UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 1-14362
-------------------
[Company Name in Chinese]
(Exact name of Registrant as specified in its charter)
GUANGSHEN RAILWAY COMPANY LIMITED
(Translation of Registrant's name into English)
PEOPLE'S REPUBLIC OF CHINA
(Jurisdiction of incorporation or organization)
-------------------
NO. 1052 HEPING ROAD, SHENZHEN, PEOPLE'S REPUBLIC OF CHINA 518010
(Address of Principal Executive Offices)
------------------
Securities registered or to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
American Depositary Shares, each
representing 50 H shares New York Stock Exchange, Inc.
Class H Ordinary Shares The Stock Exchange of Hong Kong Limited
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of December 31, 2002:
Domestic shares, par value RMB1.00 per share...................... 2,904,250,000
H shares, par value RMB1.00 per share, including 148,214,050 H
shares in the form of American Depositary Shares................. 1,431,300,000
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 X No
----- -----
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 Item 18 X
----- -----
TABLE OF CONTENTS
Pages
-----
Forward-Looking Statements....................................................................................... 1
Certain Terms and Conventions.................................................................................... 1
PART I
Item 1. Identity of Directors, Senior Management and Advisors...........................................3
Item 2. Offer Statistics and Expected Timetable.........................................................3
Item 3. Key Information.................................................................................3
Item 4. Information on the Company......................................................................9
Item 5. Operating and Financial Review and Prospects...................................................31
Item 6. Directors, Senior Management and Employees.....................................................46
Item 7. Major Shareholders and Related Party Transactions..............................................54
Item 8. Financial Information..........................................................................59
Item 9. The Offer and Listing..........................................................................61
Item 10. Additional Information.........................................................................62
Item 11. Quantitative and Qualitative Disclosures about Market Risk.....................................81
Item 12. Description of Securities other than Equity Securities.........................................82
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies...............................................83
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds..................83
Item 15. Controls and Procedures.......................................................................83
Item 16. [Reserved]....................................................................................83
PART III
Item 17. Financial Statements..........................................................................84
Item 18. Financial Statements..........................................................................84
Item 19. Exhibits......................................................................................84
FORWARD-LOOKING STATEMENTS
Certain information contained in this annual report, which 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 are intended to identify "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities and Exchange
Act of 1934, as amended, or the Exchange Act. Such 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.
We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Among the
factors that could cause our actual results in the future to differ materially
from any opinions or statements expressed with respect to future periods include
adverse effects on the economy in the Pearl River Delta region, increased
competition from other means of transportation, the unknown impact of the recent
outbreak of Severe Acute Respiratory Syndrome, or SARS, in Hong Kong and China,
and foreign currency fluctuations.
When considering such 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. Such risk factors and statements describe
circumstances which could cause actual results to differ materially from those
contained in any forward-looking statement.
CERTAIN TERMS AND CONVENTIONS
Translations of amounts in this annual report from renminbi into U.S.
dollars and vice versa have been made at the rate of RMB8.2800 to US$1.00, which
was the noon buying rate in the New York City for cable transfers in renminbi
per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of
New York on December 31, 2002. You should not construe these translations as
representations that the renminbi amounts actually represent U.S. dollar amounts
or could be converted into U.S. dollars at that rate or at all. See "Item 3. Key
Information--Exchange Rate Information" for information regarding the noon
buying rates from January 1, 1998 through June 20, 2003.
We publish our consolidated financial statements in renminbi.
Various amounts and percentages set out in this document have been
rounded and, accordingly, are not the exact figures and may not total.
Unless the context otherwise requires or otherwise specified:
o "China" or "PRC" means the People's Republic of China.
o "Guangshen Railway", "Company", "we", "our" and "us" means Guangshen
Railway Company Limited, a joint stock limited company incorporated
in China with limited liability.
1
o "Parent Company" means Guangzhou Railway (Group) Company, our
parent company.
o "Pearl River Delta" means the area in and adjacent to the southern
part of Guangdong Province, PRC, surrounding the mouth of the Pearl
River and its lower reaches, including the Hong Kong Special
Administrative Region and Macau; and
o "restructuring" means the restructuring in which we succeeded to the
railroad and certain other businesses of our predecessor company and
certain of its subsidiaries, and certain assets and liabilities of
our Parent Company and certain of its subsidiaries and associated
companies.
o "ton" means metric ton and is approximately 2,205 pounds in weight.
2
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 THE COMPANY
The following tables present our selected consolidated financial
information as of December 31, 1998, 1999, 2000, 2001 and 2002 and for the years
then ended, which were extracted from the following financial statements:
Our consolidated balance sheets as of December 31, 2001 and 2002, and
our consolidated statements of income, changes in equity and cash flows for each
of the years ended December 31, 2000, 2001 and 2002, prepared in accordance with
International Financial Reporting Standards, or "IFRS", are derived from our
audited consolidated financial statements, included elsewhere in this annual
report. Our consolidated balance sheets as of December 31, 1998, 1999 and 2000,
and our consolidated statements of income, changes in equity and cash flows for
each of the years ended December 31, 1998 and 1999 are derived from our audited
consolidated financial statements and are not included in this annual report.
The selected income statement data, cash flow statement data and other
data for the years ended December 31, 2000, 2001 and 2002, and the selected
balance sheet data as of December 31, 2001 and 2002 should be read in
conjunction with "Item 5. Operating and Financial Review and Prospects", and are
qualified by reference to our audited consolidated financial statements included
elsewhere in this annual report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
----------- ----------- ----------- ----------- ----------- ------------
RMB RMB RMB RMB RMB US$(1)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues from railroad businesses
- passenger......................... 1,070,411 1,114,046 1,237,289 1,426,010 1,846,599 223,019
- freight........................... 681,945 537,970 549,694 567,276 514,036 62,082
----------- ----------- ----------- ----------- ----------- ------------
Subtotal............................ 1,752,356 1,652,016 1,786,983 1,993,286 2,360,635 285,101
Revenues from other businesses........ 190,231 166,800 193,415 160,306 156,893 18,948
----------- ----------- ----------- ----------- ----------- ------------
Total revenues........................ 1,942,587 1,818,816 1,980,398 2,153,592 2,517,528 304,049
Railroad operating expenses........... (1,144,277) (1,189,641) (1,297,464) (1,460,629) (1,735,292) (209,576)
Other businesses operating expenses... (165,336) (151,255) (163,529) (138,852) (159,739) (19,292)
----------- ----------- ----------- ----------- ----------- ------------
Profit from operations................ 632,974 477,920 519,405 554,111 622,497 75,181
Net profit............................ 642,175 529,674 492,089 533,495 557,083 67,281
Earnings per share.................... 0.15 0.12 0.11 0.12 0.13 0.02
Dividends declared per share.......... 0.12 0.10 0.12 0.10 0.10 0.01
Earnings per ADS...................... 7.41 6.11 5.68 6.15 6.42 0.78
3
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
----------- ----------- ----------- ----------- ----------- ------------
RMB RMB RMB RMB RMB US$(1)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
BALANCE SHEET DATA (AT PERIOD END):
Working capital (excluding due from and
due to Parent Company).............. 1,951,542 1,772,772 1,463,073 1,581,054 1,592,040 192,275
Due from Parent Company............... 9,666 48,485 80,604 29,499 39,374 4,755
Fixed assets.......................... 6,877,355 6,757,336 7,074,907 7,031,040 6,798,280 821,048
Leasehold land payments............... 726,019 710,625 695,231 673,746 656,998 79,348
Total assets.......................... 10,738,335 10,970,496 10,917,564 10,997,216 11,257,594 1,359,613
Equity................................ 9,952,741 10,048,860 10,020,683 10,120,623 10,244,151 1,237,216
Share capital, issued and outstanding,
RMB1.00 per value,
domestic shares - 2,904,250,000.. 2,904,250 2,904,250 2,904,250 2,904,250 2,904,250 350,755
H shares - 1,431,300,000......... 1,431,300 1,431,300 1,431,300 1,431,300 1,431,300 172,862
CASH FLOW STATEMENT DATA:
Net cash provided by operating 855,001 656,802 729,189 886,016 1,157,177 139,756
activities............................
Net cash provided by (used in) (468,359) (61,791) (458,087) (430,425) 251,003 30,314
investing activities..................
Net cash provided by (used in) (630,821) (384,474) (520,453) (420,137) (360,643) (43,556)
financing activities..................
Capital expenditures.................. 599,114 449,130 564,759 551,508 553,337 66,828
Dividends paid........................ 520,266 433,555 520,266 419,957 356,490 43,054
OTHER DATA:
Railroad transportation operating income 608,079 462,375 489,519 532,657 625,343 75,525
Other businesses operating income..... 24,895 15,545 29,886 21,454 (2,846) (344)
US GAAP DATA
- Operating income.................. 632,974 477,920 519,405 554,111 622,497 75,181
- Net income........................ 683,334 570,833 533,248 574,654 598,242 72,251
- Earnings per share................ 0.16 0.13 0.12 0.13 0.14 0.02
- Earnings per ADS.................. 7.88 6.58 6.15 6.63 6.90 0.83
- Equity............................ 8,801,001 8,938,279 8,951,259 9,092,358 9,257,045 1,118,001
- Fixed assets...................... 5,522,366 5,450,769 5,816,762 5,821,317 5,636,979 680,794
---------------------------
(1) Translation of amounts from renminbi, or RMB, into United States dollars,
or US$, for the convenience of the reader has been made at the noon
buying rate on December 31, 2002 of US$1.00 = RMB8.2800. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at that rate on December 31, 2002 or on any other
date.
EXCHANGE RATE INFORMATION
In this report, references to "renminbi" or "RMB" are to renminbi, the
lawful currency of the PRC, references to "US$" or "U.S. dollars" are to United
States dollars, and references to "HK$" are to Hong Kong dollars in New York for
cable transfers payable in foreign currencies as certified for customs purposes
by the Federal Reserve Bank of New York. We maintain our books and records in
renminbi. On June 24, 2003, the noon buying rate for renminbi was US$1.00=RMB
8.2774.
4
The following table sets forth certain information concerning exchange
rates between the renminbi and the U.S. dollar for the periods indicated:
NOON BUYING RATE
PERIOD AVERAGE (1) HIGH LOW
------ ------------- ---------------- --------
1998..................................... 8.2968 8.3180 8.2774
1999..................................... 8.2784 8.2800 8.2770
2000..................................... 8.2784 8.2799 8.2768
2001..................................... 8.2770 8.2786 8.2676
2002..................................... 8.2766 8.2800 8.2700
December 2002............................ 8.2777 8.2800 8.2271
January 2003............................. 8.2774 8.2800 8.2766
February 2003............................ 8.2780 8.2800 8.2768
March 2003............................... 8.2773 8.2775 8.2770
April 2003............................... 8.2771 8.2774 8.2769
May 2003................................. 8.2769 8.2771 8.2768
June 2003 (through June 24).............. 8.2770 8.2774 8.2768
---------------------------
(1) Determined by averaging the rates on the last business day of each
month during the respective period.
5
RISK FACTORS
Guangshen Railway is subject to various changing competitive, economic,
political and social conditions in China. These changing conditions entail
certain risks, which are described below.
o PRC government regulation has a significant impact on our
business. The price of railway transportation in particular has a
substantial impact on our income. Current governmental regulation
of railway transportation pricing may limit our flexibility to
respond to market conditions, competition or changes in our cost
levels.
o Keen competition from other forms of transportation may affect our
profitability and growth. The railroad transportation sector,
particularly the passenger transportation business, faces
increasing competition from other means of surface, air and water
transportation. We face significant competition from bus services
operating in the Pearl River Delta.
o Our business is to a certain degree dependent on the provision by
our Parent Company, Guangzhou Railway (Group) Company, and its
subsidiaries of services for which currently we have limited
alternative sources of supply. The interests of our Parent Company
and its subsidiaries as providers of these services to us may
conflict with our interests.
o The current and continuing global economic slowdown may cause a
decline in China's and Guangdong Province's export of goods,
thereby reducing the volume of freight transported via our rail
line. Although neither exports from China nor Guangdong decreased
in 2002, if the current global economic situation continues to
deteriorate, exports from China and specifically Guangdong
Province may decrease which could adversely affect our freight
transportation and railroad transportation revenue.
o The Pearl River Delta and Hong Kong were among the areas most
seriously affected by the recent outbreak of SARS in Asia. We have
already experienced a decrease in passenger traffic on our routes.
The number of passengers traveling on our trains from January to
May 2003 decreased 11.7% from the same period in 2002. Our
operating results and financial condition could be materially
adversely affected by the SARS epidemic if our passenger volumes
do not recover sufficiently in the near future.
o China's entry into the World Trade Organization, or the WTO, may
increase competition for our businesses. After China's accession
to the WTO in December 2001, the policy advantages Shenzhen
currently enjoys due to its status as a special economic zone may
be phased out, and the high economic growth rate may not be
sustained in the long run. Other coastal regions and ports in
China may develop at a faster pace and become competitive, and
part of the freight
6
currently transferred through ports in Hong Kong and Shenzhen may
be shipped through other ports in China, which will adversely
affect our railway freight business. In addition, as the PRC
government lifts its restrictions and control over foreign
investments in China, such as allowing foreign participation
railway operations, the monopoly status we currently enjoy in our
service territory may be challenged and increasing competition may
adversely affect our revenues and results of operations.
o As a company located in the Shenzhen Special Economic Zone, we
enjoy a preferential income tax rate of 15%, rather than the 33%
income tax rate generally applicable to other domestic companies.
Any increase in this preferential income tax rate could have an
adverse effect on our operating results.
o Continued adjustments in the PRC industrial structure and
international trading policies may adversely affect our freight
transport revenues. With the expected upgrading in the PRC
industrial structure, we anticipate that transportation needs for
high technology products will grow. Because a large portion of
these compact items may be shipped by the developed road, air or
water transport systems in the Pearl River Delta region, increases
in such high-value (therefore high unit shipping revenue) products
per se may not result in improvements in our freight transport
revenues. In addition, with the adjustments by the government of
its import-export policies from time to time, our port-related
freight transportation volumes may also suffer.
o Our operations and financial results may be affected by operating
hazards and natural disasters resulting in losses for which we
have limited insurance. Consistent with relevant PRC regulations
and customary practices of railway companies in China, we do not
maintain any insurance coverage against third party liabilities.
In addition, we do not maintain insurance coverage for most of our
property, for business interruption or for environmental damage
arising from accidents relating to our operations. As a result, we
may suffer financial and other consequences of any such losses,
damages or liabilities without the benefit of any payments from
any insurance coverage.
o We are also subject to a number of risks relating to the PRC,
including the following:
- Most of our assets are located in China and most of our
revenue is primarily derived from our operations in China.
Accordingly, our financial position and operating results are
subject to the political, economic and legal developments in
China. We currently expect that the PRC government will
continue with economic reform policies, which since the 1970s
have emphasized autonomous enterprises and the utilization of
market mechanisms. Although we believe these reforms will
have a positive effect on our development, we cannot predict
whether certain changes to China's political, economic,
social conditions, laws and
7
regulations and policies will have any adverse effect on our
current or future business or results of operation.
- We receive most of our revenues in renminbi, but we may need
to make dividend payments and equipment purchase and lease
payments in foreign currencies. Accordingly, if our foreign
currency deposits are insufficient to pay all dividends and
operating expenses we may need to convert renminbi into
relevant foreign currencies at the applicable exchange rates
set by the People's Bank of China. We do not enter into any
currency hedging transactions with respect to our foreign
currency exposure. Any future devaluation of the renminbi
against the U.S. dollar will increase the effective cost of
foreign equipment and the amount of our foreign currency
expenses and have an adverse effect on the U.S. dollar
equivalent and Hong Kong dollar equivalent of our net income.
In addition, the existing foreign exchange limitations under
PRC law could affect our ability to obtain foreign exchange
through debt financing, or to obtain foreign exchange for
capital expenditures or for distribution of dividends on our
H shares.
- Because PRC laws and regulations dealing with economic
matters are relatively new and still evolving, and because of
the limited volume of published judicial interpretations and
the non-binding nature of prior court decisions, the
interpretation and enforcement of these law and regulations
involve some uncertainty. In addition, because the PRC
Company Law is different in certain important aspects from
company laws in the Hong Kong Special Administrative Region,
United States and other common law countries and regions and
because the PRC securities laws are still at an early state
of development, you may not enjoy shareholder protections to
which you may be entitled in other jurisdictions.
See also "Item 4. Information on the Company -- Business Overview --
Regulatory Overview", "-- Insurance", "Item 5. Operating and Financial Review
and Prospects", "Item 7. Major Shareholders and Related Party Transactions --
Related Party Transactions", "Item 8. Financial Information" and "Item 11.
Qualitative and Quantitative Disclosures About Market Risks".
8
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
OVERVIEW
Our registered office is located at No. 1052 Heping Road, Shenzhen,
Guangdong Province, The People's Republic of China, 518010. Our telephone number
is (86-755) 2558-4891 and our fax number is (86-755) 2556-5424.
We are mainly engaged in the railway passenger and freight
transportation business between Guangzhou and Shenzhen and certain long-distance
passenger transportation services. We provide consolidated services relating to
railway facilities and technology. We also engage in other businesses that are
ancillary to our transportation business, such as services and retail sales
aboard trains and in stations, advertising, tourism and leasing of property.
We operate the sole railroad, 147 kilometers long, between Guangzhou,
the capital city of Guangdong Province, and Shenzhen, one of the original
special economic zones of the PRC established to promote economic reforms in
China. The Guangzhou to Shenzhen railroad is an important component of the
transportation infrastructure of southern China, and we are a leading provider
of passenger and freight transportation services in the Guangzhou-Shenzhen
corridor. Our rail line connects with the rail line from Shenzhen to Hong Kong,
and we operate jointly with Kowloon-Canton Railway Corporation, or the KCR,
"through train" passenger service between Hong Kong and Guangzhou.
Our rail line is an integral part of the PRC national railroad system,
with links to the other parts of the national railroad system as well as local
railroad systems in southern China, including the Beijing-Guangzhou,
Beijing-Jiujiang, Sanshui-Maoming, Pinghu-Nantou, Pinghu-Yantian, and
Kowloon-Guangzhou lines. Moreover, our rail line has close links with regional
ports. Specifically, it connects with the Guangzhou Port in Guangzhou, and with
the Yantian, Shekou, Chiwan and Mawan ports in Shenzhen. We are well equipped
with various freight facilities and can effectively satisfy customers' needs for
transporting carload cargo, less-than-car-load cargo, containers, bulky and
overweight cargo, dangerous cargo, fresh and live cargo, and oversized cargo. We
enjoy extensive competitive advantages in transporting freight for medium to
long distances in the PRC.
Our railroad is currently one of the most modern railroads in the PRC.
It is equipped with state-of-the-art equipment and facilities, including
high-speed electric trains. Several aspects of our technical performance have
reached or are approaching international standards. Ours is one of the few rail
lines in the PRC that operate high-speed passenger trains with speeds up to 200
kilometers per hour.
RECENT DEVELOPMENTS
In 2002, we continued to optimize our high-speed train service to make
it as convenient and frequent as buses, or our, "As-frequent-as-buses" Train
Project, for the Guangzhou-Shenzhen line, and also operated more high-speed
passenger trains between Guangzhou and Shenzhen. We actively enhanced our
passenger transportation services by making it more
9
convenient for our passengers to purchase train tickets, specifically we worked
with the Guangzhou Subway and Guangzhou Fangcun Bus Station in establishing a
"Green Passage" for passengers at the Guangzhou East Station, whereby passengers
could purchase our train tickets and discounted subway and bus tickets at that
station. In addition, passengers would be able to purchase our train tickets at
the Guangzhou Subway and Guangzhou Fangcun Bus Stations. We also improved our
passenger transportation service by implementing advanced technologies such as
our Dynamic Ticket Management System for the Guangzhou-Shenzhen route, and
building the West Ticketing Hall of Shenzhen Railway Station, the first
computerized railway ticketing hall in China. Our Dynamic Ticket Management
System allows passengers to reserve specific seats on our trains along the
Guangzhou-Shenzhen route and allows us to track where and when passengers embark
and disembark. We also upgraded and rebuilt the passenger transportation
directory system. We increased passenger fares slightly during peak periods to
reflect market changes. In 2002, we carried a total of approximately 39.8
million passengers on our trains, representing an increase of 2.4% as compared
to 2001. Passenger transport revenues were RMB1,846.6 million, representing an
increase of 29.5% over 2001.
In 2002, we contributed RMB120.6 million of telecommunication assets to
China Railway Communication Company Limited ("China Railcom") for an equity
interest of approximately 0.85% in China Railcom. In 2002, we completed our
investment in China Railway Express Company Limited ("CRE"). We invested a total
of RMB13.61 million in cash and received 7.56 million common shares of CRE,
representing an equity interest of approximately 2.52% in CRE.
In 2002, we completed the following infrastructure projects: (1)
replaced 19 sections of wooden moveable center switches to improve the safety
and stability of our passenger trains; (2) purchased twelve modern "25k" coaches
with improved comfort features for long-distance trains for the Shenzhen-
Yueyang and Shenzhen-Beijing routes; and (3) implemented a computerized ticket
hall at the Shenzhen Station and established the Dynamic Ticket Management
System for the Guangzhou-Shenzhen route.
BACKGROUND AND RESTRUCTURING
The railroad system between Guangzhou and Shenzhen was part of the
original "Canton-Kowloon" railroad, which began operation in 1911. In 1949,
following the founding of the PRC, the railroad was divided into two sections,
with the first linking Guangzhou and Shenzhen, and the second, across the Hong
Kong border and separately owned, linking Luohu and the Kowloon peninsula in
Hong Kong. The Guangzhou to Shenzhen railroad has been operated since 1949 by a
sub-division of the Guangzhou Railway Administration, a predecessor to our
Parent Company.
In 1979, our predecessor, in conjunction with the KCR, was engaged in
the joint operation of through train passenger services between Guangzhou and
Hong Kong.
In 1984, to exploit the rapid growth in the Pearl River Delta, the
Guangshen Railway Company, our predecessor, was formed pursuant to the approval
of the State Council as a state-owned enterprise with the status of a
sub-administration under the Guangzhou Railway Administration. At that time, it
had only a single-line railroad. Since then, large capital expenditures have
been expended to upgrade those facilities and services. In 1987, a second line
10
was completed. In view of the magnitude of the capital expenditures and the
relative affluence of the Pearl River Delta served by Guangshen Railway Company,
the State Council permitted the charging of a premium by Guangshen Railway
Company of 50% above the national pricing guidelines for passenger and freight
transportation from 1984 through March 31, 1996. Since April 1, 1996, pursuant
to the "Jijiaguan [1996] No. 261" document issued by the State Planning
Committee, we have been able to set our own prices for our high-speed trains and
also continue charging the premium for our other passenger and freight trains.
See "- Regulatory Overview - Pricing" for a more detailed description of our
pricing scheme.
In 1991, Guangshen Railway Company began the construction of a
high-speed rail line and purchased high-speed locomotives and passenger coaches
in order to increase the speed of some of its passenger trains to 160 kilometers
per hour or faster. This high-speed line was the first of its kind in China.
Commercial operation of the high-speed trains commenced in December 1994 when
the principal facilities of the high-speed line were completed.
We were established as a joint stock limited company on March 6, 1996
as a result of the restructuring that was carried out to reorganize the railroad
assets and related businesses of the Guangshen Railway Company and certain of
its subsidiaries. As part of the restructuring, 2,904,250,000 "state legal
person shares" generally referred to herein as "domestic shares," par value
RMB1.00 per share, of Guangshen Railway were issued to our Parent Company, a
state-owned enterprise under the Ministry of Railways of the PRC. Until our
initial public offering (as described below), these shares constituted the only
issued and outstanding shares of our company. Under PRC law, domestic shares may
be owned by or transferred to PRC entities only.
The restructuring was undertaken in preparation of our initial public
offering, which occurred in May 1996. In this offering, we issued a total of
1,431,300,000 class H ordinary shares, or H shares, par value RMB1.00 per share.
Of this total, 217,812,000 H shares were listed for trading on the Stock
Exchange of Hong Kong Limited. The remaining H shares, represented by 24,269,760
American depositary shares, or ADSs, were listed for trading on the New York
Stock Exchange. Each ADS represents 50 H shares. Since our public offering,
approximately 67% of our issued and outstanding common shares have been owned by
our Parent Company, and the remaining 33% have been owned by public
shareholders. The Parent Company owns all of our domestic shares. Public
shareholders own only H shares or ADSs, which may not be purchased or owned by
PRC domestic investors.
Guangzhou Railway (Group) Guangshen Railway Enterprise Development
Company, or GEDC, a state-owned enterprise established in the restructuring
process, assumed the operations and assets of the Guangshen Railway Company that
were not transferred to us in the restructuring, such as employee housing,
hospitals, schools and public security, and has provided related services to us
on a contractual basis since the restructuring.
SERVICE TERRITORY
Our rail line traverses the Pearl River Delta, an area that was first
to benefit from the PRC economic reform policies that began in the late 1970s.
Throughout the 1980s and early 1990s, the economy of the Pearl River Delta,
fueled by foreign investments, grew rapidly. It is
11
currently one of the most affluent and fastest growing areas in China.
There are 26 stations situated on our rail line, providing passenger
and freight transportation services for cities, towns and ports situated between
Guangzhou and Shenzhen in the Guangzhou-Shenzhen corridor and Hong Kong (which
we service in conjunction with the KCR). In addition to our Hong Kong passenger
through train services in conjunction with the KCR, we also allow Hong
Kong-bound freight trains to use our Guangzhou-Shenzhen railroad.
The Guangzhou-Shenzhen railroad is an integral component of the PRC
national railway network, and provides nationwide access to passenger and
freight traffic from southern China to other regions of mainland China as
described below:
Northbound. In Guangzhou, our rail line connects with the
Beijing-Guangzhou line, which is one of the major trunk lines linking southern
China with Beijing and northern China. Another trunk line connecting northern
and southern China, the Beijing-Hong Kong rail line, includes the section of our
line from Dongguan to Shenzhen.
Southbound. Our line connects at Shenzhen with the rail line owned by
the KCR that runs to Kowloon, Hong Kong.
Westbound. Our line connects with the Sanshui-Maoming rail line
operated by Sanmao Railway Company, a joint venture railroad of the Ministry of
Railways and the Guangdong provincial government that runs through the western
part of Guangdong Province, connecting with other rail lines that continue on
into the Guangxi Zhuang Autonomous Region, which provides access to southwestern
China.
Eastbound. Our rail line intersects at Dongguan with the
Dongguan-Meizhou-Shantou rail line operated by Guangmeishan Railway Company, a
company jointly established by the Ministry of Railways and the Guangdong
provincial government. A section of this line forms, along with our Dongguan to
Shenzhen segment, a part of the Beijing-Hong Kong rail line, which terminates in
Kowloon, Hong Kong.
At Pinghu, our rail line connects with two local port lines: one of
them, Pingnan Railway, principally services three ports located in western
Shenzhen -- Shekou, Chiwan and Mawan -- and the other, Yantian Railway, services
Yantian port, an international deepwater port located in eastern Shenzhen. At
the Huangpu and Xiayuan stations in Guangzhou, our line connects with Huangpu
port and Xinsha port. Our rail line also connects with certain industrial
districts, commercial districts and the facilities of many of our customers
through spur lines, which are rail lines running off the main line that are used
and typically financed by a freight customer or set of customers and maintained
by Guangshen Railway for a fee. In 2002, the freight tonnage originating or
terminating on these spur lines amounted to approximately 12.1 million tons,
representing 43.9% of our total volume of freight handled, which was
approximately 27.6 million tons. In addition, the freight tonnage from ports
amounted to approximately 5.0 million tons, representing 18.0% of our total
volume of freight handled in 2002. We believe that the customers connected to
these spur lines and customers with goods that must be shipped through these
regional ports are likely to utilize our services on a long-term basis.
12
BUSINESS OVERVIEW
BUSINESS OPERATIONS
Our principal businesses are railroad passenger and freight
transportation. In 2002, 93.8% of our gross revenues and 100% of our total
operating income were produced by our railroad transport business. In each of
the past five years, passenger transportation has accounted for a larger portion
of our revenue base than freight transportation. In 2002, passenger
transportation represented 73.4%, and freight transportation represented 20.4%
of our total revenues. Our other businesses, including the sale of food,
beverages and merchandise aboard trains and in stations, accounted for 6.2% of
our total revenues.
The table below summarizes our railroad transportation revenues and
volumes of traffic for the past five years:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
PASSENGER TRANSPORTATION
Total passenger revenues (RMB millions)(1).. 1,070.41 1,114.05 1,237.29 1,426.01 1,846.60
Total passengers (millions)................. 28.77 31.64 34.95 38.84 39.78
Revenues per passenger (RMB)................ 37.21 35.21 35.40 36.71 46.42
Total passenger-kilometers (millions)....... 2,438.50 2,804.20 3,051.70 3,257.9 3,453.20
Revenues per passenger-kilometer (RMB)...... 0.44 0.40 0.41 0.44 0.53
FREIGHT TRANSPORTATION
Total freight revenues (RMB millions)(1).... 681.95 537.97 549.69 567.28 514.04
Total freight tons (millions)............... 26.81 27.78 28.73 29.01 27.58
Revenues per ton (RMB)...................... 25.43 19.36 19.13 19.55 18.64
Total ton-kilometers (millions)............. 1,939.10 2,082.10 2,071.60 2,082.50 1,926.00
Revenues per ton-kilometer (RMB)............ 0.35 0.26 0.27 0.27 0.27
---------------------------
(1) Audited; all other figures in the table are unaudited.
During 2002, the economic growth in our service territory generated
growth in demand for railroad transportation. However, we still faced keen
competition from transportation by road and other means of transportation in
both our passenger and freight transportation businesses.
PASSENGER TRANSPORT
Passenger transport is our largest business segment, accounting for
73.4% of our total revenues and 78.2% of our railroad revenues in 2002. We
operated:
o intercity high-speed express trains and regular-speed passenger
trains between Guangzhou and Shenzhen;
o through trains between Hong Kong and Guangzhou; and
o two pairs of long-distance passenger trains between Shenzhen and
Yueyang and
13
between Shenzhen and Beijing, along with other operators of
domestic long-distance trains that passed-through, originated or
terminated on our Guangzhou-Shenzhen railroad.
As at December 31, 2002, we operated on average, 99 pairs of passenger
trains per day (each pair of trains meaning trains making one round-trip between
two points) of which:
o 54 pairs were high-speed express passenger trains operating
between Guangzhou and Shenzhen;
o four pairs were regular-speed passenger trains operating between
Guangzhou and Shenzhen;
o seven pairs were Hong Kong through trains (including six pairs of
high-speed Guangzhou-Kowloon through trains and one pair of
high-speed Dongguan-Kowloon through trains operated during Hong
Kong holidays and weekends), but excluding one pair of
Zhaoqing-Kowloon through trains, and one pair of through trains
that operate on alternating days either on the Beijing-Kowloon
line or the Shanghai-Kowloon line; and
o 34 pairs were domestic long-distance trains.
The table below sets out passenger revenues and volumes for our Hong
Kong through trains and domestic trains in each of 2000, 2001 and 2002:
PASSENGER REVENUES PASSENGER VOLUME REVENUE PER PASSENGER
---------------------- --------------------- ----------------------
2000 2001 2002 2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ----
(RMB MILLIONS) (MILLIONS) (RMB MILLIONS)
Hong Kong through trains............ 276.8 316.7 333.2 1.9 2.0 2.2 145.20 158.4 151.5
Domestic trains..................... 960.5 1,109.3 1,513.4 33.0 36.8 37.6 29.07 30.2 40.3
Combined passenger operations....... 1,237.3 1,426.0 1,846.6 35.0 38.8 39.8 35.40 36.71 46.4
GUANGZHOU-SHENZHEN TRAINS. In 2002, our passenger transportation
services on the trains between Guangzhou and Shenzhen contributed most to our
total revenues and accounted for a substantial portion of the passenger volume.
We divide our services on the regular-speed trains and high-speed
trains into different types based on the number of stops made by the train and
the class of seating. Different types of services are priced at different fare
levels.
In 2002, approximately 14.9 million passengers traveled on the
Guangzhou-Shenzhen route, which represents a decrease of 2.9% from approximately
15.3 million in 2001. The decrease was due to the increase in the number of
high-speed trains and a decrease in the number of regular speed trains which
resulted in a decline in the number of passengers boarding on intermediate
stops. However, revenue per passenger and revenue per passenger-kilometer rose
sharply as compared to 2001 because the "As-frequent-as buses" Train Project
operated throughout 2002 and most of the passengers on this route traveled on
higher fare high-speed trains. Although there was a slight decrease in the
passenger volume over 2001 on the
14
Guangzhou-Shenzhen route, the impact of such decrease on our overall revenues
generated from passenger transportation on this route was minor.
Prior to 2002, due to limitations on data collection, the number of
passengers on the Guangzhou-Shenzhen route did not include the passengers that
traveled between Guangzhou Station (which is owned by Yangcheng Railway Company)
and stations on the Guangzhou-Shenzhen route. These passengers were included in
the passenger volume for long-distance trains. In 2002, we refined our data
collection techniques and classification methods and were able to more
accurately track and classify passengers traveling on high-speed trains and
regular-speed trains on the Guangzhou-Shenzhen route. However, for the purpose
of comparing 2001's data, the number of passengers for the Guangzhou-Shenzhen
route quoted above was based on the old data classification method. Under the
new classification method, the total number of passengers that traveled on the
Guangzhou-Shenzhen route in 2002 was approximately 17.3 million, of which
approximately 15.7 million were travelers on high-speed trains and approximately
1.6 million were travelers on regular-speed trains. We will be using the new
data collection and classification method for all future periods.
HONG KONG THROUGH TRAINS. We operate jointly with the KCR seven pairs
of high-speed through trains between Hong Kong and Guangzhou (including one pair
of high-speed Dongguan-Kowloon through trains but excluding one pair of
Zhaoqing-Kowloon through trains, and one pair of through trains that operate on
alternating days either on the Beijing-Kowloon line or the Shanghai-Kowloon
line). The KCR and we provide the trains and personnel for two pairs and five
pairs, respectively, of these Hong Kong-Guangzhou high-speed through train
services. Service beyond Guangzhou to Foshan, Zhaoqing, Beijing and Shanghai is
provided in conjunction with Guangzhou Railway (Group) Passenger Transportation
Company, Beijing Railway Administration and Shanghai Railway Administration,
respectively. Revenues from the through trains on the Guangzhou-Hong Kong
section are split 81.22% to us and 18.78% to the KCR. In addition, we share
costs with the KCR based on track mileage for the operating of the through train
service.
Most of the passengers taking Hong Kong through trains are residents of
Hong Kong, Macau, Taiwan or foreign countries, and most are travelers on
commercial or government business. As a consequence of the market pricing for
the Hong Kong through trains, these trains produce relatively high per-passenger
revenues for us.
In 2002, approximately 2.22 million passengers traveled on the Hong
Kong through trains, which represents an increase of 8.4% from approximately
2.05 million in 2001. The revenue from the operation of the Hong Kong through
trains for 2002 was RMB333.2 million, representing a 5.2% increase from RMB316.7
million for 2001. Both of these increases were mainly due to:
o the simplification of the tourist visa application procedures and
the promotion of "holiday economy" by the PRC government to
stimulate consumption through longer holidays, resulting in an
increase in the number of tourists traveling from inland China to
Hong Kong;
o an increase in passenger volume because the trains on this route
operated on all
15
PRC holidays throughout 2002, whereas the trains on this route
only operated during the second half of 2001; and
o increased purchases of leisure properties in the Pearl River Delta
by Hong Kong residents.
DOMESTIC LONG-DISTANCE TRAINS. As of December 31, 2002, an average of
34 pairs of domestic long-distance passenger trains daily connected our rail
line to cities in Guangdong, Hunan, Hubei, Jiangxi, Anhui, Liaoning, Shanxi,
Fujian, Heilongjiang, Jilin, Henan and Shandong Provinces as well as cities to
the north, such as Shanghai, Beijing and Tianjin. In 2002, the number of
long-distance passengers increased by 5.6% from approximately 21.46 million in
2001 to approximately 22.67 million in 2002. The increase was due principally to
the operation of the Shenzhen-Yueyang and Shenzhen-Beijing long-distance trains
throughout 2002 and a greater number of tourists traveling on these routes due
to longer holidays instituted by the PRC government. According to our new
classification method described under "-Guangzhou-Shenzhen Trains", the number
of long-distance passengers was approximately 20.2 million in 2002. Due to the
higher ticket prices paid by long-distance passengers, revenue per passenger
also increased as a result of the full-year operation of those two long-distance
trains.
HIGH-SPEED PROJECT. In 1991, we embarked on the construction of a
high-speed rail line, the first of its kind in the PRC. Our high-speed trains
are capable of running at 160 to 200 kilometers per hour, 33% to 67% faster than
our regular-speed trains, which run at 120 kilometers per hour. As part of our
High-Speed Project, we rebuilt two rail lines in 1994 for use by high-speed
passenger trains. We began to build the third line in 1998 for freight trains
and regular-speed passenger trains. After launching our high-speed passenger
train operations in 1994 with four daily pairs, we have steadily increased the
number of high-speed passenger trains between Guangzhou and Shenzhen and reduced
the number of regular-speed passenger trains. During 2002, we operated on
average a total of 54 pairs of inter-city express passenger trains between
Guangzhou and Shenzhen daily and basically completed our "As-frequent-as-buses"
Train Project.
Our fleet of high-speed electric trains consists of one X-2000
high-speed passenger train, known in China as "Xin Shi Su," and eight leased,
domestically-made "Blue Arrow" high-speed electric trains. The X-2000 train is
an electric tilting train built in Sweden that can travel at speeds up to 200
kilometers per hour.
MAJOR STATIONS. Guangzhou East Station We completed construction of the
main structure of our Guangzhou East Station in 2000 to serve several
objectives, including:
o enabling us to operate significantly more frequent service between
Guangzhou and Shenzhen and between Guangzhou and Hong Kong by
increasing overall station capacity dedicated to our operations;
and
o serving as a new hub for long-distance trains to locations
throughout China.
Guangzhou East Station is connected to Lines 1 and 2 of the Guangzhou
municipal subway. We believe that this connection has boosted and, with the
anticipated operation of Line
16
and 3 of the subway system in the near future, will continue to promote, our
passenger transportation business. As of December 31, 2002, the Guangzhou East
Station handles six pairs of Hong Kong through trains, 54 pairs of
Guangzhou-Shenzhen trains, 14 pairs of long-distance passenger trains between
the Guangzhou East Station and Beijing West Station, Shanghai, Jiujiang,
Shantou, Bengbu, Tianjin, Taiyuan, Nanchang, Yingtan, Harbin, Xiangfan, Qingdao,
Changchun and Xiamen, and eight pairs of passenger trains passing through the
Guangzhou East Station. In 2002, outbound passenger volume from our Guangzhou
East Station amounted to 11.6 million persons.
Dongguan Station. Our intermediate station at Dongguan is the point of
connection between our line and the neighboring Dongguan-Meizhou-Shantou rail
line, and is also the point where our line intersects with the Beijing-Hong Kong
rail line. Dongguan Station, by connecting our rail line to the Beijing-Hong
Kong line, also facilitates passenger service between Hong Kong and cities such
as Shanghai, Beijing, Guangzhou and Zhaoqing. The station currently handles on a
daily basis the transfer service for five pairs of domestic long-distance
passenger trains and 16 pairs of Guangzhou-Shenzhen high-speed passenger trains
and four pairs of Guangzhou-Shenzhen regular-speed trains. Dongguan municipality
is an area that has received substantial foreign investment. One pair of
Dongguan-Kowloon passenger trains operated during Hong Kong holidays and
weekends in 2002. As a result of these factors, outbound passenger volume from
our Dongguan Station amounted to approximately 1.9 million persons in 2002.
Shenzhen Station. Our Shenzhen Station is located in the Shenzhen
Special Economic Zone, close to the Luohu Station on the Guangzhou-Kowloon rail
line. Built in 1991, Shenzhen Station's second phase, the main construction of
the west wing of the station, was completed at the end of 2000. When the station
is connected to Shenzhen's subway system which is currently under construction,
the station's transportation and distribution capacity will be fully utilized.
We expect that the Shenzhen subway system will be completed by the end of 2004.
In 2002, we implemented China's first computerized ticket hall in our Shenzhen
Station. Currently, our Shenzhen Station handles 58 pairs of Guangzhou-Shenzhen
passenger trains and 12 pairs of domestic long-distance passenger trains between
Shenzhen and Beijing, Changsha, Shaoguan, Wuchang, Meizhou, Shantou, Maoming
East, Huangchuan, Zhengzhou, Fuzhou, Hankou and Jinjiang. Outbound passenger
volume from Shenzhen Station amounted to approximately 9.7 million persons in
2002 (excluding passengers from the Guangzhou-Kowloon through trains).
FREIGHT TRANSPORT
Revenue from our freight transport accounted for 20.4% of our total
revenues and 21.8% of our railroad revenues in 2002. Our principal market for
freight is domestic long-haul freight, originating and/or terminating outside
the Guangzhou-Shenzhen corridor.
The majority of the freight we transport is large-volume, medium- to
long-distance freight that is received from and/or transferred to other rail
lines. Little of the freight we transport both originates and terminates in the
Guangzhou-Shenzhen corridor. We classify our freight business into three
categories:
o inbound freight, which is primarily freight unloaded at freight
stations and spur
17
lines connected with ports on our line or in Hong Kong;
o outbound freight, which is primarily northbound freight loaded at
our stations and spur lines connected with ports on our line or in
Hong Kong; and
o pass-through freight, which refers to freight that travels on our
line, but originates and terminates beyond our line.
In 2002, based on a study of our freight transportation market, we took
a series of measures to improve our freight transportation business. These
measures included: (1) strengthening our marketing efforts and continuing with
the practice of freight agency system for the entire journey; (2) cooperative
marketing efforts between our freight stations and local ports to promote and
organize multi-model freight transportation services; (3) organizing and
operating container trains and improving the management of container
transportation, including improving the container express train service between
Dongguan and Hong Kong; (4) strengthening our cooperation with various industry
customers to establish a stable source of freight; (5) improving the technology
and services at our freight yards; and (6) offering price discounts for large
quantities of freight from new customers with the approval of our Parent Company
or the Ministry of Railways. We also intend to launch a container express train
service between Dongguan and Yantian port.
We transported approximately 27.6 million tons of freight for the year
2002. It represented a decrease of 4.9% over that of 2001. Among the total
tonnage of freight, approximately 7.3 million tons were outbound freight
representing an increase of 7.2% over that of 2001; inbound freight was in total
approximately 11.6 million tons, representing a decrease of 8.9% from 2001;
pass-through freight was approximately 8.7 million tons, representing a decrease
of 8.3% over that of 2001.
In 2002, revenues from our outbound freight transportation business
continued to increase due to an increase in tonnage as a result of freight price
discounts and enhanced relationships with ports, mines and factories and
cooperative efforts in directing freight traffic from ocean shipments to our
railway.
In 2002, there was a decline in our inbound freight transportation
business. This resulted from: (1) the construction of the second track on the
Beijing-Jiujiang Line; (2) railway re-routing by the Ministry of Railways; (3)
the decrease in the amount of goods being transported into the Shenzhen area
from other parts of China due to the increase of imported goods from overseas;
and (4) competition from highway and water transportation. In addition, the
development of better highways and ports led to an increase of freight handled
by trucks and water transportation vehicles.
In 2002, our freight transportation revenues were RMB514.0 million,
representing a decrease of 9.4% over 2001. Revenues generated from outbound
freight transportation services were RMB94.3 million, representing an increase
of 2.4% over 2001. Revenues generated from inbound and pass-through freight
services were RMB248.1 million, representing a decrease of
18
8.5% from 2001. Revenues from storage, loading and unloading services and other
income were RMB171.7 million, representing a decrease of 15.8% from 2001.
We serve a broad customer base and ship a wide range of goods in our
freight transport business. Our freight revenues are not dependent upon specific
customers or industries.
FREIGHT COMPOSITION. We transport a broad range of goods, which can
generally be classified into the following categories: construction materials,
energy products, food products, chemicals, manufactured goods, containers and
other goods. Inbound freight is more heavily weighted toward raw materials and
essential production inputs, while outbound freight consists of imported mineral
ores, coal and goods manufactured or processed in our service territory destined
for consumption throughout China and abroad.
The following table shows the composition of our freight volume by
percentage for the most recent three years (based on tons transported).
OUTBOUND FREIGHT INBOUND (AND PASS-THROUGH) FREIGHT
------------------------------- ----------------------------------
2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ----
Construction materials....... 14% 36% 33% 28% 31% 39%
Energy products.............. 19 24 32 18 17 14
Food products................ 10 7 6 22 23 21
Chemicals.................... 13 10 7 11 10 10
Manufactured goods........... 6 6 7 4 3 5
Containers................... 10 8 12 6 7 7
Other goods.................. 28 9 3 11 9 4
--- --- --- --- --- ---
Total........................ 100% 100% 100% 100% 100% 100%
=== === === === === ===
FREIGHT YARDS, CONTAINER YARDS AND WAREHOUSES. We own freight yards,
container yards and warehouses, most of which are located at our Shenzhen North,
Xiayuan, Huangpu, Zhangmutou, Dongguan, Shipai, Jishan, Pinghu South and
Guangzhou East Stations. Of the freight yards we own and operate either directly
or through our subsidiaries or affiliates, two handled freight exceeding 1.0
million tons each in 2002. Huangpu Station handled approximately 2.4 million
tons and Xiayuan Station handled approximately 5.7 million tons. Pursuant to the
relevant regulations of the Ministry of Railways, we charge our customers for
storing their freight at our freight yards, container yards or warehouses
starting from the third day after the freight is unloaded. The charges for using
freight yards, container yards and warehouses are subject to Guangdong
provincial government regulation. In 2002, revenues from the operation of our
warehouses (including from loading and unloading) and miscellaneous items
amounted to RMB171.7 million, accounting for 33.4% of our freight revenues for
the year.
OTHER BUSINESSES
We engage in service businesses principally related to our transport
business. Our other businesses include:
o sales of food, beverages, newspapers, magazines and other
merchandise aboard the trains and in our stations;
19
o services in the stations, including operating restaurants,
operating a travel agency and a hotel in our Shenzhen Station,
providing kiosks and advertising boards in our stations for
commercial advertising and leasing space to independent retailers;
and
o other businesses, principally railroad-related construction.
The table below sets out the revenues for our other businesses, by
category of activity, in each of 2000, 2001 and 2002:
PERCENTAGE OF TOTAL
REVENUES OTHER BUSINESSES REVENUES
------------------------------ ---------------------------
2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ----
(RMB MILLIONS)
On-board and station sales............. 58 52 41 30% 32% 26%
Station services....................... 66 41 44 34 26 28
Tourism, advertising and others........ 69 67 72 36 42 46
---------- ---------- ---------- ---------- ---------- ------
Total.............................. 193 160 157 100% 100% 100%
========== ========== ========== ========== ========== =======
Revenues from our other business segment decreased by 2.1% from
RMB160.3 million in 2001 to RMB156.9 million 2002. Revenues from our other
businesses accounted for 6.2% of our total revenues in 2002. Due to the increase
in frequency and speed of our passenger trains, the waiting time and traveling
time involved was reduced, which led to a decrease in revenues from our other
businesses as the consumption of food and beverages and other goods both in our
stations and on-board our trains was reduced.
SALES
PASSENGER TRANSPORT
Our passenger tickets are currently sold primarily at ticket counters
located at train stations. Additionally, tickets are sold in Hong Kong and in
major cities in Guangdong Province through ticket agents, travel agents and at
hotels, at prices corresponding to our pricing plus nominal commissions.
Substantially all of our ticket sales are made in cash.
Since January 1, 2001, the Ministry of Railways implemented a new
settlement method for passenger transport. This settlement method stipulates
that all revenues from any passenger train service (including revenues generated
from luggage and parcel services) are considered passenger transport revenues
and belongs to the railway administration that operates that train. The railway
administration in turn pays other railway administrations fees for the use of
their rail lines, hauling services, in-station passenger services, water supply,
electricity for electric locomotives and contact wire use fees, etc. The
settlement method does not have a consequential impact on our passenger
transport revenues. We are still using the settlement method for passenger
transport that became effective on January 1, 2001.
The implementation of the settlement method did not change the existing
settlement method for transportation revenues from the passenger trains between
Guangzhou and Shenzhen, between Beijing and Hong Kong, between Shanghai and Hong
Kong, between Zhaoqing and
20
Hong Kong and the Hong Kong through trains. However, it changes the settlement
method for revenues from long-distance passenger trains departing from, arriving
at or passing through our rail line other than from the Beijing-Hong Kong and
Shanghai-Hong Kong trains. Before the implementation of the settlement method,
we received transportation revenues from those railway administrations that
operated long-distance train services in accordance with special pricing formula
we set. Since the implementation of the settlement method, those railway
administrations operating these long-distance train services pay us the
following fees: (1) revenues from ticket prices that are higher than national
railway standards due to our special pricing standards; and (2) fees including
those for railroad line usage, in-station passenger service, haulage service,
power supply for electric locomotives, usage fees of contact wires, and water
supply.
Hong Kong through train tickets are sold in Guangdong Province through
our own ticket outlets, as well as through various hotels and travel agents. In
Hong Kong, these tickets are sold exclusively by the KCR. Because of KCR's sales
network for these tickets is relatively limited, KCR has engaged the China
Travel Service (HK) Ltd., or CTS, as the primary agent for such sales on a
non-exclusive basis. CTS also operates bus services from Hong Kong to Guangzhou.
The KCR and we are exploring plans to supplement the through train ticket sales
network through computer sales.
FREIGHT TRANSPORT
Generally, we deal directly with our customers in collecting payment
for freight service, and typically receive payment prior to, or immediately
following, delivery of service. For inbound freight, we collect from the
receiving party prior to the release of the freight. For outbound freight, we
charge the dispatching party, retain the portion allocated to transportation on
our line and remit the remainder to the other railroad operators on a monthly
basis either directly or through a national settlement procedure. These
collection procedures also apply to freight transported to or from Hong Kong.
Substantially all payments for inbound and outbound freight are settled in cash.
For pass-through freight, payments are collected at the originating
stations, and allocated portions for the use of our rail line are remitted to us
through the national settlement process. We generally receive such funds within
a month after service is provided.
Freight customers in the Guangzhou-Shenzhen area deal directly with us
or use shipping agents. In general, freight cars must be booked as part of the
national ordering process. As a practical matter, we have been able to satisfy
demand for outbound freight transport even on short notice.
COMPETITION
We are the sole railroad on the Guangzhou-Shenzhen corridor and enjoy
monopoly status; therefore, we do not face any direct competition from other
railroads in our service territory. However, in areas where our rail line
connects with lines of other railway companies, such as in the Guangzhou area,
where our rail line connects with the Beijing-Guangzhou Line, and in the
Dongguan area, where our rail line connects with the Guangzhou-Meizhou-Shantou
21
Line, we face some competition. We also face competition from providers of a
variety of other means of transportation in both our passenger and freight
transport businesses.
With respect to passenger transport, bus services are conveniently
available between Guangzhou and Hong Kong and between Guangzhou and Shenzhen.
Bus fares are lower than the fares for our high-speed passenger train services.
Furthermore, buses can offer added convenience to passengers by departing from
or arriving at locations other than central terminals, such as hotels. However,
train service generally offers greater comfort, better safety and more
reliability. The increase in high-speed rail services has allowed us to compete
more effectively with bus operators on speed, safety and frequency. There is
also commercial air and sea hovercraft passenger transport services operating
between Guangzhou and Hong Kong.
With respect to freight transport, we believe that we face competition
in our principal market, namely, long-distance freight transport. However, due
to the PRC government's prohibition on overloading trucks and the increase in
the price of gas, we believe that long-distance freight transportation
encounters only limited competition from truck transportation. Most
long-distance freight in China is still shipped by rail. Although waterway
transport is competitive to rail on the basis of price, the multiple handling
involved in water transport tends to produce greater loss of or damage to goods.
Long-distance trucking is limited by road conditions and the shortage of
heavy-duty trucks in China. Moreover, goods shipped by truck are usually more
susceptible to loss or damage. However, because the road network between the
Pearl River Delta and neighboring provinces has recently been substantially
upgraded, medium- and short-distance freight transportation by trucks poses a
significant competitive threat to our freight transport business.
EQUIPMENT, TRACKS AND MAINTENANCE
As of the end of 2002, we owned 12 diesel high-speed locomotives, five
high-speed electric locomotives, 18 shunting locomotives, one high-speed
electric passenger train, 84 semi-high-speed passenger coaches, 41 regular-speed
passenger coaches and 112 long-distance express passenger train coaches.
The freight cars we use are all leased from the Ministry of Railways,
to which we pay uniform rental fees and depreciation fees based on the national
standards set by the Ministry of Railways. The amounts of such usage fees and
depreciation charges we paid to the Ministry of Railways in 2001 and 2002 were
approximately RMB52.3 million and RMB57.3 million, respectively.
In October 1999, we entered into a five-year lease to lease eight "Blue
Arrow" high-speed electric train-sets from Guangzhou Zhongche Railway Rolling
Stock Sales and Service Company Limited, or Guangzhou Zhongche, to facilitate
the development of our "As-frequent-as-buses" Train Project. We paid the lessor
RMB39 million in 2001 and RMB104 million in 2002 under the lease. In 2002, we
purchased 12 express passenger coaches for the Shenzhen-Yueyang and
Shenzhen-Beijing long-distance routes.
Our repair and maintenance facility, located near our Guangzhou East
Station, and our Shipai passenger vehicle maintenance facility near Pinghu Nan,
near Shenzhen, services the
22
high-speed passenger coaches and locomotives we own or lease. This facility
currently performs general maintenance and routine repairs on our equipment.
Major repairs and overhauls are performed by manufacturers or qualified railway
administrations or plants.
Our track is of a type and quality suitable and satisfactory for our
operations. Most of the rails and ties on our main line have been installed
within the last six years, and generally have a useful life of approximately 45
years. In 1997, we completed a track improvement project in which we replaced a
portion of the rails on our high-speed tracks with longer rails to provide
greater stability, allow for smoother and more comfortable travel and reduce
friction damage on both rail and wheels. In 2000, we increased the attainable
speeds on our two high-speed tracks, which enabled the "Blue Arrow" high-speed
electric trains to travel at speeds of up to 210 kilometers per hour. In 2001,
we replaced 21 sets of wooden movable center switches and improved the operation
quality of the relevant rail tracks. In 2002, we replaced 19 sections of wooden
moveable center switches to improve safety and stability.
SUPPLIERS AND SERVICE PROVIDERS
All manufacturers of locomotives, rolling stock and major railway
supplies and equipment in China are owned directly or indirectly by the Ministry
of Railways. We purchase our high-speed coaches and locomotives, as well as most
other railway equipment, directly from suppliers in China. We may also purchase
such equipment from foreign vendors or other domestic suppliers. We are not
materially dependent upon any overseas suppliers.
We lease from our Parent Company regular-speed locomotives and rolling
stock that are used in our transportation operations. Our Parent Company also
services these locomotives and rolling stock according to contracts which
stipulate fees based on a cost plus profit formula. The profit portion is fixed
for a 10-year term of the relevant contract at 8%. The cost includes all actual
costs related to providing and servicing the locomotives and rolling stock.
Because such costs are affected by inflation, we are subject to inflationary
risks in connection with our payment obligations under these contracts. The
Parent Company and some of its subsidiaries, such as Yangcheng Railway Company,
Guangmeishan Railway Company, and Guangzhou Railway (Group) Passenger
Transportation Company, have similar agreements with us to provide services and
assistance with respect to our railroad operations. In addition, GEDC provides
medical and health care services, public security, education and housing for our
employees and their families under a contract and in exchange for fee payments.
In 2002, the total amount of these payments we made accounted for 6.9% of our
railroad business operating costs for the year.
Under the Listing Rules of the Stock Exchange of Hong Kong,
transactions between us and connected persons constitute connected transactions
and such transactions are normally subject to reporting, announcement and/or
shareholders' approval unless otherwise waived by the Stock Exchange of Hong
Kong. According to certain waivers granted by the Stock Exchange of Hong Kong in
connection with our original listing of H shares in May 1996, our independent
non-executive directors review and certify annually that these contracts are
entered into on normal commercial terms that are fair and reasonable for us. The
above transactions are exempted from the strict compliance of the requirements
under the Listing Rules in relation to connected transactions, subject to
certain conditions as stated in the waiver letter issued by the
23
Stock Exchange of Hong Kong.
The electricity we use, including electricity used for the
electrification of our line, is supplied through various entities under the
jurisdiction of the Guangdong provincial power bureau at regular rates
applicable to all commercial electricity users. In 2001 and 2002, we paid
approximately RMB40.3 million and RMB57.2 million, respectively, in electricity
charges.
REGULATORY OVERVIEW
As a joint stock limited company with publicly traded shares, we are
subject to regulation by the PRC securities regulatory authorities with respect
to our compliance with PRC securities laws and regulations. We are also subject
to industry regulation by the Ministry of Railways within the overall framework
of the PRC national railway system.
NATIONAL RAILWAY SYSTEM
Railroads in the PRC fall largely into two categories: national
railroads and local railroads. The national railway system comprises over 70% of
all rail lines, including all trunk lines. Local railroads consist of regional
lines usually within provincial or municipal boundaries that have been
constructed under the sponsorship of local governments or local enterprises to
serve local needs. The national railway system operates as a nationwide
integrated system under the supervision and management of the Ministry of
Railways. Although local railroads are generally administered by local
governments, the Ministry of Railways provides local railroads with guidance,
coordination, supervision and assistance with respect to industry matters. The
Ministry of Railways' responsibilities include the centralized coordination of
train routing and scheduling nationwide, planning of freight shipments and
freight car allocations, overseeing equipment standardization and maintenance
requirements, and financial oversight and revenue clearing throughout the
national railway system.
Currently, the Ministry of Railways divides the national railway system
into 14 regions, each overseen and operated by a separate railway administration
("group companies"). Twelve of these 14 administrations are further subdivided
on a geographical basis into 46 railway sub-administrations ("general
companies"). General companies are responsible for the coordination and
supervision of operations carried out by stations and other operational units.
Each of the group companies is responsible for coordinating and supervising the
activities of its subsidiary general companies.
TRANSPORT OPERATIONS
The transport operations of the PRC national railway system are
organized under the centralized control and management of the Ministry of
Railways. In order to promote efficient utilization of the railroad network
nationwide, the Ministry of Railways directly manages and coordinates traffic
flow on national trunk lines and through any bottlenecks in the system. Each
railway sub-administration is required to submit to its governing railway
administration, on a monthly basis, information regarding its requirements for
freight cars and the number of its trains that will pass through particular
bottlenecks in the coming month. The railway administration then consolidates
and coordinates this information and submits it to the Ministry of Railways,
also on a monthly basis. Based on route capacity, available equipment and
national priorities,
24
the Ministry of Railways allocates to the 14 railway administrations authority
to make routings on trunk lines and through bottlenecks, allocates numbers and
types of freight cars to the administrations and specifies requirements to
dispatch empty freight cars to designated locations in order to facilitate
freight car circulation within the national railway system. Within the
allocations set by the Ministry of Railways, each railway administration manages
and coordinates traffic within its own jurisdiction.
Historically, our passenger and freight operations that involved
long-distance routing through national bottlenecks, such as the routing of
freight trains to Shanghai, were conducted, in general, pursuant to quota
allocations from our Parent Company based on the quota allocations our Parent
Company received from the Ministry of Railways. Our passenger and freight
operations solely within the geographical territory of our Parent Company were
subject to overall planning and scheduling at our Parent Company level.
Since March 1996, the Ministry of Railways and our Parent Company have
accorded us substantially greater latitude in our transport operations. The
Parent Company has granted us sufficient autonomy over passenger services on our
own line, including autonomy over scheduling, frequency and train car mix.
Taking advantage of this authority, we have implemented a strategy of scheduling
more high-speed trains, running shorter passenger trains more frequently, and
adjusting the train schedules on our line to meet consumer demand. As of
December 31, 2002, the total number of intercity express trains running between
Guangzhou and Shenzhen increased from 52 pairs to 54 pairs daily. At the same
time, the total number of regular speed passenger trains was reduced from six
pairs in 2001 to four pairs in 2002. Now we have 34 pairs of long-distance
trains and 7 pairs of Hong Kong through trains.
Where our service runs beyond our own line, clearance by and
coordination with our Parent Company is necessary. To the extent that we operate
long-distance services beyond our Parent Company's jurisdiction, they are
subject to coordination and clearance by the Ministry of Railways. In addition,
in order to enable our Parent Company and the Ministry of Railways to allocate
freight cars and control traffic going through bottlenecks, we are required to
provide our Parent Company with prior written notice, on a monthly basis, of the
number and types of freight cars we will require, as well as the number of our
freight trains that will go through particular bottlenecks. Furthermore, we must
still carry out special shipping tasks, such as emergency aid and military and
diplomatic transport, as directed by the Ministry of Railways or our Parent
Company. Revenues from military and diplomatic transport generally account for
less than 1% of our total transportation revenues. Emergency aid transport is
required only during periods of rare natural disasters declared by the PRC
government, and is provided free of charge.
PRICING
The State Council, by taking into account national policy
considerations, prescribes from time to time certain baseline pricing standards
for the entire national railway system with respect to freight and passenger
transportation. Because railroad transportation is basic to the national economy
and people's daily life, the national pricing standards have historically been
set below market levels. The Ministry of Railways has authority over setting
transportation-related fees and charges. Since 1984, we have been granted by the
Ministry of Railways and the State Council the special authorization to charge
passenger fares and freight tariffs that have, in most
25
instances, exceeded these national standards by 50%. On April 1, 1996, the
State Council granted us additional flexibility over pricing.
In 2002, with approval from our Parent Company or the Ministry of
Railways, as applicable, we made various adjustments to our passenger and
freight transportation pricing formula, including:
1. slight upward adjustments to our passenger ticket prices for
passengers traveling on our long-distance trains during the Spring
Festival holiday in 2002;
2. continuing to offer price discounts to our freight customers; and
3. increasing passenger ticket prices by RMB5 for our
Guangzhou-Shenzhen high-speed trains during all major PRC holidays
in 2002.
Passenger Transportation. We set prices for Hong Kong through trains in
consultation with the KCR, independently of PRC national pricing standards. For
domestic passenger trains, until March 1996, we were permitted to charge fares
up to 50% above the national standard. Since April 1996, we have been given
complete autonomy in setting high-speed train fares, and have the authority to
set and adjust regular-speed train fares within a range not to exceed an
additional 50% above our previous levels (i.e., up to 125% above the national
pricing standard).
Since 1998, we have made a number of minor upward adjustments to our
passenger train fares to reflect our increased cost of operations and the
overall increase in our service quality. Depending on the types of seats, the
range of price adjustments varied. In 2001 and 2002, we raised our passenger
fares slightly on certain routes during peak seasons.
Freight Transportation. Freight transportation prices are set based on
the type of commodity, its weight and the distance shipped. Generally, higher
value products carry higher transport tariffs. Prices for freight shipments on a
renminbi per ton-kilometer basis normally decreases with the increase in the
distance shipped, reflecting both the economy of freight transport and the PRC
government's policy of encouraging the use of railroads for long-distance
freight shipments.
Under the current freight transport tariff regime, all cargo passing on
the Guangzhou-Shenzhen railroad is charged tariffs at national railroad levels.
During 2002, as a way of attracting new freight sources we offered price
discounts for such freight as beverage, steel, grains, coal, gypsum, containers,
and for coal that is transported along our lines that are directly connected to
mines and factories. These discounts were instrumental in increasing our volume
of freight in 2002, as well as in enhancing our competitiveness against other
means of transportation.
ENVIRONMENTAL PROTECTION
We believe that we have been in material compliance with all applicable
PRC national
26
and local environmental protection laws and regulations. We have not been fined
or cited for any activities that have caused environmental damages. We have six
wastewater treatment facilities used for purposes of treating wastewater
generated from cleaning of special cargo freight cars, locomotives, coaches and
from residential use. We pay regular fees to local authorities for the discharge
of waste substances. In 2002, our environmental protection-related expenses were
approximately RMB630,000.
INSURANCE
We do not currently maintain any insurance coverage with third party
carriers against third party liabilities. Pursuant to applicable PRC regulations
and the practice of national railway companies, we are liable for (i) personal
injury to or death our passengers in the case of accidents for up to RMB20,000
per passenger and (ii) personal injury to or death of passengers for fault for
up to RMB60,000 per passenger (including RMB20,000 for accidents and RMB40,000
for liability). With respect to loss of or damage to baggage, parcels and
freight, our customers may elect to purchase insurance administered by the
Ministry of Railways for up to their declared value. Passengers who do not elect
to purchase insurance in respect of their baggage and/or parcels may
nevertheless recover up to RMB30 for each 10 kilograms of damaged baggage and/or
parcels. Similarly, freight transport customers who elect not to purchase
insurance may recover up to RMB100 for each ton of damaged freight or up to
RMB2,000 for each ton of damaged freight if insured by unit and by weight.
Consistent with the customary practice among railroad operators in the
PRC, we do not maintain insurance coverage for our property and facilities
(other than for its automobiles), for business interruption or for environmental
damage arising from accidents on our property or relating to our operations. As
a consequence, in the event of an accident or other event causing loss,
destruction or damage to our property or facilities, causing interruption to our
normal operations or causing liability for environmental damage or clean-up, we
will rely on our own resources to cover losses and damages.
Based on current Ministry of Railways regulations and in view of our
past experience, we believe that our liability exposure for personal injury and
property loss under PRC law and regulations is relatively insignificant. In 2001
and 2002, we paid RMB879,381 and RMB1,009,061, respectively, in connection with
personal injuries to or deaths of non-passengers. We have never been subject to
liability for injury or death of a passenger. However, no assurance can be given
that such regulations or the interpretation thereof will not change, that the
number of claims will not increase or that our exposure to personal injury or
freight damage claims will not increase significantly in the future. In
addition, for personal injuries, deaths or property damage related to our
through train service that occur in Hong Kong, Hong Kong laws may apply, in
which case recovery ceilings under PRC regulations will not apply and we may be
subject to significantly higher damage awards.
ORGANIZATIONAL STRUCTURE
We are organized as a joint stock limited company under PRC law in
March 1996. Our Parent Company, a state-owned enterprise under the
administration of the Ministry of Railways, owns 67% of our common shares. The
remaining 33% is owned by public shareholders.
27
PROPERTY, PLANTS AND EQUIPMENT
We occupy a total area of approximately 11.2 million square meters.
We own all of the buildings and facilities on our premises in Guangdong
Province. We have freely transferable land use rights for terms ranging from
36.5 to 50 years, terminating between 2031 and 2045, in respect of the land upon
which our buildings, facilities and rail line are located. Pursuant to relevant
PRC regulations currently in effect, these land use rights are renewable at the
end of their terms upon execution of relevant documentation and payment of
applicable fees.
Railroad operators typically require substantial land use rights for
track, freight and maintenance yards, stations and related facilities. The
availability of convenient rail transportation generally enhances the value of
land along a rail line. We have not engaged and do not have any current plans to
engage in commercial development of any of our land use rights for use other
than in connection with our existing businesses. We do not at present intend to
contribute capital to engage in any land development projects in the future.
However, we may contribute land use rights not otherwise being fully utilized by
us for equity stakes in these projects if we believe these opportunities are
economically viable. Any development projects will require approval from PRC
government authorities responsible for regulating land development.
We have 26 train stations, of which the Guangzhou East Station is the
largest, occupying an area of 402,400 square meters.
For information about our equipment, see "Item 4. Information on the
Company--Business Overview--Equipment and Track Maintenance."
In 2000, we used RMB504.3 million to fund (i) improvements to our
high-speed tracks and related facilities, (ii) the ancillary facilities for the
electrification project, and (iii) the purchase of "Xin Shi Su" high-speed
electric train and high-speed locomotives and continuing to construct our
maintenance base for locomotives and coaches. Our 2000 capital expenditure
program was financed by cash flows from operations and the remainder of the
proceeds from our initial offering of H shares.
In 2001, we invested RMB548.8 million in capital expenditures, mainly
for infrastructure projects such as speed enhancing projects, the construction
of ancillary projects relating to our "As-frequent-as-buses" Train Project,
adding 98 new coaches by way of acquisition and exchange of used coaches, the
construction and rebuilding of our Guangzhou East Station, Shenzhen West Station
and their ancillary facilities, and the construction of the immigration and
customs inspection building at our Dongguan Station and crossing stations at
Huangcun, Tangmei, Nanshe and Lincun. Our 2001 capital expenditure program was
financed by cash flows from operations.
In 2002, our original annual capital expenditures plan set out at the
beginning of the year was RMB961 million, but our actual capital expenditures
were only RMB422.4 million, representing 43.95% of our original capital
expenditures plan. The reduction in capital expenditures was due to a delay in
our construction projects that were budgeted for 2002. Of the
28
422.4 million spent in 2002, RMB315 million was spent on capital construction
projects and RMB107 million was used for other purchases of equipment and
machinery. Our capital expenditures in 2002 consisted principally of the
following projects:
o acquiring the land for the construction of the technical support
and maintenance depot in northern Shenzhen (RMB81.3 million, of
which RMB80 million was paid to the Shenzhen Municipal Planning
and Land Bureau for acquiring the land and relocating residents);
o replacing 19 sections of wooden moveable center switches to
improve the safety and stability of our passenger trains (RMB13.5
million);
o constructing the last portion of the electrification project of
the Guangzhou-Shenzhen third line (RMB69.3 million);
o constructing the Western Ticket Hall at our Shenzhen Station and
other related projects (RMB28.8 million);
o constructing the immigration and customs inspection building at
our Dongguan Station and other related projects (RMB18.1
million);
o completing the construction of the Ninth National Games Stadium
Station and the crossing stations at Tangmei, Nanshe and Lincun
Villages (RMB31.9 million);
o expanding and implementing technological improvements at our
Guangzhou East Station (RMB52.8 million);
o purchasing twelve "25k" coaches (RMB 31.5 million);
o paying the down-payment for four diesel locomotives (RMB10.2
million); and
o other remodeling projects (RMB 85 million).
Our total budget for capital expenditures in 2003 is approximately
RMB769 million. In addition to the projects that were budgeted before 2002 but
are expected to be completed in 2003, we plan to invest RMB490.9 million in
several projects in 2003 to prepare for the future growth in passenger and
freight transportation, to further improve our transportation facilities, and
generally to enhance our competitiveness, including principally:
1. the planned expansion of the Guangzhou-Shenzhen Line
(construction of the fourth track), with a budgeted investment of
RMB10 million (this project did not commence in 2002 due to a
delay in obtaining the appropriate government approvals; we hope
to obtain the necessary approvals this year and, if so, we plan
to secure a portion of the funds to
29
commence this project and will increase our original budgeted
investment);
2. the construction of a technical support and maintenance depot in
northern Shenzhen for a budgeted investment of RMB50 million,
which was scheduled to commence in 2002, but did not commence due
to a delay in acquiring the land and a delay in relocating
affected residents;
3. the construction of a track from Pinghu to Shenzhen for passenger
trains, with a budgeted investment of RMB10 million;
4. the renovation of the northern square and platforms of the
Guangzhou East Station, with a budgeted investment of RMB50
million;
5. the purchase of additional locomotives and trains, with a budget
of RMB219.2 million;
6. the construction of an elevated parking lot in the south and a
walkway in the west of Shenzhen Station, with a budget of RMB10
million;
7. the construction of a pedestrian square connecting the Shenzhen
Station and the Luohu Subway Station, with a budgeted investment
of RMB10 million; and
8. other renovations and construction projects.
30
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
This discussion and analysis should be read in conjunction with our
audited consolidated financial statements contained elsewhere in this annual
report. Our audited consolidated financial statements are prepared in accordance
with International Financial Reporting Standards, which differ in certain
material respects from United States Generally Accepted Accounting Principles.
For a discussion of the differences that affect Guangshen Railway, see note 30
to our audited consolidated financial statements. References to Guangshen
Railway in this discussion shall mean Guangshen Railway and its consolidated
subsidiaries.
OVERVIEW
Our principal businesses are railroad passenger and freight
transportation between Guangzhou and Shenzhen and certain long-distance
passenger transportation services. We also operate the Hong Kong through trains
under a cooperative arrangement with the KCR in Hong Kong. Our key strategic
focus in recent years has been to develop and improve high-speed passenger train
service in the Guangzhou-Shenzhen corridor. In addition to our core railroad
transportation business, we also engage in other businesses that are
complimentary with our overall business strategy, including on-board and station
sales, station dining services, as well as advertising and tourism.
Railroad business revenues accounted for 90.2%, 92.5% and 93.8% of our
total revenues in 2000, 2001 and 2002, respectively. The following table sets
forth as a percentage of railroad business revenues the principal operating
expenses associated with our railroad businesses for 2000, 2001 and 2002:
YEAR ENDED DECEMBER 31,
----------------------------------
2000 2001 2002
---- ---- ----
Railroad businesses revenues (RMB millions)................ 1,787 1,993 2,361
Labor and benefits......................................... 15% 16% 16%
Equipment leases and services.............................. 15% 13% 18%
Materials and supplies..................................... 7% 7% 8%
Repair costs, excluding materials and supplies............. 5% 5% 4%
Depreciation (and amortization of leasehold land payments). 18% 17% 16%
General and administrative expenses........................ 7% 8% 5%
Fee for social services.................................... 3% 3% 2%
Others..................................................... 3% 4% 4%
Operating ratio(1)......................................... 73% 73% 73%
Railroad businesses operating margin....................... 27% 27% 27%
-------------
(1) Total railroad operating expenses as a percentage of railroad businesses
revenues.
RESULTS OF OPERATIONS
REVENUES
In 2002, our total revenues were RMB2,517.5 million, representing an
increase of 16.9% from RMB2,153.6 million in 2001. Revenues from passenger
transportation service, freight transportation service and other businesses
accounted for 73.4%, 20.4% and 6.2% of our 2002
31
total revenues respectively. Revenues from passenger transportation service and
freight transportation service accounted for 78.2% and 21.8% of our 2002
revenues from railway businesses, respectively.
Passenger transportation service. In 2002, passenger transportation
service continued to be the growth engine of our revenues. The sharp increase in
revenues from passenger transportation was due primarily to the full-year
operation of our Shenzhen-Yueyang and Shenzhen-Beijing long-distance passenger
trains (as compared to 2001, when these trains operated for less than half the
year) and the completion of our "As-frequent-as-buses" Train Project between
Guangzhou and Shenzhen in 2002. Before October 2001, we operated 31 pairs of
high-speed trains and 15 pairs of regular-speed trains between Guangzhou and
Shenzhen daily, with high-speed trains accounting for 67% of the total. Since
January 2002, we have been operating 54 pairs of high-speed trains and 4 pairs
of regular-speed trains, with high-speed trains accounting for more than 93% of
the total. The per passenger ticket price of long-distance trains is two to four
times the price of the Guangzhou-Shenzhen high-speed trains, and the ticket
price of the Guangzhou-Shenzhen high-speed trains is double the price of
regular-speed trains. As a result of the increase in the number of high-speed
trains and long-distance trains operating in 2002 compared to 2001, our revenue
per passenger increased by 26.4% from RMB36.7 in 2001 to RMB46.4 in 2002.
In 2002, we operated an average of 99 pairs of passenger trains per day
on the Guangzhou-Shenzhen route, of which seven pairs were the Hong Kong through
trains between Guangzhou and Kowloon, 54 pairs were high-speed trains between
Guangzhou and Shenzhen, four pairs were regular-speed trains between Guangzhou
and Shenzhen and 34 pairs were long-distance trains. The total number of
passengers increased by 2.4% from approximately 38.8 million in 2001 to
approximately 39.8 million in 2002.
The following table sets forth the revenues from passenger
transportation and the number of passengers for the three years ended December
31, 2000, 2001 and 2002:
YEAR ENDED DECEMBER 31,
---------------------------------------- CHANGE FROM
2000 2001 2002 2001
---- ---- ---- ----
Revenue from passenger
transportation (RMB thousands)............ 1,237,289 1,426,010 1,846,599 29.5%
Total passengers (thousands).................. 34,947 38,842 39,776 2.4%
Revenue per passenger (RMB)................... 35.40 36.71 46.42 26.4%
Total passenger-kilometers (millions)......... 3,051.70 3,257.90 3,453.20 6.0%
Revenue per passenger-kilometer (RMB)......... 0.41 0.44 0.53 20.5%
Freight transportation. In 2002, our freight transportation revenues
declined 9.4% from that of 2001. The decline was primarily due to the intense
competition from other modes of transportation. Total freight tonnage was
approximately 27.6 million tons, representing a 4.9% decrease from approximately
29.0 million tons in 2001.
o Outbound freight revenue increased by 2.4% from RMB92.1 million
in 2001 to RMB94.26 million in 2002. The increase in outbound
freight transportation revenue was mainly due to higher
transportation volume generated by freight price discounts. These
decreased prices helped us to maintain our existing customers and
32
attract some new freight customers. Furthermore, we enhanced our
relationships with ports, mines and factories, and strengthened
our efforts in directing certain freight from ocean shipments to
our railway, which also contributed to the increase in
transportation volume. Outbound freight tonnage increased by 7.2%
from approximately 6.8 million tons in 2001 to approximately 7.3
million tons in 2002.
o Inbound and pass-through freight revenue decreased by 8.5% from
RMB271.2 million in 2001 to RMB248.1 million in 2002. The decline
was mainly caused by the construction of the second track on the
Beijing-Jiujiang line and the national railway re-routing that
decreased the volume of inbound and pass-through freight
transportation. Furthermore, there was a decline in the amount of
goods being shipped to Shenzhen from other parts of China due to
an increase of imported goods from overseas. In 2002, our inbound
and pass-through freight transportation volume was approximately
20.3 million tons, representing a decline of 8.6% from
approximately 22.2 million tons in 2001.
o Revenue from storage, loading, unloading and other miscellaneous
items of freight services decreased by 15.8% from RMB204.0
million in 2001 to RMB171.7 million in 2002. The decrease was
mainly due to the drop in freight tonnage, the implementation of
freight price discounts and the reduction of storage and loading
charges.
The following table sets forth the revenues from freight transportation
and the volumes of commodities shipped for the three years ended December 31,
2000, 2001 and 2002:
YEAR ENDED DECEMBER 31,
----------------------------------- CHANGE FROM
2000 2001 2002 2001
---- ---- ---- ----
Revenue from freight transportation
(RMB thousands)......................... 549,694 567,276 514,036 (9.4%)
Total freight tons (thousands of tons)........ 28,733 29,012 27,583 (4.9%)
Revenue per ton (RMB)......................... 19.13 19.55 18.64 (4.7%)
Total ton-kilometers (millions)............... 2,071.6 2,082.5 1,926.0 (7.5%)
Revenue per ton-kilometer (RMB)............... 0.27 0.27 0.27 -
Other Businesses. Revenues from our other businesses decreased by 2.1%
from RMB160.3 million in 2001 to RMB156.9 million in 2002. The decline was due
primarily to increased train frequency and higher train speeds that reduced
passengers' consumption of food and beverages both on-board and in railway
stations. In addition, the subway construction outside Shenzhen Station also
affected the number of customers dining at our station restaurants.
The table below sets forth a breakdown of the revenues from different
categories of our other businesses for the three years ended December 31, 2000,
2001 and 2002:
33
YEAR ENDED DECEMBER 31,
--------- ------------------- ------------------
2000 2001 2002
---- ---- ----
(RMB THOUSANDS)
On-board and station sales................................ 58,030 51,627 40,977
Station services.......................................... 65,934 41,287 43,913
Tourism, advertising and others........................... 69,451 67,392 72,003
------- ------- -------
Total................................................ 193,415 160,306 156,893
======= ======= =======
Operating Expenses. In 2002, our total operating expenses were
RMB1,895.0 million, representing an increase of 18.5% from RMB1,599.5 million in
2001. This was due mainly to an increase in railway operating expenses.
Railway Operating Expenses. Our total railway operating expenses
increased by 18.8% from RMB1,460.6 million in 2001 to RMB1,735.3 million in
2002. Details are as follows:
o Labor and benefits. In 2002, labor and benefits expenses amounted
to RMB373.8 million, representing an increase of 16.6% from
RMB320.6 million in 2001. The rise in labor and benefits expenses
was mainly due to the increase in the number of employees
resulting from the operation of two additional long-distance
trains and the more frequent train service along the
Guangzhou-Shenzhen route, as well as an increase in the average
salaries of our employees. The number of our employees increased
to 9,258 as of December 31, 2002 from 9,132 as of December 31,
2001. Moreover, our efforts to link compensation with our
employees' performance also increased the overall salary and
welfare expenses in 2002.
o Materials and supplies. Materials and supplies consisted of fuel,
water and electricity. In 2002, our materials and supplies
expenses amounted to RMB192.1 million, representing an increase
of 32.8% from RMB144.7 million in 2001. The higher expenses were
mainly caused by the increase in materials consumption resulting
from the full year operation of the eight newly operated "Blue
Arrow" electric trains that were part of our
"As-frequent-as-buses" Train Project that we leased in the second
half of 2001 and the two additional long-distance passenger
trains that operated throughout 2002. The higher frequency of
train service on the Guangzhou-Shenzhen route, the increased
number of pairs of electric trains and the shift to electricity
power on some freight trains also added to the materials and
supplies expenses.
o Depreciation. In 2002, depreciation expenses of fixed assets were
RMB335.5 million, representing a 2.0% decrease from RMB342.5
million in 2001. The decrease in depreciation expenses was mainly
due to our contribution of RMB120.6 million of telecommunication
assets and certain related construction-in-progress to China
Railcom. The depreciation associated with these assets of
approximately RMB11.1 million was no longer reflected in our
audited consolidated financial statements, thus reducing our
depreciation expenses in 2002.
34
o Repair expenses. In 2002, repair expenses amounted to RMB102.4
million, representing an 8.3% increase from RMB94.6 million in
2001. The increase was mainly due to the full year operation of
two new long-distance trains that commenced operation in the
second half of 2001 and the full year operation of the
"As-frequent-as-buses" Train Project on the Guangzhou-Shenzhen
route. In addition, efforts to improve both passenger and freight
transportation facilities along the Guangzhou-Shenzhen route also
increased repair expenses.
o Equipment leases and services. In 2002, expenses on equipment
leases and services amounted to RMB433.9 million, representing a
65.4% increase from RMB262.3 million in 2001. The substantial
increase of such expenses in 2002 was mainly due to the full year
operation of two new long-distance trains (Shenzhen-Yueyang and
Shenzhen-Beijing) which significantly increased the expenditures
paid to other railway companies for railway line usage and train
hauling expenses. Furthermore, the full year operation of the
eight high-speed electric trains leased from Guangzhou Zhong Che
Rolling Stock Sales and Leasing Company also increased leasing
expenses significantly.
o Fees for social services. Fees for social services are paid for
services provided to our employees, including health care and
education and for services relating to passenger safety and
security. In 2002, fees for social services were RMB57.39
million, representing an increase of 0.4% from RMB57.16 million
in 2001. The increase was due primarily to the fees paid for
passenger safety and security on our two new long-distance
passenger trains.
o General and administrative expenses. General and administrative
expenses in 2002 were RMB123.8 million, representing a decrease
of 17.6% from RMB150.2 million in 2001. The decrease was due
primarily to the significant drop in the provision for bad debts
in 2002, and to the decrease in losses from bad debts from
RMB29.6 million in 2001 to RMB4.6 million in 2002. In 2002, we
improved our receivables collection by managing and clearing
outstanding accounts receivable. As a result, our accounts
receivable dropped significantly.
o Other expenses. In 2002, other expenses amounted to RMB101.3
million, representing an increase of 38.2% from RMB73.2 million
in 2001. The increase in other expenses was due to the addition
of two long-distance trains and the full year operation of the
"As-frequent-as-buses" Train Project on the Guangzhou-Shenzhen
route, which increased various direct costs. Since we contributed
our telecommunication assets into China Railcom, we started to
pay for telecommunication services provided by China Railcom,
which increased our expenses for telecommunication services.
PROFIT FROM OPERATIONS
Our profit from operations increased by 12.3% from RMB554.1 million in
2001 to RMB622.5 million in 2002, principally driven by the increase in
operating profit from railroad businesses from RMB532.7 million in 2001 to
RMB625.3 million in 2002, which was offset
35
slightly by a decrease in operating profit of our other businesses from RMB21.5
million in 2001 to an operating loss of RMB2.8 million in 2002.
TAXATION
As we are registered and established in the Shenzhen Special Economic
Zone, our railroad businesses are subject to income tax at a rate of 15%.
According to relevant tax regulations, our other businesses and our subsidiaries
are subject to income tax at the rate of either 15% or 33%, depending on the
location of incorporation. Taxes payable by us and our subsidiaries were
RMB104.4 million in 2002, implying an actual tax rate of 15.7%. Income tax
expense of RMB104.4 million in 2002 increased by RMB5.0 million over RMB99.4
million in 2001, which was due to the growth of profits before tax.
NET PROFIT
Our consolidated net profit increased from RMB533.5 million in 2001 to
RMB557.1 million in 2002, representing an increase of 4.4%.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
REVENUES
Our total revenues increased by 8.7% from RMB1,980.4 million in 2000 to
RMB2,153.6 million in 2001 as a result of the increase in revenues from both
passenger and freight transportation, which was slightly offset by the decrease
in revenues from our other businesses. Revenues from passenger and freight
transportation operations accounted for approximately 71.5% and 28.5%,
respectively, of the total revenues generated by the railroad business,
representing approximately 66.2% and 26.3%, respectively, of our total revenues
in 2001.
Passenger Transportation. Passenger transportation is our largest
business segment and it experienced significant growth in 2001. The revenues
from the passenger transportation business were RMB1,426.0 million in 2001,
representing an increase of 15.3% from RMB1,237.3 million in 2000. The increase
in the revenues from passenger transportation was mainly due to the increase in
the number of passengers from approximately 34.947 million in 2000 to
approximately 38.842 million in 2001 and an increase in revenue per passenger
from RMB35.40 in 2000 to RMB36.71 in 2001.
Freight Transportation. Revenues from our freight transportation
business in 2001 were RMB567.3 million, representing an increase of 3.2% from
RMB549.7 million in 2000. The total tonnage of freight increased from
approximately 28.7 million tons in 2000 to approximately 29.0 million tons in
2001, and the increase of revenue per ton also increased from RMB19.1 in 2000 to
RMB19.6 in 2001. This growth in freight transportation business in 2001 was
mainly due to continued domestic economic growth. As a result of our flexible
pricing policy and enhancement of marketing strategies, the freight volume and
revenues from freight transportation both increased despite increasingly keen
competition from other means of transportation.
Other Businesses. The revenues from our other businesses decreased by
17.1% from RMB193.4 million in 2000 to RMB160.3 million in 2001. The revenues
from other businesses
36
accounted for 7.5% of the total revenues in 2001. The increased frequency and
speed of our passenger trains have reduced waiting time and travel time, leading
to a decrease in revenues from our other businesses as consumption of food and
beverages and other goods both in stations and aboard trains was reduced.
OPERATING EXPENSES
Our total operating expenses were RMB1,599.5 million, representing an
increase of approximately 9.5% from RMB1,461.0 million in 2000, due mainly to
the increase in railroad operating expenses. The operating expenses of our
railroad businesses in 2001 accounted for 91.3% of our total operating expenses
for the year.
Railroad operating expenses. Our total railroad operating expenses
increased by 12.6% from RMB1,297.5 million in 2000 to RMB1,460.6 million in
2001. Our total railroad operating expenses as a percentage of total railroad
operating revenues increased slightly from 72.6% in 2000 to 73.3% in 2001. The
increase in the railroad operating expenses was due primarily to the increase in
depreciation expenses, labor and welfare expenses, materials and supplies
expenses, and general and administrative expenses. Details are as follows:
o Depreciation. Our railroad related depreciation expenses
increased by 12.2% from RMB305.3 million in 2000 to RMB342.5
million in 2001. It was attributable mainly to the further
upgrading and expansion of our railroad networks as well as to
the increase in corresponding capital expenditures.
o Labor and benefits. Due to the increase in frequency of trains
and the launching of newly operated routes in 2001, there was an
increase in workload and the number of employees. This resulted
in an increase of labor and related welfare expenses by 23.0%
from RMB260.7 million in 2000 to RMB320.6 million in 2001. In
addition, we raised the remuneration packages offered to our
employees to ensure that they were competitive. We also
implemented a pay policy of linking performance to rewards under
the existing pay and remuneration system.
o Materials and supplies. The materials and supplies expenses
consisted mainly of fuel, water and electricity expenditures.
Materials and supplies expenses increased by 19.3% from RMB121.3
million in 2000 to RMB144.7 million in 2001. The increase was due
primarily to an increase in fuel and electricity consumption
resulting from the operation of two new long-distance trains in
2001 and the increase in frequency of our high-speed electric
passenger trains.
o General and administrative expenses. The general and
administrative expenses increased by 13.9% from RMB131.9 million
in 2000 to RMB150.2 million in 2001 principally because of
increases in provisions. Provision for bad debts increased from
RMB17.0 million in 2000 to RMB29.6 million in 2001 due primarily
to a one-time provision for rental and utility expenses overdue
from a third party and, to a lesser extent, certain other
provisions including those for overdue accounts receivables from
freight transportation customers.
37
PROFIT FROM OPERATIONS
Our profit from operations increased by 6.7% from RMB519.4 million in
2000 to RMB554.1 million in 2001, principally driven by the increase in
operating profit from railroad businesses from RMB489.5 million in 2000 to
RMB532.7 million in 2001, which was offset slightly by a decrease in operating
profit of our other businesses from RMB29.9 million in 2000 to RMB21.5 million
in 2001.
TAXATION
Being registered and established in the Shenzhen Special Economic Zone,
we are subject to corporate income tax at a rate of 15%. We and our subsidiaries
had income tax expenses of RMB99.3 million in 2001 and RMB99.4 million in 2000,
reflecting effective tax rates of 15.8% and 16.8%, respectively. The decrease of
in income tax resulted from a recognition of additional deferred tax assets in
2001.
NET PROFIT
Our consolidated net profit increased 8.4% from RMB492.1 million in
2000 to RMB533.5 million in 2001.
CRITICAL ACCOUNTING POLICIES
Our audited consolidated financial statements have been prepared in
accordance with IFRS. Our principal accounting policies are set out on pages
F-12 to F-18 to our audited consolidated financial statements. IFRS requires
that we adopt the accounting policies and estimation techniques that are most
appropriate in the circumstances for the purpose of giving a true and fair view
of our results and financial condition. However, different policies, estimation
techniques and assumptions in critical areas could lead to materially different
results, in particular, with respect to impairments discussed in the next
paragraph.
IMPAIRMENTS
If circumstances indicate that the net book value of an asset or
investment may not be recoverable, this asset may be considered "impaired", and
an impairment loss may be recognized in accordance with IFRS 36 "Impairment of
Assets". We review the carrying amounts of long-lived assets periodically in
order to assess whether the recoverable amounts have declined below the carrying
amounts. We test these assets for impairment whenever events or changes in
circumstances indicate that their recorded carrying amounts may not be
recoverable. When such a decline has occurred, the carrying amount is reduced to
the estimated recoverable amount. The amount of impairment loss is the
difference between the carrying amount of the asset before the reduction and the
estimated recoverable amount. The recoverable amount is the greater of the
estimated net selling price and the value in use. It is difficult to precisely
estimate selling prices because quoted market prices for our assets are often
not readily available. In determining the value in use, we discount cash flows
that we expect the asset to generate to their present value. Determining cash
flows that we expect an asset to generate requires significant judgment relating
to the expected level of sales volume, selling prices and the amount of
operating costs.
38
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of capital has been cash flow from operations, and
principal uses of capital are to fund capital expenditures, investment and
payment of taxes and dividends.
We generated approximately RMB1,157.2 million of net cash flow from
operating activities in 2002. Substantially all of our railroad business
revenues were received in cash, with accounts receivable arising primarily from
long-distance passenger and pass-through freight transactions originating from
other railway companies whose lines connect to our railroad. Similarly, some
accounts payable arise from payments for railroad transportation services that
the we collect on behalf of other railroad companies. Accounts receivable and
payable were generally settled either quarterly or monthly between us and the
other railroad companies. Most of our revenues generated from other businesses
were received in cash. There were also accounts payable associated with purchase
of materials and supplies in other businesses. Our provision for bad debt
decreased from RMB29.6 million in 2001 to RMB4.6 million in 2002, due primarily
to the better collection of overdue accounts receivable.
In 2002, other than for operating expenses, our cash outflow was mainly
related to the following:
o capital expenditures of approximately RMB535.0 million,
representing a decrease of 36.3% from RMB840.5 million in 2001;
such expenditures were mainly used for the purchase of
long-distance passenger coaches, the renovation and expansion of
our facilities and the purchase of available-for-sale
investments; and
o payment of dividends of approximately RMB356.5 million.
Funds not needed for immediate use are kept in short and medium-term
investments and bank deposits.
We had temporary cash investments of approximately RMB567.3 million as
of December 31, 2002 and cash and cash equivalents of RMB1,413.0 million. We
have no contingent liabilities.
We believe that we have sufficient funds to satisfy our current working
capital requirements.
CASH FLOW
Cash and cash equivalents in 2002 increased by approximately RMB1,047.5
million over 2001 primarily due to the maturity of RMB809.3 million of time
deposits. The table below sets forth the major items in the consolidated cash
flow statements for 2001 and 2002 and the percentage change from 2001 to 2002.
39
YEAR ENDED DECEMBER 31,
--------------------------- CHANGE FROM
2001 2002 2001
---- ---- ----
(RMB THOUSANDS)
Net cash generated from operating
activities............................. 886,016 1,157,177 30.6%
Net cash (used)/from in investing activities (430,425) 251,003 N/A
Net cash (used) in financing activities..... (420,137) (360,643) (14.2)%
-------- --------- -----
Net increase/(decrease) of cash and
cash equivalents....................... 35,454 1,047,537 --
======== =========
CASH FLOW FROM OPERATIONS AND WORKING CAPITAL
Our net cash generated from operating activities in 2002 was
approximately RMB1,157.2 million, representing an increase of RMB271.2 million
from RMB886.0 million in 2000. The increase resulted primarily from an increase
in cash flow generated from our passenger transportation business.
Our working capital increased slightly from RMB1,610.6 million in 2001
to RMB1,631.4 million in 2002. The increase was due mainly to an increase in
payables due to related parties of RMB99.5 million from RMB58.7 million in 2001
to RMB158.2 million in 2002, a decrease of prepayments and other current assets
of RMB62.2 million from RMB322.3 million in 2001 to RMB260.1 million in 2002,
and an increase in accrued expenses and other payables of RMB4.0 million from
RMB454.0 million in 2001 to RMB458.0 million in 2002, which was offset slightly
by a decrease in trade payables of RMB27.3 million from RMB69.0 million in 2001
to RMB41.7 million in 2002 and a decrease in trade receivables (before the
provision for doubtful accounts) of RMB24.1 million from RMB91.5 million in 2001
to RMB67.4 million in 2002.
CASH FLOW FROM INVESTING ACTIVITIES
The total cash from investing activities was approximately RMB251.0
million in 2002, representing an increase of RMB681.4 million from cash used in
investing activities of RMB430.4 million in 2001. Cash from investing activities
in 2002 mainly included a decrease in temporary cash investments and interest
received. The increase was mainly due to the shortening of the term of
re-investment upon maturity of a portion of our short-term investments, thus
increasing cash and cash equivalents by approximately RMB703.2 million.
CASH FLOW FROM FINANCING ACTIVITIES
Net cash used in financing activities in 2002 was approximately
RMB360.6 million, representing a decrease of RMB59.5 million from RMB420.1
million in 2001. It consisted of a dividend payment of RMB356.5 million and
distribution to minority shareholders of approximately RMB4.15 million.
CAPITAL COMMITMENTS
The table below sets forth our capital commitments and operating lease
commitments for the years ended December 31, 1998 to 2002.
40
AS AT DECEMBER 31
---------- --------- --------- --------- ---------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(RMB THOUSANDS)
Capital commitments............................................ 1,050,000 196,625 55,340 15,640 10,158
Operating lease commitments.................................... 32,000 556,710 546,750 399,375 399,375
- not more than one year 22,040 14,460 91,125 - 108,000
- more than one year but nor more than five years 9,960 542,250 455,625 399,375 291,375
In 2002, we had capital commitments of approximately RMB10.2 million
for the purchase of four locomotives. We also had operating lease commitments of
RMB399.4 million, of which RMB108.0 million were for operating lease commitments
of less than a year and RMB291.4 million were for commitments over one year but
less than five years.
As of December 31, 2002, we had not used any of our assets as security
or collateral for any loans or provided any guarantees.
CAPITAL EXPENDITURE PLAN FOR 2003
Our capital expenditure plan for 2003 will focus on increasing our
passenger and freight transportation capacity and enhancing our competitiveness.
In 2003, we plan to invest a total of RMB490.9 million on the following
projects:
o the expansion of Guangzhou-Shenzhen Line (construction of the
fourth track);
o the construction of a technical support and maintenance depot for
passenger trains in northern Shenzhen; and
o the purchase of additional trains and other renovation and
construction projects.
For more information about these capital expenditure projects, see
"Item 4. Information on the Company - Property, Plants and Equipment".
Our capital expenditure needs for 2003 will be funded by internally
generated funds from operations and other financings, as necessary.
DIFFERENCE BETWEEN IFRS AND US GAAP
Our audited consolidated financial statements conform to IFRS, which
differ in certain respects from those prepared under US GAAP. A major difference
between IFRS and US GAAP, which has a significant effect on our consolidated net
profit and consolidated net assets is set out below:
REVALUATION OF FIXED ASSETS
As stated in Note 13 of our audited consolidated financial statements,
we revalued our fixed assets on March 6, 1996. We recorded a revaluation surplus
of fixed assets amounting to
41
approximately RMB1.5 billion. The revaluation as of September 30, 2002 did not
result in a material difference from the carrying amounts and no revaluation
surplus or deficit was recorded for the year ended December 31, 2002.
Under IFRS, revaluation of fixed assets is permitted and depreciation
is based on the revalued amount. Additional depreciation arising from the
revaluation surplus was approximately RMB48.4 million for the year ended
December 31, 2002 (2001: approximately RMB48.4 million).
Under US GAAP, fixed assets are required to be stated at their original
cost. Hence, no additional depreciation from revaluation will be recognized
under US GAAP. However, a deferred tax asset related to the revaluation surplus
amounting to approximately RMB223.8 million was created under US GAAP with a
corresponding increase in equity since the revaluation resulted in a higher tax
base which will be realized through additional depreciation for PRC tax
purposes.
Effects on our consolidated net profit of the significant differences
between IFRS and US GAAP are summarized below:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2000 2001 2002 2002
------------- ------------- ------------- -------------
RMB RMB RMB US$(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net profit under IFRS.......................... 492,089 533,495 557,083 67,280
US GAAP adjustments:
Reversal of additional depreciation charges
arising from the revaluation surplus on
fixed assets............................ 48,422 48,422 48,422 5,848
Effect of US GAAP adjustment on taxation... (7,263) (7,263) (7,263) (877)
------- ------- ------- ------
Consolidated net profit under US GAAP.......... 533,248 574,654 598,242 72,251
======= ======= ======= ======
Earnings per share under US GAAP............... 0.12 0.13 0.14 0.02
======= ======= ======= ======
Earnings per equivalent ADS under
US GAAP.................................... 6.15 6.63 6.90 0.83
======= ======= ======= ======
---------------
(1) Translated solely for the convenience of the reader into U.S. dollars at
the noon buying rate prevailing on December 31, 2002 of US$1.00 to
RMB8.2800.
42
Effects on consolidated net assets of significant differences between
IFRS and US GAAP are summarized below:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2002 2002
------------- ------------- -------------
RMB RMB US$(1)
(IN THOUSANDS)
Consolidated net assets under IFRS.......................... 10,120,623 10,244,151 1,237,216
US GAAP adjustments:
Reversal of the revaluation surplus on fixed assets..... (1,492,185) (1,492,185) (180,216)
Reversal of additional depreciation charges arising from
the revaluation surplus on fixed assets............... 282,462 330,884 39,962
Deferred tax assets created............................. 181,458 174,195 21,038
Consolidated net assets under US GAAP....................... 9,092,358 9,257,045 1,118,001
========== ========== ==========
---------------
(1) Translated solely for the convenience of the reader into U.S. dollars at
the noon buying rate prevailing on December 31, 2002 of US$1.00 to
RMB8.2800.
There are no significant differences between IFRS and US GAAP that
would affect the classification in the balance sheet and the income statement
that would not also affect our net income or shareholders' equity.
RECENTLY ISSUED U.S. ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 143, Accounting for Assets Retirement
Obligations ("SFAS 143"), Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated With Exit or Disposal Activities ("SFAS 146"),
FASB interpretation N. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, including Indirectly Guarantees of Indebtedness of Others ("FIN
45"), FASB Interpretation No. 46, Consolidation of Variable Interest Entities
("FIN 46") and Emerging Issues Task Force ("EITF") Issue 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables" that addresses certain aspects
of a vendor's accounting for multiple revenue-generating arrangements ("EITF
Issue 00-21).
(a) SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated assets retirement costs. SFAS 143 is effective for fiscal
years beginning after 31 December, 2002. We do not expect that the
adoption of SFAS143 will have a material an impact on our audited
consolidated financial statements.
(b) SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit Activity
(including Certain Costs Incurred in a Restructuring)". We adopted SFAS
146 on January 1, 2003 and do not expect the adoption of this standard
to have a material impact on our audited consolidated financial
statements.
43
(c) FIN 45 elaborates on the disclosures to be made by a guarantor about
its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions under FIN 45 are applicable
prospectively to guarantees issued or modified after December 31, 2002.
The adoption of disclosure requirements that are effective for the year
ended December 31, 2002 did not have a material impact on our audited
consolidated financial statements, or to the notes thereto.
(d) FIN 46 provides guidance on the identification of and financial
reporting for entities over which control is achieved through means
other than voting rights. This interpretation requires existing
unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse
risks among the parties involved. The interpretation applies
immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains
an interest after that date. It applies in the first fiscal year for
interim periods beginning after June 15, 2003 and to variable
interests entities in which an enterprise holds a variable interest
that it acquires before February 1, 2003. We do not expect that the
adoption of FIN 46 will have a material impact on our audited
consolidated financial statements.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENCES, ETC.
We do not generally conduct our own research and development with
respect to major capital projects. In the past, in connection with the
high-speed project and electrification, our Parent Company has contracted for
the engineering and technical services of research and design institutes under
the Ministry of Railways. Since our inception, our Parent Company has not borne
any research and development expenses on our behalf.
We conduct limited research and development in designing and
implementing automation in ticket sales, including the development of related
computer software.
We do not anticipate a significant need for research and development
services in the foreseeable future, and do not expect to require any such
services in connection with our other businesses. To the extent that these
services are needed, we expect to contract outside service providers to satisfy
this need. In connection with major engineering and construction projects, as
well as major equipment acquisitions, we intend to conduct technical research
and feasibility studies with relevant engineering service organizations, so as
to ensure the cost-effectiveness of our capital expenditures.
TREND INFORMATION
The Pearl River Delta has been one of China's fastest growing regions.
The PRC government is making adjustments to China's economic structure, import
and export policies and foreign investment policies, and is expanding its
investment in infrastructure systems, which are expected to generate additional
demand for transportation services. The policies and measures may have both
positive and negative effects on our business development. They are expected to
44
promote economic growth and create new demand for our transportation services.
At the same time, however, with the improvement of highway and waterway
transportation facilities, we anticipate additional competition. In addition,
the adjustment of the economic structure and import and export policies may
change freight composition and our freight transportation revenues, which could
have an adverse effect on our business and financial position in 2003.
In 2002, our passenger transportation operations continued to grow, due
primarily to the continued economic growth in our service territory, our
"As-frequent-as buses" Train Project and the two new long-distance trains we
added in 2002, which provide faster passenger train service at shorter
intervals. We intend to add a pair of Hong Kong through trains to support
increasing passenger volumes between Guangdong and Hong Kong. In addition, we
plan to further integrate our railway system with urban public transportation
systems to expand our service territory and attract more passengers.
However, due to the recent outbreak of SARS in Asia, we have
experienced a decrease in passenger traffic on our routes in the second quarter
of 2003. The SARS epidemic could have a material adverse effect on our operating
results and financial condition if passenger volumes do not recover sufficiently
in the near future. On May 16, 2003, the Shenzhen Bureau of Finance, Shenzhen
Municipal Office of the State Administration of Taxation and the Shenzhen Local
Taxation Bureau issued the "Notice Concerning Certain Taxation Measures for
Promoting the Prevention and Cure of Atypical Pneumonia of our Municipality,"
decreasing business taxes, urban construction taxes and educational taxes by 50%
from May 1, 2003 to September 20, 2003. However, we do not expect these tax
exemptions to have a material beneficial impact on our net income.
The implementation of our "As-frequent-as buses" Train Project has had
a negative effect on our other businesses as passengers spend less time at our
train stations and aboard trains and as a result consume less. The revenue of
our other businesses decreased by 2.1% in 2002.
Our freight transport business decreased in 2002 due to competition
from road and water transport, the shift in the mix of industries in our service
territory toward technology-intensive industrial structure, and the impact of
the global economic slowdown. We expect that growth in our freight
transportation operation is likely to be modest.
We believe that while the PRC government will fulfill its obligation to
loosen its restrictions on foreign investment after China's entry into the WTO,
the opening up of the railway transportation will be gradual and the impact of
foreign and domestic railway competition to our operations in the near term will
be limited. We also believe that we will be prepared for the challenges as well
as the opportunities that will arise with China's accession to the WTO.
45
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
DIRECTORS
All of our directors were duly elected at meetings of our shareholders.
At our general shareholders' meeting held on June 10, 2003, Mr. Wu Junguang, Mr.
Feng Qifu, Mr. Hu Lingling and Mr. Wen Weiming were elected as directors and Mr.
Jiang Linyang, Mr. Li Daihua, Mr. Wu Yiquan and Mr. Shen Jun ceased to be
directors. The business address of each of our directors is No. 1052 Heping
Road, Shenzhen, People's Republic of China 518010.
The table below sets forth the information relating to our directors:
DATE FIRST
ELECTED OR
NAME AGE POSITION APPOINTED
---- --- -------- ---------
Wu Junguang 54 Chairman of the Board of Directors 2003
Feng Qifu 54 General Manager and Director 2003
Hu Lingling 39 Director 2003
Li Qingyun 39 Deputy General Manager and Director 2000
Wu Houhui 54 Director 1999
Wen Weiming 40 Director 2003
Li Peng 56 Director and Chairman of the Trade Union 1998
Chang Loong Cheong 57 Director 1996
Deborah Kong 43 Director 1996
Wu Junguang, age 54, was elected the chairman of the board of directors
of Guangshen Railway on June 10, 2003. Mr. Wu graduated from South China Normal
University. Since 1964, Mr. Wu has served in various managerial positions
including general manager of Yangcheng Railway Company and its predecessor,
Guangzhou Railway Sub-administration. Since April 2002, Mr. Wu has served as the
general manager of our Parent Company. Since June 2002, Mr. Wu has served as our
Parent Company's Chairman.
Feng Qifu, age 54, is a director and the general manager of Guangshen
Railway. Mr. Feng is an economist and graduated from Guangdong Provincial Cadre
Management College. He has been working in the railway industry for over thirty
years. Since 1993, Mr. Feng has served as the general manager of the Changsha
Railway Company, the assistant to the general manager and the deputy general
manager of our Parent Company. Mr. Feng joined Guangshen Railway in April 2003
and was appointed our general manager on May 8, 2003.
Hu Lingling, age 39, is a director of Guangshen Railway. Mr. Hu is an
engineer and graduated from Changsha Railway Institute. Mr. Hu has served as the
deputy chief engineer and the deputy stationmaster of Shaoguan Railway station
of Yangcheng Railway Company, and the deputy chief engineer and the deputy
general manager of Yangcheng Railway Company. Since May 2001, Mr. Hu has served
as the director of the transportation department of our Parent Company.
46
Li Qingyun, age 39, is a director and deputy general manager of
Guangshen Railway. Mr. Li graduated from North Communications University in
1989. He holds a master's degree in railway transportation and organization. He
served in managerial positions in various technical and transportation
departments of our Parent Company from 1989 to August 1999. He joined us in
September 1999.
Wu Houhui, age 54, is a director of Guangshen Railway. He is a graduate
of Dalian Railway College and a senior economist. Mr. Wu served in various
managerial positions up to the position of director of the Enterprise Management
Office in our Parent Company from 1984 to 2000. Since November 2001, Mr. Wu has
served as deputy chief economist of our Parent Company.
Wen Weiming, age 40, is a director of Guangshen Railway. Mr. Wen is an
accountant and graduated from Guangzhou Railway Workers' College. He has been
working in the railway industry for over ten years, and has served as the
director of the accounting and finance department and the chief accountant of
the diversified businesses sub-section of Yangcheng Railway Company, and the
director of the finance sub-section of Yangcheng Railway Company. Since May
2001, Mr. Wen has served as the deputy director of the finance department of our
Parent Company.
Li Peng, age 56, is a director and the chairman of the trade union of
Guangshen Railway. Mr. Li is a graduate of the East China Civil Engineering
Institute and has served in various executive and labor organizational positions
in Yang Cheng since 1977. He was the deputy general manager of our predecessor
and the Guangshen Railway Enterprise Development Company from 1992 to 1997. Mr.
Li joined us in December 1997.
Chang Loon Cheong, age 57, holds a management certificate from the Hong
Kong Management Association and is an independent non-executive director of
Guangshen Railway. Mr. Chang is also a director of Shanghai Xinhua Iron & Steel
Company Limited and Orient International (Shanghai) Limited. Mr. Chang has been
a manager of Cathay Restaurant in Lagos, Nigeria, a member of the senior
management of Island Navigation Corporation International Limited and Orient
Overseas Container Line Limited in West Africa, and the general manager and a
director of Noble Ascent Company Limited.
Deborah Kong, age 43, is an independent non-executive director of
Guangshen Railway. Ms. Kong is currently an executive director of Centennial
Resources Holding Company Limited. Ms. Kong holds a bachelor of arts degree from
Sydney University and a one-year master degree course of finance degree from
Macquarie University in Australia. She is a member of the Standing Committee of
the People's Political Consultative Conference of Shandong Province in the PRC.
Wu Yiquan, age 58, was a director and the general manager of Guangshen
Railway from 1999 until this year. Mr. Wu was replaced by Mr. Feng as our
general manager on May 8, 2003. Mr. Wu ceased to be a director at our general
shareholders' meeting held on June 10, 2003.
Li Daihua, age 60, was a director of Guangshen Railway from 1997 until
2003. Mr. Li ceased to be a director at our general shareholders' meeting held
on June 10, 2003.
47
Jiang Linyang, age 60, was the chairman of the board of directors of
Guangshen Railway from 2002 until this year. Mr. Jiang ceased to be a director
at our general shareholders' meeting held on June 10, 2003.
Shen Jun, age 53, was a director of Guangshen Railway from 1999 until
this year. Mr. Shen ceased to be a director at our general shareholders' meeting
held on June 10, 2003.
SUPERVISORS
The table below sets forth the information relating to our supervisors:
DATE FIRST ELECTED
NAME AGE POSITION OR APPOINTED
---- --- -------- -------------------
Gu Hongxi 56 Chairman of the Supervisory Committee 1996
Zhao Genrong 57 Supervisor 2000
Chen Yunzhong 50 Supervisor 2001
Yao Muming 49 Supervisor 1999
Chen Yongbao 51 Supervisor 2002
Yang Rongjiu 55 Supervisor 2002
Gu Hongxi, age 56, is the chairman of the supervisory committee of
Guangshen Railway. He is a graduate of Zhejiang University. Mr. Gu joined the
railway department in 1974, and has served as the deputy director of Changsha
Railway Sub-administration and the director of the welfare and education
departments of our Parent Company. Mr. Gu has served as the chief economist of
our Parent Company since 1995.
Zhao Genrong, age 57, is a supervisor of Guangshen Railway. Mr. Zhao is
a graduate of North Communications University. He served in various financial
positions in Hengyang Railway Company from 1968. Since 1983, Mr. Zhao has served
as the deputy director and then the director of the financial department of our
Parent Company. Since August 1999, Mr. Zhao has served as the director of the
audit department of our Parent Company.
Chen Yunzhong, age 50, is a supervisor of Guangshen Railway. Mr. Chen
graduated from Guangzhou Railway Driver's School, Guangdong Jinan University and
the Central Administration Academy. He was a member of the senior management of
Hainan Railway Company. Mr. Chen joined us in May 2000.
Yao Muming, age 49, is a supervisor of Guangshen Railway. Mr. Yao is a
graduate of Huanan Normal University, and has served as the deputy director of
the Guangzhou and Zhuhai Animal and Plant Quarantine Bureaus. He joined us in
1997.
Chen Yongbao, age 51, is a supervisor of Guangshen Railway. Mr. Chen
graduated from Zhuzhou Railway Mechanical School. Since 1975, he has served in
various managerial positions in Guangzhou Railway Company and Yangcheng Railway
Company. From 1997 to 2001, Mr. Chen served in the administration supervisory
position of our Parent Company. Since May 2001, Mr. Chen served as the chief of
the supervision department of our Parent Company.
48
Yang Rongjiu, age 55, is a supervisor of Guangshen Railway. Mr. Yang
graduated from Cadres Further Education (Secondary School) at Guangzhou
Zhongshan University. He has served in various PRC railway departments since
1964 and was the Stationmaster of Shenzhen Station. In May 2001, Mr. Yang served
as the deputy chairman of our company's trade union.
SENIOR MANAGEMENT
The table below sets forth information relating to our senior
management:
DATE FIRST
ELECTED OR
NAME AGE POSITION APPOINTED
---- --- -------- ---------
Yan Ping 43 Deputy General Manager 2000
Luo Qingming 46 Deputy General Manager and Chief Engineer 1999
Yao Xiaocong 50 Chief Accountant and Company Secretary 1997
Ma Kaiming 32 Deputy General Manager 2003
Yan Ping, age 43, is a deputy general manager of Guangshen Railway. Mr.
Yan graduated with a master's degree in economic management at Donghei
University of Finance and Economics and is a senior engineer. He was the general
manager of Tielong Company of Dalian Railway Company, the director of the other
businesses department of Shenyang Railway Administration and the head of Dalian
Railway Station of Dalian Railway Sub-administration. Mr. Yan joined Guangshen
Railway in August 2000 as the head of Guangzhou East Station.)
Luo Qingming, age 46, is currently a deputy general manager and the
chief engineer of Guangshen Railway. Mr. Luo is a senior engineer. Mr. Luo
graduated from Changsha Railway Institute in 1982, where he majored in railway
engineering. He has served as an engineer, the chief engineer, a deputy section
chief, and the section chief of the engineering section of Guangshen Railway. He
received a government allowance awarded by the PRC State Council in 1999 for
achievement in his field.
Yao Xiaocong, age 50, is the chief accountant and company secretary.
Mr. Yao graduated from the Guangzhou Railway Management Academy. He has served
in financial and accounting positions in various PRC railway departments since
1975, giving him over 20 years of experience. Mr. Yao was the director of the
financial sub-department of Yang Cheng before he joined us in 1997.
Ma Kaiming, age 32, is a deputy general manager of Guangshen Railway.
Mr. Ma graduated from Norththern Jiaotong University in 1995. He holds a
master's degree and is an engineer. He served in managerial positions in various
technical and administration departments of Yangcheng Railway Company and our
Parent Company from April 1995 to April 2003. Mr. Ma became a deputy general
manager of our company on 23 April 2003.
There are no family relationships between any director or executive
officer and any other director or executive officer. Of the members of the board
of directors, our chairman, Mr. Wu Junguang, is concurrently the chairman and
general manager of our Parent Company.
49
Mr. Feng Qifu is concurrently the chairman of the board of directors of
Guangzhou Tiecheng Industrial Company and a director of Sanmao Railway
Industrial Company. Mr. Wu Houhui is concurrently the director of Guangmeishan
Railway Company, Sanmao Railway Company and Shichang Railway Company. Mr. Hu
Lingling is concurrently a director of Nanhai Saiyanqiao Railway Freight Yard
and Storage Company, Sanmao Railway Company and Guangdong Railway Youth Travel
Service Co., Ltd.. Mr. Wen Weiming is concurrently a supervisor of Guangzhou
Railway Engineering (Group) Company and Guangdong Railway Youth Travel Service
Co., Ltd.. The lines operated by Guangmeishan Railway Company, Sanmao Railway
Company and Shichang Railway Company are local railroads. Guangzhou Tiecheng
Industrial Company is a joint venture partner of ours. We have business
relationships relating to railroad transportation with Guangmeishan Railway
Company and Sanmao Railway Company.
In order to safeguard our interests and the interests of our
shareholders and to strengthen the decision-making process in our subsidiaries,
Mr. Yan Ping, deputy general manager of Guangshen Railway, also serves as
director and chairman of Guangzhou Donglian Travel Service Co., Ltd., Shenzhen
Railway Station Passenger Services Company, Shenzhen Huatie Road Multi-model
Enterprise Co., Ltd., Zengcheng Lihua Joint Stock Company Ltd., Dongguan
Changsheng Road Multi-model Enterprise Company, Shenzhen Longgang Pinghu Qunyi
Railroad Storage, Loading and Unloading Company and Shenzhen Transportation
Service Company.
COMPENSATION
DIRECTORS AND SENIOR MANAGEMENT
Total remuneration of our directors, supervisors and senior officers
during 2002 included wages and bonuses. Directors or supervisors who are also
officers and employees of Guangshen Railway receive certain other benefits in
kind from our Parent Company and GEDC, such as subsidized or free health care
services, housing and transportation, as customarily provided by enterprises in
the PRC to their employees.
The aggregate amount of cash remuneration paid by Guangshen Railway in
2002 to all individuals who are currently its directors, supervisors and senior
officers was approximately RMB1,649,000, of which approximately RMB1,237,000 was
paid to directors and supervisors and approximately HK$260,000 was paid to the
two independent non-executive directors.
The aggregate amount of cash remuneration we paid during the year ended
December 31, 2002 for pension and retirement benefits to all individuals who are
currently our directors, supervisors and senior officers was approximately
RMB134,000.
BOARD PRACTICES
BOARD OF DIRECTORS
Our board of directors is composed of nine directors, one of whom is
the chairman. Directors are appointed at the general shareholders' meeting
through voting, and serve for terms of three years. Upon the expiration of the
term of their office, they can serve consecutive terms
50
if re-appointed at the general shareholders' meeting. Mr. Jiang Linyang, Mr. Li
Daihua, Mr. Wu Yiquan and Mr. Shen Jun ceased to be directors on June 10, 2003
and Mr. Wu Junguang, Mr. Feng Qifu, Mr. Hu Lingling and Mr. Wen Weiming were
appointed as directors at the general shareholders' meeting held on June 10,
2003. The board of directors is responsible to our shareholders.
SUPERVISORY COMMITTEE
We have a supervisory committee composed of five to seven supervisors.
Supervisors serve a term of three years. Upon the expiration of their terms of
office, they may be re-appointed to serve consecutive terms. The supervisory
committee is presided over by a chairman who may be elected or removed with the
consent of two-thirds or more of the members of the supervisory committee. The
term of office of the chairman is three years, renewable upon re-election. The
current supervisory committee is comprised of five representatives of the
shareholders who may be elected or removed by the shareholders in a general
meeting and one representative of our staff and workers who may be elected or
removed by voting. Members of the supervisory committee may also observe
meetings of the board of directors. The current members of the supervisory
committee are: Gu Hongxi, Zhao Genrong, Chen Yunzhong, Yao Muming, Chen Yongbao
and Yang Rongjiu. This supervisory committee is the second supervisory committee
of Guangshen Railway, and was appointed at the interim general shareholders'
meeting held on June 28, 2002. The term of this supervisory committee will
expire in 2005, when the shareholders, at a general meeting, appoint a new
supervisory committee.
Supervisors will attend board meetings as non-voting members. The
supervisory committee is responsible to our shareholders and has the follow
duties and responsibilities:
o to supervise our handling of our financial matters;
o to supervise any acts of directors, the general manager, deputy
general manager and other senior officers that are in violation
of laws, administrative regulations or our articles of
association;
o to request directors, the general manager, deputy general manager
and other senior officers to rectify their acts that are
detrimental to the interests of Guangshen Railway;
o to verify such financial information as financial reports,
business reports and profit distribution plans submitted by the
board of directors to the general shareholders' meeting, and
arrange certified public accounts and auditors to verify issues;
o to propose to convene interim general shareholders' meetings; and
o to bring law suits against directors on behalf of Guangshen
Railway.
51
AUDIT COMMITTEE
In accordance with the Listing Rules of the Stock Exchange of Hong Kong
that encourage the establishment of an audit committee, and the "Guidance for
the Formation of An Audit Committee" promulgated by the Hong Kong Accountants'
Association in December 1997, we have established an audit committee under the
board of directors consisting of two independent non-executive directors. Its
current members, appointed by the board of directors, are: Mr. Chang Loong
Cheong and Ms. Deborah Kong. The audit committee must convene at least two
meetings each year, and may invite the executive directors, persons in charge of
the financial and audit departments and our independent auditors. The audit
committee must convene at least one meeting with the auditors each year without
any executive directors present. The duties of the audit committee include:
o reviewing the reports prepared by the board of directors, the
annual and interim reports on our operating results, the annual
financial report and public announcements of our operating
results;
o reviewing our financial reports and the reports prepared by our
independent auditor and its supporting documents, including the
review of our internal controls and disclosure controls and
procedures, and to discuss with the auditor our annual audit plan
and solutions to problems in the previous year;
o reviewing and approving the selection of and remuneration paid to
our independent auditor; and
o reviewing audit matters specifically identified by the board of
directors, and determining whether such projects are in
compliance with industrial practices and market rules, and
performing statutory duties and safeguarding our interests and
the interests of our shareholders.
The service contracts that we have entered into with our directors do
not provide for any payment of compensation upon termination.
EMPLOYEES
As of December 31, 2000, 2001 and 2002, we had approximately 7,659,
9,132 and 9,258 employees, respectively. The following chart sets forth the
number of our employees by functional area as of December 31, 2002:
FUNCTION EMPLOYEES
Passenger transportation personnel............. 1,983
Freight transportation personnel............... 531
Transportation personnel....................... 4,490
Supporting personnel........................... 286
Other business personnel....................... 716
Administrative and managerial personnel........ 1,252
-----
Total..................................... 9,258
=====
52
A substantial majority of our employees work at locations in Guangdong
Province and Shenzhen. The number of our employees increased by 1.4% in 2002 due
to the new staff employed in 2002 to fill the openings in connection with our
two additional long-distance trains.
We have established a trade union to protect employees' rights, assist
in the fulfillment of their economic objectives, to encourage employee
participation in management decisions and to assist in mediating disputes
between the management and union members. Each of our stations has a separate
branch of the trade union. Most of our employees belong to the trade union.
Since our inception in 1984, we have not been subjected to any strikes or other
labor disturbances that have interfered with our operations, and we believe that
our relations with our employees are good.
SHARE OWNERSHIP
None of our directors, supervisors or senior management own any
interest in any shares or options to purchase our shares.
53
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
We are a joint stock company organized under the laws of the PRC in
March 1996. The Parent Company, a state-owned enterprise under the
administration of the Ministry of Railways owns 67% of our outstanding common
shares. The Parent Company is the sole shareholder of all of our domestic shares
in the form of state legal person shares and is entitled to exercise all rights
as our controlling shareholder according to the relevant laws, rules and
regulations. The Parent Company has substantial influence over our operations,
not only in its capacity as controlling shareholder, but also because of its
role as an administrative agent of the Ministry of Railways that controls and
coordinates railway operations in Guangdong Province, Hunan Province and Hainan
Province. As an instrumentality of the Ministry of Railways, our Parent Company
performs direct regulatory oversight functions with respect to us, such as in
devising and enforcing technical standards and implementing special
transportation directives.
The following table sets forth information regarding ownership of our
issued and outstanding capital stock as of December 31, 2002. Note that it
includes all persons who are known by us to own, either as beneficial owners or
holders of record, five percent or more of our capital stock.
TITLE OF CLASS IDENTITY OF PERSON OR GROUP AMOUNT OWNED PERCENT OF CAPITAL
--------------------------- --------------------------- ------------ ------------------
(THOUSAND SHARES)
Common Shares (Domestic Shares) The Parent Company 2,904,250 66.99%
Common Shares (H shares) HKSCC Nominees Limited 1,379,462 31.82%
The following table sets forth all persons who are known by us to own,
as holders of record, five percent or more of our issued and outstanding H
shares as of December 31, 2001.
TITLE OF CLASS IDENTITY OF PERSON OR GROUP AMOUNT OWNED PERCENT OF CAPITAL
--------------------------- --------------------------- ------------ ------------------
(THOUSAND SHARES)
Common Shares (H Shares) Hong Kong and Shanghai Banking 705,513 49.29%
Corporation (Nominees) Limited
Common Shares (H Shares) Standard Chartered Bank 118,639 8.29%
Common Shares (H Shares) Bank of China (Hong Kong) Limited 88,890 6.21%
We are not aware of any arrangement that may at a subsequent date
result in a change of control of Guangshen Railway.
To the best of our knowledge, as of December 31, 2002, none of the
outstanding H shares was held by United States holders of record, and all of the
outstanding ADSs were held by 169 United States holders of record. Because
domestic shares can only be held by PRC investors, there were no non-PRC holders
of record.
As an owner of at least 30% of our issued and outstanding shares, our
Parent Company is deemed a controlling shareholder (defined in Item 10 below),
and therefore may not exercise our voting rights with respect to various matters
in a manner prejudicial to the interests of our other shareholders. See "Item
10. Additional Information--Memorandum and Articles of Association--Restrictions
on Controlling Shareholders". In accordance with our articles of
54
association, each share of our capital stock has one vote and the shares of the
same class have the same rights. Other than the restrictions noted in the first
sentence of this paragraph, the voting rights of our major holders of domestic
shares are identical to those of any other holders of our domestic shares, and
the voting rights of our major holders of H shares are identical to those of our
other holders of H shares. Holders of domestic shares and H shares are deemed to
be shareholders of different classes for some matters, which may affect their
respective interests. Holders of H shares and domestic shares are entitled to
the same voting rights.
RELATED PARTY TRANSACTIONS
The restructuring in 1996 was carried out in preparation for our
initial public offering and to focus Guangshen Railway on our primary business
as a railroad. Prior to our restructuring, Guangshen Railway Company, our
predecessor, was a state-owned enterprise within the national railway system,
directly controlled by Guangzhou Railway (Group) Company, our Parent Company. As
part of the restructuring, we were established as a joint stock limited company
on March 6, 1996. Our Parent Company received 100% of the equity interest in the
form of domestic shares in exchange for assets relating to the railroad and
other businesses transferred to us by our Parent Company, some of our
subsidiaries and Guangshen Railway Company. We assumed from these entities those
assets and liabilities that relate to the businesses now conducted by us,
including the high-speed project and equity interests in subsidiaries and joint
ventures whose principal businesses relate to the operation of warehouses or
freight yards. We assumed from Yangcheng Railway certain assets, including 14
shunting locomotives and passenger coaches that Yangcheng Railway had previously
leased to us. Our predecessor company retained the assets, liabilities and
businesses not assumed by us, including units providing staff quarters and
social services such as health care, educational and public security services
and other ancillary services, as well as subsidiaries or joint ventures whose
businesses do not relate to railroad operations and do not compete with our
businesses. As part of our restructuring, our predecessor was renamed Guangzhou
Railway (Group) Guangshen Railway Enterprise Development Company, or GEDC.
The Parent Company and GEDC on the one hand and us on the other have
agreed to certain mutual indemnities arising from or in respect of the various
assets and liabilities transferred to or retained by the parties. The purpose of
the indemnities is to ensure that none of Guangshen Railway, our Parent Company
or GEDC will bear liabilities that it has not agreed to assume, even in cases
where third parties have not consented to the division of liabilities among them
and continue to make claims against an entity that has not assumed the relevant
liability. The Parent Company and GEDC have agreed to indemnify Guangshen
Railway against any claims arising from facts or events prior to the
restructuring as well as any claims against Guangshen Railway in respect of
assets and liabilities retained by them in the restructuring.
As a result of the restructuring, GEDC, Yangcheng Railway and our
Parent Company (together with some of its subsidiaries) continue to provide
social services to Guangshen Railway on a contractual basis. These services
include medical care for our employees and their family members, kindergarten,
elementary and secondary school education for the children of employees, room
and board for our employees traveling on business, employee housing management
and maintenance and public security in our stations and on-board our trains.
GEDC provides most of these services through its facilities in Shenzhen. The
Parent Company and
55
Yangcheng Railway provide to Guangshen Railway in Guangzhou other services,
including health care, employee training and childcare. For the services
rendered, Guangshen Railway pays our Parent Company, Yangcheng Railway or GEDC,
as the case may be, reasonable, arms-length fees.
Some transactions between Guangshen Railway and our Parent Company and
its subsidiaries have continued after the restructuring, in the form of a
cross-provision of goods and services. The principal goods and services provided
by our Parent Company and some of its subsidiaries (including Yangcheng Railway
and GEDC) to Guangshen Railway include the following:
- locomotives, railcars and operating personnel;
- leasing of regular speed passenger coaches;
- maintenance services for regular speed locomotives and
passenger coaches;
- railroad transportation related services;
- fuel for the operation of locomotives;
- railway related materials;
- overhaul and emergency repair of our track and bridges;
- medical and health care services;
- public security;
- educational services; and
- employee housing.
The aggregate costs to us of these goods and services in 2000, 2001 and
2002 were RMB245.0 million, RMB243.2 million and RMB153.4 million, respectively.
The principal goods and services provided by us to our Parent Company
and its subsidiaries include railroad transportation related services, sale of
duty free goods on-board of our Hong Kong through trains and at Guangzhou
station and Guangzhou East Station, and advertising space at our Shenzhen
station.
Under an agreement with Yangcheng Railway, Yangcheng Railway and
Guangshen Railway provide each other and their passengers with services at
Guangzhou Station, including, among other things, passenger boarding, ticket
collection and on-board water supply.
The prices at which these goods and services are provided are different
in each case. In general:
o prices for railroad transportation-related services are
determined in accordance with the actual costs incurred in
providing these services plus a profit margin of 8% of aggregate
chargeable costs (fuel expenses, asset depreciation and water
utility fees are not counted as chargeable costs for purposes of
this calculation), which amount, Guangshen Railway believes, is
consistent with that which would be charged in an arm's-length
transaction;
o the rental amounts for the high-speed passenger coaches leased to
Guangshen Railway by our Parent Company equal 6% of our Parent
Company's purchase
56
price for the coaches, approximating our Parent Company's depreciation
expenses for the coaches; Guangshen Railway also bears all costs of
maintenance and overhaul of these coaches;
- the prices for social and related services provided by Yangcheng
Railway (i.e., educational) and GEDC (i.e., security, medical,
educational and housing) are determined based on the actual cost of
providing these services;
- the prices for social and related services provided by our Parent
Company are determined on the following basis:
- medical services : in accordance with the relevant local
standards, subject to a 20% discount
(except in respect of medicine and
registration fees);
- educational services : in accordance with the standards set
by our Parent Company;
- child care services : in accordance with the actual cost
incurred for providing such services;
- newspaper supply services : at an agreed cost of approximately
RMB25 per year per copy of newspaper
supplied, which cost may change based
on cost changes to our Parent
Company;
- the prices for the supply of railroad transportation related materials
are determined in accordance with the relevant regulations issued by
our Parent Company (which regulations are applicable to other
railroads under the jurisdiction of our Parent Company);
- the prices for the provision of overhaul and large scale maintenance
services for our track and bridges are based on the relevant approved
estimates plus a profit margin of 8%, and the prices for other
maintenance services are to be agreed by the parties on a case-by-case
basis; and
- Guangshen Railway is entitled to 45% of the profits derived from the
advertising businesses at its Shenzhen station.
The agreement with Yangcheng Railway was revised on March 6, 1996 and
provides for a 10-year lease period starting from 1996. The lease with the
Ministry of Railways is renewable annually. Substantially all the above
transactions will continue in the future, although not necessarily on the same
terms.
The chart below sets forth a breakdown by category of the material
transactions between Guangshen Railway and our Parent Company and its affiliates
in 2000, 2001 and 2002.
57
DESCRIPTION OF TRANSACTION 2000 2001 2002
-------------------------- ------- ------ -------
(RMB THOUSANDS)
Lease of locomotives and related services from Yangcheng Railway .............. 132,576 70,345 42,047
Provision of trains and related services from Guangmeishan Railway Company, a
subsidiary of our Parent Company ............................................. 23,839 5,205 4,864
Provision of trains and related services from Sanmao Railway, a subsidiary of
our Parent Company ........................................................... 3,546 - -
Provision of trains and related services from Changsha Railway, a subsidiary of
our Parent Company ........................................................... 5,336 - -
Provision of trains and related services from Huaihua Railway, a subsidiary of
our Parent Company ........................................................... 3,317 - -
Purchase of materials and supplies from Guangzhou Railway Material Supply
Company, a subsidiary of our Parent Company .................................. 22,846 36,544 33,074
Social services (employee housing, health care, educational and public security
services and other ancillary services) provided by our Parent Company and
affiliates (including GEDC) .................................................. 58,300 56,800 66,744
Operating lease rentals paid to the Ministry of Railways ...................... 50,435 52,296 57,298
Operating lease rental paid to our Parent Company ............................. -
Provision of trains and related services by the Ministry of Railway ........... - 66,475 211,667
Train use fees and related service fees paid to Guangzhou Railway (Group)
Passenger Transportation Company, a subsidiary of our Parent Company ......... - 7,844 6,681
Interest received from our Parent Company ..................................... 447 - -
Interest expenses paid to our Parent Company .................................. 3,886 1,178 2,443
Interest received from the Ministry of Railways' Railroad Deposit-taking Center 25,792 11,887 3,239
Interest received from Pingnan Railway, an affiliate of our Parent Company .... 1,712 1,866 806
Interest received from Guangmeishan Railway Company ........................... 833 1,291 1,884
As of December 31, 2002, we and our subsidiaries had the following material
balances with related parties:
CONSOLIDATED COMPANY
-------------------------------- --------------------------------
2000 2001 2002 2000 2001 2002
------- ------- -------- ------- ------- --------
(RMB THOUSANDS) (RMB THOUSANDS)
Temporary cash investments in the Ministry
of Railway's Railroad Deposit-taking
Center ..................................... 304,029 250,152 168,000 304,029 250,152 168,000
Due from our Parent Company ................. 80,604 29,499 39,374 83,183 28,492 37,575
Due from affiliates, net* ................... 247,932 276,013 267,885 246,728 275,940 263,873
Due to affiliates* .......................... (63,734) (58,650) (158,199) (63,662) (58,823) (156,909)
------------
* Affiliates mainly include GEDC and Guangmeishan Railway Company.
(1) As of December 31, 2002, the balances with the Ministry of Railways, our
Parent Company and affiliates were unsecured, non-interest bearing and
repayable on demand, except for those "material transactions" disclosed in
the table above. These balances resulted from transactions carried out by
Guangshen Railway and its subsidiaries with related parties in the ordinary
course of business.
(2) Pursuant to the Notice "Tiezhengfa 2000 No. 116" issued by the Ministry of
Railways, starting from January 1, 2001, settlement method regarding
provision of trains and related services for long-distance passenger
transportation was changed. Settlements previously made with certain
subsidiaries of our Parent Company are now performed through Ministry of
Railways' Settlement Center. The Company's directors are of the opinion
that the change in settlement method does not have material impact on our
results of operations.
58
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See pages F-1 to F-41 following Item 19.
LEGAL PROCEEDINGS
We are not a party to any material legal proceeding and no material legal
proceeding is known to us to be pending against us or with respect to our
properties.
DIVIDENDS
We make decisions concerning the payment of dividends on an annual basis.
Any dividends are paid at the discretion of our board of directors, which makes
a recommendation in this regard that must be confirmed at our annual general
shareholders' meeting. Our articles of association permit us to distribute
dividends from profits more than once a year. The amount of these interim
dividends cannot exceed 50% of our distributable income as stated in our interim
profit statements. In accordance with our articles of association, the amounts
available for the purpose of paying dividends will be deemed to be the lesser
of:
- net after-tax income determined in accordance with PRC accounting
standards and regulations; and
- net after-tax income determined in accordance with either
international accounting standards or the accounting standards of the
countries in which our shares are listed.
See "Item 10. Additional Information--Taxation" for a discussion of the tax
consequences related to the receipt of dividends.
Our articles of association prohibit us from distributing dividends without
first making up for cumulative losses from prior periods (determined in
accordance with PRC accounting standards) and making all tax and other payments
required by law. Further, prior to the payment of dividends, our profits are
subject to deductions such as allocations to a statutory common reserve fund and
into a public welfare fund. The common reserve fund may be used to make up
losses or be converted into share capital or reinvested.
Our articles of association require that cash dividends in respect of H
shares be declared in renminbi and paid in Hong Kong dollars at the average of
the People's Bank of China rate for each day of the calendar week preceding the
date of the dividend declaration. To the extent that we are unable to pay
dividends in Hong Kong dollars from our own foreign exchange resources, we will
have to obtain Hong Kong dollars through the interbank system or by other
permitted means. Hong Kong dollar dividend payments will be converted by the
depositary and distributed to holders of ADSs in U.S. dollars.
59
SIGNIFICANT CHANGES
Other than events already mentioned in this annual report, there have been
no significant changes since December 31, 2002.
60
ITEM 9. THE OFFER AND LISTING
The Stock Exchange of Hong Kong is the principal non-US trading market for
our H shares. The ADSs, each representing 50 H shares, have been issued by the
JPMorgan Chase Bank as depositary and are listed on the New York Stock Exchange.
The following table sets forth, for the periods indicated, the reported high and
low closing sales prices for our securities on each of these two stock
exchanges:
NEW YORK STOCK EXCHANGE STOCK EXCHANGE OF HONG KONG
----------------------- ---------------------------
CALENDAR PERIOD HIGH LOW HIGH LOW
--------------- ------ ------ ---- ----
(US$ PER ADS) (HK$ PER H SHARE)
------------- -----------------
1998................................................ 13.625 4.1875 2.10 0.64
1999................................................ 7.625 4.8125 1.19 0.72
2000................................................ 7.625 4.5625 1.23 0.7
2001
January to March................................. 8.33 6.19 1.36 0.96
April to June.................................... 10.48 6.50 1.76 1.03
July to September................................ 9.18 6.30 1.44 0.90
October to December.............................. 9.15 6.95 1.37 1.10
2002
January to March................................. 9.60 8.38 1.47 1.30
April to June.................................... 10.24 8.87 1.58 1.42
July to September................................ 9.60 8.30 1.49 1.33
October to December.............................. 8.90 8.05 1.39 1.27
2003
January.......................................... 9.25 8.70 1.41 1.32
February......................................... 9.40 8.91 1.47 1.41
March............................................ 9.09 8.69 1.44 1.35
April............................................ 8.87 8.20 1.40 1.26
May.............................................. 8.96 8.30 1.39 1.28
June (through June 24)........................... 9.68 8.87 1.48 1.37
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ITEM 10. ADDITIONAL INFORMATION
We were established as a joint stock limited company under the Company Law
of the PRC on March 6, 1996. Our legal name is (CHINESE CHARACTERS), and its
English translation is Guangshen Railway Company Limited.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Described below is a summary of the significant provisions of our articles
of association as currently in effect. As this is a summary, it does not contain
all the information that may be important to you. A copy of our complete
articles of association was filed with the U.S. Securities and Exchange
Commission (the "SEC") as an exhibit to the registration statement on Form F-1
(Registration No. 333-3382) under the Securities Act in connection with our
global offering of H shares and related American depositary shares on May 13,
1996.
GENERAL
We are a joint stock limited company established in accordance with the
Company Law of China, the State Council's special regulations regarding the
issue of shares overseas and the listing of shares overseas by companies limited
by shares and other relevant laws and regulations of the PRC. Guangshen Railway
was established by way of promotion with approval evidenced by the document "Ti
Gai Sheng" [1995] No.151 of the PRC's State Commission For Restructuring The
Economic System. We were registered with and obtained a business licence from
the Administration Bureau of Industry And Commerce of Shenzhen, Guangdong
Province on March 6, 1996. The number of our business licence is Shen Si Zhi
N12183. Article 12 of our articles of association states that our object is to
carry on the business of railway transportation.
SIGNIFICANT DIFFERENCES BETWEEN H SHARES AND DOMESTIC SHARES
Holders of H shares and domestic shares, with minor exceptions, are
entitled to the same economic and voting rights. However, our articles of
association provide that holders of H shares will receive dividends in Hong Kong
dollars while holders of domestic shares will receive dividends in renminbi.
Other differences between the rights of holders of H shares and domestic shares
relate primarily to ownership and transferability. H shares may only be
subscribed for and owned by legal and natural persons of Taiwan, Hong Kong,
Macau or any country other than the PRC, and must be subscribed for, transferred
and traded in a foreign currency. Other than the limitation on ownership, H
shares are freely transferable in accordance with our articles of association.
Domestic shares may only be subscribed for and owned by legal or natural persons
in the PRC, and must be subscribed for and traded in renminbi. Transfers of
domestic shares are subject to restrictions set forth under PRC rules and
regulations, which are not applicable to H shares, and also to restrictions on
transfers of shares owned by the PRC government, and by our directors or
employees. Domestic shares and H shares are also distinguished by differences in
administration and procedure, including provisions relating to notices and
financial reports to be sent to shareholders, dispute resolution, registration
of shares on different parts of the register of shareholders, the method of
share transfer and appointment of dividend receiving agents.
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RESTRICTIONS ON TRANSFERABILITY
H shares may be traded only among foreign investors, and may not be sold to
PRC investors (except investors from Hong Kong, Macau and Taiwan). PRC investors
(except investors from Hong Kong, Macau and Taiwan) are not entitled to be
registered as holders of H shares. Under our articles of association, we may
refuse to register a transfer of H shares unless:
- relevant transfer fees are paid, if any;
- the instrument of transfer only involves H shares;
- the stamp duty chargeable on the instrument of transfer has been paid;
- the relevant share certificate and, upon the reasonable request of the
board of directors, any evidence in relation to the right of the
transferor to transfer the shares have been submitted;
- if the shares are being transferred to joint owners, the maximum
number of joint owners does not exceed four; and
- we do not have any lien on the relevant shares.
DIVIDENDS
Unless otherwise resolved by a general shareholders' meeting, we may
distribute dividends more than once a year, provided that the amount of interim
dividends distributed shall not exceed 50% of the distributable income as stated
in our interim profit statement. In accordance with our articles of association,
our net income for the purpose of income distribution will be deemed to be the
least of the amounts determined in accordance with:
- PRC accounting standards and regulations,
- international accounting standards; and
- the accounting standards of the countries in which our shares are
listed.
The articles of association allow for distributions of cash dividends or
shares. Dividends may only be distributed, however, after allowance has been
made for:
- making up losses, if any, for prior years;
- allocations to the statutory common reserve fund;
- allocations to the statutory public welfare fund; and
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- allocations to a discretionary common reserve if approved by the
shareholders.
Our articles of association require us to appoint on behalf of the holders
of H shares receiving agents to receive on behalf of these shareholders
dividends declared and all other moneys owing by us in respect of the H shares.
The receiving agent appointed shall be a company that is registered as a trust
company under the Trustee Ordinance of Hong Kong. Our articles of association
require that cash dividends in respect of H shares be declared in renminbi and
paid by us in Hong Kong dollars. If we record no profit for the year, we may not
normally distribute dividends for the year.
VOTING RIGHTS AND SHAREHOLDER MEETINGS
General shareholders' meetings can be annual general shareholders' meetings
or extraordinary general meetings. Shareholders' meetings shall be convened by
the board of directors. The board of directors shall convene an annual
shareholders' meeting within six months of the end of each financial year. The
shareholders provide us with principal authority at general meetings. We
exercise our functions and powers in compliance with our articles of association
and our by-laws.
We shall not enter into any contract with any person other than a director,
supervisor, general manager or other senior officer of Guangshen Railway whereby
the management and administration of the whole or any substantial part of any
business of Guangshen Railway is to be handed over to such person without the
prior approval of the shareholders in a general meeting.
The board of directors shall convene an extraordinary shareholders' meeting
within two months if any one of the following circumstances occurs:
- the number of directors falls short of the number stipulated in our
by-laws or is below two-thirds of the number required in our articles
of association;
- our accrued losses amount to one-third of our total share capital;
- shareholders holding not less than 10% of our issued shares carrying
the right to vote make a request in writing to convene an
extraordinary general meeting; or
- the board of directors considers it necessary or the supervisory
committee proposes to convene such a meeting.
Where we convene a general shareholders' meeting (when we have more than
one shareholder), we shall, not less than 45 days before the meeting, issue a
written notice to all shareholders whose names appear in the share register of
the items to be considered and the date and venue of the meeting. Any
shareholder intending to attend the general shareholders' meeting shall give us
a written reply stating his or her intention to attend the meeting 20 days prior
to the date of the meeting.
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Where we convene an annual general meeting, shareholders holding not less
than five percent of our total shares shall be entitled to submit new motions in
writing to us. We shall include in the agenda of the meeting all items in the
motion that fall within the scope of the general shareholders' meeting. An
extraordinary shareholders' meeting shall not decide on matters that are not
specified in the notice.
Based on the written replies received by us 20 days before a general
shareholders' meeting, we shall calculate the number of voting shares
represented by shareholders who have indicated their intention to attend the
meeting. Where the number of voting shares represented by those shareholders
reaches half of our total number of shares, we may convene the general
shareholders' meeting. Otherwise, we shall, within five days, inform the
shareholders again of the motions to be considered, the date and the venue of
the meeting by way of a public announcement. After making the announcement, the
general shareholders' meeting may be convened.
A notice of meeting of shareholders shall:
- be in writing;
- specify the place, day and the time of the meeting;
- state the motions to be discussed at the meeting;
- provide such information and explanations as are necessary for the
shareholders to exercise an informed judgment on the proposals before
them. Without limiting the generality of the foregoing, where a
proposal is made to amalgamate Guangshen Railway with another entity,
to repurchase the shares of Guangshen Railway, to reorganize its share
capital or to restructure Guangshen Railway in any other way, the
terms of the proposed transaction must be provided in detail, together
with copies of the proposed agreement, if any, and the cause and
effect of the proposal must be properly explained;
- contain disclosure of the nature and extent, if any, of material
interests of any director, supervisor, general manager or other senior
officer of Guangshen Railway in the transaction proposed and the
effect of the proposed transaction on them in their capacity as
shareholders in so far as it is different from the effect on the
interests of shareholders of the same class;
- contain the text of any special resolution proposed to be moved at the
meeting;
- contain conspicuously a statement that a shareholder entitled to
attend and vote is entitled to appoint one or more proxies to attend
and vote instead of him or her and that a proxy need not also be a
shareholder; and
- state the time within which and the address to which the relevant
instruments appointing the proxies for the meeting are to be
delivered.
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Notice of general meetings of shareholders shall be served on each
shareholder whether or not entitled to vote at that meeting, by personal
delivery or prepaid mail to the address of the shareholder as shown in the share
register. For the benefit of holders of domestic shares, notice of general
meetings of shareholders may also be given by way of public announcement by
publication in one or more newspapers specified by the securities regulatory
authorities on any day within 45 to 50 days prior to the meeting. This public
announcement shall be deemed receipt by each holder of domestic shares of notice
of the relevant meeting. The accidental omission to give notice of a meeting to,
or the non-receipt of notice of a meeting by any person entitled to receive
notice shall not invalidate the meeting and the resolutions adopted. Where we
convene an annual general meeting, we shall include in the notice of the meeting
any resolutions submitted by shareholders (including proxies) who hold five
percent or more of the total number of shares, provided that these resolutions
fall within the scope of a general shareholders' meeting.
The following matters shall be resolved by way of ordinary resolution of
the general shareholders' meeting:
- work reports of the board of directors and the supervisory committee;
- profit distribution proposals and loss recovery proposals formulated
by the board of directors;
- appointment and removal of members of the board of directors and the
supervisory committee, their remuneration and methods of payment;
- our annual financial budget, final accounts, balance sheet, profit and
loss account and other financial statements; and
- matters other than those that are required by laws, administrative
regulations or our articles of association to be adopted by way of
special resolution.
The following matters shall be resolved by way of special resolution of the
general shareholders' meeting:
- increase or reduction of our share capital and the issuance of shares
of any class, warrants and other similar securities;
- issuance of company debentures;
- division, merger, dissolution and liquidation of Guangshen Railway;
- amendment to our articles of association; and
- any other matter that, according to an ordinary resolution of the
shareholders meeting, may have a significant impact on Guangshen
Railway and requires adoption by way of a special resolution.
66
Shareholders have the right to attend general meetings of shareholders and
to exercise their voting rights, in person or by proxy, in relation to the
amount of voting shares they represent. Each share carries the right to one
vote.
At any meeting of shareholders a resolution shall be decided by a show of
hands unless a poll is demanded before or after any vote by show of hands:
- by the chairman of the meeting;
- by at least two shareholders who possess the right to vote, present in
person or by proxy; or
- by one or more shareholders (including proxies) representing either
separately or in aggregate, not less than one-tenth of all shares
having the right to vote at the meeting.
Unless a poll is demanded, a declaration by the chairman of the meeting
that a resolution has on a show of hands been carried and an entry to that
effect in the minutes of the meeting shall be conclusive evidence of the fact,
without proof of the number or proportion of the votes recorded in favor of or
against that resolution, that the resolution has been carried. A demand for a
poll may be withdrawn. A poll demanded on the election of the chairman, or on a
question of adjournment, shall be taken. A poll demanded on any other question
shall be taken at such time as the chairman of the meeting directs, and any
business other than that on which the poll has been demanded may be proceeded
with, pending the taking of the poll. The result of the poll shall be deemed to
be the resolution of the meeting at which the poll was demanded. On a poll taken
at a meeting, a shareholder entitled to two or more votes need not cast all his
or her votes in the same way. In the case of a tie, the chairman of the meeting
shall be entitled to one additional vote.
BOARD OF DIRECTORS
Where a director is interested in any resolution proposed at a board
meeting, the director shall not be present and shall not have a right to vote.
That director shall also not be counted in the quorum of the relevant meeting.
LIQUIDATION RIGHTS
In the event of the termination or liquidation of Guangshen Railway,
ordinary shareholders of Guangshen Railway shall have the right to participate
in the distribution of surplus assets of Guangshen Railway in accordance with
the number of shares held by those shareholders.
LIABILITY OF SHAREHOLDERS
The liability of holders of our shares for our losses or liabilities is
limited to their capital contributions in Guangshen Railway.
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INCREASES IN SHARE CAPITAL AND PREEMPTIVE RIGHTS
Our articles of association require that approval by a special resolution
of the shareholders and by special resolution of holders of domestic shares and
H shares at separate shareholder class meetings be obtained prior to
authorizing, allotting, issuing or granting shares, securities convertible into
shares or options, warrants or similar rights to subscribe for any shares or
convertible securities. No approval is required if, but only to the extent that,
Guangshen Railway issues domestic shares and H shares, either separately or
concurrently, in numbers not exceeding 20% of the number of domestic shares and
H shares then in issue, respectively, in any 12 month period, as approved by a
special resolution of the shareholders. New issues of shares must also be
approved by relevant PRC authorities.
REDUCTION OF SHARE CAPITAL AND PURCHASE BY US OF OUR SHARES
We may reduce our registered share capital. In the following circumstances,
we may repurchase shares, that we issued in the market, subject to a resolution
passed in accordance with the provisions of our articles of association and
approval by the securities regulatory authorities:
- to cancel shares by way of reduction of capital;
- to merge with another company that holds our shares; or
- other circumstances permitted by laws and regulations.
Subject to approval by PRC securities regulatory authorities and compliance
with applicable law, we may carry out a share repurchase by one of the following
methods:
- under a general offer;
- on a stock exchange; or
- by off-market contract.
We may, with the prior approval of shareholders in general meeting obtained
in accordance with our articles of association, repurchase our shares by an
off-market contract, and we may rescind or vary such a contract or waive any of
our rights under the contract with the prior approval of shareholders obtained
in the same manner. A contract to repurchase shares includes (without
limitation) an agreement to become obliged to repurchase and an agreement to
acquire the right to repurchase our shares. We shall not assign a contract to
repurchase our own shares or any rights provided thereunder.
Shares repurchased by us shall be canceled and the amount of our registered
capital shall be reduced by the par value of those shares. To the extent that
shares are repurchased out of an amount deducted from our distributable profits,
the amount of our registered capital so reduced shall be transferred to our
share common reserve account.
Unless we are in the process of liquidation:
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- where we repurchase our shares at par value, the amount of the total
par value shall be deducted from our distributable profits or out of
the proceeds of a new issue of shares made for that purpose; and
- where Guangshen Railway repurchases its shares at a premium, an amount
equivalent to their total par value shall be deducted from our
distributable profits or the proceeds of a fresh issue of shares made
for that purpose. Payment of the portion in excess of their face value
shall be effected as follows:
- if the shares being repurchased were issued at par value, payment
shall be made out of our distributable profits; and
- if the shares being repurchased were issued at a premium, payment
shall be made out of our distributable profits or out of proceeds
of a new issue of shares made for that purpose, provided that the
amount paid out of the proceeds of the new issue may not exceed
the lesser of the aggregate of premiums received by us on the
issue of the shares repurchased or the current balance of our
capital common reserve account (inclusive of the premiums from
the fresh issue).
Payment by us in consideration for:
- the acquisition of rights to repurchase our shares; the variation of
any contract to repurchase our shares; or
- the release of any of our obligations under any contract to repurchase
our shares; shall be made out of our distributable profits.
RESTRICTIONS ON CONTROLLING SHAREHOLDERS
In addition to obligations imposed by law or required by the stock
exchanges on which our shares are listed, a controlling shareholder (as defined
below) shall not exercise his or her voting rights in respect of the following
matters in a manner prejudicial to the interests of the shareholders generally
or of our other shareholders:
- to relieve a director or supervisor of his or her duty to act honestly
in our best interests;
- to approve the expropriation, by a director or supervisor (for his or
her own benefit or for the benefit of another person), in any guise,
of our assets, including without limitation opportunities advantageous
to us; or
- to approve the expropriation by a director or supervisor (for his or
her own benefit or for the benefit of another person) of the
individual rights of other shareholders, including without limitation
rights to distributions and voting rights, save and
69
except where it was done pursuant to a restructuring submitted to and
approved by our shareholders in accordance with our articles of
association.
"Controlling shareholder" means a person or a group of persons who
satisfies one or more of the following conditions:
- he or she alone or the group acting in concert has the power to elect
more than half the board of directors;
- he or she alone or acting in concert with others has the power to
exercise or to control the exercise of 30% or more of our voting
rights;
- he or she alone or acting in concert with others holds 30% or more of
our issued and outstanding shares; or
- he or she alone or acting in concert with others in any other manner
controls us in fact.
CHANGING RIGHTS OF A CLASS OF SHAREHOLDERS
Rights conferred on any class of shareholders in the capacity of
shareholders may not be varied or abrogated unless approved by a special
resolution of shareholders at a general meeting and by holders of shares of that
class at a separate meeting conducted in accordance with our articles of
association.
DUTIES OF DIRECTORS, SUPERVISORS AND OTHER SENIOR OFFICERS IN INTERESTED
TRANSACTIONS
Where a director, supervisor or other senior officer (or an associate
thereof) of ours is in any way materially interested in a contract or
transaction or proposed contract or transaction with us (other than his or her
contract of service with us), he or she shall declare the nature and extent of
his or her interest to the board of directors at the earliest opportunity,
whether or not the contract, transaction or proposal is subject to the approval
of the board of directors.
Unless the interested director, supervisor or other senior officer
discloses his or her interests and the contract or transaction is approved by
the board of directors at a meeting in which the interested director, supervisor
or other senior officer is not counted in the quorum and refrains from voting, a
contract or transaction in which that director, supervisor or other senior
officer is materially interested is voidable by us except as against a bona fide
party to the contract or transaction acting without notice of the breach of duty
by the interested director or supervisor or other senior officer.
We shall not make a loan to or provide any guarantees in connection with a
loan to a director, supervisor or other senior officer of Guangshen Railway or
any of their respective associates. However, the following transactions are not
subject to this prohibition:
- the provision by us of a loan or a guarantee of a loan to one of our
subsidiaries;
70
- the provision by us of a loan or a guarantee in connection with a loan
or any other funds to any of our directors, supervisors or other
senior officers to pay expenditures incurred or to be incurred on our
behalf by him or her or for the purpose of enabling him or her to
perform his or her duties properly, in accordance with the terms of a
service contract approved by the shareholders at a general meeting;
and
- the provision by us of a loan or a guarantee in connection with a loan
to any of our directors, supervisors or other senior officers or their
respective associates in the ordinary course of our business on normal
commercial terms, provided that the ordinary course of business
includes the lending of money or the giving of guarantees.
MATERIAL CONTRACTS
We believe that the contracts we entered into during the fiscal year of
2002 were all made in the ordinary course of business.
EXCHANGE CONTROLS
The PRC 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. Effective 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 conversion of renminbi into
U.S. dollars in China currently must be based on the People's Bank of China
rate. The People's Bank of China rate is set based on the previous day's Chinese
interbank foreign exchange market rate and with reference to current exchange
rates on the world financial markets.
Any future devaluation of the renminbi against the U.S. dollar (whether due
to a decrease in the foreign currency reserves held by the PRC government or any
other reason) will have an adverse effect upon the U.S. dollar equivalent and
Hong Kong dollar equivalent of our net income and increase the effective cost of
foreign equipment and the amount of foreign currency expenses and liabilities.
We have no plans to hedge our currency exposure in the future. No assurance can
be given that the Hong Kong dollar to U.S. dollar exchange rate link will be
maintained in the future, or, therefore, that the Hong Kong dollar revenues of
Guangshen Railway will insulate Guangshen Railway from changes in the
renminbi-U.S. dollar and renminbi-HK dollar exchange rates. Furthermore, any
change in exchange rates that has a negative effect on the market for the H
shares in either the United States or Hong Kong is likely to result in a similar
negative effect on the other market.
We have been, and will continue to be, affected by changes in exchange
rates in connection with our ability to meet our foreign currency obligations
and will be affected by such changes in connection with our ability to pay
dividends on H shares in Hong Kong dollars and on ADSs in U.S. dollars. As of
December 31, 2002, we maintained the equivalent of approximately RMB1.3 billion
in U.S. dollar or Hong Kong dollar-denominated balances for purposes of
satisfying our foreign currency obligations (e.g., to purchase foreign
equipment) and
71
paying dividends to our overseas shareholders. See Note 32 to our audited
consolidated financial statements. Guangshen Railway believes that it has or
will be able to obtain sufficient foreign exchange to continue to satisfy these
obligations. Guangshen Railway does not engage in any financial contract or
other arrangement to hedge its currency exposure.
We are not aware of any other PRC laws, decrees or regulations that
restrict the export or import of capital or that affect the remittance of
dividends, interest or other payments to non-resident holders.
TAXATION
PRC TAXATION
TAX BASIS OF ASSETS
As of June 30, 1995, our assets were valued in conjunction with the
restructuring. This valuation, which was confirmed by the State Assets
Administration Bureau, establishes the tax basis for these assets.
INCOME TAX
Since January 1, 1994, income tax payable by PRC domestic enterprises,
including state-owned enterprises and joint stock companies, has been governed
by the PRC Enterprise Income Tax Provisional Regulations, or EIT regulations,
which provide for an income tax rate of 33%, unless a lower rate is provided by
law, administrative regulations or State Council regulations. Guangshen Railway
is generally subject to tax at a rate of 33% pursuant to the EIT Regulations.
However, as a result of its incorporation in the Shenzhen Special Economic Zone,
our corporate income tax rate is reduced to 15%. Pursuant to an approval from
the Shenzhen Local Tax Bureau dated November 12, 1997, Guangshen Railway was
also entitled to a 50% further reduction of income tax arising from its
high-speed train services in 1997, 1998 and 1999. To the extent that Guangshen
Railway engages in other businesses through subsidiaries, those other companies
are subject to corporate income tax rates of either 15% or 33% (applicable to
places other than Shenzhen), depending mainly on their places of incorporation.
VALUE ADDED TAX
Pursuant to the Provisional Regulations of the PRC Concerning Value Added
Tax effective from January 1, 1994 and its implementing rules, any goods sold by
Guangshen Railway, including any sales at concession stands operated by
Guangshen Railway, are subject to value added tax. Value added tax payable is
calculated by "output value added tax" minus "input value added tax." Input
value added tax payable by Guangshen Railway on purchases is recoverable out of
the output value added tax collected from the customers, and any excess of
output value added tax over input value added tax paid is payable to the tax
authority.
The rate of value added tax on inputs and outputs is 17%.
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BUSINESS TAX
Pursuant to the Provisional Regulations of the PRC Concerning Business Tax
effective from January 1, 1994 and its implementing rules, business tax is
imposed on enterprises that provide transportation services in the PRC. Business
tax is levied at a rate of 3% on the transport of passengers and goods in or out
of the PRC.
TAX ON DIVIDENDS
For an Individual Investor. According to the Provisional Regulations of the
PRC Concerning Questions of Taxation on Enterprises Experimenting with the Share
System promulgated on June 12, 1992, referred to herein as the provisional
regulations, an income tax of 20% shall be withheld in accordance with the
Individual Income Tax Law of the PRC on dividend payments from such enterprises
to an individual. For a foreign individual who is not a resident of the PRC, the
receipt of dividends from a company in the PRC is normally subject to this 20%
PRC withholding tax unless reduced by an applicable double-taxation treaty.
However, on July 21, 1993, the PRC State Tax Bureau issued a Notice Concerning
the Taxation of Gains on Transfers and Dividends from Shares (Equities) Received
by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals,
referred to herein as the tax notice, which stipulates that dividends from a PRC
company on shares listed on an overseas stock exchange, or overseas shares, such
as H shares (including H shares represented by ADSs), would not for the time
being be subject to PRC withholding tax. The relevant tax authority has thus far
not collected any withholding tax on dividend payments on overseas shares.
Amendments to the Individual Income Tax Law of the PRC were promulgated on
October 31, 1993 and became effective on January 1, 1994. These amendments
stipulate that any provisions of prior administrative regulations concerning
individual income tax that contradict the amendments shall be superseded by the
amendments. The amendments and the amended Individual Income Tax Law may be
interpreted as meaning that foreign individuals will be subject to a withholding
tax on dividends received from a company in the PRC at a rate of 20% unless such
income is specifically exempted from individual income tax by the financial
authority of the State Council.
However, in a letter dated July 26, 1994 to the State Commission for
restructuring the Economic System, the State Securities Commission and the China
Securities Regulatory Commission regarding "Relevant Tax Issues on Dividends
Received by Foreigners Who Hold Shares of Listed PRC Companies," the State Tax
Bureau reiterated the temporary tax exemption stated in the Tax Notice for
dividends received from a PRC company listed overseas. As long as this letter is
in effect, foreign individual investors will not be subject to the 20%
withholding tax on dividends received from such a company.
For an Enterprise. When a foreign enterprise with no establishment or
office in the PRC receives dividends from a company in the PRC, the foreign
enterprise is normally subject to PRC withholding tax of 20% under the Income
Tax Law of the PRC Concerning Enterprises with Foreign Investment and Foreign
Enterprises. With respect to dividends paid by a company incorporated in the
Shenzhen Special Economic Zone (such as Guangshen Railway), the withholding tax
rate is 10%. However, according to the tax notice, a foreign enterprise without
73
an establishment in the PRC receiving a dividend payment on overseas shares,
such as H shares or ADSs, will not be subject to withholding tax on the dividend
payment.
CAPITAL GAINS TAX
For An Individual Investor. Although the Provisions of Implementation of
Individual Income Tax Law of the PRC, issued on January 29, 1994, stipulate that
gains realized on the sale of shares by an individual would be subject to income
tax at a rate of 20% and empower the Ministry of Finance to draft detailed rules
on the mechanism of collecting this tax, the tax notice provides that gains
realized by holders (both individuals and enterprises) of H shares or ADSs will
not be subject to income tax. In March 1996, the Ministry of Finance and the
State Tax Bureau issued the Notice on the Temporary Non-Levy of Individual
Income Tax on Gains from Share Transfers, providing that individual income tax
will not be imposed on gains from the sale of shares in 1996. The Ministry of
Finance and the State Tax Bureau have made no subsequent pronouncement on this
subject. Consequently, the March 1996 notice remains in effect.
For An Enterprise. A foreign enterprise with no establishment or office in
the PRC is generally subject to a 20% tax on capital gains from the sale of
shares in a company in the PRC. However, Guangshen Railway believes that the tax
exemption on capital gains enjoyed by foreign enterprises pursuant to the tax
notice continues to be valid.
TAX TREATIES
Foreign enterprises with no establishment in the PRC and individuals not
resident in the PRC and who are resident in countries that have entered into
double taxation treaties with the PRC may be entitled to a reduction of any
withholding tax imposed on the payment of dividends from a PRC company. The PRC
currently has double taxation treaties with a number of countries, including
Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore,
the United Kingdom and the United States.
The Agreement Between the Government of the United States of America and
the PRC Government for the Avoidance of Double Taxation and the Prevention of
Tax Evasion with Respect to Taxes on Income, together with related protocols,
referred to herein as the US-PRC tax treaty, currently limit the rate of PRC
withholding tax upon dividends paid by Guangshen Railway to a United States
holder who is a United States resident for purposes of the US-PRC tax treaty to
10%. It is uncertain if the US-PRC tax treaty exempts from PRC tax the capital
gains of a U.S. holder arising from the sale or disposition of H shares or ADSs.
U.S. holders are advised to consult their tax advisors with respect to these
matters.
UNITED STATES FEDERAL INCOME TAXATION
The following is a general discussion of material United States federal
income tax consequences of purchasing, owning and disposing of the H shares or
ADSs if you are a U.S. holder, as defined below, and hold the H shares or ADSs
as capital assets within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code"). This discussion does not address all of
the tax consequences relating to the purchase, ownership and disposition of the
H shares or ADSs, and does not take into account U.S. holders who may be subject
to special rules including:
74
- tax-exempt entities;
- partnerships or other entities treated as partnerships for United
States federal income tax purposes;
- certain insurance companies;
- broker-dealers;
- traders in securities that elect to mark to market;
- U.S. holders liable for alternative minimum tax;
- U.S. holders that own 10% or more of our voting stock;
- U.S. holders that hold the H shares or ADSs 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 United States 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:
- a citizen or resident of the United States for United States federal
income tax purposes;
- a corporation or other entity treated as a corporation for United
States federal income tax purposes created or organized under the laws
of the United States or any political subdivision thereof;
- an estate the income of which is subject to United States federal
income tax without regard to its source; or
- a trust:
-- subject to the primary supervision of a United States court and
the control of one or more United States persons; or
-- that has elected to be treated as a United States person under
applicable United States Treasury regulations.
75
This discussion does not address any aspects of United States taxation
other than federal income taxation.
WE URGE YOU TO CONSULT YOUR TAX ADVISORS REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL AND NON-UNITED STATES TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE H SHARES OR ADSS.
In general, if you hold ADR's evidencing ADSs, you will be treated as the
owner of the H shares represented by the ADSs. The following discussion assumes
that we are not a passive foreign investment company ("PFIC"), as discussed
under "PFIC Rules" below.
DISTRIBUTIONS ON THE H SHARES OR ADSS
The gross amount of any distribution (without reduction for any Chinese tax
withheld) we make on the H shares or ADSs out of our current or accumulated
earnings and profits (as determined for United States federal income tax
purposes) will be includible in your gross income as ordinary dividend income
when the distribution is actually or constructively received by you, or by the
depositary in the case of ADSs. 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 H shares or ADSs and thereafter as capital
gain. Any dividend will not be eligible for the dividends-received deduction
generally allowed to United States corporations in respect of dividends received
from United States 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.
If we make a distribution paid in HK dollars, you will be considered to
receive the U.S. dollar value of the distribution determined at the spot HK
dollar/U.S. dollar rate on the date such distribution is received by you or by
the depositary, regardless of whether you or the depositary convert the
distribution into U.S. dollars. Any gain or loss resulting from currency
exchange fluctuations during the period from the date the dividend payment is
includible in your income to the date you or the depositary convert the
distribution into U.S. dollars will be treated as United States source ordinary
income or loss.
Subject to various limitations, any Chinese tax withheld from distributions
in accordance with the Agreement Between the Government of the United States of
America and the Government of the People's Republic of China for the Avoidance
of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on
Income will be deductible or creditable against your United States federal
income tax liability. For foreign tax credit limitation purposes, dividends paid
on the H shares or ADSs will be foreign source income, and generally will be
treated as "passive income" or, in the case of some U.S. holders, "financial
services income." You may not be able to claim a foreign tax credit (and instead
may claim a deduction) for non-United States taxes imposed on dividends paid on
the H Shares or ADSs if you (i) have held the H Shares or ADSs for less than a
specified minimum period during which you are not protected from risk of loss
with respect to such shares, (ii) are obligated to make payments related to the
dividends (for example, pursuant to a short sale) or (iii) hold the H shares or
ADSs
76
in an arrangement in which your expected economic return, after non-United
States taxes, is insubstantial.
SALE, EXCHANGE OR OTHER DISPOSITION
Upon a sale, exchange or other disposition of the H shares or ADSs, you
will recognize a capital gain or loss for United States 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 H
shares or ADSs. Any gain or loss will generally be United States source gain or
loss for foreign tax credit limitation purposes. Capital gain of certain
non-corporate U.S. holders, including individuals, is generally taxed at a
maximum rate of 20 percent where the property has been held more than one year.
Your ability to deduct capital losses is subject to limitations.
If you are paid in a currency other than U.S. dollars, any gain or loss
resulting from currency exchange fluctuations during the period from the date of
the payment resulting from sale, exchange or other disposition to the date you
convert the payment into U.S. dollars will be treated as United States source
ordinary income or loss.
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:
- 75% or more of its gross income consists of passive income, such as
dividends, interest, rents and royalties; or
- 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, 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 H shares or ADSs,
you generally would be subject to special rules with respect to "excess
distributions" made by us on the H shares or ADSs and with respect to gain from
your disposition of the H shares or ADSs. An "excess distribution" generally is
defined as the excess of the distributions you receive with respect to the H
shares or ADSs in any taxable year over 125% of the average annual distributions
you have received from us during the shorter of the three preceding years, or
your holding period for the H shares or ADSs. Generally, you would be required
to allocate any excess distribution or gain from the disposition of the H shares
or ADSs ratably over your holding period for the H shares or ADSs. The portion
of the excess distribution or gain allocated to a prior taxable year, other than
a year prior to the first year in which we became a PFIC, would be taxed at the
highest United States federal income tax rate on ordinary income in effect for
such taxable year, and you would be subject to an interest charge on the
resulting tax liability, determined as if the tax liability had been due with
respect to such particular taxable years. The
77
portion of the excess distribution or gain that is not allocated to prior
taxable years, together with the portion allocated to the years prior to the
first year in which we became a PFIC, would be included in your gross income for
the taxable year of the excess distribution or disposition and taxed as ordinary
income.
The foregoing rules with respect to excess distributions and dispositions
may be avoided or reduced if you are eligible for and timely make a valid
"mark-to-market" election. If your H shares or ADSs were treated as shares
regularly traded on a "qualified exchange" for United States federal income tax
purposes and a valid mark-to-market election was made, in calculating your
taxable income for each taxable year you generally would be required to take
into account as ordinary income or loss the difference, if any, between the fair
market value and the adjusted tax basis of your H shares or ADSs at the end of
your taxable year. However, the amount of loss you would be allowed is limited
to the extent of the net amount of previously included income as a result of the
mark-to-market election. The New York Stock Exchange in which the ADSs will be
traded is a qualified exchange for United States federal income tax purposes.
Alternatively, a timely election to treat us as a qualified electing fund
under Section 1295 of the Code could be made to avoid the foregoing rules with
respect to excess distributions and dispositions. You should be aware, however,
that if we become a PFIC, we do not intend to satisfy record keeping
requirements that would permit you to make a qualified electing fund election.
If you own the H shares or ADSs during any year that we are a PFIC, you
must file IRS Form 8621. We encourage you to consult your own tax advisor
concerning the United States federal income tax consequences of holding the H
shares or ADSs that would arise if we were considered a PFIC.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to dividends in
respect of the H shares or ADSs or the proceeds of the sale, exchange, or
redemption of the H shares or ADSs 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 H shares
or ADSs or the proceeds of any sale, exchange or transfer of the H shares or
ADSs, unless you
- are a corporation or fall within various other exempt categories, and,
when required, demonstrate this fact; or
- 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 United States federal income tax liability provided that
you furnish the required
78
information to the IRS in a timely manner. If you do not provide a correct
taxpayer identification number you may be subject to penalties imposed by the
IRS.
HONG KONG TAXATION
The following discussion summarizes the material Hong Kong tax provisions
relating to the ownership of H shares or ADSs held by you.
DIVIDENDS
No tax will be payable by you in Hong Kong in respect of dividends paid by
us.
TAXATION OF CAPITAL GAINS
No capital gain tax is generally imposed in Hong Kong in respect of capital
gains from the sale of property (such as the H Shares). However, if trading
gains from the sale of property by persons as part of profit making are regarded
as carrying on a trade, profession or business in Hong Kong, where such gains
are derived from or arise in Hong Kong from such trade, profession or business,
such trading gains will be chargeable to Hong Kong profits tax, which is
currently imposed at the rate of 16% on corporations and at a maximum rate of
15% on individuals. Amendments to increase the Hong Kong profits tax to 17.5%
for corporations and 15.5% for individuals have been proposed by the Financial
Secretary. However, as of the date of this annual report, such proposals have
not yet been adopted. Gains from sales of the H Shares effected on the Hong Kong
Stock Exchange will be considered to be derived from or arise in Hong Kong.
Liability for Hong Kong profits tax would thus arise in respect of trading gains
from sales of H shares realized by persons carrying on a business of trading or
dealing in Hong Kong in securities.
There will be no liability for Hong Kong profits tax in respect of profits
from the sale of ADSs (i.e., the profits derived abroad), where purchases and
sales of ADSs are effected outside Hong Kong, e.g. on the New York Stock
Exchange.
HONG KONG STAMP DUTY
Hong Kong stamp duty will be payable by each of the seller and the
purchaser for every sale and purchase, respectively, of the H shares. An ad
valorem duty is charged at the rate of 0.2% of the value of the H shares
transferred and the relevant contract notes shall be stamped (the buyer and
seller each paying half of such stamp duty). In addition, a fixed duty of HK$5
is currently payable on an instrument of transfer of H shares.
The withdrawal of H shares when ADSs are surrendered, and the issuance of
ADSs when H shares are deposited, may be subject to Hong Kong stamp duty at the
rate described above for sale and purchase transactions, if the withdrawal or
deposit results in a change of legal and beneficial ownership under Hong Kong
law. The issuance of ADSs for deposited H shares issued directly to the
depositary or for the account of the depositary should not lead to a Hong Kong
stamp duty liability. You are not liable for the Hong Kong stamp duty payable on
transfers of ADSs outside of Hong Kong.
79
HONG KONG ESTATE DUTY
Estate duty is levied on the value of property situated in Hong Kong
passing or deemed passing on the death of a person. H shares are regarded as
property situated in Hong Kong for estate duty purposes. Currently, for persons
dying on or after April 1, 1998, Hong Kong estate duty is imposed on the
principal value of a deceased's estate at graduated rates from 5% to 15%. No
estate duty is payable where the principal value of the dutiable estate does not
exceed HK$7.5 million; the maximum rate of 15% applies where the principal value
exceeds HK$10.5 million.
DOCUMENTS ON DISPLAY
We filed with SEC in Washington, D.C. a registration statement on Form F-1
(Registration No. 333-3382) under the Securities Act in connection with our
global offering of American depositary shares in May 1996. The registration
statement contains exhibits and schedules. For further information with respect
to Guangshen Railway and our American depositary shares, please refer to the
registration statement and to the exhibits and schedules filed with the
registration statement.
Additionally, we are subject to the informational requirements of the
Exchange Act, and, in accordance with the Exchange Act, we file annual reports
on Form 20-F within six months of our fiscal year end, and we will submit other
reports and information under cover of Form 6-K with the SEC. You may review a
copy of the registration statement and other information without charge at the
public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. You may also inspect the registration
statement and its exhibits and schedules at the office of the New York Stock
Exchange, 11 Wall Street, New York, New York 10005. You may also get copies,
upon payment of a prescribed fee, of all or a portion of the registration
statement from the SEC's public reference room or by calling the SEC on
1-800-SEC-0330 or visiting the SEC's website at www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements to
shareholders.
80
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following paragraphs describe the various market risks to which we were
exposed as of December 31, 2002.
CURRENCY RISK
As approved by the PRC foreign exchange administration, Hong Kong
dollar-denominated income from our through train service may be deposited in
Hong Kong dollars and need not be converted into renminbi. If necessary,
subsequent payment of Hong Kong dollar-denominated and U.S. dollar-denominated
dividends on our H shares and ADSs, respectively, may have to be made after
reconverting renminbi at the then applicable People's Bank of China rate into
the relevant foreign currency. Some of our vendor contracts and equipment leases
for the provision of equipment, parts and services, particularly with respect to
the high-speed project, are paid by us in foreign currencies. While our foreign
currency deposits are relatively stable, they are insufficient to pay all
dividends and operating expenses, therefore, we bear the risk of exchange rate
fluctuations when we convert renminbi to pay foreign-currency denominated
dividends and operating expenses. However, our management believes that these
contingent exposures relating to foreign exchange rate fluctuations have not had
and are not likely to have a material effect on our financial position. As a
result, we do not enter into any hedging transactions with respect to our
exposure to foreign currency movements. Furthermore, we are not aware of any
effective financial hedging products that serve as protection against a possible
renminbi devaluation.
INTEREST RATE RISK
Funds we do not need in the short term are kept as temporary cash deposits
in commercial banks and in the Ministry of Railways Deposit-taking Center in the
form of demand or time deposits. We do not hold any market risk-sensitive
instruments for trading purposes. As of December 31, 2002, we had no loans
outstanding. Accordingly, we are not exposed to any material interest rate
risks.
As of December 31, 2002, our balances denominated in Hong Kong dollars and
U.S. dollars had been translated into renminbi at the applicable market exchange
rates as of that date, amounting to approximately RMB1.34 billion. If the
applicable market exchange rates were to change by 10%, this would result in a
change in fair value of approximately RMB134 million in these balances. For the
year ended December 31, 2002, the interest income derived from cash balances at
banks and temporary cash investments amounted to approximately RMB29.0 million.
A 10% change in interest rates would result in a change in interest income of
approximately RMB2.9 million.
Except as described above and in notes 26 and 27 to our audited
consolidated financial statements herein, our management believes that as of the
end of December 31, 2002, at present and in our normal course of business, we
are not subject to any other market-related risks.
81
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
82
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.
ITEM 15. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision of and with the participation of our
management, including our principal executive and financial officers, of the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Exchange Act). Based on that evaluation, our
principal executive and financial officers concluded that the design and
operation of these disclosure controls and procedures were effective to ensure
that material information relating to us and our consolidated subsidiaries would
be made known to them by others within those entities. There were no significant
changes in our internal controls or in other factors that could significantly
affect our disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any significant deficiencies or material weaknesses
in our internal controls. As a result, no corrective actions were required or
undertaken. However, as recommended by the SEC in its adopting release, our
principal executive and financial officers along with other management personnel
are continually testing and improving our disclosure controls and procedures and
we will be making modifications from time to time as deemed necessary to ensure
that information is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
ITEM 16. [RESERVED]
83
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide the financial statements and related information
specified in Item 18 in lieu of Item 17.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 to F-41 following Item 19.
ITEM 19. EXHIBITS
(a) See pages F-1 to F-41 following this item.
(b) Index of Exhibits
Documents filed as exhibits to this annual report:
Exhibit
Number Description
------- -----------
6.1 X Statement explaining how earnings per share information was calculated in this annual report
7.1 X Statements explaining how certain ratios are calculated in this annual report
8.1 X List of subsidiaries of Guangshen Railway Company Limited as of December 31, 2002
12.1 X Section 302 principal executive officers' and principal financial officer's certifications
12.2 X Certifications pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the U.S. Sarbanes-Oxley
Act of 2002.
84
GUANGSHEN RAILWAY COMPANY LIMITED
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF 31 DECEMBER, 2000, 2001 AND 2002
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEX TO FINANCIAL STATEMENTS
Page
----
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
Report of Independent Public Accountants............................... F-2
Consolidated Income Statements for the years ended 31 December,
2000, 2001 and 2002................................................ F-4
Consolidated Balance Sheets as of 31 December, 2001 and 2002........... F-5
Consolidated Cash Flow Statements for the years ended 31 December
2000, 2001 and 2002................................................ F-6
Consolidated Statements of Changes in Equity for the years ended
31 December 2000, 2001 and 2002.................................... F-7
Notes to the Consolidated Financial Statements......................... F-8
[PRICEWATERHOUSECOOPERS LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Guangshen Railway Company Limited:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Guangshen Railway Company Limited (the "Company") and its subsidiaries
(established in the People's Republic of China) as of 31 December, 2002, and the
results of their operations and their cash flows for the year then ended, in
conformity with International Financial Reporting Standards. 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 audit. We conducted our audit of these statements in accordance with
International Standards on Auditing issued by the International Federation of
Accountants and auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion. The consolidated financial
statements of the Company and its subsidiaries as of 31 December, 2001, and for
each of the two years in the period ended 31 December, 2001 were audited by
other independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements in
their report dated April 23, 2002.
International Financial Reporting Standards vary in certain important respects
from accounting principles generally accepted in the United States of America.
The application of the latter would have affected the determination of
consolidated net income for each of the three years in the period ended 31
December, 2002 and the determination of consolidated shareholders' equity at 31
December, 2001 and 2002 to the extent summarized in Note 30 to the consolidated
financial statements.
PRICEWATERHOUSECOOPERS
Certified Public Accountants
Hong Kong
April 23, 2003
F-2
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
& CO AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN & CO:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Guangshen Railway Company Limited:
We have audited the accompanying Consolidated Balance Sheets of Guangshen
Railway Company Limited (the "Company") and its subsidiaries (established in the
People's Republic of China) as of 31 December, 2000 and 2001, and the related
Consolidated Statements of Income, Changes in Equity and Cash Flows for the
years ended 31 December, 1999, 2000 and 2001, expressed in Chinese Renminbi.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these Consolidated Financial
Statements based on our audits.
We conducted our audits in accordance with international standards on auditing
issued by the International Federation of Accountants and generally accepted
auditing standards in the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
Consolidated Financial Statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the Consolidated Financial Statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying Consolidated Financial Statements referred to
above present fairly, in all material respects, the financial position of the
Company and its subsidiaries as of 31 December, 2000, and 2001, and the results
of their operations and cash flows for the years ended 31 December, 1999, 2000
and 2001 in conformity with International Financial Reporting Standards.
International Financial Reporting Standards do not conform to generally accepted
accounting principles in the United States of America. A description of the
significant differences between those two generally accepted accounting
principles and the approximate effect of those differences on net income and
shareholders' equity are set forth in Note 30 to the Consolidated Financial
Statements.
ARTHUR ANDERSEN & CO
Certified Public Accountants
Hong Kong
April 23, 2002
F-3
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER, 2000, 2001 AND 2002
(Amounts in thousands, except per share and per ADS data)
Notes Years ended 31 December,
----- ----------------------------------------------------------
2000 2001 2002 2002
---------- ---------- ---------- ----------
RMB RMB RMB US$
Revenues from railroad businesses
Passenger 1,237,289 1,426,010 1,846,599 222,482
Freight 549,694 567,276 514,036 61,932
---------- ---------- ---------- ----------
Sub-total 1,786,983 1,993,286 2,360,635 284,414
Revenues from other businesses 193,415 160,306 156,893 18,903
---------- ---------- ---------- ----------
Total revenues 1,980,398 2,153,592 2,517,528 303,317
---------- ---------- ---------- ----------
Operating expenses
Railroad businesses
Labour and benefits (260,671) (320,569) (373,781) (45,034)
Equipment leases and services (263,348) (262,320) (433,918) (52,279)
Materials and supplies (121,337) (144,651) (192,141) (23,150)
Repair costs, excluding materials and
supplies (93,471) (94,545) (102,377) (12,335)
Depreciation (305,300) (342,534) (335,508) (40,423)
Amortization of leasehold land payments (15,394) (15,453) (15,131) (1,823)
Fees for social services (58,300) (57,157) (57,385) (6,914)
General and administrative expenses 4 (131,885) (150,162) (123,800) (14,915)
Others (47,758) (73,238) (101,251) (12,198)
---------- ---------- ---------- ----------
Sub-total (1,297,464) (1,460,629) (1,735,292) (209,071)
---------- ---------- ---------- ----------
Other businesses
Materials and supplies (121,535) (108,930) (124,602) (15,013)
General and administrative expenses 4 (41,994) (29,922) (35,137) (4,233)
---------- ---------- ---------- ----------
Sub-total (163,529) (138,852) (159,739) (19,246)
---------- ---------- ---------- ----------
Total operating expenses (1,460,993) (1,599,481) (1,895,031) (228,317)
---------- ---------- ---------- ----------
Profit from operations 519,405 554,111 622,497 75,000
Other (expense) income 5 (5,537) 12,952 6,575 792
Interest income, net 6 76,566 63,621 32,712 3,941
Share of profits (losses) of associates 16 253 609 (323) (39)
---------- ---------- ---------- ----------
Profit before tax 590,687 631,293 661,461 79,694
Income tax expense 7 (99,380) (99,297) (104,265) (12,562)
Minority interests 782 1,499 (113) (14)
---------- ---------- ---------- ----------
Profit attributable to shareholders 492,089 533,495 557,083 67,118
========== ========== ========== ==========
Earnings per share
- Basic 8 RMB0.11 RMB0.12 RMB0.13 USD0.02
========== ========== ========== ==========
- Diluted 8 N/A N/A N/A N/A
========== ========== ========== ==========
Earnings per equivalent ADS
- Basic 8 RMB5.68 RMB6.15 RMB6.42 USD0.77
========== ========== ========== ==========
- Diluted 8 N/A N/A N/A N/A
========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Income
Statements.
---------
Translation of amounts from Renminbi ("RMB") into United States dollars ("US$")
for the convenience of the reader has been made at the Noon Buying Rate on 31
December, 2002 of US$1.00=RMB8.3 as certified for customs purposes by the
Federal Reserve Bank of New York. No representation is made that the RMB amounts
could have been, or could be, converted into US$ at that rate on 31 December,
2002.
F-4
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF 31 DECEMBER, 2001 AND 2002
(Amounts in thousands)
Notes 31 December,
------ -------------------------------------------
2001 2002 2002
---------- ---------- ----------
RMB RMB US$
ASSETS
Current assets
Cash and cash equivalents 365,508 1,413,045 170,246
Temporary cash investments 10 1,376,602 567,339 68,354
Interest receivables 14,873 18,851 2,271
Trade receivables 11 67,440 51,457 6,200
Materials and supplies 34,191 34,105 4,109
Prepayments and other receivables, net 12 307,403 241,224 29,063
Due from Parent Company 29,499 39,374 4,744
Due from related parties 276,013 267,885 32,275
---------- ---------- ----------
Total current assets 2,471,529 2,633,280 317,262
Fixed assets 13 7,031,040 6,798,280 819,070
Construction-in-progress 14 446,399 672,827 81,063
Leasehold land payments 15 673,746 656,998 79,156
Interests in associates 16 141,122 140,842 16,969
Available-for-sale investments 17 32,000 166,695 20,084
Deferred tax assets 18 5,193 7,577 913
Deferred staff costs 19 196,187 181,095 21,819
---------- ---------- ----------
Total assets 10,997,216 11,257,594 1,356,336
========== ========== ==========
LIABILITIES AND EQUITY
Current liabilities
Trade payables 69,048 41,734 5,028
Payables for construction of fixed assets 199,780 181,473 21,864
Accrued expenses and other payables 20 519,900 529,797 63,831
Due to related parties 58,650 158,199 19,060
Dividend payable 13,598 90,663 10,923
---------- ---------- ----------
Total current liabilities 860,976 1,001,866 120,706
---------- ---------- ----------
Minority interests 15,617 11,577 1,395
---------- ---------- ----------
Equity
Common stock, par value RMB1.00 per share,
4,335,550 shares authorised and outstanding 21 4,335,550 4,335,550 522,355
Additional paid-in capital 3,984,135 3,984,135 480,016
Dedicated capital 1,198,335 1,287,370 155,105
Retained earnings 602,603 637,096 76,759
---------- ---------- ----------
Total equity 10,120,623 10,244,151 1,234,235
---------- ---------- ----------
Total liabilities and equity 10,997,216 11,257,594 1,356,336
========== ========== ==========
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
---------
Translation of amounts from Renminbi ("RMB") into United States dollars ("US$")
for the convenience of the reader has been made at the Noon Buying Rate on 31
December, 2002 of US$1.00=RMB8.3 as certified for customs purposes by the
Federal Reserve Bank of New York. No representation is made that the RMB amounts
could have been, or could be, converted into US$ at that rate on 31 December,
2002.
F-5
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER, 2000, 2001 AND 2002
(Amounts in thousands)
Year ended 31 December,
-------------------------------------------------------------
2000 2001 2002 2002
---------- ---------- ---------- ----------
RMB RMB RMB US$
CASH FLOWS FROM OPERATING ACTIVITIES:
Profit attributable to shareholders 492,089 533,495 557,083 67,118
Adjustments for:
Minority interests (782) (1,499) 113 14
Income tax expense 99,380 99,297 104,265 12,562
Depreciation 308,795 345,949 337,797 40,698
Amortisation of leasehold land payments 15,394 15,453 15,131 1,823
Loss on disposals of fixed assets 4,579 25,448 29,339 3,535
Amortization of deferred staff costs 14,461 15,721 15,092 1,818
Housing benefits charged for retired
employees 3,602 -- -- --
Share of (profits) losses of associates (253) (609) 323 39
Provision for doubtful accounts 17,030 29,620 4,598 554
Interest expense 3,887 2,087 4,064 490
Interest income (80,452) (65,708) (36,920) (4,448)
Decrease (increase) in current assets
Trade receivables 12,986 4,597 24,064 2,899
Materials and supplies (5,526) (4,158) 86 10
Prepayments and other receivables (47,702) (141,067) 87,676 10,563
Due from Parent Company (32,119) 51,105 (9,875) (1,190)
Due from related parties 48,482 (28,081) 8,128 979
Increase (decrease) in current liabilities
Trade payables 11,561 7,901 (27,314) (3,291)
Due to related parties (90,594) (5,084) 99,549 11,994
Accrued expenses and other payables 22,382 102,329 48,529 5,849
Interest paid (3,887) (2,087) (4,064) (490)
Tax paid (64,124) (98,693) (100,487) (12,107)
---------- ---------- ---------- ----------
Net cash provided by operating activities 729,189 886,016 1,157,177 139,419
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets and payments for
construction-in-progress, net of related
payables (564,759) (551,508) (553,337) (66,667)
Proceeds from sale of fixed assets -- -- 12,369 1,490
Increase in interests in associates (33,513) (17,572) (4,761) (574)
Decrease in temporary cash investments 61,450 74,728 777,898 93,723
Purchase of available-for-sale investments -- (2,000) (14,108) (1,700)
Interest received 78,735 65,927 32,942 3,969
---------- ---------- ---------- ----------
Net cash (used in) from investing activities (458,087) (430,425) 251,003 30,241
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to group shareholders (520,266) (419,957) (356,490) (42,951)
Dividends paid to minority interests (187) (180) (4,153) (500)
---------- ---------- ---------- ----------
Net cash used in financing activities (520,453) (420,137) (360,643) (43,451)
---------- ---------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents (249,351) 35,454 1,047,537 126,209
Cash and cash equivalents, beginning of year 579,405 330,054 365,508 44,037
---------- ---------- ---------- ----------
Cash and cash equivalents, end of year* 330,054 365,508 1,413,045 170,246
========== ========== ========== ==========
* Analysis of the balances of cash and cash equivalents
Year ended 31 December,
-------------------------------------------------------------
2000 2001 2002 2002
---------- ---------- ---------- ----------
RMB RMB RMB US$
Cash and bank deposits 330,054 365,508 1,413,045 170,246
========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Cash
Flow Statements.
---------
Translation of amounts from Renminbi ("RMB") into United States dollars ("US$")
for the convenience of the reader has been made at the Noon Buying Rate on 31
December, 2002 of US$1.00=RMB8.3 as certified for customs purposes by the
Federal Reserve Bank of New York. No representation is made that the RMB amounts
could have been, or could be, converted into US$ at that rate on 31 December,
2002.
F-6
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED 31 DECEMBER, 2000, 2001 AND 2002
(Amounts in thousands)
Dedicated capital
------------------------------------
Share Statutory
capital/ Additional Statutory public Discretionary
common paid-in surplus welfare surplus Retained
Note stock Capital reserve fund reserves earnings Total
---- --------- ---------- --------- --------- ------------- --------- ----------
RMB RMB RMB RMB RMB RMB RMB
Balances at January 1, 2000 4,335,550 3,984,135 321,646 315,099 286,709 805,721 10,048,860
Profit attributable to
shareholders -- -- -- -- -- 492,089 492,089
Appropriation from retained
earnings 22 -- -- 53,802 53,607 54,950 (162,359) --
Dividends relating to 1999 9 -- -- -- -- -- (520,266) (520,266)
--------- --------- --------- --------- --------- --------- ----------
Balances at January 1, 2001 4,335,550 3,984,135 375,448 368,706 341,659 615,185 10,020,683
Profit attributable to
shareholders -- -- -- -- -- 533,495 533,495
Appropriation from retained
earnings 22 -- -- 56,660 55,862 -- (112,522) --
Dividends relating to 2000 9 -- -- -- -- -- (433,555) (433,555)
--------- --------- --------- --------- --------- --------- ----------
Balances at January 1, 2002 4,335,550 3,984,135 432,108 424,568 341,659 602,603 10,120,623
Profit attributable to
shareholders -- -- -- -- -- 557,083 557,083
Appropriation from retained
earnings 22 -- -- 59,301 29,734 -- (89,035) --
Dividends relating to 2001 9 -- -- -- -- -- (433,555) (433,555)
--------- --------- --------- --------- --------- --------- ----------
Balances at 31 December, 2002 4,335,550 3,984,135 491,409 454,302 341,659 637,096 10,244,151
========= ========= ========= ========= ========= ========= ==========
The accompanying notes are an integral part of these Consolidated Statements of
Changes in Equity.
F-7
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES
Guangshen Railway Company Limited (the "Company") was established as a joint
stock limited company in the People's Republic of China (the "PRC") on 6 March,
1996 to take over and operate certain railroad and other businesses (the
"Businesses").
Prior to the formation of the Company, the Businesses were carried on by the
Company's predecessor, Guangshen Railway Company (the "Predecessor"), and
certain of its subsidiaries, and in certain cases, by Guangzhou Railway (Group)
Company (the "Parent Company") and certain of its subsidiaries, which were all
under the common control and jurisdiction of the PRC Ministry of Railways (the
"MOR"). The Predecessor was controlled by and under the administration of the
Parent Company. Pursuant to a restructuring agreement entered into among the
Parent Company, the Predecessor and the Company on 8 March, 1996 and with effect
from 6 March, 1996 (the "Restructuring Agreement"), the Company issued to the
Parent Company 100% of its equity interest in the form of 2,904,250,000 shares
of ordinary shares (the "State-owned Domestic Shares") in exchange for the
assets and liabilities of the Businesses (the "Restructuring").
In May 1996, the Company issued 1,431,300,000 shares, represented by 217,812,000
H Shares ("H Shares") and 24,269,760 American Depositary Shares ("ADSs", one ADS
represents 50 H Shares) in a global public offering for cash of approximately
RMB4,214,000,000 to finance the capital expenditures and working capital
requirements of the Company and its subsidiaries (the "Group").
The principal activities of the Group are railroad passenger and freight
transportation. The Group also operate certain other businesses, principally
services in the stations and sales of food, beverages and merchandise aboard the
trains and in the stations.
The directors of the Company considered Guangzhou Railway (Group) Company, a
state-owned enterprise established in the PRC, to be the ultimate holding
company.
The Group conduct their operations in the PRC and accordingly are subject to
special considerations and significant risks not typically associated with
investments in equity securities of North American and Western European
companies. These include risks associated with, among others, the political,
economic and legal environments, foreign currency exchange, government
regulation of the railway system, development and competition in the
transportation industry, insurance, entry by the PRC with the World Trade
Organisation (the "WTO"), and the ability to obtain sufficient financing. These
are described further in the following paragraphs:
(a) Political environment
The operating results of the Group may be adversely affected by changes in
the political and social conditions in the PRC and by changes in
governmental policies with respect to laws and regulations, inflationary
measures, currency conversion and remittance abroad, and rates and methods
of taxation, among other things. While the PRC's government is expected to
continue its economic reform policies, many of the reforms are new or
experimental and may be refined or changed. It is also possible that a
change in the PRC's leadership could lead to changes in economic policy.
F-8
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES (CONT'D)
(b) Economic environment
The economy of the PRC differs significantly from the economies in the
North America and Western Europe in many respects, including its structure,
levels of development and capital reinvestment, growth rate, government
involvement, resource allocation, self-sufficiency, rate of inflation and
balance of payments position. The adoption of economic reform policies
since 1978 has resulted in a gradual reduction in the role of state
economic plans in the allocation of resources, pricing and management of
such assets, and increased emphasis on the utilization of market forces,
and rapid growth in the PRC's economy. However, such growth has been uneven
among various regions of the country and among various sectors of the
economy.
The central government has from time to time adopted various measures
designed to stabilize the economy, regulate growth and contain inflation.
All such economic events and measures could adversely affect the results of
operations and expansion plans of the Group.
(c) Legal environment
The PRC legal system is based on written statutes under which prior court
decisions may be cited as authority but do not have binding precedential
effect. The PRC's legal system is relatively new, and the government is
still in the process of developing a comprehensive system of laws, a
process that has been ongoing since 1979. Considerable 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. Such legislation has significantly enhanced
the protection afforded to foreign investors. However, experience with
respect to the implementation, interpretation and enforcement of such laws
is limited.
(d) Foreign currency exchange
The books and records of the Group are maintained in RMB, their functional
currency. RMB is not freely convertible into foreign currencies. All
foreign exchange transactions involving RMB must take place through the
banks and other institutions authorised by the People's Bank of China
("PBOC") to buy and sell foreign exchange.
The applicable market exchange rates used for the transactions are
administered by the PBOC. Enterprises can deal with an approved bank for
foreign exchange on recurring items and approved capital items.
A major portion of the Company's revenues is denominated in RMB. A portion
of such revenues will need to be converted into other currencies to meet
foreign currency obligations such as payment of any dividends declared. The
existing foreign exchange limitations under PRC law could affect the
Group's ability to obtain foreign exchange through debt financing, or to
obtain foreign exchange for capital expenditures or for distribution of
dividends on H shares and ADSs.
F-9
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES (CONT'D)
(e) Government regulation of the railway system
The PRC's national railway system is principally state-owned and operated
as a single unified system, and is subject to operational and regulatory
control by the MOR and, with respect to price setting for transport
services, by the State Council of the PRC (the "State Council"). Prior to
the Restructuring, the Company operated substantially within this system in
which the MOR exercised overall authority over transportation operations,
equipment and materials procurement, engineering and construction, revenue
and expenditure controls, as well as other aspects of railroad operations.
In connection with the Restructuring, the Company was granted special
flexibility and autonomy in areas such as obtaining freight cars,
scheduling services and determining the mix of passenger seat classes
within its own line, routing trains through bottlenecks and dispatching
empty freight cars to destinations beyond its rail line. In addition, in
February 1996, the State Council granted the Company, with effect from
April 1, 1996, increased flexibility and autonomy with respect to the
setting of passenger fares and freight tariffs. This regulatory flexibility
and autonomy allows the Company a greater degree of control over its
operations and the ability to adjust its services to meet market demand.
Further, in preparation for the offering in 1996, the Company received
legal clarification and confirmation of its asset ownership, corporate
powers and relationships with service providers and other entities in the
national railway system.
Although the operating flexibility and autonomy were granted to the Company
without a fixed time limit, there can be no assurance that these will not
be changed in the future or that other railway operators will not be
granted similar treatment. Apart from the special dispensations granted in
connection with the Restructuring, the Company, as a part of the national
railway system, is generally subject to industry regulation by the MOR and
must coordinate as required with other entities in the railway system.
PRC government regulation has a significant impact on the Group's
businesses. The price of railway transportation in particular is an
important factor and has a substantial impact on the Group's business
income. The regulatory framework with respect to the pricing of railway
services may limit the Group's flexibility to respond to market conditions,
competition or changes in the Group's cost structure.
(f) Development and competition in the transportation industry
As the industrial structure in the PRC is increasingly upgraded, advanced
technological products, such as computer components, will gradually replace
traditional industrial products as the principal goods in the Group's
freight transportation business. These changes will affect the variety,
volume and price of the Group's freight transportation and could have an
adverse effect on the Group's results of operations.
Intensifying competition from other forms of transportation may affect the
Group's profitability and growth. With the gradual implementation of the
PRC government's policies of supporting infrastructure industries, the
railway transportation sector, particularly the passenger transportation
business, is facing increasing competition from other means of surface, air
and water transportation. The Group, in particular, face significant
competition from bus services operating in the Pearl River Delta.
F-10
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES (CONT'D)
(g) Insurance
The Company does not currently maintain any insurance coverage with third
party carriers against third party liabilities. Pursuant to applicable PRC
regulations and the practice of national railway companies, the Company is
liable for (i) personal injury to or death of its passengers, in the case
of accidents and regardless of fault, for up to RMB40 per passenger and
(ii) personal injury to or death of non-passengers, for hospital and/or
funeral expenses and a payment of up to RMB40 per person, and/or property
damage to non-passengers (exclusive of damage to freight shipped by the
Company), but in each case only to the extent that the Company is at fault.
With respect to loss of or damage to baggage, parcels and freight, the
Company's customers may elect to purchase insurance administered by the MOR
for up to their declared value. Passengers who do not elect to purchase
insurance in respect of their baggage and/or parcels may nevertheless
recover up to RMB0.013 for each kilogram of damaged baggage and/or parcels.
Similarly, freight transport customers who elect not to purchase insurance
may recover up to RMB2 for each ton of damaged freight.
Consistent with what it believes to be the customary practice among railway
operators in the PRC, the Company does not maintain insurance coverage for
its property and facilities (other than for its automobiles), for business
interruption or for environmental damage arising from accidents on Company
property or relating to Company operations. As a consequence, in the event
of an accident or other event causing loss, destruction or damage to the
Company's property or facilities, causing interruption to the Company's
normal operations or causing liability for environmental damage or
clean-up, the Company will be reliant on its own resources to cover losses
and damages.
With respect to its employees, the Company does not maintain medical
insurance or disability insurance with any third party insurance carriers.
The Company has adopted internal rules to provide for medical and
disability benefits to its employees, consistent with MOR regulations and
practices and relevant regulations of the Shenzhen municipality. The
Company has entered into service agreements with the Parent Company and
Guangzhou Railway (Group) Guangshen Railway Enterprise Development Company
("GEDC"), a wholly-owned subsidiary of the Parent Company, pursuant to
which the health care facilities owned by these entities provide medical
services to the Company's employees and their families.
(h) Entry by the PRC with the WTO
Entry by the PRC with the WTO, may increase competition for the Group's
business. With the PRC's entry into the WTO, other Chinese coastal cities'
significance in trading will be enhanced. Part of the freight currently
transferred through ports in Hong Kong and Shenzhen will be shipped to
other ports in the PRC, which will adversely affect the Group's railway
freight business. In addition, as the PRC government lifts control over
foreign investments, including allowing foreign participation in railway
construction, the Company's railway monopoly position in its region may be
challenged by foreign strategic investment, and potential competitors may
arise in the Pearl River Delta.
F-11
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES (CONT'D)
(i) Ability to obtain sufficient financing
The Company may be unable to obtain sufficient financing to fund its
substantial capital requirements, which could limit its growth potential.
The Company estimates that it will require approximately RMB769,000 for
capital expenditures in 2003, mainly including the construction of its
fourth track between Guangzhou and Shenzhen, the construction of a
technical support and maintenance depot in northern Shenzhen, the purchase
of additional locomotives and trains. The Company's actual capital
requirements may be greater. The Company may not be able to obtain
sufficient funds on commercially acceptable terms. If adequate capital is
not available, the Company's planned capital expenditure and business
prospects could be adversely affected.
2. PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies adopted in preparing the financial statements
of the Group are as follows:
(a) Basis of presentation
The financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). This basis of
accounting differs in certain material respects from that used in the
preparation of the Group's statutory accounts in the PRC, which have been
prepared in accordance with generally accepted principles and relevant
financial regulations in the PRC ("PRC GAAP"). In preparing these financial
statements, appropriate restatements have been made to the Group's
statutory accounts to conform with IFRS. Differences arising from the
restatements are not incorporated in the accounting records of the Group.
The principal adjustments made to conform to IFRS include the following:
o Additional depreciation charges on fixed assets;
o Write-down of reclaimed rails to realizable value;
o Difference in the recognition policy on housing benefits to the
employees;
o Reversal of dividends declared after end of year;
o Recording of deferred tax impact according to IFRS;
o Write-off of deferred renovation expenses.
The financial statements have been prepared under the historical cost
convention except that, as disclosed in the accounting policies below,
certain fixed assets are stated at valuation less accumulated depreciation
and impairment losses.
The preparation of financial statements in conformity with IFRS requires
the use of estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Although these estimates
are based on management's best knowledge of current event and actions,
actual results ultimately may differ from those estimates.
F-12
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(a) Basis of presentation (Cont'd)
The Consolidated Financial Statements reflect certain reclassification and
additional disclosures to conform more closely to presentations customary
in filings with the Securities and Exchange Commission of the United States
of America.
Difference between IFRS and generally accepted accounting principles in the
United States of America ("US GAAP") are set forth in Note 30.
Translation of amounts from RMB into US$ for the convenience of the reader
has been made at the Noon Buying Rate on 31 December, 2002 of
US$1.00=RMB8.3 as certified for customs purposes by the Federal Reserve
Bank of New York. No representation is made that the RMB amounts could have
been, or could be, converted into US$ at that rate on 31 December, 2002.
(b) Group accounting
The consolidated financial statements include those of the Company and its
subsidiaries and also incorporate the Group's interest in associates on the
basis as set out in Note 2(c) and 2(d) below. The equity and net income
attributable to minority shareholders' interests are shown separately in
the consolidated balance sheet and consolidated income statement,
respectively.
All significant intercompany balances and transactions, including
intercompany profits and unrealised profits and losses are eliminated on
consolidation; unrealised losses are also eliminated unless cost cannot be
recovered. Consolidated financial statements are prepared using uniform
accounting policies for like transactions and other events in similar
circumstances.
(c) Subsidiaries
Subsidiaries, which are those entities in which the Group has an interest
of more than one half of the voting rights or otherwise has power to govern
the financial and operating policies are consolidated.
(d) Associates
Associates are entities over which the Group generally has between 20% and
50% of the voting rights, or over which the Group has significant
influence, but which it does not control.
Investments in associates are accounted for by the equity method of
accounting. Under this method the Company's share of the post-acquisition
profits or losses of associates is recognised in the income statement and
its share of post-acquisition movements in reserves is recognised in
reserves. The cumulative post-acquisition movements are adjusted against
the cost of the investment.
Unrealised gains on transactions between the Group and its associates are
eliminated to the extent of the Group's interest in the associates;
unrealised losses are also eliminated unless the transaction provides
evidence of an impairment of the asset transferred. When the Group's share
of losses in an associate equals or exceeds its interest in the associate,
the Group does not to recognise further losses, unless the Group has
incurred obligations or made payments on behalf of the associates.
F-13
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(e) Foreign currency transactions
The Group maintains its books and records in RMB.
Foreign currency transactions are translated into RMB using the exchange
rates prevailing at the dates of the transactions. Foreign exchange gains
and losses resulting from the settlement of such transactions and from the
translation of monetary assets and liabilities denominated in foreign
currencies, are recognized in the income statement in the period in which
they arise. Translation differences on monetary assets measured at fair
value are recognized in foreign exchange gains and losses.
The Group did not enter into any hedge contracts during any of the periods
presented. No foreign currency exchange gains or losses were capitalized
for any periods presented.
(f) Financial instruments
Financial assets and financial liabilities carried on the balance sheet
include cash and cash equivalents, temporary cash investments, trade
receivables and payables, other receivables and payables and
available-for-sale investments. The accounting policies on recognition and
measurement of these items are disclosed in the respective accounting
policies.
The Group had no derivative financial instruments in any of the years
presented.
(g) Fixed assets
Fixed assets are initially recorded at cost less accumulated depreciation
and impairment loss. Cost represents the purchase price of the asset and
other costs incurred to bring the asset into existing use.
Subsequent to the initial recognition, fixed assets are stated at cost or
valuation less accumulated depreciation and impairment losses. Independent
valuations, on a market value basis or depreciated replacement cost basis
when there is no evidence of market value for such an item, are performed
at least every five years or sooner if considered necessary by the
directors. In the intervening years, the directors review the carrying
values of the fixed assets and adjustment is made where there has been a
material change. Increases in valuation are credited to the revaluation
reserve. Decreases in valuation of fixed assets are first offset against
increases from earlier valuations in respect of the same asset and are
thereafter charged to the income statement. Any subsequent increases are
credited to the income statement up to the amount previously charged. Upon
the disposal of the fixed assets, the relevant portion of the realized
revaluation reserve of previous valuations is transferred from the
revaluation reserve to retained earnings and is shown as a movement in
reserves.
Depreciation is calculated using the straight-line method to write off the
cost or revalued amount, after taking into account the estimated residual
value of 4% to 10% of cost, of each asset over its estimated useful life.
F-14
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(g) Fixed assets (Cont'd)
The estimated useful lives are as follows:
Buildings 25 to 40 years
Leasehold improvements over the lease terms
Track, bridges and service roads 44 years
Locomotives and rolling stock 16 years
Communications and signaling systems 8 to 20 years
Other machinery and equipment 7 to 25 years
Where the carrying amount of an asset is greater than its estimated
recoverable amount, it is written down immediately to its recoverable
amount.
Gains and losses on disposals are determined by comparing proceeds with
carrying amount and are included in the income statement. When revalued
assets are sold, the amounts included in fair value and other reserves are
transferred to retained earnings.
Repairs and maintenance are charged to the income statement during the
financial period in which they are incurred. The cost of major renovations
is included in the carrying amount of the asset when it is probable that
future economic benefits in excess of the originally assessed standard of
performance of the existing asset will flow to the Group. Major renovations
are depreciated over the remaining useful life of the related asset.
(h) Construction-in-progress
Construction-in-progress represents plant and facilities, including
railroad stations and maintenance facilities under construction and
machinery pending for installation. This includes the costs of construction
and acquisition. No depreciation is provided on construction in progress
until the asset is completed and put into use.
(i) Leasehold land payments
All land in the PRC is state-owned and no individual land ownership right
exists. The Group acquired the right to use certain land for its rail line,
stations and other businesses. The premium paid for such leasehold land
payments represents pre-paid lease payments, which are amortized over the
lease terms of 36.5 to 50 years.
(j) Impairment of long lived assets
Fixed assets and other non-current assets are reviewed for impairment
losses whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is recognized
for the amount by which the carrying amount of the asset exceeds its
recoverable amount which is the higher of an asset's net selling price and
value in use. For the purposes of assessing impairment, assets are grouped
at the lowest level for which there are separately identifiable cash flows.
F-15
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(k) Available-for-sale investments
Investments intended to be held for an indefinite period of time, which may
be sold in response to needs for liquidity or changes in interest rates,
are classified as available-for sale investments; these are included in
non-current assets unless management has the express intention of holding
the investment for less than 12 months from the balance sheet date or
unless they will need to be sold to raise operating capital, in which case
they are included in current assets. All purchases and sales of
available-for-sale investments are recognized on the date that the
transaction is effective. Cost of purchase includes transaction costs.
Available-for-sale investments are not subsequently fair-valued because
they do not have quoted market prices in active markets and whose fair
values cannot be reliably measured. These investments are carried at cost,
and are subject to review for impairments.
(l) Deferred staff costs
The Group have finalized a scheme for selling staff quarters to its staff
in 2000. Under the scheme, the Group sold certain staff quarters to their
employees at preferential prices as housing benefits to the employees. The
total housing benefits, which represented the difference between the net
book value of the staff quarters sold and the proceeds collected from the
employees, are expected to benefit the Group over 15 years, which is the
estimated remaining average service lives of the employees participating in
the scheme. Upon the sales of staff quarters to the employees, the housing
benefits incurred are recorded as deferred staff costs and amortized over
the remaining average service lives of the employees participating in the
scheme.
(m) Operating leases
Leases where a significant portion of the risks and rewards of ownership
are retained by the lesser are classified as operating leases. Payments
made under operating leases are charged to the income statement on a
straight-line basis over the period of the lease.
(n) Materials and supplies
Materials and supplies consist mainly of items for repair and maintenance
of track, and are stated at weighted average cost. Materials and supplies
are expensed when used.
(o) Receivables
Receivables are carried at original invoice amount less provision made for
impairment of these receivables. A provision for impairment of receivables
is established when there is an objective evidence that the Group will not
be able to collect all amounts due according to the original terms of
receivables. The amount of the provision is the difference between the
carrying amount and the recoverable amount, being the present value of
expected cash flows, discounted at the market rate of interest for similar
borrowers.
(p) Temporary cash investments
Temporary cash investments represent short-term deposits with original
maturities ranging from three months to one year, which are held for
investment purpose and are stated at cost.
F-16
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(q) Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at cost. For the
purposes of the cash flow statement, cash and cash equivalents comprise
cash on hand, deposits held at call with banks and other financial
institutions, other short-term highly liquid investments with original
maturities of three months or less.
(r) Income tax expense
The Group provides for income tax expense on the basis of the results for
the year as adjusted for items which are not assessable or deductible for
income tax purposes. Taxation of the Group is determined in accordance with
the relevant tax rules and regulations applicable to enterprises
established/incorporated in the PRC.
Deferred income tax is provided in full, using the liability method, on
temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements.
Currently enacted tax rates are used in the determination of deferred
income tax. Deferred tax assets are recognized to the extent that it is
probable that future taxable profit will be available against which the
temporary differences can be utilized. Deferred income tax is provided on
temporary differences arising on investments in subsidiaries and
associates, except where the timing of the reversal of the temporary
difference can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future.
(s) Employee benefits
Pursuant to the PRC laws and regulations, contributions to the basic old
age insurance for the Group's local staff are to be made monthly to a
government agency based on 10% of the standard salary set by the provincial
government, of which 5% is borne by the Company or its subsidiaries and the
remainder is borne by the staff. The government agency is responsible for
the pension liabilities relating to such staff on their retirement. The
Group accounts for these contributions on an accrual basis and charges the
related contributions to income in the year to which the contributions
relate.
(t) Provisions
Provisions are recognized when the Group has a present legal or
constructive obligation as result of past events, it is probable that an
outflow of resources will be required to settle the obligation, and a
reliable estimate of the amount can be made.
(u) Revenue recognition
Provided it is probable that the economic benefits associated with a
transaction will flow to the Group and the revenues and costs, if
applicable, can be measured reliably, revenue is recognized on the
following bases:
F-17
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
2. PRINCIPAL ACCOUNTING POLICIES (CONT'D)
(u) Revenue recognition (Cont'd)
(i) Rendering of services and sales of goods
Railroad revenues are recognized when services are performed. Revenues
from other businesses include sales aboard the trains and in the
stations of food, beverages and other merchandise and revenues from
operating restaurants in major stations. Revenues from operating
restaurants are recognized when services are rendered.
Sales aboard the trains and in the stations of food, beverages and
merchandise are recognized upon delivery, when the significant risks
and rewards of ownership of these goods have been transferred to the
buyers.
Revenues are net of turnover tax.
(ii) Interest income
Interest income from bank deposits is recognized on a time proportion
basis, taking into account of the principal outstanding and the
effective rate over the period to maturity, when it is determined that
such income will accrue to the Group.
(iii) Dividend income
Dividend income is recognized when the right to receive payment is
established.
(v) Dividends
Dividends are recorded in the Group's financial statements in the period in
which they are approved by the Group's shareholders.
(w) Segments
Business segments: for management purposes the Group is organized into
railroad transportation and other business operations. The divisions are
the basis upon which the Group reports their primary segment information.
Financial information on business segments is presented in Note 3.
Intersegment transactions: segment revenues, segment expenses and segment
performance include transfers between business segments. Those transfers
are eliminated on consolidation.
3. SEGMENTAL INFORMATION
(a) Business segments
The Group conducts the majority of its business activities in railroad and
other business operations (see Note 1). These segments are determined
primarily because the senior management makes key operating decisions and
assesses performance of the segments separately. The accounting policies of
the Group's segments are the same as those described in the principal
accounting policies in Note 2. The Group evaluates performance based on
profit from operations. Segment assets consist primarily of fixed assets,
materials and supplies, receivables and operating cash, and mainly exclude
deferred tax assets and interests in associates. Segment liabilities
comprise operating liabilities and exclude taxes payable. Capital
expenditure comprises additions to fixed assets (see Note 13) and
construction-in-progress (see Note 14).
F-18
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
3. SEGMENTAL INFORMATION
(a) Business segments
An analysis by business segment is as follows:
Railroad businesses Other businesses
------------------------ ----------------------
2002 2001 2002 2001
---------- --------- --------- ---------
RMB'000 RMB'000 RMB'000 RMB'000
Revenues
- External 2,360,635 1,993,286 156,893 160,306
- Inter-segment -- -- 75,188 52,159
---------- --------- --------- ---------
2,360,635(i) 1,993,286(i) 232,081 212,465
========== ========= ========= =========
Segment result 625,343 532,657 (2,846) 21,454
Other income 1,411 12,004 5,164 948
Interest income 36,281 64,634 639 1,074
Finance costs -- -- -- --
Share of (losses) profits of associates (323) 609 -- --
Income tax expense
Minority interests
Profit attributable to shareholders
Other information
Segment assets 10,147,098 10,123,179 962,077 727,722
Deferred tax assets -- -- -- --
Interests in associates 139,972 140,252 870 870
Total assets
Segment liabilities 678,303 495,934 251,719 299,360
Taxes payable -- -- -- --
Total liabilities
Capital expenditure
- Accrual basis 526,700 837,117 8,330 3,392
- Cash basis 545,007 548,116 8,330 3,392
Non-cash expenses - Depreciation 335,508 342,534 2,289 3,415
- Amortization of leasehold
land payments 15,131 15,453 -- --
- Provision for doubtful
accounts 4,257 29,038 341 582
- Amortization of deferred
staff costs 15,092 15,721 -- --
Unallocated Consolidation Total
--------------------- --------------------- ------------------------
2002 2001 2002 2001 2002 2001
-------- --------- --------- --------- ---------- ----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Revenues
- External -- -- -- -- 2,517,528 2,153,592
- Inter-segment -- -- (75,188) (52,159) - -
-------- --------- --------- --------- ---------- ----------
-- -- (75,188) (52,159) 2,517,528 2,153,592
======== ========= ========= ========= ========== ==========
Segment result -- -- -- -- 622,497 554,111
Other income -- -- -- -- 6,575 12,952
Interest income -- -- -- -- 36,920 65,708
Finance costs (4,208) (2,087) -- -- (4,208) (2,087)
Share of (losses) profits of associates -- -- -- -- (323) 609
Income tax expense (104,265) (99,297)
Minority interests (113) 1,499
---------- ----------
Profit attributable to shareholders 557,083 533,495
========== ==========
Other information
Segment assets -- -- -- -- 11,109,175 10,850,901
Deferred tax assets 7,577 5,193 -- -- 7,577 5,193
Interests in associates -- -- -- -- 140,842 141,122
---------- ----------
Total assets 11,257,594 10,997,216
========== ==========
Segment liabilities -- -- -- -- 930,022 795,294
Taxes payable 71,844 65,682 -- -- 71,844 65,682
---------- ----------
Total liabilities 1,001,866 860,976
========== ==========
Capital expenditure
- Accrual basis -- -- -- -- 535,030 840,509
========== ==========
- Cash basis -- -- -- -- 553,337 551,508
========== ==========
Non-cash expenses - Depreciation -- -- -- -- 337,797 345,949
========== ==========
- Amortization of leasehold
land payments -- -- -- -- 15,131 15,453
========== ==========
- Provision for doubtful
accounts -- -- -- -- 4,598 29,620
========== ==========
- Amortization of deferred
staff costs -- -- -- -- 15,092 15,721
========== ==========
For the years ended 31 December, 2000, 2001 and 2002, no revenues from a single
customer counted for 10 percent or more of the Group's total revenues
F-19
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
3. SEGMENTAL INFORMATION (CONT'D)
(a) Business segments (Cont'd)
(i) Revenues from railroad businesses include:
Year ended 31 December,
-----------------------------------------
2000 2001 2002
--------- --------- ---------
RMB RMB RMB
Passenger 1,237,289 1,426,010 1,846,599
Freight 549,694 567,276 514,036
--------- --------- ---------
Total 1,786,983 1,993,286 2,360,635
========= ========= =========
(b) Geographic segments
For the year ended 31 December, 2002, all of the Group's business
operations are conducted in the PRC.
4. GENERAL AND ADMINISTRATIVE EXPENSES
Year ended 31 December,
----------------------------------------
2000 2001 2002
------- ------- -------
RMB RMB RMB
Wages and bonus 19,666 15,026 16,226
Retirement and employee benefits 47,235 50,553 49,722
Utility expenses 3,017 361 195
Selling expenses 8,212 5,397 -
Office expenses 10,692 14,394 15,538
Construction duty, land use fees and other duties 2,944 3,664 3,761
Depreciation 3,284 3,392 1,625
Amortization of deferred staff costs 14,461 15,721 15,092
Provision for doubtful accounts 17,030 29,620 4,598
Others 47,338 41,956 52,180
------- ------- -------
173,879 180,084 158,937
======= ======= =======
Attributable to:
Railroad businesses 131,885 150,162 123,800
Other businesses 41,994 29,922 35,137
------- ------- -------
173,879 180,084 158,937
======= ======= =======
F-20
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
5. OTHER (EXPENSES) INCOME
Year ended 31 December,
-----------------------------------
2000 2001 2002
------- ------- -------
RMB RMB RMB
Exchange (gain) losses (1,691) (1,069) 799
Others (3,846) 14,021 5,776
------- ------- -------
(5,537) 12,952 6,575
======= ======= =======
6. INTEREST INCOME, NET
Year ended 31 December,
-----------------------------------
2000 2001 2002
------- ------- -------
RMB RMB RMB
Finance costs (3,887) (2,087) (4,208)
Interest income 80,453 65,708 36,920
------- ------- -------
76,566 63,621 32,712
======= ======= =======
7. INCOME TAX EXPENSE
Enterprises established in Shenzhen Special Economic Zone are subject to income
tax at a reduced rate of 15% as compared with the standard rate for PRC
companies of 33%. The Shenzhen Municipal Tax Bureau confirmed in 1996 that the
Company is subject to a reduced income tax rate of 15% starting from the same
year. The income tax rate of the Company for the year ended 31 December, 2002 is
15%.
According to the relevant income tax laws, other businesses of the Group are
subject to income tax rates of 15% or 33%, depending mainly on their places of
incorporation/establishment. Furthermore, certain subsidiaries engaged in other
businesses are Sino-foreign joint ventures which are entitled to full exemption
from the PRC income tax for two years and a 50% reduction in the next three
years starting from the first profit-making year, after offsetting available tax
losses carried forward from prior years. There is no material effect on the
consolidated financial statements of the Company arising from these tax
holidays.
Save as described above, the directors of the Company are not being informed of
any change in the enterprise income tax treatment applicable to the Group.
Details of taxation charged to the consolidated income statement during the year
were as follows:
Year ended 31 December,
-------------------------------------
2000 2001 2002
-------- -------- --------
RMB RMB RMB
Provision for PRC income tax 94,347 106,823 106,649
Deferred tax loss (income) resulting from provision for
doubtful accounts 5,033 (4,175) (1,173)
Deferred tax income resulting from loss on the disposals of
fixed assets -- (3,351) (1,211)
-------- -------- --------
99,380 99,297 104,265
======== ======== ========
F-21
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
7. INCOME TAX EXPENSE (CONT'D)
Reconciliation of the statutory tax rate to effective tax rate is as follows:
2000 2001 2002
---------- ---------- ----------
Percentage Percentage Percentage
Weighted average statutory tax rate 15.0% 15.0% 15.0%
Tax effect of expenses that are not deductible in determining
taxable profit:
- Provision for doubtful accounts 1.2% -- --
- Amortisation of deferred staff costs 0.5% 0.4% 0.3%
Effect of different tax rates for certain subsidiaries and
others 0.1% 0.4% 0.4%
----- ----- -----
Effective income tax rate 16.8% 15.8% 15.7%
===== ===== =====
8. EARNINGS PER SHARE AND PER EQUIVALENT ADS
The calculation of basic earnings per share and per equivalent ADS were based on
the profit attributable to shareholders for the year attributable to ordinary
shareholders of RMB557,083 (2001: RMB533,495), divided by the weighted average
number of ordinary shares and equivalent ADS outstanding during the year of
4,335,550,000 and 86,711,000 respectively (2001: 4,335,550,000 and 86,711,000
respectively). No diluted earnings per share and per equivalent ADS were
presented as there were no dilutive potential ordinary shares as of year end.
9. DIVIDENDS
In 2002, the directors have recommended and declared a final dividend of RMB0.10
(2001: RMB0.10) per share in respect of the financial year ended 31 December,
2002, totaling RMB433,555 (2001: RMB433,555).
10. TEMPORARY CASH INVESTMENTS
31 December,
------------------------
Note 2001 2002
---- --------- -------
RMB RMB
Time deposits with maturities over three months in banks (a) 1,126,450 399,339
Time deposits with maturities over three months in the
MOR's Railway Deposits-taking Center (b) 250,152 168,000
--------- -------
1,376,602 567,339
========= =======
F-22
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
10. TEMPORARY CASH INVESTMENTS (CONT'D)
(a) Time deposits with maturities over three months in banks consist of
short-term deposits denominated in RMB, Hong Kong dollars ("HK$") and
United States dollars ("USD") with original maturities ranging from six
months to one year, placed with banks in the PRC. The annual interest rates
of RMB deposits was 1.98% in 2002 (2001: 2.16%), the annual interest rate
of HK$ deposit was 1.13% in 2002 (2001: from 1.25% to 3.91%) and the annual
interest rates of USD deposits were LIBOR plus a floating rate ranged from
-0.2% to 0.1% (2001: from -0.2% to 0.1%). Total interest earned from such
deposits amounted to approximately RMB15,121 for the year (2001:
approximately RMB46,875).
(b) Time deposits with maturities over three months in the MOR's Railroad
Deposit-taking Center consist of short-term deposits denominated in RMB and
USD with original maturities ranging from six months to one year. The
annual interest rates of RMB deposits ranged from 1.98% in 2002 (2001: from
2.25% to 5.00%) and the annual interest rates of USD deposits were LIBOR
plus a floating rate ranged from -0.2% to 0.1% (2001: from -0.2% to 0.1%).
Total interest earned from such deposits amounted to approximately RMB3,239
(2001: approximately RMB28,792) for the year (see Note 24).
11. TRADE RECEIVABLES
31 December,
---------------------
2001 2002
------- -------
RMB RMB
Trade receivables 91,480 67,416
Less: Provision for doubtful accounts (24,040) (15,959)
------- -------
67,440 51,457
======= =======
Concentrations of credit risk with respect to trade receivables are limited due
to the Group's large number of customers, who are widely dispersed. Due to this
factor, management believes that no additional credit risk beyond amounts
provided for collection losses is inherent in the Group's trade receivables.
Movements of provision for doubtful accounts:
Year ended 31 December,
-----------------------
2001 2002
------ ------
RMB RMB
At beginning of year 8,633 24,040
Addition of provision during the year 15,407 -
Utilization during the year - (8,081)
------ ------
At end of year 24,040 15,959
====== ======
F-23
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
12. PREPAYMENTS AND OTHER RECEIVABLES, NET
31 December,
-----------------------
2001 2002
-------- --------
RMB RMB
Other receivables 125,686 149,385
Less: Provision for doubtful accounts (34,008) (39,898)
-------- --------
Other receivables, net 91,678 109,487
Prepayments 215,725 131,737
-------- --------
307,403 241,224
======== ========
Movements of provision for doubtful accounts:
Year ended 31 December,
-----------------------
2001 2002
-------- --------
RMB RMB
At beginning of year 19,144 34,008
Addition of provision during the year 14,864 5,890
-------- --------
At end of year 34,008 39,898
======== ========
As of 31 December, 2002, the Company had fixed deposit with the principal amount
of approximately RMB31 million in Zeng Cheng City Li Cheng Credit Cooperative
("Li Cheng"). The Company had not been able to recover the principal from Li
Cheng upon the expiry of the fixed deposit term . In March 1999, the Company
instituted legal proceedings against Li Cheng to recover the deposit and the
related interest. According to the court verdict dated 12 October, 1999, Li
Cheng was required to repay the deposit principal and the related interest to
the Company. As Li Cheng failed to execute the court ruling, the Company further
applied to the court for compulsory enforcement of the court order. In July
2000, Li Cheng filed a petition to the court for winding up. On 9 November,
2000, the court ordered the suspension of execution of the court ruling dated 12
October, 1999, while Li Cheng was undergoing a winding-up. On 23 November, 2000,
the Company applied to the Guangdong Provincial Government for allocation of
special funds by the government to Li Cheng for repayment of the Company's
deposit principal. The provincial government accepted the petition and requested
the municipal government to follow up on the case. As of the date of this
report, the fixed deposit has not yet been collected. Accordingly, in current
year, the Company reclassified such amount from temporary cash investments to
other receivables and accounted for provision for doubtful accounts pursuant to
management's estimates.
F-24
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
13. FIXED ASSETS, NET
Group
---------------------------------------------------------------------------------------------
Track, Locomotives Communications Other
bridges and and and machinery
Lease hold service rolling signaling and
Buildings improvement roads stock systems equipment Total
---------- ----------- ----------- ----------- -------------- ---------- ----------
RMB RMB RMB RMB RMB RMB RMB
Cost/valuation
As of 1 January, 2001 2,108,498 -- 4,102,845 849,462 510,683 1,426,443 8,997,931
Additions 1,631 38,500 7,591 56,048 8,492 99,140 211,402
Transfer from
construction-in-progress 152,761 -- 52,068 200,475 10,106 9,157 424,567
Disposals (196,345) -- (92,488) (101,774) (38,557) (11,966) (441,130)
---------- ---------- ---------- ---------- ---------- ---------- ----------
As of 31 December, 2001 2,066,545 38,500 4,070,016 1,004,211 490,724 1,522,774 9,192,770
Additions 25,985 -- 22,871 23,620 1,475 78,161 152,112
Transfer from
construction-in-progress 40,852 -- 43,791 870 46,372 14,401 146,286
Reclassification (124,057) -- 122,752 -- (42,484) 43,789 --
Disposals (68,169) -- (13,884) (2,496) (198,981) (73,413) (356,943)
---------- ---------- ---------- ---------- ---------- ---------- ----------
As of 31 December, 2002 1,941,156 38,500 4,245,546 1,026,205 297,106 1,585,712 9,134,225
---------- ---------- ---------- ---------- ---------- ---------- ----------
Representing:
At cost 27,694 38,500 40,255 870 46,456 55,586 209,361
At 2002 professional valuation 1,913,462 -- 4,205,291 1,025,335 250,650 1,530,126 8,924,864
---------- ---------- ---------- ---------- ---------- ---------- ----------
1,941,156 38,500 4,245,546 1,026,205 297,106 1,585,712 9,134,225
---------- ---------- ---------- ---------- ---------- ---------- ----------
Accumulated depreciation
As of 1 January, 2001 285,600 -- 852,322 215,657 250,614 318,831 1,923,024
Charges for the year 61,043 5,775 91,185 53,905 50,304 83,737 345,949
Disposals (1,214) -- (11,447) (56,637) (34,336) (3,609) (107,243)
---------- ---------- ---------- ---------- ---------- ---------- ----------
As of 31 December, 2001 345,429 5,775 932,060 212,925 266,582 398,959 2,161,730
Charges for the year 58,739 7,700 92,400 60,723 23,962 94,273 337,797
Reclassification (22,652) -- 18,404 -- (4,256) 8,504 --
Disposals (5,324) -- (5,311) (2,496) (107,891) (42,560) (163,582)
---------- ---------- ---------- ---------- ---------- ---------- ----------
As of 31 December, 2002 376,192 13,475 1,037,553 271,152 178,397 459,176 2,335,945
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net book value
At end of year 1,564,964 25,025 3,207,993 755,053 118,709 1,126,536 6,798,280
========== ========== ========== ========== ========== ========== ==========
At beginning of year 1,721,116 32,725 3,137,956 791,286 224,142 1,123,815 7,031,040
========== ========== ========== ========== ========== ========== ==========
Had the fixed assets been carried at cost less accumulated depreciation, the
carrying amounts at year end would have been:
Cost 1,102,617 38,500 3,466,945 1,002,484 266,179 1,470,261 7,346,986
Accumulated depreciation (192,666) (13,475) (677,572) (229,672) (160,458) (407,152) (1,680,995)
---------- ---------- ---------- ---------- ---------- ---------- ----------
909,951 25,025 2,789,373 772,812 105,721 1,063,109 5,665,991
========== ========== ========== ========== ========== ========== ==========
On 6 March, 1996, the fixed assets of the Group were revalued by Vigers Hong
Kong Limited (the "Valuer"), a qualified independent valuer in Hong Kong, using
a replacement cost approach and open market value approach. The replacement cost
approach considers the cost to replace in new condition the assets appraised for
similar assets, and includes purchase price, delivery charge and installation
cost. The purchase price is based on the open market value. The Valuer assumed
that the assets will be used for the purposes for which they are presently used
and did not consider alternative uses. The revaluation surplus of fixed assets
amounting to approximately RMB1,492,185 was recorded by the Group as of 6 March,
1996, and depreciation on the increment to fixed assets commenced on that date.
Upon the Restructuring, the revaluation surplus was converted to shares allotted
to the Parent Company.
On 30 September 2002, the fixed assets were revalued by Pan-China (Schinda)
Certified Public Accountants, a qualified independent valuer registered in the
PRC, on a replacement cost approach and open market value approach, where
applicable. These fixed assets were stated at their revalued amounts in the
financial statements as of 30 September, 2002.
The directors of the Company are of the opinion that the carrying values of
fixed assets as of 31 December, 2002 approximated to their fair values.
F-25
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
14. CONSTRUCTION-IN-PROGRESS
31 December,
-----------------------
2001 2002
-------- --------
RMB RMB
At beginning of year 369,285 446,399
Additions 629,107 382,918
Disposals (127,426) (10,204)
Transfer to fixed assets (424,567) (146,286)
-------- --------
At end of year 446,399 672,827
======== ========
As of 31 December, 2002, there was no interest capitalised in the
construction-in-progress as the Group had no bank borrowings.
Disposals in 2002 mainly represented injection in available-for-sale investments
(see Note 17). Disposals in 2001 mainly represented disposals of staff quarters.
15. LEASEHOLD LAND PAYMENTS
Year ended 31 December,
-----------------------
2001 2002
-------- --------
RMB RMB
Cost
At beginning of year 769,724 762,087
Additions 6,327 --
Disposals (13,964) (2,000)
-------- --------
At end of year 762,087 760,087
-------- --------
Accumulated amortization
At beginning of year 74,493 88,341
Charges for the year 15,453 15,131
Disposals (1,605) (383)
-------- --------
At end of year 88,341 103,089
-------- --------
Net book value
At end of year 673,746 656,998
======== ========
At beginning of year 695,231 673,746
======== ========
F-26
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
16. INTERESTS IN ASSOCIATES
31 December,
-----------------------
2001 2002
-------- --------
RMB'000 RMB'000
Share of net assets, beginning of year 116,868 117,477
Addition -- 19,420
Share of profits (losses) before tax 609 (323)
-------- --------
Share of net assets, end of year 117,477 136,574
Due from associates 88,787 48,095
Due to associates (2,742) (40)
-------- --------
203,522 184,629
Less: Provision for impairment in value (29,689) (29,689)
Provision for doubtful accounts (32,711) (14,098)
-------- --------
141,122 140,842
======== ========
The amounts due from/to associates are unsecured, interest free and had no fixed
repayment dates. The provision for impairment in value and provision for
doubtful accounts were provided for Zengcheng Lihua Stock Company Limited
("Zengcheng Lihua") as Zengcheng Lihua is in financial difficulty.
Movements of provision for impairment in value and for doubtful accounts are as
follows:
Year ended 31 December,
-----------------------
2001 2002
------- -------
RMB RMB
Beginning of year 63,051 62,400
Utilization during the year (651) (18,613)
------- -------
End of year 62,400 43,787
======= =======
As of 31 December, 2002, the Company had direct or indirect interests in the
following companies which were incorporated/established and are operating in the
PRC:
Percentage
of equity
interest
Date of attributable
incorporation to the Paid-up
Name of the entity / establishment Company capital Principal activities
-------------------------------------- ---------------- ------------ -------------- ----------------------
Directly held by the Company
Guangzhou Tiecheng Enterprise 2 May, 1995 49% RMB245,000,000 Properties management
Company Limited and trading of
merchandise
Guangzhou Tielian Economy 27 December, 1994 34% RMB1,000,000 Warehousing and
Development Company Limited freight transport
agency
F-27
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
16. INTERESTS IN ASSOCIATES (CONT'D)
Percentage
of equity
interest
Date of attributable
incorporation to the Paid-up
Name of the entity / establishment Company capital Principal activities
-------------------------------------- ---------------- ------------ -------------- ----------------------
Zengcheng Lihua Stock Company 30 July, 1992 27% RMB100,000,000 Real estate,
Limited warehousing, cargo
loading and unloading
Indirectly held by the Company
Guangzhou Dongqun Advertising 6 March, 1996 40% RMB500,000 Design and production
Company Limited of advertisements
Guangzhou Huangpu Yuehua Freight 20 July, 1990 33.3% RMB6,610,000 Cargo loading and
Transportation Joint Venture unloading,
Company Limited warehousing, freight
transport agency
17. AVAILABLE-FOR-SALE INVESTMENTS
31 December,
--------------------
Name of the investee company 2001 2002
---------------------------- ------- -------
RMB'000 RMB'000
China Railcom Company Limited ("China Railcom")* -- 120,587
Shenzhen Innovation Technology Investment
Company Limited 30,000 30,000
China Railway Express Company Limited -- 13,608
Shenzhen Huatie Enterprise Company Limited 2,000 2,000
Zhongtie Information Company Limited -- 500
------- -------
32,000 166,695
======= =======
All the above investees are unlisted companies and stated at cost. The Company's
share of equity interests in each of the respective companies is not more than
10%. No quoted market prices are available for the above unlisted companies as
of year end.
* In 2002, the Company invested in China Railcom by injecting certain
communication and signaling systems and related constructions in progress
with their respective carrying value of approximately RMB120,587. China
Railcom has confirmed in writing that the Group is entitled to the 0.85%
equity interest in China Railcom as of 31 December, 2002. The relevant
legal registration procedures are in progress.
F-28
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
18. DEFERRED TAX ASSETS
31 December,
----------------
2001 2002
----- -----
RMB RMB
Deferred tax assets:
- Provision for doubtful accounts 1,842 3,015
- Losses on disposals of fixed assets 3,351 4,562
----- -----
5,193 7,577
===== =====
The movements of deferred taxation during the years are as follows:
Year ended 31 December,
-----------------------
2001 2002
------ ------
RMB RMB
At beginning of year (2,333) 5,193
Credit to consolidated profit during the years 7,526 2,384
------ ------
At end of year 5,193 7,577
====== ======
19. DEFERRED STAFF COSTS
31 December,
-----------------------
2001 2002
-------- --------
RMB'000 RMB'000
Cost, at beginning and end of year 226,369 226,369
-------- --------
Accumulated amortization
At beginning of year (14,461) (30,182)
Charges for the year (15,721) (15,092)
-------- --------
At end of year (30,182) (45,274)
-------- --------
Net book amount
At end of year 196,187 181,095
======== ========
At beginning of year 211,908 196,187
======== ========
F-29
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
20. ACCRUED EXPENSES AND OTHER PAYABLES
31 December,
--------------------
2001 2002
------- -------
RMB RMB
Advances from customers 173,533 143,388
Accrued expenses 98,349 79,790
Salary and welfare payables 42,657 21,260
Taxes payables 65,682 71,844
Other payables 139,679 213,515
------- -------
519,900 529,797
======= =======
Other payables mainly represented various payables and deposits for daily
operation of business.
21. SHARE CAPITAL
As of 31 December, 2002, the authorised capital of the Company consisted of
ordinary shares of par value RMB1.00 per share:
Percentage
Number of Nominal of capital
shares value stock
--------- --------- ----------
'000 RMB
Authorised, issued and fully paid:
State-owned Domestic Shares 2,904,250 2,904,250 67%
H Shares 1,431,300 1,431,300 33%
--------- --------- ---------
4,335,550 4,335,550 100%
========= ========= =========
22. DISTRIBUTION OF INCOME
According to the articles of association of the Company, when distributing net
profit of each year, the Company shall set aside 10% of its net profit after tax
based on the Company's local statutory accounts for the statutory surplus
reserve (except where the reserve has reached 50% of the Company's registered
share capital) and 5% to 10% for the statutory public welfare fund at a
percentage determined by the directors. The Company may make appropriation from
its net profit to the discretionary surplus reserve provided it is approved by a
resolution of a shareholders' general meeting. These reserves cannot be used for
purposes other than those for which they are created and are not distributable
as cash dividends without prior approval from a shareholders' general meeting
under certain conditions.
When the statutory surplus reserve is not sufficient to make good for any losses
of the Company from previous years, current year net profit shall be used to
make good the losses before allocations are set aside for the statutory surplus
reserve or the statutory public welfare fund.
The statutory public welfare fund is used to build or acquire capital items,
such as dormitories and other facilities for the Company's employees and cannot
be used to pay for welfare expenses. Title of these capital items will remain
with the Company.
F-30
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
22. DISTRIBUTION OF INCOME (CONT'D)
The statutory surplus reserve, the discretionary surplus reserve and the share
premium may be converted into capital stock provided it is approved by a
resolution at a shareholders' general meeting and the balance of the statutory
surplus reserve does not fall below 25% of the registered capital stock. The
Company may either distribute new shares in proportion to the number of shares
held by shareholders, or increase the par value of each share.
In accordance with the articles of association of the Company, dividends are
determined based on the least of income determined in accordance with (a) PRC
GAAP, (b) IFRS and (c) the accounting standards of the countries in which its
shares are listed. As the statutory accounts have been prepared in accordance
with PRC GAAP, the retained earnings as reported in the statutory accounts may
be different from the amount reported in the accompanying consolidated income
statement.
As of 31 December, 2002, the reserve of the Company available for distribution
was approximately RMB667,416 (2001: approximately RMB621,595).
23. RETIREMENT BENEFITS
All the full-time staff of the Group are covered by a defined-contribution
pension scheme. Pursuant to a circular dated 24 October, 1995 issued by the
Parent Company, the Company is required to pay to the Parent Company an amount
equivalent to 19% of the salary and certain amount of bonus of the staff for
pension benefits, and the Parent Company is responsible for the ultimate pension
liability to the staff. Starting from December 2000, the percentage borne by the
Company changed to 18% pursuant to another circular dated 21 December, 2000
issued by the Parent Company.
31 December,
----------------
2001 2002
----- -----
RMB RMB
Payable for pension obligations 9,002 --
===== =====
F-31
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
24. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability, directly
or indirectly, to control the other party or exercise significant influence
over the other party in making financial and operating decisions. Parties
are also considered to be related if they are subject to common control or
common significant influence.
(a) During the year, the Group had the following material transactions with
related parties:
Recurring transactions
A significant portion of transactions undertaken by the Group during the
year was with related PRC state-owned enterprises and on such terms as
determined by the relevant PRC authorities and stipulated in the related
agreements entered into with these parties. The following is a summary of
significant recurring transactions carried out in the ordinary course of
business by the Group with its related parties during the year:
Year ended 31 December,
---------------------------------
2000 2001 2002
------- ------- -------
RMB RMB RMB
Lease of locomotives and related services from Yang Cheng Railway Company,
a subsidiary of the Parent Company(i) (iii) 132,576 70,345 42,047
Provision of trains and related services from Guangmeishan Railway
Company Limited, a subsidiary of the Parent Company (iii) 23,839 5,205 4,864
Provision of trains and related services by Sanmao Railway Company Limited,
an associate of the Parent Company (iii) 3,546 -- --
Provision of trains and related services by Changsha Railway Company,
a subsidiary of the Parent Company (iii) 5,336 -- --
Provision of trains and related services by Huaihua Railway Company,
a subsidiary of the Parent Company (iii) 3,317 -- --
Purchases of materials and supplies from Guangzhou
Railway Material Supply Company, a subsidiary of
the Parent Company 22,846 36,544 33,074
F-32
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
24. RELATED PARTY TRANSACTIONS (CONT'D)
Year ended 31 December,
---------------------------------
2000 2001 2002
------- ------- -------
RMB RMB RMB
Social services (employee housing, health care, educational and public
security services and other ancillary services) provided by the Parent
Company and related parties (including Guangzhou Railway (Group)
Guangshen Railway Enterprise Development Company) 58,300 56,800 66,744
Operating lease rentals paid to the MOR 50,435 52,296 57,298
Provision of trains and related service through MOR (iii) -- 66,475 211,667
Provision of trains usage and related services from Guangzhou Railway
(Group) Passenger Transportation Company, a subsidiary of the
Parent Company -- 7,844 6,681
Interest received from the Parent Company (ii) 447 -- --
Interest expenses paid to the Parent Company (ii) 3,886 1,178 2,443
Interest received from the MOR's Railroad
Deposit-taking Centre (see Note 10(b) and 24(b)) 25,792 11,887 3,239
Interest received from Pingnan Railway Company
Limited, an associate of the Parent Company (ii) 1,712 1,866 806
Interest received from Guangmeishan Railway Company
Limited (ii) 833 1,291 1,884
F-33
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
24. RELATED PARTY TRANSACTIONS (CONT'D)
(i) The lease agreement with Yang Cheng Railway Company was revised on
March 6, 1996 and provides for a 10-year lease period starting from
1996. The lease with MOR is renewable annually and is based on the
uniform rate set by MOR and is renewable annually.
(ii) The interest was resulted from the long-distance transportation
services, which was calculated based on the average balances due
from/to related parties on a quarterly basis, at the prevailing
interest rates of six-month bank loans.
(iii) Pursuant to the Notice "Tiezhengfa 2000 No. 116" issued by the MOR,
starting from January 1, 2001, settlement method regarding provision
of trains and related services for long-distance passenger
transportation was changed. Settlements previously made with certain
subsidiaries of the Parent are now performed through MOR's Settlement
Centre. The Company's directors are of the opinion that the change in
settlement method does not have material impact on the Group' results.
(b) As of 31 December, 2002, the Group had the following material balances with
related parties:
31 December,
----------------------
2001 2002
------- --------
RMB RMB
Temporary cash investments in the MOR's Railroad
Deposit-taking Center (see Note 10(b)) 250,152 168,000
Bank deposits in the MOR's railroad Deposit-taking
Center 38,767 206,452
Due from Parent Company 29,499 39,374
Due from related parties 276,013 267,885
Due to related parties (58,650) (158,199)
As of 31 December, 2002, the balances with the MOR, the Parent Company and
related parties are unsecured, non-interest bearing and repayable on
demand, except for those disclosed in Notes 10(b), 24(a) and bank deposits
in MOR's railroad Deposit-taking centre. These balances resulted from
transactions carried out by the Group with related parties in the ordinary
course of business.
F-34
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
25. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 December,
---------------------------------
2000 2001 2002
------- ------- -------
RMB RMB RMB
Non-cash investment transaction
- Investment in China Railcom (see Note 17) -- -- 120,587
------- ------- -------
-- -- 120,587
======= ======= =======
26. FINANCIAL INSTRUMENTS
The carrying amounts of the cash and cash equivalents, temporary cash
investments and accounts receivable and payables of the Group approximate
their fair values because of the short maturity of those instruments. Cash
and cash equivalents and temporary cash investments denominated in foreign
currencies have been translated at the applicable market exchange rates
prevailing at the balance sheet date. The Company has not had and does not
believe it will have any difficulty in exchanging its foreign currency cash
and cash equivalents for RMB.
As of 31 December, 2002, cash and cash equivalents and temporary cash
investments were mainly maintained with commercial banks in the PRC and the
MOR's Railroad Deposit-taking Centre.
As of 31 December, 2002, balances denominated in USD and HK$ have been
translated into RMB at the applicable market exchange rates as of that
date.
27. CONCENTRATION OF RISKS
(a) Credit risk
The carrying amount of cash and cash equivalents, accounts receivable and
other receivables, and due from related parties and other current assets
except for prepayments and deferred tax assets , represent the Group's
maximum exposure to credit risk in relation to financial assets.
The majority of the Group's accounts receivable relate to the rendering of
services or sales of products to third party customers. The Group perform
ongoing credit evaluations of their customers' financial condition and
generally do not require collateral on accounts receivable. The Group
maintain a provision for doubtful accounts and actual losses have been
within management's expectation.
No other financial assets carry a significant exposure to credit risk.
(b) Interest rate risk
The directors of the Group believe that the exposure to interest rate risk
of financial assets and liabilities as of 31 December, 2002 was minimum
since their deviation from their respective fair values was not
significant.
F-35
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
27. CONCENTRATION OF RISKS (CONT'D)
(c) Currency risk
Substantially all of the revenue-generating operations of the Group are
transacted in Renminbi, which is not freely convertible into foreign
currencies. On 1 January, 1994, the Mainland China government abolished the
dual rate system and introduced single rate of exchange as quoted by the
People's Bank of China. However, the unification of the exchange rate does
not imply free convertibility of Renminbi into foreign currencies. All
foreign exchange transactions continue to take place either through the
People's Bank of China or other banks authorised to buy and sell foreign
currencies at the exchange rates quoted by the People's Bank of China.
Approval of foreign currency payments by the People's Bank of China or
other institution requires submitting a payment application form together
with suppliers' invoices, shipping documents and signed contracts.
28. COMMITMENTS
(a) Capital commitments
As of 31 December, 2002, the Group had the following capital commitments:
31 December,
--------------------
2001 2002
------- -------
RMB RMB
Authorised and contracted for 15,640 10,158
======= =======
(b) Operating lease commitments
Total future minimum lease payments under non-cancelable operating leases
were as follows:
31 December,
--------------------
2001 2002
------- -------
RMB RMB
Machinery and equipment
- not more than one year -- 108,000
- more than one year but not more than two years 108,000 108,000
- more than two years but not more than three years 108,000 108,000
- more than three years but not more than four years 108,000 75,375
- more than four years but not more than five years 75,375 --
------- -------
399,375 399,375
======= =======
F-36
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
29. CONTINGENCY
As of 31 December, 2002, the Company's investment in an associated company,
Guangzhou Tiecheng Enterprise Company Limited ("Tiecheng"), amounted to
approximately RMB140,000. In 1996, Tiecheng entered into an agreement with a
Hong Kong incorporated company to establish Guangzhou Guantian Real Estate
Company("Guangzhou Guantian"), a sino-foreign contractual joint venture to
develop certain properties near a railway station operated by the Group.
On 27 October, 2000, Guangzhou Guantian together with Guangzhou Guanhua Real
Estate Company Limited ("Guangzhou Guanhua" ) and Guangzhou Guanyi Real Estate
Company Limited ("Guangzhou Guanyi") agreed to act as joint guarantors (the
"Guarantors") of certain payables of Guangdong Guancheng Real Estate Company
Limited ("Guangdong Guancheng") to an independent third party.
Guangzhou Guantian, Guangzhou Guanhua, Guangzhou Guanyi and Guangdong Guancheng
were related companies with a common chairman. As Guangdong Guancheng failed to
repay the payables, according to a court verdict on 4 Novermeber, 2001,
Guangzhou Guantian, Guangzhou Guanhua and Guangzhou Guanyi were liable to the
independent third party to recover an amount of approximately RMB257,000 plus
interest from Guangdong Guancheng.
As stated above, if Guangzhou Guantian is held responsible for the guarantee,
the Group may need to provide for impairment on its interests in Tiecheng.
Having consulted an independent lawyer, the directors are of the opinion that
the guarantee arrangement should be invalid according to the relevant PRC rules
and regulations. Tiecheng is now in the process to apply to the court for
discharging the obligation of Guangzhou Guantian in relation to the guarantee.
Accordingly, the directors consider that as of the date of this report, the
chance of Guangzhou Guantian to settle the above claim is remote and no
provision for impairment on the interests in Tiecheng was made in the accounts.
30. DIFFERENCE BETWEEN IFRS AND US GAAP
The accompanying financial statements conform to IFRS which differ in certain
respects from those prepared under Generally Accepted Accounting Principles in
the United States of America ("US GAAP"). A major difference between IFRS and US
GAAP, which has a significant effect on consolidated profit attributable to
shareholders and consolidated net assets is set out below:
Revaluation of fixed assets
As stated in Note 13, the Group revalued their fixed assets on March 6, 1996.
The revaluation surplus of fixed assets amounting to approximately RMB1,492,185
was recorded by the Group on that date. The revaluation as of September 30, 2002
did not result in a material difference from the carrying amounts and no
revaluation surplus or deficit was recorded for the year ended 31 December,
2002.
Under IFRS, revaluation of fixed assets is permitted and depreciation is based
on the revalued amount. Additional depreciation arising from the revaluation
surplus was approximately RMB48,422 for the year ended 31 December, 2002 (2001:
approximately RMB48,422).
F-37
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
30. DIFFERENCE BETWEEN IFRS AND US GAAP (CONT'D)
Under US GAAP, fixed assets are required to be stated at original cost. Hence,
no additional depreciation from revaluation will be recognized under US GAAP.
However, a deferred tax asset related to the revaluation surplus amounting to
approximately RMB223,828 was created under US GAAP with a corresponding increase
in equity since the revaluation resulted in a higher tax base which will be
realized through additional depreciation for PRC tax purposes.
Effects on the consolidated profit attributable to shareholders of significant
differences between IFRS and US GAAP are summarized below:
Year ended 31 December,
----------------------------------------------
2000 2001 2002 2002
------- ------- ------- -------
RMB RMB RMB US$
Consolidated profit attributable to
shareholders under IFRS 492,089 533,495 557,083 67,118
US GAAP adjustments:
Reversal of additional depreciation charges
arising from the revaluation surplus on
fixed assets 48,422 48,422 48,422 5,834
Effect of US GAAP adjustment on taxation (7,263) (7,263) (7,263) (875)
------- ------- ------- -------
Consolidated profit attributable to
shareholders under US GAAP 533,248 574,654 598,242 72,077
======= ======= ======= =======
Earnings per share under US GAAP RMB0.12 RMB0.13 RMB0.14 USD0.02
======= ======= ======= =======
Earnings per equivalent ADS under
US GAAP RMB6.15 RMB6.63 RMB6.90 USD0.83
======= ======= ======= =======
F-38
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
30. DIFFERENCE BETWEEN IFRS AND US GAAP (CONT'D)
Effects on consolidated net assets of significant differences between IFRS and
US GAAP are summarized below:
Year ended 31 December,
-----------------------------------------------
2001 2002 2002
----------- ----------- -----------
RMB RMB US$
Consolidated net assets under IFRS 10,120,623 10,244,151 1,234,235
US GAAP adjustments:
Reversal of the gross revaluation surplus on fixed assets (1,492,185) (1,492,185) (179,781)
Reversal of accumulated depreciation on the revaluation
surplus on fixed assets 282,462 330,884 39,866
Deferred tax assets related to net revaluation surplus 181,458 174,195 20,987
----------- ----------- -----------
Consolidated net assets under US GAAP 9,092,358 9,257,045 1,115,307
=========== =========== ===========
There are no significant differences between IFRS and US GAAP which affect
classification in the balance sheet and the income statement but do not affect
net income or shareholders' equity.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 143, Accounting for Assets Retirement Obligations
("SFAS 143"), Statement of Financial Accounting Standards No. 146, Accounting
for Costs Associated With Exit or Disposal Activities ("SFAS 146"), FASB
interpretation N. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, including Indirectly Guarantees of indebtedness of Others ("FIN
45"), FASB Interpretation No. 46, Consolidation of Variable Interest Entities
("FIN 46") and Emerging Issues Task Force ("EITF") Issue 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables" that addresses certain aspects
of a vendor's accounting for multiple revenue-generating arrangements ("EITF
Issue 00-21).
(a) SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated assets retirement costs. SFAS 143 is effective for fiscal years
beginning after 31 December, 2002. The Group does not expect that the
adoption of SFAS143 will have a material an impact on the consolidated
financial statements.
(b) SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging issues Task Force
Issue No. 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit Activity (including Certain Costs Incurred
in a Restructuring)". The Group will adopt SFAS 146 on 1 January, 2003 and
does not expect a material impact upon adoption.
F-39
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and ADSs, per share and
per ADS data and unless otherwise stated)
30. DIFFERENCE BETWEEN IFRS AND US GAAP (CONT'D)
(c) FIN 45 elaborates on the disclosures to be made by a guarantor about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions under
FIN 45 are applicable prospectively to guarantees issued or modified after
31 December, 2002. The Group does not expect that the adoption of
disclosure requirements that are effective for the year ended 31 December,
2002 did not have a material impact on the note disclosures of the
consolidated financial statements.
(d) FIN 46 provides guidance on the identification of and financial reporting
for entities over which control is achieved through means other than voting
rights. This Interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. The
interpretation applies immediately to variable interest entities created
after 31 January 2003, and to variable interest entities in which an
enterprise obtains and interest after that date. It applies in the first
fiscal year for interim period beginning after 15 June, 2003 to variable
interests entities in which an enterprise holds a variable interest that it
acquires before 1 February, 2003. The Group does not expect that the
adoption of FIN 46 will have a material impact on the consolidated
financial statements.
31. POST BALANCE SHEET EVENTS
Pursuant to a board resolution dated 23 April, 2003, the directors recommended
the payment of a final dividend of RMB0.10 per share, totaling RMB433,555.
32. FOREIGN CURRENCY EXCHANGE
The books and records of the Group are maintained in RMB, their functional
currency. RMB is not freely convertible into foreign currencies. All foreign
exchange transactions involving RMB must take place through the banks and other
institutions authorized by the People's Bank of China ("PBOC") to buy and sell
foreign exchange. The applicable market exchange rates used for the transactions
are administered by the PBOC. Enterprises can deal with an approved bank for
foreign exchange on recurring items and approved capital items.
33. APPROVAL OF ACCOUNTS
The financial statements were approved by the Board of Directors on 23 April,
2003.
GUANGSHEN RAILWAY COMPANY LIMITED AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables present selected consolidated financial information of the
Group as of 31 December, 1998, 1999, 2000, 2001 and 2002 and for the years then
ended, which were extracted from the following financial statements:
The Consolidated Balance Sheets as of 31 December, 2001 and 2002, and the
Consolidated Statements of Income, Changes in Equity and Cash Flows for the
years ended 31 December, 2000, 2001 and 2002, prepared in accordance with IFRS,
have been audited and were included elsewhere in this Annual Report. The
Consolidated Balance Sheets as of 31 December, 1998, 1999 and 2000, and the
Consolidated Statements of Income, Changes in Equity and Cash Flows for the
years ended 31 December, 1998 and 1999 have been audited while were not included
in this Annual Report.
The selected income statement data, cash flow statement data and other data for
the years ended 31 December, 2000, 2001 and 2002, and the selected balance sheet
data as of 31 December, 2001 and 2002 should be read in conjunction with, and
are qualified by reference to, the Consolidated Financial Statements.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Year ended 31 December,
----------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
----------- ---------- ----------- ----------- ----------- -----------
RMB RMB RMB RMB RMB US$
(a)
(Amounts in thousands except per share data)
INCOME STATEMENT DATA:
Revenues from railroad businesses
- passenger 1,070,411 1,114,046 1,237,289 1,426,010 1,846,599 222,482
- freight 681,945 537,970 549,694 567,276 514,036 61,932
----------- ---------- ----------- ----------- ----------- -----------
Subtotal 1,752,356 1,652,016 1,786,983 1,993,286 2,360,635 284,414
Revenues from other businesses 190,231 166,800 193,415 160,306 156,893 18,903
----------- ---------- ----------- ----------- ----------- -----------
Total revenues 1,942,587 1,818,816 1,980,398 2,153,592 2,517,528 303,317
Railroad operating expenses (1,144,277) (1,189,641) (1,297,464) (1,460,629) (1,735,292) (209,071)
Other businesses operating expenses (165,336) (151,255) (163,529) (138,852) (159,739) (19,246)
----------- ---------- ----------- ----------- ----------- -----------
Profit from operation 632,974 477,920 519,405 554,111 622,497 75,000
Profit attributable to shareholders 642,175 529,674 492,089 533,495 557,083 67,118
Earnings per common share RMB0.15 RMB0.12 RMB0.11 RMB0.12 RMB0.13 USD0.02
Dividends declared per common share RMB0.12 RMB0.10 RMB0.12 RMB0.10 RMB0.10 USD0.01
BALANCE SHEET DATA:
Working capital (excluding due from and
due to Parent Company) 1,951,542 1,772,772 1,463,073 1,581,054 1,592,040 191,812
Due from Parent Company 9,666 48,485 80,604 29,499 39,374 4,744
Fixed assets 6,877,355 6,757,336 7,074,907 7,031,040 6,798,280 819,070
Total assets 10,738,335 10,970,496 10,917,564 10,997,216 11,257,594 1,356,336
Equity 9,952,741 10,048,860 10,020,683 10,120,623 10,244,151 1,234,235
CASH FLOW STATEMENT DATA:
Net cash provided by operating
activities 851,664 656,802 729,189 886,016 1,157,177 139,419
Net cash (used in) provided by
investing activities (465,022) (61,791) (458,087) (430,425) 251,003 30,241
Net cash used in financing activities (630,821) (384,474) (520,453) (420,137) (360,643) (43,451)
Purchase of fixed assets and payment
for construction-in-progress, net of
related payables 599,114 449,130 564,759 551,508 553,337 66,667
Dividends paid 520,266 433,555 520,266 419,957 356,490 42,951
OTHER DATA:
EBITDA (b) 907,318 796,980 853,554 946,294 979,402 118,000
Railroad transportation operating income 608,079 462,375 489,519 532,657 625,343 75,343
Other businesses operating income 24,895 15,545 29,886 21,454 (2,846) (343)
US GAAP data
- Profit attributable to shareholders 683,334 570,833 533,248 574,654 598,242 72,077
- Earnings per common share RMB0.16 RMB0.13 RMB0.12 RMB0.13 RMB0.14 USD0.02
- Equity 8,801,001 8,938,279 8,951,259 9,092,358 9,257,045 1,115,307
(a) Translation of amounts from Chinese Renminbi ("RMB") into United States
dollars ("US$") for the convenience of the reader has been made at the Noon
Buying Rate on 31 December, 2002 of US$1.00=RMB8.3. No representation is
made that the RMB amounts could have been, or could be, converted into US$
at that rate on 31 December, 2002 or on any other date.
(b) EBITDA refers to earnings before interest income, interest expense, taxes,
depreciation and amortization. EBITDA should not be construed as an
alternative to operating income or any other measure of performance
determined in accordance with IFRS or US GAAP or as an indicator of the
Company's operating performance, liquidity or cash flows generated by
operating, investing and financing activities. The Company has included the
information concerning EBITDA because management believes it is useful
supplement to cash flow data as a measure of the Company's performance.
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.
GUANGSHEN RAILWAY COMPANY LIMITED
/s/ Wu Junguang
-----------------------------------
Wu Junguang
Chairman of the Board of Directors
Date: June 24, 2003
85