China Jushi FY2006: Operating risks and business commitments

Management reported that exports exceeded half of glass-fiber sales volume and identified renminbi appreciation as a risk to export revenue. That physical-sales share is not the same measure as the geographic revenue table. Natural gas, electricity and oxygen were named production inputs; higher energy and raw-material prices could reduce margins. Management also warned that industry capacity growth increased competition and product-price volatility, while its own expansion kept leverage elevated. Proposed responses included changes in processes and raw-material formulations, some additional overseas raw-material and equipment purchases to offset currency exposure, more domestic sales, better product mix, and lower logistics costs. The report does not quantify the resulting savings or the proportion of foreign-exchange exposure hedged. Its expectation of demand in wind power, boats, vehicles, construction and engineering plastics is market context, not proof of named customer orders.

The issuer had guaranteed CNY 20.55 million of bank borrowing by Beijing Xiling Adhesive and Sealant. After the borrower failed to repay, the issuer paid CNY 19.926 million on its behalf and paid a further CNY 20.065 million court-security deposit to seek preservation of assets. The report says that litigation sought repayment from the borrower and the parties providing counter-guarantee or repayment commitments, and that some of their assets had been frozen or seized. The issuer's lawyer considered the prospects of success and recovery favorable, but the annual report does not report that the money had been recovered. The other-receivables note retained the repayment and court-security balances and recorded CNY 1.799 million of allowance based on their recoverability. These are cash already tied up and the associated accounting assessment, not merely an unused guarantee limit or a confirmed final loss. The court deposit named here is narrower than the full deposits category in other receivables, which also includes other amounts.

At 31 December 2006, the fixed-asset note states that the newly completed production-line buildings at Jushi Group, Jushi Jiujiang and Jushi Chengdu were still undergoing title-certificate processing and had not obtained the building certificates. Their net carrying values were CNY 81.568 million, CNY 23.726 million and CNY 45.765 million, respectively, totaling CNY 151.059 million after CNY 2.025 million of depreciation. This is a disclosed documentation condition affecting the manufacturing asset base. It does not establish that production had stopped, that the buildings were unlawful or that the certificates remained pending in a later year. The same note separately describes older Beixin Technology and Baoyu property certificates that had not been obtained because the relevant entities did not own the land-use rights; those are a different explanation from the new factories' processing status. Production completion, transfer into fixed assets and receipt of a title certificate are distinct milestones, so the construction history retains the certificate issue as a dated condition without reversing the reported commissioning events.

Reported untitled buildings net / 2006 / fy2006 core jushi group pending title net 2006

RMB 81,568,417.46

Reported untitled buildings net / 2006 / fy2006 core jushi jiujiang pending title net 2006

RMB 23,725,500.68

Reported untitled buildings net / 2006 / fy2006 core jushi chengdu pending title net 2006

RMB 45,765,492.01

Reported untitled buildings net / 2006 / fy2006 core three new production factory buildings pending title net 2006

RMB 151,059,410.15

At the end of FY2006, China National Building Material Company Limited held 36.15% of the issuer, Zhenshi Group held 20.04% and Jiangyin Changjiang Steel Pipe held 3.81%. The report identifies China National Building Material Company Limited as the controlling shareholder and China National Building Material Group Corporation as the ultimate controller, with no change of control during the year. The split-share reform implemented on 17 August transferred 28,492,800 existing shares from non-tradable shareholders to tradable shareholders. It also provided CNY 49.862 million of cash from the named controller and non-tradable shareholders. Existing tradable holders received two shares and CNY 3.50 for each ten shares held; this was a transfer between holders, not an issuance of new shares by the company. Total shares stayed at 427,392,000. Restricted shares closed at 256,435,200, or 60%, and unrestricted shares at 170,956,800, or 40%. The report scheduled further release of 59,041,152 shares in August 2007, 85,478,400 in August 2008 and 111,915,648 in August 2009. Those were scheduled trading-eligibility changes, not forecasts that the shares would be sold. Although a later generic paragraph says there were no shareholder commitments, the detailed reform section specifies the initial twelve-month restriction and staged eligibility; that generic sentence should not erase the specific restrictions.

Issued shares at reporting date / 2006 / fy2006 issuer total issued shares 2006

427,392,000 shares

Reported issuer major shareholding percentage / 2006 / fy2006 issuer holder cnbm company 2006

36.15 percent

Reported issuer major shareholding percentage / 2006 / fy2006 issuer holder zhenshi group 2006

20.04 percent

Reported issuer major shareholding percentage / 2006 / fy2006 issuer holder jiangyin steel pipe 2006

3.81 percent

The board proposed a FY2006 cash dividend of CNY 1.00 before tax for every ten shares, totaling CNY 42.739 million on the 427,392,000-share base, with no capital-reserve conversion into shares. The proposed remaining undistributed profit was CNY 134.666 million. The report separately says that the FY2005 dividend of the same aggregate amount was paid on 10 July 2006. The cash paid in 2006 and the proposed distribution from FY2006 earnings are therefore distinct events, despite the matching amounts. The undistributed-profit note incorporates the FY2006 proposed dividend in its allocation table; this presentation does not by itself demonstrate that shareholders had approved or received that proposal by 31 December 2006. The deduction for statutory reserves and subsidiary reserve/development funds also means that reported consolidated net profit is not identical to the amount available for distribution.

Proposed cash dividend total / 2006 / fy2006 issuer fy2006 proposed cash dividend 2006

RMB 42,739,200

The main related-funding table reports CNY 20.880 million provided to Zhenshi Group during FY2006 and CNY 5.868 million outstanding at year end; the financial note includes the same closing amount in other receivables. A separate statement reports no funds provided to the controlling shareholder and its subsidiaries during the year or outstanding at year end. Zhenshi was a shareholder, so the narrower controlling-shareholder statement should not be expanded to mean that all shareholder balances were zero. The report also says that CNY 116,388 of opening non-operating occupation by a major shareholder or affiliated enterprise, described as audit travel costs, was repaid in cash in January 2006, leaving no closing balance in that particular category. That cleared category does not cancel ordinary related sales or the separately reported Zhenshi balance. The annual report alone does not establish the recovery of the latter after year end.

The main guarantee schedule reports a closing total of CNY 937.051 million, comprising CNY 735.051 million in the category labeled as excluding controlled subsidiaries and CNY 202.000 million for controlled subsidiaries. Its stated ratio to the issuer's net assets is 111.31%. The category labeled as excluding controlled subsidiaries nevertheless names Jushi Jiujiang and Jushi Chengdu, which the related-party disclosure identifies as subsidiaries of Jushi Group, as well as the Panden joint venture. The financial contingencies note separately lists CNY 429.000 million of loans supported for Jiujiang, CNY 508.130 million for Chengdu and CNY 290.000 million for Panden. Those listed loan totals do not reconcile to the main CNY 735.051 million closing category, so they are retained as different reported schedules rather than combined into a newly asserted exposure. For the issuer's direct Jushi Group guarantees, the note distinguishes limits of CNY 130 million and CNY 80 million from actual borrowing balances of CNY 122 million and CNY 50 million; these actual balances, together with CNY 30 million for Beixin Technology, explain the CNY 202 million subsidiary subtotal. The main table also prints CNY 6.983 million as the amount above 50% of net assets. That does not follow from its CNY 937.051 million total and the original CNY 841.835 million equity base, and remains an unreconciled source amount. Guarantees support debts that may already be recognized by a consolidated borrower; adding every guarantee to consolidated debt would double count rather than establish extra borrowings or a cash loss.

Reported guarantee classification amount / 2006 / fy2006 main total guarantee balance 2006

RMB 937,050,870

Reported guarantee classification amount / 2006 / fy2006 main controlled subsidiary guarantee balance 2006

RMB 202,000,000

Reported guarantee classification amount / 2006 / fy2006 jushi group supported jiujiang loan schedule 2006

RMB 429,000,000

Reported guarantee classification amount / 2006 / fy2006 jushi group supported chengdu loan schedule 2006

RMB 508,130,000

Reported guarantee classification amount / 2006 / fy2006 jushi group supported panden loan schedule 2006

RMB 290,000,000

Reported guarantee net asset ratio / 2006 / fy2006 main guarantee to net assets ratio 2006

111.31 percent

Guarantee above half equity / 2006 / fy2006 main printed unreconciled guarantee excess 2006

RMB 6,983,147.44

As a subsequent event, the report states that an extraordinary shareholder meeting on 23 January 2007 approved a proposal to increase Jushi Group's capital and introduce Pearl Success International Co., Ltd. The stated purposes were funding project construction and development while maintaining the then foreign-invested-enterprise status and associated historical tax treatment. The proposed registered capital would increase to USD 151.208 million, with new capital subscribed by China National Building Material Company Limited, the listed issuer and Pearl Success at USD 2.67 per USD 1 of registered capital. Pearl Success also agreed to acquire existing capital from Surest Finance. After completion, the proposed ownership was 51% for the listed issuer, 11.5% for China National Building Material Company Limited, 11% for Zhenshi, 8% for Surest and 18.5% for Pearl Success. The 51% was a proposed post-completion position, not the ownership at 31 December 2006. New subscription would fund the subsidiary, whereas the transfer of existing capital was a transaction between holders. The report also allowed the strategic investor a future share-swap or equity-transfer exit route; it does not establish that an exit or the capital transaction had already completed by that meeting.

The subsequent-events note reports that on 4 January 2007 Jushi Group agreed with Zhenshi Group to purchase ownership of the Jushi trademark for CNY 30 million. It describes the transfer as permanent, rather than a recurring trademark license, and records prior board approvals. This links the manufacturing brand to a specific related-party asset transaction and a stated price. The report's agreement disclosure does not separately demonstrate the payment date or the accounting recognition of the acquired right. It is a post-year-end event and should not be presented as an acquisition completed during FY2006 or as part of FY2006 product sales.