BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LIMITED
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 |
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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 |
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For the fiscal year ended: December 31, 2007 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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OR |
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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 Registrant’s 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: None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, par value US$0.01 per share
Title of Class
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 issuer’s classes of capital or common stock as of December 31, 2007:
3,669,765,900 Ordinary Shares, par value US$0.01 per share
2,103,661 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 Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 þ
If this 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 People’s 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
Automotive’s 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 People’s Republic of China, or
China, and China’s 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.
1
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 31, 2007, 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 was US$1.00 = Rmb 7.2946, US$1.00 = HK$7.7984 and Euro 1.00 =
US$1.4603. 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.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
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, 2003, 2004, 2005,
2006 and 2007, which have been derived from our audited consolidated financial statements. The
selected financial information for the years ended December 31, 2005, 2006 and 2007 and as of
December 31, 2006 and 2007 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, 2003 and
2004 and as of December 31, 2003, 2004 and 2005 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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2003 |
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2004 |
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2005 |
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2006 |
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2007 |
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2007 |
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(Rmb) |
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(US$) |
Income Statement Data: |
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Total Sales |
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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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14,149.1 |
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1,939.7 |
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Cost of sales |
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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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13,049.1 |
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1,788.9 |
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Gross Profit |
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2,382.5 |
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1,050.7 |
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457.0 |
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524.2 |
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1,100.0 |
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150.8 |
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Selling, general and administrative expenses |
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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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1,535.7 |
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210.5 |
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Net income (loss) |
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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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83.7 |
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11.5 |
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Balance Sheet Data: |
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Total assets |
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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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16,172.3 |
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2,217.0 |
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Current assets |
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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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9,611.8 |
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1,317.7 |
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Current liabilities |
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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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8,643.0 |
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1,184.8 |
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Capital stock |
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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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303.5 |
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41.6 |
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Total shareholders’ equity |
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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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5,917.2 |
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811.2 |
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Cash Flow Statement Data: |
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Payment for capital expenditure |
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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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308.4 |
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42.3 |
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Depreciation and amortization |
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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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764.2 |
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104.8 |
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Net cash flows provided by (used in) operating activities |
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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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1,338.4 |
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183.5 |
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Net cash flows provided by (used in) investing activities |
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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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(566.8 |
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(77.7 |
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Net cash flows provided by (used in) financing activities |
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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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(866.2 |
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(118.7 |
) |
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Per Share/ADS Data: |
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Basic earnings (loss) per share |
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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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0.0228 |
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0.003 |
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Basic earnings (loss) per ADS |
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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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2.28 |
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0.31 |
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Diluted earnings (loss) per share |
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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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0.0227 |
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0.003 |
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Diluted earnings (loss) per ADS |
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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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2.27 |
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0.31 |
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Cash dividends declared per ADS(1) |
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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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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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9,291 |
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7,682 |
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8,752 |
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14,277 |
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15,808 |
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Minibus — Mid-priced model |
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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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62,821 |
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Subtotal — Minibuses |
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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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78,629 |
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Zhonghua Sedans(2) |
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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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128,003 |
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Total |
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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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206,632 |
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Sales volume (units) |
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Minibus — Deluxe model |
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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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13,898 |
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Minibus — Mid-priced model |
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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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59,517 |
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Subtotal — Minibuses |
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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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73,415 |
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Zhonghua Sedans(2) |
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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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106,770 |
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Total |
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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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|
180,185 |
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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 and 2003. |
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| (2) |
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Includes the Kubao coupe launched in September 2007. |
3
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 |
| Period |
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Period End |
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Average(1) |
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High |
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Low |
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 |
|
|
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 |
|
|
7.8041 |
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|
7.9574 |
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|
8.0702 |
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|
7.8041 |
|
2007 |
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7.2946 |
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|
7.5806 |
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|
7.8127 |
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|
7.2946 |
|
January 2008 |
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7.1818 |
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|
7.2333 |
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7.2946 |
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|
7.1818 |
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February 2008 |
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7.1115 |
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|
7.1594 |
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7.1973 |
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|
7.1100 |
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March 2008 |
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7.0120 |
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|
7.0541 |
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7.1110 |
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|
7.0105 |
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April 2008 |
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6.8970 |
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|
7.0048 |
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7.0815 |
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|
6.8940 |
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May 2008 |
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6.9412 |
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|
6.9760 |
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7.0000 |
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|
6.9412 |
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June 2008 (through June 19, 2008) |
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6.8770 |
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6.9152 |
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6.9633 |
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6.8770 |
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| Source: |
|
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. |
| |
| (1) |
|
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 has effectuated the delisting of its ADSs from the New York Stock
Exchange and may terminate the registration of its securities with the U.S. Securities and Exchange
Commission in the future, which may adversely affect its ADS price.
On July 5, 2007, Brilliance China Automotive announced that its board of directors has
approved the delisting of its ADSs from the New York Stock Exchange. The delisting was sought due
to the decline in trading volume of its ADSs and the increase in administrative costs to comply
with reporting and registration obligations in the United States. On July 16, 2007, Brilliance
China Automotive filed with the U.S. Securities and Exchange Commission a Form 25 to effect the
delisting from the New York Stock Exchange as from June 26, 2007. Since the delisting, Brilliance
China Automotive’s ADSs have been traded in the over-the-counter markets. Brilliance China
Automotive has maintained its ADS program in the United States, but the liquidity of its ADSs may
be adversely affected by their delisting from the New York Stock Exchange. Further, where
circumstances permit, Brilliance China Automotive may terminate its registration as a reporting
company under the U.S. Securities Exchange Act. Deregistration will eliminate Brilliance China
Automotive’s obligation to file annual reports on Form 20-F and current reports on Form 6-K.
Accordingly, in the event of a deregistration, ADS holders may receive less information regarding
Brilliance China Automotive, including information concerning its principal shareholders, directors
and executive officers, compensation paid to its executives, audited financial statements and
related party transactions, which under certain circumstances could better enable the ADS holders
to assess Brilliance China Automotive’s financial operations and policies. The delisting of
Brilliance China Automotive’s ADSs from the New York Stock Exchange and the possible termination of
its registration as a reporting company under the U.S. Securities Exchange Act may have a negative
impact on the price of Brilliance China Automotive’s ADSs and ordinary shares.
Brilliance China Automotive experienced a net loss in 2005 and 2006 and may not be profitable 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. Although Brilliance
China Automotive recorded net income of Rmb 83.7 million (US$11.5 million) in 2007, there is no
assurance that Brilliance China Automotive will continue to be profitable in subsequent years.
Provision for impairment of property, plant and equipment was Rmb 0.8 million in 2007 (2006:
Rmb 29.2 million), 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 subsequent
years.
5
If Brilliance China Automotive incurs losses in subsequent years, Brilliance China
Automotive’s ability to implement its business strategy could be impacted and its financial
condition could be adversely affected.
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 Automotive’s 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 66,245
minibuses and 62,281 Zhonghua sedans in 2006 to 73,415 minibuses and 106,770 Zhonghua sedans in
2007, there can be no assurance that demand for Shenyang Automotive’s 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.
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
Automotive’s financial results.
Meeting consumer demand with new vehicles developed over increasingly shorter product
development cycle times is critical to Brilliance China Automotive’s continued 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 Automotive’s financial results.
Brilliance China Automotive has experienced 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 the
past. 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 Automotive’s 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 2006 and there can be no assurance that this relatively new management team will
be as effective in implementing Brilliance China Automotive’s business strategies or that any of
the new strategies that the new management team may decide to implement will achieve its intended
objectives.
6
Brilliance China Automotive’s 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
Automotive’s 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 Automotive’s future financial performance will depend to a
great extent on its ability to motivate and retain key management personnel.
There are risks involved in Brilliance China Automotive’s 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 China’s 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 China’s 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.
7
The inability of Shenyang Automotive to access Toyota’s technical resources to upgrade Shenyang
Automotive’s products, or Toyota’s provision of assistance to any of Shenyang Automotive’s
competitors could negatively impact Shenyang Automotive’s 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 refinements and modifications without assistance
from Toyota, lack of access to Toyota’s technical resources may limit Shenyang Automotive’s ability
to upgrade significantly its existing Toyota-designed products. Failure to update its existing
models could eventually result in Shenyang Automotive’s products becoming technologically inferior
to its competitors’ products, which could have an adverse impact on Shenyang Automotive’s 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 Automotive’s ability to obtain engines from Toyota could limit
Shenyang Automotive’s ability to produce its deluxe minibuses.
While Shenyang Automotive has replaced 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 some of the
engines installed in Shenyang Automotive’s Granse deluxe minibuses are still 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 Automotive’s ability to import engines. An extended disruption or
reduction in Shenyang Automotive’s supply of Toyota engines would consequently limit Shenyang
Automotive’s ability to produce Granse deluxe minibuses.
8
Any delay or disruption in Shenyang Automotive’s ability to obtain engines could limit Shenyang
Automotive’s ability to produce its Zhonghua sedans.
Currently all of the Mitsubishi engines installed in Brilliance China Automotive’s 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 may also from time to time approach other domestic and overseas
engine manufacturers, with a view towards broadening its engine sourcing for its Zhonghua sedans,
and considering using their designs to produce domestically made engines for sedans and minibuses.
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 Aerospace’s and
Harbin DongAn’s supply of engines to Shenyang Automotive would consequently limit Shenyang
Automotive’s 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
manufacture these new engines with the desired quality or on a timely basis, whether due to natural
disasters or other factors beyond its control, Shenyang Automotive’s 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 Automotive’s 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 Automotive’s businesses, financial
condition and results of operations.
Shenyang Automotive’s competitors may have access to more advanced technology, greater financial
resources and more substantial support from the Chinese government, which could negatively affect
Shenyang Automotive’s competitive position.
Some of Shenyang Automotive’s 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 Automotive’s 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.
9
Huachen, as Brilliance China Automotive’s 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 Automotive’s 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, 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 Automotive’s results of operations.
Brilliance China Automotive has established relationships with approximately 320 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 Automotive’s 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 Automotive’s results of
operations.
10
Product liabilities and recall claims may adversely affect Brilliance China Automotive’s 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 or product recall insurance and only carries limited insurance against losses due
to production and 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 Automotive’s 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 Automotive’s China operations,
including those of Shenyang Automotive.
Brilliance China Automotive’s 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 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 Automotive’s 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 Automotive’s operations are sensitive to changes in the Chinese
government’s environmental policies relating to all aspects of automobile manufacturing, including regulations or policies on
automobile emissions and gas consumption. 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 company’s internal control over financial reporting in its
annual report, which contains management’s assessment of the effectiveness of the company’s
internal control over financial reporting. In addition, an independent registered public
accounting firm must attest to and report on management’s assessment of the effectiveness of the
company’s internal control over financial reporting. The requirement for our management to
evaluate and report on internal control over financial reporting first applied to our annual report
on Form 20-F for the fiscal year ending December 31, 2006. The requirement for us to provide an
auditor’s report on internal control over financial reporting first applies to this annual report
for the fiscal year ending December 31, 2007.
11
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 management’s 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.
For the material weaknesses we have identified, we are continuing to implement 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 ongoing and
such measures have not been fully 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 management’s
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.
12
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, in 2006,
Brilliance China Automotive 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 acceptance. If Brilliance China Automotive’s 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 Automotive’s research and development capabilities are impaired,
the development of Brilliance China Automotive’s products may be delayed which, in turn, may
adversely affect its business plans and operations.
Brilliance China Automotive’s 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 Automotive’s intellectual
property rights. Counterfeit automobiles and automotive parts that improperly use Brilliance China
Automotive’s 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 management’s 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.
13
Brilliance China Automotive has uninsured risks.
Brilliance China Automotive’s insurance coverage, as of December 31, 2007, includes property
and inventory damage arising from fire, floods, riots or strikes, malicious damage, business
interruption, transportation, product and public liability. However, there are certain types of
losses, for instance, losses resulting from acts of terrorism or earthquakes, which are either
disproportionately expensive, practically infeasible or unavailable 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 Automotive’s “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.
The “Zhonghua” brand is considered one of the PRC’s “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 Automotive’s “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
China’s automobile demands may become more volatile due to macroeconomic factors.
After rapid growth between 2000 and 2003, China’s 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. China’s 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 36.5% to
approximately 3.8 million sedan units as compared to that in 2005. According to the China
Automotive Industry Newsletter, sedan sales volumes increased by 24.4% to 4,726,617 sedan units in
2007 as compared to 2006. Sales performance in China’s sedan market also improved in the first
four months of 2008 with a total of 1,818,790 sedan units being sold, compared to the 1,534,493
sedan units sold in the same period in 2007, an increase of 18.5% year on year. However, there is
no assurance that this growth will continue.
14
The demand for automobiles in China is affected by various factors beyond Brilliance China
Automotive’s control, including:
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economic and monetary policies implemented by the Chinese government; |
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volatility in petroleum, diesel and other commodity prices; |
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inflation and consumer purchasing power; |
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availability of and governmental policies relating to automobile financing; 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.
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
Automotive’s inventory and could result in a significant underutilization of its production
capacity. As a result, Brilliance China Automotive’s results of operations and financial condition
could be materially and adversely affected.
Increase in fuel prices may adversely affect demand for automobiles.
Fuel prices (including prices of petroleum and diesel) in China reached historical heights in
June 2008 as a result of a reduction in oil subsidies, the effect of which was to increase fuel
prices by 17%, representing the largest single increase in fuel prices in China. In addition,
world crude oil prices have continued to increase in 2008, which may cause fuel prices in China to
further increase. Any further increase in fuel prices may:
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have an adverse impact on China’s economy, which may thereby result in a slow down
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increase Brilliance China Automotive’s 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 Automotive’s
sales and profitability could be materially and adversely affected.
Competition is intense in China’s automobile industry.
Brilliance China Automotive currently faces intense competition mainly from other Chinese
domestic automobile manufacturers. Many of Brilliance China Automotive’s 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
Automotive’s market share and reduce its profit margin. The competition that Brilliance China Automotive faces also requires it to increase its
marketing and development costs.
15
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
Automotive’s 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 China’s 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 China’s 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 is 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. As a result, import tariffs on automotive components have decreased, from as high as
120% in January 1992, to 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 2005, the average import tariffs on automotive components for
the deluxe minibuses (including Granse minibuses) and Zhonghua sedans were 9.7% and 12.1%,
respectively, and in 2006, the average tariffs became 8.2% and 10.4% for the imported components
for deluxe minibuses and Zhonghua sedans, respectively. In 2007, import tariffs were further
reduced to 8.7% for imported components for both deluxe minibuses and Zhonghua sedans. In
addition, in 2005, tariffs became fixed at 30% for all motor vehicles and were further reduced to
28% in January 2006 and to 25% in July 2006. Import tariffs on automotive components for BMW
Brilliance’s products were reduced from 25% to 10% in the second half of 2007 when the requisite
domestic component content ratio was reached and approved by the government.
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 Automotive’s current and proposed markets.
16
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 China’s 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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emission standards; |
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maximum fuel consumption; |
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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 Automotive’s operations are sensitive to changes in the Chinese
government’s 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, China’s regulators may introduce in the future more stringent regulations and
measures which will affect Brilliance China Automotive’s 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 Automotive’s failure to comply with such laws and regulations would
result in fines, penalties or lawsuits.
17
China’s automobile industry is significantly dependent upon the economy of China.
The performance of China’s 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. For example, China has experienced
increased inflation since the second half of 2007. According to information published by the
National Bureau of Statistics of China, in 2007, the consumer price index was 4.8%. As of May
2008, the consumer price index had risen by 8.1% year-on-year, which increase was largely
attributable to soaring food prices. In addition, in June 2008, fuel prices in China were
increased by 17%, putting further inflationary pressures on the Chinese economy. Increased
inflation has caused and may continue to cause the PRC government to implement administrative and
economic measures in an effort to managing the pace of the economy growth. In 2007, the PRC
government raised interest rates six times and raised banks’ required reserve ratio ten times and
it may continue these and other significant measures to control inflation and prevent the Chinese
economy from overheating. The effects of any continued inflation may affect the purchasing power of
Chinese consumers, which could adversely affect the revenue or results of operations of Brilliance
China Automotive.
China’s 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 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. There is no assurance that demand for
these vehicles will not decrease and negatively impact Brilliance China Automotive’s businesses and
results of operations.
Risks Relating to China’s Economy and Regulatory System
China’s economic, political and social conditions, as well as government policies, could affect
Brilliance China Automotive’s businesses.
China’s 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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control of foreign exchange; and |
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allocation of resources. |
While China’s 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 Automotive’s operations. For example, Brilliance China Automotive’s
financial condition and results of operations may be adversely affected by the Chinese government’s
control over capital investments or any changes in tax regulations or foreign exchange controls
that are applicable to it.
China’s 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.
Exchange rate fluctuations may affect the results of operations of Brilliance China Automotive.
Brilliance China Automotive’s 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 People’s 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 foreign currencies, which includes, without limitation,
U.S. dollars, Euros and Japanese yen. This change in policy has resulted in an approximately 11.9%
appreciation of the Renminbi against the U.S. dollar between July 21, 2005 and December 31, 2007.
There is no assurance on whether there will be any further revaluation of the Renminbi. Any
further revaluation of the Renminbi may adversely affect China’s economy and may therefore lead to
a downturn in the automobile demand in China. In addition, a further revaluation will cause exports
from China to become more expensive, thereby negatively impacting exports of automobiles from
China.
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Significant changes to China’s income tax regime could have a material adverse effect on Brilliance
China Automotive’s results of operations.
On March 16, 2007, the National People’s Congress of the PRC promulgated the PRC Enterprise
Income Tax Law, or the new EIT Law, which became effective on 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%. The EIT Law imposes a uniform tax rate of 25% on all PRC enterprises, including
foreign-invested enterprises, and eliminates or modifies most of the tax exemptions, reductions and
preferential treatments available under previous tax laws and regulations. Under the new EIT Law,
enterprises that were established before March 16, 2007 and already enjoy preferential tax
treatments shall, in accordance with any detailed directives to be issued by the State Council, (i)
in the case of preferential tax rates, continue to enjoy the preferential tax rates which will be
gradually increased to the new tax rates within five years from January 1, 2008 or (ii) in the case
of preferential tax exemption or reduction for a specified term, continue to enjoy the preferential
tax holiday until the expiration of such term. However, the State Council has not issued any
further guidance on the detailed treatment of enterprises that were established before March 16,
2007 and already enjoy preferential tax treatments. Any increase in Brilliance China Automotive’s
effective tax rate as a result of the above may adversely affect its operating results.
Budgetary constraints on China’s government entities and state enterprises could affect Shenyang
Automotive’s sales and pricing of products.
Brilliance China Automotive believes that approximately 30% and 25% of Shenyang Automotive’s
2007 revenues from minibuses and sedans, respectively, were derived from sales to governmental
agencies and certain state-run enterprises. Because of Shenyang Automotive’s customer composition,
sales and pricing of its products can be affected by budgetary constraints applicable to government
entities and state enterprises.
Shenyang Automotive’s 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 People’s 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.
20
There are inherent uncertainties in China’s legal system which may affect Brilliance China
Automotive.
China’s 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 China’s 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 Automotive’s prospects, financial
condition and results of operations.
There can be no assurance that there will not be another significant outbreak of a highly
contagious disease in China and natural disasters may disrupt our business and operations.
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. In the past several years, 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. Natural disasters in China may also disrupt our manufacturing and production
facilities, thereby adversely affecting our business and results of operation. For example, on May
12, 2008 an earthquake of magnitude 8.0 struck southwest China and caused the death of over 70,000
people. Any future natural disasters and health hazards in China 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 Automotive’s
principal place of business is Suites 1602-05, Chater House, 8 Connaught Road Central, Hong
Kong, telephone number: (852) 2523-7227.
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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 Automotive’s 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
Automotive’s effective interest in Shenyang Automotive will increase from 51.0% to approximately
63.9%.
Prior to May 1998, Brilliance China Automotive’s 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 Company’s 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.
22
On October 12, 1998, June 9, 2000 and July 3, 2000, Brilliance China Automotive established
the following 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 Automotive’s effective interest
in Shenyang Aerospace was reduced to 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 Automotive’s 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 Automotive’s 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 in June 2006. In
early 2008, Shenyang Automotive completed the construction of a 100,000 unit facility for the
production of the new Junjie FRV line of products. The facility commenced production of the Junjie
FRV (Family Recreational Vehicle) in June 2008.
23
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 Junjie, a separate Zhonghua model, was launched in
March 2006. In September 2007, the latest Zhonghua model, the Kubao coupe, was launched.
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. 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 Automotive’s effective interests in SJAI and
the joint venture with BMW were 81.0% and 40.5%, respectively. 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 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 Automotive’s 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 2007, Shenyang Automotive sold a total of 73,415
minibuses and 106,770 Zhonghua sedans and BMW Brilliance sold a total of 32,100 BMW sedans.
Currently, Shenyang Automotive has an annual production capacity of 120,000 units of deluxe and
mid-priced minibuses and 180,000 units of Zhonghua sedans. BMW Brilliance currently has an annual
production capacity of 41,000 units. 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.
24
Shenyang Automotive’s production facilities are located in the industrial city of Shenyang,
the capital of Liaoning Province in northeastern China. Shenyang Automotive’s principal products
are the minibuses and the Zhonghua sedans. Mid-priced minibuses accounted for approximately 22.9%
of the total sales revenue of Brilliance China Automotive in 2007. The deluxe and mid-priced
minibuses are 7 to 15-seat minibuses adapted from Toyota’s 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. Both the 3- and
5-Series sedans reached the requisite domestic component content ratio and received government
approval for import tariff reduction from 25% to 10% in 2007.
In 2007, Shenyang Automotive’s sales volume increased 40.2% from 128,526 units in 2006 to
180,185 units in 2007. The 2007 sales figure comprises 73,415 minibuses and 106,770 Zhonghua
sedans. The increase in overall sales was primarily due to the increase in the sales volume of
minibuses and Zhonghua sedans. In particular, the Junjie model, which was launched in March 2006,
recorded sales of 72,502 units in 2007, compared to 35,367 units sold in 2006. Our joint venture,
BMW Brilliance, sold 32,100 BMW-branded sedans in 2007, compared to 23,600 in 2006. Shenyang
Automotive’s sales in China has been supported by a substantial network of approximately 197
minibus distributors, including approximately 93 exclusive minibus distributors, and approximately
217 sedan distributors, as well as approximately 352 after-sales service centers for minibuses and
approximately 258 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 2007, Shenyang Automotive had approximately 102 4S dealership
outlets for minibuses and approximately 200 4S dealership outlets for Zhonghua sedans nationwide.
For the year ended December 31, 2007, Brilliance China Automotive reported sales of Rmb
14,149.1 million (US$1,939.7 million), representing an increase of approximately 34.9% compared to
2006 and net income of Rmb 83.7 million (US$11.5 million) compared with a net
loss of Rmb 386.1 million in 2006. The increase in sales was primarily due to the increases
in unit sales of Shenyang Automotive’s Zhonghua sedans and minibuses in 2007.
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Principal Products
Shenyang Automotive’s principal products are minibuses and the Zhonghua sedans. Our joint
venture with BMW, BMW Brilliance, also produces BMW 3- and 5-Series sedans.
Shenyang Automotive’s principal minibus products are the deluxe minibus and the mid-priced
minibus, which constituted approximately 9.5% and 22.9% of Brilliance China Automotive’s total
sales revenue in 2007, 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 Automotive’s 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 Automotive’s Zhonghua sedan was introduced to the commercial market in China in
August 2002 and constituted approximately 49.5% and 61.9% of Brilliance China Automotive’s total
sales revenue in 2006 and 2007, 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 “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. In 2007, Shenyang Automotive introduced a new Zhonghua model, the Kubao
coupe, which features a 1.8 liter engine with manual or automatic transmission. The Group’s
self-developed 1.8T engines are now installed in some of the Zunchi and Junjie sedans, as well as
the Kubao coupe. The Junjie FRV was launched in March 2008 and commenced production in June 2008.
The Junjie FRV is a five-seat manual or automatic transmission vehicle with a 4-cylinder, 1.6-liter
engine.
26
The following table sets forth certain information with respect to Shenyang Automotive’s principal
products as of the date of this annual report.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Deluxe |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Minibus |
|
Deluxe |
|
Mid-priced |
|
Zhonghua |
|
Zhonghua |
|
Zhonghua |
|
Zhonghua |
| |
|
(Granse |
|
Minibus |
|
Minibus |
|
Sedan |
|
Sedan |
|
Sedan |
|
Sedan |
| |
|
Model(1)) |
|
(Hiase Model) |
|
(Hiase Model) |
|
Zunchi |
|
Junjie |
|
Kubao Coupe |
|
Junjie FRV |
Maximum
number of
passengers |
|
7-8 |
|
15 |
|
15 |
|
5 |
|
5 |
|
5 |
|
5 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engine type |
|
Toyota 4-
cylinder |
|
Toyota 4-
cylinder |
|
Mianyang
Xinchen |
|
Mitsubishi
4-cylinder 1.8, |
|
Mitsubishi
4-cylinder |
|
Mitsubishi
4-cylinder, |
|
Mitsubishi 4-
cylinder 1.6- |
|
|
2.7-liter |
|
2.4-liter |
|
and Xinguang |
|
2.0 and 2.4- |
|
1.6-liter, 1.8 |
|
1.8-liter |
|
liter gasoline |
|
|
gasoline |
|
gasoline |
|
Brilliance |
|
liter gasoline |
|
and 2.0-liter |
|
gasoline |
|
engine |
|
|
engine and |
|
engine and |
|
4-cylinder |
|
engine and |
|
gasoline |
|
engine and |
|
|
|
|
Mianyang |
|
Mitsubishi |
|
2.2-liter |
|
Shenyang |
|
engine and |
|
Shenyang |
|
|
|
|
Xinchen 2.7- |
|
2.4-liter |
|
gasoline |
|
Brilliance |
|
Shenyang |
|
Brilliance |
|
|
|
|
liter gasoline |
|
gasoline |
|
engine |
|
Power Train |
|
Brilliance |
|
Power Train |
|
|
|
|
engine |
|
engine |
|
|
|
4-cylinder |
|
Power Train |
|
4-cylinder |
|
|
|
|
|
|
|
|
|
|
1.8T gasoline |
|
4-cylinder |
|
1.8T gasoline |
|
|
|
|
|
|
|
|
|
|
engine |
|
1.8T gasoline |
|
engine |
|
|
|
|
|
|
|
|
|
|
|
|
engine |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horsepower
(bhp) |
|
105 |
|
100.6 |
|
92.5 |
|
122-170 |
|
100-173 |
|
136-170 |
|
100 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Price Range in Rmb(2) |
|
119,800-
239,800 |
|
121,800-
156,800 |
|
64,800-
101,800 |
|
105,800-
209,800 |
|
85,800-
157,800 |
|
123,900-
169,500 |
|
65,800 -
83,800 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fuel
Consumption |
|
10 |
|
10 |
|
9.8 |
|
6.5-7.6 |
|
6.2-7.6 |
|
6.0-6.2 |
|
6.2-6.4 |
| (Liters/100
km)(3)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
speed(4) |
|
158 km/hr |
|
130 km/hr |
|
130 km/hr |
|
185 -210 km/hr |
|
180 - 210 km/hr |
|
196 - 220 km/hr |
|
167 - 175 km/hr |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
component
content |
|
85% |
|
90% |
|
100% |
|
94-98% |
|
92-97% |
|
90-99% |
|
90-99% |
| Length |
|
4.79m |
|
4.8m |
|
4.8m |
|
4.88m |
|
4.65m |
|
4.488m |
|
4.21m |
|
|
|
| (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. |
27
The following table sets forth certain information with respect to BMW Brilliance’s principal
products as of the date of this annual report.
| |
|
|
|
|
| |
|
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 |
|
BMW 6-cylinder |
|
|
2.0-liter and 2.5-liter |
|
2.5-liter and 3.0-liter |
|
|
gasoline engines |
|
gasoline engines |
| |
|
|
|
|
| Horsepower |
|
150 - 218 |
|
177-258 |
| (bhp) |
|
|
|
|
| |
|
|
|
|
| Price range in Rmb(1) |
|
339,800-461,000 |
|
472,600-712,600 |
| |
|
|
|
|
| Fuel Consumption |
|
7.9 - 9.0 |
|
9.4 - 9.5 |
(Liters/100 km)(2) |
|
|
|
|
| |
|
|
|
|
| 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 Automotive’s 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 Automotive’s 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 Automotive’s 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.
28
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. In early 2006, Shenyang Automotive
launched the manual transmission model of the minibuses meeting the European III emission
standards.
Currently, Shenyang Automotive’s minibus capacity is 120,000 units per year. Brilliance China
Automotive believes that its long-term interests require that Shenyang Automotive continue to
expand its production capacity. Any increase in Shenyang Automotive’s 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 sedan was Rmb 500 million. In 2007, Shenyang
Automotive introduced the Kubao coupe and in 2008, Shenyang Automotive introduced the Junjie FRV.
The Kubao was designed by Porsche with certain other components (including the coupe’s platform)
being designed by Shenyang Automotive. Kubao received the “silver” prize at the 2007 Northeast
Asia Hi-Tech Fair. Total investment in Kubao was approximately Rmb 292 million. The Junjie FRV
was designed by Italdesign-Giugiaro S.P.A. with certain other components being designed by Shenyang
Automotive. The Junjie FRV received the “Best Independently Developed New Car” award at the 2007
Shanghai Automotive Exhibition. Total investment in the Junjie FRV was approximately Rmb 624
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 Automotive’s 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 has not renewed and
currently has no plans to renew the technical assistance agreement.
29
The following table sets forth Brilliance China Automotive’s revenues by category, for the
years 2005 through 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2006 |
|
2007 |
| |
|
Revenue |
|
|
|
|
|
Revenue |
|
|
|
|
|
Revenue |
|
|
| |
|
(Rmb |
|
|
|
|
|
(Rmb |
|
|
|
|
|
(Rmb |
|
|
| |
|
millions) |
|
% |
|
millions) |
|
% |
|
millions) |
|
% |
Minibus sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deluxe minibus |
|
|
958 |
|
|
|
17.5 |
|
|
|
1,460 |
|
|
|
13.9 |
|
|
|
1,346 |
|
|
|
9.5 |
|
Mid-priced minibus |
|
|
2,989 |
|
|
|
54.7 |
|
|
|
3,020 |
|
|
|
28.8 |
|
|
|
3,239 |
|
|
|
22.9 |
|
Zhonghua sedan |
|
|
863 |
|
|
|
15.8 |
|
|
|
5,190 |
|
|
|
49.5 |
|
|
|
8,755 |
|
|
|
61.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
4,810 |
|
|
|
88.0 |
|
|
|
9,670 |
|
|
|
92.2 |
|
|
|
13,340 |
|
|
|
94.3 |
|
Other sources of income(1) |
|
|
659 |
|
|
|
12.0 |
|
|
|
815 |
|
|
|
7.8 |
|
|
|
809 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,469 |
|
|
|
100.0 |
|
|
|
10,485 |
|
|
|
100.0 |
|
|
|
14,149 |
|
|
|
100.0 |
|
|
|
|
| (1) |
|
Including sales of components and scrap metal. |
30
The following table sets forth the geographic breakdown of Shenyang Automotive’s minibus and
Zhonghua sedan sales revenue throughout China for the years 2005 through 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2006 |
|
2007 |
| |
|
Revenue |
|
|
|
|
|
Revenue |
|
|
|
|
|
Revenue |
|
|
| Province/ |
|
(Rmb |
|
|
|
|
|
(Rmb |
|
|
|
|
|
(Rmb |
|
|
| Municipality |
|
millions) |
|
% |
|
millions) |
|
% |
|
millions) |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing |
|
|
755 |
|
|
|
15.7 |
|
|
|
1,180 |
|
|
|
12.2 |
|
|
|
1,814 |
|
|
|
13.6 |
|
Guangdong |
|
|
529 |
|
|
|
11.0 |
|
|
|
1,057 |
|
|
|
10.9 |
|
|
|
1,494 |
|
|
|
11.2 |
|
Liaoning |
|
|
567 |
|
|
|
11.8 |
|
|
|
1,673 |
|
|
|
17.3 |
|
|
|
1,881 |
|
|
|
14.1 |
|
Shanghai |
|
|
452 |
|
|
|
9.4 |
|
|
|
803 |
|
|
|
8.3 |
|
|
|
814 |
|
|
|
6.1 |
|
Jiangsu |
|
|
283 |
|
|
|
5.9 |
|
|
|
667 |
|
|
|
6.9 |
|
|
|
747 |
|
|
|
5.6 |
|
Zhejiang |
|
|
188 |
|
|
|
3.9 |
|
|
|
474 |
|
|
|
4.9 |
|
|
|
627 |
|
|
|
4.7 |
|
Shandong |
|
|
183 |
|
|
|
3.8 |
|
|
|
522 |
|
|
|
5.4 |
|
|
|
774 |
|
|
|
5.8 |
|
Tianjin |
|
|
115 |
|
|
|
2.4 |
|
|
|
193 |
|
|
|
2.0 |
|
|
|
334 |
|
|
|
2.5 |
|
Heilongjiang |
|
|
82 |
|
|
|
1.7 |
|
|
|
184 |
|
|
|
1.9 |
|
|
|
347 |
|
|
|
2.6 |
|
Hebei |
|
|
87 |
|
|
|
1.8 |
|
|
|
222 |
|
|
|
2.3 |
|
|
|
360 |
|
|
|
2.7 |
|
Hubei |
|
|
82 |
|
|
|
1.7 |
|
|
|
164 |
|
|
|
1.7 |
|
|
|
214 |
|
|
|
1.6 |
|
Hunan |
|
|
96 |
|
|
|
2.0 |
|
|
|
203 |
|
|
|
2.1 |
|
|
|
240 |
|
|
|
1.8 |
|
Shaanxi |
|
|
77 |
|
|
|
1.6 |
|
|
|
163 |
|
|
|
1.7 |
|
|
|
240 |
|
|
|
1.8 |
|
Henan |
|
|
106 |
|
|
|
2.2 |
|
|
|
193 |
|
|
|
2.0 |
|
|
|
334 |
|
|
|
2.5 |
|
Sichuan |
|
|
115 |
|
|
|
2.4 |
|
|
|
221 |
|
|
|
2.3 |
|
|
|
533 |
|
|
|
4.0 |
|
Shanxi |
|
|
72 |
|
|
|
1.5 |
|
|
|
164 |
|
|
|
1.7 |
|
|
|
214 |
|
|
|
1.6 |
|
Fujian |
|
|
63 |
|
|
|
1.3 |
|
|
|
173 |
|
|
|
1.8 |
|
|
|
173 |
|
|
|
1.3 |
|
Jilin |
|
|
72 |
|
|
|
1.5 |
|
|
|
116 |
|
|
|
1.2 |
|
|
|
173 |
|
|
|
1.3 |
|
Chongqing |
|
|
48 |
|
|
|
1.0 |
|
|
|
172 |
|
|
|
1.8 |
|
|
|
200 |
|
|
|
1.5 |
|
Xinjiang |
|
|
63 |
|
|
|
1.3 |
|
|
|
106 |
|
|
|
1.1 |
|
|
|
173 |
|
|
|
1.3 |
|
Yunnan |
|
|
43 |
|
|
|
0.9 |
|
|
|
126 |
|
|
|
1.3 |
|
|
|
213 |
|
|
|
1.6 |
|
Anhui |
|
|
53 |
|
|
|
1.1 |
|
|
|
135 |
|
|
|
1.4 |
|
|
|
187 |
|
|
|
1.4 |
|
Guangxi |
|
|
34 |
|
|
|
0.7 |
|
|
|
77 |
|
|
|
0.8 |
|
|
|
107 |
|
|
|
0.8 |
|
Jiangxi |
|
|
34 |
|
|
|
0.7 |
|
|
|
58 |
|
|
|
0.6 |
|
|
|
67 |
|
|
|
0.5 |
|
Inner Mongolia |
|
|
34 |
|
|
|
0.7 |
|
|
|
107 |
|
|
|
1.1 |
|
|
|
133 |
|
|
|
1.0 |
|
Guizhou |
|
|
19 |
|
|
|
0.4 |
|
|
|
58 |
|
|
|
0.6 |
|
|
|
93 |
|
|
|
0.7 |
|
Hainan |
|
|
106 |
|
|
|
2.2 |
|
|
|
26 |
|
|
|
0.3 |
|
|
|
67 |
|
|
|
0.5 |
|
Other(1) |
|
|
452 |
|
|
|
9.4 |
|
|
|
433 |
|
|
|
4.4 |
|
|
|
787 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,810 |
|
|
|
100.0 |
|
|
|
9,670 |
|
|
|
100.0 |
|
|
|
13,340 |
|
|
|
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%.
31
The registered capital and total investment cost of the joint venture is Euro 150 million and
Euro 450 million, respectively. As of December 31, 2007, 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 venture’s 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 semi-knockdown
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 domestic component content ratio
reaches a prescribed level, the import tariff on BMW Brilliance’s imported components will drop
significantly from 25% to 10%, thereby reducing the overall production costs. The required domestic
component ratio was reached by all of BMW Brilliance’s products and final approval for tariff
reduction from 25% to 10% was granted by the government in 2007.
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
Automotive’s minibuses are produced in this stamping workshop. |
32
| |
• |
|
Welding. The welding workshop consists of 2 production lines and 15 process
conveying lines, among which the Hiase has 8 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 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 production capacity. The painting
workshop has three floors, each with its own function. The 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. In early 2008, the painting workshop began painting the Junjie FRV and added
a new vehicle acceptance and delivery processing line for the Junjie FRV. Eight
additional robotic paint arms were added and various new inspection points were
introduced as part of the painting process. These modifications have enabled the
Junjie FRV to be painted simultaneously with Hiase minibuses and allowed us to reach
production capacity of 100,000 units of Junjie FRV per year. |
| |
| |
• |
|
Assembly. Shenyang Automotive’s 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. |
33
Zhonghua Sedan Production Process and Equipment
| |
• |
|
Stamping. At present, 333 pieces for 236 types of large and medium press parts of
the Zhonghua sedans are produced in the stamping (or pressing) workshop. There are
915 imported and domestically produced molds, six 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 six 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. The line for the Kubao coupe includes various lines for
different parts of the automobile and shares the same adjustment line with the Junjie
and Zunchi, with 93 stations. The two lines are 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. The welding workshop used for the Junjie FRV is situated in a new
building and uses new equipment. The welding workshop contains stud welding, spot
welding and carbon dioxide welding operations. The main production line can produce
three models, with each model having its own assembly workstation where the welding is
conducted by robots. There are currently four robots in use at the Junjie FRV welding
workshop and the SKID apparatus is also used. The Junjie FRV welding production line
has an annual production capacity of 100,000 units. |
| |
| |
• |
|
Painting. Zhonghua sedans and the BMW-branded sedans share the same painting line,
with the exception of the Junjie FRV, which uses the same painting line as Hiase
minibuses. 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 for all
Zhonghua sedans is guided by an information system based on bar code technology. The
layout of the final assembly shop for the Zhonghua sedans (other than the Junjie FRV)
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. The
assembly workshop for the Junjie FRV was reconstructed from a previously existing
painting workshop for Hiase minibuses, with a newly constructed production line. The
equipment for the assembly and testing line is provided by Durr of Germany and Huayuan
Company. Other equipment used in the assembly and testing line for the Junjie FRV
includes equipment produced by Kuka of Germany and Fori Company of the United States.
The Junjie FRV assembly and testing line has an annual production capacity of 100,000
units. |
34
| |
• |
|
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 Group’s quality standards.
| |
• |
|
Welding. The manufacturing and welding process in the welding workshop is performed
according to the BMW Group’s global standard. The dimensional quality is checked with
CMM machines 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 Group’s specialists and the process is controlled pursuant to BMW Group’s
standards. The quality checks and audits are consistent with BMW Group’s standards and
specifications. |
| |
| |
• |
|
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. |
35
| |
• |
|
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 Group’s 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 approximately 320
suppliers in China as of December 2007. 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 2007, approximately 44.8% of Shenyang Automotive’s
components sourcing was handled through Brilliance China Automotive’s subsidiaries and associated
companies.
Steel is the principal raw material for Brilliance China Automotive’s products. Shenyang
Automotive purchases steel predominantly through the use of supply contracts. Since steel
represented only approximately 5.5%, 5.0% and 3.6% of the total cost of goods sold for the Hiase
minibus, Granse minibus and the Zhonghua sedans in 2007, respectively, the impact of rising steel
prices on Shenyang Automotive’s 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 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 90% for the Hiase model
and 85% for the Granse model. Previously, the principal components of the Hiase deluxe model
imported from Toyota were the engines. Shenyang Automotive has developed deluxe minibuses (Hiase
model) 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 Zunchi and Junjie 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 component’s own components that were manufactured
outside China.
36
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 Automotive’s 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 8.7% on imported components used in
both its deluxe minibuses (including Granse minibuses) and Zhonghua sedans in 2007. During 2007,
imported components (including steel) comprised approximately 3.3% of the total cost of sales of
all minibuses. In addition, imported components comprised 0.3% of the total costs of the Zhonghua
sedan during 2007. Changes in foreign currency exchange rates also affect the cost of
foreign-manufactured components imported by China’s domestic manufacturers to make larger
components, such as engines, which we purchase domestically. The total aggregate import tariffs
paid by Shenyang Automotive for 2007 were approximately Rmb 29.7 million (US$4.1 million).
As a result of China’s accession to the WTO, import tariffs on motor vehicle components
decreased and the import tariff on motor vehicle components ranged between 5.0% and 18.6% in 2005,
between 5.0% and 14.3% in 2006 and between 5.0% and 10.0% in 2007. 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
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 Automotive’s and BMW Brilliance’s 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 38.4% of Shenyang Automotive’s purchases of parts and components in 2007. Mianyang Xinchen’s
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
market’s 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 502.1 million in 2007. Shenyang Automotive accounted for 47.7% of Mianyang
Xinchen’s overall sales of engines in 2007. Mianyang Xinchen currently manufactures 491Q, 4G24,
495QF, 4R and 4F18 gasoline engines, as well as 493 and DK4 diesel engines. It sold approximately
55,715 engines in 2007. Mianyang Xinchen’s overall annual sales of engines in 2007 decreased by
12% from 2006. Mianyang Xinchen’s current annual production capacity is 180,000 gasoline engines
and 40,000 diesel engines. Mianyang Xinchen has invested in and built new engine production lines
for its new diesel (code name DK4) and gasoline (code name G10) engines. The DK4 line commenced
production in April 2008 and it is expected that the G10 line will be ready for production in early
2009.
37
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 1.5% of Shenyang Automotive’s purchases of parts and components in
2007. Ningbo Yuming’s principal products are side windows, floor channels and inner window
moldings for minibuses and sedans. Ningbo Yuming had annual sales of Rmb 203.4 million in 2007.
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 and the
E-MARK accreditation in December 2007. Shenyang Automotive, which uses Ningbo Yuming’s products in
all of its deluxe minibuses, mid-priced minibuses and Zhonghua sedans, accounted for approximately
95.2% of Ningbo Yuming’s sales in 2007.
Xinguang Brilliance
Xinguang Brilliance is principally engaged in the manufacture and sale of gasoline engines for
use in passenger vehicles and light duty trucks. In 2007, engine purchases by Shenyang Automotive
for use in mid-priced minibuses accounted for 51% of Xinguang Brilliance’s total sales revenue,
which amounted to Rmb 273.3 million. Xinguang Brilliance currently produces 491Q, 4G20D4 and
4G22D4 gasoline engines and has a production capacity of 80,000 engines per year. It sold
approximately 61,666 gasoline engines in 2007.
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
60,000 units per year. Xinguang Brilliance sold approximately 26,773 4G20D4 and 4G22D4 engines in
2007.
38
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
Automotive’s 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 2007,
99.1% of Xing Yuan Dong’s 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 2007, 96.0% of Ningbo Brilliance Ruixing’s sales
were made to Shenyang Automotive and 50.8% of Ningbo Brilliance Ruixing’s purchases were from
Ningbo Yuming. Beginning in 2001, Ningbo Brilliance Ruixing also began manufacturing automotive
components for Shenyang Automotive. Ningbo Brilliance Ruixing’s 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 2007, 4.2% of Mianyang Brilliance Ruian’s
sales were made to Mianyang Xinchen and 87.4% of Mianyang Brilliance Ruian’s 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.
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 Aerospace’s 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 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 Automotive’s effective interest in Shenyang Jianhua will increase to
71.1% and consequently Brilliance China Automotive’s effective interest in Shenyang Aerospace will
increase to approximately 13.5%.
39
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 2007, Brilliance Dongxing had annual sales of
approximately Rmb 299.3 million and about 99.4% 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.
Shenyang Automotive Engine Plant
In 2004, Shenyang Automotive 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 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.
Production of sedans with 1.8-liter engines began in the second half of 2007.
The engines are mainly manufactured for use in Zhonghua sedans and the minibuses, but are also
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. A total investment
of Rmb 1,085 million has been made during the first phase of development. The second phase is
expected to be completed in 2010 and will require a total investment of approximately Rmb 150
million. The estimated total investment for the third phase is approximately Rmb 290 million. The
intellectual property rights over the engines developed are owned by Brilliance China Automotive.
40
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. The main product of
Shenyang Chenfa is powertrains for Harbin DongAn engines used in the Zhonghua sedan, of which it is
capable of producing 125,000 units of powertrains per year. This line has been in operation since
March 2004. It also has an engine manifold production line and a camshaft production line with a
capacity of 25,000 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 2005 through 2007 the number of
Shenyang Automotive minibuses and sedans and BMW Brilliance sedans sold and the percentage of unit
sales represented by each model:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2006 |
|
2007 |
| |
|
Units |
|
|
|
|
|
Units |
|
|
|
|
|
Units |
|
|
| |
|
Sold |
|
% |
|
Sold |
|
% |
|
Sold |
|
% |
Shenyang Automotive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deluxe minibus |
|
|
9,940 |
|
|
|
14.4 |
|
|
|
14,196 |
|
|
|
11.0 |
|
|
|
13,898 |
|
|
|
7.8 |
|
Mid-priced minibus |
|
|
50,060 |
|
|
|
72.6 |
|
|
|
52,049 |
|
|
|
40.5 |
|
|
|
59,517 |
|
|
|
33.0 |
|
Zhonghua sedan |
|
|
9,000 |
|
|
|
13.0 |
|
|
|
62,281 |
|
|
|
48.5 |
|
|
|
106,770 |
|
|
|
59.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
69,000 |
|
|
|
100.0 |
|
|
|
128,526 |
|
|
|
100.0 |
|
|
|
180,185 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BMW Brilliance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BMW sedan |
|
|
17,501 |
|
|
|
100.0 |
|
|
|
23,600 |
|
|
|
100.0 |
|
|
|
32,100 |
|
|
|
100.0 |
|
41
Shenyang Automotive’s marketing department is divided into two teams: Zhonghua and JinBei,
each supervised by its respective sales manager. Each team’s marketing activities are conducted
primarily through a regionalized sales program divided into six major sales regions, each headed by
an experienced senior executive. Provision of after sales services are also divided into the same
six regions. The Zhonghua team is responsible for the Zhonghua sedans, while the JinBei team is
responsible for the minibuses. The sales network covers about 30 provincial regions. 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 sales. The retail prices
and commission scales are both nationally unified by Shenyang Automotive, thereby preventing
cross-regional sales and price competition. Shenyang Automotive’s 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 97.5% of
Shenyang Automotive’s 2007 unit sales of both minibuses and sedans were made to its distributors
and approximately 2.5% of both were made directly to customers.
Shenyang Automotive’s sales in China have been supported by a substantial network of
approximately 197 minibus distributors, including approximately 93 exclusive minibus distributors,
and approximately 217 sedan distributors, as well as approximately 352 after-sales service centers
for minibuses and approximately 258 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, 2007, Shenyang Automotive had approximately 102 dealership outlets for
minibuses, and approximately 200 dealership outlets for sedans, which had achieved the 4S
dealership standard.
Shenyang Automotive’s minibus and sedan sales were generally made on a cash basis in 2007.
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 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 2007, all finished products were delivered to customers with zero
mileage.
42
The following table sets forth the geographic breakdown of Shenyang Automotive’s minibus and
sedan unit sales throughout China for the years 2005 through 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2006 |
|
2007 |
| |
|
Minibuses |
|
Sedans |
|
Minibuses |
|
Sedans |
|
Minibuses |
|
Sedans |
| Province/Municipality |
|
Units |
|
% |
|
Units |
|
% |
|
Units |
|
% |
|
Units |
|
% |
|
Units |
|
% |
|
Units |
|
% |
Beijing |
|
|
10,395 |
|
|
|
17.3 |
|
|
|
453 |
|
|
|
5.0 |
|
|
|
10,480 |
|
|
|
15.8 |
|
|
|
5,201 |
|
|
|
8.4 |
|
|
|
12,131 |
|
|
|
16.5 |
|
|
|
12,457 |
|
|
|
11.7 |
|
Guangdong |
|
|
7,107 |
|
|
|
11.8 |
|
|
|
467 |
|
|
|
5.2 |
|
|
|
7,959 |
|
|
|
12.0 |
|
|
|
6,114 |
|
|
|
9.8 |
|
|
|
10,586 |
|
|
|
14.4 |
|
|
|
9,553 |
|
|
|
9.0 |
|
Liaoning |
|
|
6,461 |
|
|
|
10.8 |
|
|
|
1,650 |
|
|
|
18.3 |
|
|
|
7,113 |
|
|
|
10.7 |
|
|
|
15,089 |
|
|
|
24.2 |
|
|
|
10,344 |
|
|
|
14.1 |
|
|
|
15,058 |
|
|
|
14.1 |
|
Shanghai |
|
|
6,347 |
|
|
|
10.6 |
|
|
|
141 |
|
|
|
1.6 |
|
|
|
7,509 |
|
|
|
11.3 |
|
|
|
3,130 |
|
|
|
5.0 |
|
|
|
6,577 |
|
|
|
9.0 |
|
|
|
4,519 |
|
|
|
4.2 |
|
Jiangsu |
|
|
3,915 |
|
|
|
6.5 |
|
|
|
138 |
|
|
|
1.5 |
|
|
|
4,899 |
|
|
|
7.4 |
|
|
|
3,934 |
|
|
|
6.3 |
|
|
|
3,919 |
|
|
|
5.3 |
|
|
|
6,120 |
|
|
|
5.7 |
|
Zhejiang |
|
|
2,578 |
|
|
|
4.3 |
|
|
|
88 |
|
|
|
1.0 |
|
|
|
2,955 |
|
|
|
4.5 |
|
|
|
3,319 |
|
|
|
5.3 |
|
|
|
2,798 |
|
|
|
3.8 |
|
|
|
5,735 |
|
|
|
5.4 |
|
Shandong |
|
|
2,313 |
|
|
|
3.9 |
|
|
|
296 |
|
|
|
3.3 |
|
|
|
2,377 |
|
|
|
3.6 |
|
|
|
4,593 |
|
|
|
7.4 |
|
|
|
2,448 |
|
|
|
3.3 |
|
|
|
7,941 |
|
|
|
7.4 |
|
Tianjin |
|
|
1,468 |
|
|
|
2.4 |
|
|
|
185 |
|
|
|
2.1 |
|
|
|
1,596 |
|
|
|
2.4 |
|
|
|
974 |
|
|
|
1.6 |
|
|
|
1,464 |
|
|
|
2.0 |
|
|
|
3,034 |
|
|
|
2.8 |
|
Heilongjiang |
|
|
1,079 |
|
|
|
1.8 |
|
|
|
94 |
|
|
|
1.0 |
|
|
|
1,337 |
|
|
|
2.0 |
|
|
|
1,051 |
|
|
|
1.7 |
|
|
|
1,406 |
|
|
|
1.9 |
|
|
|
3,377 |
|
|
|
3.2 |
|
Hebei |
|
|
1,187 |
|
|
|
2.0 |
|
|
|
44 |
|
|
|
0.5 |
|
|
|
1,621 |
|
|
|
2.5 |
|
|
|
1,387 |
|
|
|
2.2 |
|
|
|
1,545 |
|
|
|
2.1 |
|
|
|
3,422 |
|
|
|
3.2 |
|
Hubei |
|
|
1,136 |
|
|
|
1.9 |
|
|
|
53 |
|
|
|
0.6 |
|
|
|
1,333 |
|
|
|
2.0 |
|
|
|
830 |
|
|
|
1.3 |
|
|
|
1,071 |
|
|
|
1.4 |
|
|
|
1,808 |
|
|
|
1.7 |
|
Hunan |
|
|
1,125 |
|
|
|
1.9 |
|
|
|
275 |
|
|
|
3.1 |
|
|
|
1,141 |
|
|
|
1.7 |
|
|
|
1,510 |
|
|
|
2.4 |
|
|
|
1,098 |
|
|
|
1.5 |
|
|
|
2,224 |
|
|
|
2.1 |
|
Shaanxi |
|
|
958 |
|
|
|
1.6 |
|
|
|
126 |
|
|
|
1.4 |
|
|
|
1,064 |
|
|
|
1.6 |
|
|
|
1,090 |
|
|
|
1.7 |
|
|
|
993 |
|
|
|
1.3 |
|
|
|
1,942 |
|
|
|
1.8 |
|
Henan |
|
|
1,285 |
|
|
|
2.1 |
|
|
|
207 |
|
|
|
2.3 |
|
|
|
1,287 |
|
|
|
1.9 |
|
|
|
1,297 |
|
|
|
2.1 |
|
|
|
1,052 |
|
|
|
1.4 |
|
|
|
3,424 |
|
|
|
3.2 |
|
Sichuan |
|
|
1,007 |
|
|
|
1.7 |
|
|
|
623 |
|
|
|
7.0 |
|
|
|
1,369 |
|
|
|
2.1 |
|
|
|
1,631 |
|
|
|
2.6 |
|
|
|
1,356 |
|
|
|
1.9 |
|
|
|
5,815 |
|
|
|
5.4 |
|
Shanxi |
|
|
922 |
|
|
|
1.5 |
|
|
|
143 |
|
|
|
1.6 |
|
|
|
1,064 |
|
|
|
1.6 |
|
|
|
1,062 |
|
|
|
1.7 |
|
|
|
805 |
|
|
|
1.1 |
|
|
|
2,077 |
|
|
|
1.9 |
|
Fujian |
|
|
824 |
|
|
|
1.3 |
|
|
|
98 |
|
|
|
1.1 |
|
|
|
1,067 |
|
|
|
1.6 |
|
|
|
1,288 |
|
|
|
2.1 |
|
|
|
1,136 |
|
|
|
1.6 |
|
|
|
1,157 |
|
|
|
1.1 |
|
Jilin |
|
|
950 |
|
|
|
1.6 |
|
|
|
55 |
|
|
|
0.6 |
|
|
|
971 |
|
|
|
1.5 |
|
|
|
625 |
|
|
|
1.0 |
|
|
|
1,050 |
|
|
|
1.4 |
|
|
|
1,264 |
|
|
|
1.2 |
|
Chongqing |
|
|
476 |
|
|
|
0.8 |
|
|
|
232 |
|
|
|
2.6 |
|
|
|
909 |
|
|
|
1.4 |
|
|
|
1,364 |
|
|
|
2.2 |
|
|
|
785 |
|
|
|
1.1 |
|
|
|
1,888 |
|
|
|
1.8 |
|
Xinjiang |
|
|
830 |
|
|
|
1.4 |
|
|
|
90 |
|
|
|
1.0 |
|
|
|
693 |
|
|
|
1.0 |
|
|
|
672 |
|
|
|
1.1 |
|
|
|
623 |
|
|
|
0.9 |
|
|
|
1,670 |
|
|
|
1.6 |
|
Yunnan |
|
|
551 |
|
|
|
0.9 |
|
|
|
90 |
|
|
|
1.0 |
|
|
|
841 |
|
|
|
1.3 |
|
|
|
841 |
|
|
|
1.4 |
|
|
|
1,044 |
|
|
|
1.4 |
|
|
|
1,797 |
|
|
|
1.7 |
|
Anhui |
|
|
663 |
|
|
|
1.1 |
|
|
|
101 |
|
|
|
1.1 |
|
|
|
847 |
|
|
|
1.3 |
|
|
|
894 |
|
|
|
1.4 |
|
|
|
711 |
|
|
|
1.0 |
|
|
|
1,921 |
|
|
|
1.8 |
|
Guangxi |
|
|
478 |
|
|
|
0.8 |
|
|
|
30 |
|
|
|
0.3 |
|
|
|
463 |
|
|
|
0.7 |
|
|
|
564 |
|
|
|
0.9 |
|
|
|
336 |
|
|
|
0.5 |
|
|
|
1,099 |
|
|
|
1.0 |
|
Jiangxi |
|
|
396 |
|
|
|
0.7 |
|
|
|
120 |
|
|
|
1.3 |
|
|
|
398 |
|
|
|
0.6 |
|
|
|
428 |
|
|
|
0.7 |
|
|
|
367 |
|
|
|
0.5 |
|
|
|
562 |
|
|
|
0.5 |
|
Inner Mongolia |
|
|
414 |
|
|
|
0.7 |
|
|
|
92 |
|
|
|
1.0 |
|
|
|
619 |
|
|
|
0.9 |
|
|
|
794 |
|
|
|
1.3 |
|
|
|
574 |
|
|
|
0.8 |
|
|
|
1,334 |
|
|
|
1.2 |
|
Guizhou |
|
|
161 |
|
|
|
0.3 |
|
|
|
110 |
|
|
|
1.2 |
|
|
|
276 |
|
|
|
0.4 |
|
|
|
545 |
|
|
|
0.9 |
|
|
|
302 |
|
|
|
0.4 |
|
|
|
1,032 |
|
|
|
1.0 |
|
Hainan |
|
|
1,519 |
|
|
|
2.5 |
|
|
|
31 |
|
|
|
0.3 |
|
|
|
123 |
|
|
|
0.2 |
|
|
|
229 |
|
|
|
0.4 |
|
|
|
745 |
|
|
|
1.0 |
|
|
|
162 |
|
|
|
0.2 |
|
Other(1) |
|
|
3,455 |
|
|
|
5.8 |
|
|
|
2,968 |
|
|
|
33.0 |
|
|
|
3,934 |
|
|
|
6.0 |
|
|
|
1,825 |
|
|
|
2.9 |
|
|
|
6,149 |
|
|
|
8.4 |
|
|
|
4,378 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
60,000 |
|
|
|
100.0 |
|
|
|
9,000 |
|
|
|
100.0 |
|
|
|
66,245 |
|
|
|
100.0 |
|
|
|
62,281 |
|
|
|
100.0 |
|
|
|
73,415 |
|
|
|
100.0 |
|
|
|
106,770 |
|
|
|
100.0 |
|
|
|
|
| (1) |
|
Gansu, Ningxia, Tibet and Qinghai as well as export to other countries. |
Generally, Shenyang Automotive’s 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 government’s policy regarding western China will be conducive to the
development of the local automotive markets. Although Brilliance China Automotive’s 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.
43
Approximately 9.9% of consolidated revenues in 2007 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 Automotive’s products mainly in the
Yangtze River Delta and Shanghai. Shanghai Shenhua operates under substantially the same commercial
terms and arrangements with Shenyang Automotive as its other third party distribution agents. In
addition, Liaoning Zheng Guo Investment Development Company Limited is acting as a regional agent
for the entire range of automobiles manufactured by Shenyang Automotive for certain regions in the
PRC.
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 2007, Shenyang Automotive spent approximately Rmb 152.2 million (US$20.9 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 China Automotive Industry Newsletter, in 2007, approximately 42 manufacturers sold an aggregate
of 179,437 minibuses. The top five manufacturers sold an aggregate of 144,628 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.
The Chinese sedan manufacturing industry is also very competitive and fragmented. According to
the China Automotive Industry Newsletter, the top five brands account for 40.8% of the overall
market based on unit sales volume in 2007. 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 4,726,617 units in 2007, making sedans the largest segment of the Chinese automotive
market, accounting for 53.8% of the overall market. 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 China’s 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.
44
Effective January 1, 2002, the PRC reduced its import tariffs on motor vehicles and automotive
components. As a result, import tariffs on automotive components have decreased, from as high as
120% in January 1992, to 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 addition, in 2005, tariffs became fixed at 30% for all motor
vehicles. These tariffs were further reduced to 28% in January 2006 and 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 Automotive’s 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 Motor
Industry Corporation, 50% owned by Fujian Motor Industry Group Company and 25% owned
by Mitsubishi Motors Corporation. 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 China’s Light Car Market Analysis Association, Southeast Motors’
sales volume in 2007 was 14,406 minibuses, representing a 90.7% increase from 7,555
minibuses in 2006. Delica series includes seven-, eight- and eleven-seat ordinary,
luxury and super luxury models and is currently priced between Rmb 79,800 to Rmb
199,800. |
| |
| |
• |
|
Nanjing Iveco. In 1996, Italy’s 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 2007,
Nanjing Iveco sold 24,900 vehicles, representing an 24.1% increase from 20,060
minibuses in 2006. Its minibuses are currently priced between Rmb 99,900 to Rmb 256,000. |
| |
| |
• |
|
Jiangling Motors. Jiangling Motors Co., Ltd. of Jiangxi Province was established in
1993. Its second largest shareholder is currently Ford Motor Company in the United
States. 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 2007, Jiangling Motors sold a total
of 26,576 minibuses, representing a 15.4% increase from 23,029 vehicles in 2006.
Production capacity was approximately 100,000 per year. Its minibuses are currently
priced between Rmb 114,800 to Rmb 193,600. |
45
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 2.4 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 government’s showcase PRC-made sedans. First Auto
Works introduced the Besturn 2.0-liter and 2.3-liter sedans in August 2006, with
selling prices from Rmb 129,800 to Rmb 208,800. According to the monthly report issued
by China’s Association of National Passenger Vehicle Market Information, First Auto
Works sold 23,279 Besturn sedans in 2007, compared to 5,930 Besturn sedans sold from
August 2006 to December 2006. |
| |
| |
• |
|
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 96,800 to Rmb 118,800. According to the monthly report issued by
China’s Association of National Passenger Vehicle Market Information, in 2007,
Shanghai Volkswagen Automotive sold 101,769 units of Santana 3000 sedans representing
a 23.2% increase from the 82,617 units in 2006. |
| |
| |
• |
|
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 123,800 to Rmb 161,800. The Elantra 1.8-liter sedan sells for
approximately Rmb 112,500 to Rmb 122,500. According to the monthly report issued by
China’s Association of National Passenger Vehicle Market Information, in 2007, Beijing
Hyundai sold 25,566 units and 120,606 units of the Sonata 2.0-liter and the Elantra, respectively,
representing a decrease of 31.1 % and 28.9%, respectively, from that of 37,095 and
169,716 respectively, in 2006. |
Brilliance China Automotive believes that the Kubao coupe currently does not have domestic
competitors. Although MG has announced plans to produce coupes with 1.8-liter engines ranging from
Rmb 250,000 to Rmb 266,000, sales have not yet begun. Kubao’s main foreign competitor is Hyundai
Motor Co.’s 2.0-liter FX coupe with a sales price of approximately Rmb 183,800. According to the
Cheliang Guanli Suo of the PRC (the Vehicle Management Station of the PRC), 3,466 units of the FX
coupe were sold in the PRC in 2007.
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.
46
| |
• |
|
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 Volkswagen’s Audi
sedans have a dominant share of the PRC’s premium sedan market because of its strong
sales to the PRC government. FAW Volkswagen sold 61,686 and 73,404 units of Audi A6
sedans in 2006 and 2007, respectively. The Audi A4 sedan was formally launched in the
PRC market in 2003 and had a total sales volume of 15,536 and 19,764 in 2006 and 2007,
respectively. A new Audi A6 was launched in June 2005. The Audi A4 sedan currently
sells for between Rmb 274,900 and Rmb 343,400, and the new Audi A6 sedan sells for
between Rmb 347,200 and Rmb 853,300. |
| |
| |
• |
|
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
498,000 and Rmb 638,000 in the PRC. The vehicles are produced in a new facility in
Beijing with initial production capacity of 20,000 units per year. The domestically
produced C-Class sedan was launched in March 2008 in the PRC, and currently sells for
between Rmb 378,000 and Rmb 478,000. |
| |
| |
• |
|
Lexus. Lexus sedans are imported from Japan by Toyota Motor (China) Investment Co.,
Ltd. In 2007, the sales volume of Lexus in China was 28,839 units. The new IS and ES
models were introduced into the PRC in August 2006 and sales of these two models in
2007 was 19,837 units. The ES350 currently sells for between Rmb 472,000 and Rmb 552,000 and the IS300 currently sells
for between Rmb 435,000 and Rmb 515,000. |
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 policy’s 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.
47
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 PRC’s 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.
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.
48
In 2007 and 2008, the PRC government issued various policies regarding automobile emissions
and fuel consumption. In addition, measures were also introduced to regulate certain battery
powered or hybrid powered electric vehicles, also known as alternative fuel vehicles. Effective
November 1, 2007, there will not be any special regulations governing advanced or developed
technology alternative fuel vehicles. However, the initial production of early-stage alternative
fuel vehicles will be strictly regulated, with restrictions on the quantity, geographic area and
terms of production. In addition, although the production of alternative fuel vehicles using
developing technologies are permissible, the use of such products will be subject to certain
limitations.
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 Automotive’s specialized quality control
engineers are present at each step of the production process, with 38, 35 and 30 separate quality
inspection points for Hiase minibuses, 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 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 China’s 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 268 of Shenyang Automotive’s approximately 320 component suppliers have achieved
TS16949 certification and approximately 53 are accredited by ISO-9000.
49
After-Sales Service
In 2007, Shenyang Automotive’s 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. Since 2006, Junjie sedans and, since 2007, Kubao coupes were
sold with a 36-month or 60,000 kilometers first-to-occur limited warranty. In 2007, total warranty
costs for minibuses and sedans sold during the year were approximately Rmb 29.8 million (US$4.1 million) and Rmb 44.2 million (US$6.1 million),
respectively.
There are approximately 352 and approximately 258 service centers for Shenyang Automotive
minibuses and sedans 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 2007, Shenyang Automotive had approximately 102 and
approximately 200 4S dealership outlets for its minibuses and sedans.
BMW Brilliance currently has over 90 distributors, which are mainly located in first tier
cities in China. The number of distributors is expected to increase to over 120 by the end of
2008. 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 Automotive’s and BMW Brilliance’s 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 Automotive’s or BMW Brilliance’s 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.
50
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 Automotive’s 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 Automotive’s mid-priced minibuses. With the installation of this
engine in the mid-priced minibus, currently all of Shenyang Automotive’s 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. Since
March 2007, all the Zhonghua sedans, Granse minibuses, Hiase minibuses and BMW sedans met the
European III emission standards. Currently, some Zhonghua sedans, Granse minibuses and Hiase
minibuses meet the European IV emission standards.
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 BMW’s 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, 2007:
| |
|
|
|
|
|
|
| |
|
|
|
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 Co., 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 |
% |
51
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.
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 Automotive’s and BMW
Brilliance’s production facilities. Shenyang Automotive’s minibus facility currently has a
production capacity of 120,000 minibuses. 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 120,000 units. The welding and painting
workshops currently have annual production capacities of 120,000 units.
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 Automotive’s 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.” In early 2008, production lines were added to Shenyang Automotive’s
manufacturing facilities to enable the production of the Junjie FRV.
52
Certain workshops in these 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 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.
53
Overview
Brilliance China Automotive is a holding company. Prior to 2002, Brilliance China Automotive’s
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 Automotive’s 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 Automotive’s activities are
conducted predominantly in China. Accordingly, no geographical segmentation analysis is provided.
Prior to May 1998, Brilliance China Automotive’s sole operating asset was its interest in
Shenyang Automotive. As a result, Brilliance China Automotive’s historical results of operations
had been primarily driven by the sales price, sales volume and cost of production of Shenyang
Automotive’s 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 Automotive’s
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.
For additional information on the history and development of Brilliance China Automotive, see
“Item 4 — Information on the Company — History and Development of Brilliance China Automotive.”
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 Automotive’s 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.
54
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, 2007, none
of the bonds had been repurchased, redeemed or converted into ordinary shares of Brilliance China
Automotive. Pursuant to the terms of the bonds, the initial conversion price of HK$1.93 was
adjusted to HK$1.53, or approximately 79.3% of the initial conversion price, with effect from March
10, 2008. Apart from the adjustment, no changes were made to the terms of the bonds.
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, 2007 and 2006 was Rmb
14,149.1 million and Rmb 10,484.8 million, respectively. The increase in sales was primarily due to
increases in unit sales of Shenyang Automotive’s Zhonghua sedans and minibuses in 2007.
The mid-priced minibus continues to be one of Brilliance China Automotive’s most popular and
competitive products. Despite increasing competition in China’s automobile industry, Brilliance
China was able to maintain its position as the market leader in the minibus market in 2007. Sales
of deluxe minibuses, mid-priced minibuses, Zhonghua sedans and components represented 9.5%, 22.9%,
61.9% and 5.7%, respectively, of Brilliance China Automotive’s total sales revenue in 2007.
Brilliance China Automotive expects that the minibuses, together with the Zhonghua sedans, will continue
to represent a significant proportion of its total revenue.
55
Costs and Expenses
The major elements of Shenyang Automotive’s 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
minibuses and sedans. As a result, average per unit production costs (including depreciation and
amortization) for the deluxe minibuses 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 2007, total cost of sales increased by 31.0% compared to 2006, primarily due to the
increase in unit sales of both the Zhonghua sedans and minibuses. However, in 2007, the average
per unit production costs for the Zhonghua sedans and minibuses decreased compared to 2006, mainly
as a result of an improvement in production efficiency together with a decrease in unit cost of
components as a result of economies of scale. As a result, our overall gross profit margin
improved from 5.0% in 2006 to 7.8% in 2007.
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 China’s accession to the WTO in November 2001, import duties on automotive components
decreased and were between 5% and 18.6% in 2005, between 5.0% and 14.3% in 2006 and between 5.0%
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, and to 8.7% on imported components for both deluxe minibuses and Zhonghua
sedans in 2007.
Shenyang Automotive has successfully increased the domestic component content of its products
over the past few years, while at the same time maintaining quality. For example, in 2007, the
domestic component content was 90% for the deluxe Hiase minibus, 100% for the mid-price Hiase
minibus, 85% for the Granse minibus, 97% for manual transmission Junjie sedans (92% for automatic
transmission) and 98% for manual transmission Zunchi sedan (94% for automatic transmission). While
Shenyang Automotive will continue its efforts to increase the domestic component content, future
improvements in domestic component content for its existing mid-priced and deluxe minibuses (other
than the Granse model) is expected to 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 Automotive expects to increase the ratio of domestic components in the Granse
minibus and the Zhonghua sedan. BMW Brilliance has reached the required domestic component ratio
for all of its products and has received final government approval for tariff reduction from 25% to
10% in 2007.
56
Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
| |
|
2007 |
|
2006 |
|
2005 |
| |
|
(Rmb thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to third parties |
|
|
10,994,675 |
|
|
|
9,067,505 |
|
|
|
3,859,151 |
|
Sales to affiliated companies |
|
|
3,154,474 |
|
|
|
1,417,249 |
|
|
|
1,609,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
|
14,149,149 |
|
|
|
10,484,754 |
|
|
|
5,468,990 |
|
Cost of sales |
|
|
(13,049,107 |
) |
|
|
(9,960,587 |
) |
|
|
(5,011,955 |
) |
Gross profit |
|
|
1,100,042 |
|
|
|
524,167 |
|
|
|
457,035 |
|
Selling, general and administrative expenses |
|
|
(1,535,695 |
) |
|
|
(1,384,718 |
) |
|
|
(1,195,336 |
) |
Interest expense |
|
|
(203,263 |
) |
|
|
(177,001 |
) |
|
|
(182,354 |
) |
Interest income |
|
|
125,470 |
|
|
|
90,738 |
|
|
|
60,189 |
|
Equity in earnings of associated companies and
jointly controlled entities, net |
|
|
192,261 |
|
|
|
149,320 |
|
|
|
48,995 |
|
Subsidy income |
|
|
140,081 |
|
|
|
50,176 |
|
|
|
3,139 |
|
Other income, net |
|
|
179,706 |
|
|
|
106,150 |
|
|
|
43,650 |
|
Impairment loss on intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(173,000 |
) |
Impairment loss on goodwill(1) |
|
|
— |
|
|
|
(73,343 |
) |
|
|
(257,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) before taxation and minority interests |
|
|
(1,398 |
) |
|
|
(714,511 |
) |
|
|
(1,195,402 |
) |
(Provision) for income taxes |
|
|
(45,208 |
) |
|
|
(47,879 |
) |
|
|
(101,884 |
) |
Minority interests |
|
|
130,332 |
|
|
|
376,282 |
|
|
|
625,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
83,726 |
|
|
|
(386,108 |
) |
|
|
(671,289 |
) |
|
|
|
| (1) |
|
In 2006, an impairment loss on goodwill of Rmb 73.3
million in relation to one of Brilliance China
Automotive’s jointly controlled entities was
recognized. |
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Total sales of Brilliance China Automotive in the year ended December 31, 2007 were Rmb
14,149.1 million (US$1,939.7 million), representing a 34.9% increase from Rmb 10,484.8 million in
2006. The increase in total sales from 2006 to 2007 was primarily due to increases in unit sales
of Shenyang Automotive’s Zhonghua sedans and minibuses.
Total sales of the minibuses and automotive components segment were Rmb 5,394.3 million
(US$739.5 million) in the year ended December 31, 2007, representing a 1.9% increase from Rmb 5,295
million in 2006. Sales of the Zhonghua sedans were 8,754.8 million (US$1,200.2 million) in the
year ended December 31, 2007, representing a 68.7% increase from Rmb 5,190.1 million in 2006.
Shenyang Automotive sold 73,415 minibuses in 2007, representing a 10.8% increase from 66,245
minibuses sold in 2006. Of these minibuses sold, 59,517 were mid-priced minibuses, representing a
14.3% increase from 52,049 units sold in 2006. Unit sales of deluxe minibuses decreased slightly
by 2.1% from 14,196 units in 2006 to 13,898 units in 2007. Shenyang Automotive sold 106,770 Zhonghua sedans in 2007, representing a 71.4%
increase from 62,281 sedans sold in 2006. 33,689 units of the Zhonghua Zunchi model were sold in
2007, representing a 25.2% increase from 26,914 units for 2006. The Junjie model, which was
launched in March 2006, recorded sales of 72,502 units during the year, compared to 35,367 units
sold during the period from March to December 2006. The new Kubao coupe model was launched in
September 2007 and recorded sales of 579 units in the last quarter of the year.
Cost of sales increased 31.0% from Rmb 9,960.6 million in 2006 to Rmb 13,049.1 million
(US$1,788.9 million) in 2007. The increase was primarily due to the increase in the unit sales of
both the Zhonghua sedans and minibuses. The average unit cost for both the Zhonghua sedans and
minibuses decreased in 2007, mainly due to the improvement in production efficiency together with
the decrease in unit cost of components as a result of economies of scale. As a result, our
overall gross profit margin improved from 5.0% in 2006 to 7.8% in 2007.
57
Selling, general and administrative expenses increased by 10.9% from Rmb 1,384.7 million,
representing 13.2% of sales in 2006, to Rmb 1,535.7 million (US$210.5 million), representing 10.9%
of sales in 2007. 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 Zhonghua sedans and minibuses during the year. The selling, general
and administrative expenses as a percentage of turnover decreased in 2007 as a result of higher
Zhonghua sedan and minibus sales volume achieved in 2007.
Interest expense net of interest income decreased by 9.8% from Rmb 86.3 million in 2006 to Rmb
77.8 million (US$10.7 million) in 2007, resulting mainly from higher interest income earned from
bank deposits and reduced short-term borrowings from last year.
Net equity in earnings of associated companies and jointly controlled entities increased by
28.8% from Rmb 149.3 million in 2006 to Rmb 192.3 million (US$26.4 million) in 2007. This increase
was mainly attributable to the increased profits contributed by BMW Brilliance, our 49.5%
indirectly owned jointly controlled entity. Net profits contributed by BMW Brilliance increased by
33.3% from Rmb 106.7 million in 2006 to Rmb 142.2 million (US$19.5 million) in 2007. The BMW joint
venture achieved sales of 32,100 BMW sedans in 2007, an increase of 36.0% as compared to 23,600 BMW
sedans sold in 2006.
Subsidy income increased from Rmb 50.2 million in 2006 to Rmb 140.1 million (US$19.2 million)
in 2007. The increase was mainly due to the receipt of a new government grant by a subsidiary in
2007.
Other income net of expenses increased by 69.2% from Rmb 106.2 million in 2006 to Rmb 179.7
million (US$24.6 million) in 2007. The increase was primarily due to increases in foreign exchange
gains.
No impairment loss on goodwill was provided for the year ended December 31, 2007 compared to a
provision of Rmb 73.3 million in 2006. The 2006 impairment loss was related to one of Brilliance
China Automotive’s jointly controlled entities.
Loss before taxation and minority interests decreased 99.8% from Rmb 714.5 million in 2006 to
Rmb 1.4 million (US$0.2 million) in 2007. Taxation decreased by 5.6% from Rmb 47.9 million in 2006
to Rmb 45.2 million (US$6.2 million) in 2007, resulted mainly from utilization of previously
unrecognized tax losses.
We
recognized other comprehensive income of Rmb 33.7 million
(US$4.6 million) in 2007, comprising of the fair value
adjustment for securities available-for-sale and the share of a
jointly controlled entity’s fair value adjustment for hedging
derivatives in the amount of Rmb 2.4 million
(US$0.3 million) and Rmb 31.3 million
(US$4.3 million), respectively. The fair value adjustment for
securities available-for-sale during the year represents an increase
of 118.2% from Rmb 1.1 million in 2006.
As
a result, we recorded comprehensive income of Rmb 117.4 million
(US$16.1 million) in 2007 as
compared with a comprehensive loss of Rmb 385.1 million in 2006.
58
Basic earnings and dilutive earnings per ADS amounted to Rmb 2.28 (US$0.31) and Rmb 2.27
(US$0.31), respectively, in 2007, as compared to basic and dilutive losses per ADS of Rmb 10.53 in
2006.
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 Automotive’s 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.
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 did not 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 Zhonghua 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.
59
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 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
Automotive’s sales of scrap materials and rental income.
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.
We recognized income of Rmb 1.1 million (US$0.1 million) under other comprehensive income
compared to a loss of Rmb 27.2 million under other comprehensive loss, representing the fair value
adjustment for securities available-for-sale during the year.
As a result, Brilliance China Automotive recorded a comprehensive loss of Rmb 385.1 million
(US$49.3 million) in 2006, compared with a comprehensive loss of Rmb 698.5 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.
Contingent Liabilities and Outstanding Guarantees
As of December 31, 2007, Brilliance China Automotive and its subsidiaries had provided the
following guarantees:
60
| |
• |
|
Corporate guarantees of approximately Rmb 60 million (US$8.2 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. Default by Shanghai Shenhua and its affiliated companies
is considered remote by management and therefore no provision for the guarantor’s
obligation under the guarantee was recorded as of December 31, 2007. |
| |
| |
• |
|
Corporate guarantees of bank loans amounting to Rmb 200 million (US$27.4 million),
which is also the maximum potential amount of future payments under the guarantee as
of December 31, 2007, drawn by JinBei. Bank deposits of Rmb 213 million (US$29.2
million) were pledged as a collateral for the corporate guarantees. However, default
by JinBei is considered remote by management and therefore no provision for the
guarantor’s obligation under the guarantee was recorded as of December 31, 2007. |
See also “Item 8 — Financial Information — Legal Proceedings” for a discussion of potential
contingent liabilities relating to legal proceedings.
Liquidity and Capital Resources
The following table set forth our outstanding contractual and commercial commitments as of
December 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payment due by period |
| |
|
(Rmb thousands) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
than 5 |
| Contractual Obligations |
|
Total |
|
1 year |
|
1-3 years |
|
4-5 years |
|
years |
Notes payable (1) |
|
|
2,828,373 |
|
|
|
2,828,373 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Notes payable to affiliated companies (2) |
|
|
207,774 |
|
|
|
207,774 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Convertible bonds (3) |
|
|
1,752,233 |
|
|
|
— |
|
|
|
1,752,233 |
|
|
|
— |
|
|
|
— |
|
Financing from BMW Brilliance (4) |
|
|
174,373 |
|
|
|
40,601 |
|
|
|
16,445 |
|
|
|
20,481 |
|
|
|
96,846 |
|
Operating lease obligations (relating to
offices and property) |
|
|
66,519 |
|
|
|
16,367 |
|
|
|
10,464 |
|
|
|
8,392 |
|
|
|
31,296 |
|
Unconditional purchase obligations |
|
|
718,733 |
|
|
|
718,733 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
5,748,005 |
|
|
|
3,811,848 |
|
|
|
1,779,142 |
|
|
|
28,873 |
|
|
|
128,142 |
|
|
|
|
| (1) |
|
Approximately Rmb 0.8 billion of the Rmb 2.8 billion notes payable had effective interest
rates of 3% to 4%. The remaining Rmb 2 billion notes payable were interest-free. |
| |
| (2) |
|
Notes payable to affiliated companies are non-interest bearing. |
61
|
|
|
| (3) |
|
Included in the amount is a total accreted redemption premium payable on June 7, 2009 of
approximately Rmb 327.4 million (US$ 44.9 million). The accreted redemption premium as of
December 31, 2007 of approximately Rmb 162.3 million (US$ 22.2 million) was calculated based
on the outstanding principal of the convertible bonds using the effective interest method. |
| |
| (4) |
|
Accrued interest of approximately Rmb 68.0 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, 2007, Brilliance China Automotive and its subsidiaries had Rmb 1,373.4
million in cash and cash equivalents, Rmb 518.0 million in short-term bank deposits and Rmb 1,971.7
million in pledged short-term bank deposits, a decrease of Rmb 94.7 million, a decrease of Rmb 98.8
million and an increase of Rmb 346.6 million from its positions as of December 31, 2006,
respectively. The decrease in cash and cash equivalents during that period was mainly due to an
increase in notes payable which necessitated an increase in pledged deposits.
Brilliance China Automotive had notes payable of Rmb 3,036.1 million and outstanding
short-term bank borrowings of Rmb 370.0 million, but had no long-term bank borrowings outstanding
as of December 31, 2007.
For the year ended December 31, 2007, Brilliance China Automotive recorded net cash provided
by operating activities of Rmb 1,338.4 million (US$183.5 million), an increase of Rmb 192.8 million
from the amount of Rmb 1,145.6 million net cash provided by operating activities in 2006. The
increase was primarily due to:
| |
• |
|
a net profit of Rmb83.7 million (US$11.5 million) in 2007 compared to a net loss of
Rmb 386.1 million in 2006; and |
| |
| |
• |
|
an increase in notes and accounts payable in the amount of Rmb 2,689.1 million
(US$368.6 million) for the year ended December 31, 2007, as compared to an increase of
Rmb 1,487.9 million for the year ended December 31, 2006. |
Net cash used in investing activities amounted to Rmb 566.8 million (US$77.7 million) in 2007,
a decrease of Rmb 1,081.6 million from Rmb 514.8 million of net cash provided by investing
activities in 2006. The decrease was primarily attributable to the
increase in pledged short-term
deposits of Rmb 346.5 million in 2007 (US$47.5 million)
compared to a decrease of Rmb 307.5
million in 2006, an increase in short-term bank deposits of Rmb 98.8 million in 2007 (US$13.5 million) compared to Rmb 437.0 million in 2006,
and a decrease of dividend income to Rmb 21.0 million in 2007 (US$2.8 million) from Rmb 81.0
million in 2006.
62
Net cash used in financing activities amounted to Rmb 866.2 million (US$118.7 million) in
2007, as compared to net cash used in financing activities of Rmb 1,035.7 million in 2006. This
decrease in cash used in financing activities is primarily attributable to Rmb 880.0 million in
notes payable in 2007 (US$120.6 million) compared to Rmb 1,002.5 million in 2006, a net cash
outflow of Rmb 169.0 million in respect of the redemption of old convertible bonds and issue of new
convertible bonds in 2006 but not in 2007, and receipt of government grants of Rmb 112.1 million in
2007 (US$15.4 million) compared to Rmb 30.0 million in 2006. The decrease in cash used in
financing activities was partially offset by a smaller increase in amounts due to affiliated
companies to Rmb 30.0 million in 2007 (US$4.1 million) from
Rmb 102.5 million in 2006, and an
increase in net repayment of bank loans of Rmb 130.0 million in 2007 (US$17.8 million) from Rmb 3.5
million in 2006.
Debt Changes
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, 2007, none
of the bonds had been repurchased, redeemed or converted into ordinary shares of Brilliance China
Automotive.
Pursuant to the terms of the convertible bonds, the initial conversion price of HK$1.93 was
adjusted to HK$1.53, or approximately 79.3% of the initial conversion price, with effect from March
10, 2008. Apart from this adjustment, no change was made to the terms of the convertible bonds.
Following this adjustment, the maximum number of ordinary shares that may be issued by Brilliance
China Automotive upon full conversion of the convertible bonds based on the adjusted conversion
price of HK$1.53 will be 925,484,964 ordinary shares.
In 2007, Brilliance China Automotive continued to maintain credit facilities with banks to
finance its working capital needs. As of December 31, 2007, direct bank borrowings and bank notes
payable decreased by 27.1% to Rmb 3,406.1 million (US$466.9 million), a decrease of Rmb 0.7 million
from Rmb 2,679.2 million as of December 31, 2006. The bank loans and bank notes payable were
either secured by pledged short-term bank deposits or notes receivables, or unsecured, with
maturity periods of less than one year. Brilliance China Automotive believes that it will continue
to have access to sufficient bank facilities to meet its working capital requirements.
63
Capital Expenditures
Capital expenditures and operating expenses are funded by internal resources, loans and notes
payable borrowed by Shenyang Automotive from third parties. Brilliance China Automotive’s capital
expenditures were Rmb 308.4 million (US$ 42.3 million) in 2007, an increase of Rmb 4.3 million from
Rmb 304.2 million in 2006. Major items of expenditure included costs of building and expanding
production facilities, costs of purchasing production equipment for the Junjie FRV, Hiase and new
version of the Junjie sedan, and of building the stamping facilities.
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 3,000.0 million,
US$15.0 million and Euro 500.0 million to purchase imported equipment and components from Toyota of
Japan, BMW of Germany and other overseas suppliers for its minibuses and sedans in 2008. This
estimate is based upon the 2008 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 2008. Brilliance China Automotive believes that
it will be able to obtain adequate amounts of foreign currency to meet its planned requirements for
2008. In 2007, Brilliance China Automotive received approximately Rmb 341.4 million from its sale
of products to the Middle East, Russia and Europe. Under 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.
Exchange rate fluctuations may have a material effect on the financial performance of BMW
Brilliance. BMW Brilliance has entered into hedging transactions through exchange contracts for a
majority of its Euro-denominated requirements in order to minimize foreign exchange risks.
Research and Development, Patents and Licenses, etc.
During 2005, 2006 and 2007, Brilliance China Automotive spent Rmb 235.2 million, Rmb 214.0
million and Rmb 402.8 million, respectively, on research and development activities. 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. In
2007, these amounts were primarily used for research and development of new engines, and the Junjie
FRV, Kubao coupe and other models that we may consider producing.
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:
| |
• |
|
Increased Demand for Motor Vehicles. The rate of increase in China’s 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 China’s gross domestic product. This trend is expected to have a
favorable impact on Brilliance China Automotive’s sales volume for both minibuses and
sedans. |
64
| |
• |
|
Competition. As a result of China’s 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. |
| |
| |
• |
|
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
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
Automotive’s sales revenue and profits. |
| |
• |
|
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
China’s 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. |
65
| |
• |
|
Improvements in China’s 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 China’s infrastructure
will likely add to demand for automobiles. |
| |
| |
• |
|
Rising Fuel Prices. China’s fuel prices reached historical heights in June 2008
and may continue to increase. Any further increases in fuel prices will likely have a
negative influence on Brilliance China Automotive’s sales volume. |
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on financial condition, changes in financial condition, revenues or
expenses results of operations, liquidity, capital expenditures or capital resources that is
material to investors.
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 Automotive’s consolidated financial statements have been prepared in
accordance with US GAAP. Brilliance China Automotive’s 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
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 management’s 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.
66
Sales represent the invoiced value of goods, net of consumption tax, discounts and returns.
Sales are recognized when goods are received by customers and there is evidence of a final
arrangement, there are no uncertainties surrounding acceptance, collectibility of the sales is
reasonably assured and the price has been fixed. At the point of receipt of goods, 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 Automotive’s minibuses are sold with a 24-month or 50,000 kilometers first-to-occur
limited warranty. The Zhonghua sedans, which includes the Zunchi, Junjie, Kubao coupe and Junjie
FRV models, 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 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.
67
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 July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a two-step approach for recognizing
and measuring tax positions taken or expected to be taken in a tax return. Prior to recognizing the
benefit of a tax position in the financial statements, the tax position must be
more-likely-than-not of being sustained based solely on its technical merits. Once this recognition
threshold has been met, tax positions are recognized at the largest amount that is
more-likely-than-not to be sustained. The adoption of FIN 48 did not impact Brilliance China Automotive’s financial
position and net earnings.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS
157 defines fair value, establishes a framework for measuring fair value, and expands disclosure
requirements regarding fair value measurement. This statement simplifies and codifies fair value
related guidance previously issued and is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. The
adoption of the statement has no material impact on Brilliance China Automotive’s financial
statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of SFAS No. 115” (“SFAS 159”), which permits
companies to measure many financial instruments and certain other assets and liabilities at fair
value on an instrument-by-instrument basis (the fair value option). SFAS 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The adoption of the statement has no material impact on Brilliance
China Automotive’s financial statements.
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements” (“SFAS 160”). SFAS 160 requires all entities to report non-controlling
(minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS 160
requires that transactions between an entity and non-controlling interests are treated as equity
transactions. SFAS 160 is effective for fiscal years beginning after December 15, 2008. Brilliance
China Automotive is currently evaluating the effect of SFAS 160 on its consolidated financial
statements and results of operation and is currently not yet in a position to determine such
effects.
68
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
141R”), to improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a business combination
and its effects. This Statement applies to all transactions or other events in which an entity
obtains control of one or more businesses, and combinations achieved without the transfer of
consideration. SFAS 141R applies prospectively to business combinations with an acquisition date on
or after December 15, 2008. An earlier adoption is not permitted. Brilliance China Automotive is
still considering the impact of SFAS 141R, if any, which will depend on the nature and size of
business combinations Brilliance China Automotive consummates after the effective date to its
financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
The directors and senior executive officers of Brilliance China Automotive as of the date of
this annual report are identified below.
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Year First |
| |
|
|
|
|
|
Elected or Appointed |
| Name |
|
Age |
|
Position |
|
Director or Officer |
Executive Directors |
Wu Xiao An |
|
46 |
|
Chairman of the Board and Executive Vice President |
|
|
1994 |
|
Qi Yumin |
|
48 |
|
President and Chief Executive Officer |
|
|
2006 |
|
He Guohua |
|
57 |
|
Director |
|
|
2005 |
|
Wang Shiping |
|
51 |
|
Director |
|
|
2005 |
|
Lei Xiaoyang |
|
51 |
|
Director and Chief Financial Officer(1) |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
Independent Non-Executive Directors |
Xu Bingjin |
|
68 |
|
Director |
|
|
2003 |
|
Song Jian |
|
51 |
|
Director |
|
|
2004 |
|
Jiang Bo |
|
48 |
|
Director |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Others |
Huang Yu |
|
34 |
|
Qualified Accountant |
|
|
2007 |
|
|
|
|
| (1) |
|
Mr. Lei Xiaoyang was redesignated as an executive director effective June 2005 and has been
the Chief Financial Officer since October 2006. |
69
Executive Directors
Mr. WU Xiao An (also known as Mr. Ng Siu On), age 46, 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 48, 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 DHI•DCW 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 Dalian Committee of the National People’s Congress of the PRC and a member of the Liaoning
Provincial Committee of the Chinese People’s Political Consultative Conference. Mr. Qi holds a
Bachelor’s Degree in Engineering Science from Xi’an University of Technology and a Master’s Degree in Business Administration from Dalian
University of Technology.
Mr. HE Guohua, age 57, 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 51, has been an executive director of Brilliance China Automotive since
September 2005. Mr. Wang is currently 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 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 51, 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
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 Chief Financial Officer of Shenyang Automotive from April 2006 to
June 2008, and 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.
70
Independent Non-Executive Directors
Mr. XU Bingjin, age 68, has been an independent non-executive director of Brilliance China
Automotive since June 2003. Mr. Xu is currently the President of The Association of Sino-European
Economic and Technical Cooperation. He was formerly an Assistant Minister of The Ministry of Foreign Economic and Trade Cooperation, the Deputy
Director of the Office of National Mechanic and Electronic Products Importation and Exportation and
the Vice President 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 51, 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 Vice Director of the National Laboratory in
Automotive Safety and Energy and an advisor to the Beijing Government in Science and Technology.
He was formerly the Deputy Dean of the Automotive Engineering Department at Tsinghua University.
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 Bachelor’s 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 48, has been an independent non-executive director of Brilliance China
Automotive since September 2004. Mr. Jiang is 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 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.
71
Others
Ms. HUANG Yu, age 34, 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 Bachelor’s Degree in Economics and a Master’s 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 2007 was
approximately Rmb 30.8 million (US$ 4.2 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 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.
72
Meetings
Meetings of the audit committee shall be held at least twice per year, and Brilliance China
Automotive’s 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 Automotive’s
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 Automotive’s 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 Automotive’s
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:
| |
• |
|
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; |
| |
• |
|
review and monitor the external auditor’s 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; |
| |
• |
|
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 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; |
73
| |
• |
|
monitor the integrity of financial statements of Brilliance China Automotive and
Brilliance China Automotive’s 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
Automotive’s reports and accounts before submission to the board, the committee should
focus particularly on: |
| |
• |
|
changes in accounting policies and practices; |
| |
| |
• |
|
accounting policies which require difficult, subjective or complex judgments
(also known as critical accounting policies); |
| |
| |
• |
|
significant adjustments resulting from audits; |
| |
| |
• |
|
going concern assumptions and any qualifications; |
| |
| |
• |
|
compliance with accounting standards; and |
| |
| |
• |
|
compliance with listing rules of stock exchange(s) and other applicable legal
and regulatory requirements and guidance in relation to financial reporting; |
| |
• |
|
In regard to the review of financial information: |
| |
• |
|
members of the committee must liaise with the board, senior management and the
person appointed as Brilliance China Automotive’s qualified accountant; |
| |
| |
• |
|
the committee must meet at least once a year with the external auditor; and |
| |
| |
• |
|
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 Automotive’s qualified
accountant, compliance officer (if any) or auditor; |
| |
• |
|
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; |
| |
| |
• |
|
review Brilliance China Automotive’s financial controls, internal control and risk
management systems; |
| |
| |
• |
|
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; |
| |
| |
• |
|
discuss policies with respect to risk assessment and risk management; |
| |
| |
• |
|
consider the findings of investigations of internal control matters as delegated by
the board, or on the committee’s own initiative, and review management’s response; |
74
| |
• |
|
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; |
| |
| |
• |
|
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; |
| |
| |
• |
|
review Brilliance China Automotive’s financial and accounting policies and
practices; |
| |
| |
• |
|
review the external auditor’s 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 management’s response; |
| |
| |
• |
|
review with the external auditor any audit problems or difficulties and management’s
response; |
| |
| |
• |
|
ensure that the board provides a timely response to the issues raised in the
external auditor’s management letter; |
| |
| |
• |
|
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 (the “Listing Rules”); |
| |
| |
• |
|
give pre-approval of other services and fees of the external auditor; |
| |
| |
• |
|
set clear hiring policies for employees or former employees of the external
auditors; |
| |
| |
• |
|
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 |
| |
| |
• |
|
consider other topics, as determined from time to time by the board. |
The audit committee met most recently in April 2008, with previous meetings in April and
September in each of the past three years.
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.
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 Automotive’s 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.
75
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.
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 director’s remuneration; and |
76
| |
• |
|
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 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. |
Employees
As of December 31, 2007, Brilliance China Automotive had 8 employees located in Hong Kong,
compared with 8 as of December 31, 2006 and 9 as of December 31, 2005. These employees are
primarily responsible for overseeing the financial management and operations and for developing
strategic business plans, ensuring compliance with stock exchange rules and regulations, preparing
financial statements and coordinating investor relations for Brilliance China Automotive.
As of December 31, 2007, Brilliance China Automotive and its subsidiaries had a total of
11,681 employees, compared with 11,004 as of December 31, 2006 and 8,911 as of December 31, 2005.
As of December 31, 2007, Shenyang Automotive had a total of 8,733 employees, compared with 8,265 as
of December 31, 2006 and 6,470 as of December 31, 2005. The total number of Shenyang Automotive’s
employees increased by 468 employees from 2006 to 2007 as it hired more production workers and
technical personnel due to the significant increase in the sales volume of the Zhonghua sedans in
2007.
The following chart sets forth the number of Brilliance China Automotive’s employees by
functional area as of December 31, 2007:
| |
|
|
|
|
| |
|
Number of |
| Functional Area |
|
Employees |
|
|
|
|
|
Administrative Personnel |
|
|
1,576 |
|
Technical Personnel |
|
|
1,556 |
|
Production Workers |
|
|
8,549 |
|
|
|
|
|
|
Total |
|
|
11,681 |
|
|
|
|
|
|
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.
77
Share Ownership
As of the date of this annual report, no directors or executive officers own any shares in
Brilliance China Automotive.
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 years ended December 31, 2006 and December 31, 2007, 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 |
| |
|
2007 |
|
2006 |
At January 1 |
|
|
2,800,000 |
|
|
|
2,800,000 |
|
Cancelled/Lapsed during the year |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
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.
78
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 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
Automotive’s Board of Directors may grant options to the participants (including Brilliance China
Automotive’s employees, non-executive directors, suppliers and customers, etc.) to subscribe for
Brilliance China Automotive’s 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 exchange’s 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 exchange’s 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.
On
December 28, 2006, 35,750,000 share options were 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 for share options
granted on December 28, 2006, 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 2007, 1,375,000 of these share options granted on December 28, 2006 have
been exercised in accordance with the terms of the New Scheme.
On December 31, 2007, 59,500,000 share options were 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$1.746 for share options granted on December 31,
2007, exercisable from the date of grant for 10 years. In accordance with the terms of the
share-based arrangement, options issued during the year vest at the date of grant. During 2007, no
share options granted on December 31, 2007 have been exercised, have been cancelled or lapsed in
accordance with the terms of the New Scheme.
79
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
The following table sets forth certain information regarding ownership of Brilliance China
Automotive’s capital stock as of December 31, 2007 by all persons who are known to Brilliance China
Automotive to own more than 5% of Brilliance China Automotive’s shares or ADSs. The voting rights
of Brilliance China Automotive’s major shareholders are identical to those of its other
shareholders.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Percent of |
| |
|
|
|
Number of |
|
Capital |
| Title of Class |
|
Identity of Person or Group |
|
Shares Owned |
|
Stock |
Ordinary Shares
|
|
Huachen Automotive Group Holdings Company
Limited(1)
|
|
|
1,446,121,500 |
|
|
|
39.41 |
% |
Ordinary Shares
|
|
Templeton Asset Management Ltd.
|
|
|
407,660,000 |
|
|
|
11.11 |
% |
Ordinary Shares
|
|
Deutsche Bank Aktiengesellschaft(2)
|
|
|
310,569,073 |
|
|
|
8.46 |
% |
Ordinary Shares
|
|
Citigroup Inc.(3)
|
|
|
192,892,827 |
|
|
|
5.26 |
% |
|
|
|
| (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 116,462,388 ordinary
shares held in a short position as of December 31, 2007. |
| |
| (3) |
|
Citigroup Inc. also has 35,509,000 ordinary shares held in a
short position as of December 31, 2007. It also holds
34,616,000 ordinary shares as custodian/ “approved lending
agent” (as defined under the Securities Futures Ordinance of
Hong Kong). The 34,616,000 ordinary shares represent ordinary
shares in Citigroup Inc.’s “lending pool,” or shares that it
holds as agent for a third party to which it is authorized to
lend, and shares that have been lent by Citigroup Inc. but for
which it 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 capital of Brilliance China Automotive
and the Chinese Financial Education Development Foundation’s 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 39.41% (diluted from the
initial 39.45% due to the exercise of certain share options in 2003 and 2007) 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 Automotive’s
directors, the outcome of actions requiring majority shareholder approval and the business in
general of Brilliance China Automotive.
As at June 20, 2008, Brilliance China Automotive had 220 registered shareholders in Hong Kong,
who held 3,669,765,900 ordinary shares in the aggregate.
80
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 Automotive’s effective interest in Shenyang Automotive will increase
from its initial 51.0% to approximately 63.9%.
In 2007, Brilliance China Automotive purchased Rmb 2,762.7 million of its component parts from
various affiliated companies and paid a Rmb 257.9 million subcontracting charge to a jointly
controlled entity. These figures represented an increase of 33.9% from Rmb 2,062.9 million and
1.3% from Rmb 254.5 million, respectively, from 2006 to 2007. 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 arm’s-length basis.
Significant transactions between Brilliance China Automotive or its subsidiaries and
affiliated companies in the ordinary course of business during 2005, 2006 and 2007 are set forth
below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
2005 |
| |
|
(Rmb thousands) |
Sales to JinBei and its affiliated companies |
|
|
452,933 |
|
|
|
178,414 |
|
|
|
69,432 |
|
Purchases from JinBei and its affiliated companies |
|
|
1,477,018 |
|
|
|
895,457 |
|
|
|
383,808 |
|
Sales to Shanghai Shenhua and its affiliated companies |
|
|
1,394,130 |
|
|
|
1,052,689 |
|
|
|
1,469,402 |
|
Purchases from Shanghai Shenhua and its affiliated
companies |
|
|
102,785 |
|
|
|
16,668 |
|
|
|
85,354 |
|
Purchases from shareholders of Shenyang Aerospace and
their affiliated companies |
|
|
63,227 |
|
|
|
90,505 |
|
|
|
1,987 |
|
Subcontracting charges to BMW Brilliance |
|
|
257,937 |
|
|
|
254,479 |
|
|
|
112,160 |
|
Purchases from other affiliated companies of Brilliance
Holdings Limited |
|
|
115,223 |
|
|
|
117,336 |
|
|
|
66,441 |
|
Purchases form an affiliated company of the joint
venture partner of Xinguang Brilliance |
|
|
147 |
|
|
|
68 |
|
|
|
761 |
|
Purchases from associated companies and jointly
controlled entities |
|
|
1,004,303 |
|
|
|
942,878 |
|
|
|
524,221 |
|
Sales to associated companies and jointly controlled
entities |
|
|
188,315 |
|
|
|
186,146 |
|
|
|
71,005 |
|
Finance charge to a jointly controlled entity |
|
|
16,100 |
|
|
|
16,748 |
|
|
|
17,329 |
|
Operating lease rental on land and buildings charged by: |
|
|
|
|
|
|
|
|
|
|
|
|
— A jointly controlled entity |
|
|
3,430 |
|
|
|
908 |
|
|
|
2,206 |
|
— Shanghai Shenhua and its affiliated companies |
|
|
592 |
|
|
|
1,148 |
|
|
|
— |
|
— JinBei and its affiliated companies |
|
|
— |
|
|
|
60 |
|
|
|
— |
|
Mold testing income from a jointly controlled entity |
|
|
1,776 |
|
|
|
4,320 |
|
|
|
— |
|
Operating lease rental from a jointly controlled entity |
|
|
14,384 |
|
|
|
34,863 |
|
|
|
15,078 |
|
Sales of property, plant and equipment to a jointly
controlled entity |
|
|
— |
|
|
|
80,332 |
|
|
|
263 |
|
Service income from a jointly controlled entity |
|
|
18,560 |
|
|
|
35,067 |
|
|
|
43,671 |
|
81
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, 2007 and 2006, the net book value of the buildings
amounting to approximately Rmb 126.1 million and Rmb 134.3 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, 2007 and 2006 amounting to
approximately Rmb 174.4 million and Rmb 113.3 million, respectively, were 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 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, 2007 and 2006, service
fees of approximately Rmb 257.9 million and Rmb 254.5 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, 2007:
82
| |
• |
|
a corporate guarantee of approximately Rmb 60 million (US$8.2 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 guarantor’s obligation under the
guarantee was recorded as of December 31, 2007; |
| |
| |
• |
|
corporate guarantees for bank loans amounting to Rmb 200 million (US$27.4 million)
drawn by JinBei. Bank deposits of Rmb 213 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 guarantor’s obligation under the guarantee was
recorded as of December 31, 2007. |
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, 2007, 2006 and
2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
2005 |
| |
|
(Rmb thousands) |
Notes receivable from affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable from affiliated companies of JinBei |
|
|
3,050 |
|
|
|
16,620 |
|
|
|
9,446 |
|
Notes receivable from Shanghai Shenhua |
|
|
143,276 |
|
|
|
63,750 |
|
|
|
328,482 |
|
Notes receivable from associated companies and
jointly controlled entities |
|
|
— |
|
|
|
1,107 |
|
|
|
1,042 |
|
Notes receivable from a subsidiary of substantial
shareholders |
|
|
113,829 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1) |
|
|
260,155 |
|
|
|
81,477 |
|
|
|
338,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due from affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Due from Shanghai Shenhua and its affiliated companies |
|
|
368,499 |
|
|
|
431,310 |
|
|
|
276,763 |
|
Due from affiliated companies of JinBei |
|
|
91,347 |
|
|
|
93,446 |
|
|
|
62,877 |
|
Due from affiliated companies of Brilliance Holdings
Limited |
|
|
94,095 |
|
|
|
55,040 |
|
|
|
54,222 |
|
Due from jointly controlled entities |
|
|
321 |
|
|
|
21,470 |
|
|
|
13,380 |
|
Due from an associated company |
|
|
— |
|
|
|
— |
|
|
|
1,505 |
|
Due from a subsidiary of substantial shareholders |
|
|
61,455 |
|
|
|
— |
|
|
|
— |
|
Due from BMW Brilliance |
|
|
|
|
|
|
|
|
|
|
|
|
—Accounts receivables |
|
|
98,224 |
|
|
|
247,564 |
|
|
|
192,185 |
|
—Consideration receivable arising from the
disposal of machinery and equipment (2) |
|
|
— |
|
|
|
134,527 |
|
|
|
269,003 |
|
Dividend receivable from a jointly controlled entity |
|
|
76,173 |
|
|
|
76,173 |
|
|
|
— |
|
Dividend receivable from an associate |
|
|
21,000 |
|
|
|
21,000 |
|
|
|
— |
|
Provision for doubtful debts |
|
|
(29,720 |
) |
|
|
(29,720 |
) |
|
|
(29,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
781,394 |
|
|
|
1,050,810 |
|
|
|
840,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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. |
83
Set forth below is information on advances from Brilliance China Automotive and its
subsidiaries to affiliated companies as of December 31, 2007, 2006 and 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
2005 |
| |
|
(Rmb thousands) |
Advances to affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Advances to JinBei and its affiliated companies |
|
|
12,062 |
|
|
|
23,740 |
|
|
|
16,185 |
|
Advances to associated companies and jointly controlled
entities |
|
|
26,364 |
|
|
|
6,553 |
|
|
|
7,226 |
|
Advances to Shanghai Shenhua and its affiliated companies |
|
|
14,044 |
|
|
|
14,044 |
|
|
|
9,045 |
|
Advances to affiliated companies of Brilliance Holdings
Limited |
|
|
51,134 |
|
|
|
15,273 |
|
|
|
15,273 |
|
Advances to other affiliated companies |
|
|
12 |
|
|
|
689 |
|
|
|
452 |
|
Provision for doubtful debts |
|
|
(2,214 |
) |
|
|
(2,214 |
) |
|
|
(9,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
101,402 |
|
|
|
58,085 |
|
|
|
38,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Set forth below is information on advances from affiliated companies to Brilliance China
Automotive and its subsidiaries as of December 31, 2007, 2006 and 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
2005 |
| |
|
(Rmb thousands) |
Advances from affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Advances from Brilliance Holdings Limited and its
affiliated companies |
|
|
12,086 |
|
|
|
12,728 |
|
|
|
28,558 |
|
Advances from associated companies and jointly
controlled entities |
|
|
1,282 |
|
|
|
1,279 |
|
|
|
607 |
|
Advances from affiliated companies of Shanghai
Shenhua |
|
|
1,430 |
|
|
|
820 |
|
|
|
236 |
|
Advances from JinBei and its affiliated companies |
|
|
735 |
|
|
|
6,925 |
|
|
|
1,088 |
|
Financing received from BMW Brilliance |
|
|
174,373 |
|
|
|
113,343 |
|
|
|
74,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
189,906 |
|
|
|
135,095 |
|
|
|
105,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
2005 |
| |
|
(Rmb thousands) |
Notes payable to affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to affiliated companies of JinBei |
|
|
51,167 |
|
|
|
7,249 |
|
|
|
8,139 |
|
Notes payable to associated companies and jointly
controlled entities |
|
|
95,921 |
|
|
|
30,039 |
|
|
|
22,491 |
|
Notes payable to affiliated companies of
Brilliance Holdings Limited |
|
|
60,686 |
|
|
|
— |
|
|
|
43,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
207,774 |
|
|
|
37,288 |
|
|
|
74,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to affiliated companies |
|
|
|
|
|
|
|
|
|
|
|
|
Due to affiliated companies of JinBei |
|
|
365,275 |
|
|
|
281,721 |
|
|
|
142,438 |
|
Due to affiliated companies of Brilliance Holdings
Limited |
|
|
— |
|
|
|
— |
|
|
|
22,025 |
|
Due to affiliated companies of Shanghai Shenhua |
|
|
1,870 |
|
|
|
10,719 |
|
|
|
4,191 |
|
Due to associated companies and jointly controlled
entities |
|
|
584,971 |
|
|
|
680,943 |
|
|
|
465,023 |
|
Due to other affiliated companies |
|
|
731 |
|
|
|
9,910 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
952,847 |
|
|
|
983,293 |
|
|
|
633,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
The amounts due to affiliated companies are unsecured, non-interest bearing and have no fixed
repayment terms.
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.
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 31.4 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. Yang’s request on July 4, 2005.
85
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 since then. 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 Automotive’s 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. Brilliance China Automotive has
not declared dividends since the year ended December 31, 2005.
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 Automotive’s 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, 2007, 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 party’s 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, 2007, Xing Yuan Dong, Ningbo
Yuming and Shenyang Chenfa made an additional Rmb 9.2 million (US$1.3 million) to the
general reserve fund, enterprise expansion fund and staff welfare fund. |
86
Significant Changes
There have been no significant changes since December 31, 2007, the date of the annual
financial statements in this annual report.
ITEM 9. THE OFFER AND LISTING
Brilliance China Automotive’s ordinary shares are listed on The Stock Exchange of Hong Kong
Limited under the stock code “1114.” Brilliance China Automotive’s ADSs were listed on the New
York Stock Exchange, Inc. under the symbol “CBA” from October 13, 1999 to July 26, 2007, and prior
to that its ordinary shares were listed on the New York Stock Exchange from 1992 to 2000. On July
5, 2007, Brilliance China Automotive announced its intention to withdraw the listing of its ADSs on
the New York Stock Exchange, Inc. On July 16, 2007, filed a Form 25 with the SEC to effect the
delisting as from July 26, 2007. Following the delisting, the ADSs began to trade in the
over-the-counter markets from July 30, 2007 under the symbol “BCAHY”. The following table sets
forth for the periods indicated the reported high and low sales prices for the ordinary shares and
the ADSs on The Stock Exchange of Hong Kong Limited and the New York Stock Exchange, Inc. (up to
July 26, 2007), respectively:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
The New York Stock Exchange, |
|
The Stock Exchange of Hong |
| |
|
|
|
Inc. |
|
Kong Limited |
| |
|
|
|
(US$) |
|
(HK$) |
| |
|
|
|
ADSs |
|
Ordinary Shares |
| |
|
|
|
High |
|
Low |
|
High |
|
Low |
2003
|
|
|
|
|
61.30 |
|
|
|
18.11 |
|
|
|
4.75 |
|
|
|
1.42 |
|
2004
|
|
|
|
|
62.75 |
|
|
|
17.75 |
|
|
|
4.85 |
|
|
|
1.40 |
|
2005
|
|
|
|
|
22.73 |
|
|
|
12.56 |
|
|
|
1.78 |
|
|
|
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:
|
|
1st quarter
|
|
|
29.98 |
|
|
|
19.87 |
|
|
|
2.55 |
|
|
|
1.33 |
|
|
|
2nd quarter
|
|
|
27.00 |
|
|
|
21.14 |
|
|
|
2.14 |
|
|
|
1.64 |
|
|
|
3rd quarter
(through July 26 for
the ADSs)
|
|
|
28.98 |
|
|
|
24.57 |
|
|
|
2.32 |
|
|
|
1.40 |
|
|
|
4th quarter
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2.17 |
|
|
|
1.53 |
|
2008:
|
|
January
|
|
|
N/A |
|
|
|
N/A |
|
|
|
1.99 |
|
|
|
1.40 |
|
|
|
February
|
|
|
N/A |
|
|
|
N/A |
|
|
|
1.64 |
|
|
|
1.46 |
|
|
|
March
|
|
|
N/A |
|
|
|
N/A |
|
|
|
1.61 |
|
|
|
1.16 |
|
|
|
April
|
|
|
N/A |
|
|
|
N/A |
|
|
|
1.48 |
|
|
|
1.28 |
|
|
|
May
|
|
|
N/A |
|
|
|
N/A |
|
|
|
1.52 |
|
|
|
1.21 |
|
|
|
June (through June 19)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
1.32 |
|
|
|
1.15 |
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To the best of Brilliance China Automotive’s knowledge, as of June 19, 2008, Brilliance China
Automotive had 1,570,599ADSs outstanding, which were held by 71 registered holders of record in the
United States (including 1,549,460 ADSs held by 98 nominee holders). One ADS is equivalent to 100
ordinary shares.
Trading of Brilliance China Automotive’s 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 Automotive’s 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 Automotive’s 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 a non-Hong Kong company under Part XI of the Companies Ordinance.
Brilliance China Automotive’s 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 Automotive’s Bye-laws were
adopted on November 16, 2007 and were last amended on June 20, 2008.
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
Brilliance China Automotive or any other company in which Brilliance China Automotive is
interested.
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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
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
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.
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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 Listing Rules 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 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.
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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
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 |
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.
At the special general meeting held on November 16, 2007, Brilliance China Automotive amended
the Bye-laws in order to reflect changes to the Bermuda Companies Act and also the amendments to
the Listing Rules of the Stock Exchange of Hong Kong Limited. In light of the numerous changes
listed above and those from prior amendments, the shareholders adopted at the same special general
meeting a fully restated and consolidated set of Bye-laws incorporating all previous amendments
thereto passed in substitution for the then existing Bye-laws.
At the annual general meeting held on June 20, 2008, Brilliance China Automotive amended its
Bye-laws to allow the printing of the securities seal of Brilliance China Automotive onto
certificates for shares, warrants, debentures or any other form of security to be issued by
Brilliance China Automotive.
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 Automotive’s ordinary shares, other than in respect of local Bermuda currency.
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.
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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 People’s 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 People’s 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 policy has resulted in an approximately 11.9%
appreciation of the Renminbi against the U.S. dollar between July 21, 2005 and December 31, 2007.
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, 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 March 28, 2016.
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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 a “Technologically-Advanced Enterprise.” As a result, the effective enterprise
income tax rate for Shenyang Automotive was 15% for the years ended 2007, 2006 and 2005.
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 2007, 2006 and 2005.
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 18%, 16.5% and 16.5%, respectively, for the years ended 2007, 2006 and 2005.
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, 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%, 18% and 7.5% for the years ended
2007, 2006 and 2005, respectively.
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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 2007, 7.5% for the year ended 2006 and 0% for the year ended 2005.
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 People’s 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
2007.
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 29.7 million as customs duties in 2007.
United States Federal Income Taxation
The following is a general discussion of the material U.S. federal income tax consequences of
purchasing, owning and disposing of the ADSs or ordinary shares if you are a U.S. holder, as
defined below, and hold the ADSs or ordinary shares as capital assets within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended, or the Code. This discussion does not
address all of the U.S. federal income tax consequences relating to the purchase, ownership and
disposition of the ADSs or ordinary shares, and does not take into account U.S. holders who may be
subject to special rules including:
| • |
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banks, insurance companies and financial institutions; |
| • |
|
certain insurance companies; |
| • |
|
traders in securities that elect to mark to market; |
99
| • |
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U.S. holders liable for alternative minimum tax; |
| • |
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U.S. holders that own 10% or more of our voting stock; |
| • |
|
U.S. holders that hold the ADSs or ordinary shares as part of a straddle or a hedging or
conversion transaction; or |
| • |
|
U.S. holders whose functional currency is not the U.S. dollar. |
This discussion is based on the Code, its legislative history, final, temporary and proposed
U.S. Treasury regulations promulgated thereunder, published rulings and court decisions as in
effect on the date hereof, all of which are subject to change, or changes in interpretation,
possibly with retroactive effect. In addition, this discussion is based in part upon
representations of the depositary and the assumption that each obligation in the deposit agreement
and any related agreements will be performed according to its terms.
You are a “U.S. holder” if you are:
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• |
|
a citizen or resident of the United States for U.S. federal income tax purposes; |
| |
| |
• |
|
a corporation, or other entity treated as a corporation for U.S. federal income tax
purposes, created or organized in or under the laws of the United States or any
political subdivision thereof; |
| |
| |
• |
|
an estate the income of which is subject to U.S. federal income tax without regard
to its source; or |
| |
| |
• |
|
a trust (1) subject to the primary supervision of a U.S. court and the
control of one or more U.S. persons, or (2) that has elected to be treated as a U.S. person under
applicable U.S. Treasury regulations. |
If a partnership holds the ADSs or ordinary shares, the tax treatment of a partner generally
will depend on the status of the partner and the activities of the partnership. If you are a
partner of a partnership that holds the ADSs or ordinary shares, we urge you to consult your tax
advisors regarding the consequences of the purchase, ownership and disposition of the ADSs or
ordinary shares.
This discussion does not address any U.S. federal estate or gift tax consequences, or any
state, local or non-U.S. tax consequences of the purchase, ownership and disposition of the ADSs or
ordinary shares. We urge you to consult your tax advisors regarding the U.S. federal, state, local and non-U.S.
tax consequences of the purchase, ownership and disposition of the ADSs or ordinary shares.
100
In general, if you hold ADSs, you will be treated as the owner of the ordinary shares
represented by the ADSs.
If you receive a distribution on ADSs or Ordinary Shares in currency other than U.S. dollars, or proceeds from the sale, exchange, or other disposition of ADSs or Ordinary Shares in
currency other than U.S. dollars, there may be U.S. federal income tax consequences to you if
such payments are not converted to U.S. dollars on the day of receipt. We urge you to consult
your tax advisors regarding the U.S. federal income tax consequences to you if you receive
payments related to a distribution or sale, exchange or other disposition of ADSs or Ordinary
Shares in currency other than U.S. dollars.
Distributions on the ADSs or Ordinary Shares
Subject
to the discussion under “PFIC Rules,” below, the gross amount of any distribution we make on the ADSs or ordinary shares out of our current
or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will be
includible in your gross income as dividend income when the distribution is actually or
constructively received by the depositary, in the case of ADSs, or you, in the case of ordinary
shares. Subject to certain limitations, dividends paid by a “qualified foreign corporation,” as
determined for U.S. federal income tax purposes, to non-corporate U.S. investors, including
individuals, may be eligible for a reduced rate of taxation. A foreign corporation is a qualified
foreign corporation if (i) the foreign corporation is eligible for the benefits of an income tax
treaty with the United States that includes an information-exchange program that the U.S. Internal
Revenue Service, or the IRS, determines is satisfactory for these purposes or (ii) the shares or
ADSs with respect to which the dividends are paid are tradable on an established U.S. securities
market. We are not eligible for the benefits of an income tax treaty with the United States, and,
as our ADSs have been delisted from the New York Stock Exchange as of
July 26, 2007, it is unlikely that the ADSs would be considered to be traded on established U.S. securities
market under current law. Accordingly, it is unlikely that we are currently a qualified foreign corporation for these purposes. Our status as a qualified foreign
corporation, however, may change.
Distributions that exceed our current and accumulated earnings and profits will be treated as
a return of capital to you to the extent of your basis in the ADSs or ordinary shares and
thereafter as capital gain. Any dividend will not be eligible for the dividends-received deduction
generally allowed to U.S. corporations in respect of dividends received from U.S. corporations.
The amount of any distribution of property other than cash will be the fair market value of such
property on the date of such distribution.
For foreign tax credit limitation purposes, dividends paid on the ADSs or ordinary shares will
be foreign source income, and will be treated as “passive category income” or, in the case of some
U.S. holders, “general category income.”
101
Sale, Exchange or Other Disposition
Subject
to the discussion under “PFIC Rules,” below, upon a sale, exchange or other disposition of the ADSs or ordinary shares, you will recognize
a capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference
between the U.S. dollar value of the amount realized and your tax basis, determined in U.S.
dollars, in such ADSs or ordinary shares. Any gain or loss will generally be U.S. source gain or
loss for foreign tax credit limitation purposes. Capital gain of certain non-corporate U.S.
holders, including individuals, currently is generally taxed at a maximum rate of 15% where the
ADSs or ordinary shares have been held more than one year. Your ability to deduct capital losses
is subject to limitations.
PFIC Rules
In general, a foreign corporation is a PFIC for any taxable year in which, after applying
relevant look-through rules with respect to the income and assets of
subsidiaries (1) 75% or more of its gross income consists of passive income, such as dividends,
interest, rents and royalties; or (2) 50% or more of the average quarterly value of its assets consists of assets that
produce, or are held for the production of, passive income.
We believe that we will not meet either of the PFIC tests in the current
or subsequent taxable years and therefore will not be treated as a PFIC for such periods.
However, PFIC status cannot be determined until the close of a taxable year and, accordingly, there
can be no assurance that we will not be a PFIC in the current or
subsequent taxable years. If we were a PFIC in any taxable year that you held the ADSs or ordinary shares, you
102
may
become subject to special, generally unfavorable, U.S. federal income tax consequences. We encourage you to consult your own tax advisor concerning the U.S. federal income tax
consequences to you were we to be or become a PFIC.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply to dividends in respect of the ADSs
or ordinary shares or the proceeds of the sale, exchange, or other disposition of the ADSs or
ordinary shares paid within the United States, and in some cases, outside of the United States,
other than to various exempt recipients, including corporations. In addition, you may, under some
circumstances, be subject to “backup withholding” with respect to dividends paid on the ADSs or
ordinary shares or the proceeds of any sale, exchange or other disposition of the ADSs or ordinary
shares, unless you (1) are a corporation or fall within various other exempt categories, and, when
required, demonstrate this fact; or (2) provide a correct taxpayer identification number on a properly completed IRS Form
W-9 or a substitute form, certify that you are exempt from backup withholding and
otherwise comply with applicable requirements of the backup withholding rules.
Any amount withheld under the backup withholding rules generally will be creditable against
your U.S. federal income tax liability provided that you furnish the required information to the
IRS in a timely manner.
103
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 SEC’s public reference room at 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, 2007, approximately 1.31%, 0.42% and 0.81% of Shenyang
Automotive’s 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 7.0% from January 2, 2007
to December 31, 2007 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
Automotive’s 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
476.2 million, US$1.8 million and Euro 3.6 million from local banks.
Brilliance China Automotive also advanced shareholder’s loans to its subsidiaries in the
amounts of approximately HK$266.2 million, Rmb 1,971.5 million and US$193.3 million in 2007.
104
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 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, 2007, Brilliance China
Automotive had short-term bank loans outstanding in the amount of Rmb 2.8 million. The average
annual rate for discounting notes receivables with banks in 2007 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, 2007.
For the year ended December 31, 2007, Brilliance China Automotive’s interest income was Rmb
125.5 million (US$17.2 million) and its interest expense was Rmb 203.3 million (US$27.9 million).
A 10% change in interest rates would result in a change in interest income of approximately Rmb
12.5 million (US$1.7 million) and a change in interest expense of approximately Rmb 20.3 million
(US$2.8 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 PRC’s 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. As a result, import tariffs on automotive components have decreased, from as high as
120% in January 1992, to 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 2005, the average import tariffs on automotive components for
the deluxe minibuses (including Granse minibuses) and Zhonghua sedans were 9.7% and 12.1%,
respectively, and in 2006, the average tariffs became 8.2% and 10.4% for the imported components
for deluxe minibuses and Zhonghua sedans, respectively. In 2007, import tariffs were further
reduced to 8.7% for imported components for both deluxe minibuses and Zhonghua sedans. In
addition, in 2005, tariffs became fixed at 30% for all motor vehicles and were further reduced to
28% in January 2006 and to 25% in July 2006. Import tariffs on automotive components for BMW
Brilliance’s products were reduced from
25% to 10% in the second half of 2007 when the requisite domestic component content ratio was
reached and approved by the government.
105
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 Automotive’s current and proposed markets.
Except as described above, Brilliance China Automotive’s 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 Automotive’s disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14.
106
As more fully described below under “Management’s Report on Internal Control Over Financial
Reporting,” material weaknesses have been identified in Brilliance China Automotive’s 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, 2007.
Management’s 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 Automotive’s 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, 2007 based on criteria established by the framework of internal controls proposed
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management has concluded that, as of December 31, 2007, material weaknesses existed in
Brilliance China Automotive’s 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, 2007:
1. Monitoring Activities. Monitoring activities performed in 2007 were insufficient. There were
instances where controls were not properly designed and put into place to: (a) ensure risk
assessment is supported by detailed qualitative or quantitative analysis and approved by the Audit
Committee; or (b) ensure the proper performance and documentation of internal control work by the
Internal Audit Department.
2. Approval over accounting entries. Management did not maintain effective controls over the review
of accounting entries. There were instances where proper approval limits and system approvals were
not established and implemented for reviewing accounting entries.
3. Follow-up on prepayment to vendors. Management did not maintain effective controls over the
monitoring of payments in advance. Controls were not properly designed and put in place to: (a)
ensure that advance payments for purchases of goods are offset against related accounts payables
upon receipt of goods; or (b) monitor the status of payments in advance to assess recoverability.
107
4. Approval and follow-up of large investments. Management did not maintain effective controls over
the payment for investments. Controls were not properly designed and put in place to critically
assess the potential investments. In addition, there was one instance where a significant payment
was made for an investment without prior approval by the Board of Directors.
5. Safeguarding of notes. Management did not maintain effective controls over the monitoring of
promissory notes. Controls were not properly designed and put in place to safeguard promissory
notes, such as a documented review of the manual register or a monthly physical count of promissory
notes.
6. Accounting treatment of sales of raw materials. Management did not maintain effective controls
over establishing proper accounting policies over the sales of raw materials.
Because of these weaknesses, management has concluded that Brilliance China Automotive did not
maintain effective internal control over financial reporting as of December 31, 2007. 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:
1. Monitoring activities. Risk assessment to be supported by detailed quantitative or qualitative
analysis and approved by the Audit Committee. Proper performance and documentation of internal
control work by the internal audit department.
2. Approval over accounting entries. Establishment of proper approval limits and system approvals
for the review of accounting entries.
3. Follow-up on prepayment to vendors. Put in place measures to: (i) ensure advance payments for
purchases of goods are offset against related accounts payable upon the receipt of goods; and (ii)
monitor the status of advanced payments for assessment of recoverability.
4. Approval and follow-up of large investment. Introduction of additional controls to critically
assess potential investments.
5. Safeguarding of notes. Introduction of measures to document review of the manual register and
monthly physical count of promissory notes.
6. Accounting treatment of sales of raw materials. Establishment of proper accounting policies to
justify the accounting treatment of sales of raw materials.
Brilliance China Automotive’s 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.
Attestation Report of the Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Brilliance China Automotive Holdings Limited
We have audited Brilliance China Automotive Holdings Limited’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Brilliance China Automotive Holdings Limited’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on Brilliance China
Automotive Holdings Limited’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be prevented or detected on a
timely basis. The following material weakness has been identified and included in management’s
assessment.
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1) |
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Insufficient monitoring activities performed by Audit Committee and Internal Audit
Department; |
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2) |
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Insufficient approval over accounting entries; |
| |
| |
3) |
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Insufficient follow-up on prepayment to vendors; |
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| |
4) |
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Insufficient approval and follow-up of large investment; |
| |
| |
5) |
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Insufficient safeguarding of promissory notes; |
| |
| |
6) |
|
Ineffective controls over establishing a proper accounting policy for sales of raw
materials. |
In our opinion, because of the effect of the material weakness described above on the achievement
of the objectives of the control criteria, Brilliance China Automotive Holdings Limited has not
maintained effective internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the financial statements of year ended
December 31, 2007 of Brilliance
China Automotive Holdings Limited. The material weakness identified above was considered in
determining the nature, timing, and extent of audit tests applied in our audit of the 2007
financial statements, and this report does not affect our report dated June 27, 2008, which
expressed true and fair view on those financial statements.
/s/ GRANT THORNTON
Hong Kong,
June 27, 2008
108
Changes in Internal Control Over Financial Reporting
During the year ended December 31, 2007, Brilliance China Automotive’s management implemented
a number of measures to strengthen its internal control over financial reporting. In particular,
improvement in controls over revenue recognition, which was identified as a material weakness for
the year ended December 31, 2006, has been implemented. Brilliance China Automotive has
strengthened its monitoring and review process at year end to ensure proper recognition of revenue
in its financial statements.
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:
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• |
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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; |
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| |
• |
|
Non-Statutory Guidelines on Directors’ Duties issued by the Hong Kong Companies
Registry in January 2004; |
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• |
|
Guide for Independent Non-Executive Directors issued by The Hong Kong Institute of
Directors in 2000; |
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• |
|
Guidelines for Directors issued by The Hong Kong Institute of Directors in 2005; and |
| |
| |
• |
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Code for Securities Transactions by Employees. |
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Moores Rowland Mazars has acted as Brilliance China Automotive’s independent auditors for the
fiscal years ended December 31, 2005 and 2006. On June 1, 2007, Moores Rowland Mazars changed its
name to Moores Rowland and on the same day combined its business with Grant Thornton. Key members
of the team servicing Brilliance China Automotive joined Grant Thornton. Effective September 24,
2007, the audit committee of Brilliance China Automotive appointed Grant Thornton as auditors of
Brilliance China Automotive. Grant Thornton acted as Brilliance China Automotive’s independent
auditors for the fiscal year ended December 31, 2007. The chart below sets forth the total amount billed to us by Moores Rowland
and Grant Thornton, as applicable during the periods set forth below.
109
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|
|
|
|
|
|
|
|
| |
|
Total Fees |
| |
|
2007 |
|
2006 |
| |
|
|
|
|
|
(Rmb thousands) |
Audit fees |
|
|
3,800 |
|
|
|
2,800 |
|
Audit-related fees |
|
|
690 |
|
|
|
1,900 |
|
Tax fees |
|
|
— |
|
|
|
— |
|
Other fees |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,490 |
|
|
|
4,700 |
|
|
|
|
|
|
|
|
|
|
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 Automotive’s 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 Automotive’s interim financial statements and
agreed upon procedures performed on continuing connected transactions.
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.
110
PART III
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
(a) Financial Statements and Supplemental Data
See
pages F-1 to F-56 following item 19.
(b) Financial Statement Schedules
Schedule II — Valuation and Qualifying Accounts
Schedule II should be read in conjunction with the consolidated financial statements and
related notes thereto set forth under Item 18 of this Annual Report on Form 20-F.
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 November 16,
2007. |
| |
| |
1.2 |
|
Amendments to Bye-Laws of Brilliance China Automotive dated June 20, 2008. |
| |
| |
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.* |
| |
| |
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, 2007. |
| |
| |
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 Registrant’s annual report on Form 20-F
filed with the SEC on June 26, 2006. |
111
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 27, 2008
112
INDEX TO FINANCIAL STATEMENTS
BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LIMITED AND SUBSIDIARIES
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Page |
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F-2 |
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F-4 |
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F-5 |
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F-7 |
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F-10 |
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F-11 |
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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,
2007, and the related consolidated statements of income and comprehensive income, cash flows and
changes in shareholders’ equity for the years ended December 31, 2007. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits 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, 2007, and the results of
its operations and cash flows for the years ended December 31, 2007, in conformity with United
States generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. Schedule II is presented for purposes of additional analysis and is
not a required part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
As described in Note 3 to the consolidated financial statements the Company has adopted FASB
Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes—An
Interpretation of FASB Statement No. 109”, effective as of January 1, 2007. In 2006, and as
described in Note 3 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness Brilliance China Automotive Holdings Limited and
subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated June 27, 2008 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
/s/ Grant Thornton
Hong Kong,
June 27, 2008
F-2
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 Company’s 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-3
Brilliance China Automotive Holdings Limited
Consolidated Statements of Income and Comprehensive Income
For the years ended December 31, 2007, 2006 and 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
| |
|
|
2007 |
|
|
|
2006 |
|
|
|
2005 |
|
| |
|
|
RMB’000 |
|
|
|
RMB’000 |
|
|
|
RMB’000 |
|
| |
|
(except for share and ADS data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to third parties |
|
|
10,994,675 |
|
|
|
9,067,505 |
|
|
|
3,859,151 |
|
Net sales to affiliated companies |
|
|
3,154,474 |
|
|
|
1,417,249 |
|
|
|
1,609,839 |
|
Total sales |
|
|
14,149,149 |
|
|
|
10,484,754 |
|
|
|
5,468,990 |
|
Cost of sales (including purchase of goods
and subcontracting charges from affiliated
companies) (2007: RMB3,620,835,000,
2006:RMB2,317,393,000, 2005: RMB1,174,732,000) |
|
|
(13,049,107 |
) |
|
|
(9,960,587 |
) |
|
|
(5,011,955 |
) |
Gross profit |
|
|
1,100,042 |
|
|
|
524,167 |
|
|
|
457,035 |
|
Selling, general and administrative expenses |
|
|
(1,535,695 |
) |
|
|
(1,384,718 |
) |
|
|
(1,195,336 |
) |
Interest expenses |
|
|
(203,263 |
) |
|
|
(177,001 |
) |
|
|
(182,354 |
) |
Interest income |
|
|
125,470 |
|
|
|
90,738 |
|
|
|
60,189 |
|
Equity in earnings of associated companies
and jointly controlled entities, net |
|
|
192,261 |
|
|
|
149,320 |
|
|
|
48,995 |
|
Subsidy income |
|
|
140,081 |
|
|
|
50,176 |
|
|
|
3,139 |
|
Other income, net |
|
|
179,706 |
|
|
|
106,150 |
|
|
|
43,650 |
|
Impairment loss on intangible assets |
|
|
— |
|
|
|
— |
|
|
|
(173,000 |
) |
Impairment loss on goodwill |
|
|
— |
|
|
|
(73,343 |
) |
|
|
(257,720 |
) |
Loss before taxation and minority interests |
|
|
(1,398 |
) |
|
|
(714,511 |
) |
|
|
(1,195,402 |
) |
Provision for income taxes |
|
|
(45,208 |
) |
|
|
(47,879 |
) |
|
|
(101,884 |
) |
Minority interests |
|
|
130,332 |
|
|
|
376,282 |
|
|
|
625,997 |
|
Net income (loss) |
|
|
83,726 |
|
|
|
(386,108 |
) |
|
|
(671,289 |
) |
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment for securities
available-for-sale |
|
|
2,393 |
|
|
|
1,052 |
|
|
|
(27,227 |
) |
Share of a jointly controlled entity’s
fair value adjustment for hedging
derivative |
|
|
31,275 |
|
|
|
— |
|
|
|
— |
|
Comprehensive income (loss) |
|
|
117,394 |
|
|
|
(385,056 |
) |
|
|
(698,516 |
) |
Basic earnings (loss) per share |
|
|
RMB0.0228 |
|
|
|
RMB(0.1053 |
) |
|
|
RMB(0.1830 |
) |
Basic earnings (loss) per ADS |
|
|
RMB2.28 |
|
|
|
RMB(10.53 |
) |
|
|
RMB(18.30 |
) |
Diluted earnings (loss) per share |
|
|
RMB0.0227 |
|
|
|
RMB(0.1053 |
) |
|
|
RMB(0.1830 |
) |
Diluted earnings (loss) per ADS |
|
|
RMB2.27 |
|
|
|
RMB(10.53 |
) |
|
|
RMB(18.30 |
) |
Weighted average number of shares outstanding |
|
|
3,669,022,064 |
|
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
Weighted average number of ADSs outstanding |
|
|
36,690,221 |
|
|
|
36,683,909 |
|
|
|
36,683,909 |
|
Net income (loss) adjusted for the dilutive
effect of convertible bonds |
|
|
83,726 |
|
|
|
(386,108 |
) |
|
|
(671,289 |
) |
Weighted average number of shares
outstanding adjusted for dilutive effect of
stock options and convertible bonds |
|
|
3,679,572,569 |
|
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
Weighted average number of ADSs outstanding
adjusted for dilutive effect of stock
options and convertible bonds |
|
|
36,795,726 |
|
|
|
36,683,909 |
|
|
|
36,683,909 |
|
The accompanying notes are an integral part of these consolidated statements of income and
comprehensive income.
F-4
Brilliance China Automotive Holdings Limited
Consolidated Balance Sheets
As of December 31, 2007 and 2006
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,373,416 |
|
|
|
1,468,075 |
|
Short-term bank deposits |
|
|
518,000 |
|
|
|
616,787 |
|
Pledged short-term bank deposits, restricted |
|
|
1,971,665 |
|
|
|
1,625,149 |
|
Deferred expenses — current portion |
|
|
6,283 |
|
|
|
6,283 |
|
Notes receivable |
|
|
416,495 |
|
|
|
197,668 |
|
Notes receivable from affiliated companies |
|
|
260,155 |
|
|
|
81,477 |
|
Accounts receivable, net |
|
|
805,187 |
|
|
|
632,158 |
|
Due from affiliated companies |
|
|
684,221 |
|
|
|
953,637 |
|
Dividend receivable from affiliated companies |
|
|
97,173 |
|
|
|
97,173 |
|
Inventories, net |
|
|
2,469,033 |
|
|
|
1,346,843 |
|
Other receivables |
|
|
491,237 |
|
|
|
423,017 |
|
Prepayments and other current assets |
|
|
273,828 |
|
|
|
143,583 |
|
Income tax recoverable |
|
|
18,482 |
|
|
|
815 |
|
Other taxes recoverable |
|
|
125,179 |
|
|
|
117,830 |
|
Advances to affiliated companies |
|
|
101,402 |
|
|
|
58,085 |
|
Total current assets |
|
|
9,611,756 |
|
|
|
7,768,580 |
|
Property, plant and equipment, net |
|
|
3,569,137 |
|
|
|
3,865,210 |
|
Intangible assets, net |
|
|
266,416 |
|
|
|
420,978 |
|
Interests in associated companies and jointly controlled entities |
|
|
1,615,917 |
|
|
|
1,413,135 |
|
Investment securities |
|
|
26,129 |
|
|
|
23,736 |
|
Goodwill |
|
|
339,710 |
|
|
|
339,710 |
|
Prepayment for a long-term investment |
|
|
600,000 |
|
|
|
600,000 |
|
Deferred expenses, net — non-current portion |
|
|
15,183 |
|
|
|
21,466 |
|
Long-term land lease prepayments, net |
|
|
118,720 |
|
|
|
120,099 |
|
Other long-term assets |
|
|
9,343 |
|
|
|
7,450 |
|
Total assets |
|
|
16,172,311 |
|
|
|
14,580,364 |
|
F-5
Brilliance China Automotive Holdings Limited
Consolidated Balance Sheets
As of December 31, 2007 and 2006
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Short-term bank loans |
|
|
370,000 |
|
|
|
500,000 |
|
Notes payable |
|
|
2,828,373 |
|
|
|
2,141,947 |
|
Notes payable to affiliated companies |
|
|
207,774 |
|
|
|
37,288 |
|
Accounts payable |
|
|
3,421,891 |
|
|
|
2,299,267 |
|
Due to affiliated companies |
|
|
952,847 |
|
|
|
983,293 |
|
Customer advances |
|
|
150,354 |
|
|
|
425,778 |
|
Other payables |
|
|
419,710 |
|
|
|
403,040 |
|
Dividends payable |
|
|
3,087 |
|
|
|
3,299 |
|
Accrued expenses and other current liabilities |
|
|
152,150 |
|
|
|
159,222 |
|
Income tax payable |
|
|
9,555 |
|
|
|
11,411 |
|
Other taxes payable |
|
|
71,095 |
|
|
|
81,841 |
|
Advances from affiliated companies |
|
|
56,134 |
|
|
|
55,389 |
|
Total current liabilities |
|
|
8,642,970 |
|
|
|
7,101,775 |
|
Convertible bonds |
|
|
1,489,907 |
|
|
|
1,486,568 |
|
Deferred income |
|
|
81,555 |
|
|
|
109,502 |
|
Advances from affiliated companies |
|
|
133,772 |
|
|
|
79,706 |
|
Total liabilities |
|
|
10,348,204 |
|
|
|
8,777,551 |
|
Minority interests |
|
|
(93,116 |
) |
|
|
36,900 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Capital stock |
|
|
|
|
|
|
|
|
Common stock (8,000,000,000 and 5,000,000,000
shares of US$0.01 each authorized as of
December 31, 2007 and 2006, respectively, and
3,669,765,900 and 3,668,390,900 shares of
US$0.01 each issued and outstanding as of
December 31, 2007 and 2006, respectively) |
|
|
303,488 |
|
|
|
303,388 |
|
Additional paid-in capital |
|
|
2,327,697 |
|
|
|
2,325,690 |
|
Accumulated other comprehensive income |
|
|
75,140 |
|
|
|
41,472 |
|
Dedicated capital |
|
|
193,356 |
|
|
|
184,193 |
|
Capital reserve |
|
|
120,000 |
|
|
|
120,000 |
|
Share option reserve |
|
|
43,090 |
|
|
|
11,281 |
|
Retained earnings |
|
|
2,854,452 |
|
|
|
2,779,889 |
|
Total shareholders’ equity |
|
|
5,917,223 |
|
|
|
5,765,913 |
|
Total liabilities and shareholders’ equity |
|
|
16,172,311 |
|
|
|
14,580,364 |
|
The accompanying notes are an integral part of these consolidated balance sheets.
F-6
Brilliance China Automotive Holdings Limited
Consolidated Statements of Cash Flows
For the years ended December 31, 2007, 2006 and 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
83,726 |
|
|
|
(386,108 |
) |
|
|
(671,289 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax |
|
|
— |
|
|
|
— |
|
|
|
114,005 |
|
Depreciation of property, plant and equipment |
|
|
593,263 |
|
|
|
601,045 |
|
|
|
399,744 |
|
Amortization of long-term land lease prepayments |
|
|
3,439 |
|
|
|
4,058 |
|
|
|
3,886 |
|
Amortization of intangible assets |
|
|
161,219 |
|
|
|
181,444 |
|
|
|
204,009 |
|
Amortization of deferred expenses |
|
|
6,283 |
|
|
|
24,962 |
|
|
|
8,920 |
|
Minority interests in net loss of consolidated
subsidiaries |
|
|
(130,332 |
) |
|
|
(376,282 |
) |
|
|
(625,998 |
) |
Provision for doubtful debts and write off of bad
debts |
|
|
5,269 |
|
|
|
28,196 |
|
|
|
48,244 |
|
Provision for impairment of intangible assets |
|
|
— |
|
|
|
— |
|
|
|
173,000 |
|
Provision for impairment of property, plant and
equipment |
|
|
836 |
|
|
|
29,160 |
|
|
|
48,299 |
|
Provision for impairment of investment in a
jointly controlled entity |
|
|
— |
|
|
|
73,343 |
|
|
|
179,030 |
|
Provision for impairment of goodwill in a
subsidiary |
|
|
— |
|
|
|
— |
|
|
|
78,690 |
|
Provision for inventories, net |
|
|
(130,185 |
) |
|
|
21,264 |
|
|
|
65,827 |
|
Gain on disposal of property, plant and equipment |
|
|
(2,428 |
) |
|
|
(3,055 |
) |
|
|
(341 |
) |
Gain on disposal of land lease prepayment |
|
|
(1,399 |
) |
|
|
— |
|
|
|
— |
|
Write off of property, plant and equipment |
|
|
4,198 |
|
|
|
8,251 |
|
|
|
— |
|
Gain on disposal of a jointly controlled entity |
|
|
— |
|
|
|
— |
|
|
|
(2,098 |
) |
Government grant recognized |
|
|
(140,081 |
) |
|
|
(1,850 |
) |
|
|
(941 |
) |
Unrealized exchange gain |
|
|
(100,043 |
) |
|
|
(69,259 |
) |
|
|
(40,829 |
) |
Equity in earnings of associated companies and
jointly controlled entities, net |
|
|
(192,261 |
) |
|
|
(149,320 |
) |
|
|
(48,995 |
) |
Amortisation of finance costs of convertible bonds |
|
|
103,170 |
|
|
|
68,419 |
|
|
|
12,419 |
|
Write off of other non-current assets |
|
|
— |
|
|
|
1,798 |
|
|
|
— |
|
Share option costs |
|
|
32,243 |
|
|
|
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-7
Brilliance China Automotive Holdings Limited
Consolidated Statements of Cash Flows
For the years ended December 31, 2007, 2006 and 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(173,094 |
) |
|
|
(521,656 |
) |
|
|
(69,974 |
) |
Notes receivable |
|
|
(218,827 |
) |
|
|
179,837 |
|
|
|
243,394 |
|
Notes receivable from affiliated companies |
|
|
(178,678 |
) |
|
|
257,493 |
|
|
|
306,173 |
|
Due from affiliated companies |
|
|
886,193 |
|
|
|
(191,724 |
) |
|
|
(79,804 |
) |
Inventories |
|
|
(991,935 |
) |
|
|
(321,608 |
) |
|
|
464,059 |
|
Other receivables |
|
|
(73,424 |
) |
|
|
75,113 |
|
|
|
7,278 |
|
Prepayments and other current assets |
|
|
(130,245 |
) |
|
|
(85,876 |
) |
|
|
69,374 |
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Notes and accounts payable |
|
|
2,689,050 |
|
|
|
1,487,870 |
|
|
|
(333,250 |
) |
Due to affiliated companies |
|
|
(622,386 |
) |
|
|
363,459 |
|
|
|
171,871 |
|
Notes payable to affiliated companies |
|
|
170,486 |
|
|
|
(36,804 |
) |
|
|
(47,070 |
) |
Customer advances |
|
|
(275,424 |
) |
|
|
106,800 |
|
|
|
53,486 |
|
Other payables |
|
|
4,442 |
|
|
|
25,566 |
|
|
|
43,423 |
|
Accrued expenses and other current liabilities |
|
|
(7,072 |
) |
|
|
(106,686 |
) |
|
|
(8,277 |
) |
Import tariff and taxes payable |
|
|
(37,618 |
) |
|
|
(143,155 |
) |
|
|
117,152 |
|
Net cash provided by operating activities |
|
|
1,338,385 |
|
|
|
1,145,568 |
|
|
|
883,417 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(308,425 |
) |
|
|
(304,152 |
) |
|
|
(558,028 |
) |
Proceeds from disposal of property, plant and
equipment |
|
|
6,921 |
|
|
|
3,314 |
|
|
|
9,487 |
|
Proceeds from disposal of land lease prepayment |
|
|
6,618 |
|
|
|
— |
|
|
|
— |
|
Decrease (Increase) in short-term bank deposits |
|
|
98,787 |
|
|
|
437,045 |
|
|
|
(45,230 |
) |
Decrease(Increase) in pledged short-term bank
deposits, restricted |
|
|
(346,516 |
) |
|
|
307,500 |
|
|
|
844,542 |
|
(Increase) in advances to affiliated companies |
|
|
(43,317 |
) |
|
|
(12,944 |
) |
|
|
(8,729 |
) |
(Increase) Decrease in other non-current assets |
|
|
(1,893 |
) |
|
|
1,719 |
|
|
|
12,866 |
|
Decrease in interests in associated companies and
jointly controlled entities |
|
|
— |
|
|
|
— |
|
|
|
11,517 |
|
Dividends received from associated companies and
jointly controlled entities |
|
|
21,000 |
|
|
|
81,000 |
|
|
|
72,000 |
|
Proceeds received from disposal of investment in
associated companies |
|
|
— |
|
|
|
1,350 |
|
|
|
— |
|
Net cash (used in) provided by investing activities |
|
|
(566,825 |
) |
|
|
514,832 |
|
|
|
338,425 |
|
F-8
Brilliance China Automotive Holdings Limited
Consolidated Statements of Cash Flows
For the years ended December 31, 2007, 2006 and 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loans |
|
|
430,000 |
|
|
|
650,000 |
|
|
|
501,202 |
|
Repayment of short-term bank loans |
|
|
(560,000 |
) |
|
|
(646,500 |
) |
|
|
(4,702 |
) |
Issuance of notes payable |
|
|
2,420,000 |
|
|
|
4,530,000 |
|
|
|
7,934,900 |
|
Repayment of notes payable |
|
|
(3,300,000 |
) |
|
|
(5,532,500 |
) |
|
|
(10,106,000 |
) |
Increase (decrease) in advances from affiliated
companies |
|
|
29,974 |
|
|
|
102,480 |
|
|
|
(9,434 |
) |
Dividends paid |
|
|
— |
|
|
|
— |
|
|
|
(19,450 |
) |
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 |
) |
|
|
— |
|
Issue of share capital by exercise of share options |
|
|
1,673 |
|
|
|
— |
|
|
|
— |
|
Receipts of government grants |
|
|
112,134 |
|
|
|
29,750 |
|
|
|
80,543 |
|
Net cash used in financing activities |
|
|
(866,219 |
) |
|
|
(1,035,725 |
) |
|
|
(1,622,941 |
) |
Net (decrease) increase in cash and cash
equivalents |
|
|
(94,659 |
) |
|
|
624,675 |
|
|
|
(401,099 |
) |
Cash and cash equivalents, beginning of year |
|
|
1,468,075 |
|
|
|
843,400 |
|
|
|
1,244,499 |
|
Cash and cash equivalents, end of year |
|
|
1,373,416 |
|
|
|
1,468,075 |
|
|
|
843,400 |
|
The accompanying notes are an integral part of these consolidated statements of cash flows.
F-9
Brilliance China Automotive Holdings Limited
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2007, 2006 and 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Share |
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
| |
|
Number of |
|
|
|
|
|
|
paid-in |
|
|
Dedicated |
|
|
option |
|
|
Capital |
|
|
comprehensive |
|
|
Retained |
|
|
|
|
| |
|
shares issued |
|
|
Amount |
|
|
capital |
|
|
capital |
|
|
reserve |
|
|
reserve |
|
|
income |
|
|
earnings |
|
|
Total |
|
| |
|
|
|
|
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004 |
|
|
3,668,390,900 |
|
|
|
303,388 |
|
|
|
2,325,690 |
|
|
|
158,352 |
|
|
|
— |
|
|
|
120,000 |
|
|
|
67,647 |
|
|
|
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 |
|
|
|
167,631 |
|
|
|
— |
|
|
|
120,000 |
|
|
|
40,420 |
|
|
|
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 |
|
|
|
184,193 |
|
|
|
11,281 |
|
|
|
120,000 |
|
|
|
41,472 |
|
|
|
2,779,889 |
|
|
|
5,765,913 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
83,726 |
|
|
|
83,726 |
|
Transfer to dedicated capital |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,163 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,163 |
) |
|
|
— |
|
Issue of share capital |
|
|
1,375,000 |
|
|
|
100 |
|
|
|
1,602 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,702 |
|
Premium arising from
exercise of employee share
option |
|
|
— |
|
|
|
— |
|
|
|
405 |
|
|
|
— |
|
|
|
(434 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(29 |
) |
Share option costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,243 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,243 |
|
Net unrealized gain on
marketable equity securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,393 |
|
|
|
— |
|
|
|
2,393 |
|
Share of a jointly
controlled entity’s fair
value adjustment for hedging
derivative |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,275 |
|
|
|
— |
|
|
|
31,275 |
|
Balance as of December 31,
2007 |
|
|
3,669,765,900 |
|
|
|
303,488 |
|
|
|
2,327,697 |
|
|
|
193,356 |
|
|
|
43,090 |
|
|
|
120,000 |
|
|
|
75,140 |
|
|
|
2,854,452 |
|
|
|
5,917,223 |
|
The accompanying notes are an integral part of these consolidated statements of changes in shareholders’ equity.
F-10
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 1. |
|
ORGANIZATION, PRINCIPAL ACTIVITIES AND OPERATING ENVIRONMENT |
Brilliance China Automotive Holdings Limited (the “Company”) was incorporated in Bermuda on 9th
June, 1992 with limited liability. The Company’s shares are traded on The Stock Exchange of Hong
Kong Limited (the “SEHK”). The Company’s American depositary shares (“ADSs”) were delisted from The
New York Stock Exchange Inc. on 26th July, 2007 and are currently traded on the over-the-counter
markets in the United States of America.
The Company is an investment holding company. The principal activities of the Company’s
subsidiaries (together with the Company referred to as the “Group”) are the manufacture and sale of
minibuses, sedans and automotive components in the People’s Republic of China (the “PRC”).
Details of the Company’s principal subsidiaries as of December 31, 2007 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Percentage of effective |
|
|
| |
|
Place of |
|
equity interest/voting |
|
|
| |
|
establishment/ |
|
right attributable to |
|
|
| Name |
|
incorporation |
|
the Company |
|
Principal activities |
| |
|
|
|
Directly |
|
Indirectly |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Finance Limited
|
|
British Virgin
Islands
|
|
|
100 |
% |
|
|
— |
|
|
Financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenyang ChenFa Automobile
Component Co., Ltd.
|
|
Shenyang, the PRC
|
|
|
100 |
% |
|
|
— |
|
|
Development,
manufacture and
sale of engines
components |
F-11
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 1. |
|
ORGANIZATION, PRINCIPAL ACTIVITIES AND OPERATING ENVIRONMENT (CONTINUED) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Percentage of effective |
|
|
| |
|
Place of |
|
equity interest/voting |
|
|
| |
|
establishment/ |
|
right attributable to |
|
|
| Name |
|
incorporation |
|
the Company |
|
Principal activities |
| |
|
|
|
Directly |
|
Indirectly |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brilliance China Automotive Finance Limited
|
|
British Virgin Islands
|
|
|
100 |
% |
|
|
— |
|
|
Inactive |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Group’s interests in associated companies and jointly controlled entities are
included in Note 13.
For the years ended December 31, 2007, 2006 and 2005, approximately 7%, 8% and 26% of the
consolidated revenue was generated from sales of goods to Shanghai Shenhua Holdings Co., Ltd.
(“Shanghai Shenhua”), an affiliated company.
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 Company’s 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; |
F-12
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 2. |
|
BASIS OF PRESENTATION (CONTINUED) |
| • |
|
Write-off of certain research and development expenditures which are recgonised as intangible
assets in the statutory financial statements; and |
| |
| • |
|
Recognition of stock-based compensation. |
|
|
|
| 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 Group’s balance sheet and income
statement respectively.
In 2005, 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 VIE’s activities entitled to receive a majority of
the VIE’s 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 created before 31
December, 2003 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 46R’s provision as the Group does not have the
contractual or legal right to obtain such information.
Except the above, the adoption of FIN 46R did not have a material impact on the Group’s financial
position or results of operations.
F-13
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
|
|
| (a) |
|
Basis of consolidation (Continued) |
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. Minority shareholders have an obligation to fund the shortfall.
Sales represent the invoiced value of goods, net of consumption tax, discounts and returns, and are
recognized when goods are received by the customers and the significant risks and rewards of
ownership of the goods have been transferred to customers, provided that there is evidence of a
final arrangement, there are no uncertainties surrounding acceptance, collectibility of such sales
is reasonably assured and the price is fixed. 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.
Interest income is recognized on a time proportion basis, taking into account the principal amounts
outstanding and the interest rates applicable.
Accounts receivable are stated at the amount management expects to collect from outstanding
balances. The Company performs ongoing credit evaluations of its customers and generally
requires no collateral to secure accounts receivable. The Company maintains an allowance for
potentially uncollectible accounts receivable based upon its assessment of the collectibility
of accounts receivable.
|
|
|
| (d) |
|
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.
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 method, 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.
F-14
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| (f) |
|
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 (after taking into account respective estimated
residual values). At the following annual rates:
F-15
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
|
|
| (f) |
|
Property, plant and equipment and long-term land lease prepayments (Continued) |
| |
|
|
|
|
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.
Purchased intangible assets with finite lives are amortized using the straight-line method over the
estimated economic lives of the assets of 7 years.
|
|
|
| (h) |
|
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.
Goodwill represents the excess of the purchase price over the fair value of the net assets
resulting from the Company’s 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.
F-16
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
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 unit’s goodwill.
If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Group
records an impairment loss equal to the difference.
|
|
|
| (j) |
|
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.
|
|
|
| (k) |
|
Investment securities |
The Group’s 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, our 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.
F-17
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
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, 2007, 2006 and
2005.
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, 2007, 2006 and
2005.
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 18%, 16.5% and 16.5% for the years ended December 31, 2007,
2006 and 2005.
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 2005, 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%, 18% and 7.5% for the years ended
December 31, 2007, 2006 and 2005, respectively.
F-18
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Income Tax (Continued)
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 2006, 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 2005
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%, 7.5% and 0% for the year ended
December 2007, 2006 and 2005, respectively.
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.
On January 1, 2007 the Company adopted Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with Statement of Financial Accounting Standard
(“SFAS”) No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a two step approach for
recognizing and measuring tax positions taken or expected to be taken in a tax return. Prior to
recognizing the benefit of a tax position in the financial statements, the tax position must be
more-likely-than-not of being sustained based solely on its technical merits. Once this recognition
threshold has been met, tax positions are recognized at the largest amount that is
more-likely-than-not to be sustained. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The adoption of this pronouncement had no effect on the Group’s overall financial position or
results of operations.
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%.
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.
F-19
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
|
|
| (n) |
|
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 Company’s
change in functional currency in previous years.
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 Automotive’s minibuses are sold with a 24-month or 50,000 kilometers (2006 and 2005: same)
first-to-occur limited warranty. The “Zhonghua” sedans, “Junjie” sedans and Kubao coupes are sold
with a 36-month or 60,000 kilometers (2006 and 2005: same) first-to-occur limited warranty.
“Zunchi” sedans are sold with a 10-year or 200,000 kilometres (2006 and 2005: 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:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, |
|
|
27,348 |
|
|
|
22,460 |
|
Accrual for warranties issued during the year |
|
|
73,832 |
|
|
|
42,102 |
|
Settlement made during the year |
|
|
(72,690 |
) |
|
|
(37,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, |
|
|
28,490 |
|
|
|
27,348 |
|
|
|
|
|
|
|
|
Advertising expenses are expended as incurred. For the years ended December 31, 2007, 2006 and
2005, advertising expenses of approximately RMB152.2 million, RMB250.1 million and RMB177.0
million, respectively, have been charged to selling, general and administrative expenses.
F-20
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
|
|
| (q) |
|
Research and development expenses |
Research and development expenses are expended as incurred. For the years ended December 31, 2007,
2006 and 2005, research and development expenses of approximately RMB402.8 million, RMB214.0
million and RMB235.2 million, respectively, have been charged to selling, general and
administrative expenses.
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.
|
|
|
| (s) |
|
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.
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.
F-21
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
|
|
| (t) |
|
Earnings (Loss) per share and earnings (loss) 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 earnings (loss) per share is based on the net income (loss) 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, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) during the year |
|
|
83,726 |
|
|
|
(386,108 |
) |
|
|
(671,289 |
) |
|
|
|
|
|
|
|
|
|
|
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, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares of common stock used in
calculation of basic earnings
(loss) per share |
|
|
3,669,022,065 |
|
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
Dilutive effect of stock options |
|
|
10,550,504 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
3,679,572,569 |
|
|
|
3,668,390,900 |
|
|
|
3,668,390,900 |
|
|
|
|
|
|
|
|
|
|
|
The diluted earnings per share/ADS calculation for the year ended December 31, 2007 is based on
weighted average number of common stocks/ADSs outstanding plus the weighted average number of
10,550,504 shares/ADSs deemed to be issued as if all outstanding share options granted had been
exercised.
For the year ended December 2007, 733,674,599 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.
As the Company was in loss position for 2006, 733,674,599 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.
F-22
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
|
|
| (t) |
|
Earnings (Loss) per share and earnings (loss) per ADS (Continued) |
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, 2005 is 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 2005, 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, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ADSs
used in calculation of basic
earnings (loss) per ADS |
|
|
36,690,221 |
|
|
|
36,683,909 |
|
|
|
36,683,909 |
|
Dilutive effect of stock options |
|
|
105,505 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ADSs
adjusted for dilutive effect of
stock options and convertible
bonds used in calculation of
diluted earnings (loss) per ADS |
|
|
36,795,726 |
|
|
|
36,683,909 |
|
|
|
36,683,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (u) |
|
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 Company’s 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.
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 the Group’ s share of the
hedging reserve of a jointly controlled entity resulting from the changes in the fair value of the
effective derivative financial instruments designated as cash flow hedge.
The Group has disclosed comprehensive income, which encompasses net income (loss) in the
statement of income and comprehensive income.
F-23
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
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 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.
Guarantee issued by the Group are 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, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others”. FIN 45 also contains disclosure
provisions surrounding existing guarantees. As of December 31, 2007 and 2006, the fair values of
the guarantees the Group have entered into are not material to the Group’s financial position.
Please refer to Notes 3(o) and 21(c) for details.
|
|
|
| (y) |
|
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 Group’s 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 Group’s general credit period are considered
delinquent. Delinquent receivables are written off based on individual credit evaluation and
specific circumstances of the customer.
|
|
|
| (z) |
|
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 Group’s financial instruments, which include cash, accounts and notes
receivable, intercompany receivables and payables and other payables, approximate their carrying
values in the financial statements.
The preparation of financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at 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.
|
|
|
| (ab) |
|
Other new accounting pronouncements |
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a two step approach for recognizing
and measuring tax positions taken or expected to be taken in a tax return. Prior to recognizing the
benefit of a tax position in the financial statements, the tax position must be
more-likely-than-not of being sustained based solely on its technical merits. Once this recognition
threshold has been met, tax positions are recognized at the largest amount that is
more-likely-than-not to be sustained. FIN 48, the financial statements will reflect expected future
tax consequences of such positions presuming the taxing authorities’ full knowledge of the position
and all relevant facts, but without considering time values. FIN 48 also revises disclosure
requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax
benefits. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not impact the
Company’s financial position and net earnings.
F-24
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 3. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
|
|
|
| (ab) |
|
Other new accounting pronouncements (Continued) |
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosure requirements
regarding fair value measurement. This statement simplifies and codifies fair value related
guidance previously issued and is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of
the statement has no material impact on the Company’s financial statements.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of SFAS No. 115, which permits companies to measure
many financial instruments and certain other assets and liabilities at fair value on an
instrument-by-instrument basis (the fair value option). SFAS 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The adoption of the statement has no material impact on the Company’s
financial statements.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial
Statements”(SFAS 160). SFAS 160 requires all entities to report non-controlling (minority)
interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 requires
that transactions between an entity and non-controlling interests are treated as equity
transactions. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company
is currently evaluating the effect of SFAS 160 on its consolidated financial statements and results
of operation and is currently not yet in a position to determine such effects.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (“SFAS
141R”) to improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a business combination
and its effects. This Statement applies to all transactions or other events in which an entity
obtains control of one or more businesses, and combinations achieved without the transfer of
consideration. SFAS No. 141 (revised 2007) is effective for prospectively to business combinations
for which the acquisition date is in on or after December 15, 2008. An earlier adoption is not
permitted. The Company is still considering that impact of SFAS 141R, if any, will depend on the
nature and size or business combinations the Company consummates after the effective date to its
financial statements.
During the year, the Group was granted government subsidies of RMB112,134,000. All of the approved
subsidies were received by the Group during the year. For the year ended December 31, 2007, 2006
and 2005, the government subsidies of RMB140,081,000, RMB50,176,000 and RMB3,139,000 were recorded
as income respectively.
For the years ended December 31, 2007, 2006 and 2005, certain of the Company’s 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).
F-25
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 5. |
|
INCOME TAXES (CONTINUED) |
The amount of (provision) benefit for income taxes in the consolidated income statement represents:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current taxation |
|
|
(45,208 |
) |
|
|
(47,879 |
) |
|
|
12,121 |
|
Deferred taxation |
|
|
— |
|
|
|
— |
|
|
|
(114,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,208 |
) |
|
|
(47,879 |
) |
|
|
(101,884 |
) |
|
|
|
|
|
|
|
|
|
|
The reconciliation of the Group’s effective income tax rate, based on income (loss) before taxes
and minority interests, to its statutory income tax rate for years ended December 31, 2007, 2006
and 2005 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
% |
|
|
% |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average statutory tax rate
(including state and local income
tax) |
|
|
(5,650.24 |
) |
|
|
5.17 |
|
|
|
10.25 |
|
Effect of statutory tax holiday |
|
|
4,048.63 |
|
|
|
5.87 |
|
|
|
3.07 |
|
Effect of non-deductible expenses |
|
|
(2,111.20 |
) |
|
|
(7.02 |
) |
|
|
(2.62 |
) |
Effect of valuation allowances |
|
|
1,378.32 |
|
|
|
(8.77 |
) |
|
|
(22.93 |
) |
Others, not individually significant |
|
|
(909.32 |
) |
|
|
(1.95 |
) |
|
|
3.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
(3,243.81 |
) |
|
|
(6.70 |
) |
|
|
(8.52 |
) |
|
|
|
|
|
|
|
|
|
|
The average statutory tax rates for the relevant periods represented the weighted average tax rates
of the Company’s subsidiaries calculated on the basis of the relative amount of income (loss)
before taxes and the applicable statutory tax rate of each subsidiary.
Components of deferred tax assets were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
Research and development costs |
|
|
88,814 |
|
|
|
62,008 |
|
Provisions and accruals |
|
|
37,065 |
|
|
|
56,893 |
|
Provision for impairment of property, plant and equipment |
|
|
3,023 |
|
|
|
7,541 |
|
Amortization and provision for impairment of intangible assets |
|
|
118,378 |
|
|
|
116,737 |
|
Tax losses carry forward |
|
|
127,248 |
|
|
|
144,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374,528 |
|
|
|
387,850 |
|
Valuation allowance (Note) |
|
|
(374,528 |
) |
|
|
(387,850 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
F-26
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 5. |
|
INCOME TAXES (CONTINUED) |
|
|
|
| Note: |
|
At December 31, 2007, valuation allowances of approximately RMB127.2 million (2006: RMB144.7
million) and RMB247.3 million (2006: RMB243.2 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 temporary
differences do not expire under current legislation but the unrecognized tax losses of RMB238.1
million (2006: RMB354.2 million), RMB610.2 million (2006: RMB610.2 million) will expire in 2009 and
2010 respectively. |
|
|
|
| 6. |
|
PLEDGED SHORT-TERM BANK DEPOSITS, RESTRICTED |
As of December 31, 2007 and 2006, approximately RMB1,971.7 million and RMB1,625.1 million,
respectively, of the short-term bank deposits were pledged as security for banking facilities,
corporate guarantees for bank loans given to affiliated companies and bank guaranteed notes issued
(Notes 19 and 21).
|
|
|
| 7. |
|
ACCOUNTS RECEIVABLE, NET |
Accounts receivable consist of:
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
868,075 |
|
|
|
694,981 |
|
Less: Allowance for doubtful debts |
|
|
(62,888 |
) |
|
|
(62,823 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
805,187 |
|
|
|
632,158 |
|
|
|
|
|
|
|
|
Movements of allowance for doubtful debts during the years ended December 31, 2007 and 2006 were:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, |
|
|
62,823 |
|
|
|
48,367 |
|
Additional provision |
|
|
83 |
|
|
|
14,456 |
|
Write-back of provision |
|
|
(18 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, |
|
|
62,888 |
|
|
|
62,823 |
|
|
|
|
|
|
|
|
The Company derived operating revenue from the following major customers, which accounted for over
10% of operating revenue.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Percentage of total sales for the year |
| |
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A |
|
|
23 |
% |
|
|
7 |
% |
|
Nil |
Customer B |
|
|
7 |
% |
|
|
8 |
% |
|
|
26 |
% |
F-27
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
Details of the amounts receivable from the above major customers as of December 31, 2007
and 2006 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Percentage of accounts receivable |
| |
|
December 31, |
| |
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Major customers receivable balances |
|
|
42 |
% |
|
|
42 |
% |
|
|
30 |
% |
Notes receivable are primarily notes received from customers for settlement of accounts receivable
balances. As of December 31, 2007 and 2006, 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 RMB223 million (2006: RMB233 million) of the notes
receivable were pledged for the issuance of bank guaranteed notes (Note 19).
Included in other receivables as of December 31, 2007 and 2006 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.
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Inventories consist of: |
|
|
|
|
|
|
|
|
Raw materials |
|
|
806,580 |
|
|
|
598,970 |
|
Work-in-progress |
|
|
226,476 |
|
|
|
174,328 |
|
Finished goods |
|
|
1,435,977 |
|
|
|
573,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,469,033 |
|
|
|
1,346,843 |
|
|
|
|
|
|
|
|
Allowance for obsolete of inventories as of 31 December, 2007 and 2006 are approximately
RMB70,091,000 and RMB200,276,000 respectively. During the years ended December 31, 2007, 2006 and
2005, the Company made a net provision of inventories, amounting to (RMB130,185,000), RMB21,264,000
and 65,827,000 respectively.
F-28
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 11. |
|
PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment consist of:
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Buildings |
|
|
1,262,157 |
|
|
|
1,238,713 |
|
Machineries and equipment |
|
|
4,578,375 |
|
|
|
4,439,080 |
|
Motor vehicles |
|
|
122,355 |
|
|
|
116,133 |
|
Furniture, fixtures and office equipment |
|
|
435,372 |
|
|
|
423,321 |
|
Construction-in-progress |
|
|
257,017 |
|
|
|
233,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,655,276 |
|
|
|
6,450,351 |
|
Less: Accumulated provision for impairment losses |
|
|
(94,907 |
) |
|
|
(125,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,560,369 |
|
|
|
6,325,323 |
|
Less: Accumulated depreciation |
|
|
(2,991,232 |
) |
|
|
(2,460,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
3,569,137 |
|
|
|
3,865,210 |
|
|
|
|
|
|
|
|
| (a) |
|
During the years ended December 31, 2007, 2006 and 2005, capitalized interest expense
amounted to approximately RMB5.5 million, RMB6.8 million and RMB23.9 million, respectively. |
| |
| (b) |
|
In December 2003, Shenyang Automotive disposed of certain machineries and equipment at their
net book value to the Group’s 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. Up to December 31, 2007,
BMW Brilliance has not required Shenyang Automotive to purchase back such machineries and
equipments. 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. The service fees of approximately RMB257,937, RMB254,479
and RMB112,160,000 were incurred for 2007, 2006 and 2005, 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, 2007 and 2006, the net book
value of the buildings, amounting to approximately RMB126,140,000 and RMB134,348,000,
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, 2007, amounting to approximately
RMB174,373,000 (2006: RMB113,343,000), was treated as financing and will be partially offset
against the lease rental payable in future years. |
F-29
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
| |
|
These respective buildings have been pledged by BMW Brilliance to a bank for long-term bank
loans granted to BMW Brilliance. |
| |
| (d) |
|
As a result of the retirement from use and/or the change in use — from production to rental
— of certain property, plant and equipment of the Group’s 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 RMB0.8 million, RMB29.1 million and RMB48.3 million for
the years ended December 31, 2007, 2006 and 2005 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-30
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 12. |
|
INTANGIBLE ASSETS, NET |
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
|
|
Balance as of January 1 |
|
|
1,539,333 |
|
|
|
1,521,722 |
|
Additions |
|
|
6,657 |
|
|
|
17,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31 |
|
|
1,545,990 |
|
|
|
1,539,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization |
|
|
|
|
|
|
|
|
Balance as of January 1 |
|
|
(895,355 |
) |
|
|
(713,911 |
) |
Amortization for the year |
|
|
(161,219 |
) |
|
|
(181,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31 |
|
|
(1,056,574 |
) |
|
|
(895,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment |
|
|
|
|
|
|
|
|
Balance as of January 1 and December 31 |
|
|
(223,000 |
) |
|
|
(223,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
|
Balance as of December 31 |
|
|
266,416 |
|
|
|
420,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1 |
|
|
420,978 |
|
|
|
584,811 |
|
|
|
|
|
|
|
|
There is a group of intangible assets included in our intangible asset, including sedan design
rights with a net book value of RMB102 million (2006: RMB178 million); components and parts
technology rights with a net book value of RMB135 million (2006: RMB217 million); and others with a
net book value of RMB29 million (2006: RMB26 million), that are similar in their use in the
operations of the Group as they relate 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 this group of
intangible assets are 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, a joint
venture partner, as capital into Shenyang Brilliance JinBei Automobile Co. Ltd., a subsidiary
of the Company in 2003. |
Since the operations in the manufacture and sale of Zhonghua sedans had just made a profit in 2007
but cumulated losses in previous years, the Group critically assessed the future economic benefit
of the intangible assets in relation to Zhonghua sedans mentioned in (a) to (b) by assessing the
net cash inflow the manufacture and sale of Zhonghua sedans will bring to the Group in the future.
Accordingly, no impairment loss for these intangible assets was considered necessary for the years
ended December 31, 2007 and 2006 (2005: impairment loss of RMB173 million was provided).
For each of the five years ending December 31, 2012, the estimated amortization expense of the
intangible assets in existence as of December 31, 2007 will be approximately RMB161 million,105
million , Nil, Nil and Nil.
F-31
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 13. |
|
INTERESTS IN ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES |
Interests in associated companies and jointly controlled entities as of December 31, 2007 consist
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 Automotive
Ltd. (“BMW Brilliance”)
|
|
Shenyang, the PRC
|
|
|
49.5 |
% |
|
Manufacture and
sale of BMW sedans |
|
|
|
| Notse: |
|
|
| |
| (1) |
|
The Group has effective equity interest of 12.77% in Shenyang Aerospace through 21% equity
interest jointly held by Xin Yuan Dong and Shenyang Automotive. On 29th September, 2005, the
Group entered into an agreement with a shareholder of Shenyang Aerospace to dispose of 2% of
the Group’s interest in Shenyang Aerospace for a cash consideration of RMB50 million. The
disposal is yet to be completed as at the date of these financial statements upon the approval
of respective local government. |
| |
| (2) |
|
On 7th August, 2006, the Group entered into an agreement with an independent third party to
dispose of 3.5% of the Group’s 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 upon the approval of the respective local government. |
F-32
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 13. |
|
INTERESTS IN ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES (CONTINUED) |
The carrying values of interests in associated companies and jointly controlled entities are:
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Interests in associated companies: |
|
|
|
|
|
|
|
|
Shenyang Aerospace |
|
|
374,919 |
|
|
|
357,893 |
|
Shenyang JinBei Vehicle |
|
|
13,840 |
|
|
|
14,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
388,759 |
|
|
|
371,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests in jointly controlled entities: |
|
|
|
|
|
|
|
|
Mianyang Xinchen |
|
|
309,984 |
|
|
|
304,462 |
|
Xinguang Brilliance |
|
|
35,187 |
|
|
|
28,523 |
|
BMW Brilliance |
|
|
881,987 |
|
|
|
708,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,227,158 |
|
|
|
1,041,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,615,917 |
|
|
|
1,413,135 |
|
|
|
|
|
|
|
|
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, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Shenyang Aerospace |
|
|
31,983 |
|
|
|
31,983 |
|
Mianyang Xinchen |
|
|
91,410 |
|
|
|
91,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,393 |
|
|
|
123,393 |
|
|
|
|
|
|
|
|
The Group recorded an impairment charge of RMB73.3 million and RMB179.0 million for 2006 and 2005,
respectively, 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.
No such impairment is required for 2007.
F-33
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 13. |
|
INTERESTS IN ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES (CONTINUED) |
The equity shares in the income (loss) of the associated companies and jointly controlled entities
for the years ended December 31, 2007 and 2006 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Associated companies: |
|
|
|
|
|
|
|
|
Shenyang Aerospace |
|
|
37,863 |
|
|
|
50,183 |
|
Shenyeng JinBei Vehicle |
|
|
(246 |
) |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,617 |
|
|
|
49,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jointly controlled entities: |
|
|
|
|
|
|
|
|
Mianyang Xinchen |
|
|
5,885 |
|
|
|
(414 |
) |
Xinguang Brilliance |
|
|
6,532 |
|
|
|
(6,876 |
) |
BMW Brilliance |
|
|
142,227 |
|
|
|
106,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,644 |
|
|
|
99,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192,261 |
|
|
|
149,320 |
|
|
|
|
|
|
|
|
Combined financial information of the associated companies is summarized as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
2,225,332 |
|
|
|
2,113,735 |
|
Profit before taxation, net |
|
|
206,390 |
|
|
|
209,438 |
|
Net income |
|
|
180,563 |
|
|
|
187,388 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
838,123 |
|
|
|
889,889 |
|
Non-current assets |
|
|
1,796,883 |
|
|
|
1,906,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
2,635,006 |
|
|
|
2,795,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
(433,145 |
) |
|
|
(634,616 |
) |
Long-term liabilities |
|
|
(540,000 |
) |
|
|
(580,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
(973,145 |
) |
|
|
(1,214,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
1,661,861 |
|
|
|
1,581,298 |
|
|
|
|
|
|
|
|
F-34
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 13. |
|
INTERESTS IN ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES (CONTINUED) |
Combined financial information of the jointly controlled entities is summarized as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
| |
Revenue |
|
|
13,343,555 |
|
|
|
8,953,086 |
|
Profit before taxation, net |
|
|
315,823 |
|
|
|
159,091 |
|
Net income |
|
|
296,356 |
|
|
|
197,063 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB'000 |
|
|
RMB'000 |
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
6,366,424 |
|
|
|
6,051,057 |
|
Non-current assets |
|
|
2,812,837 |
|
|
|
2,101,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
9,179,261 |
|
|
|
8,152,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
(6,049,432 |
) |
|
|
(5,530,655 |
) |
Long-term liabilities |
|
|
(871,478 |
) |
|
|
(700,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
(6,920,910 |
) |
|
|
(6,231,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
2,258,351 |
|
|
|
1,920,699 |
|
|
|
|
|
|
|
|
|
|
|
| 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, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities at cost |
|
|
17,305 |
|
|
|
17,305 |
|
Gross unrealized gain |
|
|
4,686 |
|
|
|
2,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,991 |
|
|
|
19,598 |
|
Unlisted securities at cost |
|
|
4,138 |
|
|
|
4,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,129 |
|
|
|
23,736 |
|
|
|
|
|
|
|
|
Available-for-sale securities represent a marketable security. The change in net unrealized gain
reported as a separate component of accumulated other comprehensive income was RMB2.4 million and
RMB1.1 million as of December 31, 2007 and 2006, respectively.
F-35
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 14. |
|
INVESTMENT SECURITIES (CONTINUED) |
Unlisted securities at cost of RMB4.1 million (2006: RMB 4.1 million) represents carrying amount of
the unlisted equity investment. (a) It is not practicable for the Group to estimate the fair value
of the investment for which a quoted market price is not available 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 the investment.
The carrying amount of goodwill of RMB339,710,000 (2006: RMB339,710,000) was associated with the
manufacture and sale of minibuses and automotive components operations.
During the years ended December 31, 2007 and 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 Shenyang Automobile Industry Asset
Management Company Limited (“SAIAM”) and Shenyang XinJinBei Investment Co., Ltd. (“SXI”),
respectively. SAIAM has 24.38% and SXI has 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 arm’s 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 effectively has an aggregate of
approximately 33.05% of the equity interests of JinBei.
As at December 31, 2007 and 2006, 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-36
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 17. |
|
DEFERRED EXPENSES, NET |
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Direct expenses incurred in connection with the
issuance of convertible bonds due 2011 (Note 18) |
|
|
31,414 |
|
|
|
31,414 |
|
Amortization |
|
|
(9,948 |
) |
|
|
(3,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,466 |
|
|
|
27,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion |
|
|
15,183 |
|
|
|
21,466 |
|
Current portion |
|
|
6,283 |
|
|
|
6,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,466 |
|
|
|
27,749 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Convertible bonds issued at par |
|
|
1,460,779 |
|
|
|
1,460,779 |
|
Accreted redemption premium |
|
|
162,327 |
|
|
|
59,157 |
|
Exchange gain |
|
|
(133,199 |
) |
|
|
(33,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,489,907 |
|
|
|
1,486,568 |
|
|
|
|
|
|
|
|
On June 7, 2007, the Group, through a wholly-owned subsidiary, Brilliance China Finance Limited,
issued zero coupon guaranteed convertible bonds with principal amount of US$182,678,000 (equivalent
to approximately RMB1,461 million at the time of issue). The convertible bonds are listed on the
Singapore Exchange Securities Trading Limited.
The convertible bonds 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, 2007, and up to and including May 8, 2011, unless the
convertible bonds have previously been redeemed.
Conversion price reset
| |
(1) |
|
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 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 not be converted at such reduced conversion price
into legally issued, fully-paid and non-assessable shares. Since the average market
price was HK$1.53 prior to the 10th March 2008 reset date, the conversion price was
adjusted from HK$1.93 to HK$1.53.
|
F-37
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
| |
|
|
Due to the adjustment to the conversion price, the total number of conversion shares
will increase from 733,674,599 shares at a conversion price of HK$1.93 to 925,484,964
shares at conversion price of HK$1.53. |
| |
| |
|
|
An ordinary resolution was proposed in an EGM held on 21st April 2008 to grant the
directors a specific mandate to issue, allot and deal with the additional conversion
shares. |
|
|
|
| 18. |
|
CONVERTIBLE BONDS (CONTINUED) |
Redemption
The convertible bonds 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 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 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 has been
converted, redeemed or purchased and cancelled. |
Unless previously converted, redeemed or purchased and cancelled, the convertible bonds will be
redeemed at 141.060% of their outstanding principal amount on June 7, 2011.
The convertible bonds 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 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, 2007, none of the convertible bonds had been converted into common stock of the
Company.
As of December 31, 2007, approximately RMB820 million (2006: RMB1,700 million) of notes payable had
effective interest rates of 3% to 4%, the remaining RMB2,008 million (2006: RMB442 million) of
notes payable were interest free. All notes payable approximate fair value because of the short
maturity. All notes payable were guaranteed by banks, repayable within one year, secured by pledged
short-term bank deposits of approximately RMB1,758 million (2006: RMB1,207 million) and bank
guaranteed notes received from third parties and affiliated companies of approximately RMB223
million (2006: RMB233 million).
F-38
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
Taxes payable consist of:
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Income tax payable |
|
|
9,554 |
|
|
|
11,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VAT payable |
|
|
12,674 |
|
|
|
10,651 |
|
Consumption tax payable |
|
|
44,967 |
|
|
|
54,727 |
|
Others |
|
|
13,454 |
|
|
|
16,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other taxes payable |
|
|
71,095 |
|
|
|
81,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,649 |
|
|
|
93,252 |
|
|
|
|
|
|
|
|
|
|
|
| 21. |
|
COMMITMENTS AND CONTINGENCIES |
As of December 31, 2007, the Group had approximately RMB1,728.1 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 RMB718.7 million and
authorized but not contracted for capital commitment amounting to approximately RMB1,009.4 million.
The Company leases premises under various operating leases which do not contain any escalation
clauses. As of December 31, 2007, the future aggregate minimum lease payments under
non-cancellable operating leases are detailed as follows:
| |
|
|
|
|
| |
|
Operating |
|
| |
|
lease |
|
| |
|
RMB’000 |
|
|
|
|
|
|
Within one year |
|
|
16,367 |
|
One to two years |
|
|
6,201 |
|
Two to three years |
|
|
4,263 |
|
Three to four years |
|
|
4,263 |
|
Four to five years |
|
|
4,129 |
|
Over five years |
|
|
31,296 |
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
66,519 |
|
|
|
|
|
F-39
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 21. |
|
COMMITMENTS AND CONTINGENCIES (CONTINUED) |
|
|
|
| (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.
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 in operating leases was RMB4.4 million and RMB4.4 million for the years ended
December 31, 2007 and 2006, respectively.
Investments in operating leases are as follows:
| |
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
| |
|
RMB’000 |
|
|
|
|
|
|
Buildings |
|
|
97,358 |
|
Accumulated depreciation |
|
|
(19,542 |
) |
|
|
|
|
|
|
|
|
|
Net investment in operating leases |
|
|
77,816 |
|
|
|
|
|
Future minimum rental payments to be received on non-cancellable operating leases are contractually
due as follows:
| |
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
| |
|
RMB’000 |
|
|
|
|
|
|
Within one year |
|
|
19,884 |
|
One to two years |
|
|
14,174 |
|
Two to three years |
|
|
14,174 |
|
Three to four years |
|
|
14,174 |
|
Four to five years |
|
|
14,174 |
|
Over five years |
|
|
76,778 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
153,358 |
|
|
|
|
|
|
There were no contingent rentals under the respective lease contracts.
F-40
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 21. |
|
COMMITMENTS AND CONTINGENCIES (CONTINUED) |
| (c) |
|
Contingent liabilities |
| |
| (i) |
|
As of December 31, 2007, the Group had provided the following guarantees: |
| |
(1) |
|
Corporate guarantees of approximately RMB60 million (2006: 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, 2007, the guarantee provided for the bank loans and notes
drawn by affiliated companies of Shanghai Shenhua was approximately RMB60 million (2006:
RMB120 million), which is also the maximum potential amount of future payments under the
guarantee as of December 31, 2007. However, default by Shanghai Shenhua and its
affiliated companies is considered remote by management and therefore no liability for
the guarantor’s obligation under the guarantee existed as of December 31, 2007. |
| |
| |
(2) |
|
Corporate guarantees of bank loans amounting to RMB200 million (2006: RMB295
million), which is also the maximum potential amount of future payments under the
guarantee as of December 31, 2007, drawn by JinBei. Bank deposits of RMB213 million
(2006: RMB312 million) were pledged as collateral for the corporate guarantees. However,
default by JinBei is considered remote by management and therefore no liability for the
guarantor’s obligation under the guarantee existed as of December 31, 2007. |
| (ii) |
|
On or about 25th October, 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 RMB31.5 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 28th January, 2003. Mr. Yang
subsequently applied for a review of this decision. At the review hearing on 4th July, 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 16th September, 2003, a Statements of Claim was served on the Company. On 4th November,
2003, the Company filed a Defence and Counterclaim with the High Court. Mr. Yang filed a Reply
to Defence and Defence to Counterclaim on 26th April, 2004. On 21st July, 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 4th September, 2004.
Pleadings closed on 18th September, 2004. The parties filed and served Lists of Documents on
26th October, 2004 and witness statements were exchanged on 28th February, 2005. |
F-41
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 21. |
|
COMMITMENTS AND CONTINGENCIES (CONTINUED) |
| (c) |
|
Contingent liabilities (Continued) |
| |
| |
|
The parties applied by consent to adjourn sine die a checklist hearing fixed for 20th April ,
2005, as the respective parties anticipated that that they would be filing supplemental
evidence and amending their pleadings. The Court approved the application and made an Order on
19th April, 2005 that the checklist hearing be vacated and adjourned sine die with liberty to
restore. |
| |
| |
|
Pursuant to a request made by Mr. Yang on 2nd June, 2005 for further and better particulars of
the Defence and Counterclaim, the Company filed and served its Answer to Mr. Yang’s request on
4th July, 2005. |
| |
| |
|
On August 17, 2006, in compliance with its continuing discovery obligations, the Company filed
and served a Supplemental List of Documents. Subsequently, on September 5, 2006, 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. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
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
(Note1) |
|
8,000,000 |
|
|
|
US$80,000 |
|
|
|
5,000,000 |
|
|
US$50,000 |
|
|
|
5,000,000 |
|
|
US$50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and fully paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
of US$0.01 each (Note
2) |
|
|
3,669,766 |
|
|
RMB303,488 |
|
|
|
3,668,391 |
|
|
RMB303,388 |
|
|
|
3,668,391 |
|
|
RMB303,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Note 1: |
|
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. |
| |
| Note 2: |
|
1,125,000 and 250,000 ordinary shares were issued on 16th July,2007 and 24th July, 2007,
respectively, as a result of an exercise of share option on 16th July, 2007, at an
aggregate consideration of RMB1,702,000 (or HK$1,815,000) of which RMB1,602,000 was credited to the
share premium account. |
F-42
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
Original share option scheme approved in 1999
Upon the listing on the Company’s shares on the SEHK, the Company adopted an employee share option
scheme (the “Scheme”). Pursuant to the Scheme, the Company’s board of directors may grant options
to employees of the Group to subscribe for the Company’s 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 exchange’s 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 Company’s 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
statement 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 this scheme from 2005 to 2007.
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. On June 28, 2006 and December 31, 2007, share options were granted to certain
directors and employees of the Group, entitling them to subscribe for a total of 35,750,000 and
59,500,000 shares of the Company’s common stock at HK$1.320 and HK$1.746 per share respectively.
The exercisable period of these options is from December 28, 2006 to December 27, 2016 and from
December 31, 2007 to December 30, 2017 respectively. Pursuant to the New Scheme, the Company’s
board of directors may grant options to the participants (include the Group’s employees,
non-executive directors, suppliers and customers, etc.) to subscribe for the Company’s 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
exchange’s 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 exchange’s 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. |
F-43
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 23. |
|
STOCK OPTIONS (CONTINUED) |
Details of Movements of share options granted under both 1999 and 2002 Schemes during the year are
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Exercise prices (the |
|
|
|
|
| |
|
|
|
|
|
weighted average |
|
|
|
|
| |
|
No. of share |
|
|
exercise price in |
|
|
Aggregate |
|
| |
|
options |
|
|
parenthesis) |
|
|
intrinsic value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2005 |
|
|
14,490,000 |
|
|
HK$1.896 |
|
|
|
|
|
Cancelled/lapsed |
|
|
(11,690,000 |
) |
|
HK$1.896 |
|
|
|
|
|
| |
Outstanding as of December 31,2005
and January 1, 2006 |
|
|
2,800,000 |
|
|
HK$1.896 |
|
|
|
|
|
Granted |
|
|
35,750,000 |
|
|
HK$1.320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of December 31, 2006 and January 1, 2007 |
|
|
38,550,000 |
|
|
HK$1.896, HK$1.320 |
|
|
|
|
|
|
|
|
|
|
|
(HK$1.362 |
) |
|
|
|
|
Granted |
|
|
59,500,000 |
|
|
HK$1.746 |
|
|
|
|
|
Exercised |
|
|
(1,375,000 |
) |
|
HK$1.320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2007 |
|
|
|
|
|
HK$1.320, HK$1.746 |
|
|
|
|
|
|
|
|
|
|
|
and HK$1.896 |
|
|
|
|
|
|
|
|
96,675,000 |
|
|
(HK$1.599 |
) |
|
HK$14,437,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2007 |
|
|
|
|
|
HK$1.320 and |
|
|
|
|
|
|
|
|
96,675,000 |
|
|
HK$1.746 (HK$1.599 |
) |
|
HK$14,437,000 |
|
|
|
|
|
|
|
|
|
|
|
Share options outstanding at December 31, 2007 under both 1999 and 2002 Schemes are summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
No. of share |
|
|
average |
|
|
Weighted |
|
| |
|
options |
|
|
remaining |
|
|
average |
|
| Range of Exercise Prices |
|
outstanding |
|
|
contractual life |
|
|
exercise price |
|
HK$1.320-HK$1.896 |
|
|
96,675,000 |
|
|
9.45 years |
|
|
HK$1.599 |
|
The weighted average remaining contractual life of the share options outstanding as at December 31,
2007 was approximately 9.45 years (2006: 9.59 years)
The Compensation expenses associated with these grants was fully vested and charged to income
statement in 2007. The exercise of 1,375,000 shares option during 2007 increased common stock and
additional paid in capital by approximately RMB100,000 and RMB1,602,000, respectively.
F-44
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
The fair value of the share options granted during the year is approximately RMB32,243,000 (2006:
aproximately RMB11,281,000), which was calculated using the Black-Scholes option pricing model.
Where relevant, the expected life used in the model has been adjusted based on management’s 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.
The fair value of services received in return for share options granted is measured by reference to
the fair value of share options granted. The estimate of the fair value of the share options
granted is measured based on Black-Scholes option pricing model. The following significant
assumptions were used to derive the fair values.
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Fair value at measurement date |
|
HK$0.5549 |
|
|
HK$0.3139 |
|
Expected volatility |
|
|
48.44 |
% |
|
|
42.64 |
% |
Option life |
|
2 - 3 years |
|
|
1 - 2 years |
|
Expected dividends |
|
Nil |
|
|
Nil |
|
Risk-free interest rate |
|
|
2.58%-2.79 |
% |
|
|
3.48%-3.509 |
% |
The expected volatility reflects the assumption that the historical volatility is indicative of
future trends, which may also not necessarily be the actual outcome.
|
|
|
| 24. |
|
DISTRIBUTION OF PROFIT |
As stipulated by the relevant laws and regulations for foreign-invested enterprises in the PRC, the
Company’s subsidiaries are required to maintain non-distributable discretionary dedicated capital
RMB193 million (2006: RMB184 million), 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, 2007, 2006 and 2005, the subsidiaries of the Company appropriated approximately RMB9.2
million, RMB16.6 million and RMB9.3 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, 2007, 2006 and 2005.
The undistributed earnings retained share by the Group’s in the associated companies and jointly
controlled entities amounted to approximately RMB382.3 million and RMB159.50 million as of December
31, 2007 and 2006, respectively.
No dividend was declared by the Company during 2007 and 2006. On April 21, 2008 the directors of
the Company did not recommend the payment of any dividend for the year 2007.
|
|
|
| 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 |
F-45
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
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:
| (b) |
|
Amounts due from affiliated companies arising from trading activities consisted of the
following: |
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Due from related parties: |
|
|
|
|
|
|
|
|
— Shanghai Shenhua and its affiliated companies |
|
|
368,499 |
|
|
|
431,310 |
|
— Affiliated companies of JinBei |
|
|
91,347 |
|
|
|
93,446 |
|
— An affiliated company of BHL |
|
|
94,095 |
|
|
|
55,040 |
|
— A subsidiary of the substantial shareholder of the Company |
|
|
61,455 |
|
|
|
— |
|
— BMW Brilliance |
|
|
|
|
|
|
|
|
— Accounts receivables |
|
|
98,224 |
|
|
|
247,564 |
|
— Consideration receivable arising from the disposal
of machinery and equipment (note (i)) |
|
|
— |
|
|
|
134,527 |
|
— Other jointly controlled entities |
|
|
321 |
|
|
|
21,470 |
|
Less: Provision for doubtful debts |
|
|
(29,720 |
) |
|
|
(29,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
684,221 |
|
|
|
953,637 |
|
|
|
|
|
|
|
|
| |
|
|
| (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(c)). |
| |
| (ii) |
|
Except for (i) above, the amounts due from affiliated companies are unsecured, non-interest
bearing and have no fixed repayment terms. |
F-46
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 25. |
|
RELATED PARTY TRANSACTIONS (CONTINUED) |
|
|
|
| (c) |
|
Notes receivable from affiliated companies arising from trading activities consisted of the
following: |
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Notes receivable from related parties: |
|
|
|
|
|
|
|
|
— Affiliated companies of JinBei |
|
|
3,050 |
|
|
|
16,620 |
|
— Shanghai Shenhua |
|
|
143,276 |
|
|
|
63,750 |
|
— Associated companies and jointly controlled entities |
|
|
— |
|
|
|
1,107 |
|
— A subsidiary of the substantial shareholders of the Company |
|
|
113,829 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,155 |
|
|
|
81,477 |
|
|
|
|
|
|
|
|
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.
|
|
|
| (d) |
|
Dividends receivable from affiliated companies consisted of: |
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
Dividend receivable from a jointly controlled entity |
|
|
76,173 |
|
|
|
76,173 |
|
Dividend receivable from an associate |
|
|
21,000 |
|
|
|
21,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,173 |
|
|
|
97,173 |
|
|
|
|
|
|
|
|
|
|
|
| (e) |
|
Amounts due to affiliated companies arising from trading activities consisted of the following: |
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Due to related parties: |
|
|
|
|
|
|
|
|
— Associated companies and jointly controlled entities |
|
|
584,971 |
|
|
|
680,943 |
|
—Affiliated companies of Shanghai Shenhua |
|
|
1,870 |
|
|
|
10,719 |
|
—Affiliated companies of JinBei |
|
|
365,275 |
|
|
|
281,721 |
|
— Other affiliated companies |
|
|
731 |
|
|
|
9,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
952,847 |
|
|
|
983,293 |
|
|
|
|
|
|
|
|
The amounts due to affiliated companies are unsecured, non-interest bearing and have no fixed
repayment terms.
F-47
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 25. |
|
RELATED PARTY TRANSACTIONS (CONTINUED) |
|
|
|
| (f) |
|
Notes payable to affiliated companies arising from trading activities consisted of the
following: |
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Notes payable to related parties: |
|
|
|
|
|
|
|
|
— Affiliated companies of BHL |
|
|
60,686 |
|
|
|
— |
|
— An affiliated companies of JinBei |
|
|
51,167 |
|
|
|
7,249 |
|
— Associated companies and jointly controlled entities |
|
|
95,921 |
|
|
|
30,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,774 |
|
|
|
37,288 |
|
|
|
|
|
|
|
|
F-48
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 25. |
|
RELATED PARTY TRANSACTIONS (CONTINUED) |
|
|
|
| (g) |
|
Save as disclosed elsewhere in the financial statements, significant transactions with
affiliated companies consisted of the following: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
Sales of goods: |
|
|
|
|
|
|
|
|
|
|
|
|
— JinBei and its affiliated companies |
|
|
452,933 |
|
|
|
178,414 |
|
|
|
69,432 |
|
— Shanghai Shenhua and its affiliated companies |
|
|
1,394,130 |
|
|
|
1,052,689 |
|
|
|
1,469,402 |
|
— A subsidiary of the substantial shareholders of the
Company |
|
|
1,119,096 |
|
|
|
— |
|
|
|
— |
|
— Associated companies and jointly controlled entities |
|
|
188,315 |
|
|
|
186,146 |
|
|
|
71,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,154,474 |
|
|
|
1,417,249 |
|
|
|
1,609,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of goods: |
|
|
|
|
|
|
|
|
|
|
|
|
—Affiliated companies of JinBei |
|
|
1,477,018 |
|
|
|
895,457 |
|
|
|
383,808 |
|
—Affiliated companies of Shanghai Shenhua |
|
|
102,785 |
|
|
|
16,668 |
|
|
|
85,354 |
|
—Affiliated companies of BHL |
|
|
115,223 |
|
|
|
117,336 |
|
|
|
66,441 |
|
— Associated companies and jointly controlled entities |
|
|
1,004,303 |
|
|
|
942,878 |
|
|
|
524,221 |
|
— Affiliated companies of the joint venture partner of
Xinguang Brilliance |
|
|
147 |
|
|
|
68 |
|
|
|
761 |
|
— Shareholders of Shenyang Aerospace |
|
|
63,227 |
|
|
|
90,505 |
|
|
|
1,987 |
|
Subcontracting charges to a jointly controlled entity |
|
|
257,937 |
|
|
|
254,479 |
|
|
|
112,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,020,640 |
|
|
|
2,317,391 |
|
|
|
1,174,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intangible asset from an affiliated company
of the joint venture partner of Ningbo Yuming |
|
|
|
|
|
|
|
|
|
|
|
|
Finance charge to a jointly controlled entity |
|
|
16,100 |
|
|
|
16,748 |
|
|
|
17,329 |
|
Operating lease rental on land and buildings charged by: |
|
|
|
|
|
|
|
|
|
|
|
|
— A jointly controlled entity |
|
|
3,430 |
|
|
|
908 |
|
|
|
2,206 |
|
— Shanghai Shenhua and its affiliated companies |
|
|
592 |
|
|
|
1,148 |
|
|
|
— |
|
— Affiliated companies of JinBei |
|
|
— |
|
|
|
60 |
|
|
|
— |
|
Mould testing income from a jointly controlled entity |
|
|
1,776 |
|
|
|
4,320 |
|
|
|
— |
|
Operating lease rental from a jointly controlled entity |
|
|
14,384 |
|
|
|
34,863 |
|
|
|
15,078 |
|
Proceeds from sale of property, plant and equipment a
jointly controlled entity |
|
|
— |
|
|
|
80,332 |
|
|
|
263 |
|
Service income from a jointly controlled entity |
|
|
18,560 |
|
|
|
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-49
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 25. |
|
RELATED PARTY TRANSACTIONS (CONTINUED) |
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, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Advances to related parties: |
|
|
|
|
|
|
|
|
— Associated companies and jointly controlled entities |
|
|
26,364 |
|
|
|
6,553 |
|
—Affiliated companies of BHL |
|
|
51,134 |
|
|
|
15,273 |
|
— Shanghai Shenhua and its affiliated companies |
|
|
14,044 |
|
|
|
14,044 |
|
—JinBei and its affiliated companies |
|
|
12,062 |
|
|
|
23,740 |
|
— Other affiliated companies |
|
|
12 |
|
|
|
689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,616 |
|
|
|
60,299 |
|
Less: provision for doubtful debts |
|
|
(2,214 |
) |
|
|
(2,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,402 |
|
|
|
58,085 |
|
|
|
|
|
|
|
|
Advances to affiliated companies are unsecured, non-interest bearing and with no fixed repayment
term (2006: Same)
|
|
|
| (h) |
|
Advances from affiliated companies consisted of the following: |
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
Advances from related parties: |
|
|
|
|
|
|
|
|
— Associated companies and jointly controlled entities |
|
|
1,282 |
|
|
|
1,279 |
|
—BHL and its affiliated companies |
|
|
12,086 |
|
|
|
12,728 |
|
— Affiliated companies of Shanghai Shenhua |
|
|
1,430 |
|
|
|
820 |
|
—JinBei and its affiliated companies |
|
|
735 |
|
|
|
6,925 |
|
— Current portion of financing received from BMW
Brilliance (Note 11(d)) |
|
|
40,601 |
|
|
|
33,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,134 |
|
|
|
55,389 |
|
|
|
|
|
|
|
|
F-50
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 25. |
|
RELATED PARTY TRANSACTIONS (CONTINUED) |
Note: The advances from BMW Brilliance are repayable on the following terms.
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
| |
Within 1 year |
|
|
40,601 |
|
|
|
33,637 |
|
More than 1 year but less than 2 years |
|
|
7,772 |
|
|
|
13,204 |
|
More than 2 years but less than 5 years |
|
|
29,154 |
|
|
|
26,124 |
|
More than 5 years |
|
|
96,846 |
|
|
|
40,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,373 |
|
|
|
113,343 |
|
Less: non-current portion |
|
|
(133,772 |
) |
|
|
(79,706 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion |
|
|
40,601 |
|
|
|
33,637 |
|
|
|
|
|
|
|
|
Save for the financing received from BMW Brilliance as detailed in Note 11(d), 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 Company’s 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 Company’s 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 2007 (2006: 19%-23%; 2005: 20%) payable to Labor and Social Security
Bureaus of the PRC government. The retirement plan contributions payable for the years ended
December 31, 2007, 2006 and 2005 were approximately RMB75.6 million, RMB36.1 million and RMB33.1
million, respectively. In addition to the pension contributions, pursuant to the relevant laws and
regulations of the PRC, the Company’s subsidiaries are required to provide benefits such as housing
funds, medical insurance and unemployment insurance for their PRC employees. These provisions,
which were approximately RMB68.6 million, RMB32.7 million and RMB29.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively, were calculated at a certain percentage
(approximately 15.4% to 25.4% in 2007, 15.4% to 25.4% in 2006 and 15.4% to 25.4% in 2005) of the
employees’ basic salaries.
The Group’s 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, 2007, 2006 and 2005, contributions amounting to approximately
HK$81,000, HK$89,000 and HK$122,000, respectively, were made.
Certain officers of the Company are participants in the Executive Bonus Plan (the “Plan”). The Plan
provides that up to 5% of the Company’s net income be set aside each year for distribution among
plan participants based upon performance as determined by the Company’s 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, 2007, 2006 and 2005 , no performance bonus was allocated.
F-51
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 28. |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest (net of amount capitalized: 2007: RMB5,533,000; 2006: RMB6,766,000; 2005: RMB23,875,000) |
|
|
106,924 |
|
|
|
92,744 |
|
|
|
111,303 |
|
Income taxes |
|
|
65,858 |
|
|
|
39,240 |
|
|
|
33,975 |
|
During the years ended December 31, 2007, 2006 and 2005, major non-cash transactions included:
During the year ended December 31, 2007, the Group entered into an agreement with affiliated
companies to offset receivable balances due from the affiliated companies with the Group’s payable
balances to that affiliated companies of approximately RMB617 million (2006: 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, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Import tariffs |
|
|
29,680 |
|
|
|
31,616 |
|
|
|
15,224 |
|
Research and development costs |
|
|
402,826 |
|
|
|
214,021 |
|
|
|
235,177 |
|
Foreign exchange gains, net |
|
|
80,040 |
|
|
|
32,955 |
|
|
|
21,487 |
|
Provision for impairments of property, plant and
equipment |
|
|
— |
|
|
|
29,160 |
|
|
|
48,299 |
|
Provision for doubtful debts and write off of bad debts |
|
|
5,566 |
|
|
|
28,272 |
|
|
|
55,703 |
|
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 Group’s 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 Group’s activities are
conducted predominantly in the PRC. Accordingly, no geographical segmentation analysis is provided.
F-52
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
The Group’s credit risk primarily consists of receivables from a variety of customers including
state and local agencies, municipalities and private industries. The Group reviews its accounts
receivable and provides estimates of allowances as deemed necessary.
Business segments — 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Manufacture |
|
|
|
|
|
|
|
|
|
|
| |
|
and sale of |
|
|
Manufacture |
|
|
|
|
|
|
|
| |
|
minibuses and |
|
|
and sale of |
|
|
Manufacture |
|
|
|
|
| |
|
automotive |
|
|
Zhonghua |
|
|
and sale of |
|
|
|
|
| |
|
components |
|
|
sedans |
|
|
BMW sedans |
|
|
Total |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues from reportable segments |
|
|
5,729,289 |
|
|
|
8,754,847 |
|
|
|
— |
|
|
|
14,484,136 |
|
Elimination of intersegment revenues |
|
|
(334,987 |
) |
|
|
— |
|
|
|
— |
|
|
|
(334,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
|
5,394,302 |
|
|
|
8,754,847 |
|
|
|
— |
|
|
|
14,149,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) income before taxation and
minority interests |
|
|
194,986 |
|
|
|
(286,223 |
) |
|
|
142,227 |
|
|
|
50,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— corporate income net of corporate expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,405 |
|
—interest income less interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxation and minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of December 31, 2007 |
|
|
7,115,643 |
|
|
|
8,038,601 |
|
|
|
881,987 |
|
|
|
16,036,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts — corporate assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,172,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of fixed assets |
|
|
207,216 |
|
|
|
386,047 |
|
|
|
— |
|
|
|
593,263 |
|
Amortization of long-term land lease
prepayments |
|
|
2,254 |
|
|
|
1,185 |
|
|
|
— |
|
|
|
3,439 |
|
Amortization on intangible assets |
|
|
9,548 |
|
|
|
151,671 |
|
|
|
— |
|
|
|
161,219 |
|
Impairment of equity method goodwill (Note
13) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital expenditure |
|
|
41,810 |
|
|
|
278,843 |
|
|
|
— |
|
|
|
320,653 |
|
Equity in earnings of associated companies
and jointly controlled entities |
|
|
12,171 |
|
|
|
37,863 |
|
|
|
142,227 |
|
|
|
192,261 |
|
Equity method goodwill (Note 13) |
|
|
91,410 |
|
|
|
31,983 |
|
|
|
— |
|
|
|
123,393 |
|
Goodwill (Note 15) |
|
|
339,710 |
|
|
|
— |
|
|
|
— |
|
|
|
339,710 |
|
F-53
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
Business segments — 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Manufacture and |
|
|
|
|
|
|
|
|
|
|
| |
|
sale of |
|
|
Manufacture and |
|
|
|
|
|
|
|
| |
|
minibuses and |
|
|
sale of |
|
|
Manufacture and |
|
|
|
|
| |
|
automotive |
|
|
Zhonghua |
|
|
sale of BMW |
|
|
|
|
| |
|
components |
|
|
sedans |
|
|
sedans |
|
|
Total |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) income before taxation and
minority interests |
|
|
145,602 |
|
|
|
(830,404 |
) |
|
|
106,692 |
|
|
|
(578,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— corporate expenses net of corporate income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
Impairment of goodwill in a subsidiary (Note
15) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
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-54
Brilliance China Automotive Holdings Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
|
|
|
| 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 |
|
|
Foreign |
|
|
Accumulative |
|
| |
|
marketable |
|
|
currency |
|
|
other |
|
| |
|
available-for- |
|
|
translation |
|
|
comprehensive |
|
| |
|
sale securities |
|
|
adjustments |
|
|
income |
|
| |
|
RMB’000 |
|
|
RMB’000 |
|
|
RMB’000 |
|
| |
Balance as of January 1, 2006 |
|
|
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 |
|
Current year change |
|
|
2,393 |
|
|
|
— |
|
|
|
2,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
|
4,686 |
|
|
|
39,179 |
|
|
|
43,865 |
|
|
|
|
|
|
|
|
|
|
|
Certain comparative figures in previous years have been reclassified to conform to the fiscal 2007
presentation.
|
|
|
| 33. |
|
APPROVAL OF FINANCIAL STATEMENTS |
The financial statements were approved by the board of directors on June 27, 2008.
F-55
Financial Statements Schedules
Schedule II — Valuation and qualifying accounts
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Charged / |
|
|
|
|
| |
|
beginning of the |
|
(credited) to |
|
Deductions |
|
Balance at end |
| Description |
|
year |
|
expenses |
|
Note (a) |
|
of the year |
| |
|
RMB’000 |
|
RMB’000 |
|
RMB’000 |
|
RMB’000 |
Year ended December
31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
debt of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Accounts receivables |
|
|
62,823 |
|
|
|
65 |
|
|
|
— |
|
|
|
62,888 |
|
— Other receivables |
|
|
82,725 |
|
|
|
5,204 |
|
|
|
(292 |
) |
|
|
87,637 |
|
— Due from affiliated companies |
|
|
29,720 |
|
|
|
— |
|
|
|
— |
|
|
|
29,720 |
|
— Advances to affiliated
companies |
|
|
2,214 |
|
|
|
— |
|
|
|
— |
|
|
|
2,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventories |
|
|
200,276 |
|
|
|
(130,185 |
) |
|
|
— |
|
|
|
70,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December
31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Accounts receivables |
|
|
48,367 |
|
|
|
14,456 |
|
|
|
— |
|
|
|
62,823 |
|
— Other receivables |
|
|
78,003 |
|
|
|
13,740 |
|
|
|
(9,018 |
) |
|
|
82,725 |
|
— Due from affiliated
companies |
|
|
29,720 |
|
|
|
— |
|
|
|
— |
|
|
|
29,720 |
|
— Advances to affiliated
companies |
|
|
9,250 |
|
|
|
— |
|
|
|
(7,036 |
) |
|
|
2,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventories |
|
|
179,012 |
|
|
|
21,264 |
|
|
|
— |
|
|
|
200,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December
31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Accounts receivables |
|
|
47,719 |
|
|
|
648 |
|
|
|
— |
|
|
|
48,367 |
|
— Other receivables |
|
|
42,682 |
|
|
|
35,321 |
|
|
|
— |
|
|
|
78,003 |
|
— Due from affiliated
companies |
|
|
24,720 |
|
|
|
5,000 |
|
|
|
— |
|
|
|
29,720 |
|
— Advances to affiliated
companies |
|
|
1,975 |
|
|
|
7,275 |
|
|
|
— |
|
|
|
9,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventories |
|
|
113,185 |
|
|
|
65,827 |
|
|
|
— |
|
|
|
179,012 |
|
|
|
|
| Note (a) Bad debts write-offs |
F-56