific doubtful debt provisions totaling Rmb205,000
(US$25,402) on the loans due from Yuchai Marketing and Logistic Company Limited (YMLC) as of
December 31, 2005. YMLC is wholly owned by Coomber Investment Limited (Coomber), a shareholder
of the Company and State Holding Company (collectively, the Chinese Shareholders). |
|
|
In March and May 2004, Yuchai granted interest-free
advances to YMLC at the request of the Yuchais PRC directors to provide YMLC with initial working capital for its start-up activities. YMLC was
set up with the intention of offering a complementary range of services including spare parts
distribution, insurance, vehicle financing and warranty servicing.
These advances were provided with the approval of the previous
Chairman of Yuchai but
without the prior approval by the majority of the shareholders of Yuchai. |
|
|
On December 2, 2004, these advances were converted into
formal loans and written agreements were executed between Yuchai and YMLC through an authorized financial institution in the PRC. Under
the terms of the loan agreements, the loans were payable in their entirety on December 2, 2005 and
interest, at the rate of 5.58% per annum, was payable on a monthly basis. Further, the loans were
secured by guarantees given by the Chinese Shareholders. Interest
income of Rmb11,922 (US$1,477)
was recognized in 2005 (see Note 7). |
|
|
Because the loans had already been disbursed, the Chinese Shareholders had issued guarantees for
these loans, and the Companys relationship with the Chinese
Shareholders was improving, the
Directors of Yuchai believed that it was in the Companys and
Yuchais best interest to ratify the loans. Consequently,
the loans were ratified by the Board of Directors of Yuchai in April 2005. |
|
|
In 2005, the Company discussed with the Chinese Shareholders the possibility of converting the
loans into an equity investment in YMLC, subject to the Yuchai
boards approval. This potential alternative was
incorporated within the terms of the reorganization agreement entered into by the Company with
Yuchai and Coomber on April 7, 2005 (Reorganization Agreement). |
|
|
When the loans became due in December 2005, Yuchai was requested to extend the maturity date for
the loans. However, the Company and Yuchai had been unable to access the financial statements of YMLC.
Consequently, the Directors from the Companys and Yuchais
boards had doubts about YMLCs ability to repay the loans. However, the
Companys and Yuchais board of directors considered the request to extend the loans based on representations received from the
Chinese Shareholders and management of YMLC concerning their respective abilities and intentions to
repay the loans and honor their guarantees, and therefore agreed to extend the repayment date of the
loans for an additional year. The extension of the loans was approved by the Board of Directors of
Yuchai on December 2, 2005. An agency bank was appointed under
PRC requirements to administer the Rmb205,000 loans and the legal method requires such loans to be
repaid and the funds re-disbursed. The new loans carry the same terms, including scheduled
maturity on December 1, 2006. New guarantees were also granted by the Chinese Shareholders for these
loans. |
|
|
Later in December 2005, after it was agreed to extend
the loans, based on mutual understandings between YMLC, the Chinese
Shareholders and Yuchai, access to financial records of YMLC were
made available. The Company conducted a due
diligence review, learned that YMLC was not profitable, and concluded
that YMLCs future prospects
were dim. The Company therefore decided not to pursue the conversion of loans into an equity
investment in YMLC and also concluded that YMLC will probably not have the financial resources to
repay the loans when they become due in December 2006. |
|
|
The Company discussed this matter with the Chinese Shareholders and management of YMLC and also
considered the financial position and financial resources of the State Holding Company and Coomber.
CYI management has made an assessment of the future cash flows of the State Holding Company and
Coomber and concluded that it is likely they will not be able to
honor their respective guarantees in the event
YMLC is unable to repay the loans when they become due. |
|
|
Consequently, CYI management has identified a number of possible courses of action in the event YMLC is
unable to repay the loans when they become due. These actions include: |
|
|
|
Taking actions to force YMLC to liquidate; |
|
|
|
|
Retaining portions of future dividends declared by Yuchai and payable to State Holding Company until the guarantee obligations are fulfilled; and |
|
|
|
|
Commencing legal action against YMLC and possibly the Chinese Shareholders. |
|
|
The Companys management has ruled out any form of legal or other enforcement action against the Chinese
Shareholders as management believes that Yuchai may not be the first preferred creditor entitled to
receive payment of the judgment debt. Moreover, management believes that the process for
enforcement of a judgment in China is complex and not as effective when compared with other
jurisdictions. In addition management believes that the commencement of legal or other enforcement
actions will likely lead to a deterioration in relations with the Chinese Shareholders which could
have a materially adverse impact on the Companys investment in Yuchai and could lead to the
impairment of shareholder value of the Company. Consequently, management believes that it is
currently beneficial to the Companys shareholders for management to continue their dialogue and
seek other possible arrangements with YMLC, Coomber and State Holding Company to resolve the
repayment of the Rmb205,000 (US$25,402) loans rather than for it to resort to legal and enforcement
actions described above. However, considering the financial condition and managements assessment
of the future prospects of YMLC and managements intention to not seek legal or enforcement actions
pertaining to the loans and related guarantees, management currently believes that it is probable
it will be unable to recover any portion of these loans. |
F - 23
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
|
6 |
|
Interest cost |
|
|
|
The Company capitalizes interest charges as a component of the cost of construction in
progress. The following is a summary of interest cost incurred during 2003, 2004 and 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Interest cost capitalized |
|
|
12,146 |
|
|
|
19,701 |
|
|
|
20,991 |
|
|
|
2,601 |
|
Interest cost charged to
consolidated statements of
income |
|
|
23,624 |
|
|
|
31,757 |
|
|
|
70,527 |
|
|
|
8,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest cost incurred |
|
|
35,770 |
|
|
|
51,458 |
|
|
|
91,518 |
|
|
|
11,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Other (expenses)/income, net |
|
|
|
Other (expenses)/income, net consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
Interest
income (see Note 5) |
|
|
3,587 |
|
|
|
3,286 |
|
|
|
21,744 |
|
|
|
2,695 |
|
Foreign exchange
(loss)/gain, net |
|
|
(27 |
) |
|
|
(38 |
) |
|
|
607 |
|
|
|
75 |
|
Dividend income from
other investments |
|
|
|
|
|
|
4,591 |
|
|
|
|
|
|
|
|
|
Rental income |
|
|
|
|
|
|
|
|
|
|
6,078 |
|
|
|
753 |
|
Others, net |
|
|
(4,441 |
) |
|
|
(2,157 |
) |
|
|
(4,246 |
) |
|
|
(526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(881 |
) |
|
|
5,682 |
|
|
|
24,183 |
|
|
|
2,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Income taxes |
|
|
|
Bermuda tax |
|
|
|
The Company is incorporated under the laws of Bermuda and, under the current Bermuda laws, is not
subject to tax on income or capital gains. |
|
|
|
The Company has received an undertaking from the Minister of Finance in Bermuda pursuant to the
provisions of the Exempted Undertakings Tax Protection Act, 1966, which exempts the Company and its
stockholders, other than stockholders ordinarily resident in Bermuda, from any Bermuda taxes
computed on profit, income or any capital assets, gain or appreciation, or any tax in the nature of
estate duty or inheritance tax at least until the year 2016. |
|
|
|
PRC income tax |
|
|
|
As Yuchai is a sino-foreign enterprise in the Western Region of the PRC that is engaged in an
encouraged industry, its PRC statutory income tax rate is 15% in 2003, 2004 and 2005 under the
relevant PRC income tax laws. |
|
|
|
The PRC income tax rates of Yuchais subsidiaries under the relevant PRC income tax laws are 15% to
33% in 2003, 2004 and 2005. |
F - 24
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
8 |
|
Income taxes (continued) |
|
|
|
Income tax expense in the consolidated statements of income consists of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Current tax expense |
|
|
106,671 |
|
|
|
104,049 |
|
|
|
32,726 |
|
|
|
4,055 |
|
Deferred tax
expense/(benefit) |
|
|
6,253 |
|
|
|
1,116 |
|
|
|
(11,851 |
) |
|
|
(1,468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,924 |
|
|
|
105,165 |
|
|
|
20,875 |
|
|
|
2,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense reported in the consolidated statements of income differs from the amount
computed by applying the PRC income tax rate of 15% for the three years ended December 31, 2005 for
the following reasons: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Computed expected tax
expense |
|
|
104,536 |
|
|
|
113,078 |
|
|
|
17,586 |
|
|
|
2,179 |
|
Adjustments resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses |
|
|
1,232 |
|
|
|
471 |
|
|
|
5,703 |
|
|
|
707 |
|
Tax credits (see Note (i)) |
|
|
|
|
|
|
(16,184 |
) |
|
|
(43,535 |
) |
|
|
(5,395 |
) |
Change in valuation
allowance |
|
|
|
|
|
|
|
|
|
|
45,231 |
|
|
|
5,605 |
|
Rate differential of
subsidiaries |
|
|
7,156 |
|
|
|
7,800 |
|
|
|
(4,110 |
) |
|
|
(509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense |
|
|
112,924 |
|
|
|
105,165 |
|
|
|
20,875 |
|
|
|
2,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
|
|
(i) |
|
Amounts mainly represents tax credits relating to the purchase of domestic equipment for
technological improvement and the approved research and development costs. |
|
(ii) |
|
All taxable income and income tax expense are from PRC sources. |
F - 25
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
8 |
|
Income taxes (continued) |
|
|
|
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets at December 31, 2004 and 2005 are presented below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Trade accounts receivable |
|
|
26,006 |
|
|
|
22,900 |
|
|
|
2,838 |
|
Inventories |
|
|
6,678 |
|
|
|
8,336 |
|
|
|
1,033 |
|
Property, plant and equipment |
|
|
69,247 |
|
|
|
49,436 |
|
|
|
6,126 |
|
Accrued expenses and other liabilities |
|
|
37,020 |
|
|
|
32,961 |
|
|
|
4,084 |
|
Tax losses carried forward |
|
|
3,500 |
|
|
|
11,615 |
|
|
|
1,439 |
|
Tax credits |
|
|
|
|
|
|
43,535 |
|
|
|
5,395 |
|
Loans to a related party |
|
|
|
|
|
|
30,750 |
|
|
|
3,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
142,451 |
|
|
|
199,533 |
|
|
|
24,725 |
|
Less: Valuation allowance |
|
|
|
|
|
|
45,231 |
|
|
|
5,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
142,451 |
|
|
|
154,302 |
|
|
|
19,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the classification of the Companys net deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Net deferred tax assets comprise of: |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion |
|
|
69,704 |
|
|
|
88,783 |
|
|
|
11,001 |
|
Non-current portion |
|
|
72,747 |
|
|
|
65,519 |
|
|
|
8,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,451 |
|
|
|
154,302 |
|
|
|
19,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, a subsidiary of the Company was granted with tax credits amounted to
Rmb43,535 (US$5,395) in relation to the purchase of domestically produced equipment of which
Rmb12,502 (US$1,549) would expire in 2008 and the remaining amount would expire in 2009. According
to the relevant laws and regulations in the PRC, the amount entitled for deduction each year is
limited to the incremental current income tax expense of the subsidiary for the year compared to
the current income tax of the subsidiary in the year before the purchase of the equipment. |
F - 26
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
8 Income taxes (continued)
|
|
Certain subsidiaries of the Company had net operating loss carryforwards for PRC income tax
purposes of Rmb47,182 (US$5,846), which are available to offset future taxable income, if any. Of
which, Rmb13,328, Rmb13,630 and Rmb20,224 would expire in 2008, 2009 and 2010, respectively. |
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
management considered that it is more likely than not that tax credits totalling Rmb33,834 (US$4,193) relating to the purchase of
domestic equipment cannot be fully utilized as the amount entitled for deduction each year is
limited to the incremental current income tax expense of the subsidiary compared to the current
tax of the subsidiary for the years 2003 and 2004, when the related domestic equipment was
purchased and the management forecasted future taxable income of the subsidiary will not be
sufficient to fully utilize the tax credits. In addition, one of the subsidiaries has been loss
making since its commencement of operations in 2004 and based on this, management has determined
that it is more likely than not that the benefit of deferred tax assets in this entity totalling Rmb11,397 (US$1,412) will not be
realized. |
F - 27
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
9 Trade accounts receivable, net
|
|
Trade accounts receivable, net comprise: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
504,429 |
|
|
|
574,018 |
|
|
|
71,128 |
|
Less: Allowance for doubtful accounts |
|
|
107,457 |
|
|
|
69,047 |
|
|
|
8,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396,972 |
|
|
|
504,971 |
|
|
|
62,572 |
|
Bills receivable |
|
|
478,593 |
|
|
|
641,256 |
|
|
|
79,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
875,565 |
|
|
|
1,146,227 |
|
|
|
142,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An analysis of the allowance for doubtful accounts for 2003, 2004 and 2005 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
158,075 |
|
|
|
94,423 |
|
|
|
107,457 |
|
|
|
13,315 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge to consolidated
statements of income |
|
|
|
|
|
|
13,034 |
|
|
|
25,587 |
|
|
|
3,171 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written back to consolidated
statements of income |
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful debts written off |
|
|
63,159 |
|
|
|
|
|
|
|
63,997 |
|
|
|
7,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
94,423 |
|
|
|
107,457 |
|
|
|
69,047 |
|
|
|
8,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 and 2005, gross trade accounts receivable due from a major customer, Dongfeng
Automobile Company and its affiliates (the Dongfeng companies), were Rmb142,788 and Rmb161,930
(US$20,065), respectively. See Note 33 for further discussion of business concentration risk. |
|
|
As of December 31, 2005, certain trade accounts receivable totalling Rmb42,835 (US$5,308) were
pledged as security under certain loan arrangements (see Note 18(a)). |
F - 28
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
10 |
|
Amounts due from/to related parties |
|
|
|
|
|
Amounts due from related parties comprise: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Due within one year |
|
|
85,614 |
|
|
|
233,188 |
|
|
|
28,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to related parties comprise: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Due within one year |
|
|
42,686 |
|
|
|
75,189 |
|
|
|
9,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties include Hong Leong Management Services Pte, Limited, YMLC, State Holding Company
and their subsidiaries and affiliates. At December 31, 2005, the amounts due from/to related
parties are unsecured, interest free and arose principally from transactions as disclosed in Note
27. All amounts due from/to related parties are payable on demand. |
|
|
|
In June 2006, YMLC and State Holding Company entered into an
agreement with Yuchai to enable Yuchai and its subsidiaries to settle
the amounts due from/to YMLC, State Holding Company and their
subsidiaries on a net basis, i.e. the balance due from/to YMLC, State
Holding Company, their subsidiaries and affiliates as of
December 31, 2005 were offset. |
F - 29
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
11 |
|
Loans to customers, net |
|
|
Loans to customers, net refer to the designated loans lent by the Company through financial
institutions to customers. The terms of the loan agreements were designated by the Company. The
financial institutions assist the Company to release the principal to the borrowers and collect the
repayment on behalf of the Company without bearing the risk of default by customers, if any. The
loans carried interest rates ranged from 5.31% to 5.85% and were repayable in instalments within
one year. The loans are secured and guaranteed by independent third parties. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2004 |
|
|
|
2005 |
|
|
|
2005 |
|
|
|
Rmb |
|
|
|
Rmb |
|
|
|
US$ |
|
Raw materials |
|
|
699,132 |
|
|
|
1,027,733 |
|
|
|
127,349 |
|
Work in progress |
|
|
141,659 |
|
|
|
33,057 |
|
|
|
4,096 |
|
Finished goods |
|
|
505,754 |
|
|
|
575,493 |
|
|
|
71,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,346,545 |
|
|
|
1,636,283 |
|
|
|
202,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
Other receivables, net |
|
|
Other receivables, net comprise: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2004 |
|
|
|
2005 |
|
|
|
2005 |
|
|
|
Rmb |
|
|
|
Rmb |
|
|
|
US$ |
|
VAT recoverable (see Note (i)) |
|
|
91,977 |
|
|
|
96,151 |
|
|
|
11,914 |
|
Staff loans |
|
|
8,476 |
|
|
|
18,075 |
|
|
|
2,240 |
|
Staff advances |
|
|
3,306 |
|
|
|
1,726 |
|
|
|
214 |
|
Receivable for factoring (see Note (ii)) |
|
|
6,845 |
|
|
|
|
|
|
|
|
|
Others |
|
|
4,810 |
|
|
|
24,251 |
|
|
|
3,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,414 |
|
|
|
140,203 |
|
|
|
17,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
|
|
(i) |
|
The VAT recoverable mainly represents a delay in the input VAT approval by the local tax
bureau, totalling Rmb58,872 (US$7,295). The amount was subsequently settled in January 2006. |
F - 30
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
13 |
|
Other receivables, net (continued) |
|
|
|
|
Notes: (continued) |
|
(ii) |
|
In December 2004, Yuchai sold trade accounts receivable of Rmb64,827 to a commercial bank.
The balance represented 10% of the sales amount withheld by the bank that would be released to
the Company upon the settlement of the trade accounts receivable. The amount withheld
represented the full amounts which might be claimed by the bank pursuant to recourse
provisions. The amount was fully settled in 2005. |
14 |
|
Property, plant and equipment, net |
|
|
|
|
|
Property, plant and equipment, net comprise: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2004 |
|
|
|
2005 |
|
|
|
2005 |
|
|
|
Rmb |
|
|
|
Rmb |
|
|
|
US$ |
|
Buildings |
|
|
634,544 |
|
|
|
709,643 |
|
|
|
87,934 |
|
Machinery and equipment |
|
|
1,547,112 |
|
|
|
1,888,567 |
|
|
|
234,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,181,656 |
|
|
|
2,598,210 |
|
|
|
321,951 |
|
Less: Accumulated depreciation |
|
|
1,022,725 |
|
|
|
1,155,695 |
|
|
|
143,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
1,158,931 |
|
|
|
1,442,515 |
|
|
|
178,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2003, management determined that certain property, plant and equipment would no longer be used
in production due to the introduction of new environmental regulations in 2003. These changes
required an impairment analysis to be performed in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. The estimated undiscounted future cash flows
generated from such property, plant and equipment were less than their carrying value. The
carrying value of such assets was therefore reduced to their estimated fair value. Impairment
loss of Rmb12,405 has been included in Selling, general and administrative expenses in 2003.
Management has conducted an impairment review on the conditions of the property, plant and
equipment in 2004 and 2005 and considered no impairment loss was deemed necessary in 2004 and
2005. |
|
|
|
All of Yuchai and its subsidiaries buildings are located in the PRC. |
|
|
|
As of December 31, 2004, certain plant and equipment of Yuchai with an aggregate carrying amount
of Rmb172,630, was pledged as security under certain loan
arrangements (see Note 18(a)). The
security was released in 2005. |
F - 31
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
14 |
|
Property, plant and equipment, net (continued) |
|
|
|
|
|
Loss on disposal of property, plant and equipment for the years ended December 31, 2003, 2004
and 2005 is included in Selling, general and administrative expenses as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Loss on disposal of property,
plant and equipment |
|
|
3,359 |
|
|
|
12,998 |
|
|
|
10,474 |
|
|
|
1,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has several non-cancellable operating leases, primarily for offices and warehouses that
expire over the next four years. These leases generally contain renewal options for periods
ranging from one year to four years. |
|
|
|
Future minimum lease payments under non-cancellable operating leases (with initial or remaining
lease terms in excess of one year) as of December 31, 2005 are: |
|
|
|
|
|
|
|
|
|
|
|
Rmb |
|
|
US$ |
|
|
2006 |
|
|
2,766 |
|
|
|
343 |
|
2007 |
|
|
2,019 |
|
|
|
250 |
|
2008 |
|
|
1,084 |
|
|
|
134 |
|
2009 |
|
|
541 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,410 |
|
|
|
794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense for operating leases is included in Selling, general and administrative expenses
as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Rental expense |
|
|
5,159 |
|
|
|
9,232 |
|
|
|
8,726 |
|
|
|
1,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 32
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
15 |
|
Construction in progress |
|
|
Construction in progress comprises capital expenditures and capitalized interest charges
relating to the following construction of facilities and assembly lines projects: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2004 |
|
2005 |
|
2005 |
|
|
Rmb |
|
Rmb |
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel engine production line and
facilities projects |
|
|
211,418 |
|
|
|
286,050 |
|
|
|
35,445 |
|
Factories auxiliary facilities |
|
|
86,134 |
|
|
|
95,230 |
|
|
|
11,800 |
|
Second foundry |
|
|
29,570 |
|
|
|
26,047 |
|
|
|
3,228 |
|
Others |
|
|
51,913 |
|
|
|
52,575 |
|
|
|
6,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379,035 |
|
|
|
459,902 |
|
|
|
56,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Lease prepayments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2004 |
|
2005 |
|
2005 |
|
|
Rmb |
|
Rmb |
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease prepayments |
|
|
99,111 |
|
|
|
98,157 |
|
|
|
12,163 |
|
Less: Accumulated amortization |
|
|
24,344 |
|
|
|
27,549 |
|
|
|
3,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease prepayments, net |
|
|
74,767 |
|
|
|
70,608 |
|
|
|
8,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The land on which the Companys buildings are erected is owned by the PRC Government. Yuchai and
its subsidiaries are granted the land use rights of 15 to 50 years in respect of such land. |
F - 33
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
(a) |
|
Investments as of December 31, 2004 and 2005 are summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2004 |
|
|
|
2005 |
|
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Available-for-sale equity securities
(see Note) |
|
|
6,405 |
|
|
|
6,355 |
|
|
|
787 |
|
Investments in affiliated companies |
|
|
648 |
|
|
|
185,619 |
|
|
|
23,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,053 |
|
|
|
191,974 |
|
|
|
23,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
Available-for-sale equity securities are non-marketable equity securities and stated at
cost due to the lack of information to determine the fair value. The Company did not observe
any event or change in circumstances that would have result in the fair value being
significantly less than its carrying amount. |
(b) |
|
Investments in affiliated companies accounted for using the equity method as of December 31,
2004 and 2005 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2004 |
|
|
|
2005 |
|
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Listed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
TCL (see Note (i)) |
|
|
|
|
|
|
185,021 |
|
|
|
22,927 |
|
|
|
Unlisted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Others (see Note (ii)) |
|
|
648 |
|
|
|
598 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648 |
|
|
|
185,619 |
|
|
|
23,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
|
|
(i) |
|
The Company acquired 264,000,000 shares and 17,795,664 shares of TCLs ordinary
shares on March 23, 2005 and September 5, 2005, representing 14.99% and 1.00% interests of
the enlarged share capital of TCL at a consideration of Singapore
dollars (S$) 30,880,000 (equivalent to Rmb152,133) and
S$1,400,000 (equivalent to Rmb6,890) respectively. As a result, the Company held a 15.99%
stake in TCL as of December 31, 2005. Among the 17,795,664
ordinary shares purchased in September 2005,
6,715,196 ordinary shares held by the Company as of December 31, 2005 are
subject to a call option which is exercisable by certain members of the Thakral family
(Thakral Family Members), who are stockholders of TCL. |
F - 34
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
17 |
|
Investments (continued) |
(b) |
|
Investments in affiliated companies accounted for using the equity method as of December
31, 2004 and 2005 are as follows: (continued) |
|
|
|
|
Notes: (continued) |
|
|
|
The option was granted only to Thakral Family Members by the participating creditors in
connection with a scheme of arrangement dated October 24, 2001 in relation to TCL
sanctioned by the High Court of Singapore on November 2, 2001 (the Scheme). The option
price payable per TCL share under the call option is S$0.25 plus an interest of Singapore
Interbank offer rate plus 0.5% from March 27, 2002 until the completion of the sale and
purchase of the shares pursuant to an exercise of the call option. The Company has
assessed the fair value of the options and determined that the value was not material. The
6,715,196 shares of TCL were held by a share escrow account on trust for the Company
pending release to the Company as of December 31, 2005, subject to the call option.
Assuming that the call option is not exercised by the Thakral Family Members, all the
6,715,196 shares of TCL will be released by the share escrow agent to the Company by August
31, 2006. As of December 31, 2005, the call option has not been exercised. |
|
|
|
The fair value, based on the quoted market price, of the TCL shares held by the Company was Rmb109,434 (US$13,560) as of December 31, 2005. Management considers the decline in
fair value below the carrying value to be not other than temporary as the Company has the ability and intent to hold its
investment in TCL for a period that should allow it to recover its carrying value. |
|
|
(ii) |
|
Others represent the Companys interest in certain entities in the PRC in which the Company
has the ability to exercise significant influence in its financial and operating policy
decisions, but does not have controlling financial interests. |
F - 35
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005(CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
17 |
|
Investments (continued) |
(c) |
|
Summarized financial information regarding TCL as of December 31, 2005 and for the period
from March 23, 2005 to December 31, 2005 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
December 31, 2005 |
|
|
|
Rmb |
|
|
US$ |
|
Financial position |
|
|
|
|
|
|
|
|
|
Current assets |
|
|
932,008 |
|
|
|
115,488 |
|
Property, plant and equipment, net |
|
|
173,266 |
|
|
|
21,470 |
|
Other assets |
|
|
453,327 |
|
|
|
56,173 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
1,558,601 |
|
|
|
193,131 |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
337,971 |
|
|
|
41,879 |
|
Non-current liabilities |
|
|
1,034 |
|
|
|
128 |
|
Long term debts |
|
|
32,076 |
|
|
|
3,975 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
371,081 |
|
|
|
45,982 |
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
30,416 |
|
|
|
3,769 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
1,157,104 |
|
|
|
143,380 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
|
1,558,601 |
|
|
|
193,131 |
|
|
|
|
|
|
|
|
|
|
|
F - 36
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
17 Investments (continued)
(c) |
|
Summarized financial information regarding TCL as of December 31, 2005 and for the period
from March 23, 2005 to December 31, 2005 is as follows: (continued) |
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
Period from |
|
|
|
March 23, 2005 |
|
|
March 23, 2005 |
|
|
|
to December 31, |
|
|
to December 31, |
|
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
US$ |
|
Results of operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
|
|
Supply chain
management |
|
|
1,531,913 |
|
|
|
189,823 |
|
Others |
|
|
109,526 |
|
|
|
13,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,641,439 |
|
|
|
203,395 |
|
Cost of goods sold |
|
|
(1,508,247 |
) |
|
|
(186,890 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
133,192 |
|
|
|
16,505 |
|
Selling, general and administrative expenses |
|
|
(191,161 |
) |
|
|
(23,688 |
) |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(57,969 |
) |
|
|
(7,183 |
) |
Finance cost |
|
|
(9,338 |
) |
|
|
(1,157 |
) |
Other income |
|
|
34,906 |
|
|
|
4,325 |
|
Equity in profit of affiliates |
|
|
281 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and minority interests |
|
|
(32,120 |
) |
|
|
(3,980 |
) |
Income tax
expense |
|
|
(6,086 |
) |
|
|
(754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interests |
|
|
(38,206 |
) |
|
|
(4,734 |
) |
Minority interests in income of consolidated
subsidiaries |
|
|
6,232 |
|
|
|
772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(31,974 |
) |
|
|
(3,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial information: |
|
|
|
|
|
|
|
|
Interest revenue |
|
|
5,703 |
|
|
|
707 |
|
Interest expenses |
|
|
9,338 |
|
|
|
1,157 |
|
Depreciation and amortisation |
|
|
10,576 |
|
|
|
1,311 |
|
Significant non-cash transactions: |
|
|
|
|
|
|
|
|
Bad
debt expense |
|
|
11,629 |
|
|
|
1,441 |
|
Provision
for inventory
write-down |
|
|
33,493 |
|
|
|
4,150 |
|
Impairment
loss to property, plant and equipment |
|
|
16,031 |
|
|
|
1,986 |
|
F - 37
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
(a) |
|
Short-term bank loans |
|
|
Short-term bank loans were denominated in Renminbi as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Renminbi denominated loans |
|
|
430,000 |
|
|
|
812,835 |
|
|
|
100,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average interest rate of short-term bank loans at December 31, 2004 and 2005 was 5.28%
and 5.52% per annum, respectively. |
|
|
|
As of December 31, 2004, short-term bank loans of Rmb50,000, were secured by the pledge of certain
of Yuchais plant and equipment (see Note 14). The amount was fully repaid in 2005. |
|
|
|
As of December 31, 2005, short-term bank loans of Rmb42,835 (US$5,308), were secured by the pledge
of certain Yuchais trade accounts receivable (see Note 9). |
|
|
Yuchais long-term bank loans comprise: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
at December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
(per annum) |
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Renminbi denominated loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due in 2006 |
|
|
4.94% - 5.49 |
% |
|
|
100,000 |
|
|
|
100,000 |
|
|
|
12,391 |
|
due in 2007 |
|
|
5.85 |
% |
|
|
|
|
|
|
50,000 |
|
|
|
6,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term bank loans
outstanding |
|
|
|
|
|
|
100,000 |
|
|
|
150,000 |
|
|
|
18,587 |
|
Less: Amounts due within
one year included
under current
liabilities |
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
12,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due after one year |
|
|
|
|
|
|
100,000 |
|
|
|
50,000 |
|
|
|
6,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All long-term bank loans were unsecured as of December 31, 2004 and 2005. |
F - 38
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
|
|
On February 23, 2005, the Company issued US$25,000 (Rmb206,913) in principal amount of convertible
debt (the Convertible Debt) on a private placement basis. The Convertible Debt bear interest
rate of 2% per annum and mature in 2012, unless redeemed earlier in accordance with the terms of
the Convertible Debt. The Convertible Debt were fully exercised and converted to 1,927,673
ordinary shares on June 3, 2005, thereby increasing the Companys issued and outstanding shares
from 35,340,000 ordinary shares to 37,267,673 ordinary shares. |
20 |
|
Accrued expenses and other liabilities |
|
|
Accrued expenses and other liabilities comprise: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
Deposits from customers |
|
|
54,165 |
|
|
|
96,936 |
|
|
|
12,012 |
|
Staff welfare payable (see Note) |
|
|
15,041 |
|
|
|
15,041 |
|
|
|
1,864 |
|
Accrued product warranty (see Note 21) |
|
|
126,114 |
|
|
|
142,126 |
|
|
|
17,611 |
|
Wages payable |
|
|
110,577 |
|
|
|
98,732 |
|
|
|
12,234 |
|
Management bonus payable |
|
|
36,574 |
|
|
|
19,092 |
|
|
|
2,366 |
|
Payable for construction in progress |
|
|
39,139 |
|
|
|
39,330 |
|
|
|
4,873 |
|
Accrued research and development
expenses |
|
|
16,472 |
|
|
|
24,952 |
|
|
|
3,092 |
|
Accrued advertising expense |
|
|
7,225 |
|
|
|
3,817 |
|
|
|
473 |
|
Accrued legal fee and other professional
fees |
|
|
2,762 |
|
|
|
5,050 |
|
|
|
626 |
|
Accrued expenses for litigation and
guarantees (see Notes 24(c) and (d)) |
|
|
15,268 |
|
|
|
18,921 |
|
|
|
2,344 |
|
Individual income tax withholding |
|
|
8,161 |
|
|
|
10,250 |
|
|
|
1,270 |
|
Other accruals and liabilities |
|
|
53,422 |
|
|
|
97,470 |
|
|
|
12,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484,920 |
|
|
|
571,717 |
|
|
|
70,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
Staff welfare payable is determined by Yuchais Board of Directors. The payable can be
applied towards the payment of special bonuses or collective welfare benefits to staff and
workers of Yuchai, such as staff dormitories and staff welfare facilities. |
F - 39
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
21 |
|
Accrued product warranty |
|
|
An analysis of the accrued product warranty for 2003, 2004 and 2005 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2003 |
|
|
|
2004 |
|
|
|
2005 |
|
|
|
2005 |
|
|
|
Rmb |
|
|
|
Rmb |
|
|
|
Rmb |
|
|
|
US$ |
|
Balance at beginning of year |
|
|
66,864 |
|
|
|
101,215 |
|
|
|
126,114 |
|
|
|
15,627 |
|
Allowance charged to
consolidated statements of
income |
|
|
162,369 |
|
|
|
190,205 |
|
|
|
179,184 |
|
|
|
22,203 |
|
Less: Allowance utilized |
|
|
(128,018 |
) |
|
|
(165,306 |
) |
|
|
(163,172 |
) |
|
|
(20,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
101,215 |
|
|
|
126,114 |
|
|
|
142,126 |
|
|
|
17,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys attributable share in the statutory reserves of Yuchai and its subsidiaries for
the three years ended December 31, 2005 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2003 |
|
|
|
2004 |
|
|
|
2005 |
|
|
|
2005 |
|
|
|
Rmb |
|
|
|
Rmb |
|
|
|
Rmb |
|
|
|
US$ |
|
Statutory general reserve
(see Note (ii)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1 |
|
|
116,702 |
|
|
|
156,111 |
|
|
|
170,041 |
|
|
|
21,070 |
|
Transfer from consolidated
statements of income |
|
|
39,409 |
|
|
|
13,930 |
|
|
|
239 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
|
156,111 |
|
|
|
170,041 |
|
|
|
170,280 |
|
|
|
21,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory public welfare
fund (see Note (iii)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1 |
|
|
28,398 |
|
|
|
48,103 |
|
|
|
70,482 |
|
|
|
8,734 |
|
Transfer from consolidated
statements of income |
|
|
19,705 |
|
|
|
22,379 |
|
|
|
2,549 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
|
48,103 |
|
|
|
70,482 |
|
|
|
73,031 |
|
|
|
9,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General surplus reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1 and
December 31 |
|
|
25,706 |
|
|
|
25,706 |
|
|
|
25,706 |
|
|
|
3,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
229,920 |
|
|
|
266,229 |
|
|
|
269,017 |
|
|
|
33,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 40
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
22 |
|
Statutory reserves (continued) |
|
|
|
|
|
Notes: |
|
|
|
|
(i) |
|
In accordance with the relevant regulations in the PRC, Yuchai and its subsidiaries are
required to provide certain statutory reserves which are designated for specific purposes
based on the net income reported in the PRC GAAP financial statements. The reserves are not
distributable in the form of cash dividends (see Note 30). |
|
|
(ii) |
|
In accordance with the relevant regulations in the PRC, a 10% appropriation to the statutory
general reserve based on the net income reported in the PRC financial statements is required
until the balance reaches 50% of the authorized share capital of Yuchai and its subsidiaries.
Statutory general reserve can be used to make good previous years losses, if any, and may be
converted into share capital by the issue of new shares to stockholders in proportion to their
existing shareholdings, or by increasing the par value of the shares currently held by them,
provided that the reserve balance after such issue is not less than 25% of the authorized
share capital. |
|
|
(iii) |
|
Yuchai and its subsidiaries shall determine to transfer 5% to 10% of its net income reported
in the PRC financial statements to the statutory public welfare fund. There is no limit on the
amount that may be allocated to this fund. This fund can only be utilized on capital
expenditure for the collective welfare of Yuchai and its subsidiaries employees, such as the
construction of dormitories, canteen and other welfare facilities, and cannot be utilized to
pay staff welfare expenses. The transfer to this fund must be made before the distribution of
a dividend to stockholders. |
|
|
At December 31, 2005, Yuchai had the following commitments: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
|
2005 |
|
|
|
Rmb |
|
|
|
US$ |
Authorized and contracted for: |
|
|
|
|
|
|
|
|
|
Improvement to existing production
facilities |
|
|
214,098 |
|
|
|
26,529 |
|
|
|
|
|
|
|
|
|
|
|
F - 41
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
24 |
|
Contingencies |
|
(a) |
|
Product liability |
|
|
|
The General Principles of the Civil Law of China and the Industrial Product Quality Liability
Regulations imposes that manufacturers and sellers are liable for loss and injury caused by
defective products. Yuchai and its subsidiaries do not carry product liability insurance. Yuchai
and its subsidiaries have not had any significant product liability claims brought against them. |
|
(b) |
|
Environmental liability |
|
|
|
The Groups production is subject to certain environment protection laws and regulations in the
PRC. In addition, the manufacture and sales of EURO I engines in major urban area became unlawful
after December 31, 2004. After that date, the engines equipped with EURO I engines cannot be sold
and used in major urban area. The Company considers that the compliance with applicable
environment protection laws will not have any material adverse impact to Yuchai and its
subsidiaries. |
|
(c) |
|
Dispute with Bank of China |
|
|
|
In 2003, the Yulin Branch of Bank of China (BOC) initiated legal proceedings to recover Rmb6,603
(US$818) from Yuchai based on an irrevocable letter of guarantee issued by Yuchai to the BOC in
1993 to secure a loan of US$550 to Great Wall Machinery Plant (Great Wall). At trial, a Yulin
court ruled that if Great Wall could not pay the loan, Yuchai would be liable to pay the guaranteed
sum to the BOC. Yuchai appealed unsuccessfully. |
|
|
|
In January 2004, the State Holding Company issued a letter of commitment confirming that it would
reimburse Yuchai in the event that Yuchai was required to pay on this guarantee. |
|
|
|
Based on the advice from the Companys Legal Counsel, the Company has recorded a loss contingency
equal to the amount of the claim. The amounts due to the BOC and from the State Holding Company
have been recorded in Accrued expenses and other liabilities and Amounts due from related
parties, respectively. |
|
|
|
In 2005, there were no new developments in this case. |
F - 42
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
24 |
|
Contingencies (continued) |
|
(d) |
|
Guarantees |
|
|
|
YEGCL guaranteed borrowings of Rmb7,605 and Rmb178,480 (US$22,116) granted by commercial banks to
unrelated parties in 2004 and 2005, respectively. The borrowings are due in equal monthly or
quarterly instalments through one to two years. The guarantees were made to individual persons who
applied for mortgage loans from commercial banks to purchase automobiles equipped with diesel
engines produced by Yuchai. The guarantees are for the entire amount and term of the borrowings.
In return, YEGCL receives a premium fee amounted to 2% to 8% of the amount of borrowings. All
guarantees are secured by automobiles at a net book value totalling Rmb11,693 and Rmb242,216
(US$30,014) at December 31, 2004 and 2005, respectively. If the individual defaults on payment,
YEGCL would have to perform under the guarantees. It is reasonably possible that YEGCL would be
required to make payment under its guarantees. As of December 31, 2004 and 2005, the maximum
amount of undiscounted payments that YEGCL would have to make in the event of default is Rmb7,422
and Rmb134,235 (US$16,633). Pursuant to the requirements of FIN 45, the Company accrued Rmb220 and
Rmb16,811 (US$2,083) related to its stand ready obligation under the guarantee arrangement in 2004
and 2005, respectively. The amount recognized during the year ended December 31, 2004 and 2005
includes premium received or receivable, which is amortized on a straight line basis over the terms
of the guarantees, of Rmb220 and Rmb4,493 (US$557), respectively. The amount of premium being
amortized, which were recorded as revenue, for the year ended December 31, 2004 and 2005 were
amounted to Rmb 14 and Rmb 1,167 (US$145), respectively. The remaining balance of Rmb 12,318
(US$1,526) as of December 31, 2005 represents the provision for loss contingency related to the
guarantees where payment by the Company was probable. |
|
(e) |
|
Outstanding bills discounted |
|
|
|
As of December 31, 2005, outstanding bills discounted with banks for which the Company has retained
a recourse obligation totalled Rmb1,373,723 (US$170,222). |
|
(f) |
|
Outstanding letters of credit |
|
|
|
As of December 31, 2005, the Company issued irrevocable letters of credit totalled Rmb110,257
(US$13,662). |
|
(g) |
|
Other outstanding litigation |
|
|
|
In addition to the matters disclosed in Note 24(c), the Company is involved in various other claims
and legal actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not have a material adverse effect on
the Companys consolidated financial position, results of operations, or liquidity. |
F - 43
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
25 |
|
Dispute with State Holding Company |
|
|
|
The Company has from time to time in the period up to 2005 encountered difficulties in
obtaining the cooperation of the State Holding Company, and its former Chairman, Mr Wang Jianming,
in the daily management and operation of Yuchai, including obtaining payments of the Companys
share of the final 2001 dividend declared in August 2002. Mr Wang Jianming ceased to serve as the
Chairman, legal representative and chief executive officer of Yuchai,
as well as the Chairman and
legal representative of the State Holding Company, the principal Chinese shareholder of Yuchai with
effect from October 28, 2005. The new Chairman and legal representative of these companies is Mr Yan
Ping whose appointment was confirmed on December 2, 2005. |
|
|
|
The Chinese stakeholders had previously asserted that the transfer of ownership of shares with
respect to Yuchai in November 1994, in connection with the Companys initial public offering
(IPO), was not validly approved by the Chinese authorities, and that as a result the Companys
exercise of control over Yuchai has been improper. |
|
|
|
As a result of a number of meetings between the parties, the Company and Yuchai entered into an
agreement in July 2003 (the July 2003 Agreement) to work together in trying to jointly promote
mutual plans to enhance the Companys shareholder value. |
|
|
|
On April 7, 2005, the Company entered into a Reorganisation Agreement (Reorganisation Agreement)
with Yuchai and Coomber in furtherance of the terms of the July 2003 Agreement, and the terms of
this agreement were acknowledged and agreed to by the State Holding Company. The Reorganisation
Agreement was extended to December 31, 2006 by way of the Reorganisation Agreement Amendment No.1
dated December 2, 2005. The Reorganisation Agreement Amendment No.1 was similarly acknowledged and
agreed to by the State Holding Company. |
|
|
|
The principal terms contained in the Reorganisation Agreement relating to governance related issues
have been addressed by Yuchai. |
|
|
|
Yuchai has taken all necessary steps and submitted all necessary documents to enable the amended
and restated Articles of Association of Yuchai as approved by its directors and shareholders in
1996 incorporating the corporate governance guidelines approved by its directors and shareholders
on November 1, 2002 to be approved, formalized, endorsed, registered and filed with the relevant
governmental authorities. The formal approval of these amended Articles of Association is awaited
from the PRC Ministry of Commerce (MOC). |
|
|
|
Promptly upon receipt of the approval from the MOC of the Articles of Association, Yuchai would
formalize the implementation of the corporate governance guidelines approved by its directors and
shareholders on November 1, 2002 and establish an
appropriate corporate governance structure conforming to international custom and practice. |
|
|
|
Yuchai has begun to implement the compliance programme for the internal controls over financial
reporting of Yuchai with respect to section 404 of the Sarbanes-Oxley Act. |
F - 44
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
25 |
|
Dispute with State Holding Company (continued) |
|
|
|
Up to the date of this report: |
|
(i) |
|
the board and shareholders of Yuchai have, at a duly convened board meeting held on April 21,
2005 and a duly convened shareholders meeting held on May 16, 2005, approved the following
principal matters relating to the Reorganisation Agreement: |
|
- |
|
the proposed capitalization of YMLC was varied by the board of directors of
Yuchai at its meeting on April 21, 2005 and approved by its shareholders. Coomber has
assumed the obligation to return Rmb165,400 (US$20,495) of the authorized Rmb205,000
(US$25,402) loan that was made by Yuchai to YMLC and which had been guaranteed by
Coomber to Yuchai by December 6, 2005. The remaining Rmb39,600 (US$4,907) loan would
remain as a loan by Yuchai to YMLC and would only be injected as share capital of YMLC
after the successful spin-off of Yuchai in line with the terms of the Reorganisation
Agreement; |
|
|
- |
|
a dividend payment for the financial years ended December 31, 2003 and 2004
in the amount of Rmb302,713; |
|
|
- |
|
the establishment and appointment of members of three sub-committees under
the board, comprising the nominations committee, the remuneration committee and the
audit committee; |
|
|
- |
|
the establishment of a financial committee to approve all borrowings,
guarantees, loans issuance of company debt and investment; |
|
|
- |
|
the termination of the sales of the spare parts business of one of its
subsidiaries; |
|
|
- |
|
the payment of US$20,000 to the Company pursuant to the Reorganisation
Agreement; |
|
|
- |
|
the acceptance of the appointment of two independent directors of Yuchai
and confirmation of the appointment of three directors appointed by holders of States
Shares of Yuchai and six directors appointed by holders of Foreign Shares of Yuchai; and |
|
|
- |
|
the appointment of one independent director nominated by the holders of
State Shares of Yuchai, and three independent directors nominated by the holders of
Foreign Shares of Yuchai. |
F - 45
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
25 |
|
Dispute with State Holding Company (continued) |
|
(ii) |
|
an internationally reputable financial adviser had been engaged by Yuchai to assist Newco
(as defined below) to apply for the listing of its shares on the NYSE and assist the Company
with the implementation of spin-off. Pursuant to the Reorganization Agreement, a Bermuda
corporation (Newco) will be formed where (a) the Company will contribute its 76.4% indirect
interest in Yuchai to in exchange for a number of Newco shares equal to the number of
outstanding shares of the Company as of April 7, 2005; (b) its board of directors would
comprise of nominees from the Company and Yuchai in the same respective proportions to the
nominees of the holders of Foreign Shares of Yuchai and the holders of State Shares of Yuchai
on the Yuchai board of directors; and (c) its charter documents and officers would be mutually
agreeable to the Company and Yuchai and on the completion date of the Restructuring Exercise
(as described in the Reorganization Agreement) the Company shall have no appointees to its
board of directors. The appointment of the financial adviser was subsequently terminated
pending Yuchais ongoing review of the implementation of the corporate reorganization
contemplated in the Reorganization Agreement; |
|
|
(iii) |
|
the Yuchai board of directors subsequently directed a review of YMLCs financial position
and the implementation of the recapitalization plans for YMLC has been deferred pending the
successful spin-off of Yuchai in line with the terms of the Reorganisation Agreement; |
|
|
(iv) |
|
the Company has received payment of an advisory fee in the amount Rmb12,105 (US$1,500) from
Yuchai as provided for under the Reorganisation Agreement; and |
|
|
(v) |
|
the Company has received its share of the dividend declared and paid by Yuchai in respect of
the financial years ended December 31, 2003 and 2004 on May 24, 2005 for amount of Rmb225,207
(US$27,906). |
F - 46
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
25 |
|
Dispute with State Holding Company (continued) |
|
|
|
The principal terms of the Reorganisation Agreement Amendment No.1 are as follows: |
|
(1) |
|
Clause 1.8 of the Reorganization Agreement was previously stated as: |
|
|
|
|
In consideration of CYIs agreement to ensure that Coomber will under the terms of the share
exchange described in clause 2.4 receive no less than 6,354,911 Newco shares, Yuchai shall,
within 5 business days from the date that an unqualified audit report is issued on CYIs
financial statements in the form substantially similar to that of the unaudited financial
statements filed by CYI in its Form 6K dated February 28, 2005, pay CYI an amount of
US$20.0 million in cash into such bank account as CYI shall notify Yuchai in writing. |
|
|
|
|
was deleted and replaced with the following text: |
|
|
|
|
In consideration of CYIs agreement to ensure that Coomber will under the terms of the share
exchange in Clause 2.4 receive no less that 6,354,911 Newco shares, Yuchai shall on the
earlier of (i) the date of the completion of the transactions described in Clause 2.6 and
(ii) December 31, 2006 pay CYI an amount of US$20.0 million in cash to such bank account as
CYI shall notify Yuchai in writing. |
|
|
(2) |
|
Clause 2.10 of the Reorganization Agreement, which was stated as: |
|
|
|
|
The parties acknowledge and accept that the CYI Group, as majority shareholders of Yuchai
and with majority control of the Board of Directors of Yuchai, may cause the employment of
Yuchais current Chief Executive Officer to be terminated in accordance with the terms of his
employment agreement. CYI acknowledges and accepts, however, that the successful
implementation of the Restructuring Exercise will require the continued uninterrupted
involvement and participation of Yuchais current Chief Executive Officer on and subject to
the terms (including remuneration) of his employment agreement. Accordingly, CYI agrees that
it will not, and will procure that its appointees to the Board of Directors of Yuchai do not,
take any action prior to the completion of the Restructuring Exercise that will interfere
with, or cause the termination of, the employment of Yuchais current Chief Executive Officer
except if he were to be prosecuted or convicted for any activities of a criminal nature. |
|
|
|
|
was deleted in its entirety with effect from October 27, 2005. |
|
|
(3) |
|
The Clause 4 of the Reorganization Agreement was previously stated as: |
|
|
|
|
In the event that the parties are unable to complete the events described in each of clauses
2.1, 2.2, 2.4, 2.5 and 2.6 above (not due to the default of either party) by
5:00p.m. on December 31, 2005 (or if such day is not a business day in Hong Kong, the
immediately succeeding business day)(or such other date to be mutually agreed between the
parties), the provision of this Agreement shall terminate and in such event no party shall
have any claim against any other party for any claims, damages, losses or other costs and
expenses arising from such termination. |
F - 47
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
25 |
|
Dispute with State Holding Company (continued) |
|
(3) |
|
The Clause 4 of the Reorganization Agreement was previously stated as: (continued) |
|
|
|
|
the date appearing in the third line of Clause 4 of the Reorganization Agreement was deleted
and substituted with the words December 31, 2006 or such other date as the parties may agree
in writing |
|
|
Yuchai, Coomber and the State Holding Company have at various times reaffirmed their respective
intentions of working with the Company to carry out their respective obligations under the
Reorganization Agreement. |
|
26 |
|
Retirement and other postretirement benefits |
|
|
|
As stipulated by the regulations of the PRC, Yuchai and its subsidiaries participate in
defined contribution retirement plans organized by the Guangxi Regional Government and Beijing City
Government for its staff. All staff are entitled to an annual pension equal to a fixed proportion
of their final basic salary amount at their retirement date. For the years ended December 31,
2003, 2004 and 2005, Yuchai and its subsidiaries were required to make contributions to the
retirement plan at a rate of 20.0% of the basic salary of their staff. The Guangxi Regional
Government and Beijing City Government are responsible for the entire obligations of all Yuchai and
its subsidiaries retirees. Expenses incurred in connection with the plan were Rmb24,101,
Rmb29,868 and Rmb33,299 (US$4,126), respectively, for the years ended December 31, 2003, 2004 and
2005. |
|
|
|
Yuchai and its subsidiaries have no obligation for the payment of pension benefits or any other
postretirement benefits beyond the annual contributions described above. |
F - 48
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
27 |
|
Other related party transactions |
|
|
|
In addition to the loans to YMLC (as discussed in Note 5), the Company has undertaken other significant business transactions with related parties during the
three years ended December 31, 2005. The following is a summary of these transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Sales of trucks from customers
to Guangxi Yuchai
Mechanical and Electronics
Company (GYMEC)
(see Note (i)) |
|
|
1,346 |
|
|
|
753 |
|
|
|
|
|
|
|
|
|
Sales of diesel engines
to State Holding Company, its subsidiaries and
affiliates
(see Note (ii)) |
|
|
23,611 |
|
|
|
3,784 |
|
|
|
7,646 |
|
|
|
947 |
|
Purchase of raw materials
and supplies from
subsidiaries and affiliates
of State Holding Company
(see Note (ii)) |
|
|
(93,056 |
) |
|
|
(142,829 |
) |
|
|
(235,329 |
) |
|
|
(29,160 |
) |
Purchase of raw materials
and supplies from YMLC
(see Note (iii)) |
|
|
|
|
|
|
|
|
|
|
(60,756 |
) |
|
|
(7,528 |
) |
Purchase of trucks from
YMLC (see Note (iii)) |
|
|
|
|
|
|
(95,391 |
) |
|
|
(77,324 |
) |
|
|
(9,581 |
) |
Processing fee to YMLC
(see Note (iv)) |
|
|
|
|
|
|
(12,329 |
) |
|
|
(44,407 |
) |
|
|
(5,503 |
) |
Delivery expense charged by
a subsidiary of YMLC
(see Note (iv)) |
|
|
(62,206 |
) |
|
|
(65,468 |
) |
|
|
(126,028 |
) |
|
|
(15,616 |
) |
General and administrative
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charged by State
Holding Company
(see Note (v)) |
|
|
(30,607 |
) |
|
|
(21,180 |
) |
|
|
(25,931 |
) |
|
|
(3,213 |
) |
charged by HLA
(see Note (xii)) |
|
|
(4,427 |
) |
|
|
(4,142 |
) |
|
|
(4,035 |
) |
|
|
(500 |
) |
charged by an affiliate
of HLA (see Note (vi)) |
|
|
|
|
|
|
|
|
|
|
(30,765 |
) |
|
|
(3,812 |
) |
F - 49
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
27 |
|
Other related party transactions (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Gain on disposal of
land use rights to a
subsidiary of State
Holding Company
(See Note (vii)) |
|
|
|
|
|
|
|
|
|
|
2,533 |
|
|
|
314 |
|
Loan from State Holding
Company (see Note (viii)) |
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assignment of debt to
GYMEC (see Note (ix)) |
|
|
3,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultancy fee paid on
behalf of Coomber
(see Note (x)) |
|
|
13,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
(i) |
|
Sales of diesel trucks to GYMEC |
|
|
|
GYMEC was formerly a subsidiary of State Holding Company. It became a subsidiary of
YMLC following a share transfer from State Holding Company to YMLC in 2004. During 2003 and
2004, Yuchai received diesel trucks from certain customers as part of the settlement of their
trade accounts receivable. Pursuant to an agreement between Yuchai and GYMEC, Yuchai sold
such diesel trucks at cost to GYMEC, which owns a business license for selling diesel trucks
in the PRC. Yuchai recorded a receivable from GYMEC in connection with the truck sales. The
amount due from GYMEC is unsecured, interest free and repayable on demand. |
|
(ii) |
|
Sale and purchase of raw materials, supplies and diesel engines to/from State Holding
Company, its subsidiaries and affiliates. |
|
|
|
Certain subsidiaries and affiliates of State Holding Company have acted as suppliers of
raw materials and supplies to the Company and certain subsidiaries of State Holding Company
have acted as sales agents of the Company. The Company considers that these transactions
were entered into in the normal course of business and expects that these transactions will
continue on normal commercial terms. |
F - 50
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
27 |
|
Other related party transactions (continued) |
|
|
|
Notes: (continued) |
|
(iii) |
|
Purchase of raw materials, supplies and trucks from YMLC |
|
|
|
|
Since July 2004, subsidiaries of YMMC have engaged in the sale of trucks which were mainly
supplied by and purchased from YMLC. YMLC has also become a supplier of raw materials and
supplies to the Company since 2005. The Company considers that these transactions were
entered into in the normal course of business and expects that these transactions will
continue on normal commercial terms. |
|
|
(iv) |
|
Processing fee and delivery expense charged by YMLC and its subsidiaries |
|
|
|
|
The fee is for the packaging and delivering of spare parts charged by YMLC, which was
recorded in Cost of goods sold and Selling, general and administrative expenses
respectively. The Company considers that these transactions were entered into in the normal
course of business and expects that these transactions will continue on normal commercial
terms. |
|
|
(v) |
|
General and administrative expenses |
|
|
|
|
State Holding Company charges Yuchai for certain general and administrative expenses in
respect of rental of certain office premises, property management services rendered by State
Holding Company. The expenses are charged to Yuchai and its subsidiaries by State Holding
Company on an actual incurred basis. The Company believes that the expenses charged to
Yuchai by State Holding Company would not have been materially different on a stand-alone
basis because Yuchai could provide these services for itself at approximately the same
amount. |
|
|
(vi) |
|
Service fee to an affiliate of HLA |
|
|
|
|
The fee was paid to Hong Leong Management Services Pte Ltd., an affiliate of HLA. Service
fee includes Rmb9,167 (US$1,136) in relation to the consultancy services performed for the
acquisition of interests in TCL during 2005 and LKN-Princefield Limited (LKN) in 2006 (see
Note 34(a)). The remaining amounts were mainly in relation to secure additional credit
facilities and enter into the Reorganization Agreement. The transactions were approved by the
Board of Directors. The Company considers that the transactions were entered into in the
normal course of business. |
|
|
(vii) |
|
Gain on disposal of land use rights to a subsidiary of State Holding Company |
|
|
|
|
The Company has disposed of certain land use rights with net book value of Rmb1,047 (US$130)
to a subsidiary of SHC for a consideration of Rmb3,580 (US$444). The Company considers that
the transaction was entered into in the normal course of business. |
F - 51
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
27 |
|
Other related party transactions (continued) |
|
|
|
Notes: (continued) |
|
(viii) |
|
Loan from State Holding Company |
|
|
|
|
In 2003, GYSPM has entered into an agreement with State Holding Company for a borrowing of
Rmb8,000 for its operating activities as of December 31, 2003. As of December 31, 2003,
GYSPM pledged certain of its assets with net book value of Rmb17,132 against bank loan of
Rmb8,000 borrowed by State Holding Company. The terms set out in the loan agreement entered
into between State Holding Company and the bank and the loan agreement entered into between
GYSPM and State Holding Company are identical. The loan proceeds from the bank borrowed by
State Holding Company were solely lent to GYSPM. State Holding Company would make repayments
to the bank upon receipt of loan repayment from GYSPM. The loan was fully repaid in 2004. |
|
|
(ix) |
|
Assignment of debt to GYMEC |
|
|
|
|
In 2003, the Company entered into a deed of assignment (the Deed) whereby one of the
Companys customers assigned all the rights and liabilities of the outstanding amount due to
the Company totalling approximately Rmb15,000 to GYMEC. Pursuant to the Deed, GYMEC became
one of the sales agents of this customer who is principally engaged in manufacturing and
sales of motor vehicles. As of December 31, 2004, the outstanding balances due from GYMEC
related to this assignment was Rmb3,700 and the amount was fully repaid in 2005. |
|
|
(x) |
|
Consultancy fee paid on behalf of Coomber |
|
|
|
|
In 2003, the Company entered into an agreement, totalling Rmb60,000 with a consultancy
company in connection with the design of an information system for YMLC to be undertaken by
Coomber pursuant to which Coomber has agreed to pay for all expenses incurred by the Company
in respect of this project on or before 31 December 2004. In 2003, the Company incurred
payments totalling Rmb13,347 in respect of the project, which have been recorded in amounts
due from related parties. The amount was subsequently repaid in 2004. |
|
|
(xi) |
|
Amounts due from/to related parties |
|
|
|
|
Amounts due from/to related parties arise mainly from the transactions as stated above. |
|
|
|
|
In addition to the above, Yuchai also entered into transactions with other PRC Government
owned enterprises. The Company considers that these transactions
were entered into in the normal course of business and expects that these transactions will
continue on normal commercial terms. Balances with other PRC entities are excluded from this
caption. |
F - 52
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
27 |
|
Other related party transactions (continued) |
|
|
|
Notes: (continued) |
|
(xii) |
|
Amount due to the holding company |
|
|
|
|
Amount due to the holding company comprise mainly general and administrative expenses charged
by the holding company in relation to the management, financial planning and control and
other services provided to Yuchai. The balance is unsecured, interest free and repayable on
demand. |
|
|
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards for reporting information about
operating segments in financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance. |
|
|
|
The Companys operating segments are Yuchai and TCL for the year ended December 31, 2005. Prior to
the purchase of TCL, the Companys only operating segment was Yuchai. |
|
|
|
The segment result for Yuchai is based on income before
income taxes and minority interests.
The segment result for TCL is the Companys equity in the net
income or losses or TCL. Segment
assets for Yuchai are based on total assets of Yuchai. Segment assets
for TCL are based on the
Companys net investment in TCL. Substantially all of the Companys operations including TCL are in
the PRC. Consequentially no geographic information is presented. Further segment information about
TCL is included in Note 17(c). |
|
|
|
Following is the segment information for the year ended
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
Yuchai |
|
|
TCL |
|
|
|
Rmb |
|
|
Rmb |
|
Segment revenue from external customers |
|
|
5,829,431 |
|
|
|
|
|
Interest revenue |
|
|
21,744 |
|
|
|
|
|
Interest expenses |
|
|
70,527 |
|
|
|
|
|
Depreciation
and amortization |
|
|
139,720 |
|
|
|
|
|
Equity in losses of affiliates |
|
|
50 |
|
|
|
|
|
Segment profit / (loss) |
|
|
171,585 |
|
|
|
(5,056 |
) |
Significant
non-cash items: |
|
|
|
|
|
|
|
|
Provision for uncollectible loans to a related party |
|
|
205,000 |
|
|
|
|
|
Bad
debt expense |
|
|
25,587 |
|
|
|
|
|
Provision for inventory write-down |
|
|
15,990 |
|
|
|
|
|
Provision for losses on guarantees |
|
|
12,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
|
6,168,814 |
|
|
|
185,021 |
|
Total expenditures for additions to long-lived assets |
|
|
515,359 |
|
|
|
|
|
|
|
|
Reconciliation of segment information to the consolidated financial statements for the years ended
December 2003, 2004 and 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
Total segment profit |
|
|
722, 341 |
|
|
|
773, 571 |
|
|
|
166, 529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
fee to an affiliate of HLA (see Note 27) |
|
|
|
|
|
|
|
|
|
|
(30,765 |
) |
Other corporate general and
administrative expenses |
|
|
(25,435 |
) |
|
|
(19,717 |
) |
|
|
(18,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income
taxes and minority interests |
|
|
696,906 |
|
|
|
753,854 |
|
|
|
117,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segment |
|
|
3,896,463 |
|
|
|
5,268,660 |
|
|
|
6,353,835 |
|
Corporate cash and cash equivalents |
|
|
129,795 |
|
|
|
108,514 |
|
|
|
247,332 |
|
Other corporate assets |
|
|
7,374 |
|
|
|
7,074 |
|
|
|
12,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets |
|
|
4,033,632 |
|
|
|
5,384,248 |
|
|
|
6,613,785 |
|
|
|
|
|
|
|
|
|
|
|
F - 53
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
28 |
|
Segment information (continued) |
|
|
|
Revenues from external customers by product category are summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4108 Light-Duty Diesel
Engines |
|
|
174,173 |
|
|
|
325,242 |
|
|
|
688,265 |
|
|
|
85,285 |
|
4110 Light-Duty Diesel
Engines |
|
|
328,993 |
|
|
|
544,297 |
|
|
|
596,565 |
|
|
|
73,922 |
|
4112 Light-Duty Diesel
Engines |
|
|
266,639 |
|
|
|
314,453 |
|
|
|
322,266 |
|
|
|
39,933 |
|
6105 Medium-Duty Diesel
Engines |
|
|
911,190 |
|
|
|
1,143,535 |
|
|
|
1,748,847 |
|
|
|
216,704 |
|
6108 Medium-Duty Diesel
Engines |
|
|
1,504,140 |
|
|
|
1,372,073 |
|
|
|
810,859 |
|
|
|
100,475 |
|
6112 Heavy-Duty Diesel
Engines |
|
|
1,003,791 |
|
|
|
1,203,558 |
|
|
|
786,989 |
|
|
|
97,518 |
|
6113 Heavy-Duty Diesel
Engines |
|
|
3,697 |
|
|
|
97,368 |
|
|
|
193,280 |
|
|
|
23,950 |
|
Diesel Engine Parts |
|
|
228,500 |
|
|
|
446,135 |
|
|
|
489,480 |
|
|
|
60,653 |
|
Others * |
|
|
148,827 |
|
|
|
135,434 |
|
|
|
192,880 |
|
|
|
23,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,569,950 |
|
|
|
5,582,095 |
|
|
|
5,829,431 |
|
|
|
722,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Others mainly represent the revenues earned through sales of motor vehicle chassis and power
generators. |
29 |
|
Foreign currency exchange |
|
|
|
The Renminbi is not fully convertible into foreign currencies. All foreign exchange
transactions involving Renminbi must take place either through the PBOC or other institutions
authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange
transactions are the rates of exchange quoted by the PBOC which are determined largely by supply
and demand. |
|
|
|
Foreign currency payments, including the remittance of earnings outside of the PRC, must be
arranged through banks authorized to conduct foreign exchange business. |
|
30 |
|
Distribution of profits |
|
|
|
The Companys sources of cash flow are its share of the dividends, if any, paid by Yuchai and
TCL to the Company. With respect to dividends by Yuchai, applicable PRC laws and regulations
require that, before it can distribute profit to its stockholders it must satisfy all tax
liabilities, recover losses in previous years and make contributions to certain statutory reserves
as discussed in Note 22. Such dividends may be paid partly in Renminbi and partly in foreign
currency. In the event that dividends are distributed in Renminbi, the dividends may be converted
into foreign currency and remitted in accordance with relevant PRC laws, regulations and policies
and to the extent permitted by PRC market conditions. Dividends of Yuchai are determined based on
distributable profit reported in its PRC GAAP financial statements, after appropriation to
statutory reserves. Such distributable profits differ from the amounts reported under U.S. GAAP.
No similar provisions were imposed with respect to dividends by TCL. |
|
|
|
Under the Companies Act of 1981 of Bermuda (as amended), the Companys contributed surplus is
available for distribution to stockholders. |
|
31 |
|
Derivative instrument and hedging activities |
|
|
|
For the periods presented, the Company and its subsidiaries did not enter into transactions
with respect to derivative instruments. The Company and its subsidiaries do not hedge risk
exposures or speculate using derivative instruments. |
F - 54
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
32 |
|
Fair value of financial instruments |
|
|
|
The fair value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amount of cash and cash
equivalents, trade accounts receivable, bills receivable, short term amounts due from related
parties, prepaid expenses, other receivables, short-term bank loans, current instalments of
long-term bank loans, trade accounts payable, amount due to the holding company and amounts due to
related parties approximates their fair value because of the short maturity of these instruments.
It was not practicable for Yuchai to estimate the fair value of its equity investment for which a
quoted market price is not available because it has not yet obtained or developed the valuation
model necessary to make the estimate, and the cost of obtaining an independent valuation appears
excessive considering the materiality of the equity investment to Yuchai. Yuchai does not believe
the carrying value of the equity investment will be significantly different from its fair value. |
|
|
|
Cash and cash equivalents of Yuchai and its subsidiaries denominated in foreign currencies have
been translated at the balance sheet date into Renminbi at rates quoted by the PBOC. Yuchai does
not have and does not believe it will have any difficulty in exchanging its foreign currency cash
for Renminbi. |
|
|
|
The carrying amount of long-term bank loans approximates their fair value based on the borrowing
rates currently available for bank loans with similar terms and average maturities. |
|
33 |
|
Significant concentrations and risks |
|
(a) |
|
Customer concentration |
|
|
|
Substantially all of the Companys customers are located in the PRC. The following are the
customers that individually comprise 10% or more of gross revenue in any of the relevant periods: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
|
Rmb |
|
|
Rmb |
|
|
Rmb |
|
|
US$ |
|
Liuzhou Dongfeng
Automobile (see Note (i)) |
|
|
391,086 |
|
|
|
830,018 |
|
|
|
385,049 |
|
|
|
47,712 |
|
Hubei Dongfeng
Automobile (see Note (ii)) |
|
|
613,448 |
|
|
|
344,910 |
|
|
|
333,452 |
|
|
|
41,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
(i): |
|
Sales to Liuzhou Dongfeng Automobile for the year ended December 31, 2003, 2004 and 2005 was
approximately 8.6%, 14.9% and 6.6% of total sales. |
|
(ii): |
|
Sales to Hubei Dongfeng Automobile for the year ended December 31, 2003, 2004 and 2005 was
approximately 13.4%, 6.2% and 5.7% of total sales. |
F - 55
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
33 |
|
Significant concentrations and risks (continued) |
|
|
|
All the above customers are controlled by or affiliated with Dongfeng Automobile Company. At
December 31, 2004 and 2005, approximately 29% and 13% of gross trade accounts receivable,
respectively, were due from these customers. The Company considers its relationships with these
major customers to be good; however, the loss of one or more of the Companys major customers would
have a material adverse effect on the Companys results of operations. |
|
(b) |
|
Nature of operations |
|
|
|
During periods of economic expansion, the demand of trucks, construction machinery and other
application of diesel engines generally increases. Conversely, during economic slowdowns the
diesel engine industry is generally adversely affected by a decline in demand. As a result, the
performance of Chinese economy will affect the Companys business and prospects by a significant
degree. |
|
(c) |
|
Transactions involving Yuchai's Chinese shareholders |
|
|
|
Although the Company has proper legal ownerships and a
controlling financial interest of 76.41% interest in Yuchai, the Company has
from time to time encountered difficulties in obtaining the cooperation of the State Holding Company and Coomber. As part of the terms of
the Reorganization Agreement, Yuchai and State Holding Company acknowledged and reaffirmed the Companys continued rights as majority shareholder
to direct the management and policies of Yuchai through Yuchais board of directors. However, no assurance can be given that disagreements or
difficulties with Yuchais management of State Holding Company
and Coomber will not recur. In addition, as described in Note 5,
Yuchai has entered into transactions that involves the Chinese
Shareholders that have resulted in losses. No assurance can be given that future transactions
involving the State Holding Company, Coomber and their related parties will be conducted on an arm-length basis or otherwise be beneficial to the Company.
Consequently, such disagreements, or difficulties and transactions involving State Holding Company, Coomber and their related parties could have a material adverse impact on the Companys consolidated financial position, operating results and cash flows. |
|
34 |
|
Subsequent events |
|
(a) |
|
Acquisition of debt and equity in an investment-holding company |
|
|
|
In February 2006, the Company acquired S$129 million (equivalent to Rmb 626 million) in
principal amount of secured bonds (the Bonds), 123,010,555 redeemable convertible preference
shares (the Preference Shares), and 191,413,465 ordinary shares (the Ordinary Shares) (collectively, the Sale
Securities) issued by LKN for an aggregate purchase consideration of approximately S$132 million
(equivalent to approximately Rmb639 million) (the Aggregate Purchase Consideration) from certain
banks, financial institutions, corporations and individuals (collectively the Sellers). Immediately following the purchase, the Company hold 29.13% of the Ordinary Shares based on LKNs total issued and
outstanding Ordinary Shares or approximately 40.30% of the Ordinary Shares of LKN assuming full
conversion of the 123,010,555 Preference Shares. |
|
|
|
LKN is a company listed on the Main Board of the Singapore Exchange and is primarily engaged in the
business of investment holding, including investing in rental property and hospitality business in
Asia. |
|
|
|
The Company initially intends to account for the
Ordinary Shares of LKN using equity method and the Bonds and Preference Shares as
available-for-sale securities. |
F - 56
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
34 |
|
Subsequent events (continued) |
|
(b) |
|
Right issue of LKN |
|
|
|
On February 28, 2006, LKN announced a proposed renounceable rights issue of zero coupon unsecured
non-convertible bonds due 2009 (the New Bonds) and non-redeemable convertible cumulative preference shares
in the capital of LKN (the New NCCPS) (the Rights
Issue). The purpose of the Rights Issue of LKN is to raise funds for redeeming the existing Bonds and for
working capital purpose. The Company has provided LKN an irrevocable undertaking to subscribe in
full and by way of excess application, all New Bonds and New NCCPS not taken up by other
stockholders of LKN. |
|
|
|
On July 4, 2006, the Company was alloted 196,201,374 of
New NCCPS and S$130,800,917 of New Bonds at a consideration of
S$135 million (equivalent to approximately
Rmb655 million). Assuming full conversion
of the existing Preference Shares and New NCCPS, the Companys
equity interest in LKN would increase from 40.3% to 51.7%. In the
event the Company obtains a controlling financial interest in LKN,
then LKN would become a subsidiary of the Company and its financial
statement would be included in the consolidated financial statements
of the Company from that point forward. |
|
(c) |
|
Rights issue of TCL |
|
|
|
In January 2006, TCL conducted a renounceable non-underwritten rights issue of new shares (Rights
Shares) at an issue price of S$0.08 (equivalent to approximately Rmb0.39) for each Rights Share;
and a renounceable non-underwritten rights issue of unsecured 2% convertible bonds due 2009
(Convertible Bonds) in the denomination of S$0.8 (equivalent to approximately Rmb3.9) for each
Convertible Bond. |
|
|
|
On February 16, 2006, the Company was allotted 87,860,288 Rights Shares and 52,933,440 Convertible Bonds in TCL
for an aggregate cash consideration of S$49,400,000 (equivalent to approximately Rmb239,758). |
|
|
|
As a result of the rights issues, the Companys equity interest in TCL increase from 15.99% to
19.36%, and would increase to 36.85% assuming full conversion of the Convertible Bonds held by the Company. |
F - 57
CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)
(Rmb and US$ amounts expressed in thousands, except per share data)
34 |
|
Subsequent events (continued) |
|
(d) |
|
New bank facility |
|
|
|
In January to March 2006, the Company entered into additional unsecured credit facilities with certain banks for
approximately S$170 million (equivalent to approximately Rmb825 million). The facilities may only
be utilized by the Company in connection with certain limited circumstances relating to its
business expansion activities. The terms of the facilities require, among other things, that HLA
retains ownership of the Companys special share and that the Company remains a consolidated
subsidiary of HLA. The terms of the facilities also include certain financial covenants with
respect to the Companys tangible net worth and net gearing ratio throughout the tenor of the
facility, as well as negative pledge provisions and customary drawdown requirements and events of
default. |
|
(e) |
|
Issuance of corporate bonds by Yuchai |
|
|
|
In March 2006, Yuchai applied to the PBOC to issue short term bonds
up to Rmb1,000,000 (US$123,912). The application was approved by PBOC on May
30, 2006 and the first tranche of bonds of Rmb500,000 (US$61,956) was
issued on June 12, 2006. The bonds were issued at a discount
and an amount totalling
Rmb488 million was received by Yuchai. The bonds mature on
March 9, 2007 and the funds will be used to pay off existing bank loans. |
F - 58