BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LTD
UNITED STATES
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, 2006
OR
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o |
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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
OR
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o |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 1-11412
BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LIMITED
(Exact name of Registrant as specified in its charter)
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Not Applicable
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Bermuda |
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(Translation of Registrants name into English)
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(Jurisdiction of Incorporation or Organization) |
Suites 1602-05, Chater House, 8 Connaught Road Central, Hong Kong
(Address 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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Exchange on which registered |
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American Depositary Shares
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New York Stock Exchange, Inc. |
Ordinary Shares, par value US$0.01 per share
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The Stock Exchange of Hong Kong Limited |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Number of outstanding shares of each of the issuers classes of capital or common stock as of December 31, 2006:
3,668,390,900 Ordinary Shares, par value US$0.01 per share
2,382,966 American Depositary Shares, each representing 100 Ordinary Shares
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
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 þ No o
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 Filero Accelerated Filerþ Non-Accelerated Filero
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 þ
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
CONVENTIONS
Unless the context otherwise requires, references in this annual report to we, us, our,
the Company or Brilliance China Automotive are to Brilliance China Automotive Holdings Limited
and its consolidated subsidiaries and their respective operations. References to China or PRC
are to the Peoples Republic of China, but do not apply to Hong Kong, Macau or Taiwan for purposes
of this annual report.
FORWARD-LOOKING STATEMENTS
Certain information contained in this annual report that does not relate to historical
financial information may be deemed to constitute forward-looking statements. The words or phrases
will likely result, are expected to, will continue, is anticipated, estimate,
project, believe or similar expressions identify forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to
certain risks and uncertainties that could cause actual results to differ materially from
historical results and those presently anticipated or projected. Brilliance China Automotive
wishes to caution readers not to place undue reliance on any of these forward-looking statements,
which speak only as of the date made. Among the factors that could cause Brilliance China
Automotives actual results in the future to differ materially from any opinions or statements
expressed with respect to future periods include:
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unexpected adverse effects on the economy of the Peoples Republic of
China, or China, and Chinas automobile sector in particular; |
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increased competition from other domestic and international automobile
manufacturers; |
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increased costs for raw materials and components; |
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possible further revaluation of the Renminbi against foreign currencies; and |
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fluctuations in foreign exchange rates. |
When considering these forward-looking statements, you should keep in mind the factors
described in Item 3 Key Information Risk Factors and other cautionary statements appearing
in Item 5 Operating and Financial Review and Prospects of this annual report. These risk
factors and statements describe circumstances that could cause actual results to differ materially
from those contained in any forward-looking statement.
CURRENCY TRANSLATION
Unless otherwise specified, all references in this annual report to U.S. dollars or US$
are to United States dollars; all references to Renminbi or Rmb are to Renminbi, which is the
legal tender currency of China; all references to H.K. dollars or HK$ are to Hong Kong dollars,
which is the legal tender currency of Hong Kong and all references to Euro and Euros are to the
legal tender currency of the European Monetary Union. On December 29,
2006, the noon buying rates in New York City for cable transfers of Renminbi, Hong Kong
dollars and Euros, as certified for customs purposes by the Federal Reserve Bank of New York
1
was US$1.00 = Rmb 7.8041, US$1.00 = HK$7.7771 and Euro 1.00 = US$1.3197. Unless otherwise specified,
translations of amounts from Renminbi, Hong Kong dollars and Euros to U.S. dollars for the
convenience of the reader have been made at those rates. No representation is made that the
Renminbi, Hong Kong dollar or Euro amounts could have been, or could be converted into U.S. dollars
at those rates or at any other rates. In addition, all financial information presented herein has
been prepared in accordance with United States generally accepted accounting principles, or U.S.
GAAP.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
Selected Financial Data
Historical Financial Information of Brilliance China Automotive
The following table presents the selected consolidated financial information of Brilliance
China Automotive and its subsidiaries as of and for the years ended December 31, 2002, 2003, 2004,
2005 and 2006, which have been derived from our audited consolidated financial statements. The
selected financial information for the years ended December 31, 2004, 2005 and 2006 and as of
December 31, 2005 and 2006 should be read in conjunction with, and is qualified in its entirety by
reference to, the financial statements, prepared in accordance with U.S. GAAP, included elsewhere
in this annual report, the accompanying notes thereto and Item 5 Operating and Financial Review
and Prospects. The financial statements and footnotes for the years ended December 31, 2002 and
2003 and as of December 31, 2002, 2003 and 2004 are not included in this annual report.
2
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(Amounts in millions, |
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As of and for the years ended December 31, |
except per share/ADS and operating data) |
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2002 |
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2003 |
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2004 |
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2005 |
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2006 |
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2006 |
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(Rmb) |
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(US$) |
Income Statement Data: |
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Total Sales |
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7,319.5 |
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10,109.6 |
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6,542.0 |
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5,469.0 |
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10,484.8 |
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1,343.5 |
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Cost of sales |
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5,411.3 |
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7,727.1 |
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5,491.3 |
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5,012.0 |
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9,960.6 |
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1,276.3 |
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Gross Profit |
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1,908.1 |
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2,382.4 |
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1,050.7 |
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457.0 |
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524.2 |
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67.2 |
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Selling, general and administrative expenses |
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1,067.2 |
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1,410.1 |
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1,510.4 |
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1,195.3 |
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1,384.7 |
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177.4 |
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Net income (loss) |
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610.5 |
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780.8 |
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1.2 |
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(671.3 |
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(386.1 |
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(49.5 |
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Balance Sheet Data: |
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Total assets |
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13,853.7 |
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18,288.2 |
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17,776.4 |
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14,692.3 |
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14,580.4 |
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1,868.3 |
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Current assets |
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8,263.0 |
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10,286.5 |
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9,428.3 |
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7,110.2 |
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7,768.6 |
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995.5 |
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Current liabilities |
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7,332.7 |
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8,031.0 |
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8,187.7 |
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8,059.8 |
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7,181.5 |
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920.2 |
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Capital stock |
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303.2 |
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303.4 |
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303.4 |
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303.4 |
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303.4 |
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38.9 |
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Total shareholders equity |
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6,005.3 |
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6,886.3 |
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6,857.7 |
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6,139.7 |
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5,765.9 |
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738.8 |
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Cash Flow Statement Data: |
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Payment for capital expenditure |
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798.8 |
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955.9 |
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999.1 |
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558.0 |
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304.2 |
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39.0 |
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Depreciation and amortization |
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270.6 |
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677.8 |
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603.0 |
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616.6 |
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811.5 |
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104.0 |
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Net cash flows provided by (used in) operating activities |
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1,913.0 |
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753.4 |
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(712.4 |
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883.4 |
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1,145.6 |
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146.8 |
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Net cash flows provided by (used in) investing activities |
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(2,209.9 |
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(2,491.3 |
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(729.2 |
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338.4 |
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514.8 |
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66.0 |
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Net cash flows provided by (used in) financing activities |
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365.9 |
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2,281.1 |
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853.9 |
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(1,622.9 |
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(1,035.7 |
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132.7 |
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Per Share/ADS Data: |
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Basic earnings (loss) per share |
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0.17 |
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0.21 |
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0.0003 |
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(0.1830 |
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(0.1053 |
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(0.01 |
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Basic earnings (loss) per ADS |
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16.65 |
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21.30 |
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0.03 |
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(18.30 |
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(10.53 |
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(1.3 |
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Diluted earnings (loss) per share |
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0.17 |
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0.21 |
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0.0003 |
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(0.1830 |
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(0.1053 |
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(0.01 |
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Diluted earnings (loss) per ADS |
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16.65 |
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21.16 |
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0.03 |
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(18.30 |
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(10.53 |
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(1.3 |
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Cash dividends declared per ADS(1) |
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1.48 |
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2.12 |
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1.07 |
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n/a |
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n/a |
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n/a |
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Operating Data: |
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Production
volume (units) |
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Minibus Deluxe model |
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8,620 |
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9,291 |
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7,682 |
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8,752 |
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14,277 |
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Minibus Mid-priced model |
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56,959 |
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65,734 |
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56,215 |
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48,131 |
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53,811 |
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Subtotal Minibuses |
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65,579 |
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75,025 |
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63,897 |
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56,883 |
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68,088 |
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Zhonghua Sedans(2) |
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8,890 |
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27,054 |
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11,806 |
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6,854 |
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63,560 |
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Total |
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74,469 |
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102,079 |
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75,703 |
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63,737 |
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131,648 |
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Sales volume
(units) |
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Minibus Deluxe model |
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9,017 |
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9,004 |
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6,626 |
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9,940 |
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14,196 |
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Minibus Mid-priced model |
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56,121 |
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65,614 |
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54,992 |
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50,060 |
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52,049 |
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Subtotal Minibuses |
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65,138 |
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74,618 |
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61,618 |
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60,000 |
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66,245 |
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Zhonghua Sedans(2) |
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8,816 |
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25,600 |
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10,982 |
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9,000 |
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62,281 |
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Total |
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73,954 |
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100,218 |
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72,600 |
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69,000 |
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128,526 |
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3
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(1) |
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Calculated using the respective U.S. dollar to Renminbi year-end
noon buying rates for the years presented. Brilliance China
Automotive declared cash dividends per ordinary share in H.K.
dollars in each of 2004, 2003 and 2002. |
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(2) |
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Commercial production of Zhonghua sedans began in August 2002. |
Exchange Rate Information
The following table sets forth certain information concerning exchange rates between Renminbi
and U.S. dollars for the periods indicated:
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Noon Buying Rate |
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Period |
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Period End |
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Average(1) |
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High |
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Low |
2002 |
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8.2800 |
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8.2772 |
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8.2800 |
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8.2765 |
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2003 |
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8.2767 |
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8.2771 |
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8.2800 |
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8.2765 |
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2004 |
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8.2765 |
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8.2768 |
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8.2774 |
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8.2764 |
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2005 |
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8.0702 |
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8.1826 |
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8.2765 |
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8.0702 |
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2006 |
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7.8041 |
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7.9574 |
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8.0702 |
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7.8041 |
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January 2007 |
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7.7714 |
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7.7883 |
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7.8127 |
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7.7705 |
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February 2007 |
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7.7410 |
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7.7468 |
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7.7632 |
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7.7410 |
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March 2007 |
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7.7232 |
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7.7338 |
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7.7454 |
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7.7232 |
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April 2007 |
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7.7090 |
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7.7190 |
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7.7345 |
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7.7090 |
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May 2007 |
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7.6516 |
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7.6758 |
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7.7065 |
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7.6463 |
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June 2007
(through June 20, 2007) |
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7.6180 |
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7.6465 |
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7.6680 |
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7.6175 |
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Source: |
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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. |
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(1) |
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Determined by averaging the rates on the last business day of each
month during the respective year and on the last business day of each
week during the respective month. |
4
Risk Factors
Brilliance China Automotive is subject to various changing competitive, economic, political
and social conditions in China, as well as special concerns and significant risks not usually
encountered by a United States company. These include the following:
Risks Relating to Brilliance China Automotive Minibus and Sedan Businesses
Brilliance China Automotive experienced a net loss of Rmb 386.1 million in 2006 and may not be
profitable in 2007 or in subsequent years.
Brilliance China Automotive recorded a net loss of Rmb 386.1 million (US$49.5 million) in 2006
as compared with a net loss of Rmb 671.3 million (US$83.2 million) in 2005. During the same
period, total sales of Brilliance China Automotive were Rmb 10,484.8 million (US$1,343.5 million),
representing a 91.7% increase from Rmb 5,469.0 million (US$677.7 million) in 2005. Although net
loss decreased and total sales increased compared to 2005, there is no assurance that sales of
vehicles by Brilliance China Automotive will not be affected in the future by the highly
competitive automobile market and economic conditions in China.
In 2006, Brilliance China Automotive also recognized a provision for impairment of goodwill of
Rmb 73.3 million (US$9.4 million) associated with one of its jointly-controlled engine
manufacturing companies due to lower than expected projected operating profits and cash flows.
Provision for impairment of property, plant and equipment was Rmb 29.2 million in 2006, primarily
due to the retirement from use of certain property, plant and equipment of the minibus and
automotive components segment. There can be no assurance that Brilliance China Automotive will not
be required to recognize an impairment loss on goodwill or a provision for impairment of the
property, plant and equipment, or any other provision in 2007 or in subsequent years.
As a result of these factors, Brilliance China Automotive may incur losses in 2007 and in
subsequent years, which could impact Brilliance China Automotives ability to implement its
business strategy and adversely affect its financial condition.
If demand for minibuses and sedans in China does not increase, and if Shenyang Automotive does not
increase its market share, the ability of Shenyang Automotive to increase its sales volume will be
adversely impacted.
The success of Brilliance China Automotives business strategy will depend on the ability of
its 51.0%-owned subsidiary, Shenyang Brilliance JinBei Automobile Co., Ltd., or Shenyang
Automotive, to increase substantially its sales volume. Such an increase can only be achieved if
Shenyang Automotive increases its market share or if there is an overall increase in the size of
the minibus and sedan markets in China. Although we experienced an increase in sales from
approximately 60,000 minibuses and 9,000 Zhonghua sedans in 2005 to 66,245 minibuses and 62,281
Zhonghua sedans in 2006, there can be no assurance that demand for Shenyang Automotives minibuses
and sedans will continue to grow. If overall demand for domestic minibuses and sedans decreases in
the future, the ability of Shenyang Automotive to increase its sales volume or market share could
be adversely affected.
5
Delays in the development of new products, lack of consumer acceptance of new products and
unforeseen shifts in consumer preferences may have a negative effect on Brilliance China
Automotives financial results.
Meeting consumer demand with new vehicles developed over increasingly shorter product
development cycle times is critical to Brilliance China Automotives continued success. Brilliance
China Automotives ability to strengthen its position within its traditional minibus segment while
it continues to expand into additional market segments such as sedans, will play a key role in
determining its future success. In order to compete successfully within its traditional markets, as
well as to enter new markets with new product offerings, Brilliance China Automotive must assess
trends in consumer preferences, modify existing products or develop new products to match those
trends and deliver to market these newly developed or modified products before such preferences
change. Delays in the development of new products, lack of consumer acceptance of new products and
unforeseen shifts in consumer preferences may have a negative effect on Brilliance China
Automotives financial results.
Brilliance China Automotive has experienced a management turnover and could continue to have
problems retaining and recruiting key personnel in the future.
Brilliance China Automotive had a turnover of its directors and executive officers in 2004,
2005 and 2006, and this trend of management changes may continue in the future. In 2004, three of
its directors had either resigned or retired. Of the three directors who resigned or retired in
2004, one was an executive director and two were independent non-executive directors. In 2005,
three executive directors resigned. Of the three directors who resigned in 2005, one was the
President and Chief Executive Officer, another was the Vice President and Chief Financial Officer,
and the third was the Vice Chairman, Executive Vice President and Company Secretary. In 2006, an
executive director, who was appointed in 2004 as President and Chief Executive Officer to fill the
then vacant positions, resigned and a non-executive director retired. In addition, in 2006,
Brilliance China Automotives Chief Financial Officer resigned and one of the executive directors
was appointed subsequently to fill this role. Brilliance China Automotive appointed a new
President and Chief Executive Officer, two new Chief Financial Officers and new executive directors
and independent non-executive directors between 2004 and now and there can be no assurance that
this relatively new management team will be as effective in implementing Brilliance China
Automotives business strategies or that any of the new strategies that the new management team may
decide to implement will achieve its intended objectives.
Brilliance China Automotives success depends to a large degree upon the continued
contributions of key management and other personnel, some of whom could be difficult to replace.
There can be no assurance that Brilliance China Automotive will be able to recruit or retain
suitable candidates, and turnover of senior management can adversely impact Brilliance China
Automotives stock price and customer relationships as well as make recruiting for future
management positions more difficult. In addition, Brilliance China Automotive must successfully
integrate any new management personnel that it recruits in order to achieve its operating
objectives, and changes in other key management positions may temporarily affect its financial
performance and results of operations as new management may need time to become familiar with its
business. Accordingly, Brilliance China Automotives future financial
6
performance will depend to a great extent on its ability to motivate and retain key management
personnel.
There are risks involved in Brilliance China Automotives joint venture with BMW to produce BMW
sedans in China.
On March 27, 2003, Brilliance China Automotive, through its indirect subsidiary, Shenyang
JinBei Automotive Industry Holdings Company Limited, or SJAI, entered into a joint venture contract
with BMW Holding BV, or BMW Holding, to assemble, produce and sell BMW designed and branded sedans
in China. Production began in September 2003 and the 3-Series and 5-Series sedans were formally
launched in China in October and November 2003, respectively. There are risks involved in this
joint venture, including, but not limited to, the ability of the joint venture to obtain adequate
financing as and when necessary, obtain timely delivery of imported components and parts, source
necessary components at competitive prices, successfully develop, manufacture, market and sell BMW
sedans in China, and obtain appropriate approvals for its new products from governmental
authorities in China. Brilliance China Automotive currently has a 49.5% effective interest in the
joint venture and provides guarantees for the performance of all obligations of SJAI, including
required capital contributions.
Failure by Brilliance China Automotive to continue to form and maintain alliances with foreign
automobile manufacturers could adversely affect its competitiveness.
In order for Brilliance China Automotive to remain competitive and obtain additional
technology and financing, it is crucial that it enters into and maintains alliances with foreign
motor vehicle manufacturers. This is particularly true since Chinas accession to the World Trade
Organization, or the WTO, in November 2001. As a result of the reduction in import restrictions,
more automobile manufacturers have been and will be entering Chinas motor vehicle market. If
Brilliance China Automotive cannot maintain its existing alliances with Toyota and BMW or form
strategic alliances with other foreign automobile manufacturers regarding the establishment of
joint ventures and the procurement of necessary components on commercially beneficial terms, its
competitive position will be adversely affected.
The inability of Shenyang Automotive to access Toyotas technical resources to upgrade Shenyang
Automotives products, or Toyotas provision of assistance to any of Shenyang Automotives
competitors could negatively impact Shenyang Automotives sales and competitive position.
Shenyang Automotive has historically relied to a significant extent on Toyota for technical
assistance for its minibuses. On December 17, 2001, Shenyang Automotive entered into an agreement
with Toyota for the technology transfer of the fifth generation of the Toyota minibus the
Granvia for which production based upon semi-knockdown kits from Toyota commenced in 2003. In
the first half of 2004, the Granvia, which is marketed under the brand name Granse (known as
Grace before February 2004) when sold in China by Brilliance China Automotive, entered into
commercial production, with more than 60% of its parts and components from domestic sources.
Although Shenyang Automotive has introduced new products, including its successful mid-priced
minibus, incorporating styling and engineering
7
refinements and modifications without assistance from Toyota, lack of access to Toyotas
technical resources may limit Shenyang Automotives ability to upgrade significantly its existing
Toyota-designed products. Failure to update its existing models could eventually result in
Shenyang Automotives products becoming technologically inferior to its competitors products,
which could have an adverse impact on Shenyang Automotives sales. Although Brilliance China
Automotive has no knowledge of any intention of Toyota to produce, or assist a current or potential
competitor in the production of, minibuses similar to those of Shenyang Automotive in China,
neither Brilliance China Automotive nor Shenyang Automotive could prohibit Toyota from doing so.
Any delay or disruption in Shenyang Automotives ability to obtain engines from Toyota could limit
Shenyang Automotives ability to produce its deluxe minibuses.
While Shenyang Automotive is currently in the process of replacing the Toyota engines used in
some of its minibus models with engines from Mitsubishi, Mianyang Xinchen Engine Co., Ltd., or
Mianyang Xinchen, and Shenyang Xinguang Brilliance Automobile Engine Co., Ltd., or Xinguang
Brilliance, currently most of the engines installed in Shenyang Automotives Granse deluxe
minibuses are purchased from Toyota on a commercial basis. Shenyang Automotive generally maintains
an inventory of Toyota engines sufficient to sustain two months of planned production. To date,
Shenyang Automotive has not experienced any material disruption in its supply of engines from
Toyota. Changes in regulatory requirements, tariffs and other trade barriers and price or exchange
controls could, however, hinder Shenyang Automotives ability to import engines. An extended
disruption or reduction in Shenyang Automotives supply of Toyota engines would consequently limit
Shenyang Automotives ability to produce Granse deluxe minibuses.
Any delay or disruption in Shenyang Automotives ability to obtain engines could limit Shenyang
Automotives ability to produce its Zhonghua sedans.
Currently all of the Mitsubishi engines installed in Brilliance China Automotives Zhonghua
sedans are purchased from Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co., Ltd., or
Shenyang Aerospace, and Harbin DongAn Automotive Engine Manufacturing Co. Ltd., or Harbin DongAn,
on a commercial basis. Shenyang Aerospace is an associated company of Brilliance China Automotive,
in which Brilliance China Automotive has currently an indirect 12.8% equity interest. Harbin
DongAn is a joint venture between Harbin DongAn Engine Group, Mitsubishi Group and Malaysia China
Investment Holding Company. See Item 4 Information on the Company Business Overview
Other Significant Subsidiaries, Jointly Controlled Entities and Associated Companies Shenyang
Aerospace. Shenyang Automotive is currently in discussions with other domestic and overseas
engine manufacturers, with a view towards broadening its engine sourcing for its Zhonghua sedans,
and considering using foreign designs to produce domestically made engines for sedans and
minibuses. Shenyang Automotive generally maintains an inventory of Mitsubishi and Harbin DongAn
engines sufficient to sustain two months of planned production. To date, Shenyang Automotive has
not experienced any material disruption in its supply of engines from Shenyang Aerospace and Harbin
DongAn. However, there can be no assurance that Shenyang Automotive will at all times be able to
obtain a steady supply of Mitsubishi engines from Shenyang Aerospace and Harbin DongAn. An
extended disruption or reduction in Shenyang Aerospaces
8
and Harbin DongAns supply of engines to Shenyang Automotive would consequently limit Shenyang
Automotives ability to produce its Zhonghua sedans.
In addition, Shenyang Automotive began to install engines manufactured by its new engine plant
in its Zhonghua sedans in March 2007. There is no assurance that these new engines will be
successful or will not have quality-related problems. If Shenyang Automotive is not able to timely
manufacture these new engines with the desired quality, Shenyang Automotives ability to produce
its Zhonghua sedans may be materially and adversely affected.
If Brilliance China Automotive fails to upgrade its existing production facilities or build new
facilities in a timely and cost-efficient manner, its businesses, financial condition and results
of operation may be negatively affected.
In order to maintain its competitive edge, Brilliance China Automotives strategy is to
upgrade its production facilities, including molding, welding, painting and assembly facilities and
build new facilities, such as its new engine plant. Any failure or delay in implementing such
upgrading or construction plans in a timely and cost-efficient manner could limit its future growth
and have a material adverse effect upon Brilliance China Automotives businesses, financial
condition and results of operations.
Shenyang Automotives competitors may have access to more advanced technology, greater financial
resources and more substantial support from the Chinese government, which could negatively affect
Shenyang Automotives competitive position.
Some of Shenyang Automotives competitors have formed joint ventures with, or licensed
technology from, foreign automobile manufacturers, and others may do so in the future. These
competitors may have access to greater financial resources than Brilliance China Automotive or to
technology and equipment that are more advanced than the technology and equipment utilized by
Brilliance China Automotive. In addition, some of Shenyang Automotives potential competitors may
receive substantial support from the Chinese government, including priority access to loans,
favorable import quotas and tariffs, expedited approvals of proposed projects and products and
preferential tax treatment. Such advantages may make it difficult for Shenyang Automotive to
compete with these other automobile manufacturers.
Huachen, as Brilliance China Automotives substantial shareholder, may not always act in the best
interest of other shareholders.
Huachen, a wholly owned subsidiary of the Liaoning Provincial Government, currently owns 39.4%
of the issued and outstanding shares of Brilliance China Automotive. Accordingly, Huachen is
entitled to cast 39.4% of the votes on all matters voted on by the shareholders of Brilliance China
Automotive (to the extent it is not required to abstain from exercising its voting rights under the
Bye-laws of Brilliance China Automotive and applicable laws and regulations), and therefore is able
to exert substantial influence over the election of Brilliance China Automotives directors, the
outcome of actions requiring majority shareholder approval and the business in general of
Brilliance China Automotive. Such influence could preclude the ability of minority shareholders to
influence important business decisions of Brilliance China Automotive,
9
and may result in actions by Brilliance China Automotive that are not in the best interest of
its minority shareholders.
Significant changes in the cost or availability of raw materials or components may have a material
adverse impact on Brilliance China Automotives results of operations.
Brilliance China Automotive has established relationships with over 280 suppliers in the PRC
and sources the majority of its important components and raw materials from at least two different
suppliers to ensure availability and increase competition among suppliers. Brilliance China
Automotive has also made significant progress in increasing the domestic component content of its
products. However, certain principal components of BMW sedans continue to be imported from overseas
suppliers. For example, certain components used in sedans produced by BMW Brilliance Automotive
Ltd., or BMW Brilliance, are imported from BMW Group and certain other components used in minibuses
are imported from Toyota. Because these components are imported from the BMW Group, Toyota and
other suppliers in Europe and Japan, the costs as well as availability of such components may be
affected by exchange rates, import restrictions, customs clearance, shipment schedules and import
duties and consequently drive up Brilliance China Automotives costs of production. In addition,
unexpected disruptions in the supply of certain components, particularly from foreign suppliers,
may also require using alternative suppliers or cause delays in the production process.
Furthermore, an increase in the price of electricity or certain raw materials, such as steel, may
result in increased costs of production. Significant changes in the cost or availability of raw
materials or components may have an adverse impact on Brilliance China Automotives results of
operations.
Product liabilities and recall claims may adversely affect Brilliance China Automotives results of
operation.
Manufacturers and sellers of defective products in China or other countries may be subject to
liability for losses and injury caused by such defective products under the laws of China and other
jurisdictions. However, there is currently no compulsory legal requirement under PRC legislation
for automobile manufacturers to maintain insurance coverage in respect of production interruption,
product liability or damage to third party properties. Brilliance China Automotive does not carry
product liability insurance or insurance against losses due to production insurance, product
recalls or damage to third party properties. Brilliance China Automotive cannot guarantee that
product liability claims will not be brought against Brilliance China Automotive or its
subsidiaries and affiliates in the future, and, if such claims are successful, that such claims
will not have a material adverse impact upon Brilliance China Automotives results of operations,
or that the Chinese government will not impose new requirement for sufficient insurance to be
maintained to cover the risks associated with Brilliance China Automotives China operations,
including those of Shenyang Automotive.
Brilliance China Automotives business and future growth depend on availability of funding.
Research and development is capital intensive. Capital costs are funded by Brilliance China
Automotive from operating cash flow and financing. The availability of future borrowings and
access to the capital markets for financing depend on prevailing market conditions and the
acceptability of the financing terms offered. Brilliance China Automotive
10
cannot assure that future financings will be available on acceptable terms, or in amounts
sufficient to fund its needs. If Brilliance China Automotive fails to obtain sufficient funding,
it may be unable to implement its expansion plans, which may have a material adverse impact upon
its business and financial condition.
Brilliance China Automotive is required to comply with increasingly stringent environmental, safety
and other standards applicable to its vehicles and manufacturing facilities.
Brilliance China Automotives production facilities are subject to government pollution
regulations enforced by the relevant local governments. In addition, the Chinese government has
set vehicle safety, exhaust and performance standards with which Brilliance China Automotive must
comply. Brilliance China Automotives operations are sensitive to changes in the Chinese
governments environmental policies relating to all aspects of the automobile manufacturing. There
is no assurance that changes in such policies would not have an adverse effect on the revenue or
results of operations of Brilliance China Automotive. In addition, as Brilliance China Automotive
expands its exports to other overseas markets such as the Middle East, Southeast Asia, and Europe,
it may be subject to more stringent environmental, safety or other tests and standards in the
markets to which Brilliance China Automotive exports its products. There is no assurance that our
products will pass such tests, which could delay entry into new segments or markets and have a
negative impact on our business operations.
Brilliance China Automotive is exposed to potential risks and increased costs from the requirements
to evaluate internal control over financial reporting under the Sarbanes-Oxley Act of 2002, and has
identified material weaknesses in its internal control as a result of such evaluation.
The United States Securities and Exchange Commission, as required by Section 404 of the
Sarbanes-Oxley Act of 2002, adopted rules requiring every public company in the United States to
include a management report on such companys internal control over financial reporting in its
annual report, which contains managements assessment of the effectiveness of the companys
internal control over financial reporting. In addition, an independent registered public
accounting firm must attest to and report on managements assessment of the effectiveness of the
companys internal control over financial reporting. The requirement for our management to
evaluate and report on internal control over financial reporting first applies to this annual
report on Form 20-F for the fiscal year ending December 31, 2006. The requirement for us to
provide an auditors report on internal control over financial reporting will apply to our annual
report for the fiscal year ending December 31, 2007.
In preparation for the implementation of the requirements of Section 404, we undertook a
company-wide review and documentation of internal controls, performing the system and process
evaluation required, and have completed the process of reviewing and documenting the system of
internal control over financial reporting to provide the basis for managements report which is set
out in Item 15 Controls and Procedures. As a result of this evaluation, certain material
weaknesses in our internal control over financial reporting, as set forth in Item 15 Controls
and Procedures, were identified.
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For the material weaknesses we have identified, we are in the process of implementing remedial
measures and establishing controls to address these weaknesses, as set forth in Item 15
Controls and Procedures. However, the implementation of these corrective measures is not yet
complete and such measures have not been tested for their effectiveness. We cannot assure you that
these measures would be effective in remedying such material weaknesses.
Due to ongoing evaluation and testing of our internal control over financial reporting, there
is no assurance that there may not be significant deficiencies that would be required to be
reported or that our management will conclude that our internal control over our financial
reporting are effective in the future. Moreover, even if our management concludes that our
internal control over financial reporting are effective, our independent registered public
accounting firm may still be unable to attest to our managements assessment or may issue a report
that concludes that our internal controls over financial reporting are not effective. If we fail
to achieve and maintain the adequacy of our internal controls, we or our auditors may not be able
to conclude that we have effective internal controls, on an ongoing basis, over financial reporting
in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly
those related to revenue recognition, are necessary for us to produce reliable financial reports. As a result, our failure to achieve and maintain
effective internal controls over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could harm our business
and negatively impact the trading prices of our ADSs. Furthermore, we have already incurred
considerable costs and spent significant management time and other resources in an effort to comply
with Section 404 and other requirements of the Sarbanes-Oxley Act. We anticipate that we will
continue to incur considerable costs and use significant resources for purposes of compliance with
Section 404.
There is no assurance that the research and development carried out by Brilliance China Automotive
will materialize in products that can achieve market acceptance.
Brilliance China Automotive invests and plans to continue to invest capital and other
resources to develop or acquire proprietary automobile-related technologies. As the development of
proprietary technologies is a highly complex, uncertain and costly process, there is no assurance
that Brilliance China Automotive can successfully develop and commercialize new products based on
its new technologies and innovations (or to do so in a timely manner), or that any new products
that Brilliance China Automotive introduces will achieve market acceptance. For example,
Brilliance China Automotive recently began manufacturing engines at its new engine plant for
installation in its sedans. Sedans equipped with these engines were formally launched to the
market in March 2007. Brilliance China Automotive has made significant investments for the
development and manufacture of these new engines and there is no assurance that the engines built
at the new engine plant will achieve the desired quality or market
12
acceptance. If Brilliance China Automotives efforts to commercialize new products developed
based on such technologies are unsuccessful, it may not be able to recover its investment in such
technologies and may suffer losses as a result of the failure of such products.
Moreover, if Brilliance China Automotives research and development capabilities are
impaired, the development of Brilliance China Automotives products may be delayed which, in turn,
may adversely affect its business plans and operations.
Brilliance China Automotives intellectual property rights may be infringed by third parties and
Brilliance China Automotive may also face infringement claims brought by third parties.
Brilliance China Automotive has adopted strict policies to protect its existing and future
intellectual property under existing and future patent, copyright, trademark, trade secret and
unfair competition laws. However, policing breaches of its intellectual property rights is
difficult and sometimes impracticable. There is no assurance that the current measures taken by
Brilliance China Automotive will prevent infringement of Brilliance China Automotives intellectual
property rights. Counterfeit automobiles and automotive parts that improperly use Brilliance China
Automotives brands, technology or designs could cause it to lose sales and damage its reputation,
brands and product images. Even if Brilliance China Automotive succeeds in establishing
infringement claims against third parties, such parties may be unable to pay damages and expenses.
Brilliance China Automotive may also face infringement claims brought by third parties. These
claims against Brilliance China Automotive could cause it to incur significant legal fees and other
costs, divert its managements attention and cause significant disruptions to its businesses and
operations. If an infringement claim is successfully asserted against Brilliance China Automotive,
it could also be required to pay substantial monetary damages and be enjoined from further
production or sale of certain products, which could have a material adverse effect on its
businesses, results of operations and financial condition.
Brilliance China Automotive has uninsured risks.
Brilliance China Automotives insurance coverage, as of December 31, 2006, includes fire,
flood, riot, strike, malicious damage, business interruption, transportation, product and public
liability. However, there are certain types of losses, for instance, losses resulting from acts of
terrorism which are disproportionately expensive or practically infeasible for Brilliance China
Automotive to fully insure against, or to insure at all. Therefore, there may be circumstances in
which Brilliance China Automotive will not be fully insured for losses and liabilities, which may
in turn result in the interruption of its business. These uninsured losses and liabilities could
adversely affect the financial position of Brilliance China Automotive.
Brilliance China Automotives Zhonghua local brand may not succeed and Brilliance China
Automotive may subsequently suffer losses as PRC consumers give more weight to brand recognition as
they make automobile purchase decisions.
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The Zhonghua brand is considered one of the PRCs Local Brands of domestically produced
vehicles. This Local Branding approach encourages PRC auto companies to establish and grow their
self-established auto name brands and to use domestic technologies, production facilities and
components to build vehicles. Shenyang Automotives Zhonghua was recognized as a well-known
Local Brand shortly after its launch. However, because PRC customers have associated auto brands
with automobile quality, innovation and reliability, and brand recognition has become an
increasingly important factor in consumers decisions in purchasing vehicles, certain foreign auto
brands still have substantial brand recognition advantage over these Local Brands. Thus,
although Shenyang Automotive has committed itself to this branding approach and has made efforts to
boost its brand recognition, there can be no assurance that this approach will be effective in the
long run, nor can there be assurance that Zhonghua as well as other brands Brilliance China
Automotive may launch in the future can withstand the severe competition from the long-established
foreign auto brands.
Risks Relating to the Minibus and Sedan Industries in China
Chinas automobile demands may become more volatile due to macroeconomic factors.
After rapid growth between 2000 and 2003, Chinas sedan industry growth slowed down
significantly in 2004. In particular, the sales volume increased 71.0% from 2002 to 2003, as
compared to only 19.3% from 2003 to 2004. Chinas sedan industry has however showed improvement
since 2005. According to the China Auto Industry Comprehensive Analysis and China Auto
Association, sedan sales volume increased by 21.3% to 2,784,629 sedan units in 2005, compared to
the 2,294,752 sedan units sold in 2004. In 2006, sedan sales volume further increased by 36.9% to
3,811,607 sedan units as compared to that in 2005. Sales performance in Chinas sedan market also
improved in the first four months of 2007 with a total of 1,533,435 sedan units being sold,
compared to the 1,206,185 sedan units sold in the same period in 2006, an increase of 27.1% year on
year. However, there is no assurance that this growth will continue.
The demand for automobiles in China is affected by various factors beyond Brilliance China
Automotives control, including:
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economic and monetary policies implemented by the Chinese government; |
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availability of automobile consumption loans; |
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availability of automobile insurance policies; |
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consumer confidence; |
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volatility in petroleum, diesel and other commodity prices; and |
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development of transportation infrastructure, for example express ways. |
If the general economy in China slows down or the Chinese government adopts new policies that
adversely affect the automotive industry, the demand for automobiles is also likely to experience a
significant downturn.
14
Over the years, Brilliance China Automotive has been increasing its production capacities in
anticipation of a significant increase in automobile demand in China. Any slow down in automobile
demand in China, such as that experienced in 2004, may lead to an increase in Brilliance China
Automotives inventory and could result in a significant underutilization of its production
capacity. As a result, Brilliance China Automotives results of operations and financial condition
could be materially and adversely affected.
Competition is intense in Chinas automobile industry.
Brilliance China Automotive currently faces intense competition mainly from other Chinese
domestic automobile manufacturers. Many of Brilliance China Automotives competitors have joint
ventures with leading foreign automobile manufacturers and may have significantly more resources
than Brilliance China Automotive. Any further increase in competition may dilute Brilliance China
Automotives market share and reduce its profit margin. The competition that Brilliance China
Automotive faces also requires it to increase its marketing and development costs.
As Chinese automotive components and parts industry is highly fragmented, Brilliance China
Automotive competes with a large number of manufacturers in this market. Brilliance China
Automotive also competes with other automobile manufacturers and automotive components and parts
manufacturers in the hiring and retention of management and skilled employees. There can be no
assurance that Brilliance China Automotive will be able to compete successfully with its
competitors in the automobile and automotive components and parts industries. If Brilliance China
Automotives competitors gain a competitive advantage in terms of value for money, product quality,
brand recognition or financial resources, the market share, profitability and financial position of
Brilliance China Automotive may be adversely affected.
Reduced tariffs and import restrictions on foreign-made motor vehicles and motor vehicle components
as a result of Chinas entry into the WTO may lead to increased competition for Brilliance China
Automotive.
The Chinese government imposes restrictions, quotas and tariffs on the import of foreign-made
motor vehicles, as well as motor vehicle components. However, as a result of Chinas accession to
the WTO, which regulates trading and tariffs among its signatory states, in November 2001, China
has committed to reducing its import restrictions on motor vehicles and motor vehicle components.
In addition, China will be required to conform its import tariffs to the uniform tariffs under the
WTO.
Effective January 1, 2002, China reduced its import tariffs on motor vehicles and automotive
components from between 80% to 100% and between 18% to 40%, respectively, to between 43.8% to 50.7%
and between 14% to 31.4%, respectively. This range was lowered further to between 4.8% and 25% for
automotive components in 2003, between 5% and 22.9% in 2004 and between 5% and 18.6% in 2005. In
2006, the import tariffs on automotive components were reduced to between 5.0% and 14.3%. In
January 2007, they were further reduced to between 5.0% and 10.0%. In 2004, the average import
tariffs on automotive components for the deluxe minibuses (including Granse minibuses) and Zhonghua
sedans were 13.8% and 10.5%, respectively, and in 2005, the average tariffs became 9.7% and 12.1%
for the imported
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components for deluxe minibuses and Zhonghua sedans, respectively. In 2006, the average
tariffs were reduced to 8.2% and 10.4% for the imported components for deluxe minibuses and
Zhonghua sedans, respectively. In addition, tariffs on vehicles with nine seats or less and engine
sizes of three liters or below fell from 43.9% in 2002 to 38.2% in 2003, while tariffs on vehicles
with more than nine seats and engines of more than three liters decreased from 50.7% in 2002 to
43.0% in 2003. In 2004, tariffs were 34.2% for vehicles with nine seats or less and engine sizes
of three liters or less and 37.6% for vehicles with more than nine seats and engines of more than
three liters. In 2005, tariffs were fixed at 30% for all motor vehicles. These tariffs were
further reduced to 28% in January 2006 and 25% in July 2006.
Although lower tariffs and reduced import restrictions may benefit Brilliance China Automotive
in terms of lower cost of imported components, lower tariffs and reduced import restrictions could
also lead to a substantial increase in the number of minibuses, sport utility vehicles, sedans and
other motor vehicles imported into China, thereby significantly increasing competition in
Brilliance China Automotives current and proposed markets.
The automobile industry is heavily regulated in China, and automobile-related regulations may
become even more stringent in the future.
Brilliance China Automotive is subject to various laws, rules and regulations in China imposed
at national, provincial and municipal levels that regulate or affect Chinas automobile
manufacturing industry and automotive components and parts manufacturing industry, including:
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crash test requirements and other safety standards in relation to automobile and automotive parts
and components; |
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minimum warranty requirements; |
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automobile recall requirements; |
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noise, waste, discharge and other pollution controls relating to manufacturing of automobiles; |
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restrictions on road use, including time restriction and segmental restriction; and |
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market entry requirements and/or minimum production requirements for automobile and automotive
components and parts manufacturers. |
Moreover, every new product type must be approved by the Chinese government before it can be
introduced into the market. This approval process can sometimes be lengthy, and can impact the
ability of Brilliance China Automotive to introduce new products in a timely manner. This
regulatory framework may limit the flexibility of Brilliance China Automotive to respond to market
conditions or competition. The cost of complying with these policies and regulations can also be
significant. Brilliance China Automotives operations are sensitive to changes in the
16
Chinese governments policies relating to all aspects of the automobile industry. There can
be no assurance that changes in such policies would not have an adverse effect on the revenue or
results of operations of Brilliance China Automotive.
In addition, Chinas regulators may introduce in the future more stringent regulations and
measures which will affect Brilliance China Automotives automobile manufacturing and automotive
components and parts manufacturing businesses. On December 26, 2006, the regulators introduced new
measures to trim overcapacity in the PRC automobile industry and promote local brands. For
example, among other things, annual sales of automobile manufacturers in China must reach certain
levels in order for them to build new manufacturing plants. The imposition of any such more
stringent requirements may require Brilliance China Automotive to incur substantial and costly
changes to its automobile and/or automotive components and parts designs and its business structure
or organization, or restrict its ability to respond to changing market conditions or competition.
Moreover, Brilliance China Automotives failure to comply with such laws and regulations would
result in fines, penalties or lawsuits.
Chinas automobile industry is significantly dependent upon the economy of China.
The performance of Chinas automobile manufacturing industry is highly dependent on general
economic conditions and the purchasing power of Chinese consumers. Thus, the revenue and profits
of Brilliance China Automotive are subject to cyclical fluctuations and may be adversely affected
by any unfavorable changes in the economic conditions in China.
Increase in fuel prices may adversely affect demand for automobiles.
Fuel prices (including prices of petroleum and diesel) in China reached historical heights in
May 2006. Any further increase in fuel prices may:
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have an adverse impact on Chinas economy and may thereby result in a slow down for
automobile demand; |
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increase Brilliance China Automotives production costs due to increase in costs of
petrochemical products; and |
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discourage customers from purchasing automobiles due to increased running costs. |
If fuel prices continue to increase or remain at high levels, Brilliance China Automotives
sales and profitability could be materially and adversely affected.
Chinas re-adjustment of consumption taxes on vehicles may cause decline of demand for certain
models Brilliance China Automotive currently manufactures.
On April 1, 2006, the State Administration of Taxation of China, in an effort to encourage
environmental protection and fuel efficiency, re-adjusted consumption tax rates on passenger
vehicles (including imported vehicles). Before the re-adjustment, the consumption tax rate for passenger vehicles was a
three-tiered system: 3% for automobiles with engine displacement lower than 1.0 liter; 5% for
17
automobiles with engine displacements between 1.0 liter and 2.0 liters, and 8% for automobiles
with engine displacements above 2.0 liters. After the re-adjustment, tax rates on vehicles with
smaller engines (under 2.0 liters) either fell or remained unaltered, whereas tax rates on
automobile with larger engines were raised. The new tax rates are: 3% for 0.0-1.5 liters; 5% for
1.51-2.0 liters; 9% for 2.01-2.5 liters; 12% for 2.51-3.0 liters; 15%
for 3.01-4.0 liters; and 20%
for above 4.0 liters. Consequently, the tax rates on the BMW 3 and 5 series sedans produced by
BMW Brilliance, as well as the Zhonghua sedans equipped with the larger 2.4-liter engines, have
been raised by this re-adjustment. As a result of this new consumption tax regime, the prices of
the above-mentioned vehicles have increased, which may lower demand for these vehicles in 2007 and
subsequent years, and therefore negatively impact Brilliance China Automotives businesses and
results of operations.
Risks Relating to Chinas Economy and Regulatory System
Chinas economic, political and social conditions, as well as government policies, could affect
Brilliance China Automotives businesses.
Chinas economy differs from the economies of most developed countries in many respects,
including:
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extent of government involvement; |
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level of development; |
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growth rate; |
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control of foreign exchange; and |
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allocation of resources. |
While Chinas economy has experienced significant growth in the past 20 years, growth has been
uneven, both geographically and among the various sectors of the economy. The Chinese government
has implemented various measures to encourage economic growth and guide the allocation of
resources. Some of these measures benefit the overall PRC economy, but may also have a negative
effect on Brilliance China Automotives operations. For example, Brilliance China Automotives
financial condition and results of operations may be adversely affected by the Chinese governments
control over capital investments or any changes in tax regulations or foreign exchange controls
that are applicable to it.
Chinas economy has been transitioning from a planned economy to a more market-oriented
economy. Although in recent years the Chinese government has implemented measures emphasizing the
utilization of market forces for economic reform, the reduction of state ownership of productive
assets and the establishment of sound corporate governance in business enterprises, a substantial
portion of productive assets in China is still owned by the Chinese government. In addition, the
Chinese government continues to play a significant role in regulating the development of industries
in China by imposing top-down policies. It also exercises significant control over PRC economic
growth through the allocation of resources, controlling the payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to particular industries
or companies.
18
Exchange rate fluctuations may affect the results of operations of Brilliance China Automotive.
Brilliance China Automotives major operations are based in China and a significant proportion
of its turnover is derived from its operations in China.
The Renminbi was revalued on July 21, 2005 to Rmb 8.11 per US$1.00 from its previously pegged
rate of Rmb 8.28 per US$1.00. The Peoples Bank of China also announced that the Renminbi would be
pegged to a basket of foreign currencies, rather than tied solely to the U.S. dollar, and would
trade within a band against this basket of currencies, which includes, without limitation, U.S.
dollars, Euro, Japanese yen, South Korean won, British pounds, Thai baht and Russian ruble. This
change in policy has resulted in an approximately 6% appreciation of the Renminbi against the U.S.
dollar between July 21, 2005 and December 31, 2006. There is no assurance on whether there will be
any further revaluation of the Renminbi. Any further revaluation of the Renminbi may adversely
affect Chinas economy and may therefore lead to a downturn in the automobile demand in China.
Significant changes to Chinas income tax regime could have a material adverse effect on Brilliance
China Automotives results of operations.
On March 16, 2007, the National Peoples Congress of the PRC promulgated the PRC Enterprise
Income Tax Law, or the new EIT Law, which will take effect from January 1, 2008. According to the
new EIT Law, certain preferential income tax treatments currently applicable to domestic companies
will be phased out in five years beginning from January 1, 2008, and after such five-year period,
the applicable tax rate applicable to all domestic companies in the PRC with minor exceptions will
become 25%. To date, the relevant authorities have not yet issued any detailed rules implementing
the new EIT Law concerning the applicable income tax rates, computation of taxable income, as well
as any phase out of specific preferential tax treatments, and the related measures for the
transitional periods from 2008 and onwards have not been clarified. Consequently, Brilliance China
Automotive is not in a position to reasonably assess the impact, if any, of the carrying values of
deferred tax assets and deferred tax liabilities resulting from the implementation of the new EIT
Law. Any increase in Brilliance China Automotives effective tax rate as a result of the above may
adversely affect its operating results.
Budgetary constraints on Chinas government entities and state enterprises could affect Shenyang
Automotives sales and pricing of products.
Brilliance China Automotive believes that approximately 35% and 30% of Shenyang Automotives
2006 revenues from minibuses and sedans, respectively, were derived from sales to governmental
agencies and certain state-run enterprises. Because of Shenyang Automotives customer composition,
sales and pricing of its products can be affected by budgetary constraints applicable to government
entities and state enterprises.
19
Any significant failure or disruption of Chinas banking system could materially and adversely
affect Brilliance China Automotives ability to obtain credit.
Most major banks in China are owned by the Chinese government. Most of these banks have
historically extended significant amounts of loans according to governmental policy rather than for
commercial reasons. As a result, these banks currently have significant loans outstanding to
state-owned enterprises, many of which have incurred recurring and material losses. Consequently,
many banks in China have substantial levels of loans that are not current with respect to payments
of either interest or principal and may not have made adequate provisions to cover potential losses
on these loans. Any significant failure or disruption of Chinas banking system could materially
and adversely affect Brilliance China Automotives ability to obtain credit and the economic
environment in which it conducts its business and may also affect its customers and distributors.
Shenyang Automotives ability to obtain sufficient foreign exchange to satisfy its requirements is
dependent on authorization of the State Administration of Foreign Exchange of China.
Substantially all of the revenues of Shenyang Automotive are denominated in Renminbi, while
some of its operating expenses, purchase costs of components and capital expenditures are
denominated in foreign currencies. The Renminbi currently is not a freely convertible currency.
The State Administration of Foreign Exchange of China, under the authority of the Peoples Bank of
China, regulates the conversion of Renminbi into foreign currency. There can be no assurance that
the current authorizations for foreign-invested enterprises, such as Shenyang Automotive, to retain
its foreign exchange to satisfy foreign exchange liabilities or to pay dividends in the future will
not be limited or eliminated or that Shenyang Automotive will be able to obtain sufficient foreign
exchange to pay dividends and to satisfy their other foreign exchange requirements.
There are inherent uncertainties in Chinas legal system which may affect Brilliance China
Automotive.
Chinas legal system is a civil law system. Unlike the common law system, the civil law
system is based on written statutes in which decided legal cases have little value as precedents.
Since 1979, the Chinese government has begun to promulgate a comprehensive system of laws and
has introduced many new laws and regulations to provide general guidance on economic and business
practices in China and to regulate foreign investment. Progress has been made in the promulgation
of laws and regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. The promulgation of new changes to
existing laws and the abrogation of local regulations by national laws could have a negative impact
on the business and prospects of Brilliance China Automotive and its joint ventures. In addition,
as these laws, regulations and legal requirements are relatively recent, their interpretation and
enforcement may involve significant uncertainty. The interpretation of PRC laws may be subject to
policy changes which reflect domestic political changes. As Chinas legal system develops, the
promulgation of new laws, changes to existing laws and the preemption of local regulations by
national laws may have an adverse effect on Brilliance China Automotives prospects, financial
condition and results of operations.
20
There can be no assurance that there will not be another significant outbreak of a highly
contagious disease in China.
In 2003, there was an outbreak of Severe Acute Respiratory Syndrome, or SARS, in the PRC,
Singapore, Hong Kong, other Asian countries and Canada. The SARS outbreak had a significant
adverse impact on the economies of the affected countries. Recently, there have been media reports
regarding the spread of the H5N1 virus or Avian Influenza A among birds, poultry and in some
isolated cases, transmission of Avian Influenza A virus from animals to human beings. There can be
no assurance that there will not be another significant outbreak of a severe contagious disease.
If such an outbreak were to occur in China, it may have a material adverse impact on the operations
of Brilliance China Automotive and its results of operations may suffer.
See also Government Regulation and Environmental Matters in Item 4 Information on the
Company, Item 5 Operating and Financial Review and Prospects, Item 8 Financial
Information Legal Proceedings and Item 11 Quantitative and Qualitative Disclosures About
Market Risk.
ITEM 4. INFORMATION ON THE COMPANY
History and Development of Brilliance China Automotive
Brilliance China Automotive Holdings Limited was established as an exempted company with
limited liability under the laws of Bermuda on June 9, 1992. Brilliance China Automotives
principal place of business is Suites 1602-05, Chater House, 8 Connaught Road Central, Hong Kong,
telephone number: (852) 2523-7227.
Brilliance China Automotive was initially established to hold a 51.0% interest in Shenyang
Brilliance JinBei Automobile Co., Ltd. (formerly known as Shenyang JinBei Passenger Vehicle
Manufacturing Company, Ltd.), or Shenyang Automotive, a Sino-foreign equity joint venture
enterprise established on July 22, 1991. The remaining 49.0% (9.9% of which was subsequently sold)
interest in Shenyang Automotive was owned by Shenyang JinBei Automotive Company Limited (formerly
Shenyang Brilliance Automotive Company Limited and FAW-JinBei Automotive Company Limited), or
JinBei. In February 2003, an amendment was made to Shenyang Automotives joint venture contract
and as a result, the term of Shenyang Automotive became perpetual. Shenyang Automotive is
currently the leading manufacturer and distributor of minibuses in China and also the manufacturer
of Zhonghua sedans.
On December 29, 2003, Brilliance China Automotive, through Shenyang XinJinBei Investment and
Development Co., Ltd., or SXID, and Shenyang JinBei Automotive Industry Holdings Co., Ltd., or
SJAI, its 100% and 99.0% indirectly owned subsidiaries, respectively, entered into agreements to
acquire the entire equity interests of Shenyang Automobile Industry Asset Management Company
Limited, or SAIAM, and Shenyang XinJinBei Investment Co., Ltd, or SXI. SAIAM and SXI own 24.38%
and 8.97%, respectively, of the issued share capital of JinBei. Upon the completion of the
acquisition and the receipt of government approvals for the transaction, Brilliance China
Automotives effective interest in Shenyang Automotive will increase from 51.0% to approximately
63.9%.
21
Prior to May 1998, Brilliance China Automotives sole operating asset was its interest in
Shenyang Automotive. On May 18, 1998, Brilliance China Automotive acquired 50% and 51% equity
interests, respectively, in Mianyang Xinchen, a manufacturer of gasoline engines for use in
passenger vehicles and light duty trucks, and Ningbo Yuming Machinery Industrial Co., Ltd., or
Ningbo Yuming, a producer of automobile windows and window molding and stripping. Mianyang Xinchen
is a Sino-foreign joint venture whose 50-year term will expire in 2048. Ningbo Yuming is a wholly
foreign-owned enterprise with a 50-year term that will expire in 2043. On October 19, 2004,
Brilliance China Automotive, through its subsidiary Beston Asia Investment Limited, entered into an
agreement with Ms. Chen Qiuling for the acquisition of her 49% interest in Ningbo Yuming. Approvals
of the acquisition were obtained from the relevant Chinese authorities on November 25, 2004 and
Ningbo Yuming has thus become a wholly owned subsidiary of Brilliance China Automotive.
On August 7, 2006, Brilliance China Automotive, through its subsidiary Southern State
Investment Limited, entered into an agreement with an independent third party to dispose of a 3.5%
interest in Mianyang Xinchen. Upon obtaining the approval from the
relevant government authorities and completion of the proposed transfer, the Companys effective
interest in Mianyang Xinchen will decrease from 50.0% to 46.5%. The disposal is yet to be
completed as of the date of this annual report.
In addition to the acquisition of interests in Mianyang Xinchen and Ningbo Yuming, Brilliance
China Automotive has also acquired from Brilliance Holdings Limited, an affiliated company, a 50.0%
equity interest in Xinguang Brilliance on December 11, 2000. Xinguang Brilliance is a Sino-foreign
equity joint venture manufacturer of gasoline engines for use in passenger vehicles and light duty
trucks. Shenyang Automotive is a major customer of each of Mianyang Xinchen, Ningbo Yuming and
Xinguang Brilliance. Brilliance China Automotive believes that the acquisition of these components
suppliers has enabled it to maintain the quality, and ensure a stable supply, of certain key
components required for the production needs of Shenyang Automotive.
On October 12, 1998, June 9, 2000 and July 3, 2000, Brilliance China Automotive established
wholly owned subsidiaries (1) Shenyang XingYuanDong Automobile Component Co., Ltd., or Xing Yuan
Dong, (2) Ningbo Brilliance Ruixing Auto Components Co., Ltd., or Ningbo Brilliance Ruixing, and
(3) Mianyang Brilliance Ruian Automotive Components Co., Ltd., or Mianyang Brilliance Ruian,
respectively, to centralize and consolidate the sourcing of automotive parts and components for
Shenyang Automotive, Ningbo Yuming, and Mianyang Xinchen, respectively. In order to maintain their
preferential tax treatment from the Chinese government, Xing Yuan Dong, Ningbo Brilliance Ruixing
and Mianyang Brilliance Ruian all began manufacturing automotive components in 2001.
Under an acquisition agreement dated April 25, 1998 between Shenyang Automotive and Shenyang
State Assets Administration Bureau, Shenyang Automotive was to acquire a 21.0% indirect interest in
Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co., Ltd., or Shenyang Aerospace, a
Sino-foreign equity joint venture. A revised agreement was subsequently signed on August 15, 1999
among Shenyang Automotive, Shenyang State Assets Administration Bureau, Shanghai Brilliance
Industrial Company Limited and Xing Yuan Dong, under which Shenyang Automotives effective interest
in Shenyang Aerospace was reduced to
22
16.8% in exchange for cash consideration and the remaining 4.2% effective interest was
transferred to Xing Yuan Dong at cost. At the completion of the transfer on May 25, 2000,
Brilliance China Automotives indirect effective interest in Shenyang Aerospace was 12.8% with
Mitsubishi Motors Corporation, or MMC, Mitsubishi Corporate, China Aerospace Automotive Industry
Group Co., MCIC Holdings Sdn. Bhd. and Shenyang Jianhua Motors Engine Co., Ltd., or Shenyang
Jianhua, owning equity interests of 25.0%, 9.3%, 30.0%, 14.7% and 21.0%, respectively. Pursuant to
a share transfer agreement dated September 29, 2005, Shenyang Jianhua agreed to sell to MMC a 2.0%
interest in Shenyang Aerospace. The transfer has yet to be approved by the relevant authorities in
China. Upon completion of the transfer, each of Shenyang Jianhua and MMC will own an equity
interest of 19.0% and 27.0% in Shenyang Aerospace, respectively. Upon completion of the
acquisition of additional shares in JinBei and the receipt of approvals from the relevant PRC
authorities for the transfer, Brilliance China Automotives effective interest in Shenyang
Aerospace will increase to approximately 13.5%.
At the end of 1998, Shenyang Automotive began to construct new production lines for the
manufacture of sedans and multi-purpose vehicles, or MPVs. These new production lines were
completed in mid-2002 and reached a total annual production capacity of 100,000 sedans or MPVs as
at the end of 2002. Beginning in 1999, Shenyang Automotive implemented an expansion of its minibus
facilities that resulted in an increase in its annual production capacity for deluxe and mid-priced
minibuses from 40,000 units to 70,000 units in 2002 (based on two shifts per day). The stamping
and assembly workshops for minibuses currently have annual production capacities of 80,000 and
90,000 units, respectively, based on two shifts of workers, and can be increased to 120,000 units
based on three shifts. In 2003, Shenyang Automotive constructed a new painting facility with a
capacity of 120,000 units per year. In June 2005, Shenyang Automotive invested and built a new
engine plant with an initial planned capacity of 50,000 engines per year. The new engine plant
commenced commercial production on June 26, 2006.
On December 17, 2001, Shenyang Automotive entered into an agreement with Toyota Motor
Corporation for the transfer of technology relating to the fifth generation of the Toyota minibus,
the Granvia, which Shenyang Automotive markets under the brand name Granse (known as Grace
before February 2004) in China. Production of this minibus model based on semi-knockdown kits from
Toyota began in the second half of 2002 and commercial production using domestic parts and
components commenced in the second half of 2004.
The Zhonghua sedan, designed by the world-renowned Italdesign, was launched to the market in
China in August 2002, after approval for production and sale of the Zhonghua sedan was obtained
from the Chinese government in May 2002. The latest Zhonghua model, Junjie, was launched in March
2006.
On March 27, 2003, Brilliance China Automotive, through its indirect subsidiary, SJAI, entered
into a joint venture contract with BMW Holding to produce and sell BMW sedans in China. On April
28, 2003, Brilliance China Automotive increased its effective interest in SJAI from 81.0% to 89.1%
and thereby increased its effective interest in the joint venture with BMW Holding BV from 40.5% to
44.6%. On December 16, 2003, Brilliance China Automotive further increased its effective interest
in the joint venture to 49.5% by further increasing its interest in SJAI from 89.1% to 99.0%. BMW
Brilliance received its business license on May 22, 2003 and
23
introduced the BMW designed and branded 3-Series and 5-Series sedans in China in October and
November of 2003, respectively, based on knockdown kits supplied by BMW. BMW Brilliance
subsequently launched the new 3-Series and 5-Series long-wheelbase sedans in China in September
2005 and November 2006, respectively. Since the first half of 2004, BMW Brilliance had begun to
incorporate domestically produced components in its sedans.
Brilliance China Automotive currently has no material acquisitions or divestitures planned or
pending.
For additional information see Item 5 Operating and Financial Review and Prospects
Liquidity and Capital Resources Capital Expenditures.
Business Overview
Brilliance China Automotives core businesses are the manufacture and sale of minibuses and
Zhonghua sedans in China through its subsidiary, Shenyang Automotive. Brilliance China Automotive
also has a joint venture, BMW Brilliance, with BMW Holding to produce and sell 3-Series and
5-Series sedans in China. In 2006, Shenyang Automotive sold a total of 66,245 minibuses and 62,281
Zhonghua sedans and BMW Brilliance sold a total of 23,600 BMW sedans. Currently, Shenyang
Automotive has an annual production capacity of 80,000 units of deluxe and mid-priced minibuses
(based on two shifts per day), 120,000 units of deluxe and mid-priced minibuses (based on three
shifts per day), 100,000 units of Zhonghua sedans (based on two shifts per day) and 130,000 units
of Zhonghua sedans (based on three shifts per day). BMW Brilliance currently has an annual
production capacity of 30,000 units (based on two shifts per day) and 41,000 units (based on three
shifts per day). In addition, Brilliance China Automotive has also established strategic
partnerships or working relationships with various other leading global automotive companies,
including Toyota, Mitsubishi, FEV Motorentechnik Gmbh, Porsche, Pininfarina S.p.A., and Italdesign
S.p.A.
Shenyang Automotives production facilities are located in the industrial city of Shenyang,
the capital of Liaoning Province in northeastern China. Shenyang Automotives principal products
are the deluxe minibus, the mid-priced minibus and the Zhonghua sedan. Mid-priced minibuses
accounted for approximately 28.8% of the total sales revenue of Brilliance China Automotive in
2006. The deluxe and mid-priced minibuses are 8 to 15-seat minibuses adapted from Toyotas Hiace
minibus (marketed under the name of Hiase in China) and Granvia minibuses (marketed under the
name of Granse in China).
On May 22, 2003, BMW Brilliance received its business license issued by the Shenyang City
Administration for Industry and Commerce. Commercial production of BMW-designed and branded sedans
commenced in September 2003 based on knockdown kits supplied by BMW Group. The 3-Series BMW sedans
were launched in the market in October 2003 and the 5-Series were launched in November 2003. BMW
Brilliance subsequently launched new versions of the 3-Series in September 2005 and the new
5-Series long-wheelbase in November 2006. Since the first half of 2004, BMW Brilliance had begun
to incorporate domestically produced components in its 3- and 5-Series sedans.
24
In 2006, Shenyang Automotives sales volume increased 86.3% from approximately 69,000 units in
2005 to 128,526 units in 2006. The 2006 sales figure comprises 66,245 minibuses and 62,281
Zhonghua sedans. The increase in overall sales was primarily due to the increase in the sales
volume of minibuses and the significant increase in the sales volume of the Zhonghua sedans, in
particular the Junjie model which was launched in March 2006. Our joint venture, BMW Brilliance,
sold 23,600 BMW-branded sedans in 2006, compared to 17,501 in 2005. Shenyang Automotives sales in
China has been supported by a substantial network of approximately 180 minibus distributors,
including approximately 35 exclusive minibus distributors, and approximately 130 sedan
distributors, as well as approximately 390 after-sales service centers for minibuses and
approximately 220 for sedans. Shenyang Automotive also continued to implement its 4S sales
center system, with sales, after-sales service, spare parts and surveys offered by the same
dealership outlet. As of the end of 2006, Shenyang Automotive had approximately 70 4S dealership
outlets for minibuses and approximately 100 4S dealership outlets for Zhonghua sedans nationwide.
For the year ended December 31, 2006, Brilliance China Automotive reported sales of Rmb
10,484.8 million (US$1,343.5 million), representing an increase of approximately 91.7% compared to
2005 and net loss of Rmb 386.1 million (US$49.5 million) compared with a net loss of Rmb 671.3
million (US$83.2 million) in 2005. The increase in sales and decrease in net loss was primarily
due to the increases in unit sales of Shenyang Automotives minibuses and, especially, Zhonghua
sedans in 2006, and decreases in impairment losses on intangible assets and goodwill.
Principal Products
Shenyang Automotives principal products are minibuses and the Zhonghua sedans. Our joint
venture with BMW, BMW Brilliance, also produces BMW 3- and 5-Series sedans.
Shenyang Automotives principal minibus products are the deluxe minibus and the mid-priced
minibus, which constituted approximately 13.9% and 28.8% of Brilliance China Automotives total
sales revenue in 2006, respectively. These vehicles are used primarily for passenger
transportation but can also be modified for use as police vans, ambulances or other specialty
vehicles. Shenyang Automotive sells all of its minibuses under the JinBei brand name in a variety
of models designed to meet the requirements of particular market segments. Brilliance China
Automotive believes that Shenyang Automotives minibuses have established a reputation in China for
high quality and reliability that has enabled Shenyang Automotive to maintain its market-leading
position in recent years. Shenyang Automotive commenced production of the high-end Granse model in
2002 based on semi-knockdown kits from Toyota and started production of the domestic version of the
Granse model using domestic parts and components in the first half of 2004.
Shenyang Automotives Zhonghua sedan was introduced to the commercial market in China in
August 2002 and constituted approximately 15.8% and 49.5% of Brilliance China Automotives total
sales revenue in 2005 and 2006, respectively. The initial model was a five-seat manual
transmission sedan with a 4-cylinder, 2.0-liter Mitsubishi engine. Shenyang Automotive now also
produces manual transmission Zhonghua sedans with 2.4-liter engines and automatic transmission
versions with both 2.0-liter and 2.4-liter engines. In December 2004, the
25
facelift version of the Zhonghua model, known as Zunchi, was launched. In March
2006, Shenyang Automotive launched another Zhonghua model, Junjie, which features a 1.6-liter,
1.8-liter or 2.0-liter engine with manual or automatic transmission.
The following table sets forth certain information with respect to Shenyang Automotives
principal products as of the date of this annual report.
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Deluxe |
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Minibus |
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(Granvia or |
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Deluxe |
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Mid-priced |
|
Zhonghua |
|
Zhonghua |
|
|
Granse |
|
Minibus |
|
Minibus |
|
Sedan |
|
Sedan |
|
|
Model(1)) |
|
(Hiase Model) |
|
(Hiase Model) |
|
Zunchi |
|
Junjie |
Maximum number
of passengers
|
|
78 |
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15 |
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15 |
|
5 |
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5 |
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Engine type
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Toyota 4-cylinder
2.7-liter gasoline
engine and
Mianyang
Xinchen 2.7-liter
gasoline engine
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Toyota 4-cylinder
2.4-liter gasoline
engine and
Mitsubishi
2.4-liter gasoline
engine
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Mianyang Xinchen
and Xinguang Brilliance
4-cylinder
2.2-liter gasoline
engine
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Mitsubishi
4-cylinder 1.8,
2.0 and 2.4-liter
gasoline
engine
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Mitsubishi
4-cylinder
1.8 and 2.0-liter
and Mitsubishi &
Harbin DongAn
1.6-liter gasoline
engine
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Horsepower
(bhp)
|
|
105 |
|
100.6 |
|
92.5 |
|
122170 |
|
134173 |
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Price Range in Rmb(2)
|
|
119,800239,800 |
|
121,800156,800 |
|
64,800101,800 |
|
105,800209,800 |
|
85,800157,800 |
|
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|
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Fuel Consumption
(Liters/100 km)(3)(4)
|
|
10 |
|
10 |
|
9.8 |
|
6.5 7.6 |
|
6.2 7.6 |
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|
|
|
|
|
|
Maximum speed(4)
|
|
158 km/hr
|
|
130 km/hr
|
|
130 km/hr
|
|
185 210 km/hr
|
|
180 210 km/hr
|
|
|
|
|
|
|
|
|
|
|
|
Domestic component content
|
|
> 80%
|
|
> 85%
|
|
100% |
|
92100% |
|
9099% |
|
|
|
|
|
|
|
|
|
|
|
Length
|
|
4.7 m |
|
4.8 m |
|
4.8 m |
|
4.88 m |
|
4.65 m |
|
|
|
(1) |
|
Known as Grace before February 2004. |
|
(2) |
|
Actual price depends on specific model. |
|
(3) |
|
Based on an average speed of 50-55 kilometers per hour for minibuses and 80 kilometers per hour for sedans. |
The following table sets forth certain information with respect to BMW
Brilliances principal products as of the date of this annual report.
26
|
|
|
|
|
|
|
BMW Brilliance |
|
BMW Brilliance |
|
|
3-Series Sedan |
|
5-Series Sedan |
|
|
|
|
|
Models
|
|
320i and 325i
|
|
523Li, 525Li and 530Li
|
|
|
|
|
|
Maximum
number of passengers
|
|
5
|
|
5 |
|
|
|
|
|
Engine types
|
|
BMW 4 and 6-cylinder
2.0-liter and 2.5-liter
gasoline engines
|
|
BMW 6-cylinder
2.5-liter and 3.0-liter
gasoline engines |
|
|
|
|
|
Horsepower
(bhp)
|
|
150 218
|
|
177258 |
|
|
|
|
|
Price range in Rmb(1)
|
|
339,800461,000
|
|
477,600699,000 |
|
|
|
|
|
Fuel Consumption
(Liters/100 km)(2)
|
|
7.9 9.0
|
|
9.4 9.5 |
|
|
|
|
|
Maximum speed
|
|
215 242 km/hr
|
|
227 250 km/hr |
|
|
|
|
|
Length
|
|
4.52 m
|
|
4.98 m |
|
|
|
(1) |
|
Actual price depends on specific model. |
|
(2) |
|
Based on an average speed of 80 kilometers per hour. |
Deluxe minibus. The deluxe minibus has historically been Shenyang Automotives flagship
product and is among the highest quality, most technologically advanced minibuses currently
produced in China. The deluxe minibus is used primarily as a passenger vehicle and features air
conditioning, optional power steering, power windows, automatic locks, a rear window wiper, full
interior carpeting and alternative interior configurations.
Shenyang Automotives high-end products have been further improved to incorporate more
user-friendly features to meet diversified customer demands. In the deluxe line, Shenyang
Automotive has introduced a locally developed model, based on the Toyota 441N, which is equipped
with an anti-lock braking system, improved helix rear suspension and refined interior trim. It has
the highest technical content among Shenyang Automotives product lines.
On December 17, 2001, Shenyang Automotive entered into an agreement with Toyota for the
technology transfer of the fifth generation of the Toyota minibus the Granvia for which
production based upon semi-knockdown kits from Toyota commenced in 2002. Shenyang Automotive began
producing the Granvia using domestic parts in the first half of 2004. The Granvia is marketed under
the brand name Granse (known as Grace before February 2004) when sold in China by Shenyang
Automotive. The Granse minibus exhibits several improvements over the fourth generation minibus,
including more responsive performance when carrying heavy loads, better handling, better
maneuverability, 360-degree interior moveable seats and a more luxurious and comfortable interior.
Mid-priced minibus. The mid-priced minibus was developed by Shenyang Automotive and was
commercially introduced in the second half of 1996. Shenyang Automotive produces two principal
mid-priced minibus models, both of which are based on the deluxe minibus and share the same styling
and body of the deluxe minibus, with the principal difference being the engine. By equipping the
majority of these models with a domestically manufactured Mianyang Xinchen or Xinguang Brilliance
engine, Shenyang Automotive is able to sell them for significantly less than the deluxe minibus,
yet still maintain function and quality standards for these models that are only slightly lower
than the deluxe minibus. This has allowed the mid-priced minibus models to compete more effectively
in terms of price with other domestically produced products. See Competition below.
27
In 2002, Shenyang Automotive introduced three new minibus models to the market, including
mid-priced minibuses that utilize Mitsubishi engines and in 2003 Shenyang Automotive launched the
updated versions of these minibus models. In 2004, Shenyang Automotive launched lower-priced models
with more limited features in response to market demand and in the first half of 2005, a
lower-priced domestic version of the Granse was launched. Early 2006, Shenyang Automotive launched
the manual transmission model of the minibuses meeting the European III emission standards.
Since the end of 2003, Shenyang Automotives minibus capacity has been 80,000 units per year
(based on two shifts) and 120,000 units per year (based on three shifts). Brilliance China
Automotive believes that its long-term interests require that Shenyang Automotive continue to
expand its production capacity. Any increase in Shenyang Automotives future revenue will depend on
its ability to continue to expand in a similar manner. Realization of its production and sales
goals is also contingent upon other factors, including the development of new vehicle models, the
ability to continue to achieve overall cost reductions, ongoing access to high-quality raw
materials and domestic component manufacturers and maintenance of a large well-trained labor force,
an effective distribution network and after-sales service capabilities.
Zhonghua sedans. The Zhonghua sedan was designed by Italdesign and was commercially introduced
by Shenyang Automotive in August 2002 after receiving approval from the Chinese government in May
2002. This sedan is designed to target the mid-priced sedan market segment, including governmental
institutions, businesses and individual users in China. This sedan model was specifically designed
for the Chinese market and utilizes a high degree of domestic component content, thereby offering
cost advantages to consumers. In 2003, Shenyang Automotive spent approximately Rmb 200.0 million on
upgrading the Zhonghua production facilities and related dies and tools. The facelift version of
the Zhonghua model, known as Zunchi, was launched in December 2004 and in March 2006, the
Junjie model was launched. The Junjie sedan uses the Zhonghua sedan design as its foundation,
and is designed for family use and business use in China. Junjie was designed by Pininfarina
S.p.A., an Italian design company, and other aspects of its development, including its platform,
involved cooperation with Porsche. The Junjie sedan received the 2006 China CCTV China annual
1.8-liter car prize. Total investment in the Junjie product was Rmb 500 million.
On March 27, 2001, Brilliance China Automotive entered into a three-year technical assistance
agreement with BMW Group under which BMW engineers provided consulting services to help in the
initial stages of production of Zhonghua sedans at Shenyang Automotives sedan production
facilities in Shenyang, including assistance in achieving and maintaining the desired level of
production quality. A similar agreement entered into in early 2006 between Shenyang Automotive and
BMW Group regarding the technical support program for the Junjie sedan expired in July 2006.
Shenyang Automotive currently has no plans to renew the technical assistance agreement.
28
The following table sets forth Brilliance China Automotives revenues by category, for the
years 2004 through 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2005 |
|
2006 |
|
|
Revenue |
|
|
|
|
|
Revenue |
|
|
|
|
|
Revenue |
|
|
|
|
(Rmb millions) |
|
% |
|
(Rmb millions) |
|
% |
|
(Rmb millions) |
|
% |
Minibus sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deluxe minibus |
|
|
960 |
|
|
|
14.7 |
|
|
|
958 |
|
|
|
17.5 |
|
|
|
1,460 |
|
|
|
13.9 |
|
Mid-priced minibus |
|
|
3,797 |
|
|
|
58.1 |
|
|
|
2,989 |
|
|
|
54.7 |
|
|
|
3,020 |
|
|
|
28.8 |
|
Zhonghua sedan |
|
|
1,324 |
|
|
|
20.2 |
|
|
|
863 |
|
|
|
15.8 |
|
|
|
5,190 |
|
|
|
49.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
6,081 |
|
|
|
93.0 |
|
|
|
4,810 |
|
|
|
88.0 |
|
|
|
9,670 |
|
|
|
92.2 |
|
Other sources of income(1) |
|
|
461 |
|
|
|
7.0 |
|
|
|
659 |
|
|
|
12.0 |
|
|
|
815 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,542 |
|
|
|
100.0 |
|
|
|
5,469 |
|
|
|
100.0 |
|
|
|
10,485 |
|
|
|
100.0 |
|
|
|
|
(1) |
|
Including sales of components and scrap metal. |
29
The following table sets forth the geographic breakdown of Shenyang Automotives minibus
and Zhonghua sedan sales revenue throughout China for the years 2004 through 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2005 |
|
2006 |
Province/ |
|
Revenue |
|
|
|
|
|
Revenue |
|
|
|
|
|
Revenue |
|
|
Municipality |
|
(Rmb millions) |
|
% |
|
(Rmb millions) |
|
% |
|
(Rmb millions) |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing |
|
|
1,131 |
|
|
|
18.6 |
|
|
|
755 |
|
|
|
15.7 |
|
|
|
1,180 |
|
|
|
12.2 |
|
Guangdong |
|
|
821 |
|
|
|
13.5 |
|
|
|
529 |
|
|
|
11.0 |
|
|
|
1,057 |
|
|
|
10.9 |
|
Liaoning |
|
|
644 |
|
|
|
10.6 |
|
|
|
567 |
|
|
|
11.8 |
|
|
|
1,673 |
|
|
|
17.3 |
|
Shanghai |
|
|
566 |
|
|
|
9.3 |
|
|
|
452 |
|
|
|
9.4 |
|
|
|
803 |
|
|
|
8.3 |
|
Jiangsu |
|
|
389 |
|
|
|
6.4 |
|
|
|
283 |
|
|
|
5.9 |
|
|
|
667 |
|
|
|
6.9 |
|
Zhejiang |
|
|
328 |
|
|
|
5.4 |
|
|
|
188 |
|
|
|
3.9 |
|
|
|
474 |
|
|
|
4.9 |
|
Shandong |
|
|
237 |
|
|
|
3.9 |
|
|
|
183 |
|
|
|
3.8 |
|
|
|
522 |
|
|
|
5.4 |
|
Tianjin |
|
|
183 |
|
|
|
3.0 |
|
|
|
115 |
|
|
|
2.4 |
|
|
|
193 |
|
|
|
2.0 |
|
Heilongjiang |
|
|
134 |
|
|
|
2.2 |
|
|
|
82 |
|
|
|
1.7 |
|
|
|
184 |
|
|
|
1.9 |
|
Hebei |
|
|
128 |
|
|
|
2.1 |
|
|
|
87 |
|
|
|
1.8 |
|
|
|
222 |
|
|
|
2.3 |
|
Hubei |
|
|
128 |
|
|
|
2.1 |
|
|
|
82 |
|
|
|
1.7 |
|
|
|
164 |
|
|
|
1.7 |
|
Hunan |
|
|
128 |
|
|
|
2.1 |
|
|
|
96 |
|
|
|
2.0 |
|
|
|
203 |
|
|
|
2.1 |
|
Shaanxi |
|
|
128 |
|
|
|
2.1 |
|
|
|
77 |
|
|
|
1.6 |
|
|
|
163 |
|
|
|
1.7 |
|
Henan |
|
|
110 |
|
|
|
1.8 |
|
|
|
106 |
|
|
|
2.2 |
|
|
|
193 |
|
|
|
2.0 |
|
Sichuan |
|
|
103 |
|
|
|
1.7 |
|
|
|
115 |
|
|
|
2.4 |
|
|
|
221 |
|
|
|
2.3 |
|
Shanxi |
|
|
103 |
|
|
|
1.7 |
|
|
|
72 |
|
|
|
1.5 |
|
|
|
164 |
|
|
|
1.7 |
|
Fujian |
|
|
91 |
|
|
|
1.5 |
|
|
|
63 |
|
|
|
1.3 |
|
|
|
173 |
|
|
|
1.8 |
|
Jilin |
|
|
85 |
|
|
|
1.4 |
|
|
|
72 |
|
|
|
1.5 |
|
|
|
116 |
|
|
|
1.2 |
|
Chongqing |
|
|
85 |
|
|
|
1.4 |
|
|
|
48 |
|
|
|
1.0 |
|
|
|
172 |
|
|
|
1.8 |
|
Xinjiang |
|
|
79 |
|
|
|
1.3 |
|
|
|
63 |
|
|
|
1.3 |
|
|
|
106 |
|
|
|
1.1 |
|
Yunnan |
|
|
79 |
|
|
|
1.3 |
|
|
|
43 |
|
|
|
0.9 |
|
|
|
126 |
|
|
|
1.3 |
|
Anhui |
|
|
79 |
|
|
|
1.3 |
|
|
|
53 |
|
|
|
1.1 |
|
|
|
135 |
|
|
|
1.4 |
|
Guangxi |
|
|
73 |
|
|
|
1.2 |
|
|
|
34 |
|
|
|
0.7 |
|
|
|
77 |
|
|
|
0.8 |
|
Jiangxi |
|
|
55 |
|
|
|
0.9 |
|
|
|
34 |
|
|
|
0.7 |
|
|
|
58 |
|
|
|
0.6 |
|
Inner Mongolia |
|
|
49 |
|
|
|
0.8 |
|
|
|
34 |
|
|
|
0.7 |
|
|
|
107 |
|
|
|
1.1 |
|
Guizhou |
|
|
30 |
|
|
|
0.5 |
|
|
|
19 |
|
|
|
0.4 |
|
|
|
58 |
|
|
|
0.6 |
|
Hainan |
|
|
18 |
|
|
|
0.3 |
|
|
|
106 |
|
|
|
2.2 |
|
|
|
26 |
|
|
|
0.3 |
|
Other(1) |
|
|
97 |
|
|
|
1.6 |
|
|
|
452 |
|
|
|
9.4 |
|
|
|
433 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,081 |
|
|
|
100.0 |
|
|
|
4,810 |
|
|
|
100.0 |
|
|
|
9,670 |
|
|
|
100.0 |
|
|
|
|
(1) |
|
Gansu, Ningxia, Tibet and Qinghai as well as export to other countries. |
BMW Brilliance
On March 14, 2003, Brilliance China Automotive received formal approval from the Chinese
government with respect to the feasibility study for the establishment of a joint venture between
BMW Holding, a wholly owned subsidiary of BMW AG, and SJAI, an indirect subsidiary of Brilliance
China Automotive. On March 27, 2003, SJAI entered into a joint venture contract with BMW Holding in
relation to the establishment of the joint venture in China. On April 28, 2003, Brilliance China
Automotive, through its indirectly 90%-owned subsidiary, SXID, entered into an agreement with the
10% shareholder of SJAI to acquire an additional 9% interest in SJAI, thereby increasing its
effective interest from 40.5% to 44.6%. On December 16, 2003, by increasing its indirect interest
in SJAI from 89.1% to 99.0%, Brilliance China Automotive effectively further increased its interest
in BMW Brilliance to 49.5%.
30
The registered capital and total investment cost of the joint venture is Euro 150 million and
Euro 450 million, respectively. As of December 31, 2006, Brilliance China Automotive had injected
approximately Rmb 688.5 million into the joint venture. The joint venture is 50%-owned by each of
SJAI and BMW Holding and has a term of 15 years starting from May 22, 2003, the date of issuance of
the joint ventures business license, which may be extended by mutual consent of the parties to the
joint venture. The business scope of the joint venture is to produce and sell BMW-designed and
branded passenger cars, engines, parts and components and to provide after-sales services
(including repair, maintenance and spare parts) relating to its products. Profits of the joint
venture are shared equally by SJAI and BMW Holding, in proportion to their respective contributions
to the registered capital of the joint venture. This joint venture contract prohibits Brilliance
China Automotive from entering into similar ventures with other automobile manufacturers for the
manufacture and sale of premium sedans in China.
Brilliance China Automotive has agreed to provide a guarantee to BMW Holding in relation to
the performance by SJAI of its obligations under the joint venture contract. A reciprocal guarantee
has been provided by BMW AG to SJAI in respect of the obligations of BMW Holding under the joint
venture contract. In addition, Brilliance China Automotive has been indemnified by SAIAM and
Shenyang JinBei Automobile Industry Company Limited with respect to its liabilities under this
guarantee to BMW Holding.
On May 22, 2003, the business license for the joint venture was issued by the Shenyang City
Administration for Industry and Commerce. BMW Brilliance started the production of the 3-Series
BMW sedans in September 2003 and the 5-Series BMW sedans in November 2003 based on semiknockdown
kits supplied by BMW Group. In September 2005, BMW Brilliance launched a new model of the 3-Series
BMW sedans and in November 2006, it launched the new 5-Series long-wheelbase. Since the first half
of 2004, BMW Brilliance had begun to incorporate domestically produced components in its 3-Series
and 5-Series sedans. According to PRC regulations, once the local content ratio reaches a
prescribed level, the import tariff on BMW Brilliances imported components will drop significantly
from 25% to 10%, thereby reducing the overall production costs. However, given the sophisticated
technology associated with BMW Brilliances products as well as the relatively small production
volume achieved to date, there is no guarantee that BMW Brilliance will be able to meet the
required local content level, or that final approval for tariff reduction will be granted by the
government.
Production Process
Minibus Production Process and Equipment
|
|
|
Stamping. Shenyang Automotive produces its own semi-finished steel sheets
for stamping on a roll, drop and stack production line. Stamping is carried out at
seven production stations that utilize 31 domestic and imported presses, the largest of
which is calibrated at 3,200 tons and is used to stamp roofs and side panels for the
deluxe and mid-priced minibuses. The 175 dies used for stamping and cutting body
components for the Hiase and Granse minibuses were purchased from Toyota. Substantially
all of the stamped metal vehicle components utilized in Shenyang Automotives minibuses
are produced in this stamping workshop. |
31
|
|
|
Welding. The welding workshop consists of 2 production lines and 14
process conveying lines, among which the Hiase has 7 lines and the Granse has 7 lines.
Each line is focused on a different section of the minibus. These lines were
manufactured with Toyota technology and utilize a combination of manual welding and
automatic robotic welding, the latter of which is utilized for the more difficult
welding points. Each welding station is equipped with a domestically manufactured
testing machine. The annual production capacity based on two shifts is 120,000 units
among which 80,000 units are dedicated to the Hiase minibuses and 40,000 units to the
Granse. |
|
|
|
Painting. Shenyang Automotive currently operates a 36,347 square meter
painting workshop that was set up in April 2004 to enhance the production capacity. The
new painting workshop has three floors, each with its own function. The new workshop
has an annual production capacity of 120,000 units, with space reserved for expansion
up to an annual production capacity of 150,000. The new workshop uses a painting method
that combines the use of a conveyor, automated machine and robotic machine. Steps taken
to prepare the vehicle body for painting include de-greasing, rinsing, phosphatization
and electrophoretic coating. Using the 3C1B process, each of three coats of paint is
applied by a sprayer to the minibus body and dried in a heated drying chamber. The
specialized pre-painting preparation of the vehicle allows the frame to withstand
corrosion for 10 to 15 years. Also, the high standard of cleanliness in the painting
workshop and the advanced paint sprayers used allow Shenyang Automotive to reduce
environmental pollution, provide better working conditions for the painting workshop
employees, conserve raw materials and ensure that each minibus receives three
consistent, high-quality coats of paint. Finally, various quality control tests are
conducted, including measurement of the luster and thickness of the paint on each
vehicle. |
|
|
|
Assembly. Shenyang Automotives final assembly workshop is equipped with a
combination single slot, hanging and double slot conveyor. The conveyor is 570 meters
long, has 88 separate workstations and is capable of producing minibuses at the rate of
one every 160 seconds. Shenyang Automotive also developed jointly with the Shenyang
Automation Research Center an automated lifting system that is used in the assembly of
the power train, rear chassis and crank case, as well as a computerized hydraulic
machine for carrying out the transfer from a single rail conveyor onto a hanging line
conveyor the first of its kind to be developed in China. |
|
|
|
Testing. Shenyang Automotive employs an advanced comprehensive vehicle
testing system to ensure that each vehicle conforms to specifications, including wheel
alignment, exhaust emissions, steering, braking and engine performance and testing, and
windshield leakage testing. All of these final testing procedures are also supported by
a comprehensive quality control staff that monitors each step of the production
process. See Business Overview Quality Control below. |
Zhonghua Sedan Production Process and Equipment
|
|
|
Stamping. At present, 324 pieces for 232 types of large and medium press
parts of the Zhonghua sedan (including Zunchi and Junjie) are produced in the stamping
(or |
32
|
|
|
pressing) workshop. There are 1,029 imported and domestically produced molds, five
large and medium pressing lines, among which the line producing large (2,300 ton) parts
was imported from Schuler of Germany, which can supply parts for five production lines.
There is also a 100-ton molding press imported from Kawasaki of Japan. The other
pressing lines were purchased from domestic equipment manufacturers. |
|
|
|
Welding. The welding workshop is required to assemble and weld 394
separate panels, 30 machined parts, 10 roll-pressed parts and 30 standard parts. This
line was designed, manufactured and installed by Kuka of Germany. The welding line
consists of 26 zones and 347 stations, and is capable of spot-welding, carbon dioxide
welding, project welding, T-stud welding, sealing, brazing and hemming. At present,
there are 43 working robots in this workshop, which are used to weld, seal and inspect
at the most important stations on the line. The SKID apparatus that transports
components both on the ground and overhead adds speed and efficiency to the welding
process. |
|
|
|
Painting. Zhonghua sedans and the BMW-branded sedans share the same
painting line. The equipment used in the painting line is provided by Durr of Germany,
and the paint supply system was imported from Graco of the United States. Steps
involved in the body painting process include pre-treatment, E-coat, sealing, PVC,
primer, top-coat and cavity wax. The painting line is highly mechanized and automated,
with a central control system imported from Siemens. The painting line may switch
paints of different colors within 10 seconds and 15 paints of different colors may be
used in the same painting line. All of the paints and other materials utilized in
paint workshop are high quality products sourced both from within China and abroad. |
|
|
|
Assembly and Testing. The performance of the assembly and testing workshop
is guided by an information system based on bar code technology. The layout of the
final assembly shop is designed by Schenck Engineering of Germany and consists of the
body buffer line, main production line, test line, water proof line, finishing line and
marriage line, as well as various sub-lines and a rework area. The assembly line
utilizes a double-track conveyer system for transporting the vehicles through each
process. |
|
|
|
Instrument Production. The instrument panel workshop, occupying an area of
6,540 square meters, produces Zhonghua instrument panels. The processes include vacuum
shaping, foaming, hydrocutting and welding, and use seven different machines. The
workshop has a high production capacity for the production of parts and assembly of
instrument panels. |
BMW Sedan Production Process
The automotive production process employed by BMW Brilliance is generally divided into four
stages: welding, painting, assembly and testing. In each stage, BMW Brilliance utilizes equipment
that complies with BMW Group standards. Each stage of the manufacturing process is also carefully
monitored both by quality control engineers and through specialized testing equipment to ensure
that the final product achieves the specified BMW Groups quality standards.
33
|
|
|
Welding. The manufacturing and welding process in the welding workshop is
performed according to the BMW Groups global standard. The dimensional quality is
checked with a CMM Machine from Wenzel Company of Germany. The sourced welding
equipment is from standard suppliers in Germany. The welding workshop contains stud
welding, spot welding, mig welding and sealing operations. The line operators have been
trained by the BMW Groups specialists and the process is controlled by the BMW Groups
specialists from Germany. The quality checks and audits are consistent with those
performed at other BMW Group plants. |
|
|
|
Painting. All of the equipment used in the painting line is provided by
Durr of Germany, and the paint supply system was imported from Graco of the United
States. Steps involved in the body painting process are highly mechanized and
automated, with a central control system imported from Siemens. All of the paints and
other materials utilized in the paint workshop are high quality products sourced both
from within China and abroad. |
|
|
|
Assembly. The assembly workshop consists of two areas, both using conveyor
systems designed by the German supplier AFT with 60 line stations in total, as well as
handling devices for heavy parts from Dalmec Company and filling equipment from Durr of
Germany. |
|
|
|
Testing. The finishing and testing equipment is located in the second area
of the assembly workshop. A wide range of special equipment used in BMW Groups plants
worldwide is used to test 100% of the cars produced. |
Raw Materials and Components
Raw Materials. To ensure its supply of high-quality domestic raw materials, components and
spare parts, Shenyang Automotive has established stable relationships with over 280 suppliers in
China as of December 2006. Shenyang Automotive sources the majority of its important components
and raw materials from at least two different suppliers to ensure availability and increase
competition among suppliers. In 2006, approximately 37.6% of Shenyang Automotives components
sourcing was handled through Brilliance China Automotives subsidiaries and associated companies.
Steel is the principal raw material for Brilliance China Automotives products. Shenyang
Automotive purchases steel predominantly through the use of supply contracts. Since steel
represented only approximately 5.6%, 5.2% and 5.0% of the total cost of goods sold for the Hiase
minibus, Granse minibus and the Zhonghua sedans in 2006, respectively, the impact of rising steel
prices on Shenyang Automotives overall production costs was not significant. Furthermore, this
increase in the costs for steel was offset by decreases in the costs of components due to a
decrease in prices of the minibus components used in the minibuses and the domestically produced
components used in the Zhonghua sedans.
Components. Shenyang Automotive has adopted a system that regularly evaluates its existing
suppliers. These suppliers range from well-known international suppliers to domestic suppliers
with special technology and know-how. Shenyang Automotive has conducted a comprehensive survey of
its suppliers against an array of criteria, such as quality problem
34
feedback ratio, production capacity, quality assurance systems and after-sales services.
Implementing this process has enabled Shenyang Automotive to build a stronger supplier network as
the foundation for future growth.
The domestic component content of the deluxe minibuses is currently 89% for the Hiase model
and 84% for the Granse model. Previously, the principal components of the Hiase deluxe model that
we imported from Toyota were the engines. Shenyang Automotive has developed deluxe minibuses that
utilize Mitsubishi engines made by Shenyang Aerospace in order to offer a greater variety of
products to its customers. Instead of using imported Toyota engines, Shenyang Automotive has
already installed Mitsubishi engines in most of the deluxe minibus (Hiase model) units. As a
result, the domestic component content of the deluxe minibuses has increased.
The mid-priced minibus uses almost 100% domestic parts and the domestic component content of
the Zhonghua sedan is over 90%. Brilliance China Automotive calculates domestic component content
by looking through larger components, such as engines, produced by domestic Chinese entities to
determine the percentage of such components own components that were manufactured outside China.
Because certain components are imported from Toyota and other suppliers in Japan and Europe,
the availability of foreign exchange, exchange rates, import restrictions and the level of import
duties may affect the availability of certain components and Shenyang Automotives costs of
production. See Item 5 Operating and Financial Review and Prospects Liquidity and Capital
Resources.
Shenyang Automotive is required to pay import duties on imported automobile components.
Shenyang Automotive was subject to an average tariff rate of 8.2% and 10.4% on imported components
used in its deluxe minibuses (including Granse minibuses) and Zhonghua sedans, respectively, in
2006. During 2006, imported components (including steel) comprised approximately 9.8% of the total
cost of sales of all minibuses. In addition, imported components comprised 1.7% of the total costs
of the Zhonghua sedan during 2006. Changes in foreign currency exchange rates also affect the cost
of foreign-manufactured components imported by Chinas domestic manufacturers to make larger
components, such as engines, which we purchase domestically. The total aggregate import tariffs
paid by Shenyang Automotive for 2006 were approximately Rmb 31.6 million (US$4.0 million). However,
as a result of Chinas accession to the WTO, import tariffs on motor vehicle components decreased
to between 4.8% and 25% effective January 1, 2003. In 2004, the import tariff on motor vehicle
components ranged between 5.0% and 22.9%, in 2005, between 5.0% and 18.6%, in 2006, between 5.0%
and 14.3% and in 2007, between 5.0% and 10.0%. A decrease in import tariffs will result in a
decrease in the percentage of the total cost of minibuses and sedans that imported components
comprise.
Brilliance China Automotive intends to continue its efforts to increase domestic component
content for both deluxe minibuses and sedans, while at the same time emphasizing quality. See Item
5 Operating and Financial Review and Prospects.
Other
Significant Subsidiaries, Jointly Controlled Entities and Associated
Companies
35
Brilliance China Automotive believes that the acquisition of interests in strategic
components suppliers has and will continue to broaden its revenue base, increase the reliability of
the supply of certain core components of Shenyang Automotives and BMW Brilliances minibuses and
sedans, enhance their ability to monitor component quality and facilitate greater coordination
among the management and engineering personnel and their respective principal suppliers.
Mianyang Xinchen
Mianyang Xinchen, directly and indirectly through Xing Yuan Dong (described below), accounted
for 3.0% of Shenyang Automotives purchases of parts and components in 2006. Mianyang Xinchens
principal product is the 2.2-liter 491Q gasoline engine. In 2000, Mianyang Xinchen also began
producing the 491QE electronic fuel injection engine on a mass production basis to satisfy the
markets demand for products that can meet new higher emission standards. In 2001, Mianyang Xinchen
developed three additional passenger vehicle gasoline engines. As a result, Shenyang Automotive has
access to engines suited to a full range of light-duty passenger vehicles. Mianyang Xinchen had
annual sales of Rmb 550.2 million in 2006. Shenyang Automotive accounted for 47.7% of Mianyang
Xinchens overall sales of engines in 2006. Mianyang Xinchen currently manufactures 491Q, 4G24,
495QF and 4R gasoline engines, and 493 diesel engines. It sold over 64,400 engines in 2006.
Mianyang Xinchens overall annual sales of gasoline engines in 2006 increased by 9.3% from 2005.
Mianyang Xinchens current annual production capacity is 180,000 gasoline engines and 20,000 diesel
engines. Mianyang Xinchen is planning to invest in and build new engine production lines for its
new DK4 diesel and G10 gasoline engines. It is estimated that the DK4 line will be ready for
production in the first quarter of 2008 and the G10 line will be ready for production in the second
half of 2008.
In March 2004, the technology center of Mianyang Xinchen was designated by the PRC
governmental authorities as a State-class enterprise technology center, becoming only the second
State-class enterprise technology center in the PRC automotive gasoline engine industry.
Ningbo Yuming
Ningbo Yuming, directly and indirectly through Xing Yuan Dong and Ningbo Brilliance Ruixing
(described below), accounted for 1.4% of Shenyang Automotives purchases of parts and components in
2006. Ningbo Yumings principal products are side windows, floor channels and interior and
exterior water mouldings for minibuses and sedans. Ningbo Yuming had annual sales of Rmb 203.4
million in 2006. Ningbo Yuming intends to further develop front axles for use in different types
of light duty vehicles to enlarge its market share in the safety components market. Ningbo Yuming
received ISO-9002 accreditation in December 1999 and achieved the TS16949 standard in September
2006. Shenyang Automotive, which uses Ningbo Yumings products in all of its deluxe minibuses,
mid-priced minibuses and Zhonghua sedans, accounted for approximately 96.0% of Ningbo Yumings
sales in 2006. Shenyang Automotive also granted Ningbo Yuming the status of Class A Supplier in
1999, which it continues to hold.
Xinguang Brilliance
36
Xinguang Brilliance is principally engaged in the manufacture and sale of gasoline engines for
use in passenger vehicles and light duty trucks. In 2006, engine purchases by Shenyang Automotive
for use in mid-priced minibuses accounted for 44.6% of Xinguang Brilliances total sales revenue,
which amounted to Rmb 340.4 million. Xinguang Brilliance currently produces 491Q, 4G20D4 and
4G22D4 gasoline engines and has a production capacity of 70,000 engines per year. It sold over
45,000 gasoline engines in 2006.
Xinguang Brilliance started to further develop upgraded versions of the 491Q engine in 2005.
These new 16-valve 4G20D4 and 4G22D4 engines have greater power and are designed to satisfy
European III and IV emission standards. They are suitable for use in JinBei minibuses and Zhonghua
sedans. Xinguang Brilliance produces these new engines by using part of its existing 491Q
facilities, together with a new production line. Capacity for these 4G20D4 and 4G22D4 engines is
56,000 units per year. Xinguang Brilliance sold over 3,000 4G20D4 and 4G22D4 engines in 2006.
Xing Yuan Dong, Ningbo Brilliance Ruixing and Mianyang Brilliance Ruian
Xing Yuan Dong assists Shenyang Automotive in obtaining and developing a reliable supply of
domestically produced parts and components. Xing Yuan Dong also facilitates development of locally
produced automotive parts and components and acts to improve the quality of these components. When
a customized component is needed, Xing Yuan Dong provides potential suppliers with designs and
specifications for the customized parts and components required by Shenyang Automotive. These
potential suppliers liaise with Xing Yuan Dong and negotiate with Xing Yuan Dong about the details
of production. Xing Yuan Dong then selects appropriate suppliers and offers technical assistance
and cost evaluations. Xing Yuan Dong continuously strives to reduce the number of Shenyang
Automotives suppliers, lower costs, increase the efficiency and commitment of the remaining
suppliers, streamline the component purchasing process and ensure a steady supply of high quality
components. In 2001, Xing Yuan Dong, in order to maintain its preferential tax treatment from the
PRC government, also began manufacturing automotive components for Shenyang Automotive. In 2006,
94.2% of Xing Yuan Dongs sales were to Shenyang Automotive.
Ningbo Brilliance Ruixing was established on June 9, 2000 as a wholly owned subsidiary of
Brilliance China Automotive to facilitate the trading and development of automotive components
between Ningbo Yuming and Shenyang Automotive. In 2006, 99.4% of Ningbo Brilliance Ruixings sales
were made to Shenyang Automotive and 47.7% of Ningbo Brilliance Ruixings purchases were from
Ningbo Yuming. Beginning in 2001, Ningbo Brilliance Ruixing also began manufacturing automotive
components for Shenyang Automotive. Ningbo Brilliance Ruixings principal products are front
axles, mirrors and suspensions.
Mianyang Brilliance Ruian was established on July 3, 2000 as a wholly owned subsidiary of
Brilliance China Automotive to facilitate the trading and development of automotive components for
Mianyang Xinchen. In 2006, 4.7% of Mianyang Brilliance Ruians sales were made to Mianyang Xinchen
and 91.6% of Mianyang Brilliance Ruians sales of its manufactured automotive components were made
to Shenyang Automotive through Xing Yuan Dong. In 2001, Mianyang Brilliance Ruian also began
manufacturing automotive components for Shenyang Automotive.
37
Shenyang Aerospace
Shenyang Aerospace was formed for the purpose of manufacturing the 2.0-liter, 122 horsepower
and the 2.4-liter, 130 horsepower Mitsubishi gasoline engines. Shenyang Aerospace commenced trial
operation in March 1999. Shenyang Automotive uses these engines in its deluxe minibuses and in the
Zhonghua sedans. In addition, Shenyang Aerospaces engines are also sold domestically to other
passenger vehicle producers. Mitsubishi Motors Corporation, or MMC, Mitsubishi Corporation, China
Aerospace Automotive Industry Group Co., MCIC Holdings Sdn. Bhd. and Shenyang Jianhua Motors Engine
Co. Ltd., or Shenyang Jianhua, own equity interests of 25.0%, 9.3%, 30.0%, 14.7% and 21.0%
respectively, in Shenyang Aerospace. Pursuant to a share transfer agreement dated September 29,
2005, Shenyang Jianhua agreed to sell to MMC 2% interests in Shenyang Aerospace. The transfer has
yet to be approved by the relevant authorities in the PRC. Upon the completion of the transfer,
each of Shenyang Jianhua and MMC will own equity interests of 19.0% and 27.0% in Shenyang
Aerospace, respectively. After the acquisition of additional shares of JinBei and the receipt of
approvals from relevant PRC authorities for the transfer, Brilliance China Automotives effective
interest in Shenyang Jianhua will increase to 71.1% and consequently Brilliance China Automotives
effective interest in Shenyang Aerospace will increase to approximately 13.5%.
Brilliance Dongxing and Xingchen Automotive Seats
In December 2001, Brilliance China Automotive entered into an agreement with Brilliance
Holdings Limited for the acquisition of the entire issued share capital of Key Choices Group
Limited, or Key Choices, at a consideration of approximately Rmb 278.2 million. Key Choices is an
investment holding company and its principal assets are the 100% equity interest in the registered
capital of Brilliance Dongxing and a 90% equity interest in the registered capital of Shenyang
Xingchen Automotive Seats Co., Ltd., or Xingchen Automotive Seats. Brilliance Dongxing is a
foreign-invested enterprise established in the PRC whose principal products are automotive
components for use in passenger vehicles. In 2006, Brilliance Dongxing had annual sales of
approximately Rmb 260.2 million and about 99% of its sales were to Shenyang Automotive and Xing
Yuan Dong. Xingchen Automotive Seats is a Sino-foreign equity joint venture established in the PRC
in December 2001 that formerly was principally engaged in the manufacturing of automotive seats.
However, Xingchen Automotive Seats ceased its operations in the second half of 2002.
Brilliance JinBei Engine Plant
In 2004, Shenyang Brilliance Jinbei Automobile Co., Ltd., or JinBei, invested in a new engine
plant located in the Shenyang Economic and Trade Development Zone. Construction on this plant was
completed in December 2004 and the plant occupies 280,000 square meters of land, with a building
size of approximately 64,000 square meters and a main workshop area of 52,000 square meters. FEV
Motorentechnik GmbH provided certain technologies relating to engine production, and most of the
required equipment was imported from Germany.
The first product currently under development at this plant is a four-cylinder, 16-valve
multiple injection 1.8TCI turbo-charged engine for sedans. This engine will form the core of the
new Brilliance China Automotive family of engine products and serve as the basis for expanding
38
the size of engines used in Shenyang Automotive sedans from 1.6 liters to 2.0 liters. The
development of 1.8-liter engines began in 2005, and trial production commenced in 2006. Zunchi and
Junjie sedans that are equipped with the 1.8-liter engines were launched to the market in March
2007. It is expected that mass production of sedans with 1.8-liter engines will start in the
second half of 2007.
The engines will be mainly manufactured for use in Zhonghua sedans and the minibuses, but will
also be open for sale to third party automotive manufacturers both domestically and abroad. The
targeted capacity for the first phase of development is 50,000 engines per year, with two
subsequent phases having targeted capacity of 100,000 and 200,000 engines per year, respectively.
The first phase will require Rmb 1.13 billion in investment for completion. The intellectual
property rights over the engines developed are owned by Brilliance China Automotive.
Shenyang Brilliance Power Train Machinery Co., Ltd.
Shenyang Brilliance Power Train Machinery Co., Ltd. is a PRC joint venture that was
established in December 2004 by Shenyang Automotive and Brilliance China Automotive with registered
capital of US$29.9 million. Shenyang Automotive holds a 51% equity interest and Brilliance China
Automotive holds a 49% equity interest. Shenyang Brilliance Power Train Machinery Co., Ltd. was
established to purchase engines, manual and automatic transmissions and other components from
various suppliers, including the Brilliance JinBei Engine Plant and to assemble completed
powertrains for the engines made by Brilliance JinBei Engine Plant that can be used in automobiles,
in particular Zhonghua sedans. The plant has been in operation since the end of 2005. The
powertrain products will primarily be used in Zhonghua sedans and will also be sold to automobile
makers that have no powertrain manufacturing capacity of their own.
Shenyang Chenfa Automobile Component Co., Ltd.
Shenyang Chenfa Automobile Component Co., Ltd., or Shenyang Chenfa, is a wholly foreign-owned
enterprise held by Brilliance China Automotive, with a registered capital of US$8.0 million and a
total investment of US$8.4 million. Its scope of business is the production and sale of powertrains
and automotive components. Shenyang Chenfa was established in June 2003 and currently has over 70
employees. The main product of Shenyang Chenfa is powertrains for Mitsubishi engines used in the
Zhonghua sedan, of which it is capable of producing 100,000 units per year. This line has been in
operation since March 2004. It also has an engine manifold production line and a cam bearing frame
production line with a capacity of 50,000 units per year. Shenyang Chenfa is also responsible for
purchasing engine management systems and other automotive components for Brilliance China
Automotive.
Sales and Marketing
The following tables set forth by vehicle model for the years 2004 through 2006 the number of
Shenyang Automotive minibuses and sedans sold and BMW Brilliance sedans sold and the percentage of
unit sales represented by each model:
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2005 |
|
2006 |
|
|
Units |
|
|
|
|
|
Units |
|
|
|
|
|
Units |
|
|
|
|
Sold |
|
% |
|
Sold |
|
% |
|
Sold |
|
% |
Shenyang Automotive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deluxe minibus |
|
|
6,626 |
|
|
|
9.1 |
|
|
|
9,940 |
|
|
|
14.4 |
|
|
|
14,196 |
|
|
|
11.0 |
|
Mid-priced minibus |
|
|
54,992 |
|
|
|
75.8 |
|
|
|
50,060 |
|
|
|
72.6 |
|
|
|
52,049 |
|
|
|
40.5 |
|
Zhonghua sedan |
|
|
10,982 |
|
|
|
15.1 |
|
|
|
9,000 |
|
|
|
13.0 |
|
|
|
62,281 |
|
|
|
48.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
72,600 |
|
|
|
100.0 |
|
|
|
69,000 |
|
|
|
100.0 |
|
|
|
128,526 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BMW Brilliance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BMW sedan |
|
|
8,708 |
|
|
|
100.0 |
|
|
|
17,501 |
|
|
|
100.0 |
|
|
|
23,600 |
|
|
|
100.0 |
|
Shenyang Automotives marketing efforts are supervised by its general manager and are
conducted primarily through a regionalized sales program under which Shenyang Automotive has
divided China into six major sales regions and three sales belts, each headed by an experienced
senior executive. These regions are further subdivided into 30 provincial sales regions for
minibuses and 26 provincial sales regions for sedans. Each of these sales regions corresponds to a
separate province in China. These units are responsible for meeting defined sales targets, with the
executives compensation linked to performance. In addition, Shenyang Automotive implements a
commission compensation package for its sales personnel and rewards with bonuses its non-sales
personnel who develop customer leads that result in minibus sales. The retail prices and commission
scales are both nationally unified by Shenyang Automotive, thereby preventing cross-regional sales
and price competition. Shenyang Automotives minibuses and Zhonghua sedans are marketed through
its nationwide sales network as well as annual automobile industry trade shows and at special sales
shows sponsored by JinBei and Shenyang Automotive. Approximately 95% of Shenyang Automotives 2006
unit sales of both minibuses and sedans were made to its distributors and approximately 5% of both
were made directly to customers.
Shenyang Automotives sales in China have been supported by a substantial network of
approximately 180 minibus distributors, including approximately 35 exclusive minibus distributors,
and approximately 130 sedan distributors, as well as approximately 390 after-sales service centers
for minibuses and approximately 220 for sedans. Shenyang Automotive also continued to implement its
4S sales center system, with sales, service, spare parts and surveys offered by the same dealership
outlet. As of December 31, 2006, Shenyang Automotive had approximately 70 dealership outlets for
minibuses, and approximately 100 dealership outlets for sedans, which had achieved the 4S
dealership standard.
Shenyang Automotives minibus and sedan sales were generally made on a cash basis in 2006.
However, credit is generally offered to a few large customers following a financial assessment and
an established payment record. Credit terms are generally between 30 to 90 days and security in the
form of guarantees or bank notes is obtained from major customers. Designated staff monitors
accounts receivable and follow up regarding payment collections. Customers considered to be of
high credit risk are required to make payment in full on a cash basis. In addition, in order to
incentivize customers and facilitate sales, Shenyang Automotive
40
also accepts three-month to six-month bank-endorsed notes as payment for its minibuses and
sedans.
Shenyang Automotive has 5 regional distribution centers in order to shorten delivery
lead-times and to increase cost efficiencies. Also, by utilizing transportation methods such as
trucking, rail and shipping, Shenyang Automotive ensures that most vehicles are not driven until
they reach the end users. In 2006, all finished products were delivered to customers with zero
mileage.
The following table sets forth the geographic breakdown of Shenyang Automotives minibus and
sedan unit sales throughout China for the years 2004 through 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2005 |
|
2006 |
|
|
Minibuses |
|
Sedans |
|
Minibuses |
|
Sedans |
|
Minibuses |
|
Sedans |
Province/Municipality |
|
Units |
|
% |
|
Units |
|
% |
|
Units |
|
% |
|
Units |
|
% |
|
Units |
|
% |
|
Units |
|
% |
Beijing |
|
|
13,031 |
|
|
|
21.1 |
|
|
|
1,002 |
|
|
|
9.1 |
|
|
|
10,395 |
|
|
|
17.3 |
|
|
|
453 |
|
|
|
5.0 |
|
|
|
10,480 |
|
|
|
15.8 |
|
|
|
5,201 |
|
|
|
8.4 |
|
Guangdong |
|
|
9,385 |
|
|
|
15.2 |
|
|
|
825 |
|
|
|
7.5 |
|
|
|
7,107 |
|
|
|
11.8 |
|
|
|
467 |
|
|
|
5.2 |
|
|
|
7,959 |
|
|
|
12.0 |
|
|
|
6,114 |
|
|
|
9.8 |
|
Liaoning |
|
|
6,173 |
|
|
|
10.0 |
|
|
|
1,145 |
|
|
|
10.4 |
|
|
|
6,461 |
|
|
|
10.8 |
|
|
|
1,650 |
|
|
|
18.3 |
|
|
|
7,113 |
|
|
|
10.7 |
|
|
|
15,089 |
|
|
|
24.2 |
|
Shanghai |
|
|
6,933 |
|
|
|
11.3 |
|
|
|
296 |
|
|
|
2.7 |
|
|
|
6,347 |
|
|
|
10.6 |
|
|
|
141 |
|
|
|
1.6 |
|
|
|
7,509 |
|
|
|
11.3 |
|
|
|
3,130 |
|
|
|
5.0 |
|
Jiangsu |
|
|
4,254 |
|
|
|
6.9 |
|
|
|
569 |
|
|
|
5.2 |
|
|
|
3,915 |
|
|
|
6.5 |
|
|
|
138 |
|
|
|
1.5 |
|
|
|
4,899 |
|
|
|
7.4 |
|
|
|
3,934 |
|
|
|
6.3 |
|
Zhejiang |
|
|
3,534 |
|
|
|
5.7 |
|
|
|
505 |
|
|
|
4.6 |
|
|
|
2,578 |
|
|
|
4.3 |
|
|
|
88 |
|
|
|
1.0 |
|
|
|
2,955 |
|
|
|
4.5 |
|
|
|
3,319 |
|
|
|
5.3 |
|
Shandong |
|
|
1,927 |
|
|
|
3.1 |
|
|
|
812 |
|
|
|
7.4 |
|
|
|
2,313 |
|
|
|
3.9 |
|
|
|
296 |
|
|
|
3.3 |
|
|
|
2,377 |
|
|
|
3.6 |
|
|
|
4,593 |
|
|
|
7.4 |
|
Tianjin |
|
|
1,512 |
|
|
|
2.5 |
|
|
|
552 |
|
|
|
5.0 |
|
|
|
1,468 |
|
|
|
2.4 |
|
|
|
185 |
|
|
|
2.1 |
|
|
|
1,596 |
|
|
|
2.4 |
|
|
|
974 |
|
|
|
1.6 |
|
Heilongjiang |
|
|
1,094 |
|
|
|
1.8 |
|
|
|
334 |
|
|
|
3.0 |
|
|
|
1,079 |
|
|
|
1.8 |
|
|
|
94 |
|
|
|
1.0 |
|
|
|
1,337 |
|
|
|
2.0 |
|
|
|
1,051 |
|
|
|
1.7 |
|
Hebei |
|
|
1,089 |
|
|
|
1.8 |
|
|
|
361 |
|
|
|
3.3 |
|
|
|
1,187 |
|
|
|
2.0 |
|
|
|
44 |
|
|
|
0.5 |
|
|
|
1,621 |
|
|
|
2.5 |
|
|
|
1,387 |
|
|
|
2.2 |
|
Hubei |
|
|
1,104 |
|
|
|
1.8 |
|
|
|
373 |
|
|
|
3.4 |
|
|
|
1,136 |
|
|
|
1.9 |
|
|
|
53 |
|
|
|
0.6 |
|
|
|
1,333 |
|
|
|
2.0 |
|
|
|
830 |
|
|
|
1.3 |
|
Hunan |
|
|
1,006 |
|
|
|
1.6 |
|
|
|
408 |
|
|
|
3.7 |
|
|
|
1,125 |
|
|
|
1.9 |
|
|
|
275 |
|
|
|
3.1 |
|
|
|
1,141 |
|
|
|
1.7 |
|
|
|
1,510 |
|
|
|
2.4 |
|
Shaanxi |
|
|
993 |
|
|
|
1.6 |
|
|
|
447 |
|
|
|
4.1 |
|
|
|
958 |
|
|
|
1.6 |
|
|
|
126 |
|
|
|
1.4 |
|
|
|
1,064 |
|
|
|
1.6 |
|
|
|
1,090 |
|
|
|
1.7 |
|
Henan |
|
|
937 |
|
|
|
1.5 |
|
|
|
299 |
|
|
|
2.7 |
|
|
|
1,285 |
|
|
|
2.1 |
|
|
|
207 |
|
|
|
2.3 |
|
|
|
1,287 |
|
|
|
1.9 |
|
|
|
1,297 |
|
|
|
2.1 |
|
Sichuan |
|
|
751 |
|
|
|
1.2 |
|
|
|
386 |
|
|
|
3.5 |
|
|
|
1,007 |
|
|
|
1.7 |
|
|
|
623 |
|
|
|
7.0 |
|
|
|
1,369 |
|
|
|
2.1 |
|
|
|
1,631 |
|
|
|
2.6 |
|
Shanxi |
|
|
815 |
|
|
|
1.3 |
|
|
|
323 |
|
|
|
3.0 |
|
|
|
922 |
|
|
|
1.5 |
|
|
|
143 |
|
|
|
1.6 |
|
|
|
1,064 |
|
|
|
1.6 |
|
|
|
1,062 |
|
|
|
1.7 |
|
Fujian |
|
|
811 |
|
|
|
1.3 |
|
|
|
229 |
|
|
|
2.1 |
|
|
|
824 |
|
|
|
1.3 |
|
|
|
98 |
|
|
|
1.1 |
|
|
|
1,067 |
|
|
|
1.6 |
|
|
|
1,288 |
|
|
|
2.1 |
|
Jilin |
|
|
845 |
|
|
|
1.4 |
|
|
|
146 |
|
|
|
1.3 |
|
|
|
950 |
|
|
|
1.6 |
|
|
|
55 |
|
|
|
0.6 |
|
|
|
971 |
|
|
|
1.5 |
|
|
|
625 |
|
|
|
1.0 |
|
Chongqing |
|
|
549 |
|
|
|
0.9 |
|
|
|
351 |
|
|
|
3.2 |
|
|
|
476 |
|
|
|
0.8 |
|
|
|
232 |
|
|
|
2.6 |
|
|
|
909 |
|
|
|
1.4 |
|
|
|
1,364 |
|
|
|
2.2 |
|
Xinjiang |
|
|
764 |
|
|
|
1.3 |
|
|
|
166 |
|
|
|
1.5 |
|
|
|
830 |
|
|
|
1.4 |
|
|
|
90 |
|
|
|
1.0 |
|
|
|
693 |
|
|
|
1.0 |
|
|
|
672 |
|
|
|
1.1 |
|
Yunnan |
|
|
674 |
|
|
|
1.1 |
|
|
|
244 |
|
|
|
2.2 |
|
|
|
551 |
|
|
|
0.9 |
|
|
|
90 |
|
|
|
1.0 |
|
|
|
841 |
|
|
|
1.3 |
|
|
|
841 |
|
|
|
1.4 |
|
Anhui |
|
|
748 |
|
|
|
1.2 |
|
|
|
201 |
|
|
|
1.8 |
|
|
|
663 |
|
|
|
1.1 |
|
|
|
101 |
|
|
|
1.1 |
|
|
|
847 |
|
|
|
1.3 |
|
|
|
894 |
|
|
|
1.4 |
|
Guangxi |
|
|
681 |
|
|
|
1.1 |
|
|
|
161 |
|
|
|
1.5 |
|
|
|
478 |
|
|
|
0.8 |
|
|
|
30 |
|
|
|
0.3 |
|
|
|
463 |
|
|
|
0.7 |
|
|
|
564 |
|
|
|
0.9 |
|
Jiangxi |
|
|
440 |
|
|
|
0.7 |
|
|
|
193 |
|
|
|
1.8 |
|
|
|
396 |
|
|
|
0.7 |
|
|
|
120 |
|
|
|
1.3 |
|
|
|
398 |
|
|
|
0.6 |
|
|
|
428 |
|
|
|
0.7 |
|
Inner Mongolia |
|
|
355 |
|
|
|
0.6 |
|
|
|
203 |
|
|
|
1.9 |
|
|
|
414 |
|
|
|
0.7 |
|
|
|
92 |
|
|
|
1.0 |
|
|
|
619 |
|
|
|
0.9 |
|
|
|
794 |
|
|
|
1.3 |
|
Guizhou |
|
|
139 |
|
|
|
0.2 |
|
|
|
166 |
|
|
|
1.5 |
|
|
|
161 |
|
|
|
0.3 |
|
|
|
110 |
|
|
|
1.2 |
|
|
|
276 |
|
|
|
0.4 |
|
|
|
545 |
|
|
|
0.9 |
|
Hainan |
|
|
175 |
|
|
|
0.3 |
|
|
|
39 |
|
|
|
0.4 |
|
|
|
1,519 |
|
|
|
2.5 |
|
|
|
31 |
|
|
|
0.3 |
|
|
|
123 |
|
|
|
0.2 |
|
|
|
229 |
|
|
|
0.4 |
|
Other(1) |
|
|
899 |
|
|
|
1.5 |
|
|
|
246 |
|
|
|
2.2 |
|
|
|
3,455 |
|
|
|
5.8 |
|
|
|
2,968 |
|
|
|
33.0 |
|
|
|
3,934 |
|
|
|
6.0 |
|
|
|
1,825 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
61,618 |
|
|
|
100.0 |
|
|
|
10,982 |
|
|
|
100.0 |
|
|
|
60,000 |
|
|
|
100.0 |
|
|
|
9,000 |
|
|
|
100.0 |
|
|
|
66,245 |
|
|
|
100.0 |
|
|
|
62,281 |
|
|
|
100.0 |
|
41
|
|
|
(1) |
|
Gansu, Ningxia, Tibet and Qinghai as well as export to other countries. |
Generally, Shenyang Automotives sales are the highest in the second and fourth quarters
of the year.
The Chinese government continues to encourage the development of the relatively
underdeveloped, resource-rich western provinces of China and significant government resources have
been allocated in the past to develop the infrastructure of the western provinces. Brilliance China
Automotive believes the governments policy regarding western China will be conducive to the
development of the local automotive markets. Although Brilliance China Automotives largest market
today remains in the eastern coastal provinces, Brilliance China Automotive believes that the
market in the western provinces of China represent substantial upward growth potential in the
future. Brilliance China Automotive will continue to expand its dealership system in that region to
tap into this potential growth.
Approximately 10.0% of consolidated revenues in 2006 were generated from Shanghai Shenhua
Holdings Co., Ltd. (formerly known as Shanghai Brilliance Group Co., Ltd. and Shanghai Shenhua
Industrial Co., Ltd.) or Shanghai Shenhua. Shanghai Shenhua is an affiliate of Brilliance China
Automotive that serves as the principal distributor of Shenyang Automotives products. Shanghai
Shenhua operates under substantially the same commercial terms and arrangements with Shenyang
Automotive as its other third party distribution agents. However, in southern China, where it sells
solely to distributors on an exclusive basis, Shanghai Shenhua receives an additional compensation
of 1% on sales as commission for operating after-sales service centers.
Shenyang Automotive uses a computerized sales monitoring system to accurately identify
customer demographics, determine which products and options are most in demand and improve
inventory control. As Shenyang Automotive brings more product options to market, Brilliance China
Automotive believes that this computer system will provide Shenyang Automotive with the ability to
track customer preferences in various regions and adjust its production and distribution efforts
accordingly.
In 2006, Shenyang Automotive spent approximately Rmb 250.1 million (US$32.0 million) on
overall advertising, consisting primarily of Internet, television and print advertising.
Competition
The Chinese minibus manufacturing industry is highly fragmented and competitive. According to
the Chinese Automotive Technology & Research Center, in 2006, approximately 41 manufacturers sold
an aggregate of 144,331 minibuses. The top five manufacturers sold an aggregate of 114,377
minibuses during the same period. Significant competitive factors in the industry include price,
quality, reliability and customer service. Brilliance China Automotive believes that Shenyang
Automotive is competitive in all of these respects, and particularly in terms of quality, although
Shenyang Automotive has experienced competition in recent years from other manufacturers producing
lower priced, mid-range minibuses.
42
The Chinese sedan manufacturing industry is also very competitive and fragmented. The top five
brands account for 44.4% of the overall market based on unit sales volume in 2006. The market shares of the three leading manufacturers have been decreasing over the past several
years. New models are being introduced on an increasingly rapid basis as the number of new entrants
into the market has also increased. Unit sales of sedans totaled 3,811,607 units in 2006, making
sedans the largest segment of the Chinese automotive market, accounting for 52.8% of the overall
market. Due to the implementation of macro-economic polices and austerity measures, the domestic
demand for automobiles in China has declined significantly since the second half of 2004.
Nevertheless, sedans are widely expected to continue to be the fastest growing segment of the
Chinese automobile market over the next few years. However, while vehicle ownership is expected to
continue to increase steadily in China as a result of increasing individual disposable income,
there is also expected to be increasing pricing pressure as tariff rates decline and competition
continues to grow from domestic, foreign and foreign-invested sedan manufacturers.
Historically, Chinese motor vehicle producers have been exposed to little competition from
non-Chinese enterprises, partly as a result of import restrictions on foreign-made components and
motor vehicles. However, as a result of Chinas accession to the WTO, which regulates trading and
tariffs among its signatory states, in November 2001, China committed to reducing its import
restrictions on motor vehicles and motor vehicle components. In addition, China will be required to
conform its import tariffs to the uniform tariffs under the WTO.
Effective January 1, 2002, China reduced its import tariffs on motor vehicles and automotive
components from between 80% to 100% and between 18% to 40%, respectively, to between 43.8% to 50.7%
and between 14.0% to 31.4%, respectively. This range was lowered further to between 4.8% and 25%
for automotive components in 2003, between 5.0% and 22.9% in 2004, between 5.0% and 18.6% in 2005,
between 5.0% and 14.3% in 2006 and between 5.0% and 10.0% in January 2007. Tariffs on vehicles with
nine seats or less and engine sizes of three liters or below fell from 38.2% in 2003 to 34.2% in
2004, while tariffs on vehicles with more than nine seats and engines of more than three liters
decreased from 43.0% in 2003 to 37.6% in 2004. In 2005 tariffs have been fixed at 30% of all motor
vehicles. These tariff levels were reduced to 28% in January 2006 and further reduced to 25% in
July 2006. Such reductions in tariffs and import restrictions could potentially increase the
competition Brilliance China Automotive will face from foreign manufacturers.
Shenyang Automotives main competitors in the Chinese minibus and sedan market include, but are not
limited to, the following:
Minibus
|
|
|
Southeast Motors. Southeast Motors is currently 25% owned by Taiwan China
Motors, 50% owned by Fujian Provincial Automobile Industry Company and 25% owned by
Mitsubishi. Southeast Motors has launched over thirty different models of light
passenger vehicles (including minibuses) under the Delica and Freeca brand names and
also launched the MPV in 2004. Southeast Motors had an annual production capacity of
60,000 minibuses. According to Qing Xing Che Yao Wen, a publication issued by Chinas
Light Car Market Analysis Association, Southeast
|
43
Motors sales volume in 2006 was 7,555 minibuses, representing a 39.0% decrease from 12,381 minibuses in 2005. Delica series
includes seven-, eight- and eleven-seat ordinary, luxury and super luxury models and is currently priced between Rmb 79,800 to
Rmb 219,800.
|
|
|
Nanjing Iveco. In 1995, Italys Fiat Auto Company and Yuejin Group
established Nanjing Iveco Automotive Company, Ltd., a 50-50 equity joint venture, for
the manufacture of 33 models of five-ton passenger, goods and off-road vehicles in the
Iveco S series. Models currently in production include the A30, A40 and A49 passenger
vehicles, as well as a separate series of goods vehicles. Nanjing Iveco has an annual
production capacity of 60,000 vehicles. According to Qing Xing Che Yao Wen, in 2006,
Nanjing Iveco sold 20,060 vehicles, representing an 11.3% increase from 18,018
minibuses in 2005. Its minibuses are currently priced between Rmb 119,000 to Rmb
206,900. |
|
|
|
|
Jiangling Motors. Jiangling Motors Corp. of Jiangxi Province is currently
50% owned by the Ford Motor Company and 50% owned by the Changan Group. Jiangling
Motors produced China Transit, a Ford brand minibus, light trucks and pick-ups. At
present, China Transit is available in 15-seat, 12-seat and 9-seat versions. According
to Qing Xing Che Yao Wen, in 2006, Jiangling Motors sold a total of 23,029 minibuses,
representing a 25.9% increase from 18,289 vehicles in 2005. Production capacity was
approximately 100,000 per year. Its minibuses are currently priced between Rmb 105,800
to Rmb 177,900. |
Zhonghua Sedan
Brilliance China Automotive considers the following companies to be its main competitors in
the market for sedans with engine size between 1.8 liters to 2.0 liters and priced between Rmb
80,000 and Rmb 210,000:
|
|
|
First Auto Works Group of the PRC. First Auto Works is one of the largest
automotive companies in the PRC. First Auto Works Hongqi sedan was launched in 2001
and is considered one of the PRC governments showcase PRC-made sedans. Its Hongqi
Mingshi is priced at approximately Rmb 159,800 to Rmb 198,800. According to the
monthly report issued by Chinas Association of National Passenger Vehicle Market
Information, First Auto Works sold 10,280 Honqi Mingshi sedans in 2006, representing a
13.8% increase from the 9,036 units in 2005. First Auto Works introduced the Besturn
2.0-liter and 2.3-liter sedans in August 2006, with selling prices from Rmb 151,800 to
Rmb 208,800. |
|
|
|
|
Shanghai Volkswagen Automotive. Shanghai Volkswagen Automotive was one of
the original state-designed automobile manufacturers in the PRC. It is currently 50%
owned by Volkswagen AG of Germany and 50% owned by Shanghai Automotive Industry Corp.
It still holds a dominant share of the PRC sedan market and competes with the Zhonghua
sedan through the Santana 3000 sedans. The Santana 3000 has a 1.78-liter engine and
sells for between Rmb 118,000 to Rmb 149,000. According to the monthly report issued by
Chinas Association of National Passenger Vehicle
|
44
Market Information, in 2006, Shanghai Volkswagen Automotive sold 82,617 units of Santana 3000 sedans representing a 24.9%
increase from the 66,152 units in 2005.
|
|
|
Beijing Hyundai. Beijing Hyundai was established in 2002 as a 50-50 joint
venture between Beijing Auto Investment and Hyundai Motor Co. of South Korea. It
currently produces and sells the Sonata 2.0-liter, Sonata 2.5-liter and Sonata
2.7-liter, and the Elantra 1.6-liter and 1.8-liter models. The Sonata 2.0-liter sells
for approximately Rmb 149,800 to Rmb 228,000. The Elantra 1.8-liter sedan sells for
approximately Rmb 112,800 to Rmb 151,800. According to the monthly report issued by
Chinas Association of National Passenger Vehicle Market Information, in 2006, Beijing
Hyundai sold 37,095 units and 169,716 units of the Sonata 2.0-liter and the Elantra,
respectively, representing a decrease of 17.6 % and 3.9 %, respectively, from that of
45,006 and 176,589 respectively, in 2005. |
BMW Sedans
Brilliance China Automotive currently considers the Audi and Mercedes-Benz sedans produced by
FAW Volkswagen and Beijing Benz Daimler Chrysler Auto Co. Ltd., respectively, as well as the
Japanese imported Lexus sedans to be its closest competitors in the domestic market for high-end
luxury cars in terms of quality, craftsmanship, price, performance and technology.
|
|
|
FAW Volkswagen. FAW Volkswagen is 10% owned by Audi AG, 30% by Volkswagen
AG and 60% by First Auto Works of China. FAW Volkswagen produces and sells the Audi A4
and A6 sedans and the Volkswagen Jetta and Bora sedans in the PRC. FAW Volkswagens
Audi sedans have a dominant share of the PRCs premium sedan market because of its
strong sales to the PRC government. FAW Volkswagen sold 45,176 and 61,686 units of Audi
A6 sedans in 2005 and 2006, respectively. The Audi A4 sedan was formally launched in
the PRC market in 2003 and had a total sales volume of 10,791 and 15,536 in 2005 and
2006, respectively. A new Audi A6 was launched in June 2005. The Audi A4 sedan
currently sells for between Rmb 275,400 and Rmb 500,900, and the new Audi A6 sedan
sells for between Rmb 347,200 and Rmb 856,300. |
|
|
|
|
Beijing Benz. Beijing Benz Daimler Chrysler Auto Co. Ltd., or Beijing Benz,
a 50-50 joint venture between Daimler Chrysler and Beijing Automotive Industry Holding
Company, obtained a license to produce the Mercedes-Benz C-Class and E-Class sedans in
the PRC in August 2005. Beijing Benz launched its domestically produced models of E280
and E200K in December 2005. These E-Class sedans currently are sold for between Rmb 525,000
and Rmb 648,000 in the PRC. The vehicles are produced in a new facility in Beijing with
an initial production capacity of 20,000 units per year. The C-Class sedans currently
available for sale in China at Rmb 398,000 are imported. Beijing Benz will commence
producing the new C-Class sedan in late 2007. |
|
|
|
|
Lexus. Lexus sedans are imported from Japan by Toyota Motor (China)
Investment Co., Ltd. In 2006, the sales volume of Lexus in China was 13,344 units. The
new IS and ES models were introduced into the PRC in August 2006 and sales of these two |
45
models in 2007 up to May 2007 reached 5,967 units. The ES350 currently
sells for between Rmb 469,000 and Rmb 549,000 and the IS300 currently sells for between
Rmb 435,000 and Rmb 479,000.
Governmental Regulation
The automobile industry in the PRC is controlled at the central government level by the
National Development and Reform Commission, or NDRC, and the Ministry of Commerce. These entities
were created as a result of the governmental restructuring that commenced in March 2003. The NDRC
generally oversees and regulates the automobile industry in the PRC and any new product or new
automobile production facility must obtain the prior approval of this body before entering the
market. Similarly, approval from the Ministry of Commerce must be obtained prior to any changes to
existing products or the expansion of existing facilities. Both of these entities must also approve
any Sino-foreign joint venture for the production of automobiles.
On June 1, 2004, the NDRC issued a new automobile policy to replace the one that had been in
place since 1994. Two of the policys stated goals are industry consolidation and enhancement of
corporate capacity for research and development. To further these goals, the new policy sets
minimum levels of investment for new plants and research and development. Engine plant investments
are required to be over Rmb 1.5 billion and new automobile manufacturing projects must be over Rmb
2.0 billion. New automobile projects must also include a product research and development
investment of at least Rmb 500 million.
In contrast to the old regulations, foreign investors in the automobile and motorcycle market
will now be allowed to control more than 50% of a joint venture with the PRC partners if the joint
venture is located in an export processing zone and plans to sell its products in overseas markets.
The new policy will also allow foreign investors to establish more than two joint venture plants in
the PRC to produce the same categories of vehicles if they do so with their existing PRC partners
through acquisitions of other companies in the PRC.
The new policy acknowledges the success of the PRCs automobile industry and seeks to
encourage this pillar industry to foster further growth, particularly of domestically produced
and branded products and research and development, through consolidation of smaller, less-efficient
manufacturers and increased foreign and domestic investment. In addition, the policy aims to
centralize or reorganize certain automobile-related sectors, such as consumer loan services, to
reduce overhead and administrative burdens on the industry and allowing industry participants to
focus on their core businesses.
By encouraging industry consolidation and establishing clearer guidelines for foreign
investment, the policy, in the opinion of Brilliance China Automotive, encourages existing players
in the industry to grow and provides incentives for targeted investment from both domestic and
foreign sources. Certain implementing regulations have been promulgated and more such regulations
are expected to be promulgated by the NDRC in the future.
46
On February 28, 2005, the General Administration of Customs, the NDRC, the Ministry of Finance
and the Ministry of Commerce jointly issued the Administrative Measures on the Import of Automobile
Parts with Complete Vehicle Characteristics. This measure sets up detailed standards and procedures
of the identification of automobile parts with complete vehicle characteristics and treats
automobile parts with complete vehicle characteristics, which include semi-knocked down kits, as
complete vehicle imports and imposes vehicle import tariffs instead of component tariffs on them.
Current vehicle import tariff level is 25% whereas current component tariff levels are between 5%
and 10%.
On April 1, 2006, the State Administration of Taxation of the PRC, in an effort to encourage
environmental protection and fuel efficiency, re-adjusted consumption tax rates on passenger
vehicles (including imported vehicles). Before the re-adjustment, the consumption tax rate for passenger vehicles was a
three-tiered system: 3% for automobiles with engine displacement lower than 1.0 liter; 5% for
automobiles with engine displacements between 1.0 liter and 2.0 liters, and 8% for automobiles with
engine displacements above 2.0 liters. After the re-adjustment, tax rates on vehicles with smaller
engines (under 2.0 liters) either fell or remained unaltered, whereas tax rates on automobile with
larger engines were raised. The new tax rates are: 3% for 0.0-1.5 liters; 5% for 1.51-2.0 liters;
9% for 2.01-2.5 liters; 12% for 2.51-3.0 liters; 15% for 3.01-4.0
liters; and 20% for above 4.0 liters.
On December 26, 2006, the NDRC issued a circular to assess the current PRC automobile industry
and developments since the 2004 policy. Consistent with the 2004 policy, the NDRC continues to
stress the importance of stable growth and preventing overcapacity in the automobile industry, and
to encourage industry consolidation and reorganization among sectors, in particular the components
sector. The NDRC also encouraged more research and development be focused on new products, such as
environmental friendly models, in order to enhance and upgrade domestic products. The NDRC also
imposed, among other things, a requirement that annual sales of automobile manufacturers in China
must reach certain levels in order for them to build new manufacturing plants.
Quality Control
As a result of technical and managerial training from Toyota and technical assistance from
BMW, Shenyang Automotive has adopted a highly regimented production quality management system for
its minibuses and sedans. This two-fold system concentrates both on the quality of the raw
materials and other production inputs and on the production process itself. In the production
process, the focal point of quality control is the production line worker, who undergoes extensive
training and testing to ensure that he or she performs the assigned task to the highest quality
standards and is qualified and able to determine on his or her own whether or not the product meets
the required specifications. In addition, Shenyang Automotives specialized quality control
engineers are present at each step of the production process, with 16, 16 and 12 separate quality
inspection points for Hiase minibuses, the Granse minibuses and Zhonghua sedans, respectively.
In addition, Shenyang Automotive has established a quality improvement unit to supervise and
monitor after-sales service centers in major regional sales bases, such as Guangzhou, Shanghai and
Beijing, which also serve as channels for information feedback on
47
product quality. Designated personnel are assigned to follow-up on finding remedies for
recurring quality issues in a timely manner.
Shenyang Automotive was granted the internationally recognized ISO-9001-94 quality system
certificate in October 1995, making it the first major automobile manufacturer in China to be
awarded such certificate. Shenyang Automotive has successfully obtained recertification in each
subsequent year by demonstrating a continued commitment to upholding among the highest quality
standards in Chinas automobile industry. Since the second half of 2006, Shenyang Automotive has
applied the TS16949 quality system introduced by the international automobile industry for the
major automobile components, replacing the QS9000 and VAD6.1 accreditations (which are not specific
to the automobile industry) it previously had. By applying the TS16949 system, Shenyang Automotive
believes that its products will be further recognized in the international markets. To date,
approximately 256 of Shenyang Automotives over 280 component suppliers have achieved TS16949
certification and approximately 33 are accredited by ISO-9000.
After-Sales Service
In 2006, Shenyang Automotives minibuses were sold with a 24-month or 50,000 kilometers
(18-month or 30,000 kilometers for minibuses sold in 2002 and 2001) first-to-occur limited
warranty. The Zhonghua sedans were sold with a 36-month or 60,000 kilometers (24-month or 40,000
kilometers for sedans sold in 2002) first-to-occur limited warranty. In addition to these basic
limited warranties, during 2003 Shenyang Automotive also offered customers a broader warranty for
its Zhonghua sedans. During the warranty period, Shenyang Automotive pays service stations for
parts and labor covered by the warranty; thereafter, customers must pay for all parts and labor.
Since December 2004, Zunchi sedans were sold with a 10-year or 200,000 kilometers first-to-occur
limited warranty on key components. In 2006, Junjie sedans were sold with a 36-month or 60,000
kilometers first-to-occur limited warranty. In 2006, total warranty costs for minibuses and sedans
sold during the year were approximately Rmb 19.2 million (US$2.5 million) and Rmb 23.0 million
(US$2.9 million), respectively.
There are approximately 390 and approximately 220 service centers for Shenyang Automotive
minibuses and sedans, respectively, throughout China, with centers clustered in areas that match
distribution patterns of the vehicles. Such centers have been granted authority by Shenyang
Automotive to service its minibuses and sedans, including the provision of repair services and the
sale of spare parts. This extensive service network has enabled Shenyang Automotive to adopt its
current policy of resolving routine customer complaints in all provincial capitals and major cities
within 24 hours and major problems within three days.
To improve customer service, Shenyang Automotive continually reevaluates its existing
distributors based on certain criteria, including financial soundness, customer service
capabilities and customer complaint record. Shenyang Automotive has also implemented a more
advanced 4S sales center system, with sales, service, spare parts and survey offered by the same
dealership outlet. As of the end of 2006, Shenyang Automotive had approximately 70 and
approximately 100 4S dealership outlets for its minibuses and sedans, respectively.
48
BMW Brilliance currently has over 70 distributors, which are mainly located in first tier
cities in China. The number of distributors is expected to increase to over 90 by the end of 2007.
Like Shenyang Automotive, BMW Brilliance has implemented the more advanced 4S sales center system.
Environmental Matters
The Chinese government has set vehicle safety, exhaust and performance standards with which
Shenyang Automotive and BMW Brilliance must comply. Brilliance China Automotive believes that
Shenyang Automotives and BMW Brilliances minibuses and sedans currently meet the standards
imposed by the government. Their respective facilities are subject to government pollution
regulations enforced by the Shenyang municipal government. If operations are found to be in
violation, the government will allow a period of time to remedy the problem. If it should fail to
do so, the government can force a shutdown of Shenyang Automotives or BMW Brilliances operations
until such time as the violator complies with the regulations. To date, neither Shenyang Automotive
nor BMW Brilliance has been cited as violating a government pollution regulation.
On January 1, 2000, the cities of Beijing and Tianjin, as well as Yunnan Province, put into
effect emission standards that were significantly stricter than the then prevailing gasoline
vehicle emission standards. Since then, these emission standards have been adopted nationwide.
Shenyang Automotives electronic fuel injection minibus, introduced in 1999, passed the emission
standards tests at the China National Automobile Testing Center in Tianjin in October 1999. In
2001, Shenyang Automotive began to install multiple electronic fuel injection engines, which are
currently used in all of Shenyang Automotives mid-priced minibuses. With the installation of this
engine in the mid-priced minibus, currently all of Shenyang Automotives minibuses meet European II
emission standards. All Zhonghua and BMW sedans also meet these emission standards. In 2004, the
Chinese government began to encourage its vehicle manufacturers to meet the European III standards.
In 2006, nearly all the Zhonghua sedans, Granse minibuses, Hiase minibuses and BMW sedans
currently meet the European III emission standards. It is expected
that these Zhonghua sedans,
Granse minibuses and Hiase minibuses will meet the European IV emission standards in June 2008.
Insurance
Shenyang Automotive currently hold insurance policies that Brilliance China Automotive
believes are customary and standard for companies of comparable size in comparable industries in
China. Shenyang Automotive does not carry product liability insurance, and Brilliance China
Automotive believes it is customary and standard in the Chinese automobile industry for
manufacturers not to carry product liability insurance. BMW Brilliance has elected to purchase
product liability and other insurance in order to conform with BMWs worldwide standards.
Brilliance China Automotive does not carry any business interruption insurance.
Organizational Structure
The following table lists information concerning the subsidiaries, jointly controlled entities
and associated companies of Brilliance China Automotive as of December 31, 2006:
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Interest held by |
|
|
Jurisdiction of |
|
|
Brilliance China |
Name of Companies |
|
Incorporation |
|
|
Automotive |
Subsidiaries
|
|
|
|
|
|
|
|
|
Shenyang Brilliance JinBei Automobile Co., Ltd. |
|
China |
|
|
51.0 |
% |
Ningbo Yuming Machinery Industrial Co., Ltd. |
|
China |
|
|
100.0 |
% |
Shenyang XingYuanDong Automobile Component Co., Ltd. |
|
China |
|
|
100.0 |
% |
Shenyang Jianhua Motors Engine Co., Ltd. |
|
China |
|
|
60.8 |
% |
Ningbo Brilliance Ruixing Auto Components Co., Ltd. |
|
China |
|
|
100.0 |
% |
Mianyang Brilliance Ruian Automotive Components Co., Ltd. |
|
China |
|
|
100.0 |
% |
Shenyang JinBei Automotive Industry Holdings Company Ltd. |
|
China |
|
|
99.0 |
% |
Shenyang XinJinBei Investment and Development Co., Ltd. |
|
China |
|
|
100.0 |
% |
Shenyang Brilliance Dongxing Automotive Component Co., Ltd. |
|
China |
|
|
100.0 |
% |
Shenyang Jindong Development Co., Ltd. |
|
China |
|
|
75.5 |
% |
Shenyang Chenfa Automobile Component Co., Ltd. |
|
China |
|
|
100.0 |
% |
Shanghai Hidea Auto Design Co., Ltd. |
|
China |
|
|
63.3 |
% |
Shenyang Brilliance Power Train Machinery Co., Ltd. |
|
China |
|
|
75.0 |
% |
China Brilliance Automotive Components Group Limited |
|
Bermuda |
|
|
100.0 |
% |
Southern State Investment Limited |
|
BVI |
|
|
100.0 |
% |
Beston Asia Investment Limited |
|
BVI |
|
|
100.0 |
% |
Pure Shine Limited |
|
BVI |
|
|
100.0 |
% |
Key Choices Group Limited |
|
BVI |
|
|
100.0 |
% |
Brilliance China Automotive Finance Ltd. |
|
BVI |
|
|
100.0 |
% |
Brilliance China Finance Limited |
|
BVI |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Jointly Controlled Entities
|
|
|
|
|
|
|
|
|
Mianyang Xinchen Engine Co., Ltd. |
|
China |
|
|
50.0 |
% |
Shenyang Xinguang Brilliance Automobile Engine Co., Ltd. |
|
China |
|
|
50.0 |
% |
BMW Brilliance Automotive Ltd. |
|
China |
|
|
49.5 |
% |
|
|
|
|
|
|
|
|
|
Associated Companies
|
|
|
|
|
|
|
Shenyang Aerospace Mitsubishi Motors Engine Manufacturing
Co., Ltd. |
|
China |
|
|
12.8 |
% |
Shenyang JinBei Vehicle Dies Manufacturing Co., Ltd. |
|
China |
|
|
48.0 |
% |
Property, Production Facilities and Equipment
The Shenyang municipal government granted to Shenyang Automotive the right to use three
parcels of land situated in the northern, eastern and western sectors of Shenyang with a total area
of approximately 960,000 square meters, approximately 90% of which is currently utilized by
Shenyang Automotive and BMW Brilliance. These land use rights will expire in 2021.
The western parcel consists of 66,000 square meters, 40,000 square meters of which is occupied
by a mid-priced minibus production facility for stamping out parts. This facility is currently
utilized to produce a small number of special purpose minibuses and can also be used to produce
components as well.
50
The northern parcel covers 40,000 square meters and is used by Shenyang Automotive primarily
for parts production.
The eastern parcel covers 854,000 square meters, including Shenyang Automotives and BMW
Brilliances production facilities. Shenyang Automotives minibus facility currently has a
production capacity of 80,000 minibuses per year (based on two shifts) and 120,000 minibuses (based
on three shifts). This facility is specially designed for the manufacture and assembly of minibuses
and consists of four workshops. The stamping and assembly workshops for minibuses currently have
annual production capacities of 80,000 and 90,000 units, respectively, based on two shifts of
workers, and can be increased to 120,000 units based on three shifts. The welding and painting
workshops currently have annual production capacities of 120,000 units, based on two shifts of
workers.
In 2003, Shenyang Automotive completed the construction of new manufacturing facilities for
sedans (including the Zhonghua sedan), which has a production capacity of 100,000 units, based on
two shifts per day, and 130,000 units, based on three shifts per day. The new manufacturing
facilities are located adjacent to Shenyang Automotives previously existing minibus production
facilities in the eastern parcel and include new pressing, welding, painting and final assembly
lines. Dies and other key production equipment were purchased from leading European equipment
manufacturers for the Zhonghua sedan. The total costs for completion of this expansion project were
approximately US$250.0 million, including new equipment, construction costs and other expenditures,
but excluding the design costs for the sedans. See Item 5 Operating and Financial Review and
Prospects Liquidity and Capital Resources.
Certain workshops in these new sedan manufacturing facilities are currently shared with BMW
Brilliance, including part of a welding workshop for the BMW sedans, all of the painting
facilities, and part of the Zhonghua sedan assembly shop, which is currently used by BMW Brilliance
to test BMW sedans.
Shenyang Automotive has transferred legal titles and ownership of certain buildings in its
eastern parcel to BMW Brilliance for use in the production of BMW sedans. The agreement also states
that BMW Brilliance will lease back a substantial portion of those buildings to Shenyang
Automotive. BMW Brilliance also has the option to require Shenyang Automotive to purchase back such
buildings at the purchase price less depreciation upon the occurrence of certain events, including
the passing of a valid resolution pursuant to the joint venture contract by the board of directors
of BMW Brilliance. For financial reporting purposes, the buildings were retained as fixed assets on
the balance sheet of Brilliance China Automotive and the portion of consideration received from BMW
Brilliance is treated as a financing and will be partially offset against the lease rental payable
in future years.
In December 2003, BMW Brilliance purchased certain machinery and equipment from Shenyang
Automotive for use in the production of BMW sedans. The agreement of sale includes an option for
BMW Brilliance to require Shenyang Automotive to purchase back such machinery and equipment at the
purchase price less depreciation upon the occurrence of certain events, including the passing of a
valid resolution pursuant to the joint venture contract by the board of directors of BMW
Brilliance. This machinery and equipment is maintained by BMW Brilliance for the manufacturing of
its products, as well as to provide certain services to Shenyang
51
Automotive upon the payment of a service fee, which is a predetermined fixed charge per unit
based on the number of Zhonghua sedans produced by Shenyang Automotive using this machinery and
equipment.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with the rest of this annual report,
including the consolidated financial statements and notes thereto contained elsewhere in this
annual report. The results discussed below are not necessarily indicative of the results to be
expected in any future periods.
Overview
Brilliance China Automotive is a holding company. Prior to 2002, Brilliance China Automotives
operating segment consisted solely of the manufacture and sale of minibuses and automotive
components through its subsidiaries and associated companies within China. No separate financial
information and segment information was disclosed. In 2002 and 2003, Brilliance China Automotive
began manufacturing and selling Zhonghua sedans and BMW sedans through Shenyang Automotive and BMW
Brilliance, respectively, which are managed separately because each of them represents a strategic
business unit that serves a different market in the PRC automobile industry. Therefore, Brilliance
China Automotives reportable operating segments consist of (1) the manufacture and sale of
minibuses and automotive components, (2) the manufacture and sale of Zhonghua sedans and (3) the
manufacture and sale of BMW sedans. The accounting policies of each operating segment are the same.
Brilliance China Automotive evaluates performance based on stand-alone operating segment net income
and generally accounts for intersegment sales and transfers as if the sales or transfers were to
third parties, that is, at current market prices. Brilliance China Automotives activities are
conducted predominantly in China. Accordingly, no geographical segmentation analysis is provided.
Prior to May 1998, Brilliance China Automotives sole operating asset was its interest in
Shenyang Automotive. As a result, Brilliance China Automotives historical results of operations
had been primarily driven by the sales price, sales volume and cost of production of Shenyang
Automotives minibuses. With a view to maintaining quality, ensuring a stable supply of certain key
components and developing new businesses and products, Brilliance China Automotive acquired
interests in various suppliers of components and established joint ventures in China since May
1998. As a result of these additional investments and joint ventures, Brilliance China Automotives
income base has since broadened and its future financial performance is driven by the sales of
numerous vehicles and components in addition to those produced by Shenyang Automotive.
In May 1998, Brilliance China Automotive acquired indirect interests in two components
suppliers: (1) a 51% equity interest in Ningbo Yuming Machinery Industrial Co., Ltd., a wholly
foreign-owned Chinese enterprise primarily engaged in the production of automobile window molding,
stripping and other auto components; and (2) a 50% equity interest in Mianyang Xinchen Engine Co.,
Ltd., a Sino-foreign joint venture manufacturer of gasoline engines for use in passenger vehicles
and light duty trucks. On October 19, 2004, Brilliance China Automotive,
52
through a subsidiary, entered into an agreement to acquire the remaining 49% interest in
Ningbo Yuming. With the approval of the acquisition by the government on November 25, 2004, Ningbo
Yuming became a wholly owned subsidiary of Brilliance China Automotive.
In October 1998, June 2000 and July 2000, Brilliance China Automotive established Shenyang
XingYuanDong Automobile Component Co., Ltd., Ningbo Brilliance Ruixing Auto Components Co., Ltd.
and Mianyang Brilliance Ruian Automotive Components Co., Ltd., respectively, as its wholly owned
subsidiaries to centralize and consolidate the sourcing of auto parts and components for Shenyang
Automotive. In 2001, in order to maintain their preferential tax treatment from the Chinese
government, all three companies began manufacturing automotive components as well.
In December 2000, Brilliance China Automotive acquired a 50% equity interest in Shenyang
Xinguang Brilliance Automobile Engine Co., Ltd., a Sino-foreign equity joint venture manufacturer
of gasoline engines for use in passenger vehicles. In December 2001, Brilliance China Automotive
acquired a 100% equity interest in Shenyang Brilliance Dongxing Automotive Component Co., Ltd., a
foreign-invested manufacturer of automotive components in China.
In May 2002, Shenyang Automotive obtained the approval from the Chinese government to produce
and sell its Zhonghua sedans in China. The Zhonghua sedans were launched in the market in August
2002. In March 2006, a new model of the Zhonghua sedan, Junjie, was launched in the market.
On March 27, 2003, Brilliance China Automotive, through its indirect subsidiary, Shenyang
JinBei Automotive Industry Holdings Co., Ltd., or SJAI, entered into a joint venture contract with
BMW Holding BV to produce and sell BMW-designed and branded sedans in China. The registered capital
and total investment cost of the joint venture was Euro 150 million and Euro 450 million,
respectively. At that time, Brilliance China Automotives effective interests in SJAI and the joint
venture with BMW were 81% and 40.5%, respectively. On April 28, 2003, Brilliance China Automotive
increased its effective interest in SJAI from 81% to 89.1% and thereby increased its effective
interest in the joint venture with BMW from 40.5% to 44.6%. On December 16, 2003, Brilliance China
Automotive further increased its effective interest in SJAI from 89.1% to 99.0% and thereby
increased its effective interest in the joint venture with BMW from 44.55% to 49.5%.
On December 29, 2003, Brilliance China Automotive entered into agreements in relation to the
proposed acquisition of an indirect 40.1% interest in Shenyang JinBei Automotive Company Limited,
the joint venture partner of Shenyang Automotive and a supplier of automotive components for
Brilliance China Automotives minibuses and sedans. JinBei is an A-share company listed on the
Shanghai Stock Exchange. As a result of JinBeis recent share reform, which took place in August
2006, all issued shares of JinBei were converted into tradable shares on the Shanghai Stock
Exchange. Brilliance China Automotives prospective 40.1% interest in JinBei consequently was
reduced to 33.1%. Upon obtaining the approvals from the relevant government authorities and
completion of the proposed acquisition, Brilliance China Automotives effective interest in
Shenyang Automotive will increase from 51% to approximately 63.9%.
53
On November 28, 2003, Brilliance China Automotive, through its wholly owned subsidiary,
Brilliance China Automotive Finance Ltd., issued an aggregate principal amount of US$200.0 million
(equivalent to approximately Rmb 1,654.3 million at the time of issue) zero coupon convertible
bonds due 2008. These bonds are guaranteed by Brilliance China Automotive and are convertible into
fully paid ordinary shares with a par value of US$0.01 of Brilliance China Automotive at an initial
conversion price of HK$4.60 per share at any time from January 8, 2004 to November 14, 2008, unless
the bonds have previously been redeemed or matured. Brilliance China Automotive Finance Ltd. may
redeem a portion of the convertible bonds in certain circumstances at the early redemption amount
(as defined in the Trust Deed constituting the bonds) during the period from November 28, 2005 to
November 14, 2008. In addition, all or some of the bonds may be redeemed at the option of the
holder at 102.27% of their principal amount on November 28, 2006 and upon certain events, such as
the change of control of Brilliance China Automotive or the shares of Brilliance China Automotive
ceasing to be listed on The Stock Exchange of Hong Kong Limited, the bonds may be redeemed at the
option of the holder at the early redemption amount (as defined in the Trust Deed constituting the
bonds). These bonds rank equally with all of Brilliance China Automotives senior, unsecured and
unsubordinated obligations. As of December 31, 2006, all of the outstanding bonds had been
repurchased or redeemed. Total consideration for the repurchase and redemption amounted to
approximately US$202.5 million.
On June 7, 2006, Brilliance China Automotive, through its wholly owned subsidiary, Brilliance
China Finance Limited (formerly known as Goldcosmos Investments Limited), issued zero coupon
guaranteed convertible bonds due 2011 with an aggregate principal amount of approximately US$183.0
million (equivalent to approximately Rmb 1,460.8 million at the time of issue). These bonds are
guaranteed by Brilliance China Automotive and are convertible by the holders into fully paid
ordinary shares with a par value of US$0.01 of Brilliance China Automotive at an initial conversion
price of HK$1.93 per share at any time from July 6, 2006 to May 8, 2011, unless the bonds have
previously been redeemed or matured. Brilliance China Finance Limited may redeem the convertible
bonds in whole but not in part in certain circumstances at the early redemption amount (as defined
in the Trust Deed constituting the bonds) during the period from June 7, 2008 to May 8, 2011. In
addition, each holder will have the right, at the option of the holder, to redeem in whole but not
in part the convertible bonds at 122.926% of their principal amount on June 7, 2009. Unless
previously redeemed, converted or purchased and cancelled, the convertible bonds will be redeemed
at 141.060% of their outstanding principal amount on June 7, 2011. As of December 31, 2006, none
of the bonds had been repurchased, redeemed or converted into ordinary shares of Brilliance China
Automotive.
Production Volumes and Sales
Brilliance China Automotive derives its revenues from the sale of minibuses, sedans and
automotive components in China. Total sales for the years ended December 31, 2006 and 2005 was Rmb
10,484.8 million and Rmb 5,469.0 million, respectively. The increase in sales was primarily due to
increase in unit sales of Shenyang Automotives minibuses and, especially, Zhonghua sedans in 2006.
The mid-priced minibus continues to be one of Brilliance China Automotives most popular and
competitive products. Despite increasing competition in Chinas automobile
54
industry, Brilliance China was able to maintain its position as the market leader in the
minibus market in 2006. Sales of deluxe minibuses, mid-priced minibuses, Zhonghua sedans and
components represented 13.9%, 28.8%, 49.5% and 7.8%, respectively, of Brilliance China Automotives
total sales revenue in 2006. Brilliance China Automotive expects that the minibuses, together with
the Zhonghua sedans, will continue to represent a significant proportion of its total revenue.
Costs and Expenses
The major elements of Shenyang Automotives production costs in recent years have been the
purchase of automotive components, labor and depreciation and amortization. Shenyang Automotive has
significantly lowered its per unit production costs by improving operating efficiency, increasing
production volume and increasing the domestic component content ratios of its deluxe and mid-priced
models. As a result, average per unit production costs (including depreciation and amortization)
for the deluxe model have been steadily decreasing over the past several years. The domestic
component ratio of the Zhonghua sedans also increased from 60% in August 2002 to its current level
of over 90%.
In 2006, per unit production costs for minibuses remained relatively stable. The average per
unit production costs for the Zhonghua sedans decreased by approximately 39.1% mainly due to an
improvement in production efficiency and economies of scale together with a decrease in cost of
components in 2006. Due to the intensified price competition brought about by the significantly
weakened market and the change in product mix, the average selling prices of minibuses and Zhonghua
sedans decreased in 2006 by an average of 2.8% and 14.9% respectively, compared to those in 2005.
Gross profit increased from Rmb 457.0 million (US$56.6 million) in 2005 to Rmb 524.2 million (US$67.2 million) in 2006 as a result of an increase in unit sales of Shenyang Automotives minibuses,
and especially Zhonghua sedans, and a decrease in the average unit costs for both the minibuses and
Zhonghua sedans.
Imported components are generally more expensive than domestically produced components and
were subject to import duties that have ranged as high as 120% since January 1992. However, as a
result of Chinas accession to the WTO in November 2001, import duties on automotive components
decreased to between 14% and 31.4% in 2002, between 4.8% and 25% in 2003, between 5% and 22.9% in
2004, between 5% and 18.6% in 2005, between 5% and 14.3% in 2006 and between 5% and 10.0% in 2007.
In 2004, Shenyang Automotive paid an average tariff of 13.8% and 10.5% on its minibus (including
Granse minibus) and sedan components, respectively. In 2005, Shenyang Automotive was subject to an
average tariff rate of 9.7% and 12.1% on imported components used in its deluxe minibuses
(including Granse minibuses) and Zhonghua sedans, respectively. In 2006, the average tariffs were
reduced to 8.2% and 10.4% on imported components for deluxe minibuses and Zhonghua sedans,
respectively. Shenyang Automotive intends to continue its efforts to increase the domestic
component content of its products, while at the same time maintaining quality. However, Brilliance
China Automotive expects that future improvements in domestic component content for its existing
mid-priced and deluxe minibuses (other than the Granse model) will be at a rate slower than in
prior years due to an already high domestic component content ratio, and the extent and rate of any
corresponding price reductions are expected to be lower than in prior years. Brilliance China
55
Automotive expects to increase the ratio of domestic components in the Granse minibus and
the Zhonghua sedan. Brilliance China Automotive also expects BMW Brilliance to increase the
domestic components ratio in its BMW sedans. However, given the sophisticated technology
associated with BMW Brilliances products as well as the relatively small production volume
achieved to date, there is no guarantee that BMW Brilliance will be able to meet the required local
content level, or that final approval for tariff reduction will be granted by the government.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(Rmb thousands) |
|
|
Sales to third parties |
|
|
9,067,505 |
|
|
|
3,859,151 |
|
|
|
4,402,141 |
|
Sales to affiliated companies |
|
|
1,417,249 |
|
|
|
1,609,839 |
|
|
|
2,139,857 |
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
10,484,754 |
|
|
|
5,468,990 |
|
|
|
6,541,998 |
|
Cost of sales |
|
|
(9,960,587 |
) |
|
|
(5,011,955 |
) |
|
|
(5,491,250 |
) |
Gross profit |
|
|
524,167 |
|
|
|
457,035 |
|
|
|
1,050,748 |
|
Selling, general and administrative expenses |
|
|
(1,384,718 |
) |
|
|
(1,195,336 |
) |
|
|
(1,510,442 |
) |
Interest expense |
|
|
(177,001 |
) |
|
|
(182,354 |
) |
|
|
(182,458 |
) |
Interest income |
|
|
90,738 |
|
|
|
60,189 |
|
|
|
58,800 |
|
Equity in earnings of associated companies and jointly
controlled entities, net |
|
|
149,320 |
|
|
|
48,995 |
|
|
|
126,261 |
|
Subsidy income |
|
|
50,176 |
|
|
|
3,139 |
|
|
|
1,815 |
|
Other income, net |
|
|
106,150 |
|
|
|
43,650 |
|
|
|
25,709 |
|
Impairment loss on intangible assets |
|
|
|
|
|
|
(173,000 |
) |
|
|
(50,000 |
) |
Impairment
loss on goodwill(1) |
|
|
(73,343 |
) |
|
|
(257,720 |
) |
|
|
(47,320 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) before taxation and minority interests |
|
|
(714,511 |
) |
|
|
(1,195,402 |
) |
|
|
(526,887 |
) |
(Provision) benefit for income taxes |
|
|
(47,879 |
) |
|
|
(101,884 |
) |
|
|
63,110 |
|
Minority interests |
|
|
376,282 |
|
|
|
625,997 |
|
|
|
464,991 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(386,108 |
) |
|
|
(671,289 |
) |
|
|
1,214 |
|
|
|
|
(1) |
|
In 2006, an impairment loss on goodwill of Rmb 73.3 million in
relation to one of Brilliance China Automotives jointly controlled
entities was recognized. |
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Total sales of Brilliance China Automotive in the year ended December 31, 2006 were Rmb
10,484.8 million (US$1,343.5 million), representing a 91.7% increase from Rmb 5,469.0 million in
2005. The increase in total sales from 2005 to 2006 was primarily due to increases in unit sales
of Shenyang Automotives minibuses and, especially, Zhonghua sedans in 2006.
Total sales of the minibuses and automotive components segment were Rmb 5,295 million
(US$678.5 million) in the year ended December 31, 2006, representing a 15.0% increase from Rmb
4,606 million in 2005. Sales of the Zhonghua sedans were 5,190 million (US$665.0 million) in the
year ended December 31, 2006, representing a 501.3% increase from Rmb 863.1 million in 2005.
56
Shenyang Automotive sold 66,245 minibuses in 2006, representing a 10.4% increase from
approximately 60,000 minibuses sold in 2005. Of these vehicles sold, 52,049 were mid-priced minibuses, representing a 4.0% increase from approximately 50,060 units sold in 2005.
Unit sales of deluxe minibuses increased by 42.8% from approximately 9,940 units in 2005 to 14,196
units in 2006. Shenyang Automotive sold 62,281 Zhonghua sedans in 2006, representing a 592.0%
increase from approximately 9,000 sedans sold in 2005.
Cost of sales increased 98.7% from Rmb 5,012.0 million in 2005 to Rmb 9,960.6 million
(US$1,276.3 million) in 2006. The increase was primarily due to the increase in the unit sales of both
minibuses and Zhonghua sedans in 2006. However, the average unit costs for both the minibuses and
Zhonghua sedans decreased in 2006, mainly due to the improvement in production efficiency and
economies of scales together with the decrease in cost of components. Despite the increase in
sales and decrease in unit costs, the overall gross profit margin of Brilliance China Automotive
decreased from 8.4% in 2005 to 5.0% in 2006. The decrease in gross profit margin resulted mainly
from the significant increase in sales of Zhonghua sedans, which have yet to reach profitability in
2006, as well as a shift in product mix to lower-margin products.
Selling, general and administrative expenses increased by 15.8% from Rmb 1,195.3 million,
representing 21.9% of sales in 2005, to Rmb 1,384.7 million (US$177.4 million), representing 13.2%
of sales in 2006. The increase was mainly due to the increase in advertising, promotion and
marketing expenses as well as transportation costs for finished products resulting from the
increase in sales volume of Zhonguha sedans and minibuses in 2006, together with an increase in
staff costs. Selling, general and administrative expenses as a percentage of turnover decreased
from 21.9% in 2005 to 13.2% in 2006 as the rate of increase in turnover exceeded that of
advertising, promotion and marketing expenses in 2006.
Interest expense net of interest income decreased by 29.4% to Rmb 86.3 million (US$11.1
million) in 2006 from Rmb 122.2 million in 2005, resulting mainly from the increase in interest
income from deposits placed with banks and a financial institution.
Net equity in earnings of associated companies and jointly controlled entities increased
204.7% from Rmb 49.0 million in 2005 to Rmb 149.3 million (US$19.1 million) in 2006. The increase
was mainly attributable to the increased profits contributed by BMW Brilliance, Brilliance China
Automotives 49.5% indirectly owned jointly controlled entity and an associate in 2006. Net
profits contributed to Brilliance China Automotive by BMW Brilliance increased by 237.7% from
RMB31.6 million in 2005 to RMB106.7 million in 2006. The BMW joint venture achieved sales of
23,600 BMW sedans in 2006, an increase of 34.8% as compared to 17,501 BMW sedans in 2005.
Subsidy income increased from Rmb 3.1 million in 2005 to Rmb 50.2 million (US$6.4 million) in
2006. The increase was mainly due to the receipt of new government grants by a subsidiary in 2006.
Other income net of expenses increased from Rmb 43.7 million in 2005 to Rmb 106.2 million
(US$13.6 million) in 2006. The increase was primarily due to increases in Brilliance China
Automotives sales of scrap materials and rental income.
57
No impairment loss on intangible assets was provided for the year ended December 31, 2006
compared to a provision of Rmb 173.0 million in 2005. The 2005 impairment loss was related to the
low sales volume and decrease in average unit selling prices of Zhonghua sedans in 2005.
Impairment loss on goodwill decreased from Rmb 257.7 million in 2005 to Rmb 73.3 million
(US$9.4 million) in 2006. The decrease was mainly because Brilliance China Automotive recognized
impairment loss for one of its jointly controlled entities in 2006, while it recognized an
impairment loss both for the jointly controlled entity and a subsidiary in 2005.
Loss before taxation and minority interests decreased 40.2% from Rmb 1,195.4 million in 2005
to Rmb 714.5 million (US$91.6 million) in 2006. Taxation decreased by 53.0% from Rmb 101.9 million
in 2005 to Rmb 47.9 million (US$6.1 million) in 2006, resulting mainly from the recognition of
certain deferred tax assets as expenses in 2005.
As a result, Brilliance China Automotive recorded a net loss of Rmb 386.1 million (US$49.5
million) in 2006, compared with a net loss of Rmb 671.3 million in 2005. Basic loss per ADS
amounted to Rmb 10.53 (US$1.3) in 2006 as compared to the basic loss per ADS of Rmb 18.3 (US$2.3)
in 2005.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Total sales of Brilliance China Automotive in the year ended December 31, 2005 were Rmb
5,469.0 million (US$677.7 million), representing a 16.4% decrease from Rmb 6,542.0 million in 2004.
The decrease in total sales from 2005 to 2004 was primarily due to the decrease in sales volume of
Shenyang Automotives minibuses and Zhonghua sedans and the decrease in average unit selling prices
due to the intensified price competition of the Chinese automobile industry during 2005.
Total sales of the minibuses and automotive components segment were Rmb 4,605.9 million
(US$570.7 million) in the year ended December 31, 2005, representing a 11.7% decrease from Rmb
5,217.4 million in 2004. Sales of the Zhonghua sedans were Rmb 863.1 million (US$107.0 million) in
the year ended December 31, 2005, representing a 34.8% decrease from Rmb 1,324.6 million in 2004.
Shenyang Automotive sold approximately 60,000 minibuses in 2005, representing a 2.6% decrease
from approximately 61,618 minibuses sold in 2004. Of these vehicles sold, approximately 50,060
were mid-priced minibuses, representing a 9.0% decrease from approximately 54,992 units sold in
2004. Unit sales of deluxe minibuses, however, increased by 50.0% from approximately 6,626 units
in 2004 to approximately 9,940 units in 2005. Shenyang Automotive sold approximately 9,000
Zhonghua sedans in 2005, representing a 18.0% decrease from approximately 10,982 sedans sold in
2004.
Cost of sales decreased 8.7% from Rmb 5,491.3 million in 2004 to Rmb 5,012.0 million (US$621.1
million) in 2005. The decrease was primarily due to the decrease in the unit sales of minibuses
and Zhonghua sedans in 2005. Furthermore, the unit production costs of minibuses have decreased as
a result of the reduction of materials and component costs in 2005. The
58
overall gross profit margin of Brilliance China Automotive decreased from 16.1% in 2004 to
8.4% in 2005. The decrease in gross profit margin resulted mainly from the decrease in gross
profit margin of both Zhonghua sedans and mid-priced minibuses due to the lower sales volume and
decrease in average unit selling prices.
Selling, general and administrative expenses decreased 20.9% from Rmb 1,510.4 million,
representing 23.1% of sales in 2004, to Rmb 1,195.3 million (US$148.1 million), representing 21.9%
of sales in 2005. The decrease was primarily due to the reduction in advertising, promotion and
marketing expenses resulting from the decrease in sales volume of Zhonghua sedans and minibuses in
2005 and the reduction in research and development costs as compared to 2004.
Interest expense net of interest income amounted to Rmb 122.2 million (US$15.1 million) in
2005, compared to Rmb 123.7 million in 2004.
Net equity in earnings of associated companies and jointly controlled entities decreased 61.2%
from Rmb 126.3 million in 2004 to Rmb 49.0 million (US$6.1 million) in 2005. The decrease was
mainly due to the decrease in profit contributed by jointly controlled entities and associated
companies and the losses of a jointly controlled engine company in 2005. However, the decrease was
partly offset by the increase in contribution of profit from BMW Brilliance Automotive Ltd. in
2005. Net profits contributed by BMW Brilliance Automotive Ltd., Brilliance China Automotives 49%
indirectly owned jointly controlled entity, increased 45.0% from Rmb 21.8 million in 2004 to Rmb
31.6 million in 2005. The BMW joint venture achieved sales of 17,501 BMW sedans in 2005, an
increase of 101.0% as compared to 8,708 BMW sedans in 2004.
Subsidy income increased from Rmb 1.8 million in 2004 to Rmb 3.1 million in 2005. The
increase was mainly due to recognition of a government grant to a subsidiary in 2005.
Other income net of expenses increased from Rmb 25.7 million in 2004 to Rmb 43.7 million
(US$5.4 million) in 2005. The increase was primarily due to service income received from a jointly
controlled entity in 2005.
Impairment loss on intangible assets increased from Rmb 50.0 million in 2004 to Rmb 173.0
million in 2005. The impairment loss was related to the design and development costs of the
Zhonghua sedans. The increase was mainly related to the lower sales volume and decrease in average
unit selling prices of Zhonghua sedans in 2005.
Impairment loss on goodwill increased from Rmb 47.3 million in 2004 to Rmb 257.7 million in
2005. The increase was mainly due to impairment loss in relation to one of the jointly controlled
entities and a subsidiary.
Loss before taxation and minority interests increased 126.9% from Rmb 526.9 million in 2004 to
Rmb 1,195.4 million in 2005. Brilliance China Automotive recorded a tax expense of Rmb 101.9
million in 2005 as compared to a net tax credit of Rmb 63.1 million in 2004, resulting mainly from
the additional valuation allowance of deferred tax assets in 2005.
59
As a result, Brilliance China Automotive recorded a net loss of Rmb 671.3 million (US$83.2
million) in 2005, compared with net income of Rmb 1.2 million in 2004. Basic loss per ADS amounted
to Rmb 18.3 (US$2.3) in 2005 as compared to the basic earnings per ADS of Rmb 0.03 (US$0.0036) in
2004.
Contingent Liabilities and Outstanding Guarantees
As of December 31, 2006, Brilliance China Automotive and its subsidiaries had provided the
following guarantees:
|
|
|
Corporate guarantees of approximately Rmb 120 million (US$15.4 million)
for revolving bank loans and notes drawn by affiliated companies of Shanghai Shenhua
Holdings Co., Ltd., or Shanghai Shenhua. The guarantee arose from the mutual
negotiation between Shenyang Automotive and Shanghai Shenhua. Associated with the
corporate guarantee, Shanghai Shenhua also provided a cross guarantee for the bank
facilities of Shenyang Automotive. The guarantee was for revolving activities of
Shanghai Shenhua and will be terminated upon mutual agreements between Shenyang
Automotive and Shanghai Shenhua. If Shanghai Shenhua defaults on the repayment of its
bank loans or notes when they fall due, Shenyang Automotive is required to repay the
outstanding balance. There is no recourse or collateralization provision in the
guarantee. Default by Shanghai Shenhua and its affiliated companies is considered
remote by management and therefore no provision for the guarantors obligation under
the guarantee was recorded as of December 31, 2006. |
|
|
|
|
A joint and several proportional corporate guarantee with a shareholder of
Shenyang Aerospace on a Shenyang Aerospaces long-term bank loan. As of December 31,
2006, no amount is outstanding on the loan. The guarantee was provided by Brilliance
China Automotive and a shareholder of Shenyang Aerospace for its long-term loan
financing needs during its start-up period. If Shenyang Aerospace defaults on the
repayment of its bank loan when it falls due, Brilliance China Automotive and the
shareholder are jointly and severally liable to repay the outstanding balance. There
is no recourse or collateralization provision in the guarantee. |
|
|
|
|
Corporate guarantees of bank loans amounting to Rmb 295 million (US$37.8
million), which is also the maximum potential amount of future payments under the
guarantee as of December 31, 2006, drawn by JinBei. Bank deposits of Rmb 312 million
(US$40.0 million) were pledged as a collateral for the corporate guarantees. However,
default by JinBei is considered remote by management and therefore no provision for the
guarantors obligation under the guarantee was recorded as of December 31, 2006. |
See also Item 8 Financial Information Legal Proceedings for a discussion of potential
contingent liabilities relating to legal proceedings.
60
Liquidity and Capital Resources
The following table set forth our outstanding contractual and commercial commitments as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period |
|
|
|
(Rmb thousands) |
|
Contractual Obligations |
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
More than 5 years |
|
Notes payable (1) |
|
|
2,141,947 |
|
|
|
2,141,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to affiliated companies (2) |
|
|
37,288 |
|
|
|
37,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible bonds (3) |
|
|
1,755,488 |
|
|
|
|
|
|
|
1,755,488 |
|
|
|
|
|
|
|
|
|
Financing from BMW Brilliance (4) |
|
|
165,271 |
|
|
|
165,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations (relating to
offices and property) |
|
|
88,149 |
|
|
|
18,943 |
|
|
|
24,627 |
|
|
|
4,053 |
|
|
|
40,526 |
|
Unconditional purchase obligations |
|
|
186,260 |
|
|
|
186,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,374,403 |
|
|
|
2,549,709 |
|
|
|
1,780,115 |
|
|
|
4,053 |
|
|
|
40,526 |
|
|
|
|
(1) |
|
Approximately Rmb 1.7 billion of the Rmb 2.1 billion notes payable had effective interest
rates of 3% to 4%. The remaining Rmb 0.4 billion notes payable were interest free. |
|
(2) |
|
Notes payable to affiliated companies are non-interest bearing. |
|
(3) |
|
Included in the amount is a total accreted redemption premium payable on June 7, 2009 of
approximately Rmb 327.4 million (US$41.9 million). The accreted redemption premium as of
December 31, 2006 of approximately Rmb 59.2 million (US$7.5 million) was calculated based on
the outstanding principal of the convertible bonds using the effective interest method. |
|
(4) |
|
Accrued interest of approximately Rmb 51.9 million was calculated on the outstanding
principal using the compound interest method at an effective annual rate of 11.127% on a
quarterly basis. |
Cash Flows
As of December 31, 2006, Brilliance China Automotive and its subsidiaries had Rmb 1,468.1
million in cash and cash equivalents, Rmb 616.8 million in short-term bank deposits and Rmb 1,625.1
million in pledged short-term bank deposits, an increase of Rmb 624.7 million, a decrease of Rmb
437.0 million and a decrease of Rmb 307.5 million from its positions as of December 31, 2005,
respectively. The increase in cash and cash equivalents during that period was mainly due to an
increase in cash from operating activities.
Brilliance China Automotive had bank notes payable of Rmb 2,179.2 million and outstanding
short-term bank borrowings of Rmb 500.0 million, but had no long-term bank borrowings outstanding
as of December 31, 2006.
For the year ended December 31, 2006, Brilliance China Automotive recorded net cash provided
by operating activities of Rmb 1,145.6 million (US$146.8 million), an increase of
61
Rmb 262.2 million from the amount of Rmb 883.4 million net cash provided by operating activities
in 2005. The increase was primarily due to:
|
|
|
a decrease in net loss of Rmb 386.1 million (US$49.5 million) in 2006
compared to Rmb 671.3 million in 2005; |
|
|
|
|
an increase in notes and accounts payable in the amount of Rmb 1,487.9
million (US$190.7 million) for the year ended December 31, 2006, as compared to a
decrease of Rmb 333.3 million for the year ended December 31, 2005; and |
|
|
|
|
an increase in amounts due to affiliated companies of Rmb 363.5 million
(US$46.6 million) for the year ended December 31, 2006, as compared to an increase of
Rmb 171.9 million for the year ended December 31, 2005. |
Net cash provided by investing activities amounted to Rmb 514.8 million (US$66.0 million) in
2006, an increase of Rmb 176.4 million from Rmb 338.4 million in 2005. The increase was primarily
attributable to the decrease in capital expenditures from Rmb 558.0 million in 2005 to Rmb 304.2
million in 2006 (US$39.0 million) and the decrease in short-term bank deposits of Rmb 437.0 million
(US$56.0 million) in 2006, compared to an increase of Rmb 45.2 million in 2005. The increase in
cash provided by investing activities was partially offset by a Rmb 307.5 million (US$39.4 million)
decrease in pledged short term bank deposits, compared to a decrease of Rmb 844.5 million in 2005
and a Rmb 12.9 million (US$1.7 million) increase in advances to affiliated companies, compared to
an increase of Rmb 8.7 million in 2005.
Net cash used in financing activities amounted to Rmb 1,035.7 million (US$132.7 million) in
2006, as compared to net cash used in financing activities of Rmb 1,622.9 million in 2005. This
decrease in cash used in financing activities is primarily attributable to a decrease in repayment
of notes payable from Rmb 10,106.0 million in 2005 to Rmb 5,532.5 million (US$708.9 million) in
2006, an increase in advances from affiliated companies of Rmb 102.5 million (US$13.1 million) and
proceeds from the issuance of convertible bonds due 2011 of Rmb 1,460.8 million (US$187.2 million).
The decrease in cash used in financing activities was partially offset by an increase in repayment
of short-term bank loans of Rmb 641.8 million and the buy back and redemption of convertible bonds
due 2008 in the amount of Rmb 1,598.3 million.
Debt Changes
On November 28, 2003, Brilliance China Automotive, through its wholly owned subsidiary,
Brilliance China Automotive Finance Ltd., issued zero coupon guaranteed convertible bonds due 2008
with an aggregate principal amount of US$200.0 million. These bonds were guaranteed by Brilliance
China Automotive and are convertible into fully paid ordinary shares of par value US$0.01 of
Brilliance China Automotive at an initial conversion price of HK$4.60 per share at any time from
January 8, 2004 to November 14, 2008, unless the bonds have previously been redeemed or matured.
As of December 31, 2006, all of the outstanding bonds had been repurchased or redeemed. Total
consideration for the repurchase and redemption amounted to approximately US$202.5 million.
62
On June 7, 2006, Brilliance China Automotive, through its wholly owned subsidiary, Brilliance
China Finance Limited (formerly known as Goldcosmos Investments Limited), issued zero coupon
guaranteed convertible bonds due 2011 with an aggregate principal amount of approximately US$183.0
million (equivalent to approximately Rmb 1,460.8 million at the time of issue). These bonds are
guaranteed by Brilliance China Automotive and are convertible by the holders into fully paid
ordinary shares of par value US$0.01 of Brilliance China Automotive at an initial conversion price
of HK$1.93 per share at any time from July 6, 2006 to May 8, 2011, unless the bonds have previously
been redeemed or matured. Brilliance China Finance Limited may redeem the convertible bonds in
whole but not in part in certain circumstances at the early redemption amount (as defined in the
Trust Deed constituting the bonds) during the period from June 7, 2008 to May 8, 2011. In
addition, each holder will have the right, at the option of the holder, to redeem in whole but not
in part the convertible bonds at 122.926% of their principal amount on June 7, 2009. Unless
previously redeemed, converted or purchased and cancelled, the convertible bonds will be redeemed
at 141.060% of their outstanding principal amount on June 7, 2011. As of December 31, 2006, none
of the bonds had been repurchased, redeemed or converted into ordinary shares of Brilliance China
Automotive.
In 2006, Brilliance China Automotive continued to maintain credit facilities with banks to
finance its working capital needs. As of December 31, 2006, direct bank borrowings and bank notes
payable decreased by 25.0% to Rmb 2,641.9 million (US$338.5 million), a decrease of Rmb 881.6
million from Rmb 3,523.5 million as of December 31, 2005. The bank loans and bank notes payable
were either secured by pledged short-term bank deposits or notes receivables, or unsecured, with
maturity periods of less than one year. Brilliance China Automotive believes that it will continue
to have access to sufficient bank facilities to meet its working capital requirements.
Capital Expenditures
Capital expenditures and operating expenses are funded by internal resources, loans and notes
payable borrowed by Shenyang Automotive from third parties. Brilliance China Automotives capital
expenditures were Rmb 251.1 million (US$32.2 million) in 2006, a decrease of Rmb 334.6 million from
Rmb 585.7 million in 2005. Major items of expenditure included facilities upgrades relating to the
production of new versions of the Granse deluxe minibus and Zhonghua sedans and acquisition of new
facilities for engine businesses.
Foreign Currency Requirements
Brilliance China Automotive together with its subsidiaries, associated companies and jointly
controlled entities expect to require an aggregate of approximately Japanese Yen 6,000.0 million,
US$50.0 million and Euro 650.0 million to purchase imported equipment and components from Toyota of
Japan, BMW of Germany and other overseas suppliers for its minibuses and sedans in 2007. This
estimate is based upon the 2007 production plans of Brilliance China Automotive and its
subsidiaries, associated companies and jointly controlled entities and the level of domestic
content expected for its minibuses and sedans in 2007. Brilliance China Automotive believes that
it will be able to obtain adequate amounts of foreign currency to meet its planned requirements for
2007. In 2006, Brilliance China Automotive received approximately Rmb 167.5 million from its sale
of products to the Middle East, Russia
63
and Europe. Under the Chinese law, Brilliance China Automotive and its associated companies
and jointly controlled entities in China are able to obtain necessary foreign exchange in exchange
for Renminbi upon approval from the State Administration of Foreign Exchange, based on executed
purchase contracts, joint venture agreements, feasibility studies and other documents evidencing
the needs and proposed usage of such foreign exchange.
Brilliance China Automotive does not consider exchange rate fluctuations to have any material
effect on the overall financial performance of Brilliance China Automotive, but may consider
entering into hedging transactions through exchange contracts in order to minimize foreign exchange
risks, if and when necessary. There were no outstanding hedging transactions as of December 31,
2006.
Research and Development, Patents and Licenses, etc.
During 2004, 2005 and 2006, Brilliance China Automotive spent Rmb 479.9 million, Rmb 235.2
million and Rmb 214.0 million, respectively, on research and development activities. In 2004,
these amounts were primarily used for the development of new models of minibus, the development of
the facelift version of the Zhonghua sedan and the development of a new 1.8-liter turbo engine
with the technical assistance of FEV Motorentechnik GmbH. In 2005, these amounts were primarily
used for the development of the new Zhonghua sedan, Junjie and the new 1.8-liter turbo engine. In
2006, these amounts were primarily used for the research and development of new engines and new
Hiase minibus projects.
Trend information
General trends that Brilliance China Automotive expects will have a significant impact on its
results of operations in the near future include the following:
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Increased Demand for Motor Vehicles. The rate of increase in Chinas
gross domestic product has been one of the highest in the world over the past decade,
and this growth has fueled demand for automobiles. In fact, demand in the Chinese
automobile industry has been growing over the past several years at a faster rate than
the growth in Chinas gross domestic product. This trend is expected to have a
favorable impact on Brilliance China Automotives sales volume for both minibuses and
sedans. |
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Competition. As a result of Chinas accession to the WTO, domestic
production of automobiles (including minibuses and sedans) is expected to continue
increasing, particularly through Sino-foreign joint ventures that are being established
for this purpose. Formation of new Sino-foreign joint ventures and further investments
by foreign auto makers to increase the capacity of existing operations could result in
overcapacity and increased domestic competition for Brilliance China Automotive and
greater downward pressure on vehicle prices as competitors begin to employ a higher
ratio of domestically produced components and as more competitors achieve economies of
scale due to increased volume of production. |
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Price. Retail prices in the automotive market are expected to continue to
fall as a result of the localization of production and sourcing of components as
described |
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immediately above as well as increased competition. A decrease in average selling
prices may lower margins and cause industry-wide deterioration of profitability. Any
decline in vehicle prices will likely have an adverse effect on Brilliance China
Automotives gross income and profits. |
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Growth, Consolidation and Development. On June 2, 2004, the NDRC issued a
new automotive policy for China to encourage consolidation in the industry and further
the development and sophistication of the automobile industry in areas such as consumer
financing and research and development. The policy acknowledges the success of Chinas
automobile industry and seeks to encourage this pillar industry to foster further
growth, particularly of domestically produced and branded products and research and
development, through consolidation of smaller, less-efficient manufacturers and
increased foreign and domestic investment. By encouraging industry consolidation and
establishing clearer guidelines for foreign investment, the policy encourages existing
players in the industry to grow and provides incentives for targeted investment from
both domestic and foreign sources. On December 26, 2006, the NDRC issued a circular to
assess the current PRC automobile industry and developments since the 2004 policy.
Consistent with the 2004 policy, the NDRC continues to stress the importance of stable
growth and preventing overcapacity in the automobile industry, and to encourage
industry consolidation and reorganization among sectors, in particular the components
sector. The NDRC also encouraged more research and development be focused on new
products, such as environmental friendly models, in order to enhance and upgrade
domestic products. The NDRC also imposed, among other things, a requirement that
annual sales of automobile manufacturers in China must reach certain levels in order
for them to build new manufacturing plants. Given the high capacity utilization rates
already achieved at its production plants, Brilliance China Automotive does not expect
this policy to restrict its capacity expansion plans in the future. |
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Improvements in Chinas Infrastructure. China continues to improve and
expand its roadway system. By making automobile travel a more practical and accessible
mode of transportation for motorists in China, such improvements in Chinas
infrastructure will likely add to demand for automobiles. |
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Rising Fuel Prices. Chinas fuel prices reached historical heights in May
2006 and may continue to increase. Any further increases in fuel prices will likely
have a negative influence on Brilliance China Automotives sales volume. |
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments
and uncertainties and potentially result in materially different results under different
assumptions and conditions.
Brilliance China Automotives consolidated financial statements have been prepared in
accordance with US GAAP. Brilliance China Automotives principal accounting policies are set forth
in note 3 to its consolidated financial statements. US GAAP requires that Brilliance China
Automotive adopt the accounting policies and make estimates that its directors believe are most
65
appropriate in the circumstances for the purposes of giving a true and fair view of its
results of operations and financial condition. However, different policies, estimates and
assumptions in critical areas could lead to materially different results.
Brilliance China Automotive considers certain accounting policies, including those related to
revenue recognition, warranties, inventories, investment in jointly controlled entities and
associated companies, taxation, related party transactions and impairment of long-lived assets, to
be critical accounting policies due to the estimation processes involved in each.
Revenue Recognition
Brilliance China Automotive recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) (as amended by Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104)). SAB 101 and SAB 104 require that four
basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed
and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and
(4) is based on managements judgments regarding the fixed nature of the fee charged for services
rendered and products delivered, and the collectibility of those fees. Should changes in
conditions cause management to determine these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely affected.
Sales represent the invoiced value of goods, net of consumption tax, discounts and returns.
Sales are recognized when goods are delivered to customers and the significant risks and rewards of
ownership of the goods have been transferred to customers. Provisions for sales allowances and
rebates are made at the time of the sales of goods and are recognized as a reduction of sales.
Warranties
Shenyang Automotives minibuses are sold with a 24-month or 50,000 kilometers first-to-occur
limited warranty. The Zhonghua and Junjie sedans are sold with a 36-month or 60,000 kilometers
first-to-occur limited warranty. Zunchi sedans are sold with a 10-year or 200,000 kilometers
first-to-occur limited warranty. During the warranty period, Shenyang Automotive pays service
stations for parts and labor covered by the warranty. The costs of the warranty obligation are
accrued as selling expenses at the time the sales are recognized, based on the estimated costs of
fulfilling the total obligations, including handling and transportation costs. The factors used to
estimate warranty expenses are reevaluated periodically in light of actual experience. Actual
warranty expense may be different from our estimates.
Inventories
Inventories are carried at the lower of cost or market. Cost comprises all costs of purchase,
costs of conversion and other costs incurred in bringing the inventories to their present location
and condition. Cost is calculated on the moving-average basis, except for costs of
work-in-progress and finished goods of sedans and minibuses, which are calculated by the specific
identification basis. Brilliance China Automotive provides allowance for excess, slow moving
66
and obsolete inventory by specific identification and reduces the carrying value of its
inventory to the lower of cost or market. When inventories are sold, the carrying amount of those
inventories is recognized as an expense in the period in which the related revenue is recognized.
Impairment of long-lived assets
Long-lived assets, such as property, plant and equipment and purchased intangible assets with
finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable from its undiscounted future cash flow. If
such assets are considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the assets.
Deferred Taxation
Deferred income tax is provided using the liability method, in which deferred income taxes are
recognized for temporary differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences expected to occur in subsequent years are
recorded as assets and liabilities on the balance sheet. Estimates may differ from actual results.
A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered
more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
Transactions with affiliated companies
An affiliated company is a company in which one or more of the directors or substantial
shareholders of Brilliance China Automotive have direct or indirect beneficial interests in the
company or are in a position to exercise significant influence over the company. Parties are also
considered to be affiliated if they are subject to common control or common significant influence.
The accounting treatment for transactions with these affiliated companies, including sales and
revenue recognition policies, is similar to that for transactions with third parties.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Option for Financial Assets and
Financial Liabilities, which permits entities to choose to measure financial instruments and
certain other items at fair value that are not currently required to be measured at fair value.
SFAS 159 will be effective for Brilliance China Automotive on January 1, 2008. Brilliance China
Automotive does not expect the adoption of SFAS 159 will have a material impact on its financial
statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 applies under other
existing accounting pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, SFAS 157 does not require any new fair value measurements. However, the
application of this statement may change the current
67
practice for fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
Brilliance China Automotive does not expect the adoption of SFAS 157 will have a material impact on
its financial statements.
In July 2006, FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, which
clarifies the accounting for uncertainty in income taxes recognized in the financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for
years beginning after December 15, 2006. Brilliance China Automotive does not expect the adoption
of FIN 48 will have a material impact on its financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
On September 16, 2005, Mr. He Guohua and Mr. Wang Shiping were appointed as executive
directors. On January 6, 2006, Mr. Lin Xiaogang resigned as the President, Chief Executive Officer
and an executive director and on June 23, 2006, Mr. Wu Yong Cun retired as a non-executive
director. Effective January 6, 2006, Mr. Qi Yumin was appointed as the President, Chief Executive
Officer and an executive director. Mr. Lei Xiaoyang was redesignated as an executive director
effective June 2005 and has been the Chief Financial Officer since October 2006, following the
resignation of Mr. Zha Jianping.
The directors and senior executive officers of Brilliance China Automotive as of the date of
this annual report are identified below.
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Year First |
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Elected or Appointed |
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Name |
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Age |
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Position |
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Director or Officer |
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Executive Directors |
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Wu Xiao An |
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45 |
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Chairman of the Board and Executive Vice President |
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1994 |
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Qi Yumin |
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47 |
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President and Chief Executive Officer |
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2006 |
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He Guohua |
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56 |
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Director |
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2005 |
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Wang Shiping |
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50 |
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Director |
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2005 |
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Lei Xiaoyang |
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50 |
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Director and Chief Financial Officer(1) |
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2003 |
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Independent Non-Executive Directors |
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Xu Bingjin |
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67 |
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Director |
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2003 |
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Song Jian |
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50 |
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Director |
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2004 |
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Jiang Bo |
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47 |
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Director |
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2004 |
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Others |
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Huang Yu |
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33 |
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Qualified Accountant |
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2007 |
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(1) |
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Mr. Lei Xiaoyang was redesignated as an executive director effective June 2005 and has been
the Chief Financial Officer since October 2006. |
Executive Directors
Mr. WU Xiao An (also known as Mr. Ng Siu On), age 45, has been the Chairman of the Board of
Brilliance China Automotive since June 2002, and an executive director since 1994. He is
responsible for the overall management and strategy of Brilliance China Automotive. He was the
Vice Chairman and the Chief Financial Officer of the Company from 1994 to June 2002. He is also a
director of Huachen and Shenyang Automotive. Mr. Wu holds a Bachelor of Arts Degree from Beijing
Foreign Languages Institute and a Master of Business Administration Degree from Fordham University
in New York. He was the Deputy Manager of the Bank of China, New York Branch from 1988 to 1993.
Mr. QI Yumin, age 47, has been an executive director, the President and the Chief Executive
Officer of Brilliance China Automotive since January 2006. He is a senior engineer. Since
December 2005, Mr. Qi has been the Chairman and President of Huachen. Prior to joining Huachen,
Mr. Qi has held offices as the Chairman and the general manager of Dalian Heavy Industries Co.,
Ltd. and as the Chairman and the President of DHIDCW Group Co., Ltd. He was the Vice Mayor of
Dalian Municipal Government from October 2004 to December 2005. Mr. Qi is currently a member of
the National Peoples Congress of the PRC Dalian Committee and a member of the Chinese Peoples
Political Consultative Conference Liaoning Provincial Committee.
Mr. Qi holds a Bachelors Degree in
Engineering Science from Xian University of Technology and a
Masters Degree in Business
Administration from Dalian University of Technology.
Mr. HE Guohua, age 56, has been an executive director of Brilliance China Automotive since
September 2005. Mr. He is currently a director and the Vice President of Huachen and the Vice
Chairman and a director of Shenyang Automotive. He is also a director and the Chairman of JinBei
(an A-share listed company in the PRC). Mr. He previously worked as an engineer of Shenyang First
Machine Tools Factory and was a Director of Shenyang Planning & Economic Commission, a Director of
the Shenyang Economic & Trade Commission, a Deputy Director of Shenyang Automotive Development
Office and the Chairman and General Manager of Shenyang Automotive Assets Operation Corporation.
Mr. He is a Senior Engineer in electrical engineering. He graduated from Hefei University of
Technology, majoring in Micro Computer Science in 1984.
Mr. WANG Shiping, age 50, has been an executive director of Brilliance China Automotive since
September 2005. Mr. Wang is currently a director and the Vice President of Huachen and a director
of Shenyang Automotive. He is a director and the Chairman of Shanghai Shenhua. Mr. Wang was
previously the Deputy Head Engineer of Radiator Branch Company of China First Automobile Group
Corporation, the General Manager of FAW-ZEXEL Air-Condition Branch Company, the Deputy General
Manager and Director of Strategic Planning of Fawer Automobile Part Co., Ltd. Mr. Wang is a Senior
Engineer (Researcher) in corporate management. He graduated from Anshan Iron & Steel University in
1982 with a Bachelor of
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Engineering Degree. He also received a Master of Business Economics Degree from the Graduate
School of the Chinese Academy of Social Sciences in 1998.
Mr. LEI Xiaoyang, age 50, was a non-executive director of Brilliance China Automotive from
June 2003 to June 2005 and was redesignated as an executive director of the Company effective June
2005, and has been the Chief Financial Officer since October 2006. Mr. Lei is currently a director
and the Chief Financial Officer of Shenyang Automotive. He has been a director of Shanghai Shenhua
since June 2006 and the Deputy Chief Economist as well as the General Manager of the Department of
Asset Operations in Huachen since January 2003. He was the Assistant President of Liaoning
International Trust and Investment Corporation from June 1996 to September 2002, and was in charge
of the Financing Department, the Accounting Department, the Strategic Planning Department and the
Securities Department. Mr. Lei holds a Bachelor of Engineering Degree from the Shenyang
Polytechnic University and a Master of Finance Degree from Liaoning University as well as a
Master of Business Administration Degree from Roosevelt University.
Independent Non-Executive Directors
Mr. XU Bingjin, age 67, has been an independent non-executive director of Brilliance China
Automotive since June 2003. Mr. Xu is currently the Chairman of The Association of Sino-European
Economic and Technical Cooperation. He was formerly an Assistant Minister of The Ministry of
Foreign Trade and Economic Cooperation, a director of the Office of National Mechanic and
Electronic Products Importation and Exportation and a Senior Consultant of the World Trade
Organization Research Association. Mr. Xu received a Bachelor of Science Degree in Engineering
Economics from Jilin University of Technology in 1964 and holds the title of Senior Engineer.
Mr. SONG Jian, age 50, has been an independent non-executive director of Brilliance China
Automotive since September 2004. Mr. Song is currently the Executive Vice President of the
Tsinghua Automotive Engineering Institute, the Deputy Dean of the Automotive Engineering Department
at Tsinghua University, the Vice Director of the National Laboratory in Automotive Safety and
Energy and an advisor to the Beijing Government in Science and Technology. In 1998, Mr. Song
received the Award for Outstanding Science and Technology Persons in the China Automotive Industry.
In 2005, he was ranked first in the Class One China Automotive Industry and Technology Advancement
Award. In 2006, Mr. Song was named jointly by The China Association of Automotive Industry, The
China Society of Automotive Engineering and The China Automotive News as the best chief designer of
the automobile industry in the PRC. Mr. Song holds a
Bachelors Degree and a Doctorate, both
in Engineering Science, from Tsinghua University. He is currently a professor of Automotive
Dynamics and Control Engineering at Tsinghua University.
Mr. JIANG Bo, age 47, has been an independent non-executive director of Brilliance China
Automotive since September 2004. Mr. Jiang is an accountant, a Certified Public Accountant and a
certified public valuer in the PRC. He has been the general manager of Liaoning Reanda Certified
Public Accountants in the PRC since 1999 and was a director of Dandong Zhongpeng Accounting Firm
from 1993 to 1999. Mr. Jiang has over 10 years of experience in auditing financial statements of
companies listed on the PRC stock exchanges. Mr. Jiang has been a
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Certified Public Valuer since 1998 and has been involved in asset appraisals of companies in
preparation for listing in the PRC. He has participated in various listing projects of state-owned
enterprises in the PRC and overseas and has gained experience in reviewing and analyzing the
audited financial statements of companies listed in the PRC. Mr. Jiang has worked with one of the
Big-4 international accounting firms in the auditing of a state-owned enterprise. Mr. Jiang
holds a Bachelor of Science Degree in Mathematics from Liaoning University and a diploma in
Accounting from the Central Finance and Economics University.
Others
Ms. HUANG Yu, age 33, has been the qualified accountant of Brilliance China Automotive since
May 2007. Ms. Huang is the head of the financial department of Brilliance China Automotive and its
subsidiaries. She graduated with a Bachelors Degree in Economics and a Masters Degree in Economics
from South Western University of Finance and Economics in 1996 and 1999, respectively. She is a
qualified PRC accountant and also a PRC certified public accountant registered as an individual
member with the Shanghai Institute of Certified Public Accountants, as well as a student member of
the Association of Chartered Certified Accountants. Ms. Huang also has the qualifications to be a
lawyer in the PRC. Ms. Huang has worked for Shenyang Automotive as an analyst and internal auditor
since her graduation in 1999 and worked as a financial manager of Brilliance China Automotive from
June 2002.
There is no family relationship between any director or executive officer of Brilliance China
Automotive and any other director or executive officer.
Compensation
The aggregate amount of compensation, consisting of salary, allowances and benefits in kind,
paid by Brilliance China Automotive to its directors and executive officers during 2006 was
approximately Rmb 27.4 million (US$3.5 million).
Board Practices
The board of directors of Brilliance China Automotive currently consists of eight members,
one-third of whom (if the number is not three or in a multiple of three, then the number nearest to
one-third but not greater than one-third) are required to retire from office by rotation at each
annual general meeting in accordance with the terms of its Bye-laws. Those directors that retire
from office, however, may be immediately re-elected as directors by the shareholders.
Service Agreements
On March 1, 2006, Brilliance China Automotive entered into a service agreement with Mr. Wu
Xiao An, an executive director of the Company for a term of three years beginning March 1, 2006. On
March 1, 2006, Brilliance China Automotive entered into a service agreement with Mr. Qi Yumin, an
executive director of the Company for a term of three years beginning January 6, 2006. Save as
disclosed herein, no director has a service contract with Brilliance
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China Automotive that is not determinable by the employer within one year without payment of
compensation, other than statutory compensation.
Audit Committee
Brilliance China Automotive has established an audit committee whose primary duties consist of
reviewing and supervising the financial reporting process of Brilliance China Automotive. The audit
committee currently consists of three independent non-executive directors, Mr. Xu Bingjin, Mr. Song
Jian and Mr. Jiang Bo, and Mr. Xu is the chairman of the committee.
Meetings
Meetings of the audit committee shall be held at least twice per year, and Brilliance China
Automotives external auditors may request a meeting if they consider that one is necessary. A
quorum for a meeting of the audit committee shall be two members. Brilliance China Automotives
secretary shall serve as secretary of the audit committee and shall (i) circulate to members of the
committee the draft and final versions of minutes of audit committee meetings and (ii) circulate to
the board reports of the audit committee. Brilliance China Automotives Chief Financial Officer,
the Head of Internal Audit and a representative of its external auditors shall normally attend
audit committee meetings as well. The audit committee shall meet with Brilliance China Automotives
external auditors at least once per year.
Authority and Duties
The audit committee is authorized by the board to investigate any activity within its scope of
duty. It is authorized to seek any information it requires from any employee and all employees are
directed to cooperate with any request made by the audit committee. The audit committee is
authorized by the board to obtain outside legal or other independent professional advice and to
secure the attendance of outsiders with relevant experience and expertise if it considers this
necessary.
The duties of the audit committee are to:
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be primarily responsible for the appointment, re-appointment and removal
of the external auditor, the remuneration and terms of the engagement of the external
auditor, and the resignation or dismissal of the external auditor; |
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review and monitor the external auditors independence and objectivity and
the effectiveness of the audit process in accordance with applicable standards, and to
oversee the work of external auditor (including resolution of disagreements between
management and the external auditor regarding financial reporting). The committee
should establish with the external auditor the nature and scope of the audit and
reporting obligations before the audit commences; |
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develop and implement policy on the engagement of an external auditor to
supply non-audit services. For this purpose, external auditor shall include any
entity that is under common control, ownership or management with the audit firm or any
entity |
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that a reasonable and informed third party having knowledge of all relevant information
would reasonably conclude as part of the audit firm nationally or internationally. The
committee should identify to the Board any matters in respect of which it considers that
action or improvement is needed and make recommendations as to the steps to be taken; |
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monitor the integrity of financial statements of Brilliance China
Automotive and Brilliance China Automotives annual reports and accounts, interim
reports and, if prepared for publication, quarterly reports, and to review significant
financial reporting judgments contained in them. In this regard, in reviewing
Brilliance China Automotives reports and accounts before submission to the board, the
committee should focus particularly on: |
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changes in accounting policies and practices; |
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accounting policies which require difficult, subjective or complex
judgments (also known as critical accounting policies); |
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significant adjustments resulting from audits;
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going concern assumptions and any qualifications;
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compliance with accounting standards; and |
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compliance with listing rules of stock exchange(s) and other
applicable legal and regulatory requirements and guidance in relation to financial
reporting; |
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In regard to the review of financial information: |
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members of the committee must liaise with the board, senior management
and the person appointed as Brilliance China Automotives qualified accountant; |
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the committee must meet at least once a year with the external
auditor; and |
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the committee should consider any significant or unusual items that
are, or may need to be, reflected in such reports and accounts and must give due
consideration to any matters that have been raised by Brilliance China Automotives
qualified accountant, compliance officer (if any) or auditor; |
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establish procedures for the receipt, retention and treatment of
complaints regarding accounting, internal accounting controls or auditing matters,
including procedures for the confidential, anonymous submission by employees of
concerns regarding questionable accounting or auditing matters; |
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review Brilliance China Automotives financial controls, internal control
and risk management systems; |
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discuss with the management the system of internal control and ensure that
management has discharged its duty to establish and maintain an effective internal
control system; |
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discuss policies with respect to risk assessment and risk management; |
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consider the findings of investigations of internal control matters as
delegated by the board, or on the committees own initiative, and review managements
response; |
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where an internal audit function exists, to ensure co-ordination between
the internal and external auditors, to ensure that the internal audit function is
adequately resourced and has appropriate standing within Brilliance China Automotive,
and to review and monitor the effectiveness of the internal audit function; |
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where an internal audit function exists, to meet separately, periodically,
with management, with internal auditors (or other personnel responsible for the
internal audit function) and with external auditors; |
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review Brilliance China Automotives financial and accounting policies and
practices; |
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review the external auditors management letter, any material queries
raised by the external auditor to management in respect of the accounting records,
financial accounts or systems of control, and managements response; |
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review with the external auditor any audit problems or difficulties and
managements response; |
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ensure that the board provides a timely response to the issues raised in
the external auditors management letter; |
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report to the board on the matters set out in the code provision of Rule
C.3 of Appendix 14 to the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited; |
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give pre-approval of other services and fees of the external auditor; |
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set clear hiring policies for employees or former employees of the
external auditors; |
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report regularly to the board of the result of their review of the
financial reporting system and internal control procedures and recommendations (if any)
thereon; and |
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consider other topics, as determined from time to time by the board. |
The audit committee met most recently in April 2007, with previous meetings in April,
September, and December 2004, April and September 2005, and April and September 2006.
Remuneration Committee
Brilliance China Automotive has established a remuneration committee. The remuneration
committee shall consist of not less than three members, a majority of whom should be independent
non-executive directors. The remuneration committee currently consists of three independent
non-executive directors, Mr. Xu Bingjin, Mr. Song Jian and Mr. Jiang Bo, and two executive
directors, Mr. Wu Xiao An and Mr. Qi Yumin. Mr. Xu Bingjin is the chairman of the committee.
74
Meetings
Meetings of the remuneration committee shall be held at least once a year. Meetings will be
held at the request of any member of the board. A quorum for a meeting of the remuneration
committee shall be two members. Brilliance China Automotives secretary shall serve as the
secretary of the remuneration committee and shall (i) circulate to members of the committee the
draft and final versions of minutes of remuneration committee meetings and (ii) circulate to the
board reports of the remuneration committee.
Authority and Duties
The remuneration committee is authorized by the board to carry out any activity within its
scope of duty. It may request from the management information relating to the compensation and
remuneration packages of employees as appropriate to enable members of the committee to perform
their duties set out herein. The remuneration committee may consult the chairman and/or chief
executive officer of Brilliance China Automotive regarding any proposed remuneration or
compensation in respect of any executive director of Brilliance China Automotive, as appropriate.
The remuneration committee is also authorized by the board to obtain outside legal or other
independent professional advice and to secure the attendance of other persons with relevant
experience and expertise, at the expense of Brilliance China Automotive.
75
The duties of the remuneration committee are to:
|
|
|
make recommendations to the board on the policy and structure for all
remuneration of the directors and senior management of Brilliance China Automotive and
its subsidiaries and on the establishment of a formal and transparent procedure for
developing the policy of Brilliance China Automotive and its subsidiaries on such
remuneration; |
|
|
|
|
determine the specific remuneration packages of all executive directors
and senior management, including benefits in kind, pension rights and compensation
payments, including any compensation payable for loss or termination of their office or
appointment, and make recommendations to the board on the remuneration of non-executive
directors; |
|
|
|
|
review and approve performance-based remuneration in accordance with
corporate goals and objectives resolved by the board from time to time; |
|
|
|
|
review and approve the compensation payable to executive directors and
senior management in connection with any loss or termination of their office or
appointment in order to ensure that such compensation is determined in accordance with
relevant contractual terms and that such compensation is otherwise fair and not
excessive for Brilliance China Automotive and its subsidiaries; |
|
|
|
|
review and approve compensation arrangements relating to dismissal or
removal of directors for misconduct to ensure that such arrangements are determined in
accordance with relevant contractual terms and that any compensation payment is
otherwise reasonable and appropriate; |
|
|
|
|
ensure that no director or any of his associates is involved, directly or
indirectly, in deciding such directors remuneration; and |
|
|
|
|
in respect of any service agreement to be entered into between Brilliance
China Automotive/its subsidiaries and its respective director or proposed director, the
prior approval of which by the shareholders of Brilliance China Automotive in general
meeting is required pursuant to the Rules Governing the Listing of Securities on The
Stock Exchange of Hong Kong Limited (the Listing Rules), to review and provide
recommendations to the shareholders of Brilliance China Automotive (other than the
shareholders who are directors with a material interest in the relevant service
agreements and their respective associates (as defined in the Listing Rules)) as to
whether the terms of the service agreements are fair and reasonable and whether such
service agreements are in the interests of Brilliance China Automotive and the
shareholders as a whole, and to advise shareholders on how to vote. |
Summary Corporate Governance Differences
There are significant differences between Brilliance China Automotives corporate governance
practices and those of domestic companies listed on the New York Stock Exchange. Pursuant to
76
Section 303A.11 of the New York Stock Exchange Listing Manual, these differences are set forth
in the table below:
|
|
|
NYSE |
|
Brilliance China Automotive |
Listed companies must have a
majority of independent
directors. Companies must
identify which directors are
independent and disclose the
basis for that determination.
|
|
Brilliance China Automotive is not
required to have a majority of
independent directors. Under the rules
of The Stock Exchange of Hong Kong
Limited, Brilliance China Automotive is
required to have at least three
independent non-executive directors.
Brilliance China Automotive identifies
the status of each director based on
standards set forth by The Stock
Exchange of Hong Kong Limited. Every
independent non-executive director has
to declare his independency at the time
of his appointment and on an annual
basis. The Board has to assess the
independence of all the independent
non-executive directors and to consider
if it is satisfied of their
independence. |
|
|
|
Non-management directors must
meet at executive sessions
without management.
|
|
Non-management directors are not
required to meet at executive sessions
without management. |
|
|
|
Listed companies must have a
nominating/corporate governance
committee composed entirely of
independent directors.
|
|
Brilliance China Automotive is not
required to have a nominating/corporate
governance committee composed entirely
of independent directors and does not
have such a committee. |
|
|
|
Listed companies must have a
compensation committee composed
entirely of independent
directors.
|
|
Brilliance China Automotive has
established a remuneration committee.
The remuneration committee must consist
of not less than three members, a
majority of whom must be independent
non-executive directors. |
|
|
|
Listed companies 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.
|
|
Brilliance China Automotive is not
required to adopt a code of business
conduct and ethics for directors,
officers and employees and is not
required to promptly disclose any
waivers of any such code for directors
or executive officers. Brilliance China
Automotive has adopted a Model Code for
Securities Transactions by Directors
and a Code for Securities Transactions
by Employees that, among other things,
sets forth a policy for
|
77
|
|
|
NYSE |
|
Brilliance China Automotive |
|
|
compliance with securities laws, primarily insider
trading, and has also adopted an
Employee Handbook that, among other
things, contains procedures for
compliance with securities laws, a
policy on confidential information and
a code of conduct. |
Employees
As of December 31, 2006, Brilliance China Automotive had 8 employees located in Hong Kong,
compared with 9 as of both December 31, 2005 and December 31, 2004. These employees are primarily
responsible for overseeing the financial management and operations and for developing strategic
business plans, preparing financial statements and coordinating investor relations for Brilliance
China Automotive.
As of December 31, 2006, Brilliance China Automotive and its subsidiaries had a total of
11,004 employees, compared with 8,911 as of December 31, 2005 and 9,112 as of December 31, 2004.
As of December 31, 2006, Shenyang Automotive had a total of 8,265 employees, compared with 6,470 as
of December 31, 2005 and 6,731 as of December 31, 2004. The total number of Shenyang Automotives
employees increased by 1,795 employees from 2005 to 2006 as it hired more production workers due to
the significant increase in the sales volume of the Zhonghua sedans in 2006.
The following chart sets forth the number of Brilliance China Automotives employees by
functional area as of December 31, 2006:
|
|
|
|
|
|
|
Number of |
Functional Area |
|
Employees |
|
Administrative Personnel |
|
|
1,387 |
|
Technical Personnel |
|
|
1,508 |
|
Production Workers |
|
|
8,109 |
|
|
|
|
|
|
Total |
|
|
11,004 |
|
|
|
|
|
|
Substantially all of Brilliance China Automotive and its subsidiaries employees are
based in Shenyang, Liaoning Province, China.
Brilliance China Automotive and its subsidiaries have not experienced any strikes or other
labor disputes that materially affected their business activities. Brilliance China Automotive
considers its labor relations to be good.
Share Ownership
As of the date of this annual report, no directors or executive officers own any shares in
Brilliance China Automotive.
78
Employee Share Option Schemes
The 1999 Share Option Scheme
On September 18, 1999, Brilliance China Automotive approved a share option scheme, or the
Original Scheme, under which the directors may, at their discretion, at any time during the ten
years from the date of approval of the scheme, invite employees of any member company of Brilliance
China Automotive, including executive directors, to take up its share options. The maximum number
of shares on which options may be granted may not exceed 10% of the issued share capital of
Brilliance China Automotive excluding any shares allotted and issued on the exercise of options
from time to time. The exercise price in relation to each option offer shall be determined by the
directors at their absolute discretion, but in any event shall not be less than the greater of (i)
80 percent of the average of the official closing price of the shares on The Stock Exchange of Hong
Kong for the five trading days immediately preceding the relevant offer date or (ii) the nominal
value of the shares. The directors may determine and adjust the period within which the relevant
grantee may exercise his or her option and the proportion of the options to be exercised in each
period, so long as the period within which the option must be exercised is not more than ten years
from the date of grant of the option.
During (a) the year ended December 31, 2003, 2,338,000 share options granted to a former
employee have been exercised; (b) the year ended December 31, 2004, 1,000,000 share options granted
to a former employee have been cancelled or lapsed; (c) the year ended December 31, 2005,
11,690,000 share options granted to certain former directors and a former employee have been
cancelled or lapsed; (d) the year ended December 31, 2006, no share options granted have been
cancelled or lapsed in accordance with the terms of the Original Scheme.
A summary of the movements of outstanding share options granted under the Original Scheme
during the year is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of share options |
|
|
2006 |
|
2005 |
At January 1 |
|
|
2,800,000 |
|
|
|
14,490,000 |
|
Cancelled/Lapsed during the year |
|
|
|
|
|
|
(11,690,000 |
) |
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
2,800,000 |
|
|
|
2,800,000 |
|
|
|
|
|
|
|
|
|
|
The outstanding share options under the Original Scheme entitle the holder to subscribe
for each ordinary share of Brilliance China Automotive at HK$1.896 for each outstanding share
option, exercisable from June 2, 2001 to June 1, 2011.
New Share Option Scheme
On June 28, 2002, Brilliance China Automotive adopted a new share option scheme, or the New
Scheme, in compliance with the amendments to the listing rules and regulations of The Stock
Exchange of Hong Kong Limited that became effective on September 1, 2001. The New Scheme became
effective on July 15, 2002 and the Original Scheme was terminated. Pursuant to
79
the Original Scheme, all the share options granted prior to its termination shall continue to
be valid and exercisable in accordance with the terms of the grant and the Original Scheme. Share
options granted after July 15, 2002 are subject to the terms of the New Scheme. Pursuant to the New
Scheme, Brilliance China Automotives Board of Directors may grant options to the participants
(including Brilliance China Automotives employees, non-executive directors, suppliers and
customers, etc.) to subscribe for Brilliance China Automotives common stock at a price that shall
not be lower than the higher of:
|
(a) |
|
the closing price of the common stock on the relevant stock exchange as stated
in such stock exchanges quotation sheet on the date of the grant, which must be a
trading date; |
|
|
(b) |
|
the average closing price of the common stock on the relevant stock exchange as
stated in such stock exchanges quotation sheets for the five trading days immediately
preceding the date of the grant; or |
|
|
(c) |
|
the nominal value of the common stock. |
The New Scheme allows Brilliance China Automotive to grant options to a wider category of
participants. Under the New Scheme, the board would also have the discretion to set a minimum
period for which an option must be held before the exercise of the subscription rights attached to
that option, as well as any performance targets it considers appropriate before an option can be
exercised. The purpose of the New Scheme is to provide incentives or rewards to participants under
the scheme for their contribution to Brilliance China Automotive and its subsidiaries and to enable
Brilliance China Automotive and its subsidiaries to recruit and retain skilled employees.
At December 31, 2006, 35,750,000 share options have been granted under the New Scheme. Each
of the outstanding share options under the New Scheme entitles the holder to subscribe for one
ordinary share of Brilliance China Automotive at HK$1.32, exercisable from December 28, 2006 to
December 27, 2016. In accordance with the terms of the share-based arrangement, options issued
during the year vest at the date of grant. During the year, no share options granted have been
exercised, cancelled or lapsed in accordance with the terms of the New Scheme.
Call Option Agreements
On December 18, 2002, Huachen entered into a principal agreement, or the Principal Agreement,
with the Chinese Financial Education Development Foundation, or the Foundation, the then
substantial shareholder, to purchase from the Foundation a total of 1,446,121,500 ordinary shares,
representing approximately 39.446% of the then issued share capital of Brilliance China Automotive
and the Foundations entire shareholding interests in Brilliance China Automotive. Completion of
the Principal Agreement took place upon signing.
On December 18, 2002, each of Mr. Wu Xiao An (also known as Mr. Ng Siu On), Mr. Su Qiang (also
known as Mr. So Keung), Mr. Hong Xing and Mr. He Tao (also known as Mr. Ho To), or the Management
Directors, entered into a call option agreement, or the Call Option
80
Agreements with Huachen, immediately after the Principal Agreement was entered into and after
completion of the sale and purchase of the ordinary shares pursuant thereto. Pursuant to the terms
of the Call Option Agreements, Huachen granted to each of the Management Directors a call option in
respect of a specified number of ordinary shares, totaling 346,305,630 shares in aggregate and
representing approximately 9.446% of the then issued share capital of Brilliance China Automotive,
at an exercise price of HK$0.95 per share. Each call option is exercisable in whole or in part at
any time during the period of 3 years commencing from the date falling 6 months after the earlier
of: (a) the end of the general offer made to the remaining shareholders by Huachen and the
Management Directors dated December 18, 2002, or the Offer; and (b) the close of the Offer in
accordance with the offer document issued by the offerors in respect of the Offer as required under
the Hong Kong Code on Takeovers and Mergers. The Offer closed on February 6, 2003.
The call options lapsed on August 6, 2006 and none of them were exercised in 2006.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
The following table sets forth certain information regarding ownership of Brilliance China
Automotives capital stock as of December 31, 2006 by all persons who are known to Brilliance China
Automotive to own more than 5% of Brilliance China Automotives shares or ADSs. The voting rights
of Brilliance China Automotives major shareholders are identical to those of its other
shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
Number of Shares |
|
Capital |
Title of Class |
|
Identity of Person or Group |
|
Owned |
|
Stock |
Ordinary Shares |
|
Huachen Automotive Group Holdings Company Limited(1) |
|
|
1,446,121,500 |
|
|
|
39.42 |
% |
Ordinary Shares |
|
Brandes Investment Partners, L.P. |
|
|
333,852,000 |
|
|
|
9.10 |
% |
Ordinary Shares |
|
Deutsche Bank Aktiengesellschaft(2) |
|
|
252,551,134 |
|
|
|
6.88 |
% |
Ordinary Shares |
|
Templeton Asset Management Ltd. |
|
|
222,446,000 |
|
|
|
6.06 |
% |
Ordinary Shares |
|
The Northern Trust Company (ALA)(3) |
|
|
190,012,000 |
|
|
|
5.18 |
% |
|
|
|
(1) |
|
Huachen Automotive Group Holdings Company Limited, or Huachen, is a
wholly-owned subsidiary of the Liaoning Provincial
Government. |
|
(2) |
|
Deutsche Bank Aktiengesellschaft also has 59,307,300
ordinary shares held in a short position as of December 31,
2006. |
|
(3) |
|
The Northern Trust Company (ALA), or NTC, is an approved lending
agent under the Securities Futures Ordinance of Hong Kong.
The 190,012,000 ordinary shares represent ordinary shares
in NTCs lending pool, or shares that NTC holds as agent
for a third party to which NTC is authorized to lend, and
shares that have been lent by NTC but for which NTC still
has a right to require the return of such shares. |
On December 18, 2002, Huachen, a wholly owned subsidiary of the Liaoning Provincial
Government, entered into a principal agreement with the Chinese Financial Education Development
Foundation, the then substantial shareholder of Brilliance China Automotive, for the purchase from
the Chinese Financial Education Development Foundation of a total of 1,446,121,500 ordinary shares,
representing approximately 39.45% of the then issued share
81
capital of Brilliance China Automotive and the Chinese Financial Education Development
Foundations entire shareholding interest in Brilliance China Automotive. Completion of the
principal agreement took place at signing on December 18, 2002. Accordingly, Huachen is currently
entitled to cast 39.42% (diluted from the initial 39.45% due to the exercise of certain share
options during 2003) of the votes on all matters to be voted on by the shareholders of Brilliance
China Automotive (to the extent it is not required to abstain from exercising its voting rights
under the applicable laws and regulations), and will therefore exert substantial influence over the
election of Brilliance China Automotives directors, the outcome of actions requiring majority
shareholder approval and the business in general of Brilliance China Automotive.
Related Party Transactions
Currently, JinBei holds a 39.1% equity interest in Shenyang Automotive. Shenyang Automotive
began operating as a separate legal entity from JinBei in January 1992. Shenyang Automotive and
JinBei are parties to a trademark license agreement under which JinBei has granted to Shenyang
Automotive the license to use indefinitely the JinBei trademark on its products and marketing
materials. On December 29, 2003, Brilliance China Automotive, through Shenyang JinBei Automotive
Industry Holdings Co., Ltd., or SJAI, and Shenyang XinJinBei Investment and Development Co., Ltd.,
or SXID, its 99.0% indirectly owned subsidiary and indirectly wholly owned subsidiary,
respectively, entered into agreements to acquire the entire equity interests of Shenyang Automobile
Industry Asset Management Company Limited, or SAIAM, and Shenyang XinJinBei Investment Co., Ltd, or
SXI, which own 24.38% and 8.97%, respectively, of the issued share capital of JinBei. Upon
completion of the acquisition and the receipt of the necessary governmental approvals for this
transaction, Brilliance China Automotives effective interest in Shenyang Automotive will increase
from its initial 51.0% to approximately 63.9%.
In 2006, Brilliance China Automotive purchased Rmb 2,062.9 million of its component parts from
various affiliated companies and paid a Rmb 254.5 million subcontracting charge to a jointly
controlled entity. These figures represented an increase of 94.2% from Rmb 1,062.5 million and an
increase of 126.8% from Rmb 112.2 million, respectively, from 2005 to 2006. Brilliance China
Automotive believes that its purchases of such parts have been on terms as favorable to Brilliance
China Automotive as it could have obtained from unrelated third parties on an arms-length basis.
Significant transactions between Brilliance China Automotive or its subsidiaries and
affiliated companies in the ordinary course of business during 2004, 2005 and 2006 are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Rmb thousands) |
Sales to JinBei and its affiliated companies |
|
|
178,414 |
|
|
|
69,432 |
|
|
|
38,127 |
|
Purchases from JinBei and its affiliated companies |
|
|
895,457 |
|
|
|
383,808 |
|
|
|
764,311 |
|
Sales to Shanghai Shenhua and its affiliated companies |
|
|
1,052,689 |
|
|
|
1,469,402 |
|
|
|
1,895,881 |
|
Purchases from Shanghai Shenhua and its affiliated
companies |
|
|
16,668 |
|
|
|
85,354 |
|
|
|
214,467 |
|
Purchases from shareholders of Shenyang Aerospace |
|
|
90,505 |
|
|
|
1,987 |
|
|
|
39,019 |
|
Subcontracting charges to BMW Brilliance |
|
|
254,479 |
|
|
|
112,160 |
|
|
|
178,685 |
|
Purchases from other affiliated companies of Brilliance
Holdings Limited |
|
|
117,336 |
|
|
|
66,441 |
|
|
|
89,690 |
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Rmb thousands) |
Purchases from associated companies and jointly
controlled entities |
|
|
942,878 |
|
|
|
524,221 |
|
|
|
898,914 |
|
Purchases from affiliated companies of the joint
venture partner of Ningbo Yuming |
|
|
|
|
|
|
|
|
|
|
342 |
|
Sales to associated companies and jointly controlled
entities |
|
|
186,146 |
|
|
|
71,005 |
|
|
|
205,849 |
|
Consideration paid to the joint venture partner of
Ningbo Yuming for acquisition of further interests in
Ningbo Yuming |
|
|
|
|
|
|
|
|
|
|
10,000 |
|
Purchase of intangible asset from an affiliated company
of the joint venture partner of Ningbo Yuming |
|
|
|
|
|
|
|
|
|
|
6,940 |
|
Finance charge to a jointly controlled entity |
|
|
16,748 |
|
|
|
17,329 |
|
|
|
17,850 |
|
Operating lease rental on land and buildings charged by: |
|
|
|
|
|
|
|
|
|
|
|
|
a jointly controlled entity |
|
|
908 |
|
|
|
2,206 |
|
|
|
12,840 |
|
Shanghai Shenhua and its affiliated companies |
|
|
1,148 |
|
|
|
|
|
|
|
|
|
JinBei and its affiliated companies |
|
|
60 |
|
|
|
|
|
|
|
|
|
Mould testing income from a jointly controlled entity |
|
|
4,320 |
|
|
|
|
|
|
|
|
|
Operating lease rental from a jointly controlled entity |
|
|
34,863 |
|
|
|
15,078 |
|
|
|
15,364 |
|
Sales of property, plant and equipment to JinBei and
its affiliated companies |
|
|
|
|
|
|
|
|
|
|
4,407 |
|
Sales of property, plant and equipment to a jointly
controlled entity |
|
|
80,332 |
|
|
|
263 |
|
|
|
1,105 |
|
Purchase of machinery from JinBei and its affiliated
companies |
|
|
|
|
|
|
|
|
|
|
58,089 |
|
Service income from a jointly controlled entity |
|
|
35,067 |
|
|
|
43,671 |
|
|
|
|
|
The above transactions were carried out after negotiations between Brilliance China
Automotive and its subsidiaries and the affiliated companies in the ordinary course of business and
on the basis of estimated market value as determined by the directors of Brilliance China
Automotive.
During the year ended December 31, 2002, JinBei allowed Shenyang Automotive to use certain
components-related technology in the manufacturing of the Zhonghua sedan. This technology was
transferred from JinBei to Shenyang Automotive in the form of an increase in the registered capital
of Shenyang Automotive in January 2003, and Shenyang Automotive thereby became the legal owner of
this components-related technology.
In 2003, Shenyang Automotive transferred the legal titles and ownership of certain buildings
at their net book value to BMW Brilliance and entered into an agreement with BMW Brilliance to
lease-back a substantial portion of the buildings. The agreement of sale includes an option for
BMW Brilliance to require Shenyang Automotive to purchase back such buildings at the purchase price
less depreciation upon the occurrence of certain events, including the passing of a valid
resolution pursuant to the joint venture contract by the board of directors of BMW Brilliance. For
financial reporting purposes, as of December 31, 2006 and 2005, the net book value of the buildings
amounting to approximately Rmb 134.3 million and Rmb 142.6 million, respectively, were retained as
assets on the consolidated balance sheet of Brilliance China Automotive and the portion of
consideration received from BMW Brilliance up to December 31, 2006 and 2005 amounting to
approximately Rmb 113.3 million and Rmb 74.6 million, respectively, were treated as a financing and
will be partially offset against the lease rental
83
payable in future years. The remaining balance of approximately Rmb 61.1 million will be
received from BMW Brilliance and will be accounted for as additional financing.
In December 2003, BMW Brilliance purchased certain machinery and equipment from Shenyang
Automotive at their net book value mutually agreed by both parties for use in the production of BMW
sedans. The agreement of sale includes an option for BMW Brilliance to require Shenyang Automotive
to purchase back such machinery and equipment at the purchase price less depreciation over a
specified period upon the occurrence of certain events, including the passing of a valid resolution
pursuant to the joint venture contract by the board of directors of BMW Brilliance. This machinery
and equipment is maintained by BMW Brilliance for the manufacturing of its products and is also
used by Shenyang Automotive for a service fee based on the number of Zhonghua sedans produced by
Shenyang Automotive using this machinery and equipment. As of December 31, 2006 and 2005, service
fees of approximately Rmb 411.4 million and Rmb 308.3 million had been accrued, respectively.
The operating subsidiaries of Brilliance China Automotive have provided the following
outstanding guarantees to affiliated companies as of December 31, 2006:
|
|
|
a corporate guarantee of approximately Rmb 120 million (US$15.4 million)
for revolving bank loans and notes drawn by affiliated companies of Shanghai Shenhua.
However, default by Shanghai Shenhua and its affiliated companies is considered remote
by management and therefore no provision for the guarantors obligation under the
guarantee was recorded as of December 31, 2006; |
|
|
|
|
a joint and several proportional corporate guarantee with a shareholder of
Shenyang Aerospace on Shenyang Aeropspaces long-term bank loan with no amount
outstanding as of December 31, 2006. There is no recourse or collateralization
provision in the guarantee; and |
|
|
|
|
corporate guarantees for bank loans amounting to Rmb 295 million (US$37.8
million) drawn by JinBei. Bank deposits of Rmb 312 million were pledged as a collateral
for the corporate guarantees. However, default by JinBei is considered remote by
management and therefore no provision for the guarantors obligation under the
guarantee was recorded as of December 31, 2006. |
Set forth below is information on amounts due from affiliated companies to Brilliance China
Automotive and its subsidiaries arising from trading activities as of December 31, 2006, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Rmb thousands) |
Notes receivable from affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable from affiliated companies of JinBei |
|
|
16,620 |
|
|
|
9,446 |
|
|
|
22,500 |
|
Notes receivable from Shanghai Shenhua |
|
|
63,750 |
|
|
|
328,482 |
|
|
|
601,348 |
|
Notes
receivable from associated companies and jointly controlled entities |
|
|
1,107 |
|
|
|
1,042 |
|
|
|
21,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1) |
|
|
81,477 |
|
|
|
338,970 |
|
|
|
645,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Rmb thousands) |
Amounts due from affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Due from Shanghai Shenhua and its affiliated companies |
|
|
431,310 |
|
|
|
276,763 |
|
|
|
386,710 |
|
Due from affiliated companies of JinBei |
|
|
93,446 |
|
|
|
62,877 |
|
|
|
58,312 |
|
Due from affiliated companies of Brilliance Holdings
Limited |
|
|
55,040 |
|
|
|
54,222 |
|
|
|
|
|
Due from jointly controlled entities |
|
|
21,470 |
|
|
|
13,380 |
|
|
|
26,643 |
|
Due from an associated company |
|
|
|
|
|
|
1,505 |
|
|
|
882 |
|
Due from BMW Brilliance |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivables |
|
|
247,564 |
|
|
|
192,185 |
|
|
|
48,581 |
|
Consideration receivable arising from the
disposal of machinery and equipment(2) |
|
|
134,527 |
|
|
|
269,003 |
|
|
|
269,003 |
|
Dividend receivable from a jointly controlled entity |
|
|
76,173 |
|
|
|
|
|
|
|
|
|
Dividend receivable from an associate |
|
|
21,000 |
|
|
|
|
|
|
|
|
|
Provision for doubtful debts |
|
|
(29,720 |
) |
|
|
(29,720 |
) |
|
|
(24,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,050,810 |
|
|
|
840,215 |
|
|
|
765,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The notes receivable from affiliated companies are guaranteed by
banks in China and have maturities of six months or less. The
fair value of the notes receivable approximates their carrying
value. |
|
(2) |
|
The outstanding balance is unsecured, non-interest bearing and
will be settled by BMW Brilliance when certain conditions
specified in the agreement of sale are fulfilled. |
Set forth below is information on advances from Brilliance China Automotive and its
subsidiaries to affiliated companies as of December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Rmb thousands) |
Advances to affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Advances to JinBei and its affiliated companies |
|
|
23,740 |
|
|
|
16,185 |
|
|
|
16,786 |
|
Advances to associated companies and jointly controlled
entities |
|
|
6,553 |
|
|
|
7,226 |
|
|
|
22,528 |
|
Advances to Shanghai Shenhua and its affiliated companies |
|
|
14,044 |
|
|
|
9,045 |
|
|
|
|
|
Advances to affiliated companies of Brilliance Holdings
Limited |
|
|
15,273 |
|
|
|
15,273 |
|
|
|
|
|
Advances to other affiliated companies |
|
|
689 |
|
|
|
452 |
|
|
|
138 |
|
Provision for doubtful debts |
|
|
(2,214 |
) |
|
|
(9,250 |
) |
|
|
(1,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
58,085 |
|
|
|
38,931 |
|
|
|
37,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Set forth below is information on advances from affiliated companies to Brilliance China
Automotive and its subsidiaries as of December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Rmb thousands) |
Advances from affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Advances from Brilliance Holdings Limited and
its affiliated companies |
|
|
12,728 |
|
|
|
28,558 |
|
|
|
14,319 |
|
Advances from associated companies and jointly
controlled entities |
|
|
1,279 |
|
|
|
607 |
|
|
|
|
|
Advances from affiliated companies of Shanghai
Shenhua |
|
|
820 |
|
|
|
236 |
|
|
|
230 |
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Rmb thousands) |
Advances from JinBei and its affiliated companies |
|
|
6,925 |
|
|
|
1,088 |
|
|
|
945 |
|
Advances from other affiliated companies |
|
|
|
|
|
|
|
|
|
|
382 |
|
Financing received from BMW Brilliance |
|
|
113,343 |
|
|
|
74,605 |
|
|
|
74,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
135,095 |
|
|
|
105,094 |
|
|
|
90,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aside from the financing received from BMW Brilliance, the other advances from affiliated
companies are unsecured, non-interest bearing and have no fixed repayment terms.
Amounts due to affiliated companies arising from trading activities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Rmb thousands) |
Notes payable to affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to affiliated companies of JinBei |
|
|
7,249 |
|
|
|
8,139 |
|
|
|
24,229 |
|
Notes payable to associated companies and
jointly controlled entities |
|
|
30,039 |
|
|
|
22,491 |
|
|
|
91,892 |
|
Notes payable to other affiliated companies |
|
|
|
|
|
|
|
|
|
|
925 |
|
Notes payable to affiliated companies of
Brilliance Holdings Limited |
|
|
|
|
|
|
43,462 |
|
|
|
|
|
Notes payable to Shanghai Shenhua |
|
|
|
|
|
|
|
|
|
|
4,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
37,288 |
|
|
|
74,092 |
|
|
|
121,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Due to affiliated companies of JinBei |
|
|
281,721 |
|
|
|
142,438 |
|
|
|
195,166 |
|
Due to affiliated companies of Brilliance
Holdings Limited |
|
|
|
|
|
|
22,025 |
|
|
|
8,705 |
|
Due to affiliated companies of Shanghai Shenhua |
|
|
10,719 |
|
|
|
4,191 |
|
|
|
40,570 |
|
Due to associated companies and jointly
controlled entities |
|
|
680,943 |
|
|
|
465,023 |
|
|
|
276,951 |
|
Due to other affiliated companies |
|
|
9,910 |
|
|
|
130 |
|
|
|
1,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
983,293 |
|
|
|
633,807 |
|
|
|
522,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts due to affiliated companies are unsecured, non-interest bearing and have no
fixed repayment terms.
As of December 31, 2004, included in prepayments and other current assets were approximately
Rmb 9.5 million of prepayment for purchases of raw materials made to an affiliated company of
Brilliance Holdings Limited.
ITEM 8. FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
See Item 18 Financial Statements for a list of the financial statements filed with this
document.
86
Legal Proceedings
Yang Rong Employment Proceedings
On or about October 25, 2002, Brilliance China Automotive was served with a claim lodged by
Mr. Yang Rong in the Labour Tribunal in Hong Kong against Brilliance China Automotive for alleged
wrongful repudiation and/or breach of his employment contract. The claim was for approximately
US$4.3 million (equivalent to approximately Rmb 35.6 million) with respect to loss of salary. In
addition, Mr. Yang claimed unspecified damages in respect of bonuses and share options. The claim
was dismissed by the Labour Tribunal in Hong Kong on January 28, 2003. Mr. Yang subsequently
applied for a review of this decision. At the review hearing on July 4, 2003, the Labour Tribunal
ordered the case to be transferred to the High Court in Hong Kong. The claim has therefore been
transferred to the High Court and registered as High Court Action No. 2701 of 2003. On September
16, 2003, a Statement of Claim was served on Brilliance China Automotive. On November 4, 2003,
Brilliance China Automotive filed a Defence and Counterclaim with the High Court. Mr. Yang filed a
Reply to Defence and Defence to Counterclaim on April 26, 2004. On July 21, 2004, Mr. Yang obtained
leave from the Court to file an Amended Reply to Defence and Defence to Counterclaim. Brilliance
China Automotive filed and served a Reply to Defence to Counterclaim on September 4, 2004.
Pleadings closed on September 18, 2004. The parties filed and served Lists of Documents on October
26, 2004 and witness statements were exchanged on February 28, 2005. The parties applied by consent
to adjourn sine die a checklist hearing fixed for April 20, 2005, as the respective parties
anticipated that they would be filing supplemental evidence and amending their pleadings. The Court
approved the application and made an Order on April 19, 2005 that the checklist hearing be vacated
and adjourned sine die with liberty to restore. Pursuant to a request made by Mr. Yang on June 2,
2005 for further and better particulars of the Defence and Counterclaim, Brilliance China
Automotive filed and served its Answer to Mr. Yangs request on July 4, 2005.
On August 17, 2005, in compliance with its continuing discovery obligations, Brilliance China
Automotive filed and served a Supplemental List of Documents. Subsequently, on September 5, 2005,
Mr. Yang also filed and served a Supplemental List of Documents. There has been no material
progress in the litigation. The directors of Brilliance China Automotive do not believe the action
will have any significant impact on the financial position of Brilliance China Automotive. The
directors of Brilliance China Automotive intend to continue vigorously defending the action.
Dividends
All dividends to holders of ADSs are declared and paid in U.S. dollars. Interim dividends may
be paid at the discretion of Brilliance China Automotives board of directors based on its
evaluation of the financial condition of Brilliance China Automotive, while final dividends are
subject to the approval of the shareholders at a general meeting. From 1993 to 1996, Brilliance
China Automotive paid a quarterly dividend at the rate of US$0.02 per share in each quarter.
Brilliance China Automotive began to pay dividends on a semi-annual basis in the second half of
1996. The amount of these dividend payments have been adjusted on a pro rata basis to reflect
Brilliance China Automotives 1999 and 2000 bonus share issuances as well as the increase in
earnings per share. No dividends were declared or paid for 2005 or 2006.
87
Under Section 54 of the Companies Act 1981 of Bermuda (as amended), a company shall not
declare or pay a dividend, or make a distribution out of contributed surplus, if there are
reasonable grounds for believing that
|
|
|
Brilliance China Automotive is, or would after payment be, unable to pay
its liabilities as they become due; or |
|
|
|
|
the realizable value of Brilliance China Automotives assets would thereby
be less than the aggregate of its liabilities and its issued share capital and share
premium account. As a Bermuda company, Brilliance China Automotive must abide by these
criteria in formulating its dividend policy. |
Applicable Chinese laws and regulations require that before a foreign-invested enterprise
distributes profits to investors it must:
|
|
|
satisfy all tax liabilities; |
|
|
|
|
provide for losses in previous years; |
|
|
|
|
in the case of a Sino-foreign joint venture, also make appropriation, in
proportions determined at the sole discretion of the board of directors of the joint
venture, to a general reserve fund, an enterprise expansion fund and a staff welfare
and employee bonus fund. During the year ended December 31, 2006, Shenyang Automotive
was not required to and therefore did not make any additional contributions into these
funds. Distributions of profits to investors are required to be in proportion to each
partys shareholdings in the joint venture; and |
|
|
|
|
in the case of a wholly foreign owned enterprise, appropriate 10% of
profit after providing for taxes and losses in previous years to a general reserve fund
until the balance of the fund reaches 50% of its share capital. Any further
appropriation thereafter is optional. The appropriation to an enterprise expansion fund
and a staff welfare fund is at the sole discretion of the board of directors of the
wholly foreign owned enterprise. During the year ended December 31, 2006, Xing Yuan
Dong, Ningbo Yuming and Shenyang Chenfa made an additional Rmb 16.6 million (US$2.1
million) to the general reserve fund, enterprise expansion fund and staff welfare fund. |
Significant Changes
There have been no significant changes since December 31, 2006, the date of the annual
financial statements in this annual report.
ITEM 9. THE OFFER AND LISTING
Brilliance China Automotives ordinary shares are listed on The Stock Exchange of Hong Kong
Limited under the stock code 1114, and Brilliance China Automotives ADSs are listed on the New
York Stock Exchange, Inc. under the symbol CBA. The following table sets forth for the periods
indicated the reported high and low sales prices for the ordinary shares and the
88
ADSs on The Stock Exchange of Hong Kong Limited and the New York Stock Exchange, Inc.,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The New York Stock |
|
The Stock Exchange of |
|
|
|
|
Exchange, Inc. |
|
Hong Kong Limited |
|
|
|
|
(US$) |
|
(HK$) |
|
|
|
|
ADSs |
|
Ordinary Shares |
|
|
|
|
High |
|
Low |
|
High |
|
Low |
2002: |
|
1st quarter |
|
|
21.48 |
|
|
|
16.00 |
|
|
|
1.70 |
|
|
|
1.26 |
|
|
|
2nd quarter |
|
|
18.50 |
|
|
|
12.34 |
|
|
|
1.49 |
|
|
|
0.98 |
|
|
|
3rd quarter |
|
|
15.15 |
|
|
|
12.10 |
|
|
|
1.22 |
|
|
|
0.98 |
|
|
|
4th quarter |
|
|
19.00 |
|
|
|
10.65 |
|
|
|
1.49 |
|
|
|
0.80 |
|
2003: |
|
1st quarter |
|
|
25.49 |
|
|
|
18.11 |
|
|
|
2.03 |
|
|
|
1.42 |
|
|
|
2nd quarter |
|
|
29.29 |
|
|
|
20.48 |
|
|
|
2.28 |
|
|
|
1.56 |
|
|
|
3rd quarter |
|
|
34.49 |
|
|
|
26.80 |
|
|
|
2.73 |
|
|
|
2.10 |
|
|
|
4th quarter |
|
|
61.30 |
|
|
|
34.20 |
|
|
|
4.75 |
|
|
|
2.65 |
|
2004: |
|
1st quarter |
|
|
62.75 |
|
|
|
39.52 |
|
|
|
4.85 |
|
|
|
3.85 |
|
|
|
2nd quarter |
|
|
48.25 |
|
|
|
28.55 |
|
|
|
3.73 |
|
|
|
2.15 |
|
|
|
3rd quarter |
|
|
32.20 |
|
|
|
19.21 |
|
|
|
2.53 |
|
|
|
1.52 |
|
|
|
4th quarter |
|
|
24.40 |
|
|
|
17.75 |
|
|
|
1.93 |
|
|
|
1.40 |
|
2005: |
|
1st quarter |
|
|
22.73 |
|
|
|
14.76 |
|
|
|
1.78 |
|
|
|
1.22 |
|
|
|
2nd quarter |
|
|
20.00 |
|
|
|
15.75 |
|
|
|
1.61 |
|
|
|
1.26 |
|
|
|
3rd quarter |
|
|
19.10 |
|
|
|
13.41 |
|
|
|
1.50 |
|
|
|
0.98 |
|
|
|
4th quarter |
|
|
15.25 |
|
|
|
12.56 |
|
|
|
1.18 |
|
|
|
0.97 |
|
2006: |
|
1st quarter |
|
|
23.66 |
|
|
|
14.52 |
|
|
|
1.57 |
|
|
|
1.12 |
|
|
|
2nd quarter |
|
|
19.25 |
|
|
|
14.05 |
|
|
|
1.55 |
|
|
|
1.10 |
|
|
|
3rd quarter |
|
|
16.93 |
|
|
|
14.40 |
|
|
|
1.33 |
|
|
|
1.15 |
|
|
|
4th quarter |
|
|
18.81 |
|
|
|
15.15 |
|
|
|
1.46 |
|
|
|
1.17 |
|
2007: |
|
January |
|
|
22.47 |
|
|
|
19.87 |
|
|
|
1.76 |
|
|
|
1.33 |
|
|
|
February |
|
|
29.98 |
|
|
|
20.00 |
|
|
|
2.55 |
|
|
|
1.57 |
|
|
|
March |
|
|
28.25 |
|
|
|
23.09 |
|
|
|
2.18 |
|
|
|
1.83 |
|
|
|
April |
|
|
25.85 |
|
|
|
21.26 |
|
|
|
1.99 |
|
|
|
1.64 |
|
|
|
May |
|
|
25.24 |
|
|
|
21.14 |
|
|
|
1.96 |
|
|
|
1.67 |
|
|
|
June (through June 20) |
|
|
24.19 |
|
|
|
22.73 |
|
|
|
1.89 |
|
|
|
1.78 |
|
To the best of Brilliance China Automotives knowledge, as of June 20, 2007, Brilliance
China Automotive had 3,110,888 ADSs outstanding, which were held by 77 registered holders of record in
the United States (including 3,059,462 ADSs held by three nominee holders). One ADS is equivalent to 100
ordinary shares.
Trading of Brilliance China Automotives shares in Hong Kong was suspended from January 24,
2003 through January 27, 2003 and trading of Brilliance China Automotives ADSs in New York was
also suspended on January 24, 2003 to allow Brilliance China Automotive to clarify the impact of
the court order obtained by Broadsino Finance Company Limited against Brilliance China Automotive,
the Executive Directors, the Chinese Financial Education Development Foundation and Huachen
Automotive Group Holdings Company Limited restraining the registration of any sale or transfer of
shares of Brilliance China Automotive.
89
Trading of Brilliance China Automotives shares in Hong Kong was suspended from 2:36 p.m. Hong
Kong time October 2, 2003 through October 3, 2003 and trading of Brilliance China Automotives ADSs
in New York was suspended on October 2, 2003 pending the release of an announcement in relation to
the placement of an aggregate of 113,640,000 shares of Brilliance China Automotive by certain
directors of Brilliance China Automotive.
Trading of Brilliance China Automotives shares in Hong Kong was suspended on December 31,
2003 pending the release of an announcement in relation to the acquisition by Brilliance China
Automotive, through its indirectly owned subsidiaries SJAI and SXID, of the entire equity interests
of SAIAM and SXI.
Trading of Brilliance China Automotives shares in Hong Kong was suspended from 9:37 a.m. Hong
Kong time May 8, 2006 through May 9, 2006 and trading of Brilliance China Automotives ADSs in New
York was suspended on May 8, 2006, pending the release of an announcement in relation to the
issuance by Brilliance China Finance Limited (formerly known as Goldcosmos Investments Limited) of
zero coupon guaranteed convertible bonds due 2011 with an aggregate principal amount of
approximately US$183.0 million.
ITEM 10. ADDITIONAL INFORMATION
Memorandum of Association and Bye-laws
Described below is a summary of certain provisions of Brilliance China Automotives memorandum
of association and Bye-laws, as currently in effect.
General
Brilliance China Automotive was incorporated in Bermuda under the Companies Act as an exempted
company with limited liability on June 9, 1992. Its headquarters are located at Suites 1602-05,
Chater House, 8 Connaught Road Central, Hong Kong and it is registered with the Registrar of
Companies in Hong Kong as an overseas company under Part XI of the Companies Ordinance.
Brilliance China Automotives memorandum of association also sets out its objects, including
acting as a holding and investment company, and its powers, including the powers set out in the
First Schedule of the Companies Act 1981 of Bermuda (as amended), or the Companies Act. As an
exempted company, Brilliance China Automotive will be carrying on business outside Bermuda,
although it maintains a registered office in Bermuda. Brilliance China Automotives Bye-laws were
adopted on June 25, 2004 and were last amended on February 12, 2007.
Directors
Disclosure of interests in contracts with Brilliance China Automotive or its subsidiaries
A director may not vote or be counted in the quorum on any resolution of the board of
directors concerning his own appointment as the holder of any office or place of profit with
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Brilliance China Automotive or any other company in which Brilliance China Automotive is
interested.
A director who to his knowledge is in any way, whether directly or indirectly, interested in a
contract or arrangement or proposed contract or arrangement with Brilliance China Automotive must
declare the nature of his interest at the meeting of the board of directors at which the question
of entering into the contract or arrangement is first taken into consideration, if he knows his
interest then exists, or in any other case at the first meeting of the board of directors after he
knows that he is or has become so interested.
Save as otherwise provided by the Bye-laws, a director may not vote (nor be counted in the
quorum) on any resolution of the board of directors in respect of any contract, proposal or
arrangement in which he or any of his associates has any material interest, and if he does so his
vote may not be counted (nor shall he be counted in the quorum), but this prohibition will not
apply to any of the following matters:
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any contract or arrangement for the giving by Brilliance China Automotive
of any security or indemnity to the director or his associates in respect of money lent
by him or any of his associates or obligations incurred or undertaken by him or his
associates at the request of or for the benefit of Brilliance China Automotive or any
of its subsidiaries; |
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any contract or arrangement for the giving by Brilliance China Automotive
of any security or indemnity to a third party in respect of a debt or obligation of
Brilliance China Automotive, or any of its subsidiaries, for which the director or his
associates have assumed responsibility or guaranteed or secured in whole or in part
whether solely or jointly; |
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any contract or arrangement concerning an offer of the shares, debentures
or other securities of or by Brilliance China Automotive or any other company which
Brilliance China Automotive may promote or be interested in for subscription or
purchase where the director or his associates are interested as a participant in the
underwriting or sub-underwriting of the offer; |
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any contract or arrangement concerning any other company in which the
director or his associates are interested whether directly or indirectly, as an officer
or executive or shareholder or in which the director or his associates are beneficially
interested in shares of that company, other than a company in which the director
together with any of his associates beneficially own 5% or more of the issued shares of
any class of shares of such company (or of any third company through which his/their
interest is derived) or of the voting rights; |
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any proposal or arrangement concerning the adoption, modification or
operation of any employees share scheme or any share incentive or share option scheme
under which the director or his associates may benefit; |
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any proposal or arrangement for the benefit of employees of Brilliance
China Automotive or its subsidiaries including the adoption, modification or operation
of a |
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pension fund or retirement, death or disability benefit scheme which relates both to
directors, their associates and employees of Brilliance China Automotive or any of its
subsidiaries and does not give the director or their associates any privilege or
advantage not generally accorded to the class of persons to whom such scheme or fund
relates; and |
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any contract or arrangement in which the director or his associates are
interested in the same manner as other holders of shares or debentures or securities of
Brilliance China Automotive by virtue only of their interest in shares or debentures or
other securities of Brilliance China Automotive. |
Remuneration
The directors are entitled to receive remuneration for their services a sum determined by
Brilliance China Automotive in general meeting, such sum (unless otherwise directed by the
resolution by which it is voted) to be divided amongst the directors in such proportions and in
such manner as the board of directors may agree, or failing agreement, equally, except that in such
event any director holding office for less than the whole of the relevant period in respect of
which the remuneration is paid shall only rank in such division in proportion to the time during
the period for which he has held office.
Borrowing powers
Subject to the provisions of the Companies Act, the board of directors may exercise all the
powers of Brilliance China Automotive to raise or borrow or to secure the payment of any sum or
sums of money for the purposes of Brilliance China Automotive and to mortgage or charge its
undertaking, property and uncalled capital or any part thereof. The board of directors may raise or
secure the payment or repayment of such sum or sums in such manner and upon such terms and
conditions in all respects as it thinks fit and in particular by the issue of debentures, debenture
stock, bonds or other securities of Brilliance China Automotive, whether outright or as collateral
security for any debt, liability or obligation of Brilliance China Automotive or of any third
party.
Alterations to constitutional documents
Subject to the provisions of the Companies Act, the memorandum of association of Brilliance
China Automotive may be altered by resolution passed at a general meeting of members of which due
notice has been given. The Bye-laws may be amended by the directors subject to the approval of
Brilliance China Automotive in general meeting. The Bye-laws state that a special resolution is
required to alter the memorandum of association or to approve any amendment of the Bye-laws.
Variation of rights of existing shares or classes of shares
If at any time the capital is divided into different classes of shares, all or any of the
special rights (unless otherwise provided for by the terms of issue of that class) attached to any
class may, subject to the provisions of the Companies Act, be varied or abrogated either with the
consent in writing of the holders of not less than three-fourths in nominal value of the issued
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shares of that class or with the sanction of a special resolution passed at a separate general
meeting of the holders of the shares of that class. To every such separate general meeting the
provisions of the Bye-laws relating to general meetings will apply, but so that the necessary
quorum is not less than two persons holding or representing by proxy one-third in nominal value of
the issued shares of the class, and that any holder of shares of the class present in person or by
proxy or by a duly authorized corporate representative may demand a poll.
Special resolutions majority required
A special resolution of Brilliance China Automotive must be passed by a majority of not less
than three-fourths of the votes cast of such members as, being entitled so to do, vote in person,
or by a duly authorized corporate representative, or where proxies are allowed, by proxy at a
general meeting of which not less than 21 days notice, specifying the intention to propose the
resolution as a special resolution, has been duly given. However, if it is so agreed by a majority
in number of the members having a right to attend and vote at such meeting, being a majority
together holding not less than 95% in nominal value of the shares giving that right, a resolution
may be proposed and passed as a special resolution at a meeting of which less than 21 days notice
has been given.
Voting rights and right to demand a poll
Subject to any special rights, privileges or restrictions as to voting attached to any class
or classes of shares, at any general meeting on a show of hands every member who is present in
person or by a duly authorized corporate representative shall have one vote and on a poll, every
member present in person or by a duly authorized corporate representative or by proxy shall have
one vote for every share of which he is the holder which is fully paid up or credited as fully paid
(but so that no amount paid up or credited as paid up on a share in advance of calls or
installments is treated for the foregoing purposes as paid up on the share). On a poll, a member
entitled to more than one vote need not use all his votes or cast all the votes in the same way.
At any general meeting a resolution put to the vote of the meeting shall be decided on a show
of hands unless a poll is required under The Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited or demanded (before or at the declaration of the result of the show
of hands or on the withdrawal of any other demand for a poll):
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by the chairman of the meeting; |
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by at least three members present in person, or by a duly authorized
corporate representative, or by proxy for the time being entitled to vote at the
meeting; |
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by any member or members present in person, or by a duly authorized
corporate representative, or by proxy, and representing not less than one-tenth of the
total voting rights of all the members having the right to attend and vote at the
meeting; or |
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by any member or members present in person, or by a duly authorized
corporate representative, or by proxy having the right to attend and vote at the
meeting, and in respect of whose shares, sums have been paid up in the aggregate equal
to not less than one-tenth of the total sum paid up on all the shares having that
right. |
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Requirements for annual general meetings
An annual general meeting must be held once in every year and within not more than fifteen
months after the last preceding annual general meeting.
Notices of annual general meetings
An annual general meeting and any special general meeting at which it is proposed to pass a
special resolution must be called by at least 21 days notice in writing and any other special
general meeting shall be called by at least 14 days notice in writing (in each case exclusive of
the day on which the notice is served or deemed to be served and of the day for which it is given).
The notice shall specify the place, the day and the hour of meeting and, in the case of special
business, the general nature of that business.
Quorum for meetings and separate class meetings
For all purposes the quorum for a general meeting shall be two members present in person or by
a duly authorized corporate representative or by proxy and entitled to vote. In respect of a
separate class meeting convened to sanction the modification of class rights, the necessary quorum
shall not be less than two persons holding or representing by proxy or by a duly authorized
corporate representative one-third in nominal value of the issued shares of that class and that any
holder of shares of the class present in person by proxy or by a duly authorized corporate
representative may demand a poll.
Dividends
Brilliance China Automotive in general meeting may declare dividends in any currency but no
dividends may exceed the amount recommended by the board of directors.
Unless and to the extent that the rights attached to any shares or its terms of issue
otherwise provide, all dividends will be apportioned and paid pro rata according to the amounts
paid or credited as paid up on the shares during any portion or portions of the period in respect
of which the dividend is paid. No amount paid upon a share in advance of calls will for this
purpose be treated as paid up on the shares. The board of directors may retain any dividends or
other moneys payable on or in respect of a share upon which Brilliance China Automotive has a lien,
and may apply the same in or towards satisfaction of the debts, liabilities or engagements in
respect of which the lien exists. The board of directors may deduct from any dividend or bonus
payable to any member all sums of money, if any, presently payable by him to Brilliance China
Automotive on account of calls, installments or otherwise.
Whenever the board of directors or Brilliance China Automotive in general meeting has resolved
that a dividend be paid or declared, the board of directors may further resolve either:
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that such dividend be satisfied wholly or in part in the form of an
allotment of shares credited as fully paid up, on the basis that the shares so allotted
shall be of the same class or classes as the class or classes of shares already held by
the allottee, provided that the members will be entitled to elect to receive such
dividend (or part of it) in cash in lieu of such allotment; or |
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that the members entitled to such dividend will be entitled to elect to
receive an allotment of shares credited as fully paid up in lieu of the whole or such
part of the dividend as the board of directors may think fit, on the basis that the
shares so allotted shall be of the same class or classes as the class or classes of
shares already held by the allottee. |
Brilliance China Automotive may also, upon the recommendation of the board of directors, by a
special resolution resolve in respect of any one particular dividend of Brilliance China Automotive
that it may be satisfied wholly in the form of an allotment of shares credited as fully paid up
without offering any right to members to elect to receive a dividend in cash in lieu of an
allotment.
Whenever the board of directors or Brilliance China Automotive in general meeting has resolved
that a dividend be paid or declared the board of directors may further resolve that such dividend
be satisfied wholly or in part by the distribution of specific assets of any kind.
All dividends or bonuses unclaimed for one year after having been declared may be invested or
otherwise made use of by the board of directors for the benefit of Brilliance China Automotive
until claimed and Brilliance China Automotive may not be constituted a trustee. All dividends or
bonuses unclaimed for six years after having been declared may be forfeited by the board of
directors and must revert to Brilliance China Automotive.
Procedures on liquidation
A resolution that Brilliance China Automotive be wound up by the court or be wound up
voluntarily must be a special resolution. If Brilliance China Automotive is wound up, the surplus
assets remaining after payment to all creditors are to be divided among the members in proportion
to the capital paid up on the shares held by them respectively, and if the surplus assets are
insufficient to repay the whole of the paid up capital, they are to be distributed so that, as
nearly as may be, the losses shall be borne by the members in proportion to the capital paid up on
the shares held by them respectively, all subject to the rights of any shares issued on special
terms and conditions.
If Brilliance China Automotive is wound up (whether the liquidation is voluntary or by the
court) the liquidator may, with the sanction of a special resolution, divide among the members in
specie or kind the whole or any part of the assets of Brilliance China Automotive and whether the
assets consist of property of one kind or consists of properties of different kinds and the
liquidator may, for such purposes, set such value as he deems fair upon any one or more class or
classes of property to be divided and may determine how such division is to be carried out as
between the members or different classes of members and the members within each class. With the
like sanction, the liquidator may vest any part of the assets in trustees upon such trusts for the
benefit of members as the liquidator shall think fit but so that no member shall be compelled to
accept any shares or other assets upon which there is a liability.
Transfer of shares
Subject to the Companies Act, all transfers of shares must be effected by transfer in writing
in the usual or common form or in any other form acceptable to the board of directors
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and may be under hand or by means of mechanically imprinted signatures or such other manner as
the board of directors may approve. An instrument of transfer must be executed by or on behalf of
the transferor and by or on behalf of the transferee, providing that the board may dispense with
the execution of the instrument of transfer by the transferee in any case in which it thinks fit,
in its absolute discretion to do so, and the transferor shall be deemed to remain the holder of the
shares until the name of the transferee is entered in the register of members.
The board of directors may, in its absolute discretion, transfer any share upon the principal
register to any branch register or any share on any branch register to the principal register or
any other branch register.
Unless the board of directors otherwise agrees, no shares on the principal register shall be
transferred to any branch register nor shall shares on any branch register be transferred to the
principal register or another branch register. All transfers and other documents of title must be
lodged for registration and registered, in the case of shares on a branch register, at the relevant
registration office and, in the case of shares on the principal register, at the transfer office in
Bermuda.
The board of directors may in its absolute discretion and without assigning any reason, refuse
to register any transfer of any shares (not being fully paid shares) to a person of whom it does
not approve, or any share issued under any share option scheme for employees upon which a restraint
on transfer still applies, and it may refuse to register the transfer of any shares (not being
fully paid shares) on which Brilliance China Automotive has a lien. The board of directors may also
refuse to register a transfer of shares (whether fully paid or not) in favor of more than four
persons jointly. If the board of directors refuses to register a transfer, it will within two
months after the date on which the transfer was lodged with Brilliance China Automotive send to the
transferor and transferee notice of the refusal.
The board of directors may decline to recognize any instrument of transfer unless:
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the sum, if any, as the board of directors shall determine to be paid to
Brilliance China Automotive has been paid; |
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the shares are free of any lien in favor of Brilliance China Automotive; |
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the instrument of transfer is properly stamped, and is in respect of only
one class of shares; |
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the instrument of transfer is lodged at the relevant registration or
transfer office accompanied by the relevant share certificate(s), and other evidence as
the board of directors may reasonably require to show the right of the transferor to
make the transfer has been presented (particularly if the instrument of transfer is
executed by some other person on his behalf); and |
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in some circumstances, the permission of the Bermuda Monetary Authority
has been obtained. |
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The registration of transfers may, on giving notice by advertisement in an appointed newspaper
in Bermuda and in one or more newspapers circulating in Hong Kong, be suspended at times and for
periods as the board of directors may determine and either generally or in respect of any class of
shares. The register of members must not be closed for more than thirty days in any year.
Recent Amendments to the Bye-laws
In 2003, the Companies Act 1981 of Bermuda (as amended) was amended to permit companies to
offer their shareholders a summary financial report in place of the complete annual report and
accounts. On February 17, 2002, The Stock Exchange of Hong Kong Limited announced amendments to the
Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, or the
Listing Rules, which will allow companies to distribute to their shareholders a summary financial
report instead of the longer report. On February 5, 2002, The Stock Exchange of Hong Kong Limited
also announced amendments to its Listing Rules that allow companies to distribute corporate
communications to their shareholders via electronic means. As a result of these amendments, the
board of directors of Brilliance China Automotive amended the Bye-laws of Brilliance China
Automotive to permit Brilliance China Automotive to take advantage of these changes to the Listing
Rules by allowing shareholders to choose to receive a summary financial report in place of the
longer, complete annual report and to receive copies of corporate communications by electronic
means or by relying on the versions of those documents published on Brilliance China Automotives
website instead of printed copies of such documents. These amendments were approved by the
shareholders of Brilliance China Automotive by way of a special resolution at the special general
meeting held on June 28, 2002.
At the annual general meeting held on June 25, 2004, the shareholders of Brilliance China
Automotive approved amendments to the Bye-laws in order to reflect certain recent amendments to the
Listing Rules, which came into effect on March 31, 2004. A brief description of these amendments to
the Bye-laws is as follows:
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Bye-law 1(A): To amend the existing definition of associates and
Clearing House and to add a new definition for subsidiaries |
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Bye-law 70: To reflect the requirement of voting by poll in respect of
certain transactions under the Listing Rules |
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Bye-law 76: To provide for circumstances under which shareholders are
required to abstain from voting or restricted to vote for or against any particular
resolution as required by the revised Appendix 3 to the Listing Rules |
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Bye-laws 98(E), 98(H) and 98(K): To be consistent with the provisions of
the revised Appendix 3 to the Listing Rules so that, subject to certain exceptions, a
director shall abstain from voting at the board meeting on any contract or arrangement
in which he and/or any of his associates has/have a material interest nor shall he be
counted towards the quorum of the relevant board meeting |
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Bye-law 103: To be consistent with the revised Appendix 3 to the Listing
Rules which stipulates the minimum seven-day period for lodgment by a shareholder of
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notice to nominate a director and the nomination shall commence no earlier than the day
after the despatch of the notice of the general meeting appointed for such election and
end no later than seven days before the date of such general meeting |
In light of the numerous changes listed above as well as those from prior amendments, the
shareholders adopted at the same annual general meeting a fully restated and consolidated set of
the Bye-laws incorporating all previous amendments thereto passed at the special general meeting
held on June 28, 2002 and the amendments approved at the annual general meeting on June 25, 2004,
in substitution for the existing Bye-laws.
At the annual general meeting held on June 24, 2005, Brilliance China Automotive amended the
Bye-laws in order to reflect certain amendments to the Listing Rules of The Stock Exchange of Hong
Kong Limited, which came into effect on January 1, 2005. A brief description of the amendments is
as follows:
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Bye-law 6(A): To reflect the existing authorized share capital of
Brilliance China Automotive |
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Bye-law 70: To facilitate the process for demanding a poll at general
meetings |
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Bye-law 99: To provide for retirement by rotation of every director at
annual general meetings of Brilliance China Automotive in compliance with code
provision A.4.2 of the Code on Corporate Governance Practices issued by The Stock
Exchange of Hong Kong Limited |
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Bye-law 102 (A) and (B): To specify that any director of Brilliance China
Automotive appointed to fill a casual vacancy shall hold office until the next
following general meeting, instead of the next following annual general meeting |
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At the special general meeting held on February 12, 2007, Brilliance China Automotive amended
Bye-law 6(A) in order to reflect an increase in the authorized share capital.
Material Contracts
The following contracts, not being contracts in the ordinary course of business, have been
entered into by Brilliance China Automotive and/or its subsidiaries within the two years preceding
the date of this annual report and are or may be material.
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Service Agreement for Executive Director dated March 1, 2006 between Brilliance
China Automotive and Mr. Wu Xiao An; |
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Service Agreement for Executive Director dated March 1, 2006 between Brilliance
China Automotive and Mr. Qi Yumin; |
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Purchase Agreement, dated May 8, 2006, between Brilliance China Finance Limited
(formerly known as Goldcosmos Investments Limited), Brilliance China Automotive and
Citigroup Global Markets Limited relating to the sale of zero coupon guaranteed
convertible bonds due 2011 by Brilliance China Finance Limited; and |
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Trust Deed, dated June 7, 2006, between Brilliance China Finance Limited
(formerly known as Goldcosmos Investments Limited), Brilliance China Automotive and The
Bank of New York, London Branch relating to the zero coupon guaranteed convertible
bonds due 2011 issued by Brilliance China Finance Limited. |
Exchange Controls
Brilliance China Automotive has been designated as a non-resident for exchange control
purposes by the Bermuda Monetary Authority, whose permission was obtained and is in force for the
issue of the ordinary shares and ADSs of Brilliance China Automotive to persons not resident in
Bermuda for exchange control purposes.
The transfer of shares between persons regarded as residents outside Bermuda for exchange
control purposes and the issue of shares to or by such persons may be effected without specific
consent under the Exchange Control Act 1972 of Bermuda (as amended) and regulations thereunder.
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.
There are no limitations on the rights of non-Bermuda residents to hold or vote shares of
Brilliance China Automotive. Because Brilliance China Automotive 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 Brilliance China Automotives ordinary shares, other than in respect of local Bermuda currency.
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In accordance with Bermuda law, share certificates are only issued in the names of
corporations or individuals. In the case of an applicant acting in a special capacity (for example,
as an executor or trustee), certificates may, at the request of the applicant, record the capacity
in which the applicant is acting. Notwithstanding the recording of any such special capacity,
Brilliance China Automotive is not bound to investigate further or incur any responsibility in
respect of the proper administration of any such estate or trust.
Brilliance China Automotive will take no notice of any trust applicable to any of its shares
whether or not it had notice of such trust.
As an exempted company, Brilliance China Automotive is exempted from Bermuda laws that
restrict the percentage of share capital that may be held by non-Bermudians, but as an exempted
company, Brilliance China Automotive may not participate in certain business transactions,
including:
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the acquisition or holding of land in Bermuda (except that required for
its business and held by way of lease or tenancy for terms of not more than 50 years)
without the express authorization of the Bermuda legislature; |
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the taking of mortgages on land in Bermuda to secure an amount in excess
of BD$50,000 without the consent of the Minister of Finance of Bermuda; |
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the acquisition of securities secured on any land in Bermuda, other than
certain types of Bermuda government securities; or |
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the carrying on of business of any kind in Bermuda, except in furtherance
of the business of Brilliance China Automotive carried on outside Bermuda or under a
license granted by the Minister of Finance of Bermuda. |
The Bermuda government actively encourages foreign investment in exempted entities such as
Brilliance China Automotive that are based in Bermuda but do not operate in competition with local
business. In addition to having no restrictions on the degree of foreign ownership, Brilliance
China Automotive is subject neither to taxes on its income or dividends nor to any foreign exchange
controls in Bermuda. In addition, there is no capital gains tax in Bermuda, and profits can be
accumulated by Brilliance China Automotive, as required, without limitation.
The Chinese government imposes control over its foreign currency reserves in part through
direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on
foreign trade. On January 1, 1994, the dual foreign exchange system in China was abolished in
accordance with the notice of the Peoples Bank of China concerning future reform of the foreign
currency control system issued December 1993. The Renminbi was revalued on July 21, 2005 to Rmb
8.11 per US$1.00 from its previously pegged rate of Rmb 8.28 per US$1.00. The Peoples Bank of
China also announced that Renminbi would be pegged to a basket of foreign currencies, rather than
tied solely to the U.S. dollars, and would trade within a band against this basket of currencies,
which includes, without limitation, U.S. dollars, Euro, Japanese yen, South Korean won, British
pounds, Thai baht and Russia ruble. This change in
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policy has resulted in an approximately 6% appreciation of the Renminbi against the U.S.
dollar between July 21, 2005 and December 31, 2006.
Taxation
Income tax
Brilliance China Automotive was incorporated under the laws of Bermuda and has received an
undertaking from the Ministry of Finance in Bermuda pursuant to the provisions of the Exempted
Undertakings Tax Protection Act, 1966, which exempts Brilliance China Automotive and its
shareholders, other than shareholders ordinarily residing in Bermuda, from any Bermuda taxes
computed on profit, income or any capital asset gain or appreciation, or any tax in the nature of
estate duty or inheritance tax, at least until year 2016.
No provision for Hong Kong profits tax has been made to Brilliance China Automotive as it has
no estimated assessable profits for the year.
The subsidiaries are subject to state and local income taxes in the PRC at their respective
tax rates, based on the taxable income reported in their statutory financial statements in
accordance with the relevant state and local income tax laws applicable.
Shenyang Automotive is subject to state and local income taxes in the PRC at standard rates of
15% and 3% respectively in accordance with enterprise income tax laws applicable to Sino-foreign
equity joint venture enterprises. Shenyang Automotive is exempted from local income tax of 3% as it
was designated as an Technologically-Advanced Enterprise. As a result, the effective enterprise
income tax rate for Shenyang Automotive was 15% for the years ended 2006, 2005 and 2004.
Ningbo Yuming Machinery Industrial Co., Ltd., or Ningbo Yuming, and Ningbo Brilliance Ruixing
are subject to state and local income taxes in the PRC at standard rates of 30% and 3%,
respectively, in accordance with enterprise income tax laws applicable. Pursuant to the relevant
income tax laws in the PRC, the applicable state and local income tax rates were reduced to 15% and
1.5%, respectively. As a result, the effective enterprise income tax rate for Ningbo Yuming and
Ningbo Brilliance Ruixing was 16.5% for the years ended 2006, 2005 and 2004.
Shenyang Xing Yuan Dong Automobile Component Co., Ltd., or Xing Yuan Dong and Brilliance
Dongxing are subject to state and local income taxes in the PRC at standard rates of 30% and 3%,
respectively, in accordance with enterprise income tax laws applicable. Xing Yuan Dong and
Brilliance Dongxing each received official designation by the local tax authority as a New and
Technologically-Advanced Enterprise and a foreign-invested enterprise engaged in manufacturing
activities. As a result, the effective enterprise income tax rate for Xing Yuan Dong and Brilliance
Dongxing were 16.5% for the years ended 2006, 2005 and 2004.
Mianyang Brilliance Ruian is subject to state and local income taxes in the PRC at standard
rates of 30% and 3%, respectively, in accordance with enterprise income tax laws applicable.
During 2001, Mianyang Brilliance Ruian received official designation by the local tax authority as
a foreign-invested enterprise engaged in manufacturing activities. In 2004,
101
Mianyang Brilliance Ruian was also designated as an encouraged industries under Catalogue for
the Guidance of Foreign Investment Industries and located in the Western area of the PRC. Pursuant
to the relevant income tax laws in the PRC, from 2004 to 2010, the applicable state income tax rate
for Mianyang Brilliance Ruian is 15%. In addition, Mianyang Brilliance Ruian is also exempted from
state and local enterprise income taxes for two years starting from the first profitable year in
2001 followed by a 50% reduction of enterprise income tax for the next three years. Mianyang
Brilliance Ruian is also exempted from local enterprise income tax for the same five-year period.
As a result, the effective tax rates for Mianyang Brilliance Ruian were 18%, 7.5% and 7.5% for the
years ended 2006, 2005 and 2004, respectively.
Shenyang Chenfa is subject to state and local income taxes in the PRC at standard rates of 30%
and 3%, respectively, in accordance with enterprise income tax laws applicable. In 2005, Shenyang
Chenfa received official designation by the local tax authority as a foreign-invested enterprise
engaged in manufacturing activities. Pursuant to the relevant income tax laws in the PRC, Shenyang
Chenfa is exempted from state enterprise income tax for two years starting from the first
profitable year in 2004 followed by a 50% reduction of state enterprise income tax for the next
three years. In addition, Shenyang Chenfa is also exempted from local enterprise income tax for the
same five-year period. As a result, the effective tax rate for Shenyang Chenfa was 7.5% for the
year ended 2006 and 0% for the years ended 2005 and 2004.
Other subsidiaries in China are subject to state and local income taxes within China at
standard rates of 30% and 3%, respectively, based on the respective taxable income reported in
their statutory financial statements in accordance with the relevant state and local income tax
laws applicable to foreign-invested enterprises.
Value Added Tax and Consumption Tax
Under the Provisional Regulations on Value Added Tax in the Peoples Republic of China,
which came into effect on January 1, 1994, all subsidiaries are subject to value added tax, which
is the principal indirect tax on the sale of tangible goods. The general value added tax rate
applicable to sales and purchases of minibuses, sedans and automotive components in China is 17%.
Sales of minibuses and sedans are also subject to consumption tax at standard rates of 5% to 12% in
2006.
Customs Duties
See Item 11 Quantitative and Qualitative Disclosures About Market Risk Tariff
Reductions for a discussion of the import tariffs that generally apply to Brilliance China
Automotive and its subsidiaries. Brilliance China Automotive and its subsidiaries paid
approximately Rmb 31.6 million as customs duties in 2006.
Documents on Display
Brilliance China Automotive is subject to the informational requirements of the U.S.
Securities and Exchange Act of 1934, as amended, or the Exchange Act, and, in accordance with the
Exchange Act, Brilliance China Automotive files annual reports on Form 20-F within six months of
its fiscal year end, and submit other reports and information under cover of Form 6-K with the SEC.
You may read and copy this information at the SECs public reference room at
102
450 Fifth Street, N.W., Washington, D.C. 20549. Recent filings and reports are also available
free of charge through the EDGAR electronic filing system at www.sec.gov. You can also request
copies of the documents, upon payment of a duplicating fee, by writing to the public reference
section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference room or accessing documents through EDGAR. As a foreign private issuer,
Brilliance China Automotive is exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements to shareholders.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rates
In the year ended December 31, 2006, approximately 2.7%, 1.6% and 0.6% of Shenyang
Automotives costs of sales were denominated in Japanese Yen, U.S. dollars and Euros, respectively.
These costs related primarily to the purchase and importation of equipment and components from
foreign suppliers. Shenyang Automotive pays foreign currency for the imported components and spare
parts through Japanese Yen-, U.S. dollar- or Euro-denominated letters of credit issued by the Bank
of China and other Chinese banks. Shenyang Automotive funds these letters of credit in U.S. dollars
or converts a portion of its Renminbi earnings into Japanese Yen, U.S. dollars or Euros as
required. Accordingly, Shenyang Automotive is exposed to exchange rate risk among these currencies.
The value of Renminbi to the U.S. dollar increased by approximately 3.2% in 2006 as a result
of the loosening of the peg to the U.S. dollar since July 21, 2005. The appreciation of the
Renminbi versus the Japanese Yen, U.S. dollar or Euro has made purchases of foreign-produced
components and payments denominated in foreign currency less expensive for Shenyang Automotive in
Renminbi terms, thereby marginally improving its results of operations. A devaluation of the
Renminbi would have the opposite effect. While there can be no assurance that the exchange rates
will continue their current trends or that a devaluation or continued appreciation of the Renminbi
will not occur, Brilliance China Automotive does not believe that such occurrences would, in any
event, have any material adverse effect on Brilliance China Automotives earnings.
Other than US$200 million zero coupon convertible bonds issued in 2003 (which have all been
cancelled as of December 31, 2006) and US$183 million zero coupon guaranteed convertible bonds
issued in 2006, Brilliance China Automotive and its subsidiaries currently have no foreign
currency-denominated borrowings from third parties, but have outstanding letters of credit of Yen
349.4 million, US$1.1 million and Euro 5.2 million from local banks. Brilliance China Automotive
also advanced shareholders loans to its subsidiaries in the amounts of approximately HK$266.2
million, Rmb 1,891.6 million and US$193.3 million in 2006.
Since Brilliance China Automotive does not believe that exchange rate fluctuations have any
material effect on the overall financial performance of Brilliance China Automotive, and the amount
of foreign currency that it requires is not significant, Brilliance China Automotive does
103
not enter into any hedging transactions with respect to its exposure to foreign currency
movements.
Interest Rates
Funds not required by Brilliance China Automotive in the short term are kept as temporary
demand or time deposits in commercial banks. Brilliance China Automotive does not hold any market
risk-sensitive instruments for trading purposes. As of December 31, 2006, Brilliance China
Automotive had short-term bank loans outstanding in the amount of Rmb
2,141.9 million. The average
annual rate for discounting notes receivables with banks in 2006 ranged from 3% to 4% per annum,
which rate is fixed separately for each transaction. Brilliance China Automotive did not have any
variable rate loans or commitments outstanding as of December 31, 2006.
For the year ended December 31, 2006, Brilliance China Automotives interest income was Rmb
90.7 million (US$11.6 million) and its interest expense was Rmb 177.0 million (US$22.7 million). A
10% change in interest rates would result in a change in interest income of approximately Rmb 9.1
million (US$1.2 million) and a change in interest expense of approximately Rmb 17.7 million (US$2.3
million).
Tariff Reductions
The PRC government imposes restrictions, quotas and tariffs on the import of foreign-made
motor vehicles, as well as motor vehicle components. However, as a result of the PRCs accession to
the WTO, which regulates trading and tariffs among its signatory states, in November 2001, the PRC
has committed to reducing its import restrictions on motor vehicles and motor vehicle components.
In addition, the PRC will be required to conform its import tariffs to the uniform tariffs under
the WTO.
Effective January 1, 2002, the PRC reduced its import tariffs on motor vehicles and automotive
components from between 80% to 100% and between 18% to 40%, respectively, to between 43.8% to 50.7%
and between 14% to 31.4%, respectively. This range was lowered further to between 4.8% and 25% for
automotive components in 2003, between 5% and 22.9% in 2004 between 5% and 18.6% in 2005, between
5.0% and 14.3% in 2006 and between 5.0% to 10.0% in January 2007. In 2004, the average import
tariffs on automotive components for the deluxe minibuses (including Granse minibuses) and Zhonghua
sedans were 13.8% and 10.5%, respectively, and in 2005, the average tariffs became 9.7% and 12.1%
for the imported components for deluxe minibuses and Zhonghua sedans, respectively. In 2006, the
average tariffs were reduced to 8.2% and 10.4% for the imported components for deluxe minibuses and
Zhonghua sedans, respectively. In addition, tariffs on vehicles with nine seats or less and engine
sizes of three liters or below fell from 38.2% in 2003 to 34.2% in 2004, while tariffs on vehicles
with more than nine seats and engines of more than three liters decreased from 43.0% in 2003 to
37.6% in 2004. In 2005, tariffs were fixed at 30% for all motor vehicles. These tariffs were
further reduced to 28% in January 2006 and 25% in July 2006.
Although lower tariffs and reduced import restrictions may benefit Brilliance China Automotive
in terms of lower cost of imported components, lower tariffs and reduced import
104
restrictions could also lead to a substantial increase in the number of minibuses, sport
utility vehicles, sedans and other motor vehicles imported into China, thereby significantly
increasing competition in Brilliance China Automotives current and proposed markets.
Except as described above, Brilliance China Automotives management believes that at present
and in its normal course of business, Brilliance China Automotive is not subject to any other
market-related risks.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Material Modifications to the Rights of Security Holders
None.
Use of Proceeds
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Chief Executive Officer and Chief Financial Officer of Brilliance China Automotive are
responsible for establishing and maintaining disclosure controls and procedures (as defined in the
Exchange Act Rules 13a-15(e) and 15d-15(e)). The management of Brilliance China Automotive carried
out an evaluation, under the supervision and with the participation of its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of Brilliance China Automotives disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14.
As more fully described below under Managements Report on Internal Control Over Financial
Reporting, material weaknesses have been identified in Brilliance China Automotives internal
control over financial reporting. Consequently, given the overlap between disclosure controls and
internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer
have concluded that disclosure controls and procedures were not effective as of December 31, 2006.
105
Managements Report on Internal Control Over Financial Reporting
The Chief Executive Officer and Chief Financial Officer of Brilliance China Automotive are
responsible for establishing and maintaining internal control over financial reporting (as defined
in the Exchange Act Rule 13a-15(f)).
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies and procedures may deteriorate.
Brilliance China Automotives management, including the Chief Executive Officer and the Chief
Financial Officer, has evaluated the effectiveness of internal control over financial reporting as
of December 31, 2006 based on criteria established by the
framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Management has concluded that, as of December 31, 2006, material weaknesses existed in
Brilliance China Automotives internal control over financial reporting. An internal control
material weakness is a control deficiency, or combination of control deficiencies, that results in
more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Management has identified the following material
weaknesses as of December 31, 2006:
Brilliance China Automotive did not maintain effective controls over the timing of the
recognition of revenue. Specifically, controls were not designed and in place to ensure that
revenue from the sale of goods is properly recorded in the appropriate accounting period in
accordance with generally accepted accounting principles in the United States of America.
Brilliance China Automotive recognizes revenue from the sale of goods at the time when a delivery
order and an advance payment are received from customers, irrespective of whether the goods are
delivered to customers. This would cause revenue and related costs of sales to be overstated.
Brilliance China Automotive did not maintain effective controls over the payment for
investments. Specifically, controls were not designed and in place to critically assess the
potential investments, such as evaluating the expected returns, potential risks, resources and
funding requirements. In addition, we noted one instance where a
significant payment was made for
an investment without prior approval by the board of directors of Brilliance China Automotive.
Brilliance China Automotive did not maintain effective controls over the granting of credit
limits to customers. Specifically, controls were not properly designed and in place to
106
evaluate the creditworthiness of potential customers. In a particular instance, the decision to
grant credit was not properly supported and there was no proper documentation of background
information on the customer.
4. |
|
Monitoring of Credit Risks |
Brilliance China Automotive did not maintain effective controls over the monitoring of its
credit risk. Specifically, controls were not properly designed and in place to prevent the
balances due from customers from exceeding their credit limits.
5. |
|
Monitoring of Payments in Advance |
Brilliance China Automotive did not maintain effective controls over the monitoring of
payments in advance. Specifically, controls were not properly designed and in place to (1) ensure
advanced payments for purchases of goods are offset against related accounts payable upon the
receipt of goods; and (2) monitor the status of payments in advance for the assessment of
recoverability.
Because of these weaknesses, management has concluded that Brilliance China Automotive did not
maintain effective internal control over financial reporting as of December 31, 2006. Management
has recommended the following measures for improvement in each of the areas to the Audit Committee,
which adopted the recommendations and presented them to the Board of
Directors for implementation:
Revenue recognition. Design and maintain controls to accurately recognize revenue at the time
when goods are received by customers.
Investments. Design and maintain effective controls over payment for investments. Significant
investments should be approved by the Board of Directors of both Brilliance China Automotive and
the relevant subsidiary, and before making significant investments, Brilliance China Automotive
should obtain sufficient information to evaluate the expected returns, potential risks and funding
requirements of each investment.
Credit Approval. Design and maintain internal control procedures for the granting of credit to
potential customers. Sufficient information, including background information, financial statements
and past trading records, should be obtained to assess the creditworthiness of potential customers.
Monitoring of Credit Risks. Implement policies to monitor credit risks. Delivery of goods
should only be made after checking the available credit limit of the customer.
Monitoring of Payments in Advance. Assign responsible personnel in monitoring the status of
payments in advance. Payments in advance should be offset against related accounts payable when
goods are received and aging analyses of advanced payments should be reviewed regularly with
regular follow up on long overdue outstanding items.
107
Brilliance China Automotives internal control team is supervising staff from various
departments to implement the corrective policies and measures, and once the corrective measures are
in place, trial testing of the effectiveness of such measures will be conducted.
Brilliance China Automotive is not a large accelerated filer as defined in the rules
promulgated by the Commission. Accordingly, this management internal control report is not, and is
not required to be, accompanied by an attestation report of Brilliance China Automotives auditors.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in internal controls, or in factors that could
significantly affect internal controls, during the period covered by this annual report.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors of Brilliance China Automotive has determined that Brilliance China
Automotive does not have an audit committee financial expert, as defined by the SEC, serving on its
audit committee. Brilliance China Automotive is seeking to appoint a director who would serve as
the audit committee financial expert on the audit committee. However as of the date of this annual
report, no suitable candidate has been identified.
ITEM 16B. CODE OF ETHICS
Brilliance China Automotive has not adopted a code of ethics that applies to the principal
executive officer, the principal financial officer and the principal accounting officer or
controller. However, the board of directors of Brilliance China Automotive has adopted or follows
the following written standards for purposes of corporate governance:
|
|
|
The Rules Governing the Listing of Securities on The Stock Exchange of
Hong Kong Limited, including the Model Code for Securities Transactions by Directors of
Listed Issuers; |
|
|
|
|
Non-Statutory Guidelines on Directors Duties issued by the Hong Kong
Companies Registry in January 2004; |
|
|
|
|
Guide for Independent Non-Executive Directors issued by The Hong Kong
Institute of Directors in 2000; |
|
|
|
|
Guidelines for Directors issued by The Hong Kong Institute of Directors in
2005; and |
|
|
|
|
Code for Securities Transactions by Employees. |
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
108
Moores Rowland Mazars has acted as Brilliance China Automotives independent auditors for the
fiscal years ended December 31, 2004, 2005 and 2006. The chart below sets forth the total amount
billed to us by PricewaterhouseCoopers and Moores Rowland Mazars.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Rmb thousands) |
Audit fees |
|
|
2,800 |
|
|
|
3,146 |
|
|
|
4,452 |
|
Audit-related fees |
|
|
1,900 |
|
|
|
723 |
|
|
|
662 |
|
Tax fees |
|
|
|
|
|
|
|
|
|
|
|
|
Other fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,700 |
|
|
|
3,869 |
|
|
|
5,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees
Audit fees are the aggregate fees billed by the auditors for the annual financial statement
audit and other procedures required to be performed by the auditors so as to form an opinion on
Brilliance China Automotives annual financial statements.
Audit-Related Fees
Audit-related fees mainly include the aggregate fees billed by the auditors in relation to
agreed-upon procedures performed on Brilliance China Automotives interim financial statements and
professional services in connection with the issue of the convertible bonds due 2011.
Pre-Approval Policies and Procedures
As part of its duties, the Audit Committee considers the appointment of the external auditor
and the audit fee and discusses with the external auditor, before the audit commences, the nature
and scope of the audit. The Audit Committee pre-approves the fees and services provided by the
external auditor through meetings or written resolutions circulated to members of the Audit
Committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
PART III
109
ITEM 17. FINANCIAL STATEMENTS
Brilliance China Automotive has elected to provide the financial statements and related
information specified in Item 18 in lieu of Item 17.
ITEM 18. FINANCIAL STATEMENTS
See
pages F-1 to F-50 following Item 19.
ITEM 19. EXHIBITS
The following exhibits are furnished along with annual report or are incorporated by reference
as indicated.
|
1.1 |
|
Amended and Restated Bye-Laws of Brilliance China Automotive, dated June 25,
2004.* |
|
|
1.2 |
|
Amendments to Bye-Laws of Brilliance China Automotive dated
February 12, 2007 and June 24,
2005. |
|
|
2.1 |
|
Trust Deed, dated June 7, 2006, between Brilliance China Finance Limited
(formerly known as Goldcosmos Investments Limited), Brilliance China Automotive and The
Bank of New York, London Branch relating to the zero coupon guaranteed convertible
bonds due 2011 issued by Brilliance China Finance Limited.** |
|
|
4.1 |
|
Form of Service Agreement for Executive Director.** |
|
|
4.2 |
|
Purchase Agreement, dated May 8, 2006, between Brilliance China Finance Limited
(formerly known as Goldcosmos Investments Limited), Brilliance China Automotive and
Citigroup Global Markets Limited relating to the sale of zero coupon guaranteed
convertible bonds due 2011 by Brilliance China Finance Limited.** |
|
|
7.1 |
|
Statement explaining how certain ratios were calculated in the annual report. |
|
|
8.1 |
|
List of significant subsidiaries, jointly controlled entities and associated
companies of Brilliance China Automotive as of December 31, 2006. |
|
|
12.1 |
|
Section 302 Certification of the Chief Executive Officer. |
|
|
12.2 |
|
Section 302 Certification of the Chief Financial Officer. |
|
|
13.1 |
|
Section 906 Certification of the Chief Executive Officer and Chief Financial
Officer. |
|
|
|
* |
|
Incorporated by reference from the Registrants annual report on Form 20-F
filed with the SEC on June 24, 2005. |
|
** |
|
Incorporated by reference from the Registrants annual report on Form 20-F
filed with the SEC on June 26, 2006. |
110
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
|
|
|
|
|
|
BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LIMITED
|
|
|
/s/ WU Xiao An
|
|
|
WU Xiao An |
|
|
Chairman |
|
|
Date: June 29, 2007
111
INDEX TO FINANCIAL STATEMENTS
BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LIMITED AND SUBSIDIARIES
|
|
|
|
|
Page |
Report of Independent Registered Public Accounting Firm of Moores
Rowland Mazars, dated April 20, 2007
|
|
F-2 |
|
|
|
Consolidated Statements of Income and Comprehensive Income for the
years ended December 31, 2006, 2005 and 2004
|
|
F-3 |
|
|
|
Consolidated Balance Sheets as of December 31, 2006 and 2005
|
|
F-4 |
|
|
|
Consolidated Statements of Cash Flows for the years ended December
31, 2006, 2005 and 2004
|
|
F-6 |
|
|
|
Consolidated Statements of Changes in Shareholders Equity for the
years ended December 31, 2006, 2005 and 2004
|
|
F-9 |
|
|
|
Notes to Consolidated Financial Statements
|
|
F-10 |
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders of
Brilliance China Automotive Holdings Limited
We have audited the accompanying consolidated balance sheets of Brilliance China Automotive
Holdings Limited (a Bermuda corporation) and its subsidiaries (the Group) as of December 31, 2006
and 2005, and the related consolidated statements of income and comprehensive income, cash flows
and changes in shareholders equity for the years ended December 31, 2006, 2005 and 2004. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Group as of December 31, 2006 and 2005, and the
results of its operations and cash flows for the years ended December 31, 2006, 2005 and 2004, in
conformity with United States generally accepted accounting principles.
Moores Rowland Mazars
Chartered Accountants
Certified Public Accountants
Hong Kong,
April 20, 2007
F-2
Brilliance China Automotive Holdings Limited
Consolidated Statements of Income and Comprehensive Income
For the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
|
|
(except for share and ADS data) |
|
Sales to third parties |
|
|
9,067,505 |
|
|
|
3,859,151 |
|
|
|
4,402,141 |
|
Sales to affiliated companies |
|
|
1,417,249 |
|
|
|
1,609,839 |
|
|
|
2,139,857 |
|
Total sales |
|
|
10,484,754 |
|
|
|
5,468,990 |
|
|
|
6,541,998 |
|
Cost of sales (include purchase of goods and
subcontracting charges from affiliated
companies) (2006: RMB2,317,393,000,
2005: RMB1,174,732,000, 2004: RMB2,185,428,000) |
|
|
(9,960,587 |
) |
|
|
(5,011,955 |
) |
|
|
(5,491,250 |
) |
Gross profit |
|
|
524,167 |
|
|
|
457,035 |
|
|
|
1,050,748 |
|
Selling, general and administrative expenses |
|
|
(1,384,718 |
) |
|
|
(1,195,336 |
) |
|
|
(1,510,442 |
) |
Interest expenses |
|
|
(177,001 |
) |
|
|
(182,354 |
) |
|
|
(182,458 |
) |
Interest income |
|
|
90,738 |
|
|
|
60,189 |
|
|
|
58,800 |
|
Equity in earnings of associated companies
and jointly controlled entities, net |
|
|
149,320 |
|
|
|
48,995 |
|
|
|
126,261 |
|
Subsidy income |
|
|
50,176 |
|
|
|
3,139 |
|
|
|
1,815 |
|
Other income, net |
|
|
106,150 |
|
|
|
43,650 |
|
|
|
25,709 |
|
Impairment loss on intangible assets |
|
|
|
|
|
|
(173,000 |
) |
|
|
(50,000 |
) |
Impairment loss on goodwill |
|
|
(73,343 |
) |
|
|
(257,720 |
) |
|
|
(47,320 |
) |
Loss before taxation and minority interests |
|
|
(714,511 |
) |
|
|
(1,195,402 |
) |
|
|
(526,887 |
) |
(Provision) benefit for income taxes |
|
|
(47,879 |
) |
|
|
(101,884 |
) |
|
|
63,110 |
|
Minority interests |
|
|
376,282 |
|
|
|
625,997 |
|
|
|
464,991 |
|
Net (loss) income |
|
|
(386,108 |
) |
|
|
(671,289 |
) |
|
|
1,214 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment for securities
available-for-sale |
|
|
1,052 |
|
|
|
(27,227 |
) |
|
|
28,468 |
|
Comprehensive (loss) income |
|
|
(385,056 |
) |
|
|
(698,516 |
) |
|
|
29,682 |
|
Basic (loss) earnings per share |
|
|
RMB(0.1053 |
) |
|
|
RMB(0.1830 |
) |
|
|
RMB0.0003 |
|
Basic (loss) earnings per ADS |
|
|
RMB(10.53 |
) |
|
|
RMB(18.30 |
) |
|
|
RMB0.03 |
|
Diluted (loss) earnings per share |
|
|
RMB(0.1053 |
) |
|
|
RMB(0.1830 |
) |
|
|
RMB0.0003 |
|
Diluted (loss) earnings per ADS |
|
|
RMB(10.53 |
) |
|
|
RMB(18.30 |
) |
|
|
RMB0.03 |
|
Weighted average number of shares outstanding |
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
Weighted average number of ADSs outstanding |
|
|
36,683,909 |
|
|
|
36,683,909 |
|
|
|
36,683,909 |
|
Net (loss) income adjusted for the dilutive
effect of convertible bonds |
|
|
(386,108 |
) |
|
|
(671,289 |
) |
|
|
1,214 |
|
Weighted average number of shares
outstanding adjusted for dilutive effect of
stock options and convertible bonds |
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
|
|
3,683,795,968 |
|
Weighted average number of ADSs outstanding
adjusted for dilutive effect of stock
options and convertible bonds |
|
|
36,683,909 |
|
|
|
36,683,909 |
|
|
|
36,837,960 |
|
The accompanying notes are an integral part of these consolidated statements of income and
comprehensive income.
F-3
Brilliance China Automotive Holdings Limited
Consolidated Balance Sheets
As of December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,468,075 |
|
|
|
843,400 |
|
Short-term bank deposits |
|
|
616,787 |
|
|
|
1,053,832 |
|
Pledged short-term bank deposits |
|
|
1,625,149 |
|
|
|
1,932,649 |
|
Deferred expenses current portion |
|
|
6,283 |
|
|
|
8,920 |
|
Notes receivable |
|
|
197,668 |
|
|
|
377,505 |
|
Notes receivable from affiliated companies |
|
|
81,477 |
|
|
|
338,970 |
|
Accounts receivable, net |
|
|
632,158 |
|
|
|
124,958 |
|
Due from affiliated companies |
|
|
1,050,810 |
|
|
|
840,215 |
|
Inventories, net |
|
|
1,346,843 |
|
|
|
1,046,818 |
|
Other receivables |
|
|
423,017 |
|
|
|
432,019 |
|
Prepayments and other current assets |
|
|
143,583 |
|
|
|
57,707 |
|
Income tax recoverable |
|
|
815 |
|
|
|
12,476 |
|
Other taxes recoverable |
|
|
117,830 |
|
|
|
1,766 |
|
Advances to affiliated companies |
|
|
58,085 |
|
|
|
38,931 |
|
Total current assets |
|
|
7,768,580 |
|
|
|
7,110,166 |
|
Property, plant and equipment |
|
|
3,865,210 |
|
|
|
4,362,762 |
|
Intangible assets |
|
|
420,978 |
|
|
|
584,811 |
|
Interests in associated companies and jointly controlled entities |
|
|
1,413,135 |
|
|
|
1,520,696 |
|
Investment securities |
|
|
23,736 |
|
|
|
22,684 |
|
Goodwill |
|
|
339,710 |
|
|
|
339,710 |
|
Prepayment for a long-term investment |
|
|
600,000 |
|
|
|
600,000 |
|
Deferred expenses non-current portion |
|
|
21,466 |
|
|
|
16,353 |
|
Long-term land lease prepayments |
|
|
120,099 |
|
|
|
124,157 |
|
Other long-term assets |
|
|
7,450 |
|
|
|
10,966 |
|
Total assets |
|
|
14,580,364 |
|
|
|
14,692,305 |
|
F-4
Brilliance China Automotive Holdings Limited
Consolidated Balance Sheets
As of December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Convertible bonds due 2008 |
|
|
|
|
|
|
1,639,550 |
|
Short-term bank loans |
|
|
500,000 |
|
|
|
496,500 |
|
Notes payable |
|
|
2,141,947 |
|
|
|
3,026,952 |
|
Notes payable to affiliated companies |
|
|
37,288 |
|
|
|
74,092 |
|
Accounts payable |
|
|
2,299,267 |
|
|
|
928,892 |
|
Due to affiliated companies |
|
|
983,293 |
|
|
|
633,807 |
|
Customer advances |
|
|
425,778 |
|
|
|
318,978 |
|
Other payables |
|
|
403,040 |
|
|
|
434,651 |
|
Dividends payable |
|
|
3,299 |
|
|
|
3,406 |
|
Accrued expenses and other current liabilities |
|
|
159,222 |
|
|
|
265,908 |
|
Income tax payable |
|
|
11,411 |
|
|
|
14,309 |
|
Other taxes payable |
|
|
81,841 |
|
|
|
117,695 |
|
Advances from affiliated companies |
|
|
135,095 |
|
|
|
105,094 |
|
Total current liabilities |
|
|
7,181,481 |
|
|
|
8,059,834 |
|
Convertible bonds due 2011 |
|
|
1,486,568 |
|
|
|
|
|
Deferred income |
|
|
109,502 |
|
|
|
79,602 |
|
Total liabilities |
|
|
8,777,551 |
|
|
|
8,139,436 |
|
Minority interests |
|
|
36,900 |
|
|
|
413,181 |
|
Shareholders equity |
|
|
|
|
|
|
|
|
Capital stock |
|
|
|
|
|
|
|
|
Common stock (5,000,000,000 shares of US$0.01
each authorized and 3,668,390,900 shares of
US$0.01 each issued and outstanding as of
December 31, 2006 and 2005) |
|
|
303,388 |
|
|
|
303,388 |
|
Additional paid-in capital |
|
|
2,325,690 |
|
|
|
2,325,690 |
|
Accumulated other comprehensive income |
|
|
41,472 |
|
|
|
40,420 |
|
Dedicated capital |
|
|
184,193 |
|
|
|
167,631 |
|
Capital reserve |
|
|
120,000 |
|
|
|
120,000 |
|
Share option reserve |
|
|
11,281 |
|
|
|
|
|
Retained earnings |
|
|
2,779,889 |
|
|
|
3,182,559 |
|
Total shareholders equity |
|
|
5,765,913 |
|
|
|
6,139,688 |
|
Total liabilities and shareholders equity |
|
|
14,580,364 |
|
|
|
14,692,305 |
|
The accompanying notes are an integral part of these consolidated balance sheets.
F-5
Brilliance China Automotive Holdings Limited
Consolidated Statements of Cash Flows
For the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(386,108 |
) |
|
|
(671,289 |
) |
|
|
1,214 |
|
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax |
|
|
|
|
|
|
114,005 |
|
|
|
(74,450 |
) |
Depreciation of property, plant and equipment |
|
|
601,045 |
|
|
|
399,744 |
|
|
|
365,638 |
|
Amortization of long-term land lease prepayments |
|
|
4,058 |
|
|
|
3,886 |
|
|
|
2,369 |
|
Amortization of intangible assets |
|
|
181,444 |
|
|
|
204,009 |
|
|
|
226,041 |
|
Amortization of deferred expenses |
|
|
24,962 |
|
|
|
8,920 |
|
|
|
8,920 |
|
Minority interests in net loss of consolidated
subsidiaries |
|
|
(376,282 |
) |
|
|
(625,998 |
) |
|
|
(464,991 |
) |
Provision for doubtful debts and write off of bad
debts |
|
|
28,272 |
|
|
|
55,703 |
|
|
|
55,292 |
|
Write back of provision for doubtful debts |
|
|
(76 |
) |
|
|
(7,459 |
) |
|
|
(1,000 |
) |
Provision for impairment of intangible assets |
|
|
|
|
|
|
173,000 |
|
|
|
50,000 |
|
Provision for impairment of property, plant and
equipment |
|
|
29,160 |
|
|
|
48,299 |
|
|
|
10,000 |
|
Provision for impairment of investment in a
jointly controlled entity |
|
|
73,343 |
|
|
|
179,030 |
|
|
|
47,320 |
|
Provision for impairment of goodwill in a
subsidiary |
|
|
|
|
|
|
78,690 |
|
|
|
|
|
Write back of provision for inventories sold |
|
|
(163,094 |
) |
|
|
(39,638 |
) |
|
|
(15,522 |
) |
Gain on disposal of property, plant and equipment |
|
|
(3,055 |
) |
|
|
(341 |
) |
|
|
12,519 |
|
Write off of property, plant and equipment |
|
|
8,251 |
|
|
|
|
|
|
|
|
|
Gain on disposal of a jointly controlled entity |
|
|
|
|
|
|
(2,098 |
) |
|
|
|
|
Government grant recognized |
|
|
(1,850 |
) |
|
|
(941 |
) |
|
|
|
|
Unrealized exchange gain |
|
|
(69,259 |
) |
|
|
(40,829 |
) |
|
|
|
|
Equity in earnings of associated companies and
jointly controlled entities, net |
|
|
(149,320 |
) |
|
|
(48,995 |
) |
|
|
(126,261 |
) |
Amortisation of finance costs of convertible bonds |
|
|
68,419 |
|
|
|
12,419 |
|
|
|
12,401 |
|
Write off of other non-current assets |
|
|
1,798 |
|
|
|
|
|
|
|
|
|
Share option costs |
|
|
11,281 |
|
|
|
|
|
|
|
|
|
Gain on disposal of an associate |
|
|
(384 |
) |
|
|
|
|
|
|
|
|
Loss on disposal of an associate |
|
|
709 |
|
|
|
|
|
|
|
|
|
Gain on buy back of convertible bonds due 2008 |
|
|
(10,733 |
) |
|
|
|
|
|
|
|
|
F-6
Brilliance China Automotive Holdings Limited
Consolidated Statements of Cash Flows
For the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(521,656 |
) |
|
|
(69,974 |
) |
|
|
32,858 |
|
Notes receivable |
|
|
179,837 |
|
|
|
243,394 |
|
|
|
206,553 |
|
Notes receivable from affiliated companies |
|
|
257,493 |
|
|
|
306,173 |
|
|
|
(117,968 |
) |
Due from affiliated companies |
|
|
(191,724 |
) |
|
|
(79,804 |
) |
|
|
(10,157 |
) |
Inventories |
|
|
(137,250 |
) |
|
|
569,524 |
|
|
|
(328,154 |
) |
Other receivables |
|
|
75,113 |
|
|
|
7,278 |
|
|
|
50,625 |
|
Prepayments and other current assets |
|
|
(85,876 |
) |
|
|
69,374 |
|
|
|
191,443 |
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Notes and accounts payable |
|
|
1,487,870 |
|
|
|
(333,250 |
) |
|
|
(391,075 |
) |
Due to affiliated companies |
|
|
363,459 |
|
|
|
171,871 |
|
|
|
(162,132 |
) |
Notes payable to affiliated companies |
|
|
(36,804 |
) |
|
|
(47,070 |
) |
|
|
|
|
Customer advances |
|
|
106,800 |
|
|
|
53,486 |
|
|
|
48,656 |
|
Other payables |
|
|
25,566 |
|
|
|
43,423 |
|
|
|
(121,962 |
) |
Accrued expenses and other current liabilities |
|
|
(106,686 |
) |
|
|
(8,277 |
) |
|
|
85,409 |
|
Import tariff and taxes payable |
|
|
(143,155 |
) |
|
|
117,152 |
|
|
|
(306,000 |
) |
Net cash provided by (used in) operating activities |
|
|
1,145,568 |
|
|
|
883,417 |
|
|
|
(712,414 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(304,152 |
) |
|
|
(558,028 |
) |
|
|
(999,058 |
) |
Proceeds from disposal of property, plant and
equipment |
|
|
3,314 |
|
|
|
9,487 |
|
|
|
18,204 |
|
Decrease (increase) in short-term bank deposits |
|
|
437,045 |
|
|
|
(45,230 |
) |
|
|
661,994 |
|
Decrease (increase) in pledged short-term bank
deposits |
|
|
307,500 |
|
|
|
844,542 |
|
|
|
(512,607 |
) |
(Increase) decrease in advances to affiliated
companies |
|
|
(12,944 |
) |
|
|
(8,729 |
) |
|
|
204,030 |
|
Increase in long term investment |
|
|
|
|
|
|
|
|
|
|
(4,138 |
) |
Increase in other long-term assets |
|
|
|
|
|
|
|
|
|
|
(6,523 |
) |
Decrease (increase) in other non-current assets |
|
|
1,719 |
|
|
|
12,866 |
|
|
|
(6,843 |
) |
Decrease (increase) in interests in associated
companies and jointly controlled entities |
|
|
|
|
|
|
11,517 |
|
|
|
(12,250 |
) |
Dividends received from associated companies and
jointly controlled entities |
|
|
81,000 |
|
|
|
72,000 |
|
|
|
15,103 |
|
Payment for acquisition of further interest in a
subsidiary |
|
|
|
|
|
|
|
|
|
|
(10,000 |
) |
Proceeds received from disposal of investment in
associated companies |
|
|
1,350 |
|
|
|
|
|
|
|
20,000 |
|
Advances to a joint venture partner of a
non-wholly owned subsidiary |
|
|
|
|
|
|
|
|
|
|
(97,156 |
) |
Net cash provided by (used in) investing activities |
|
|
514,832 |
|
|
|
338,425 |
|
|
|
(729,244 |
) |
F-7
Brilliance China Automotive Holdings Limited
Consolidated Statements of Cash Flows
For the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loans |
|
|
650,000 |
|
|
|
501,202 |
|
|
|
900,000 |
|
Repayment of short-term bank loans |
|
|
(646,500 |
) |
|
|
(4,702 |
) |
|
|
(900,000 |
) |
Issuance of notes payable |
|
|
4,530,000 |
|
|
|
7,934,900 |
|
|
|
12,405,435 |
|
Repayment of notes payable |
|
|
(5,532,500 |
) |
|
|
(10,106,000 |
) |
|
|
(11,376,454 |
) |
Increase (decrease) in advances from affiliated
companies |
|
|
102,480 |
|
|
|
(9,434 |
) |
|
|
(2,161 |
) |
Dividends paid |
|
|
|
|
|
|
(19,450 |
) |
|
|
(88,974 |
) |
Dividends paid to joint venture partners |
|
|
|
|
|
|
|
|
|
|
(83,987 |
) |
Proceeds from issuance of convertible bonds due
2011 |
|
|
1,460,779 |
|
|
|
|
|
|
|
|
|
Payment of direct expenses incurred in connection
with the issuance of convertible bonds due 2011 |
|
|
(31,414 |
) |
|
|
|
|
|
|
|
|
Buy back and redemption of convertible bonds due
2008 |
|
|
(1,598,320 |
) |
|
|
|
|
|
|
|
|
Receipts of government grants |
|
|
29,750 |
|
|
|
80,543 |
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(1,035,725 |
) |
|
|
(1,622,941 |
) |
|
|
853,859 |
|
Net increase (decrease) in cash and cash
equivalents |
|
|
624,675 |
|
|
|
(401,099 |
) |
|
|
(587,799 |
) |
Cash and cash equivalents, beginning of year |
|
|
843,400 |
|
|
|
1,244,499 |
|
|
|
1,832,298 |
|
Cash and cash equivalents, end of year |
|
|
1,468,075 |
|
|
|
843,400 |
|
|
|
1,244,499 |
|
The accompanying notes are an integral part of these consolidated statements of cash flows.
F-8
Brilliance China Automotive Holdings Limited
Consolidated Statements of Changes in Shareholders Equity
For the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
paid-in |
|
|
comprehensive |
|
|
Dedicated |
|
|
Capital |
|
|
Share option |
|
|
Retained |
|
|
|
|
|
|
Number of |
|
|
Amount |
|
|
capital |
|
|
income |
|
|
capital |
|
|
reserve |
|
|
reserve |
|
|
earnings |
|
|
Total |
|
|
|
shares issued |
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Balance as of December 31,
2003 |
|
|
3,668,390,900 |
|
|
|
303,388 |
|
|
|
2,325,690 |
|
|
|
39,179 |
|
|
|
112,168 |
|
|
|
120,000 |
|
|
|
|
|
|
|
3,985,882 |
|
|
|
6,886,307 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,214 |
|
|
|
1,214 |
|
Transfer to dedicated capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,184 |
|
|
|
|
|
|
|
|
|
|
|
(46,184 |
) |
|
|
|
|
Net unrealized gain on
marketable equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,468 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,335 |
) |
|
|
(58,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004 |
|
|
3,668,390,900 |
|
|
|
303,388 |
|
|
|
2,325,690 |
|
|
|
67,647 |
|
|
|
158,352 |
|
|
|
120,000 |
|
|
|
|
|
|
|
3,882,577 |
|
|
|
6,857,654 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(671,289 |
) |
|
|
(671,289 |
) |
Transfer to dedicated capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,279 |
|
|
|
|
|
|
|
|
|
|
|
(9,279 |
) |
|
|
|
|
Net unrealized loss on
marketable equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,227 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,450 |
) |
|
|
(19,450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005 |
|
|
3,668,390,900 |
|
|
|
303,388 |
|
|
|
2,325,690 |
|
|
|
40,420 |
|
|
|
167,631 |
|
|
|
120,000 |
|
|
|
|
|
|
|
3,182,559 |
|
|
|
6,139,688 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(386,108 |
) |
|
|
(386,108 |
) |
Share option costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,281 |
|
|
|
|
|
|
|
11,281 |
|
Transfer to dedicated capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,562 |
|
|
|
|
|
|
|
|
|
|
|
(16,562 |
) |
|
|
|
|
Net unrealized gain on
marketable equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006 |
|
|
3,668,390,900 |
|
|
|
303,388 |
|
|
|
2,325,690 |
|
|
|
41,472 |
|
|
|
184,193 |
|
|
|
120,000 |
|
|
|
11,281 |
|
|
|
2,779,889 |
|
|
|
5,765,913 |
|
The accompanying notes are an integral part of these consolidated statements of changes in
shareholders equity.
F-9
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
1. ORGANIZATION, PRINCIPAL ACTIVITIES AND OPERATING ENVIRONMENT
Brilliance China Automotive Holdings Limited (the Company) was incorporated in Bermuda on June 9,
1992 with limited liability. The Companys ADSs and shares are traded on The New York Stock
Exchange Inc. and The Stock Exchange of Hong Kong Limited (SEHK), respectively. The Company is an
investment holding company. The principal activities of the Companys subsidiaries are the
manufacture and sale of minibuses, sedans and automotive components in the Peoples Republic of
China (the PRC).
Details of the Companys principal subsidiaries as of December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of effective |
|
|
|
|
|
|
equity interest/voting |
|
|
|
|
Place of |
|
right attributable to |
|
|
|
|
establishment/ |
|
the Company |
|
|
Name |
|
incorporation |
|
Directly |
|
Indirectly |
|
Principal activities |
Shenyang Brilliance JinBei
Automobile Co., Ltd. (Shenyang
Automotive)
|
|
Shenyang, the PRC
|
|
|
51 |
% |
|
|
|
|
|
Manufacture,
assembly and sale
of minibuses and
sedans |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ningbo Yuming Machinery
Industrial Co., Ltd. (Ningbo
Yuming)
|
|
Ningbo, the PRC
|
|
|
|
|
|
|
100 |
% |
|
Manufacture and
sale of automotive
components |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenyang XingYuanDong
Automobile Component Co., Ltd.
(Xing Yuan Dong)
|
|
Shenyang, the PRC
|
|
|
100 |
% |
|
|
|
|
|
Manufacture and
trading of
automotive
components |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ningbo Brilliance Ruixing Auto
Components Co., Ltd. (Ningbo
Ruixing)
|
|
Ningbo, the PRC
|
|
|
100 |
% |
|
|
|
|
|
Manufacture and
trading of
automotive
components |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mianyang Brilliance Ruian
Automotive Components Co., Ltd.
(Mianyang Ruian)
|
|
Mianyang, the PRC
|
|
|
100 |
% |
|
|
|
|
|
Manufacture and
trading of
automotive
components |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenyang Brilliance Dongxing
Automotive Component Co., Ltd.
(Dongxing Automotive)
|
|
Shenyang, the PRC
|
|
|
|
|
|
|
100 |
% |
|
Manufacture and
trading of
automotive
components and
remodeling
minibuses and
sedans |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenyang Jindong Development
Co., Ltd.
|
|
Shenyang, the PRC
|
|
|
|
|
|
|
75.5 |
% |
|
Trading of
automotive
components |
|
|
|
|
|
|
|
|
|
|
|
|
|
Brilliance China Automotive
Finance Ltd.
|
|
British Virgin
Islands
|
|
|
100 |
% |
|
|
|
|
|
Financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Brilliance China Finance Limited
|
|
British Virgin
Islands
|
|
|
100 |
% |
|
|
|
|
|
Financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenyang ChenFa Automobile
Component Co., Ltd.
|
|
Shenyang, the PRC
|
|
|
100 |
% |
|
|
|
|
|
Development,
manufacture and
sale of engines
components |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenyang XinJinBei Investment
and Development Co., Ltd.
(SXID)
|
|
Shenyang, the PRC
|
|
|
|
|
|
|
100 |
% |
|
Investment holding |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenyang JinBei Automotive
Industry Holdings Co., Ltd.
(SJAI)
|
|
Shenyang, the PRC
|
|
|
|
|
|
|
99 |
% |
|
Investment holding |
F-10
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of effective |
|
|
|
|
|
|
equity interest/voting |
|
|
|
|
Place of |
|
right attributable to |
|
|
|
|
establishment/ |
|
the Company |
|
|
Name |
|
incorporation |
|
Directly |
|
Indirectly |
|
Principal activities |
Shanghai Hidea Auto Design Co.,
Ltd
|
|
Shenyang, the PRC
|
|
|
|
|
|
|
63.25 |
% |
|
Design of automotive |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenyang Brilliance Power Train
Machinery Co., Ltd
|
|
Shenyang, the PRC
|
|
|
49 |
% |
|
|
26.01 |
% |
|
Manufacture and
sale of power train |
Details of the Groups interests in associated companies and jointly controlled entities are
included in Note 13.
For the years ended December 31, 2006, 2005 and 2004, approximately 8%, 26% and 29% of the
consolidated revenue was generated from sales of goods to Shanghai Shenhua Holdings Co., Ltd.
(Shanghai Shenhua), an affiliated company.
2. BASIS OF PRESENTATION
The financial statements are prepared in accordance with generally accepted accounting principles
in the United States of America (U.S. GAAP). The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. This basis of accounting
differs from that used in the statutory financial statements of the Companys subsidiaries, which
were prepared in accordance with the relevant accounting principles and financial reporting
regulations applicable to foreign investment enterprises as established by the Ministry of Finance
in the PRC. Certain accounting principles stipulated under U.S. GAAP are not applicable in the PRC.
The principal adjustments made to conform the statutory financial statements to U.S. GAAP included
the following:
|
|
Reclassification of certain items, designated as
construction-in-progress in the statutory financial statements, as
property, plant and equipment; |
|
|
|
Reclassification of certain items, designated as long-term land lease
prepayments, from property, plant and equipment in the statutory
financial statements; |
|
|
|
Reclassification of certain items, designated as reserves
appropriated from net income in the statutory financial statements,
as charges to income; |
|
|
|
Recognition of deferred income taxes; |
|
|
|
Recognition of provision for impairment loss of long-lived assets; |
|
|
|
Recognition of research and development expenditures as intangible
assets and related amortization; and |
|
|
|
Recognition of stock-based compensation.
|
F-11
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of consolidation
The consolidated financial statements of the Group include the financial statements of the Company
and the enterprises that it controls. This control is normally evidenced when the Group has the
power to govern the financial and operating policies of an enterprise so as to benefit from its
activities. The results of subsidiaries acquired or disposed of during the period are consolidated
from or to their effective dates of acquisition or disposal. The equity and net income attributable
to minority shareholders interests are shown separately in the Groups balance sheet and income
statement respectively.
In 2004, the Group adopted Financial Accounting Standards Board (FASB) Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest Entities, an interpretation of ARB No.
51 (FIN 46R). FIN 46R addresses the consolidation of an entity whose equity holders either (a)
have not provided sufficient equity at risk to allow the entity to finance its own activities or
(b) do not possess certain characteristics of a controlling financial interest. FIN 46R requires
the consolidation of such an entity, known as a variable interest entity (VIE), by the primary
beneficiary of the entity. The primary beneficiary is the entity, if any, that is obligated to
absorb a majority of the risk of loss from the VIEs activities or entitled to receive a majority
of the VIEs residual returns, or both. FIN 46R excludes from its scope businesses (as defined by
FIN 46R) unless certain conditions exist.
In connection with the adoption of FIN 46R, the Group has identified a supplier to which the Group
had provided a guarantee of approximately RMB300 million, which expired in the first quarter of
2005. The annual purchase from the supplier was approximately RMB92 million in 2005. The Group made
and continues to make exhaustive but so far unsuccessful efforts to obtain information necessary to
apply the FIN 46Rs provision as the Group does not have the contractual or legal right to obtain
such information. The Groups maximum exposure to loss as a result of its involvement with this
supplier is approximately RMB300 million, representing the guarantee to the supplier in the event
of its liquidation. Except the above, the adoption of FIN 46R did not have a material impact on the
Groups financial position or results of operations.
Intragroup balances and transactions, including sales to companies within the Group and resulting
unrealized profits, are eliminated in full. Unrealized losses resulting from intragroup
transactions are eliminated unless the cost cannot be recovered. Consolidated financial statements
are prepared using uniform accounting policies for like transactions and other events in similar
circumstances.
(b) Sales
Sales represent the invoiced value of goods, net of consumption tax, discounts and returns, and are
recognized when goods are delivered to the customers and the significant risks and rewards of
ownership of the goods have been transferred to customers. Provisions for sales allowances and
rebates are made at the time of sales of goods and are recognized as a reduction of sales. Costs
related to shipping and handling are included in selling, general and administrative expenses for
all periods presented.
(c) Cash, cash equivalents and short-term bank deposits
Cash represents cash on hand and deposits with financial institutions which are repayable on
demand. Cash equivalents represent short-term, highly liquid investments which are readily
convertible into known amounts of cash and which are subject to an insignificant risk of changes in
value.
Bank deposits with original maturity between three and twelve months are classified as short-term
deposits.
F-12
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
(d) Inventories
Inventories are carried at the lower of cost or market. Cost comprises all costs of purchase, costs
of conversion and other costs incurred in bringing the inventories to their present location and
condition. Cost is calculated on the moving-average basis, except for costs of work-in-progress and
finished goods of sedans and minibuses, which are calculated by the specific identification basis.
The Group provides allowance for excess, slow moving and obsolete inventory by specific
identification and reduces the carrying value of its inventory to the lower of cost or market.
When inventories are sold, the carrying amount of those inventories is recognized as an expense in
the period in which the related revenue is recognized.
(e) Property, plant and equipment and long-term land lease prepayments
Property, plant and equipment are stated at cost less accumulated depreciation and impairment loss.
The cost of an asset comprises its purchase price and any directly attributable costs of bringing
the asset to its working condition and location for its intended use. Expenditure incurred after
the assets have been put into operation, such as repairs and maintenance and overhaul costs, is
normally charged to the income statement in the period in which it is incurred. In situations where
it can be clearly demonstrated that the expenditure has resulted in an increase in the future
economic benefits expected to be obtained from the use of the assets beyond its originally assessed
standard of performance, the expenditure is capitalized as an additional cost of the assets.
Depreciation is calculated on a straight-line basis, at annual rates estimated to write off the
cost less estimated residual value of 10% of each asset over its expected useful life. The annual
rates are as follows:
|
|
|
|
|
Buildings |
|
|
5 |
% |
Machinery and equipment (excluding special tools and moulds) |
|
|
10 |
% |
Furniture, fixtures and office equipment |
|
|
20 |
% |
Motor vehicles |
|
|
20 |
% |
The costs of special tools and moulds included in machinery and equipment are amortized over their
estimated productive volume.
When property, plant and equipment are sold or retired, their cost and accumulated depreciation are
eliminated from the accounts and any gain or loss resulting from their disposal is included in the
income statement.
Construction-in-progress consists of factories and office buildings under construction and
machinery pending installation and includes the costs of construction, machinery and equipment, and
any interest charges arising from borrowings used to finance these assets during the period of
construction or installation. No provision for depreciation is made on construction-in-progress
until such time as the relevant assets are completed and ready for their intended use.
Long-term land lease prepayments are amortized on a straight-line basis over the term of lease.
(f) Intangible assets
Purchased intangible assets with finite lives are amortized using the straight-line method over the
estimated economic lives of the assets of 7 years.
F-13
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
(g) Impairment of long-lived assets
Long-lived assets, such as property, plant and equipment and purchased intangible assets with
finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable from its undiscounted future cash flow. If
such assets are considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the assets.
(h) Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets
resulting from the Companys acquisitions of interests in its subsidiaries.
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, which was effective for the Group for year 2002, prohibits the amortization of goodwill
and purchased intangible assets with indefinite useful lives. The Group reviews goodwill for
impairment annually at the year end and whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable in accordance with SFAS No. 142.
The Group performs a two-step impairment test. In the first step, the Group compares the fair value
of each reporting unit to its carrying value. The Group determines the fair value of its reporting
units based on the present value of estimated future cash flows. If the fair value of the reporting
unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired
and no further testing is performed. If the carrying value of the net assets assigned to the
reporting unit exceeds the fair value of the reporting unit, then the Group must perform the second
step impairment test in order to determine the implied fair value of the reporting units goodwill.
If the carrying value of a reporting units goodwill exceeds its implied fair value, the Group
records an impairment loss equal to the difference.
(i) Investments in associated companies and jointly controlled entities
An associated company is a company in which the Group has significant influence, but not control or
joint control, and thereby has the ability to participate in the investees financial and operating
policy decisions. A jointly controlled entity is a company in which the Group has joint control
with the other joint venture partners. Investments in associated companies and jointly controlled
entities are accounted for using the equity method (equity method investment). Goodwill arising
on the acquisition of interests in associated companies and jointly controlled entities (equity
method goodwill) is included in the carrying cost of the investment. The Group considers whether
the fair values of any of its equity method investments have declined below their carrying value
whenever adverse events or changes in circumstances indicate that recorded values may not be
recoverable. In assessing the recoverability of equity method investments (including equity method
goodwill), the Group uses discounted cash flow models. If the fair value of the equity investee is
determined to be lower than carrying value, an impairment is recognized.
F-14
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
(j) Investment securities
The Groups investment securities consist of marketable available-for-sale securities and
investments in unlisted equity securities. Securities classified as available-for-sale under SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities, are carried at fair
value, with unrealized gains and losses, net of income taxes, recorded in the accumulated other
comprehensive income (loss), a separate component of statement of changes in shareholders equity,
until realized. The fair values of individual investments in marketable securities are determined
based on market quotations. Gains or losses on securities sold are based on the specific
identification method. Equity securities that are restricted for more than one year or not publicly
traded are recorded at cost.
The Group periodically assesses whether its investments in non-marketable equity securities and
available-for-sale securities are impaired and if any impairment is other than temporary. Factors
considered in assessing whether an impairment is other than temporary include the credit quality of
the investment, the duration of the impairment, the Groups ability and intent to hold the
investment until recovery and overall economic conditions. A decline in value of these securities
below cost that is deemed to be other than temporary results in an impairment charge to earnings
that reduces the carrying amount of the securities to fair value establishing a new cost basis.
(k) Taxation
Income Tax
The Company was incorporated under the laws of Bermuda and has received an undertaking from the
Ministry of Finance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax
Protection Act, 1966, which exempts the Company and its shareholders, other than shareholders
ordinarily residing in Bermuda, from any Bermuda taxes computed on profit, income or any capital
asset gain or appreciation, or any tax in the nature of estate duty or inheritance tax, at least
until year 2016.
No provision for Hong Kong profits tax has been made to the Company as the Company has no estimated
assessable profit for the year.
The subsidiaries are subject to state and local income taxes in the PRC at their respective tax
rates, based on the taxable income reported in their statutory financial statements in accordance
with the relevant state and local income tax laws applicable.
Shenyang Automotive is subject to state and local income taxes in the PRC at standard rates of 15%
and 3%, respectively, in accordance with enterprise income tax laws applicable to Sino-foreign
equity joint venture enterprises. Shenyang Automotive is exempted from local income tax of 3% as it
was designated as a Technologically-Advanced Enterprise. As a result, the effective enterprise
income tax rate for Shenyang Automotive was 15% for the years ended December 31, 2006, 2005 and
2004.
Ningbo Yuming and Ningbo Ruixing are subject to state and local income taxes in the PRC at standard
rates of 30% and 3%, respectively, in accordance with enterprise income tax laws applicable.
Pursuant to the relevant income tax laws in the PRC, the applicable state and local income tax
rates were reduced to 15% and 1.5%, respectively. As a result, the effective enterprise income tax
rate for Ningbo Yuming and Ningbo Ruixing was 16.5% for the years ended December 31, 2006, 2005 and
2004.
Xing Yuan Dong and Dongxing Automotive are subject to state and local income taxes in the PRC at
standard rates of 30% and 3%, respectively, in accordance with enterprise income tax laws
applicable. Xing Yuan Dong and Dongxing Automotive received official designation by the local tax
authority as a New and Technologically-Advanced Enterprise and a foreign-invested enterprise
engaged in manufacturing activities. As a result, the effective enterprise income tax rate for Xing
Yuan Dong and Dongxing Automotive was 16.5% for the years ended December 31, 2006, 2005 and 2004.
F-15
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
Mianyang Ruian is subject to state and local income taxes in the PRC at standard rates of 30% and
3%, respectively, in accordance with enterprise income tax laws applicable. In 2001, Mianyang Ruian
received official designation by the local tax authority as a foreign-invested enterprise engaged
in manufacturing activities. In 2004, Mianyang Ruian was also designated as an encouraged
industries under Catalogue for the Guidance of Foreign Investment Industries and located in the
Western area of the PRC. Pursuant to the relevant income tax laws in the PRC, from 2004 to 2010,
the applicable state income tax rate for Mianyang Ruian is 15%. In addition, Mianyang Ruian is also
exempted from state and local enterprise income taxes for two years starting from the first
profitable year in 2001 followed by a 50% reduction of enterprise income tax for the next three
years. Mianyang Ruian is also exempted from local enterprise income tax for the five-year period.
As a result, the effective tax rates for Mianyang Ruian were 18%, 7.5% and 7.5% for the years ended
December 31, 2006, 2005 and 2004, respectively.
Shenyang ChenFa is subject to state and local income taxes in the PRC at standard rates of 30% and
3%, respectively, in accordance with enterprise income tax laws applicable. In 2005, Shenyang
ChenFa received official designation by the local tax authority as a foreign-invested enterprise
engaged in manufacturing activities and is confirmed by the local tax authority that it is exempted
from state enterprise income tax for the two years starting from the first profitable year in 2004
followed by a 50% reduction of state enterprise income tax for the next three years. In addition,
Shenyang ChenFa is also exempted from local enterprise income tax for the same five-year period. As
a result, the effective tax rate for Shenyang ChenFa was 7.5% for the year ended December 31, 2006
and 0% for the years ended December 31, 2005 and 2004.
Other principal subsidiaries operating in the PRC are subject to state and local income taxes in
the PRC at standard rates of 30% and 3%, respectively, based on the respective taxable income
reported in their statutory financial statements in accordance with the relevant state and local
income tax laws applicable to foreign-invested enterprises.
Value Added Tax (VAT) and Consumption Tax
The general VAT rate applicable to sales and purchases of minibuses, sedans and automotive
components in the PRC is 17%.
Sale of minibuses and sedans is also subject to consumption tax at standard rates of 5% to 12%.
(l) Deferred taxation
Deferred income taxes are provided using the liability method in which deferred income taxes are
recognized for temporary differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences expected to occur in subsequent years are
recorded as assets and liabilities on the balance sheet.
A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered
more likely than not that some portion of, or all of, the deferred tax assets will not be realized.
(m) Foreign currency translation
The functional currency of the Company and its subsidiaries is RMB. Transactions denominated in
foreign currencies are translated into RMB at exchange rates prevailing at the date of
transactions. Monetary assets and liabilities denominated in foreign currencies are re-translated
into RMB at exchange rates prevailing at the balance sheet dates. The resulting exchange
differences are included in the determination of income. Non-monetary assets and liabilities
denominated in foreign currencies are translated into RMB using the applicable exchange rates
prevailing at the time of transaction.
Foreign currency translation adjustments in other comprehensive income arose from the Companys
change in functional currency in previous years.
F-16
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
(n) Warranty
A provision is recognized when an enterprise has a present obligation (legal or constructive) as a
result of a past event and it is probable (i.e. more likely than not) that an outflow of resources
embodying economic benefits will be required to settle the obligation, and a reliable estimate can
be made of the amount of the obligations. Provisions are reviewed at each balance sheet date and
adjusted to reflect the current best estimate. Where the effect of the time value of money is
material, the amount of a provision is the present value of the expenditures expected to be
required to settle the obligation.
Shenyang Automotives minibuses are sold with a 24-month or 50,000 kilometers (2005 and 2004: same)
first-to-occur limited warranty. The Zhonghua and Junjie sedans are sold with a 36-month or
60,000 kilometers (2005 and 2004: same) first-to-occur limited warranty. Zunchi sedans are sold
with a 10-year or 200,000 kilometres (2005 and 2004: same) first-to-occur limited warranty. During
the warranty period, Shenyang Automotive pays service stations for parts and labor covered by the
warranty.
The costs of the warranty obligation are accrued at the time the sales are recognized, based on the
estimated costs of fulfilling the total obligations, including handling and transportation costs.
The factors used to estimate warranty expenses are reevaluated periodically in light of actual
experience. The reconciliation of the changes in the warranty obligation is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Balance as of January 1, |
|
|
22,460 |
|
|
|
21,058 |
|
Accrual for warranties issued during the year |
|
|
42,102 |
|
|
|
32,396 |
|
Settlement made during the year |
|
|
(37,214 |
) |
|
|
(30,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, |
|
|
27,348 |
|
|
|
22,460 |
|
|
|
|
|
|
|
|
(o) Advertising expenses
Advertising expenses are expended as incurred. For the years ended December 31, 2006, 2005 and
2004, advertising expenses of approximately RMB250.1 million, RMB177.0 million and RMB206.9
million, respectively, have been charged to selling, general and administrative expenses.
(p) Research and development expenses
Research and development expenses are expended as incurred. For the years ended December 31, 2006,
2005 and 2004, research and development expenses of approximately RMB214.0 million, RMB235.2
million and RMB479.9 million, respectively, have been charged to selling, general and
administrative expenses.
(q) Operating leases
Leases where substantially all the rewards and risks of ownership remain with the lessor are
accounted for as operating leases. Payment made under operating leases net of any incentives
received from the lessor are charged to the income statement on a straight-line basis over the
period of the relevant leases.
Assets leased out under operating leases are included in property, plant and equipment in the
balance sheet. Rental income (net of any incentives given to lessees) is recognized on a
straight-line basis over the lease terms.
(r) Stock-based compensation
The Company sponsors several stock-based compensation plans pursuant to which non-qualified stock
options and restricted stock awards are granted to eligible employees. These plans are described
more fully in Note 23.
F-17
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
Through the year ended December 31, 2005, the Company followed the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123), and, accordingly, accounted
for awards under these plans pursuant to the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) and related
Interpretations, as permitted by SFAS 123. Under APB 25, compensation expense was recognized in the
financial statements relating to awards of stock. However, no compensation expense was recorded in
the financial statements for stock option grants, as all options have been granted with an exercise
price equal to the market value of the underlying common stock on the date of grant.
Effective from January 1, 2006, the Company adopted the fair value recognition provisions of SFAS
No. 123R, Share-Based Payments, (SFAS 123R) using the modified prospective transition method.
SFAS 123R revises SFAS 123, supersedes APB 25 and amends SFAS No. 95, Statement of Cash Flows.
Under the modified prospective transition method, compensation expense is recognized in the
financial statements on a prospective basis for (a) all share-based payments granted prior to, but
not vested as of January 1, 2006, based upon the grant-date fair value estimated in accordance with
the original provisions of SFAS 123, and (b) share-based payments granted on or subsequent to
January 1, 2006, based upon the grant-date fair value estimated in accordance with the provisions
of SFAS 123R. The grant-date fair value of awards expected to vest is expensed on a straight-line
basis over the vesting period of the related awards. Under the modified prospective transition
method, results for prior periods are not restated.
Details of share options granted by the Company and their fair value are set out in Note 23.
(s) (Loss) earnings per share and (loss) earnings per ADS
The calculation of basic (loss) earnings per share is based on the net (loss) income for the year
and the weighted average number of shares of common stock outstanding during the year.
The calculation of diluted (loss) earnings per share is based on the net (loss) income for the year
and the weighted average number of shares of common stock and adjusted for the effects of all
dilutive potential shares of common stock outstanding during the year.
A reconciliation of the net (loss) income used in the calculation of basic and diluted (loss)
earnings per share/ADS is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Net (loss) income for the year |
|
|
(386,108 |
) |
|
|
(671,289 |
) |
|
|
1,214 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the weighted average number of shares of common stock used in calculation of
basic and diluted (loss) earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Weighted average number of
shares of common stock used in
calculation of basic (loss)
earnings per share |
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
Dilutive effect of stock options |
|
|
|
|
|
|
|
|
|
|
15,405,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares of common stock adjusted
for dilutive effect of stock
options and convertible bonds
used in calculation of diluted
(loss) earnings per share |
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
|
|
3,683,795,968 |
|
|
|
|
|
|
|
|
|
|
|
F-18
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
As the Company was in loss position for 2006, 733,674,602 and 38,550,000 potentially dilutive
stocks for the year ended December 31, 2006 from conversion of the convertible bonds and
outstanding share options respectively, were excluded from the calculation of diluted loss per
share because to do so would be anti-dilutive.
As the Company was in loss position for 2005, 336,956,522 and 6,258,959 potentially dilutive stocks
for the year ended December 31, 2005 from conversion of the convertible bonds and outstanding share
options respectively, were excluded from the calculation of diluted loss per share because to do so
would be anti-dilutive.
The diluted earnings per share/ADS calculation for the year ended December 31, 2004 was based on
weighted average number of common stocks/ADSs outstanding plus the weighted average number of
shares/ADSs deemed to be issued as if all outstanding share options granted had been exercised.
For the year ended December 31, 2004, 336,956,522 potentially dilutive stocks from conversion of
the convertible bonds were not included in the computation of diluted earnings per share because
the effect would have been anti-dilutive.
A reconciliation of the weighted average number of ADSs for calculation of basic and diluted (loss)
earnings per ADS is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Weighted average number of ADSs
used in calculation of basic
(loss) earnings per ADS |
|
|
36,683,909 |
|
|
|
36,683,909 |
|
|
|
36,683,909 |
|
Dilutive effect of stock options |
|
|
|
|
|
|
|
|
|
|
154,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ADSs
adjusted for dilutive effect of
stock options and convertible
bonds used in calculation of
diluted (loss) earnings per ADS |
|
|
36,683,909 |
|
|
|
36,683,909 |
|
|
|
36,837,960 |
|
|
|
|
|
|
|
|
|
|
|
(t) Segmental information
Segmental information is presented in accordance with SFAS No. 131 Disclosures about Segments of
an Enterprise and Related Information which establishes standards for reporting information about
operating segments on a basis consistent with the Companys internal organization structure as well
as information about geographic areas and major customers. Disclosure of segmental information in
accordance with SFAS No. 131 is made in Note 30.
(u) Comprehensive income
SFAS No. 130 Reporting Comprehensive Income requires the components of comprehensive income to be
disclosed in the financial statements. Comprehensive income consists of net income, the net
unrealized gains or losses on available-for-sale marketable securities, foreign currency
translation adjustments, minimum pension liability adjustments and unrealized gains and losses on
financial instruments qualifying for hedge accounting. For the Group, such items consist primarily
of unrealized gains and losses on marketable equity investments and
F-19
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
foreign currency translation adjustments. The Group has disclosed comprehensive income, which
encompasses net (loss) income in the statement of income and other comprehensive income.
(v) Convertible bonds
Convertible bonds issued at par are stated in the balance sheet at face value plus accreted
redemption premium which is calculated based on the outstanding principal of the convertible bonds
using effective interest method so that the carrying value of the bonds equals to the redemption
price on the redemption date. Direct expenses in connection with the issuance of convertible bonds
are capitalized as deferred expenses on the balance sheet and are amortized over the life of the
convertible bonds.
(w) Guarantees
Guarantee issued by the Group is initially recognized on the balance sheet as a liability at the
fair value, or market value, of the obligations the Group assumed under that guarantee in
accordance with FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 is applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. FIN 45 also contains disclosure
provisions surrounding existing guarantees, which are effective for financial statements with
periods ended after December 15, 2002. As of December 31, 2006 and 2005, the fair values of the
guarantees the Group entered into after December 31, 2002 are not material to the Groups financial
position. Please refer to Notes 3(n) and 21(c) for details.
(x) Allowance for doubtful accounts
Accounts receivable are stated at the amount billed to customers. The Group recognizes allowance
for doubtful accounts to ensure trade and other receivables are not overstated due to
uncollectibility. The Groups estimate is based on a variety of factors, including historical
collection experience, existing economic conditions and a review of the current status of the
receivable. Accounts past due more than the Groups general credit period are considered
delinquent. Delinquent receivables are written off based on individual credit evaluation and
specific circumstances of the customer.
(y) Fair value of financial instruments
The estimated fair values for financial instruments under SFAS No. 107, Disclosures about Fair
Value of Financial Instruments, are determined at discrete points in time based on relevant market
information. These estimates involve uncertainties and cannot be determined with precision. The
estimated fair values of the Groups financial instruments, which include cash, accounts
receivable, intercompany receivables and payables and other payables, approximate their carrying
values in the financial statements.
(z) Other new accounting pronouncements
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, which
clarifies the accounting for uncertainty in income taxes recognized in the financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for
years beginning after December 15, 2006. The Group does not expect the adoption of FIN 48 will have
a material impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 applies under other
existing accounting pronouncements that require or permit fair value measurements, the FASB having
F-20
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, SFAS 157 does not require any new fair value measurements. However, the
application of this statement may change the current practice for fair value measurements. SFAS 157
is effective for financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Group does not expect the adoption of SFAS 157
will have a material impact on its financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities which permits entities to choose to measure financial instruments and
certain other items at fair value that are not currently required to be measured at fair value.
SFAS 159 will be effective for the Group on January 1, 2008. The Group does not expect the adoption
of SFAS 159 will have a material impact on its financial statements.
4. SUBSIDY INCOME
During the year, the Companys subsidiaries were granted government subsidies of RMB73,210,000.
All of the approved subsidies were received by the Group during the year. For the years ended
December 31, 2006, 2005 and 2004, government subsidies of RMB50,176,000, RMB3,139,000 and
RMB1,815,000 were recorded as income respectively.
5. INCOME TAXES
For the years ended December 31, 2006, 2005 and 2004, certain of the Companys subsidiaries were
subject to income taxes in the PRC at the applicable statutory tax rates on allowable losses or
taxable income as reported in the statutory financial statements adjusted for the reduced tax rates
and exemptions described in Note 3(k).
The amount of (provision) benefit for income taxes in the consolidated statement of income
represents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Current taxation |
|
|
(47,879 |
) |
|
|
12,121 |
|
|
|
(11,340 |
) |
Deferred taxation |
|
|
|
|
|
|
(114,005 |
) |
|
|
74,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,879 |
) |
|
|
(101,884 |
) |
|
|
63,110 |
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the Groups effective income tax rate, based on (loss) income before taxes
and minority interests, to its statutory income tax rate for years ended December 31, 2006, 2005
and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
% |
|
|
% |
|
|
% |
|
Average statutory tax rate (including
state and local income tax) |
|
|
5.17 |
|
|
|
10.25 |
|
|
|
17.44 |
|
Effect of statutory tax holiday |
|
|
5.87 |
|
|
|
3.07 |
|
|
|
15.44 |
|
Effect of non-deductible expenses |
|
|
(7.02 |
) |
|
|
(2.62 |
) |
|
|
(5.38 |
) |
Effect of valuation allowances |
|
|
(8.77 |
) |
|
|
(22.93 |
) |
|
|
(15.06 |
) |
Others, not individually significant |
|
|
(1.95 |
) |
|
|
3.71 |
|
|
|
(0.46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
(6.70 |
) |
|
|
(8.52 |
) |
|
|
11.98 |
|
|
|
|
|
|
|
|
|
|
|
F-21
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
The average statutory tax rates for the relevant periods represented the weighted average tax
rates of the Companys subsidiaries calculated on the basis of the relative amount of (loss) income
before taxes and the applicable statutory tax rate of each subsidiary.
Components of deferred tax assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
Research and development costs |
|
|
62,008 |
|
|
|
57,519 |
|
Provisions and accruals |
|
|
56,893 |
|
|
|
46,488 |
|
Provision for impairment of property, plant and equipment |
|
|
7,541 |
|
|
|
7,619 |
|
Amortization and provision for impairment of intangible assets |
|
|
116,737 |
|
|
|
102,436 |
|
Tax losses carry forward |
|
|
209,905 |
|
|
|
185,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
453,084 |
|
|
|
399,930 |
|
Valuation allowance (Note) |
|
|
(453,084 |
) |
|
|
(399,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: At December 31, 2006, valuation allowances of approximately RMB209.9 million (2005: RMB185.9
million) and RMB243.2 million (2005: RMB214 million) were made for deferred tax assets recognized
in respect of the unused tax losses and deductible temporary differences because it is more likely
than not that the tax benefit will not be realized in the foreseeable future. The net change in
valuation allowances for the year ended December 31, 2006 of approximately RMB53.2 million (2005:
RMB297.4 million) represented valuation allowances provision of approximately RMBNil million (2005:
RMB114 million) made for deferred tax assets previously recognized with reference to a forecast of
taxable profits of a subsidiary for next five years and the increase in deferred tax assets of
approximately RMB53.2 million (2005: RMB183.4 million). The temporary differences do not expire
under current legislation but the unrecognized tax losses of RMB565.9 million (2005: RMB565.9
million), RMB610.2 million (2005: RMB673.2 million) and RMB223.2 million will expire in 2009, 2010
and 2011 respectively.
6. PLEDGED SHORT-TERM BANK DEPOSITS
As of December 31, 2006 and 2005, approximately RMB1,625.1 million and RMB1,932.6 million,
respectively, of the short-term bank deposits were pledged as security for banking facilities,
corporate guarantees for bank loans drawn by affiliated companies and bank guaranteed notes issued
(Notes 19 and 21).
7. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Accounts receivable |
|
|
694,981 |
|
|
|
173,325 |
|
Less: Allowance for doubtful debts |
|
|
(62,823 |
) |
|
|
(48,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632,158 |
|
|
|
124,958 |
|
|
|
|
|
|
|
|
F-22
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
Movements of allowance for doubtful debts during the years ended December 31, 2006 and 2005
were:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Balance as of January 1, |
|
|
48,367 |
|
|
|
47,718 |
|
Additional provision |
|
|
14,456 |
|
|
|
1,177 |
|
Write-back of provision |
|
|
|
|
|
|
(528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, |
|
|
62,823 |
|
|
|
48,367 |
|
|
|
|
|
|
|
|
8. NOTES RECEIVABLE
Notes receivable are primarily notes received from customers for settlement of accounts receivable
balances. As of December 31, 2006 and 2005, all notes receivable were guaranteed by established
banks in the PRC with maturities of less than six months. The fair value of the notes receivable
approximated their carrying value. Approximately RMB233 million (2005: RMB238 million) of the notes
receivable were pledged for the issuance of notes payable (Note 19).
9. OTHER RECEIVABLES
Included in other receivables as of December 31, 2006 and 2005 was an amount of RMB300 million
advanced to Shenyang Automobile Industry Asset Management Company Limited (SAIAM) which will
become a subsidiary of the Group after the completion of the proposed acquisition of SAIAM as
detailed in Note 16.
10. INVENTORIES, NET
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Raw materials |
|
|
598,970 |
|
|
|
564,596 |
|
Work-in-progress |
|
|
174,328 |
|
|
|
64,025 |
|
Finished goods |
|
|
573,545 |
|
|
|
418,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,346,843 |
|
|
|
1,046,818 |
|
|
|
|
|
|
|
|
F-23
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
11. PROPERTY, PLANT AND EQUIPMENT AND LONG-TERM LAND LEASE PREPAYMENTS
Property, plant and equipment consist of:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Buildings |
|
|
1,238,713 |
|
|
|
1,260,101 |
|
Machineries and equipment |
|
|
4,439,080 |
|
|
|
4,136,064 |
|
Motor vehicles |
|
|
116,133 |
|
|
|
117,497 |
|
Furniture, fixtures and office equipment |
|
|
423,321 |
|
|
|
382,017 |
|
Construction-in-progress |
|
|
233,104 |
|
|
|
454,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,450,351 |
|
|
|
6,350,270 |
|
Less: Accumulated provision for impairment losses |
|
|
(125,028 |
) |
|
|
(95,868 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,325,323 |
|
|
|
6,254,402 |
|
Less: Accumulated depreciation |
|
|
(2,460,113 |
) |
|
|
(1,891,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
3,865,210 |
|
|
|
4,362,762 |
|
|
|
|
|
|
|
|
(a) |
|
During the years ended December 31, 2006, 2005 and 2004, capitalized interest expenses
amounted to approximately RMB6.8 million, RMB23.9 million and RMB 18.4 million, respectively. |
|
(b) |
|
In December 2003, Shenyang Automotive disposed of certain machineries and equipment at their
net book value to the Groups jointly controlled entity, BMW Brilliance Automotive Ltd (BMW
Brilliance), at a consideration mutually agreed by both parties. The agreement of sale
includes an option for BMW Brilliance to require Shenyang Automotive to purchase back such
machineries and equipment at the purchase price less depreciation over a specified period upon
the occurrence of certain events, including the passing of a valid resolution pursuant to the
joint venture contract by the board of directors of BMW Brilliance. These machineries and
equipment are maintained and operated by BMW Brilliance for the manufacturing of its products.
BMW Brilliance will provide certain services to Shenyang Automotive upon the payment of a
service fee which is determined based on the number of Zhonghua sedans produced by Shenyang
Automotive using these machineries and equipment at a predetermined formulated unit charge. As
of the date of approval of 2006 financial statements, the basis of service fees has not yet
been finalized and service fees of approximately RMB411,440,073, RMB308,283,000 and
RMB196,125,000 have been accrued as of December 31, 2006, 2005 and 2004, respectively. |
|
(c) |
|
In 2003, Shenyang Automotive transferred the legal titles and ownership of certain buildings
at their net book value to BMW Brilliance and entered into an agreement with BMW Brilliance to
lease-back a substantial portion of the buildings. The agreement of sale includes an option
for BMW Brilliance to require Shenyang Automotive to purchase back such buildings at the
purchase price less depreciation upon the occurrence of certain events, including the passing
of a valid resolution pursuant to the joint venture contract by the board of directors of BMW
Brilliance. For financial reporting purposes, as of December 31, 2006 and 2005, the net book
value of the buildings, amounting to approximately RMB134,348,000 and RMB142,556,000,
respectively, were retained as assets on the balance sheet of the Group and the portion of
consideration received from BMW Brilliance up to December 31, 2006, amounting to approximately
RMB113,343,000 (2005: RMB74,605,000), was treated as financing and will be partially offset
against the lease rental payable in future years. The remaining balance of approximately
RMB61,030,000 (2005: RMB99,768,000) will be received from BMW Brilliance and will be accounted
for as additional financing. |
|
(d) |
|
As a result of the retirement from use and the change in use from production to rental of
certain property, plant and equipment of the Groups minibus and automotive components
segment, the Group assessed the recoverability of the carrying value of these long-lived
assets, which resulted in impairment losses of approximately RMB29.1 million, RMB48.3 million
and RMB10.0 million for the years ended December 31, 2006, 2005 and 2004 respectively. These
losses reflect the amounts by which the carrying values of these assets exceeded their
estimated fair values determined by their estimated discounted future cash flows. The
impairment loss was recorded as a component of Selling, general and administrative expenses
in the Consolidated Statement of Income and Comprehensive Income for the years. |
F-24
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
12. INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Cost |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
1,521,722 |
|
|
|
1,512,342 |
|
Additions |
|
|
17,611 |
|
|
|
9,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
|
1,539,333 |
|
|
|
1,521,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
(713,911 |
) |
|
|
(509,902 |
) |
Amortization for the year |
|
|
(181,444 |
) |
|
|
(204,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
|
(895,355 |
) |
|
|
(713,911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
(223,000 |
) |
|
|
(50,000 |
) |
Impairment loss provision for the year |
|
|
|
|
|
|
(173,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
|
(223,000 |
) |
|
|
(223,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
|
End of year |
|
|
420,978 |
|
|
|
584,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
584,811 |
|
|
|
952,440 |
|
|
|
|
|
|
|
|
There was a group of intangible assets that were similar in their use in the operations of the
Group as they related to a specific model of Zhonghua sedans. The Group assessed the future
economic benefit of this group as a whole based on net future cash flow from the manufacture and
sale of that specific model of Zhonghua sedans. Included in the group of intangible assets were
primarily:
(a) |
|
Sedan design rights, which include rights, titles and interests in certain design and
engineering agreements and a technical assistance agreement related to Zhonghua sedans; and |
(b) |
|
Components and parts technology rights, which include rights, titles and interests in the
design of the components and spare parts for Zhonghua sedans contributed by JinBei, as capital
into Shenyang Automobile in 2003. |
Since the operations in the manufacture and sale of Zhonghua sedans had resulted in a loss in 2006,
the Group critically assessed the future economic benefit of the intangible assets and property,
plant and equipment in relation to Zhonghua sedans by assessing the net cash inflow that the
manufacture and sale of Zhonghua sedans
will bring to the Group in the future. For the year ended December 31, 2006, no impairment loss
(2005: RMB173 million) was provided for assets related to Zhonghua sedans.
For each of the five years ending December 31, 2010, the estimated amortization expense of the
intangible assets in existence as of December 31, 2006 will be approximately RMB177.8 million.
F-25
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
13. INTERESTS IN ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES
Interests in associated companies and jointly controlled entities as of December 31, 2006 consisted
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of effective |
|
|
|
|
|
|
equity interest held |
|
|
|
|
Place of |
|
indirectly by the |
|
|
Name of company |
|
establishment |
|
Company |
|
Principal activities |
Associated companies: |
|
|
|
|
|
|
|
|
Shenyang Aerospace
Mitsubishi Motors Engine
Manufacturing Co., Ltd.
(Shenyang Aerospace)
(Note 1)
|
|
Shenyang, the PRC
|
|
|
12.77% |
|
|
Manufacture and
sale of automotive
engines |
|
|
|
|
|
|
|
|
|
Shenyang JinBei Vehicle
Dies Manufacturing Co.,
Ltd. (Shenyang JinBei
Vehicle)
|
|
Shenyang, the PRC
|
|
|
48% |
|
|
Manufacture and
sale of automotive
components |
|
|
|
|
|
|
|
|
|
Jointly controlled entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mianyang Xinchen Engine
Co., Ltd. (Mianyang
Xinchen) (Note 2)
|
|
Mianyang, the PRC
|
|
|
50% |
|
|
Manufacture and
sale of automotive
engines for
minibuses and light
duty trucks |
|
|
|
|
|
|
|
|
|
Shenyang Xinguang
Brilliance Automobile
Engine Co., Ltd. (Xinguang
Brilliance)
|
|
Shenyang, the PRC
|
|
|
50% |
|
|
Manufacture and
sale of automotive
engines for
minibuses and light
duty trucks |
|
|
|
|
|
|
|
|
|
BMW Brilliance
|
|
Shenyang, the PRC
|
|
|
49.5% |
|
|
Manufacture and
sale of BMW sedans |
|
|
|
Notes: |
|
(1) |
|
On September 29, 2005, the Group entered into an agreement with a shareholder of Shenyang
Aerospace to dispose of 2% of the Groups interest in Shenyang Aerospace for a cash consideration
of RMB 50 million. The disposal is yet to be completed as at the date of these financial
statements. |
|
(2) |
|
On August 7, 2006, the Group entered into an agreement with an independent third party to
dispose 3.5% of the Groups interest in Mianyang Xinchen for a cash consideration of approximately
RMB16.4 million. The disposal is yet to be completed as at the date of these financial statements. |
|
(3) |
|
During the year ended December 31, 2006, the Group disposed of two associates, Chongqing FuHua
Automotive Sales Service Co., Ltd. (Chongqing FuHua)and Chongqing Baosheng Automotive Sale and
Service Co., Ltd. (Chongqing Baosheng) to affiliated companies of Shanghai Shenhua and other
third parties for a consideration of approximately RMB9 million and RMB4.5 million respectively. |
F-26
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
The carrying values of interests in associated companies and jointly controlled entities are:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Interests in associated companies: |
|
|
|
|
|
|
|
|
Shenyang Aerospace |
|
|
357,893 |
|
|
|
349,401 |
|
Chongqing FuHua |
|
|
|
|
|
|
9,709 |
|
Chongqing Baosheng |
|
|
|
|
|
|
4,116 |
|
Shenyang JinBei Vehicle |
|
|
14,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371,980 |
|
|
|
363,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests in jointly controlled entities: |
|
|
|
|
|
|
|
|
Mianyang Xinchen |
|
|
304,462 |
|
|
|
311,102 |
|
Xinguang Brilliance |
|
|
28,523 |
|
|
|
244,890 |
|
BMW Brilliance |
|
|
708,170 |
|
|
|
601,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,041,155 |
|
|
|
1,157,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,413,135 |
|
|
|
1,520,696 |
|
|
|
|
|
|
|
|
The acquisitions of associated companies and jointly controlled entities have been accounted for
using the purchase method of accounting. The tangible assets were valued in the acquisitions at
their estimated fair values. The excess of the purchase price over the fair values of the net
assets acquired has been accounted for as goodwill. The carrying values of goodwill of the acquired
associated companies and jointly controlled entities, which are included in the carrying amount of
interests in associated companies and jointly controlled entities are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Shenyang Aerospace |
|
|
31,983 |
|
|
|
31,983 |
|
Mianyang Xinchen |
|
|
91,410 |
|
|
|
91,410 |
|
Xinguang Brilliance |
|
|
|
|
|
|
73,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,393 |
|
|
|
196,736 |
|
|
|
|
|
|
|
|
F-27
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
The changes in the carrying amount of equity-method goodwill for the year ended December 31,
2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacture and |
|
|
|
|
|
|
|
|
|
sale of minibuses |
|
|
Manufacture and |
|
|
|
|
|
|
and automotive |
|
|
sale of Zhonghua |
|
|
|
|
|
|
components |
|
|
sedans |
|
|
Total |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Balance as of January 1, 2006 |
|
|
164,753 |
|
|
|
31,983 |
|
|
|
196,736 |
|
Impairment losses |
|
|
(73,343 |
) |
|
|
|
|
|
|
(73,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
|
91,410 |
|
|
|
31,983 |
|
|
|
123,393 |
|
|
|
|
|
|
|
|
|
|
|
At of December 31, 2006, the Group recorded an impairment charge of RMB73.3 million (2005: RMB179.0
million) for equity method goodwill associated with its minibuses and automotive components
operations due to lower than expected projected operating profits and cash flows. The fair value of
the equity method investments was estimated using the expected present value of future cash flows.
The equity shares in the income (loss) of the associated companies and jointly controlled entities
for the years ended December 31, 2006 and 2005 were:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Associated companies: |
|
|
|
|
|
|
|
|
Shenyang Aerospace |
|
|
50,183 |
|
|
|
28,386 |
|
Chongqing FuHua |
|
|
|
|
|
|
192 |
|
Chongqing Baosheng |
|
|
|
|
|
|
477 |
|
Shenyeng JinBei Vehicle |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,918 |
|
|
|
29,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jointly controlled entities: |
|
|
|
|
|
|
|
|
Mianyang Xinchen |
|
|
(414 |
) |
|
|
1,978 |
|
Xinguang Brilliance |
|
|
(80,219 |
) |
|
|
(13,296 |
) |
BMW Brilliance |
|
|
106,692 |
|
|
|
31,582 |
|
Shanghai Kowin Automobile Company Co., Ltd. |
|
|
|
|
|
|
(324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,059 |
|
|
|
19,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,977 |
|
|
|
48,995 |
|
|
|
|
|
|
|
|
F-28
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
Combined financial information of the associated companies is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Revenue |
|
|
2,113,735 |
|
|
|
1,807,849 |
|
Profit before taxation, net |
|
|
209,438 |
|
|
|
147,361 |
|
Net income |
|
|
187,388 |
|
|
|
131,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Current assets |
|
|
889,889 |
|
|
|
908,750 |
|
Non-current assets |
|
|
1,906,025 |
|
|
|
2,020,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
2,795,914 |
|
|
|
2,928,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
(634,616 |
) |
|
|
(940,641 |
) |
Long-term liabilities |
|
|
(580,000 |
) |
|
|
(470,967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
(1,214,616 |
) |
|
|
(1,411,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,581,298 |
|
|
|
1,517,377 |
|
|
|
|
|
|
|
|
F-29
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
Combined financial information of the jointly controlled entities is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Revenue |
|
|
8,953,086 |
|
|
|
6,597,047 |
|
Profit before taxation, net |
|
|
159,091 |
|
|
|
23,277 |
|
Net income |
|
|
197,063 |
|
|
|
23,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Current assets |
|
|
6,051,057 |
|
|
|
3,983,194 |
|
Non-current assets |
|
|
2,101,276 |
|
|
|
1,727,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
8,152,333 |
|
|
|
5,711,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
(5,530,655 |
) |
|
|
(3,579,826 |
) |
Long-term liabilities |
|
|
(700,979 |
) |
|
|
(420,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
(6,231,634 |
) |
|
|
(3,999,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,920,699 |
|
|
|
1,711,292 |
|
|
|
|
|
|
|
|
14. INVESTMENT SECURITIES
The aggregate cost, gross unrealized gain and fair value pertaining to available-for-sale
securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Available-for-sale securities at cost |
|
|
17,305 |
|
|
|
17,305 |
|
Gross unrealized gain |
|
|
29,520 |
|
|
|
28,468 |
|
Gross unrealized loss |
|
|
(27,227 |
) |
|
|
(27,227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,598 |
|
|
|
18,546 |
|
Unlisted securities at cost |
|
|
4,138 |
|
|
|
4,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,736 |
|
|
|
22,684 |
|
|
|
|
|
|
|
|
The change in net unrealized gain reported as a separate component of accumulated other
comprehensive income was RMB2.3 million and RMB1.2 million as of December 31, 2006 and 2005,
respectively. At
December 31, 2006, the Group determined that the decline in value of securities with unrealized
losses shown in the above table is not other-than-temporary in nature.
Investments with an aggregate cost of RMB4.1 million (2005: RMB4.1 million) were not evaluated for
impairment because (a) the Group did not estimate the fair value of those investments in accordance
with
F-30
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
paragraphs 14 and 15 of SFAS No. 107 and (b) the Group did not identify any events or changes
in circumstances that may have had a significant adverse effect on the fair value of those
investments.
15. GOODWILL
The carrying amount of goodwill of RMB339,710,000 (2005: RMB339,710,000) was associated with the
manufacture and sale of minibuses and automotive components operations.
During the year ended December 31, 2006, no impairment loss was recognized in respect of goodwill.
During the year ended December 31, 2005, the Group recorded an impairment charge of RMB79 million
for goodwill associated with its manufacture and sale of minibuses and automotive components
operations due to lower than expected projected operating profits and cash flows. The fair value of
that reporting unit was estimated using the expected present value of future cash flows.
16. PREPAYMENT FOR A LONG-TERM INVESTMENT
On December 29, 2003, SJAI (a 99% indirectly-owned subsidiary of the Company) and SXID (an indirect
wholly-owned subsidiary of the Company) entered into agreements with the respective sellers in
relation to the acquisition of the entire equity interests of SAIAM and Shenyang XinJinBei
Investment Co., Ltd. (SXI), respectively. SAIAM is interested in 24.38% and SXI is interested in
8.97% of the equity interest in JinBei, a company listed on the Shanghai Stock Exchange. The
consideration for the acquisitions was RMB600 million and was determined after arms length
negotiations between the parties taking into account the respective financial position of SAIAM and
SXI.
Although the acquisitions have been approved by State-Owned Assets Supervision and Administration
Commission of Liaoning Provincial Government and State-owned Assets Supervision and Administration
Commission of the State Council of the PRC, the transfer of the entire interest of SAIAM and SXI is
subject to the granting of a waiver to SXID and SJAI from making an offer for all of the shares of
JinBei under the Regulation on Acquisitions of Listed Companies by the China Securities Regulatory
Commission. Upon completion of the acquisitions, the Group will be effectively interested in an
aggregate of approximately 33.05% of the equity interests of JinBei.
As at December 31, 2006 and 2005, the consideration of RMB600 million paid to the shareholders of
SAIAM and SXI was recorded as prepayments for a long-term investment by the Group. The directors
have assessed the fair value of the underlying shares in JinBei and are satisfied that the
recoverability of the prepayments is supported by the underlying shares of JinBei.
F-31
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
17. DEFERRED EXPENSES
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Direct expenses incurred in connection with the
issuance of convertible bonds due 2008 (Note
18(a)) |
|
|
44,599 |
|
|
|
44,599 |
|
Amortization |
|
|
(40,623 |
) |
|
|
(19,326 |
) |
Buy back / redemption |
|
|
(3,976 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,273 |
|
Direct expenses incurred in connection with the
issuance of convertible bonds due 2011 (Note
18(b)) |
|
|
31,414 |
|
|
|
|
|
Amortization |
|
|
(3,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,749 |
|
|
|
25,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion |
|
|
21,466 |
|
|
|
16,353 |
|
Current portion |
|
|
6,283 |
|
|
|
8,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,749 |
|
|
|
25,273 |
|
|
|
|
|
|
|
|
18. CONVERTIBLE BONDS
(a) Convertible bonds due 2008
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Convertible bonds issued at par |
|
|
1,654,300 |
|
|
|
1,654,300 |
|
Accreted redemption premium |
|
|
35,270 |
|
|
|
26,008 |
|
Buy back |
|
|
(673,847 |
) |
|
|
|
|
Redemption |
|
|
(939,351 |
) |
|
|
|
|
Exchange gain |
|
|
(76,372 |
) |
|
|
(40,758 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,639,550 |
|
|
|
|
|
|
|
|
On November 28, 2003, the Company, through its wholly-owned subsidiary, Brilliance China Automotive
Finance Ltd., issued zero coupon guaranteed convertible bonds due 2008 with principal amount of
US$200,000,000 (equivalent to approximately RMB1,654.3 million at the time of issue). The
convertible bonds due 2008 are listed on the Luxembourg Stock Exchange.
The convertible bonds due 2008 are convertible into fully paid common stocks of US$0.01 each of the
Company at an initial conversion price of HK$4.60 per share and the total potential number of
shares was 336,956,522, subject to the following two events, at any time on or after January 8,
2004, and up to and including November 14, 2008, unless the convertible bonds due 2008 have
previously been redeemed or matured.
(i) |
|
The convertible bonds due 2008 will mature on November 28, 2008. At any time from November
28, 2005 through November 14, 2008, all, or from time to time, some of the aggregate
outstanding principal |
F-32
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
|
|
amount of the convertible bonds due 2008 is redeemable at the option of Brilliance China
Automotive Finance Ltd. at the early redemption amount if the closing price of the shares of
the Company on the SEHK for each of the last 20 consecutive trading days has been at least
130% of the conversion price or if at least 90% in principal amount of the convertible bonds
due 2008 has been converted, redeemed or purchased and cancelled. Unless previously converted,
redeemed or purchased and cancelled, the convertible bonds due 2008 will be redeemed at 100%
of their outstanding principal amount on November 28, 2008. |
|
(ii) |
|
All or some of the convertible bonds due 2008 may be redeemed at the option of the relevant
holder on November 28, 2006 at 102.27% of their principal amount. The convertible bonds due
2008 may also be redeemed, in whole or in part, at the option of the holders at the Early
Redemption Amount on the occurrence of a change of control of the Company. The convertible
bonds due 2008 may also be redeemed at the option of the holders if the shares of the Company
cease to be listed or admitted to trading on the SEHK. |
During the year end December 31, 2006, the Group, through its agent, entered into transactions to
buy back the convertible bonds due 2008 with par value and carrying amount of US$82,790,000
(equivalent to approximately RMB660,576,000) and US$84,453,000 (equivalent to approximately
RMB673,847,000) respectively. Total consideration for the buy back was US$82,590,000 (equivalent
to approximately RMB658,969,000). The remaining outstanding convertible bonds due 2008 with par
value and carrying amount of US$117,210,000 (equivalent to approximately RMB918,520,000) and
US$119,868,000 (equivalent to approximately RMB939,351,000) respectively have been redeemed by the
Group at a consideration of US$119,868,000 (equivalent to approximately RMB939,351,000).
As a result of the buy back transactions, the Group recorded a gain of approximately RMB11 million
during the year ended December 31, 2006.
(b) Convertible bonds due 2011
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Convertible bonds issued at par |
|
|
1,460,779 |
|
|
|
|
|
Accreted redemption premium |
|
|
59,157 |
|
|
|
|
|
Exchange gain |
|
|
(33,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,486,568 |
|
|
|
|
|
|
|
|
|
|
|
|
On June 7, 2006, the Group, through a wholly-owned subsidiary, Brilliance China Finance Limited,
issued zero coupon guaranteed convertible bonds due 2011 with principal amount of US$182,678,000
(equivalent to
approximately RMB1,461 million at the time of issue). The convertible bonds due 2011 are listed on
the Singapore Exchange Securities Trading Limited.
The convertible bonds due 2011 are convertible into fully paid ordinary shares of US$0.01 each of
the Company at an initial conversion price of HK$1.93 per share, subject to adjustment in certain
events, at any time on or after July 6, 2006, and up to and including May 8, 2011, unless the
convertible bonds due 2011 have previously been redeemed or matured.
Conversion price reset
If the average of the closing price (the Average Market Price) of the shares of the Company for
the period of 20 consecutive trading days immediately prior to the reset dates (being March 10,
2007 and March 10, 2008) is less than the conversion price on the applicable reset date, the
conversion price shall be adjusted on the applicable reset date so that the Average Market Price of
the shares of the Company will become the adjusted conversion price with effect from the applicable
reset date provided that, among other things, any such
F-33
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
adjustment to the conversion price in no event shall be less than 68% (for the March 10, 2007
reset date) and 75% (for the March 10, 2008 reset date) of the conversion price prevailing on the
applicable reset date and that the conversion price shall not be reduced below the then par value
of the shares unless under applicable law then in effect the convertible bonds due 2011 could be converted at such reduced conversion price into legally issued, fully-paid and non-assessable
shares.
Redemption
The convertible bonds due 2011 will mature on June 7, 2011. All but not some of the aggregate
outstanding principal amount of the convertible bonds due 2011 is redeemable at the option of
Brilliance China Finance Limited at the early redemption amount (calculated at principal amount of
the convertible bonds due 2011 plus a yield at 7% per annum, compounded semi-annually):
(i) |
|
on or at any time after June 7, 2008 and prior to June 7, 2009, if the closing price of the shares of the Company on the SEHK for each of the last 30 consecutive trading days has been at
least 145% of the applicable early redemption amount divided by the conversion ratio
(principal amount of the convertible bonds due 2011 divided by the conversion price); |
(ii) |
|
on or at any time after June 7, 2009 and prior to May 8, 2011, if the closing price of the shares of the Company on the SEHK for each of the last 30 consecutive trading days has been at
least 130% of the applicable early redemption amount divided by the conversion ratio; or |
(iii) |
|
at any time, if more than 90% in principal amount of the convertible bonds due 2011 has been
converted, redeemed or purchased and cancelled. |
Unless previously converted, redeemed or purchased and cancelled, the convertible bonds due 2011
will be redeemed at 141.060% of their outstanding principal amount on June 7, 2011.
The convertible bonds due 2011 may be redeemed in whole but not in part at the option of the
relevant holder on June 7, 2009 at 122.926% of their principal amount. The convertible bonds due
2011 may also be redeemed in whole but not in part at the option of the holders at the early
redemption amount on the occurrence of a change of control of the Company, or if the shares of the
Company cease to be listed or admitted to trading on the SEHK.
As of December 31, 2006, none of the convertible bonds due 2011 had been converted into common
stock of the Company.
19. NOTES PAYABLE
As of December 31, 2006, approximately RMB1,700 million (2005: RMB2,703 million) of notes payable
had effective interest rates of 3% to 4%, the remaining RMB442 million (2005: RMB324 million) of
notes payable were interest free. All notes payable were guaranteed by banks, repayable within one
year, secured by short-term bank deposits of approximately RMB1,207 million (2005: RMB1,450
million) and bank guaranteed notes received from third parties and affiliated companies of
approximately RMB233 million (2005: RMB238 million).
F-34
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
20. TAXES PAYABLE
Taxes payable consist of:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Income tax payable |
|
|
11,411 |
|
|
|
14,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VAT payable |
|
|
10,651 |
|
|
|
47,087 |
|
Others |
|
|
71,190 |
|
|
|
70,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other taxes payable |
|
|
81,841 |
|
|
|
117,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,252 |
|
|
|
132,004 |
|
|
|
|
|
|
|
|
21. COMMITMENTS AND CONTINGENCIES
(a) Commitments
As of December 31, 2006, the Group had approximately RMB1,190.6 million in outstanding capital and
purchases commitments of which certain items are denominated in Japanese Yen, U.S. Dollars and
Euros. The amount included contracted but not provided for capital commitment for construction
projects, purchase of equipment, and others amounting to approximately RMB186.3 million and
authorized but not contracted for capital commitment amounting to approximately RMB1,004.3 million.
As of December 31, 2006, the future aggregate minimum lease payments under non-cancellable
operating leases are detailed as follows:
|
|
|
|
|
|
|
Operating |
|
|
|
lease |
|
|
|
RMB000 |
|
Within one year |
|
|
18,943 |
|
One to two years |
|
|
13,566 |
|
Two to three years |
|
|
7,008 |
|
Three to four years |
|
|
4,053 |
|
Four to five years |
|
|
4,053 |
|
Over five years |
|
|
40,526 |
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
88,149 |
|
|
|
|
|
(b) Operating lease income
Operating leases arise from the leases for certain buildings to BMW Brilliance (see also Note
25(f)). The lease terms are generally 180 months.
F-35
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
Depreciation expense for assets subject to operating leases is provided primarily on the
straight-line method over the estimated useful life of the assets. Depreciation expense relating to
the buildings held as investments in operating leases was RMB4.4 million and RMB4.2 million for the
years ended December 31, 2006 and 2005, respectively.
Investments in operating leases are as follows:
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
|
RMB000 |
|
Buildings |
|
|
97,358 |
|
Accumulated depreciation |
|
|
(15,161 |
) |
|
|
|
|
|
|
|
|
|
Net investment in operating leases |
|
|
82,197 |
|
|
|
|
|
Future minimum rental payments to be received on non-cancellable operating leases are contractually
due as follows:
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
|
RMB000 |
|
Within one year |
|
|
19,611 |
|
One to two years |
|
|
14,174 |
|
Two to three years |
|
|
14,174 |
|
Three to four years |
|
|
14,174 |
|
Four to five years |
|
|
14,175 |
|
Over five years |
|
|
90,952 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
167,260 |
|
|
|
|
|
There were no contingent rentals under the respective lease contracts.
(c) Contingent liabilities
(i) |
|
As of December 31, 2006, the Group had provided the following guarantees: |
|
(1) |
|
Corporate guarantees of approximately RMB120 million (2005: RMB120 million) for
revolving bank loans and notes drawn by affiliated companies of Shanghai Shenhua: |
|
|
|
|
The guarantee arose from the mutual negotiation between Shenyang Automotive and Shanghai
Shenhua. Associated with the corporate guarantee, Shanghai Shenhua also provided a cross
guarantee for the bank facilities of Shenyang Automotive. The guarantee was for revolving
activities of Shanghai Shenhua and will be terminated upon mutual agreements between
Shenyang Automotive and Shanghai Shenhua. If Shanghai Shenhua defaults on the repayment
of its bank
loans or notes when they fall due, Shenyang Automotive is required to repay the
outstanding balance. There is no recourse or collateralization provision in the
guarantee. As of December 31, 2006, the guarantee provided for the bank loans and notes
drawn by affiliated companies of Shanghai Shenhua was approximately RMB120 million (2005:
RMB120 million), which is also the maximum potential amount of future payments under the
guarantee as of December 31, 2006. However, default by Shanghai Shenhua and its
affiliated companies is considered remote by management and therefore no liability for
the guarantors obligation under the guarantee existed as of December 31, 2006. |
F-36
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
|
(2) |
|
A joint and several proportional corporate guarantee with a shareholder of Shenyang
Aerospace on a long-term bank loan of approximately RMBNil million (2005: RMB111 million)
drawn by Shenyang Aerospace which will expire in 2008: |
|
|
|
|
The guarantee was provided by the Group and a shareholder of Shenyang Aerospace for its
long-term loan financing needs during its start-up period. If Shenyang Aerospace defaults
on the repayment of its bank loan when it falls due, the Group and the shareholder are
jointly and severally liable to repay the outstanding balance. There is no recourse or
collateralization provision in the guarantee. |
|
|
(3) |
|
Corporate guarantees of bank loans amounting to RMB295 million (2005: RMB295
million), which is also the maximum potential amount of future payments under the
guarantee as of December 31, 2006, drawn by JinBei. Bank deposits of RMB312 million
(2005: RMB311 million) were pledged as collateral for the corporate guarantees. However,
default by JinBei is considered remote by management and therefore no liability for the
guarantors obligation under the guarantee existed as of December 31, 2006. |
(ii) |
|
On or about October 25, 2002, the Company was served with a claim lodged by Mr. Yang Rong
(Mr. Yang) in the Labour Tribunal in Hong Kong against the Company for alleged wrongful
repudiation and/or breach of his employment contract. The claim was for approximately US$4.3
million (equivalent to approximately RMB35.6 million) with respect to loss of salary. In
addition, Mr. Yang claimed unspecified damages in respect of bonuses and share options. The
claim was dismissed by the Labour Tribunal in Hong Kong on January 28, 2003. Mr. Yang
subsequently applied for a review of this decision. At the review hearing on July 4, 2003, the
Labour Tribunal ordered the case to be transferred to the High Court in Hong Kong. The claim
has therefore been transferred to the High Court and registered as High Court Action No. 2701
of 2003 (the Action). |
|
|
|
On September 16, 2003, a Statement of Claim was served on the Company. On November 4, 2003,
the Company filed a Defence and Counterclaim with the High Court. Mr. Yang filed a Reply to
Defence and Defence to Counterclaim on April 26, 2004. On July 21, 2004, Mr. Yang obtained
leave from the Court to file an Amended Reply to Defence and Defence to Counterclaim. The
Company filed and served a Reply to Defence to Counterclaim on September 4, 2004. Pleadings
closed on September 18, 2004. The parties filed and served Lists of Documents on October 26,
2004 and witness statements were exchanged on February 28, 2005. |
|
|
|
The parties applied by consent to adjourn sine die a checklist hearing fixed for April 20,
2005, as the respective parties anticipated that they would be filing supplemental evidence
and amending their pleadings. The Court approved the application and made an Order on April
19, 2005 that the checklist hearing be vacated and adjourned sine die with liberty to restore. |
|
|
|
Pursuant to a request made by Mr. Yang on June 2, 2005 for further and better particulars of
the Defence and Counterclaim, the Company filed and served its Answer to Mr. Yangs request on
July 4, 2005. |
|
|
|
On August 17, 2005, in compliance with its continuing discovery obligations, the Company filed
and served a Supplemental List of Documents. Subsequently, on September 5, 2005, Mr. Yang also
filed and served a Supplemental List of Documents. |
|
|
|
There has been no material progress in the litigation. |
|
|
|
The directors of the Company do not believe the Action will have any significant impact on the
financial position of the Company and of the Group. The directors of the Company intend to
continue vigorously defending the action. |
F-37
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
22. CAPITAL STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
shares |
|
|
Amount |
|
|
shares |
|
|
Amount |
|
|
shares |
|
|
Amount |
|
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
Authorized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
of US$0.01 each
(Note) |
|
|
5,000,000 |
|
|
|
US$50,000 |
|
|
|
5,000,000 |
|
|
|
US$50,000 |
|
|
|
5,000,000 |
|
|
US$50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and fully paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
of US$0.01 each |
|
|
3,668,391 |
|
|
RMB303,388 |
|
|
|
3,668,391 |
|
|
RMB303,388 |
|
|
|
3,668,391 |
|
|
RMB303,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: At a special general meeting held on February 12, 2007, shareholders of the Company
approved the increase of the authorized share capital of the Company from US$50,000,000 to
US$80,000,000 by the creation of an additional 3,000,000,000 shares of par value of US$0.01 each.
23. STOCK OPTIONS
Original share option scheme approved in 1999
Upon the listing on the Companys shares on the SEHK, the Company adopted an employee share option
scheme (the Scheme). Pursuant to the Scheme, the Companys board of directors may grant options
to employees of the Group to subscribe for the Companys common stock at a price which shall be the
higher of:
(a) |
|
a price being not less than 80%, of the average closing price of the common stock on the
relevant stock exchange as stated in such stock exchanges quotation sheets for the five
trading days immediately preceding the relevant date in respect of such options; and |
(b) |
|
the nominal value of the common stock. |
The maximum number of shares on which options may be granted may not exceed 10% of the issued share
capital of the Company excluding any shares issued on the exercise of the option from time to time.
On June 2, 2001, share options were granted to certain directors and employees of the Group,
entitling them to subscribe for a total of 31,800,000 shares of the Companys common stock at
HK$1.896 per share. The exercisable period of these options is from June 2, 2001 to June 1, 2011.
The compensation expense associated with these grants was fully vested and was charged to income
during the year ended December 31, 2001. During the year ended December 31, 2003, 2,338,000 shares
of the above share options were exercised. Accordingly, the common stock and additional paid-in
capital increased by approximately RMB194,000 and RMB4,507,000, respectively. No option was granted
under the scheme from 2004 to 2006.
|
|
|
|
|
|
|
No. of share options |
|
|
|
000 |
|
As of January 1, 2005
|
|
|
|
|
Granted |
|
|
14,490 |
|
Exercised |
|
|
|
|
Cancelled/lapsed |
|
|
(11,690 |
) |
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
2,800 |
|
Granted |
|
|
|
|
Exercised |
|
|
|
|
Cancelled/lapsed |
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
2,800 |
|
|
|
|
|
F-38
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
New share option scheme approved in 2002
On June 28, 2002, the Company adopted a new share option scheme (the New Scheme) in compliance
with the amendments to the listing rules and regulations of SEHK which came into effect on
September 1, 2001. The New Scheme came into effect on July 15, 2002 and the original share option
scheme adopted by the Company on September 18, 1999 (as described above) was terminated. Any new
share option granted after July 15, 2002 will be in accordance with the terms of the New Scheme,
but the outstanding share options granted under the original share option scheme in 2001 will not
be affected. Pursuant to the New Scheme, the Companys board of directors may grant options to the
participants (include the Groups employees, non-executive directors, suppliers and customers,
etc.) to subscribe for the Companys common stock at a price which shall not be lower than the
higher of:
(a) |
|
the closing price of the common stocks on the relevant stock exchange as stated in such stock
exchanges quotation sheet on the date of the offer of grant, which must be a trading date; |
(b) |
|
the average closing price of the common stocks on the relevant stock exchange as stated in
such stock exchanges quotation sheets for the five trading days immediately preceding the
date of the offer of grant; and |
|
(c) |
|
the nominal value of the common stock. |
Movements of outstanding share options granted under the New Scheme during the year are as follows:
|
|
|
|
|
|
|
|
|
|
|
No. of share options |
|
|
|
2006 |
|
|
2005 |
|
|
|
000 |
|
|
000 |
|
Granted during the year and as at 31st December, |
|
|
35,750 |
|
|
|
|
|
|
|
|
|
|
|
|
The options under the New Scheme were granted for a nominal consideration of HK$1 per person. Each
of the outstanding share options under the New Scheme entitles the holder to subscribe for one
ordinary share of the Company at HK$1.32, exercisable from December 28, 2006 to December 27, 2016.
In accordance with the terms of the share-based arrangement, options issued during the year vest at
the date of grant.
The fair value of the share options granted during the year is HK$11,221,493 (equivalent to
approximately RMB11,281,000), which was calculated using the Black-Scholes option pricing model and
recognised as expenses in the statement of income. Where relevant, the expected life used in the
model has been adjusted based on managements best estimate for the effects of non-transferability,
exercise restrictions and behavioural consideration. Due to the restriction on the transferability
of the share options, the option holders tend to early exercise the options on hand. Therefore,
management considers it is appropriate to assume that the option holders will exercise their
options earlier as it is the only way for them to realise their option value. Such expected time of
exercise constitutes the expected tenors of the options, which are adopted in the calculation of
the fair value of the options. The expected tenors for options held by the directors and other
employees are two years and one year respectively. Expected volatility is based on the historical
price volatility over the past 260 days.
F-39
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
Call Option Agreements
On December 18, 2002, Huachen entered into a principal agreement (the Principal Agreement)
with the Chinese Financial Education Development Foundation (the Foundation) to purchase from the
Foundation a total of 1,446,121,500 shares of common stock, representing approximately 39.446% of
the then issued share capital of the Company and the Foundations entire shareholding interests in
the Company. Completion of the Principal Agreement took place upon signing.
On December 18, 2002, each of Mr. Wu Xiao An, Mr. Su Qiang, Mr. Hong Xing and Mr. He Tao (the
Management Directors) entered into a call option agreement (Call Option Agreements) with
Huachen, immediately after the Principal Agreement was entered into and after completion of the
sale and purchase of the common stocks pursuant thereto. Pursuant to the terms of the Call Option
Agreements, Huachen granted to each of the Management Directors a call option in respect of a
specified number of shares of common stock, totaling 346,305,630 shares in aggregate and
representing approximately 9.446% of the then issued share capital of the Company, at an exercise
price of HK$0.95 per share. Each call option is exercisable in whole or in part at any time during
the period of 3 years commencing from the date falling 6 months after February 6, 2003, the closing
date of the general offer made to the remaining shareholders by Huachen and the Management
Directors dated December 18, 2002.
Under the terms of the Call Option Agreements, the Management Directors may elect to pay the
exercise price in full or to pay 10% of the exercise price at the time of exercise of the option.
If the Management Directors elect the latter payment option, the balance of the exercise price will
be payable, without interest, within a 3-year period after the date of completion of the purchase
of the relevant common stock, and the shares will be pledged as security in favor of Huachen until
full payment of the exercise price.
As a result of the Call Option Agreements entered into between Huachen and the Management
Directors, compensation expense associated with these call options is being recognized by the
Company on a straight-line basis from December 18, 2002 to August 6, 2003, the date that the call
options became fully vested. Accordingly, compensation expenses of approximately RMB173.2 million
and RMB10.3 million were charged to the income statements for the years ended December 31, 2003 and
2002, respectively.
The call options lapsed on August 6, 2006 and none of them was exercised during the year ended
December 31, 2006.
F-40
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
24. DISTRIBUTION OF PROFIT
As stipulated by the relevant laws and regulations for foreign-invested enterprises in the PRC, the
Companys subsidiaries are required to maintain discretionary dedicated capital, which includes a
general reserve fund, an enterprise expansion fund and a staff welfare and incentive bonus fund.
The dedicated capital is to be appropriated from statutory net income as stipulated by statute or
by the board of directors of respective subsidiaries and recorded as a component of shareholders
equity. For the years ended December 31, 2006, 2005 and 2004, the subsidiaries of the Company
appropriated approximately RMB16.6 million, RMB9.3 million and RMB46.2 million, respectively, to
the general reserve fund. No appropriation to the enterprise expansion fund was made by the
subsidiaries for the years ended December 31, 2006, 2005 and 2004.
The Groups share of undistributed earnings retained in the associated companies and jointly
controlled entities amounted to approximately RMB159.5 million and RMB107.20 million as of December
31, 2006 and 2005, respectively.
Dividends declared by the Company during 2006 and 2005 consisted of:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
2005 and 2004 final dividends of HK$Nil and
HK$0.005 per share, respectively |
|
|
|
|
|
|
19,450 |
|
|
|
|
|
|
|
|
On April 20, 2007 the directors of the Company did not recommend the payment of any dividend for
the year 2006.
25. RELATED PARTY TRANSACTIONS
(a) Name and relationship
|
|
|
Name |
|
Relationship |
JinBei
|
|
A shareholder of Shenyang Automotive |
Shanghai Shenhua
|
|
Common directorship of certain directors of the Company |
Brilliance Holdings Limited (BHL)
|
|
Common directorship of certain directors of the Company |
An affiliated company is a company in which one or more of the directors or substantial
shareholders of the Company have direct or indirect beneficial interests in the company or are in a
position to exercise significant influence over the company. Parties are also considered to be
affiliated if they are subject to common control or common significant influence.
Save as disclosed elsewhere in the financial statements, particulars of significant transactions
with affiliated companies (these affiliated companies and the Company have certain directors in
common and/or other relationships as specified) are summarized below.
F-41
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
(b) |
|
Amounts due from affiliated companies consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Due from related parties: |
|
|
|
|
|
|
|
|
Shanghai Shenhua and its affiliated companies |
|
|
431,310 |
|
|
|
276,763 |
|
Affiliated companies of JinBei |
|
|
93,446 |
|
|
|
62,877 |
|
Affiliated companies of BHL |
|
|
55,040 |
|
|
|
54,222 |
|
Jointly controlled entities |
|
|
21,470 |
|
|
|
13,380 |
|
An associated company |
|
|
|
|
|
|
1,505 |
|
BMW Brilliance |
|
|
|
|
|
|
|
|
Accounts receivables |
|
|
247,564 |
|
|
|
192,185 |
|
Consideration receivable arising from the
disposal of machinery and equipment (note
(i)) |
|
|
134,527 |
|
|
|
269,003 |
|
Dividend receivable from a jointly controlled entity |
|
|
76,173 |
|
|
|
|
|
Dividend receivable from an associate |
|
|
21,000 |
|
|
|
|
|
Less: Provision for doubtful debts |
|
|
(29,720 |
) |
|
|
(29,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,050,810 |
|
|
|
840,215 |
|
|
|
|
|
|
|
|
(i) |
|
The outstanding balance is unsecured, non-interest bearing and will be settled by BMW
Brilliance when certain conditions specified in the agreement of sale are fulfilled (See also
Note 11(b)). |
|
(ii) |
|
Except for (i) above, the amounts due from affiliated companies are unsecured, non-interest
bearing and have no fixed repayment term. |
|
(c) |
|
Notes receivable from affiliated companies arising from trading activities consisted of the
following: |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Notes receivable from related parties: |
|
|
|
|
|
|
|
|
Affiliated companies of JinBei |
|
|
16,620 |
|
|
|
9,446 |
|
Shanghai Shenhua |
|
|
63,750 |
|
|
|
328,482 |
|
Associated companies and jointly controlled entities |
|
|
1,107 |
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,477 |
|
|
|
338,970 |
|
|
|
|
|
|
|
|
All the notes receivable from affiliated companies are guaranteed by banks in the PRC and have
maturities of six months or less. The fair value of the notes receivable approximates their
carrying value.
F-42
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
(d) |
|
Amounts due to affiliated companies arising from trading activities consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Due to related parties: |
|
|
|
|
|
|
|
|
Associated companies and jointly controlled entities |
|
|
680,943 |
|
|
|
465,023 |
|
Affiliated companies of Shanghai Shenhua |
|
|
10,719 |
|
|
|
4,191 |
|
Affiliated companies of JinBei |
|
|
281,721 |
|
|
|
142,438 |
|
Affiliated companies of BHL |
|
|
|
|
|
|
22,025 |
|
Other affiliated companies |
|
|
9,910 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
983,293 |
|
|
|
633,807 |
|
|
|
|
|
|
|
|
The amounts due to affiliated companies are unsecured, non-interest bearing and have no fixed
repayment term.
(e) |
|
Notes payable to affiliated companies arising from trading activities consisted of the
following: |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Notes payable to related parties: |
|
|
|
|
|
|
|
|
Affiliated companies of BHL |
|
|
|
|
|
|
43,462 |
|
An affiliated company of JinBei |
|
|
7,249 |
|
|
|
8,139 |
|
Associated companies and jointly controlled entities |
|
|
30,039 |
|
|
|
22,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,288 |
|
|
|
74,092 |
|
|
|
|
|
|
|
|
F-43
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
(f) |
|
Save as disclosed elsewhere in the financial statements, significant transactions with
affiliated companies consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Sales of goods: |
|
|
|
|
|
|
|
|
|
|
|
|
JinBei and its affiliated companies |
|
|
178,414 |
|
|
|
69,432 |
|
|
|
38,127 |
|
Shanghai Shenhua and its affiliated companies |
|
|
1,052,689 |
|
|
|
1,469,402 |
|
|
|
1,895,881 |
|
Associated companies and jointly controlled entities |
|
|
186,146 |
|
|
|
71,005 |
|
|
|
205,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,417,249 |
|
|
|
1,609,839 |
|
|
|
2,139,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of goods: |
|
|
|
|
|
|
|
|
|
|
|
|
JinBei and its affiliated companies |
|
|
895,457 |
|
|
|
383,808 |
|
|
|
764,311 |
|
Shanghai Shenhua and its affiliated companies |
|
|
16,668 |
|
|
|
85,354 |
|
|
|
214,467 |
|
Affiliated companies of BHL |
|
|
117,336 |
|
|
|
66,441 |
|
|
|
89,690 |
|
Associated companies and jointly controlled entities |
|
|
942,878 |
|
|
|
524,221 |
|
|
|
898,914 |
|
Affiliated companies of the joint venture partner of
Ningbo Yuming |
|
|
|
|
|
|
|
|
|
|
342 |
|
Affiliated companies of the joint venture partner of
Xinguang Brilliance |
|
|
68 |
|
|
|
761 |
|
|
|
|
|
Shareholders of Shenyang Aerospace |
|
|
90,505 |
|
|
|
1,987 |
|
|
|
39,019 |
|
Subcontracting charges to a jointly controlled entity |
|
|
254,479 |
|
|
|
112,160 |
|
|
|
178,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,317,391 |
|
|
|
1,174,732 |
|
|
|
2,185,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration paid to the joint venture partner of
Ningbo Yuming for acquisition of further interests in
Ningbo Yuming |
|
|
|
|
|
|
|
|
|
|
10,000 |
|
Purchase of intangible asset from an affiliated company
of the joint venture partner of Ningbo Yuming |
|
|
|
|
|
|
|
|
|
|
6,940 |
|
Finance charge to a jointly controlled entity |
|
|
16,748 |
|
|
|
17,329 |
|
|
|
17,850 |
|
Operating lease rental on land and buildings charged by: |
|
|
|
|
|
|
|
|
|
|
|
|
A jointly controlled entity |
|
|
908 |
|
|
|
2,206 |
|
|
|
12,840 |
|
Shanghai Shenhua and its affiliated companies |
|
|
1,148 |
|
|
|
|
|
|
|
|
|
JinBei and its affiliated companies |
|
|
60 |
|
|
|
|
|
|
|
|
|
Mould testing income from a jointly controlled entity |
|
|
4,320 |
|
|
|
|
|
|
|
|
|
Operating lease rental from a jointly controlled entity |
|
|
34,863 |
|
|
|
15,078 |
|
|
|
15,364 |
|
Proceeds from sale of property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
JinBei and its affiliated companies |
|
|
|
|
|
|
|
|
|
|
4,407 |
|
A jointly controlled entity |
|
|
80,332 |
|
|
|
263 |
|
|
|
1,105 |
|
Purchase of machinery from affiliated companies of
JinBei |
|
|
|
|
|
|
|
|
|
|
58,089 |
|
Service income from a jointly controlled entity |
|
|
35,067 |
|
|
|
43,671 |
|
|
|
|
|
The above transactions were carried out after negotiations between the Group and the affiliated
companies in the ordinary course of business and on the basis of estimated market value as
determined by the directors. Other significant transactions with affiliated companies consisted of:
F-44
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
i. Trademark license
Pursuant to a trademark license agreement, JinBei granted Shenyang Automotive the right to use the
JinBei trademark on its products and marketing materials indefinitely.
ii. Guarantees provided to affiliated companies
Please refer to Note 21 (c) (i) for details of the guarantees provided to affiliated companies.
(g) |
|
Advances to affiliated companies consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Advances to related parties: |
|
|
|
|
|
|
|
|
Associated companies and jointly controlled entities |
|
|
6,553 |
|
|
|
7,226 |
|
Affiliated companies of BHL |
|
|
15,273 |
|
|
|
15,273 |
|
Shanghai Shenhua and its affiliated companies |
|
|
14,044 |
|
|
|
9,045 |
|
JinBei and its affiliated companies |
|
|
23,740 |
|
|
|
16,185 |
|
Other affiliated companies |
|
|
689 |
|
|
|
452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,299 |
|
|
|
48,181 |
|
Less: provision for doubtful debts |
|
|
(2,214 |
) |
|
|
(9,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,085 |
|
|
|
38,931 |
|
|
|
|
|
|
|
|
Advances to affiliated companies are unsecured, non-interest bearing and with no fixed repayment
term except for an unsecured advance to JinBei of RMB5 million which is interest-bearing at 5.4%
per annum and has 6 months repayment term (2005: advances to affiliated companies were unsecured,
non-interest bearing and with no fixed repayment term).
In July 2006, the Group advanced a sum of RMB150 million to an affiliated company of JinBei, which
was fully repaid within the same month.
F-45
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
(h) |
|
Advances from affiliated companies consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
RMB000 |
|
|
RMB000 |
|
Advances from related parties: |
|
|
|
|
|
|
|
|
Associated companies and jointly controlled entities |
|
|
1,279 |
|
|
|
607 |
|
BHL and its affiliated companies |
|
|
12,728 |
|
|
|
28,558 |
|
Affiliated companies of Shanghai Shenhua |
|
|
820 |
|
|
|
236 |
|
JinBei and its affiliated companies |
|
|
6,925 |
|
|
|
1,088 |
|
Financing received from BMW Brilliance (Note 11(c)) |
|
|
113,343 |
|
|
|
74,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,095 |
|
|
|
105,094 |
|
|
|
|
|
|
|
|
Save for the financing received from BMW Brilliance as detailed in Note 11(c), other advances from
affiliated companies are unsecured, non-interest bearing and have no fixed repayment terms.
26. RETIREMENT PLAN AND EMPLOYEES BENEFIT
As stipulated by the regulations of the PRC government, the Companys subsidiaries in the PRC have
defined contribution retirement plans for their employees. The PRC government is responsible for
the pension liability to these retired employees. The Companys subsidiaries are required to make
specified contributions for the state-sponsored retirement plan at 19% to 23% of the basic salary
costs of their staff for 2006 (2005: 20%; 2004: 20% to 23.5%) payable to Labor and Social Security
Bureaus of the PRC government. The retirement plan contributions payable for the years ended
December 31, 2006, 2005 and 2004 were approximately RMB36.1 million, RMB33.1 million and RMB37.5
million, respectively. In addition to the pension contributions, pursuant to the relevant laws and
regulations of the PRC, the Companys subsidiaries are required to provide benefits such as housing
funds, medical insurance and unemployment insurance for their PRC employees. These provisions,
which were approximately RMB32.7 million, RMB29.6 million and RMB35 million for the years ended
December 31, 2006, 2005 and 2004, respectively, were calculated at a certain percentage
(approximately 15.4% to 25.4% in 2006, 15.4% to 25.4% in 2005 and 14.8% to 23.4% in 2004) of the
employees basic salaries.
The Groups Hong Kong employees are covered by the mandatory provident fund which is managed by an
independent trustee. The Group and its Hong Kong employees each makes monthly contribution to the
scheme at 5% of the employees salary with maximum contributions by each of the Group and the
employees limited to HK$1,000 per month. The retirement benefit scheme cost charged to the
consolidated statement of income represents contributions payable by the Group to the fund. During
the years ended December 31, 2006, 2005 and 2004, contributions amounting to approximately
HK$89,000, HK$122,000 and HK$147,000, respectively, were made.
27. EXECUTIVE BONUS PLAN
Certain officers of the Company are participants in the Executive Bonus Plan (the Plan). The Plan
provides that up to 5% of the Companys net income be set aside each year for distribution among
plan participants based upon performance as determined by the Companys board of directors. The
allocation of bonuses among participants is determined at the discretion of the President of the
Company. For the years ended December 31, 2006, 2005 and 2004 , no performance bonus was allocated.
F-46
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
28. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest (net of amount capitalized: 2006: RMB6,766,000; 2005: RMB
23,875,000; 2004: RMB18,369,000) |
|
|
92,744 |
|
|
|
111,303 |
|
|
|
154,041 |
|
Income taxes |
|
|
39,240 |
|
|
|
33,975 |
|
|
|
127,538 |
|
During the years ended December 31, 2006, 2005 and 2004, major non-cash transactions included:
During the year ended December 31, 2006, the Group entered into an agreement with an affiliated
company to offset accounts receivable from the affiliated company with the Groups accounts payable
to that affiliated company of approximately RMB86 million.
29. OTHER SUPPLEMENTAL INFORMATION
The following items are charged (credited) to the consolidated statements of income and
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Import tariffs |
|
|
31,616 |
|
|
|
15,224 |
|
|
|
56,857 |
|
Research and development costs |
|
|
214,021 |
|
|
|
235,177 |
|
|
|
479,928 |
|
Foreign exchange (gains) losses, net |
|
|
(32,955 |
) |
|
|
(21,487 |
) |
|
|
6,044 |
|
Provision for impairments of property, plant and
equipment |
|
|
29,160 |
|
|
|
48,299 |
|
|
|
10,000 |
|
Provision for doubtful debts and write off of bad debts |
|
|
28,272 |
|
|
|
55,703 |
|
|
|
55,292 |
|
30. SEGMENT INFORMATION
SFAS No. 131 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 Group began manufacturing and selling Zhonghua sedans and BMW sedans, respectively, which are
managed separately because each of them represents a strategic business unit that serves a
different market in the automobile industry. Therefore, the Groups reportable operating segments
consist of i) manufacture and sale of minibuses and automotive components; ii) manufacture and sale
of Zhonghua sedans; and iii) manufacture and sale of BMW sedans.
The accounting policies of each operating segment are the same as those described in the summary of
significant accounting policies. The Group evaluates performance based on stand-alone operating
segment net income and generally accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices. The Groups activities are
conducted predominantly in the PRC. Accordingly, no geographical segmentation analysis is provided.
The Groups credit risk primarily consists of receivables from a variety of customers including
state and local agencies, municipalities and private industries. The Group had one customer and its
affiliates (see Note 25(f)) that accounted for more than 10% of revenues. The Group reviews its
accounts receivable and provides estimates of allowances as deemed necessary.
F-47
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
Business segments 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacture |
|
|
|
|
|
|
|
|
|
|
|
|
and sale of |
|
|
Manufacture |
|
|
|
|
|
|
|
|
|
minibuses and |
|
|
and sale of |
|
|
Manufacture |
|
|
|
|
|
|
automotive |
|
|
Zhonghua |
|
|
and sale of |
|
|
|
|
|
|
components |
|
|
sedans |
|
|
BMW sedans |
|
|
Total |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Total revenues from reportable segments |
|
|
5,533,953 |
|
|
|
5,190,129 |
|
|
|
|
|
|
|
10,724,082 |
|
Elimination of intersegment revenues |
|
|
(239,328 |
) |
|
|
|
|
|
|
|
|
|
|
(239,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
|
5,294,625 |
|
|
|
5,190,129 |
|
|
|
|
|
|
|
10,484,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) before taxation and
minority interests |
|
|
145,602 |
|
|
|
(830,404 |
) |
|
|
106,692 |
|
|
|
(578,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
corporate expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,138 |
) |
interest income less interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxation and minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(714,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of December 31, 2006 |
|
|
6,237,217 |
|
|
|
5,274,223 |
|
|
|
708,170 |
|
|
|
12,219,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts corporate assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,360,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,580,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of fixed assets |
|
|
223,233 |
|
|
|
377,812 |
|
|
|
|
|
|
|
601,045 |
|
Amortization of long-term land lease
prepayments |
|
|
2,485 |
|
|
|
1,573 |
|
|
|
|
|
|
|
4,058 |
|
Amortization on intangible assets |
|
|
2,603 |
|
|
|
178,841 |
|
|
|
|
|
|
|
181,444 |
|
Impairment of equity method goodwill (Note
13) |
|
|
73,343 |
|
|
|
|
|
|
|
|
|
|
|
73,343 |
|
Capital expenditure |
|
|
106,130 |
|
|
|
144,935 |
|
|
|
|
|
|
|
251,065 |
|
Equity in earnings of associated companies
and jointly controlled entities |
|
|
(7,556 |
) |
|
|
50,184 |
|
|
|
106,692 |
|
|
|
149,320 |
|
Equity method goodwill (Note 13) |
|
|
91,410 |
|
|
|
31,983 |
|
|
|
|
|
|
|
123,393 |
|
Goodwill (Note 15) |
|
|
339,710 |
|
|
|
|
|
|
|
|
|
|
|
339,710 |
|
F-48
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
Business segments 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacture and |
|
|
|
|
|
|
|
|
|
|
|
|
sale of |
|
|
Manufacture and |
|
|
|
|
|
|
|
|
|
minibuses and |
|
|
sale of |
|
|
|
|
|
|
|
|
|
automotive |
|
|
Zhonghua |
|
|
Manufacture and |
|
|
|
|
|
|
components |
|
|
sedans |
|
|
sale of BMW |
|
|
Total |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
sedans |
|
|
RMB000 |
|
|
|
(Restated) |
|
|
(Restated) |
|
|
RMB000 |
|
|
(Restated) |
|
Total revenues from reportable segments |
|
|
4,837,379 |
|
|
|
863,140 |
|
|
|
|
|
|
|
5,700,519 |
|
Elimination of intersegment revenues |
|
|
(231,529 |
) |
|
|
|
|
|
|
|
|
|
|
(231,529 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
|
4,605,850 |
|
|
|
863,140 |
|
|
|
|
|
|
|
5,468,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) income before taxation and
minority interests |
|
|
(75,047 |
) |
|
|
(970,603 |
) |
|
|
32,250 |
|
|
|
(1,013,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
corporate expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,837 |
) |
interest income less interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxation and minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,195,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of December 31, 2005 |
|
|
6,995,223 |
|
|
|
4,630,005 |
|
|
|
615,304 |
|
|
|
12,240,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts corporate assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,451,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,692,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of fixed assets |
|
|
245,598 |
|
|
|
154,146 |
|
|
|
|
|
|
|
399,744 |
|
Amortization of long-term land lease
prepayments |
|
|
2,848 |
|
|
|
1,038 |
|
|
|
|
|
|
|
3,886 |
|
Amortization on intangible assets |
|
|
4,746 |
|
|
|
199,263 |
|
|
|
|
|
|
|
204,009 |
|
Impairment of equity method goodwill (Note
13) |
|
|
179,030 |
|
|
|
|
|
|
|
|
|
|
|
179,030 |
|
Impairment of goodwill in a subsidiary (Note
15) |
|
|
78,690 |
|
|
|
|
|
|
|
|
|
|
|
78,690 |
|
Capital expenditure |
|
|
165,225 |
|
|
|
420,447 |
|
|
|
|
|
|
|
585,672 |
|
Equity in earnings of associated companies
and jointly controlled entities |
|
|
(11,642 |
) |
|
|
28,387 |
|
|
|
32,250 |
|
|
|
48,995 |
|
Equity method goodwill (Note 13) |
|
|
164,753 |
|
|
|
31,983 |
|
|
|
|
|
|
|
196,736 |
|
Goodwill (Note 15) |
|
|
339,710 |
|
|
|
|
|
|
|
|
|
|
|
339,710 |
|
F-49
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004
31. ACCUMULATED OTHER COMPREHENSIVE INCOME
SFAS No. 130 requires the components of comprehensive income to be disclosed in the financial
statements. Comprehensive income consists of net income (loss) and other gains and losses affecting
shareholders equity that, under generally accepted accounting principles, are excluded from net
income. For the Group, comprehensive income consists primarily of unrealized gains and losses on
marketable equity investments and foreign currency translation adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain |
|
|
|
|
|
|
|
|
|
|
(loss) on |
|
|
|
|
|
|
Accumulative |
|
|
|
marketable |
|
|
Foreign currency |
|
|
other |
|
|
|
available-for-sale |
|
|
translation |
|
|
comprehensive |
|
|
|
securities |
|
|
adjustments |
|
|
income |
|
|
|
RMB000 |
|
|
RMB000 |
|
|
RMB000 |
|
Balance as of January 1, 2005 |
|
|
28,468 |
|
|
|
39,179 |
|
|
|
67,647 |
|
Current year change |
|
|
(27,227 |
) |
|
|
|
|
|
|
(27,227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
1,241 |
|
|
|
39,179 |
|
|
|
40,420 |
|
Current year change |
|
|
1,052 |
|
|
|
|
|
|
|
1,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 |
|
|
2,293 |
|
|
|
39,179 |
|
|
|
41,472 |
|
|
|
|
|
|
|
|
|
|
|
32. COMPARATIVE FIGURES
Certain comparative figures in previous years have been reclassified to conform to the fiscal 2006
presentation.
33. APPROVAL OF FINANCIAL STATEMENTS
The financial statements were approved by the board of directors on April 20, 2007.
F-50