Yantai Changyu Pioneer Wine Co. Ltd. 2012 Annual Report Yantai Changyu Pioneer Wine Co. Ltd. 2012 Annual Report 2013-Ding01 April 19, 2013 1 Yantai Changyu Pioneer Wine Co. Ltd. 2012 Annual Report I. Important Notice, Contents and Definition The Board of Directors , the Board of Supervisors , directors, supervisors & senior management of the Company collectively and individually accept full responsibility for the truthfulness,accuracy and completeness of the information contained in this report and confirm that to the best of their knowledge and belief there are no unfaithful facts, significant omissions or misleading statements. Mr. Sun Liqiang (Chairman of the Company), Mr. Leng Bin (Chief Financial Officer) and Mr. Jiang Jianxun (Financial Manager) assure the truthfulness, accuracy and completeness of the financial report in the annual report. No director, supervisor or senior manager declares to have dissidence or to be unable to guarantee the truthfulness, accuracy and completeness of the information contained in this report. All the directors have personally attended the Board of Directors’ meeting for this report. The Company’s preliminary scheme of profit distribution deliberated and passed by the board of the directors is as following: “ Based on the Company’s total shares in Dec 31, 2012,we plan to pay CNY 11.00 in cash as dividends for every 10 shares (including tax) to the Company’s all stockholders, present 0 share and capital reserve will not be transferred to equity. ” The prospective statements mentioned in the report like those in relation to the future plan are made out mostly on the basis of the Company’s general comprehension of Chinese economic development trend and discretion of the sector’ situation by the Company’s accumulated experience in the past years. Although there are quite a lot of uncertainties in the statements, they don’t affect the Company’ substantial promises to the investors who are requested to pay attention to risks and make decisions prudently. This report is worked out in bilingual version in two sets: Chinese and English, In case of understanding discrepancy, the original version in Chinese shall prevail. 2 Yantai Changyu Pioneer Wine Co. Ltd. 2012 Annual Report Contents 2012 Annual Report ..........................................................................................................................1 I、Important Notice, Contents and Definition ...............................................................................2 II、Brief Introduction for the Company ........................................................................................6 III、Summary of Financial Datas and Indicators .........................................................................8 IV、Board of Directors’Report .....................................................................................................10 V、Major Issues ..............................................................................................................................31 VI、Changes in Shares and the Shareholders’ Situation ...........................................................38 VII、Situation for Directors, Supervisors, Senior Management and Staffs .............................45 VIII、Corporate Governance ........................................................................................................53 IX、Internal Control ......................................................................................................................61 X、Financial Report .......................................................................................................................64 XI、Reference Documents ...........................................................................................................179 3 Yantai Changyu Pioneer Wine Co. Ltd. 2012 Annual Report Definition Definition Item Refers to Definition Content Company/The Company Refers to Yantai Changyu Pioneer Wine Co. Ltd. Changyu Group/Controlling Refers to Yantai Changyu Group Co. Ltd. Shareholder CSRC Refers to China Securities Regulatory Commission SSE Refers to Shenzhen Stock Exchange CNY Refers to Chinese Yuan 4 Yantai Changyu Pioneer Wine Co. Ltd. 2012 Annual Report Significant Risk Warning Companies may face significant risks in production and operation, please refer to “expectation for the Company’s future development” sector of “5. Risks likely to occur” part in the chapter four named “Board of Directors’ Report”. We advise investors to read those carefully, please pay attention to the investment risks. 5 Yantai Changyu Pioneer Wine Co. Ltd. 2012 Annual Report II、Brief Introduction for the Company 1. Company’s information Abbreviation of the Code number of the Changyu A、Changyu B 000869、200869 Shares: Shares Abbreviation of the Shares after alteration (if have) Place of listing of the Shenzhen Stock Exchange Shares Legal Name in 烟台张裕葡萄酿酒股份有限公司 Chinese Abbreviation of 张裕 Chinese name Legal Name in English YANTAI CHANGYU PIONEER WINE COMPANY LIMITED Abbreviation of CHANGYU English name Legal Representative Mr. Sun Liqiang Registered Address 56 Dama Road, Yantai, Shandong, China Postal Code 264000 Office Address 56 Dama Road, Yantai, Shandong, China Postal Code 264000 Website http://www.changyu.com.cn E-mail webmaster@changyu.com.cn 2. Contact person and information Secretary to the Board of Authorized Representative of Directors the Securities Affairs Name Mr. Qu Weimin Mr. Li Tingguo 56 Dama Road, Yantai, 56 Dama Road, Yantai, Address Shandong, China Shandong, China Tel 0086-535-6633658 0086-535-6633656 Fax 0086-535-6633639 0086-535-6633639 E-mail quwm@changyu.com.cn stock@changyu.com.cn 3、Information disclosure and filing Location The newspapers in which the “China Securities Newspaper” , “Securities Times” and Company’s information is disclosed “Hong Kong Commercial Daily” Web Site assigned by CSRC to carry http://www.cninfo.com.cn the annual report Filing Location BOD Office of the Company 6 Yantai Changyu Pioneer Wine Co. Ltd. 2012 Annual Report 4、Registration changes Registration Registration Business Organizatio Tax No. Date Place License No. n Code State Taxation the Business Bureau Administration First September 18th, 37060216500338- 26710003- Bureau of 3700001806012 registration 1997 1;Local Taxation 5 Shandong Bureau Province 370601267100035 State Taxation the Business Bureau Registration at st Administration 1 August, 3700000180601 37060216500338- 26710003- the end of the Bureau of 2012 22 1;Local Taxation 5 report period Shandong Bureau Province 370601267100035 On 18th September 1997 the Company’s operating scope was the production, processing and sale of wine, spirits, medicated wine, fruit wine, non-alcohol beverages, fruit jam, packing materials and products and winemaking machines. On 17th April 2008, after the deliberation of 2007 shareholders’ Changes for the main business meeting, the Company’s operating scope is amended to “the Company, legally registered, is in business of production, of the Company since it was processing and sale of wine, spirits, medicated wine, fruit wine, listed non-alcohol beverages, fruit jam, packing materials and products and winemaking machines; licensed import and export.” (if have) On 12th May 2010, after the deliberation of 2009 shareholders’ meeting, the Company revised its operating scope to “the Company, legally registered, is in business of production, processing and sale of wine, spirits, medicated wine, fruit wine, non-alcohol beverages, fruit jam, packing materials and products and winemaking machines; licensed import and export; external investments according to governmental policies. Changes for all previous No. controlling shareholders 5、Other documents The accountant appointed by the Company Name Ernst & Young Hua Ming Certified Public Accounts Co. Ltd. Address Floor 17, Ernst & Young Tower, Oriental Plaza, Beijing, the PRC Name of signatory Zhang Mingyi, Ma Yue Accountants The sponsor agency the Company appointed to perform the duty of continuous supervision during the report period □Available V Not available The financial adviser the Company appointed to perform the duty of continuous supervision during the report period □Available V Not available 7 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. III、Summary of Financial Datas and Indicators 1、Key accounting data and financial indicators Whether the Company makes retroactive adjustments or restates the accounting data of previous fiscal years because of changes of accounting policy and/or accounting errors. □ Yes V No Unit:CNY More or less than Item 2012 2011 2010 last year(%) Business revenue 5,643,530,553.00 6,027,549,212.00 -6.37% 4,982,943,397.00 Net profit attributed to the shareholders of the listed 1,700,928,117.00 1,907,208,732.00 -10.82% 1,434,218,328.00 company Net profit attributed to the shareholders of the listed company after deducting 1,675,956,428.00 1,835,054,874.00 -8.67% 1,375,218,809.00 the irregular profit and loss Net cash flows from the 1,302,041,322.00 1,505,722,107.00 -13.53% 1,289,922,042.00 operating activities Basic earnings per share 2.48 2.78 -10.79% 2.09 Diluted earnings per share 2.48 2.78 -10.79% 2.09 Return on net assets 31.13% 43.18% -12.05% 41.57% More or less than Dec. 31th 2012 Dec. 31th 2011 Dec. 31th 2010 last year(%) Total assets 8,123,134,580.00 7,295,944,221.00 11.34% 5,983,377,253.00 Net Assets attributed to the shareholders of the listed company 5,913,104,178.00 5,013,641,661.00 17.94% 3,839,708,341.00 (Equity attributed to the shareholders of the listed company 2. Details of irregular profit and loss Unit:CNY Amount in Amount in Amount in Item Explaination 2012 2011 2010 Gain on disposal of non-current assets, including the reversal of -1,940,260.00 2,735,871.00 -436,922.00 accrued impairment provision Tax refund or exemption that is either non-recurring or without 10,038,943.00 5,354,701.00 proper approval Government grants credited in 23,393,756.00 4,701,553.00 17,289,537.00 profit and loss (except for those 8 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. recurring government grants that are closely related to the entity's operation, in line with related regulations and have proper basis of calculation) Gains on fair value change and disposal of trading financial assets and financial liabilities, 52,122.00 900,000.00 except for those from hedgings that are closely related to the entity's principal operations Other non-recurring gains and losses defined in gains and loss 10,953,355.00 4,282,169.00 201,044.00 items Reversal of unpaid advertising 74,072,580.00 55,718,673.00 fee Income tax effect 7,435,162.00 23,729,380.00 19,756,758.00 Minority interest impact (after 270,756.00 tax) Total 24,971,689.00 72,153,858.00 58,999,519.00 -- The reasons shall be made clear and definitely as to the non-recurring profit and loss that the Company has defined by virtue of the Explanatory Announcement on Public Company’s Information Disclosure No.1 - Non-recurring Profit and Loss and as to regarding the non-recurring profit and loss as recurrent profit and loss as specified in the Explanatory Announcement on Public Company’s Information Disclosure No.1 - Non-recurring Profit and Loss. □Available V Not availabl 9 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. IV、Board of Directors’ Report 1、Summarization In 2012, the cumulative effects of slowdown of domestic economic growth and overwhelming flow of foreign wine into the Chinese market in the previous years as well as the worse competition in the domestic wine sector brought about strong pressure on the company’s sustainable growth. Facing quite a lot of external disadvantages, the company consistently aimed at the market, timely adjusted the marketing tactics, perfected the marketing channels and optimized the product structure so that the company’s operating result didn’t fluctuate obviously. In the year, the company realized business revenue of CNY 5643.53 million, 6.37% down over the previous year, and realized a net profit of CNY 1700.93 million, 10.82% down over the previous year. 2、Analysis to main business (1) Summarization Description Increase or Cause of major changes decrease of the end of the period over the end of last year Operating revenue -6.37%Mainly because of decline of sales volume Operating cost -2.66%Mainly because of decline of sales volume Sales expense -3.61%Mainly because of reduction of advertising expense in 2012 Management expense 8.32%Mainly because of increase of landscaping expense in 2012 over the year before R&D investment 8.28%Mainly because of increase of expenses on research and development in2012 Financial expense 55.24%Mainly because of reduction of interest income due to decrease of time deposit balance and decline of interest rate Net amount of cash flow -13.53%Mainly because of year-on-year decline of operating income generated in operating activities that makes inflow of cash in operating activities decrease。 Net amount of cash flow 58.80%Mainly because of year-on-year increase of recovering the generated in investment activities time deposits of over three months that makes inflow of cash in investment activities rise。 Net amount of cash flow -6.52%Mainly because of year-on-year increase of cash paid for generated in capital-raising 2011 profit distribution。 activities During the report period, the Company went on with carrying out the strategy of taking wine as pillar product while developing all kinds of products, giving priority to middle and high-grade products in the course of mass production, while trying to hold on the favorable position in self-produced wine, extended the brandy market and sped up the import of foreign wine to make them become the Company’s new sources of revenue growth. But under the critical circumstances of slowdown of inland economic growth, overall 10 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. restriction of consumption with public funds as well as increase of sales of imported wine, fiercely competitive Chinese wine market and media’s negative reports, the business revenue the Company realized in 2012 was CNY 5643.53 million, not reaching the lowest goal of CNY 6600 million the company initially set for 2012. Facing the severe market challenges, the Company mainly fulfilled the following tasks: Firstly, in adaptation to the changes of market environment, the Company adjusted and improved the marketing system and corresponding measures, established Wine Sales Company and Brandy Sales Company, which, together with Changyu International Pioneer Company, form a setup of subdivided and systematic sales, rationally set up a channel system, strengthened management of marketing channels, established a mart direct supply management company responsible to promote direct supply to big emporiums all over the country. In order to find efficacious solutions to the market changes as soon as possible, the Company strengthened market research and study, adjusted the sale incentive policy, and further defined the measures on acceleration of domestic brandy market exploitation. Secondly, tighten the product quality control and strengthen the core competitiveness of the Company’s products. By means of first-hand investigation into and study on the world top wine brands, the Company found out the differences through comparison, set the quality improvement target and worked out corresponding measures. The Company successfully fulfilled the plan of grape purchase in the year, paid more attention to control and test of all quality indicators on all links from grape purchase to product delivery, making product quality increasingly improved. The Company’s 2 select products or KoYac XO brandy and KoYac VSOP brandy were awarded Silver Best in Class and Silver Medal respectively in 2011 London International Wine and Liquor Contest, becoming only award-winning products from Asia, and the Company’s KoYac XO brandy was awarded Silver Medal in 2012 Brussels Wine-tasting Contest, also the only award-winning product from Asia. Thirdly, steadily push forward construction of the investment projects and properly enlarge the production capacity of fast-sellers. In the light of market trend, the Company readjusted the investment schedule in time, steadily push forward construction of 13 investment projects that had been confirmed at the beginning of the year, stabilized the vineyard area, decided to enlarge production capacity gradually in the future 3-5 years, optimized the product structure and adapted itself to market changes all the time. Fourthly, improve financial management, beef up in-house auditing and prevent operating risks. The Company has bettered the financial accounting and supervisory system of bulk wine and vineyards, standardized the analytic processes of financial examination, economic operation, budget compilation and management system by wine assortments and grades, finished the financial accounting of bulk wine management and bulk wine cost of the production system and the auditing of the economic responsibilities of all units in the production and sales systems and punished related blamable persons. Fifthly, improve the level of scientific research and increase innovation to promote the development of the Company. During the report period, the company finished the topics such as application for setting up a laboratory jointly sponsored by the central and local governments, the projects of “Study on Modern Viniculture of Wine Grapes and Compilation of Related Standards” and “Study on Characteristic Comparison of Yeast Community in Chinese Quality Wine Grape Areas” that are financially supported by the Department of Finance of Shandong Province with special innovation fund, totally acquiring a financial aid of CNY 3.35 million, applied for 3 invention patents and attained 1 invention patent authorization, which further strengthened the Company’s technical innovation ability and spread the Company’s branding influence both at home and abroad. On the ranking list of World’s 11 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Most Admired Wine Brand released by UK’s Drinks International in March 2013, Changyu became one of 50 biggest wine brands for the first time, being one and only selected brand in the Asian Region. The cause of difference that the company’s actual operating result is 20% lower or higher than the already disclosed annual profiting estimates. □ available √ Not available (2)、Incomes Explanation During the report period, the business revenue from the Company’s self-produced wine is CNY4551.39 million, that from brandy is CNY 859.01 million and that from imported wine is CNY 68.90 million, accounting for 81.91%, 15.46% and 1.24% respectively in 2012. Whether the Company’s revenue from sales of physical goods is more than labor income √ Yes □ No Sector Description 2012(ton) 2011(ton) Increase or decrease (%) Wine Sales volume 81,677 89,541 -8.78% Brandy Sales volume 40,659 42,414 -4.13% Explanation on the causes of over 30% changes of the related comparison data. □ available √ Not available The company’s big orders in hand □ available √ Not available Major changes or adjustments of the Company’s products or services during the report period. □ available √ Not available The Company’s important customers The total sales amount of the top five customers(CNY) 141,406,556 Total sales of the top five customers accounting for the 2.51% proportion in total sales for the year(%) Information on the Company’s 5 biggest customers √available □Not available Sales Amount Proportion in Total Sales for No. Customer Name (CNY) the year(%) 1 Kangcheng Investment (China) Co., Ltd. 35,801,700 0.63% 2 Jinan Guidunyimou trading Co., Ltd. 30,283,948 0.54% 3 Nanjing Xiyuhong trading Co., Ltd 26,283,531 0.47% 4 Songzhou Huimingxin bottle shop Co., Ltd. 24,706,004 0.44% 5 Huian County Chongwulongxing Co., Ltd. 24,331,373 0.43% Total — 141,406,556 2.51% 12 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. (3) Costs Sector category Unit: CNY 2012 2011 Proportion in Proportion in Sector Description Increase or Amount the operating Amount the operating decrease(%) cost (%) cost (%) Finished 690,952,316 51.02% 682,193,238 49.61% 1.41% liquor Wine and Packing alcoholic 504,132,271 37.22% 525,064,769 38.18% -0.96% material beverages Wages 58,407,065 4.31% 60,190,704 4.38% -0.07% Production 100,877,948 7.45% 107,643,380 7.83% -0.38% Product category Unit: CNY 2012 2011 Proportion Proportion in in the Increase or Product Description Amount Amount the operating decrease(%) operating cost (%) cost (%) Finished 478,009,218 50.37% 500,309,233 48.55% 1.82% wine Packing 347,191,316 36.58% 401,224,019 38.94% -2.36% Wine material Wages 42,493,417 4.48% 40,241,381 3.91% 0.57% Production 81,393,397 8.58% 88,708,905 8.61% -0.03% cost Finished 175,239,406 54.23% 160,018,216 55.80% -1.57% wine Packing 119,144,258 36.87% 98,781,708 34.44% 2.43% Brandy material Wages 12,990,167 4.02% 12,660,896 4.41% -0.39% Production 15,768,958 4.88% 15,332,426 5.35% -0.47% cost 13 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Note: The cost of the wine that the company has imported is not included in the cost disclosure scope because there is no way to obtain the data of cost structure from suppliers. The company’s important suppliers Information on the company’s 5 biggest suppliers √available □Not available Purchase Amount Proportion in Total Purchase No. Supplier Name for the year (CNY) (%) 1 Yantai Shenma Packaging Co.,Ltd 206,438,932 11.52% 2 Yantai Changyu Glass Co.,Ltd 161,503,568 9.01% Xinjiang Tianyu Pioneer Wine 3 57,790,735 3.22% Co.,Ltd 4 Yantai Changyu Printing Co.,Ltd 49,419,958 2.76% Liquan sales of Shandong Yantai 5 38,960,000 2.17% Winery Co.,Ltd (4) Expenses Finance costs,the financial income reduced 55.24% in 2012, due to the decrease in time deposits and deposit interest rate. (5) R&D expenditure R&D expenditure has year-on-year growth of 8.28%, due to the increase expenses on technology research and development in 2012 14 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. (6) Cash flow Unit: CNY Year-on-year Item 2012 2011 increase or decrease (%) Subtotal of cash inflow in 6,830,238,129 8,143,461,018 -16.13% operating activities Subtotal of cash outflow in 5,528,196,807 6,637,738,911 -16.72% operating activities Net amount of cash flow 1,302,041,322 1,505,722,107 -13.53% generated in operating activities Subtotal of cash inflow in 1,322,520,366 276,587,627 378.16% investment activities Subtotal of cash outflow in 1,532,689,645 786,725,056 94.82% investment activities Net amount of cash flow -210,169,279 -510,137,429 58.80% generated in investment activities Subtotal of cash inflow in capital- 100,062,522 190,371 52461.85% raising activities Subtotal of cash outflow in 886,158,412 738,192,000 20.04% capital-raising activities Net amount of cash flow generated in capital-raising -786,095,890 -738,001,629 -6.52% activities Net increase of cash and cash 305,776,153 257,583,049 18.71% equivalents Explanation on the causes of over 30% year-on-year change of the related data. √ Available □Not available 1)The 378.16% minor total increase of the cash inflow in the investment activities is mainly because of significant increase of recovering the time deposits of over three months. 2)The 94.82% minor total increase of the cash outflow in the investment activities is mainly because of significant increase of buying the time deposits of over three months. 15 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 3)The 52461.85% minor total increase of the cash inflow in the capital-raising activities is mainly because of significant increase of receiving the other cash relating to the capital-raising activities. Explanation on the causes of the major differences in between the cash inflow in the company’s operating activities and the years’ net profit during the report period. √ Available □Not available The main cause of the obvious differences CNY-398,886,795 between the net amount of cash flow CNY 1,302,041,322 generated in the Company’s operating activities and the company’s current net profit CNY 1,700,928,117 is because of more cash the Company defrayed as expenses of taxation during the report period. 3、Structure of main businesses The table below sets out the details of the business operations which take up over 10% of the main business income or operating profit, and its industry , main product, region situation: Unit: CNY Increase or Increase or Increase or decrease of decrease of decrease of Operating Operating Gross profit operating operating gross profit revenue cost (%) revenue over cost over the over the year the year year before before (%) before (%) (%) Sector Wine and alcoholic 5,556,442,502 1,359,873,644 75.53% -6.46% -2.66% -0.96% beverages Product Wine 4,551,386,761 949,087,383 79.15% -8.37% -7.90% -0.11% Brandy 859,005,714 323,142,789 62.38% 13.40% 12.67% 0.24% Region Domestic 5,539,069,119 135,021,8367 75.62% -6.45% -2.67% -0.95% In case the Company’s statistical calibre of main business data is adjusted during the report period, the main business data adjusted at the end of the report period will be taken for the recent one year. 16 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. □ Avaliable √ Not avaliable 4、Analysis to assets and liabilities (1)、Major changes of assets Unit: CNY At the end of 2012 At the end of 2011 Proportio Proportio Proporti on n in the n in the increase Explanation on major changes Amount Amount total total or decrease assets (%) assets (%) Mainly because of increase of cash outflow for 2011 profit Monetary funds 2,227,470,828 27.42% 2,532,967,197 34.72% -7.30% distribution and capital expenditure。 Receivables 135,217,384 1.66% 126,906,526 1.74% -0.08% No major change Mainly because the stock up prepared at the end of 2012 for Stock 2,268,621,441 27.93% 1,755,964,582 24.07% 3.86% 2013 Spring Festival which comes later than usual years has not been sent out。 Long-term equity 5,000,000 0.06% 5,000,000 0.07% -0.01% No major change investments Fixed assets 1,823,983,721 22.45% 1,609,111,868 22.05% 0.40% No major change Mainly because of increase of investments in 2011 new Construction in 832,828,689 10.25% 406,353,081 5.57% 4.68% chateau projects and renovation progress of production lines。 17 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. (2)、Major changes of liabilities Unit: CNY 2012 2011 Proportio Proportio Proportio n Explanation on major n in the n in the increase Amount Amount changes total total or assets (%) assets (%) decrease Short-term 0 0% 0 0% 0% 0 borrowings Long-term 0 0% 0 0% 0% 0 borrowings (3)、Assets and liabilities calculated by fair value Unit: CNY Gain or Changes of Amount at loss from accumulat Purchase the Impairme Sale amount Amount at fair value ed fair amount Description beginning nt during during the end of the change value during the of the the period theperiod period during the calculated period period period in equity Financial assets 1. Financial assets at fair value through profit or loss 0 0 0 0 0 0 0 (excluding derivative financial assets) 2. Derivative 0 0 0 0 0 0 0 financial assets 3. Available- for-sale 0 0 0 0 0 0 0 financial assets Subtotal of 0 0 0 0 0 0 0 financial assets Investment 0 0 0 0 0 0 0 property Productive biological 42,355,441 0 0 795,539 18,573,749 20,452,071 39,681,580 assets Others 0 0 Total for the 42,355,441 0 0 795,539 18,573,749 20,452,071 39,681,580 above Financial 0 0 liabilities Whether the measurement attribute of the company’s main assets changes greatly. □ Yes √ No 18 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 5. Analysis to core competitiveness Compared with the participants in the arena of the Chinese wine sector, we believe that the company is provided with the following advantages: Firstly, the Company has been enjoying a well-known wine brand since 130-odd years, both “Changyu” and “Jiebaina” are Chinese famous trademarks that have strong influence and good reputation. Secondly, the Company has set up a nationwide marketing network, formed a “three-level” marketing network system mainly composed of the company’s salesmen and dealers, possessed the strong marketing ability and market exploitation ability. Thirdly, the Company has already had strong research strength and a product R&D system, owned a one and only “State-level Wine R&D Center”, made mastery of advanced winemaking technology and production processes, been powerful enough in product innovation and established a perfect quality control system. Fourthly, the Company is in possession of a lot of grape-growing bases to meet its future development, having developed a great deal of vineyards in the most suitable areas for wine grape growing such as in Shandong, Ningxia, Xinjiang, Liaoning, Hebei and Sha’anxi, whose scales and structures have generally met the company’s needs for development. Fifthly, the Company has a great variety of products composed of all grades, its wine and brandy of over 100 sorts can meet different consumers’ demands. The Company has taken the lead in the domestic wine sector through rapid development in the past 10-odd years and has possessed comparative superiority in the future competition. All in all, the Company has built up a strong core competitive edge and obtained and maintained a relatively dominant position in the long-term market competition. 19 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 6、Analysis to investments (1) Use of raised capital The Company made a public offering of 32 million A Shares for capital increase in October of 2000, and received net proceeds of CNY 613.46 million. By end of report period, the Company actually invested all proceeds in same projects as disclosed in the Prospectus, and there was no any change on investment project. Except those projects for improvement of intermediate procedures on production and sales which were difficult to rationally confirm the benefit, other productive projects all made good benefits. (2) Analysis to the major subsidiaries and joint stock companies Information about the major subsidiaries and joint stock companies Business Operating Company Main products or Registered Total assets Net asset Net profit Company name Industry revenue profit type services capital (CNY) (CNY) (CNY) (CNY) (CNY) Yantai Changyu-Castle To research, produce Wine Chateau Co. LTD. Wine and and sell wine and USD 5 Subsidiary alcoholic 258,210,665 91,483,111 161,160,742 16,855,216 12,405,610 sparkling wine as well million beverages industry as the tourism service Langfang Castel- Wine and Changyu Wine Co. LTD. Joint stock To produce and sell USD alcoholic wine 64,066,550 46,826,404 5,702,842 -2,883,512 -3,031,521 company 6,108,818 beverages industry Yantai Kylin Packaging Subsidiary To produce and sell CNY 15.41 Co. LTD. Packaging industry 72,942,826 46,102,666 90,841,717 8,883,395 6,813,161 packaging material million Chateau Changyu AFIP Subsidiary Wine and To research, produce Global CNY 110 alcoholic and sell brandy and 226,642,016 150,708,626 230,430,743 9,459,188 9,579,524 million beverages industry wine Chateau Liaoning Subsidiary Wine and Changyu Ice Wine Co., CNY 26.30 alcoholic To produce ice wine 87,695,376 38,110,795 37,988,809 1,443,315 1,100,051 Ltd. million beverages industry Xinjiang Tianzhu Winery Subsidiary Wine and To plant grape, Co., Ltd. produce and sell grape CNY 75 alcoholic juice, bulk wine and 190,782,029 162,261,994 117,233,903 7,020,380 6,823,069 million beverages industry fruit wine 20 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Explanation on the major subsidiaries and joint stock companies (comparing with the same period of last year) The total asset of Yantai Changyu Castel Chateau Co. Ltd. is increased 27.93%, mainly because it was drawn from the headquarters floating capital, fixed asset and the growth of inventory; the net asset is decreased 15.66%, mainly because of the profit distribution for 2011; net profit is decreased 70.19%, mainly because the decline of sales quantity and the growth of operation cost,. The total asset, net asset and net profit of Langfang Castel-Changyu Wine Co. is increased seperately 82.73%, 55.41% and -566.39%, mainly because its original bottling line was stopped for reformation which influenced the production and operation. The net profit of Yantai Kylin Packaging Co. Ltd. is increased 612.27%, mainly because of the reduction of operation cost and growth of gross profit margin. The net profit of Chateau Beijing Changyu Afip Global is decreased 59.20%, mainly because of the growth on operation cost influenced by the development of service on hotel accommodation and catering. The net profit of Chateau Liaoning Changyu Ice Wine Co., Ltd. is decreased 68.02%, mainly because of the reduction of operating income and the growth of operation cost. The net profit of Xinjiang Tianzhu Winery Co., Ltd. is decreased 55.14%, mainly because of the reduction of operating income and gross profit margin. Acquisition and disposal of subsidiaries during the report period □ Available √ Not available 21 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. (3)、Important projects financed with non-raised capital Unit: CNY’0000 Actual Total investment Investment Project Project Project Name Investmen until the end in the year progress benefits t of the report period Construction of Tinlot Chateau 15,240 3,200 7,800 50% 0 Construction of Changyu Reina Chateau 31,074 9,500 25,500 95% 0 Sha'anxi Construction of Chateau Moser XV 24,415 5,774 23,000 95% 0 Ningxia Construction of Changyu Baron Balboa 23,343 7,200 23,990 95% 0 Chateau XinJiang Already be in Expansion of Langfang Changyu 1,973 1,744 1,744 100% operation Wine Company’s Production Capacity and generate revenue Procurement of Oak Barrels 11,333 9,679 9,679 98% 0 Construction of Changyu International 65,331 3,600 3,600 5% 0 Wine City blending and cooling Center Construction of Changyu International 46,736 1,600 1,600 3% 0 Wine City Bottling Center Construction of Changyu International 12,095 1,100 1,100 9% 0 Wine City Logistics Center Construction of Changyu Vine and 20,000 0 0 0% 0 Wine Research Institute Construction of Treasure Wine Chateau 14,545 345 345 2% 0 Construction of Vineyards 9,140 908 908 10% 0 Investment in landscaping 5,000 0 0 0% 0 Total 280,225 44,650 99,266 -- -- 22 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Explanation on the major projects with non-raised capital The investment amount in the table is the actually paid amount while the completed work quantity is used in the “projects under construction” in the annex to the financial statement of this report. So, there may be differences between the two. The progress of the projects is as follows: 1. The project of Construction of Tinlot Chateau has not been completed as scheduled because of adjustments to the design proposal of the interior layout. 2. The main building and supporting facilities of the project of Construction of Changyu Reina Chateau Sha'anxi have almost come to an end, the production equipment has been installed and tested and the chateau will be soon put into operation. 3. The project of Construction of Chateau Moser XV Ningxia have been completed and put into operation. 4. The main building and supporting facilities of the project of Construction of Changyu Baron Balboa Chateau XinJiang have almost come to an end, the production equipment has been installed and tested and the chateau will be soon put into operation. 5.The whole renovation and construction of Expansion of Langfang Changyu Wine Company’s Production Capacity have been completed and the production license renewed. The production has come into operation. 6. In the barrel procurement plan 13,800 barrels have been purchased, satisfactorily meeting the company’s needs for production. 7. Both the commencement date and the engineering progress of the project of Construction of Changyu International Wine City blending and cooling Center are affected because of postponement of the design proposals and more administrative examinations. The project has now formally started, the site leveling and some masonry of retaining walls have been finished. 8. Both the commencement date and the engineering progress of the project of Construction of Changyu International Wine City Bottling Center are affected because of more administrative examinations. The project has now started; the site leveling and some masonry of retaining walls have been finished. 9. Both the commencement date and the engineering progress of the project of Construction of Changyu International Wine City Logistics Center are affected because of more administrative examinations. The project has now started, the site leveling; backfilling and compacting have been finished. 10. The project of Construction of Changyu Vine and Wine Research Institute has not been started yet because of adjustments to the design plan that makes the approval processes delayed and the shop drawings not finished on schedule. The project has not started yet. 11. The project of Construction of Treasure Wine Chateau is affected because of postponement of land requisition. The project has now started, the site leveling and some infrastructures have been finished. 12. The project of Construction of Vineyards is affected because of postponement of land requisition. So, 2012 planting plan has not been finished. 13. The landscaping investment is affected because of postponement of land requisition. So, 2012 landscaping plan has not been finished. 23 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 7. Expectation for the Company’s future development On the basis of our limited experience and special skills, we make the following estimation of the wine sector and the Company’s future development. (1) The sector competition setup and development trend Affected by swift flow of main winemaking countries’ products into Chinese market and change of consumption environment and consumption main structure, the Chinese wine sector began its structural adjustment in 2012 and the market competition will evolve from domestic competition to global competition, from individual competition to whole industry chain competition, and the market competition will be severer and severer. But in the long run, people’s pursuits to health and fashion life thanks to increase of their incomes will ceaselessly stimulate their demand for quality wine, that’s to say, the Chinese wine sector still has huge potential to tap. In such a case of long-term coexistence of opportunities and challenges, only those enterprises that possess strong branding influence and marketing competence, can timely get the run of the consumers’ demands and provide products of high performance-to-price ratio will be the final winners of competition and form a new structure of the future Chinese wine market. (2) The Company’s development strategy The Company will continue to adhere to the strategy of taking wine as pillar product while developing all kinds of products, giving priority to middle and high-grade products in the course of mass production, and make efforts to provide consumers with a rich variety of products in a competitive price. (3) Management plan in a new year In 2013, the Company will try its best to realize a business revenue of not less than CNY 6 billion and curb the main operating costs and three period charges below CNY 3.4 billion. (4) The measures the company will take The Company will emphasize the following aspects: Firstly, continue to reinforce construction of distribution channels and outlets and ensure overall development of all sorts of alcoholic liquors. The Company will go on with its efforts in promotion of its self-produced wine, accelerate the product positioning in three chateaus in the west so as finally to form a market scale as early as possible, further rationalize the structures of middle and low-grade products, vigorously develop backbone assortments, enlarge sales volume, substantially push forward construction of three kinds of marketing channels respectively leading to middle and high-grade market, middle and low-grade market and county market, make better use of all resources in terms of brandy and imported wine, perfect the sales system of all sorts of alcoholic liquors, extend market coverage and product popularity, and realize harmonious development of all sorts of alcoholic liquors. Secondly, adapt to the changes in terms of market demand and actively develop new marketing channels. The Company will, on the basis of doing better in two traditional marketing channels respectively leading to marts and hotels, make great efforts to build new channels connecting to electronic business, Pioneer International, monopoly shops and group consumers, and activate a new market growth source. Thirdly, tighten control of expenses and reduce operating cost. The Company will tighten supervision and control of bulk wine cost, packing cost, wages, fuel and power cost, production loss, fund use cost, advertising cost, warehousing cost, transport cost and other outlays, further specify the assessment details, perfect the pricing mechanism of main raw materials, simplify product packing, accelerate fund turnover, try to save energy and reduce consumption, and cut down all costs and 24 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. expenses. Besides, the Company will speed up construction of SAP project in order to upgrade the Company’s management level and strengthen its governance ability. Fourthly, steadily push forward construction of investment projects, optimize the Company’s production structure and enlarge production capacity. The Company will, in the light of future development requirements, plan and actualize investment projects, optimize production structure in time, enrich product assortments, perfect production supporting facilities, enlarge production capacity and improve product quality to meet the market requirements. Fifthly, reinforce development of vineyards and grape quality supervision and control, successfully fulfill grape procurement in the year, enhance technological level and improve product quality all the time. The Company will adopt the classified management means at the vineyards, substantially put the mode of winemakers’ vineyard follow-up management into practice, ensure the winemakers to fulfill the course management and quality control all along from grape growing to bulk wine production, generalize the mode of mechanized farming, further reduce grape-growing cost, increase growers’ earnings, conscientiously do well in construction of self-run vineyards and chateau-owned vineyards in Yantai, take the lead in mechanized farming in the self-run vineyards in Yantai in order to lower labor cost, perfect the full-course management and pricing mechanism of grape procurement, incessantly improve the key technologies like aging in oak barrel, use of oak products and bottle storing, and better product’s inherent quality. (5) Risks likely to occur A) Risks in price fluctuation of raw materials Grapes are the Company’s main raw materials. The grape’s yield and quality are affected to a certain extent by the natural factors such as drought, wind, rain, frost and snow. These force majeure factors greatly influence the quantity and price of the grapes this Company orders and add the uncertainty to the Company’s production and operation. Therefore, the Company will lower the risks that are likely to affect grape quality and result in price fluctuation by means of expanding the self-run vineyards, strengthening the vineyard management and optimizing the layout of vineyards. B) Risks in uncertainty of market input and output To cope with the cutthroat market competition and to meet the needs for market development, the Company has input more and more capital in the market and the sales expense has taken up a higher percentage point in the business revenue. The input-output ratio will affect the Company’s operating results to a great extent and the risk that some investments may not reach the expectations is likely to occur. Therefore, the Company will strengthen market research and analysis, enhance market forecast accuracy and continue to perfect the input-output evaluation system to ensure the investments in market to be satisfactory as expected. C) Risks in product transport The Company’s products are fragile and sent to different places all over the world, mostly by sea, railway and expressway. The peak season of sales is usually in cold winter and close to the spring festival when market has a great demand. At that time, the natural and human factors such as serious shortage of transport capacity resulting from busy flow of people and goods, wind, snow, freezing as well as traffic accidents make the transport departments difficult to send products to markets in time and safely. As a result, it makes this Company have to face the risks of missing the peak season of sales. Therefore, the Company will adopt all methods possible like making precise sales prediction and well designed connection of production and sales, reasonably arranging production and transport means and making use of more available warehouses in different places to lower these kinds of risks. 25 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. D) Risks in investment faults According to the Company’s plan, the company has a lot of investment projects in a couple of years, the investment amount is big, the construction period of some projects is long and there are more unpredictable factors. Although the Company’s decision makers have made full study and scientific decisions strictly in accordance with the Company’s regulations, some projects may still be affected by various uncertainties that consequently make the investment amount exceed the budget or make the projects fail to realize the desired earnings on investment. 8、Compared with the previous year’s financial report, explaination for the changes of the consolidated statements scope. The consolidated statements scope is in consistency with the previous year, except the new set-up companies in 2012 Ning Xia Changyu Trade Company, Shanxi Changyu Reina Wine Sales Company and Penglai Changyu Wine Sales Company, which has been included in the scope of consolidation. 9. The Company’s profit and dividend distribution 1) Promulgation, implementation or adjustment of profit distribution policies, especially the cash dividend policy during the report period. According to the auditing result made by Ernst & Young Hua Ming Certified Public Accounts Co. Ltd., the net profit that the Company made in 2011 was CNY 1,907.21 million. After deducting the minority shareholders’ profit and loss, the net profit belong to the Company’s shareholders is CNY1,907.21 million. After the deliberation of the Company’s Board of Directors and the Shareholders’ Meeting, the profit plan of 2011 is as following: Because the left amount of legal earned surplus reserve exceeds 50% of registered capital, while making profit distribution, the legal earned surplus reserve will be not drawn. Based on the Company’s 527.28 million shares at total up to December 31, 2011, we plan to pay CNY 1.52 in cash as dividends for every one share (including tax) to the Company’s all stockholders, totaling up to CNY 801.4656 million and we plan to give three shares as stock dividends for every ten shares or 158.184 million shares totally to the Company’s all stockholders. This plan is in line with the provisions of the Company’s Articles of Association in 2011. On June 9, 2012, the Company released the Implementation Announcement of 2011 Annual Equity Distribution, determining that the share registration day of A Stock was on June 15, 2012 and the ex- dividend day was on June 18, 2012, the last trading day of B Stock was on June 15, 2012, the share registration day was on June 20, 2012 and the ex-dividend day was on June 18, 2012. The company also distributed equity before June 30, 2012 to the Company’s all A Stock holders registered after closing of Shenzhen Stock Exchange on the afternoon of June 15, 2012 at China Securities Depository and Clearing Corporation Limited Shenzhen Company and the Company’s all B Stock holders registered after closing of Shenzhen Stock Exchange on the afternoon of June 20, 2012 at China Securities Depository and Clearing Corporation Limited Shenzhen Company. After the deliberation of 2011 Shareholders’ Meeting dated on 15th May 2012, the Clause 1 of Article 157 in the Articles of Association reads that “the Company can distribute dividends either in cash or by stock . The profit to be distributed each year is not less than 50% of the distributable profit realized in the same year and the accumulated sum of profit to be distributed in cash in the 26 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. next three years is not less than 30% of the yearly average distributable profit to be realized in the next three years”, which will be revised to: “the Company can distribute dividends either in cash or by stock . The profit to be distributed each year is not less than 25% of the distributable profit realized in the same year and the accumulated sum of profit to be distributed in cash in the next three years is not less than 30% of the yearly average distributable profit to be realized in the next three years.” The Company has clearly defined the dividend distribution standard and proportion, the conditions and procedures of adjustment or change of profit distribution policy were legal and transparent, the promulgation, implementation or adjustment of profit distribution policies, especially the cash dividend policy were in accordance with the Company’s articles of association and rule of examination procedures, and the middle and small investors’ interests were fully protected. The Company’s preliminary scheme of profit distribution and preliminary scheme of increasing equity with capital reserve during the report period conformed with relevant provisions including the Company’s articles of association. 2) The Company’s preliminary scheme of profit distribution and preliminary scheme of increasing equity with capital reserve in the recent three years (including the report period). The profit distribution plan of 2010 is as following: Because the left amount of legal earned surplus reserve exceeds 50% of registered capital, while making profit distribution, the legal earned surplus reserve will be not drawn. Based on the Company’s 527.28 million shares at total up to December 31, 2010, we plan to pay CNY 1.4 in cash as dividends for every one share (including tax, which means that the actual cash after deduction of the tax for Stock A’s individual stockholders and investment funds is CNY 1.26 for every one share) to the Company’s all stockholders, totaling up to CNY 738.19 million accounted for 51.47% of net profits CNY 1434.22 milion attributable to shareholders of parent company in the consolidated statements. The retained and undistributed profit of CNY 696.03 million will be reserved for distribution in the next year. The profit distribution plan of 2011 is as following: Because the left amount of legal earned surplus reserve exceeds 50% of registered capital, while making profit distribution, the legal earned surplus reserve will be not drawn. Based on the Company’s 527.28 million shares at total up to December 31, 2011, we plan to pay CNY 1.52 in cash as dividends for every one share (including tax) to the Company’s all stockholders, totaling up to CNY 801.4656 million, and we plan to give three shares as stock dividends for every ten shares or 158.184 million shares totally to the Company’s all stockholders. According to this plan, in the year of 2011 totally CNY959.65 million of profit was distributed, accounting for 50.32% of net profits CNY 1907.21 milion attributable to shareholders of parent company in the consolidated statements. The retained and undistributed profit of CNY 947.56 million will be reserved for distribution in the next year. The Company’s preliminary scheme of profit distribution and preliminary scheme of increasing equity with capital reserve in 2012 is as following: Because the left amount of legal earned surplus reserve is less than 50% of registered capital, while making profit distribution, the legal earned surplus reserve of CNY46,789,370.00 will be drawn. Based on the Company’s 685,464,000 shares at total up to December 31, 2012, we plan to pay CNY 11.00 in cash as dividends for every 10 shares (including tax)to the Company’s all stockholders, totaling up to CNY 754,010,400, accounting for 44.33% of net profits CNY 1,700,928,117.00 attributable to shareholders of parent company in the consolidated statements. The retained and undistributed profit of CNY 900,128,347.00 will be reserved for distribution in the next year. The Company’s cash dividend record in recent three years 27 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Unit: CNY Net profit belonging to Proportion in the net profit the listed company’s belonging to the listed Amount of cash Year of distribution stockholders in the company’s stockholders in dividend (including tax) consolidated statement the consolidated statement of the distribution year (%) 2012 754,010,400 1,700,928,117 44.33% 2011 801,465,600 1,907,208,732 42.02% 2010 738,192,000 1,434,218,328 51.47% During the report period the Company earned profit, the undistributed profit of the parent company was positive but withouting proposing cash dividend distribution. Available V not available 10、Social Responsibility During the report period, considering the fulfillment of the Company’s social responsibility, please see 2012 social responsibility report disclosed on www.cninfo.com.cn on 19th April 2013. 11、The Company’s Receptions, Studies and Visits Meeting room Field survey East security, Hengtai 2012.01.10 of the Securities Company Meeting room Field survey Yuren Xinchuang 2012.01.16 of the investment Company Meeting room Field survey PIMCO 2012.02.09 of the Company Meeting room Field survey CSC, 2012.02.15 of the China Reinsurance Company (Group) Corporation Meeting room Field survey UBS Securities,Qilu 2012.02.17 of the Securities, Prudential Company Fund Meeting room Field survey Qilu Securities, GF fund 2012.02.20 of the Company Meeting room Field survey Haitong Securities 2012.04.18 of the Company 2012.04.27 Meeting room Field survey Taiwan life 28 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. of the Company 2012.05.03 Meeting room Field survey GouplandCardiff of the current Company business Meeting room Field survey Value Partners operation 2012.05.10 of the situation and Company other issues Meeting room Field survey Changjiang pension 2012.05.14 of the insurance Company 2012.05.15 Meeting room Field survey Citic Securities, of the Haitong Securities, Company First Capital Securities, BOCI Securities, Taiwan Life, Heying investment, China Universal Asset Management, CSC Da Cheng Fund, fortune securities,GF securities 2012.05.16 Meeting room Field survey Taiwan Life,CICC, Fuh of the Hwa Securities Company Meeting room Field survey BOCI Securities 2012.05.29 of the Company Meeting room Field survey Shanghai International 2012.08.16 of the Trust & Investment Company Meeting room Field survey Zhonghai Fund 2012.08.22 of the Company Meeting room Field survey General investment, 2012.08.28 of the Huatai securities Company Meeting room Field survey Guosen Securities, of the Credit Suisse Company Securities,Hongta 2012.08.30 securities,baishan venture investment, Lombarda China Fund, China Reinsurance (Group) Corporation Meeting room Field survey Qianyang Investment 2012.09.07 of the Company Meeting room Field survey Norges Bank, Fortis 2012.09.19 of the Haitong 29 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Company Investment,OWL GREEK,Taiping asset management,shanghai rightshare investment, Orient Securities, SMC China Fund Meeting room Field survey Franklin Templeton 2012.10.18 of the Sealand Fund Company Meeting room Field survey Shenzhen river asset 2012.10.26 of the management company Company Meeting room Field survey Great Wall Fund 2012.11.08 of the Company Meeting room Field survey Morgan Stanley Huaxin 2012.11.12 of the Funds Company Meeting room Guangda Yongming of the Field survey asset management 2012.11.15 Company company, Aeon Life insurance company Meeting room Field survey Newburgh Asia 2012.11.16 of the Company Meeting room Field survey Shanghai Jiayou 2012.11.21 of the investment Company Schroder Investment Meeting room Field survey Management (Hong 2012.11.27 of the Kong) Limited, Company Goldman Sachs(Asia) co.,LTD Meeting room Field survey Founder securities 2012.11.28 of the Company Meeting room Field survey Kaixinlong Fund, 2012.12.07 of the Hanlun ivestment Company Consultant 30 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. V、Major Issues 1、Material litigation and arbitration □ available √not available There are no material litigation and arbitration in the year. Media’s doubts □ available √not available 31 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 2、Important related transactions (1)、Related transactions in relation to routine operations Amount of Pricing Proportion in Settlement Type of Content of Price of related Interrelation principle of the same kind method of Market Date of Disclosure Related party related related related transaction ship related of transaction related price disclosure index transaction transaction transaction (CNY transaction (%) transaction ‘0000) (http://www.cni Procurement nfo.com.cn) of Announcement Related commodity No.2012-L005, Yantai Shenma Under the party’s and Agreement title of Packing Co., same parent commodity - 20,643.9 11.19% Check - acceptance price announcement: Ltd. company and labor of labor Announcement transaction from related on 2012 party Routine Related Deals Total -- -- 20,643.9 11.19% -- -- -- -- Details of rejection of big sales No The company will sign a processing contract with and purchase packing materials from Yantai Necessity and continuity as well as cause to transact Shenma Packing Materials Co., Ltd. under Changyu Group, which is helpful for the Company, as a with related party (but not with other dealer in the prerequisite of fair price, to acquire sustainable, quality and stable supply of packing materials and to market) save the Company’s procurement and transport costs of packing materials so as to strengthen its 32 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. product competitiveness. The Company’s independency will not be affected by related transactions because the Company has Influence of related transaction on listed company’s lower requirements for production technology of packing materials and there are too many qualified independency producers ready for selection. The level of Company’s dependency on related party as No well as solutions (if any) If a prediction is made to the total amount of routine related transactions to occur during this period by type, The Company predicts that the procurement amount paid to Yantai Shenma Packing Co., Ltd. is CNY what is the actual implementation result during the 250 million and the actual trading price is CNY206.439 million. report period (if any). Cause of bigger differences in between transaction price The transaction price is fixed in reference to market price, no obvious difference. and market reference price. (2) Related transactions in asset procurement and sale There were no related transactions in asset procurement and sale in the report period. (3) Important related transactions in joint external investment There were no important related transactions in joint external investment in the report period. 33 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. (4) Record of related credits and liabilities Whether there is a record of non-operating related credits and liabilities. □ Yes √ No Balance at the Use of non- Amount occurred Balance at the Type of credits Cause of beginning of the Related party Interrelationship operating fund or during this period end of the period and liabilities existence period (CNY not (CNY ‘0000) (CNY ‘0000) ‘0000) Liabilities Use of the Yantai Changyu The Company’s payable to trademarks like No 10,891 9,994 9,994 Pioneer Wine Co., Ltd. parent company related party “Changyu” Influence of the related credits and The related credits and liabilities produce a minor influence on the Company’s operating results and financial liabilities on the Company’s operating condition as they account for a small proportion in the Company’s total assets. results and financial condition. (5) Other important related transactions For other important related transactions, please see Annex 6 “Relations among the Related Parties and Their Transactions” to Financial Statement of the report. Interim reports disclosure website’s related queries about the significant related party transactions Disclosure date of interim Name of Interim announcement Website of disclosure of interim announcement announcement Yantai Changyu Pioneer Wine Co., Ltd. Announcement on 2012 Routine Related April 20, 2012 http://www.cninfo.com.cn Transactions 34 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 3、Major and important contracts and execution results (1) Trusteeship, contract and leasehold issues A) Trusteeship situation There are no trusteeships happened in the report period. Project in gains and losses for the Company to achieve more than 10% of the total profit in the report period. □ available √ not available B) Contract situation During the report period, the contract for the operation of the Company, please see the part of “Subsidiary” in the consolidation scope of consolidated financial statements which is in the report’s financial report. Project in gains and losses for the Company to achieve more than 10% of the total profit in the report period. □ available √ not available C) Leasehold situation On 1st January 2012, the Company renewed the “space lease agreement” with the controlling shareholder Changyu Group, the Company leased the space with 57749.77 square meters located at 174 Shihuiyao Road, Zhifu District,Yantai City and the space with 3038 square meters located at 56 Dama Road, Zhifu District, Yantai City, which are all under the name of controlling shareholder. The rent of the above spaces per year is CNY 5.858 million with a period of 5 year from 1st January 2012 to 31st December 2016. Project in gains and losses for the Company to achieve more than 10% of the total profit in the report period. □ available √ not available (2) Other importanct contracts Other important contracts, please see 24 part of “Other non-current liabilities” and 22 part of “Non- current liabilities due within one year” in the notes to the consolidated financial statements of the report’s financial report. 4、Implementation of commitments (1)、The commitments of the Company or shareholders of the Company holding more than 5% in the report period or until the report period Commitment Commitment Commitment Commitment Commitments Implementation party content time period - - - - Has been Commitments at share reform fulfilled Commitments made in - - - - - acquisition report or equity changes report Commitments at asset - - - - - restructuring Commitments at the initial - - - - - public offering or refinancing Commitments made to the Yantai Intra-industry 18th May Has been Forever minority shareholders of the Changyu competition 1997 performing 35 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Company Group Co. Ltd. Commitment under timely Yes implementation or not Specific reasons of not completing the implementation - and the next step Whether or not to have commitments at leading to intra- NO industry competition and related party transaction Solution period for the - commitments Solution method - Fulfillment of the commitments - (2)、The Company makes an explanation of the assets or projects that have reached the profiting predictions and of the causes if the Company’s assets or projects are likely to generate profits and are still optimistic as expected during the report period. The Company did not make any profit forcast for the assets or projects. 5、The appointment and dismissal of certified public accountants Currently appointed accounting firm Domestic accounting firm name Ernest & Yong Huaming Accounting Firm Reward for domestic accounting firm 168 (CNY‘0000) Consecutive period for the audit 6 services of domestic accounting Firm Foreign accounting firm Ernest & Yong Huaming Accounting Firm Consecutive period for the audit 6 services of foreign accounting Firm Whether or not to dismiss the accounting firm during the report period □ Yes √ NO To employ internal control audit accounting firms, financial adviser or sponsor. □ available √ not available 6.Explaination for the other major issues Explanation on the Company’s Interrelationship with Yantai Zhongya Pharmaceutical and Medicated Wine Co., Ltd. Before November 25, 2010, Mr. Li Jianjun was legal representative of both Yantai Yusheng Investment and Development Co., Ltd. (hereinafter referred to as Yusheng Investment) and Yantai Yuyuan Investment and Development Co., Ltd. (hereinafter referred to as Yuyuan Investment) and held 46.5% of Yuyuan Investment’s total equity. Yusheng Investment was, at that time, indirectly 36 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. holding this company’s equity. For the shareholding details, please see “Block Diagram of Property Rights and Control Relations between the Company and Actual Controlling Party” in Section Six “Record of Share Changes and Stockholders” of this Report. Yuyuan Investment held 50% of the total equity of Yantai Zhongya Pharmaceutical Co., Ltd. (hereinafter referred to as Zhongya Pharmaceutical). It can be confirmed by virtue of the abovementioned equity structure that Zhongya Pharmaceutical was one of the Company’ interrelated parties. To sever this relationship, Yushang Investment replaced the legal representative Li Jianjun with Sun Jian (currently acting as this company’s vice general manger) on November 25, 2010, thereby terminating the Company’s interrelationship with Zhongya Pharmaceutical. On December 26, 2011, Zhongya Pharmaceutical was renamed to Yantai Zhongya Pharmaceutical and Medicated Wine Co., Ltd. Or “Zhongya Pharmaceutical” for short. On September 10,2012, Changyu Group acquired 36% of Zhongya Pharmaceutical’s total equity by investing in it, making the shareholding proportions of Zhongya Pharmaceutical’s former stockholder Yuyuan Investment and Zhongya Pharmaceutical’workers both reduced from 50% to 32% and the legal representative changed from Li Jianjun to Leng Bin (currently acting as director of Changyu Group and this company’s director and vice general manager). The anticipated routine related transactions between the Company and Zhongya Pharmaceutical in 2012 have already been disclosed in the Announcement of 2012 Routine Related Transactions. The actually occurred related transactions between the Company and Zhongya Pharmaceutical during the report period were stated in Annex Six “Interrelationship and Deals” to Financial Statement of this Report. 37 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. VI、Changes in Shares and the Shareholders’ Situation 1、Changes in shares Amount after this Amount before this change Change (+, -) change Transfe Percent Allot r other Percenta age Distribute Amount new capital others Sub total Amount ge bonus share % share to share % capital 2、Unrestricted shares 527,280,000 100% 158,184,000 158,184,000 685,464,000 100% (1)、A shares 348,816,000 66.15% 104,644,800 104,644,800 453,460,800 66.15% (2)、B shares 178,464,000 33.85% 53,539,200 53,539,200 232,003,200 33.85% 3、Total shares 527,280,000 100% 158,184,000 158,184,000 685,464,000 100% Cause of share change During the report period, the Company brought its 2011 equity allocation scheme into effect and taking the total capital stock of 527,280,000 shares as cardinal number, distributed 3 shares for every 10 shares to all stockholders. Approval of stock change □ available √ not available Transfer of changed shares Transfer is completed. The influence of stock change on the financial indicators such as basic earnings per share, diluted earnings per share of the latest year and the latest period, net asset per share belonging to the company’s common stock holders, etc.. 38 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. √available □ not available Because the stock capital had an increase of 30%, the Company’s financial indicators such as basic earnings per share, diluted earnings per share and net asset per share belonging to the Company’s common stock holders all decreased accordingly. Other contents this company thinks necessary or securities regulatory departments ask to make public. No. 2、Information about the Issuance and Listing of Stocks (1)Issuance of stocks in recent three years by the end of the report period Description of the stocks issued in recent three years The Company did not issue any new stocks within recent three years by the end of report period. (2)Changes situation in the Company’s total shares, structure of shareholders, the Company’s assets and liabilities. During the report period, the Company brought its 2011 equity allocation scheme into effect and taking the total capital stock of 527,280,000 shares as cardinal number, distributed 3 shares for every 10 shares to all stockholders, which increased the total share capital of the Company from 527,280,000 shares to 685,464,000 shares. There are no any changes for the shareholders’ structure of the Company and no big changes for the structure of assets and liabilities. (3)Existing internal employee shares The Company has not issued internal employee shares. 39 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 3、Situation for shareholders and the acutal controllers (1)、The number of shareholders of the Company and the shareholdings Unit:share th Total number of shareholders until the end of the 5 trading days Total shareholders in the report period 37,300 46,745 before the disclosure day of the annual report Shareholders holding more than 5% Shares held Number Pledged or frozen Changes Number of Character of Percentage until the end of Name of Shareholders shareholders (%) of the report during the restricted unrestricted Share status Amount period report period shares shares Domestic non- YANTAI CHANGYU GROUP CO. state-owned legal 50.4% 345,473,856 79,724,736 0 345,473,856 - 0 LTD. person Foreign GAOLING FUND,L.P. shareholder 3.54% 24,279,731 5,881,837 0 24,279,731 - 0 HTHK/CMG FSGUFP-CMG FIRST Foreign 3.46% 23,731,144 7,248,301 0 23,731,144 - STATE CHINA GROWTH FD shareholder GOVERNMENT OF SINGAPORE INV. Foreign 2.45% 16,802,658 9,210,284 0 16,802,658 - 0 CORP.- A/C "C" shareholder BBH BOS S/A FIDELITY FD - CHINA Foreign 2.21% 15,123,476 4,749,879 0 15,123,476 - 0 FOCUS FD shareholder DACHENG WEALTH MANAGEMENT Domestic non- 2020 LIFE CYCLE SECURITIES state-owned legal 0.95% 6,529,779 3,925,327 0 6,529,779 - 0 INVESTMENT FUND person Foreign VALUE PARTNERS CLASSIC FUND 0.82% 5,628,804 3,755,970 0 5,628,804 - 0 shareholder GSIC A/C MONETARY AUTHORITY Foreign 0.81% 5,561,447 3,127,836 0 5,561,447 - 0 OF SINGAPORE shareholder Foreign UBS (LUXEMBOURG) S.A. 0.73% 5,002,999 718,763 0 5,002,999 - 0 shareholder HTHK-MANULIFE CHINA VALUE Foreign 0.66% 4,540,765 984,382 0 4,540,765 - 0 FUND shareholder 40 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Strategic investors or legal result of the placement of new No. shares to become a top 10 shareholders Among the top 10 shareholders, Yantai Changyu Group Company Limited has no The explanation for the associated relationship and associated relationship or accordant action relationship with the other 9 listed shareholders, accordant action of the top 10 shareholders and the relationship among the other shareholders is unknown. The top 10 shareholders with unrestricted shares Number of unrestricted Type of share Name of Shareholders shares held until the Type of share Amount end of the year YANTAI CHANGYU GROUP CO. LTD. 345,473,856 A share 345,473,856 GAOLING FUND,L.P. 24,279,731 B share 24,279,731 HTHK/CMG FSGUFP-CMG FIRST STATE CHINA GROWTH FD 23,731,144 B share 23,731,144 GOVERNMENT OF SINGAPORE INV. CORP.- A/C "C" 16,802,658 B share 16,802,658 BBH BOS S/A FIDELITY FD - CHINA FOCUS FD 15,123,476 B share 15,123,476 BANK OF CHINA-DACHENG WEALTH MANAGEMENT 2020 LIFE CYCLE 6,529,779 A share 6,529,779 SECURITIES INVESTMENT FUND VALUE PARTNERS CLASSIC FUND 5,628,804 B share 5,628,804 GSIC A/C MONETARY AUTHORITY OF SINGAPORE 5,561,447 B share 5,561,447 UBS (LUXEMBOURG) S.A. 5,002,999 B share 5,002,999 HTHK-MANULIFE CHINA VALUE FUND 4,540,765 B share 4,540,765 Among the top 10 shareholders with unrestricted shares, Yantai The explanation for the associated relationship and accordant action of the top 10 Changyu Group Company Limited has no associated shareholders with unrestricted shares, the the associated relationship and accordant relationship or accordant action relationship with the other 9 action between the top 10 shareholders with unrestricted shares and the top 10 listed shareholders, and the relationship among the other shareholders shareholders is unknown. Yantai Changyu Group Company Limited is not involved in Explanation for the shareholders who involved in financing activities and stock financing activities and stock trading business, and it is unknown trading business for the other shareholders. 41 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. (2)、Situation for the controlling shareholders of the Company Legal Establishment Organization Name of controlling shareholder Registered capital Main business representative date code Production and distribution of wine, healthy liquor, spirits and Yantai Changyu Group Co. Ltd. Sun Liqiang 1997.04.27 26564582-4 CNY 50 million beverages,cultivation of agricultural products and export business within permission. Operating results, financial condition, cash No. flow and future development strategy etc. Equity situation for the other domestic listed companies controlled or shared by the No. controlling shareholders during the report period Changes of the controlling shareholder during the report period □ available √ not available (3)、Situation for the actual controllers of the company Name of actual Legal Establishment Organization Registered Main business controllers representative date code capital Under state permission, property investment, tenancy of machine and facility, Yantai Yuhua Investment CNY wholesale and retail of construction material, chemical products (chemical Jiang Hua 2004.10.28 76779294-7 & Development Co. Ltd 387,995,000 hazard products excluded), hardware and electronical products, grape planting. ILLVA Saronno Augusto 2005.01.24 - EUR Receiving the investments and dividends that Italian or overseas businesses 42 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Investment Italy Reina 5,160,000 provide or distributed to other companies; controlling the use of and dealing with and buying or selling and disposing the corporate stocks, public stocks and individual stocks; providing capital and technical coordination to the company’s joint ventures and performing the duties of a controlling party; engaging in the activities in terms of providing financial assistance, technical and R&D and occupational training, shareholding affairs, organizing the storage of raw materials and warehousing of final products upon the precondition that it is helpful for the joint ventures and in order to realize the final operation goals; production and sales of food products, alcoholic and nonalcoholic products as well as any other related industrial, commercial, financial and tertiary activities via subsidiary companies and joint ventures or directly by itself; conducting business activities in the fields of acid food and agriculture. International Finance Corporation is one of the members of World Bank, mainly dedicated to investment in private sectors of developing countries International Finance while providing technical support and consultation service. The corporation USD 2.36 Corporation Cai Jinyong 1956.07.25 - is a multilateral financial institution that ranks first in the world in terms of billion providing capital stock and loans to developing countries. Its purpose is to promote sustainable investments of private sectors of developing countries in order to alleviate poverty and improve people’s life. State-owned Assets Supervision and According to the municipal government authorization, to perform the Administration Wei Jing 2005.02.01 004260686 - investor’s responsibility on behalf of state asset. Commission of Yantai Municipal Government Operating results, financial condition, cash flow and No. future development strategy etc. Equity situation for the other domestic listed companies controlled by No. the actual controller during the report period 43 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Changes of the actual controllers during the report period □ available √ not available Introduction for property right and control relations between the Company and its actual controllers Changyu Group and 27 persons for medium-level of the Company 100% Yantai Yusheng Investment & Changyu Group and 46 common staff of O U J F G U T H S A R E . E 62.22% 37.78% R A P A R K A N M 5% . C O REINA REINA REINA REINA N C A U AUGUSTO RICCARDO MARINA LODOVICO E N N T 24% 6% 5% 5% 5% R I 25% 25% 25% 25% E S IFC 55% Yantai Yuhua Investment & Development Illva Saronno Investment SASAC 10% 45% 33% 12% current shareholders for A Changyu Group current shareholders for B 15.75% 50.40% 33.85% the Company Actual controller control the Company through a trust or other asset management □ available √ not available 44 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. VII、Situation for Directors, Supervisors, Senior Management and Staffs 1、Changes in shareholdings of directors, supervisors and senior management Shares Shares hold at Increased Decreased hold at the Beginning date Ending date of shares shares the Name Post Status Gender Age beginni of the post the post during the during the ending ng of period period of the the period period Sun Liqiang Chairman to the Board present M of Directors 65 2010.05.13. 2013.05.12 0 0 0 0 incumbent Zhou Hongjiang Vice-chairman to the present M Board of Directors and 48 2010.05.13 2013.05.12 0 0 0 0 general manager incumbent Leng Bin Director and vice- present M general manager 50 2010.05.13 2013.05.12 0 0 0 0 incumbent Qu Weimin Director, Vice-general M manager and Secretary present to the Board of 55 2010.05.13 2013.05.12 0 0 0 0 incumbent Directors Chen Jizong Director present M 37 2010.05.13 2013.05.12 0 0 0 0 incumbent Augusto Reina Director present M 72 2010.05.13 2013.05.12 0 0 0 0 incumbent Aldino Marzorati Director present M 60 2010.05.13 2013.05.12 0 0 0 0 incumbent Antonio Appignani Director present M 74 2010.05.13 2013.05.12 0 0 0 0 incumbent Jean Paul Pinard Director present M 63 2010.05.13 2013.05.12 0 0 0 0 45 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. incumbent Geng Zhaolin Independent director present M 70 2006.12.07 2009.12.06 0 0 0 0 incumbent Xiao Wei Independent director present M 52 2010.09.01 2013..05.12 0 0 0 0 incumbent Wang Zhuquan Independent director present M 48 2010.05.13 2013.05.12 0 0 0 0 incumbent Wang Shigang Independent director present M 47 2011.05.10 2013.05.12 0 0 0 0 incumbent Fu Mingzhi Chairman for the Board present M of Supervisors 59 2010.05.13 2013.05.12 0 0 0 0 incumbent Zhang Hongxia Supervisor present F 56 2010.05.13 2013.05.12 0 0 0 0 incumbent Jiang Jinqiang Supervisor present M 40 2010.05.13 2013.05.12 0 0 0 0 incumbent Yang Ming Vice-general manager present M 54 - - 0 0 0 0 incumbent Li Jiming Chief engineer present M 46 - - 0 0 0 0 incumbent Jiang Hua Vice-general manager present M 49 - - 0 0 0 0 incumbent Sun Jian Vice-general manager present M 46 - - 0 0 0 0 incumbent Jiang Jianxun Finance manager present M 46 - - 0 0 0 0 incumbent Total - - - - - - 0 0 0 0 46 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 2、Situation for the work experience The main work experiences of the Company’s directors, supervisors and senior managementin the recent 5 years. (1)、Members of board of directors Mr. Sun Liqiang, Chairman, is a college graduate and senior economist. Now he is the representative of 11th National People’s Congress, Party Secretary, Chairman and General Manager of Changyu Group. He began serving as chairman of the Company on September 18th , 1997 and has held the position ever since. Mr. Zhou Hongjiang, is a mastership graduate and senior engineer, the vice chairman of Changyu Group. Now he is the representative of 12th National People’s Congress. He began serving as general manager of the Company on December 28th , 2001 and as Director, Vice Chairman and General Manager of the Company on May 20th , 2002. Mr. Leng Bin, is a postgraduate and senior accountant and now is the Director of Changyu Group. He began serving as a director of the Company on June 15th, 2000. Mr. Qu Weimin, holds a bachelor of engineering and is a senior economist. He began serving as Director, Deputy General Manager and concurrently as Secretary to the board of directors of the Company on September 18th , 1997. Mr. Chen Jizong, is a university graduate, holds the qualifications of statistician and accountant, now is the Trade union director of property management department of SASAC Yantai and the director of Changyu Group. He began serving as a director of the Company on May 13th 2010. Mr. Augusto Reina is serving as chief executive officer of several companies including Illva Saronno Holding SpA and Illva Saronno Investment SRL, member of the board of directors of Barberini Spa, director of Federvini (Italian Alcohols Production and Export Association), director of Istituto Del Liquore (Wine Research Institute), director of Assovini (Sicily Viniculture and Wine Production Association) and director of Changyu Group. He has been director of the Company since April 27th, 2006. Mr. Aldino Marzorati, a university graduate, is the General Manager of Illva Saronno Holding SpA and director of the board of directors of some branches under the group company and the director of Changyu Group. He has been director of the Company since April 27th, 2006. Mr. Antonio Appignani, a university graduate, is vice chairman of Italian Business Consultation Committee, chief of Professional Ethics Committee, teacher of vocational training course of Industrial and Commercial Consultation Committee, member of Economic and Commercial Committee of the public university “G. D Annunzio” and concurrently serving as member of the board of directors of different companies and member of the board of directors of several companies under Illva Group and the director of Changyu Group. He has been director of the Company since April 27th, 2006. Mr. Jean-Paul Pinard, a doctor in economics and finance, began to serve as director of the Bureau of Agriculture of International Finance Corporation under World Bank from 2001, and retired in 2007, now is the director of Changyu Group. He has been director of the Company since December 7th, 2006. Mr. Geng Zhaolin, is a postgraduate and senior engineer, now is the Vice Director of the China Foods Standardization Technology Committee, executive director of China Foods Science & 47 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Technology Institute, counselor of China Association of Wine Industry. He began serving as an independent director of the Company on May 20th, 2002. Mr. Wang Zhuquan, is the doctor for administration (accountancy), holds the qualifications of China Certified Public Accountant and China Certified Public Valuer , now is the professor, master and PhD Supervisor, vice dean of Administration Institute, dean of Accountancy Department under Ocean University of China. He began serving as independent director of the Company on September 7th, 2007. Mr. Xiao Wei, is a postgraduate and lawyer, and now is the partner of Jun He Law Offices. He began serving as independent director of the Company on September 1st, 2010. Mr. Wang Shigang holds an MBA and also qualification of China Certified Public Accountant, now is the boardchairman of Shandong Tianhengxin Construction Cost Consultion Co. Ltd., independent director of Shandong Jinling Chemical Industry Co.,Ltd. He previously served as independent director of the Company from May 20th , 2002 till May 13th, 2010. (2). 、 Members of board of supervisors Mr. Fu Mingzhi, is a university graduate and senior economist. Currently he is the Director and Deputy General Manager of Changyu Group. He began serving as a Chairman to Board of Supervisors of the Company on April 27th, 2006. Ms. Zhang Hongxia, is a college graduate and senior accountant. She began serving as supervisor of the Company on September 18th, 1997. Mr. Jiang Jinqiang, is a university graduate, holds the qualifications of China Certified Public Accountant and China Certified Public Valuer, now is the full-time supervisor of SASAC Yantai and once was the director of Changyu Group and also this company before. He began serving as supervisor of the Company on May 13th, 2010. (3)、Other senior managers Mr. Yang Ming, is a university graduate and applied researcher. He began serving as Deputy General Manager of the Company on August 12th, 1998. Mr. Li Jiming, is a doctoratoral graduate and applied researcher. He began serving as Chief Engineer of the Company on September 14th, 2001. Mr. Jiang Hua, is a postgraduate and senior engineer. He began serving as Deputy General Manager of the Company on September 14th, 2001. Mr. Sun Jian, holds an MBA and is an assistant engineer. He began serving as Deputy General Manager of the Company on March 22nd, 2006. Mr. Jiang Jianxun, holds an MBA and is an accredited accountant. He began serving as Financial Manager of the Company on May 20th, 2002. 48 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Post in the shareholder’s company √ available □ not available Paid by Beginning date Ending date of Name Shareholder’s Company Post shareholder’s of the post the post company or not Sun Liqiang Yantai Changyu Group Co. Ltd. Chairman and 2009.10.28 2013.10.27 No general manager Zhou Hongjiang Yantai Changyu Group Co. Ltd. Vice chairman 2009.10.28 2013.10.27 No Fu Mingzhi Yantai Changyu Group Co. Ltd. Director and vice 2009.10.28 2013.10.27 No general manager Leng Bin Yantai Changyu Group Co. Ltd. Director 2009.10.28 2013.10.27 No Chen Jizong Yantai Changyu Group Co. Ltd. Director 2009.10.28 2013.10.27 No Augusto Reina Yantai Changyu Group Co. Ltd. Director 2009.10.28 2013.10.27 No Aldino Marzorati Yantai Changyu Group Co. Ltd. Director 2009.10.28 2013.10.27 No Antonio Appignani Yantai Changyu Group Co. Ltd. Director 2009.10.28 2013.10.27 No Jean Paul Pinard Yantai Changyu Group Co. Ltd. Director 2009.10.28 2013.10.27 No Explaination for the post in the No. shareholder’s company Post at other companies √ available □ not available Mr. Leng Bin has been the director and legal representative of Yantai Zhongya Pharmaceutical and Medicated Wine Co., Ltd. since 10th September 2012. 49 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 3、Salary of directors, supervisors and senior management Decision-making process, the basis for determining the actual payments of directors, supervisors and senior management The salary for the independent directors is paid according to the resolution of shareholders’ meeting. The salary for the chairman, directors with administration duty, supervisors, managers and other senior management should be paid on basis of the evaluation result according to the Evaluation and Incentives Scheme for Senior Management of the Company which is passed during the Board of Directors’ meeting. Salary of directors, supervisors and senior management during the report period Unit: CNY’0000 Total reward Actual reward Total reward from the at the end of Name Post Gender Age Status from the shareholder’s the report company company period Sun Liqiang Chairman to the Board of M 65 present 0 Directors 108.70 108.70 incumbent Zhou Hongjiang Vice-chairman to the M Board of Directors and 48 present 108.70 0 108.70 general manager incumbent Leng Bin Director and vice-general M 50 present 0 manager 76.59 76.59 incumbent Qu Weimin Director, Vice-general M manager and Secretary to 55 present 77.11 0 77.11 the Board of Directors incumbent Chen Jizong Director M 37 present 0 0 0 incumbent Augusto Reina Director M 72 present 0 0 0 incumbent Aldino Marzorati Director M 60 present 0 0 0 incumbent Antonio Appignani Director M 74 present 0 0 0 incumbent Jean Paul Pinard Director M 63 present 0 0 0 incumbent Geng Zhaolin Independent Director M 70 present 0 5 5 incumbent 50 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Xiao Wei Independent Director M 52 present 0 5 5 incumbent Wang Zhuquan Independent Director M 48 present 0 5 5 incumbent Wang Shigang Independent Director M 47 present 0 5 5 incumbent Fu Mingzhi Chairman for the Board M 59 present 0 of supervisors 81.21 81.21 incumbent Zhang Hongxia supervisor 56 present 0 F 14.43 14.43 incumbent Jiang Jinqiang Supervisor M 40 present 0 0 0 incumbent Yang Ming Vice-general manager M 54 present 0 77.12 77.12 incumbent Li Jiming Chief Engineer M 46 present 0 72.01 72.01 incumbent Jiang Hua Vice-general manager M 49 present 0 71.48 71.48 incumbent Sun Jian Vice-general manager M 46 present 0 68.74 68.74 incumbent Jiang Jianxun Finance manager M 46 present 0 47.36 47.36 incumbent Total -- -- -- -- 823.45 0 823.45 The awarded equity incentives for the directors, supervisors and senior management of the Company during the report period □available √ not available 51 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 4、Changes for core technical team or key technical personnel during the report period (non- directors, supervisors and senior management) During the report period, there are no changes for core technical team or key technical personnel. 5、Staff of the Company (1) Staff of the Company As to December 31st 2012, the total registered staff number of the Company (including the headquarter and main controlling subsidiary companies) was 5,268, consisting of: Classification Category Number Percentage of total staff Speciality Production staff 1,983 37.64% Sales staff 2,866 54.40% Technical staff 134 2.54% Financial and administrative staff 267 5.41% Education degree Bachelor or above 1,322 25.09% College graduate 2,231 42.35% Vocational school 662 12.57% Senior high school diploma or below 1,053 19.99% (2)、The Company implemented the social security system of Yantai city, all the retired staff’s expenses were arranged by Yantai social security department, not by the Company. 52 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. VIII、Corporate Governance 1. Current Corporate Governance Situation of the Company The Company has, according to relevant national laws and rules including the “Company Law of the People’s Republic of China”, “Securities Law of the People’s Republic of China” , “Guidelines on Corporate Governance of Listed Companies”, “Listing Guidelines at Shenzhen Stock Exchange” and also other laws and rules issued by CSRC and Shenzhen Stock Exchange, and combining the own actual situation, established Articles of Associations and other internal governance regulations, constantly improved its legal entity structure and internal management rules, legally conducted its activities and strengthened the information disclosure. The Company’s governance structure is in accord with requirements of relevant regulatory documents on listing company’s governance issued by CSRC. (1) About shareholders and shareholders’ meeting The Company has already set up the Deliberation Rules of Shareholders’ Meeting, and convened the shareholders’ meetings in strict accordance with requirements of standard opinion of shareholders’ meeting, made the great effort to provide convenient conditions for more shareholders to participate the shareholders’ meeting, and ensured all shareholders to enjoy same equity and well exercised their rights. The Company drew great attention to the communication and exchange with shareholders, actively responded the shareholders’ inquiry and questions, and widely listened to the suggestions and comments from shareholders. (2) About the Company and holding shareholder The Company has independent power on business and self-management, and also be independent of its holding shareholder on business, staff, assets, organization and finance. The Board of Directors, Board of Supervisors, management team and also internal organizations operated independently in the Company. The holding shareholder of the Company could regulate its activities, no other behavior was found that surpassed the shareholders’ meeting to directly or indirectly interfere with the decision- making and business activities of the Company, or occupied any assets of the Company which damaged the Company’s and medium & small shareholders’ interests. (3) About the director and board of directors The Company strictly appoints all directors in light of Company Law and Articles of Associations. The qualifications of all directors are in line with the requirements of laws and regulations. In accordance with the requirements of Corporate Governance Guidelines, the Company has already carried out the cumulative voting system. At present, the Company has four independent directors accounting for one third of all directors, and the number and composition of board of directors was basically in accord with requirements of regulations and also Articles and Associations. All directors of the Company could work in the light of regulations including Rules of Board of Directors’ Procedure and Working Rules for Independent Directors, punctually attended board of directors’ and shareholders’ meetings, actively took part in relevant knowledge training, knew very well about the laws and regulations concerned, had a deep knowledge and long experience of practitioners, and performed their duties according to the law and regulations. The Board of Directors convened the meetings in accordance with related rules and regulations. 53 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. (4) About supervisor and board of supervisors The Company strictly elected all supervisors in light of Company Laws and Articles of Associations. At present, board of supervisors has three people among which one supervisor is representative for staff, the number and composition of board of supervisor was in accord with requirements of regulations and rules. All supervisors of the Company could follow the requirement of Rules of Board of Supervisors’ Procedure, insist the principle of responsibility to all shareholders, seriously perform their duties, effectively supervise and present their independent opinion on important issues, interrelated deals, financial status, the duty performance of directors and managers of the Company. (5) About performance evaluation and incentive system The engagement of managers was open and transparent, and accorded with laws and regulations. The Company has established and gradually improved the performance evaluation standard and formed efficient incentive system, so as to ensure the salary of staff to be linked with job performance. (6) About the party with relevant benefit The Company could fully respect and safeguard the legal rights of the party with relevant benefit, cooperate actively with the stakeholders, jointly drive the Company to develop continually and stably, pay great attention to the issues such as local environmental protection and public utilities etc., and assume full responsibilities for the social responsibility. (7) About the information disclosure and transparency The Company has appointed the secretary to Board of Directors to be responsible for investor relation management including information disclosure, investor relations management and reception of shareholders’ visit and consultation. The Company has also assigned China Securities Newspaper, Securities Times, Honking Commercial Daily and web site http://www.cninfo.com.cn/ to disclose information, punctually, accurately and truly disclosed any information in the light of requirement of relevant laws and rules, and also ensured all shareholders to have same opportunity to acquire any information. (8) Progress of the Company’s special activities in terms of corporate governance as well as formulation and implementation of inside information source registration and management rules In order to strengthen management of inside information source and prevent occurrence of backstage deals, the Company’s fifth board of directors’ 10th session deliberated and passed the Inside Information Source Registration and Management Rule on April 18, 2012. The founding of the system standardized the approval process of inside information reporting, defined the scope of inside information source, and set up a prevention and punishment mechanism of inside information. During the report period, there were no in the Company the information insiders’ transactions of the Company’s shares by taking advantage of the sensitive inside information that affects the Company’s share price before it was disclosed and no supervisory departments’ punishment records, either. Whether the Company’s corporate governance is in compliance with the Company Law and the relevant provisions of China Securities Regulatory Commission □ Yes √ No 54 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. 2、Information for the shareholders’ meeting and temporary shareholders’ meeting held during the report period (1)、Information for the shareholders’ meeting during the report period Disclosure Session Date Proposals name Resolution Disclosure Index date The Board of Directors Announcement NO.: Working Report 2011, 2012-Lin006, The Board of Supervisors Working Report 2011, Announcement Name: 2011Annual Report, Resolution for 2011 2011 th All th 15 May 2011 Profit Distribution 16 May Shareholders’ meeting, Shareholders’ Scheme, deliberated an 2012 2012 Disclosure media: meeting Proposal on Amendment of passed “China Securities Articles of Association, Newspaper” , Proposal on Renewal of “Securities Times” , Contract with the Present “Hong Kong Certified Public Commercial Daily” and www.cninfo.com.cn Accountants Firm (2)、Information for the temporary shareholders’ meeting during the report period No temporary shareholders’ meeting was held in the report period. 3、Performance of independent directors during the report period (1)Attendance of independent directors for the board of directors and the shareholders’ meeting Attendance of independent directors for the board of directors Whether or not to Required Personal Communication Authorized attend the meetings Name Absence attendance time attendance attendance attendance personally for successive twice Geng Zhaolin 5 2 3 0 0 No. Wang Zhuquan 5 2 3 0 0 No. Xiao Wei 5 2 3 0 0 No. Wang Shigang 5 2 3 0 0 No. Attendance time of independent directors for the shareholders’ 1 meeting Explaination for not attending personally the board of directors’ meetings for successive twice. No. (2) Any objections for the Company’s projects from the independent directors 55 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Whether or not the independent directors raised any objections for the company’s projects. □Yes √No. During the report period, the independent directors did not raise any objections for the Company’s projects. (3) Other explanations on independent directors’ performance The independent directors’ propositions are accepted by the Company or not √ Yes □ No Explanation on acceptance or refusal of the independent directors’ propositions The independent directors inspected the Company’s investment projects in person, proposed that the Company should properly control the progress of engineering, reinforce engineering audits and try to reduce project investment. The Company adopted the relevant propositions, took effective measures, ensured the progress of all investment projects and reduced the amount of investment in some of the projects. 4、Performance of the special committees under the board of directors during the report period (1) Summary report of the board of directors’ auditing committee A) On March 30, 2012, after the certified public accountants responsible for annual audits had introduced their preliminary opinions, the independent directors on behalf of the auditing committee communicated with them and made written comments which read that “we communicated in detail with the certified public accountants responsible for auditing of the Company’s 2011 annual report who expounded the problems and the matters necessary to adjust that were found during the auditing as well as the risks we had to pay attention to. We’ve noticed that the Company has adjusted the matters as the accountants suggested. On the basis of our communication with the accountants, the production and operation results that the Company’s management reported to us as well as the progress of important events, we believe that we have no objection to the Company’s 2011 financial statement preliminarily examined by Ernst & Young Hua Ming Assurance & Advisory Business Services and the preliminary audit opinions of that Services.” (B)On 18th April 2012, the board of directors’ auditing committee deliberated and passed 2011 Auditing report issued by Ernst&Young Hua Ming Certified Public Accounts Co., Ltd., Draft Proposal on 2011 Profit Distribution, Proposal on Renewal of Contract with the Present Certified Public Accountants Firm, 2011 Self Assessment Report on the Company's Internal Control and Proposal on Deliberation about the Annual Report Working System of the Auditing Committee under the Board of Directors. 56 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. All of Committee members unanimously agree that the above proposals should be supplied for the fifth Session Board of Directors’ 10th Meeting of the Company to make deliberation. The meeting reached the following consensus: ①Ernst&Young Hua Ming Certified Public Accounts Co., Ltd. issued a clean-opinion auditing report on the Company’s 2011 financial statements, which reflected the Company’s financial condition, operating results and cash flow truly, objectively and correctly. In 2011, the Company maintained the satisfied financial condition and faster developing momentum. ② The profit distribution scheme the Company formulated is relatively acceptable, taking the stockholders’ interest into account while paying attention to the Company’s long-term development . ③The Company’s “2011 Self Assessment Report on the Company's Internal Control” has truly and objectively mirrored out the present standing of the company’s internal control and can basically ensure the effective implementation of its policies and realization of its strategic goals. But in order to better respond to possible changes in the business environment, the Company 's internal control system should still base on the requirement of the General Standards of Company’s Internal Control and the supplementary guidelines jointly promulgated by five authorities including the Ministry of Finance and China Securities Regulatory Commission as well as the Circular on Supervision of Implementation of the Internal Control Rules of Shandong Region’s Listed Companies in the Main-board Market formulated by China Securities Regulatory Commission Shandong Regulatory Bureau so as to Standardize and improve the Company's existing internal control system. ④During the period of Ernst & Young Hua Ming Certified Public Accounts Co. Ltd making audit to 2011 the Company’s financial statements, Ernst & Young Hua Ming Certified Public Accounts Co. Ltd carefully perform the audit responsibilities, strictly implement the audit plan, have full audit evidence and timely issuing the appropriate audit opinion, so, the meeting proposed that in 2012 the company plans to continually appoint Ernst & Young Hua Ming Certified Public Accounts Co. Ltd. to be the Company’s auditor for a period of one year and the auditing fee of financial report be CNY 1.7 million. ⑤The Annual Report Working System of the Auditing Committee under the Board of Directors meets the provisions of the relevant state laws and regulations and departmental rules and regulations, which is helpful to standardize and strengthen the work of the Audit Committee’s Annual Report and also to improve the quality of information disclosure. (C) On 3rd August 2012, the board of directors’ auditing committee deliberated and passed 2012 Semiannual Report and Semiannual Profit Distribution 2012. The meeting reached the following consensus: 57 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. ①The Company’s 2012 semiannual financial statements reflected the Company’s financial condition, operating results and cash flow truly, objectively and correctly. ②As the Company just realized 2011 annual profit distribution scheme in early June 2012, we propose neither to distribute profits for the first half of 2012 nor to increase the Company’s capital stock with accumulated public fund. The net profit made in the first half of this year will be reserved and distributed at the end of the year. Our Auditing Committee considers the suggestion to be reasonable . ③All of Committee members unanimously agree that the above proposals should be supplied for the fifth Session Board of Directors’ 12th Meeting of the Company to make deliberation. D) On December 30, 2012, the auditing committee and the certified public accountants responsible for annual audits together discussed the Company’s 2012 Auditing Plan and determined the schedule of 2012 financial statement audits. The auditing committee urged the accountants to carry out the audits strictly in accordance to 2012 auditing plan and submit an auditing report within the agreed time frame. (2) Summary report of the board of directors’ emolument committee The board of directors’ emolument committee is responsible for assessment of the economic responsibilities of the directors and the senior managers who receive salaries from the Company and examination of the salary policy and scheme designed for the Company’s directors and senior mangers. “2011 Assessment Results of the Company’s Senior Officers’ Performance”was deliberated and passed by the board of directors’ emolument committee on 18th April 2012, who thought that “Proposal on 2011 Assessment Results of the Company’s Senior Officers’ Performance” was in compliance with assessment methods stipulated in the“proposal on Incentive Scheme on the Company’s Senior Officers ”approved during the 4th Session Board of Directors 20th Meeting of the company. All of committee members unanimously agree that the above proposal should be submitted to the fifth Session Board of Directors’ 10th Meeting of the Company for making deliberation. During the report period, the board of directors’ emolument committee also examined the payroll records of the directors and the senior managers who receive salaries from the Company. The committee believes that the Company’s directors, supervisors and senior managers got paid completely in line with the processes of the Company’s economic responsibility assessment system and the salaries the Company made public were in conformity with the actually paid amount. 5、The work of the Board of Supervisors During the report period, whether the board of supervisors found any existence of risk for the Company during their oversight activities. 58 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. □Yes √No 6、Relative to the controlling shareholder, independence and completeness of the Company on business, personnel, assets, organization and finance (1) Personnel arrangement: the Company’s general manager, deputy general managers and other senior officers, all of whom were paid by the Company did not hold any post in the controlling parties. The Company was entirely independent in personnel arrangement, conclusion and adjustment of labor contracts thanks to its sound and independent system for labor, personal and salary management. (2) Assets: Tangible assets and Intangible assets including trademark, industrial property right and non- patent technologies were all clearly divided between the Company and the controlling shareholder, and all legal formalities were completed. The Company being a legal independent entity consistently conducted business activities legally and provided no guarantee in any form with its assets for its shareholders or individuals’ liabilities or any other legal persons or natural persons. During the report period, Yantai Changyu Group Co., Ltd., the controlling shareholder, has already transferred free the trademarks to the Company including 黄金冰谷,爱斐堡,爱菲堡,爱斐 and AFIP which were once owned by the controlling shareholder, and the transfer has been approved by Trademark Office of the State Administrative For Industry & Commerce of PRC. However, due to some issues from the past, the Company’s assets are as yet incomplete, the intangible assets such as part of trademark ownership and patent still held by the controlling shareholders, and the Company will actively negotiate with the controlling shareholder to rectify those long-standing problems step by step upon the precondition of no infringement on the Company and shareholders’ interests. (3) Finance: the Company has independent finance department, chief account and financial staff, and also complete, independent and standardized accounting system. The Company has also established its own bank accounts, duly and legally paying taxes, workers insurance fund. All financial individuals do not hold any concurrent posts in associated companies and are able to make financial decisions independently. The Company has its own audit department, which is especially responsible for the internal audit work of the Company. (4) Offices: the Company has set up a sound organizational framework, in which the Board of Directors and Board of Supervisors operate independently, no superior and subordinate relationship exists between the functional departments of the controlling shareholder. The Company has its own independent production & business offices, all functional departments are independent to exercise their powers and carry out the production and business activities independently. 59 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. (5) Operations: the operations of the Company are independent of the controlling shareholder, the Company owns itself completely independent systems covering research and development, accounting, workforce and labor, quality control, raw materials purchase, production and sales, and is possessed of self-run capabilities, and has neither relationship with the controlling shareholder in terms of supply and sales by proxy nor competition with the other. 7、Situation for industry competition It is not happened to break the industry competition promise among the company, the controlling shareholders and the actual controllers. 8、Performance Evaluation and Incentive to Senior Management The Company has already established a sound system for evaluation of achievement of senior management and the related incentive system, which linked the reward with the Company’s benefit and personal achievement. The Emolument Committee under Board of Directors assumed the responsibility of stipulating the policy and appraising the scheme for salaries and rewards. Based on the Company’s annual production and business goals, this committee examined senior personals and also their responsible subsidiaries or departments according to their management achievement and index, and took these as basis for awards or penalties. During the report period, because of not finishing the annual business plan deliberated and passed in the board of directors meeting at the beginning of the year, the total salaries and rewards of the senior management will be reduced 3.63% than last year. 60 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. IX、Internal Control 1、 Internal control construction During the report period, the Company followed the the relevant provisions of the “Fundamental Norms for Company’s Internal Control” and the “Guidelines on Company’s Internal Control” promulgated by the Ministry of Finance to start construction of its internal control system and according to the changes of external environment and the in-house control requirements, drew up and brought the implementation plan of the internal control rules into effect. The details are as follows: (1)The Company called the board of directors’ 2012 first interim meeting on March 27, 2012, deliberating and approving the “Implementation Plan of Internal Control Rules”, which was then disclosed in China Securities News, Securities Times and the website www.cninfo.com.cn. (2) On April 25, 2012, the Company set up a leading group of internal control construction led by chairman Sun Liqiang, a working group of internal control construction led by general manager Zhou Hongjiang, an executing group of internal control construction led by financial supervisor Jiang Jianxun and a supervising and reviewing group of internal control construction led by supervisor Zhang Hongxia, each and every group’s duties were defined, since when the Company formally stepped into the organizing and implementing phase of its internal control rules. (3) From May 4 to May 7, 2012, the Company convened an internal control mobilization meeting and arranged training courses in various forms such as discussion, lecture and demonstration for concerned leaders, accountants and other managerial staff of functional departments, subsidiaries and subordinates. With the engaged internal control professionals’ assistance, the Company stressed on importance of internal control implementation, opened systematic training classes on internal control evaluation, corporate risk evaluation and so on, gave detailed lectures on the implementation plan and working program to make the Company’s management team and backbones fully realize the importance, necessity and urgency of construction of a standard internal control system, and determined the participants from different units and departments in this work. (4) From May 17 to June 20, 2012, in the light of the general rules of internal control and other related documents, in 8 aspects or the Company’s governance structure, strategic management, risk evaluation system, anti-malpractice, human resources management, budget management system, performance result assessment and report, supervision and control as well as emphasizing on 10 procedures or sales process, 61 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. purchasing process, inventory management process, funds management process, cost management process, tax management process, human resources management process, fixed asset and intangible asset management process, financial accounting and settlement reporting process, IT system control and automatic control process, and by means of the methods like questionnaire on internal control, interview, description of technological process, walk-through test and designing the risk control matrix, the company thoroughly checked its current internal control rules and implementation results, determined the priority control risk points, found 13 management-related control defects and 27 process-related ones, formulated the testing documents of internal control validity including the summary statement of internal control defects, and worked out the improving measures accordingly. (5) From June 20 to August 31, 2012, the Company launched a corrective activity in the light of the actual situation and in reference to the related suggestions. The functional departments, subsidiaries and subordinates, according to the correction scheme, revised and amended the internal control rules and made an adjustment to departments, workers and posts. The leading group of internal control construction gave direct and clear instructions to the relevant units and workers. (6) Inspection of correction results. From September 1, to December 31, 2012, the in-house auditing department organized the members from the working group of internal control construction and the workers from the functional departments to check the defect-correction results and effects. (7) Implementation effects of internal control. Since the start of the internal control system construction in 2012, the Company has all the time carried out the standardized construction of internal control system in a planned and intended way. In order to eliminate the problems and strengthen the weak links in the internal control system, the Company drew up a series of new rules and regulations including the Managerial System of the Internal Information Insiders’ Registration, the Managerial System of the External Information User, the Opinions on Assignments and Duties in the Company Officer-supervised Cities, the Key Points in Appraisal of Chateau General Manager’s Responsibility System of Landscaping, Self-run Vineyards and Contract-based Vineyards, the Opinions on Duty Fulfillment of Expansionary Policy of Yantai Base, the Incentive Policy on Big Professional Growers and Major Villages’ Grape Growing at Yantai Contract-based Vineyards, the Opinions on Changyu Company’s Support to Big Professional Growers and Major Villages’ Development of Vineyards, the Opinions on Construction Scheme Compilation of Self-run Vineyards, the Main Work for This Winter and Next Spring, Changyu Company’s Decision on Management of Winemakers’ Follow-up Vineyards and the Decision on Carrying out Overall Innovation in the Whole 62 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. Group Company, which as a result, made the company’s internal control system better meet the production operation needs. 2、The board of directors’ statement on the internal control responsibilities The corporate internal control is a long-term, complex and systematic project and is likely to result in inapplicability or deviation of the control measures in force due to inherent limitations and unexpected changes in both internal and external environments as well as policies and statutes. The Company’s board of directors will, in accordance with the national laws and rules and the requirements of securities regulatory departments, duly revise the internal control rules, push forward the deepening of implementation of all regulations so as to provide reliable security for realization of trueness and completeness of the financial reports as well as the Company’s strategy and operation objectives. The company’s board of directors bears main responsibilities for integrity and rationality of the Company’s all internal control rules and the Company’s management team takes main responsibilities for implementation of the internal control rules. 3、Basis of establishing internal control for financial report In accordance with the requirements of the relevant regulatory documents of the "Accounting Law", the "Accounting Standards for Enterprises” and “Internal Control System”, the Company established “Financial Report Internal Control System”, there are no significant deficiencies in the Company’s financial report internal control system of the year. 4、Self-assessment report on internal control The specific circumstances for the obvious defects of the internal control found during the report period in the internal control self assessment report. The Company’s board of directors believes that although the Company’s internal control rules still need revising and amending due to the Company’s business expansion, Changes in the internal and external environment and laws and regulations as well as the higher requirements for internal management, the Company has already formed the relatively reliable internal control systems which have run well and ensured the business activities carried on in the normal and efficient ways, protected the asset safety and completeness, can effectively prevent, find and correct major mistakes and malpractices, and have ensured the authenticity, accuracy, legality and completeness of financial documents. As a whole, the Company’s present rules are designed reasonably and work effectively. 63 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. In 2012, the Company didn’t have obvious defects in major control activities and realized the intended targets. Disclosure date for the full text of the 19th April 2013 internal control self assessment report Disclosure index for the full text of the www.cninfo.com.cn internal control self assessment report 5、Audit report for internal control □ available √ not available Whether or not the certified public accountants issued a non-standard advice for the audit report of internal control □Yes √ No. Whether the audit report of internal control issued by the certified public accountants is in consistency with the self-assesment report of the board of directors. √ Yes □ No. 6 、 The establishment and implementation of responsibility ascertainment rules for the significant errors in the annual report “The responsibility ascertainment rules for the significant errors in the annual report” of the Company has already been deliberated and passed by the 4th meeting of 5th session of borad of directors and also been in strict performance. During the report period, there are no big errors in 2011 annual report and 2012 semi-annual report issued and disclosed by the Company. X、Financial Report 1、Audit Report Type of audit opinion Standard unqualified audit opinion Date of the audit report signed 2013.04.19 Audit agency name Ernst & Young Hua Ming Accounting Firm Ernst & Young Hua Ming (2013) Shenzi Audit reports Symbol 60652799_A01 64 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. INDEPENDENT AUDITORS’ REPORT To shareholders of Yantai Changyu Pioneer Wine Company Limited (A joint stock limited company incorporated in the People’s Republic of China) We have audited the accompanying financial statements of Yantai Changyu Pioneer Wine Company Limited (the “Company”) and its subsidiaries (collectively the “Group”) set out on pages 3 to 110, which comprise the consolidated and company balance sheets as at 31 December 2012, and the consolidated and company income statements, statements of changes in equity and cash flow statement for the year then ended, and the notes to the financial statements. Management’ responsibility for the financial statements The management of the Company is responsible for the preparation and the true and fair presentation of these financial statements. This responsibility includes (1) preparing and fairly presenting the financial statements in accordance with Accounting Standards for Business Enterprises; (2) designing, implementing, maintaining internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Chinese Standards on Auditing. Those standards require that we comply with Code of Ethics for Chinese Certified Public Accountants and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 65 2012 Annual Report of Yantai Changyu Pioneer Wine Co. Ltd. INDEPENDENT AUDITORS’ REPORT (continued) Opinion In our opinion, the aforementioned financial statements give a true and fair view of the financial position of the Company and of the Group as at 31 December 2012 and its performance and cash flows for the year then ended in accordance with Accounting Standards for Business Enterprises. Ernst & Young Hua Ming LLP Beijing, the People’s Republic of China 17 April 2013 66 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED BALANCE SHEET 31 December 2012 (All amounts in RMB Yuan unless otherwise stated) ASSETS Notes 5 2012 2011 CURRENT ASSETS Cash and bank (1) 2,227,470,828 2,532,967,197 Bills receivable (2) 92,635,701 56,268,482 Trade receivables (3) 135,217,384 126,906,526 Advances to suppliers (4) 44,294,482 77,252,611 Interest receivable (5) 7,215,854 15,763,431 Other receivables (6) 28,462,945 75,423,614 Inventories (7) 2,268,621,441 1,755,964,582 Total current assets 4,803,918,635 4,640,546,443 NON-CURRENT ASSETS Long-term equity investments (8) 5,000,000 5,000,000 Property, plant and equipment (9) 1,823,983,721 1,609,111,868 Construction in progress (10) 832,828,689 406,353,081 Intangible assets (11) 278,293,922 263,838,087 Biological assets (12) 39,681,580 42,355,441 Long-term prepaid expenses (13) 160,871,860 148,429,436 Deferred tax assets (14) 150,376,138 175,528,938 Other non-current assets 28,180,035 4,780,927 Total non-current assets 错误!未指定 3,319,215,945 书签。 Total assets 8,123,134,580 7,295,944,221 67 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED BALANCE SHEET (CONTINUED) 31 December 2012 LIABILITIES AND EQUITY Notes 5 2012 2011 CURRENT LIABILITIES Trade payables (16) 324,881,168 229,920,729 Advances from customers (17) 450,172,253 293,655,222 Employee benefits (18) 140,484,927 188,274,937 Taxes payable (19) 444,084,576 698,459,857 Other payables (20) 470,650,111 536,059,000 Non-current liability due within 1 year (21) 150,945,000 81,081,000 Other current liabilities (22) 8,090,382 4,744,074 Total current liabilities 1,989,308,417 2,032,194,819 NON-CURRENT LIABILITIES Deferred tax liability (14) 5,336,115 5,336,115 Other non-current liabilities (23) 69,004,861 108,453,139 Total non-current liabilities 74,340,976 113,789,254 Total liabilities 2,063,649,393 2,145,984,073 EQUITY Share capital (24) 685,464,000 527,280,000 Capital surplus (25) 562,139,042 562,139,042 Surplus reserve (26) 342,732,000 295,942,630 Retained earnings (27) 4,322,769,136 3,628,279,989 Equity attributable to shareholders of the Company 5,913,104,178 5,013,641,661 Non-controlling interests 146,381,009 136,318,487 Total equity 6,059,485,187 5,149,960,148 Total liabilities and equity 8,123,134,580 7,295,944,221 68 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED INCOME STATEMENT Year ended 31 December 2012 Notes 5 2012 2011 Revenue (29) 5,643,530,553 6,027,549,212 Less: Cost of sales (29) 1,401,088,983 1,439,417,134 Taxes and surcharges (30) 318,214,304 362,103,767 Selling expenses (31) 1,449,224,163 1,503,492,226 Administrative expenses (32) 254,374,809 234,832,194 Impairment loss of assets (33) 2,777,648 14,364,887 Add: Financial income (34) 19,918,261 44,503,581 Investment income (35) - 52,122 Operating profit 2,237,768,907 2,517,894,707 Add: Non-operating income (36) 35,378,260 26,578,054 Less: Non-operating expenses (37) 2,971,409 4,819,518 Including: losses on disposal of non-current assets 2,581,199 775,064 Profit before tax 2,270,175,758 2,539,653,243 Less: Income tax (38) 569,247,641 632,444,511 Profit for the year 1,700,928,117 1,907,208,732 Attributable to shareholders of the Company 1,700,928,117 1,907,208,732 Earnings per share Basic and diluted earnings per share (39) 2.48 2.78 Comprehensive income 1,700,928,117 1,907,208,732 Attributable to shareholders of the Company 1,700,928,117 1,907,208,732 69 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED SATATEMENT OF CHANGES IN EQUITY Year ended 31 December 2012 2012 Attributable to shareholders of the Company Non- Issued Capital Surplus Retained controlling capital surplus reserve earnings Subtotal interests Total 1January 2012 527,280,000 562,139,042 295,942,630 3,628,279,989 5,013,641,661 136,318,487 5,149,960,148 Profit for the year - - - 1,700,928,117 1,700,928,117 - 1,700,928,117 Total comprehensive income - - - 1,700,928,117 1,700,928,117 - 1,700,928,117 Shareholders’ injection Injection of non-controlling interest - - - - - 10,062,522 10,062,522 Proposed final dividend ( Notes 5 (27) ) - - - ( 801,465,600) ( 801,465,600) - ( 801,465,600 ) Withdrawal of surplus reserve - - 46,789,370 ( 46,789,370 ) - - - Internal carry forward - - - - - - - Others ( Notes 5 (24) ) 158,184,000 - - ( 158,184,000) - - - 31 December 2012 685,464,000 562,139,042 342,732,000 4,322,769,136 5,913,104,178 146,381,009 6,059,485,187 2011 Attributable to shareholders of the Company Non- Issued Capital Surplus Retained controlling capital surplus reserve earnings Subtotal interests Total 1January 2011 527,280,000 557,222,454 295,942,630 2,459,263,257 3,839,708,341 156,436,954 3,996,145,295 Profit for the year - - - 1,907,208,732 1,907,208,732 - 1,907,208,732 Total comprehensive income - - - 1,907,208,732 1,907,208,732 - 1,907,208,732 Proposed final dividend ( Notes 5 (27) ) - - - ( 738,192,000 ) ( 738,192,000 ) - ( 738,192,000 ) Injection of non-controlling interest - - - - - 190,371 190,371 Acquisition of Non-controlling interest - 4,916,588 - - 4,916,588 ( 20,308,838 ) ( 15,392,250 ) 31 December 2011 527,280,000 562,139,042 295,942,630 3,628,279,989 5,013,641,661 136,318,487 5,149,960,148 70 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 2012 Notes 5 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from sales of goods or rendering of service 6,775,549,780 8,020,168,162 Cash received form tax refund 14,636,437 14,835,943 Cash received relating to other operating activities (40) 40,051,912 108,456,913 Cash inflows from operating activities 6,830,238,129 8,143,461,018 Cash paid for goods and services (1,997,334,346 ) (3,165,478,308 ) Cash paid to and on behalf of employees ( 409,261,052 ) ( 389,160,880 ) Cash paid for all types of taxes (1,768,277,184 ) (1,683,046,968 ) Cash paid relating to other operating activities (40) (1,353,324,225 ) (1,400,052,755 ) Cash outflows from operating activities (5,528,196,807 ) (6,637,738,911 ) Net cash flows from operating activities (41) 1,302,041,322 1,505,722,107 CASH FLOWS FROM INVESTING ACTIVITIES Decrease in term deposits over 3 months 1,273,844,720 219,562,493 Proceeds from return on investments 38,087,324 45,126,875 Proceeds from disposal of property, plant and equipment 2,094,333 11,898,259 Cash inflows from investing activities 1,314,026,377 276,587,627 Cash paid for acquisition of properties, plants and equipments, intangible assets and other long-term assets ( 870,164,926 ) ( 766,332,806 ) Cash paid for term deposits over 3 months ( 662,524,719 ) ( 5,000,000 ) Other cash paid for the purchase of non-controlling interest - ( 15,392,250 ) Cash outflows from investing activities (1,532,689,645 ) ( 786,725,056 ) Net cash flows from investing activities ( 218,663,268 ) ( 510,137,429 ) 71 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) Year ended 31 December 2012 Notes 5 2012 2011 CASH FLOWS FROM FINANCING ACTIVITIES Cash received from Non-controlling interest 10,062,522 190,371 Cash received from other financing activities 90,000,000 - Cash inflows from financing activities 100,062,522 190,371 Dividends paid and interest paid ( 805,660,589 ) ( 738,192,000 ) Cash paid from other financing activities ( 80,497,823 ) - Cash outflows from financing activities ( 886,158,412 ) ( 738,192,000 ) Net cash flows from financing activities ( 786,095,890 ) ( 738,001,629 ) NET INCREASE OF CASH AND CASH EQUIVALENTS 305,776,153 257,583,049 ADD: CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,256,517,873 998,934,824 CASH AND CASH EQUIVALENTS AT END (42) OF YEAR 1,562,294,026 1,256,517,873 72 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED BALANCE SHEET Year ended 31 December 2012 ASSETS Notes 11 2012 2011 CURRENT ASSETS Cash and bank 1,090,260,851 1,568,184,564 Bills receivables 1,450,000 25,779,768 Trade receivables (1) 710,080 20,977,065 Advances to suppliers 26,131,908 45,090,601 Interest receivable 7,215,854 15,763,431 Dividend receivable 993,614,383 1,866,646,179 Other receivables (2) 2,194,219,753 1,685,950,766 Inventories 893,442,758 579,452,383 Total current assets 5,207,045,587 5,807,844,757 NON-CURRENT ASSETS Long-term equity investments (3) 1,006,492,893 598,299,363 Property, plant and equipment 354,789,743 365,152,521 Construction in progress 24,640,660 42,040,898 Intangible assets 81,512,908 89,684,756 Biological assets 16,866,437 9,683,931 Deferred tax assets 19,517,202 31,337,829 Other non-current assets 2,502,630 3,854,796 Total non-current assets 1,506,322,473 1,140,054,094 Total assets 6,713,368,060 6,947,898,851 73 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED BALANCE SHEET (CONTINUED) Year ended 31 December 2012 LIABILITIES AND EQUITY 2012 2011 CURRENT LIABILITIES Trade payables 164,815,117 134,893,846 Employee benefits 80,144,533 97,418,899 Taxes payable 17,995,089 115,489,659 Other payables 1,432,464,297 1,918,592,985 Other current liabilities 1,856,337 828,000 Total current liabilities 1,697,275,373 2,267,223,389 NON-CURRENT LIABILITIES Other non-current liabilities 19,905,019 13,918,000 Total non-current liabilities 19,905,019 13,918,000 Total liability 1,717,180,392 2,281,141,389 EQUITY Share capital Notes 5 (24) 685,464,000 527,280,000 Capital surplus Notes 11 (4) 557,222,454 557,222,454 Surplus reserve Notes 5 (26) 342,732,000 295,942,630 Retained earnings 3,410,769,214 3,286,312,378 Total equity 4,996,187,668 4,666,757,462 Total liabilities and equity 6,713,368,060 6,947,898,851 74 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED INCOME STATEMENT Year ended 31 December 2012 Notes 11 2012 2011 Revenue (5) 1,776,979,032 1,864,033,002 Less: Cost of sales (5) 1,444,948,143 1,516,393,443 Taxes and surcharges 175,240,595 203,595,724 Administrative expenses 126,120,749 103,293,450 Impairment loss of assets - 3,120,600 Add: Financial income 24,834,687 42,257,079 Investment income (6) 1,091,018,499 1,340,842,685 Operating Profit 1,146,522,731 1,420,729,549 Add: Non-operating income 2,141,698 6,853,437 Less: Non-operating expenses 2,434,516 757,865 Profit before tax 1,146,229,913 1,426,825,121 Less: Income tax 15,334,107 17,734,345 Profit for the year 1,130,895,806 1,409,090,776 Total comprehensive income 1,130,895,806 1,409,090,776 75 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2012 2012 Capital Surplus Retained Issued capital surplus reserve earnings Total 1 January 2012 527,280,000 557,222,454 295,942,630 3,286,312,378 4,666,757,462 Profit for the year - - - 1,130,895,806 1,130,895,806 Total comprehensive income - - - 1,130,895,806 1,130,895,806 Withdrawal of surplus reserve - - 46,789,370 ( 46,789,370 ) - Proposed final dividend (Notes 5 (27)) - - - ( 801,465,600) ( 801,465,600) Shareholder equity internal carry forward Others(Notes 5 (24)) 158,184,000 - - ( 158,184,000 ) - 31 December 2012 685,464,000 557,222,454 342,732,000 3,410,769,214 4,996,187,668 2011 Capital Surplus Retained Issued capital surplus reserve earnings Total 1 January 2011 527,280,000 557,222,454 295,942,630 2,615,413,602 3,995,858,686 Profit for the year - - - 1,409,090,776 1,409,090,776 Total comprehensive income - - - 1,409,090,776 1,409,090,776 Proposed final dividend - - - ( 738,192,000) ( 738,192,000) 31 December 2011 527,280,000 557,222,454 295,942,630 3,286,312,378 4,666,757,462 76 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CASH FLOW STATEMENT Year ended 31 December 2012 Notes 11 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from sales of goods or rendering of service 2,190,406,491 2,204,885,626 Cash received relating to other operating activities 8,085,071 3,414,003 Cash inflows from operating activities 2,198,491,562 2,208,299,629 Cash paid for goods and services ( 1,930,252,146) (1,889,029,729 ) Cash paid to and on behalf of employees ( 147,607,346) ( 106,908,222 ) Cash paid for all types of taxes ( 335,467,847) ( 285,074,377 ) Cash paid relating to other operating activities ( 1,026,816,523) ( 423,823,656 ) Cash outflows from operating activities (3,440,143,862) (2,704,835,984 ) Net cash flows from operating activities (7) (1,241,652,300) ( 496,536,355 ) CASH FLOWS FROM INVESTING ACTIVITIES Decrease in term deposits over 3 months 1,268,844,720 219,562,493 Proceeds from return on investments 2,003,196,895 1,278,509,420 Proceeds from disposals of property, plant and equipment 6,647,026 6,856,964 Cash inflows from investing activities 3,278,688,641 1,504,928,877 Cash paid for acquisition of property, plant and equipment, intangible assets and other long- term assets ( 36,503,683) ( 114,692,238 ) Cash paid for term deposits over 3 months ( 662,524,719) - Cash paid for purchase of non-controlling interest - ( 15,392,250 ) Cash paid for subsidiary investment ( 408,193,530) ( 251,000,000 ) Cash outflows from investing activities (1,107,221,932) ( 381,084,488 ) Net cash flows from investing activities 2,171,466,709 1,123,844,389 77 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED CASH FLOW STATEMENT (CONTINUED) Year ended 31 December 2012 Notes 11 2012 2011 CASH FLOWS FROM FINANCING ACTIVITIES Cash paid for distribution of dividends or profits and for interest expenses ( 801,465,600 ) ( 738,192,000) Cash outflows from financing activities ( 801,465,600) ( 738,192,000 ) Net cash flows from financing activities ( 801,465,600) ( 738,192,000) INCREASE/(DECREASE) OF CASH AND CASH EQUIVALENTS 128,348,809 ( 110,883,966) ADD: CASH AND CASH EQUIVALENTS AT (8) BEGINNING OF THE YEAR 296,735,240 407,619,206 CASH AND CASH EQUIVALENTS AT END OF (8) THE YEAR 425,084,049 296,735,240 78 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS Year ended 31 December 2012 1. CORPORATE INFORMATION Yantai Changyu Pioneer Wine Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in accordance with the Company Law of the People’s Republic of China (the “PRC”) in a reorganization carried out by Yantai Changyu Group Co., Ltd. (“Changyu Group Company”), in which Changyu Group Company injected certain assets and liabilities in relation to the brandy, wine, and sparkling wine production and sales businesses to the Company. The Company and its subsidiaries (the “Group”) are principally engaged in the production and sales of wine, brandy, sparkling wine and tonic wine. Pursuant to the approval from the Government of Shandong Province (Luzheng [1997]119), the Company was reorganized as a joint stock limited company on 10 April 1997. On 23 September 1997, the Company was approved by China Securities Regulatory Commission (the “CSRC”) ([1997] No. 52) to issue 88,000,000 domestically listed foreign investment shares (“B shares”) on Shenzhen Stock Exchange. On 18 September 1997, the Company obtained the business license with the registered number No. 26718011-9. In October 2000, the Company was approved by CSRC to issue 32,000,000 domestically listed Shares (“A Shares”). The A shares were listed on Shenzhen Stock Exchange on 26 October 2000. Pursuant to the share reform notices issued by the Company in February 2006, Changyu Group Company transferred its 13,977,600 shares to the shareholders of A share of the Company. After the reform, percentage of equity attributable to Changyu Group Company decreased from 53.8% to 50.4%. At June 2012, the board of directors proposed an allotment to all shareholders by 3 shares every 10 shares based on the issued shares of 527,280,000, the aggregate number of share dividend is 158,184,000 shares. The total shares issued by the Company amounts to 685,464,000 shares. Please refer to Notes 5 (24) in detail. The holding company of the Group is Changyu Group Company, which is jointly controlled by Yantai SASAC, ILLVA Saronno Investment Italy, International Finance Corporation and Yantai Yuhua Investment and Development Company Limited. The financial statements have been authorized by the board of directors on 17 April 2012. According to the Company’s articles of association, the financial statements will be reviewed by shareholders on the shareholder’s meeting. 79 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (1) Preparation of financial statements The financial statements are prepared in according with “Corporate Accounting Standards – The Principles” which was published by Ministry of Finance in February 2006, and “the 38 specific accounting standards”, its application guide, interpretations for accounting standards, and other relevant regulations (collectively Chinese Accounting Standards or “CAS”). The financial statements are prepared on a going concern basis. Except for certain financial instrument, all other financial instruments are recognized at historical cost. If there is objective evidence that an impairment loss has incurred, the impairment loss are recognized in accordance with related regulations. (2) Declaration for implementing CAS The financial statements are prepared in accordance with CAS, which showing a true and fair view of the financial position on 31 December 2011, financial performance and cash flow in 2011 of the Company and the Group. (3) Accounting year The accounting year of the Group is from 1 January to 31 December of each calendar year. (4) Reporting currency The Group reporting and presentation currency is the Renminbi (“RMB”). Unless otherwise stated, the unit of the currency is Yuan. 80 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (5) Business combination A business combination is the bringing together of separate entities or businesses into one reporting entity, classified into the business combination under common control and business combination under non common control. Business combination under common control A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The combining entity that obtains control of other combining entities or businesses is the acquirer, and the other entities involved are the acquirees. The combination date is when the acquirer effectively obtains the control of the acquirees. The assets and liabilities obtained by the acquirer shall be measured at carrying amount in the acquiree's accounts as at the date of combination. Where there is a difference between the carrying amount of the net assets of the acquiree and the cost of combination, capital surplus shall be adjusted. Where the capital surplus is not sufficient to offset the value of the net assets acquired, retained earnings shall be adjusted. Business combination under non-common control A business combination involving entities or businesses under non-common control is a business combination in which all of the combining entities or businesses are not ultimately controlled by the same party or parties both before and after the business combination. The combining entity that obtains control of other combining entities or businesses is the acquirer, and the other entities involved are the acquirees. The acquisition date is when the acquirer effectively obtains the control of the acquirees. For business combination under non-common control, the assets and liabilities and contingent liabilities obtained by the acquirer shall be measured at fair value as at the date of combination. Where the cost of combination is greater than the fair value of assets and liabilities and contingent liabilities, the difference should be recognized as goodwill. Where the cost of combination is smaller than the fair value of acquiree’s assets and liabilities and contingent liabilities, and cost of combination should be reevaluated. Where cost of combination is still smaller than fair value of acquiree’s net assets, the difference should be recognized in income statement. 81 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (6) Consolidated financial statements The consolidation scope of consolidated financial statements is determined on the basis of control. The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2012. The subsidiaries are entities that are controlled by the Company. The subsidiaries adopt the same accounting year and accounting policies as the Company adopted. All intercompany balances, transactions, unrealized gain and loss and dividends within the Group are eliminated in full on consolidation. Losses within a subsidiary are attributed to the Non-controlling interest even if that results in a deficit balance. Any changes of Non-controlling interest that do not result loss of control is accounted for as equity transaction. For the subsidiaries acquired through business combination under non-common control, their financial performance and cash flow shall be included in the consolidated financial statements from the combination date, as long as they are under control by the Company. In preparation of the consolidated financial statements, the subsidiaries’ identifiable assets, liabilities and contingent liabilities are adjusted by their fair value on the acquisition date. For the subsidiaries acquired through business combination under common control, their financial performance and cash flow shall be included in the consolidated financial statements. When preparing comparative consolidated financial statements, the pre-combination adjustment of the subsidiary’s financial statements is considered as it has existed before the business combination from the beginning of the reporting period. (7) Cash and cash equivalents Cash comprises cash on hand and demand deposit. Cash equivalents refers to short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. 82 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (8) Accounts receivable (i) Individually significant and provision The Group assesses at each balance sheet date whether there is any objective evidence that the accounts receivable and other receivables, whose individual carrying amount is greater than RMB4,800,000 is impaired. If there is any evidence indicates that the carrying amount of the individual asset is lower than the present value of future cash flows, the impairment will be recognized. (ii) Individually insignificant and provision The Group made assessment on whether or not there is any indication of potential asset impairment. If there is any evidence indicates that the carrying amount of the individual insignificant accounts receivable is lower than the present value of future cash flows, the impairment will be recognized. (9) Foreign currency transactions and foreign currencies reporting For any foreign currency transactions, they are recorded in functional currency. Transactions in currencies other than the reporting currency are translated into the reporting currency at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are restated into the reporting currency using the rates of exchange ruling at the balance sheet date. The differences arisen from the transaction are dealt with in the income statement for the year. The exchange gains or losses arising from foreign currency borrowings in relation to the acquisition or construction of a fixed asset are accounted for according to the requirements relating to the capitalization of borrowing costs. Non-monetary items denominated in foreign currencies which are measured at historical cost are translated using the exchange rates on their transaction dates. Non-monetary foreign items denominated in foreign currencies which are measured at fair value are translated using the exchange rates on balance sheet date, and any difference is recognized in income statement or other comprehensive income. Foreign currency cash flows are translated using the spot exchange rate prevailing on the date that the cash flows occur. The effect of exchange rate changes on cash is separately presented as an adjustment item in the cash flow statement. 83 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (10) Inventories Inventories comprise raw materials, work in progress and finished goods. The inventories are initially measured at cost. The cost of inventories comprises all costs of purchase, cost of conversion and other costs. When inventories are sold, the cost of sale is calculated on a weighted-average basis. Agricultural products harvested are reported in accordance with the CAS 1 Inventories. The Company adopts perpetual inventory system. Inventories are measured at the lower of cost and net realizable value at the balance sheet date. If the cost of inventories is higher than the net realizable value, the impairment of inventories is accrued and recognized in income statement. If the factors causing any impairment of the inventories do not exist, where the net realizable value is higher than the cost, the amount of impairment is reversed and the reversed amount is recognized in the income statement. The net realizable value is estimated selling prices in ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The net realizable value is estimated selling prices in ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The inventory provision for raw materials is assessed by categories of inventories, where finished goods are assessed by items. For the homogeneous products which are produced and sold in the same region and are inseparable from other inventories, the inventory provision is accrued collectively. 84 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (11) Long term equity investments Long-term equity investments include investments in subsidiaries, jointly controlled enterprises and associates, and investments where the Group does not have control, joint control or significant influence over the investees and which are not quoted in an active market and the fair values of which cannot be reliably measured. The investment is initially measured at cost. For business combination under common control, the investment cost is recorded at the book value of the acquiree’s equity acquired. For business combination under non-common control, the investment cost is recorded at combination cost. Long term equity investments other than business combination, the investment cost is recorded at cash paid plus any direct expense, tax or other expenditures associate with the investment, or the fair value of the equity instruments issued, or value agreed in the investment contract, except for the value agreed in the investment contract is not a fair market value. Control means having direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s financial and operating activities, and right to receive benefits from operating activities of the legal entity. Cost method is adopted for the investments whose fair value cannot be reliably measured, with which the Group does not exert control, joint control or significant influence over the investees. Cost method is also adopted for the investments in subsidiaries in the Company’s balance sheet. When cost method is adopted, the long term equity investments are measured at its initial investment cost, except that the initial investment cost contains declared dividend. The dividend declared by the investee is recorded as investment income in income statement. Impairment is assessed according to relevant policies. The invested entities over which the Group has joint control or significant influence are measured by equity method. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control. Significant influences refers to the power to participate in making decisions on the financial and operating of an enterprise but not to control or joint control together with other parties over the formulation of the policies. When using equity method, where initial cost of investment excesses the fair value of identifiable net assets of investee, the difference should be recognized in initial investment cost. Where initial cost of investment is smaller than the fair value of identifiable net assets of investee, the difference should be recognized in income statement and the investment cost should be adjusted accordingly. 85 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (11) Long term equity investments (continued) When using equity method, after investment, the Group recognizes the investment profits or losses and adjusts the book value of the long term equity investment based on the share of the net profits or losses of the investee. The share of the net profits and losses of the investee should be recognized at fair value of all identifiable assets in accordance with the accounting policy and accounting period of the Group, and the inter-company transactions between the investees and the Group shall be eliminated in proportion to the Group’s equity interest in the investees after making adjustments on the net profits of the investees’(the loss shall be recognized in full in case impairment is recognized from the inter-company transactions). For the investment in associate and joint ventures before the first time adoption of CAS, the debit balance of the investment differences, if any, also should be deducted from the investment income. The Group will reduce the book value of the long term equity investment in accordance with the share of profits or cash dividends declared to distribute by the invested entities. The net losses of the invested entity should be recognized until the book value of the long term equity investment and other long term rights and interests which substantially from the net investment made to the invested entities are reduced to zero, unless the Group has the obligation to assume extra losses. Where any change is made to the owner's equity other than the net profits and losses of the invested entity, the book value of the long term equity investment are adjusted and included in the owner's equity. When disposing of a long term equity investment, the difference between its book value and the proceeds is recognized in the income statement in the corresponding period. Details for the impairment test and impairment loss recognition for the long term equity investments in subsidiaries, associates and joint ventures, please refer to Note 2 (19). Details for the impairment test and impairment loss recognition for other long term equity investment, which fair value not available in active market and cannot be reliably measured, please refer to Note 2 (18). (12) Biological assets The biological assets of the Group are vines. Biological assets should be recognized when and only when: (i) The Group controls the asset as a result of past events; (ii) It is probable that future economic benefits associate with the asset will flow to the entity; and (iii) The cost of the asset can be measured reliably. 86 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (12) Biological assets (continued) Biological assets comprise consumptive biological assets, productive biological assets, and not-for- profit biological assets. Biological assets are initially measured at its cost. The Group charge deprecation for productive biological assets which satisfy expected production, and record the deprecation in balance sheet and income statement. The Group uses straight line method to calculate the deprecation, and details as follows: Category Estimated useful life Estimated residual Annual depreciation rate rate Vines 20 years - 5% Consumptive biological assets and productive biological assets are measured as at each balance sheet date. Where reliable evidence shows there is natural disaster, plant diseases, insect pests, animal disease or change of market demand that make the realizable net value of any consumptive biological asset or the recoverable amount of any productive biological asset is lower than its book value, provision or impairment should be recognized in income statement in according to the difference. Where the factors which cause any provision of a consumptive biological asset are not exist, the amount of provision are reversed limited to the provision which has been made. The reversed amounts are recognized in the income statement of the current period. Impairment on productive biological assets cannot be reversed. No provision is made for not-for-profit biological assets. The Group evaluates the useful life, expected net salvage value, and the depreciation method of the property, plant and equipment at the end of each year. Agricultural produce harvested from the entity’s biological assets are measured at its weighted- average book value. The book value comprises all material, labor and other indirect expense occurred in producing and gathering the agricultural assets. Agricultural produce harvested are reported in accordance with the CAS 1 Inventories. When biological assets are sold, lost, dead, or damaged, the carrying amount is recognized in the income statement after deduction of relevant taxes. 87 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (13) Property, plant and equipment Property, plant and equipment should be recognized as an asset if, and only if: (i) It is probable that future economic benefits associated with the item will flow to the entity; and (ii) The cost of the item can be measured reliably. Property, plant and equipment are initially measured at cost. The cost of an item of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation is calculated on a straight line basis. The estimated useful life and residual value rate are as follows: Estimated useful Estimated residual Annual depreciation life rate rate Buildings 30-40years 5%-40% 2%-3.2% Machinery 10-20years 5% 4.8%-9.5% Motor Vehicles 6-12years 5% 7.9%-15.8% A variety of depreciation rate can be used for different components of an item of property, plant and equipment according to its different useful lives or nature. The Group evaluates the useful life, expected net residual value, and the depreciation method of the property, plant and equipment every year, and makes adjustment where necessary. For details of the impairment test and impairment loss recognition for property, plant and equipment, please refer to Note 2 (19). 88 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (14) Construction in progress Construction in progress are measured on actual construction costs, including the direct costs of construction, capitalized borrowing costs during the period of construction and other expenditures. Construction in progress is reclassified to the property, plant and equipment when completed and ready for use. Details for the impairment test and impairment loss recognition for construction in progress, please refer to Note 2 (19). (15) Borrowing costs Borrowing costs are interest and other costs incurred by the Group in connection with the borrowing of funds, which includes interests, amortization of discounts or premiums, ancillary costs, and exchange differences arising from foreign currency borrowings. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost of that asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The capitalization of borrowing costs as part of the cost of a qualifying asset shall commence when: (i) Expenditures of the asset are being incurred; (ii) Borrowing costs are being incurred; and (iii) Activities that are necessary to prepare the asset for its intended use of sale are in progress. Capitalization of borrowing costs shall cease when all the activities necessary to prepare the qualifying asset for its intended use of sale are substantially complete. Any borrowing costs incurred after this should be recognized in income statement. 89 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (15) Borrowing costs (continued) During the capitalization period, the amount of borrowing costs eligible for capitalization on a qualifying asset for each accounting period shall be determined by: (i) The actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowing for specifically purpose borrowing; or (ii) Applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing coasts applicable to the borrowings of the entity for general purpose borrowing. When the acquisition, construction or production of a qualifying asset is abnormally interrupted before it necessarily takes a substantial period of time to get ready for its intended use or sale, and the interruption period exceed three months, the capitalization of borrowing coasts shall be temporally ceased. During the cessation of capitalization, the borrowing costs should be recognized in income statement, until the construction resume. 90 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (16) Intangible assets Intangible assets would only be recognized when it can bring economic benefits to the group and its cost could be reliably measured. The opening balance of such intangible assets is measured at its cost. For those intangible assets that acquired by merger and acquisition and its fair value could be reliably measured, their book value would be measured by its fair value. The estimated useful lives are determined on the periods during which it can bring economic benefits to the Group. If the periods cannot be reliably determined, the intangible assets are classified as intangible assets with indefinite useful life. The useful lives of the intangible assets are as follows: Useful life Land use rights 50 years Software use rights 5 years The land use rights obtained by purchase or payment of land lease prepayment are recorded as intangible assets. For self-constructed buildings, the land use rights and plants are recorded as intangible assets and property, plant and equipment, respectively. Purchased buildings are allocated between land use rights and buildings based on actual payments, and are totally recorded as property, plant and equipment when it is difficult to allocate. Intangible assets with finite lives are amortized over the useful life on the straight line basis. The amortization period and amortization method for an intangible asset with a finite useful life are reevaluated at each year end. Intangible assets with indefinite lives are assed for impairment every year whenever there is an indication that the intangible asset may be impaired. If there is evidence that the useful lives of the intangible assets are finite, the change in the useful life assessment from infinite to finite is accounted for on a prospective basis. For details for the impairment test and impairment loss recognition for intangible assets, please refer to Note 2 (19). 91 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (17) Long term prepaid expenses Long term prepaid expenses are amortized over the useful economic life on a straight line basis. Amortization period: Land requisition fee 50 years Land lease prepayment 50 years Greening fee 5 years Others 50 years (18) Financial instruments Financial instruments refer to the contracts whereby the financial assets of an enterprise are formed, and whereby the financial liabilities or right instruments of any other entity are formed. Recognition and derecognizing of financial instruments The Group recognizes the financial assets or financial liabilities as it contracted in financial instruments agreements. If a financial asset meets any of the following requirements, it is derecognized: (i) If the contractual rights for collecting the cash flow of the said financial asset are terminated; or (ii) Transferred the ownership of receive the cash flow form financial assets, or with the responsibility of transferred all cash flow received form financial assets to the third parties; And (a) actually transferred out all the risk and reward related to the financial assets, or (b) actually neither remained nor transferred out almost of the risk and reward of financial assets, but lost the control of the financial assets. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognizing of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognized in the income statement. 92 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (18) Financial instruments (continued) In a regular way purchase or sale financial instrument, the financial instrument should be recognized or derecognized on transaction date. A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation of convention in the marketplace concerned. Transaction date is the date that the Group commits to purchase or disposal a financial instrument. Classification and measurement of financial assets Financial assets are classified when they are initially recognized, including financial assets at fair through profits or losses, loans and receivables. Financial assets initially recognized at fair value. For financial assets measured at fair value through profits or losses, the transaction expenses thereof are directly included in the current profits or losses; for loan and receivables, the transaction expenses thereof are included in the initial costs. Subsequent measurement of financial assets depends on its classification: Financial assets at fair value through profits and losses Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they meet any of the following requirements: (i) The financial assets being acquired mainly for the purpose of selling or repurchase in the near future; (ii) Forming a part of the identifiable combination of financial instruments, which are managed in a centralized way, and for which there is objective evidence that the enterprise will manage the combination by way of short term profit making in the near future; (iii) Being a derivative instrument. Theses financial assets are subsequently measured at fair value, and all the realized and unrealized profits and losses are included in profits and losses of the current year. Gains or losses on these financial assets are recognized in the income statement whenever they are realized or not realized. Dividend or interest associate with financial instrument which measured at fair value and changes recorded in income statement, should be recorded in income statement. 93 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (18) Financial instruments (continued) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are subsequently carried at amortized cost using the effective interest method. Gains and losses are recognized in the income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process. Classification and measurement of financial liabilities Financial liabilities are classified into financial liabilities at fair through profits and losses, other financial liabilities and hedging instrument when they are initially recognized. For financial liabilities at fair through profits and losses, the transaction expenses thereof are directly included in the current profits or losses, while the transaction expenses of other financial liabilities are include in the initially recognized amounts. Subsequent measurement of financial liability depends on its classification: For other financial liabilities, the financial liabilities are subsequently measured at amortized cost by adopting effective interest rate method. Fair value of financial instruments The fair value of investments that are actively traded in organized financial markets is determined by reference to quoted market prices. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument, which is substantially the same; a discounted cash flow analysis; option pricing models and other valuation models. 94 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (18) Financial instruments (continued) Impairment of financial assets The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Positive evidences refer to those occurred after the initial recognition, have effect on estimated future cash flows of the financial assets, and can be measured reliably. Assets carried at amortized cost If there is objective evidence that an impairment loss on financial assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate after taking into account of the collateral over these balances. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If it is determined that objective evidence of impairment exists for an individually assessed financial asset, the impairment losses are recognized in the income statement of the current year. Not individually significant financial assets are assessed individually or collectively included in a group of financial assets with similar credit risk characteristics. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the income statement, to the extent that the carrying value of asset does not exceed its amortized cost at the reversal date. 95 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (18) Financial instruments (continued) Financial assets carried at cost If there is objective evidence that the financial assets have been impaired, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset, and recognized in the income statement of the current year. Such impairment losses are not reversed. The impairment on long term equity investment which are measured by employing cost method in accordance with CAS2 Long term equity investments, have no quoted market price in an active market and the fair value cannot be reliably measured are recorded according to the aforesaid requirements. Transfers of financial assets If the Group has transferred substantially all the risks and rewards of the asset and waived the control of the asset, the asset is derecognized. If the Group has retained substantially all the risks and rewards of the asset, the assets are not de recognized. Where the Group has neither transferred nor retained substantially all the risks and rewards of the asset, if the Group waived the control of the assets, the financial assets are derecognized and the assets and liabilities are recognized accordingly; if the Group did not waive the control of the assets, the financial assets are recognized to the extent of the Group's continuing involvement in the asset, and the liabilities are recognized accordingly. 96 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (19) Impairment of assets Impairments on assets other than inventories, deferred tax, financial assets and long term equity investments without quoted market price in active market the fair value cannot be reliably measured are determined according to the following methods: On each balance sheet date, the Group made assessment on whether or not there is any indication of potential asset impairment. If there is any evidence that indicates the possibility of asset impairment, the recoverable amount of the asset is being estimated. Independent of whether there are indication of potential impairment, the goodwill from an enterprise merger and intangible assets whose useful lives are indefinite are subjected to impairment testing each year. Intangible assets which are not ready to use also need perform impairment test every year. The recoverable amount of an asset is the higher of the asset's or cash generating unit's value in use and its fair value less costs to sell, and is determined for an individual asset. If it is difficult to determine the recoverable amount individually, the recoverable amount is determined for the cash generating unit to which the asset belongs. Cash generating unit is determined as the asset generate cash inflows that are largely independent of those from other assets or groups of assets. An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the income statement and provision is made accordingly. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, and not larger than the reportable segment determined by the Group. 97 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (19) Impairment of assets (continued) When conducting impairment testing on relevant cash generating units or groups of cash generating units that have related goodwill, if there is any evidence indicating that impairment of the cash generating units or groups of units has occurred, the Company first carries out impairment testing on the cash generating units or groups of units excluding goodwill, calculating the recoverable amount, comparing it with the corresponding carrying amount and recognizing any resulting impairment loss. Then impairment testing are conducted on the cash generating units or groups of units with goodwill included, the carrying amount of these cash generating units or combinations of cash generating units (including the carrying amount of the goodwill allocated thereto) compared to the recoverable amount; if the recoverable amount of said cash generating units or groups of units is below the carrying amount thereof, the impairment loss are first deducted from the carrying amount of the corporate assets and goodwill which have been allocated to the cash generating unit or group of units, and then deducted from the carrying amount of the remaining assets pro rata with goodwill excluded from consideration. After a loss of asset impairment has been recognized, it is not be reversed in future accounting periods. (20) Contingent liabilities Besides the contingent consideration or liabilities through merger and acquisition, contingent liabilities should be recognized when and only when: (i) The group has a present obligation as a result of a past event; (ii) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (iii) A reliable evaluation can be made of the obligation. The contingent liabilities are measured at the best estimate of the expenditure required to settle the present obligation at the balance sheet date, taking into consideration of the risks, uncertainties and time value of money. The book value of contingent liabilities is reviewed at each balance sheet date. Whether there is any objective evidence indicating that the book value cannot reflect the best estimated amount, adjustments should be make to the book value. The acquiree’s contingent liabilities through business combination is initial recognized at fair value, and its subsequent measurement is recognized at the higher of estimated value and the initial cost less any accumulated amortization. 98 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (21) Revenue Revenue is recognized when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: Revenue from the sale of goods When the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold, and cost of sales can be measured reliably. The amount of revenue arising on sale of goods is determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable. Rendering of service When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognized by reference the stage of completion of the transaction at the reporting date. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: (i) The amount of revenue can be measured reliably; (ii) It is probable that the economic benefit associated with the transaction will flow to the entity; (iii) The stage of completion of the transaction at the reporting date can be measured reliably; and (iv) The costs incurred for the transaction and the costs to complete the transaction can be measured reliably. Interest income Interest income is measured based on the borrowing periods and actual interest rate. (22) Leases Leases that substantially transfer all the rewards and risks of ownership of assets are accounted for as finance leases, otherwise are accounted for as operating leases. As an operating lessee Rental expenses under the operating leases are charged to related costs of the assets or the income statement on a straight line basis over the lease period. 99 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (23) Employee benefits Employee benefits refer to all kinds of remunerations and other relevant reimbursements made by the Group to its employees in exchange for services of employees. During accounting periods wherein an employee renders services to the Group, the Group recognized the benefits payable as a liability. The benefits payable which will be matured over 1 year are discounted when it is material. Medical insurance, pensions, unemployment insurance, other social insurance and housing fund are recorded as cost of relevant assets or expenses for the relevant period. If an Group terminates the labor relationship with any employee prior to the expiration of the relevant labor contract or makes a severance package proposal with the purpose of enticing the employees to willingly accept such a termination, the Group recognized the contingent liabilities to be incurred due to severance pay, and recorded them in income statement of the current period. The treatment for the early retirement planning is on the same basis to that of the termination benefits. The salaries and the social insurance expenses for the periods from the employee’s termination of service and the normal retirement of these staffs are recognized as employee benefits payable when meeting the aforesaid retirement benefits recognition requirements, and recognized to income statement of relevant period. (24) Profit distribution The cash dividend is recognized as liability after the approval of shareholders’ meeting. (25) Income tax Income tax comprises current and deferred tax. Income tax is recognized in the income statement, except for goodwill arises from business combination, or transactions directly recorded in equity of which the related income is recorded in equity. The Group recognizes the income tax assets or liabilities related to current period and prior period by calculating the expected payable or refundable amount in accordance with the tax law. Deferred tax is provided on balances sheet approach on all temporary differences between tax basis and accounting basis at each balance sheet date. 100 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (25) Income tax (continued) Deferred tax liabilities are recognized for all taxable temporary difference, except: (i) Where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and (ii) In respect of taxable temporary differences associated with interests in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except: (i) Where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and (ii) In respect of deductible temporary differences associated with interests in subsidiaries, associates and joint ventures, deferred tax assets are only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. At each reporting date, the entity re-assesses unrecognized deferred tax assets. The entity recognizes a previously unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. 101 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (26) Government grants Government grants refers to monetary or non monetary assets received by an enterprise from the government, but excludes capital invested in the Group by the government that gives the government ownership rights. Government grants are recognized where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. Monetary grants are measured on the basis of the amount received or the amount receivable. Non monetary grants are measured based on the fair value of relevant assets, where fair value cannot be measure reliably, the grants are measured based on nominal amount. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual installments. Grant which measured at nominal amount, should be recorded in income statement. (27) Related party relationships Related party relationships can be defined as the entity is under control, joint control or significant influence by another entity or two or more than two entities are under the control, joint control by the same entity. (28) Significant accounting judgments and accounting estimates Preparing financial statements requires management make judgment and estimates, which could affect the amount of revenue, expense, asset, liabilities and the disclosure of contingent liabilities. However, those uncertainties of estimate may cause significant adjustment on the book value of assets and liabilities. Estimation uncertainty The following are key assumptions for after balance sheet date event and other factors of uncertain estimation. They may cause material adjustment on balance sheet in following accounting period. 102 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (28) Significant Accounting Judgments and Accounting Estimates (continued) Estimation uncertainty (continued) Deferred tax assets Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Depreciation As set out in Note 2 (13), the depreciation is calculated on the straight line basis to write-off the cost of each item of fixed assets to its residual value over its estimated useful life. The Group’s management determines the estimated useful lives for its property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. If the previous estimates have significant changes, and depreciation expenses will be adjusted in the future periods. Useful life of intangible assets The estimated useful lives of the intangible assets are determined based on the historical experience of the actual useful lives of intangible assets of similar nature and functions as well as considering the contractual rights and statutory rights applicable to the intangible assets. When the estimated useful lives of finite intangible assets are shortened or extended, the amortization periods should be adjusted accordingly. When there is evidence indicating the useful lives of intangible assets with indefinite useful lives becomes finite, the useful lives should be estimated and the intangible assets should be accounted for in accordance with the standards for the intangible assets with finite useful lives. 103 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (28) Significant Accounting Judgments and Accounting Estimates (continued) Estimation uncertainty (continued) Impairment of biological assets As set out in Note 2 (12), the Group examined the consumptive biological assets and productive biological assets at each balance sheet date. If any reliable evidence shows that the realizable net value of any consumptive biological asset or the recoverable amount of any productive biological asset is lower than its book value due to natural disaster, plant diseases and insect pests, animal disease or change of market demand, the Group, on the basis of the difference between the realizable net value or the recoverable amount and the book value, make provision for the loss on decline in value of or for the impairment of the biological asset and are recorded it in the profits and losses of the current period. The aforesaid realizable net value and recoverable amount is determined according to the CAS 1 Inventories and CAS 8 Asset Impairment, respectively. Impairment of non-current assets As set out in Note 2 (19), the Group assesses whether the recoverable amount is lower than the book value. If there are any indicators that the book value of non-current assets cannot be fully recoverable, impairment losses should be recorded. The recoverable amount is the higher of an asset’s fair value less costs to sell and the present value of the future cash flows expected to be derived from an asset. As it is difficult for the Group to obtain the quoted market price of the assets (or assts group), the fair value of the assets cannot be reliably estimated. When the management make estimation on the expected future cash flows from the asset or cash generating unit, estimates should be made on choosing a suitable production volume, selling price and related operating costs discount rate in order to calculate the present value of those cash flows. When recoverable amounts are undertaken, management may use all available for use information, including the forecast on production volume, selling price and related operating costs in reasonable and supportable assumptions. Estimated provision for trade receivables A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy are considered indicators that the trade receivable is impaired. The provision is reassessed at the end of each year. 104 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (CONTINUED) (28) Significant Accounting Judgments and Accounting Estimates (continued) Estimation uncertainty (continued) Inventory provision based on net realizable value The inventory are measured on the lower of carrying value and net realizable value, and provision should be made for impairment on obsolete and slow moving inventories. The group will reassess whether the net realizable value is lower than the carrying cost at the end of each year. 3. TAXES (1) The main taxes and tax rate are as follows: Value added tax VAT is levied at 17% on the invoiced amount after deduction of eligible input VAT. Consumption tax The consumption tax of the group is levied on gross revenue at rates ranging from 10% to 20%. Business tax The Group is subject to a business tax of 5% on its taxable revenue. City development tax Levied at 7% of total business tax payment. Corporate income tax The Group is subject to a corporate income tax rate of 25% on its taxable income. 105 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 3. TAXES (CONTINUED) (2) Tax incentives and relative permit A subsidiary of the Company, Xinjiang Tianzhu Co., Ltd which is a wine production enterprise incorporated in Xinjiang Weizu Autonomous. In accordance with (Caishui [2011] No.60) and (Xinzhengfa [2010] No.105), from the first profit-making year, which is from 2012 to 2015, the company enjoys a favorable corporate income tax rate of 15% besides the exemption of corporate income tax which belongs to local government. The corporate income tax applicable for 2012 is 9% A subsidiary of the Company, Xinjiang Babao Baron Chateau Co., Ltd. which is a wine production enterprise incorporated in Xinjiang Weizu Autonomous. In accordance with (Caishui [2011] No.60) and (Xinzhengfa [2010] No.105), from the first profit-making year, which is from 2011 to 2015, the company enjoys a favorable corporate income tax rate of 15% besides the exemption of corporate income tax which belongs to local government. The corporate income tax applicable for 2012 is 9% Ningxia Changyu Grape Growing Co., Ltd., a subsidiary of the Group, whose principal activity is grape growing is incorporated in Ningxia Huizu Autonomous Region. According to clause 27 of PRC Corporate Income Tax and clause 86 of PRC Corporate Income Tax Measures for Implementation, Ningxia Changyu Grape Growing Co., Ltd. enjoys an exemption of corporate income tax. 106 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 4. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (1) Particulars of the subsidiaries Name Place and date of Legal Business Registered Principle Incorporate registration representative nature capital activities code Subsidiary acquired from a business combination: under non-common control Xinjiang Tianzhu Wine Co.,Ltd. 11 April 2006 Zhou Manufacturing RMB Production and 787 604 261 (“Xinjiang Tianzhu”) (a) Shihezi , Xinjiang, Hongjiang 75,000,000 sales of wine China Subsidiaries acquired by establishment: Yantai Changyu Pioneer Vehicular 1 December 1992 Zhang Transportation RMB Transportation 165 031 729 Transport Co., Ltd. (“Vehicular Yantai, Shandong, Lixian 300,000 service Transportation”) China Beijing Changyu Sales and 14 July 1998 Sun Sales RMB Sales of wine 634 377 029 Distribution Co., Ltd. (“Beijing Beijing, China Jian 1,000,000 Sales”) Yantai Kylin Packaging Co., Ltd. 29 September 1999 Yang Manufacturing RMB Production of 863 052 455 (“Kylin Packaging”) (b) Yantai, Shandong, Ming 15,410,000 packaging China materials Yantai Changyu-Castel Wine 3 September 2001 Sun Manufacturing USD Production and 730 682 613 Chateau Co., Ltd. Yantai, Shandong, Liqiang 5,000,000 sales of wine (“Changyu Chateau”) (c) China Changyu (Jingyang) Wine Co., 5 December 2001 Wei Manufacturing RMB Production and 732 663 643 Ltd. (“Jingyang Wine”) Jingyang, Shanxi, Bingsheng 1,000,000 sales of wine China Yantai Changyu Pioneer Wine 24 December 2001 Jiang Sales RMB Sales of wine 746 576 380 Sales Co., Ltd. (“Sales Yantai, Shandong, Hua 8,000,000 Company”) China Langfang Development Zone 1 March 2002 Alan Manufacturing USD Production and 735 624 56X Castel-Changyu Wine Co., Ltd. Lanfang , Hebei, Castel 6,108,808 sales of wine (“Langfang Castel”) (d) China Changyu (Jingyang) Wine Sales 8 April 2002 Wei Sales RMB Sales of 735 379 154 Co., Ltd. (“Jingyang Sales”) Jingyang, Shanxi, Binsheng 1,000,000 wine China Langfang Changyu Pioneer Wine 19 April 2002 Liu Sales RMB Sales of wine 737 388 150 Sales Co.,Ltd. (“Langfang Langfang, Hebei, Wanqiang 1,000,000 Sales”). China 107 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 4. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) (1) Particulars of the subsidiaries (continued) Name Place and date of Legal Business nature Registered Principle Incorporate registration represe- capital activities code ntative Shanghai Changyu Sales and 28 April 2003 Zhou Sales RMB Sales of wine 749 571 075 Distribution Co., Ltd. (“Shanghai Shanghai, China Hongjiang 1,000,000 Sales”) Beijing Changyu AFIP Agriculture 8 November 2011 Sun Sales RMB Planting and 585 851 395 Development Co., Ltd. Beijing, China Liqiang 1,000,000 tourism (“Agriculture Development”) Beijing Changyu AFIP Wine 27 October 2005 Sun Manufacturing RMB Production and 780 953 469 Chateau Co., Ltd. (“Beijing Beijing, China Liqiang 110,000,000 sales of wine Chateau”) (e) Yantai Changyu Wine Sales Co., 9 January 2006 Jiang Sales RMB Sales of wine 783 487 627 Ltd.( “Wines Sales”) Yantai, Shandong, Hua 5,000,000 China Yantai Changyu Pioneer 29 September 2005 Zhou Sales RMB Import and 780 766 161 International Co., Ltd. (“Pioneer Yantai, Shandong, Hongjiang 5,000,000 export of wine International”) China and technology Hangzhou Changyu Wine Sales 14 June 2006 Jiang Sales RMB Whole-sale and 788 283 631 Co., Ltd.(“Hangzhou Changyu”) Hangzhou, Hua 500,000 retail of packaged Zhejiang, China food Ningxia Changyu Grape-Growing 28 April 2006 Shao Planting RMB Plant and 788 200 410 Co., Ltd.(“Ningxia Growing”) Yinchuang, Chunsheng 1,000,000 purchase of Ningxia, China grape Huanren Changyu National Wines 16 November 2006 Leng Sales RMB Whole-sale and 794 822 179 Sales Co., Ltd. (“National Wines”) Huanren, Liaoning, Bin 2,000,000 retail of wine China Liaoning Changyu Ice Wine 3 April 2003 Zhou Manufacturing RMB Production and 747 128 301 Chateau Co., Ltd. (“Ice Benxi, Liaoning, Hongjiang 26,300,000 sales of ice wine Chateau”) (f) China Yantai Development Zone 4 December 2006 Zhou Sales RMB Whole-sale and 796 183 411 Changyu Trading Co., Yantai, Shandong, Hongjiang 5,000,000 retail of wine Ltd.(“Development Zone China Trading”) Shenzhen Changyu Wine 17 July 2007 Lin Sales RMB Whole-sale and 664 195 20X Marketing Ltd.(“Shenzhen Futian, Shenzhen, Pu 500,000 retail of wine Marketing”) China 108 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 4. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) (1) Particulars of the subsidiaries (continued) Name Place and Legal Business Registered Principle Incorporate date of represe nature capital activities code registration -ntative Yantai Changyu 27 March 2007 Zhou Sales RMB Whole-sale and 660 176 044 FushanTrading Yantai, Hongjiang 5,000,000 retail of wine Company (“Fushan Shandong, Trading”) China Beijing AFIP 4 December Sun Services RMB Meeting service, 669 926 612 Meeting Center 2007 Hongbo 500,000 foods, (“Meeting Center”) Miyun, accommodation, (g) Beijing , China tourism and sales of souvenir Beijing AFIP 4 June 2008 Liu Tourism RMB Tourism and 676 627 372 Tourism and Culture Miyun, Shilu 500,000 culture Company (“AFIP Beijing , China communication, Tourism”) (h) development of tourist resources, meeting service Ningxia Changyu 25 April 2008 Li Manufacturing RMB Manufacturing 670 408 275 Pioneer Wine Co., Yinchuan, Jiming 1,000,000 and sales of wine, Ltd. (“Ningxia Ningxia, China packing material, Wine”) plant, process and purchase of grapes Yantai Changyu 26 November Liu Quan Sales RMB Packaging of 683 222 859 DingLuoTe Chateau. 2008 Yantai, 80,000,000 foods (“Ding Luo Te Shandong China Chateau”) Qing Tong Xia 17 November Liu Sales RMB Whole-sale and 694 334 151 Changyu Wine 2009 Yuquan 500,000 retail of wine Qing Tong Marketing Ltd. Xia , Ningxia, (“Qing Tong Xia China Sales”) XinJiang BaBao 2 April 2010 Sun Manufacturing RMB Manufacturing 552 414 949 Baron Changyu Wine Shihezi, Liqiang 150,000,000 and sales of wine Chateau Co., Xinjiang, China Ltd.(“Shi He Zi Chateau”) 109 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 4. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) (1) Particulars of the subsidiaries (continued) Name Place and Legal Business Registered Principle Incorporate date of representative nature capital activities code registration Ningxia Moser 15th 26 April 2010 Zhou Manufacturing RMB Wine / packaging 694 349 740 Changyu Wine Chateau Yinchuan, Hongjiang 2,000,000 manufacturing, Co., Ltd. (“ Ningxia Ningxia, tourism Chateau”) China Shanxi Changyu Rina 12 April 2010 Sun Manufacturing RMB Tourism and wine 552 180 142 Castle Chateau Co., Xianyang, Liqiang 20,000,000 manufacturing Ltd.(“ Chang’an Shanxi, China Chateau”) Yantai Changyu Wine 29 March Sun Manufacturing RMB Wine 555 235 76X Research and 2010 Liqiang 500,000,000 manufacturing Development Co., Ltd. Yantai, (“R&D Centre”) (i) Shandong China Changyu (HuanRen) 2 December Zhou Hong Jiang Manufacturing RMB Fermatition 587 310 365 Wine Co., Ltd. (“Huan 2011 5,000,000 project preparation Ren Wine”) Benxi LiaoNing China Xinjiang Changyu Sales 8 August 2011 Lin Sales RMB Foods wholesales 580 208 296 Co., Ltd (“Xinjiang Shihezi Pu 10,000,000 Sales”) Xinjiang China Xinjiang Changyu 25 August Lin Sales RMB Red wine and fruit 280 222 610 Winery Co., Ltd 2011 Pu 10,000,000 wine (“Xinjiang Winery”) Shihezi Xinjiang China Ningxia Changyu 8 November Zhou Sales RMB Whole sale of 054 609 428 Trading Co., Ltd 2012 Hongjiang 1,000,000 pre-packed foods (“Ningxia Trading”) Yinchuan (j) Ningxia China Shanxi Changyu Rina 29 October Sun Sales RMB Tourism and wine 056 906 215 Wine Sales Co., Ltd 2012 Liqiang 3,000,000 manufacturing (“Shanxi Sales”)(k) Xianyang Shanxi China Penglai Changyu Wine 7 September Leng Sales RMB Sales of red wine 053 429 070 Sales Co., Ltd (“Penglai 2012 Bin 5,000,000 Sales”)(l) Penglai Shandong China 110 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 4. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) (1) Particulars of the subsidiaries (continued) Equity interest owned by the Company Name Paid in capital Direct Indirect Voting Consolidated Non- at 31 December power financial controlling 2012 statements interest Subsidiary acquired in business combination :under non-common control Xinjiang Tianzhu (a) RMB 60% - 100% Yes RMB 60,000,000 56,093,912 Subsidiaries acquired by establishment: Vehicular Transportation RMB 100% - 100% Yes - 300,000 Beijing Sales RMB 100% - 100% Yes - 1,000,000 Kylin Packaging (b) RMB 100% - 100% Yes - 23,176,063 Changyu Chateau (c) RMB 70% - 100% Yes RMB 28,968,100 12,365,016 Jingyang Wine RMB 90% - 10% Yes - 1,000,000 Sales Company RMB 90% 10% 100% Yes - 8,000,000 Langfang Castel (d) RMB 39% 10% 100% Yes RMB 12,142,200 22,702,522 Jingyang Sales RMB 10% - 90% Yes - 1,000,000 Langfang Sales RMB 10% - 90% Yes - 1,000,000 Shanghai Sales RMB 30% 70% 100% Yes - 1,000,000 Agriculture Development RMB -- 100% 100% Yes -- 1,000,000 Beijing Chateau (e) RMB 70% - 100% Yes RMB 77,000,000 35,293,868 111 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 4. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) (1) Particulars of the subsidiaries (continued) Equity interest owned by the Company Name Paid in capital Direct Indirect Voting Consolidate Non-controlling at 31 December power financial interest 2012 statements Wines Sales RMB 90% 10% 100% Yes - 5,000,000 Pioneer International RMB 70% 30% 100% Yes - 5,000,000 Hangzhou Changyu RMB - 100% 100% Yes - 500,000 Ningxia Growing RMB 100% - 100% Yes - 1,000,000 National Wines RMB 100% - 100% Yes - 2,000,000 Ice Chateau (f) RMB 51% - 100% Yes RMB 13,413,000 16,959,292 Development Zone Trade RMB - 100% 100% Yes - 5,000,000 Shenzhen Marketing RMB - 100% 100% Yes - 500,000 Fushan Trading RMB - 100% 100% Yes - 5,000,000 Meeting Center (g) RMB - 100% 100% Yes - 500,000 AFIP Tourism(h) RMB 70% - 100% Yes RMB 350,000 2,966,399 Ningxia Wine RMB 100% - 100% Yes - 1,000,000 Ding Luo Te Chateau RMB 100% - 100% Yes - 80,000,000 112 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 4. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) (1) Particulars of the subsidiaries (continued) Equity interest owned by the Company Name Paid in Direct Indirect Voting Consolidate Non- capital as of power financial controlling 12/31/2012 statements interest Qing Tong Xia Sales RMB 100% 100% Yes - 500,000 Shi He Zi Chateau RMB 100% - 100% Yes - 150,000,000 Ningxia Chateau RMB 100% - 100% Yes - 2,000,000 Chang’an Chateau RMB 100% - 100% Yes - 20,000,000 Research and Development RMB 100% - 100% Yes - Centre (i) 500,000,000 Huan Ren Wine RMB 100% - 100% Yes - 5,000,000 Xinjiang Sales RMB - 100% 100% Yes - 10,000,000 Xinjiang Winery RMB - 100% 100% Yes - 10,000,000 Ningxia Trading (j) RMB - 100% 100% Yes - 1,000,000 Shanxi Sales (k) RMB - 100% 100% Yes - 3,000,000 Penglai Wine Sales (l) RMB - 100% 100% Yes - 5,000,000 113 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 4. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) (1) Particulars of the subsidiaries (continued) (a) Xinjiang Tianzhu was acquired by the Company in 2009, accounting for 60% of Tianzhu’s equity interest. Pursuant to the operation contract signed by the Company, the Company is entrusted to manage Tianzhu and therefore has the full power to control its strategic operating, investing and financing policies by paying the non-controlling party contract fee. The operation agreement will be terminated on 31 December 2018. (b) Kylin Packaging is a sino-foreign joint venture founded in 29 September 1999. On 4 July 2011, the Company has purchased the 50% share of Kylin Packaging held by the foreign investor at the price of RMB15,392,250. By 23 August 2011, the Company has become the parent company of Kylin Packaging by fully paid the valuable consideration. The change procedure of Kylin Packaging has been done by 31 December 2012. (c) Changyu Chateau is a Sino-foreign joint venture established by the Company and a foreign investor. Pursuant to an operation contract signed by the Company, and the foreign investor, the Company is entrusted to manage Changyu Chateau and therefore has the full power to control its strategic operating, investing and financing policies. The operation agreement will be terminated on 31 December 2012. (d) Langfang Castel is a sino-foreign joint venture established by the Company and a foreign investor. Pursuant to the agreement signed by the Company, Langfang Castel and the foreign investor, the Company is entrusted to manage Langfang Castel and therefore has the full power to control its strategic operating, investing and financing policies, therefore the financial statements of Langfang Castel are consolidated in the Group’s consolidated financial statements. The operation agreement will be terminated on 31 December 2012. (e) Beijing Chateau is a joint venture established by the Company and two investors. Pursuant to an operation contract signed by the Company and the investors, the Company is entrusted to manage Beijing Chateau and therefore has the full power to control its strategic operating, investing and financing policies. The operation agreement will be terminated on 2 September 2019. (f) Ice Chateau is a sino-foreign joint venture established by the Company and a foreign investor. Pursuant to the agreement signed by the Company, Ice Chateau and the foreign investor, the Company is entrusted to manage Ice Chateau and therefore has the full power to control its strategic operating, investing and financing policies. The operation agreement will be terminated on 31 December 2016. 114 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 4. SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS (continued) (1) Particulars of the subsidiaries (continued) (g) Meeting Centre is a joint venture established by the Company and two investors. Pursuant to an operation contract signed by the Company and the investors, the Company is entrusted to manage Meeting Centre and therefore has the full power to control its strategic operating, investing and financing policies. The operation agreement will be terminated on 2 September 2019. (h) AFIP Tourism is a joint venture established by the Company and two investors. Pursuant to an operation contract signed by the Company and the investors, the Company is entrusted to manage AFIP Tourism and therefore has the full power to control its strategic operating, investing and financing policies. The operation agreement will be terminated on 2 September 2019. (i) R&D Centre is a joint venture established by the Company in 2010. The registered capital is RMB500,000,000. Up to 31 December 2012, all capital injection of RMB 500,000,000 has been remitted (j) Ningxia trading is a limited liability company solely founded by the Company in 2012. The registered capital is RMB1,000,000. Up to 31 December 2012, all capital injection of RMB 1,000,000 has been remitted. (k). Shanxi sales is a limited liability company solely founded by the Company in 2012. Its paid capital is RMB3, 000,000 which has been fully paid by the end of 2012. (l). Penglai sales is a limited liability company solely founded by the Company 2012. Its paid capital is RMB5, 000,000 which has been fully paid by the end of 2012. (2) Changes in the scope of consolidated financial statement Except for those newly established subsidiaries, the scope of consolidated financial statements was same with last year. (3) The entity newly included in the consolidation and the entity no longer in the consolidation The newly included subsidiary is as following: Net Asset Net profit/(loss) up to date as at 2012.12.31 Ningxia Trading 1,000,000 - Shanxi Sales 2,994,271 ( 5,729) Penglai Sales 5,000,000 83,849,580 115 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Cash and bank 2012 2011 Cash on hand 48,894 74,859 Cash at bank 2,227,421,934 2,508,587,182 Other monetary assets - 24,305,156 2,227,470,828 2,532,967,197 As at 31 December 2012, the balance of restricted cash of the Group is RMB 2,652,083, which is the Group’s housing fund (31 December 2011:RMB 2,604,604). As at 31 December 2012, the Group has no overseas cash and bank deposit (31 December 2011: Nil). Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between three months to one year, based on the demands of the Group. As at 31 December 2012, The Group’s term deposits with original maturity of more than three months when acquired is 662,524,719.31 (31 December 2011: RMB1,273,844,720) with interest rates ranging from 2.86%-3.50%, which will mature from 3 months to 1 year. (2) Bills receivable 2012 2011 Bank acceptance bills 92,635,701 56,268,482 As of 31 December 2012, there was no pledged bills receivable (31 December 2011: Nil), and no bills receivable were reclassified as accounts receivable due to the default of drawer (31 December 2011: Nil). As at 31 December 2012, the top four bills receivable endorsed to third parties but not yet matured is as follows: 2012 Drawer Issuing date Maturity date Amount Fuzhou Shengshihanggang trading 11/30/2012 2/28/2013 500,000 Co.,Ltd. Fuzhou Shengshihanggang trading 11/30/2012 2/28/2013 500,000 Co.,Ltd. Fuzhou Shengshihanggang trading 11/30/2012 2/28/2013 500,000 Co.,Ltd. Jinba Men’s clothing Co.,Ltd. 11/16/2012 2/16/2013 100,000 1,600,000 116 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (2) Bills receivable (continued) As at 31 December 2011, the top five bills receivable endorsed to third parties but not yet matured is as follows: Drawer Issuing date Maturity date Amount Weifang Hongda Co.,Ltd. 5/8/2011 5/2/2012 500,000 Anqing Hailin electronic Co.,Ltd. 4/7/2011 4/1/2012 200,000 Qingzhou Longxing cloth Co.,Ltd. 1/7/2011 1/1/2012 200,000 Changzhou Changlai metallic 11/7/2011 11/1/2012 200,000 materials Co.,Ltd. Huabei Zhiyao Hebei Minyao Co.,Ltd. 14/10/2011 14/4/2012 115,000 1,215,000 As at 31 December 2012, there was no notes receivable discounted to obtain short-term loan (31 December 2011: Nil). (3) Trade receivables The normal credit term is one month, which can be extended to three months for certain major customers. The trade receivables are interest free. The aging analysis is as follows: 2012 2011 Within 1 year 135,217,384 126,906,526 As at 31 December 2012, there was no bad debt provision for trade receivables (31 December 2011: Nil). There was no bad debt provision made, reversed or written-off by management in 2012 (2011: Nil). 2012 2011 Balance Provision Balance Provision Amount % Amount % Amount % Amount % Individually significant 73,711,433 54.5 - 63,712,485 50.2 - Individually insignificant 61,505,951 45.5 - 63,194,041 49.8 - 135,217,384 100.0 - 126,906,526 100.0 - As at 31 December 2012, there was no trade receivable due from shareholders with voting rights of 5% or above (31 December 2011: Nil). 117 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) Trade receivables (continued) As at 31 December 2012, the top 5 of trade receivables are as follows: Relationship Percentage with the of total Group receivables Amount Aging % Kangcheng Investment(China)Co., Ltd Third party 27,942,717 Within 1 year 20.7 Nonggongshang supermarket (group) Co., Ltd Third party 11,439,282 Within 1 year 8.5 Jiangsu Hengxing wine Co., Ltd Third party 7,512,422 Within 1 year 5.6 Linhua supermarket (group) Co., Ltd Third party 4,428,464 Within 1 year 3.3 Beijing Wumei Commercial (group) Co., Ltd Third party 4,415,473 Within 1 year 3.3 55,738,358 41.4 As at 31 December 2011, the top 5 of trade receivables are as follows: Relationship Percentage with the of total Group receivables Amount Aging % Yantai Zhongya Sales Co., Ltd Third party 13,667,157 Within 1 year 10.8 Nonggongshang supermarket (group) Co., Ltd Third party 13,261,917 Within 1 year 10.5 Yantai Zhongya pharmacy Co., Ltd Third party 7,309,907 Within 1 year 5.8 Suguo Supermarket Co., Ltd Third party 6,895,232 Within 1 year 5.4 Jiangsu Hengxing wine Co., Ltd Third party 6,651,512 Within 1 year 5.2 47,785,725 37.7 118 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) Trade receivables (continued) As at 31 December 2012, trade receivables due from related parties are as following: Relationship with the Percentage of total Group Amount receivables % Yantai Changyu Under the control of Tourism Co.,Ltd the same parent company 311,220 0.2 Yantai Zhongya Under the control of Phamaceutical tonic the same parent wine Co.,Ltd company 1,820,376 1.3 2,131,596 1.5 As of 31 December 2011, trade receivables from related parties are as following: Relationship with the Percentage of total Group Amount receivables % Yantai Changyu International Window of the Wine City Under the control of the Co.,Ltd same parent company 218,690 0.2 Yantai Changyu Under the control of the Tourism Co.,Ltd same parent company 358,020 0.3 Yantai ShenMa Under the control of the Packing Co.,Ltd same parent company 968,136 0.8 1,544,846 1.3 119 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) Advances to suppliers As at 31 December 2012 and 2011, the aging of advances to suppliers are all within 1 year. As at 31 December 2012, the top 5 of advances to suppliers are as follows: Percentage of Relationship Reason total advances with the for being to suppliers Group Amount Aging outstanding % Shandong Yantai Brewing goods not Sales Co.,Ltd. Third party 17,714,762 Within 1 year received 40.0 Zhuhai Quanda Industrial goods not Co.,Ltd Third party 10,590,809 Within 1 year received 23.9 Jialidatong Logistics goods not Co.,Ltd Yantai Branch Third party 2,678,178 Within 1 year received 6.0 goods not Custom of Yantai Third party 1,082,298 Within 1 year received 2.4 Austria Lawrence Fine goods not Wines V Co. Ltd Third party 955,301 Within 1 year received 2.2 33,021,348 74.5 As at 31 December 2011, the top 5 of advances to suppliers are as follows: Percentage of Relationship Reason total advances with the for being to suppliers Group Amount Aging outstanding % Shandong Yantai Brewing goods not Sales Co.,Ltd. Third party 17,874,715 Within 1 year received 23.1 goods not Yantai Custom Third party 6,160,448 Within 1 year received 8.0 goods not Qingdao Xiangu Co., Ltd. Third party 5,863,346 Within 1 year received 7.6 goods not Seguin Morean Co., Ltd. Third party 5,838,421 Within 1 year received 7.6 Yantai Zhongya Sales goods not Co., Ltd. Third party 5,686,206 Within 1 year received 7.4 41,423,136 53.7 As at 31 December 2012, there was no advance paid to shareholders with voting rights of 5% or above (31 December 2011: Nil). 120 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) Interest receivable 2012 Opening Closing balance Increase Decrease balance Interests of term deposits 15,763,431 27,146,293 (35,693,870) 7,215,854 2011 Opening Closing balance Increase Decrease balance Interests of term deposits 9,519,721 34,027,807 (27,784,097) 15,763,431 As at 31 December 2012, there was no overdue interest receivable (31 December 2011: Nil). (6) Other receivables The aging analysis is as follows: 2012 2011 Within 1 year 26,741,541 71,196,465 1 to 2 years 943,410 3,480,623 2 to 3 years 376,038 7,394,855 Over 3 years 11,522,556 8,006,463 39,583,545 90,078,406 Less: bad debts provision (11,120,600 ) ( 14,654,792 ) 28,462,945 75,423,614 121 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOT ES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) Other receivables (continued) The movement of provision for other receivables is as follows: Opening Accrued Write-off Closing 2012 14,654,792 - (3,534,192) 11,120,600 2011 8,000,000 6,654,792 - 14,654,792 2012 2011 Bad debts Bad debts Balance provision Balance provision Amount % Amount % Amount % Amount % Individually significant and Provision 11,120,600 28.1 11,120,600 100 8,000,000 8.9 8,000,000 100 Individually insignificant and Provision - - - 6,654,792 7.4 6,654,792 100 Not overdue and not impaired 28,462,945 71.9 - 75,423,614 83.7 - 39,583,545 100.0 11,120,600 90,078,406 100.0 14,654,792 As at 31 December 2012 and 2011, the bad debt provision for individually significant balance is as follows: Bad debts Reason for provision Balance provision Percentage Tiantong Security Co., The debtor is in the Ltd. 8,000,000 8,000,000 100% process of liquidation Finance Bureau The aging is more than of Jingyang three years and not likely County 3,120,600 3,120,600 100% to be recovered 11,120,600 11,120,600 122 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) Other receivables (continued) As at 31 December 2011, the bad debt provision for individually insignificant balances is as follows: Bad debts Reason for provision Balance provision Percentage Jingyang Finance Aging over 2 years and Bureau 3,120,600 3,120,600 100.0% unlikely to recover Penglai Daliuhang Vineyard 4,451,936 3,534,192 79.4% Unlikely to recover 7,572,536 6,654,792 As at 31 December 2012, there was no other receivable due from shareholders with voting rights of 5% or above (31 December 2011: Nil). Write off of other receivables in 2012 Nature Write-off Reason of Whether are amount write-off related party transaction Penglai Daliuhang Payment of Unable to Vineyard grape 3,534,192 recover No As at 31 December 2012, the top 5 of other receivables are as follows: Percentage of Relationship total other with the receivables Group Amount Aging % Tiantong Security Co., Ltd. Third party 8,000,000 Over 3 years 20.2 Penglai Daliuhang Vineyard Third party 4,970,684 Within 1 year 12.6 Finance Bureau of Jingyang County Third party 3,120,600 Over 3 years 7.9 Tax Bureau of Shihezi Third party 2,228,821 Within 1 year 5.6 Land Bureau of Longkou Third party 1,500,000 Within 1 year 3.8 19,820,105 50.1 123 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) Other receivables (continued) As at 31 December 2011, the top 5 of other receivables are as follows: Percentage of Relationship total other with the receivables Group Amount Aging % Yantai Development Zone Management Committee Third party 49,410,000 Within 1 year 54.9 Tiantong Security Co., Ltd. Third party 8,000,000 Over 3 years 8.9 Yantai Zhifu State Taxation Bureau Third party 6,213,946 Within 1 year 6.9 Penglai Daliuhang Vineyard Third party 4,451,936 Within 1 year 4.9 Jingyang Finance Bureau Third party 3,120,600 2 years-3 years 3.5 71,196,482 79.0 As at 31 December 2012, there was no other receivable due from related parties (31 December 2011: Nil). (7) Inventories 2012 2011 Net carrying Net carrying Balance Provision amount Balance Provision amount Raw material 61,041,026 - 61,041,026 55,439,304 - 55,439,304 Finished goods 1,051,981,303 15,378,581 1,036,602,722 783,191,752 12,600,933 770,590,819 Work in progress 1,170,977,693 - 1,170,977,693 929,934,459 - 929,934,459 2,284,000,022 15,378,581 2,268,621,441 1,768,565,515 12,600,933 1,755,964,582 Movement of inventory provision is as follows: Opening Closing 2012 balance Increase Decrease balance Finished goods 12,600,933 2,777,648 - 15,378,581 124 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) Inventories (continued) Opening Increase Decrease Closing 2011 Balance Balance Finished goods 10,077,620 7,710,095 (5,186,782) 12,600,933 As at 31 December 2012, the carrying amount of inventory with restrictions in ownership is RMB25,726,686 (31 December 2011: RMB18,030,733), which was due to the Group has transferred the related right of profit to a specialized trust fund established by Zhong Hai Trust Co.,Ltd. Please also refer to Notes 5 (21). In 2012 and 2011, no provision was reversed. (8) Long-term equity investment 2012 Opening Current and closing Equity Voting year Initial cost balance interest Power Provision provision % % Cost method: Yantai Dingtao Construction and Development Co., Ltd. (“Yantai Dingtao”) 10,000,000 5,000,000 18 18 5,000,000 - 2011 Opening Current and closing Equity Voting year Initial cost balance interest Power Provision provision % % Cost method: Yantai Dingtao Construction and Development Co., Ltd. (“Yantai Dingtao”) 10,000,000 5,000,000 18 18 5,000,000 - The initial investment in Yantai Dingtao is RMB10, 000,000, as at 31 December 2012 and 2011, and the Group holds 18% of its equity interests. 125 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) Property, plant and equipment 2012 Opening Closing balance Increase Decrease balance Cost: Buildings 1,192,249,068 192,548,295 ( 7,978,626) 1,376,818,737 Machineries and equipment 972,547,932 150,214,730 (12,071,710) 1,110,690,952 Motor vehicles 21,461,978 1,404,931 ( 588,777) 22,278,132 2,186,258,978 344,167,956 (20,639,113) 2,509,787,821 Accumulated depreciation: Buildings 156,943,676 32,451,878 ( 4,985,981) 184,409,573 Machineries and equipment 404,851,382 90,357,482 (11,081,000) 484,127,864 Motor vehicles 15,352,052 2,452,150 ( 537,539) 17,266,663 577,147,110 125,261,510 (16,604,520) 685,804,100 Net carrying amount: Buildings 1,035,305,392 1,192,409,164 Machineries and equipment 567,696,550 626,563,088 Motor vehicles 6,109,926 5,011,469 1,609,111,868 1,823,983,721 126 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) Property, plant and equipment (continued) 2011 Opening Closing balance Increase Decrease balance Cost: Buildings 812,780,815 385,469,087 ( 6,000,834) 1,192,249,068 Machineries and equipment 875,907,151 132,641,281 (36,000,500) 972,547,932 Motor vehicles 19,819,539 1,954,011 ( 311,572) 21,461,978 1,708,507,505 520,064,379 (42,312,906) 2,186,258,978 Accumulated depreciation: Buildings 129,641,538 30,498,848 ( 3,196,710) 156,943,676 Machineries and equipment 377,433,760 57,068,617 (29,650,995) 404,851,382 Motor vehicles 13,350,962 2,303,904 ( 302,814) 15,352,052 520,426,260 89,871,369 (33,150,519) 577,147,110 Net carrying amount: Buildings 683,139,277 1,035,305,392 Machineries and equipment 498,473,391 567,696,550 Motor vehicles 6,468,577 6,109,926 1,188,081,245 1,609,111,868 The increase of accumulated depreciation for 2012 and 2011 are all depreciation accrued for the year. In 2012, the value of property, plant and equipment transferred from construction in progress is RMB 208,080,554 (2011: RMB486, 899,261). As at 31 December 2012, there was no property, plant and equipment with ownership restricted (31 December 2011:Nil). As at 31 December 2012, there was no property, plant and equipment is idle, held for disposal or under finance or operating lease (31 December 2011: Nil). 127 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) Property, plant and equipment (continued) As at 31 December 2012, buildings without property certificate are as follows: Reason for not receiving property certificates Fermentation/Experiment centre and workshop Waiting for completion report Xinjiang Tianzhu fermentations and storage warehouse Waiting for completion report Kylin Packaging finished goods warehouse and workshop Waiting for completion report Ice Wine Chateau office building and packing workshop Waiting for completion report Beijing Chateau European town Processing Beijing Chateau office town Processing Beijing Chateau main, service, reception building Processing Sales Company office buildings Processing Ning Xia Wine production factory and office building Waiting for completion report Jingyang factory Fermentation building Waiting for completion report Shihezi Chateau main building and warehouse Waiting for completion report 128 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) Construction in progress 2012 2011 West mountain factory project 5,791,292 30,878,151 Brandy capacity enlargement project - 152,609 Cabernet centre project - 5,581,283 Cabernet wine cellar project 18,552,775 4,491,463 Sparkling wine reconstruction project 261,663 902,463 Fermentation centre reconstruction project 34,930 34,930 Xinjiang Tianzhu workshop reconstruction project 4,479,084 5,999,376 Kylin Packing production line project - 1,674,302 Yantai Chateau vineyard project 3,300,000 - Beijing Chateau construction project 11,731 200,512 Sales Company construction project 62,842,601 34,221,669 Langfang Castor workshop project 7,633,319 - Jingyang ferment project - 505,520 Ningxia united workshop 1,556,490 1,743,526 Shi He Zi Chateau construction project 156,451,724 47,662,677 Ningxia Chateau construction project 41,367,789 102,421,590 Xianyang Chateau construction project 261,525,502 118,802,003 R&D Centre construction 169,912,227 1,804,810 project Ding Luo Te Chateau Project 91,790,388 49,276,197 Huanren factory construction project 7,317,174 - 832,828,689 406,353,081 129 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) Construction in progress (continued) 2012 Budget Opening Addition Transfer to Closing Financed Accumulated Balance PPE Balance by expenditure /budget % West Mountain factory project 63,000,000 30,878,151 10,193,695 ( 35,280,554) 5,791,292 Self-raised 99.6% Brandy Capacity enlargement 12,690,000 152,609 4,751,881 ( 4,904,490) - Self-raised 95.7% project Cabernet Centre project 11,000,000 5,581,283 - ( 5,581,283) - Self-raised 36.3% Cabernet Wine cellar project 32,000,000 4,491,463 15,143,399 ( 1,082,087) 18,552,775 Self-raised 61.4% Sparkling Wine reconstruction 59,850,000 902,463 43,200 ( 684,000) 261,663 Self-raised 100.0% project Fermentation Centre 5,000,000 34,930 12,906 ( 12,906) 34,930 Self-raised 92.9% reconstruction project Xinjiang Tianzhu Workshop 37,570,000 5,999,376 5,557,297 ( 7,077,589) 4,479,084 Self-raised 110.9% Reconstruction Project Kylin Packing production line 6,200,000 1,674,302 2,666,078 ( 4,340,380) - Self-raised 84.9% project Yantai Chateau vineyard 30,000,000 - 3,300,000 - 3,300,000 Self-raised 11.0% project Beijing Chateau construction 548,250,000 200,512 21,906,756 ( 22,095,537) 11,731 Self-raised 87.6% project Sales Company construction 106,350,000 34,221,669 46,038,312 ( 17,417,380) 62,842,601 Self-raised 112.8% project Langfang Castor workshop 8,000,000 - 7,633,319 - 7,633,319 Self-raised 95.4% project Jingyang ferment project 26,000,000 505,520 153,984 ( 659,504) - Self-raised 72.1% Ningxia United Workshop 58,700,000 1,743,526 100,467 ( 287,503) 1,556,490 Self-raised 97.7% Shihezi Chateau Construction 540,000,000 47,662,677 155,672,330 ( 46,883,283) 156,451,724 Self-raised 86.9% Project Ningxia Chateau Construction 244,150,000 102,421,590 720,257 ( 61,774,058) 41,367,789 Self-raised 100.7% Project Xianyang Chateau 310,740,000 118,802,003 142,723,499 - 261,525,502 Self-raised 84.6% Construction Project R&D Centre Construction 1,693,970,000 1,804,810 168,107,417 - 169,912,227 Self-raised 10.0% Project Ding Luo Te Chateau project 152,400,000 49,276,197 42,514,191 - 91,790,388 Self-raised 60.2% Huanren factory construction project 15,000,000 - 7,317,174 - 7,317,174 Self-raised 48.8% 406,353,081 634,556,162 (208,080,554) 832,828,689 130 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) Construction in progress (continued) 2011 Budget Opening Addition Transfer to Closing Financed Accumulated Balance PPE Balance by expenditure /budget % West Mountain factory project 40,000,000 2,985,201 49,562,462 ( 21,669,512) 30,878,151 Self-raised 131.4% Brandy Capacity enlargement 7,690,000 - 7,388,722 ( 7,236,113) 152,609 Self-raised 96.1% project Sparkling Wine reconstruction 45,000,000 - 1,466,146 ( 563,683) 902,463 Self-raised 132.9% project Cabernet Centre project 21,000,000 7,619,532 - ( 2,038,249) 5,581,283 Self-raised 36.3% Cabernet Wine cellar project 50,000,000 - 4,491,463 - 4,491,463 Self-raised 9.0% Carbernet container project 36,480,000 - 25,000,000 ( 25,000,000) - Self-raised 68.5% Cabernet Centre project 22,000,000 - 10,000,000 ( 10,000,000) - Self-raised 45.5% Cabernet Packing warehouse 36,000,000 - 22,000,000 ( 22,000,000) - Self-raised 61.1% project Fermentation Centre 5,000,000 2,998,926 1,465,580 ( 4,429,576) 34,930 Self-raised 92.6% reconstruction project Kylin Packing production line 6,200,000 - 2,599,241 ( 924,939) 1,674,302 Self-raised 41.9% project Beijing Chateau 3000 Ton 92,500,000 30,000,000 22,257,726 ( 52,257,726) - Self-raised 56.5% Production Line Project Beijing Chateau construction 455,750,000 19,468,392 30,330,610 ( 49,598,490) 200,512 Self-raised 100.6% project Ningxia United Workshop 58,700,000 3,380,801 1,298,927 ( 2,936,202) 1,743,526 Self-raised 97.5% Xinjiang Tianzhu Workshop 37,570,000 17,878,259 6,672,094 ( 18,550,977) 5,999,376 Self-raised 96.2% Reconstruction Project Jingyang ferment project 26,000,000 15,048,365 2,583,383 ( 17,126,228) 505,520 Self-raised 71.5% Sales Company construction 53,000,000 33,737,780 14,881,068 ( 14,397,179) 34,221,669 Self-raised 139.6% project Shihezi Chateau Construction 540,000,000 85,455,488 200,377,57 (238,170,387) 47,662,677 Self-raised 58.2% Project 6 Ningxia Chateau Construction 196,000,000 11,271,515 91,150,075 - 102,421,590 Self-raised 52.3% Project Xianyang Chateau 250,000,000 10,458,506 108,343,49 - 118,802,003 Self-raised 47.5% Construction Project 7 R&D Centre Construction 165,000,000 1,804,810 - - 1,804,810 Self-raised 1.1% Project Ding Luo Te Chateau project 152,400,000 - 49,276,197 - 49,276,197 Self-raised 32.3% 242,107,575 651,144,767 (486,899,261) 406,353,081 There was no interest capitalized in construction in progress in 2012 (2011: Nil). As at 31 December 2012, there was no provision was made for the construction in process (31 December 2011: Nil). 131 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) Intangible assets 2012 Opening Closing balance Increase balance Cost: Land use right 280,441,211 19,269,751 299,710,962 Software use right 3,480,000 300,000 3,780,000 283,921,211 19,569,751 303,490,962 Accumulated amortization Land use right 17,299,124 4,417,916 21,717,040 Software use right 2,784,000 696,000 3,480,000 20,083,124 5,113,916 25,197,040 Net carrying amount: Land use right 263,142,087 277,993,922 Software use right 696,000 300,000 263,838,087 278,293,922 2011 Opening Closing balance Increase balance Cost: Land use right 220,872,498 59,568,713 280,441,211 Software use right 3,480,000 - 3,480,000 224,352,498 59,568,713 283,921,211 Accumulated amortization Land use right 13,416,651 3,882,473 17,299,124 Software use right 2,088,000 696,000 2,784,000 15,504,651 4,578,473 20,083,124 Net carrying amount: Land use right 207,455,847 263,142,087 Software use right 1,392,000 696,000 208,847,847 263,838,087 The increase of accumulated amortization in 2012 and 2011 are all amortization accrued for the year. As at 31 December 2012, there was no intangible asset with restricted ownership (31 December 2011: Nil). 132 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) Biological assets 2012 2011 Opening balance 42,355,441 37,773,638 Addition 18,573,749 6,615,603 Disposal (20,452,071 ) - Amortization ( 795,539 ) ( 2,033,800) Closing balance 39,681,580 42,355,441 As at 31 December 2012, there is no biological asset with ownership restricted (31 December 2011: Nil). The biological assets are vines. The risks, such as disasters, plant diseases and insect pests, fluctuation in market demand and other risk factors, may lead to impairment on biological assets. The Group will take effective procedures and controls to prevent plant diseases and insect pests, and strengthen the management of vines and soils to protect the biological assets. Except for the new biological assets in 2012 and 2011, the remaining biological assets had reached production status and thus had been amortized from 2009. As at 31 December 2012, there is no indication that biological assets may be impaired, and no provision was made (31 December 2011: Nil). (13) Long-term prepaid expenses 2012 Opening Closing balance Increase Amortization balance Land lease prepayments 64,873,456 - ( 1,331,989) 63,541,467 Land requisition fee 38,340,026 13,072,577 ( 562,655) 50,849,948 Greening fee 43,445,077 13,500,000 (12,197,371) 44,747,706 Others 1,770,877 - ( 38,138) 1,732,739 148,429,436 26,572,577 (14,130,153) 160,871,860 133 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (13) Long-term prepaid expenses (continued) 2011 Opening Closing balance Increase Amortization balance Land lease prepayments 65,299,233 1,069,596 ( 1,495,373) 64,873,456 Land requisition fee 38,484,280 236,514 ( 380,768) 38,340,026 Greening fee - 51,111,856 ( 7,666,779) 43,445,077 Others 2,450,160 - ( 679,283) 1,770,877 106,233,673 52,417,966 (10,222,203) 148,429,436 (14) Deferred tax assets/liabilities Deferred tax assets and liabilities are presented separately: Deferred tax assets and liabilities recognized are as follows: 2012 2011 Deferred tax assets Unrealized profit from intra-company transactions 98,817,513 107,340,177 Unpaid bonus 20,873,113 39,118,917 Retirement benefit 6,178,176 7,873,591 Asset impairment provision 7,874,795 8,063,931 Deductable losses 10,064,437 4,572,888 Deferred income 6,568,104 8,559,434 150,376,138 175,528,938 Deferred tax liabilities Fair value adjustment in business combination under non-common control 5,336,115 5,336,115 Deferred tax assets and liabilities not recognized: 2012 2011 Deductable losses 20,505,913 20,591,253 134 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (14) Deferred tax assets/liabilities (continued) Deductable losses not recognized as deferred tax assets will expire in: 2012 2011 2012 - 85,340 2013 64,997 64,997 2014 19,077,494 19,077,494 2016 1,363,422 1,363,422 20,505,913 20,591,253 Temporary differences from assets and liabilities that resulting in such differences are as follows: 2012 2011 Deductible temporary difference Unrealized profit from intra-company transactions 395,270,055 429,360,708 Unpaid bonus 83,492,454 156,475,668 Early retirement benefit 24,712,704 31,494,364 Provision for impairment 31,499,181 32,255,725 Deductible losses 40,257,750 18,291,552 Deferred income 40,465,889 47,440,738 615,698,033 715,318,755 2012 2011 Taxable temporary difference Fair value adjustment in business combination under non-common control 21,344,460 21,344,460 135 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (15) Provision for impairment of assets 2012 Opening Closing balance Accrual Written off balance Bad debt provision 14,654,792 - (3,534,192 ) 11,120,600 Inventory provision 12,600,933 2,777,648 - 15,378,581 Impairment of long- term investment 5,000,000 - - 5,000,000 32,255,725 2,777,648 (3,534,192) 31,499,181 2011 Opening Accrual Reversal Closing balance balance Bad debt provision 8,000,000 6,654,792 - 14,654,792 Inventory provision 10,077,620 7,710,095 (5,186,782) 12,600,933 Impairment of long- term investment 5,000,000 - - 5,000,000 23,077,620 14,364,887 (5,186,782) 32,255,725 136 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (16) Trade payables The trade payables are interest free with a credit period no more than three months from its suppliers normally. 2012 2011 Within 1 year 324,881,168 229,920,729 As at 31 December 2012, the Group had no significant outstanding balance aged more than one year (31 December 2011: Nil). As at 31 December 2012, there are no payables to the shareholders with voting rights of 5%, the Group’s outstanding balance payable to related parties are as following: 2012 2011 Accounts payables to related party Yantai ShenMa Packing Co., Ltd. 43,366,087 6,213,337 Yantai Zhongya Pharmaceutical Tonic Wine Co., Ltd. 7,972,184 - 51,338,271 6,213,337 (17) Advances from customers 2012 2011 Within 1 year 450,172,253 293,655,222 As at 31 December 2012, the Group had no outstanding balance payable to the related parties or shareholders with voting rights of 5% or above (31 December 2011: Nil). 137 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (18) Employee benefit 31 December 2012 Opening Closing balance Increase Decrease balance Salaries and bonus 125,038,715 315,939,854 (353,380,353 ) 87,598,216 Staff benefit - 12,039,050 ( 12,039,050 ) - Staff welfare 338,880 27,360,435 ( 27,437,022 ) 262,293 Includes: Medical insurance 74,012 5,169,057 ( 5,185,553 ) 57,516 Pension 254,394 18,999,205 ( 19,051,112 ) 202,487 Unemployment insurance 7,152 1,075,043 ( 1,080,047 ) 2,148 Injury insurance 1,734 1,810,188 ( 1,811,780 ) 142 Maternity insurance 1,588 306,942 ( 308,530 ) - Housing fund 489,288 2,311,105 ( 2,505,479 ) 294,914 Union fee and education fee 3,786,479 617,964 ( 2,386,053 ) 2,018,390 Termination benefits 36,275,292 704,058 ( 8,985,519 ) 27,993,831 Other allowances 22,346,283 124,630 ( 153,630 ) 22,317,283 188,274,937 359,097,096 (406,887,106 ) 140,484,927 31 December 2011 Opening Closing balance Increase Decrease balance Salaries and bonus 122,804,887 289,613,276 (287,379,448 ) 125,038,715 Staff benefit - 8,590,306 ( 8,590,306 ) - Staff welfare 3,022,339 32,131,473 ( 34,814,932 ) 338,880 Includes: Medical insurance 598,887 7,695,132 ( 8,220,007 ) 74,012 Pension 2,199,409 20,613,939 ( 22,558,954 ) 254,394 Unemployment insurance 81,668 1,791,145 ( 1,865,661 ) 7,152 Injury insurance 137,764 1,120,452 ( 1,256,482 ) 1,734 Maternity insurance 4,611 910,805 ( 913,828 ) 1,588 Housing fund 430,600 5,654,408 ( 5,595,720 ) 489,288 Union fee and education fee 5,644,688 1,383,090 ( 3,241,299 ) 3,786,479 Termination benefits 31,252,497 15,456,078 ( 10,433,283 ) 36,275,292 Other allowances 23,760,801 - ( 1,414,518 ) 22,346,283 186,915,812 352,828,631 (351,469,506 ) 188,274,937 138 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (18) Employee benefit (continued) As at 31 December 2012, the Group had no overdue employee benefit payable (31 December 2011: Nil). In 2012, the Group paid union fee and education fee of RMB2,386,053 (2011: RMB3,241,299), termination payment of RMB8,985,519 (2011 RMB10,433,283). There is no non-monetary welfare in 2012 (2011: Nil). (19) Taxes payable 2012 2011 Value added tax ( 21,005,478 ) 22,405,920 Consumption tax 33,478,543 48,064,764 Business tax 1,041,384 372,616 Corporation income tax 405,075,954 596,777,047 Urban land use tax 1,180,572 709,120 Individual income tax 6,091,205 6,968,982 City construction tax 8,872,888 11,907,032 Property tax 1,904,752 1,774,578 Others 7,444,756 9,479,798 444,084,576 698,459,857 139 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (20) Other payables 2012 2011 Advertising costs 20,434,958 89,115,832 Deposit from distributors 210,775,654 152,184,670 Payables for equipment and construction 51,846,156 86,651,441 Royalty fee 99,943,588 108,911,034 Deposits from suppliers 2,370,702 10,377,751 Others 85,279,053 88,818,272 470,650,111 536,059,000 The balance due to the shareholders with voting right of 5% or above is as follows: 2012 2011 Royalty fee 99,943,588 108,911,034 As at 31 December 2012, significant outstanding balance aged over than one year is as follows: Amount payable Reasons for outstanding Deposits payables from distributors 115,660,324 Deposits There was no repayment of the above balances after the balance sheet date. 140 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (21) Non-current liabilities due within one year 2012 2011 Trust scheme due within one year 142,785,000 77,220,000 Interest payable 8,160,000 3,861,000 150,945,000 81,081,000 In July 2011, the Company and Zhonghai Trust Co., Ltd. entered into a profit transfer agreement, pursuant to which the Company agreed to transfer its right to the profit generated by certain type of wine to a special trust fund established by Zhonghai International Trust Co., Ltd. and received RMB52,785,000 with annual interest rate of 7%. The trust scheme would be expired in February. 2013. In October 2012, the Company and Shangdong Province International Trust Co., Ltd. entered into a profit transfer agreement, pursuant to which the Company agreed to transfer its right to the profit generated by certain type of wine to a special trust fund established by Shangdong Province International Trust Co., Ltd. and received RMB90,000,000 with annual interest rate of 8.5%. The trust scheme would be expired in November. 2013. (22) Other current liabilities 2012 2011 Deferred income 8,090,382 4,744,074 Details of deferred income: 2012 2011 Government grant related with assets Fund to support major constructing projects 2,404,874 1,334,874 Fund to support emerging and key industries 2,300,808 828,000 Others 3,384,700 2,581,200 8,090,382 4,744,074 141 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (23) Other non-current liabilities 2012 2011 Employee benefit (1) 7,856,000 11,424,000 Trust scheme - 52,785,000 Interest payable - 1,847,475 Deferred income (2) 61,148,861 42,696,664 69,004,861 108,453,139 (1) Employee benefit represents bonus accrued for management. According to the bonus payment schedule of 2011, the bonus is expected to be paid during 2013 to 2015. (2) Details of deferred income: 2012 2011 Government grant related with assets Fund to support major constructing projects 20,148,990 12,013,864 Fund to support emerging and key industries 20,707,271 7,452,000 Others 20,292,600 23,230,800 61,148,861 42,696,664 142 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (24) Share capital 2012 Opening balance Unrestricted in 2011 Closing balance Restricted shares Shares held by domestic investors Including: Shares held by non-state owned legal persons - - - Total of restricted shares - - - Unrestricted shares A Shares 348,816,000 104,644,800 453,460,800 B Shares 178,464,000 53,539,200 232,003,200 Total of unrestricted shares 527,280,000 158,184,000 685,464,000 Total shares 527,280,000 158,184,000 685,464,000 2011 Opening balance Unrestricted in 2011 Closing balance Restricted shares Shares held by domestic investors Including: Shares held by non-state owned legal persons 213,021,120 (213,021,120) - Total of restricted shares 213,021,120 (213,021,120) - Unrestricted shares A Shares 135,794,880 213,021,120 348,816,000 B Shares 178,464,000 - 178,464,000 Total of unrestricted shares 314,258,880 213,021,120 527,280,000 Total shares 527,280,000 - 527,280,000 For the current year movement of paid-in capital, please refer to Note.5 (27) Restricted shares of 213,021,120 held by Yantai Changyu Group Co.,Ltd., representing 40% of total shares issued, were released from restriction since 25 March 2011. 143 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (25) Capital surplus Opening Closing 2012 Balance Addition Balance Share premium 557,222,454 - 557,222,454 Other 4,916,588 - 4,916,588 562,139,042 - 562,139,042 2011 Share premium 557,222,454 - 557,222,454 Other - 4,916,588 4,916,588 557,222,454 4,916,588 562,139,042 (26) Surplus reserve In accordance with the Company Law of the People's Republic of China and the Articles of Association of the Company, the Company is required to appropriate 10% of the net profit to the statutory surplus reserve until the accumulated balance of the statutory surplus reserve reaches 50% of the registered share capital. The Company can appropriate discretionary surplus reserve after appropriation of the statutory surplus reserve. Discretionary surplus reserve can be utilized to offset the deficit or increase the share capital after approval. 144 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (27) Retained earnings 2012 2011 Retained earnings brought forward 3,628,279,989 2,459,263,257 Add: profit attributable to shareholders of the Company 1,700,928,117 1,907,208,732 Less: Dividends paid in respect prior year’s profit ( 801,465,600) ( 738,192,000) Withdrawal of legal surplus ( 46,789,370) - Convertion of ordinary share dividends ( 158,184,000) - Retained earnings carried forward 4,322,769,136 3,628,279,989 On 15 May 2012, the board of the directors of the Company proposed a cash dividend of RMB15.2 every 10 shares in respect of 2011 based on the issued shares of 527,280,000. The aggregate amount of cash dividend is RMB 801,465,600. (2011: RMB738,192,000) Meanwhile, the board of the directors proposed an allotment to all shareholders by 3 shares every 10 shares based on the issued shares of 527,280,000. The aggregate number of share dividend is 158,184,000 shares. (2011:Nil) On 17 April 2013, the board of the directors of the Company proposed a cash dividend of RMB11 (tax inclusive) every 10 shares in respect of 2012 based on the issued shares of 685,464,000. The aggregate amount of cash dividend is RMB 754,010,400. The aforementioned proposal is still pending for the approval of General Meeting of Shareholders 145 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (28) Assets with restriction of ownership Opening Closing 2012 Balance Increase Decrease balance Cash at bank 2,604,604 47,479 - 2,652,083(i) Inventory 18,030,733 20,688,000 (12,992,047) 25,726,686(ii) 20,635,337 20,735,479 (12,992,047) 28,378,769 Opening Closing 2011 Balance Increase Decrease balance Cash at bank 2,462,124 170,923 ( 28,443) 2,604,604(i) Inventory 13,524,960 4,968,469 ( 462,696) 18,030,733(ii) 15,987,084 5,139,392 ( 491,139) 20,635,337 (i) As at 31 December 2012 and 2011, the restricted deposit is the Group’s housing fund. (ii) As at 31 December 2012, inventory with restriction in ownership was due to the trust scheme with Zhonghai Trust Co., Ltd and Shandong International trust Co., Ltd. (As at 31 December 2011, inventory with restriction in ownership was due to the trust scheme with Zhongrong International Trust Co., Ltd, Zhonghai Trust Co., Ltd ) Please also refer to Note 5 (21) for details. 146 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (29) Operating income and costs Operating income is as follows: 2012 2011 Revenue 5,556,442,502 5,939,875,597 Other operating income 87,088,051 87,673,615 5,643,530,553 6,027,549,212 2012 2011 Cost of sales 1,359,873,644 1,396,984,223 Other operating expenses 41,215,339 42,432,911 1,401,088,983 1,439,417,134 The operating income for the group is mainly from the sales of wine, brandy and sparkling wine. Over 99% of the sales generated in PRC. Operating income from top five customers in 2012 is as follows: Amount Percentage of total operating incomes % Kangcheng Investment (China) Co., Ltd. 35,801,700 0.6 Jinan Guidunyimou trading Co., Ltd. 30,283,948 0.5 Nanjing Xiyuhong trading Co., Ltd 26,283,531 0.5 Songzhou Huimingxin bottle shop Co., Ltd. 24,706,004 0.5 Huian County Chongwulongxing Co., Ltd. 24,331,373 0.4 141,406,556 2.5 Operating income from top five customers in 2011 is as follows: Amount Percentage of total operating incomes % Putian Baicheng trading Co., Ltd. 34,363,944 0.6 Zhuhai Huahaipengcheng wine Co., Ltd. 27,566,277 0.5 Fuzhou Bainianhanggang trading Co., Ltd. 27,258,001 0.5 Shaoguan Zhenjiang Youhui Co., Ltd. 24,414,643 0.4 Foushan Nanhai Lizhi Store 24,109,304 0.4 137,712,169 2.4 147 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (29) Operating income and costs (continued) Operating income is analyzed as follows: 2012 2011 Sales of goods 5,556,442,502 5,939,875,597 Rendering services 87,088,051 87,673,615 5,643,530,553 6,027,549,212 (30) Taxes and surcharges 2012 2011 Consumption tax 198,061,661 243,150,036 Business Tax 4,490,563 4,583,506 City construction tax 61,248,671 62,942,415 Education fee and surcharges 45,595,614 46,167,761 Others 8,817,794 5,260,049 318,214,304 362,103,767 For detail standards of tax rate please refer to Notes.3 Tax. (31) Selling expenses 2012 2011 Advertising costs 832,290,075 863,774,831 Freight 136,710,184 162,039,548 Salary and employee benefit 191,099,359 211,834,772 Trademark fee 99,943,588 108,911,034 Warehouse leasing expenses 36,959,537 35,763,374 Travelling expenses 23,177,961 20,298,868 Commission 12,314,338 11,319,425 Expenses incurred for Wine festival 29,711,497 2,720,426 Others 87,017,624 86,829,948 1,449,224,163 1,503,492,226 148 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (32) General and administrative expense 2012 2011 Salary and employee benefit 55,908,211 50,482,485 Insurance fee 30,024,891 30,171,410 Leasing expenses 8,943,367 10,258,411 Depreciation 23,715,321 20,468,648 Amortization 5,793,090 7,655,556 Administrative expenses 14,546,769 13,584,278 Travelling expenses 6,379,358 7,058,152 Entertainment fee 5,296,737 4,079,211 Property tax, stamp duty and other taxes 13,619,934 10,898,973 Maintenance fee 14,716,086 5,178,210 Management fee 11,745,536 12,531,670 Others 63,685,509 62,465,190 254,374,809 234,832,194 (33) Loss on impairment of assets 2012 2011 Inventory provision 2,777,648 7,710,095 Bad debts provision - 6,654,792 2,777,648 14,364,887 (34) Financial income 2012 2011 Interest income 38,033,736 51,747,843 Less: interest expenses ( 8,493,989) ( 5,708,475) Bank charges ( 9,621,486 ) ( 1,535,787) 19,918,261 44,503,581 149 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (35) Investment income 2012 2011 Investment income gained from disposal of financial assets held for trading - 52,122 (36) Non-operation income 2012 2011 Gains on disposal of non-current assets 4,379,454 3,510,935 Including: gain on disposal of plant property and equipments 640,939 3,510,935 Government grants 23,393,756 14,740,496 Penalty income 373,987 1,150,934 Others 7,231,063 7,175,689 35,378,260 26,578,054 Government grants recognized in the income statement is as follows: 2012 2011 Major projects support fund 1,483,193 1,483,193 Small and medium enterprises support fund 646,646 1,425,000 Tax refund 14,636,437 10,038,943 Others 6,627,480 1,793,360 23,393,756 14,740,496 150 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (37) Non-operation expenses 2012 2011 Loss on disposal of non-current assets 2,581,199 775,064 Including: loss on disposal of property, plant and equipment 2,581,199 775,064 Donation 221,106 412,662 Others 169,104 3,631,792 2,971,409 4,819,518 (38) Income tax 2012 2011 Current income tax 554,519,329 647,698,083 Deferred income tax 14,728,312 ( 15,253,572 ) 569,247,641 632,444,511 Reconciliation between income tax expenses and profits is as follows: 2012 2011 Profit before tax 2,270,175,758 2,539,653,243 Income tax expense at statutory tax rate 25% 567,543,940 634,913,311 Effect of different tax rates applied by certain subsidiaries ( 2,746,040 ) ( 4,543,795 ) Tax losses not recognized - 340,856 Non-taxable income ( 380,412 ) - Non-deductable expenses 4,830,153 1,734,139 Income tax expenses at the Group’s effective tax rate 569,247,641 632,444,511 151 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (39) Earnings per share The calculation of basic earnings per share is based on the consolidated profit attributable to ordinary shareholders of the Company during the year and the weighted average number of outstanding ordinary shares. 2012 2011 Earnings Consolidated profit attributable to ordinary shareholders of the Company 1,700,928,117 1,907,208,732 Shares Weighted average number of outstanding ordinary shares (i) 685,464,000 685,464,000 Basic earnings per share 2.48 2.78 The company does not have potential dilutive ordinary shares. Note1: In June 2012, the Company allotted share dividend of 158,184,000 shares, after which the issued ordinary share became 685,464,000. Thus, the basic earnings per share is based on the adjusted number of shares. From the balance sheet date to the date of approval of this report, there are no subsequent events which would affect the numbers of the weighted average number of outstanding of ordinary shares. (40) Notes to consolidated cash flow statement Cash received relating to other operating activities: 2012 2011 Government grants 30,555,824 47,345,289 Others 9,496,088 61,111,624 40,051,912 108,456,913 Cash paid relating to other operating activities: 2012 2011 Selling expenses 1,233,262,732 1,259,544,184 General and administrative expenses 110,485,877 105,976,203 Others 9,575,616 34,532,368 1,353,324,225 1,400,052,755 152 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 5. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (41) Supplementary information to consolidated cash flow statement (i) Supplementary information to consolidated cash flow statement Cash flows from operating activities calculated by adjusting the net profit: 2012 2011 Net profit 1,700,928,117 1,907,208,732 Add: Loss for impairment of assets 2,777,648 14,364,887 Depreciation 125,261,510 89,871,369 Amortization of intangible assets 5,113,916 4,578,473 Amortization of Biological assets 795,539 2,033,800 Amortization of long-term prepaid expenses 14,130,153 10,222,203 Losses/(gain) on disposal of property, plant and equipment 1,940,260 ( 2,735,871 ) Finance income ( 26,261,924) ( 46,039,368 ) Investment income - ( 52,122 ) Decrease/(increase) in deferred tax assets 25,152,800 ( 15,253,572 ) Decrease/(increase) in inventories ( 515,434,507) ( 469,268,271 ) Decrease/(increase) in operating receivables 32,246,207 ( 105,672,433 ) Increase/(decrease) in operating payables ( 64,608,397) 116,464,280 Net cash flows from operating activities 1,302,041,322 1,505,722,107 (ii) Cash and cash equivalents 2012 2011 Cash 1,562,294,026 1,256,517,873 Including: Cash on hand 48,894 74,859 Bank deposits on demand 1,562,245,132 1,234,742,462 Other monetary capital on demand - 21,700,552 Closing balance of cash and cash equivalents 1,562,294,026 1,256,517,873 153 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 6. RELATED PARTY AND RELATED PARTY TRANSACTIONS (1) Parent company Name of Type of Place of Legal Scope of Registered Percentage Percentage Incorporate parent enterprise registration representative business capital of shares of voting Code company rights Cotrolling Limited Yantai Sun Manufacturing 50,000,000 50.4% 50.4% 265 645 824 Company Company Liqiang During the year ended 31 December 2012, there is no change in parent company’s registered capital, shares holding or voting power. (2) Subsidiaries: Please refer to Note 4 (1). (3) Other related parties Nature of related parties Incorporate code Controlled by the same Yantai Changyu Travelling Co., Ltd. parent company 258 258 654 Yantai Changyu International Controlled by the same Window of the Wine City Co., Ltd. parent company 672 208 146 Controlled by the same parent Yantai ShenMa Packing Co., Ltd. company 553 393 350 Yantai Zhongya Pharmaceutical Tonic Controlled by the same Wine Co., Ltd. parent company 726 203 923 (4) Significant related party transactions (i) Purchases from and sales to related parties Purchase from related parties 2012 2011 Yantai Changyu Travelling Co. Ltd. 118,886 425,193 Yantai Changyu International Window of the Wine City Co., Ltd 725,996 65,508 Yantai ShenMa Packing Co., Ltd 206,438,932 78,774,219 Yantai Zhongya Pharmaceutical tonic Wine Co., Ltd. 7,821,383 - 215,105,197 79,264,920 All related party transactions are based on the negotiated price. In 2012, purchases from related parties accounted for less than 12% of the Group’s total purchase (2011: less than 3%) 154 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 6. RELATED PARTY AND RELATED PARTY TRANSACTIONS (CONTINUED) (4) Significant related party transactions (continued) (i) Purchases from and sales to related parties (continued) Sales to related parties 2012 2011 Yantai Changyu Travelling Co. Ltd. 4,382,547 6,791,363 Yantai Changyu International Window of the Wine City Co., Ltd. 4,450,553 5,354,827 Yantai Zhongya Pharmaceutical tonic Wine Co., Ltd. 512,551 - Yantai ShenMa Packing Co., Ltd. - 1,515,455 9,345,651 13,661,645 All related party transactions are based on the negotiated price. In 2012, sales to related parties accounted for less than 1% of the Group’s total sales (2011: less than 1%). (ii) Property leased from a related party 2012 Note Assets leased Beginning date Ending date Rental expense Changyu Group (a) Warehouse and office Company building 2012/1/1 2016/12/31 5,858,000 2011 Note Assets leased Beginning date Ending date Rental expense Changyu Group (a) Warehouse and office Company building 2007/1/1 2011/12/31 6,383,000 (a) Pursuant to the lease agreement entered into between the Company and Changyu Group Company on 1 January 2012, starting from 1 January 2012, the Company rented properties from Changyu Group Company for operation purposes at a basic annual rental of RMB5,858,000, and till 31 December 2016. For the year ended 31 December 2012, the rental payable to Changyu Group Company amounted to RMB5, 858, 000 (2011 RMB6,383,000). During 2011, leasing expenses paid to related company accounted for 12.8% of the Group (during 2011: 13.9%). 155 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 6. RELATED PARTY AND RELATED PARTY TRANSACTIONS (CONTINUED) (4) Significant related party transactions (continued) (iii) Other significant related party transactions Note 2012 2011 Royalty fee (a) 99,943,588 108,911,034 Patents fee (b) 50,000 50,000 All related party transactions are based on the negotiated price. (a) Royalty fee Pursuant to a royalty agreement dated 18 May 1997, starting from 18 September 1997, the Company may use certain trademarks of Changyu Group Company, which have been registered with the PRC Trademark Office. An annual royalty fee at 2% of the Group’s annual sales is payable to Changyu Group Company. The license is effective until the expiry of the registration of the trademarks. During 2012, royalty fee paid to related company accounted for 100% of the Group (2011: 100%). (b) Patents fee Pursuant to a patents implementation license dated 18 May 1997, starting from 18 September 1997, the Company may use the patents of Changyu Group Company. The annual patents usage fee payable by the Company to Changyu Group Company was RMB 50,000. The contract was expired on 20 December 2005. The Company renewed the contract on 20 August 2006 for 10 years. The annual patents usage fee payable by the Company to Changyu Group Company remained RMB50,000. For the year ended 31 December 2012, the patents usage fee payable to Changyu Group Company amounted to RMB 50,000 (2011: RMB50,000). During 2012, patent fee paid to related company accounted for 100% of the Group (2011: 100%). (iv) Remuneration of the management 2012 2011 Remuneration of the management 10,804,108 11,341,529 156 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 6. RELATED PARTY AND RELATED PARTY TRANSACTIONS (CONTINUED) (4) Significant related party transactions (continued) (v) Guarantee provided by a related party Acceptance of guarantee provided by related parties Whether the Amount guarantee has Notes guaranteed From To ended Changyu Group Company (a) 88,236,000 2010-10-25 2012-4-24 Yes (a) In 2011, Changyu Group Company has provided guarantee to the Company for the full responsibility under the trust scheme amounting to RMB88,236,000 (2011: RMB 88,236,000). (5) Balance due from related parties 2012 2011 Trade receivables Balance Provision Balance Provision Yantai Changyu Travelling Co. Ltd. 311,220 - 358,020 - Yantai Changyu International Window of the Wine City Co., Ltd. - - 218,690 - Yantai Shen Ma Packing Co.Ltd. - 968,136 - Yantai Zhongya Pharmaceutical tonic Wine Co., Ltd. 1,820,376 - - - 2,131,596 - 1,544,846 - The above amounts due from related parties are unsecured, interest-free and have no fixed terms of repayment. 157 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 6. RELATED PARTY AND RELATED PARTY TRANSACTIONS (CONTINUED) (6) Balance due to related parties 2012 2011 Trade payable Yantai Shen Ma Packing Co, Ltd. 43,366,087 6,213,337 Yantai Zhongya Pharmaceutical tonic Wine Co., Ltd. 7,972,184 - 51,338,271 6,213,337 Other payable Royalty fee payable to parent company 99,943,588 108,911,034 Total 151,281,859 115,124,371 The above amounts due to related parties are unsecured, interest-free and have no fixed terms of repayment. 7. CONTINGENT LIABILITIES The Group and the Company did not have any significant contingent liabilities as at balance sheet date. 8. COMMITMENT 2012 2011 Capital commitments Authorized, but not contracted 1,605,664,161 626,590,498 Investment commitments Contracted, but not provided for - 395,000,000 As at 31 December 2012, all capital commitments in 2011 have been fulfilled. 9. POST BALANCE SHEET DATE EVENT On 17 April 2013, the board of the directors of the Company proposed a cash dividend of RMB11 (tax inclusive) every 10 shares in respect of 2012 based on the issued shares of 685,464,000. The aggregate amount of cash dividend is RMB 754,010,400. The proposed profit distribution plan is subject to the approval from the Annual General Meeting. 158 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 10. OTHER SIGNIFICANT EVENTS (1) Lease As lessee Significant operating lease: the Company has total future minimal lease payments under non- cancelable contract with lessor are as follow: 2012 2011 Within one year 14,334,416 23,814,036 One year to two years 8,560,300 5,908,103 Two years to three years 6,511,570 2,852,650 Three years and above 20,278,532 15,262,627 49,684,818 47,837,416 (2) Segment report Over 99% of the Group’s revenue is generated within the PRC, and 100% assets of the Group are located in the PRC. As all the major customers and operating activities are within the PRC, it is not necessary to disclose detailed geographical segment information. Since all of the businesses of the Group are related to the manufacturing and sales of wines, it is not necessary to disclose business segment information. 159 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 10. OTHER SIGNIFICANT EVENTS (continued) (3) Financial instrument and risk management The Group's principal financial instruments comprise cash and bank and trust scheme. The main purpose of these financial instruments is to raise funds for the Group's operations. The Group has various other financial assets and liabilities such as accounts receivables, bill receivables, other receivables, trade payables and other payables which arise directly from its operations. The main risks arising from the Group's financial instruments are credit risk, liquidity risk and market risk. CLASSIFICATION FOR FINANCIAL INSTRUMENT The carrying amounts of each category of financial instruments as at the balance sheet date are as follows: 2012 2011 Financial assets Loans and receivables Loans and receivables Cash and bank 2,227,470,828 2,532,967,197 Bills receivable 92,635,701 56,268,482 Trade receivables 135,217,384 126,906,526 Other receivables 28,462,945 75,423,614 Interests receivable 7,215,854 15,763,431 2,491,002,712 2,807,329,250 160 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 10. OTHER SIGNIFICANT EVENTS (CONTINUED) (3) Financial instrument and risk management (continued) Financial liabilities 2012 2011 Other financial liabilities Other financial liabilities Trade payables 324,881,168 229,920,729 Other payables 470,650,111 536,059,000 Non-current liabilities due within one year 150,945,000 81,081,000 Other non-current liability - 54,632,475 946,476,279 901,693,204 CREDIT RISK Credit risk is the risk of financial loss on one party of a financial instrument due to the failure of another party to meet its obligations. The Group trades only with recognized and creditworthy third parties. It is the Group's policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis to ensure that the Group's exposure to bad debts is not significant. For transactions that are not denominated in the functional currency of the relevant operating unit, the Group does not offer credit terms without the specific approval of the Department of Credit Control in the Group. The credit risk of the Group's other financial assets, which comprise cash and bank, bills receivable, interests receivable and other receivables,, arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments. Since the Group trades only with recognized and creditworthy third parties, there is no requirement for collateral. Concentrations of credit risk are managed by customer/counterparty, by geographical region and by industry sector. As at 31 December 2012, 41.4% of trade receivables of the Group are due from the top 5 customers (31 December 2011: 37.7%). There is no collateral or other credit enhancement on the balance of the trade receivables of the Group. Further quantitative data in respect of the Group’s exposure to credit risk arising from trade receivable and other receivables are disclosed in Note 5, (3) and (6) to the financial statements. 161 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 10. OTHER SIGNIFICANT EVENTS (CONTINUED) (3) Financial instrument and risk management (continued) As at 31 December 2012, the financial assets which are regarded as no impairment has been incurred are analyzed as follows: 2012 2011 Trade receivables 135,217,384 126,906,526 Other receivables 28,462,945 74,505,870 Bills receivable 92,635,701 56,268,482 Interests receivable 7,215,854 15,763,431 263,531,884 273,444,309 LIQUIDITY RISK Liquidity risk is the risk that an enterprise may encounter deficiency of funds in meeting obligations associated with financial liabilities. The Group monitors its risk of deficiency of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial instruments and expected cash flows from the Group’s operations. The Group’s financial liabilities mainly consist of trade payables and other payables (except for deposits) arose from principal activities and amount received from trust scheme. The fair value of the financial liabilities is equal to their book value. The Group is of the view that the cash flow from the above financial assets is adequate to cover all financial liabilities whereby the Group has no significant liquidity risk. The table below summarizes the maturity profile of the Group's financial assets and liabilities as at the balance sheet date, based on the undiscounted contractual cash flows: 2012 Financial assets 1 to 3 months 3 to 12 months Total Cash and bank 1,564,946,109 662,524,719 2,227,470,828 Bill receivables 57,819,130 34,816,571 92,635,701 Trade receivable 135,217,384 - 135,217,384 Other receivables 28,462,945 - 28,462,945 Interest receivables 7,215,854 - 7,215,854 1,793,661,422 697,341,290 2,491,002,712 162 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 10. OTHER SIGNIFICANT EVENTS (CONTINUED) (3) Financial instrument and risk management (continued) LIQUIDITY RISK 2012 Financial liabilities 1 to 3 Months 3 to 12 Months Total Trade payables 324,881,168 - 324,881,168 Other payables 318,738,101 151,912,010 470,650,111 Non-Current Liabilities due within one year - 150,945,000 150,945,000 643,619,269 302,857,010 946,476,279 2011 Financial assets 1 to 3 months 3 to 12 months Total Cash and bank 1,259,122,477 1,273,844,720 2,532,967,197 Trade receivables 32,864,335 23,404,147 56,268,482 Bills receivable 126,906,526 - 126,906,526 Other receivables 75,423,614 - 75,423,614 Interest receivables 15,763,431 - 15,763,431 1,510,080,383 1,297,248,867 2,807,329,250 Financial liabilities 1 to 3 Months 3 to 12 Months Total Trade payables 229,920,729 - 229,920,729 Other payables 455,899,312 80,159,688 536,059,000 Non-Current Liabilities due within one year - 83,011,500 83,011,500 Other non-current liabilities - - 58,327,425 685,820,041 163,171,188 907,318,654 163 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 10. OTHER SIGNIFICANT EVENTS (CONTINUED) (3) Financial instrument and risk management (continued) MARKET RISK Market risk represents the fair value or future cash flows of financial instruments may vary with the change of market price. Market risk includes interest rate risk and foreign currency. INTEREST RATE RISK Interest rate risk represents the fair value of financial instruments of the present value cash flows may vary with the change of interest rate. The income and the cash flow from operating activities are generally independent with fluctuation of market interest rate, and there was no significant interest bearing assets and liabilities except for cash in bank and other non-current liabilities. The Company is of the view that the Group has no significant interest rate risks, and no interest rate swaps are designated to hedge against interest rate risks. FOREIGN CURRENCY RISK Foreign currency risk represents the risks on fluctuation of fair value of financial instruments or the future cash flow as a result of the fluctuation in foreign exchange. The Group has no significant concentration of foreign currency risk because its business is principally conducted in the PRC and all transactions are denominated in RMB. FAIR VALUE Fair value refers to the value that two parties would voluntarily accept in an arm length transaction. The following methods and hypothesizes are used for the calculation of fair value. Since the remaining period for cash and bank, trade receivables, bills receivables, other receivables, trade payables and other payables is not long, their fair value are deemed to be the same as the book value. The fair value of non-current liabilities due within one year and other non-current liabilities are calculated by discounting the expected future cash flows with the effective interest rate currently available for the instruments on similar terms. On 31 December 2012, except for the restricted bank deposit (Note 5 (1)), there was no significant restrictions on the Group’s financial assets. Except for the balance in other receivables that have been provided for, no provision of the Group’s financial assets is needed. 164 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 11. NOTES TO COMPANY FINANCIAL STATEMENTS (1) Trade receivables The normal credit term of trade receivables is one month, which can be extended to three months for certain major customers. The trade receivables are interest free. As at 31 December 2012, there was no provision provided for trade receivables (31 December 2011: Nil). The Company did not provide, reverse or write off any provision during 2012 (31 December 2011: Nil) 2012 2011 Carrying Amount Provision Carrying Amount Provision Amount % Amount % Amount % Provision % Individually significant - - - - 19,185,460 91.0 - - Individually insignificant 710,080 100.0 - - 1,791,605 9.0 - - 710,080 100.0 - 20,977,065 100.0 - As at 31 December 2012, there was no account receivable due from the Company’s shareholders with voting rights of 5% or above (31 December 2011: Nil). As at 31 December 2012, the particulars of top 1 account receivables amount are as follows: Relationship Ratio of total with the receivables % Company Amount Aging Yantai Zhongya Co., Ltd. Third party 710,080 Within 1 year 100 As at 31 December 2011, the particulars of top 2 account receivable amount are as follows: Relationship Ratio of total with the receivables % Company Amount Aging Yantai Zhongya Co., Ltd. Third party 15,458,760 Within 1 year 73.7 Yantai Zhongya Sales Co., Ltd. Third party 5,518,305 Within 1 year 26.3 20,977,065 100.0 As at 31 December 2012, no outstanding balance was due from related parties (31 December 2011: Nil). 165 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 11. NOTES TO COMPANY FINANCIAL STATEMENTS (CONTINUED) (2) Other receivables The aging analysis is as follows: 2012 2011 Bad debt Account Book Bad debt Account Book Value Provision Balance Value Provision Balance Within 1 year 2,194,000,959 - 2,194,000,959 1,550,839,490 - 1,550,839,490 1 to 2 years 191,603 - 191,603 134,263,466 - 134,263,466 2 to 3 years 27,191 - 27,191 3,961,947 3,120,600 841,347 Over 3 years 11,120,600 11,120,600 - 8,006,463 8,000,000 6,463 2,205,340,353 11,120,600 2,194,219,753 1,697,071,366 11,120,600 1,685,950,766 2012 2011 Amount % Bed debt % Amount % Bed debt % provision provision Individually significant and provided for 11,120,600 0.5 11,120,600100.0 11,120,600 0.7 11,120,600 100.0 Individually insignificant and provided for 2,194,219,753 99.5 - 1,685,950,766 99.3 - 2,205,340,353 100.0 11,120,600 1,697,071,366 100.0 11,120,600 166 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 11. NOTES TO COMPANY FINANCIAL STATEMENTS (CONTINUED) (2) Other receivables (continued) As at 31 December 2012, there was no other receivable due from the shareholders with voting rights of 5% or above. (31 December 2011: Nil) As at 31 December 2012, the particulars of top 5 other receivables are as follows: Relationship with Amount Aging Percentage of the Group total advances to suppliers % Beijing Chateau Subsidiary 525,969,790 Within 1 year 23.8 Shihezi Chateau Subsidiary 523,244,636 Within 1 year 23.7 Changan Chateau Subsidiary 356,096,158 Within 1 year 16.1 Ningxia Wine Subsidiary 249,196,746 Within 1 year 11.3 Changan Chateau Subsidiary 244,813,400 Within 1 year 11.1 1,899,320,730 86.0 As at 31 December 2011, the particulars of top 5 other receivables amount are as follows: Relationship with Amount Aging Percentage of the Group total advances to suppliers % Beijing Chateau Subsidiary 469,605,240 Within 1 year 27.7 Shihezi Chateau Subsidiary 359,412,913 Within 1 year 21.2 Ningxia Wine Subsidiary 263,080,539 Within 1 year 15.5 Changan Chateau Subsidiary 203,848,400 Within 1 year 12.0 Ningxia Chateau Subsidiary 146,072,400 Within 1 year 8.6 1,442,019,492 85.0 At 31 December 2012, the balance of other receivables from related parties is RMB 2,163,251,044, approximately 98.1% of total other receivables. These were all from subsidiaries of the Company (2011: the balance of other receivable from related parties is RMB 1,442,019,492, approximately 85.0% of total other receivables.). 167 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 11. NOTES TO COMPANY FINANCIAL STATEMENTS (CONTINUED) (3) Long-term equity investments 2012 Share Voting Cash Opening Movement Closing holding power Dividends for Cost balance for the year balance % % the year Cost Method: Xinjiang Tianzhu (a) 60,000,000 60,000,000 60,000,000 60 100 - Vehicular 300,000 300,000 - 300,000 100 100 - Transportation Kylin Packaging 23,176,063 23,176,063 23,176,063 100 100 - Changyu Chateau (a) 28,968,100 28,968,100 - 28,968,100 70 100 42,091,942 AFIP Tourism (a) 350,000 350,000 - 350,000 70 100 - Pioneer International 3,500,000 3,500,000 - 3,500,000 70 100 3,747,021 Ningxia Growing 1,000,000 1,000,000 - 1,000,000 100 100 - National Wines 2,000,000 2,000,000 - 2,000,000 100 100 44,868,620 Ice Chateau (a) 13,413,000 13,413,000 - 13,413,000 51 100 - Beijing Chateau (a) 77,000,000 77,000,000 - 77,000,000 70 100 - Sales Company 7,200,000 7,200,000 - 7,200,000 90 100 1,200,000,000 Langfang Sales (b) 100,000 100,000 - 100,000 10 100 2,894,035 Langfang Castel (a) 19,835,730 12,142,200 7,693,530 19,835,730 39 100 445,206 Wines Sales 4,500,000 4,500,000 - 4,500,000 90 100 - Shanghai Sales (b) 300,000 300,000 - 300,000 30 100 - Beijing Sales 850,000 350,000 500,000 8500,000 100 100 - Jingyang Sales (b) 100,000 100,000 - 100,000 10 100 35,929,376 Jingyang Wine 900,000 900,000 - 900,000 90 100 10,814,363 Ningxia Wine 1,000,000 1,000,000 - 1,000,000 100 100 - Yantai Dingtao 5,000,000 5,000,000 - 5,000,000 18 18 - Ningxia Chateau 2,000,000 2,000,000 - 2,000,000 100 100 - Dingluote Chateau 80,000,000 80,000,000 - 80,000,000 100 100 - Shihezi Chateau 150,000,000 150,000,000 - 150,000,000 100 100 - Xianyang Chateau 20,000,000 20,000,000 - 20,000,000 100 100 - Development Centre 500,000,000 100,000,000 400,000,000 500,000,000 100 100 - Huanren Wine 5,000,000 5,000,000 - 5,000,000 100 100 - 1,006,492,893 598,449,363 408,193,530 1,006,492,893 1,006,642,893 168 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 11. NOTES TO COMPANY FINANCIAL STATEMENTS (CONTINUED) (3) Long-term equity investments 2011 Share Voting Cash Opening Movement Closing holding power Dividends for Cost balance for the year balance % % the year Cost Method: Xinjiang Tianzhu (a) 60,000,000 60,000,000 60,000,000 100 100 - Vehicular 300,000 300,000 - 300,000 100 100 - Transportation Kylin Packaging 23,176,063 7,783,813 15,392,250 23,176,063 100 100 - Changyu Chateau (a) 28,968,100 28,968,100 - 28,968,100 70 100 42,091,942 AFIP Tourism (a) 350,000 350,000 - 350,000 70 100 - Pioneer International 3,500,000 3,500,000 - 3,500,000 70 100 3,747,021 Ningxia Growing 1,000,000 1,000,000 - 1,000,000 100 100 - National Wines 2,000,000 2,000,000 - 2,000,000 100 100 44,868,620 Ice Chateau (a) 13,413,000 13,413,000 - 13,413,000 51 100 - Beijing Chateau (a) 77,000,000 77,000,000 - 77,000,000 70 100 - Sales Company 7,200,000 7,200,000 - 7,200,000 90 100 1,200,000,000 Langfang Sales 100,000 100,000 - 100,000 10 100 2,894,035 Langfang Castel (a) 12,142,200 12,142,200 - 12,142,200 49 100 445,206 Wines Sales 4,500,000 4,500,000 - 4,500,000 90 100 - Shanghai Sales 300,000 300,000 - 300,000 30 100 - Beijing Sales 350,000 350,000 - 350,000 70 100 - Jingyang Sales 100,000 100,000 - 100,000 10 100 35,929,376 Jingyang Wine 900,000 900,000 - 900,000 90 100 10,814,363 Ningxia Wine 1,000,000 1,000,000 - 1,000,000 100 100 - Yantai Dingtao 10,000,000 5,000,000 5,000,000 18 18 - Ningxia Chateau 2,000,000 2,000,000 2,000,000 100 100 - Dingluote Chateau 80,000,000 - 80,000,000 80,000,000 100 100 - Shihezi Chateau 150,000,000 2,000,000 148,000,000 150,000,000 100 100 - Xianyang Chateau 20,000,000 2,000,000 18,000,000 20,000,000 100 100 - Development Centre 100,000,000 100,000,000 100,000,000 99 99 - Huanren Wine 5,000,000 - 5,000,000 5,000,000 100 100 - 603,299,363 331,907,113 266,392,250 598,299,363 1,340,790,563 169 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 11. NOTES TO COMPANY FINANCIAL STATEMENTS (CONTINUED) (3) Long-term equity investment (continued.) (a) The Group is entrusted to manage these non-wholly owned subsidiaries whereby the Group owned the entire operating results of these subsidiaries deducting fixed fees paid to the non- controlling holders. Please refer to Note 4 (1) for details. (b)The Group has 100% voting power of those subsidiaries by the way of indirect controlling. During 2012and 2011, there was no significant restriction on the remittance of fund from the investees to the Company. As at 31 December 2012, the impairment provision of RMB5, 000,000 was provided for Yantai Dingtao (31 December 2011: RMB5,000,000). (4) Capital reserve As at 31 December 2012 and 31 December 2011, the balance of capital reserve represented capital premium. (5) Revenue and cost of sales Revenue is as follows: 2012 2011 Income from principal activities 1,776,979,032 1,864,033,002 Cost of sales is as follows: 2012 2011 Cost from principal activities 1,444,948,143 1,516,393,443 170 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 11. NOTES TO COMPANY FINANCIAL STATEMENTS (CONTINUED) (5) Revenue and cost of sales (continued) In 2012, revenue derived from top 5 customers is as follows: Amount Percentage of total revenue % Sales Company 1,508,463,434 84.9 Penglai wine sales 88,927,036 5.0 Yantai wine sales 43,236,192 2.4 Pioneer International 14,775,600 0.8 Jingyang Winery 3,955,609 0.2 1,659,357,871 93.3 In 2012, top 5 customers of the Company are all subsidiaries. In 2011, revenue derived from top 5 customers is as follows: Amount Percentage of total revenue % Sales Company 1,615,286,672 86.7 Changyu Chateau 42,508,100 5.4 Qing tong xia Sales 22,799,202 2.8 Beijing Chateau 4,273,366 2.1 Langfang Castel 2,293,668 1.2 1,687,161,008 98.2 In 2011, top 5 customers of the Company are all subsidiaries. Revenue is analyzed as follows: 2012 2011 Sales of goods 1,776,979,032 1,864,033,002 171 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 11. NOTES TO COMPANY FINANCIAL STATEMENTS (CONTINUED) (6) Investment income 2012 2011 Long-term equity investment income accounted for by using the cost method 1,091,018,499 1,340,790,563 Investment income from disposal of held for trading financial assets - 52,122 1,091,018,499 1,340,842,685 Among the long-term equity investment income accounted for by using cost method, the investees with investment income accounting for more than 5% of the Company’s total profit before tax are as follows: Investees 2012 2011 Sales Company 980,000,000 1,200,000,000 As at 31 December 2012 and at 31 December 2011, there was no significant restriction on the remittance of investment income to the Company. 172 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 11. NOTES TO COMPANY FINANCIAL STATEMENTS (CONTINUED) (7) Supplement to cash flow statement Cash flows from operating activities calculated by adjusting the net profit: 2012 2011 Net profit 1,130,895,806 1,409,090,776 Add: Impairment provision - 3,120,600 Depreciation 47,318,392 37,104,808 Amortization of intangible assets 4,291,247 3,069,076 Amortization of Biological assets 586,905 586,905 Losses/(gains) on disposal of property, 2,354,433 ( 2,694,891 ) plant and equipments Finance costs ( 30,599,023 ) ( 44,235,900 ) Investment income (1,091,018,499 ) (1,340,842,685 ) Increase/(decrease) in deferred tax 11,820,627 ( 4,318,060 ) assets Increase in inventories ( 313,990,373 ) ( 98,403,068 ) Increase in trade receivables ( 475,386,959 ) ( 560,525,865 ) Increase/(decrease) in trade payables ( 527,924,856 ) 101,511,949 Net cash flows from operating activities (1,241,652,300 ) ( 496,536,355 ) (8) Cash and cash equivalents 2012 2011 Cash and bank 425,084,049 296,735,240 Including: Cash on hand 11,916 26,472 Bank deposits on demand 425,072,133 275,011,335 Other monetary capital on demand - 21,697,433 425,084,049 296,735,240 173 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 1. DETAILS OF EXTRAORDINARY PROFIT AND LOSS 2012 Loss on disposal of non-current assets, including reversal of accrued impairment provision ( 1,940,260) Government grants credited in profit and loss (except for those recurring government grants that are closely related to the Group's operation, in line with related regulations and have proper basis of calculation) 23,393,756 Other non-operating income and expense 10,953,355 32,406,851 Corporate income tax effect ( 7,435,162) 24,971,689 The Group’s extraordinary profit and loss items are recognized in accordance with the regulations of the "public offering of securities of the Company Disclosure Explanatory Notice No. 1 - non-recurring profit and losses" (SFC [2008] No. 43). All non-operation income and non-operation expenses are non-operating profit in 2012.Please refer to Note 5 (36) and (37). 174 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED SUPPLEMENTARY INFORMATION TO THE FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 2. RETRUN ON EQUITY (“ROE”) AND EARNINGS PRE SHARE (“EPS”) 2012 Weighted average ROE Basic EPS (%) (RMB) Net profit attributable to shareholders of the Company 31.13 2.48 Net profit attributable to shareholders of the Company deducting extraordinary profit and loss 30.68 2.44 The Company did not have any potential dilutive shares. 2011 Weighted average ROE Basic EPS (%) (RMB) Net profit attributable to shareholders of the Company 43.18 2.78 Net profit attributable to shareholders of the Company deducting extraordinary profit and loss 41.55 2.68 The Company did not have any potential dilutive shares. 175 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED SUPPLEMENTARY INFORMATION TO THE FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 3. VARIANCE ANALYSIS Analysis on items with fluctuation more than 30% (inclusive) in consolidated financial statements or balance greater than 5% (inclusive) of the total assets at the balance sheet date or amount greater than 10% (inclusive ) of gross profit of the reporting period. (1) The balance of cash and bank as at 31 December 2012 was RMB 2,227,470,828, decreasing by 12% compared with 2011. The decrease is mainly due to the cash outflow of the financing activities. (2) The balance of bills receivable and account receivable as at 31 December 2012 was RMB 92,635,702 and RMB 135,217,384, increasing by 65% and 7% compared with 2011, which is in mainly because of the aggregate increasing of sales near the end of the year. (3) The balance of advance to supplier as at 31 December 2012 was RMB 47,822,482, decreasing by 38% compared with 2011. The decrease was mainly due to the decreasing sales resulted in decrease of purchase of raw material. (4) The balance of interest receivable as at 31 December 2012 was RMB 7,215,854, decreasing by 54% compared with 2011. The decrease was mainly due to the combined effect of decreasing of interest rate and amount of term deposits in 2012. (5) The balance of other receivables at 31 December 2012 is RMB 28,462,945, decreasing by 62% compared with 2011, which was due to the decrease of deposits made for bid of land. (6) The balance of inventory as at 31 December 2012 was RMB 2,268,621,441, increasing by 29% compared with 2011, which is mainly due to the lunar new year is relatively late in 2013, all the stocks prepared for lunar new year haven’t been ship out yet. (7) The balance of property, plant and equipment as at 31 December 2012 was RMB 1,823,983,721, increasing by 13% compared with 2011, which was mainly due to the transfers from construction in process to property, plant and equipment and purchased new equipment. (8) The balance of construction in progress as at 31 December 2012 was RMB 832,828,689, increasing by 105% compared with 2011, which was mainly due to the construction of newly established chateau. Meanwhile improvement project on the production lines also contributed to the increase of construction in progress. (9) The balance of intangible asset was RMB 278,293,922 as at 31 December 2012, increasing by 5% compared with 2011, which mainly due to the increasing land use rights of newly established chateau and winery factory. (10) The balance of deferred tax asset was RMB 150,376,138 as at 31 December 2012, decreasing by 14% compared with 2011, which was mainly due to the decrease of the unpaid bonus of the group. (11) The balance of other non-current asset was RMB 28,180,035 as at 31 December 2012, increasing by 489% compared with 2011, which was mainly due to the accounts receivables resulting from the disposing of biological asset. (12) The balance of accounts payables as at 31 December 2012 was RMB 324,881,168, increasing by 41% compared with 2011, which is in line with the increase of procurement of grape and bulk wine in2012. 176 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED SUPPLEMENTARY INFORMATION TO THE FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 3. VARIANCE ANALYSIS (CONTINUED) (13) The balance of advance from customer was RMB 450,172,253 as at 31 December 2012, increasing by 53% compared with 2011. The increase was mainly due to the lunar new year is relatively late in 2013, all the stocks prepared for lunar new year haven’t been ship out yet (14) The balance of tax payables as at 31 December 2012 was RMB 444,084,576, decreasing by 26% compared with 2011 due to the decreasing of sales. (15) The balance of other payables as at 31 December 2012 was RMB 470,650,111, decreasing by 12% compared with 2011 which was mainly due to the decreasing advertisement expense and faster processing time of reimbursement. (16) The balance of other non-current liabilities within one year was RMB 150,945,000 as at 31 December 2012, increasing by 86% compared with 2011, the balance represents the wine future that would be mature within one year. (17) The balance of other current liabilities was RMB 8,090,382 as at 31 December 2012, increasing by 71% compared with 2011, the balance represents the deferred income for the group which would be recognized in next year. (18) The balance of other non-current liabilities was RMB 69,004,862 as at 31 December 2012 decreasing by 36% compared with 2011 which was mainly due to the deferred income would be recognized in one year been reclassified to other current liabilities. (19) The balance of issued capital was RMB 685,464,000 as at 31 December 2012 increasing by 30% compared with 2011 which was mainly due to the convertion of ordinary share dividend. . (20) The balance of capital surplus was RMB 562,139,042 as at 31 December 2012, no fluctuation compared to 2011. (21) The balance of reserved surplus was RMB 342,732,000 as at 31 December 2012, increasing by 16% compared with 2011, which was due to the increasing legal reserved surplus. (22) The balance of retained earnings was RMB 4,322,769,136 as at 31 December 2012, increasing by 19% compared with 2011, which was due to the Group’s profit in 2012 and the distribution of profit for the year 2011. (23) The revenue of 2012 was RMB 5,643,530,553, decreasing by 6% compared with 2011. The decrease was mainly contributed by the poor market condition of wine, champagne and brandy. The cost of sales of 2011 was RMB 1,401,088,983, decreasing by 3% compared with 2011. The decrease was in line with the decrease of sales. (24) The taxes and surcharges for 2012 was RMB 318,214,304, decreasing 12% compared with 2011. The decrease is in line with the decrease of sales. (25) The selling expense for 2012 was RMB 1,449,224,163, decreasing by 4% compared with 2011.The decrease was mainly due to the decrease of promotion and advertisement expenses. (26) The G&A expense for the year ended 31 December 2012 was RMB 254,374,809, increasing by 8% compared with that of the year 2011. The increase was mainly due to the increase of forestation fee. 177 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED SUPPLEMENTARY INFORMATION TO THE FINANCIAL STATEMENTS(CONTINUED) Year ended 31 December 2012 3. VARIANCE ANALYSIS (CONTINUED) (27) The assets impairment loss for the year ended 31 December 2012 was RMB 2,777,648, decreasing by 81% compared with that of the year 2011. The decrease was mainly due to there was no new provision for bad debts. (28) The financial income for 2012 was RMB 19,918,261, decreasing by 55% compared with year 2011. The decrease was mainly due to the decreasing balance and interest rate of term deposits. (29) The investment income for 2012 was nil, decreasing by 100% compared with 2011. The decrease was mainly due to the Group didn’t have any income from disposing any hold for sales financial assets. (30) The other revenue was RMB 35,378,260 in 2012, increasing by 33% compared with 2011. The increase was mainly due to government grant. The other expense was RMB 2,971,409 in 2012, decreasing by 38% compared with 2011 which was mainly due to the loss of disposal of non-current asset. (31) The income tax expense for 2012 was RMB 569,247,641, decreasing by 10% compared with 2011. The decrease was in line with the decrease of taxable income of the Group caused by the decrease of revenue. 178 XI、Reference Documents (1)The original of annual report autographed by the chairman. (2)The financial statements autographed and signed by the chairman, chief accountant and accountants in charge. (3)The Prospectus and Public Offering Announcement for Stock B in 1997, the Prospectus and The Shares’ Change & Public Offering Announcement for Stock A in 2000. (4) The originals of all documents and announcements that the Company made public during the report period in the newspapers designated by China Securities Regulatory Commission. Yantai Changyu Pioneer Wine Co. Ltd. Board of Directors 19th April 2013 179