China Jushi FY2008: Operating risks and business commitments

The shareholders' meeting of 27 December 2007 authorised a proposed share-swap absorption merger with Jushi Group, with the resolutions valid for twelve months. By 27 December 2008, the required approvals had not all been obtained and the resolutions automatically ceased to be effective. The expiry relates to that authorisation; the report does not describe a completed merger. The listed issuer's reported 51% interest in Jushi Group therefore remains the ownership basis for this year's account.

An external loan guarantee dating from 2000 resulted in the issuer paying CNY 19.93 million in June 2006 after the borrower, Beijing Xiling sealing materials, failed to repay. The issuer then pursued recovery from the borrower and counter-guarantors. The annual report records CNY 5.33 million recovered in 2007, CNY 756,203 in January 2008 and CNY 13.89 million on 15 August 2008, bringing cumulative recovery to CNY 19.98 million. This is recovery of a historical guarantee exposure, not a new glass fiber customer sale or a current loan repayment by the issuer. The disclosed outcome does not establish that other guarantees were free of risk.

The board proposed no profit distribution and no conversion of capital reserves into share capital for FY2008, subject to the annual shareholders' meeting. The listed parent company alone reported a CNY 81.94 million loss and a CNY 124.47 million accumulated retained loss at year-end. These parent-company amounts differ from the positive consolidated profit generated across the group; consolidated earnings should not be treated as a cash dividend already available to shareholders. Issued shares remained 427,392,000 at 31 December 2008. The annual report describes a proposal, not evidence of a subsequent shareholder vote or dividend payment.

Reported parent retained earnings / 2008 / listed parent alone retained earnings as reported fy2008

RMB -124,468,780.85

Reported issued share count / 2008 / listed issuer issued shares as reported fy2008

427,392,000 shares

The FY2008 report corrects the preceding year's income-tax figures following settlement with the relevant tax authorities. It reports a CNY 26.05 million increase for Jushi Group and a CNY 11.63 million decrease for Jushi Jiujiang, producing a net CNY 14.42 million increase. The board's adjustment table shows comparative income-tax expense increasing from CNY 104.02 million to CNY 118.44 million, alongside changes to tax payable, retained earnings, minority interests and employee remuneration payable. This is a correction affecting 2007 comparisons disclosed in the 2008 annual report, not an extra 2008 production expense or a new cash payment established by this table. The original and subsequently restated reporting vintages remain separate, so a change in a comparative figure does not automatically describe a change in current operating performance.

Prior period tax correction / 2007 / jushi group prior year tax increase as reported fy2008

RMB 26,054,098.9

Prior period tax correction / 2007 / jushi jiujiang prior year tax decrease as reported fy2008

RMB 11,631,144.88

Prior period tax correction / 2007 / consolidated prior year net tax increase as reported fy2008

RMB 14,422,954.02

Beijing Xinghua's financial audit report, dated 8 February 2009, expresses an unqualified opinion on the FY2008 consolidated and parent-company financial statements under the stated Chinese accounting framework. Its audit procedures considered financial-reporting controls to plan the audit, but expressly did not aim to give an opinion on their effectiveness. A separate attached report examines management's financial-reporting control self-assessment; it says its work is not assurance on all internal controls and restricts use to submission to the Beijing securities regulator. The financial opinion and the self-assessment report have different purposes and scopes; neither establishes that every operating control was independently certified.

The annual guarantee summary reports CNY 2.075 billion outstanding at year-end, comprising CNY 1.024 billion in its category excluding controlled subsidiaries and CNY 1.051 billion for controlled subsidiaries. It reports the total as 139.04% of its net-assets measure. Annual guarantee activity of CNY 1.603 billion and CNY 1.267 billion in those categories is distinct from the closing balances. The first category lists Jushi Jiujiang, Jushi Chengdu and Jushi Pandeng, even though Jiujiang and Chengdu also appear in the consolidation information and Pandeng is listed as a 50%-held joint venture. The summary's category labels therefore should not be read as establishing that all of these borrowers were unrelated third parties. Guarantees expose the guarantor to obligations associated with the borrowers' financing; the reported guarantee total is not an extra cash outflow or a second borrowing balance to add to group loans. Individual contract amounts, annual activity and closing guarantee exposure are separate measures.

Closing subsidiary-guarantee balance / 2008 / reported excluding controlled subsidiaries category original fy2008

RMB 1,023,876,000

Closing subsidiary-guarantee balance / 2008 / reported controlled subsidiaries category original fy2008

RMB 1,051,200,000

Closing subsidiary-guarantee balance / 2008 / reported total including controlled subsidiaries original fy2008

RMB 2,075,076,000

Reported guarantee net asset ratio / 2008 / reported total to net assets ratio original fy2008

139.04%

Reported guarantee occurrence / 2008 / reported excluding controlled subsidiaries category original fy2008

RMB 1,602,996,300

Reported guarantee occurrence / 2008 / reported controlled subsidiaries category original fy2008

RMB 1,267,200,000

The company appointed Beijing Xinghua for its FY2008 audit, replacing its previous auditor. The annual report explains that the ultimate controlling group, China National Building Material Group, had entered the state-owned assets regulator's 2008 financial inspection programme. Beijing Xinghua was selected through the regulator's unified tender to conduct the financial final-accounts audit. This is the issuer's stated reason for the change; the report does not identify an accounting disagreement as that reason.

At 31 December 2008, China National Building Material Company held 154,502,208 shares, or 36.15%, and was identified as the controlling shareholder of the listed issuer. Zhenshi Holding Group held 85,631,040 shares, or 20.04%. The report names China National Building Material Group as the ultimate controlling group and says the controlling shareholder and ultimate controller did not change during 2008. This ownership of the listed company is distinct from the issuer's 51% interest in the Jushi manufacturing subgroup. Total issued shares stayed at 427,392,000. The report describes 42,739,200 shares becoming unrestricted under the share reform on 17 August 2008, a classification change rather than a new share issue. It also records the two major shareholders' undertaking not to reduce their holdings in the secondary market before 17 August 2010, alongside a restricted-share table showing a 2009 release schedule. The share classifications and voluntary commitment are separate disclosures; the table alone does not establish freely tradable shares after all commitments. Zhenshi's share pledge of 50,022,240 shares is a shareholder-level encumbrance and is not reported here as an additional borrowing by the issuer.