Shang Gong Group Co., Ltd. Annual Report 2018 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd IMPORTANT NOTES 1. The board of directors, the board of supervisors, directors, supervisors and senior executives of the Company undertake that the content of the annual report is true, accurate and complete, and contains no false records, misleading statements, or major omissions, and will assume joint and several legal liabilities arising therefrom. 2. All the directors of Shang Gong Group Co., Ltd. attended the meeting of the board of directors. 3. BDO China Shu Lun Pan Certified Public Accountants LLP. provided a standard unqualified opinion audit report for the Company. 4. Zhang Min, Chairman of the Company, Zhang Jianrong, the principal in charge of the accounting, and Zhao Lixin, Chief of Accounting Affairs, declare and guarantee the veracity, accuracy and integrity of the financial report in the annual report. 5. Plan of profit distribution or transfer of reserves deliberated by the board Audited by BDO China Shu Lun Pan Certified Public Accountants LLP., the Company achieved the consolidated net profit of 158,449,643.95 yuan in 2018, of which, the net profit attributable to parent company owners is 140,828,047.20 yuan. According to the provisions in the Articles of Association, before withdrawing the legal accumulation fund, the Company should first cover the deficit with the profit of the year. As the profit of the year failed to make up the deficit of previous years, the Company did not draw the legal accumulation fund. The current-period net profit of the parent company is 32,898,977.07 yuan; the undistributed profits at the beginning of 2018 are -143,892,809.85 yuan; thus the practical profit available for distribution is -110,993,832.78 yuan at the end of 2018. As the parent company’s profit available for distribution is negative, the profit distribution cannot be made in 2018, neither the transferring of capital reserves into share capital. 6. Warning statement of forward-looking statements The Company’s future plan, development strategy and other forward-looking statements in the report do not constitute any material commitment of the Company to investors. Investors and relevant persons shall be sufficiently mindful of risks, and undertake the difference in plans, predictions and commitments. 7. There was no occupation of fund of the Company occurred for non-operating use by holding shareholder and its related parties. 8. There was no external guarantee against the rules and regulations of the Company. 9. Major risk waring The Company has described in detail the risks faced by the Company in this report. For details see ―Discussion and Analysis on Business Operation‖ and other relevant chapters in this report. 10. This report is prepared in both Chinese and English. In the case of any inconsistent understanding between the Chinese version and the English version, the Chinese version shall prevail. 2 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd TABLE OF CONTENTS Chapter 1 Definition .............................................................................................................................. 4 Chapter 2 Company Profile and Main Financial Index ......................................................................... 4 Chapter 3 Summary of Company Business ........................................................................................... 6 Chapter 4 Discussion and Analysis on the Business Operation ............................................................ 9 Chapter 5 Important Matters ............................................................................................................... 21 Chapter 6 Changes in Common Shares and Shareholders .................................................................. 26 Chapter 7 Preferred Stock ................................................................................................................... 27 Chapter 8 Directors, Supervisors, Senior Management and Employees ............................................. 28 Chapter 9 Corporate Governance ........................................................................................................ 33 Chapter 10 Corporate Bond................................................................................................................... 36 Chapter 11 Financial Report .................................................................................................................. 37 Chapter 12 Documents for Reference ..................................................................................................121 3 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Chapter 1 Definition 1. As used in this report, the following terms have the following meanings unless the context requires otherwises: Definition of common terms ShangGong Group, SGG, the Company refer to Shang Gong Group Co., Ltd. PKFR refers to Shanghai Puke Flyingman Investment Co., Ltd State-owned Assets Supervision and Administration Commission of Shanghai Pudong SASAC refers to Pudong New Aear People’s Government Dürkopp Adler AG. In July 2018, DAP Industrial AG completed the acquisition of DA AG refers to all minority shareholders' equity of DA AG, and absorbed DA AG, and changed its name to Dürkopp Adler AG after the merger was completed. PFAFF GmbH refers to PFAFF Industriesystemeund Maschinen GmbH KSL refers to PFAFF Industriesystemeund Maschinen GmbH Zweigniederlassung KSL Stoll KG, STOLL refers to H. Stoll AG & Co. KG DAP Branch refers to Shang Gong Group Co., Ltd. Industrial Sewing Machine Branch Butterfly Branch refers to Shang Gong Group Co., Ltd. Shanghai Butterfly Sewing Machine Branch Richpeace, SG Richpeace refers to TIANJIN RICHPEACE AI CO., LIMITED SGGEMSY refers to Zhejiang ShangGong GEMSY CO., LTD. PIZ refers to PFAFF Industrial Sewing Machine (Zhangjiagang) Co., Ltd. SHENSY refers to Shanghai Shensy Enterprise Development Co., Ltd. SG Zhejiang refers to ShangGong Sewing Machine (Zhejiang) Co., Ltd. Report period, reporting period refers to From 1st January 2018 to 31st December 2018 Yuan, RMB refer to The lawful currency of the People’s Republic of China Euro, EUR refer to The lawful currency of the European Union 2. In this report, the unit of the amount is expressed in RMB Yuan unless otherwise specified. Chapter 2 Company Profile and Main Financial Index 1. Company information Company name in Chinese 上工申贝(集团)股份有限公司 Abbreviation of the Company name in Chinese 上工申贝 Compay name in English Shang Gong Group Co., Ltd. Abbreviation of the Company name in English ShangGong Group Legal representative Zhang Min 2. Contact information Secretary of Board of Directors Representative of Securities Affairs Name Zhao Lixin Shen Lijie Office address No. 1566 New Jinqiao Road, Pudong New Aear, Shanghai No. 1566 New Jinqiao Road, Pudong New Aear, Shanghai Tel 021-68407700 021-68407515 Fax 021-63302939 021-63302939 Email zlx@sgsbgroup.com shenlj@sgsbgroup.com 3. Basic situation introduction Room A-D, 12th Floor, Orient Mansion, No. 1500 Century Avenue, China Registered address (Shanghai) Pilot Free Trade Zone Postal code of registered address 200122 4 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Office address No. 1566 New Jinqiao Road, Pudong New Aear, Shanghai Postal code of office address 201206 Company website http://www.sgsbgroup.com/ Email 600843@sgsbgroup.com 4. Place for information disclosure and consulting Shanghai Securities News, Hong Kong Commercial The name of the information disclosure media selected by the company Daily The website that publishes the annual report designated by China http://www.sse.com.cn Securities Regulatory Commission Lodging address of annual report of the Company Office of the Company 5. Corporate stock Type Stock exchange Stock abbreviation Stock code A Share Shanghai Stock Exchange SGSB 600843 B Share Shanghai Stock Exchange SGBG 900924 6. Other information Name BDO China Shu Lun Pan Certified Public Accountants LLP. Accounting firm appointed Sixth Floor, New Huangpu Financial Plaza, No. 61 East Address by the Company (Domestic) Nanjing Road, Shanghai Signing accountant's name Li Ping, Zhang Yongmei 7. Main accounting data and financial index 7.1 Main accounting data Unit: Yuan, Currency: RMB Year-on-year Main accounting data 2018 2017 2016 increase/decrease (%) Operaing income 3,200,527,741.09 3,064,971,500.79 4.42 2,759,855,136.98 Net profit attributable to shareholders of 140,828,047.20 197,487,226.27 -28.69 144,231,343.84 listed company Net profit attributable to shareholders of listed company after deduction of 124,656,582.51 154,753,519.99 -19.45 117,425,853.16 non-recurrent account profits and losses Net cash flow from operating activities 79,553,871.30 117,335,869.17 -32.20 99,056,912.42 31st December 31st December Year-on-year 31st December 2018 2017 increase/decrease (%) 2016 Net assets attributable to shareholders of 2,212,858,250.06 2,145,214,676.69 3.15 1,916,349,381.88 listed company Total assets 4,144,127,162.05 3,703,515,071.60 11.90 3,506,172,981.71 7.2 Main financial index Main financial index 2018 2017 Year-on-year increase/decrease (%) 2016 Basic earnings per share (yuan/share) 0.2567 0.3600 -28.69 0.2629 Diluted earning per share (yuan/share) 0.2567 0.3600 -28.69 0.2629 Basic earnings per share after deduction of non-recurrent profits 0.2272 0.2821 -19.46 0.2141 and losses (yuan/share) Weighted average return on net assets (%) 6.3561 9.8004 Decrease 3.44 percent point 7.8098 Weighted average return on net assets after deduction of 5.6262 7.6797 Decrease 2.05 percent point 6.3584 non-recurrent profits and losses (%) 8. Accounting data differences between domestic and foreign accounting standards Not applicable. 9. Main accounting data of each quarter in report period The first quarter The second quarter The third quarter The forth quarter (from January to (from April to (from July to (from October to March) June) September) December) Operaing income 701,350,250.94 793,444,162.33 798,251,068.15 907,482,259.67 Net profit attributable to shareholders of listed company 45,491,262.77 54,670,083.73 34,854,917.67 5,811,783.03 5 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Net profit attributable to shareholders of listed company 39,609,986.99 49,760,628.20 29,755,246.40 5,530,720.92 after non-recurrent account profit/loss Net cash flow from operating activities -21,967,006.01 -35,736,148.74 22,598,770.01 114,658,256.04 10. Items and amount of non-recurring profit and loss Item 2018 2017 2016 Profits and losses from disposal of non-current assets -1,285,095.62 23,550,480.53 3,529,785.81 Government subsidies recorded in the current profit and loss 9,897,636.07 11,861,884.98 11,190,319.23 Except effective hedging business relevant to the normal business of the Company, gains and losses from changes in fair value arising from trading financial assets and trading financial 12,601,058.35 10,553,231.30 4,708,383.25 liabilities, and investment income from disposal of trading financial assets, trading financial liabilities and available-for-sale financial assets Profits and losses from external entrusted loans 603,626.80 Other non-operating income and expenditure except the 4,659,776.73 5,690,312.52 17,172,464.17 above-said items Impact on minority interests -4,268,282.88 -5,345,419.70 -6,050,593.20 Impact on income tax -6,037,254.76 -3,576,783.35 -3,744,868.58 Total 16,171,464.69 42,733,706.28 26,805,490.68 11. Items for adopting fair value measurement Influence on Item Opening balance Ending balance Current change current profit Trading financial assets 0.00 0.00 0.00 45,148.42 Available-for-sale financial assets 89,721,694.56 86,406,778.33 -3,314,916.23 1,664,198.76 Total 89,721,694.56 86,406,778.33 -3,314,916.23 1,709,347.18 Chapter 3 Summary of Company Business 1. The Company’s main business, business model in the report period and industry situation During the reporting period, the Company's main business is the sewing equipment manufacturing industry and intelligent equipment manufacturing industry. The Company’s business also involved flat knitting machines, office machinery, logistics services and trade. The Company's sewing equipment includes industrial sewing machines, household sewing machines and custom-made industrial machines for special purposes. The Company adheres to globalization of business, and implements unified management of sales of sewing equipment. The Company adopts a gradient-based specialized multi-brand marketing strategy, and conducts gradient division management on production sites throughout Europe and Asia. The Company pays attention to collaborative research and development, and seizes the global high-end market of sewing equipment with leading technology. At the same time, the Company is cultivating the business model of ―Shanghai Manufacturing‖, which means R&D and marketing in Shanghai while production in Jiangsu, Zhejiang and other provinces. In recent years, through the implementation of mergers and acquisitions at home and abroad and the reorganization and integration within the Company, with the business philosophy of ―market orientation and benefit first‖ to manage subsidiaries in a unified manner, the synergy effect has gradually emerged and the international business model has achieved good results. China’s sewing machinery manufacturing industry is a branch of light industry in China. It has established the most complete industrial system in the world, and is capable of manufacturing a full range of sewing machinery products, including household and industrial sewing machine, embroidery machine and cutting machine, and the related controller, motor ability and spare parts, which satisfies all kinds of social needs. However, compared with the advanced in the world, there is still a large gap for China’s sewing machinery manufacturing industry in independent innovation ability, industrial structure, technology, product and brand quality and other aspects. The whole industry is big but not strong. The development of the world sewing machinery industry started in the middle of the nineteenth Century in Europe and the United States. 6 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd After 100 years of development, at present the world sewing machine industry development center has been transferred to the Asian region like China and Japan, and gradually formed tripartite confrontation pattern between China, Germany and Japan. In 2018, the industry's production and sales maintained a double-digit growth rate, the operation quality was good, showing the remarkable characteristics of ―stable and good, and call back from the top‖. According to the China Sewing Machinery Association, in terms of production, from January to December in 2018, the top 100 backbone machine manufacturers in the industry produced 7.54 million sewing machines, a year-on-year increase of 15.2%. Production volume of industrial sewing machines was 5.44 million units, an increase of 21.5%, of which the volume of flatbed lockstitch was 3.16 million units, an increase of 24.2%; volume of special machine was 360,000 units, an increase of 15%; volume of automatic sewing equipment was 30,000 units, an increase of 38.6 %. Production volume of industrial sewing machines was 1.65 million units, an increase of 3.7%. The overall production of the industry has reached new heights and the product structure has been upgraded. In terms of sales, from January to December in 2018, the top 100backbone machine manufacturers in the industry sold 7.14 million sewing machines, a year-on-year increase of 10.5%. Among them, 5.06 million units were industrial machines, an increase of 15.2% year-on-year, and 1.62 million units were household machines, an increase of 0.4%. In terms of domestic sales, the domestic market was first raised and then suppressed in 2018. In the first half of the year, the downstream industry's consumer demand represented by clothing, leather, home textiles and other industries upgraded and accelerated the construction of smart factories, and promoted the continuous growth of China's sewing machinery domestic market. However, since the third quarter, the impact of Sino-US trade friction has gradually emerged. The willingness to increase investment in the industry has declined, and the cyclical demand in the domestic market has gradually saturated, and industry sales have declined month by month. In terms of export trade, in the context of the overall recovery of the international economy and the release of downstream market demand, the export trade of domestic enterprises has reached a new high. According to the data of the General Administration of Customs, the export volume of the industry in 2018 reached 2.45 billion US dollars, an increase of 5.3%. Among them, the export of industrial sewing machines reached 1.22 billion US dollars, an increase of 19.2%. In terms of operating efficiency, in 2018 the sales revenue of the top 100 backbone machine manufaturers in the industry reached 21.6 billion yuan, a year-on-year increase of 9.7%. However, as the market gradually became saturated, market competition became increasingly fierce, and investment in product promotion, new product development, production and other inputs increased, operating and management expenses increased substantially, thus the growth rate of industry efficiency was lowered. In 2018, the total profit of top 100 backbone machine manufaturers in the industry reached 1.58 billion yuan, a year-on-year increase of only 3.3%. 2. Description of major changes in main assets of the Company during the reporting period For details of major changes in the Company's major assets in the report period, please refer to ―(3) Analysis of assets and liabilities‖ in ―Chapter 4 Disscussion and Analysis on Business Operation‖. The Company’s overseas assets amounted to 1,953.5446 million yuan, accounting for 47.12% of the total assets. The Company’s overseas assets mainly come from the Company’s previous overseas acquisitions and the business growth of overseas subsidiaries. The Company’s wholly-owned subsidiary SGE acquired DA AG in 2005, acquired PFAFF GmbH and KSL in 2013, and invested in STOLL KG in 2016. 3. Core competitiveness analysis in the report period The Company is the first listed company with the longest history in the domestic sewing equipment industry, and has more than 50-year experience in sewing equipment production. The Company’s "Butterfly" household sewing machine originated in 1919 and has a history of nearly 100 years.The Company controlled 7 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd DA AG and PFAFF GmbH, both are famous sewing machine manufacturing companies in the world with more than 150 years’ history, as well as PFAFF KSL Branch, which possesses the world's top sewing technology. During the reporting period, the Company continued to promote the integration of global resources, promote the further integration of European subsidiaries, accelerate the construction of European and domestic manufacturing bases, implement mergers and acquisitions at the appropriate time in China, and expand the main business. Furthermore, based on the existing business, the Company continue to expand business in aviation manufacturing and structural parts on the basis of customers of aviation companies such as COMAC, Hafei and AVIC. During the reporting period, the Company's core competitiveness was further consolidated and enhanced, further consolidating the foundation of the Company's sustainable and healthy development.The core competence of the Company is mainly shown in the following aspects: (1) Strong technological research and development capability The Company always adheres to the guidance of science and technology and develop through innovation, attaches much importance to the construction of technological research and development capabilities, which have become the important force driving the development of the Company. The Company has owned a powerful technological research and development team, has advanced testing methods and has strong continuous development capabilities of product and application technology. The R&D team's research and development of Industry 4.0 on sewing equipment has achieved initial results. The Company's technology center was identified as a Shanghai-Municipal-level R&D center, SGGEMSY was identified as a Zhejiang-Province-level R&D center, and Richpeace was recognized as a Tianjin-Municipal-level R&D center. (2) Advanced technology advantage The Company has the world’s high-end intelligent and 3D sewing technology of flexible material, and the Company is a global leader in special sewing machine for medium or heavy materials, garment automatic sewing unit, robot-control automatic sewing technology and textile material welding technology and other fields. The products are not only applied in the traditional market for sewing machine industry but also applied in some fields, such as automobile, environmental protection, aeronautics and astronautics and renewable energy, etc. Especially, the Company has a leaing position in sewing technology for light carbon fiber, 3D sewing automation and QONDAC 4.0 Intelligent Industrial Sewing Network Online Production Monitoring System. (3) Multiple brand and product advantage The Company owns some internationally well-known brands, such as DA, PFAFF Industrial, KSL, Beisler, and etc., and some famous domestic brands, such as Butterfly with 100 years’ history, Bee, Flyingman, and Shanggong with over 50 years’ history. In recent years, the Company is cultivating industrial machine brands, such as SGGEMSY, Mauser and so on. The Company has a full range of high-end sewing equipment product chain, these brands of the Company has a high recognition and reputation in the industry. The Company has a group of customers with great value and stability in the field of high-end automotive accessories manufacturing and luxury goods manufacting. (4) Global resource integration capability The Company utilizes and develops the basis and advantages of its respective domestic and foreign subsidiaries, implements globalization layout and integration in the production base, sales network, procurement of raw materials, technology R&D and other aspects, implements resource sharing, has complementary advantages and develops collaboratively. The Company not only has a wide sales network and business base in China, but also has established a relatively complete marketing channel and service network in the world. The Company has established three sewing machine R&D and production bases in Shanghai, Zhejiang and Zhangjiagang; the Company also has five R&D and manufacturing bases in Germany, Czech Republic and Romania. 8 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd (5) Internationalized operation and management experience Since 2005, the Company has begun to implement an overseas merger and acquisition strategy for international operations. In recent years, the Company has increased the pace of overseas acquisitions and mergers, and the proportion of overseas businesses has grown. The Company's multi-year international operation and management has gradually cultivated a management team with an international perspective and multinational operating capabilities, and has accumulated rich international management experience. Chapter 4 Discussion and Analysis on the Business Operation 1. Discussion and analysis on the business operation In 2018, affected by the US tariff policy and other retaliatory measures by other economies, trade protection sentiment rose, international trade friction increased, investors' confidence in the economic outlook declined, and manufacturing and trade growth slowed. In 2018, China's economic operation has been steady but with change. The external environment is complex and severe, and the economy is facing downward pressure. Judging from the economic situation of the industry, in 2018, the production and sales of China's sewing machinery industry maintained a double-digit growth rate, the operation quality was good, and the concentration continued to increase, showing the remarkable characteristics of ―stable and good, and call back from the top‖. 2018 is a relatively difficult year for SGG. In the face of complex and severe market environment, the Company has reached a critical period when it is urgent to change again. On the one hand, the Company faces enormous cyclical pressures on corporate growth, increasing human labor costs, and the technical advantages of some products are being challenged. The market base of conventional products has not yet been established, and China's intelligent manufacturing base is still under construction. On the other hand, the automobile industry is accelerating its decline. The downstream markets such as garment and luggage are accelerating the transfer to Southeast Asia and other regions. External factors such as low-cost competition among domestic peers have had a negative impact on the Company. In 2018, the Company faced challenges and overcome difficulties, and achieved remarkable results. The Company mainly carried out the following works: (1) Deepening the reform and integration, and promoting acquisitions and mergers In 2018, 49% shares of PKFR, the Company's largest shareholder, were transferred to the Shendie Equity Investment Partnership, which was indirectly held by the management, and initially realized the Company's management participation. The Company further promoted internal integration in 2018. In Europe, the Company overcame the difficulties and steadily promoted the squeeze-out of 6% of the minority shareholders of DA AG, completed the legal procedures in July 2018, and ended the listing status in Frankfurt, Berlin and Düsseldorf Stock Exchange. In addition, in 2018, the Company launched the integrated integration of PFAFF GmbH and KSL Branch, adjusted its organization, and promoted production integration and product transfer in an orderly manner. The integration promoted the transformation of PFAFF GmbH into KSL technology and products, and realized the rapid development of the Company's intelligent equipment R&D and manufacturing. Through asset restructuring and business integration of European subsidiaries, the Company is able to take full advantage of the technology, production, procurement, sales, capital and human resources of DA AG and its subsidiaries, PFAFF GmbH and KSL Branch, and to enhance profitability. In China, the import and export business of the Company's subsidiary Butterfly Import and Export, Shanggong Import and Export and SMPIC Import and Export has been steadily advanced, and the transfer of personnel and business has been basically completed. At the same time, the Company completed the transfer of business from the domestic sales 9 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd subsidiary, SG Butterfly and DAP Shanghai, to the parent company in 2018. Throught the integration, the effect of the parent company's materialized operation has gradually emerged. The rising cost of human resources has been digested, and the operating profit of the parent company has increased significantly, which is conducive to solving the problem that the undistributed profit of the parent company is negative and cannot be distributed. In 2018, the Company seized the opportunity to invest in mergers and acquisitions and invested 130 million yuan to acquire a 65% stake in Tianjin Richpeace Computer Machinery Co., Ltd. The acquisition will help solve the problem of the Company's relatively weak ability to undertake German KSL product technology in domestic software development and automatic sewing solution technology, thereby enhancing the Company's market share in the domestic high-end special sewing equipment field, which will help improve the overall performance of the Company. Richpeace's automated cutting and embroidering equipment complements the Company's product range. Its automatic patterning machine and other automation solutions are also an effective extension of the Company's existing business. (2) Adhere to the professional multi-brand strategy and increase the market share of products In 2018, DA AG further promoted the integration of the marketing network, established DAP Russia, and completed the reorganization of the welding machine marketing network. In China, the Company has established branches or offices in Guangdong, Fujian and Wuhan, and organized exhibitions and exhibitions of various themes in industrial clusters, including 12 garment machine exhibitions and 22 heavy material machine exhibitions. In 2018, the Company achieved the goal of a substantial increase in sales revenue in the sofa and luggage industry. The sales of DA and PFAFF basic products also achieved breakthroughs. The Company has improved the visit mechanism of major customers, established a saleperson/technician daily report system, and continued to strengthen maintenance and technical training. In addition, the Company has also established and improved the evaluation and elimination mechanism of dealers, vigorously expanded the construction of dealer networks, and realized the contractual management of all dealers. (3) Maintaining product technology leadership and strengthening production and manufacturing capabilities DA AG completed the development of a new generation of M-Type as planned, and realized the production of the new DAC-Compact electronic control series. The QONDAC Network system was commercialized in May 2018. In 2018, DAMSH completed five R&D projects, such as keyhole fastening machine and semi-automatic wire-cutting machine. The project of automatic wire-cutting machine and single-cut wire-cutting machine is under development. PIZ completed the trial production of automatic feeding shoe machine, short shearing shoe machine and PFAFF welding machine and extended version of Powerline; Mauser 591 has started mass production; the cost of three machines such as DA 1767 have been reduced. The trial production of 11 types of parts such as the needle bar swing frame and the column was completed, and the mass production capability was obtained. SGGEMSY strives to expand production capacity in 2018, and the volume of self-produced machines has increased by 21% year-on-year. At the same time, the integration and improvement of products have been continuously promoted. Mauser 8125 sewing machine and Mauser EX overlock sewing machine have begun to produce in small batches. The automatic sewing machine, the 8802E single-stop sewing machine and the program-controlled tying machine have been prototyped. In Europe, the Company invested 13.33 million euros in 2018 to build a European intelligent product research and development center and a trial production base in Bensheim, Germany, which is expected to be completed by the end of 2019. This investment is conducive to meeting the rising demand for automation and 10 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd intelligent upgrading of sewing machinery; it can expand the production capacity of KSL Branch, solve the problem of limited production sites, achieve capacity balance and meet market demand. This project is conducive to enhancing the Company's research and development capabilities and improving the trial production level of new products; it is also conducive to the Company's continued integration and promotes the Company's globalization strategy. In China, the Company invested 154 million yuan to build an intelligent manufacturing base in Huangyan District, Taizhou, Zhejiang Province. The investment in the construction of Taizhou Huangyan Intelligent Manufacturing Base is conducive to better grafting German DA and PFAFF product technology based on the Company's existing industry, developing multi-brand and intelligent product manufacturing, and creating the largest sewing machine production base in China. (4) Continue to do a good job in internal control management and continuously improve operational efficiency In 2018, the Company completed the revision of the Company's ISO 9001:2015 quality management system. Combined with the new standards, such as performance appraisal and risk prevention, based on the Company's new organizational structure, the Company has sort out the related processes of quality control. In 2018, the Company will do a good job in the implementation and management of the Group's annual budget, do a good job in fund arrangement and fund pooling within the Group, and expand financing channels. In addition, the Company continued to build the internal control system of the Company and its subsidiaries, and rectified the 2017 internal control re-evaluation test and defects. Nine internal audit engineering audits were also completed. 2. Main Operating Condition During the reporting period, the Company achieved operating income of 3.2 billion yuan, a year-on-year increase of 4.42%, mainly due to the year-on-year increase of 11.31% in sewing equipment and intelligent manufacturing equipment. Operating profit was 200 million yuan, down 30.92% year-on-year, mainly due to the loss of Stoll in current period and the year-on-year reduction of housing relocation compensation income. The net profit attributable to shareholders of listed companies was 141 million yuan, a year-on-year decrease of 28.59%. The net profit attributable to shareholders of listed companies after deducting non-recurring gains and losses decreased by 19.45% year-on-year. 1) Main Business Analysis A. Analysis of Changes of Items in Income Statement and Cash Flow Statement Increase/Decrease Item 2018 2017 (%) Operating income 3,200,527,741.09 3,064,971,500.79 4.42 Operating cost 2,322,152,730.89 2,245,537,329.26 3.41 Selling expenses 322,696,906.11 284,810,887.21 13.30 General and administration expenses 230,502,679.98 207,021,408.70 11.34 R & D expenses 97,647,657.57 84,350,255.40 15.76 Finance expenses 16,859,739.48 -5,263,527.90 N/A Net cash flow from operating activities 79,553,871.30 117,335,869.17 -32.20 Net cash flow from investing activities -352,612,604.58 -119,869,574.99 N/A Net cash flow from financing activities 113,452,905.75 -60,325,135.90 N/A B. Income and Cost Analysis During the reporting period, the Company achieved operating income of 3.2 billion yuan, a year-on-year increase of 4.42%, mainly due to the year-on-year increase of 11.31% in sewing equipment and intelligent 11 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd manufacturing equipment. The main reason is that the Company is committed to the development of intelligent manufacturing. In 2018, SGG acquired 65% of stake in Richpeace and incorpoarted it in the scope of consolidation. a) Main Business by Industry/Region Main Business by Industry Gross Operating Operating cost Gross margin increase/ Industry Operating income Operating cost margin income increase/ increase/ decrease (%) (%) decrease (%) decrease (%) Sewing equipment & 2,159,131,523.78 1,399,795,850.60 35.17 11.31 14.42 Decrease 1.76 percent point intelligent equipment Logistic 761,681,126.67 695,390,097.46 8.70 -0.94 -2.71 Increase 1.66 percent point service Export trade 95,223,904.21 93,291,211.22 2.03 -51.97 -52.16 Increase 0.4 percent point Office equipment 46,474,027.84 39,231,617.54 15.58 -17.62 -20.80 Increase 3.38 percent point and film materials Others 12,168,911.64 7,764,028.10 36.20 19.45 -6.69 Increase 17.87 percent point Total 3,074,679,494.14 2,235,472,804.92 27.29 3.41 2.03 Increase 0.98 percent point Main Business by Region Gross Operating Operating cost Gross margin increase/ Industry Operating income Operating cost margin income increase/ increase/ decrease (%) (%) decrease (%) decrease (%) Domestic 1,734,368,475.06 1,477,335,063.27 14.82 9.00 4.02 Increase 4.08 percent point Overseas 1,500,442,605.74 918,269,328.31 38.80 1.23 5.47 Decrease 2.46 percent point b) Analysis of Production and Sales Increase/Decrease Increase/Decrease Increase/Decrease Product Sales in production over in inventory over Major Product Inventory in sales over the output volume the previous year the previous year previous year(%) (%) (%) Industrial sewing equipment 193,344 187,215 37,964 3.4% 3.5% 19.3% (domestic) Industrial sewing equipment 45,053 45,063 135 76.1% 76.1% -7.4% (domestic, OEM) Industrial sewing equipment 29,837 32,419 -2.9% -11.6% (overseas) Industrial sewing equipment 268,234 264,697 35,517 10.3% 8.9% 11.1% (Total) Household sewing machine 293,523 293,341 677 40.9% 39.4% 36.8% (OEM) Multi-functional household 85,604 87,091 18,976 -14.0% -6.4% -7.3% sewing machine(OEM) Household sewing machine 379,127 380,432 19,653 23.1% 25.4% -6.2% (Total) c) Cost Analysis Current Previous period period Industry Cost item 2018 2017 Change (%) Notes proportion proportion (%) (%) Material 941,826,785.27 42.13 774,957,920.33 35.37 21.53 Sewing Labor 341,566,272.60 15.28 296,611,105.46 13.54 15.16 equipment Depreciation 44,765,110.83 2.00 38,158,659.16 1.74 17.31 & Manufacture intelligent 71,637,681.90 3.20 113,687,326.29 5.19 -36.99 cost equipment Total 1,399,795,850.60 62.62 1,223,415,011.24 55.84 14.42 Logistic Logistics service 695,390,097.46 31.11 714,752,388.59 32.62 -2.71 cost Export trade 93,291,211.22 4.17 195,004,666.92 8.90 -52.16 Office Material 26,314,943.38 1.18 37,664,031.50 1.72 -30.13 12 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd equipment Labor 9,983,697.47 0.45 7,587,657.23 0.35 31.58 and film Depreciation 264,644.22 0.01 338,835.76 0.02 -21.90 materials Manufacture 2,668,332.47 0.12 3,943,876.00 0.37 -32.34 cost Total 39,231,617.54 1.75 49,534,400.49 2.26 -20.80 Others 7,764,028.10 0.35 8,320,443.37 0.38 -6.69 d) Main Consumers and Main Suppliers The sales of the top five customers were 357.62 million yuan, accounting for 11.17% of the total annual sales; the purchase amount of the top five suppliers was 149.95 million yuan, accounting for 7.72% of the total annual purchase. C. Expense Item 2018 2017 Increase/Decrease (%) Selling expenses 322,696,906.11 284,810,887.21 13.30 General and administration 230,502,679.98 207,021,408.70 11.34 expenses R & D expenses 97,647,657.57 84,350,255.40 15.76 Finance expenses 16,859,739.48 -5,263,527.90 N/A Income tas expenses 45,789,835.67 82,928,869.66 -44.78 Note 1: Financial expenses increased by RMB 22.12 million year-on-year, mainly due to the year-on-year decrease in interest income and the increase in exchange losses. Note 2: Income tax expenses decreased by 44.58% year-on-year, mainly due to the year-on-year decrease in net profit of DA AG with high income tax rate. D. Investment in R & D R & D investment capitalized in 2018 97,647,657.57 R & D investment expensing in 2018 6,768,028.94 Total 104,415,686.51 Total R &D investment in proportion in operating income 3.26 Proportion of R & D investment capitalized (%) 6.48 E. Cash Flow Item 2018 2017 Increase/Decrease (%) Net cash flow from operating activities 79,553,871.30 117,335,869.17 -32.20 Net cash flow from investing activities -352,612,604.58 -119,869,574.99 N/A Net cash flow from financing activities 113,452,905.75 -60,325,135.90 N/A Impact of exchange rate changes on cash and 4,033,729.47 26,314,632.54 N/A cash equivalents Note 1: Mainly due to the year-on-year decrease in the sales-to-revenue ratio, the increase in cash paid to employees and the year-on-year increase in cash paid for employees and the year-on-year decrease in taxes paid. Note 2: Mainly due to the increase in the purchase of Richpeace's 65% equity and the purchase and construction of fixed assets and the year-on-year decrease in the receipt of housing relocation compensation income. Note 3: Mainly due to the increase in bank loans. Note 4: Mainly due to the impact of changes in the exchange rate of the euro. 2) Explanation of major changes in profits caused by non-core business (1) Detailed description of major changes in the company's profit composition or source of profit Item 2018 2017 Increase/Decrease (%) Reason 13 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Finance expense 16,859,739.48 -5,263,527.90 N/A Note 1 Investment income 12,758,268.06 45,607,259.29 -72.03 Note 2 Asset disposal income 443,708.05 23,963,103.89 -98.15 Note 3 Income tax expense 45,958,015.67 82,928,869.66 -44.58 Note 4 Net after tax for other -3,215,557.02 36,930,889.17 -108.71 Note 5 comprehensive income Note 1: Mainly due to the year-on-year decrease in interest income and the increase in exchange loss year-on-year. Note 2: Mainly due to the decrease in investment income of the joint venture Stoll. Note 3: Mainly due to the compensation for housing relocation in 2017. Note 4: Mainly due to the year-on-year decrease in the net profit of the DA Group with high income tax rate. Note 5: Mainly due to the decrease in the net assets of the European subsidiaries' re-measurement of the defined benefit plan and the translation of the foreign currency statement. 3) Analysis of Assets and Liabilities Ending Ending balance balance to Ending balance of Ending balance of to total assets Item total assets of Change(%) Notes current period previous period of current current period period(%) (%) Mainly due to the transfer of intangible assets by the transfer Prepayments 39,695,762.85 0.96 64,393,627.71 1.74 -38.35 of land transferred by SG Zhejiang in the previous year. Mainly due to the dividends distributed by Stoll KG and the increase in the current development of the Other receivables 120,422,496.29 2.91 58,966,056.94 1.59 104.22 welding business of the domestic subsidiary DAMSH and the increase in the export tax rebate in the current period. Due to the company's reduction of the purchase of Other current 249,326,335.31 6.02 366,533,356.84 9.90 -31.98 bank-guaranteed assets wealth management products in the current period. Due to the financing lease receivable from Long-term the domestic 31,427,418.92 0.76 0.00 0.00 receivables subsidiary ShangGong SMPIC Finance Leasing Co., Ltd. Mainly due to the expenditures of construction projects such as production, R&D bases and Construction in 119,166,627.75 2.88 12,665,274.09 0.34 840.89 modern logistics progress management centers increased by domestic and foreign subsidiaries during the current period. Mainly due to the acquisition of 65% equity of Tianjin Intangible assets 270,072,349.34 6.52 149,988,157.46 4.05 80.06 Richpeace in the current period, which was included in the scope of consolidation 14 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Ending Ending balance balance to Ending balance of Ending balance of to total assets Item total assets of Change(%) Notes current period previous period of current current period period(%) (%) and increased land use rights. Mainly due to the overseas subsidiaries' Development carryover of 6,798,312.48 0.16 16,683,772.84 0.45 -59.25 expenditure capitalized R&D expenditures to intangible assets Mainly due to the company’s premium Goodwill 140,074,270.28 3.38 72,482,033.43 1.96 93.25 acquisition of 65% equity of Richpeace Mainly due to the increase in fixed Long-term assets improvement 3,875,409.77 0.09 1,631,013.88 0.04 137.61 prepaid expenses expenses of domestic subsidiaries in the current period Mainly due to the company's overseas subsidiary DA AG short-term loan 206,614,015.12 4.99 330,389,201.62 8.92 -37.46 reduced the short-term bank loans in the current period Mainly due to the increase in bank acceptance bills of Notes payable and SGGEMSY and 318,803,039.91 7.69 206,343,320.56 5.57 54.50 accounts payable Richpeace was include in the consolidation scope in the current period. Mainly due to the acquisition of 65% Advance receipt 75,412,987.77 1.82 38,326,094.65 1.03 96.77 equity of Richpeace in the current period. Mainly due to the inclusion of unpaid corporate income tax and value-added tax at Taxes payable 21,208,862.17 0.51 14,074,587.91 0.38 50.69 the end of the period in which Richpeace was included in the the scope of consolidation. Mainly due to the increase of Tianjin Other payables 254,827,223.50 6.15 195,761,119.66 5.29 30.17 Baoying’s minority shareholders’ loans Mainly due to the technology development funds Non-current received by the liabilities due 4,173,297.07 0.10 1,260,000.00 0.03 231.21 company in the within one year current period and the financing leases due within one year. Mainly due to the increase in bank borrowings for more Long term loan 340,477,650.27 8.22 62,956,504.27 1.70 440.81 than one year of the company's overseas subsidiary DA AG. The development service industry guidance fund project Deferred income 0.00 0.00 2,340,000.00 0.06 -100.00 received by SHENSY will be accepted by the government in 15 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Ending Ending balance balance to Ending balance of Ending balance of to total assets Item total assets of Change(%) Notes current period previous period of current current period period(%) (%) 2018, so it is adjusted to the subject of ―other non-current liabilities due within one year‖. Mainly due to the income tax liabilities arising from the taxable temporary Deferred income differences arising 70,805,236.44 1.71 52,863,141.42 1.43 33.94 tax liabilities from the increase in the identifiable assets calculated by Richpeace on the date of purchase. Not applicable. 4) Industry Business Information Analysis See Chapter 3 for details. 5) Investment Analysis A. General Analysis Unit: 10,000 Yuan Long-term equity investment in 2018 28,351.59 Increase/Decrease 27,331.59 Long-term equity investment in 2017 1,020 Increase/Decrease (%) 2,679.57% a) Significant equity investment Cumulative Total Shareholding Investment in Sources of Other Name Business investment Lawsuit Amount ratio 2018 funds shareholders amount Richpeace Automation special RMB 65% RMB RMB Self-owned Shenzhen No equipment, 15,613,780 12,881,300,300 12,881,300,300 funds Yingning high-tech content Venture (light, machine, Capital Co., electricity Ltd., Tianjin integration) special Tongshang sewing equipment Software manufacturing; Co., Ltd. high-end textile and apparel software design, development; computer textile machinery manufacturing and software development, production, sales and related technical products consulting services; Import and export business; ordinary freight. Sequeeze-out 20 million / 20.35 million 20.517 million Self-owned Yes of 5.99% euro euros euros funds The minority Squeeze-out shareholders is of DA AG completed. Lawsuit on the Purchase price is in progress. 16 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd b) Major non-equity investment Actual Cumulative investment actual Sources of Project Item Total amount amount for the investment funds progress current year amount Investment in the RMB 28.61 Self-owned Under construction of Taizhou 394 million yuan RMB 65 million million funds construction Manufacturing Base Investment in the construction of the European intelligent 271.34 million 271.34 million Self-owned Under 13.39 million euros product research and euros euros funds construction development center and manufacturing base c) Financial assets measured at fair value Proportion Changes in of the Book value as owner's equity Securities Initial Profi/loss in Accounting Source of Abbreviation of December during the code investment cost company's 2018 item Shares 31, 2018 reporting equity(%) period The transferee’s Changjiang interest in the 600757 Publising & 72,085,722.82 0.85 67,146,441.68 1,029,853.40 -4,428,369.62 bankruptcy Media Available and for sale reorganization Lujia B financial 900932 773,099.71 0.0067 1,975,180.91 100,135.76 -157,523.95 Enforcement Share assets Shenwan & 000166 200,000.00 0.0011 889,791.54 10,931.10 -284,208.60 Purchased Hongyuan Bank of 601229 951,400.00 0.013 16,395,364.20 523,278.50 1,555,185.94 Purchased Shanghai Total 74,010,222.53 - 86,406,778.33 1,664,198.76 -3,314,916.23 - - 6) Major assets and equity sales Not applicable. 7) Analysis of Major Subsidiaries Unit: 10,000 Yuan Registered Total Net Operating Operating Net Name Business Scope capital assets assets income profit profit Production, processing and sale of machines, machines and related parts 12.5 DA AG and software, in particular sewing 191,230 87,448 147,620 12,681 8,954 million machines and conveyors and other industrial products SHENSY Transportation of goods 17,882 47,658 26,092 76,294 1,912 1,419 Manufacturing and sales of various SGGEMSY 21,600 36,061 21,413 35,556 143 320 sewing equipment Automatic special equipment, high-tech content (light, machine, electricity Richpeace integration) special sewing equipment 5,000 21,225 4,961 9,541 2,191 1,913 manufacturing; high-end textile and apparel software design, development 3. Discussion and Analysis of the Company's Future Development 1) Industry Pattern and Trend From the perspective of the external environment, there are still many opportunities in the industry. First, 17 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd the demand for replacement of the international sewing equipment market will continue to be released. Second, the national ―One Belt, One Road‖ policy strategy will be further promoted. Exports to the countries in the ―Belt and Road‖ accounted for 62.3% of the total in the industry, which has increased by about nine percentage points in the past five years. It is expected that the future growth will remain huge. Third, the government has actively introduced various policies to reduce burdens for manufacturing enterprises and promote the high-quality development of manufacturing industries. Fourth, the upgrading of consumer demand for downstream industries represented by garment, leather, home textiles and other industries and the acceleration of the construction of smart factories in China will provide a broader space for development and growth in innovation and intelligent transformation of products, service expansion, value extension, and structural upgrading in the sewing machinery industry. At the same time, the unstable global economic situation has also brought challenges to the industry. First, the impact of Sino-US trade disputes will continue to be uncertain, downstream enterprises will continue to wait and see, and many manufacturing enterprises will shift to Southeast Asia. Second, the emerging US dollar will continue to raise interest rates. The market currency crisis and sluggish demand pose challenges to industry exports. From the perspective of the internal environment of the industry, the industry has gradually entered a new round of industry growth cycle from automation to intelligence. The combination of strong and strong industries and complementary advantages has become an important development option for enterprises. The integration of new technologies, new models, new formats, and sewing machinery industries such as Internet of Things, big data, and intelligent manufacturing will strongly promote industry transformation and upgrading. "Automation" + "Big Data" + "Artificial Intelligence" may become the core competitiveness of the future. However, the challenges and operational pressures faced by enterprises are still unabated. First, under the impetus of environmental protection and supply-side reform, the cost of enterprises will rise irreversibly. Second, the adverse effects of the staged overcapacity caused by the rapid downturn of the market in the second half of 2018 will soon appear, and a new round of market and price competition will have an adverse impact on the industry. Third, in the process of transformation, the shortage of talents is more prominent, and enterprises lack effective talent support. 2) Company Development Strategy In 2019, the Company will continue to adhere to the Market-oriented, Benefit-first business philosophy, comprehensively promote institutional adjustment, mechanism reform, achieve rapid response to the market, and strive to create a market-oriented enterprise oriented to customer demand. The Company will adhere to technological innovation, increase investment in research and development, accelerate product technology upgrades, consolidate product technology advantages, and continue to maintain its leading position in the global sewing equipment industry. Meanwhile, the Company will continue to do a good job in internal control management, reduce costs and increase efficiency, and complete the business objectives set by the Board of Directors. Main tasks of SGG in 2019: 1. Vigorously promote institutional reform and explore the diversified development of manufacturing industry In 2019, the Company will further deepen the mechanism reform and continue to promote the operator's shareholding operation. The Company will seize market opportunities, conduct financing investments in a timely manner, and explore and promote the moderate diversification of manufacturing products. In 2019, the Company will vigorously promote the comprehensive reform of the customer-oriented organization. The enterprises and departments of SGG will adjust the system based on the rapid response to the market, and allocate the salary of the cadre and employees based on the economic benefits. In Europe, the Company will accelerate the full integration of DA Group with PFAFF and KSL, and 18 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd achieve break-even of PFAFF by reducing costs. In China, the Company will steadily advance the follow-up work of SMPIC Electronics Co., Ltd., and integrate DAMSH, SMPIC Electronics and the Group’s Manufacturing Branch to promote the development of robot application technology and intelligent manufacturing equipment business. In addition, according to the decision of the Board, the Company will also make a follow-up capital increase for Richpeace and promote the cooperation between Richpeace and PFAFF/KSL. 2. Adhere to market orientation and actively expand sales The Company will always adhere to the Market-oriented, Benefit-first business philosophy, continue to implement a professional multi-brand marketing strategy, and strive to expand the market. The Company and its subsidiaries will work together to actively carry out the exhibitions of the two major exhibitions of CISMA and Texprocess in 2019, and vigorously promote the company's brands. DA Group will further increase the revenue of DAC electronic control business, actively promote Qondac system, and plan to launch M-Type Delta machine at Texprocess in 2019. In China, the Company will continue to integrate the domestic DAP sales platform, and integrate DAP Shanghai, DAP Taizhou and Richpeace’s domestic branches, and implement localized management of sales and maintenance personnel. For the basic products of the DA, Pfaff and Mauser brands, the Company will strive to increase sales significantly; in the field of heavy material machine sales, it will gradually form a classified sales comparable to the sales of automotive products. In 2019, try to realize the significant increase of sales in heavy/medium material machine applid for luggages and sofas. The sales of KSL automatic equipment products are also striving to achieve substantial growth; further improve the evaluation and elimination mechanism of dealers and vigorously expanding the dealer network; in addition, promote sales of the full series of the Mauser brand which is also identified as an important marketing strategy task. In Southeast Asia, the Company will strengthen the coordinated sales of its subordinate DAP Singapore, Richpeace and SGGEMSY in Southeast Asia, integrate customer resources, and make full use of SGG's marketing platform to tap market potential and expand market share. In the Vietnamese market, the Company will consolidate the dealer network and do contract management. According to the customer country, choose different agents; at the same time, strengthen the training of local sales staff, rapidly expand the sales of local Vietnamese companies, and significantly increase the sales of the PFAFF brand in the Vietnamese market. In the Thai market, the Company will set up a sales and service team as soon as possible, taking the automotive industry as a breakthrough point, focusing on serving large customers, and vigorously promoting basic products such as DA, PFAFF, Masuer and Richpeace, resulting in a large increase in sales. In addition, the Company will actively expand its market in the Indonesian market, the Myanmar market and the Cambodian market. In 2019, the Company's production companies will share sales responsibilities and achieve budgetary targets with sales organizations, and organize efforts to assist sales organizations to meet customer requirements for product price, functional performance, quality improvement and maintenance services, and jointly control sales expenses. . In 2019, the Company's household sewing machine will make full use of the "Butterfly" brand's centennial celebration, promoting the "Butterfly" brand, and striving to achieve a substantial increase in domestic sewing machine sales in China. Continue to improve the "Sewn Embroidery Home" network platform, actively promote the network platform, and strive to achieve a full coverage of the country. In addition, SGG will continue to build the industrial sewing machine network sales platform, realize the breakthrough of the standard industrial sewing machine online sales, and expand the online sales range of industrial sewing machine parts. In addition, the Company will focus on the development of major markets such as India, Russia, Algeria, Sri Lanka and Brazil, and deploy a network of distribution agents. 19 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 3. Consolidate product technology advantages and steadily promote intelligent manufacturing In 2019, the Company will continue to build the Bensheim trial base in Germany and enhanced KSL production capacity. SG Zhejiang will continue to promote the construction of the Taizhou intelligent manufacturing base, and with the assistance of SGGemsy, do a good job in equipment selection and site layout of the base, and strive to complete the integration and commissioning of the Taizhou factory by the end of 2019. In terms of research and development, the Company will continue to do research and development of embroidery electrical control, integrated flat seam electrical control (automatic), integrated overlock electrical control and automatic feeding shoe electrical control (improved); Development and trial production of L-Type sewing machine; advancement of M-Type 3 development as planned; and together with Shanghai Jiaotong University to further promote the design-manufacturing-service integrated cloud platform development for apparel customization. In 2019, the Company completed the trial production of the sleeve card machine and the improvement of the forklift machine, completed the manufacture of the DA 806 and PFAFF 3588 templates and other important parts and accessories of the sewing unit; optimize the cost, focus on the rectification of existing product quality problems and after-sales service; do a good job of item management of intelligent equipment to ensure that the gross profit margin reaches 15% or more. PFAFF welding machine and short-cutting shoe machine must have mass production capacity in China; the Company will strengthen supply chain management, reorganize the supplier system, and strive to reduce the cost of Mauser machine raw materials and parts by 10% under the premise of ensuring quality. In addition, accelerate the trial production and mass production of key components, and try to sell some third-party products in addition to the Company's internal support. 4. Improve operational efficiency and manage risk In 2019, the Company will continue to build the internal control system of the parent company and its subsidiaries, and continue to complete the rectification of the internal control re-evaluation test and defects in 2018, as well as the combing, supervision and improvement of the internal control standardization of the group system in 2019 and the independent testing of the Internal Control Evaluation Work Programme for 2019. Richpeace should further improve the system construction, establish a suitable internal control management system on the premise of meeting the requirements of internal control, implement comprehensive management, advocate full participation, establish internal control system that restricts each other and connects each other, and improves Enterprise management level and anti-risk ability; at the same time, self-diagnosis of the status quo of internal institutions, analysis of the division of functions, past performance, cooperation ability, personnel composition, cost and other aspects of various agencies, judging the implementation of separation of main and auxiliary, streamlining and simple administration, collaborative production The feasibility of other aspects, and do a good job of reform and adjustment. Actively explore the establishment of an efficient financial management and control system, do a good job in the preparation of comprehensive budget management in 2019, do a good job in financial risk early warning, realize early warning management of major financial risks, prevent financial risks; actively explore and establish a "fund pool" of the group company Improve capital gains and strengthen fund supervision. Continue to do a good job of maintaining stability, further tap effective assets, and properly handle historical issues. Continue to implement the safety production responsibility system and continue to do a good job in safety production and environmental protection. 3) Business plan Operating income: 3.7 billion yuan; operating profit: 290 million yuan; ROE: not less than 8%. 20 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 4) Possible risks (1) Industrial and market risk The sewing equipment industry is an industry full of market competition, with obvious periodicity, and has strong dependence on downstream textile and garment, leather bags and other industries, and is greatly affected by the macroeconomic environment. Due to the large proportion of the Company's sewing equipment industry, the Company is more likely to be affected by the overall industry fluctuations. The Company may face increased competition in the industry, lower gross profit margins and lower product prices. (2) Transnational operations and integration risk With the expansion of the Company's overseas assets and business scale, transnational operations put forward higher requirements for the Company's organizational structure, business model, management team and staff. In the process of production, operation and the integration of overseas subsidiaries, the Company will face challenges arising from differences in domestic and international policy systems, corporate culture and management concepts. (3) Risk of exchange rate fluctuations The bookkeeping base currency of the Company's consolidated statements is RMB. Domestic product exports are mostly settled in US dollars. The daily operations of the Company's subsidiary DAP AG and its holding subsidiaries are mainly settled in foreign currencies such as the Euro. Fluctuations in the RMB exchange rate will bring certain exchanges on the future operation of the Company, resulting in asset depreciation risk. Chapter 5 Important Matters 1. Common stock profit distribution plan or capital reserve fund transfer plan According to the documentary spirit of the China Securities Regulatory Commission's "Guidelines for the Supervision of Listed Companies No. 3 - Cash dividends of listed companies" and the relevant documents of the Shanghai Stock Exchange on the "Guidelines for Cash Dividends of Listed Companies of the Shanghai Stock Exchange", combined with the actual situation of the company, The company has formulated a clear cash dividend policy and its decision-making and adjustment mechanism in the Articles of Association. During the reporting period, the company implemented the dividend policy in strict accordance with the relevant dividend regulations formulated by the Company's Articles of Association. During the reporting period, the 2017 annual profit distribution plan reviewed and approved by the Company's 2017 Annual General Meeting of Shareholders was implemented without the implementation of cash dividend distribution, non-shareholding or transfer of share capital. Audited by BDO China Shu Lun Pan Certified Public Accountants LLP., the Company achieved the consolidated net profit of 158,449,643.95 yuan in 2018, of which, the net profit attributable to parent company owners is 140,828,047.20 yuan. According to the provisions in the Articles of Association, before withdrawing the legal accumulation fund, the Company should first cover the deficit with the profit of the year. As the profit of the year failed to make up the deficit of previous years, the Company did not draw the legal accumulation fund. The current-period net profit of the parent company is 32,898,977.07 yuan; the undistributed profits at the beginning of 2018 are -143,892,809.85 yuan; thus the practical profit available for distribution is -110,993,832.78 yuan at the end of 2018. As the parent company’s profit available for distribution is negative, the profit distribution cannot be made in 2018, neither the transferring of capital reserves into share capital. 21 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 2. Commitment PKFR promised that its shareholding ratio will not be reduced to less than the shareholding ratio of Pudong SASAC within 36 months from the date of stock delivery. The commitment period is from December 29, 2016 to December 28, 2019. It is being strictly implemented. 3. The situation of funds being occupied and the progress of debts during the reporting period Not applicable. 4. Explanation of “non-standard opinion audit report” Not applicable. 5. Analysis of the Reasons and Impacts of Changes in Accounting Policies, Changes in Accounting Estimates, or Major Accounting Errors The Content and reasons of accounting policy changes Item and amount affected The ―receivable notes‖ and ―accounts receivable‖ are combined into ―receivable notes and accounts receivable‖. The current amount is 617,760,694.90 yuan, and the previous period amount is 526,096,919.07 yuan; (1) The ―receivable notes‖ and ―accounts receivable‖ in The ―Accounts payable‖ and ―Accounts payable‖ are combined into the balance sheet are combined as ―receivable notes and ―Accounts payable and accounts payable‖. The current amount is accounts receivable‖; ―payable notes‖ and ―accounts 318,803,039.91 yuan, and the previous amount is 206,343,320.56 payable‖ are combined as ―payable‖ "Notes and accounts yuan; payable"; "interest receivable" and "dividends Increasing the amount of ―other receivables‖ for the current period receivable" are included in "other receivables"; "interest of 27,041,989.94 yuan, and increasing the amount of the previous payable" and "dividend payable" are included in "other period by 21,645.73 yuan; payables"; ―Asset Clearance‖ is included in ―Fixed Increasing the amount of ―other payables‖ for the current period was Assets‖; ―Engineering Materials‖ is included in 1,838,717.63 yuan, and the amount of the previous period was ―Construction in Construction‖; ―Special Payables‖ is 2,143,371.92 yuan; included in ―Long-term Payables‖. The comparison data The amount of the ―fixed assets‖ in the current period and the is adjusted accordingly.。 amount in the previous period have not been increased; The current amount of the ―construction in progress‖ and the amount of the previous period have not been increased; The amount of the ―long-term payables‖ for the current period and the amount of the previous period have not been increased. (2) Add ―R&D Expenses‖ item in the income statement, reclassify the R&D expenses in the original The amount of ―administrative expenses‖ was reduced to ―Management Expenses‖ to ―R&D Expenses‖ separately; 97,647,657.57 yuan, and the previous amount was 84,350,255.40 add ―Including: Interest‖ under the financial expenses in yuan, which was reclassified to ―R&D expenses‖. the income statement.: Fees and interest income items. The comparison data is adjusted accordingly. In the table of changes in owner's equity, the item ―Setting the benefit of the change in the defined benefit N/A plan to carry forward the retained income‖ is added. The comparison data is adjusted accordingly. 6. Appointment of Accounting Firms Unit: 10,000 Yuan Name BDO China Shu Lun Pan Certified Public Accountants LLP. Payment 100 Audit Years 12 Name Payment Internal control audit accounting firm BDO China Shu Lun Pan Certified Public Accountants LLP. 45 7. Risk of Suspension of Listing Not applicable. 8. The Situation and Reasons for the Termination of Listing Not applicable. 22 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 9. Bankruptcy Not applicable. 10. Major lawsuits and arbitrations According to the capital increase agreement signed by DAP AG, a subsidiary of the Company, on August 29, 2015, the calculation of the 26% share price of the capital increase is based on the net assets in the 2014 audited consolidated statement of Stoll. It is agreed that the share price will be adjusted according to the net assets in the 2015 audited consolidated statement of Stoll and the relevant terms of the agreement. Due to the dispute between the two parties on the calculation of Stoll's 2015 net asset value and the relevant provisions in the agreement, there are differences in the calculation of the equity price adjustment. On July 20, 2017, DAP AG received an arbitration application from 12 Stoll shareholders including Michael Stoll and Corinna Stoll, except for DAP AG. The Company will settle the dispute through arbitration in accordance with the German legal procedures in accordance with the terms of the agreement. As of December 31, 2018, DAP AG absorbed and merged DA AG. and changed its name to DA AG. The arbitration is still in progress and will be resolved together with the company's disposal of 26% equity of Stoll. 11. Penalties and rectification of listed companies and their directors, supervisors, senior management personnel, controlling shareholders, actual controllers and purchaser Not applicable. 12. Explanation of the integrity of the company and its controlling shareholders and actual controllers during the reporting period Not applicable. 13. The Company's Equity Incentive Plan, Employee Stock Ownership Plan or Other Employee Incentives Not applicable. 14. Major related party transactions Shanghai SGSB Electronic Co., Ltd., a wholly-owned subsidiary of the Company, sells products to Fiji Xerox of Shanghai Limited., and is its permanent accessory supplier. The above-said transaction constitutes the daily associated transaction. It is estimated that in 2018, the amount of products that it will sell to Fiji Xerox is 20 million yuan, and in the report period, the sales amount was 17.43 million yuan, decreased by 12.85%. It is mainly due to the year-on-year decrease in the sales volume of Shanghai Fuji Xerox Co., Ltd. and the adjustment of production models. 15. Significant contracts and their implementation 1) Trusteeship, contracting and lease Not applicable. 2) Guarantee Unit: 10,000 Yuan, Currency: RMB Guarantee Relations of guarantee Guarantee available? Amount If counter guarantee date Overdue Overdue amounts Relation If the guarantor Expiration for Guarantor Security party (agreement Start date Type guarantee d to listed date related signoff is done company party? date Commerzbank Joint SGG The Company Shanghai 7,000 2014/3/25 2014/3/25 2018/11/15 liability Yes No 0 No No Branch guarantee Commerzbank Joint SGG The Company Shanghai 6,866 2014/6/30 2014/7/1 2018/11/15 liability Yes No 0 No No Branch guarantee Commerzbank Joint SGG The Company Shanghai 10,299 2016/9/19 2016/9/19 2018/11/15 liability Yes No 0 No No Branch guarantee Commerzbank Joint SGG The Company Shanghai 8,583 2015/8/28 2015/8/28 2018/11/15 liability Yes No 0 No No Branch guarantee 23 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Industrial & Commercial Joint Bank of China SGG The Company 6,278 2015/12/21 2015/1221 2020/12/21 liability No No 0 No No Shanghai guarantee Hongkou Branch Joint Wholly-owned DA AG Commerzbank 2,146 2016/1/7 2016/1/7 2018/7/30 liability Yes No 0 No No subsidiary guarantee Guarantee amounts spent during the report period (excluded guarantee to affiliate company. -34,858 Total balance of guarantee at the end of period (affiliate companies are not quailed.)(A) 6,278 Guarantee of company to affiliates Total guarantee amounts of subsidiaries in the report period 6,000 Total balance of guarantee to subsidiaries at the end of report period (B) 6,000 Company total guarantee amounts (including those to subsidiaries) Total guarantee amounts(A+B) 12,278 Ratio of total guarantee amounts to company net assets (%) 5.55 In which: Guarantee amounts provided to stockholders, actual controller and affiliated parties (C) 0 Guarantee amounts directly or indirectly provided for liabilities of guarantor whose assets 6,000 liabilities ratio is higher than 70%(D) Differences of total guarantee amounts exceeds 50% of the net assets(E) 0 Total guarantee amounts of the above-mentioned three items (C+D+E) 6,000 On 21st December 2015, the Company's wholly owned subsidiary DAP AG applied to the Frankfurt Branch of ICBC for a limit loan of 7.878 million euro so as to pay the acquisition fee to Stoll KG. ICBC Shanghai Hongkou Branch issued a financing guarantee letter for the funds, and the Company issued an unconditionally irrecoverable corporate letter of guarantee for self-using fix assets where No.603 Dapu Road as counter guarantee for the abovementioned financing guarantee letter. On November 20, 2018, Tianjin Richpeace Computer Machinery Co., Ltd., a subsidiary of the Company, applied to the Shanghai Branch of China Minsheng Bank Co., Ltd. for a comprehensive credit of 60 million yuan. The company provides the highest comprehensive credit guarantee. Tianjin Tongshang Software Co., Ltd. and Shenzhen Yingning Venture Capital Co., Ltd., minority shareholders of Richpeace, respectively provided 15% and 20% of the shares of Richpeace to provide 15% and 20% guarantee fro the company's guarantee responsibility. 3) Cash asset management A. Entrusted financing Unit: 100 million yuan, Currency: RMB Type Resource Total amount Amount unexpired Amount overdue Structured deposits Idle raised funds 1.11 1.1 0 Structured deposits Idle self-owned funds 2.22 0.7 0 With the review and approval of the 35th meeting of the Seventh Board of Directors on 31st March 2017, it is resolved that idle raised funds of 110 million yuan and self-owned funds of 222 million yuan were managed in purchasing RMB financial products of the bank with principal guaranteed. With the review and approval of the 4th meeting of the Eighth Board of Directors on 12 April 2018, it is resolved that idle raised funds of 110 million yuan and self-owned funds of 222 million yuan were managed in purchasing RMB financial products of the bank with principal guaranteed. Unit: 10,000 yuan, Currency: RMB Starting Ending Fund Method of determining Annualized rate of Gains actually Name of partner Product name Amount date date resource gains return obtained Wenjin No. 2 Floating gains with BOS Fumin Branch 8,000 2017/7/6 2018/1/4 Self-owned 4.20% 167.54 SD21706M041B guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 2,500 2017/8/1 2018/1/30 Self-owned 4.35% 54.23 SD21706M051B guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 2,500 2017/8/1 2018/1/30 Raised 4.35% 54.23 SD21706M051B guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 6,500 2017/11/28 2018/5/29 Raised 4.30% 139.37 SD21706M091B guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 1,500 2017/11/28 2018/5/29 Self-owned 4.30% 32.16 SD21706M091B guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 2,000 2017/12/7 2018/3/8 Raised 4.40% 21.94 SD21703M114B guaranteed principal 24 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Wenjin No. 2 Floating gains with BOS Fumin Branch 10,200 2017/12/7 2018/6/7 Self-owned 4.30% 218.70 SD21706M094B guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 7,000 2018/1/9 2018/4/10 Self-owned 4.55% 79.41 SD21803M004B guaranteed principal Shanghai Pudong JG903 Structured Floating gains with 1,000 2018/1/9 2018/7/9 Self-owned 4.60% 23.00 Development Bank deposit guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 2,500 2018/2/1 2018/8/2 Self-owned 4.60% 57.34 SD21806M012A guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 2,500 2018/2/1 2018/8/2 Raised 4.60% 57.34 SD21806M012A guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 2,000 2018/4/17 2018/7/17 Raised 4.60% 22.94 SD21803M048B guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 7,000 2018/4/17 2018/10/16 Self-owned 4.60% 160.56 SD21806M037B guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 6,000 2018/6/12 2018/9/11 Self-owned 4.55% 68.06 SD21803M078C guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 6,500 2018/6/19 2018/7/24 Raised 4.20% 26.18 SD21801M088A guaranteed principal Floating gains with China Merchants Bank BBSJ 8688 2,000 2018/6/15 2018/8/14 Self-owned 3.15%—3.90% 10.73 guaranteed principal Floating gains with China Merchants Bank BBSJ 8688 1,500 2018/7/10 2018/8/14 Self-owned 3.15%—3.70% 4.60 guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 8,500 2018/7/26 2018/10/25 Raised 4.20% 89.01 SD21803M105B guaranteed principal Yuntong Wealth 91 Floating gains with Bank of Communications 2,500 2018/8/6 2018/11/5 Raised 4.30% 26.80 Days guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 4,000 2018/10/16 2018/11/20 Self-owned 3.60% 13.81 SD21801M137A guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 8,500 2018/11/8 2019/2/14 Raised 4.00% SD21803M158B guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 2,500 2018/11/20 2019/2/19 Raised 4.00% SD21803M162A guaranteed principal Floating gains with PING AN BANK Structured deposits 1,500 2018/11/20 2019/2/19 Self-owned 4.10% guaranteed principal Wenjin No. 2 Floating gains with BOS Fumin Branch 4,000 2018/12/6 2019/3/7 Self-owned 4.00% SD21803M170A guaranteed principal Structured deposits Floating gains with PING AN BANK 1,500 2018/12/4 2019/1/4 Self-owned 3.80% 92Days guaranteed principal B. Entrusted loan Unit: 10,000 yuan, Currency: RMB Actual Starting Fund Investment Annualized rate Trustee Type Amount Ending date gain or Note date resource targets of return loss Principal BOS and Fumin Others 5,300 2018/5/22 2018/11/22 Self-owned Richpeace 4.7% 125.08 interest Branch are fully recovered 16. Other Major Issues Not applicable. 17. Implementation of Social Responsibility 1) Poverty alleviation work of listed companies Not applicable. 2) Social responsibility work situation The Company always regards the operation according to law as the basic principle of the Company's operation, and pays attention to the simultaneous and win-win situation of the economic and social benefits of the enterprise. In 2018, the Company earnestly abides by the requirements of national laws, regulations and policies, always operates according to law, actively pays taxes, strictly controls product quality, develops jobs, actively participates in Pudong New Area charity donations and volunteers for the people, and supports local economic development. There have been no cases of social responsibility such as social and economic development and environmental protection. 3) Environmental information The company and its Subsidiaries are not key pollutant discharge units announced by the environmental protection department. During the reporting period, the Company and its subsidiaries strictly implemented the national laws and regulations on environmental protection, formulated strict environmental practices, and adopted corresponding measures for pollution sources. 25 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 18. Convertible Corporate Bonds Not applicable. Chapter 6 Changes in Common Shares and Shareholders 1. Changes in common stock capital Not applicable. 2. Securities issuance and listing Not applicable. 3. Shareholders and actual controllers 1) Total number of shareholders As of the end of the reporting period, the company had a total of 57,633 ordinary shareholders, including 31,036 shareholders of A shares and 26,597 shareholders of B shares. As of the end of January last year, the total number of common shareholders of the company was 55,234, including 28,805 A-share shareholders and 26,429 B-share shareholders. 2) The shareholdings of the top ten shareholders as of the end of the reporting period Unit: Share Top Ten Unrestricted Shareholders' Shareholdings Amount of Pledge or freeze Amount of shares held Changer in shares held at Proportion Nature of Name under 2018 the end of the (%) Type Amount shareholders restricted period conditions Domestic Shanghai Puke Flyingman Investment -789,457 60,000,000 10.94 0 Pledge 60,000,000 non-state Co., Ltd. legal person State-owned Assets Supervision and Administration Commission of Shanghai 0 45,395,358 8.27 0 / State Pudong New Aear People’s Government China GreatWall Asset Management Co., State-owned 0 22,200,000 4.05 0 / Ltd. legal person Shanghai International Group Asset State-owned 0 10,968,033 2.00 0 / Management Co., Ltd. legal person SCBHK A/C KG INVESTMENTS ASIA Foreign legal 520,985 5,430,440 0.99 0 / LIMITED person ISHARES CORE MSCI EMERGING Foreign legal 1,427,060 4,989,260 0.91 0 / MARKETS ETF person GreatWall Guorong Investment State-owned 0 4,770,654 0.87 0 / Management Co., Ltd. legal person VANGUARD EMERGING MARKETS Foreign legal 0 3,678,113 0.67 0 / STOCK INDEX FUND person Domestic Zeng Weili 3,487,900 3,487,900 0.64 0 / natural persons Domestic Chen Yan 3,263,500 3,263,500 0.59 0 / natural persons Top Ten Unrestricted Shareholders' Shareholdings Number of shares held in Type & Amount Name unrestricted conditions Type Amount Shanghai Puke Flyingman Investment Co., Ltd. 60,000,000 A Share 60,000,000 State-owned Assets Supervision and Administration Commission of Shanghai Pudong New Aear People’s 45,395,358 A Share 45,395,358 Government China GreatWall Asset Management Co., Ltd. 22,200,000 A Share 22,200,000 Shanghai International Group Asset Management Co., Ltd. 10,968,033 A Share 10,968,033 SCBHK A/C KG INVESTMENTS ASIA LIMITED 5,430,440 B Share 5,430,440 26 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd ISHARES CORE MSCI EMERGING MARKETS ETF 4,989,260 Share 4,989,260 GreatWall Guorong Investment Management Co., Ltd. 4,770,654 A Share 4,770,654 VANGUARD EMERGING MARKETS STOCK INDEX 3,678,113 Share 3,678,113 FUND Zeng Weili 3,487,900 A Share 3,487,900 Chen Yan 3,263,500 A Share 3,263,500 Note: PKFR is a wholly-owned subsidiary of Shanghai Pudong Technology Investment Co., Ltd., which has a relationship. Shanghai Pudong Technology Investment Co., Ltd. directly holds 789,457 A shares of the company, and PKFR holds 60,000,000 A sharesof the company. GreatWall Guorong Investment Management Co., Ltd. is a wholly-owned subsidiary of China GreatWall Asset Management Co., Ltd., and there is a relationship; the Company is not aware of any relationship or concerted action among other shareholders. The top ten shareholders with restricted sales and restricted sales: Not applicable. 4. The Situation of Controlling Shareholders and Actual Controllers As the Company's largest shareholder PKFR and the second largest shareholder Pudong SASAC holds a relatively low proportion of shares of the Company, and the shareholding ratio is relatively close, no more than 30%, no shareholder can form a separate control over the Company, the Company is a listed company with no controlling shareholder and no actual controller. 5. Other corporate shareholders holding more than 10% of shares Date of Registered Name Legal representative Organization Code Main business establishment capital Shanghai Puke Industrial investment, 7.235 million Flyingman Investment Zhu Xudong 2016/6/16 91310115MA1K3D9W81 investment management, yuan Co., Ltd. investment consulting 6. Explanation of the restrictions on shareholding reduction Not applicable. Chapter 7 Preferred Stock Not applicable. 27 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Chapter 8 Directors, Supervisors, Senior Management and Employees 1. Share change and compensation 1) Share change and compensation of current and former directors, supervisors and senior managers Unit: Share Shares Pre Tax Shares Held at Compensation Compensation Held at the Increase/ Reason for Payable in the Payable by Name Title) Gender Age Starting Date Ending Date the End Beginning Decrease the Change Report Period Related of the of the (Unit: 10,000 Parties Year Year yuan) Zhang Chairman 2004/7/30 2020/4/26 Male 56 170,000 170,000 105.92 No Min President 2017/4/27 2020/4/26 Zhu Director Male 54 2017/4/27 2020/4/26 Yes Xudong Yin Qiang Director Male 40 2017/4/27 2020/4/26 Yes Huang Director Female 42 2017/4/27 2020/4/26 Yes Yingjian Lu Yujie Director Male 49 2009/6/30 2020/4/26 Yes Li Chen Director Male 35 2018/6/20 2020/4/26 No Independent Xi Lifeng Male 52 2017/4/27 2020/4/26 12 No director Independent Rui Meng Male 51 2017/4/27 2020/4/26 12 Yes director Chen Independent Male 44 2017/4/27 2020/4/26 12 Yes Zhen director Chairman Qiao of the Male 61 2014/4/28 2020/4/26 No Junhai Supervisory Board Chen Supervisor Male 41 2017/4/27 2020/4/26 Yes Mengzhao Zhang Supervisor Male 59 2017/4/27 2020/4/26 64.30 No Jianguo Vice Li Jiaming president Male 58 2008/4/18 2020/4/26 80.17 No (Chief) Fang Vice Male 52 2008/4/18 2020/4/26 No Haixiang president Li Vice Male 44 2012/12/27 2020/4/26 78.44 No Xiaofeng president Xia Vice Male 54 2018/10/29 2020/4/26 54,900 54,900 11.51 No Guoqiang president Zhang CFO Male 46 2018/10/29 2020/4/26 8.20 No Jianrong Zhao Secretary of Male 52 2019/1/30 2020/4/26 No Lixin the board Li Director Male 36 2017/4/27 2018/4/4 No Wenhao Purchase Zheng Vice in the Female 54 2008/10/27 2018/2/26 21,500 23,500 2,000 No Ying president secondary marked Zhou Secretary of Male 56 2017/4/27 2018/10/30 50.02 No Yongqiang the Board Total / / / / / 246,400 248,400 2,000 / 434.56 / Name Main work experience He has a bachelor degree in engineering from Shanghai Jiao Tong University, an EMBA from China Europe International Business School, a professor-level senior engineer. He has won the title ―China's Light Industry Model Worker‖, ―Shanghai Labor Model Worker‖, ―National Model Worker‖, ―National Outstanding Zhang Min Entrepreneur‖ from 2015 to 2016, and ――2018 Shanghai Outstanding Entrepreneur‖. He took part in the work in July 1983. He used to be the engineer of the introduction office., the deputy section chief of the quality control department, the chief section of the supply section, the director of the full quality office, the chief of the financial section, the head of the investment and development section, and general manager of Shanghai Refrigerator Compressor Co., Ltd. Assistant; General Manager of Shanghai Zanussi Electric Machinery Co., Ltd.; Deputy Party Secretary, Vice Chairman and General Manager, Chairman of Shanghai SMPIC Office Machinery Co., Ltd.; 28 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Chairman and CEO of ShangGong Group Co., Ltd. Since April 2017, he has served as chairman of the eighth Board of Directors and the General Manager of SGG. Now he is concurrently the vice chairman of China National Light Industry Council and vice chairman of the China Sewing Machinery Association. He has a doctor degree from Tongji University, a EMBA from China Europe International Business School, senior engineer. He used to be Assistant Engineer of Aeronautics and Aircraft Design Institute of Ministry of Transportation, Chief Staff Officer and Assistant to the Director of Urban Construction Bureau of Pudong New Area, Deputy Director and Chief Engineer of Pudong New Area Municipal Construction Construction Administration, General Manager of Pudong New Area Construction and Management Co., Ltd., Deputy Director of the Planning and Development Bureau of Pudong New Area, Secretary of Science and Zhu Xudong Technology Bureau of Pudong New Area, Secretary of the Party Group (Director of Intellectual Property Office and Director of the Information Commission), Director of Science and Technology Committee of Pudong New Area, Party Secretary and First Vice-President and Party Secretary of the Pudong New Area Science and Technology Association. He is currently the chairman and president of Shanghai Pudong Science and Technology Investment Co., Ltd., and serves as the board chairman of Shanghai Wanye Enterprise Co., Ltd. and the director of Shanghai Xinmei Real Estate Co., Ltd. Since April 2017, he has served as a director of the eighth Board of Directors of the Company. He holds a master's degree in financial investment from the School of Management of the University of Rotterdam in Netherlands, and is a first-tier financial analyst. He used to be a programmer in the financial software development department of the Shanghai Institute of Computing Technology; a staff member of the Investment Banking Department and the Investment Finance Department of Pudong Development Group Finance Co., Ltd.; a director of the Office of Pudong Public Rental Housing Yin Qiang Company; an assistant to the director of office of Pudong Development Group Co., Ltd.; assistant director (Presiding) of Pudong SASAC. He is currently the general manager of the investment management department of Shanghai Pudong Investment Holdings Co., Ltd. and chairman of Shanghai Shine-link International Logistics Co., Ltd.. Since April 2017, he has served as a director of the eighth Board of Directors of the Company. She graduated from the University of Braunschweig in Germany with a master's degree and is an economist. She used to be a project consultant of Desun Trading & Consulting GmbH, a researcher at Fuka Economic Forecasting Institute, investment staff Huang and employee director of Shanghai Digital Industry (Group) Co., Ltd., assistant director of the property rights section of Pudong Yingjian SASAC; Deputy Manager of the Equity Management Department of Shanghai Pudong Investment Holding (Group) Co., Ltd. (Presiding), Legal Representative of Shanghai Pudong Asset Management Co., Ltd., Director of Shanghai Digital Industry Group Co., Ltd. Since April 2017,s he has served as a director of the eighth Board of Directors of the Company. Fudan University Master of Business Administration, Senior Economist. Previously worked at Shanghai Metro Corporation; once served as head of the investment bank of Shanghai International Trust & Investment Corporation; project manager of Financial Advisory Department, manager of Investment Banking Department and financial manager of Shanghai International Group Asset Lu Yujie Management Co., Ltd.; operations director, financial director, and investment director of asset management of hanghai International Group Asset Management Co., Ltd. Currently he is deputy general manager of Shanghai International Group Asset Management Co., Ltd. Since April 2017, he has served as a director of the eighth Board of Directors of the Company. Li Chen He is a senior professor in Shanghai Jiao Tong University. He received his Ph.D. from Shanghai Jiaotong University in 1995. Since September 1995, he has taught at Shanghai Jiao Tong University and served as vice president and dean of School of Mechanical and Power Engineering of Shanghai Jiao Tong University. Currently He serves as Vice President of Shanghai Jiao Tong University and Dean of Gas Turbine Research Institute, Executive Deputy Dean of China Institute of Quality Development, Xi Lifeng and Deputy Director of the Machinery Engineering Professional Steering Committee of the Ministry of Education, founded Fellow of International Engineering Asset Management Society, Standing Director of China Quality Association, and deputy chief editor of "Industrial Engineering and Management" journal. Since April 2017, he has served as an independent director of the 8th Board of Directors of the Company. He holds a Ph.D. in Finance from University of Houston. He is also professionally designated as Certified Financial Analyst (CFA) and Financial Risk Manager (FRM). He used to be a tenured Professor at Chinese University of Hong Kong. He was the Programme Director of Executive Master of Professional Accountancy which is a joint programme between the CUHK and Shanghai National Institute of Accounting. He was a deputy director of the Center for Institutions and Governance and a senior research fellow of Institute of Economics and Finance. He also serves as an independent director for COSCO Shipping Energy Transportation Co., Ltd. and Shanghai Winner Information Technology Co., Inc. He is a Member of American Finance Rui Meng Association, Financial Management Association, American Accounting Association, Hong Kong Securities Institute. He was a former member of the Panel of Examiners of the Securities Industry Examination of the Hong Kong Stock Exchange and a former member of the Advisory Board of the Business Valuation Forum in Hong Kong. He was a visiting financial economist at Shanghai Stock Exchange, research fellow at Hong Kong Institute for Monetary Research and research fellow at Asian Development Bank Institute. He was also a vice president of Hong Kong Financial Engineering Association. Since April 2017, he has served as an independent director of the eighth Board of Directors of the Company. Bachelor of law. Chinese practicing lawyers. Since 1999, He has worked as a lawyer and partner in Llinks Law Offices. Since Chen Zhen April 2017, he has served as an independent director of the 8th Board of Directors of the Company. Serve in the army from December 1976 to April 2005, former deputy commander. Former director and secretary of party committee of Shanghai Nanhui District Sports Bureau, vice secretary and secretary-general of Nanhui District Politics and Law Committee, director of Nanhui District Comprehensive Management of Public. Former Party Committee Secretary of Pudong Qiao Junhai New Area Politics and Law Committee, vice director of Comprehensive Management of Social Security Committee Office, member of Pudong New Area Commission for Discipline Inspection. From April 28, 2014, he served as the Supervisory Board Chairman of the Company. Bachelor of Engineering, Bachelor of Law, Lawyer. He used to be a layer at Shanghai Allbright Law Offices and Shanghai Chen HIWAYS Law Firm. He joined Shanghai Pudong Science & Technology Investment Co., Ltd. in 2011 and has served as Senior Mengzhao Legal Manager of the Legal Department, Deputy General Manager of the Legal Department and Legal Director. He has also served as Director of Shanghai Wanye Enterprise Co., Ltd.; currently he serves as Partner of Shanghai Pudong Science & 29 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Technology Investment Co., Ltd., and Director & General Manager of Shanghai Xinmei Real Estate Co., Ltd. Since April 2017, he has served as a supervisor of the Company's8th Supervisory Board. University degree, senior engineer. He once served at Shanghai Washing Machine Third Factory and was the Chief of the Production Unit and Technical Unit; Deputy Chief of the Technical Department and the Workshop Director of Shanghai Washing Machine Factory; Director of the Enterprise Management Department, the Director of the Technology Development Department Zhang and the Deputy General Manager of Shanghai Shui Xian Electric Appliance Co., Ltd.; Chief engineer and deputy general Jianguo manager of Shanghai SMPIC Office Machinery Co., Ltd., party secretary and deputy general manager of Shanghai Fuji Xerox Co., Ltd., secretary of the board of directors of ShangGong Group Co., Ltd. Now he is the deputy party secretary of the Company and the chairman of the labor union. Since April 2017, he has served as the supervisor of the 8th Supervisory Board of the Company. He holds a bachelor's degree in science from Fudan University and is a professor-level senior engineer. Former R&D Director, Deputy General Manager of Shanghai SMPIC Office Equipment Co., Ltd., Site Manager of SMPIC Photosensitive Materials Li Jiaming Factory, General Manager and Party Secretary of Shanghai Machinery Co., Ltd.; Director and deputy general manager of ShangGong Group Co., Ltd.. Since April 2008, he served as deputy general manager of the Company. Fang Master of engineering, senior engineer. Former deputy general manager and chief engineer of Shanghai Xiechang Feiren Co., Haixiang Ltd.; former director of the Company. Since April 2017, he served as deputy general manager of the Company. EMBA from China Europe International Business School, MBA from Shanghai University of Finance and Economics, Senior Economist. Former general manager Assistant of the Company, general manager of Shanghai Import & Export Co., general Li Xiaofeng manager of Shanghai Shanggong Butterfly Sewing Machine Co., Ltd., currently general manager of DAPSH. Since December 2012, he served as the Company’s deputy general manager. Shanghai University of Technology (now Shanghai University) undergraduate degree, senior engineer. He used to be the technical technician and deputy section chief of Shanghai Jiangwan Machinery Factory, the marketing manager of Venus Needle Shanghai Co., Ltd. (Taiwan-funded), and the marketing director of Jinmingdun Water Heater Co., Ltd. (China-Canada Cooperation), Singer (Shanghai) Sewing Machine Co., Ltd. Engineering Xia Manufacturing Manager, Product Manager, China Sales Director, Global Industrial Products Purchasing Manager; Guoqiang joined Shang Gong Group Co., Ltd. in February 2012, and served as Manager of Shanghai Purchasing Center of DA AG, Germany. Deputy General Manager of DAMSH, General Manager of Pfaff Industrial Sewing Machine (Taicang) Co., Ltd., General Manager of SGGEMSY, Assistant to President of SGG. Director of Manufacturing Management; from October 2019 to present, served as Vice President of the Company. Master of Zhongnan University of Economics and Law, China Certified Public Accountant, China Registered Asset Appraiser. He used to be a trader of Wuhan Stock Exchange, the financial director of the Hong Kong and Macao Zhang Securities Hankou business department, the financial supervisor of Huawei Technologies Co., Ltd. (Wuhan); the Jianrong assistant director of the financial direction of Shanghai Mingyuan Industrial Group Co., Ltd., the head of the audit department, and the assistant to the chairman; Guangwei Holdings General Manager of Risk Control Department. From October 2018 to present, he served as the Company's CFO. Undergraduate degree, accountant title. He used to be a financial officer of Shanghai Shenbei Office Machinery Co., Ltd., manager of the financial department of Shanghai Shenbei Real Estate Development Co., Ltd., manager Zhao Lixin of the finance department of Shanghai Suoying Real Estate Co., Ltd., and deputy manager of the finance department, Finance Director, and Assistant to the President of SGG. Since January 2019, he has served as Secretary of the Board of Directors and Director of the Finance Department. Note 1: During the reporting period, Mr. Fang Haixiang, the Company's vice president, worked in Germany and received remuneration from overseas subsidiaries. He did not receive remuneration from the company headquarters. Note 2: The Company's ninth meeting of the eighth board of directors held on January 30, 2019, appointed Mr. Zhao Lixin as the company's board secretary. 2) Equity incentives granted to directors and senior managers during the reporting period Not applicable. 2. Current and former director, supervisor and senior manager’s employment 1) Employment with shareholders Name Shareholder Title Starting date Ending date Director, Legal Zhu Xudong PKFR June 2016 Representative Zhang Min PKFR Director October 2018 Huang Yingjian Pudong SASAC Assistant Director Feburary 2013 Shanghai International Group Asset Lu Yujie Deputy general manager May 2015 Management Co., Ltd. GreatWall Guorong Investment Li Chen Manager (Senior) July 2015 Management Co., Ltd. Chen Mengzhao PKFR Supervisor June 2016 2) Employment with other institutions 30 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Name Company name Title Starting date Ending date China Sewing Machinery Association Deputy Director 26 September 2011 China Light Industry Federation Deputy Director 21 June 2016 Ningbo Meishan Bonded Port Area Executive Director, Shangshen Investment Management Co., Manager, Legal 23 March 2018 Zhang Min Ltd. Representative Ningbo Meishan Bonded Port Area Chairman, legal 17 April 2018 Gongbei Investment Management Co., Ltd. representative Ningbo Meishan Bonded Port Area Delegated representative 28 April 2018 Shendie Equity Investment Partnership Shanghai Pudong Technology Investment Founding Partner, January 2018 Co., Ltd. Chairman, President Zhu Xudong Shanghai Wanye Enterprise Co., Ltd. Director 18 December 2015 14 January 2022 Shanghai Xinmei Real Estate Co., Ltd. Director 16 November 2016 Shanghai Pudong Investment Holdings General Manager of January 2018 Co., Ltd. Investment Management Yin Qiang Shanghai Changlian International Logistics Chairman June 2016 Co., Ltd. Deputy Manager of Shanghai Pudong Investment Holdings Equity Management January 2016 Co., Ltd. Department (presiding) Huang Yingjian Shanghai Digital Industry (Group) Co., Director August 2014 Ltd. Shanghai Pudong Asset Management Co., Legal representative February 2016 Ltd. Shanghai International Group Asset Executive director March 2009 Management Co., Ltd. Gimpo Industrial Investment Fund Director December 2015 Management Co., Ltd. Lu Yujie Shanghai Baoding Investment Co., Ltd. Director June 2014 Longjiang Bank Co., Ltd. Director July 2015 Tonglian Payment Network Service Co., Supervisor August 2014 Ltd. Luoyang Axis Technology Co., Ltd. Director 11 July 2018 Li Chen Space Intelligence Co., Ltd. Director 15 May 2018 COSCO Shipping Energy Transportation Independent director June 2015 Co., Ltd. Shanghai Huina Information Technology Independent director December 2015 Rui Meng Co., Ltd. Midea Group Co., Ltd. Independent director December 2015 26 September 2018 China Education Group Holdings Limited Independent director December 2017 KONE Law Firm Lawyer, partner January 1999 China Longgong Holdings Co., Ltd. Independent director October 2014 Chen Zhen Ashridge Technology (Shanghai) Co., Ltd. Independent director May 2014 Chengdu Nibilu Technology Co., Ltd. Independent director July 2014 Shanghai Pudong Technology Investment Partner January 2018 Co., Ltd. Shanghai Wanye Enterprise Co., Ltd. Director 18 December 2015 15 January 2019 Chen Mengzhao Shanghai Xinmei Real Estate Co., Ltd. Director November 2016 Shanghai Xinmei Real Estate Co., Ltd. General manager 25 May 2018 Shanghai Fuji Xerox Co., Ltd. Vice Chairman June 2014 Li Jiaming Ningbo Meishan Bonded Port Area Director April 2018 Gongbei Investment Management Co., Ltd. Ningbo Meishan Bonded Port Area Li Xiaofeng Director April 2018 Gongbei Investment Management Co., Ltd. 3. Compensation for director, supervisor and senior managers Decision making procedure for director, supervisor and Apply the regulation on Officers’ Salary in Senior Management Personnel officer compensation Remuneration Management Regulation Implement according to Senior Management Personnel Remuneration Management Basis for director, supervisor and officer compensation Regulation and other corporate internal control system Director, supervisor and officer compensation payable Compensation will be paid according to KPI, according to independent director 31 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd compensation standard and procedure approved by the shareholder general meeting. Total compensation at end of reporting period for director, RMB 4.3456 million yuan, before tax supervisor and officer 4. Change of directors, supervisors and senior managers of the Company Name Title Change Reason Zheng Ying Vice President Outgoing Resignation Li Wenhao Director Outgoing Resignation Li Chen Director Election Election Xia Guoqiang Vice President Appointment Appointment Zhang Jianrong CFO Appointment Appointment Zhou Yongqiang Secretary of the board Outgoing Resignation 5. Punishment by the securities regulatory authorities in last three years Not applicable. 6. Staff condition of parent company and major subsidiaries 1) Staff condition Population of serving staff in parent company 194 Population of serving staff in major subsidiary companies 3,885 Total population of serving staff 4,079 Professional composition Type of professional composition Population of professional composition Production Staff 2,432 Sales Personnel 486 Technician 534 Financial Staff 154 Administrative Staff 473 Total 4,079 Education Type of educational degree Population Postgraduate, undergraduate and above 814 Junior college 2,078 Junior college and below 1,187 Total 4,079 2) Compensation policy In the report period, the Company has formulated the Employee Performance Assessment and Salary Management Method in the Department. The staff salary is implemented strictly according to stipulated policies. 3) Training plan The Company will do a good job in budget implementation of training costs according to the annual training plan, especially for the special training of the enterprises, so as to have an after-the-fact evaluation and focus on the training effect. The Company urges all enterprises to improve the continuing education of all kinds of professional and technical personnel and management personnel, establish training files, and link the training effectiveness with performance. At the same time, it is one of the basis for promotion of positions and forms a positive learning atmosphere. It reflects the concept of common development between the company and its employees. In order to get closer to the market, the Company continued to arrange the training of young cadres in 2018, and exercised in practice by exercising at the grassroots level. In the second half of 2018, the Company 32 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd concentrated on training and evaluation of sales management and financial management for young cadres, and continuously improved the quality and management level of young cadres. In 2018, the Company organized and completed 30 continuing financial trainings for financial auditing professionals in the group's corporate finance personnel; organized and completed 12 ―labor management personnel continuing education in the 2018 annual labor management cadres organized by the Shanghai Light Industry Labor Branch‖. Training with 33 person labor contracts and individual tax deductions; organize personnel to participate in special trainings such as brand management, equity incentives, and new accounting standards. Through training, we continuously improve the comprehensive quality of professionals. 4) Outsourcing Not applicable. Chapter 9 Corporate Governance 1. Description of Corporate Governance In the report period, the Company has continuously improved the corporate governance structure and regulated operation in strict accordance with laws and regulations including the Corporate Law, Securities Law and Code of Corporate Governance for Listed Companies, and the requirement of China Securities Regulatory Commission, Shanghai Stock Exchange and other regulators. The Company has formed the legal governance structure with distinct rights and liabilities, each performing its own functions, effective balance, scientific decisions and coordinating operation. The corporate governcet complies with the requirement of relevant laws and regulations, and there is no rectification within a limited time required by any supervision department. The shareholders’ meeting, board of directors and board of supervisors fulfill their own duties and operate in a standard way to practically guarantee the interest of vast investors and the Company. (1) Shareholders and shareholders’ meeting The Company holds shareholders’ meeting in strict accordance with the laws and regulations including the Corporate Law, Listing Rule of Shanghai Stock Exchange, and the requirement of the Articles of Association and Procedure Rules of Shareholders’ Meeting to ensure that all the shareholders can enjoy equal status and rights. Meanwhile, lawyers are invited to attend the shareholders’ meeting and confirm and witness the convention procedure, deliberation matters and attendees’ identities. The meeting minutes should be complete to guarantee the legitimacy and effectiveness of the shareholders’ meeting. (2) Controlling shareholders and the Company The Company possesses independent business and management abilities. Both the Company and controlling shareholders can realize ―five independences‖ in terms of staff, asset, finance, organization and business. The board of directors, board of supervisions and internal organizations can operate independently. The Company’s major decisions are made by the shareholders meeting according to the law. The controlling shareholders exercise shareholders’ rights by law without the behavior of interfering with the Company’s decision and operating activities directly or indirectly exceeding the shareholders’ meeting. The Company has no related transaction with controlling shareholders. (3) Directors and board of directors The Company has formulated the Procedure Rules of the Board of Directors according to the stipulation of the Corporate Law and Articles of Association. The directors’ qualification and electoral procedure comply with the stipulation of relevant laws and regulations. All the directors strictly abide by the directors’ declaration and promise that they have made, fulfill the rights and obligations endowed by the Articles of Association earnestly, and perform their duties loyally, diligently and sincerely. The Company’s independent directors shouldn’t be less than 1/3 of total directors. During the report 33 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd period, they have attended the board meeting carefully, delivered their professional opinions on major issues including periodic reports, related party transactions and external securities, and played a positive role in the scientific decisions of the board of directors and the healthy development of the company. (4) Supervisors and board of supervisors The Company elects supervisors in strict accordance with the selection procedure of the Corporate Law and Articles of Association. The Company’s board of supervisors consists of five supervisors, including two staff representatives. Population and staff composition comply with the requirement of laws and regulations. All the supervisors can carefully fulfill the obligations according to the Procedure Rule of the Board of Supervisors. Driven by the responsibility for all the shareholders, especially minority shareholders, supervisors fulfill responsibilities carefully, according to the Procedure Rules of the Board of Supervisors, supervise the Company’s finance, the legitimacy and compliance of directors and senior executives in fulfilling their duties. (5) Information disclosure and transparency The Company appoints the secretary of the board to be responsible for the Company’s information disclosure, receiving investors’ visit and consultation, and designates Shanghai Securities News and Hong Kong Commercial Daily to disclose the Company’s information. The Company strictly abides relevant stipulations of information disclosure, effectively prevents selective information disclosure and occurrence of insider trading, and makes everything in a just, impartial and open way. The Company can disclose relevant information truly, accurately, completely and timely according to relevant stipulations of laws, regulations and the Articles of Association to ensure that all the shareholders have the equal opportunity to gain information. (6) About investors’ relation and related interest parties The Company further enhances the channel to communicate with investors, fully respects and maintains the legitimate interest of related interest parties realizes the balance of the interest of shareholders, staff and society, commonly promotes the sustainable and healthy development of the company according to the Investor Relations Management. A specially-assigned person in the Company’s board office is responsible for receiving investors’ incoming calls, letters, visits and questions, and replies them by instant answers, relying letters or emails. In order to regulate the Company’s insider information management, enhance the privacy of inside information and maintain information disclosure fairness, the Company formulates and strictly executes the Inside Information and Insiders Management System according to laws and regulations of the Corporate Law, Securities Law, Administrative Measures on Information Disclosure by Listed Companies, Stock Listing Rule of Shanghai Stock Exchange, relevant stipulations of the Articles of Association and the actual condition of the company. The Company’s inside information management will be under the centralized leadership and management of the board of directors to guarantee that the information insiders files are true, accurate and complete. The chairman will become the major person in charge. The secretary of the board organizes the implementation and is responsible for registering and filling information insiders. The board of supervisors supervises the management system implementation of information insiders. During the report period, the Company has strictly implemented the registration management system of inside information and normalized information transfer process. During the regular report and temporary announcement disclosure period, the company has strictly controlled insiders range for private information, organized to fill in the Information Insider Registration Form, and truly and completely recorded the list of all the information insiders before the information above were public, and the time when insiders knew the inside information, etc. During the report period, the Company’s directors, supervisors, senior executives and other relevant staff have strictly abided by the management system of information insiders. No information insider has been discovered to utilize inside information to buy and sell Company’s stocks, and no information insider has been 34 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd investigated by the supervision department for being suspected of being involved in inside information trade. During the report period, the Company has revised the Articles of Association, Rules for the Shareholders' Meetings, and various regulations and systems to further perfect the corporate governance and normalize operation. There is no significant difference between the Company’s corporate governance and the requirements of relevant provisions released by CSRC. 2. Brief Introduction of Shareholder’S Meeting Inquiry index of designated website for Disclosure date for publishing Name of meeting Date of meeting publishing resolutions resolutions The 2017 Annual Shareholders’ Meeting 2018/6/20 www.sse.com.cn 2018/6/21 First Extraordinary General Meeting of 2018/9/18 www.sse.com.cn 2018/9/18 Shareholders in 2018 3. Directors' performance of duties 1) Attendance of Directors in Board Meeting and Shareholders Meeting Attendance in Board Meeting Whether Whether two times Attendance in Name Independent By Shareholders’ Scheduled Personal in a row did not Director Telecommuni- By Proxy Absent Meeting Meeting Attendance personally attend cation the meeting Zhang Min No 5 5 3 0 0 No 2 Zhu Xudong No 5 5 5 0 0 No 0 Yin Qiang No 5 5 3 0 0 No 1 Huang Yingjian No 5 5 3 0 0 No 2 Lu Yujie No 5 5 3 0 0 No 0 Li Chen No 3 3 3 0 0 No 0 Xi Lifeng No 5 5 5 0 0 No 0 Rui Meng No 5 5 3 0 0 No 1 Chen Zhen No 5 5 4 0 0 No 2 Li Wenhao No 0 0 0 0 0 No 0 Number of Board Meetings Held During the Year 5 Including on-site meeting 0 meetings by telecommunication 3 On-site with telecommunication meeting 2 2) Independent directors’ objection against significant events of the Company Not applicable. 4. Important opinions and recommendations of special committees under the board in report period Not applicable. 5. Explanation by supervisory board on the risks of the Company Not applicable. 6. Explanation on structural independence of the Company on business, personnel, assets, organization and finance from the holding shareholder Not applicable. 7. Appraisal and incentive system for senior managers According to the requirements of the Company's marketization and centralized management, through the project consultation of PricewaterhouseCoopers Management Consulting (Shanghai) Co., Ltd., the Company revised and improved the compensation performance optimization plan of the executive team. On the basis of 35 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd the salary incentive design plan of the middle management staff of SGG, the program design is further carried out in the medium and long-term incentives, and the incentive projects are basically completed. In 2018, senior executive compensation is linked to the completion of the Company's business objectives, the performance of individual in charge of work, and the completion of key tasks. The Remuneration and Appraisal Committee of the Board of Directors determines the evaluation of senior management personnel based on the completion of the company's business indicators in 2018 and the completion of the duties of the senior executives. 8. Self-evaluation report of internal control There were not factors which have influence on evaluation conclusion of effectiveness of internal control from the benchmark date of self-evaluation report of internal control to issuance date of self-evaluation report of internal control. For details of self-evaluation report of internal control, please see the complete report released in the website of Shanghai Stock Exchange. 9. Internal control audit report Appointed by the Company, BDO conducted an audit on the effectiveness of internal control of financial statements, and issued a standard audit report for internal control without reserved opinions. For details of audit report for internal control, please see the complete report released in the website of Shanghai Stock Exchange. Chapter 10 Corporate Bond Not applicable. 36 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Chapter 11 Financial Report 1. Audit Report XinKuaiShiBaoZi[2019]No. ZA11614 To all the shareholders of Shang Gong Group Co., Ltd.: 1. Audit Opinion We have audited the financial statements of Shang Gong Group Co., Ltd. (hereinafter referred to as ―the Company‖), including the consolidated statement of financial position and statement of financial position as of 31st December 2018, consolidated statement of comprehensive income and statement of comprehensive income, consolidated statement of cash flows and statement of cash flows, consolidated statement of changes in equity and statement of changes in equity and notes to the financial statements for the Year 2018. In our opinion, the accompanying financial statements are prepared in all material respects in accordance with the Accounting Standards for Business Enterprises and fairly reflect the consolidated financial position and the parent company’s financial position as of 31st December 2018 and the consolidated and the parent company’s operating results and cash flows for the Year 2018. 2. Basis of Forming Audit Opinion We performed the audit in accordance with the Chinese Certified Public Accountants Auditing Standards. The ―CPA's Responsibility for Auditing Financial Statements‖ section of the audit report further elaborated our responsibilities under these guidelines. According to the Code of Ethics of Chinese Certified Public Accountants, we are independent of the Company and perform other professional ethics duties. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for issuing an audit opinion. 3. Key Audit Matters The key audit matters are the matters that we believe are most important for the audit of the current financial statements based on professional judgment. The response to these matters is based on the audit of the financial statements as a whole and the formation of an audit opinion. We do not comment on these matters separately. We confirm that the following matters are key audit matters that need to be communicated in the audit report. Key audit matter How is this matter handled in the audit (1) Impairment of inventory As of December 31, 2018, the book balance of your company's ①Understand and evaluate the design and operation inventory was 1,036,353,124.60 yuan, the inventory effectiveness of key internal controls related to the provision depreciation reserve amount was 139,375,239.77 yuan, and the of inventory impairment by your Company's management. inventory depreciation loss occurred in the current period was ②Carry out the inventory monitoring process, check the 9,068,644.01 yuan. Your company's inventories are measured at quantity and status of the inventory. Carry out a major the lower of cost and net realisable value. The net realizable inspection of the long-age inventory, and analyze the value of the completed product is determined by the estimated adequacy of the depreciation reserve for the inventory with selling price of the inventory minus the estimated sales indications of impairment. expenses and related taxes; The net realizable value of ③ Check the changes in the inventory depreciation inventory which needs to be processed, in the normal reserve provision of the Company in previous years and production and operation process, is determined by the analyze the rationality of inventory depreciation reserve estimated selling price of the finished product produced minus changes. the estimated cost, estimated selling expenses, and related taxes ④Acquire the Company's inventory depreciation reserve and fees that will be incurred when the finished product is calculation table, review the net realizable value of inventory completed. The service cost is determined by the settlement and the amount of provision for impairment of inventory, and unit price and the carrier amount confirmed by both parties of check the estimated selling price, settlement unit price, and the service. Determining the net realisable value of inventory sales expense when the management determines the net involves the use of significant accounting estimates and realizable value with the actual amount incurred. In this way judgments by the management, and the provision for inventory to assess whether management's judgment in determining the devaluation reserve is of importance for the consolidated 37 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd financial statements. Therefore, we recognize the provision for net realizable value of inventory is reasonable. inventory devaluation reserve as a key audit matter. For details of the relevant accounting policies for inventory depreciation provision, please refer to Note V. (12). For details of the provision for inventory depreciation, please refer to Note VII. (VII). (2) Impairment of goodwill As of December 31, 2018, the book value of the goodwill ① Understand the historical performance and of the company was 173,308,163.56 yuan, the impairment development plan of the acquired subsidiary, as well as the provision of goodwill was 33,233,893.28 yuan, and the development trend of the industry. impairment loss of goodwill occurred during the period was ② Understand and evaluate how the Company's 10,370,000.00 yuan. The management of the Company management utilizes the work of assessment experts. Assess conducts impairment test on goodwill at the end of each year the rationality of the valuation method chosen by the and adjusts the book value of goodwill based on the results of management and the key assumptions adopted. the impairment test. Goodwill impairment testing involves ③Review the rationality of the estimated cash flow and management using significant accounting estimates and the discount rate adopted, and compare and analyze the judgments, primarily including estimates of estimated future historical data of the relevant subsidiaries. cash flows and discount rates for subsidiaries. The provision for ④Review the calculation accuracy of the impairment test goodwill impairment provision is of importance to the of goodwill. consolidated financial statements, so we recognise the provision for impairment of goodwill as a key audit matter. For details of the accounting policies for impairment of goodwill, please refer to Note V. (22). For details of the provision for impairment of goodwill, please refer to Note VII (22). (3) Confirmation of sales related to sales of sewing equipment and intelligent manufacturing equipment In 2018, your company's annual sales revenue totaled ①Understand and evaluate the design and operational 3,200,527,741.09 yuan, of which the sales of sewing equipment effectiveness of key internal controls related to your and intelligent manufacturing equipment confirmed a total of company's management and sales of product revenue. 2,159,131,523.78 yuan. ②Implement an analytical review procedure to analyze Your company has confirmed the realization of sales performance indicators such as gross profit margin and revenue when transferring the main risks and rewards of turnover rate, and pay attention to whether there are abnormal ownership of the goods to the purchaser. For domestic sales, fluctuations. your company recognizes revenue primarily when the product ③ Select important customer, implement letter is handed over or the product is fully accepted. For export sales, procedures. your company recognizes revenue primarily when the risk ④ Select important sales orders to perform detailed transfer conditions agreed in the applicable international trade testing, obtain various internal and external documents for the terms are met. sales process, and verify whether the sales revenue actually Since sales of sewing equipment revenue is one of your company's key performance indicators, and there is inherent occurs.。 risk that management will manipulate revenue recognition in ⑤Perform a cut-off test on the revenues recognized near order to achieve specific goals or expectations, we identify your the balance sheet date to verify that the sales revenue is company's revenue recognition as a key audit matter. included in the correct period. For the relevant accounting policies on revenue recognition, please refer to Note V. (28); for the confirmation of income, please refer to Note VII (52). 4. Other information The management of the Company (hereinafter referred to as ―management‖) is responsible for other information. Other information includes information contained in the Annual Report 2017, but exclude financial statements and our audit report. Our audit opinion on financial statements does not contain any other information, nor do we publish any form of forensic conclusion on other information. In combination with our audit of financial statements, our responsibility is to read other information. In the process, it is important to consider whether other information is in significant disagreement with the financial statements or what we know in the process of auditing, or if there seems to be a material misstatement. Based on the work we have performed, if we determine that there is a material misstatement of other information, we should report that fact. In this regard, we have nothing to report. 5. Responsibility of the management and the governance for financial statements 38 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd The management is responsible for preparing financial statements in accordance with the requirements of the Accounting Standards for Business Enterprises to enable them to achieve fair reflection. And design, implement and maintain necessary internal controls so that there are no material misstatements due to fraud or errors in the financial statements. In preparing the financial statements, the management is responsible for assessing the Company's continuing operations capabilities, disclosing issues related to going-concern (if applicable), and applying the going-concern assumption unless the plan is to liquidate, terminate operations or have no other realistic options. The governance layer is responsible for overseeing the Company's financial reporting process. 6. Auditors’ responsibilities Our objective is to obtain reasonable assurance as to whether the entire financial statements are free from material misstatement due to fraud or error and to issue an audit report containing audit opinion. Reasonable assurance is a high level of assurance, but it does not guarantee that an audit performed in accordance with auditing standards can always be discovered when a material misstatement exists. Misstatement may be caused by fraud or mistakes, and if a reasonable expectation of misstatement alone or aggregated may affect the economic decision made by users of financial statements based on the financial statements, the misstatement is generally considered to be material. In the process of auditing in accordance with auditing standards, we use professional judgment and maintain professional suspicion. At the same time, we also perform the following tasks: (1) Identify and assess risks of material misstatement of financial statements due to fraud or errors, design and implement audit procedures to address these risks, and obtain adequate and appropriate audit evidence as a basis for issuing audit opinions. Since fraud may involve collusion, falsification, intentional omissions, misrepresentation or override of internal controls, the risk of failing to detect a material misstatement due to fraud is higher than the risk of failing to detect a material misstatement due to an error. (2) Understand the internal control related to auditing to design appropriate auditing procedures, but the purpose is not to express opinions on the effectiveness of internal control. (3) Evaluate the appropriateness of accounting policies used by the management and the reasonableness of accounting estimates and related disclosures. (4) Conclusions are reached on the appropriateness of management's use of going-concern. At the same time, according to the audit evidence obtained, reach conclusions on whether there are significant uncertainties in the matters or circumstances that have major doubts about the Company's ability to continue to operate. If we conclude that there are significant uncertainties, the auditing standards require us to request the users of the report to pay attention to the relevant disclosures in the financial statements in the audit report; if the disclosure is insufficient, we should publish non-unqualified opinions. Our conclusions are based on the information available as of the date of the audit report. However, future events or circumstances may prevent the Company from continuing to operate. (5) Evaluate the overall presentation, structure, and content (including disclosures) of the financial statements and evaluate whether the financial statements fairly reflect the relevant transactions and events. (6) Obtain sufficient and appropriate audit evidence on the financial information of entities or business activities in the Company to express an opinion on the financial statements. We are responsible for directing, supervising and executing group audits and assume full responsibility for audit opinions. We communicate with the governance on planned audit scope, timing, and major audit findings, including communication of the internal control deficiencies that we identified during the audit. We also provide a statement to the governance on compliance with ethical requirements related to independence, and communicate with the governance on all relationships and other matters that may 39 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd reasonably be considered to affect our independence, as well as related preventive measures (if applicable). From matters communicated with the governance, we determine which items are most important for the audit of financial statements for current period and thus constitute the key audit matters. We describe these matters in our audit report, unless laws and regulations prohibit the public disclosure of these matters, or in rare cases, if it is reasonably expected that the negative consequences of communicating something in the audit report will outweigh the benefits in the public interest, we determine that the matter should not be communicated in the audit report. BDO China Shu Lun Pan Certified Public Accountant of China: Li Ping (Project Partner) Certified Public Accountants LLP Certified Public Accountant of China: Zhang Yongmei Shanghai China 12th April 2019 2. Financial Statement Shang Gong Group Co., Ltd. Consolidated Statement of Financial Position As of 31st December 2018 Unit: Yuan, Currency: RMB Item Note Ending Balance Beginning Balance Current assets: Cash and cash equivalents 595,034,146.11 723,337,878.53 Deposit reservation for balance Lending funds Financial assets at fair value whose fluctuation is attributed to profit or loss for current period Derivative financial assets Notes receivable and Accounts receivable 617,760,694.90 526,096,919.07 Including: Notes receivable 81,482,151.15 61,337,538.87 Accounts receivable 536,278,543.75 464,759,380.20 Prepayment 39,695,762.85 64,393,627.71 Premiums receivable Reinsurance accounts receivable Provision of cession receivable Other receivables 120,422,496.29 58,966,056.94 Including: Interest receivable 21,645.73 Dividends receivable 27,041,989.94 Redemptory monetary capital for sale Inventories 896,977,884.83 705,141,821.59 Assets held for sale Non-current assets maturing within one year Other current assets 249,326,335.31 366,533,356.84 Total current assets 2,519,217,320.29 2,444,469,660.68 Non-current assets: Loans and payments on behalf Available-for-sale financial assets 117,733,027.78 118,959,944.05 Held-to-maturity investments Long-term receivables 31,427,418.92 Long-term equity investments 248,368,207.89 275,799,606.70 Investment properties 145,386,135.12 149,502,332.46 Fixed assets 473,157,221.59 397,788,367.78 Construction in progress 119,166,627.75 12,665,274.09 40 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Item Note Ending Balance Beginning Balance Productive biological assets Oil and gas assets Intangible assets 270,072,349.34 149,988,157.46 Development expenditures 6,798,312.48 16,683,772.84 Goodwill 140,074,270.28 72,482,033.43 Long-term deferred expenses 3,875,409.77 1,631,013.88 Deferred income tax assets 68,850,860.84 63,544,908.23 Other non-current assets Total non-current assets 1,624,909,841.76 1,259,045,410.92 Total assets 4,144,127,162.05 3,703,515,071.60 Current liabilities: Short-term loans 206,614,015.12 330,389,201.62 Borrowings from central bank Deposits from customers and interbank Borrowings from banks and other financial institutions Financial liabilities at fair value whose fluctuation is attributed to profit or loss for current period Derivative financial liabilities Notes payable and accounts payable 318,803,039.91 206,343,320.56 Receipt in advance 75,412,987.77 38,326,094.65 Financial assets sold for repurchase Handling charges and commissions payable Employee benefits payable 101,169,469.49 91,112,179.00 Taxes and surcharges payable 21,208,862.17 14,074,587.91 Other payables 254,827,223.50 195,761,119.66 Including: Interest payable 805,898.77 1,110,553.06 Dividends payable 1,032,818.86 1,032,818.86 Reinsurance accounts payable Provision for insurance contracts Acting trading securities Acting underwriting securities Liabilities held for sale Non-current liabilities maturing within one year 4,173,297.07 1,260,000.00 Other current liabilities 47,083.80 48,330.03 Total current liabilities 982,255,978.83 877,314,833.43 Non-current liabilities: Long-term loans 340,477,650.27 62,956,504.27 Bonds payable Including: preference shares Perpetual bond Long-term payables 3,403,296.49 3,121,893.11 Long-term employee benefits payable 234,036,612.41 247,420,777.32 Estimated liabilities 672,720.00 546,461.91 Deferred income 2,340,000.00 Deferred income tax liabilities 70,805,236.44 52,863,141.42 Other non-current liabilities 520,000.00 520,000.00 Total non-current liabilities 649,915,515.61 369,768,778.03 Total liabilities 1,632,171,494.44 1,247,083,611.46 Owners' equity Share capital 548,589,600.00 548,589,600.00 Other equity instruments Including: preference shares Perpetual bond Capital reserves 916,215,448.24 972,000,595.56 Less: treasury stock Other comprehensive income -75,701,094.41 -72,163,452.90 41 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Item Note Ending Balance Beginning Balance Special reserves Surplus reserves 4,546,242.52 4,546,242.52 General risk reserves Undistributed profits 819,208,053.71 692,241,691.51 Total owners' equity attributable to the parent 2,212,858,250.06 2,145,214,676.69 company Minority equity 299,097,417.55 311,216,783.45 Total owners' equity 2,511,955,667.61 2,456,431,460.14 Liabilities and owners' equity 4,144,127,162.05 3,703,515,071.60 Legal representative: Zhang Min Financial director: Zhang Jianrong Financial manager: Zhao Lixin Shang Gong Group Co., Ltd. Statement of Financial Position As of 31st December 2018 Unit: Yuan, Currency: RMB Item Note Ending Balance Beginning Balance Current assets: Cash and cash equivalents 125,257,400.64 137,028,156.51 Financial assets at fair value whose fluctuation is attributed to profit or loss for current period Derivative financial assets Notes receivable and Accounts receivable 49,567,114.47 55,466,452.06 Including: Notes receivable 8,713,253.21 18,619,880 Accounts receivable 40,853,861.26 36,846,572.06 Prepayment 1,013,250.66 3,488,722.53 Other receivables 154,756,949.21 107,954,125.03 Including: Interest receivable Dividends receivable 1,050,356.92 Inventories 116,010,332.72 114,386,355.60 Assets held for sale Non-current assets maturing within one year Other current assets 182,331,726.62 310,981,332.13 Total current assets 628,936,774.32 729,305,143.86 Non-current assets: Available-for-sale financial assets 117,733,027.78 118,959,944.05 Held-to-maturity investments Long-term receivables 132,003,607.99 135,720,449.62 Long-term equity investments 795,948,021.03 639,310,221.03 Investment properties 82,357,348.39 88,389,027.77 Fixed assets 5,108,388.24 8,036,379.04 Construction in progress 2,804,766.05 2,871,501.40 Productive biological assets Oil and gas assets Intangible assets 10,991,616.43 11,541,893.86 Development expenditures Goodwill Long-term deferred expenses 1,600,982.68 1,496,482.78 Deferred income tax assets 940,809.20 587,977.83 Other non-current assets Total non-current assets 1,149,488,567.79 1,006,913,877.38 Total assets 1,778,425,342.11 1,736,219,021.24 Current liabilities: Short-term loans 9,348,148.62 348,148.62 Financial liabilities at fair value whose fluctuation is attributed to profit or loss for 42 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Item Note Ending Balance Beginning Balance current period Derivative financial liabilities Notes payable and Accounts payable 95,996,884.11 123,067,605.01 Receipt in advance 19,890,459.82 14,500,867.77 Employee benefits payable 9,208,635.04 9,133,348.57 Taxes and surcharges payable 4,352,572.60 579,085.22 Other payables 174,326,023.74 154,311,408.71 Including: Interest payable 805,898.77 1,110,553.06 Dividends payable 1,032,818.86 1,032,818.86 Liabilities held for sale Non-current liabilities maturing within one 2,700,000.00 1,260,000.00 year Other current liabilities Total current liabilities 315,822,723.93 303,200,463.90 Non-current liabilities: Long-term loans 1,489,984.87 1,489,984.87 Bonds payable Including: preference shares Perpetual bond Long-term payables 1,574,312.63 1,574,312.63 Long-term employee benefits payable Estimated liabilities Deferred income Deferred income tax liabilities 1,197,067.41 1,197,067.41 Other non-current liabilities 520,000.00 520,000.00 Total non-current liabilities 4,781,364.91 4,781,364.91 Total liabilities 320,604,088.84 307,981,828.81 Owners' equity: Share capital 548,589,600.00 548,589,600.00 Other equity instruments Including: preference shares Perpetual bond Capital reserves 1,003,282,687.73 1,003,282,687.73 Less: treasury stock Other comprehensive income 12,396,555.80 15,711,472.03 Special reserves Surplus reserves 4,546,242.52 4,546,242.52 Undistributed profits -110,993,832.78 -143,892,809.85 Total owners' equity 1,457,821,253.27 1,428,237,192.43 Liabilities and owners' equity 1,778,425,342.11 1,736,219,021.24 Legal representative: Zhang Min Financial director: Zhang Jianrong Financial manager: Zhao Lixin 43 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Shang Gong Group Co., Ltd. Consolidated Statement of Comprehensive Incomes From 1st January 2018 to 31st December 2018 Unit: Yuan, Currency: RMB Item Note 2018 2017 1. Incomes 3,200,527,741.09 3,064,971,500.79 Including: operating income 3,200,527,741.09 3,064,971,500.79 Interest income Premiums earned Income from handling charges and commissions 2. Costs 3,023,493,792.82 2,856,099,579.43 Including: Cost of sales 2,322,152,730.89 2,245,537,329.26 Interest expenses Handling charges and commissions expenses Surrender value Net amount of compensation payout Net amount withdrawn for insurance contract reserves Policy dividend payment Reinsurance costs taxes and surcharges 13,033,211.21 13,445,563.98 Selling expenses 322,696,906.11 284,810,887.21 General and administrative expenses 230,502,679.98 207,021,408.70 R & D expenses 97,647,657.57 84,350,255.40 Financial expenses 16,859,739.48 -5,263,527.90 Including: Interest expense 14,154,020.93 13,537,239.17 Interest income 4,431,325.55 12,388,093.76 Losses from asset impairment 20,600,867.58 26,197,662.78 Plus: gains from changes in fair value ("-" for losses) 10,190,505.23 11,713,174.75 Investment income ("-" for losses) 12,758,268.06 45,607,259.29 Including: income from investment in -12,972,718.90 17,990,723.92 associates and joint ventures Fair gains from changes in fair value ("-" for losses) Gains on disposal of assets 443,708.05 23,963,103.89 Foreign exchange gains ("-" for losses) 3. Operating profits ("-" for losses) 200,426,429.61 290,155,459.29 Plus: non-operating income 7,878,704.50 9,192,748.08 Less: non-operating expenses 4,065,654.49 3,766,348.69 4. Total profits ("-" for total losses) 204,239,479.62 295,581,858.68 Less: income tax expenses 45,789,835.67 82,928,869.66 5. Net profit ("-" for net loss) 158,449,643.95 212,652,989.02 (1) Classified by operating sustainability a. Net profit from continuing operations ("-" for 158,449,643.95 212,652,989.02 losses) b. Net profit from discontinued operations ("-" for losses) (2) Classified by ownership a. Non-controlling interests 140,828,047.20 197,487,226.27 b. Net profit attributable to owners of the parent 17,621,596.75 15,165,762.75 company 6. Net of tax of other comprehensive income -3,215,557.02 36,930,889.17 Net of tax of other comprehensive income attributable -3,537,641.51 30,980,593.25 to owners of the parent company (1) Other comprehensive income can't be reclassified -195,235.00 5,682,076.80 to gains and losses later a. Changes in net liabilities or assets due to the -195,235.00 5,682,076.80 remeasurement and redefinition of the benefit plan b. The shares in other comprehensive income of the investee that can't be reclassified to gains and losses under the equity method 44 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Item Note 2018 2017 (2) Other comprehensive income to be reclassified to -3,342,406.51 25,298,516.45 gains and losses later a. The shares in other comprehensive income of the investee that can be reclassified to gains and losses under the equity method b. Gains and losses from changes in fair value of -3,314,916.23 -18,259,294.75 available-for-sale financial assets c. Gains and losses from the reclassification of the held-to-maturity investment to held-for-sale financial assets d. The effective portion of the gains and losses from cash flow hedging e. Translation differences of financial statements -27,490.28 43,557,811.20 f. Others Net of tax of other comprehensive income attributable 322,084.49 5,950,295.92 to non-controlling shareholders 7. Total comprehensive incomes 155,234,086.93 249,583,878.19 Total comprehensive income attributable to owners of 137,290,405.69 228,467,819.52 the parent company Total comprehensive income attributable to 17,943,681.24 21,116,058.67 non-controlling shareholders 8. Earnings per share (1) Basic earnings per share (yuan/share) 0.2567 0.3600 (2) Diluted earnings per share (yuan/share) 0.2567 0.3600 Legal representative: Zhang Min Financial director: Zhang Jianrong Financial manager: Zhao Lixin Shang Gong Group Co., Ltd. Statement of Comprehensive Incomes From 1st January 2018 to 31st December 2018 Unit: Yuan, Currency: RMB Item Note 2018 2017 1. Operating income 367,960,667.27 207,618,193.06 Less: Operating cost 259,199,202.19 139,483,153.60 tax and surcharges 4,684,246.76 4,092,703.92 Selling expenses 46,138,151.55 24,026,800.66 General and Administration expenses 50,965,593.67 47,523,439.27 R & D expenses 4,057,999.93 145,292.60 Finance expenses -4,544,544.30 -20,567,218.74 Including: Interest expense 684,673.61 343,483.78 Interest income 5,048,704.81 13,899,856.76 Impairment losses on assets 1,261,403.29 6,083,598.81 Plus: Other income 524,968.70 1,873,821.10 Investment income ("-" for losses) 27,172,011.05 30,708,465.14 Including: Investment income in associates and joint ventures gains from changes in fair value ("-" for losses) Gain on disposal of assets ("-" for losses) -4,246.42 21,997,891.55 2. Operating profits ("-" for losses) 33,891,347.51 61,410,600.73 Plus: Non-operating income 3,419,360.11 1,196,634.66 Less: Non-operating expenses 763,346.00 256,782.69 3. Total profits ("-" for total losses) 36,547,361.62 62,350,452.70 Less: income tax expenses 3,648,384.55 -587,977.83 4. Net profit ("-" for net loss) 32,898,977.07 62,938,430.53 a. Net profit from continuing operations ("-" for 32,898,977.07 62,938,430.53 losses) b. Net profit from discontinued operations ("-" for losses) 5. Net of tax of other comprehensive income -3,314,916.23 -18,259,294.75 Net of tax of other comprehensive income attributable to owners of the parent company (1) Other comprehensive income can't be reclassified to gains and losses later 45 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Item Note 2018 2017 a. Changes in net liabilities or assets due to the remeasurement and redefinition of the benefit plan b. The shares in other comprehensive income of the investee that can't be reclassified to gains and losses under -3,314,916.23 -18,259,294.75 the equity method (2) Other comprehensive income to be reclassified to gains and losses later a. The shares in other comprehensive income of the investee that can be reclassified to gains and losses under -3,314,916.23 -18,259,294.75 the equity method b. Gains and losses from changes in fair value of available-for-sale financial assets c. Gains and losses from the reclassification of the held-to-maturity investment to held-for-sale financial assets d. The effective portion of the gains and losses from cash flow hedging e. Translation differences of financial statements 6. Total comprehensive incomes 29,584,060.84 44,679,135.78 7. Earnings per share (1) Basic earnings per share (yuan/share) (2) Diluted earnings per share (yuan/share) Legal representative: Zhang Min Financial director: Zhang Jianrong Financial manager: Zhao Lixin Shang Gong Group Co., Ltd. Consolidated Statement of Cash Flows From 1st January 2018 to 31st December 2018 Unit: Yuan, Currency: RMB Item Note 2018 2017 1. Cash flows from operating activities: Cash received from sale of goods and 3,236,145,513.33 3,164,760,853.53 provision of services Net increase in customer bank deposits and placement from banks and other financial institutions Net increase in borrowings from central bank Net increase in loans from other financial institutions Premiums received from original insurance contracts Net cash received from reinsurance business Net increase in deposits and investments from policyholders Net increase from disposal of financial assets at fair value whose fluctuation is attributed to profit or loss for current period Cash received from interest, handling charges and commissions Net increase in loans from banks and other financial institutions Net capital increase in repurchase business Refunds of taxes and surcharges 76,064,162.93 43,906,468.45 Cash received from other operating activities 52,723,527.37 50,445,946.85 Sub-total of cash inflows from operating 3,364,933,203.63 3,259,113,268.83 activities Cash paid for goods purchased and services 2,123,866,868.13 2,017,747,474.86 received Net increase in loans and advances to customers Net increase in deposits in central bank and other banks and financial institutions Cash paid for original insurance contract claims Cash paid for interests, handling charges and commissions Cash paid for policy dividends 46 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Item Note 2018 2017 Cash paid to and on behalf of employees 723,853,477.52 658,533,406.62 Cash paid for taxes and surcharges 125,411,834.31 185,158,629.33 Cash paid for other operating activities 312,247,152.37 280,337,888.85 Sub-total of cash outflows from operating 3,285,379,332.33 3,141,777,399.66 activities Net cash flows from operating 79,553,871.30 117,335,869.17 activities 2. Cash flows from investing activities: Cash inflow from divestment 874,980,665.96 1,012,030,235.06 Cash inflow from investment incomes 12,600,885.09 16,326,012.85 Cash gain from disposal of fixed assets, intangible 848,621.30 36,421,255.81 assets, and other long-term investment Cash inflow from disposal of subsidiaries and other operating units Cash received from other investing activities 393,810.60 Sub-total of cash inflows from investing activities 888,823,982.95 1,064,777,503.72 Cash paid for acquisition of fixed assets, intangible 225,273,247.86 158,264,625.96 assets and other long-term assets Cash paid for investments 921,981,573.80 1,005,380,152.75 Net increase in pledge loans Net cash paid to acquire subsidiaries and other 94,181,765.87 21,002,300.00 business units Cash paid for other investing activities Sub-total of cash outflows from investing activities 1,241,436,587.53 1,184,647,078.71 Net cash flows from investing activities -352,612,604.58 -119,869,574.99 3. Cash flows from financing activities Cash received from investors Including: cash received by subsidiaries from investments by non-controlling shareholders Cash received from loans 624,144,720.00 224,230,000.00 Cash received from bonds issuance Cash received from other financing activities 3,897,697.51 Sub-total of cash inflows from financing activities 624,144,720.00 228,127,697.51 Cash paid for debt repayments 487,840,810.20 273,539,464.00 Cash paid for distribution of dividends and profits 21,685,176.55 14,913,369.41 or payment of interest Including: dividends and profits paid to non-controlling shareholders by subsidiaries Cash paid for other financing activities 1,165,827.50 Sub-total of cash outflows from financing 510,691,814.25 288,452,833.41 activities Net cash flows from financing activities 113,452,905.75 -60,325,135.90 4. Effect of fluctuation in exchange rate on cash 4,033,729.47 26,314,632.54 and cash equivalents 5. Net increase in cash and cash equivalents -155,572,098.06 -36,544,209.18 Plus: beginning balance of cash and cash 713,813,720.45 750,357,929.63 equivalents 6. Ending balance of cash and cash equivalents 558,241,622.39 713,813,720.45 Legal representative: Zhang Min Financial director: Zhang Jianrong Financial manager: Zhao Lixin Shang Gong Group Co., Ltd. Statement of Cash Flows From 1st January 2018 to 31st December 2018 Unit: Yuan, Currency: RMB Item Note 2018 2017 1. Cash flows from operating activities: Cash received from sale of goods and provision of 387,054,926.14 229,795,360.70 services Refunds of taxes and surcharges 1,536,599.94 Cash received from other operating activities 78,486,350.81 63,397,907.63 Sub-total of cash inflows from operating activities 467,077,876.89 293,193,268.33 47 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Cash paid for goods purchased and services 282,896,673.53 156,824,506.55 received Cash paid to and on behalf of employees 51,443,489.27 36,908,166.30 Cash paid for taxes and surcharges 7,870,185.99 7,411,003.59 Cash paid for other operating activities 159,293,598.74 117,490,277.69 Sub-total of cash outflows from operating activities 501,503,947.53 318,633,954.13 Net cash flows from operating activities -34,426,070.64 -25,440,685.80 2. Cash flows from investing activities: Cash inflow from divestment 865,342,851.82 932,849,014.15 Cash inflow from investment incomes 14,210,229.53 21,090,100.93 Cash gain from disposal of fixed assets, intangible 32,017.27 23,855,652.27 assets, and other long-term investment Cash inflow from disposal of subsidiaries and other operating units Cash received from other investing activities Sub-total of cash inflows from investing activities 879,585,098.62 977,794,767.35 Cash paid for acquisition of fixed assets, intangible 3,101,244.10 4,925,918.01 assets and other long-term assets Cash paid for investments 862,354,965.00 929,584,425.75 Net cash paid to acquire subsidiaries and other business units Cash paid for other investing activities Sub-total of cash outflows from investing activities 865,456,209.10 934,510,343.76 Net cash flows from investing activities 14,128,889.52 43,284,423.59 3. Cash flows from financing activities Cash received from investors Cash received from loans 9,000,000.00 Cash received from bonds issuance Cash received from other financing activities Sub-total of cash inflows from financing activities 9,000,000.00 Cash paid for debt repayments Cash paid for distribution of dividends and profits 41,325.00 or payment of interest Cash paid for other financing activities Sub-total of cash outflows from financing activities 41,325.00 Net cash flows from financing activities 8,958,675.00 4. Effect of fluctuation in exchange rate on cash and -432,249.75 -25,815.69 cash equivalents 5. Net increase in cash and cash equivalents -11,770,755.87 17,817,922.10 Plus: beginning balance of cash and cash 137,028,156.51 119,210,234.41 equivalents 6. Ending balance of cash and cash equivalents 125,257,400.64 137,028,156.51 Legal representative: Zhang Min Financial director: Zhang Jianrong Financial manager: Zhao Lixin 48 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Shang Gong Group Co., Ltd. Consolidated Statement of Changes in Equity From 1st January 2018 to 31st December 2018 Unit: Yuan, Currency: RMB 2018 Owners' equity attributable to the parent company Item Other equity instruments Less: Other General Minority equity Total owners' equity Special Surplus Undistributed Share capital Preference Perpetual Capital reserves treasury comprehensive risk Others reserves reserves profits shares bonds stock income reserves 1. Previous year ending balance 548,589,600.00 972,000,595.56 -72,163,452.90 4,546,242.52 692,241,691.51 311,216,783.45 2,456,431,460.14 brought forward Plus: accounting policy changes Correction of previous-period accounting errors Business combination involving entities under common control Others 2. Beginning balance of current 548,589,600.00 972,000,595.56 -72,163,452.90 4,546,242.52 692,241,691.51 311,216,783.45 2,456,431,460.14 year 3. Increase/ (decrease) for the -55,785,147.32 -3,537,641.51 126,966,362.20 -12,119,365.90 55,524,207.47 current year ("-" for losses) (1) Total comprehensive -3,537,641.51 140,828,047.20 17,943,681.24 155,234,086.93 incomes (2) Investment/ (divestment) -55,785,147.32 -13,861,685.00 -30,063,047.14 -99,709,879.46 a. Common shares from shareholders b. Investment capital from the holders of other equity instruments c. Amount of the share-based payment included in the owners' equity d. Others -55,785,147.32 -13,861,685.00 -30,063,047.14 -99,709,879.46 (3) Distribution of profits a. Surplus reserves b. General risk reserves c. Distribution to owners or shareholders d. Others (4) Internal transfer of owners' equity a. Capital reserve turn to stock 49 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd equity b. Surplus reserve turn to stock equity c. Surplus reserve to recover loss d. Defined benefit plans change amount to carry forward retained earnings e. Others (5) Special reserves a. Appropriation for current year b. Use in current year (6) Others 4. Ending balance of the current 548,589,600.00 916,215,448.24 -75,701,094.41 4,546,242.52 819,208,053.71 299,097,417.55 2,511,955,667.61 year 2017 Owners' equity attributable to the parent company Item Other equity instruments Less: Other General Minority equity Total owners' equity Special Surplus Undistributed Share capital Preference Perpetual Capital reserves treasury comprehensive risk Others reserves reserves profits shares bonds stock income reserves 1. Previous year ending 548,589,600.00 971,603,120.27 -103,144,046.15 4,546,242.52 494,754,465.24 291,984,568.18 2,208,333,950.06 balance brought forward Plus: accounting policy changes Correction of previous-period accounting errors Business combination involving entities under common control Others 2. Beginning balance of 548,589,600.00 971,603,120.27 -103,144,046.15 4,546,242.52 494,754,465.24 291,984,568.18 2,208,333,950.06 current year 3. Increase/ (decrease) for the current year ("-" for 397,475.29 30,980,593.25 197,487,226.27 19,232,215.27 248,097,510.08 losses) (1) Total comprehensive 30,980,593.25 197,487,226.27 21,116,058.67 249,583,878.19 incomes (2) Investment/ 397,475.29 397,475.29 (divestment) a. Common shares from shareholders b. Investment capital from the holders of other equity instruments 50 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd c. Amount of the share-based payment included in the owners' equity d. Others 397,475.29 397,475.29 (3) Distribution of -1,883,843.40 -1,883,843.40 profits a. Surplus reserves b. General risk reserves c. Distribution to owners -1,883,843.40 -1,883,843.40 or shareholders d. Others (4) Internal transfer of owners' equity a. Capital reserve turn to stock equity b. Surplus reserve turn to stock equity c. Surplus reserve to recover loss d. Defined benefit plans change amount to carry forward retained earnings e. Others (5) Special reserves a. Appropriation for current year b. Use in current year (6) Others 4. Ending balance of the 548,589,600.00 972,000,595.56 -72,163,452.90 4,546,242.52 692,241,691.51 311,216,783.45 2,456,431,460.14 current year Legal representative: Zhang Min Financial director: Zhang Jianrong Financial manager: Zhao Lixin Shang Gong Group Co., Ltd. Statement of Changes in Equity From 1st January 2018 to 31st December 2018 Unit: Yuan, Currency: RMB 2018 Item Other equity instruments Less: Other Special Surplus Undistributed Share capital Preference Perpetual Capital reserves treasury comprehensive Total owners' equity Others reserves reserves profits shares bonds stock income 1. Previous year ending balance brought forward 548,589,600.00 1,003,282,687.73 15,711,472.03 4,546,242.52 -143,892,809.85 1,428,237,192.43 Plus: accounting policy changes 51 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Correction of previous-period accounting errors Others 2. Beginning balance of current year 548,589,600.00 1,003,282,687.73 15,711,472.03 4,546,242.52 -143,892,809.85 1,428,237,192.43 3. Increase/(decrease) for the current year ("-" for -3,314,916.23 32,898,977.07 29,584,060.84 losses) (1) Total comprehensive incomes -3,314,916.23 32,898,977.07 29,584,060.84 (2) Investment/ (divestment) a. Common shares from shareholders b. Investment capital from the holders of other equity instruments c. Amount of the share-based payment included in the owners' equity d. Others (3) Distribution of profits a. Surplus reserves b. Distribution to owners or shareholders c. Others (4) Internal transfer of owners' equity a. Capital reserve turn to stock equity b. Surplus reserve turn to stock equity c. Surplus reserve to recover loss d. Defined benefit plans change amount to carry forward retained earnings e. Others (5) Special reserves a. Appropriation for current year b. Use in current year (6) Others 4. Ending balance of the current year 548,589,600.00 1,003,282,687.73 12,396,555.80 4,546,242.52 -110,993,832.78 1,457,821,253.27 2017 Item Other equity instruments Less: Other Special Surplus Undistributed Share capital Preference Perpetual Capital reserves treasury comprehensive Total owners' equity Others reserves reserves profits shares bonds stock income 1. Previous year ending balance brought forward 548,589,600.00 1,003,282,687.73 33,970,766.78 4,546,242.52 -206,831,240.38 1,383,558,056.65 Plus: accounting policy changes Correction of previous-period accounting errors Others 52 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 2. Beginning balance of current year 548,589,600.00 1,003,282,687.73 33,970,766.78 4,546,242.52 -206,831,240.38 1,383,558,056.65 3. Increase/(decrease) for the current year ("-" for -18,259,294.75 62,938,430.53 44,679,135.78 losses) (1) Total comprehensive incomes -18,259,294.75 62,938,430.53 44,679,135.78 (2) Investment/ (divestment) a. Common shares from shareholders b. Investment capital from the holders of other equity instruments c. Amount of the share-based payment included in the owners' equity d. Others (3) Distribution of profits a. Surplus reserves b. Distribution to owners or shareholders c. Others (4) Internal transfer of owners' equity a. Capital reserve turn to stock equity b. Surplus reserve turn to stock equity c. Surplus reserve to recover loss d. Defined benefit plans change amount to carry forward retained earnings e. Others (5) Special reserves a. Appropriation for current year b. Use in current year (6) Others 4. Ending balance of the current year 548,589,600.00 1,003,282,687.73 15,711,472.03 4,546,242.52 -143,892,809.85 1,428,237,192.43 Legal representative: Zhang Min Financial director: Zhang Jianrong Financial manager: Zhao Lixin 53 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 3. Company basic information 1) Company profile Shang Gong Group Co., Ltd.( hereinafter referred to as "Company" or "the Company"), a joint stock limited company with publicly issued A & B shares on the Shanghai Stock Exchange, is the first listed company in the sewing machinery industry of China. The Company was incorporated in April 1994. The registration number has changed to 91310000132210544K (Unified social credit code) in 2016. The organizational form of the Company is a joint stock limited company (a Sino-foreign joint venture and a listed company) and the registered capital amounts to 548,589,600.00 yuan. The registered address is Room A-D, 12th Floor, Orient Mansion, No. 1500, Century Avenue, China (Shanghai) Pilot Free Trade Zone and the head office is located in No. 1566 New Jinqiao Road, Pudong New Area, Shanghai. The legal representative is Mr. Zhang Min. On 22nd May 2006, it was decided on the General Meeting on equity division reform by the Company that: the non-tradable equity stockholders pay partially their shares to all the tradable equity shareholders at a ratio of 10 to 6 as consideration of getting tradable rights. After the above consideration of share donation, the total number of shares remains unchanged, but consequently the equity structure has changed. As at 31st December 2013, there were 448,886,777 shares in total. On 28th February 2014, CSRC approved the non-public offering of A shares of the Company under the Official Reply to the Approval of Non-public Offering of Shares of Shang Gong Group Co., Ltd. ([2014] No. 237). The number of shares issued was 99,702,823.00 and the total number of share capital after the issue was 548,589,600.00. The Company handled equity registration and escrow formalities with the CSDC Shanghai Branch; the corresponding registered capital was changed to RMB 548,589,600.00 yuan and had been verified by the Verification Report (PCPAR [2014] No.111126) issued by BDO CHINA Shu Lun Pan Certified Public Accountants LLP on 26th March 2014. On 29th December 2016, Pudong SASAC, the original controlling shareholder and actual controller of the Company, had sold 60.00 million A shares of the Company to Shanghai Puke Flyman Investment Co., Ltd. which is the wholly-owned subsidiary of Shanghai Pudong Science and Technology Investment Co., Ltd. China Securities Depository and Clearing Co., Ltd. has issued a "transfer registration confirmation" on the same day. After the transfer, PKFR held A shares accounted for 10.94% of the total share capital of the Company, which is the largest shareholder of the Company; Pudong SASAC held A shares accounted for 8.27%, which is the second largest shareholder of the Company. After the completion of the equity transfer, the Company has changed to a listed company with no controlling shareholder and no actual controller. As of 31st December 2018, the Company’s total share capital was 548,589,600.00, including 548,589,600 shares with no restrictive terms, accounting for 100.00% of the total number of shares. The Company belongs to special equipment manufacturing industry; main operating activities of the Company are: production and sales of sewing equipment. According to the resolution of the 11th meeting of the 8th board of directors, the financial statements were approved for disclosure by all directors of the Company on 12th April 2019. 2) Scope of the consolidated financial statements As of 31st December 2018, the subsidiaries within the consolidated financial statements of the Company are as follows: Name of subsidiary 1. Shanghai Shanggong & Butterfly Sewing Machine Co., Ltd. 2. DAP (Shanghai) Co., Ltd. 3. Shanghai SMPIC IMPORT & EXPORT CO., LTD. 54 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 4. Shanghai SGSB Electronics Co., Ltd. 5. Shanghai SGSB Asset Management Co., Ltd. 6. Shanghai Sewing Construction Property Co., Ltd. 7. Dürkopp Adler Aktiengesellschaft(Note 2) 8.Zhejiang ShangGong GEMSY Co., Ltd. 9.Shanghai Shensy Enterprise Development Co., Ltd. 10.Shanghai ShangGong Financial Leasing Co., Ltd. 11. PFAFF Industrial Sewing Machine (Zhangjiagang) Co., Ltd. 12.DAP (Vietnam) Co., Ltd. 13.ShangGong Sewing Equipment (Zhejiang) Co., Ltd. 14.Dürkopp Adler Manufacturing(Shanghai) Co.,Ltd. 15.Tianjin Richpeace(Note 1) Note 1: The company's subsidiary DAP Trading (Shanghai) Co., Ltd. was renamed as DAP Industrial (Shanghai) Co., Ltd. in January 2019, and its subsidiary T Tianjin Richpeace was renamed as Tianjin Richpeace Computer & Machinery Co.,Ltd in February 2019. Note 2: DAP Industrial Co., Ltd., a subsidiary of the Company, absorbed the Dürkopp Adler Aktiengesellschaft, a third-tier subsidiary of the Company in 2018 and changed its name to Dürkopp Adler Aktiengesellschaft. See ―Note 8 Changes in the scope of consolidation" and ―Note 9 Equity in other subjects" for details of the scope of consolidated financial statements in the current year and the changes thereof. 4. Preparation basis of financial statements 1) Preparation basis of financial statements The Company prepares the financial statements based on going concern, according to the transactions and events actually occurred and in accordance with the Accounting Standards for Business Enterprises – Basic Standard and various specific accounting standards, application guidance and interpretations for accounting standards for business enterprises and other relevant provisions (hereinafter collectively referred to as ―Accounting Standards for Business Enterprises‖) promulgated by the Ministry of Finance and disclosure provisions of the Rules for the Information Disclosure and Compilation of Companies Publicly Issuing Securities No. 15 – General Rules on Financial Reports of the China Securities Regulatory Commission. 2) Going concern The Company has going-concern ability within 12 months as of the end of the report period and has no matters or situations that may lead to serious doubts about the Company’s going-concern ability. 5. Principal accounting policies and accounting estimates Specific accounting policies and accounting estimates: The following disclosure has covered the Company’s specific accounting policies and accounting estimates prepared according to the actual production and operation characteristics. 1) Statement on compliance with Accounting Standards for Business Enterprises The financial statements prepared by the Company meet the requirements of the Accounting Standards for Business Enterprises and truly and completely reflect the Company’s financial position, operating results, cash flows and other related information in the report period. 2) Accounting period The accounting year is from 1st Januaryto 31st December in calendar year. 3) Operating cycle The Company’s operating cycle is 12 months. 4) Functional currency The Company adopts RMB as its functional currency. 55 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 5) Accounting treatment methods of business combinations under common control and not under common control Business combinations under common control: Assets and liabilities acquired from business combinations by the Company are measured at book value of assets and liabilities (including goodwill formed from the purchase of the cquire by the ultimate controller) in the consolidated financial statements of the ultimate controller. Stock premium in the capital reserve should be adjusted according to the difference between the book value of net asset acquired from the combinations and that of consideration (or total face value of the shares issued) paid. In case the stock premium in the capital reserve is not enough, the retained earnings need to be adjusted. Business combinations not under common control: Assets paid for consideration and liabilities incurred or borne by the Company on the acquisition date shall be measured at their fair values. The difference between the fair value and the book value should be included in the current profit and loss. The Company shall recognize the difference of the combination costs in excess of the fair value of the identifiable net assets acquired from the cquire as goodwill. The Company shall include the difference of the combination costs in short of the fair value of the identifiable net assets acquired from the cquire in the current profit and loss after review. Intermediary service charges such as audit fee, legal service fee, appraisal and consultancy fee paid for business combinations and other directly relevant expenses are included in the current profit and loss when incurred; the transaction costs for the issuance of equity securities shall be used to offset equities. 6) Preparation methods of consolidated financial statements 1. Scope of consolidation The scope of consolidation of the Company’s consolidated financial statements is recognized based on the control. All subsidiaries (including the divisible part of the investee controlled by the Company) should be included in the consolidated financial statements. 2. Consolidation procedure The Company prepares consolidated financial statements based on its own financial statements and financial statements of its subsidiaries according to other relevant materials. When the Company prepares its consolidated financial statements, it shall regard the whole enterprise group as an accounting entity to reflect the overall financial position, operating results and cash flows of the enterprise group according to the requirements for recognition, measurement and presentation of the relevant Accounting Standards for Business Enterprises and the uniform accounting policies. Accounting policies and accounting periods adopted by all subsidiaries included in the consolidation scope of the consolidated financial statements should be consistent with those of the Company. If accounting policies and accounting periods adopted by all subsidiaries are inconsistent with those of the Company, in the preparation of the consolidated financial statements, necessary adjustments shall be made according to the accounting policies and accounting periods of the Company. For the subsidiaries acquired through business combination not under common control, adjustments to their financial statements shall be made based on the fair values of net identifiable assets on the acquisition date. For the subsidiaries acquired through business combination not under common control, adjustments to their financial statements shall be made based on the fair values of their assets and liabilities (including goodwill from acquisition of the subsidiaries by the ultimate controller) in the financial statements of the ultimate controller. The share of owner’s equity, net profits and losses in the current year and comprehensive income in the current year of subsidiaries attributable to minority shareholders should separately presented under the item of owner’s equity of the Consolidated Balance Sheet, the item of net profit of the Consolidated Income Statement and the item of total comprehensive income. The difference formed by the loss in the current year shared by 56 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd minority shareholders of the subsidiaries in excess of the share of minority shareholders in the owner’s equity at the beginning of the year of the subsidiaries should be used to offset the minority equity. (1)Increase in subsidiaries or business In the report period, if the Company increased subsidiaries or business from business combinations under common control, then the beginning amount of the Consolidated Balance Sheet should be adjusted; the incomes, expenses and profits from the combinations of the subsidiaries and business from the beginning of the current year to the end of the reporting period shall be included in the Consolidated Income Statement; cash flows from the combinations of the subsidiaries and business from the beginning of the current year to the end of the reporting period shall be included in the Consolidated Cash Flow Statement. At the same time, the Company should adjust the relevant items of the comparative statements and deem that the reporting entity already exists when the ultimate controller starts its control. Where the Company can control the investee under common control from additional investments, it should deem that parties involved in the combination have make adjustments at the current state when the ultimate controller starts its control. Equity investments held before the Company controls the cquire, the relevant profit and loss recognized during the period from the later of the date when the Company obtains the original equity and the date when the acquirer and the cquire are under common control, other comprehensive income and changes in other net assets shall be used to offset the retained earnings at the beginning of the year or the current profit and loss in the period of the comparative statements. In the report period, if the Company increased subsidiaries or business from business combinations not under common control, then the beginning amount of the Consolidated Balance Sheet should not be adjusted; the incomes, expenses and profits from the subsidiaries and business from the acquisition date to the end of the report period shall be included in the Consolidated Income Statement; cash flows from the subsidiaries and business from the acquisition date to the end of the reporting period shall be included in the Consolidated Cash Flow Statement. Where the Company can control the investee not under common control from additional investments, it shall re-measure equity of the cquire held before the acquisition date at the fair value of such equity on the acquisition date and include the difference of the fair value and book value in the investment income in the current year. Where equity of the cquire held before the acquisition date involves in other comprehensive income accounted for under equity method and other changes in owner’s equity other than net profit and loss, other comprehensive income and profit distribution, the relevant other comprehensive income and other changes in owner’s equity shall be transferred to investment income in the current year which the acquisition date falls in, except for other comprehensive income from changes arising from re-measurement of net liabilities or net assets of defined benefit plan. (2)Disposal of subsidiaries or business ①General treatment methods In the reporting period, if the Company disposed subsidiaries or business, then the incomes, expenses and profits from the subsidiaries and business from the beginning of the year to the disposal date shall be included in the Consolidated Income Statement; cash flows from the combinations of the subsidiaries and business from the beginning of the year to the disposal date shall be included in the Consolidated Cash Flow Statement. When the Company losses the control over the original subsidiary due to disposal of partial equity investments or other reasons, the remaining equity investments after the disposal will be re-measured at the fair value at the date of loss of the control. The difference of total amount of the consideration from disposal of equities plus the fair value of the remaining equities less the shares calculated at the original shareholding ratio in net assets of the original subsidiary which are continuously calculated as of the acquisition date is included in the investment income of the period at the loss of control. Other comprehensive income associated with the 57 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd original equity investments of the subsidiary and other changes in owner’s equity other than net profit and loss, other comprehensive income and profit distribution are transferred into investment income in the current year when the control is lost, except for other comprehensive income from changes arising from re-measurement of net liabilities or net assets of defined benefit plan. If other investors increase their shareholdings due to the increase in capital of their subsidiaries and lose control, they shall be accounted for in accordance with the above principles. ②Disposal of subsidiary by stages Where the Company disposes the equity investments in subsidiary through multiple transactions and by stages until it loses the control, if the effect of the disposal on the terms and conditions of all transactions of equity investments in subsidiary and economic effect meet one or more of the following circumstance, it usually indicates that the multiple transactions should be accounted for as a package deal: i. These transactions are concluded at the same time or under the consideration of mutual effect; ii. These transactions as a whole can reach a complete business results; iii. The occurrence of a transaction depends on the occurrence of at least one other transaction; ⅳ. A single transaction is uneconomical but it is economical when considered together with other transactions. Where various transactions of disposal of equity investments in subsidiaries until loss of the control belong to a package deal, accounting treatment shall be made by the Company on the transactions as a transaction to dispose subsidiaries and lose the control; however, the difference between each disposal cost and net asset share in the subsidiaries corresponding to each disposal of investments before loss of the control should be recognized as other comprehensive income in the consolidated financial statements and should be transferred into the current profit or loss at the loss of the control. Where various transactions of disposal of equity investments in subsidiaries until loss of the control do not belong to a package deal, before the loss of the control, accounting treatment shall be made according to the relevant policies for partial disposal of equity investments in the subsidiary without losing control; at the loss of the control, accounting treatment shall be made according to general treatment methods for disposal of subsidiaries. (3)Purchase of minority interest of subsidiaries The difference between long-term equity investments newly acquired by the Company through purchase of minority interest and the subsidiary’s identifiable net assets attributable to the Company calculated continuously from the acquisition date (or the combination date) in accordance with the newly increased shareholding ratio shall be charged against stock premium within capital reserves in the consolidated balance sheet; when stock premium within capital reserves is insufficient to offset, the retained earnings shall be adjusted. (4)Partial disposal of equity investments in the subsidiary without losing control The difference between the proceeds from partial disposal of equity investments in the subsidiary and the share of identifiable net assets of the subsidiary attributable to the Company which are calculated continuously from the acquisition date (or the combination date) and which are corresponding to the disposal of long-term equity investments without losing control shall be charged against stock premium within capital reserves in the consolidated balance sheet; when stock premium within capital reserves is insufficient to offset, the retained earnings shall be adjusted. 7) Classification of joint venture arrangements and accounting methods for joint operation Not applicable. 8) Determination of cash and cash equivalents Cash equivalents refer to short-term (usually due within three months from the date of purchase), highly 58 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. 9) Foreign currency transactions and translation of foreign currency statements 1. Foreign currency transactions Foreign currency transactions are, on initial recognition, translated to RMB at the spot exchange rates at the dates of the transactions. The balance of foreign currency monetary items is adjusted and translated into functional currency at balance sheet date using the spot exchange rate. Regarding the year-end differences of translation in foreign currency, except those special borrowing accounts under the acquisition, building or production of assets to be capitalized are capitalized and accounted into related assets cost, all the other differences are accounted into current profits and losses. The foreign currency non-monetary items at historical cost are translated using the spot exchange rate. And the foreign currency non-monetary items at fair value are adjusted and translated into measurement currency at adoption date of fair value using the spot exchange rate. The difference of translation between different currencies is accounted into current profits and losses or capital reserves. 2. Translation of foreign currency statements The assets and liabilities of foreign operation are translated to RMB at the spot exchange rate at the balance sheet date. The equity items, excluding ―Retained earning‖, are translated to RMB at the spot exchange rates at the transaction dates. The income and expenses of foreign operation are translated to RMB at the spot exchange rates or the rates that approximate the spot exchange rates at the transaction dates. The resulting exchange differences are recognized in a separate component of equity. Upon entire/partial disposal of a foreign operation, the entire/partial cumulative amount of the exchange differences recognized in equity which relates to that foreign operation is transferred to profit or loss in the period in which the disposal occurs. 10) Financial instruments Financial instruments include financial assets, financial liabilities and equity instruments. 1. Classification of financial instruments At the initial recognition, financial assets and financial liabilities are classified as: financial assets or financial liabilities measured at fair value through current profit and loss, including financial assets or financial liabilities held for trading, and financial assets or financial liabilities that are directly to be measured at fair value through current profit and loss, held-to-maturity investments, accounts receivable, available-for-sale financial assets and other financial liabilities, etc. 2. Recognition basis and measurement method of financial instruments (1) Financial assets (financial liabilities) measured at fair value through current profit and loss Financial assets (financial liabilities) are initially recorded at fair values when acquired (deducting cash dividends that have been declared but not distributed and bond interest that has matured but not been drawn). Relevant transaction expenses are included in the current profit and loss. The interest or cash dividends to be received during the holding period are recognized as investment income. Change in fair values is included in the current profit and loss at the end of the period. Upon the disposal, difference between the fair value and the initial book-entry value is recognized as investment income; meanwhile, adjustment is made to gains or losses from changes in fair values. (2) Held-to-maturity investments Held-to-maturity investments are initially recorded at the sum of fair values (less the bond interest that has matured but not been drawn) and relevant transaction expenses when acquired. During the period of holding the investment, the interest income is calculated and recognized according to the amortized costs and effective interest rate, and included in the investment income. The effective interest 59 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd rates are determined upon acquisition and remain unchanged during the expected remaining period, or a shorter period if applicable. Difference between the proceeds and the book value of the investment is recognized as investment income upon disposal. (3) Receivables For creditor’s rights receivable arising from external sales of goods or rendering of service by the Company and creditor’s rights of other enterprises (excluding creditor’s right quoted in the active market) held by the Company, including accounts receivable, other receivables, the initial recognition amount shall be the contract price or agreement price receivable from the purchasing party; for those with financing nature, they are initially recognized at their present values. The difference between the amount received and the book value of accounts receivable is included in the current profit and loss upon the recovery or disposal. (4) Available-for-sale financial assets Available-for-sale financial assets are initially recorded at the sum of fair values (deducting cash dividends that have been declared but not distributed and bond interest that have matured but not been drawn) and relevant transaction costs when acquired. The interest or cash dividends to be received during the holding period is or are recognized as investment income. Available-for-sale financial assets are measured at fair value at the end of the year and the changes in fair value are included in other comprehensive income. However, equity instrument investments that have no quoted price in the active market and of which fair values cannot be measured reliably and derivative financial assets that relate to such equity instruments and that shall be settled through the delivery of such equity instruments shall be measured at cost. Difference between the proceeds and the book value of the financial assets is recognized as investment income upon disposal; meanwhile, amount of disposal corresponding to the accumulated change in fair value which is originally and directly included in other comprehensive income shall be transferred out and recognized as the current profit and loss. (5) Other financial liabilities Other financial liabilities are initially recognized at fair values plus related transaction costs. The subsequent measurement is based on amortized costs. 3. Recognition and measurement of transfer of financial assets Upon occurrence of transfer of a financial asset, the Company shall de-recognize the transfer of the financial asset if nearly all the risks and rewards associated with the ownership of the financial assets have been transferred to the transferee; and shall not de-recognize the transfer of the financial asset if nearly all the risks and rewards associated with the ownership of the financial assets are retained. The principle of substance over form is adopted to determine whether a financial asset meets the above de-recognition conditions for the financial asset. The transfer of a financial asset of the Company is classified into the entire transfer and the partial transfer of financial asset. If the entire transfer of financial asset satisfies the criteria for de-recognition, the difference between the amounts of the following two items shall be included in the current profit and loss: (1) The book value of the transferred financial asset; (2) The sum of the consideration received from the transfer and the accumulated amount of the changes in fair value originally and directly included in shareholders’ equity (the situation where the financial asset transferred is an available-for-sale financial asset is involved in). If the partial transfer of financial asset satisfies the criteria for de-recognition, the entire book value of the transferred financial asset shall be split into the derecognized part and recognized part according to their 60 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd respective fair value and the difference between the amounts of the following two items shall be included in current profit and loss: (1) The book value of derecognized part; (2) The sum of the consideration for the derecognized part and the portion of de-recognition corresponding to the accumulated amount of the changes in fair value originally and directly included in owners’ equity (the situation where the financial asset transferred is an available-for-sale financial asset is involved in). If the transfer of financial assets does not meet the de-recognition criteria, the financial assets shall continue to be recognized and the consideration received will be recognized as a financial liability. 4. Derecognition criteria of financial liabilities A financial liability shall be wholly or partly derecognized if its present obligations are wholly or partly dissolved. Where the Company enters into an agreement with a creditor so as to substitute the existing financial liabilities with any new financial liability, and the new financial liability is substantially different from the contractual stipulations regarding the existing financial liability, it shall derecognize the existing financial liability, and shall at the same time recognize new financial liability. Where substantial revisions are made to some or all of the contractual stipulations of the existing financial liability, the Company shall derecognize the existing financial liability wholly or partly, and at the same time recognize the financial liability with revised contractual stipulations as a new financial liability. Upon whole or partial derecognition of financial liabilities, the difference between the book value of the financial liabilities derecognized and the consideration paid (including non-cash assets surrendered or new financial liabilities assumed) shall be included in the current profit and loss. Where the Company redeems part of its financial liabilities, it shall, on the redemption date, allocate the entire book value of financial liabilities according to the comparative fair value of the part that continues to be recognized and de-recognized part. The difference between the book value allocated to the derecognized part and the considerations paid (including non-cash assets surrendered and the new financial liabilities assumed) shall be included in the current profit and loss. 5. Determination method of fair value of financial assets and financial liabilities Where there is an active market for financial instruments, the fair values shall be determined according to quoted prices in active markets. Where there is no active market, the fair values shall be determined using reasonable valuation techniques. At the time of valuation, the Company adopted valuation techniques applicable in the current situation and supported by enough available data and other information, select input values consistent with the features of assets or liabilities considered by market participants in the transaction related to the assets or liabilities, and give priority to using the relevant observable input values. Only when it is unable or impracticable to obtain the relevant observable input values, unobservable input values can be used. 6. Test method and accounting treatment of depreciation of financial assets (excluding receivables) Except for the financial assets measured at fair values through current profit and loss, the book value of financial assets on the balance sheet date should be checked. If there is objective evidence that a financial asset is impaired, provision for impairment shall be made. (1)Provision for impairment of available-for-sale financial assets: If the fair value of available-for-sale financial assets has significantly declined at the end of the period, or it is expected that the trend of decrease in value is non-temporary after considering of various relevant factors, the impairment shall be recognized, and accumulated losses from decreases in fair value originally and directly included in owners’ equity shall be all transferred out and recognized as impairment loss. For available-for-sale debt instruments whose impairment losses have been recognized, if their fair values 61 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd rise in the subsequent accounting period and such rise is objectively related to the matters occurring after the recognition of impairment loss, the previously recognized impairment loss shall be reversed and recorded into the current profit and loss. Impairment losses on available-for-sale equity instruments should not be reversed through profit and loss. Criteria of the Company for ―serious‖ decline of fair value of investments in available-for-sale equity instruments: In general, for highly liquid equity investments that are actively traded in the market, over 50% of the decline is considered to be a serious fall. Criteria for ―non-temporary‖ decline of fair value: In general, if a continuous decline lasts for more than six months, it is considered as ―non-temporary decline.‖ (2)Provision for impairment of held-to-maturity investments: Measurement of provision for impairment loss on held-to-maturity investments is treated in accordance with the measurement method of impairment loss on accounts receivable. 11) Receivables 1. Receivables that are individually significant but with provision for bad debts made on an individual basis Assessment basis or standard of amount Top five biggest balance accounts. individually significant An impairment test shall be separately made. Provision for bad debts shall be accrued based on the difference between the present value of estimated future cash flow and its book value. And Method of provision for bad debts of it shall be recorded into the current profit and loss. If the difference between expected future receivables individually significant cash flow of short-term receivables and its present value is very small, it does not discount its expected future cash flows when determining the relevant impairment losses. 2. Provision for bad debts of receivables made on credit risk characteristics portfolio basis Methods of provision for bad debts made on credit risk characteristics portfolio basis Balances of receivables other than accounts receivable subject to provisions for bad debts on an individual Portfolio1 basis and other receivables Portfolio2 Amount due from government agencies and institutions Portfolio3 Security deposit Portfolio4 Employee reserve and employee collection and payment Balances of receivables other than accounts receivable subject to provisions for bad debts on an individual Portfolio5 basis and other receivables Provision for bad debts made at aging analysis method in the portfolio: Proportion of Provision for Accounts Proportion of Provision for Other Receivables Aging Receivable (%) (%) Within 1 year (including 1 year) 5 5 1 to 2 years 20 20 2 to 3 years 50 50 Over 3 years 100 100 The receivables of the overseas subsidiaries of the Company were all tested separately and provision for bad debts was made separately. 3. Receivables that are individually insignificant but with provision for bad debts made on an individual basis Reason for bad debt provision provided Receivables of a particular object on an individual basis An impairment test shall be separately made. If there is objective evidence that it has been Method of provision for bad debts impaired, provision for bad debts is made based on the difference between the present value of expected future cash flows and its book value, which is included in the current profit or loss. 12) Inventories 1. Classification of inventories Inventories are classified into Materials in transit, raw materials, revolving materials, stock commodities, goods in progress, dispatched goods, material procurement, consigned processing materials, labor cost and others. 62 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 2. Measurement method of dispatched inventories Inventories are measured with weighted average method when dispatched. The percentage matches method of the labor cost and labor revenue. One-off amortization method is adopted for low-cost consumables when they are consumed. 3. Recognition basis for net realizable values of inventories of different categories In normal operation process, for merchandise inventories for direct sale, including finished goods, stock commodities and materials for sale, their net realizable values are determined at the estimated selling prices minus the estimated selling expenses and relevant taxes and surcharges; in normal operation process, for material inventories that need further processing, their net realizable values are determined at the estimated selling prices of finished goods minus estimated costs to completion, estimated selling expenses and relevant taxes and surcharges; for inventories held to execute sales contract or service contract, their net realizable values are calculated on the basis of contract price. If the quantities of inventories specified in sales contracts are less than the quantities held by the Company, the net realizable value of the excess portion of inventories shall be based on general selling prices. At the end of the period, provisions for inventory depreciation reserve are made on an individual basis. For inventories with large quantity and low unit price, the provisions for inventory depreciation reserve are made on a category basis. For inventories related to the product portfolios manufactured and sold in the same area, and of which the final usage or purpose is identical or similar thereto, and which is difficult to separate from other items for measurement purposes, the provisions for inventory depreciation reserve shall be made on a portfolio basis. Except that there is clear evidence that the market price is abnormal on the balance sheet date, the net realizable value of inventory items shall be recognized at the market price on the balance sheet date. Net realizable value of inventory items at the end of the year is recognized at the market price on the balance sheet date. 4. Inventory system Perpetual inventory system is adopted. 13) Assets held for sale Not applicable. 14) Long-term equity investments 1、 Criteria for judgment of common control and significant influence The term ―common control‖ refers to the sharing of control over an arrangement in accordance with the relevant agreement, and related activities of the arrangement must be unanimously agreed by the parties that share the right of control. Where the Company and other investors exert common joint control over the investee and have rights over the net assets of the investee, the investee is a joint venture of the Company. Significant influence refers to the power to participate in making decisions on the financial and operating policies of an enterprise, but not the power to control, or jointly control, the formulation of such policies with other parties. Where the Company is able to exert significant influence over the investee, the investee is its associate. 2、 Recognition of initial investment costs (1)Long-term equity investments acquired from business combination Business combination under common control: if the Company makes payment in cash, transfers non-cash assets or bears debts and issues equity securities as the consideration for the business combination, the book value of the owner’s equity of the cquire in the consolidated financial statements of the ultimate controller is recognized as the initial cost of the long-term equity investment on the combination date. In case the Company can exercise control over the investee under common control for additional investment or other reasons, the 63 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd initial investment cost of long-term equity investments is recognized at the share of book value of net asset of the cquire after the combination in the consolidated financial statements of the ultimate controller on the combination date. The stock premium should be adjusted at the difference between the initial investment cost of long-term equity investments on the combination date and the book value of long-term equity investments before the combination plus the book value of consideration paid for additional shares; if there is no sufficient stock premium for write-downs, the retained earnings are adjusted. Business combination not under common control: The Company recognizes the combination cost determined on the combination date as the initial cost of long-term equity investments. Where the Company can exercise control over the investee not under common control for additional investments or other reasons, the initial investment cost changed to be accounted for under the cost method should be recognized at the book value of originally held equity investments plus costs of additional investments. (2)Long-term equity investment acquired by other means For a long-term equity investment acquired through making payments in cash, its initial cost is the actually paid purchase cost. For a long-term equity investment acquired from issuance of equity securities, its initial cost is the fair value of the issued equity securities. If the exchange of non-monetary assets has commercial substance and the fair values of assets traded out and traded in can be measured reliably, the initial cost of long-term equity investment traded in with non-monetary assets are determined based on the fair values of the assets traded out and the relevant taxes and surcharges payable unless there is any conclusive evidence that the fair values of the assets traded in are more reliable; if the exchange of non-monetary assets does not meet the above criteria, the book value of the assets traded out and the relevant taxes and surcharges payable are recognized as the initial cost of long-term equity investment traded in. For a long-term equity investment acquired from debt restructuring, its initial cost is determined based on the fair value. 3、 Subsequent measurement and recognition of gains and losses (1)Long-term equity investment accounted for under the cost method Long-term equity investments in subsidiaries are accounted for under the cost method. Except for the actual price paid for acquisition of investment or the cash dividends or profits contained in the consideration which have been declared but not yet distributed, the Company recognizes the investment income in the current year at the cash dividends or profits declared by the investee. (2)Long-term equity investments accounted for under the equity method Long-term equity investments in associates and joint ventures are accounted for under the equity method. If the cost of initial investment is in excess of the proportion of the fair value of the net identifiable assets in the investee when the investment is made, the difference will not be adjusted to the initial cost of the long-term equity investments; if the cost of initial investment is in short of the proportion of the fair value of the net identifiable assets in the investee when the investment is made, the difference will be included in the current profit and loss. The Company shall recognize the investment income and other comprehensive income at the shares of net profit and loss and other comprehensive income realized by the investee which the Company shall enjoy or bear and adjust the book value of long-term equity investments at the same time; the Company shall calculate the shares according to profits or cash dividends declared by the investee and correspondingly reduce the book value of long-term equity investments; the book value of long-term equity investments shall be adjusted according to the investee’s other changes in owner’s equity other than net profit and loss, other comprehensive income and profit distribution, which should be included in owner’s equity. 64 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd The share of the investee’s net profit or loss should be recognized after adjustments are made to net profit of the investee based on the fair value of identifiable net assets of the investee upon acquisition of investments and according to accounting policies and accounting period of the Company. When holding the investment, the investee should prepare the consolidated financial statements, it shall account for the investment income based on the net profit, other comprehensive income and the changes in other owner’s equity attributable to the investee. When the Company recognizes its share of loss incurred to the investee, treatment shall be done in following sequence: firstly, the book value of the long-term equity investment shall be reduced. Secondly, where the book value thereof is insufficient to cover the share of losses, investment losses are recognized to the extent of book value of other long-term equities which form net investment in the investee in substance and the book value of long term receivables shall be reduced. Finally, after all the above treatments, if the Company is still responsible for any additional liability in accordance with the provisions stipulated in the investment contracts or agreements, provisions are recognized and included into current investment loss according to the obligations estimated to undertake. (3)Disposal of long-term equity investments For disposal of long-term equity investment, the difference between its book value and the actual price shall be included in the current profit and loss. For long-term equity investments accounted for under the equity method, when the Company disposes such investments, accounting treatment should be made to the part that is originally included in other comprehensive income according to the corresponding proportion by using the same basis for the investee to directly dispose the relevant assets or liabilities. Owner’s equity recognized at the changes in the investee’s other owner’s equity other than net profit or loss, other comprehensive income and profit distribution shall be transferred to the current profit and loss according to the proportion, except for other comprehensive income from changes arising from re-measurement of net liabilities or net assets of defined benefit plan. In case the joint control or significant influence over the investee is lost for disposing part of equity investments or other reasons, the remaining equity will be changed to be accounted for according to the recognition and measurement principles of financial instruments. The difference between the fair value and the book value on the date of the loss of joint control or significant influence should be included in the current profit and loss. For other comprehensive income recognized from accounting of the original equity investments under the equity method, accounting treatment should be made by using the same basis for the investee to directly dispose the relevant assets or liabilities when the equity method is no longer adopted. Owner’s equity recognized from the investee’s changes in other owner’s equity other than net profit or loss, other comprehensive income and profit distribution should all transferred to the current profit and loss when the equity method confirmed is no longer adopted. In case the control over the investee is lost for disposing part of equity investments or other reasons, when the Company prepares the individual financial statements, where the remaining equity after the disposal can exercise joint control or significant effect on the investee, then such equity will be changed to be accounted for under the equity method and the remaining equity is deemed to have been adjusted under the equity method on acquisition; where the remaining equity after the disposal cannot exercise joint control or significant effect on the investee, then accounting treatment shall be changed to be made according to the relevant provisions on the recognition and measurement principles of financial instruments. The difference between the fair value and the book value on the date of the loss of joint control or significant influence should be included in the current profit and loss. In case the disposed equity is acquired from additional investments or other reasons, when the Company prepares the individual financial statements, where the remaining equity after the disposal is accounted for 65 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd under the cost method or the equity method, other comprehensive income and other owner’s equity recognized from the accounting of equity investments held before the acquisition date under the equity method shall be transferred according to the proportion; where accounting treatment of the remaining equity after the disposal is changed to be made according to the recognition and measurement principles of financial instruments, all of other comprehensive income and other owner’s equity shall be transferred. 15) Investment property If using the cost measurement model: Investment properties are properties to earn rentals or for capital appreciation or both. Examples include land leased out under operating leases, land held for long-term capital appreciation, buildings leased out under operating leases, (including buildings that have been constructed or developed for future lease out under operating leases, and buildings that are being constructed or developed for future lease out under operating leases). The Company adopts the cost model to measure all current investment properties. The Company adopts the same depreciation policy for the investment property measured at cost model – building for renting as that for the Company’s fixed assets and the same amortization policy of land use right for renting as that for the Company’s intangible assets. 16) Fixed assets A. Recognition criteria for fixed assets Fixed assets refer to tangible assets held for the purpose of producing commodities, providing services, renting or business management with useful lives exceeding one accounting year. Fixed assets will only be recognized when all the following criteria are satisfied: (1) It is probable that the economic benefits relating to the fixed assets will flow into the Company; and (2) The costs of the fixed asset can be measured reliably. B. Depreciation method Annual Depreciation Rate Category Depreciation Method Depreciation Life (years) Residual Rate (%) (%) Buildings and constructions Straight-line method 5-50 0-10% 2.00%-25.00% Machinery equipment Straight-line method 3-15 0-10% 6.00%-33.33% Transportation equipment Straight-line method 3-14 0-10% 6.43%-33.33% Electronic equipment Straight-line method 3-14 0-10% 6.43%-33.33% Renovations of fixed assets Straight-line method 5-15 0 6.67%-20.00% Other equipment Straight-line method 3-14 0-10% 6.43%-33.33% C. Identification basis and pricing method of financing lease fixed assets If one of the following conditions is stipulated in the terms of the lease agreement signed between the Company and the lessor, it is recognized as a leased asset under finance: (1) The ownership of the leased assets after the lease expires belongs to the Company; (2) The Company has the option to purchase assets. The purchase price is much lower than the fair value of the assets when the option is exercised; (3) The lease period accounts for the majority of the useful life of the leased asset; (4) The present value of the minimum lease payment on the lease start date is not significantly different from the fair value of the asset. At the beginning of the lease, the Company uses the lower of the fair value of the leased asset and the present value of the minimum lease payments as the entry value of the leased asset, and uses the minimum lease payment as the entry value of long-term payables. The difference is as unrecognized financing fee. 66 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 17) Construction in progress The book values of the construction in progress are stated at total expenditures incurred before reaching working condition for their intended use. For construction in progress that has reached working condition for intended use but relevant budgets for the completion of projects have not been completed, the estimated values of project budgets, prices, or actual costs should be included in the costs of relevant fixed assets, and depreciation should be provided according to relevant policies of the Company when working condition is reached. After the completion of budgets needed for the completion of projects, the estimated values should be substituted by actual costs, but depreciation already provided is not adjusted. 18) Borrowing costs A. Recognition criteria for capitalization of borrowing costs Borrowing costs include the interest on borrowings, the amortization of discount or premium, auxiliary expenses, exchange differences incurred by foreign currency borrowings, etc. The borrowing costs incurred to the Company and directly attributable to the acquisition and construction or production of assets eligible for capitalization should be capitalized and recorded into asset costs; other borrowing costs should be recognized as costs according to the amount incurred and be included into current profit and loss. Assets eligible for capitalization refer to fixed assets, investment property, inventories and other assets which may reach their intended use or sale status only after long-time acquisition and construction or production activities. Borrowing costs may be capitalized only when all the following conditions are met at the same time: (1) The asset disbursements have already incurred, which shall include the cash paid, non-cash assets transferred or interest bearing debts undertaken for the acquisition and construction or production activities for preparing assets eligible for capitalization; (2) The borrowing costs has already incurred; and (3) Purchase, construction or manufacturing activities that are necessary to prepare the asset for its intended use or sale have already started. B. Capitalization period of borrowing costs Capitalization period refers to the period from commencement of capitalization of borrowing costs to its cessation; period of suspension for capitalization is excluded. When the qualified asset under acquisition and construction or production is ready for the intended use or sale, the capitalization of the borrowing costs shall be ceased. When some projects among the acquired and constructed or produced assets eligible for capitalization are completed and can be used separately, the capitalization of borrowing costs of such projects should be ceased. Where construction for each part of assets purchased, constructed or manufactured has been completed separately but can be used or sold only after the entire assets have been completed, capitalization of attributable borrowing costs should cease at the completion of the entire assets. C. Period of capitalization suspension If the acquisition and construction or production activities of assets eligible for capitalization are interrupted abnormally and this condition lasts for more than three months, the capitalization of borrowing costs should be suspended; if the interruption is necessary for the acquisition and construction or production to prepare the assets for their intended use or sale, the capitalization of borrowing costs should continue. The borrowing costs incurred during interruption are recognized in the current profit and loss, and the capitalization of borrowing costs continues after the restart of the acquisition and construction or production activities of the assets. D. Capitalization rate and measurement of capitalized amounts of borrowing costs 67 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd As for special borrowings borrowed for acquiring and constructing or producing assets eligible for capitalization, the to-be-capitalized amount shall be determined at interest expense of special borrowing actually incurred in the current period less the interest income of the borrowings unused and deposited in bank or return on temporary investment. As for general borrowings used for acquiring and constructing or producing assets eligible for capitalization, the to-be-capitalized amount should be calculated by multiplying the weighted average of asset disbursements of the part of accumulated asset disbursements exceeding special borrowings by the capitalization rate of used general borrowings. The capitalization rate is calculated by using the weighted average interest rate of general borrowings. 19) Biological assets Not applicable. 20) Oil and gas assets Not applicable. 21) Intangible assets A. Valuation method, service life, impairment test (1) Measurement of intangible assets ① The Company initially measures intangible assets at cost on acquisition The costs of external purchase of intangible assets comprise their purchase prices, related taxes and surcharges and any other directly attributable expenditure incurred to prepare the asset for its intended use. If payments for the purchase of intangible assets are extended beyond the normal credit terms with financing nature, the costs of intangible assets are determined on the basis of present values of the purchase prices. For intangible assets obtained from debtors in settlement of his liabilities in case of debt restructuring, they should be initially stated at their fair values. Differences between the book values and the fair values of the intangible assets are charged to profit or loss for the current period. If the exchange of non-monetary assets has commercial substance, and the fair values of these assets can be measured reliably, the book-entry values of intangible assets traded in are based on the fair values of the intangible assets traded out unless there is any conclusive evidence that the fair values of the assets traded in are more reliable. If the exchange of non-monetary assets does not meet the above criteria, the costs of the intangible assets traded in should be the book values of the assets traded out and relevant taxes and surcharges paid, and no profit or loss shall be recognized. ② Subsequent measurement The useful lives of the intangible assets are analyzed and determined on their acquisition. As for intangible assets with limited useful life, straight-line amortization method is adopted in the period when the intangible assets generate economic benefit for enterprise; if the period when the intangible assets generate economic benefit for enterprise cannot be forecasted, the intangible assets shall be deemed as those with indefinite useful life and shall not be amortized. (2) Estimate of the useful life of the intangible assets with finite useful lives : Item Estimated Useful Lives Land use right 50 years Right to use trade mark 10 years Patent and non-patent technology 4-8 years Computer software 3-10 years The useful lives and amortization methods of intangible assets with limited useful lives are reviewed at each year end. Upon review, the useful lives and amortization method of the intangible assets as at the end of the year are 68 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd not different from those estimated before. (3) Specific criteria divided the research stage and development stage Expenditure internal research and development project is divided into research expenditures and development expenditures. Research stage: the planned investigation and research activities to acquire and understand new scientific or technological knowledge. Development stage: before commercial production and use, the research findings or other knowledge are applied in some plan or design to produce new or substantially improved materials, devices, products, etc. B. Internal research and development expenditure accounting policy Specific criteria divided the research stage and development stage: If it can be reliably estimated that future economic benefits will flow to the entity, and that the purchase and production costs can be reliably measured, the development cost should be capitalized. The measurement of production cost of internally generated intangible assets is based on direct cost, indirect cost and amortization. If it can be clearly defined that newly developed products or methods are technically feasible, and that they are intended for private use or sale, the development cost should be capitalized. The capitalized development cost should be amortized within a product’s expected 5 to 8 years’ life cycle, using a straight-line method. If the value in use cannot be recognized, impairment and amortization should be carried out. Research cost and the development cost which cannot be capitalized should be expense when it occurs. 22) Impairment of long-term assets The Company will conduct the impairment test if any evidence suggests that the long-term assets, such as the long-term equity investment and the investment property, fixed assets, construction in progress and intangible assets, are impaired on the balance sheet date. If impairment test results indicate that the recoverable amounts of the assets are lower than their carrying amounts, the provision for impairment is made based on the differences which are recognized as impairment losses. The recoverable amount is the higher of the fair value of the asset minus the disposal expenses and the present value of the estimated future cash flow of the asset. The provision for assets impairment is calculated and recognized by the individual asset. If it is difficult to estimate the recoverable amount of an individual asset, the Company shall estimate the recoverable amount of the asset portfolio that the individual asset belongs to. The asset portfolio is the minimum asset group that can independently generate the cash inflow. Goodwill is tested for impairment at least at the end of each year. The Company conducts an impairment test for the goodwill. The book value of goodwill arising from business combinations is amortized to relevant asset groups with a reasonable method since the date of acquisition; or amortized to relevant combination of asset groups if it is difficult to be amortized to relevant asset groups. The book value of goodwill is amortized to relevant asset groups or combinations of asset groups according to the proportion of the fair value of such asset groups or combinations of asset groups in the total fair value of relevant asset groups or combinations of asset groups. Where the fair value cannot be reliably measured, it should be amortized according to proportion of the book value of each asset group or combination of asset group in the total book value of relevant asset groups or combinations of asset groups. When making an impairment test on the relevant asset groups or combination of asset groups containing goodwill, if any indication shows that the asset groups or combinations of asset groups related to the goodwill may be impaired, the Company shall first conduct an impairment test on the asset groups or combinations of asset groups not containing goodwill, calculate the recoverable amount and compare it with the relevant book value to recognize the corresponding impairment loss. Then the Company shall conduct an impairment test on the asset groups or combinations of asset groups containing goodwill, and compare the book value of these 69 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd asset groups or combinations of asset groups (including the book value of the goodwill apportioned thereto) with the recoverable amount. Where the recoverable amount of the relevant asset groups or combinations of asset groups is lower than the book value thereof, the Company shall recognize the impairment loss of the goodwill. The above impairment loss is not reversed in the future accounting period once recognized. 23) Long-term Deferred Expenses Not applicable 24) Employee compensation 1. Accounting treatment of short-term remuneration During the accounting period in which employees provide service to the Company, the short-term remuneration actually incurred is recognized as liabilities and charged to the current profit or loss or the relevant assets cost. The medical insurance premium, work-related injury insurance premium and the housing provident fund paid by the Company for its employees, together with the labor union expenditures and employee education are used to calculate and determine the relevant employee compensation amount based on the prescribed accrual basis and accrual proportion. The non-monetary benefits for employees that can be measured reliably are measured at fair value. 2. Accounting treatment of benefits paid after departure (1) Defined withdrawal plan The basic endowment insurance premium and unemployment insurance premium paid by the Company for its employees in accordance with relevant provisions of the local government are recognized as liabilities and charged to the current profit or loss or the relevant assets cost, with the payable amount calculated based on the local prescribed payment base and percentage, during the accounting period in which the employees provide services to the Company. In addition to the basic endowment insurance, the Company also builds the enterprise annuity payment system (supplementary pension insurance) in accordance with relevant national policies for enterprise annuity system. The Company pays a certain percentage of the total employee compensation to the local social institution, and record the relevant expenditures into the current profit or loss or the relevant assets cost. (2) Defined benefit plan The Company attributes the welfare obligation arising from the defined benefit plan to the period during which the employees provide services, in accordance with the formula determined under the estimated accumulated welfare unit method, and records the same into the current profit or loss or the relevant asset cost. A net liability or net asset in relation to the defined benefit plan is recognized at the present value of the obligation under the defined benefit plan less the deficit or surplus arising out of the fair value of the assets in relation to the defined benefit plan. Where the defined benefit plan has any surplus, the Company will determine the net assets in relation to the defined benefit plan at the lower of the surplus of the defined benefit plan or the asset cap. The obligations under the defined benefit plan, including the estimated payment obligation within 12 months following the annual report period during which the employees provide service, are discounted to the present value at the market return of the national debt of which the term and currency match those of the obligation under the defined benefit plan on the balance sheet date, or of the high-quality corporate debt in an active market. The service cost incurred by the defined benefit plan, together with the net interest on the net liability or net asset in relation to the defined benefit plan, are charged to the current profit or loss or the relevant asset cost; the change arising from the re-measurement of the net liability or net asset in relation to the defined benefit plan are recorded into other comprehensive income and are not reversed to the profit or loss in the subsequent accounting period. The gains or losses on the settlement in respect of the defined benefit plan are recognized at the difference 70 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd between the present value and the settlement price of the obligation under the defined benefit plan on the settlement date. 3. Accounting treatment of dismissal welfare Where the Company cannot unilaterally withdraw the dismissal welfare offered in view of the cancellation of the labor relation plan or the layoff proposal, or recognizes the cost or expenses as to the restructuring involving the payment of dismissal welfare (whichever is earlier), the employee compensation arising from the dismissal welfare should be recognized as the liabilities and charged to the current profit or loss. 25) Estimated liabilities 1. Recognition criteria for estimated liabilities The Company should recognize an obligation in relation to contingencies as an estimated liability, such as the litigation, debt guarantee, loss-making contract or restructuring, when all the following conditions are satisfied: (1) The obligation is a present obligation of the Company; (2) The performance of such obligation is likely to result in outflow of economic benefits from the Company; (3) The amount of the obligation can be measured reliably. 2. Measurement of estimated liabilities The estimated liabilities of the Company are initially measured as the best estimate of expenses required for the performance of relevant present obligations. The risks, uncertainties, time value of money, and other factors relating to the contingencies. If the time value of money is significant, the best estimates shall be determined after discount of relevant future cash outflows. The best estimates shall be treated as follows in different circumstances: If there is continuous range (or interval) for the necessary expenses, and probabilities of occurrence of all the outcomes within this range are equal, the best estimate shall be determined at the average amount of upper and lower limits within the range. Given the fact that there is no continuous range (or interval) for the necessary expenses, or probabilities of occurrence of all the outcomes within this range are unequal despite such a range exists, in case that the contingency involves a single item, the best estimate shall be determined at the most likely outcome; if the contingency involves two or more items, the best estimate should be determined according to all the possible outcomes with their relevant probabilities. When all or part of the expenses necessary for the settlement of an estimated liabilities are expected to be compensated by a third party or other parties, the compensation shall be separately recognized as an asset only when it is virtually certain that the compensation will be received. The amount recognized for the compensation shall not exceed the book value of the estimated liabilities. 26) Share payment Not applicable. 27) Other financial instruments such as preferred shares and perpetual bonds Not applicable. 28) Incomes 1. Specific criteria for determining the timing of income recognition for sales of goods The Company will confirm that the sales income of the goods is realized when the Company has transferred the major risks and rewards of ownership of the goods to the purchaser; the Company does not retain the right to continue management linked to ownership, nor does it have effective control over the products sold; the amount of income can be measured reliably; the related costs incurred or to be incurred can 71 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd be reliably measured. The specific judgment criteria are as follows: (1) Domestic sales: After the delivery of the goods, the Company confirms the sales income. According to the delivery method agreed in the sales order, the detailed standards for income recognition are: When the customer goes directly to the warehouse of the Company to pick up goods, based on the outbound documents confirmed by the parties in various ways, the income is confirmed when the goods leave the warehouse. When the customer appoints a carrier, based on the logistics document issued by the carrier, income is recognized when the goods are delivered to the carrier. When the Company appoints a carrier, based on the logistics receipts signed and confirmed by the customer, income is recognized when the customer actually signs the receipt. When the Company sells through the e-commerce platform, income is recognized when the electronic order received by the customer to confirm the receipt or the e-commerce receipt period expires. If an unconditional return period or acceptance period has been agreed upon, the income recognition will be delayed to the expiry of unconditional return periodor acceptance period. For sales on behalf of distributors, the income is recognized when the dealership list with the final customer confirmation is received. (2) International sales: If choose to apply international trade terms, sale income is recognized according to the time point of risk transfer agreed in the specific applicable international trade terms. If an unconditional return period or acceptance period is agreed upon, the income recognition will be extended to the unconditional return period or the acceptance period after meeting the applicable trade term risk transfer point. If no international trade terms have been selected, the Company will recognize income after obtaining various types of risk transfer documents according to the agreed delivery method and the time of risk transfer. (3) Sales of specialized sewing machine: As the customer has deeply customized the machine, according to the relevant agreement in the contract signed by both parties, the specific delivery obligations under each technical clause are distinguished, and the corresponding income is confirmed according to the completion of the customer demand and the relevant confirmation documents. 2. Recognition of income from transfer of assets use right When the economic benefit related to the transaction is probably to flow into the Company and the relevant income can be reliably measured, the income from transfer of the assets use right is determined as follows: (1) Interest income is measured based on the length of time for which the Company’s monetary funds is used by others and the applicable interest rate; (2) Royalty income is measured according to the period and method of charging as stipulated in the relevant agreements or contracts. 3. Measurement principles and methods of completion stage where revenues from rendering of labor are recognized under percentage-of-completion method The Company confirmed the income from the labor service when obtain the written settlement confirmation from the customer and issue the settlement certificate. If the outcome of transactions can be estimated reliably at the balance sheet date, income from rendering of labor service is recognized under the percentage-of-completion method. The percentage of completion is determined by measurement of completed work as a percentage of total estimated costs. Income from rendering of labor service is determined by prices stated in the contracts or agreements, whether already received or to be received, unless such relevant prices are unfair. The current income from the rendering of labor service is recognized at the amount of multiplying the total income from the rendering of 72 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd labor service by completion progress and deducting the accumulated income from the rendering of labor service recognized in previous accounting periods on the balance sheet date; meanwhile, the current cost of labor service is carried forward by the amount of multiplying the total costs of the rendering of labor service by completion progress and deducting the accumulated cost from the rendering of labor services recognized in previous accounting periods. When the outcome of transactions involving the rendering of services cannot be estimated reliably, income is recognized and measured at the balance sheet date as follows: (1) If the service costs incurred are expected to be fully recoverable, the amounts equal to the labor costs incurred shall be recognized as incomes and the equivalent amounts of labor costs shall be carried forward; (2) If the service costs incurred are not expected to be fully recoverable, the labor costs incurred shall be included in the current profit and loss, with no income from the rending of labor services not recognized. The Company’s income from logistics service and sewing equipment maintenance services is recognized when related services have been provided, service costs have actually occurred, and service settlement documents confirmed by the service recipient have been obtained. 29) Government grants 1. Types Government grants refer to the monetary or non-monetary assets obtained by the Company from the government for free. Government grants are classified into government grants related to assets and government grants related to income. Government grants related to assets refer to government grants obtained by the Company that are used to purchase, construct or form long-term assets, including financial allocations for purchases of fixed assets or intangible assets, and financial discounts for special loans for fixed assets. Government grants related to income refer to government grants other than those related to assets. The Company’s specific criteria for classifying government grants as related to assets are: government grants obtained by the Company that are used to purchase, construct or form long-term assets. The Company’s specific criteria for classifying government grants as related to income are: government grants other than those related to assets. If the government documents do not clearly specify the target of the grant, the judgment basis of classifying the government grant as related to the assets or related to the income is whether it is used to purchase or construct or form long-term assets. 2. Accounting treatment Government grants related to assets: write down the carrying amount of the related assets or recognize them as deferred income. If it is recognized as deferred income, it shall be recorded into current profits and losses in a reasonable and systematic way within the useful life of the relevant assets (related to the Company’s daily activities, included in other income; unrelated to the Company’s daily activities, included in non-operating income). Government grants related to income: grants used to compensate for the related costs or losses of the Company in the future period, shall be recognized as deferred income, and shall be recorded in the current profits and losses (related to the Company’s daily activities, included in other income; unrelated to the Company’s daily activities, included in non-operating income), or be used to reduce the related costs, expenses or losses during the period for confirming the relevant costs, expenses or losses. 30) Deferred income tax assets and deferred income tax liabilities Deferred income tax assets shall be recognized for deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Deferred income tax assets should be recognized for deductible temporary differences to the extent that it is 73 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd probable that taxable profit will be available against which the deductible temporary differences can be utilized. Taxable temporary differences are recognized as deferred income tax liabilities except in special circumstances. Special circumstances in which deferred income tax assets or deferred income tax liabilities shall not be recognized include: the initial recognition of goodwill; other transactions or events excluding business combinations, which affect neither accounting profits nor the taxable income (or deductible losses) when occurred. If the Company has the legal right of netting and intends to settle in net amount or to obtain assets and discharge liabilities simultaneously, the income tax assets and income tax liabilities of the Company for the current period shall be presented based on the net amount after offset. When the Company has the legal rights to balance income tax assets and income tax liabilities for the current period with net settlement, and deferred income tax assets and deferred income tax liabilities are related to the income tax which are imposed on the same taxpaying subject by the same tax collection authority or on different tax paying subjects, but, in each important future period in connection with the reverse of deferred income tax assets and liabilities, the involved tax paying subject intends to balance income tax assets and liabilities for the current period with net settlement at the time of obtaining assets and discharging liabilities, deferred income tax assets and deferred income tax liabilities shall be presented based on the net amount after offset. 31) Lease 1. Accounting treatment of operating lease (1) Lease fees paid by the Company for leased asset shall be amortized at straight-line method over the whole lease period (including rent-free period) and shall be included in the current expenses. Initial direct costs relating to lease transactions incurred by the Company shall be recognized as the current expenses. If the expense related to the lease which shall be paid by the Company is assumed by the lessor of the asset, then such expenses shall be deducted from total lease fees, and the balances shall be amortized over the lease term s and charged to the current expenses. (2) The lease fees received for the assets acquired under lease shall be recognized as current expenses over the lease terms (including rent-free periods) on a straight-line basis. The initial direct costs related to lease transactions paid by the Company, included in the current expenses; if a larger amount is to be capitalized, according to confirm the same basis throughout the period of the lease installments related to the lease income is recognized in profit gains. If expenses relating to leases which should be borne by the lessee of the assets are paid by the Company, they shall be deducted from the total lease income and the balances shall be amortized over the lease terms by the Company. 2. Accounting treatment of financial lease (1) Assets rented in by financial lease: At the beginning of the lease, the Company uses the lower of the fair value of the leased assets and the present value of the minimum lease payments as the entry value of the leased assets, and uses the minimum lease payment as the entry value of the long-term payables. The difference is used as unrecognized financing expenses. The Company adopts the actual interest rate method to amortize the unrecognized financing expenses during the asset lease period and count it into financial expenses. The initial direct costs incurred by the company are included in the value of the leased assets. (2) Assets rented out by financial lease: At the lease beginning date, the Company recognizes the financial lease receivables, difference between the sum of unguaranteed residual value and its current value as unrealized financing income. It is recognized as lease income in each period during which rent is received in the future. The initial direct costs incurred by the Company in relation to the lease transaction are included in 74 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd the initial measurement of the financial lease receivable, and the amount of income recognized in the lease period is reduced. 32) Other important accounting policies and accounting estimates Not applicable. 33) Adjustment for changes in principal accounting policies and accounting estimates 1. Adjustment for changes in accounting policies Approval The Content and reasons of accounting policy changes Item and amount affected procedure The Eleventh The ―receivable notes‖ and ―accounts receivable‖ are Session of the combined into ―receivable notes and accounts receivable‖. Eighth Board of The current amount is 617,760,694.90 yuan, and the Directors previous period amount is 526,096,919.07 yuan; (1) The ―receivable notes‖ and ―accounts receivable‖ in the balance sheet are combined as The ―Accounts payable‖ and ―Accounts payable‖ are ―receivable notes and accounts receivable‖; combined into ―Accounts payable and accounts payable‖. The current amount is 318,803,039.91 yuan, and the ―payable notes‖ and ―accounts payable‖ are previous amount is 206,343,320.56 yuan; combined as ―payable‖ ―Notes and accounts payable‖; ―interest receivable‖ and ―dividends Increasing the amount of ―other receivables‖ for the receivable‖ are included in ―other receivables‖; current period of 27,041,989.94 yuan, and increasing the amount of the previous period by 21,645.73 yuan; ―interest payable‖ and ―dividend payable‖ are Increasing the amount of ―other payables‖ for the current included in ―other payables‖; ―Asset Clearance‖ is included in ―Fixed Assets‖; ―Engineering period was 1,838,717.63 yuan, and the amount of the Materials‖ is included in ―Construction in previous period was 2,143,371.92 yuan; The amount of the ―fixed assets‖ in the current period and Construction‖; ―Special Payables‖ is included in the amount in the previous period have not been increased; ―Long-term Payables‖. The comparison data is The current amount of the ―construction in progress‖ and adjusted accordingly.。 the amount of the previous period have not been increased; The amount of the ―long-term payables‖ for the current period and the amount of the previous period have not been increased. (2) Add ―R&D Expenses‖ item in the income The Eleventh statement, reclassify the R&D expenses in the Session of the Eighth Board of The amount of ―administrative expenses‖ was reduced to original ―Management Expenses‖ to ―R&D Directors 97,647,657.57 yuan, and the previous amount was Expenses‖ separately; add ―Including: Interest‖ 84,350,255.40 yuan, which was reclassified to ―R&D under the financial expenses in the income expenses‖. statement.: Fees and interest income items. The comparison data is adjusted accordingly. In the table of changes in owner’s equity, the The Eleventh item ―Setting the benefit of the change in the Session of the defined benefit plan to carry forward the retained Eighth Board of N/A Directors income‖ is added. The comparison data is adjusted accordingly. 2. Adjustment for changes in principal accounting estimates Not applicable. 6. Tax 1) Major taxes and tax rates Tax type Basis of tax assessment Tax rate Calculated based on the income from sales of goods and the provision of taxable Value-added labor services according to tax law, and value added tax payable should be the 3%、5%、6%、7%、11%、10%、 tax (VAT) balance of the output tax for the period after deducting the deductible input tax 16%、17%、19% for the period. consumption tax Business tax Urban maintenance and Levied based on the actual payment of business tax and VAT. 1%、5%、7% construction tax Enterprise income tax Levied based on the taxable income 16%-38%、15%、25% (EIT) Education Levied based on the actual payment of VAT. 3%、2%、1% 75 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd surtax and local education sutax Note: The VAT rate applicable to DAAG and its subsidiaries is 19% or 7%. If there are different corporate income tax rate taxpayers, see the disclosure statement Tax subject name Income tax rate(%) Dürkopp Adler AG 16-38 DAP (Vietnam) Co., Ltd. 20 Zhejiang ShangGong GEMSY Co., Ltd. 15 Dürkopp Adler Manufacturing(Shanghai) Co.,Ltd. 15 SG Richpeace 15 2) Tax incentives The company’s subsidiary Zhejiang ShangGong GEMSY Co., Ltd.,, Dürkopp Adler Manufacturing(Shanghai) Co.,Ltd.,, Tianjin Richpeace are state-level high-tech enterprises, enjoying corporate income tax at 15%. The Company and all subsidiaries in Mainland China are entitled to a tax benefit of 75% deduction for research and development expenses. Shanghai ShangGong Financial Leasing Co., Ltd.,, a subsidiary of the Company, provides tangible movable property financing leasing services and tangible movable property financing after-sales leaseback services, and enjoys the tax incentives for the portion of the VAT that exceeds 3% of the actual tax burden. The company’s three-tier subsidiary Shenzhen Yingruiheng Technology Co., Ltd. and Tianjin Yingrui’an Technology Co., Ltd. sell their own software products developed and produced, and enjoy the tax rebate of the part of the VAT actual tax burden of more than 3%. 7. Notes to items of consolidated financial statements 1) Cash and cash equivalents Item Ending Balance Beginning Balance Cash on hand 743,089.39 707,925.98 Bank deposit 556,653,249.22 712,794,196.15 Other monetary funds 37,637,807.50 9,835,756.40 Total 595,034,146.11 723,337,878.53 Including: total amount of cash and cash equivalents offshore 261,229,432.22 373,357,927.57 Details of cash and cash equivalents restricted for use due to mortgage, pledge or freezing are follows: Item Ending Balance Beginning Balance Bank Acceptance Deposit Guarantee 35,374,936.26 6,539,032.60 Security deposit 712,626.09 400,000.00 Deposit held for foreign exchange inspection 320,825.64 2,585,125.48 Other guaranteed deposit 384,135.73 Total 36,792,523.72 9,524,158.08 Note 1: The balance of December 31, 2018 is the monetary fund that SGGEMSY and Richpeace, which are subsidiaries of the Company, cannot withdraw at any time due to the opening of bank acceptance bills. . Note 2: The balance of December 31, 2018 is the electricity security deposit of Richpeace, a subsidiary of the Company, and the counterfeit deposit of Shanghai Butterfly Import & Export Co., Ltd., a third-level subsidiary of the Company. Note 3: The balance of December 31, 2018 is the foreign exchange supervisor of the company’s subsidiary DAPSH and the company’s third-level subsidiary Shanghai Butterfly Import and Export Co., Ltd. The department has reviewed and has not transferred to the retained funds in the general trade account. Note 4: The balance of December 31, 2018 is that the bank account information of Shanghai Shanggong 76 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Import & Export Co., Ltd., a third-level subsidiary of the Company, has not been completed yet. The bank temporarily freezes the retained funds in the account. 2) Financial assets at fair value whose fluctuation is attributed to profit and loss for current period Not applicable. 3) Derivative financial assets Not applicable. 4) Notes receivable and accounts receivable Item Ending Balance Beginning Balance Notes receivable 81,482,151.15 61,337,538.87 Accounts receivable 536,278,543.75 464,759,380.20 Total 617,760,694.90 526,096,919.07 Notes receivable A. Presentation of notes receivable by category Item Ending Balance Beginning Balance Bank acceptance bills 71,718,740.15 47,405,556.75 Commercial acceptance bills 9,763,411.00 13,931,982.12 Total 81,482,151.15 61,337,538.87 B. Notes receivable pledged as at the end of period Item Ending Balance Bank acceptance bills 2,380,000.00 Total 2,380,000.00 C. Notes receivable endorsed or discounted at the end of the period and have not yet expired at the balance sheet date Item Closing confirmed amount Closing unconfirmed amount Bank acceptance bills 16,562,902.94 Total 16,562,902.94 D. Notes receivable transferred to accounts receivable due to the issuer’s performance failure Not applicable. Accounts receivable A. Disclosure of accounts receivable by category Ending Balance Beginning Balance Type Book balance Provision for bad debt Book balance Provision for bad debt Book Value Book Value Amount % Amount % Amount % Amount % Accounts receivable with significant individual 43,578,964.20 6.71 19,784,571.25 45.40 23,794,392.95 79,818,629.27 13.64 19,622,784.50 24.58 60,195,844.77 amount and provision for bad debt is accrued separately Accounts receivable with provision for bad debt 209,297,564.65 32.21 73,592,992.61 35.16 135,704,572.04 119,721,460.79 20.46 72,220,264.69 60.32 47,501,196.10 accrued by credit risk characteristics of a portfolio 77 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Accounts receivable with insignificant individual 396,860,846.20 61.08 20,081,267.44 5.06 376,779,578.76 385,572,745.19 65.90 28,510,405.86 7.39 357,062,339.33 amount but provision for bad debt is accrued separately Total 649,737,375.05 100.00 113,458,831.30 17.46 536,278,543.75 585,112,835.25 100.00 120,353,455.05 20.57 464,759,380.20 Accounts receivable with significant individual amount and provision for bad debt is accrued separately at the end of the period Accounts receivable (By Ending Balance entity) Proportion of provision Accounts receivable Provision for bad debt Reason for provision (%) Impaired according to the No.2 Client 19,735,959.50 19,735,959.50 100.00 separate test Impaired according to the No.3 Client 12,315,321.00 48,611.75 0.39 separate test Unimpaired according to No.5 Client 11,527,683.70 the separate test Total 43,578,964.20 19,784,571.25 45.40 / Accounts receivable with provision for bad debt accrued using the aging analysis method in the portfolio Ending Balance Aging Accounts receivable Provision for bad debt Proportion of provision (%) Within 1 year 77,476,546.06 3,873,827.29 5.00 1-2 years 4,362,501.88 872,500.38 20.00 2-3 years 3,349,564.89 1,674,782.46 50.00 Over 3 years 67,171,882.48 67,171,882.48 100.00 Total 152,360,495.31 73,592,992.61 48.30 Accounts receivable with provision for bad debt accrued using other methods in the portfolio Proportion of provision Name Accounts receivable Provision for bad debt (%) Receivables guaranteed by financial institutions 56,937,069.34 Total 56,937,069.34 Accounts receivable with insignificant individual amount but provision for bad debt is accrued separately Ending Balance Accounts Receivable (By Entity) Provision for Bad Proportion of Accounts Receivable Reason for Provision Debt Provision Other insignificant accounts 24,356,242.98 7,295,176.66 29.95 Impaired according to the separate test receivable (Note 1) Other insignificant accounts 11,616,479.63 6,335,462.38 54.54 Impaired according to the separate test receivable (Note 2) Other insignificant accounts 7,831,016.87 7,590.41 0.10 Impaired according to the separate test receivable (Note 3) Other insignificant accounts 11,610.00 11,610.00 100.00 Impaired according to the separate test receivable (Note 4) Other insignificant accounts 238,883,440.57 6,296,805.05 2.64 Impaired according to the separate test receivable (Note 5) Other insignificant accounts 169,198.40 216.55 0.13 Impaired according to the separate test receivable (Note 6) Other insignificant accounts 113,495,813.28 134,300.00 0.12 Impaired according to the separate test receivable (Note 7) Other insignificant accounts 306,725.49 106.39 0.03 Impaired according to the separate test receivable (Note 8) Other insignificant accounts 190,318.98 Unimpaired according to separate test receivable (Note 9) Total 396,860,846.20 20,081,267.44 5.06 Note 1: Mainly for the accounts receivable of the parent company of SGG, the impairment provision is made according to the individual amount test. Note 2: Mainly for the accounts receivable of the subsidiary Shanghai Shanggong Butterfly Sewing 78 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Machine Co., Ltd., the impairment provision is made according to the individual amount test. Note 3: Mainly for the accounts receivable of the subsidiary DAPSH, the impairment provision is made according to the individual amount test. Note 4: Mainly for the subsidiary of Shanghai SGSB Electronics Co., Ltd., the accounts receivable are accrued for impairment according to the individual amount test. Note 5: Mainly for the accounts receivable of the subsidiary DA AG, the impairment provision is made according to the individual amount test. Note 6: Mainly for the subsidiary of SGGEMSY, the accounts receivable are accrued for impairment according to the individual amount. Note 7: Mainly for the subsidiary of Shanghai Shensy Enterprise Development Co., Ltd., the accounts receivable are depreciated according to the individual amount test. Note 8: Mainly for the accounts receivable of the subsidiary PFAFF Industrial Sewing Machine (Zhangjiagang) Co., Ltd., the impairment provision is made according to the individual amount test. Note 9: Mainly due to the accounts receivable of the subsidiary DAP Vietnam Co., Ltd., no impairment occurred according to the individual amount test. B. The accrual, reversal or recovery of the provision for bad debts in the current period The provision for bad debts accrued in the current period is 7,764,954.65 yuan. The amount reversed or recovered of the provision for bad debts in the current period is 7,097,708.43 yuan. C. Accounts receivable actually write-off in the current period Item Amount Accounts receivable actually write-off 8,644,485.21 Note: Due to the liquidation and cancellation of Shanghai SMPIC Photosensitive Material Factory, the Company’s President’s Office Meeting agreed to write off the accounts receivable totaling RMB 3,436,227.61; the Company’s President’s Office Meeting agreed to write off the accounts receivable of the industrial sewing machine branch that have been determined to be uncollectible and have been fully withdrawn for bad debts totaling RMB 2,582,333.45. D. Top five accounts receivable in terms of their ending balance Ending Balance Company name Proportion in total accounts receivable ratio Accounts receivable Provision for bad debt (%) No.1 Client 22,361,217.60 3.44 No.2 Client 19,735,959.50 3.04 19,735,959.50 No.3 Client 12,315,321.00 1.90 48,611.75 No.4 Client 11,530,775.39 1.77 11,530,775.39 No.5 Client 11,527,683.70 1.77 Total 77,470,957.19 11.92 31,315,346.64 5) Prepayment A. Presentation of prepayments by aging Ending Balance Beginning Balance Aging Amount % Amount % Within 1 year 33,268,163.01 83.81 58,228,035.05 90.43 1-2 years 257,817.83 0.65 9,442.01 0.01 2-3 years 15,583.50 0.04 6,153,752.47 9.56 Over 3 years 6,154,198.51 15.50 2,398.18 Total 39,695,762.85 100.00 64,393,627.71 100.00 B. Top five prepayments to suppliers in terms of their ending balance Supplier Ending Balance Proportion in Total Ending Balance of Advances to Suppliers (%) No.1 Supplier 6,147,650.83 15.49 79 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd No.2 Supplier 3,913,507.58 9.86 No.3 Supplier 2,874,815.44 7.24 No.4 Supplier 1,948,300.55 4.91 No.5 Supplier 1,469,583.19 3.70 Total 16,353,857.59 41.20 6) Other receivables Item Ending Balance Beginning Balance Interest receivable 21,645.73 Dividends receivable 27,041,989.94 Other receivables 93,380,506.35 58,944,411.21 Total 120,422,496.29 58,966,056.94 A. Interest receivable Item Ending Balance Beginning Balance Fixed deposit 21,645.73 Total 21,645.73 B. Dividends receivable Company Name Ending Balance Beginning Balance H. Stoll AG & Co. KG 27,041,989.94 Total 27,041,989.94 Other receivables C. Disclosure of other receivables by category Ending Balance Beginning Balance Type Book Balance Provision for Bad Debt Book Balance Provision for Bad Debt Book Value Book Value Amount % Amount % Amount % Amount % Other receivables with significant individual 32,015,520.86 24.82 amount and 15,933,916.53 49.77 16,081,604.33 30,666,334.88 33.51 13,304,781.50 43.39 17,361,553.38 provision for bad debt is accrued separately Other receivables with provision for bad debt 87,820,109.01 68.08 16,921,209.59 19.27 70,898,899.42 24,977,450.21 27.29 16,622,435.95 66.55 8,355,014.26 accrued by credit risk characteristics of a portfolio Other receivables with insignificant individual amount but 9,165,563.42 7.10 2,765,560.82 30.17 6,400,002.60 35,869,414.39 39.20 2,641,570.82 7.36 33,227,843.57 provision for bad debt is accrued separately Total 129,001,193.29 100.00 35,620,686.94 27.61 93,380,506.35 91,513,199.48 100.00 32,568,788.27 35.59 58,944,411.21 Other receivables with significant individual amount and provision for bad debt is accrued separately at the end of period Ending Balance Other Receivables (By Other receivables Provision for bad debt Proportion of provision(%) Reason for Provision Entity) No.1 Client 18,028,004.56 1,946,400.23 10.80 Impaired according to the 80 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd separate test Impaired according to the No.3 Client 13,987,516.30 13,987,516.30 100.00 separate test Total 32,015,520.86 15,933,916.53 49.77 / Other receivables with provision for bad debt accrued using the aging analysis method in the portfolio: Ending Balance Aging Other receivables Provision for bad debt Proportion of provision(%) Within 1 year 5,922,821.39 296,141.06 5.00 1-2 years 1,404,446.92 280,889.38 20.00 2-3 years 285,469.04 142,734.52 50.00 Over 3 years 16,201,444.63 16,201,444.63 100.00 Total 23,814,181.98 16,921,209.59 71.06 Other receivables with provision for bad debt accrued using other method in the portfolio: Proportion of provision Name Receivables Provision for bad debt (%) Receivables from government agencies 17,823,075.77 and institutions Deposit in security 44,239,906.50 Employee Standby Fund and Employee 1,942,944.76 Collection and Payment Total 64,005,927.03 Other receivable with insignificant individual amount but provision for bad debt is accrued separately at the end of period Other receivables (By Ending Balance entity) Other receivables Provision for bad debt Proportion of provision (%) Reason for provision Other insignificant other receivables (Note 1) 4,529,575.94 17,725.00 0.39 Impaired according to the separate test Other insignificant other receivables (Note 2) 1,780,485.31 1,780,485.31 100.00 Impaired according to the separate test Other insignificant other receivables (Note 3) 674,943.00 Unimpaired according to separate test Other insignificant other receivables (Note 4) 50,000.00 50,000.00 100.00 Impaired according to the separate test Other insignificant other receivables (Note 5) 1,194,446.34 Unimpaired according to separate test Other insignificant other receivables (Note 6) 917,350.51 917,350.51 100.00 Impaired according to the separate test Other insignificant other receivables (Note 7) 18,762.32 Unimpaired according to separate test Total 9,165,563.42 2,765,560.82 30.17 Note 1: Mainly for other receivables of the parent company of SGG, the impairment provision is made according to the individual amount test. Note 2: Mainly for the other receivables of the subsidiary Shanghai Shanggong Butterfly Sewing Machine Co., Ltd., the impairment provision is made according to the individual amount test. Note 3: Mainly for the other receivables of the subsidiary DAPSH, no impairment occurred according to the individual amount test. Note 4: Mainly for the other receivables of the subsidiary Shanghai SGSB Electronics Co., Ltd., the impairment provision is made according to the individual amount test. Note 5: Mainly for other receivables of the subsidiary DA AG, no impairment occurred according to the individual amount test. Note 6: Mainly for the other receivables of the subsidiary Shanghai Shensy Enterprise Development Co., Ltd., the impairment provision is made according to the individual amount test. Note 7: Mainly for the other receivables of the subsidiary DAP Vietnam Co., Ltd., no impairment was found according to the individual amount test. 81 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd D. The accrual, reversal or recovery of the provision for bad debts in the current period The provision for bad debts accrued in the current period is 3,958,712.82 yuan. The amount reversed or recovered of the provision for bad debts in the current period is 3,823,650.77 yuan. E. Other receivables actually write-off in the current period Item Amount Other receivables actually write-off 534,288.45 F. Top five other receivables in terms of their ending balance Proportion in the ending Provision for bad debt Company name Nature Ending balance Aging balance of total other ending balance receivable (%) No.1 Client Current accounts 18,028,004.56 Within 1year 13.98 1,946,400.23 Export tax refund Export tax 17,823,075.77 Within 1year 13.82 receivable rebate From within 1year No.3 Client Current accounts 13,987,516.30 to over 3 years 10.84 13,987,516.30 No.4 Client Security deposit 4,000,000.00 Within 1year 3.10 No.5 Client Security deposit 3,500,000.00 Within 1year 2.71 Total / 57,338,596.63 44.45 15,933,916.53 G. Receivables involving government grants Not applicable. H. Other receivables derecognized due to the transfer of financial assets Not applicable. I. Amount of assets and liabilities transferred from other receivables and continue to be involved Not applicable 7) Inventories A. Classification of inventories Ending Balance Beginning Balance Item Provision for Provision for Book balance Book value Book balance Book value impairment impairment Raw materials 344,109,150.92 57,005,053.46 287,104,097.46 285,435,138.31 52,813,472.76 232,621,665.55 Goods in progress 243,900,021.71 39,753,513.85 204,146,507.86 153,406,126.71 28,555,276.42 124,850,850.29 Finished goods 301,330,071.32 40,953,279.20 260,376,792.12 283,033,493.86 39,909,017.40 243,124,476.46 Revolving materials 1,847,268.54 1,158,016.41 689,252.13 1,427,640.89 1,427,640.89 Consigned processing 1,312,325.29 1,312,325.29 3,273,904.32 3,273,904.32 materials Dispatched goods 32,403,336.09 32,403,336.09 20,569,892.77 20,569,892.77 Semi finished product 10,818,745.22 505,376.85 10,313,368.37 Labor cost 100,632,205.51 100,632,205.51 79,273,391.31 79,273,391.31 Total 1,036,353,124.60 139,375,239.77 896,977,884.83 826,419,588.17 121,277,766.58 705,141,821.59 Note 1: For details of the restricted inventory, please refer to ―VII. (70) Assets with limited ownership or use rights‖ in this note. Note 2: The Company’s semi finished products include intelligent equipment projects that have not yet been assembled. B. Inventory depreciation reserve Increase in current period Decrease in current period Item Beginning Balance Reversal or Ending Balance Provision Others Others write-off Raw 52,813,472.76 1,165,070.61 8,084,531.48 4,693,127.87 364,893.52 57,005,053.46 materials 82 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Increase in current period Decrease in current period Item Beginning Balance Reversal or Ending Balance Provision Others Others write-off Goods in 28,555,276.42 8,478,272.88 3,556,023.51 248,353.85 587,705.11 39,753,513.85 progress Finished 39,909,017.40 3,127,872.07 805,549.73 2,464,395.94 424,764.06 40,953,279.20 goods Revolving 1,065,536.74 167,479.18 74,999.51 1,158,016.41 materials Semi finished 985,271.08 479,894.23 505,376.85 product Total 121,277,766.58 13,836,752.30 13,598,854.98 7,960,771.40 1,377,362.69 139,375,239.77 C. Explanation of the amount of capitalization of borrowing costs in the ending balance of inventory Not applicable. 8) Assets held for sale Not applicable. 9) Non-current assets maturing within one year Not applicable. 10) Other current assets Item Ending Balance Beginning Balance Unamortized expense 565,112.42 400,169.64 Input tax to be credited 15,243,281.57 31,638,470.24 Rentals and insurance fees 2,580,239.87 1,592,432.66 Overpaid enterprise income tax 50,937,701.45 902,284.30 Structured deposit 180,000,000.00 332,000,000.00 Total 249,326,335.31 366,533,356.84 11) Available-for-sale financial assets A. Available-for-sale financial assets Ending Balance Beginning Balance Item Provision for Provision for Book Balance Book Value Book Balance Book Value Impairment Impairment Available for sale debt instruments Available for sale equity 119,431,159.69 1,698,131.91 117,733,027.78 120,658,075.96 1,698,131.91 118,959,944.05 instruments Including: 86,406,778.33 86,406,778.33 89,721,694.56 89,721,694.56 Measured at fair value Measured at cost 33,024,381.36 1,698,131.91 31,326,249.45 30,936,381.40 1,698,131.91 29,238,249.49 Total 119,431,159.69 1,698,131.91 117,733,027.78 120,658,075.96 1,698,131.91 118,959,944.05 B. Available-for-sale financial assets measured at fair value as at the end of report period Classification of available-for-sale Financial Available-for-sale Equity Available-for-sale Debt Total Assets Instruments Instruments Cost of equity instruments 74,010,222.53 74,010,222.53 Fair value 86,406,778.33 86,406,778.33 Accumulated changes in fair value included in 12,396,555.80 12,396,555.80 other comprehensive income Accrued provision for impairment C. Available-for-sale financial assets measured atcost at the end of report period Book balance Provision for impairment Shareholding Cash dividend Investee Beginning Beginning Ending ratio in + - Ending balance + - in report period balance balance balance investee (%) Shanghai Fuji Xerox 29,140,749.49 29,140,749.49 15.92 9,949,000.00 Co., Ltd. Shanghai 30.00 900,000.00 Hirose 83 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Precision Industrial Co., Ltd. (Note 1) Changshu Qixing 90.00 Elec-plating Co., Ltd. Shanghai Huazhijie 736,283.66 736,283.66 736,283.66 736,283.66 23.04 Plastic Co., Ltd. (Note 2) Shanghai Xingguang Underwear 308,033.99 308,033.99 308,033.99 308,033.99 14.30 Factory (South Africa) Wuxi Shanggong Sewing 153,814.26 153,814.26 153,814.26 153,814.26 80.00 Machines Co., Ltd. (Note 3) China Perfect Machinery 90,000.00 90,000.00 0.099 10,227.55 Co., Ltd. Shanghai Baoding 7,500.00 7,500.00 0.008 2,875.50 Investment Co., Ltd. Shanghai Shanggong Jiarong Sewing 500,000.00 500,000.00 500,000.00 500,000.00 12.50 Machine Trade Co., Ltd. Shanghai Pacific Industrial 2,087,999.96 2,087,999.96 48.00 Co., Ltd. (Note 4) Total 30,936,381.40 2,087,999.96 33,024,381.36 1,698,131.91 1,698,131.91 10,862,103.05 Note 1: Shang Gong Group Co., Ltd. holds 30% shares of Shanghai Hirose Precision Industrial Co., Ltd. According to the articles of association, the Company obtains guaranteed minimum revenue each year. In addition, the Company does not participate in the decision-making process of daily operations, and does not have significant influence on the invested enterprise. Therefore, it adopts cost accounting to measure its revenue from its shares of Shanghai Hirose Precision Industrial Co., Ltd. Note 2: Shang Gong Group Co., Ltd. holds 23.04% shares of Shanghai Huazhijie Plastic Co., Ltd. According to the articles of association, Shang Gong Group Co., Ltd. does not have facto control over the invested enterprise. In addition, the Company does not participate in the decision-making process of daily operations, and does not have significant influence on the invested enterprise. Therefore, it adopts cost accounting to measure its revenue from its shares of Shanghai Huazhijie Plastic Co., Ltd. Note 3: Shang Gong Group Co., Ltd. holds 80.00% shares of Wuxi Shanggong Sewing Machines Co., Ltd. According to the articles of association, Shang Gong Group Co., Ltd. does not have facto control over the invested enterprise. In addition, the Company does not participate in the decision-making process of daily operations, and does not have significant influence on the invested enterprise. Therefore, it adopts cost accounting to measure its revenue from its shares of Wuxi Shanggong Sewing Machines Co., Ltd. Note 4: The Company holds 48% equity of Shanghai Pacific Industrial Co., Ltd. Since the Company does not participate in the business activities of the invested entity, it does not have a significant impact on the invested entity, so it is accounted for by the cost method. 84 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd D. Changes in the impairment of available-for-sale financial assets during the reporting period Classification of Available-for-sale Available-for-sale Equity Available-for-sale Debt Total Financial Assets Instruments Instruments Balance of provision for impairment 1,698,131.91 1,698,131.91 accrued as at 1st January 2018 Provision in Report Period Including: transfer-in from other comprehensive income Decrease in Report Period Including: reversal due to the subsequent increase in fair value Balance of provision for impairment 1,698,131.91 1,698,131.91 accrued as at 31st December 2018 12) Held-to-maturity investments Not applicable. 13) Long-term receivables Ending Balance Beginning Balance Discount Item Provision for Provision for Book balance Book value Book balance Book value Rate bad debt bad debt Financing lease 31,427,418.92 31,427,418.92 Of which: unrealized 5,591,540.26 5,591,540.26 financing income Total 31,427,418.92 31,427,418.92 / 14) Long-term equity investment Change in current period Other Ending Balance Beginning Return on Declared Cash Ending Decrea Equity Chang Increa Increa Invest Invest Invest Other ment mentin ment Investees of Provision of se se in es in se in Comprehensive Balance Investment under Dividends or Other Balance Income Impairment Equity Method Profit Adjustment H. Stoll AG & Co. 275,799,606.70 -12,972,718.90 27,041,989.94 12,583,310.03 248,368,207.89 KG Total 275,799,606.70 -12,972,718.90 27,041,989.94 12,583,310.03 248,368,207.89 15) Investment properties A. Investment property measured at cost Buildings and Investment Real Estate Item Leased Land Use Rights Total Constructions Decoration 1. Original book value (1) Beginning balance 226,181,075.92 50,523,752.24 2,583,492.92 279,288,321.08 (2) Increase in current period 2,837,434.34 2,837,434.34 ① Outsourcing 2,315,430.07 2,315,430.07 ② Transfer in from inventories, fixed assets or construction in progress ③ Increase from business combination ④ Exchange rate fluctuation 522,004.27 522,004.27 (3) Decrease in current period ① Disposal 4.Ending Balance 229,018,510.26 50,523,752.24 2,583,492.92 282,125,755.42 2. Accumulated depreciation and accumulated amortization (1) Beginning balance 105,181,671.01 16,183,322.31 688,931.76 122,053,925.08 (2) Increase in current period 5,632,800.53 1,104,003.24 172,233.00 6,909,036.77 ①Amortization or accrual 5,501,506.05 1,104,003.24 172,233.00 6,777,742.29 ②Exchange rate fluctuation 131,294.48 131,294.48 (3) Decrease in current period ①Disposal (4) Ending balance 110,814,471.54 17,287,325.55 861,164.76 128,962,961.85 3. Provision for impairment (1) Beginning balance 7,732,063.54 7,732,063.54 (2) Increase in current period 44,594.91 44,594.91 ①Accrual ②Exchange rate fluctuation 44,594.91 44,594.91 (3) Decrease in current period ①Disposal 85 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd ②Others (4) Ending balance 7,776,658.45 7,776,658.45 4. Book value (1) Book value at the end of the period 110,427,380.27 33,236,426.69 1,722,328.16 145,386,135.12 (2) Book value at the beginning of the 113,267,341.37 34,340,429.93 1,894,561.16 149,502,332.46 period Note: For details of the restricted circumstances such as investment real estate mortgage, please refer to ―VII. (70) Assets with limited ownership or use rights and 14. (II) Contingencies‖. 16) Fixed assets A. Classification Item Ending Balance Beginning Balance Fixed assets 473,157,221.59 397,788,367.78 Liquidation of Fixed Assets Total 473,157,221.59 397,788,367.78 B. Fixed assets Buildings and Machinery Transportation Electronic Other Item Total Constructions Equipment Equipment Equipment Equipment 1. Original book value (1) Beginning balance 449,191,194.52 391,885,505.83 14,935,691.94 3,916,967.73 280,602,586.17 1,140,531,946.19 (2) Increase in current period 82,762,170.09 39,282,629.74 6,758,433.32 4,868,116.16 24,903,764.72 158,575,114.03 ① Purchase 18,043,421.67 27,554,064.83 2,334,223.77 549,580.01 23,394,982.59 71,876,272.87 ② Transfer from 94,167.60 61,327.34 439,448.80 594,943.74 construction in progress ③ Increase from business 63,267,378.54 11,360,584.66 4,424,209.55 4,255,522.28 249,313.00 83,557,008.03 combination ④Exchange rate fluctuation 1,451,369.88 273,812.65 1,686.53 820,020.33 2,546,889.39 (3) Decrease in current 2,043,450.90 11,831,012.24 806,064.83 1,425,971.50 4,726,217.31 20,832,716.78 period ①Disposal or scrap 2,042,503.40 11,803,269.44 806,064.83 1,425,971.50 4,669,628.27 20,747,437.44 ② Exchange rate 947.50 27,742.80 56,589.04 85,279.34 fluctuation (4) .Ending Balance 529,909,913.71 419,337,123.33 20,888,060.43 7,359,112.39 300,780,133.58 1,278,274,343.44 2. Accumulated depreciation (1) Beginning balance 226,646,410.27 261,274,240.20 7,965,828.54 2,667,327.07 231,928,699.23 730,482,505.31 (2) Increase in current period 32,423,745.25 22,170,957.15 3,574,444.67 4,277,096.69 16,441,556.94 78,887,800.70 ①Accrual 10,569,402.64 18,457,620.31 1,731,248.03 1,429,545.36 15,734,314.41 47,922,130.75 ②Increase in the business scope of 20,882,854.70 3,472,088.48 1,843,196.64 2,846,896.08 226,884.23 29,271,920.13 consolidation ③Exchange rate fluctuation 971,487.91 241,248.36 655.25 480,358.30 1,693,749.82 (3) Decrease in current period 1,638,098.62 8,936,083.34 591,460.24 1,275,229.13 4,298,915.65 16,739,786.98 ①Disposal or scrap 1,637,605.92 8,914,366.64 591,460.24 1,275,229.13 4,280,913.15 16,699,575.08 ②Exchange rate fluctuation 492.70 21,716.70 18,002.50 40,211.90 (4) Ending balance 257,432,056.90 274,509,114.01 10,948,812.97 5,669,194.63 244,071,340.52 792,630,519.03 3. Provision for impairment (1) Beginning balance 4,913,777.92 7,232,165.07 75,908.67 37,818.61 1,402.83 12,261,073.10 (2) Increase in current period 409,415.30 409,415.30 ①Accrual 409,415.30 409,415.30 (3) Decrease in current period 156,147.61 27,737.97 183,885.58 ① Disposal or scrap 156,147.61 27,737.97 183,885.58 (4) Ending balance 4,913,777.92 7,485,432.76 48,170.70 37,818.61 1,402.83 12,486,602.82 4. Book value (1) Book value at the end of the 267,564,078.89 137,342,576.56 9,891,076.76 1,652,099.15 56,707,390.23 473,157,221.59 period (2) Book value at the 217,631,006.33 123,379,100.56 6,893,954.73 1,211,822.05 48,672,484.11 397,788,367.78 beginning of the period Note: For details of the restrictions on fixed assets mortgage, please refer to ―VII. (70) Assets with limited ownership or use rights and 14. (II) Contingencies‖. C. Idle fixed assets Accumulated Item Book value Impairment Book value Note depreciation Machinery and equipment 1,060,570.30 758,706.83 295,393.48 6,500.00 Total 1,060,570.30 758,706.82 295,393.48 6,500.00 D. Fixed assets leased through finance leases Item Book value Accumulated depreciation Impairment Book value Machinery and equipment 5,834,516.29 634,265.41 5,200,250.88 Transportation Equipment 5,905,280.88 1,230,693.18 4,674,587.70 86 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Total 11,739,797.17 1,864,958.59 9,874,838.58 E. Fixed assets leased out through operating leases Item Ending Book Value Machinery and equipment 120,960.00 Electronic equipment 175,960.00 Total 296,920.00 F. Fixed assets without certificate of title Item Book value Reason for failure in completing the formalities for obtaining certificates of title Buildings and constructions 1,793,232.40 Self-built housing, the certificates are in the process Note: Self-built housing for the Company’s subsidiary Shanghai SGSB Asset Management Co., Ltd. 17) Construction in progress Ending Balance Beginning Balance Item Provision for Provision for Book balance Book value Book balance Book value impairment impairment Household multifunctional 1,304,367.87 1,304,367.87 1,025,599.74 1,025,599.74 sewing machine Software development 1,589,858.17 1,589,858.17 186,166.68 186,166.68 project Sewing Equipment 14,361,655.65 14,361,655.65 4,347,153.83 4,347,153.83 Engineering Bensheim base project 7,140,762.85 7,140,762.85 Modern logistics 54,755,378.01 54,755,378.01 4,858,082.75 4,858,082.75 management center Taizhou manufacturing 28,259,697.79 28,259,697.79 project Construction Project 6,269,885.19 6,269,885.19 2,248,271.09 2,248,271.09 Equipment project 1,657,178.48 1,657,178.48 Production process 3,827,843.74 3,827,843.74 improvement project Total 119,166,627.75 119,166,627.75 12,665,274.09 12,665,274.09 A. Changes in major construction in progress for current period Proportion of the Construct capitaliza capitaliza Including Transferr Accumul 2017(%) :tion rate progress Amount Current amount Interest accumulated interest interest Budget for the Period Assets tionof in amount ion in Fixed 2017 ed in Beginning Increase in current Other decreases Source of ated tion of Item Ending balance investment in balance period in current period Fund project in budget (%) Household Self-owned multifunctional 1,025,599.74 278,768.13 1,304,367.87 sewing machine Software Self-owned/ development 186,166.68 1,616,797.82 61,327.34 151,778.99 1,589,858.17 raised project Sewing Self-owned Equipment 4,347,153.83 10,548,118.22 533,616.40 14,361,655.65 Engineering Bensheim base Self-owned 7,140,762.85 7,140,762.85 project Modern logistics Self-owned management 4,858,082.75 49,897,295.26 54,755,378.01 center Taizhou Self-owned manufacturing 28,259,697.79 28,259,697.79 project Construction Self-owned 2,248,271.09 5,913,209.58 1,891,595.48 6,269,885.19 Project Equipment Self-owned/ 1,657,178.48 1,657,178.48 raised project Production Self-owned process 3,827,843.74 3,827,843.74 improvement project 87 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Total 12,665,274.09 109,139,671.87 594,943.74 2,043,374.47 119,166,627.75 / / / / Note 1: The software development project was transferred to intangible assets after partial acceptance this year. Note 2: The construction project will be transferred to the long-term deferred expenses after partial completion and acceptance this year. 18) Productive biological assets Not applicable. 19) Oil and gas assets Not applicable. 20) Intangible assets A. Intangible assets Land Use Trademark Use Patent and Non-patent Computer Item Others Total Right Right Technology Software 1. Original book value (1) Beginning balance 101,054,020.23 20,161,268.51 134,827,412.78 5,273,690.04 6,187,223.90 267,503,615.46 (2) Increase in current period 67,917,887.04 12,000,000.00 64,365,166.81 3,755,633.37 35,685.00 148,074,372.22 ① Purchase 37,499,895.00 24,271,951.35 351,724.20 62,123,570.55 ② R&D ② Increase from business conbination 30,417,992.04 12,000,000.00 28,400,000.00 304,957.26 71,122,949.30 ③Exchange rate fluctuation 722,690.06 35,685.00 758,375.06 ② Transfer from construction in 10,970,525.40 3,098,951.91 14,069,477.31 progress/ development expenditure (3) Decrease in current period 973,065.20 973,065.20 ① Disposal 968,365.60 968,365.60 ②Exchange rate fluctuation 4,699.60 4,699.60 (4) .Ending Balance 168,971,907.27 32,161,268.51 198,219,514.39 9,029,323.41 6,222,908.90 414,604,922.48 2. Accumulated amortization (1) Beginning balance 9,445,749.34 20,161,268.51 79,996,390.86 1,724,825.39 6,187,223.90 117,515,458.00 (2) Increase in current period 5,300,467.94 400,000.00 20,821,229.67 1,432,797.73 35,685.00 27,990,180.34 ① Accrual 3,673,475.90 400,000.00 20,414,779.18 1,258,980.16 25,747,235.24 ② increase of scope of consolidation 1,626,992.04 173,817.57 1,800,809.61 ③ Exchange rate fluctuation 406,450.49 35,685.00 442,135.49 (3) Decrease in current period 973,065.20 973,065.20 ① Disposal 968,365.60 968,365.60 ② Exchange rate fluctuation 4,699.60 4,699.60 4.Ending Balance 14,746,217.28 20,561,268.51 99,844,555.33 3,157,623.12 6,222,908.90 144,532,573.14 3. Provision for impairment (1) Beginning balance (2) Increase in current period ① Accrual (3) Decrease in current period ① Disposal (4) Ending balance 4. Book value (1) Book value at the end of the period 154,225,689.99 11,600,000.00 98,374,959.06 5,871,700.29 270,072,349.34 (2) Book value at the beginning of the 91,608,270.89 54,831,021.92 3,548,864.65 149,988,157.46 period For details of the intangible assets mortgage, please refer to ―VII. (70) Assets with limited ownership or use rights‖ in this note. 21) Development Expenditures Increase in current period Decrease in current period Beginning Ending Item Internal Development Recognized as Intangible Transferred to Current Profits Balance Balance Expenditure Assets and Losses Sewing 11,968,675.38 5,732,180.04 10,970,525.40 535,790.98 6,194,539.04 equipment WeChat 1,099,814.50 1,099,814.50 platform Freight 3,615,282.96 1,035,848.90 4,047,358.42 603,773.44 platform Total 16,683,772.84 6,768,028.94 16,117,698.32 535,790.98 6,798,312.48 Note: The development expenditures of sewing equipment represent the development costs of DAP AG. The development expenditures of WeChat platform and Freight platform represent the development costs of SHENSY. During the year, Shanghai Shensy Enterprise Development Co., Ltd. transferred the developed WeChat platform and freight platform to intangible assets, and the government subsidies related to it received is used to offset the book value of intangible assets. For details, please refer to ―Note 73‖. Government 88 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd subsidies, (1) Basic information on government subsidies.‖ 22) Goodwill A. Book value of goodwill Increase in Current Period Decrease in Current Period Name of investee or Beginning Exchange Rate Ending Balance goodwill formation events Balance Acquisition Disposal Fluctuation PFAFF GmbH 72,482,033.43 418,042.31 72,900,075.74 Beisler 22,732,781.28 131,112.00 22,863,893.28 Richpeace 77,544,194.54 77,544,194.54 Total 95,214,814.71 77,544,194.54 549,154.31 173,308,163.56 B. Provision for impairment of goodwill Increase in Current Period Decrease in Current Period Name of investee or Beginning Exchange Rate Ending Balance goodwill formation events Balance Acquisition Disposal Fluctuation Beisler 22,732,781.28 131,112.00 22,863,893.28 PFAFF GmbH 10,370,000.00 10,370,000.00 Total 22,732,781.28 10,370,000.00 131,112.00 33,233,893.28 C. Information about the asset group or asset group combination in which the goodwill is located The company’s goodwill belongs to the sewing equipment and intelligent manufacturing equipment division. After the acquisition, the company re-planned the product portfolio of each subsidiary, and each subsidiary independently produced and operated according to the product portfolio planned by the company. Therefore, all the assets of each subsidiary constitute the smallest cash-generating unit. Based on this, the Company separately treats each subsidiary as a separate asset group, and distributes the goodwill formed by the acquisition to the corresponding asset group for impairment test. The company acquired PFAFF and KSL in March 2013. In March 2015, PFAFF absorbed and merged with KSL. After the merger was completed, KSL became a subsidiary of PFAFF. However, KSL’s product portfolio and various business activities remain unchanged and independent of PFAFF. The Company still conducts the goodwill impairment test of PFAFF and KSL as different asset groups, and the results of the goodwill impairment test are disclosed according to the independent legal entity. D. The Company confirms the impairment loss of goodwill against the recoverable amount and book value of the asset group including goodwill. The recoverable amount is determined based on the present value of the estimated future cash flow of the asset group. The management of the Company prepares the cash flow forecast for the next five years based on the most recent financial budget, and estimates the cash flow for the following years, which is discounted accordingly. The key parameters used by the Company in conducting goodwill impairment testing are as follows: Operating income growth Gross profit margin Discount Rate(%) rate(%) (%) PFAFF 0.00 or 4.00-13.00 25.00-28.00 10.24 KSL 0.00 or 7.00-33.00 22.00-25.00 10.25 Richpeace 0.00 or 5.00-10.00 40.00 14.70 The management of the Company determines the above parameters based on the historical situation before the budget period and the forecast of market development. The Company assumes that the operating income growth rate will be 0.00% in the next five years (after 2024 and after the period). According to PFAFF’s signed irrevocable sales orders, the company’s estimated operating income growth rate for the year 2019 is 13.00%, and the expected operating income growth rate for the period 2020-2023 is 4.00%-5.00%. As KSL’s production site in Bensheim, Germany, is scheduled to be completed in 2019, the company’s estimated operating revenue growth rate for the 2019 is 33.00% based on the capacity of the new production 89 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd base and KSL’s irrevocable sales orders. The projected revenue growth rate for the period from 2020 to 2023 is 7.00%-25.00%. E. Impact of goodwill impairment test Based on the above assumptions, the results of the Company’s goodwill impairment test this year are as follows: Unit: RMB 10,000 Asset group Book value of asset Goodwill impairment loss recoverable amount group PFAFF 11,763.00 11,838.00 75.00 KSL 10,661.00 11,623.00 962.00 Richpeace 31,570.00 29,849.67 N/A 23) Long-term deferred expenses Beginning Increase in Current Amortization in Other Decreases in Item Period Current Period Current Period Ending Balance Balance Enterprise Mailbox rental expense 142,249.20 63,786.66 53,395.04 152,640.82 Online brand registration fee 486,727.12 59,433.96 112,061.15 434,099.93 Landscape engineering 134,531.10 48,920.40 85,610.70 Leasehold improvements 123,916.71 2,737,816.86 248,418.88 2,613,314.69 Tooling cost 743,589.75 153,846.12 589,743.63 Total 1,631,013.88 2,861,037.48 616,641.59 3,875,409.77 24) Deferred income tax assets / deferred income tax liabilities A. Deferred income tax assets Ending Balance Beginning Balance Item Deductible temporary Deferred income tax Deductible temporary Deferred income tax differences assets differences assets Unrealized profits from internal 9,942,558.47 11,066,767.51 transactions Receivables 2,812,242.21 1,885,764.75 Inventories 23,969,903.97 19,654,766.53 Long-term assets 850,120.55 353,743.29 Pension (Europe) 32,606,465.72 34,005,022.74 Deferred income 550,000.00 Estimated liabilities 168,180.00 136,615.48 Other liabilities 3,171,305.91 3,796,682.43 Offset amount -4,669,915.99 -7,904,454.50 Total 68,850,860.84 63,544,908.23 B. Deferred income tax liabilities Ending Balance Beginning Balance Item Taxable Deferred income tax Taxable temporary Deferred income tax temporary liabilities differences liabilities differences Receivables 5,426,063.85 6,146,045.08 Inventories 446,228.60 Long-term assets 65,007,499.07 49,472,348.52 Other liabilities 5,041,589.51 4,702,973.72 Offset amount -4,669,915.99 -7,904,454.50 Total 70,805,236.44 52,863,141.42 25) Other non-current assets Not applicable. 90 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 26) Short-term loans Item Ending Balance Beginning Balance Note Mortgage loans 15,000,000.00 10,221,013.00 Note 1 Guaranteed loans 157,900,000.00 319,820,040.00 Note 2 Credit loans 33,714,015.12 348,148.62 Total 206,614,015.12 330,389,201.62 Note 1: Richpeace, a subsidiary of the Company, secured the fixed assets with a book value of RMB 8,596,802.43 and intangible assets with a book value of RMB 5,389,231.47 as collateral to guarantee the company and its third-tier subsidiary Tianjin Richpeace Times Trading Co., Ltd. to borrow RMB 9,000,000.00 and RMB 6,000,000.00 from Tianjin Baodi Pufa Village Bank respectively. At the same time, natural persons Feng Hui and Zhou Jiao (a member of the management team of Richpeace) provided joint liability guarantee for the aforementioned loans. Note 2: Please refer to ―IV. Commitments and Contingencies, (II) Contingencies, Note 2, Note 5‖ for details of the guarantees related to guarantee loans. 27) Financial liabilities measured at fair value through profit or loss for the current period Not applicable. 28) Derivative financial liabilities Not applicable. 29) Notes payable and accounts payable Item Ending Balance Beginning Balance Notes payable 71,109,160.21 12,311,525.18 Accounts payable 247,693,879.70 194,031,795.38 Total 318,803,039.91 206,343,320.56 Notes payable Type Ending Balance Beginning Balance Bank acceptance bill 71,109,160.21 12,311,525.18 Total 71,109,160.21 12,311,525.18 Accounts payable Item Ending Balance Beginning Balance Payable to suppliers 247,693,879.70 194,031,795.38 Total 247,693,879.70 194,031,795.38 30) Receipt in advance Item Ending Balance Beginning Balance Advances on sales 75,412,987.77 38,326,094.65 Total 75,412,987.77 38,326,094.65 31) Employee compensation payable A. Employee compensation payable Beginning Increase in current Decrease in current Item period period Ending Balance Balance Short-term remuneration 70,429,400.35 693,036,304.70 682,047,283.36 81,418,421.69 Post-employment benefits – defined benefit plans 591,856.15 23,126,011.64 22,761,103.49 956,764.30 Dismissal welfare 29,000.00 29,000.00 Defined benefit plan maturing within one year 20,090,922.50 18,812,566.00 20,109,205.00 18,794,283.50 Total 91,112,179.00 735,003,882.34 724,946,591.85 101,169,469.49 91 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd B. Short-term remuneration Increase in Current Decrease in Current Item Beginning Balance Ending Balance Period Period (1) Salary, bonus, allowance and 69,704,983.42 548,154,927.92 556,054,510.90 61,805,400.44 subsidy (2) Employee welfare 8,639.56 126,526,718.28 107,780,559.91 18,754,797.93 (3) Social insurance expenses 490,969.52 10,844,170.72 10,837,600.28 497,539.96 Including: medical insurance premium 342,596.18 8,990,949.83 8,981,683.24 351,862.77 Work-related injury insurance 37,465.61 651,488.90 650,774.99 38,179.52 premium Maternity insurance premium 20,885.53 801,099.48 794,330.57 27,654.44 Other 90,022.20 400,632.51 410,811.48 79,843.23 (4) Housing provident funds 160,871.34 5,806,497.60 5,644,623.94 322,745.00 (5) Labor union expenditures and 63,936.51 1,703,990.18 1,729,988.33 37,938.36 employee education expenses (6) Short-term paid absences (7) short-term profit-sharing plan Total 70,429,400.35 693,036,304.70 682,047,283.36 81,418,421.69 C. Defined contribution plan Increase in current Decrease in current Item Beginning Balance period period Ending Balance Basic endowment insurance premium 574,972.14 21,331,979.76 20,972,734.19 934,217.71 Unemployment insurance premium 16,884.01 605,417.45 599,754.87 22,546.59 Payment of annuity 1,188,614.43 1,188,614.43 Total 591,856.15 23,126,011.64 22,761,103.49 956,764.30 32) Taxes and surcharges payable Item Ending Balance Beginning Balance Value-added tax 6,825,857.95 4,454,097.17 Enterprise income tax 8,221,152.27 3,646,204.96 Individual income tax 4,696,274.54 5,613,216.71 Urban maintenance and construction tax 524,568.34 186,230.26 Educational surtax 417,462.59 168,142.01 Use tax of land 473,407.84 Stamp tax 10,922.70 6,696.80 Others 39,215.94 Total 21,208,862.17 14,074,587.91 33) Other payables Item Ending Balance Beginning Balance Interest Payable 805,898.77 1,110,553.06 Dividends payable 1,032,818.86 1,032,818.86 Other payables 252,988,505.87 193,617,747.74 Total 254,827,223.50 195,761,119.66 Interest Payable Item Ending Balance Beginning Balance Term interest on long-term borrowings due in installments 478,320.87 471,243.32 Short-term loan interest payable 327,577.90 639,309.74 Total 805,898.77 1,110,553.06 Dividends payable Item Ending Balance Beginning Balance Light Industrial Holding Group Co., Ltd 959,269.79 959,269.79 92 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Privately-owned corporate shares 73,549.07 73,549.07 Total 1,032,818.86 1,032,818.86 Other payables Item Ending Balance Beginning Balance Other payables 252,988,505.87 193,617,747.74 Total 252,988,505.87 193,617,747.74 34) Liabilities held for sale Not applicable. 35) Non-current liabilities maturing within 1 year Item Ending Balance Beginning Balance Long-term payable due within one year 1,473,297.07 Deferred income due within one year 2,700,000.00 1,260,000.00 Total 4,173,297.07 1,260,000.00 36) Other current liabilities Item Ending Balance Beginning Balance Short-term bond payable Interest and rentals 47,083.80 48,330.03 Total 47,083.80 48,330.03 37) Long-term loans Item Ending Balance Beginning Balance Mortgage loans 61,821,029.40 61,466,519.40 Credit loans 278,656,620.87 1,489,984.87 Total 340,477,650.27 62,956,504.27 Note: For the description of the related mortgages in the closing balance of the mortgage loan of RMB 61,821,029.40 (7,878,000.00), please refer to ―14. Commitments and Contingencies, (2) Contingencies, Note 1‖. 38) Bonds payable Not applicable. 39) Long-term payables Item Ending Balance Beginning Balance Long-term payables 3,403,296.49 3,121,893.11 Total 3,403,296.49 3,121,893.11 Item Beginning Balance Ending Balance Financing lease payments 1,853,818.94 960,531.14 Less: unconfirmed financing charges 213,538.77 79,007.64 other 1,763,016.32 2,240,369.61 Total 3,403,296.49 3,121,893.11 40) Long-term employee compensation payable A. Long-term employee compensation payable Item Ending Balance Beginning Balance 1. Post-employment benefits – net liability of defined benefit plan 234,036,612.41 243,516,774.09 2. Dismissal welfare 3. Other long-term benefits 3,904,003.23 Total 234,036,612.41 247,420,777.32 93 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd B. Changes of defined benefit plan liabilities Presenet value of liabilities of defined benefit plan: Item 2018 2017 1. Beginning Balance 263,607,696.59 271,454,022.22 2. Cost of defined benefit plan included in 5,380,676.60 4,971,817.2 current profit and loss 1) Current service cost 1,093,316.00 1,038,659.20 2) Previous service cost 3) Settlement gains (loss is indicated by ―-―) 4) Net interest 4,287,360.60 3,933,158.00 3. Cost of defined benefit plan included in other 203,044.40 -8,798,054.40 comprehensive income 1) Actuarial gains (loss is indicated by ―-―) 203,044.40 -8,798,054.40 4. Other change -16,360,521.68 -4,020,088.43 1) The consideration paid at the time of settlement 2) Paid benefits -19,992,064.00 -21,872,940.80 3) Exchange rate fluctuation 3,631,542.32 17,852,852.37 5. Ending Balance 252,830,895.91 263,607,696.59 Defined benefit plan of DA AG is based on supporting commitment. The base of measuring supporting liability is on actuarial and hypothesis, not only consider known and possessed right to draw defined benefit plan, but the increase of future payroll and defined benefit plan. By the end of 2018, the weighted average period of defined benefit plan liability is 10.36 year. (10.28 year by the end of 2017). Assumed payment of defined benefit plan in 2019 is the same as in 2018. ① Significant actuarial assumptions: The method used to calculate pension obligations is actuarial. The computation basis includes life expectancy, developed rate, changes in pension, and developed payroll trends. In 2018, actuarial assumptions are below, compared with 2017 Item 2018 2017 Actuaria rate 3.21% 1.70% Rate of payroll increase 2.00% 2.00% Rate of pension increase 1.50% 1.50% ② Sensitivity analysis On 31st December 2018, sensitivity analysis was executed based on rational judgment possible changes in assumptions. Other assumptions remain unchanged. Item PV of defined benefit plan liability increase PV of defined benefit plan liability decrease Discount rate (changed by 0.5%) 13,127,601.40 -11,971,810.20 Increase in payroll (changed by 0.5%) 413,898.20 -390,470.00 Increase in pension (changed by 0.5%) 11,308,011.20 -10,448,977.20 Life expectancy (changed by 1 year) 21,577,372.20 — The sensitivity analysis above may not reflect the actual change of present value of defined benefit plan. 41) Estimated liabilities Item Beginning Balance Ending Balance Reason Expected compensation Pending litigation 546,461.91 672,720.00 expenses Total 546,461.91 672,720.00 / 94 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 42) Deferred income Beginning Item + - Ending Balance Reason Balance Government grants 2,340,000.00 2,340,000.00 Total 2,340,000.00 2,340,000.00 / Projects that involve government grants: Subsidies Subsidies Included in Beginning Ending Asset-related / Item Increased in Current Other Change Item Balance Balance Income-related Current period Non-operating Income Guiding funds of developing 2,200,000.00 -2,200,000.00 Asset-related service industry Taizhou science and Technology Bureau R & 140,000.00 140,000.00 Income-related D expenditure subsidy Total 2,340,000.00 140,000.00 -2,200,000.00 Other changes (reduction) of the logistics project development fund are the completion of the development project of the Shanghai Shensy Enterprise Development Co., Ltd. of this year, which is transferred to intangible assets, and the related deferred income offsets the book value of intangible assets. 43) Other non-current liabilities Item Ending Balance Beginning Balance Other long-term loan 520,000.00 520,000.00 Total 520,000.00 520,000.00 44) Share capital Beginning Change in Current Period(+/-) Ending Balance Balance Issuance of New Shares Others Sub-total Total 548,589,600.00 548,589,600.00 45) Other equity instruments Not applicable. 46) Capital reserves Decrease in Current Item Beginning Balance Increase in Current Period Period Ending Balance Stock premium 851,345,853.61 851,345,853.61 Other capital reserves 120,654,741.95 55,785,147.32 64,869,594.63 Total 972,000,595.56 55,785,147.32 916,215,448.24 The reduction of capital reserve is the acquisition of minority shareholders’ equity by the Company’s premium, and the premium partially offsets the capital reserve. For details, please refer to ―Note IX. Interests in other entities, (2) Changes in the share of owners’ equity in subsidiaries and control of transactions of subsidiaries, 2. Transactions on minority shareholders and ownership of owners’ equity Impact‖. 47) Treasury stock Not applicable. 48) Other Comprehensive Income Change in Current Period Less: recognized as other Beginning Accrual before Less: Ending Item comprehensive income for Attributable to Attributable to Balance Income tax for Income Balance previous years and Owners of the Minority the Current Tax transferred in the profit or Parent Company Shareholders Period Expenses loss for the current year 95 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 1. Other comprehensive income that cannot be -43,487,893.99 -203,044.40 -7,809.40 -195,235.00 -43,683,128.99 reclassified in the loss and gain in the future Including: change in re-measurement of the net -43,487,893.99 -203,044.40 -7,809.40 -195,235.00 -43,683,128.99 liabilities and net assets under defined benefit plan A share in other comprehensive income of investee that cannot be reclassified in the losses and gains under the equity method 2. Other comprehensive income that will be -28,675,558.91 -3,342,406.51 -3,342,406.51 -32,017,965.42 reclassified in the loss and gain in the future Including: a share in other comprehensive income of investee that will be reclassified in the loss and gain under the equity method Losses and gains on the change in fair value of 15,711,472.03 -3,314,916.23 -3,314,916.23 12,396,555.80 available-for-sale financial assets Held-to-maturity investments reclassified as losses and gains on available-for-sale financial assets Effective portion of losses and gains on cash flow hedges Foreign currency translation -44,387,030.94 -27,490.28 -27,490.28 -44,414,521.22 differences Total other comprehensive -72,163,452.90 -3,545,450.91 -7,809.40 -3,537,641.51 -75,701,094.41 income 49) Special reserve Not applicable. 50) Surplus reserves Item Beginning Balance Increase in current period Decrease in current period Ending Balance Statutory surplus reserves 2,273,121.26 2,273,121.26 Discretionary surplus reserves 2,273,121.26 2,273,121.26 Total 4,546,242.52 4,546,242.52 51) Undistributed profits Item Reporting period Same period of the previous year Adjustments to undistributed profits as at December 31, 2017 692,241,691.51 494,754,465.24 Adjustments to total undistributed profits as at January 1, 2018 (―+‖ for increase, ―-― for decrease) Adjusted undistributed profits as at January 1, 2018 692,241,691.51 494,754,465.24 Plus: net profit attributable to owners of the parent company for current period 140,828,047.20 197,487,226.27 Less: withdrawal of statutory surplus reserves Withdrawal of discretionary surplus reserves Withdrawal of general risk reserves Ordinary share dividends payable Ordinary share dividend transferred to share capital (paid-in capital) Other 13,861,685.00 undistributed profits as at December 31, 2018 819,208,053.71 692,241,691.51 Note: Other reductions are the acquisition of minority shareholders’ equity premiums by DA AG, a subsidiary of the Company, which offsets retained earnings. 52) Operating income and operating costs 2018 2017 Item Income Cost Income Cost 96 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Main business 3,074,679,494.14 2,235,472,804.92 2,973,395,095.35 2,191,026,910.61 Other businesses 125,848,246.95 86,679,925.97 91,576,405.44 54,510,418.65 Total 3,200,527,741.09 2,322,152,730.89 3,064,971,500.79 2,245,537,329.26 53) Taxes and surcharges Item 2018 2017 Urban maintenance and construction tax 2,026,701.31 3,841,225.33 Educational surtax 1,653,067.87 2,851,563.83 Property tax 3,875,635.78 4,557,720.89 land use tax 3,408,292.34 1,206,499.65 Vehicle and vessel tax 174,043.92 29,173.45 Stamp tax 976,763.08 794,782.50 Other 918,706.91 164,598.33 Total 13,033,211.21 13,445,563.98 54) Selling expenses Item 2018 2017 Employee compensation 144,738,512.88 127,100,318.51 Fix and after-sale service charges 27,142,860.46 16,883,164.44 Office expenses 1,352,509.32 1,636,944.60 Travelling expenses 22,650,014.98 19,339,407.84 Transportation cost 28,614,220.14 23,818,035.11 Advertising expense 3,966,999.44 5,448,163.62 Commission 34,776,854.93 32,259,945.51 Leasing and storage charges 9,760,134.13 9,715,517.43 Insurance premium 1,875,695.42 1,305,233.66 Conference fees 127,812.64 1,420,907.90 Depreciation costs 2,996,905.44 2,137,262.39 Exhibition fees 2,961,522.90 6,697,223.82 Sample printed matter and product loss 12,726,208.62 11,978,393.15 Entertainment expenses 1,706,092.80 594,503.68 E-commerce service fee 1,180,310.00 226,972.23 Other 26,120,252.01 24,248,893.32 Total 322,696,906.11 284,810,887.21 55) General and administrative expenses Item 2018 2017 Employee compensation 150,462,688.99 142,665,436.43 Office expenses 9,359,090.03 9,234,901.56 Water and electricity 1,636,587.92 1,134,181.97 Entertainment expenses 8,293,683.75 5,630,236.43 Property insurance premium 2,065,233.87 1,892,141.80 Conference fees 606,887.82 1,248,356.45 Travelling expenses 10,611,440.65 9,345,153.24 Depreciation costs 14,177,905.04 10,418,234.14 Repair charges 637,038.59 1,682,156.57 Transportation cost 1,445,861.81 1,624,137.32 Rental fees 10,724,657.60 4,955,542.72 Costs of board meetings and supervisors’ meetings 547,472.11 523,146.21 Agency fees and advisory expenses 17,843,739.89 13,263,611.48 Litigation cost 234,967.57 738,687.57 Other 1,855,424.34 2,665,484.81 Total 230,502,679.98 207,021,408.70 56) R &D expenses Item 2018 2017 Employee compensation 67,347,677.92 48,564,093.48 97 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Material consumption 24,860,961.88 29,796,060.27 Depreciation and amortization expenses 2,583,510.19 3,198,130.60 Others 2,855,507.58 2,791,971.05 Total 97,647,657.57 84,350,255.40 57) Financial expenses Item 2018 2017 Interest expenses 14,154,020.93 13,537,239.17 Less: Interest income -4,431,325.55 -12,388,093.76 Gains and losses on exchange 4,834,141.46 -6,945,484.64 Others 2,302,902.64 532,811.33 Total 16,859,739.48 -5,263,527.90 58) Losses from asset impairment Item 2018 2017 Losses from bad debts 752,808.27 14,232,260.76 Losses from inventory impairment 9,068,644.01 9,538,291.98 Fixed asset impairment loss 409,415.30 2,427,110.04 Goodwill impairment loss 10,370,000.00 Total 20,600,867.58 26,197,662.78 59) Other gains Item 2018 2017 Financial support fund 7,858,472.82 10,730,000.00 VAT refund 293,707.16 809,353.65 Special subsidies for employee education 194,940.70 31,010.22 funds Special funds for economic development 234,000.00 140,000.00 Trademarks and intellectual property, science 1,080,800.00 and technology project related subsidies Special subsidies for financing leases 278,600.00 Special subsidies for sewing equipment 140,000.00 research and development projects Others 109,984.55 2,810.88 Total 10,190,505.23 11,713,174.75 60) Investment income Item 2018 2017 Long-term equity investments measured under equity method -12,972,718.90 17,990,723.92 Investment income from disposal of long-term equity investment investment income of a financial asset at its fair value and whose changes are included in the current profits and losses during the period of holding Investment income obtained from the disposal of financial assets at fair value and their changes are 45,148.42 16,690.26 included in the current profits and losses Investment income of the held-to-maturity investment during the holding period Investment income derived from available-for-sale financial assets Investment income from disposal of available-for-sale financial assets 12,526,301.81 16,249,837.40 After the loss of control, the residual equity is measured at fair value -7.64 Others Item 13,159,536.73 11,350,015.35 Total 12,758,268.06 45,607,259.29 98 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 61) Gains from changes in fair value Not applicable. 62) Gains on disposal of assets Item 2018 2017 Fixed assets -104,177.97 23,963,103.89 Intangible assets 547,886.02 Total 443,708.05 23,963,103.89 63) Non-operating income Non-operating income Amount included in current Item 2018 2017 non-recurring gains and losses Government grants 838.00 148,710.23 838.00 Unpayable payables 3,150,715.12 3,150,715.12 Export trade rebate 2,103,953.87 2,131,628.81 1,222,714.92 Litigation gains 1,874,114.87 1,874,114.87 Others 749,082.64 6,912,409.04 749,082.64 Total 7,878,704.50 9,192,748.08 6,997,465.55 Government grants included in current profit and loss Item Reporting period Same period of the previous year Asset-related /Income-related Shanghai old public housing 85,710.23 management fee subsidies Other 838.00 63,000.00 Income-related Total 838.00 148,710.23 64) Non-operating expenses Amount included in current non-recurring gains Item 2018 2017 and losses Fixed asset disposal loss 1,728,803.67 412,623.36 1,728,803.67 Donations made 683,000.00 200,000.00 683,000.00 Amercement and overdue fine outlay 624,345.07 2,547,131.17 624,345.07 Others 1,029,505.75 606,594.16 1,029,505.75 Total 4,065,654.49 3,766,348.69 4,065,654.49 65) Income tax expenses Item 2018 2017 Current income tax expenses 41,000,022.97 75,912,541.36 Deferred income tax expenses 4,789,812.70 7,016,328.30 Total 45,789,835.67 82,928,869.66 66) Other comprehensive income See notes for details. 67) Items of the statement of cash flows A. Cash received from other operating activities Item 2018 2017 Current accounts and advances withdrawn 36,267,444.87 16,478,636.33 Special subsidies and grants 7,942,196.52 11,074,399.76 Interest income 4,472,642.90 12,937,203.19 Non-operating income: 2,449,391.77 6,570,902.72 Other 1,591,851.31 3,384,804.85 Total 52,723,527.37 50,445,946.85 B. Cash paid for other operating activities Item 2018 2017 Current accounts paid 57,318,220.58 55,241,626.14 Selling expenses 159,093,616.25 121,033,239.46 General and administrative expenses 91,441,901.13 97,509,435.48 Non-operating expenses 752,722.87 2,744,339.67 99 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Others 3,640,691.54 3,809,248.10 Total 312,247,152.37 280,337,888.85 C. Cash received from other investing activities Item 2018 2017 Received financial lease security deposit 393,810.60 Total 393,810.60 D. Cash paid from other investing activities Not applicable. E. Cash received from other financing activities Item 2018 2017 Bank deposit, security deposit and other pledge, mortgage 2,947,447.51 Cash received from financing leas 950,250.00 Total 3,897,697.51 F. Cash paid from other financing activities Item 2018 2017 Bank deposit, security deposit and other pledge, mortgage Cash paid for finance lease 1,165,827.50 Total 1,165,827.50 68) Supplementary information to the statement of cash flows A. Supplementary information to the statement of cash flows Supplementary Information Reporting period Same period of the previous year 1. Net profit adjusted to cash flows from operating activities Net profit 158,449,643.95 212,652,989.02 Plus: Provision for assets impairment 20,600,867.58 26,197,662.78 Depreciation of fixed assets and others 54,699,873.04 61,400,632.56 Amortization of intangible assets 25,747,235.24 23,812,401.29 Amortization of long-term deferred expenses 616,641.59 250,014.86 Losses on disposal of fixed assets, intangible -443,708.05 -23,963,103.89 assets and other long-term assets (―-― for gains) Losses on write-off of fixed assets (―-‖ for 1,728,803.67 412,623.36 gains) Losses from changes in fair value (―-― for gains) Financial expenses (―-‖ for income) 10,120,291.46 -8,200,943.06 Investments losses (―-― for gains) -12,758,268.06 -45,607,259.29 Decreases in the deferred income tax assets (―-‖ -6,704,509.63 -4,481,358.32 for increases) Increases in the deferred income tax liabilities 3,573,154.30 11,498,815.79 (―-‖ for decreases) Decreases in inventories (―-‖ for increases) -103,695,100.04 -53,078,397.74 Decreases in operating payables (―-‖ for -89,099,505.47 -76,119,802.22 increases) Increases in operating payables (―-‖ for 18,592,566.59 -7,438,405.97 decreases) Others -1,874,114.87 Net cash flows from operating activities 79,553,871.30 117,335,869.17 2. Significant investment and financing activities involving no cash receipts and payments Conversion of debt into capital Convertible corporate bonds maturing within one year Fixed assets acquired under financial lease 3. Net change in cash and cash equivalents: Ending balance of cash 558,241,622.39 713,813,720.45 Less: beginning balance of cash 713,813,720.45 750,357,929.63 Plus: ending balance of cash equivalents Less: beginning balance of cash equivalents 100 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Supplementary Information Reporting period Same period of the previous year Net increase in cash and cash equivalents -155,572,098.06 -36,544,209.18 Note: The other item is that the company obtained 48% equity of Shanghai Pacific Industrial Co., Ltd. through litigation in February 2018. The company included it in the available-for-sale financial assets and recognized the non-operating income according to the equity investment cost amount. B. Net cash paid to acquire subsidiaries during the current period Amount Cash or cash equivalents paid by the business combination in the current period 109,310,300.00 Among them: Richpeace 109,310,300.00 Less: the cash and cash equivalents held by the company on the date of purchase 15,128,534.13 Among them: Richpeace 15,128,534.13 Plus: Cash or cash equivalents paid in the current period for business combinations in the previous period Obtain the net cash paid by the subsidiary 94,181,765.87 Note: On the purchase date, Richpeace opened a bank acceptance bill, and the bank acceptance bill deposit amounted to 15,000,000.00 yuan, which was included in the total amount of monetary funds but not included in the cash and cash equivalents on the purchase date. C. Net cash received from disposal of subsidiaries during the current period Not applicable. D. Composition of cash and cash equivalents Item Ending Balance Beginning Balance 1. Cash 558,241,622.39 713,813,720.45 Including: cash on hand 743,089.39 707,925.98 Unrestricted bank deposit 556,269,113.49 712,794,196.15 Other unrestricted monetary funds 1,229,419.51 311,598.32 Deposit in central bank available for payment Deposits with banks and other financial institutions Loans from banks and other financial institutions 2. Cash equivalents Including: bond investments maturing within three months 3. Balance of cash and cash equivalents as at 31 558,241,622.39 713,813,720.45 December 2018 Including: cash and cash equivalents restricted for use by the parent company or subsidiaries within the group 69) Notes of items in Statement of Changes in Equity Not applicable. 70) Assets with restricted ownership or use rights Item Book value at the end of period Restricted reasons Monetary funds 36,792,523.72 Various types of deposits and other restricted funds Notes receivable 2,380,000.00 Bill pledge business Inventary 2,398,160.00 Purchasing business with ownership retention Bank loan and ownership purchase business is Fixed assets 14,875,120.33 mortgaged Intangible assets 5,389,231.47 Bank loan is mortgaged Investment property 27,257,000.00 Financing guarantee Total 89,092,035.52 / 71) Monetary items in foreign currency A. Monetary items in foreign currency Ending balance of foreign Ending balance of conversion Item currency Exchange rate into RMB Monetary funds 19,314,581.64 101 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Including: USD 1,774,848.24 6.8632 12,181,111.39 EUR 895,835.74 7.8473 7,029,891.91 JPY 1.00 0.0619 0.06 外币核算 - Indonesian currency 2,193,373,789.00 0.000047 103,578.28 B. Description of overseas operating entities The domicile of primary operation of the Company’s subsidiary, DA AG, is in Germany, with Euro as functional currency for it is the applicable currency for the operation region. The domicile of primary operation of the Company’s subsidiary, DAP Vietnam Co., Ltd., is in Vietnam, with VND as functional currency for it is the applicable currency for the operation region. 72) Hedging Not applicable. 73) Government grants Amount recognized in Type Amount Item current profits and losses Development of service industry guidance 2,200,000.00 Reversing the value of intangible assets 220,000.00 funds Financial support funds 7,858,472.82 Other income 7,858,472.82 VAT refund 293,707.16 Other income 293,707.16 Special funds for economic development 234,000.00 Other income 234,000.00 Employee education subsidy 194,940.70 Other income 194,940.70 Trademarks and intellectual property, science and technology project related 1,080,800.00 Other income 1,080,800.00 subsidies Special subsidies for financing leases 278,600.00 Other income 278,600.00 Sewing equipment special subsidy 140,000.00 Other income 140,000.00 Other 110,822.55 Other income / Non-operating income 110,822.55 8. Change in the scope of consolidation 1) Business combinations not under common control A. Business combinations not under common control in 2018 Basis for Net profit of the Name of When the Shareholding Equity determining Revenue from the purchaser from the Equity Purchase the equity is ratio acquisition the purchaser to the date of purchase to acquisition cost date Acquiree acquired (%) method purchase end of the period the end of the date period Business combinations Equity SG 2018/8/31 136,637,800.00 65.00 not under 2018/8/31 transfer 95,414,392.86 19,133,660.04 Richpeace common completed control B. Merger costs and goodwill Purchase cost SG Richpeace --Cash 136,637,800.00 -- Fair value of non-cash assets Total purchase cost 136,637,800.00 Less: the fair value share of the identifiable net assets acquired 59,093,605.46 Goodwill 77,544,194.54 C. The identifiable assets and liabilities of the purchased party on the purchase date SG Richpeace Fair value at the date of purchase Book value at the date of purchase Assets: 300,978,046.76 228,798,958.38 Money funds 30,128,534.13 30,128,534.13 Receivables 35,094,545.97 35,094,545.97 Inventory 96,850,024.33 96,850,024.33 Fixed assets 54,285,087.90 47,665,430.23 102 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Intangible assets 69,322,139.69 3,762,708.98 Prepayments 12,867,504.34 12,867,504.34 Construction in progress 166,848.13 166,848.13 Long-term deferred expenses 483,686.63 483,686.63 Deferred income tax assets 1,710,937.76 1,710,937.76 Other current assets 68,737.88 68,737.88 Liabilities: 210,064,807.59 199,237,944.33 Loan 68,000,000.00 68,000,000.00 Payables 91,583,641.64 91,583,641.64 Deferred income tax liabilities 10,826,863.26 Receipt in advance 35,765,085.52 35,765,085.52 Employee compensation payable 712,514.48 712,514.48 Long-term payables 3,176,702.69 3,176,702.69 Net assets 90,913,239.17 29,561,014.05 Less: minority shareholders' equity Net assets acquired 90,913,239.17 29,561,014.05 Method for determining the fair value of identifiable assets and liabilities: Yinxin Assets Appraisal Co., Ltd. issued the Yinxin Caibao (2018) Shanghai No. 249 Asset Appraisal Report to determine the fair value of each identifiable asset on the purchase date. 2) Business combinations under common control Not applicable. 3) Reverse purchase Not applicable. 4) Disposal of subsidiaries Not applicable. 5) Changes in consolidation scope with other reasons Not applicable. 9. Equity in other entities 1) Equity in subsidiaries A. Composition of enterprise groups Shareholding Ratio Name of Major Places Registered (%) Business Nature Acquisition method Subsidiary of Business Place Direct Indirect Shanghai Shanghai, Shanghai, Shanggong China China Production and Butterfly sales of sewing 100.00 Investment Sewing machines Machine Co., Ltd. DAP (Shanghai) Shanghai, Shanghai, Sales of sewing 100.00 Investment Co., Ltd. China China machines Shanghai Shanghai, Shanghai, Sales, import and SMPIC Imp. & China China export of office 100.00 Investment Exp. Co., Ltd. equipment Shanghai SGSB Shanghai, Shanghai, Production and Electronics Co., China China sales of electronic 100.00 Investment Ltd. equipment Shanghai SGSB Shanghai, Shanghai, Asset China China Asset and property 100.00 Investment Management management Co., Ltd. Shanghai Shanghai, Shanghai, Fengjian China China Property 100.00 Business combinations under common control Property Co., Management Ltd. In 2018, the company's second-level subsidiary, Production and Duerkopp Adler Bielefeld, Bielefeld, DAP Industrial AG, merged with the third-tier sales of sewing 100.00 AG Germany Germany subsidiary DA AG and changed its name to DA machines AG. Zhejiang Taizhou, Taizhou, Production and 60.00 Investment 103 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd ShangGong Zhejiang, Zhejiang, sales of sewing GEMSY CO., China China machines LTD. Shanghai Shanghai, Shanghai, Shensy China China Business combinations not under common Enterprise Logistics, etc. 40.03 control Development Co., Ltd. Shanghai Shanghai, Shanghai, ShangGong China China Financial Financial Leasing 51.00 49.00 Investment Leasing Co., Ltd. The company directly holds 30.25% of the shares PFAFF of PFAFF Sewing Machine (Zhangjiagang) Co., Industrial Ltd., and indirectly holds the remaining 69.75% Production and Sewing Zhangjiagang, Zhangjiagang, equity through other subsidiaries. Since the sales of sewing 30.25 69.75 Machine Jiangsu, China Jiangsu, China company directly manages the business activities (Zhangjiagang) machines of PFAFF Industrial Sewing Machine Co., Ltd. (Zhangjiagang) Co., Ltd., this company is included in the direct scope of the company. DAP Vietnam Ho Chi Minh, Ho Chi Minh, Sales of sewing 100.00 Investment Co., Ltd. Vietnam Vietnam machines ShangGong Sewing Taizhou, Taizhou, Production and Equipment Zhejiang, Zhejiang, sales of sewing 100.00 Investment (Zhejiang) Co., China China machines Ltd. During the reporting period, the Company invested in and increased the capital of DAMSH, Dürkopp Adler with a shareholding ratio of 51. The chairman, Industrial Production and Shanghai, Shanghai, general manager and chief financial officer are Manufacturing sales of sewing 51.00 49.00 China China all dispatched by the Company to directly (Shanghai) Co., machines manage the business. DAMSH is included in the Ltd. direct consolidation scope of the Company from the date of completion of the capital increase. TIANJIN Production and RICHPEACE Tianjing, Tianjing, sales of sewing Business combinations not under common 65.00 AI CO., China China and intelligent control LIMITED equipment 104 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd B. Important non-wholly owned subsidiary Minority Other comprehensive income attributable to Profit and loss attributable to minority Balance of minority shareholders' Name of subsidiary shareholders minority shareholders in this period shareholders for the current period equity at the end of the period Shareholding% Zhejiang ShangGong GEMSY CO., LTD. 40.00% 1,278,618.68 85,650,027.87 Shanghai Shensy Enterprise Development Co., Ltd. 59.97% 8,510,494.83 156,283,940.73 TIANJIN RICHPEACE AI CO., LIMITED 35.00% 5,924,205.24 38,065,923.44 C. Main financial data of important non-wholly owned subsidiary Ending Balance Beginning Balance Name of subsidiary Non-current Current Non-current Non-current Current Non-current Current assets Total assets Total liabilities Current assets Total assets Total liabilities assets liabilities liabilities assets liabilities liabilities Zhejiang ShangGong 262,049,874.07 98,559,165.52 360,609,039.59 146,483,969.92 146,483,969.92 180,972,291.99 102,795,535.43 283,767,827.42 72,699,304.44 140,000.00 72,839,304.44 GEMSY CO., LTD. Shanghai Shensy Enterprise 382,809,588.75 93,768,523.55 476,578,112.30 213,777,562.28 1,878,628.16 215,656,190.44 319,865,459.20 46,144,064.50 366,009,523.70 115,076,875.63 4,201,979.88 119,278,855.51 Development Co., Ltd. TIANJIN RICHPEACE AI 154,392,606.55 57,857,955.80 212,250,562.35 161,027,646.24 1,608,000.62 162,635,646.86 CO., LIMITED 2018 2017 Name of subsidiary Total comprehensive Cash flow from Total comprehensive Cash flow from Operating income Net profit Operating income Net profit income operating activities income operating activities Zhejiang ShangGong GEMSY CO., LTD. 355,562,212.96 3,196,546.69 3,196,546.69 25,134,868.84 279,057,289.37 -4,495,201.96 -4,495,201.96 -3,638,394.34 Shanghai Shensy Enterprise Development 762,944,769.75 14,191,253.67 14,191,253.67 -41,275,319.88 768,874,679.88 7,005,860.61 7,005,860.61 78,188,474.68 Co., Ltd. TIANJIN RICHPEACE AI CO., LIMITED 95,414,392.86 19,133,660.04 20,053,901.44 15,063,349.86 D. Major restrictions on the use of group assets and liquidation of group debt Not applicable. E. Financial support or other support provided to structured entities included in the scope of consolidated financial statements Not applicable. 105 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 2) Transaction that changes the shareholding ratio in subsidiaries but still controls the subsidiaries A. Desciption The company's wholly-owned subsidiary DAP Industrial AG acquired all minority shareholders'rights and interests of DA AG, a third-class subsidiary, in this year, and absorbed and merged DA AG and renamed DA AG after the merger was completed. B. Impact of the transaction on minority shareholders' equity and Total owners' equity attributable to the parent company DA AG Purchase cost/disposal consideration -- Cash 131,529,513.17 -- Fair value of non-cash assets Total purchase cost/disposal consideration 131,529,513.17 Less: Net assets of subsidiaries calculated according to the proportion of acquired/disposed equity 61,882,680.85 Difference 69,646,832.32 Among them: adjusting the capital reserve 55,785,147.32 Adjust surplus reserve Adjust undistributed profit 13,861,685.00 3) Equity in joint operation and joint venture A. Important joint operation and joint venture Shareholding Accounting Measurement Name of Joint Domicile of Registered Ratio (%) for Investment in Joint Operation and Primary Business Nature Place Operation and Joint Joint Venture Operation Direct Indirect Venture H. Stoll AG & Co. Reutlingen, Reutlingen, Computerized flat knitting 26.00 Equity method KG Germany Germany machine manufacturing B. Main financial information of joint operation and joint venture Unit: 10,000 Yuan, Currency: RMB Ending Balance/ 2018 Beginning Balance/ 2017 H. Stoll AG & Co. KG H. Stoll AG & Co. KG Current assets 144,632.52 168,299.51 Non-current assets 27,409.88 26,033.15 Total assets 172,042.4 194,332.66 Current liabilities 42,576.15 57,559.13 Non-current liabilities 34,124.11 33,250.28 Total liabilities 76,700.26 90,809.41 Operating income 137,588.47 195,797.19 Net profit -4,989.50 8,659.06 Other comprehensive income Total comprehensive income -4,989.50 8,659.06 Dividends received from associates 2,704.20 during the year C. Description of major restrictions on the ability of a joint venture or an associate to transfer funds to the company Not applicable. D. Excessive losses incurred by joint ventures or associates Not applicable. 106 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd E. Unconfirmed commitments related to investment in joint ventures Not applicable. F. Contingent liabilities related to investments in joint ventures or associates Not applicable. 4) Important common management Not applicable. 5) Equity in structured entities not included in the scope of consolidated financial statements Not applicable. 10. Risks related to financial instruments The Company faces various financial risks in the course of its operations: credit risk, market risk and liquidity risk. The Board of Directors of the Company is fully responsible for the determination of risk management objectives and policies, and assumes ultimate responsibility for risk management objectives and policies. The Board of Directors reviews the effectiveness of the implemented procedures and the rationality of risk management objectives and policies through monthly reports submitted by the heads of functional departments and subsidiaries. The Company's internal audit department will audit the risk management policies and procedures and report the findings to the audit committee. The overall goal of the Company's risk management is to formulate a risk management policy that minimizes risks without excessively affecting the Company's competitiveness and resilience. 10.1 Credit risk Credit risk refers to the risk that one party to a financial instrument fails to perform its obligations and causes financial losses to the other. The Company's credit risk is mainly related to accounts receivable. (1) Accounts Receivable The accounts receivable of the Company are mainly exposed to the credit risk of customers caused by credit sales. Before opening up new customers and signing new framework contracts, the Company will evaluate new customers' credit risks, including external credit ratings and, in some cases, bank credit certificates (when this information is available). For the sewing machine business and export trading business, the Company sets a credit limit for each customer, which is the maximum amount that does not require additional approval. For sales that exceed the credit limit, the Company only sells it on the premise of additional approval. Otherwise, it must demand that it pay the corresponding amount in advance. For customers who have not completed payment in a timely manner on the previous credit sale, the Company will no longer accept new product orders before recovering accounts receivable. For the logistics business, the Company only deals with customers that have been approved and have a good reputation and have a certain scale. After the credit period expires, the Company will perform various forms of collection for customers who have not paid on time. Due to the high dispersion of customers in the logistics business, there is no significant concentration of credit risk. As of the end of the report period, the top five customers' accounts receivable of the Company accounted for 15.62% of the ending balance, and the Company did not have significant credit risk. (2) Other Receivables The Company's other receivables mainly include export tax refund receivables, various types of deposits and deposits. The Company manages and monitors this type of payments together with related economic activities to ensure that the Company does not have significant bad debt risks. 10.2 Market risk The market risk of financial instruments refers to the risk that the fair value or future cash flow of 107 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd financial instruments fluctuates due to changes in market prices, including exchange rate risk, interest rate risk and other price risks. (1) Interest Rate Risk Interest rate risk refers to the risk that the fair value or future cash flow of a financial instrument will fluctuate due to changes in market interest rates. The interest rate risk that the Company may face is mainly derived from bank loans that carry interest at floating rates. As of 31 December 2018, the Company’s short-term bank loans with Euribor as benchmark interest rate totaled 3.105 million euros, and long-term loans with Euribor as benchmark interest rate totaled 43.198 million euros. Supposing that other variables remain unchanged, a 50% benchmark change in interest rates would have no significant impact on the Company's current profit or loss and shareholders' equity. (2) Exchange Rate Risk Exchange rate risk refers to the risk of loss due to exchange rate changes. The foreign exchange risk of the Company mainly includes the risk associated with the monetary assets and liabilities formed by the Company and its subsidiaries and overseas customers through the settlement of non-standard currencies, as well as the risk of translation differences in foreign currency statements. The former risk affects the current period profit and loss, and the latter risk affects owner's equity (other comprehensive income). See Note 7.77 for details of monetary items in foreign currency as of 31 December 2018. Exchange rate risk sensitivity analysis: With the other variables unchanged, the pre-tax impact of reasonable changes in exchange rates on the current profit or loss and owner's equity is as follows: 2018 2017 Item Exchange rate changes Impact on current Impact on owner's Impact on current Impact on owner's profits and losses equity profits and losses equity Foreign currency 10% appreciation of statement 9,134,416.91 90,779,097.87 18,052,832.71 91,994,946.53 RMB conversion Foreign currency 10% depreciation of statement -9,134,416.91 -90,779,097.87 -18,052,832.71 -91,994,946.53 RMB conversion Foreign Currency 10% appreciation of 8,591,797.27 8,591,797.27 6,211,726.82 6,211,726.82 Items RMB Foreign Currency 10% depreciation of -8,591,797.27 -8,591,797.27 -6,211,726.82 -6,211,726.82 Items RMB (3) Other Price Risks The Company holds equity investments in other listed companies. The management of the Company believes that the market price risks faced by these investment activities are acceptable. The listed company’s equity investment held by the Company is listed as follows: Item Ending Balance Beginning Balance Available-for-sale financial assets and trading financial assets 86,406,778.33 89,721,694.56 Total 86,406,778.33 89,721,694.56 If all other variables remain unchanged, if the value of the equity instrument increases or decreases by 20%, the Company will increase or decrease the other comprehensive income by 17,281,355.67 yuan (31st December 2017: Others Comprehensive income of 17,944,757.88 yuan). The management of the Company believes that 20% reasonably reflects the reasonable range of possible changes in the value of equity instruments in the next year. 10.3 Liquidity risk Liquidity risk refers to the risk of shortage of funds when performing obligations settled by way of delivery of cash or other financial assets. The Company's policy is to ensure that it has sufficient cash to repay the debts due. Liquidity risk is centrally controlled by the Company's financial department. By monitoring cash balances, marketable securities that can be realised at any time, and rolling forecasts of cash 108 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd flows for the next 12 months, the financial department ensures that the Company has sufficient funds to repay debts under all reasonably foreseen circumstances. The Company's external sources of funds mainly include bank loans. As of 31 December 2018, the Company's unused bank loan quota was 8 million euros (is equivalent to 62.78 million yuan at the end of the period) and 420.86 million yuan. The Company's own funds are relatively abundant and liquidity risk is relatively small. 11. Disclose of fair value 1) The fair value at end of current period of assets and liabilities measured at fair value Fair value at the end of reporting period Item Measured at the fair Measured at the fair Measured at the fair value of the second Total value of the first level value of the third level level 1. Measurement at fair value based on going concern (1) Financial assets measured at fair value through current profit and loss A. Financial assets held for trading a. Investment in debt instruments b. Investments in equity instruments c. Derivative financial assets B. Financial assets designated to be measured at fair value through current profit and loss a. Investment in debt instruments b. investments in equity instruments (2) Available-for-sale financial assets 86,406,778.33 86,406,778.33 a. Investment in debt instruments b. Investments in equity instruments 86,406,778.33 86,406,778.33 c. Others (3) Investment property A. Use right of leased land B. Leased buildings C. Land use right held for transfer upon appreciation (4) Biological assets A. Consumable biological assets B. Productive biological assets Total amount of assets measured at fair value based on going 86,406,778.33 86,406,778.33 concern (5) Financial liabilities held for trading Including: issued bonds held for trading Derivative financial liabilities Others (6) Designated financial liabilities measured at fair value through current profit and loss Total amount of liabilities measured at fair value based on going concern 2. Measurement at fair value based on going concern (1) Assets held for sale 109 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Fair value at the end of reporting period Item Measured at the fair Measured at the fair Measured at the fair value of the second Total value of the first level value of the third level level Total amount of assets measured at fair value not based on going concern Total amount of liabilities measured at fair value not based on going concern The input values used for fair value measurement are divided into three levels: The first level of input is an unadjusted quote for the same asset or liability that can be obtained on the measurement date in an active market. The second level input value is an input value that is directly or indirectly observable for related assets or liabilities other than the first level input value. The third level input value is the unobservable input value of the relevant asset or liability. The level to which the fair value measurement result belongs is determined by the lowest level to which the input value of the fair value measurement is significant. 2) Basis for determination of market price for measurement of fair value of the first level based on going concern and not based on going concern The fair value at end of reporting period of available-for-sale financial assets was determined on the basis of the closing price of Shenzhen Stock Exchange and Shanghai Stock Exchange on the last trading day in 2018.。 12. Related party and related party transaction 1) The parent company of the Company The Company is a listed company with no controlling shareholder and no actual controller. 2) The subsidiaries of the Company See the Note 9 Equity in Other Entities for the details. 3) The joint operation and joint ventures of the Company See the Note 9 Equity in Other Entities for the details. 4) Other related parties Name of Other Related Parties Relationship with the Company Shanghai Hirose Precision Industrial Co., Ltd. Other related party Shanghai Fuji Xerox Co., Ltd. Other related party Shanghai Kaile Investment Management Co., Ltd. Other related party Zhejiang GEMSY Electromechanical Co., Ltd. Other related party Shenzhen Yingning Venture Capital Co., Ltd. Other related party Tianjin Tongshang Software Co., Ltd. Other related party Stoll Electronics Co., Ltd. Other related party 5) Related transactions A. Related transactions for purchase and sale of goods, receiving and rendering of services Table of purchase of goods / receipt of services Related Party Content of Related Transaction 2018 2017 Purchase of goods / Receiving of Stoll Electronics Co., Ltd. service 18,531,706.20 19,673,427.20 Table of sales of goods /rendering of services Related Party Content of Related Transaction 2018 2017 Shanghai Fuji Xerox Co., Ltd. Sales of goods 17,427,907.76 21,610,693.53 Zhejiang Gemsy Mechanical and Sales of goods 317,000.00 Electrical Co., Ltd. Stoll Electronics Co., Ltd. Sales of goods 722,873.75 664,436.40 110 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd B. Associated trusteeship/contracting and entrusted management/outsourcing Not applicable. C. Related lease The Company acted as lessor: Name of leasee Type of leased asset Rental recognized in report period Rental recognized in last period Shanghai Hirose Precision Industrial Co., Ltd. Machinery equipment 250,000.00 250,000.00 D. Related guarantees Not applicable. E. Related party funds lending Not applicable. F. Related party assets transfer and debt reorganization Not applicable. G. Compensation for key managers Unit: RMB 10,000 YUAN Item 2018 2017 Compensation for key managers 434.55 638.57 Note: In 2018, the Company's key management personnel include 10 directors, supervisors, presidents, vice presidents and board secretary (17 in 2017). 6) Receivables and payables from related parties A. Receivables Ending Balance Beginning Balance Item Related party Provision for Provision for Book balance Book balance bad debts bad debts Accounts receivable Shanghai Fuji Xerox Co., Ltd. 1,688,554.30 84,427.72 2,365,537.24 118,276.86 Accounts receivable Stoll Electronics Co., Ltd. 57,950.27 Zhejiang Gemsy Mechanical and Electrical Prepayment Co., Ltd. 6,147,650.83 6,147,650.83 Zhejiang Gemsy Mechanical and Electrical Other receivables Co., Ltd. 697,279.69 367,679.69 617,279.69 B. Payables Item Related party Ending Balance Beginning Balance Account payables Stoll Electronics Co., Ltd. 1,696,195.46 1,630,680.70 Other payables Shenzhen Yingning Venture Capital Co., Ltd. 35,116,900.00 Other payables Tianjin Tongshang Software Co., Ltd. 24,810,600.00 Other payables H. Stoll AG & Co. KG 23,675,820.92 7) Related party commitments Not applicable. 13. Share payment Not applicable. 14. Commitments and contingencies 1) Important commitments Not applicable. 2) Contingencies A. Important contingent events at the balance sheet date (1) Contingent liabilities formed by debt guarantees provided by the Company for its subsidiary DA AG as of 31 December 2018 Guarantee Guarantee Commencement Date Expiration Date of Whether the Guarantee has No 111 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Amount of Guarantee Guarantee been Fulfilled or not te Industrial and Commercial bank EUR 7.878 21st December No 21st December 2015 No Shanghai Hongkou Branch million 2020 te Note 5: on 21st December 2015, the Company's wholly owned subsidiary, DAP Industrial AG, applied to the Frankfurt Branch of ICBC for a loan of no more than 7.878 million euro so as to pay the acquisition fee to Stoll KG. ICBC Shanghai Hongkou Branch issued a financing guarantee letter for the funds, and the Company issued an unconditionally irrecoverable corporate letter of guarantee for self-using fix assets where No.603 Dapu Road as counter guarantee for the abovementioned financing guarantee letter. In 2018, DAP Industrial AG merged and merged with DA AG and changed its name to DA AG. The name of the financing guarantee was changed to DA AG. The financing guarantee provided by Industrial and Commercial Bank of China Shanghai Hongkou Sbranch AND the counter guarantee provided by the company continues to be valid. As of 31 December 2018, there is no outflow of economic benefits arising from the above contingencies. (2) As of December 31, 2018, contingent liability from providing guarantee by SGG for SG Richpeace On November 22, 2018, SG Richpeace, a subsidiary of the Company, signed a ―Comprehensive Credit Contract‖ with China Minsheng Bank Shanghai Branch. The company fulfills the repayment obligations under the credit contract and provides a guarantee of up to RMB 60 million for SG Richpeace. The other minority shareholders of SG Richpeace provided counter-guarantee for 35% of the Company's guarantee with 35% stake of SG Richpeace. As of 31 December 2018, there is no outflow of economic benefits arising from the above contingencies. (3) The Agreement to Increase Capital to Shanghai Shensy Enterprise Development Co., Ltd. According to the capital increase agreement of Shanghai Shensy Enterprise Development Co., Ltd., by 30 June 2018, if SHENSY has not realized IPO and listed independently in A shares market, the persons acting in concert, Shanghai Pudong New Industrial Investment Co., Ltd., will be entitled to require the Company and another shareholder, Zhang Ping, to repurchase all or some of the shares that Shanghai Pudong New Industrial Investment Co., Ltd. holds in cash, within 3 months after it requests in writing. And assist it in the approval process of State-owned Assets Supervision and Administration Commission, commercial registration, etc. Per the agreement, the Company and Zhang Ping will respectively assume 50% of the above mentioned amount, and the Company bears unconditional joint responsibility to repurchase the shares that Shanghai Pudong New Industrial Investment Co., Ltd. holds. If Shanghai Pudong New Industrial Investment Co., Ltd. has not listed in A shares market by 30 June 2018, it has 6 months (e.g. before 31 December 2018) to request our company and Zhang Ping to repurchase the shares which it holds in Shanghai Shensy Enterprise Development Co., Ltd.. If not, our company and Zhang Ping will not assume the above mentioned repurchase responsibility. As of 30 June 2018, SHENSY has failed to complete its IPO and be listed on the A-shares independently. The company has negotiated with Shanghai Pudong New Industrial Investment Co., Ltd. on repurchase matters. The repurchase matters still need to complete the approval and listing of the state assets, so the 112 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd parties have not signed a follow-up repurchase agreement on the repurchase. There is considerable uncertainty in the share repurchase. Before the completion of the repurchase, Shanghai Pudong New Industrial Investment Co., Ltd. will still maintain a concerted relationship with the company. (4) Arbitration on investment of 26% equity in H. Stoll AG & Co. KG Accounting to the Contract signed on 29th August 2015 by SGE, the calculation of share price is based on the net assets of STOLL's audited consolidated statement in 2014, and the parties agreed that share price will be adjusted according to the net assets of STOLL's audited consolidated statement in 2015 and related clauses in the Contract. Now the parties have disputes on the calculation of net assets of STOLL's audited consolidated statement in 2015 and the understanding of the relevant terms of the Contract, resulting in a difference of approximately 4.26 million euro in the calculation of the price adjustment. SGE has received the Application for Arbitration submitted by Michael Stoll, Corinna Stoll and other 10 limited partners of STOLL KG on 20 July 2017. SGE will, in accordance with the terms of the contract, settle the dispute by arbitration in accordance with German legal procedures. As of the date of this report, the arbitration is in process and with great uncertainty. (5) Shanghai Shensy Enterprise Development Co., Ltd., a second-level subsidiary of the Company, borrowed 40,000,000.00 yuan from Bank of Communications Shanghai Baoshan Branch, borrowed RMB 54,900,000.00 from China Construction Bank Shanghai Baosteel Baoshan Branch, and borrowed RMB 10,000,000.00 from Shanghai Bank Fumin Branch. The third-level subsidiary Shanghai Shensy Kaile Internet of Things Co., Ltd. provides joint liability guarantee. As of 31 December 2018, there is no outflow of economic benefits arising from the above guarantee. (6) Labor Arbitration and Pending Litigation with the Staff of Li Fuquan The family members of Li Fuquan, a employee of the company's subsidiary Shanghai Shensy Enterprise Development Co., Ltd. Harbin Branch, submitted to the labor arbitration for work injury compensation. The case has been terminated by the Labor and Personnel Dispute Arbitration Committee of the Harbin Foreign Trade Zone, which was held on March 22, 2019. According to the HWLRZZ (2019) No. 2 Arbitral Report, SHENSY Harbin Branch is required to paid Li Fuquan's family members various types of work-related injury compensation totaled 702,720.00 yuan . Shanghai Shensy Enterprise Development Co., Ltd. Harbin Branch will apply to the Harbin Intermediate People's Court for revocation of the above ruling, and has deducted the corresponding estimated liabilities according to the amount of the arbitral award after deducting the prepaid compensation. (7) As of December 31, 2018, Shanghai Shensy Enterprise Development Co., Ltd., a second-tier subsidiary of the Japanese company, provided contingent liabilities for the debt guarantee provided by the third-level subsidiary Mudanjiang Kailehui Logistics Co., Ltd. The company's third-level subsidiary Mudanjiang Kailehui Logistics Co., Ltd. and ProLogis Financial Leasing (Shanghai) Co., Ltd. signed a financing sale and leaseback contract. Shanghai Shensy Enterprise Development Co., Ltd., a second-level subsidiary of the Company, is jointly and severally liable for all payment obligations under the financing sale and leaseback contract. 113 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd As of December 31, 2018, Shanghai Shensy Enterprise Development Co., Ltd. has not yet experienced the outflow of economic benefits due to the above guarantees, and the amount of financing leases that have not yet been settled amounts to 383,176.52 yuan. 15. Post balance sheet event 1) Important non-adjusting events ① Capital increase in SG Richpeace According to the agreement of the equity purchase agreement signed by the Company and other shareholders of SG Richpeace in 2018, the completion of the equity delivery of SG Richpeace and the settlement of all acquisitions After the related parties' remittances, all shareholders jointly increased the capital of RMB 3,000 million in Richpeace, of which the company increased the capital by RMB 19.5 billion, and the other shareholders increased the capital by RMB 10,500,000. As of the date of issuance of the financial statements, all shareholders have completed the payment of all the capital increase, and Richpeace has completed all the registration procedures related to the capital increase. ② Capital increase in Shanghai ShangGong Financial Leasing Co., Ltd. The Company and its subsidiary DA AG plans to jointly increase capital with Oriental Hengxin Capital Holding Group Co., Ltd. to Shanghai ShangGong Financial Leasing Co., Ltd.; the Company will increase its capital by USD 2.10 million, DA AG will increase its capital by USD 2.6 million, and Oriental Hengxin Capital Holdings Group Co., Ltd.will increased its capital by USD 15.53 million. Upon completion of the capital increase, Oriental Hengxin Capital Holdings Group Co., Ltd. will hold a 51.00% stake in Shanghai ShangGong Financial Leasing Co., Ltd. The Company will lose control of Shanghai ShangGong Financial Leasing Co., Ltd. and will no longer include Shanghai ShangGong Financial Leasing Co., Ltd. in the scope of consolidation of the Company. As of the date of issuance of the financial statements, the capital increase has not yet completed the required government filing or approval work and registration procedures, and the capital increase of each shareholder has not been paid in place. ③ Equity incentive plan The Company plans to implement equity incentives to the company's directors, senior management and other key personnel in business and management positions, in the form of stock options. At the time of exercise, the Company will issue RMB A shares of common stock to the incentive object. The equity incentive plan is valid for five years. The exercise period is 36 months after the grant of equity, and the lock option period is 12 months after the stock option grant. The stock option is valid to meet the performance requirements announced by the company. The equity incentive plan is to be awarded 13,204,200.00 stock options, with a total of 318 people granted for the first time, and the exercise price is RMB 7.90/share. The equity incentive plan was approved by the 10th meeting of the 8th Board of Directors of the Company on February 28, 2019, and was approved by the company's first extraordinary shareholders meeting in 2019 on March 18, 2019. As of the date of issuance of the financial statements, the equity incentive plan has not yet reached the exercise period. 114 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 2) Profit distribution According to the resolution of the Company’s 11th Meeting of the 8th Board of Directors on 12 April 2019, no dividends of 2018 will be distributed, neither the transferring of capital reserves into share capital. 3) Sales return Not applicable. 4) Others Not applicable. 16. Other significant events 1) Correction of previous accounting errors Not applicable. 2) Debt reorganization Not applicable. 3) Asset replacement Not applicable. 4) Annuity plan Not applicable. 5) Discontinued operations Not applicable. 6) Division information A. Basis for determining the report division According to the Company's development strategy, four report divisions are identified according to the nature of the business: sewing equipment & intelligent equipment, logistics services, export trade and other business segments. Each of the Company's reporting segments offers different products and services. B. Report division’s financial information Sewing Logistics Export trade Other business Offset between Item equipment Total service division division segments divisions division 1. Operating income 2,730,956,602.44 762,944,769.75 101,416,874.14 107,956,220.41 502,746,725.65 3,200,527,741.09 Including: External 2,250,341,508.42 762,944,769.75 101,171,704.50 86,069,758.42 3,200,527,741.09 transaction income Inter-segment 480,615,094.02 - 245,169.64 21,886,461.99 502,746,725.65 - transaction income 2. Investment income from associates and -10,161,995.93 - - - 2,810,722.97 -12,972,718.90 joint ventures asset impairment losses 17,016,440.98 180,207.75 -768,073.82 974,523.30 -3,197,769.37 20,600,867.58 4. Depreciation and 67,079,259.92 2,874,029.43 220,020.85 10,890,439.67 81,063,749.87 amortization 5. Total profit 169,325,209.15 19,388,903.30 1,583,616.03 15,036,463.72 1,094,712.58 204,239,479.62 6. Income tax expenses 36,355,827.94 5,197,649.63 - 4,905,207.25 668,849.15 45,789,835.67 7. Net profit 132,969,381.21 14,191,253.67 1,583,616.03 10,131,256.47 425,863.43 158,449,643.95 8. Total assets 3,266,086,230.29 476,578,112.30 22,456,759.09 1,737,974,683.76 1,358,968,623.39 4,144,127,162.05 9. Total liabilities 1,848,822,323.49 215,656,190.44 15,074,207.66 169,713,658.31 617,094,885.46 1,632,171,494.44 115 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd 10. Other important non-cash items 17. Notes to mains items of the financial statements of the parent company 1) Notes receivable and Accounts receivable Item Ending Balance Beginning Balance Notes receivable 8,713,253.21 18,619,880.00 Accounts receivable 40,853,861.26 36,846,572.06 Total 49,567,114.47 55,466,452.06 Notes receivable A. Disclosure of classification of notes receivable Item Ending Balance Beginning Balance Bank Acceptance Bill 8,713,253.21 18,619,880.00 Total 8,713,253.21 18,619,880.00 B. Notes receivable that the company has endorsed or discounted and has not yet expired on the balance sheet date Amount confirmed at the end of the Amount not confirmed at the end of the Item reporting period reporting period Bank Acceptance Bill 1,100,000.00 Total 1,100,000.00 Accounts receivable A. Disclosure of classification of accounts receivable Ending Balance Beginning Balance Book balance Provision for bad debts Book balance Provision for bad debts Type Proportion Proportion Book value Proportion Proportion Book value Amount Amount Amount Amount (%) (%) (%) (%) Accounts receivable with significant single amount and 15,224,682.99 14.25 10,457,069.39 68.68 4,767,613.60 15,115,630.80 13.88 5,561,028.32 36.79 9,554,602.48 provision for bad debt made on an individual basis Accounts receivable with provision for bad debt made on a 64,602,975.75 60.47 46,768,063.44 72.39 17,834,912.31 80,650,765.60 74.09 61,342,035.96 76.06 19,308,729.64 portfolio with similar risk credit characteristics basis Accounts receivables with insignificant single amount 27,011,365.22 25.28 8,760,029.87 32.43 18,251,335.35 13,092,694.77 12.03 5,109,454.83 39.03 7,983,239.94 and provision for bad debt made on an individual basis Total 106,839,023.96 100.00 65,985,162.70 61.76 40,853,861.26 108,859,091.17 100.00 72,012,519.11 66.15 36,846,572.06 Accounts receivable with significant single amount and provision for bad debts made on an individual basis at the end of report period Ending Balance Accounts receivable (By entity) Provision ratio Accounts receivable Provision for bad debts Reason for provision (%) Customer C 5,570,630.90 5,529,005.67 99.25 Impaired according to the separate test Customer D 4,974,724.60 248,736.23 5.00 Impaired according to the separate test Customer E 4,679,327.49 4,679,327.49 100.00 Impaired according to the separate test Total 15,224,682.99 10,457,069.39 68.68 / Accounts receivable with provision for bad debt made using the aging analysis method among the 116 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd portfolios: Ending Balance Aging Accounts receivable Provision for bad debts Provision ratio Within 1 year 18,688,560.79 934,428.03 5.00 1 to 2 years 96,464.02 19,292.80 20.00 2 to 3 years 7,216.67 3,608.34 50.00 Over 3 years 45,810,734.27 45,810,734.27 100.00 Total 64,602,975.75 46,768,063.44 72.39 B. Bad debt provision recovered or reversed in report period The amount of provision for bad debts was 49,948.84 yuan in current period; the amount of bad debt provision recovered or reversed in the current period was 279,811.08 yuan. C. Accounts receivable actually written off in current period Item Write-off amount Accounts receivable actually written off 6,018,561.06 Note: Due to the liquidation and cancellation of Shanghai SMPIC Photosensitive Material Factory, the Company's President's Office Meeting agreed to write off the accounts receivable totaling RMB 3,436,227.61; the Company's President's Office Meeting agreed to write off the accounts receivable of the industrial sewing machine branch that have been determined to be uncollectible and have been fully withdrawn for bad debts totaling RMB 2,582,333.45. D. Top five accounts receivable by the ending balance of the borrowers Ending Balance Company name Accounts receivable Proportion in total accounts receivable (%) Provision for bad debts Customer A 11,530,775.39 10.79 11,530,775.39 Customer B 7,480,189.67 7.00 7,480,189.67 Customer C 5,570,630.90 5.21 5,529,005.67 Customer D 4,974,724.60 4.66 248,736.23 Customer E 4,679,327.49 4.38 4,679,327.49 Total 34,235,648.05 32.04 29,468,034.45 E. Receivables derecognized due to transfer of financial assets Not applicable. F. Transfer of accounts receivable and continued involvement in the formation of assets, liabilities Not applicable. 2) Other receivables Item Ending Balance Beginning Balance Interest receivable Dividends receivable 1,050,356.92 Other receivables 153,706,592.29 107,954,125.03 Total 154,756,949.21 107,954,125.03 Interest receivable Not applicable. Dividends receivable Investee Ending Balance Beginning Balance Shanghai ShangGong Butterfly Sewin 1,050,356.92 Machine Co., Ltd. Total 1,050,356.92 Other receivables 117 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd A. Disclosure of classification of other receivables Ending Balance Beginning Balance Type Book balance Provision for bad debts Book balance Provision for bad debts Amount % Amount % Book Value Amount % Amount % Book Value Other receivables with significant single amount and provision 60,016,216.10 25.37 60,016,216.10 100.00 61,325,622.45 32.26 61,325,622.45 100.00 for bad debt made on an individual basis Other receivables with provision for bad debt made on a portfolio 172,013,467.01 72.71 22,818,725.66 13.27 149,194,741.35 125,819,372.64 66.20 20,769,399.12 16.51 105,049,973.52 with similar risk credit characteristics basis Other receivables with insignificant single amount and provision 4,529,575.94 1.92 17,725.00 0.39 4,511,850.94 2,925,886.51 1.54 21,735.00 0.74 2,904,151.51 for bad debt made on an individual basis Total 236,559,259.05 100.00 82,852,666.76 35.02 153,706,592.29 190,070,881.60 100.00 82,116,756.57 43.20 107,954,125.03 Other receivables with significant single amount and provision for bad debts made on an individual basis at the end of report period Ending Balance Other receivables (By entity) Provision for bad Proportion of provision Other receivables Reason for provision debts (%) Impaired according to the Customer C 46,028,699.80 46,028,699.80 100.00 separate test Impaired according to the Customer E 13,987,516.30 13,987,516.30 100.00 separate test Total 60,016,216.10 60,016,216.10 100.00 / Other receivables with provision for bad debts made using the aging analysis method among those portfolios Ending Balance Aging Proportion of Provision Other Receivables Provision for Bad Debts (%) Within 1 year 153,677,376.65 7,683,868.82 5.00 1 to 2 years 902,835.50 180,567.10 20.00 2 to 3 years 185,896.00 92,948.00 50.00 Over 3 years 14,861,341.74 14,861,341.74 100.00 Total 169,627,449.89 22,818,725.66 13.45 Other receivables with provision for bad debts made using other methods among those portfolios Proportion of Name Amound Provision for bad debts provision (%) Receivables from government agencies 1,547,836.20 and institutions Cash pledge and security deposit 181,200.00 Employee Standby Fund and Employee 656,980.92 Collection and Payment Total 2,386,017.12 B. Other receivables classified by nature of payment Not applicable. C. Withdrawal, recovery or reversal of provision for bad debt The provision for bad debts in current period was 1,275,590.18 yuan, and the amount of provision for bad debt recovered or reversed this period was 0 yuan. 118 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd D. Other receivables actually written off in current period Item Write off amount Other receivables actually written off 534,288.45 E. Top five other receivables by the ending balance of the borrowers Ending balance of Proportion in total other Company name Nature of fund Ending balance Aging provision for bad receivable (%) debts Customer A Current accounts 65,851,054.68 Within 1 year 27.84 3,292,552.73 Customer B Current accounts 51,500,000.00 Within 1 year 21.77 2,575,000.00 From within 1 year to Customer C Current accounts 46,028,699.80 over 3 years 19.46 46,028,699.80 Customer D Current accounts 20,544,256.86 Within 1 year 8.68 1,027,212.84 From within 1 year to Customer E Current accounts 13,987,516.30 over 3 years 5.91 13,987,516.30 Total / 197,911,527.64 / 83.66 66,910,981.67 F. Receivables involving government grants Not applicable. G. Other receivables derecognized due to the transfer of financial assets Not applicable. H. Transfer of other receivables and continued involvement in the formation of assets, liabilities Not applicable. 3) Long-term equity investments Ending Balance Beginning Balance Item Provision for Provision for Book balance Book value Book balance Book value impairment impairment Investment in subsidiaries 801,448,021.03 5,500,000.00 795,948,021.03 644,810,221.03 5,500,000.00 639,310,221.03 Total 801,448,021.03 5,500,000.00 795,948,021.03 644,810,221.03 5,500,000.00 639,310,221.03 A. Investment in subsidiaries Provision for Decrease impairment Ending balance of Beginning Increase in in Name Ending balance provided in provision for balance current period current current impairment period period DAP (Shanghai) Co., Ltd. 59,046,675.86 59,046,675.86 Shanghai Shanggong Butterfly Sewing Machines 79,000,000.00 79,000,000.00 Co., Ltd Duerkopp Adler AG 142,370,693.64 142,370,693.64 Shanghai SMPIC Imp. & 12,000,000.00 12,000,000.00 Exp. Co., Ltd. Shanghai SGSB Asset 60,000,000.00 60,000,000.00 5,000,000.00 Management Co., Ltd. Shanghai SGSB Electronics 20,000,000.00 20,000,000.00 Co., Ltd Shanghai Fengjian Property 500,000.00 500,000.00 500,000.00 Co., Ltd. Shanghai Shensy Enterprise 86,083,077.64 86,083,077.64 Development Co., Ltd. Zhejiang ShangGong 129,600,000.00 129,600,000.00 GEMSY CO., LTD. Shanghai ShangGong 33,452,430.00 33,452,430.00 Financial Leasing Co.,Ltd. PFAFF Industrial Sewing Machine (Zhangjiagang) 12,553,070.89 12,553,070.89 Co., Ltd. DAP Vietnam Co., Ltd. 204,273.00 204,273.00 ShangGong Sewing Equipment (Zhejiang) Co., 10,000,000.00 10,000,000.00 Ltd. Dürkopp Adler Industrial 20,000,000.00 20,000,000.00 Manufacturing (Shanghai) 119 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd Co., Ltd. TIANJIN RICHPEACE AI 136,637,800.00 136,637,800.00 CO., LIMITED Total 644,810,221.03 156,637,800.00 801,448,021.03 5,500,000.00 B. Investment in associates and joint ventures Not applicable. 4) Operating income and operating costs 2018 2017 Item Income Cost Income Cost Main Business 325,847,704.74 244,390,700.79 167,723,172.35 124,224,886.12 Other Business 42,112,962.53 14,808,501.40 39,895,020.71 15,258,267.48 Total 367,960,667.27 259,199,202.19 207,618,193.06 139,483,153.60 5) Investment income Item 2018 2017 Long-term equity investment measured at cost method 1,050,356.92 4,000,000.00 Long-term equity investment measured at equity method Investment income from disposal of long-term equity investments Investment income from holding of financial assets measured at fair value through current profit and loss Investment income from disposal of financial assets measured at fair value through current profit and loss 45,148.42 16,690.26 Investment income from holding of available-for-sale financial assets Investment income from holding of available-for-sale financial assets 12,526,301.81 16,249,837.40 Investment income from disposal of available-for-sale financial assets Gains from re-measurement of residual equity at fair value after the loss of control right Others Long-term equity investment measured at cost method 13,550,203.90 10,441,937.48 Total 27,172,011.05 30,708,465.14 18. Supplementary information 1) Extraordinary profit or loss for current period Item Amount Note Profits or losses from disposal of non-current assets -1,285,095.62 Tax returns, deduction and exemption approved beyond the authority or without official approval documents Government grants included in current profits and losses (except for government grants closely 9,897,636.07 related to the enterprise business, obtained by quota or quantity at unified state standards) Payment for use of state funds received from non-financial institutions recorded in current profits and losses Gains from the difference between the investment costs of acquisition of subsidiaries, associates and joint ventures and share in the net fair value of the identifiable assets of the investee when investing Gains or losses from non-monetary asset exchange Gains or losses from entrusting the investments or management of asset Impairment provision for force majeure such as natural calamities Gains or losses from debt restructuring Restructure expenses, such as the compensation for employee relocation and integration costs Gains or losses from transactions with obvious unfair transaction price Year-to-date net profits or losses of subsidiaries arising from business combinations under common control Profits or losses arising from contingencies not related to the company’s normal business Except for effective hedging business related to the normal business of the company, profits or 12,601,058.35 losses from fair value changes in held-for-trading financial assets and held-for-trading financial 120 / 121 上工申贝(集团)股份有限公司 Annual Report 2018 Shang Gong Group Co., Ltd liabilities, and investment income from disposal of held-for-trading financial assets, held-for-trading financial liabilities and available-for-sale financial assets Reversal of the impairment provision for receivables subject to separate impairment test Profits or losses from entrusted loans 603,626.80 Profits or losses from fair value changes in investment property subsequently calculated with the fair value mode Impacts of one-time adjusting the current profits or losses in accordance with requirements of tax and accounting laws and regulations on the current profits and losses Custodian income from entrusted management Other non-operating income and expenditure except for the above items 4,659,776.73 Other profits or losses which can be deemed as non-recurring profits or losses Income tax effects -6,037,254.76 Minority interest effects -4,268,282.88 Total 16,171,464.69 2) Return on equity and earnings per share Weighted average return Earnings per share Profit in Report Period on equity (%) Basic earnings per share Diluted earnings per share Net profit attributable to common shareholders of the company 6.3561 0.2567 0.2567 Net profit attributable to common shareholders of the company after 5.6262 0.2272 0.2272 deducting non-recurring gains and losses 3) Differences in accounting data under domestic and overseas accounting standards Not applicable. Chapter 12 Documents for Reference 1. Financial Statements signed by the legal representative, chief accountant and accounting manager and sealed by the Company. 2. Audit report signed by certified public attantants and sealed by the accounting firm. 3. Original documentation and announcements published by the Company in the newspaper appointed by CSRC within the report period. Shang Gong Group Co., Ltd. Chairman of Board of Directors: Zhang Min April 12, 2019 121 / 121