About Us We are one of the leading dairy companies in Gansu, Shaanxi and Qinghai where our operations and sales are primarily located and we operate a vertically integrated business model. Our business model covers the critical stages of the dairy industry value chain, from dairy farming, to manufacturing, and then to marketing and sales of dairy products. Our dairy farming operations aim to ensure a stable supply of high quality raw milk for our dairy product manufacturing. We believe our business model allows stringent control over each important process of dairy production and thereby guarantees the high quality and safety of our dairy products. Contents 2 Corporate Information 4 Annual Results Highlights 5 Chairman’s Statement 6 Management Discussion and Analysis 25 Directors, Supervisors and Senior Management 29 Supervisory Committee’s Report 30 Corporate Governance Report 48 Directors’ Report 70 Auditor’s Report 76 Consolidated Income Statement 79 Consolidated Balance Sheet 82 Consolidated Cash Flow Statement 84 Consolidated Statement of Changes in Equity 86 Income Statement of the Parent Company 88 Balance Sheet of the Parent Company 91 Cash Flow Statement of the Parent Company 93 Statement of Changes in Equity of the Parent Company 95 Notes to the Financial Statements 230 Financial Summary Corporate Information BOARD OF DIRECTORS STRATEGY COMMITTEE Executive Directors Mr. Ma Hongfu (Chairman) Mr. Ma Hongfu Mr. Zhao Xinmin Mr. Wang Guofu Ms. Zhang Qianyu AUTHORISED REPRESENTATIVES Mr. Ma Hongfu Non-Executive Director Ms. Ho Wing Yan (ACG, ACS (PE)) Mr. Yap Kean Chong JOINT COMPANY SECRETARIES Independent Non-Executive Directors Ms. Zhang Qianyu (Executive Director) Ms. Liu Zhijun Ms. Ho Wing Yan (ACG, ACS (PE)) Mr. Zhao Xinmin Mr. Wong Cho Hang Stanley STOCK CODE 1533 Supervisors Ms. Du Wei PRINCIPAL PLACE OF BUSINESS IN Mr. Sun Chuang HONG KONG Mr. Wei Lin Suite 2703, 27/F Shui On Centre AUDIT COMMITTEE Nos. 6-8 Harbour Road Ms. Liu Zhijun (Chairman) Wanchai, Hong Kong Mr. Zhao Xinmin Mr. Wong Cho Hang Stanley REGISTERED OFFICE Sanjiaocheng Village REMUNERATION AND APPRAISAL Sanjiaocheng Town COMMITTEE Yuzhong County Ms. Liu Zhijun (Chairman) Lanzhou, Gansu Mr. Wang Guofu PRC Mr. Zhao Xinmin PRINCIPAL PLACE OF BUSINESS AND NOMINATION COMMITTEE HEAD OFFICE IN THE PRC Mr. Zhao Xinmin (Chairman) 25th-26th Floors, Block B Mr. Ma Hongfu Shanghui Building of Gansu Province Mr. Wong Cho Hang Stanley No. 601, Yanyuan Road Chengguan District Lanzhou City, Gansu Province PRC 2 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Information H SHARE REGISTRAR AND TRANSFER PRINCIPAL BANK OFFICE Agricultural Development Bank of China, Union Registrars Limited Yuzhong County Branch Suites 3301-04, 33/F No. 19, Tai Bai Road Two Chinachem Exchange Square Yuzhong County 338 King’s Road Lanzhou, Gansu North Point, Hong Kong PRC LEGAL ADVISOR (AS TO HONG KONG AUDITORS LAW) WUYIGE Certified Public Accountants LLP Wan & Tang 22/F., Xueyuan International Tower 23/F., Somptueux Central No. 1 Zhichun Road 52 Wellington Street Haidian District Central Beijing Hong Kong COMPANY WEBSITE http://www.lzzhuangyuan.com ANNUAL REPORT 2020 3 Annual Results Highlights FINANCIAL HIGHLIGHTS Results Years ended 31 December 2020 2019 RMB’000 RMB’000 Operating income 739,821 813,554 Gross profit 206,877 253,899 Profit for the year attributable to equity shareholders of the Company 10,453 51,321 Earnings per share (RMB)(1) 0.05 0.27 Proposed dividend per share (RMB) 2.00 cents 5.50 cents Operating income decreased by approximately 9.06% as compared to the year ended 31 December 2019. Gross profit decreased by approximately 18.52% as compared to the year ended 31 December 2019. Profit for the year attributable to equity shareholders of the Company decreased by approximately 79.63% as compared to the year ended 31 December 2019. Note: (1) The calculation of earnings per share is based on the profit attributable to ordinary equity shareholders of the Company and the weighted average of ordinary shares in issue during the year. 4 LANZHOU ZHUANGYUAN PASTURE CO LTD Chairman’s Statement REPORT TO THE SHAREHOLDERS During the year of 2020, dairy enterprises are accelerating the integration of upstream milk source resources. In 2020, we had Dear Shareholders, steadily promoted the “Recycling Industrial Park Project of a On behalf of the board (the “Board”) of directors (the Dairy Farm for 10,000 Dairy Cows in Jinchuan District”, which “Directors”), I am pleased to present the audited annual report is located in the advantaged breeding environment and forage of Lanzhou Zhuangyuan Pasture resources of Hexi Corridor in Gansu province. We completed Co., Ltd.* (the “Company”) and its subsidiaries (collectively, the the non-public offering of 43 million A-shares to four investors “Group”) for the year ended 31 December 2020 (the “Reporting in 2020 to further guarantee the financial support of “Recycling Year”). Industrial Park Project of a Dairy Farm for 10,000 Dairy Cows in Jinchuan District”; meanwhile, introduced Gansu Nongken I n 2 0 2 0 , w e re c o rd e d o p e r a t i n g re v e n u e o f R M B 7 4 0 Asset Operation Company Limited million, representing a decrease of 9.06% compared with as the substantial shareholder of the Company, and the corresponding period last year, the total profit was its parent company, Gansu Nongken Group Limited Liability RMB12,360,600, representing a decrease of 80.98% compared Company( ), will gain control of with the corresponding period last year, and net profit the Company through further transfer of shares in the company. attributable to shareholders of the parent of RMB10,453,500, Relying on the unique natural endowment of Gansu Province, representing a decrease of 79.63% compared with the Gansu Nongken Group Limited Liability Company has corresponding period last year. We currently have three production bases in Gansu, Qinghai and Shaanxi, and seven reserved rich resources and management experience in both operating ranches with 16,094 cows in stock, up 20% from planting and breeding. Gansu Nongken Group Limited Liability 13,412 at the end of 2019. The raw milk yield was 54,639 tons, Company will concentrate the advantageous resources such as up 9.99% from 49,675 tons in 2019. Our own milk supply rate forage planting base and milk source base to actively support during the reporting period exceeded 60%. The company has the comprehensive business development of Zhuangyuan three dairy brands, namely“Zhuangyuan Ranch”( ), Pasture. Thanks to the strong support from Gansu Nongken “Shenghu”( ) and “Dongfang Duoxian Zhuangyuan”( Group Limited Liability Company on raw milk in the future, ), and the main sales ares are Gansu Province, Qinghai which will enable the Company's raw milk to get sustainable Province and Shaanxi Province. development and consolidation, and will further improve the capacity and quality of fresh milk, the Company can meet its The Company has fully played to its diversified characteristics own brand product demand growth brought by the raw milk, of the company brand in recent years, and implemented also can cooperate with other downstream dairy products the strategy of differentiation of products. The Company's production enterprise to supply the high quality of raw milk. core and characteristic products, namely pasteurized milk, The Company's business will enter into the stage of diversified sterilized milk, modified milk and fermented milk have been development. widely accepted by the local consumers, which was nurtured with high brand loyalty consumer groups. Our products have After the Company's “reconstruction and expansion project with a certain geographical advantage in gansu, qinghai, shaanxi daily processing 600 tons of liquid milk” was put into operation, region, occupying a higher market position and with a certain the Company's intelligent manufacturing level will provide brand effect. During the reporting period, the Company's support for the Company's product innovation and research business scope and main business did not change significantly. The company will further strengthen the fresh milk production and development. The Company will upgrade the cold chain capacity and its quality, to meet the rapid growth of consumer distribution facilities, consolidate the system of milk delivery demand, and timely through the integration of valuable to households, raise the channel barriers of low-temperature complementary enterprises to achieve scale expansion and products in the market of Gansu, Shaanxi and Qinghai, rapid development. enrich the product mix, especially high-end pasteurized milk and other upgraded products, to meet the ever-increasing consumer demand; meanwhile, continue to carry out product development, provide new taste experiences and functional products to meet the changing consumer preferences, further strengthen the Company's market leadership and brand recognition in Gansu, Shaanxi and Qinghai regions, and lay the foundation for the long-term development of the Company. Ma Hongfu Chairman * For identification purpose only ANNUAL REPORT 2020 5 Management Discussion and Analysis INDUSTRY REVIEW In China, dairy products are mainly divided into three categories: liquid milk, milk powder, and other dairy products. Liquid milk mainly includes UHT milk, modified milk, pasteurised milk (also known as fresh milk), and yogurt, categorised by different processing techniques. Other dairy products mainly include cheese, cream, condensed milk, lactose, and so on. China has strong consuming power in dairy products, and Chinese consumers have increasingly realised the benefits of dairy products. The market has therefore been enjoying healthy growth in recent years. With the rising disposable income, ongoing urbanisation progress as well as consumers’ rising health awareness, the consumption and the market share of pasteurised milk among liquid milk in China are expected to increase in the future. Similar with pasteurised milk, the market share of yogurt has also been increasing among liquid milk and has become the second largest segment in China’s liquid milk product market. Compared with the overall liquid milk market in China, the liquid milk markets in Gansu, Qinghai and Shaanxi provinces in China (“Gansu”, “Qinghai” and “Shaanxi”) were still at their growth stage. Pursuant to the rising per capita disposable income and increasing regional nominal GDP of Gansu, Qinghai and Shaanxi, the liquid milk markets in these regions are expected to grow faster in the future. BUSINESS REVIEW We are one of the leading dairy companies in Gansu, Qinghai and Shaanxi where our operations and sales are primarily located and we operate a vertically integrated business model. Our vertically integrated business model covers the critical stages of the dairy industry value chain, from dairy farming, to manufacturing, and then to marketing and sales of dairy products. Our dairy farming operations aim to ensure stable supply of high quality raw milk for our dairy product manufacturing. We owned and operated 7 dairy farms as at 31 December 2020. Our strategy is to expand the herd size of dairy cows in our self-operated dairy farms and existing collectively-operated dairy farms so as to maintain approximately 60% of our raw milk requirement that could be sourced internally in the near future, which will enable us to achieve balanced, complementary yet diverse sources of raw milk supply to satisfy our dairy product manufacturing need. We believe our vertically integrated business model allows stringent control over each important process of dairy production and thereby guarantees the high quality and safety of our dairy products. 6 LANZHOU ZHUANGYUAN PASTURE CO LTD Management Discussion and Analysis We offer a broad range of dairy products tailored to the needs and taste preferences of different consumer groups. Our principal products sold to retail consumers, mainly through distributors and sales agents, include (i) liquid milk products, which comprise pasteurised milk (i.e. fresh milk), UHT milk, modified milk and yogurt; and (ii) milk beverages. We place strong emphasis on our product development to continuously develop new products that meet the evolving tastes and preference of our consumers, which enables us to maintain our leading position in the region. We are a major player in the sales of “Cold Chain Liquid Milk Products” (i.e. liquid milk product(s) that has a short shelf life between 3 days to 21 days and need to be stored at low temperature of 2C – 6C, which include pasteurised milk and yogurt products) in the Gansu, Qinghai and Shaanxi regional market. We believe that we are well positioned to compete in the Cold Chain Liquid Milk Product market in Gansu, Qinghai and Shaanxi due to our close proximity to the local market and our established local distribution network. We plan to continue to expand our cold chain production capacity and distribution network to increase the sales of Cold Chain Liquid Milk Products in the Gansu, Qinghai and Shaanxi regional market and then further expand into other provinces in the northwestern China market. While focusing on the Cold Chain Liquid Milk Product market, we also leveraged on our strong brand recognition in the regional market to continue to strengthen the sales of our popular UHT milk products, thereby maintaining our diversified product offerings. Going forward, we intend to continue our efforts in the sales of our UHT milk products and modified milk products that are popular among local customers to maintain our diversified product offerings. Key Financial Ratios The table below sets out our key financial ratios as at the dates indicated: 2020 2019 Current ratio(1) 0.95 0.64 Quick ratio(2) 0.85 0.54 Return on equity(3) 0.74% 4.26% Return on assets(4) 0.38% 2.24% Gearing ratio(5) 48.33% 50.84% Notes: (1) Current assets/current liabilities. ANNUAL REPORT 2020 7 Management Discussion and Analysis (2) (Current assets — inventory)/current liabilities. (3) Net profit for the year/(total equity attributable to equity shareholders of the Company as at the beginning of the year + total equity attributable to equity shareholders of the Company as at the end of the year)/2 x 100%. (4) Net profit for the year/(total assets as at the beginning of the year + total assets as at the end of the year)/2 x 100%. (5) Total liabilities/total assets x 100%. Biological Assets During the Reporting Year, our biological assets comprised dairy cows. Dairy cows are further categorised into calves, heifers and milkable cows. The following table sets out the value of our biological assets as at 31 December of 2020 and 2019: At 31 December 2020 2019 RMB’000 RMB’000 Dairy cows Milkable cows 338,928 189,266 Heifers 111,986 155,117 Calves 43,778 15,712 Total 494,691 360,095 The numbers of dairy cows in our self-owned dairy farms are summarised as follows: 2020 2019 (Heads) (Heads) Dairy cows Milkable cows 8,236 5,560 Heifers 4,308 6,472 Calves 3,550 1,380 Total 16,094 13,412 8 LANZHOU ZHUANGYUAN PASTURE CO LTD Management Discussion and Analysis Dairy Farming Milk Production Our raw milk production was approximately 54,639 tons (2019: approximately 49,675 tons), representing a year-on-year increase of approximately 9.99%, mainly due to the increase in the number of milkable cows. During the Reporting Year, the average annual milk production per milkable cow increased from 5.04 to 10.21 tons in 2019 to 5.96 to 11.39 tons in 2020, representing an increase as compared to that of the previous year. Dairy Products Production In 2020, the market of domestic dairy products, especially liquid milk products, was highly competitive. In response to these market conditions, we continuously optimized our product structure by making use of our own advantages of milk sources produced by our own dairy farms and high quality fresh dairy milk products, thus strengthening our differentiated competitiveness, and focused on developing the northwestern China market. Impact of COVID-19 on the Product Sales As the outbreak of COVID-19 in early 2020 had a significant impact on the product sales of the Company in the first half of the year, the products were sold at lower prices than in the previous years in response to the epidemic, resulting in lower annual average selling prices than that of the previous year, which in turn led to an overall decline in gross profit margin. Expansion of our Distribution Network We rely on our distribution network to sell our dairy products to end consumers. The effectiveness and geographic reach of our distribution network and sales force directly impact our sales. We have established a distribution network comprising various sales channels covering most of the local markets in Gansu, Qinghai and Shaanxi. As at 31 December 2020, we had entered into distribution agreements with 743 distributors and sales agents, as compared to 765 distributors and sales agents as at 31 December 2019. To further promote our branded dairy products across the region, we aim to enhance our distribution network to deepen our regional sales and distribution network, solidify our established position in our primary markets and we have conducted an integrated management of our distributors and sales agents in 2020. Furthermore, we have also expanded our distribution network into the China national market, especially in the northwestern China region. Average Selling Price of our Liquid Milk Products Our revenue and profitability are affected by the average selling price of our liquid milk products, which in turn, is determined by prevailing market conditions, cost of raw materials, production costs and competition situation. We reduced the average selling price due to the impact of COVID-19. The average selling price of our liquid milk products decreased from approximately RMB8,916 per tonne in 2019 to approximately RMB8,607 per tonne in 2020. ANNUAL REPORT 2020 9 Management Discussion and Analysis Quality Control Product safety management and quality control are our core values and of paramount importance to our business. We implement stringent quality control and production safety management measures throughout our production process from the procurement of feeds, dairy farming, raw milk sourcing and processing to production, packaging, storage and delivery of our products. Our quality control system is designed based on the Good Manufacturing Practices (GMPs), the Hazard Analysis and Critical Control Points (HACCPs) and the Sanitation Standard Operating Procedures (SSOPs). GMPs are the foundation for our milk safety and milk quality programme. GMPs are implemented in four main areas of our dairy processing, specifying control measures in respect of (i) personnel hygiene; (ii) building and facilities; (iii) equipment and utensils; and (iv) production and process control. In addition, we have also applied the principles of HACCP in the management of our milk safety. Our HACCP plan focuses on areas where problems potentially may occur and requires that production facilities be prepared to deal with problems immediately if they occur. Under our HACCP plan, we conducted a hazard analysis in order to identify any hazardous biological, chemical or physical properties in raw materials and processing steps. Based on the analysis, we identified the critical control points and established monitoring procedures and use the monitoring results to streamline processes on a continuous basis. As a testament of our efforts in complying with HACCP, our production plants in Gansu and Qinghai received the HACCP Certification issued by the China Quality Certification Centre and Beijing Continental Hengtong Certification Co. Ltd., respectively. Furthermore, we have also implemented the SSOPs specifying step-by-step procedures needed for processes related to sanitation. Following the SSOPs, we focus on key sanitation conditions and requirements, such as the safety of water that comes into contact with dairy products, condition and cleanliness of contact surfaces, prevention of cross-contamination from insanitary objects to dairy product, protection of dairy products and packaging materials, labelling, storage, and use of cleaning solutions and pesticides, control of employee health conditions, and exclusion of pests from the production plant. Our quality control system is divided into six stages: (i) control over the quality of feeds; (ii) control over the quality of dairy cows; (iii) control over sourcing and processing of raw milk; (iv) control over raw materials and suppliers; (v) control over production process; and (vi) control over storage and delivery of finished products. Brand Building The liquid milk product industry in China, including Gansu, Qinghai and Shaanxi, our major markets, is highly concentrated. The competitive landscape of the dairy product industry in China can be split into three categories: (1) national brands; (2) regional brands; and (3) foreign brands. As a regional brand, we are located near to the market with shorter transportation time that guarantees better freshness. Our products are also more tailored to the taste and spending habits of end consumers. Compared with our competitors, we benefited from over 60% of our own farm's supply of raw milk a stable supply of raw milk from our suppliers with whom we have developed good relationship over the years. 10 LANZHOU ZHUANGYUAN PASTURE CO LTD Management Discussion and Analysis We believe the demand for premium Cold Chain Liquid Milk Products will continue to rise along with the increased awareness of the importance of nutritional products to the health and well-being of consumers. To capture the increasing demand for Cold Chain Liquid Milk Products, we plan to continue to expand our cold chain distribution network in Gansu, Qinghai and Shaanxi and further in northwestern China. We believe that one of the key factors to a successful cold chain distribution network is the strategic location of cold warehouses outside of our production plants as it allows our products to reach local markets within 300 kilometers radius of our cold warehouses and also allows us to have better control over the quality of the Cold Chain Liquid Milk Products during the distribution process. We also seek to expand our third party distributors to deepen our regional sales and distribution network and solidify our established position in Gansu, Qinghai and Shaanxi, our primary markets. We will also continue to develop the e-commerce sales channels and satisfy the demands and preferences of different consumer groups through the internet direct sales portal to reach a wider customer base and to adapt to consumers’ purchase preference. FINANCIAL OVERVIEW Operating Income Principal Activities The following table sets out the breakdown of sales amount, sales volume and average selling price by product types for the years ended 31 December 2020 and 2019: 2020 2019 Sales Sales Average Sales Sales Average Amount Volume Selling Price Amount Volume Selling Price RMB’000 Tonne RMB/Tonne RMB’000 Tonne RMB/Tonne Liquid Milk Products Pasteurised milk 60,218 7,673 7,848 49,609 6,136 8,085 UHT milk 209,178 29,714 7,040 193,179 28,368 6,810 Modified milk 267,311 29,716 8,995 279,751 30,399 9,203 Yogurt 177,581 15,392 11,537 255,975 22,416 11,419 Subtotal 714,287 82,495 8,659 778,514 87,319 8,916 Milk Beverage 7,450 1,396 5,338 10,114 2,051 4,932 Other Dairy Products 415 10 42,229 3,687 158 23,309 Total 722,152 83,901 8,607 792,315 89,528 8,850 Our income from principal activities decreased by approximately 8.86% from approximately RMB792.3 million for the year ended 31 December 2019 to approximately RMB722.2 million for the year ended 31 December 2020, mainly due to the impact of COVID-19 on the Group in the first and second quarters of 2020. ANNUAL REPORT 2020 11 Management Discussion and Analysis Gross profit and gross profit margin The following table sets forth the breakdown of our cost of sales and gross profit by our product types, as well as their respective gross profit margin after biological asset fair value adjustments, for the years indicated: 2020 2019 Gross Profit Gross Profit Products Cost of Sales Gross Profit Margin Cost of Sales Gross Profit Margin RMB’000 RMB’000 % RMB’000 RMB’000 % Liquid milk products Pasteurized milk 39,527 20,690 34.36% 29,486 20,123 40.56% UHT milk 170,097 39,081 18.68% 157,475 35,704 18.48% Modified milk 187,524 79,787 29.85% 179,377 100,373 35.88% Yogurt 122,582 54,998 30.97% 170,073 85,902 33.56% Sub-total 519,730 194,557 27.24% 536,411 242,103 31.10% Milk beverage 5,920 1,530 20.54% 7,521 2,593 25.64% Other diary products 288 126 30.48% 3,158 529 14.34% Total 525,938 196,214 27.17% 547,090 245,225 30.95% Our total gross profit margin of our dairy products after taking into account biological asset fair value adjustments was approximately 30.95% for the year ended 31 December 2019 and approximately 27.17% for year ended 31 December 2020. The overall gross margin during the Reporting Year slightly decreased as compared to the previous year. Asset Impairment (1) Goodwill Incurred from the Company’s Acquisition of 82% Equity of Xi’an Dongfang Dairy Co., Ltd. The acquisition of a total of 82% equity of Xi’an Dongfang Dairy Co., Ltd. by the Company incurred goodwill of RMB58,690,500. The Company made a provision for impairment amounting to RMB48,719,300 in the annual report of 2019. At the end of 2020, the Company made an impairment provision of RMB9,971,200 as it considered that Dongfang Dairy had failed to achieve the expected performance, and the goodwill impairment exists. 12 LANZHOU ZHUANGYUAN PASTURE CO LTD Management Discussion and Analysis (2) Impairment Loss on Fixed Assets Ningxia Zhuangyuan Pasture Co., Ltd. and Qinghai Shengyuan Pasture Co., Ltd., the wholly-owned subsidiaries of the Company, have been delimitated into forbidden areas for animal and poultry and included in the area of closure and relocation. The Company has proactively responded to the work arrangement of the Government for relocation and closure, and has been proactively negotiating with local people’s government in respect of the compensation matters. The Company has made an impairment provision of RMB11,621,000 in relation to the fixed assets of the above mentioned two wholly-owned subsidiaries that may be disposed of in advance due to such relocation and closure. As disclosed in “Announcement Regarding the Signing of the Share Transfer Agreement by the Controlling Shareholder and the De Facto Controller and Proposed Change in Control of the Company” dated 25 January 2021 by the Company, Gansu Nongken Group Limited Liability Company is proposed to be the controlling shareholder of the Company, and Gansu People’s Government Asset Supervisory Management Committee will become the ultimate de facto controller of Zhuangyuan Pasture. According to the overall arrangement made by Gansu Nongken Group Limited Liability Company for optimizing dairy farming in the future,as the wholly-owned subsidiaries operating under the Company are likely to be at risk of consolidation in the next three years, the preparation for the provision of RMB54,390,000 for asset impairment for these subsidiaries is required. A provision for impairment of fixed assets of a total of RMB66,011,000 has been prepared for the above two matters. Gain arising from initial recognition of agricultural produce at fair value less costs to sell at the point of harvest Our gain arising from initial recognition of agricultural produce at fair value less costs to sell at the point of harvest decreased from approximately RMB16.12 million for the year ended 31 December 2019 to approximately RMB15.12 million for the year ended 31 December 2020. The decrease during the Reporting Year was primarily due to the average cost of producing milk on owned farms has increased slightly. ANNUAL REPORT 2020 13 Management Discussion and Analysis Gain from changes in fair value less costs to sell of biological assets We recorded gain from changes in fair value less costs to sell of biological assets amounted to approximately RMB59.15 million for the year ended 31 December 2020, which increased by approximately 451.70% from the gain of approximately RMB10.72 million for the year ended 31 December 2019, primarily due to increasing of cattle prices in 2020. Qualification and independence of the valuers Beijing Yatai Lianhua Assets Appraisal Co. Ltd. (“Beijing Yatai Lianhua”) was established in 1993 certified with the Licensed Certification for Appraisals in relation to Securities and Futures ( ) jointly issued by the MOF and the CSRC. It possesses qualifications in the valuation of properties and land. Given the need of the Company for the preparation of financial statements for the year ended 31 December 2020, the Company engaged Beijing Yatai Lianhua to perform a valuation on the biological assets intended to be carried at fair value that are reported by six wholly-owned subsidiaries and a wholly-owned sub-subsidiary under the Company, being Lanzhou Ruixing Farming Co., Ltd., Wuwei Ruida Pasture Co., Ltd., Qinghai Shengya Plateau Pasture Co., Ltd., Gansu Ruijia Animal Husbandry Co., Ltd., Linxia Ruiyuan Pasture Co., Ltd. and Shaanxi Duoxian Animal Husbandry Co., Ltd. Beijing Yatai Lianhua is a firm of independent qualified professional valuer. The asset valuation report was prepared in accordance with the Asset Evaluation Standards — Basic Standards ( ) issued by the MOF and the Asset Valuation Professional Ethical Standards ( ) issued by the China Appraisal Society. Beijing Yatai Lianhua, the party engaged in the valuation and preparation of the valuation results does not hold any interests in the Company or our related parties. The appointment of the valuer for the performance of valuation by the Company is based on the requirements under laws and regulations such as the Asset Appraisal Law of the People’s Republic of China ( ), the Contract Law of the People’s Republic of China ( ), the Asset Evaluation Basic Standards ( ) and the Practicing Standards for Asset Valuation — Asset Valuation Engagement Contracts ( — ). The valuer of Beijing Yatai Lianhua obtained the appraisal results in accordance with the relevant PRC regulations on valuing assets and the principles of independence, objectiveness, fairness and science. Payment of valuation fees is not contingent upon the conclusion drawn in the valuation results. The key members of Beijing Yatai Lianhua engaged in this valuation were Mr. Wang Ming and Ms. Chen Ying. Mr. Wang Ming is the deputy head and asset appraiser of Beijing Yatai Lianhua, and Ms. Chen Ying is the project manager and asset appraiser of Beijing Yatai Lianhua. They have provided valuation services in relation to the conversion, listing, transfer of equity interest, ect., to numerous companies in Mainland China and have extensive experience in asset appraisal. 14 LANZHOU ZHUANGYUAN PASTURE CO LTD Management Discussion and Analysis Operating expenses Years ended 31 December 2020 2019 RMB’000 RMB’000 Selling and adminstrative expenses 73,121 81,584 General and administration expenses 68,815 77,390 Total operating expenses 141,936 158,974 Operating expenses decreased from approximately RMB159.0 million for the year ended 31 December 2019 to approximately RMB141.9 million for the year ended 31 December 2020, which was mainly due to a decrease in selling expenses along with a decrease in revenue affected by COVID-19 during the Reporting Year. The decrease in administration expenses was mainly due to the improvement of management and efficiency of the Company. Financial expenses Our net finance costs increased by approximately 7.61% from approximately RMB22.2 million for the year ended 31 December 2019 to approximately RMB23.9 million for the year ended 31 December 2020, mainly due to the increase in the scale of debt financing. Current ratio As at 31 December 2020, our current ratio (current assets/current liabilities) was approximately 0.95 compared to approximately 0.64 as at 31 December 2019. ANNUAL REPORT 2020 15 Management Discussion and Analysis Liquidity and capital resources During the Reporting Year, we financed our operations primarily through net cash inflows from our daily operations. As at 31 December 2020 and 2019, we had approximately RMB631.56 million and approximately RMB248.23 million in cash and cash equivalents, respectively, which were mainly denominated in RMB and primarily consisted of cash on hand and bank deposits. Indebtedness During the Reporting Year, our borrowings were denominated in RMB. As at 31 December 2020, our outstanding short-term bank loans, including long-term loans due within one year, amounted to approximately RMB364.7 million at interest rates ranging from 4.35% to 6.5% per annum. As at 31 December 2020, our outstanding long-term bank loans, net of amount due within one year, amounted to approximately RMB311.3 million at interest rates ranging from 4.15% to 5.7% per annum. The management believes that the existing financing resources will be sufficient to meet current operations, current and future expansion plans and, if necessary, we will be able to obtain additional financing with favorable terms. There is no material effect of seasonality on our borrowing requirements. Asset-liability ratio As at 31 December 2020, our asset-liability ratio was approximately 48.33% (the ratio of total liabilities to assets) compared to approximately 50.84% as at 31 December 2019. Foreign exchange risk and pledge of assets The Group operates in the PRC with most of its transactions denominated and settled in RMB. The Group’s assets and liabilities, and transactions arising from its operations do not expose the Group to material foreign exchange risk as the Group’s assets and liabilities as at 31 December 2020 were denominated in the respective Group companies’ functional currencies. For the year ended 31 December 2020, we were not subject to significant exposure to interest rate risk. Hence, no financial instrument for hedging was employed. The management will continue to monitor foreign currency risk and adopt prudent measures as and when appropriate. As at 31 December 2020, the book value of our restricted assets was approximately RMB787.4 million (31 December 2019: approximately RMB601.7 million). The types and book value the restricted assets were as follows: (1) monetary capital of approximately RMB215.2 million (31 December 2019: approximately RMB165.5 million); (2) fixed assets of approximately RMB454.8 million (31 December 2019: approximately RMB346.1 million); (3) intangible assets of approximately RMB82.2 million (31 December 2019: approximately RMB54.8 million); (4) long-term equity investments of approximately RMB35.3 million (31 December 2019: approximately RMB35.3 million). 16 LANZHOU ZHUANGYUAN PASTURE CO LTD Management Discussion and Analysis Contingent liabilities As at 31 December 2019 and 31 December 2020, we did not have significant contingent liabilities. Capital structure Save as disclosed in the paragraph headed “Non-public Issuance of A Shares under Specific Mandate” in the Directors’ report, there was no change in the capital structure of the Group during the Reporting Year. The capital of the Group only comprises ordinary shares. Significant investments The Company was established in April 2000. Its production base located in Sanjiaocheng, Yuzhong County, Lanzhou City, Gansu Province was built according to the then market size, consumer demand and industry characteristics, and was completed and put into production in 2003. After nearly 20 years, some workshops became outdated with some equipment getting obsolete. Due to limited plant area and fixed plant layout, the Company's dairy processing base in Yuzhong County is now unable to fully meet the growing demand for product diversification in the dairy consumer market and introduction of advanced dairy production processes such as filling technology. In view of its future long-term planning and sustainable development, the Company started the “reconstruction and expansion project with daily processing 600 tons of liquid milk” in 2018. This “reconstruction and expansion project with daily processing 600 tons of liquid milk” will be built on the land where the existing production and processing base is located with a site area of 35.70 acres and 113.82 acres of newly purchased land in 2018, that is, a total of 149.52 acres of land. An experienced and qualified engineering design institute was engaged to provide a rational and modern plan for overall layout for investment and construction. Existing obsolete production equipment with low utilization rate, long service life and outdated production technology will be demised. At the same time, new production lines will be purchased and built to increase the Company's production capacity. The capacity and output realized after the project is completed and put into operation will include the existing capacity and output of the Yuzhong processing base with some enhancement. The Company invested approximately RMB14.5 million in 2018, and approximately RMB316.7 million in 2019. As of 31 December 2020, the cumulative investment was approximately RMB331.2 million, accounting for 10.75% of its total assets of RMB3,080.6 million as at 31 December 2020. The completion and acceptance work for the “reconstruction and expansion project with daily processing 600 tons of liquid milk” has been completed during the Reporting Year, and the Company has obtained the Housing Construction Project and Municipal infrastructure Project Completion Acceptance Recording Form (No. 17 [2020]) ( 2020 17 ), issued by the Housing and Urban-rural Development Bureau of Yuzhong County. The operation of this project will help optimize the production process and enrich the product structure; improve production efficiency and reduce labor costs; improve production standards and strengthen product quality control; and integrate the Group’s production resources for long-term development. ANNUAL REPORT 2020 17 Management Discussion and Analysis Material acquisitions and disposals of subsidiaries, associates and joint ventures Save as disclosed herein, the Group had no material acquisitions and disposals of subsidiaries, associates and joint ventures during the year ended 31 December 2020. Use of proceeds from the A Share Listing Information about the use of raised funds from the public offering of A Shares in 2017: As approved by the “Approval for the Issue of Shares of Lanzhou Zhuangyuan Pasture Co., Ltd. ( ) 2017 No. 1779” issued by the CSRC on 29 September 2017, the Company carried out the public offering of 46,840,000 A Shares of RMB1 each via offline placing through price consultations to qualified investors and online issuance at an issue price of RMB7.46 per share to public investors who hold the market value of non- restricted A Shares circulated in the Shenzhen market. The total sum of funds raised was RMB349,426,400 and the total net proceeds after deduction of the related issuance expenses of RMB39,922,700 (exclusive of value- added taxes) amounted to RMB309,503,700. As of 24 October 2017, the Company has received the monetary funds raised through the public offering of A shares. Such proceeds were verified by KPMG Huazhen (Special General Partnership) which accordingly issued its capital verification reports (KPMG Huazhen Yan Zi No. 1700634). The Company deposited the proceeds in a special account for management purposes. The funds utilized in 2020 were RMB57,248,130.25, the temporary supplemental liquidities were RMB50,000,000.00 and the interest income of the special account for funds raised after deducting handling charges for the current year was RMB119,843.64. As of 31 December 2020, the Company had utilized RMB260,648,130 out of the funds raised from the A Share Listing. The net interest income from the Raised Funds after deduction of handling charges was RMB1,474,040.64. The balance of the Raised Funds deposited in the special account was RMB329,610.39, and the balance of the Raised Funds unutilized was RMB50,329,610.39. 18 LANZHOU ZHUANGYUAN PASTURE CO LTD Management Discussion and Analysis Table of actual use of raised funds from the public offering of A Shares in 2017 Unit: RMB'000 Total raised funds 309,504 Total raised funds invested during this year 57,248 Total raised funds which changed purpose Total raised funds invested accumulatively 260,648 during the reporting period Total accumulatively raised funds which 256,104 changed purpose The proportion of total accumulatively raised 83.00% funds which changed purpose Whether the project has been Total Investment The date when Whether there changed committed Total Accumulated progress as of the project Whether it are significant (including investment investment The amount amount invested the end of the reaches The benefit has achieved changes on the Committed investment projects Some of raised After invested during as of the end of period(%) a predetermined realized during expected feasibility of the and use of excessive raised funds changes funds adjustment(1) this year the period(2) (3)=(2)/(1) usable state this year benefit project Committed investment projects 1. The project of cultivation and Yes 260,193 53,400 0 53,400 100.00% N/A N/A N/A No construction of 10,000 imported good dairy cows 2. The construction project of self- Yes 49,310 0 0 0 N/A N/A N/A Yes service milk selling machines and ancillary facility 3. The acquisition of 82% equity 0 150,000 0 150,000 100.00% 2018 13,791 No No interest of Xi’an Dongfang Dairy 4. Recycling Industrial Park Project 0 106,104 57,248 57,248 53.95% N/A N/A N/A No of a Dairy Farm for 10,000 Dairy (Note) Cows in Jinchuan District Sub-total of committed investment projects 309,504 309,504 57,248 260,648 84.21% 13,791 Use of excessive raised funds No Repayment of bank loan (if any) Supplemental liquidities (if any) Sub-total of use of excessive raised funds Total 309,504 309,504 57,248 260,648 84.21% Note: The balance is expected to be fully utilized by the end of 2022. ANNUAL REPORT 2020 19 Management Discussion and Analysis NON-PUBLIC ISSUANCE OF A SHARES UNDER SPECIFIC MANDATE On 5 December 2019, the Board approved the proposed non-public issuance of A Shares. The proposed non-public issuance of A Shares has been approved by the Shareholders at the extraordinary general meeting and the class meetings of the Company held on 17 January 2020. On 3 April 2020, the Board approved the adjustments to non-public issuance of A Shares. The Shareholders approved the adjustments to non-public issuance of A Shares at the extraordinary general meeting and the class meetings of the Company held on 25 May 2020. On 10 August 2020, the application for the non-public issuance was approved at the Issuance Examination Committee’s 119th meeting in 2020 by voting and the Issuance Examination Committee had no audit opinion. On 25 August 2020, the Company received the Reply on Approval of Non-public Issuance of Shares by Lanzhou Zhuangyuan Pasture Co., Ltd.* (Zheng Jian Xu Ke [2020] No. 1864) issued by China Securities Regulatory Commission. On 25 December 2020, an aggregate of 43,000,000 A Shares was allotted and issued (the “Non-public Issuance”) to 4 subscribers at the subscription price of RMB8.78 per A Share. Number of A Shares Subscriber subscribed Subscription price Gansu Nongken Asset 37,931,665 RMB8.78 per A Share Xie Kai ( ) 2,050,113 RMB8.78 per A Share Gao Aiping ( ) 1,651,480 RMB8.78 per A Share Su Guimin ( ) 1,366,742 RMB8.78 per A Share Total 43,000,000 Each of Xie Kai, Gao Aiping and Su Guimin is a merchant. Gansu Nongken Asset is a company established in the PRC with limited liability and is principally engaged in equity investment and enterprise equity custody; project investment and investment management; enterprise asset reorganization, economic information, investment, financial advisory service. To the best of the Directors’ knowledge, information and belief, and having made all reasonable enquiries, each of Xie Kai, Gao Aiping, Su Guimin and Gansu Nongken Asset and its ultimate beneficial owner was a third party independent of the Company and its connected persons prior to the Non-public Issuance. 20 LANZHOU ZHUANGYUAN PASTURE CO LTD Management Discussion and Analysis The subscription price of RMB8.78 per subscription A share represents (i) no less than 80% of the average trading price of the A Share for the 20 trading days preceding the price determination date, i.e. not be less than RMB8.78 per A Share (the average trading price of the A Shares of the Company for the 20 trading days prior to the price determination date = total trading amount of shares for the 20 trading days prior to the price determination date/ total trading volume of A Shares for the 20 trading days prior to the price determination date); (ii) a discount of approximately 21.5% to the closing price of RMB11.18 per A share as quoted on The Shenzhen Stock Exchange on the price determination date of the Non-public Issuance, i.e. 20 November 2020, the first day of the issue period of the Non-public Issuance of the Company; and (iii) a discount of approximately 15.8% to the closing price of RMB10.43 per A share as quoted on The Shenzhen Stock Exchange on the day before the listing of A share. The aggregate gross proceeds of the Non-public Issuance were approximately RMB377,540,000. The aggregate net proceeds of the Non-public Issuance, after the deduction of related expenses, were approximately RMB368,878,786.79. The net price of each A Share allotted and issued under the Non-public Issuance were approximately RMB8.78. The Company intends to apply the net proceeds of the Non-public Issuance for the purpose to the repayment of bank loan and finance the investment project, which can further enhance the supply ratio of the Company’s own raw milk, strengthen the product quality control, address the Company’s increasing demand for raw milk in the future, optimize the product mix, improve its profitability, enhance the Company’s core competitiveness and promote the Company’s sustainable development, which is in the interests of the Company and all Shareholders. Please refer to the circulars of the Company dated 31 December 2019 and 6 April 2020, and the announcements of the Company dated 5 November 2020 and 22 December 2020 for details of the Non-public Issuance. Information about the use of raised funds from the non-public offering of A Shares in 2020: As approved by the “Reply on Approval of Non-public Issuance of Shares by Lanzhou Zhuangyuan Pasture Co., Ltd. (Zheng Jian Xu Ke [2020] No. 1864) ( 2020 1864 )” issued by the CSRC on 18 August 2020, the Company carried out the offering of 43,000,000 A Shares of RMB1 each through non-public issuance method to specific investors at an issue price of RMB8.78 per share. The total sum of funds raised was RMB377,540,000 and the total net proceeds after deduction of the related issuance expenses of RMB8,661,213.21 (exclusive of value-added taxes) amounted to RMB368,878,786.79. As of 30 November 2020, the Company has received the monetary funds raised through the public offering of A shares. Such proceeds were verified by WUYIGE Certified Public Accountants LLP which accordingly issued its capital verification reports (Da Xin Yan Zi [2020] No. 35-00010). The Company deposited the proceeds in a special account for management purposes. The funds utilized in 2020 were RMB140,708,317.44, the temporary supplemental liquidities were RMB100,000,000.00 and the interest income of the special account for funds raised after deducting handling charges for the current year was RMB74,434.70. As of 31 December 2020, the Company had utilized RMB140,708,317.44 out of the funds raised from the A Share Listing. The net interest income from the Raised Funds after deduction of handling charges was RMB74,434.70. The balance of the Raised Funds deposited in the special account was RMB128,244,904.05, and the balance of the Raised Funds unutilized was RMB228,244,904.05. ANNUAL REPORT 2020 21 Management Discussion and Analysis Table of actual use of raised funds from the non-public offering of A Shares in 2020 Unit: RMB’000 Total raised funds 368,879 Total raised funds invested during this year 140,708 Total raised funds which changed purpose Total raised funds invested accumulatively 140,708 during the reporting period Total accumulatively raised funds which changed purpose The proportion of total accumulatively raised funds which changed purpose Whether the project has been Total Investment The date when Whether there changed committed Total Accumulated progress as of the project Whether it are significant (including investment investment The amount amount invested the end of the reaches The benefit has achieved changes on the Committed investment projects Some of raised After invested During as of the end of period(%) a predetermined realized during expected feasibility of the and use of excessive raised funds changes funds adjustment(1) this year the period(2) (3)=(2)/(1) usable state this year benefit project Committed investment projects Recycling Industrial Park Project of a No 328,879 328,879 100,708 100,708 30.62% N/A N/A N/A No Dairy Farm for 10,000 Dairy Cows (Note) in Jinchuan District Repayment of bank loan No 40,000 40,000 40,000 40,000 100.00% Sub-total of committed investment 368,879 368,879 140,708 140,708 38.14% projects Use of excessive raised funds No Repayment of bank loan (if any) Supplemental liquidities (if any) Sub-total of use of excessive raised funds Total 368,879 368,879 140,708 140,708 38.14% Note: The balance is expected to be fully utilized by the end of 2023. 22 LANZHOU ZHUANGYUAN PASTURE CO LTD Management Discussion and Analysis Human Resources We had 1,268 employees in PRC and Hong Kong as at 31 December 2020 (31 December 2019: 922 employees). During the Reporting Year, total staff costs were approximately RMB71.1 million (the corresponding period in 2019: RMB69.5 million). Our remuneration policies aim to attract, retain and incentivize talents to ensure competency of our team in implementing our business strategies and to maximize shareholder value. We will regularly review our remuneration policies and employee benefits with reference to market practices and performance of individual employees. For its employees in the PRC, the Group has participated in defined contribution benefit plans and social insurance plans organised by the relevant local governmental authorities. The Restricted Shares Incentive Scheme for 2019 (draft) was considered and approved at the meeting of the board held by the Company on 11 March 2019; the general meeting was held on 23 May 2019 to consider and approve the Restricted Shares Incentive Scheme for 2019 (draft); the meeting of the board was held on 21 June 2019 to consider and approve “first granting 3,340,600 restricted shares to the 84 incentive targets after adjustments”; the Company completed the registration procedures of restricted shares grant of Lanzhou Zhuangyuan Pasture Co., Ltd. 2019 Restricted Share Incentive Scheme (Draft) with China Securities Depository and Clearing Corporation Limited Shenzhen Branch on 9 July 2019. The listing date of restricted shares granted firstly was 12 July 2019. Corporate Social Responsibility We believe that social responsibility is the foundation for the development of an enterprise. We will take part in social welfare activities is an important method for an enterprise to give back to the society, as well as a key way for an enterprise to achieve mutual development and advancement with the society. ANNUAL REPORT 2020 23 Management Discussion and Analysis OUTLOOK 1. The Company will continue to take the production of quality dairy products as the goal on the basis of a complete set of production facilities and processes such as large-scale concentrated farming, concentrated unified milking, specialized storage, transportation and processing of fresh milk and further improve the level of dairy farming through production demonstration and technology radiation. We will strengthen the cooperation with external professional dairy farming institutions with large farming scale, rich farming experience and high product quality to form balanced, complementary and diversified supply sources of fresh and raw milk while strengthening the construction of our own milk source base. We will continue to ensure the effective connection of safe and reliable milk source with dairy product processing link to achieve the security and controllability of product quality during the whole process. 2. We will continue to strengthen the study on the consumption behaviors of dairy products consumers within the region, perfect the formula of products and optimization configuration of processes and equipments on a consumer-oriented basis, make the products to own targeted and characteristic advantages, and establish a system of consumption analysis to trigger research and development in order to satisfy consumption demands under different scenarios and maintain the loyalty of consumers to the brand with upgrading products. 3. We will further deepen and penetrate sales channels, increase the sinking efforts of sales channels, actively expand the markets of third-tier cities and rural areas and vigorously promote the in-depth development of channels, so as to consolidate and increase market share and enhance market occupancy rate. 4. The Company will continue to conduct various forms of on-the-job trainings, improve work skills, enhance work efficiency and tamp the construction of the middle-level team. The Company will strengthen the recruitment of professional talents with market qualifications or excellent skills and give full development space and positive incentive policies to ensure the stability of the talent team and the echelon construction of the talent reserve and enhance the core competitiveness of the Company. 24 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors, Supervisors and Senior Management EXECUTIVE DIRECTORS Mr. Ma Hongfu ( ), aged 55, the founder of our Group, is the executive Director, chairman of the Board, the general manager of the Company and a member of each of the strategy committee and the nomination committee of the Company. Mr. Ma Hongfu also served as the general manager of our Company from April 2011 to 21 December 2017 and was appointed as the general manager of the Company again on 10 March 2020. He was appointed to the Board on 6 April 2011. He is responsible for the overall management of our Company. Mr. Ma worked as the chairman of the board and the general manager of Gansu Minqinxian Hongchang Agriculture and Trading Company* ( ) from 1988 to 1999. Mr. Ma obtained a degree of Executive Master of Business Administration (EMBA) from Tsinghua University ( ) in July 2005. He is the legal representative of Qinghaihu Dairy Co., Ltd.* ( ) (“Qinghaihu Dairy”), Lanzhou Ruixing Farming Co., Ltd.* ( ) (“Lanzhou Ruixing”), Wuwei Ruida Pasture Co., Ltd.* ( ) (“Wuwei Ruida”), Qinghai Shengya Plateau Pasture Co., Ltd.* ( ) (“Qinghai Shengya”) and Qinghai Shengyuan Pasture Co., Ltd.* ( ) (“Qinghai Shengyuan”). Mr. Ma currently is the president of the Dairy Association of Gansu Province ( ) and deputy president of the Food Industry Association of Gansu Province ( ). In addition, he was honoured as “2004 Excellent Operator in Industrial Economic Field (2004 )” by Lanzhou People’s Government ( ) in January 2005, and “Rural Entrepreneur of Lanzhou ( )” by Lanzhou People’s Government in February 2005. He was also awarded the “Labour Model of Lanzhou ( )” by Lanzhou Communist Party Committee ( ) and Lanzhou People’s Government in January 2005. Mr. Ma was the committee member of 6th Yuzhong County of the National Committee of the Chinese People’s Political Consultative Conference ( ) from November 2002 to December 2007. Mr. Ma currently serves as a deputy to the 13th Gansu’s People’s Congress, a member of the Agriculture and Rural Affairs Committee, a deputy to the 16th Lanzhou’s People’s Congress, the president ( ) of the Dairy Association of Gansu Province ( ) and deputy president ( ) of the Food Industry Association of Gansu Province ( ). Mr. Ma was honoured as “2004 Excellent Operator in Industrial Economic Field (2004 )” by Lanzhou People’s Government ( ) in January 2005, and “Rural Entrepreneur of Lanzhou ( )” by Lanzhou People’s Government in February 2005. In June 2017, he was accredited as “Long Shang New Talent” ( ) by eight departments, such as the propaganda department of the Gansu provincial party committee. ANNUAL REPORT 2020 25 Directors, Supervisors and Senior Management Executive Directors (Continued) Mr. Wang Guofu ( ), aged 52, is the executive Director, deputy chairman and financial controller of the Company. He was appointed to the Board on 6 April 2011 and was appointed as the financial controller of the Company on the same day. Mr. Wang has more than 20 years of experience in the food industry. Mr. Wang completed his master courses majoring in Business Management in Lanzhou University ( ) in August 2005 and has accountant qualification ( ). He was an accountant in Gansu Import and Export of Agricultural By-products Company ( ) from 1990 to 1992, and he was the financial manager and subsequently the financial controller of Lanzhou Yongtai Food Co., Ltd. ( ) from 1992 to 2001. He is primarily responsible for the overall financial management of our Company. He is the legal representative of Yuzhong Ruifeng Pasture Co., Ltd.* ( ) (“Yuzhong Ruifeng”) and Linxia County Ruian Pasture Co., Ltd.* ( ) (“Linxia Ruian”) and the supervisor of Qinghaihu Dairy Co., Ltd.* ( ) (“Qinghaihu Dairy”), Qinghai Shengya Plateau Pasture Co., Ltd.* ( ) (Qinghai Shengya), Linxia County Ruiyuan Pasture Co., Ltd.* ( ) (“Linxia Ruiyuan”) and Lanzhou Ruixing Farming Co., Ltd.*( ) (“Lanzhou Ruixing”). Ms. Zhang Qianyu ( ), aged 40, is the executive Director, secretary to the Board, manager of the securities department and joint company secretary of the Company. Ms. Zhang is responsible for system establishment, plans administration and equity management. Ms. Zhang joined the Company in January 2018. Ms. Zhang obtained her bachelor degree in Accounting from Taiyuan University of Technology ( ) in July 2003. She was a member of The Chinese Institute of Certified Public Accountants. Prior joining the Company, Ms. Zhang worked as a business manager of the investment banking department of Xi’an Branch of GF Securities Co., Ltd. from July 2012 to December 2016. Ms. Zhang was the general manager of the investment banking department of Lanzhou Branch of China CITIC Bank Corporation Limited from January 2017 to December 2017. Non-executive Director Mr. Yap Kean Chong ( ), aged 55, is the non-executive Director of the Company. He was appointed to the Board on 6 April 2011. Mr. Yap obtained his bachelor degree in Business in Curtin University of Technology in February 1988, and his post graduate diploma in Business from Curtin University of Technology in August 1990. He was qualified as the admitted Associate of the Institute of Chartered Secretaries and Administrators in May 1991 and received the Certificate of Membership of the Institute of Chartered Accountant in Australia in February 2002. Mr. Yap has been the director and chief executive officer of Rico Harvest Capital ( ) since 2009. 26 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors, Supervisors and Senior Management Independent Non-executive Directors Ms. Liu Zhijun ( ), aged 48, is the independent non-executive Director and the chairman of each of the audit committee and the remuneration and appraisal committee of the Company. She was appointed to the Board on 14 June 2014. She graduated from Shanghai University of Finance and Economics ( ) with a bachelor degree in securities and futures ( ) in July 1996. Ms. Liu then obtained a master degree in finance ( ) in January 2001 from Wuhan University ( ) and a doctoral degree in finance ( ) in June 2009 from Suzhou University ( ). She is also a member of the Chinese Institute of Certified Public Accountants ( ). Since July 1996, Ms. Liu has been teaching in School of Finance of Lanzhou University of Finance and Economics ( ) and is currently a professor of the said university. Ms. Liu also serves as an independent non-executive director of Gansu Dunhuang Seed Co., Ltd. ( ) (a company listed on the Shanghai Stock Exchange, stock code: 600354), Gansu Yasheng Industrial (Group) Co., Ltd ( ( ) ) (a company listed on the Shanghai Stock Exchange, Stock code: 600108) and Lanzhou Foci Pharmaceutical Co., Ltd ( ) (a company listed on the Shenzhen Stock Exchange, stock code: 002644). Mr. Zhao Xinmin ( ), aged 51, is the independent non-executive Director, chairman of the nomination committee and a member of each of the audit committee, the remuneration and appraisal committee and the strategy committee of the Company. He was appointed to the Board on 26 March 2018. Mr. Zhao has more than 20 years of experience in the securities law sector. Mr. Zhao obtained his bachelor degree in Law from Gansu Institute of Political Science and Law ( ) in June 1993. He acquired the Lawyer’s Practice License of the PRC in March 1994. He was a lawyer of Gansu Zheng Tian He Law Firm ( ) from 1994 to 2001. Mr. Zhao was a lawyer of Allbright Law Office ( ) from 2001 to 2005. Mr. Zhao has been the partner of Shanghai Ke Hui Law Firm* ( ) since 2005. Mr. Zhao also serves as an independent non-executive director of Gansu Qilianshan Cement Group Company Limited ( ), a company listed on the Shanghai Stock Exchange (stock code: 600720), Duzhe Publishing and Media Corp. ( ), a company listed on the Shanghai Stock Exchange (stock code: 603999), and Lanzhou Foci Pharmaceutical Co., Ltd ( ), a company listed on the Shenzhen Stock Exchange (stock code: 002644). Mr. Wong Cho Hang Stanley ( ), aged 46, is the independent non-executive Director and a member of each of the audit committee and nomination committee of the Company. He was appointed to the Board on 2 March 2015. Mr. Wong has been the director and vice general manager of Chuan Chiong Co., Ltd. ( ) since 2007. He was awarded the “2014 Excellence in Achievement of World Chinese Youth Entrepreneurs” ( ) jointly by Yazhou Zhoukan ( ) and World Federation of Chinese Entrepreneurs Organisation ( ). He was the committee member of 11th Fujian Provincial Committee of the National Committee of the Chinese People’s Political Consultative Conference ( ). Mr. Wong obtained his bachelor degree in Economics, from Carleton University in 1998. ANNUAL REPORT 2020 27 Directors, Supervisors and Senior Management Supervisors Mr. Wei Lin ( ), aged 52, was appointed to the Supervisory Committee on 2 March 2015. Mr. Wei has been the managing partner ( ) of Gansu Hengrui Asset Valuation Firm ( ) since 2012. Mr. Wei worked in ICBC Lanzhou Branch Qilihe Sub-branch ( ) from 1985 to 2001. He has obtained the Finance and Economics Personnel Certificate ( ) accredited by Ministry of Personnel People’s Republic of China ( ) in October 1996. He was qualified as a PRC Asset Valuer accredited by the China Appraisal Society ( ) in August 2005. Mr. Wei has completed a three-year Finance programme in Night College of Lanzhou University of Finance and Economics ( ) in July 1991. Mr. Sun Chuang ( ), aged 34, obtained his bachelor degree in Law from Zhengzhou University ( ) in July 2010. He was appointed to the Supervisory Committee on 27 March 2018. He is also the arbitrator of the Shenzhen Court of Arbitration. Mr. Sun obtained the Legal Professional Qualification Certificate of the PRC in 2010. He also obtained Securities Investment Fund Industry Qualification Certificate of the PRC in 2017. Mr. Sun has served as the vice general manager for the risk management department of Shenzhen CDF- Capital Co., Ltd. ( ) since July 2016. Mr. Sun has extensive experience in investment risk management and legal matters. From July 2010 to July 2013, Mr. Sun served as the legal specialist of China General Nuclear Power Service Group Company Limited* ( ) (formerly known as Guangdong Daya Bay Nuclear Power Service (Group) Company Limited ( )). Mr. Sun served as the legal manager of Shenzhen Taifeng Investment Group Company Limited ( ) from August 2013 to August 2014. From September 2014 to June 2016, Mr. Sun served as the legal manager of Shenzhen Baode Investment Holding Company Limited ( ). Ms. Du Wei ( ), aged 42, was appointed to the Supervisory Committee on 6 April 2011. Ms. Du has obtained the college diploma majoring in Electronic Technology and Micro-computer Application by Lanzhou University ( ) in July 2001, and was engaged in a self-learning programme of Lanzhou University majoring in Computer Science Application and graduated in June 2004. Ms. Du is also qualified as Second Level Corporate Human Resource Manager ( ) by the Occupational Skill Testing Centre of Human Resource and Social Security Department ( ) in December 2013. Ms. Du joined our Company in March 2008 and used to serve as the person-in-charge in our human resource department. Ms. Du is currently the manager of our human resource department responsible for management of human resource of our Company. Senior Management Mr. Feng Jun ( ), aged 42, was appointed as the deputy general manager of the Company on 17 December 2019. From May 2011 to July 2012, Mr. Feng completed his advanced education in Senior Training Course for Marketing Directors and successfully graduated from Xi’an Jiaotong University. Mr. Feng started his career by working at Zhuangyuan Dairy in August 2000 as a manager of the marketing department, marketing director, etc. At present, he acts as the general manager of Qinghaihu Dairy, responsible for the operation and management work of Qinghaihu Dairy. (Discharged on 16 March 2021) 28 LANZHOU ZHUANGYUAN PASTURE CO LTD Supervisory Committee’s Report The supervisory committee of the Company (the “Supervisory Committee”) has executed its duties earnestly, safeguarded the rights and interests of the Company and the Shareholders, complied with the principle of good faith and carried out its work in a diligent and proactive manner pursuant to the provisions of the Company Law of People’s Republic of China, other relevant laws and regulations and the articles of association of the Company. During the Reporting Year, the Supervisory Committee reviewed cautiously the operation and development plans of the Company and put forward reasonable suggestions and opinions to the Board. It also strictly and effectively monitored and supervised the significant policies and specific decisions made by the management of the Company to ensure that they were in compliance with the laws and regulations of the PRC and the articles of association of the Company (the “Articles of Association”), and in the interests of the Shareholders. During the Reporting Year, the Supervisory Committee convened eleven meetings. The Supervisory Committee has reviewed earnestly and approved the report of the Board, audited financial statements and the dividend payment proposal to be presented by the Board at the forthcoming AGM. We are of the opinion that the Board, chief executive of the Company and other Senior Management have strictly complied with the principle of good faith, and have worked diligently, exercised their authority faithfully in the best interests of the Company, and executed various tasks pursuant to the articles of association of the Company. Up till now, none of the Directors, chief executive of the Company nor Senior Management has been found to have been in breach of any laws or regulations or the articles of association of the Company in material respects and damaged the interests of the Company or the Shareholders. The Supervisory Committee is satisfied with the various tasks carried out by the Company in 2020 and the economic benefits generated therefrom. It has full confidence in the future development outlook of the Company. Chairman of the Supervisory Committee Wei Lin Lanzhou, the PRC, 29 March 2021 ANNUAL REPORT 2020 29 Corporate Governance Report The Company is committed to achieving sound corporate governance in order to protect shareholders’ interests and enhance investors’ confidence, thus paving the way for the Company’s development. The Company has complied with the code provisions set out in the Corporate Governance Code (“CG Code”) and Corporate Governance Report as set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) during the Reporting Year except the deviation mentioned in the below section headed “CHAIRMAN AND CHIEF EXECUTIVE OFFICER”. In addition, the Board is of the view that the balanced composition of executive and non-executive Directors (including the independent non-executive Directors) on the Board and the various committees of the Board (primarily comprising independent non-executive Directors) in overseeing different aspects of the Company’s affairs would provide adequate safeguards to ensure a balance of power and authority. The Company will continue to commit itself to enhancing its corporate governance standard, promoting sustainable development of the Company and adding value. SECURITIES TRANSACTIONS BY DIRECTORS AND SUPERVISORS The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”) as set out in Appendix 10 to the Listing Rules regarding directors’ securities transactions. Having made specific enquiry of all Directors and the supervisors of the Company (the “Supervisors”), all the Directors and Supervisors confirm that they have complied with the required standards of the Model Code during the year ended 31 December 2020. BOARD OF DIRECTORS AND MANAGEMENT The Board is responsible and has general power for the management and conduct of the Group’s business. As of the date of this report, the Board consists of seven Directors, comprising three executive Directors, namely Mr. Ma Hongfu, Mr. Wang Guofu and Ms. Zhang Qianyu, one non-executive Director, namely Mr. Yap Kean Chong, and three independent non-executive Directors, namely Ms. Liu Zhijun, Mr. Zhao Xinmin and Mr. Wong Cho Hang Stanley. Biographical details of the Directors are set out in the “Directors, Supervisors and Senior Management” section on pages 25 to 28 of this annual report. Save as disclosed above, none of the Directors has any personal relationship (including financial, business, family or other material/relevant relationship), with any other Director. The Board is responsible for establishing the Group’s strategic goals, leading the Group’s development and achieving established strategic goals. The principal duties of the Board are to manage and decide on the Company’s strategic plans, management structures, investment and financing, financial control, human resources, and so forth. Significant matters of the Group which require approval by the Board include the followings: developing the Company’s development plans; developing the Company’s management and business strategies; approving financial statements; developing and approving the internal control and risk management systems; developing and reviewing the Company’s corporate governance policies and practices; developing, reviewing and monitoring the code of conduct and compliance manual for employees and Directors; 30 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Governance Report reviewing and monitoring training and continuous professional development of Directors and senior management of the Company (the “Senior Management”); reviewing the Company’s compliance with the CG Code under the Listing Rules and disclosure as set out in the Corporate Governance Reports included in annual reports of the Company; and reviewing and monitoring the Company’s policies and practices regarding compliance with laws and regulations. The Board delegates its functions on the Group’s day-to-day operation and administration to the management. The Board is regularly provided with brief management reports of the Group containing balanced and comprehensive evaluation on the Group’s performance, status and prospects to keep it abreast of the Group’s affairs and facilitate the Directors’ performance of their obligations under the relevant requirements of the Listing Rules. We are committed to ensuring high standards of corporate governance at all times and in all aspects of our operations. The Board believes that good corporate governance is an essential element in enhancing the confidence of current and potential shareholders, investors, employees, business partners and the community as a whole. The Board strives to adhere to the principles of corporate governance and has further strengthened and improved its internal controls in order to undertake sound corporate governance code provisions and practices to meet the relevant statutory and commercial standards by focusing on internal control, fair disclosure and accountability to all shareholders during the Reporting Year. CORPORATE GOVERNANCE FUNCTIONS During the Reporting Year, the Board as a whole has performed the following corporate governance duties: (a) developed and reviewed the Company's policies and practices on corporate governance; (b) reviewed and monitored the training and continuous professional development of the Directors and Senior Management; (c) reviewed and monitored the Company's policies and practices on compliance with legal and regulatory requirements; (d) developed, reviewed and monitored the code of conduct and compliance manual (if any) applicable to employees and the Directors; (e) reviewed the Company's compliance according to the CG Code and disclosure in the Corporate Governance Report; and (f) performed such other corporate governance duties and functions set out in Appendix 14 to the Listing Rules (as amended from time to time) for which the Board is responsible. ANNUAL REPORT 2020 31 Corporate Governance Report TRAINING AND DEVELOPMENT OF DIRECTORS For the year ended 31 December 2020, the Directors took part in various continuous training with respect to Directors’ duties through regularly receiving latest information and updates in relation to the Listing Rules and related regulations, participating in relevant training programmes or through regularly taking note of industrial updates, attending relevant seminars or perusing reading materials, magazines and updated information in relation to business and industrial development. The following table sets out a summary of the types of training our Directors received: Reading materials updating on new rules Directors and regulations Executive Directors Mr. Ma Hongfu Mr. Wang Guofu Mr. Chen Yuhai (resigned on 6 March 2020) Ms. Zhang Qianyu Non-executive Directors Mr. Yap Kean Chong Mr. Song Xiaopeng (resigned on 22 December 2020) Independent non-executive Directors Ms. Liu Zhijun Mr. Zhao Xinmin Mr. Wong Cho Hang Stanley Note: The Company has received from each of the Directors the confirmations on taking continuous professional training. CHAIRMAN AND CHIEF EXECUTIVE OFFICER According to code provision A.2.1 of the CG Code, the roles of chairman and chief executive should be separate and should not be performed by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established and set out in writing. Following the appointment of Mr. Ma Hongfu (“Mr. Ma”) as the general manager of the Company, a position equivalent to a chief executive officer in the PRC, on 10 March 2020 after the resignation of Mr. Chen Yuhai, Mr. Ma concurrently holds the position of the chairman of the Board and the general manager of the Company. This deviates from code provision A.2.1 of the CG Code as set out in Appendix 14 of the Listing Rules which requires that the roles of chairman and chief executive should be separated and should not be performed by the same individual. 32 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Governance Report Mr. Ma is the founder of the Group and has over 20 years of experience in the dairy industry. His positions in the industry associates can also keep the Group updated with the latest development of the industry. The Board has set up four committees under the Board (including the strategy committee, the nomination committee, the remuneration committee and the audit committee) and includes three independent non-executive Directors. The members of the Board committees and the independent non-executive Directors have important role and functions in the decision making process of the Board and the daily operations of the Company, which has the effect of checks and balances of the power of the chairman of the Board and the general manager. After evaluation of the current situation of the Company and taking into account of the experience and past performance of Mr. Ma, the Board is of the opinion that it is appropriate and in the best interests of the Company at the present stage for Mr. Ma to hold both positions as the chairman and the general manager of the Company as it helps to maintain the continuity of the policies and the stability of the operations of the Company. The Board will continue to review and consider splitting the roles of the chairman of the Board and the general manager of the Company at a time when it is appropriate and suitable by taking into account the circumstances of the Group as a whole. INDEPENDENCE OF INDEPENDENT NON-EXECUTIVE DIRECTORS The Board has received from each independent non-executive Director a written annual confirmation of their independence pursuant to Rule 3.13 of the Listing Rules and the Company considers that all independent non- executive Directors are independent pursuant to the requirements as set out in the Listing Rules. APPOINTMENT OF DIRECTORS The principal particulars of these service contracts for each of the executive Directors, non-executive Director and independent non-executive Directors are (a) for a term of three years commencing from 26 March 2018, and (b) are subject to termination in accordance with their respective terms. None of the Directors and the Supervisors had entered into a service contract with the Company or its subsidiaries which is not determinable by the Company within one year without payment of compensation (other than statutory compensation). ANNUAL REPORT 2020 33 Corporate Governance Report BOARD MEETINGS The Board meets regularly. During the Reporting Year, 14 Board meetings were held at approximately monthly intervals. Number of Meeting(s) Attended/ Name of Directors Number of Meeting(s) Held Executive Directors Mr. Ma Hongfu 14/14 Mr. Wang Guofu 14/14 Mr. Chen Yuhai (resigned on 6 March 2020) 1/14 Ms. Zhang Qianyu 14/14 Non-executive Directors Mr. Yap Kean Chong 14/14 Mr. Song Xiaopeng (resigned on 22 December 2020) 12/14 Independent Non-executive Directors Ms. Liu Zhijun 14/14 Mr. Zhao Xinmin 14/14 Mr. Wong Cho Hang Stanley 14/14 The Board is responsible for leading and managing the Company. It is primarily responsible for formulating the general strategies and policies of the Company, setting performance and management objectives, assessing operational performance and monitoring the performance of the management. The Board delegates part of its management and administrative functions to the management to manage and operate the Company. The management is responsible for implementing strategies and policies as determined by the Board, and performing their duties within the framework as determined by the Board and specified in any written procedures and directions. Among others, the following matters were considered and approved at Board meetings during the Reporting Year: to consider and approve acquisition and merger proposals; to consider and approve proposals to optimize liquidity of the Group; to consider and approve capital expenditures; to consider and approve internal control policies; to consider and approve the announcement of financial results; and to consider and approve other disclosures specifically required by or matters as specifically mentioned under the Listing Rules. 34 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Governance Report BOARD MEETINGS (Continued) During the Reporting Year, the Company convened one annual general meeting on 29 June 2020 and two extraordinary general meetings on 17 January 2020 and 25 May 2020, respectively. Number of Meeting(s) Attended/ Name of Directors Number of Meeting(s) Held Executive Directors Mr. Ma Hongfu 3/3 Mr. Wang Guofu 3/3 Mr. Chen Yuhai (resigned on 6 March 2020) 1/3 Ms. Zhang Qianyu 3/3 Non-executive Directors Mr. Yap Kean Chong 3/3 Mr. Song Xiaopeng (resigned on 22 December 2020) 3/3 Independent Non-executive Directors Ms. Liu Zhijun 3/3 Mr. Zhao Xinmin 3/3 Mr. Wong Cho Hang Stanley 3/3 BOARD COMMITTEES In order to assist the Board in discharging its duties in a more efficient manner, the Board has established four specialized committees, namely the audit committee, nomination committee, remuneration and appraisal committee and strategy committee. Each committee has its terms of reference and is responsible for making recommendations to the Board. All of the committees are allocated with resources sufficient for the performance of their respective duties. ANNUAL REPORT 2020 35 Corporate Governance Report AUDIT COMMITTEE The audit committee of the Company (the “Audit Committee”) comprises three independent non-executive Directors, namely Ms. Liu Zhijun, Mr. Zhao Xinmin and Mr. Wong Cho Hang Stanley. The chairman of the Audit Committee is Ms. Liu Zhijun. Details of the terms of reference of the Audit Committee are set out on the Company’s website (www.lzzhuangyuan.com) and the website of the Stock Exchange (www.hkexnews.hk). The principal duties of the committee include but not limited to the followings: (1) suggest engagement or change of external audit organisation; (2) supervise on internal audit agency and its implementation; (3) take charge of communication between internal and external audit; (4) audit on our Company’s financial information and its disclosures; (5) supervise on our Company’s risk management and internal control systems and audit on significant connected transactions; and (6) other issues as authorised by the Board. During the Reporting Year, the Audit Committee has, inter alia, reviewed the consolidated financial statements of the Group for the year ended 31 December 2019, for the three months ended 31 March 2020, for the six months ended 30 June 2020 and for the nine months ended 30 September 2020 respectively, including the accounting principles and practices adopted by the Group, the report prepared by the external auditor covering major findings in the course of the audit, the selection and appointment of the external auditor and the risk management and internal control systems of the Group. Subsequent to the end of the Reporting Year, the Audit Committee has reviewed the consolidated financial statements for the year ended 31 December 2020. During the Reporting Year, seven meetings of the Audit Committee were held. Number of Meeting(s) Attended/ Name of Members Number of Meeting(s) Held Ms. Liu Zhijun 7/7 Mr. Zhao Xinmin 7/7 Mr. Wong Cho Hang Stanley 7/7 36 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Governance Report NOMINATION COMMITTEE The nomination committee of the Company (the “Nomination Committee”) consists of one executive Director, namely Mr. Ma Hongfu, and two independent non-executive Directors, namely Mr. Zhao Xinmin and Mr. Wong Cho Hang Stanley. The chairman of the Nomination Committee is Mr. Zhao Xinmin. Details of the terms of reference of the Nomination Committee are set out on the Company’s website (www.lzzhuangyuan.com) and the website of the Stock Exchange (www.hkexnews.hk). The principal duties of the committee include but not limited to the followings: (1) provide advice on the Board’s scale and composition according to our Company’s operation condition, asset size and shareholding structure; (2) research on selecting standards and procedure of Directors and Senior Management and provide advice to the Board accordingly; (3) search for suitable candidates as qualified Directors and Senior Management; (4) examine and provide advice on candidates as Directors and Senior Management; (5) examine and provide advice on other candidates of Senior Management that needs to be appointed by the Board; and (6) other issues as authorised by the Board. During the Reporting Year, one meeting of the Nomination Committee was held. Number of Meeting(s) Attended/ Name of Members Number of Meeting(s) Held Mr. Zhao Xinmin 1/1 Mr. Ma Hongfu 1/1 Mr. Wong Cho Hang Stanley 1/1 ANNUAL REPORT 2020 37 Corporate Governance Report Nomination Policy The Board has adopted the nomination policy (the “Nomination Policy”) which sets out the nomination criteria and procedures for the Company to select candidate(s) for possible inclusion in the Board. The Nomination Policy could assist the Company to achieve board diversity in the Company and enhance the effectiveness of the Board and its corporate governance standard. When assessing the suitability of a candidate, factors such as the qualifications, skills, integrity and experience will be taken into consideration as a whole. In the case of independent non-executive Directors, they must further satisfy the independence criteria set out within Rule 3.13 of the Listing Rules. Since the selection of candidates should ensure that diversity remains a central feature of the Board, a range of diverse perspectives, including but not limited to gender, age, cultural and educational background, or professional experience would be considered. The process to identify potential candidates for the Board would be as follows: (1) identifying potential candidates, including recommendations from the Board members, professional search firms and the shareholders of the Company; (2) evaluating the candidates based on the approved selection criteria through methods such as reviewing the resume and conducting the background checks; (3) reviewing the profiles of the shortlisted candidates and interview them; and (4) making recommendations to the Board on the selected candidates. The Nomination Policy also includes the Board succession plan to assess whether vacancies on the Board would be created or expected due to the Directors’ resignation, retirement, death and other circumstances and to identify candidates in advance if necessary. The Nomination Policy will be reviewed on a regular basis. The nomination committee will also give consideration to the board diversity policy adopted by the Board (“Board Diversity Policy”) when identifying suitably qualified candidates to become the members of the Board, and the Board will review the Board Diversity Policy, so as to develop and review measurable objectives for the implementing the same and to monitor the progress on achieving these objectives. 38 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Governance Report In designing the Board’s composition, board diversity has been considered from a number of aspects, including but not limited to gender, age, cultural and educational background, or professional experience. All Board appointments will be based on meritocracy, and candidates will be considered against objective criteria, having due regard for the benefits of diversity on the Board. The Nomination Committee will disclose annually, in the corporate governance report, on the Board’s composition under diversified perspectives (including gender, age, cultural and educational background, or professional experience), and monitor the implementation of this policy. The Nomination Committee will also review the diversity policy, as appropriate, to ensure the effectiveness of the diversity policy. The Nomination Committee will discuss any revisions which may be required, and recommend any such revisions to the Board for consideration and approval. As at 31 December 2020, the Board's composition under major diversity perspectives was summarised as follows: Board Diversity ED: Executive Director NED: Non-Executive Director INED: Independent Non-Executive Director ANNUAL REPORT 2020 39 Corporate Governance Report REMUNERATION AND APPRAISAL COMMITTEE The remuneration and appraisal committee of the Company (the “Remuneration and Appraisal Committee”) consists of one executive Director, namely Mr. Wang Guofu, and two independent non-executive Directors, namely Ms. Liu Zhijun and Mr. Zhao Xinmin. The chairman of the Remuneration and Appraisal Committee is Ms. Liu Zhijun. Details of the terms of reference of the Remuneration and Appraisal Committee are set out on the Company’s website (www.lzzhuangyuan.com) and the website of the Stock Exchange (www.hkexnews.hk). The principal duties of the committee include but not limited to the followings: (1) draft remuneration plan according to the Directors and Senior Management’s position scope, duties, significance and remuneration level in other similar companies and similar positions; (2) remuneration plan includes but not limited to performance evaluation standards, procedures, and major evaluation system and major plan of incentives and punishment; (3) review performance of the duties of the Directors and Senior Management and undertake annual evaluation; (4) supervise on implementation of our Company’s remuneration plan; and (5) other issues as authorised by the Board. During the Reporting Year, one meetings of the Remuneration and Appraisal Committee was held. Number of Meeting(s) Attended/ Name of Members Number of Meeting(s) Held Ms. Liu Zhijun 1/1 Mr. Wang Guofu 1/1 Mr. Zhao Xinmin 1/1 The emoluments payable to executive Directors are determined with reference to their experiences and duties with the Company and the fees payable to non-executive Directors are determined with reference to the estimated time spent by them on the Company’s matters. The Remuneration and Appraisal Committee makes recommendations to the Board on the remuneration packages of Directors and Senior Management, which are ultimately determined by the Board. 40 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Governance Report SENIOR MANAGEMENT EMOLUMENTS For the year ended 31 December 2020, the emoluments of the Senior Management are within the following band: Number of Senior Management HK$Nil – HK$500,000 — HK$500,001 – HK$1,000,000 1 Pursuant to Appendix 16 of the Listing Rules, the emoluments of the employees who are Directors and who are amongst the five highest paid individuals are set out in Notes XIV to the Financial Statements. ANNUAL REPORT 2020 41 Corporate Governance Report STRATEGY COMMITTEE The strategy committee of the Company (the “Strategy Committee”) consists of one executive Director, namely Mr. Ma Hongfu, and one independent non-executive Director, namley Mr. Zhao Xinmin. The chairman of the Strategy Committee is Mr. Ma Hongfu. The primary duties of the Strategy Committee include, but are not limited to, the followings: (1) organise and research on our Company’s long-term development strategy and offer advice to the Board; (2) organise and research on effects of adjustment of the country’s macroeconomic policy and structure on our Company; (3) track actions of major similar companies worldwide; (4) provide advice on our Company’s structure organisation and development strategy according to our needs; (5) research and provide advice on significant financing plan that needs to be approved by the Board according to our articles of association; (6) research and provide advice on significant projects of capital operation and asset management that needs to be approved by the Board according to our articles of association; (7) research and provide advice on other significant issues that may affect the long-term development of our Company; (8) examine and demonstrate long-term plan, significant projects or strategic suggestions provided by our Company’s departments before the Board’s meeting to provide advice for formal examination in the Board meeting; (9) supervise and analyse issues mentioned above and provide advice on adjustments and improvements to the Board; and (10) other issues as authorised by the Board. During the Reporting Year, one meeting of the Strategy Committee was held. Number of Meeting(s) Attended/ Name of Members Number of Meeting(s) Held Mr. Ma Hongfu 1/1 Mr. Song Xiaopeng (resigned on 22 December 2020) 1/1 Mr. Zhao Xinmin 1/1 42 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Governance Report INSURANCE ON DIRECTORS’ AND OFFICERS’ LIABILITIES The Company has arranged for liability insurance cover to indemnify the Board, Directors and certain members of the Senior Management against liability for compensation arising from their corporate activities. Purchase of liability insurance can enhance the Company’s ability to reduce exposure to risks. The insurance coverage is reviewed by the Company on an annual basis. Save as disclosed, no permitted indemnity provision (whether made by the Company or otherwise) is in force for the benefit of one or more Directors. FINANCIAL REPORTING The Directors acknowledge their responsibility for preparing financial statements that give a true and fair view of the financial position, financial performance and cash flow of the Group. The Company has selected appropriate accounting policies and has applied them consistently based on prudent and reasonable judgments and estimates. The Board considers that the Group has adequate resources to continue in business for the foreseeable future and is not aware of any material uncertainties relating to any events or conditions that may affect the business of the Group or cast doubts on its ability to continue as going concern. The Board and the Audit Committee have reviewed the resources for financial reporting function to ensure the adequacy of resources, qualifications and experience of staff for the Group’s accounting and financial reporting function, their training programmes. Please also refer to the auditor’s report in this annual report for further details. AUDITORS AND THEIR REMUNERATIONS During the Reporting Year, the fees received/receivable by the Company’s auditor, WUYIGE Certified Public Accountants LLP (“DAXIN”), is set out as follows: Nature of Services Fee paid/payable (RMB'000) Audit Service 1,600 Non-audit Services* 1,350 Significant non-audit service assignments include capital verification fee for non-public offering of A shares (RMB1,000,000 was paid). ANNUAL REPORT 2020 43 Corporate Governance Report JOINT COMPANY SECRETARIES Ms. Zhang Qianyu and Ms. Ho Wing Yan are our joint company secretaries as at the date of this report. The Company has engaged in a service contract with an external service provider, Ms. Ho Wing Yan, who was appointed as one of the joint company secretaries of the Company. Ms. Zhang Qianyu, the executive Director and the other joint company secretary of the Company, is the primary corporate contact person of the Company with Ms. Ho Wing Yan. The Company has appointed the joint company secretaries who are responsible for providing secretarial services to the Board of the Company and ensuring that the operation of the Company is in compliance with Hong Kong listed companies’ regulatory requirements as well as enhancing its corporate governance standards. Minutes of Board meetings and meetings of all specialized committees under the Board are recorded by the company secretaries in sufficient detail on the matters considered by all Directors and decisions reached, including any concerns raised by the Directors or any dissenting views expressed. Draft minutes of Board meetings and meetings of all specialized committees under the Board are provided to relevant Directors for their comments and the final version of the same is given to the relevant Directors for their records within a reasonable time. During the Reporting Year, the Company has provided Ms. Zhang Qianyu and Ms. Ho Wing Yan with sufficient resources to receive not less than 15 hours of relevant professional training for every financial year as required by Rule 3.29 of the Listing Rules. SHAREHOLDERS’ COMMUNICATION POLICY AND RIGHTS Shareholders are provided with information of the Company for their evaluation on the Company’s overall results and informed exercise of their rights to proactively establish close relations with the Company. Relevant information is communicated to Shareholders through the Company’s corporate communications including interim and annual reports, press releases, annual general meetings and other general meetings which may be convened. All disclosures of the Company submitted to the Stock Exchange, together its corporate communications and other materials, are available on the Company’s website. 44 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Governance Report Convening extraordinary general meetings Pursuant to the Articles of Association, the Board shall convene an extraordinary general meeting or class meeting within two months where any Shareholder holding, severally or jointly, 10% or more of the Company’s issued shares carrying voting rights requests in writing for the convening of an extraordinary general meeting or class meeting. The Shareholders holding, severally or jointly, 10% or more of voting shares at such proposed meeting may request the Board to convene an extraordinary general meeting or class meeting by signing and submitting one or several written requests with the same format and contents and specifying the agenda of the meeting. An extraordinary general meeting or class meeting shall be convened by the Board as soon as practicable upon receipt of the aforesaid written request. The aforesaid shareholding shall be calculated on the basis of the date on which the relevant Shareholders submit the written request. The procedures for convening such meeting should follow those for convening a general meeting or class meeting of Shareholders by the Board as closely as practicable. All reasonable expenses incurred by convening and holding the aforesaid meeting by Shareholders due to the failure of the Board to hold such meeting in response to the aforesaid request shall be borne by the Company. Such expenses shall be deducted from the amounts due by the Company to the Director(s) who have defaulted their duties. Procedures for putting forward proposals at a general meeting In overseeing and monitoring the business operation of the Company, the Shareholders have the right to put forward proposals and raise inquiries. Shareholders individually or together holding 3% or more of the Company’s voting Shares have the right to put up ad hoc proposals in writing to the Company ten days before the holding of the general meeting, and the Company shall include such ad-hoc proposals into the agenda for such general meeting. The contents of the proposals to be raised shall be within the scope of duties of the general meetings and the business scope of the Company. It shall have a clear topic and specific matters to be resolved on, and shall be in compliance with relevant requirements of the laws and administrative regulations of the Company. Procedures of Making Enquiry to the Board Shareholders may make direct enquiry to the Company’s share registrar as regards their shareholdings. Shareholders and public investors may at any time make enquiry for information of the Company by writing to the head office of the Company in Hong Kong by way of post, facsimile or email at the contact number(s) and email address(es) as provided on the website of the Company, provided that such information is open to public. The Board undertakes that it listens to and takes note of Shareholders’ opinion, and Shareholders are welcome to raise questions or concerns as to the management and governance of the Group. They may at any time send their questions or concerns to the company secretary by post at Suite 2703, 27/F., Shui On Centre, Nos. 6-8 Harbour Road, Wanchai, Hong Kong, which will be forwarded to the Board. ANNUAL REPORT 2020 45 Corporate Governance Report Dividend Distribution Plan The Company has adopted the dividend distribution plan for shareholders within the next three years (2018-2020) (the “Dividend Distribution Plan”) on 29 September 2017 and be implemented on 1 January 2018 which sets out the appropriate procedure on declaring and recommending the dividend payment of the Company. Details of the Dividend Distribution Plan are set out in the circular of the Company dated 12 September 2017. The Company takes priority to distributing dividends in cash, shares or a combination of cash and shares and shares its profits with the Shareholders. The dividend distribution decision of the Company will depend on, among others, the current earning scale, cash flows, development status and requirement for funds and other factors as the Board may deem relevant. The Dividend Distribution Plan will be reviewed at least once every three years. Constitutional Documents of the Company Save as the amendments to the Articles of Association as detailed in the Company’s circular dated 15 May 2020 and the Company's announcements dated 15 May 2020 and 29 June 2020 and as approved by our Shareholders at the annual general meeting held on 29 June 2020, there has been no amendment to the constitutional documents of the Company. INTERNAL CONTROL AND RISK MANAGEMENT The Board has overall responsibility for the Group’s internal control, assessment and management of risks. The internal control systems are designed to manage the risk of failure to achieve business objectives, and can only provide reasonable but not absolute assurance against any material misstatement or loss. The Board is responsible for maintaining and reviewing the effectiveness of the Group’s internal control and particularly the adequacy of resources, qualifications and experience of staff of the Group’s accounting and financial reporting function, and their training programs and budget. A year-end review of the effectiveness of the Group’s risk management and internal control systems is conducted annually, and self-assessment and comprehensive risk assessment surveys are also conducted during the review. The Company also has an internal audit function to carry out the analysis and independent appraisal of the adequacy and effectiveness of the systems, and has procedures in place to keep information confidential and manage actual or potential conflicts of interest. 46 LANZHOU ZHUANGYUAN PASTURE CO LTD Corporate Governance Report The process to identify, evaluate and manage risks of the Group are carried out on a regular and on-going basis. These processes are summarised as follows: Risk identification Identify risks that may potentially affect the Group’s business and operations. Risk assessment Assess the impact and consequence of the identified risks on the business and the likelihood of their occurrence. Response to findings of risk assessment Prioritise the risks by comparing the results of the risk assessment; and Determine the risk management strategies and internal control processes to prevent, avoid or mitigate the risks. Risk monitoring and reporting Perform ongoing and regular monitoring of the risk and ensure that appropriate internal control processes are in place; Enhance the risk management strategies and internal control processes in case of any significant change of situation; and Report the results and effectiveness of risk management and internal control to the Board regularly. The Board, through the Audit Committee, keeps regularly appraised of significant risks that may have impact on the Group’s performance. The Board considers that the Group’s internal control is adequate and effective. For the handling and dissemination of inside information, an inside information handling policy is in place to enable the Group to handle inside information and, where required, communicate with the Group’s stakeholders in a timely manner. ANNUAL REPORT 2020 47 Directors’ Report The Board herein presents to the Shareholders its report for the Reporting year. The Directors’ Report must contain a business review required under Paragraph 1 of Schedule 5 of the Companies Ordinance (Cap. 622 of the Laws of Hong Kong) (the "Companies Ordinance") that consists of: (A) a fair review of the company’s business; (B) a description of the principal risks and uncertainties facing the company; (C) particulars of important events affecting the company that have occurred since the end of the financial year; and (D) an indication of likely future development in the company’s business. The Board would present the business review section according to the Accounting Bulletin 5 (AB5): Guidance for The Preparation and Presentation of a Business Review under the Companies Ordinance. (A) FAIR REVIEW OF THE COMPANY’S BUSINESS Paragraph 31 of AB5 states that in order to satisfy the minimum requirements for a fair review of the reporting entity’s business, the review should include as a minimum: (1) a description of the business and the external environment in which the reporting entity operates, as context for the directors’ discussion and analysis; (2) an analysis of the performance of the reporting entity for the year under review and the financial position of the reporting entity as at the end of that period using financial KPIs which complement or supplement the financial statements; (3) a discussion of the reporting entity’s environmental policies and performance and the reporting entity’s compliance with the relevant laws and regulations that have a significant impact on the entity; and (4) an account of the reporting entity’s key relationships with its employees, customers and suppliers and others that have a significant impact on the entity and on which the entity’s success depends. 48 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report (1) BUSINESS AND THE EXTERNAL ENVIRONMENT (PARAGRAPH 32-35 OF AB5) Overview We are one of the leading dairy companies in Gansu, Shaanxi and Qinghai where our operations and sales are primarily located and we operate a vertically integrated business model. Our vertically integrated business model covers the critical stages of the dairy industry value chain, from dairy farming, to manufacturing, and then to marketing and sales of dairy products. Our dairy farming operations aim to ensure a stable supply of high quality raw milk for our dairy product manufacturing. We own and operate 7 dairy farms, with raw milk self-sufficiency rate of exceeds 60% as at 31 December 2020. Our strategy is to expand the herd size of dairy cows in our self-operated dairy farms, which will enable us to achieve balanced, complementary yet diverse sources of raw milk supply to satisfy our dairy product manufacturing need. We believe our vertically integrated business model allows stringent control over each important process of dairy production and thereby guarantees the high quality and safety of our dairy products. Due to the COVID-19 epidemic in 2020, the revenue of the Company's liquid milk product decreased when compared with the previous year. In addition, due to the relatively short shelf life of liquid milk products, the Company implemented a strong marketing policy to promote sales, however, the fixed costs and other expenses did not significantly decrease when compared with the previous year. Due to the influence of the above factors, the consolidated gross margin of liquid milk products of the Company in 2020 was 27.24%, decreased by 3.86 percentage points compared with 31.10% in 2019. While focusing on the Cold Chain Liquid Milk Product market, we also leveraged on our strong brand recognition in the regional market to continue to strengthen the sales of our popular UHT milk and modified milk products, thereby maintaining our diversified product offerings. Going forward, we intend to continue our efforts in the sales of our UHT milk and modified milk products that are popular among local consumers to maintain our diversified product offerings. ANNUAL REPORT 2020 49 Directors’ Report Our business model Our business consists of dairy farming, manufacturing and sales of dairy products. We currently own 3 milk production plants, 1 in Gansu, 1 in Qinghai and 1 in Shaanxi. Our dairy farms are strategically located in Gansu, Qinghai and Shaanxi, a region that has favourable climate and geographical conditions for dairy cattle raising. We own and operate 7 dairy farms. Our products and brands We offer a broad range of dairy products tailored to the needs and taste preferences of different consumer groups. Our principal products sold to retail consumers, mainly through distributors and sales agents, include (i) liquid milk products, which comprise pasteurised milk (i.e fresh milk), sterilized milk, modified milk and yogurt, and (ii) milk beverages. We place strong emphasis on our product development to continuously develop new products that meet the evolving tastes and preference of our consumers, which differentiates us from our competitors in the region. (2) ANALYSIS OF THE PERFORMANCE AND THE FINANCIAL POSITION (PARAGRAPH 36-43 OF AB5) Further discussion and analysis of the performance for 2020 and the financial position as at the end of 2020 using financial KPIs which complement or supplement the financial statements can be found in the Financial Overview of the Management Discussion and Analysis section set out on this annual report. This discussion forms part of this Directors’ Report. 50 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report (3) ENVIRONMENTAL POLICIES AND PERFORMANCE AND COMPLIANCE WITH THE RELEVANT LAWS AND REGULATIONS (PARAGRAPH 44-45 OF AB5) Environmental matters We are subject to extensive PRC national and local environmental laws and regulations concerning, among others, emissions to the air, discharges to land, sewage disposal, solid waste, the generation, handling, storage, transportation, treatment and disposal of waste and other materials, and the remediation of environmental pollution relating to our properties and operations. Such environmental laws and regulations levy fees for the discharge of waste substances above prescribed levels and impose fines for serious violations. Environmental protection authorities may at their own discretion close or suspend the operation of any facility that fails to comply with orders requiring it to cease or remedy operations causing environmental damage. We have implemented various measures in respect of our production plants and dairy farms to eliminate damage to the environment caused by waste water, waste gas, biowaste, solid wastes and noise from our production. Our PRC legal adviser has confirmed that we have obtained all necessary environmental permits and that our operations are currently conducted in accordance with the PRC environmental protection laws and regulations in all material respects. During the Reporting Year, the wholly-owned subsidiary of the Company, Qinghai Shengya Plateau Pasture Co., Ltd., received the Administrative Punishment Decision (Ning Sheng Punishment [2020] No.7)( [2020]7 ) issued by Xining Municipal Bureau of Ecology and Environment on December 14, 2020. Xining Municipal Bureau of Ecology and Environment stated that the cow urine of organic fertilizer from Qinghai Shengya through the back gate were leaked to be in violation of Articles 39 of Law of the People’s Republic of China on the Prevention and Control of Water Pollution: “It is forbidden to use the pits, crevices or karat caves to set up concealed pipe without permission, or tampered with, forge the monitoring data, or abnormal operation of water pollution prevention and control facilities and other ways to evade supervision of the discharge of water pollutants”. Qinghai Shengya was fined RMB100,000 in accordance with Article 23 of the Administrative Punishment Law of the People's Republic of China and Article 83 of the Law of the People’s Republic of China on the Prevention and Control of Water Pollution. Qinghai Shengya has implemented comprehensive rectification according to the requirement of correcting illegal behavior from Xining Municipal Bureau of Ecology and Environment, the Company attaches great importance to the administrative penalty, set up special inspection team, fully comprehensive environmental risks, organize ranch full of drainage system of the pasture, dung scraping board, dry wet separator, oxidation pond, etc., so as to do detailed screening, strictly put an end to such events happening again. At the same time, the Company organized special conclusion meeting and training to strengthen the supervision and management of organic fertilizer and water discharge in dairy farming. Health and safety matters We are also subject to PRC laws and regulations regarding labour, safety and work related incidents. To maintain a safe working environment and increase awareness in occupational health and safety, we have implemented production safety management policies supplemented by a production safety responsibility assessment system, which identifies applicable occupational safety laws and regulations for self-evaluation by different personnel. We complied with all applicable PRC workplace safety regulatory requirements in all material aspects and were not subject to any penalties or disputes relating to health and safety matters that have a material and adverse effect on our financial conditions or business operations. ANNUAL REPORT 2020 51 Directors’ Report (4) KEY RELATIONSHIPS WITH STAKEHOLDERS OTHER THAN MEMBERS (PARAGRAPH 46-48 OF AB5) Relationship with third party raw milk suppliers Raw milk purchased from third party suppliers mainly comes from dairy farms in Gansu, which are two of the six traditional pastoral areas in China with plenty supply of raw milk. The years of business relationship with the Group ranged from 2020 to 2021. In order to alleviate risks for conduct of suppliers, we select our suppliers based on their production environment, number of milkable cows, quality as well as price. We generally source raw milk from dairy farms that have more than 250 dairy cows to ensure quality and safety. Before we make our selection, we also engage in verification of the suppliers’ information including area of the dairy farms, milk tank capacity, inspection certificate of the fresh raw milk and business licence. We conduct regular inspection on our suppliers’ dairy farms and facilities and we regularly monitor the conditions of our suppliers’ facilities, hygiene conditions, quality of raw milk and storage and transportation equipment. Our Company has established long-standing relationships with many dairy farms in Gansu and Qinghai, which allows us to secure steady supply of fresh raw milk at reasonable prices. We had entered into raw milk supply agreements with 22 external raw milk suppliers during the Reporting Year. Under our arrangements with the dairy farms, we do not substantially reduce the purchase prices when raw milk is low in demand and in return, the dairy farms do not substantially raise the purchase prices when raw milk is high in demand, nor do they reduce the amount of their supply. To address potential fluctuations of raw milk price, the purchase price of raw milk is usually set under the terms of the purchase agreements with our suppliers, which can be adjusted as agreed between both parties with regard to the prevailing market conditions. There is no requirement on minimum purchase amount of raw milk in our purchase agreements. We typically settle payments for raw milk with our suppliers monthly, although in some cases we may be required to make prepayments. Our purchase agreements usually have a term of one year. During the Reporting Year, the Group did not have any significant disputes with our major suppliers. 52 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report Relationship with distributors Our major customers include distributors, sales agents, and direct sales (retail chains, supermarkets and local schools). For our targeted markets outside of Lanzhou, Xining and Xian, we generally sell our dairy products through third-party distributors ( ). By adopting this distribution model, we are able to expand our business quickly by saving additional management resources and attention, including administrative, selling, and marketing expenses. Moreover, it generally takes less time to explore market opportunities and build local sales and marketing teams in new regions under the distributorship model when compared with the sales agent or direct sales model. We believe that the use of distributors is generally in line with the industry practice in China. As our principal products sold to retail consumers, mainly through distributors and sales agents, the quality of distributors is important. In order to alleviate quality risks of distributors, our distributors are primarily self- employed individuals and trading companies. We select our third party distributors based on a number of criteria, including but not limited to delivery capabilities, distribution network coverage, relationship with sales channels, possession of relevant licences and their resource deployment for target markets. For example, we generally require new distributors to have a stable place of business, a wide network of sales points and more than two years’ working relationship with targeted sales channels. We require our distributors to possess qualifications and licences required for their operation under our distribution agreement. During the Reporting Year, the Group did not have any material disputes with our major customers. Relationship with employees According to the PRC Labour Law ( ) and the Labour Contract Law of PRC ( ), we are required to enter into labour contracts with individual workers we hired. The wages we paid to our employees and workers cannot be lower than the local minimum wage standards specified by the government from time to time. We are also required to make severance payments to an employee when the term of their employment contract expires, unless the employee voluntarily terminates the contract or voluntarily rejects an offer to renew the contract in circumstances where the conditions offered by the employer are the same as or better than those stipulated in the existing contract. To secure the need for production operations and increase management efficiency, we have entered into a labour outsourcing service agreement with a local human resources company. Furthermore, in accordance with relevant national and local social welfare laws and regulations in the PRC, we are required to pay in respect of our employees in the PRC various social security funds including basic pension insurance, unemployment insurance, occupational injury insurance, medical insurance, maternity insurance and housing provident fund. Our PRC legal adviser has advised us that contributions to these social security funds have been made as required by applicable PRC laws and regulations during the Reporting Year. In order to advance the skills and knowledge of our employees as well as to explore new potentials from our workforce, we provide regular training to various department heads, design training programmes for our staff and offer targeted training to certain of our key employees. We did not experience any material labour dispute with our employees, received any relevant complaints, notice or orders from relevant government authorities or third parties. We believe that our senior management, labour union and employees will continue to maintain good relationships with each other. ANNUAL REPORT 2020 53 Directors’ Report (B) PRINCIPAL RISKS AND UNCERTAINTIES (PARAGRAPH 49-52 OF AB5) The major risks we face in our business are: Actual or perceived contamination in our dairy products could adversely and materially affect our business and reputation Our results of operations are subject to biological asset fair value adjustments, which can be highly volatile and are subject to a number of assumptions Failure to manage our distribution network may materially and adversely affect our business Raw milk supply, quality and price fluctuation may materially and adversely affect our business Quality control system failures may materially and adversely affect our business Our operations could be adversely affected if we no longer benefit from favourable government policies in the dairy industry and policies to promote the economic development in Northwestern China Disruption of operations at our dairy farms and production plants could materially and adversely affect our business Our business and future expansion depend on the quality and health conditions of our dairy cows, as well as the quality of raw milk and yield of the cows The outbreak of any major disease among our cows or at neighbouring farms could materially and adversely affect our business Further discussion and analysis of the ability of the Company to fund its current and future operations and stated strategies under paragraph 51-52 of AB5 can be found in the Financial Overview — Indebtedness of the Management Discussion and Analysis section set out on this annual report. This discussion forms part of this Directors’ Report. 54 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report (C) IMPORTANT EVENTS THAT HAVE OCCURRED SINCE THE END OF 2020 (PARAGRAPH 53-54 OF AB5) On 9 February 2021, the Company entered into a master purchase agreement (the “Master Purchase Agreement”) with Gansu Nongken Tianmu Dairy Company Limited* (“Tianmu Dairy”, a limited company established under the laws of the PRC and is a fellow subsidiary of the holding company of Gansu Nongken Asset Operation Company Limited* (“Gansu Nongken Asset”), a substantial shareholder of the Company) in relation to the possible purchase of raw milk from Tianmu Dairy for the year ending 31 December 2021. As Tianmu Dairy is a fellow subsidiary of Gansu Nongken Asset, a substantial shareholder of the Company, Tianmu Dairy is regarded as an associate of a connected person of the Company under Chapter 14A of the Listing Rules. The transactions contemplated under the Master Purchase Agreement constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules. Therefore, the entering into of the Master Purchase Agreement is subject to the reporting, announcement and the Company’s independent shareholders’ approval requirements under Chapter 14A of the Listing Rules. The entering into the Master Purchase Agreement will contribute to the business of the Group by providing a stable source of quality raw milk required in the production process and operations of the Group. As a result of the increase in production, the Group’s revenue and net profit is expected to increase. The Company considers that the entering into of the Master Purchase Agreement will allow the Group to secure a stable source of quality raw milk so as to achieve the increase in production capacity brought by the expansion of its production facilities for the processing of 600 tonnes of liquid milk per day in Sanjiaocheng Village, Sanjiaocheng Town, Yuzhong County, Lanzhou, Gansu in 2018. The Master Purchase Agreement has been approved by the Shareholders of the Company (“the Shareholders”) at the extraordinary general meeting of the Company held on 18 March 2021. Details of the entered into the Master Purchase Agreement are set out in the announcement of the Company dated 15 January 2021 and 9 February 2021, and the circular of the Company dated 3 March 2021. Save as disclosed herein, subsequent to 31 December 2020, there had been no significant change in our business environment, principal business, pricing policy and costs structure. (D) LIKELY FUTURE DEVELOPMENT IN THE COMPANY’S BUSINESS (PARAGRAPH 55-57 OF AB5) Extensive sales and distribution regional network in Gansu, Qinghai and Shaanxi We utilise multiple sales and distribution channels for our dairy products to maximise our reach to consumers. We have actively responded to market development through the establishment of different sales channels. We have expanded our sales and distribution network by engaging additional distributors, especially in second and third- tier cities in Gansu, Shaanxi and Qinghai. Our sales and distribution network covers most of the local markets in Gansu, Shaanxi and Qinghai. ANNUAL REPORT 2020 55 Directors’ Report Strong market-oriented product development We manufacture, promote, distribute and sell a broad range of dairy products tailored to the needs and preferences of different consumer groups in our principal markets. Our broad product portfolio enables us to meet the different demands and taste preferences of consumers. We are dedicated to introducing new products to further improve our product range and offering so that we can keep up with changes in consumer preference and capture new market trends. Innovative product offerings differentiate us from our competitors. We constantly evaluate our products and seek to adapt to changing market conditions. Our marketing team performs market research and analysis to identify the latest consumer preferences. Our product development team then follows up by conducting a feasibility analysis and updating our existing products. We have devoted resources to adjust our product portfolio, upgrade our product lines, and add new products or line extensions to respond to market needs and target a wider group of consumers. Short and longer term funding needs Through the successful listing on 31 October 2017 as A Share Company in Shenzhen Stock Exchange, the Company has adequate cash to fund the liquidity needs of short and medium term. The Company can also raise excessive funds through the secondary market after being recognized as listed company when required. On 5 December 2019, at the twenty-ninth meeting of the third session of the Board of the Company, the Board considered and approved, among others, the relevant resolutions on the proposed non-public issuance of A Shares. The proposed non-public issuance of A Shares has been approved by the Shareholders at the extraordinary general meeting and the class meetings of the Company held on 17 January 2020. For details, please refer to the announcement of the Company dated 5 December 2019 and the circular of the Company dated 31 December 2019. On 3 April 2020, at the thirty-sixth meeting of the third session of the Board, the Board considered and approved, among others, the relevant resolutions on the proposed adjustments to the non-public issuance of A Shares. The proposed adjustments to the non-public issuance of A Shares has been approved by the Shareholders at the extraordinary general meeting and the class meetings of the Company held on 25 May 2020. For details, please refer to the announcements of the Company dated 3 April 2020 and 6 April 2020 and the circular of the Company dated 6 April 2020. 43,000,000 A Shares were issued on 25 December 2020 upon the completion of the non-public issuance of A Shares. Risk warning in respect of forward-looking statements The forward-looking statements set out in this annual report such as future plans involve uncertainties and do not constitute the Company’s substantial commitment to investors. Investors are advised to be aware of investment risks. 56 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report PRINCIPAL ACTIVITIES The Group principally operates two business segments: (i) dairy farming business, under which we produced and sold raw milk and (ii) dairy products production business, under which we produced and sold dairy products. Details of principal activities of the major subsidiaries of the Company are set out in Note VII(I) to the Financial Statements. RESULTS OF THE GROUP The Group’s and the Company’s results for the Reporting Year and the state of affairs of the Group and the Company as at 31 December 2020 are set out in the Financial Statements on pages 76 to 229 of this annual report. DIVIDEND The Board has resolved to recommend the payment of final dividend of RMB2.00 cents per share (including tax) for the year ended 31 December 2020 (for the year ended 31 December 2019: RMB5.50 cents per share). The total dividend amounted to approximately RMB4.7 million. The proposed final dividend is subject to the consideration and approval of the Shareholders at the forthcoming annual general meeting (the “AGM”) of the Company. The Company will publish announcement, circular and notice of general meeting regarding the AGM in accordance with the Listing Rules and the articles of association of the Company. It is expected that the final dividend will be distributed within 2 months upon the approval of the Shareholders at the AGM. The final dividend will be denominated and declared in RMB. The holders of A Shares will be paid in RMB and the holders of H Shares will be paid in Hong Kong dollars. The exchange rate for the dividend to be paid in Hong Kong dollars will be the mean of the exchange rates of Hong Kong dollars to RMB as announced by the People’s Bank of China during the five business days prior to the date of declaration of the dividend at the AGM. In accordance with the Enterprise Income Tax Law of the People’s Republic of China ( ) and its implementation regulations which came into effect on 1 January 2008, the Company is required to withhold and pay enterprise income tax at the rate of 10% on behalf of the non-resident enterprise shareholders whose names appear on the register of members for H Shares when distributing the cash dividends. Any H Shares not registered under the name of an individual shareholder, including HKSCC Nominees Limited, other nominees, agents or trustees, or other organisations or groups, will be deemed as shares held by non-resident enterprise shareholders. Therefore, enterprise income tax will be withheld from dividends payable to such shareholders. If holders of H Shares intend to change its shareholder status, please enquire about the relevant procedures with your agents or trustees. The Company will strictly comply with the law or the requirements of the relevant government authority and withhold and pay enterprise income tax on behalf of the relevant shareholders based on the register of members for H Shares as at the record date of the proposed final dividend. ANNUAL REPORT 2020 57 Directors’ Report In accordance with the “Circular on Certain Issues Concerning the Policies of Individual Income Tax” (Cai Shui Zi 1994 No.020) ( ( 1994020 )) promulgated by the Ministry of Finance and the State Administration of Taxation on 13 May 1994, overseas individuals are, temporarily, exempted from the individual income tax for dividend or bonuses received from foreign invested enterprises. In accordance with the “Letter of the State Administration of Taxation concerning Taxation Issues of Dividends Received by Foreign Individuals Holding Shares of Companies Listed in China” (Guo Shui Han Fa 1994 No. 440) ( ( 1994440 )) as promulgated by the State Administration of Taxation on 26 July 1994, dividends (capital bonuses) received by foreign individuals holding B shares or overseas shares (including H Shares) from Chinese enterprises issuing such B shares or overseas shares are temporarily exempted from individual income tax. Accordingly, in the payment of final dividend, the Company will not withhold and pay the PRC individual income tax on behalf of individual Shareholders whose names appear on the register of members of H Shares of the Company. FINANCIAL SUMMARY A summary of the published financial performance and of the assets and liabilities of the Group for the last five reporting years, is set out on page 230 of this annual report. SHARE CAPITAL As at 31 December 2020, there was a total issued share capital of 233,680,600 Shares which include: Approximate Number of percentages of Shares share capital % H Shares 35,130,000 15.03 A Shares 198,550,600 84.94 Total 233,680,000 100.00 58 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report TAX RELIEF AND EXEMPTION The Directors are not aware of any tax relief and exemption available to the Shareholders by reason of their holding of the Company’s securities. PURCHASE, REDEMPTION OR SALE OF LISTED SECURITIES OF THE COMPANY Save as disclosed in this report, during the Reporting Year there was no purchase, redemption or sale by the Company, or any of its subsidiaries, of any listed securities of the Company during the Reporting Year. PRE-EMPTIVE RIGHTS There are no provisions for pre-emptive rights under the Company’s articles of associations and related laws which oblige the Company to offer new shares on a pro-rata basis to existing Shareholders. CAPITAL RESERVE, SURPLUS RESERVE AND RETAINED EARNINGS Details of the movements in the reserves of the Company during the Reporting Year are set out in Notes XXXIV, XXXVI and XXXVII to the Financial Statements. DISTRIBUTABLE RESERVES As at 31 December 2020, the aggregate amount of reserves available for distribution to equity Shareholders amounted to approximately RMB4.67 million (31 December 2019: approximately RMB10.49 million). FIXED ASSETS AND CONSTRUCTION IN PROGRESS Details of the changes in the fixed assets and construction in progress of the Group during the Reporting Year are set out in Notes IX and X to the Financial Statements. MATERIAL LITIGATION AND ARBITRATION PROCEEDINGS The Group has no material litigation or arbitration proceedings during the year ended 31 December 2020. MAJOR CUSTOMERS AND SUPPLIERS During the Reporting Year, the largest customer and supplier of the Group accounted for approximately 3.07% and approximately 7.06% of the Group’s total revenue and raw materials purchases, respectively, and the five largest customers and five largest suppliers of the Group accounted for approximately 9.27% and approximately 15.51% of the Group’s total revenue and raw materials purchases, respectively. None of our Directors or any of their associates or any Shareholders (which to the best knowledge of our Directors owned more than 5% of the Company’s issued share capital) had a material interest in our five largest customers and suppliers. ANNUAL REPORT 2020 59 Directors’ Report DIRECTORS AND SUPERVISORS The Directors during the financial year and up to the date of this annual report were: Executive Directors Mr. Ma Hongfu Mr. Wang Guofu Mr. Chen Yuhai Note 1 (resigned on 6 March 2020) Ms. Zhang Qianyu Non-Executive Directors Mr. Yap Kean Chong Mr. Song Xiaopeng Note 2 (resigned on 22 December 2020) Independent Non-Executive Directors Ms. Liu Zhijun Mr. Zhao Xinmin Mr. Wong Cho Hang Stanley The Supervisors during the financial year and up to the date of this annual report were: Supervisors Ms. Du Wei Mr. Wei Lin Mr. Sun Chuang Note 1: Mr. Chen Yuhai has resigned as an executive Director and the general manager of the Company with effect from 6 March 2020, so as to devote more time to his other business committments. Note 2: Mr. Song Xiaopeng, who was nominated by Chongqing FuKun Venture Investment Centre LLP* ( ( ))(“Chongqing FuKun”) to serve as a non-executive Director, has resigned as a non-executive Director with effect from 22 December 2020, as Chongqing FuKun has disposed all of its shares in the Company following the expiry of its lock-up period and ceased to be a Shareholder. The Company has received from each of its independent non-executive Directors an annual confirmation of his independence pursuant to Rule 3.13 of the Listing Rules and the Company considers all its independent non- executive Directors independent. None of the Directors or the Supervisors has entered into a service contract with the Company or its subsidiaries which is not determinable by the Company within one year without payment of compensation (other than statutory compensation). 60 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report UPDATES ON DIRECTORS’ INFORMATION There has been on change to the information of the Directors pursuant to Rule 13.51B(1) of the Listing Rules. MANAGEMENT CONTRACTS No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the Reporting Year and up to the date of this annual report. PERMITTED INDEMNITY PROVISION During the Reporting Year and up to the date of this annual report, the Company has in force indemnity provisions as permitted under the relevant statutes for the benefit of the Directors of the Company or its associated companies. The permitted indemnity provisions are provided for in the Articles of Association in respect of potential liability and costs associated with legal proceedings that may be brought against such Directors. DIRECTORS’, SUPERVISORS’ AND CONTROLLING SHAREHOLDERS’ INTERESTS IN COMPETING BUSINESS Save for their respective interests in the Group, none of the Directors, Supervisors and controlling shareholders of the Company was interested in any business which competes or is likely to compete with the businesses of the Group during the Reporting Year and up to the date of this annual report. COMPLIANCE WITH NON-COMPETE UNDERTAKING Each of Mr. Ma Hongfu, Lanzhou Zhuangyuan Investment Co., Ltd.* ( ) (“Zhuangyuan Investment”) and Gansu Lucky Cow Investment Co., Ltd.* ( ) (“Lucky Cow”) (the Controlling Shareholders) has confirmed to the Company that he/it has complied with the non-compete undertaking given by them to the Company on 23 September 2015. The independent non-executive Directors have reviewed the status of compliance and enforcement of the non-compete undertaking and confirmed that all the undertakings thereunder have been complied with throughout the period for the year ended 31 December 2020. ANNUAL REPORT 2020 61 Directors’ Report ARRANGEMENT FOR DIRECTORS AND SUPERVISORS TO PURCHASE SHARES OR DEBENTURES The interests in shares of the Company held by the Directors and Supervisors during the Reporting Year is disclosed in the section headed “DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE’S INTERESTS AND/OR SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES” below. Save as disclosed in the paragraph headed “Restricted Share Incentive Scheme”, at no time during the Reporting Year, the Directors or Supervisors (including their spouse and children under 18 years of age) had any interest in, or had been granted, or had exercised, any rights to subscribe for shares (warrants or debentures, if applicable) of the Company or any of its associated corporation required to be disclosed pursuant to the Securities and Futures Ordinance. Other than as disclosed herein, at no time during the Reporting Year was the Company, its subsidiaries or holding companies or fellow subsidiaries a party to any arrangements to enable the Directors or Supervisors to acquire benefits by means of acquisitions of shares in, or debt securities (including debentures) of the Company or any other body corporate. EMOLUMENT POLICY The Nomination Committee and the Remuneration and Appraisal Committee were set up for, among others, reviewing and making recommendations on remuneration policy and scheme for Directors, Supervisors, Senior Management and employees, taking into account salaries paid by comparable companies, time commitment and responsibilities of the Directors and performance of the Group. EQUITY-LINKED AGREEMENTS Save as disclosed herein, no other equity-linked agreements were entered into during the Reporting Year or subsisted at the end of the Reporting Year. SHARE OPTION SCHEME There was no share option scheme adopted for the Company during the Reporting Year. 62 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report RESTRICTED SHARE INCENTIVE SCHEME On 28 September 2018, the Board passed a resolution in respect of the proposed adoption of the 2018 Restricted Share Incentive Scheme (the “2018 Incentive Scheme”) and the respective grants, and also the approval of the draft of the 2018 Incentive Scheme and the draft proposal in respect of the grants. On 11 March 2019, the Board passed a resolution in respect of the proposed adoption of the amendment of the 2018 Incentive Scheme (i.e. the "2019 Incentive Scheme") and the respective grants, and also the approval of the draft of the 2019 Incentive Scheme and the draft proposal in respect of the grants. The 2019 Incentive Scheme became effective upon the approval at the extraordinary general meeting and class meetings of the Company held on 23 May 2019. On 21 June 2019, the Board approved the first grant of 3,340,600 A Shares (the “Restricted Shares”) to 84 participants of the Group after adjustments under the 2019 Incentive Scheme (the “First Grant”). “Application Materials for Completion of Registration of Equity Incentive Grant” was submitted to Shenzhen Stock Exchange and China Securities Depository and Clearing Corporation Limited on 27 June 2019 and the registration of the First Grant was completed on 12 July 2019. Among the 3,340,600 A Shares granted under the First Grant, 1,530,400 A Shares were granted to the Directors or the chief executive officers of the Company and certain subsidiaries of the Company and hence a connected person of the Company. The grant of Restricted Shares to such persons constitutes non-exempt connected transactions of the Company under Chapter 14A of the Listing Rules. The purpose of the 2019 Incentive Scheme is: 1. To establish and improve the long-term incentives mechanism of the Company, fully motivate the Directors, senior and middle management and core technical (business) personnel of the Company, effectively combine the interests of the shareholders, the Company and members of core teams and promote the sustainable, stable and rapid development of the Company; and 2. To attract and retain excellent management, business and technical talent to meet the huge demands for core business (technical) talent and management talent of the Company and establish the Company’s advantages in human resources, thus further promoting the innovation of the Company and injecting new vitality into the sustainable and rapid development of the Company. ANNUAL REPORT 2020 63 Directors’ Report Details of the grant of Restricted Shares to connected persons under the First Grant are as follows: Approximate Approximate percentage in Considerations Number of percentage of the issued received from Name of the Restricted total issued share capital of the participants participants Titles Shares granted A Shares the Company (Note) Wang Guofu Executive Director, deputy 483,000 0.31% 0.25% RMB3,361,680 chairman and financial controller of the Company Chen Yuhai The Executive Director 375,000 0.24% 0.20% RMB2,610,000 and the general manager of the Company Zhang Qianyu Executive Director, 108,000 0.07% 0.06% RMB751,680 secretary to the Board, manager of the securities department and joint company secretary of the Company Ding Jianping Chairman of a subsidiary 458,000 0.29% 0.24% RMB3,187,680 of the Company Zhao Qinghua Executive director of 106,400 0.07% 0.06% RMB740,544 a subsidiary of the Company Total 1,530,400 0.98% 0.80% RMB10,651,584 Note: The grant price per Restricted Share is RMB6.96. For details, please refer to the announcements of the Company dated 28 September 2018, 11 March 2019 and 21 June 2019 and the circular of the Company dated 23 April 2019. 64 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report RELATED PARTY TRANSACTIONS AND CONNECTED TRANSACTIONS Details of significant related party transactions of the Group (including those which constitute connected transactions and continuing connected transactions under the Listing Rules) are set out in Note X to the Financial Statements. No matter is required to be disclosed and no connected transaction is noted pursuant to the requirements under Chapter 14A of the Listing Rules. DIRECTORS’ AND SUPERVISORS’ MATERIAL INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS OF SIGNIFICANCE For the year ended 31 December 2020, if any, no transaction, arrangement or contract of significance in relation to the Group’s business to which the Company, any of its subsidiaries or fellow subsidiaries or its parent company was a party, and in which a Director or Supervisor or an entity connected with any of them had a material interest, whether directly or indirectly subsisted at the end of the Reporting Year or at any time during the Reporting Year. Save as disclosed in the paragraph headed “Restricted Share Incentive Scheme”, as at 31 December 2020, no contract of significance had been entered into between the Company, or any of its subsidiaries, and the controlling shareholders of the Company or any of its subsidiaries. ANNUAL REPORT 2020 65 Directors’ Report DIRECTORS’, SUPERVISORS’ AND CHIEF EXECUTIVE’S INTERESTS AND/OR SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES As at 31 December 2020, the interests and short positions of the Directors, Supervisors and the chief executive of the Company and their associates in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the Securities and Future Ordinance (“SFO”)) which have been notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, or which were recorded in the register required to be kept pursuant to Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code set out in Appendix 10 to the Listing Rules were as follows: Approximate Approximate percentage percentage of in the issued Total Number total issued share capital of Name of Director Nature of Interest of Shares A Shares the Company A Shares Ma Hongfu (Note 2) Beneficial owner 32,197,400 16.22% 13.78% Interested in controlled 45,894,700 23.11% 19.64% corporation Wang Guofu Beneficial owner 483,000 0.24% 0.21% Zhang Qianyu Beneficial owner 108,000 0.05% 0.05% Ding Jianping Beneficial owner 458,000 0.23% 0.20% Zhao Qinghua Beneficial owner 106,400 0.05% 0.05% Notes: (1) All interests in Shares were long positions. (2) Mr. Ma Hongfu holds 97.38% equity interests in Zhuangyuan Investment and 39.44% equity interests in Lucky Cow. Under the SFO, he is deemed to be interested in the Shares held by Zhuangyuan Investment and Lucky Cow. Save as disclosed above, as at 31 December 2020, none of the Directors, Supervisors or chief executive of the Company nor their associates had any interest or short positions in the shares, underlying shares or debentures of the Company, its specified undertakings or any of its other associated corporations (within the meaning of Part XV of the SFO) which had to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO or which were required, pursuant to Section 352 of the SFO and the Companies Ordinance (Cap. 622), to be entered in the register referred to therein or which were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange. 66 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report SUBSTANTIAL SHAREHOLDERS’ INTERESTS AND/OR SHORT POSITIONS IN THE SHARES AND UNDERLYING SHARES OF THE COMPANY As at 31 December 2020, as far as known to the Directors, the following persons or entities (not being a Director, a Supervisor or a chief executive of the Company) who had interests or short positions in the Shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or which were recorded in the register required to be kept by the Company under Section 336 of the SFO were as follows: Approximate Approximate percentage of percentage in total issued the issued share Name of Substantial Total Number A Shares/H Shares capital of the Shareholder Nature of Interest of Shares (as applicable) Company A Shares Gansu Nongken Asset Beneficial owner 37,931,665 19.10% 16.23% (Note 2) Gansu Nongken Group Limited Interest of controlled 37,931,665 19.10% 16.23% Liability Company* corporation (“Gansu Nongken Group“) (Note 2) Lanzhou Zhuangyuan Beneficial owner 30,894,700 (L) 15.56% 13.22% Investment Co., Ltd.* ( ) (Note 3) Gansu Lucky Cow Investment Beneficial owner 15,000,000 (L) 7.55% 6.42% Co., Ltd.* ( ) (Note 3) ANNUAL REPORT 2020 67 Directors’ Report Approximate Approximate percentage of percentage in total issued the issued share Name of Substantial Total Number A Shares/H Shares capital of the Shareholder Nature of Interest of Shares (as applicable) Company H Shares Hu Keliang Beneficial owner 5,844,000 (L) 76.64% 2.50% Li Yanling (Note 4) Interests of spouse 5,844,000 (L) 76.64% 2.50% Wang Wei (Note 5) Beneficial owner 800,000 (L) 2.28% 0.34% Interest of controlled 2,800,000 (L) 7.97% 1.20% corporation Li Qi (Note 5) Interests of spouse 3,600,000 (L) 10.25% 1.54% Venko Limited (Note 5) Beneficial owner 2,800,000 (L) 7.97% 1.20% Ren Qifeng (Note 6) Interest of controlled 3,523,000 (L) 10.03% 1.51% corporation Ren Songliu (Note 6) Interests of spouse 3,523,000 (L) 10.03% 1.51% Technoart Investments Beneficial owner 3,523,000 (L) 10.03% 1.51% Limited (Note 6) Zhang Fenmei Beneficial owner 3,379,000 (L) 9.62% 1.45% Notes: 1. All interests in shares were long positions. 2. The share capital of Gansu Nongken Asset was wholly owned by Gansu Nongken Group. Accordingly, Gansu Nongken Group was deemed to be interested in the 37,931,665 A Shares held by Gansu Nongken Asset. 3. Mr. Ma Hongfu holds 97.38% equity interests in Zhuangyuan Investment and 39.44% equity interests in Lucky Cow. Under the SFO, he is deemed to be interested in the shares held by Zhuangyuan Investment and Lucky Cow. 4. Ms. Li Yanling is the spouse of Mr. Hu Keliang. Therefore, Ms. Li Yanling is deemed to be interested in the shares in which Mr. Hu Keliang is interested by virtue of the SFO. 5. The entire issued share capital of Venko Limited is beneficially owned by Mr. Wang Wei who is deemed to be interested in the shares held by Venko Limited by virtue of the SFO. Mr. Wang Wei is also beneficially interested in 800,000 H Shares. Ms. Li Qi is the spouse of Mr. Wang Wei. Therefore, Ms. Li Qi is deemed to be interested in the shares in which Mr. Wang Wei is interested by virtue of the SFO. 6. The entire issued share capital of Technoart Investments Limited is beneficially owned by Mr. Ren Qifeng who is deemed to be interested in the shares held by Technoart Investments Limited by virtue of the SFO. Ms. Ren Songliu is the spouse of Mr. Ren Qifeng. Therefore, Ms. Ren Songliu is deemed to be interested in the shares in which Mr. Ren Qifeng is interested by virtue of the SFO. 68 LANZHOU ZHUANGYUAN PASTURE CO LTD Directors’ Report Save as disclosed above, as at 31 December 2020, the Company had not been notified by any other persons (other than Directors, Supervisors and chief executive of the Company) who had interests or short positions in the Shares or underlying Shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of the Part XV of the SFO, or which were recorded in the register required to be kept by the Company under section 336 of the SFO. SUFFICIENCY OF PUBLIC FLOAT Based on information that is publicly available to the Company and within the knowledge of the Directors, as at the date of this report, the Company has maintained a sufficient public float of 25% of the Company’s issued share capital as required under the Listing Rules. AUDITORS The consolidated financial statements for the year ended 31 December 2017 were audited by KPMG and KPMG Huazhen LLP respectively. The consolidated financial statements for the year ended 31 December 2018 were audited by Ruihua Certified Public Accountants (Special General Partnership). The consolidated financial statements for the year ended 31 December 2019 and the Reporting Year were audited by WUYIGE Certified Public Accountants LLP. WUYIGE Certified Public Accountants LLP will retire at the AGM and, being eligible, offer themselves for re- appointment. A resolution for the reappointment of WUYIGE Certified Public Accountants LLP as auditors of the Company will be proposed at the AGM. ON BEHALF OF THE BOARD Lanzhou Zhuangyuan Pasture Co., Ltd.* Ma Hongfu Chairman Lanzhou, the PRC, 29 March 2021 ANNUAL REPORT 2020 69 Auditor’s Report To the Shareholders of Lanzhou Zhuangyuan Pasture Co., Ltd., I. OPINIONS We have audited the financial statements of Lanzhou Zhuangyuan Pasture Co., Ltd. (hereinafter referred to as “Zhuangyuan Pasture Company” or “Company”), which comprise the consolidated and parent company balance sheets as at 31 December 2020, the consolidated and parent company income statements, the consolidated and parent company cash flow statements, the consolidated and parent company statements of changes in shareholders’ equity for the year of 2020 and relevant notes to the financial statements. In our opinion, the accompanying financial statements are prepared in accordance with the provisions of Accounting Standards for Business Enterprises in all material respects and present fairly the consolidated and parent company financial position of Zhuangyuan Pasture Company as at 31 December 2020 and the consolidated and parent company operating results and cash flows for the year of 2020. II. BASIS OF OUR OPINIONS We conducted our audit in accordance with the provisions of China Standards on Auditing for Certified Public Accountants. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of Zhuangyuan Pasture Company in accordance with the China Code of Ethics for Certified Public Accountants, and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our Opinion. III. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We identify that the following matters as the key audit matters which shall be provided in the auditor’s report. 70 LANZHOU ZHUANGYUAN PASTURE CO LTD Auditor’s Report (I) Revenue Recognition 1. Description of matters Please refer to note “III. Significant accounting policies and accounting estimate” (XXIII) and note “V. Notes to consolidated financial statements” (XXXVIII) to the financial statements. The operating revenue of Zhuangyuan Pasture Company was RMB739,820,700 in 2020. We identified revenue recognition as a key audit matter as revenue is the main source of profit and is one of the key performance indicators, which gives rise to an inherent risk that the recognition points of revenue may be manipulated by the management for the purpose of achieving certain objectives. 2. How the matter was addressed in our audit We mainly implemented the following audit procedures in the process of auditing key matters: (1) understanding and testing the effectiveness of the design and operation of internal controls related to operating revenue; (2) obtaining the agreements signed by and between the Company and the customer as well as inspecting key terms, and assessing whether the accounting policies for revenue recognition of Zhuangyuan Pasture Company comply with requirements of Accounting Standards of Business Enterprises and are implemented consistently; (3) distinguishing product and sale type, taking samples for inspection, respectively, selecting important samples to inspect the revenue and recognising related supporting documents (including financial documents, sales records, contracts, shipment documents, receipt documents, regular letters of reconciliation and records on signing in) to verify truthfulness and accuracy of revenue recognition; (4) sampling and recognising sale and settlement balance of payment for goods to the customer with letters of recognition; (5) cut-off test for sales revenue before and after the balance sheet date to evaluate whether the sales revenue is recorded in the proper accounting period. ANNUAL REPORT 2020 71 Auditor’s Report (II) Valuation of Bearer Biological Assets 1. Description of matters Please refer to note “III. Significant accounting policies and accounting estimate of the Company” XVI and note “V. Notes to the consolidated financial statements” XI and “IX. Fair value” to the financial statements. As at 31 December 2020, the balance of the the bearer biological assets of Zhuangyuan Pasture Company was RMB494,690,800, accounting for 16.06% of the total assets as at 31 December 2020. Zhuangyuan Pasture Company’s bearer biological assets comprise calves, heifers and milkable cows. Zhuangyuan Pasture Company’s bearer biological assets are measured at fair value. The fair value assessment of bearer biological assets involves the exercise of significant management judgment, particularly in respect of estimated culling and birth rates, future average milk production volumes, future raw milk market prices, breeding costs and the discount rate applied. As this will give rise to an inherent risk that the estimation of fair value may be manipulated by the management for the purpose of achieving certain objectives, we identified the valuation of bearer biological assets as a key audit matter. 2. How the matter was addressed in our audit We mainly implemented the following audit procedures in the process of auditing key matters: (1) understanding and testing the effectiveness of the design and operation of the internal control of Zhuangyuan Pasture Company for recognition of the fair value of the bearer biological assets; (2) evaluating the competence, capabilities and objectivity of the external valuers engaged by Zhuangyuan Pasture Company; (3) assessing the reasonableness of the key assumptions adopted in the valuation of bearer biological assets, including the estimated culling and birth rates, future average milk production volumes, future market prices for raw milk, breeding costs and discount rate based on the work by external evaluation experts; (4) observing the physical count of bearer biological assets performed by Zhuangyuan Pasture Company and reviewing the quantity of bearer biological assets in the valuation model. 72 LANZHOU ZHUANGYUAN PASTURE CO LTD Auditor’s Report IV. OTHER INFORMATION Zhuangyuan Pasture Company’s management (the “Management”) is responsible for the other information. The other information comprises all the information included in 2020 annual report of Zhuangyuan Pasture Company, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information and we are required to report that fact. We have nothing to report in this regard. V. RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL STATEMENTS The Management is responsible for the preparation and fair presentation of the financial statements in accordance with the Accounting Standards for Business Enterprises, and for the design, implementation and maintenance of such internal control necessary to enable that the financial statements are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Management is responsible for assessing Zhuangyuan Pasture Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management intends either to liquidate Zhuangyuan Pasture Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing Zhuangyuan Pasture Company’s financial reporting process. ANNUAL REPORT 2020 73 Auditor’s Report VI. CERTIFIED PUBLIC ACCOUNTANT’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Standards on Audit will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with CSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: (1) Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (2) Understand the internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances but not to express our opinions on the effectivenss of the internal control. (3) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. (4) Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on Zhuangyuan Pasture’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosure in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause Zhuangyuan Pasture Company to cease to continue as a going concern. (5) Evaluate the overall presentation, structure and content of the financial statements, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 74 LANZHOU ZHUANGYUAN PASTURE CO LTD Auditor’s Report (6) Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within Zhuangyuan Pasture to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit and remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. WUYIGE Certified Public Accountants LLP PRC Certified Public Accountant: Li Zongyi (Engagement Partner) Beijing, PRC Certified Public Accountant: Zhang Yingli 29 March 2021 ANNUAL REPORT 2020 75 Consolidated Income Statement For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 2020 2019 Item RMB’000 RMB’000 I. Total operating income 739,821 813,554 Including: Operating income 739,821 813,554 Interest income Earned premium Handling charges and commission income II. Total operating cost 715,619 756,560 Including: Operating cost 532,944 559,656 Interest expenses Handling charges and commission expense Surrenders Net compensation payout Provisions for reinsurance contracts, net Policy dividend expenses Reinsurance cost Taxes and surcharges 7,745 6,267 Selling expenses 73,121 81,584 Administrative expenses 68,815 77,390 Research and development expenses 9,103 9,462 Financial expenses 23,891 22,201 Including: Interest expenses 27,550 20,996 Interest income 5,470 2,553 Add: Other income 6,503 7,372 Investment income (loss is indicated by “-”) (12,925) (8,823) Including: Investment income from associated enterprises and joint ventures 0 0 Income from derecognition of financial assets at amortised cost (12,925) (8,823) Exchange gains (loss is indicated by “-”) Net exposure to hedging gains (loss is indicated by “-”) Gains from changes in fair value (loss is indicated by “-”) 74,263 47,252 Impairment losses on Credit (loss is indicated by “-”) (1,513) (992) Impairment loss on Assets (loss is indicated by “-”) (75,838) (57,958) Gains from asset disposal (loss is indicated by “-”) 313 (2) 76 LANZHOU ZHUANGYUAN PASTURE CO LTD Consolidated Income Statement (Continued) For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 2020 2019 Item RMB’000 RMB’000 III. Operating profit (loss is indicated by “-”) 15,005 43,843 Add: Non-operating income 9,006 24,828 Less: Non-operating expenses 11,650 3,693 IV. Total profit (total loss is indicated by “-”) 12,361 64,979 Less: Income tax expenses 1,907 13,657 V. Net profit (net loss is indicated by “-”) 10,453 51,321 (I) Classification by operating continuity 1. Net profit from continuing operations (net loss is indicated by “-”) 10,453 51,321 2. Net profit from discontinued operations (net loss is indicated by “-”) (II) Classification by ownership 1. Net profit attributable to shareholders of the Parent Company 10,453 51,321 2. Non-controlling interests VI. Other net comprehensive income after tax Other net comprehensive income after tax attributable to owners of the Parent Company (I) Other comprehensive income that cannot be reclassified into profit or loss 1. Changes arising from re-measurement of the defined benefit plan 2. Other comprehensive income that cannot be reclassified into profit or loss under the equity method 3. Changes in fair value of other equity instruments investment 4. Change in fair value of the Enterprise’s own credit risk 5.Others (II) Other comprehensive income that will be reclassified into profit or loss 1. Other comprehensive income that can be reclassified into profit or loss under the equity method 2. Change in fair value of other debt investments 3. Financial assets reclassified into other comprehensive income 4. Credit impairment provision for other debt investments 5. Reserve for cash flow hedging 6. Exchange rate differences of financial statements denominated in foreign currency 7.Others Other net comprehensive income after tax attributable to non-controlling interests ANNUAL REPORT 2020 77 Consolidated Income Statement (Continued) For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 2020 2019 Item RMB’000 RMB’000 VII. Total comprehensive income 10,453 51,321 Total comprehensive income attributable to the owners of the Parent Company 10,453 51,321 Total comprehensive income attributable to non-controlling interests VIII. Earnings per share: (I) Basic earnings per share (RMB/share) 0.05 0.27 (II) Diluted earnings per share (RMB/share) 0.05 0.27 78 LANZHOU ZHUANGYUAN PASTURE CO LTD Consolidated Balance Sheet For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 31 December 2020 31 December 2019 Item RMB’000 RMB’000 Current assets: Cash at bank and on hand 846,729 413,742 Balances with clearing companies Loans to banks and other financial institutions Financial assets held for trading 20,412 Derivative financial assets Bills receivable Accounts receivable 41,586 29,649 Receivables financing Prepayments 7,998 16,185 Premium receivable Amounts receivable from reinsurers Provision for reinsurance contracts receivable Other receivables 20,792 17,694 Including: Interests receivable Dividends receivable Purchase of repo financial assets Inventories 113,625 94,832 Contract assets Assets held for sale Non-current assets due within 1 year Other current assets 10,738 17,595 Total current assets 1,041,467 610,110 Non-current assets: Grant of loans and advances Debt investments Other debt investments Long-term receivables Long-term equity investment Other equity instruments investment 44 44 Other non-current financial assets Investment properties Fixed assets 1,179,537 1,247,639 ANNUAL REPORT 2020 79 Consolidated Balance Sheet (Continued) For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 31 December 2020 31 December 2019 Item RMB’000 RMB’000 Construction in progress 152,093 59,188 Productive biological assets 494,691 360,095 Oil & gas assets Right-of-use assets 53,784 43,437 Intangible assets 97,156 90,609 Research & development expenses Goodwill 9,971 Long-term deferred expenses 4,246 7,138 Deferred income tax assets 2,502 6,644 Other non-current assets 55,037 57,852 Total non-current assets 2,039,091 1,882,617 Total assets 3,080,558 2,492,727 Current liabilities: Short-term borrowings 322,337 315,184 Borrowings from central bank Placements from banks and other financial institutions Financial liabilities held for trading Derivative financial liabilities Bills payable 431,160 283,014 Accounts payable 214,105 228,221 Advances from customers Contract liabilities 10,669 16,470 Amounts from disposal and repurchase of financial assets Customer deposits and deposits due to banks and other financial institutions Amounts of securities trading as agent Amounts of securities underwriting as agent Employee remuneration payable 6,226 2,621 Taxes payable 6,419 7,504 Other payables 52,990 50,725 Including: Interests payable Dividends payable Handling charge and commission payable 80 LANZHOU ZHUANGYUAN PASTURE CO LTD Consolidated Balance Sheet (Continued) For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 31 December 2020 31 December 2019 Item RMB’000 RMB’000 Amounts due to reinsurers Liabilities held for sale Non-current liabilities due within 1 year 48,422 56,249 Other current liabilities 1,448 Total current liabilities 1,093,777 959,987 Non-current liabilities: Provision for insurance contracts Long-term borrowings 311,281 227,327 Bonds payable Including: Preferred shares Perpetual bonds Lease liabilities 40,483 30,946 Long-term payables Long-term employee remuneration payable Estimated liabilities 490 515 Deferred income 37,059 39,518 Deferred income tax liabilities 5,633 9,027 Other non-current liabilities Total non-current liabilities 394,947 307,332 Total liabilities 1,488,724 1,267,320 Owners’ equity: Share capital 233,681 190,681 Other equity instruments Including: Preferred shares Perpetual bonds Capital reserves 854,580 531,119 Less: Treasury stocks 23,251 23,251 Other comprehensive income Special reserves Surplus reserves 43,387 43,387 Provisions for general risk Retained earnings 483,437 483,471 Total equity attributable to the owners of the Parent Company 1,591,834 1,225,407 Non-controlling interests Total shareholders’ equity 1,591,834 1,225,407 Total liabilities and shareholders’ equity 3,080,558 2,492,727 ANNUAL REPORT 2020 81 Consolidated Cash Flow Statement For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 2020 2019 Item RMB’000 RMB’000 I. Cash flow from operating activities: Proceeds from sale of goods and rendering of services 816,686 896,830 Net increase in customer deposits and deposits from banks and other financial institutions Net increase in borrowings from central bank Net increase in placements from other financial institutions Cash received as premiums of original insurance contracts Net cash received from reinsurance business Net increase in policyholder deposits and investment funds Cash received as interests, handling charges and commissions Net increase in placements Net increase in funds of repurchase business Net cash received from securities trading agency services Tax rebates received 914 Cash received in connection with other operating activities 43,869 41,347 Sub-total of cash inflow from operating activities 861,470 938,176 Payment for goods and services 527,721 576,476 Net increase in loans and advances to customers Net increase in deposits with central bank and other financial institutions Cash paid for original insurance contract claims Net increase in loans to banks and other financial institutions Cash paid for interest, handling charges and commissions Cash paid for policyholder dividend Payment to and for employees 67,528 70,063 Payment of various taxes 30,574 61,896 Cash paid for other operating activities 94,000 89,465 Sub-total of cash outflows from operating activities 719,823 797,900 Net cash flows from operating activities 141,647 140,277 II. Cash flows from investing activities: Cash received upon recovery of investments Cash received from return on investments Net cash received from disposal of fixed assets, intangible assets and other long-term assets 21,619 28,640 Net cash received upon disposal of subsidiaries and other business units Cash received from other investing activities 41,233 2,553 82 LANZHOU ZHUANGYUAN PASTURE CO LTD Consolidated Cash Flow Statement (Continued) For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 2020 2019 Item RMB’000 RMB’000 Sub-total of cash inflows from investing activities 62,853 31,194 Cash paid for acquisition of fixed assets, intangible assets and other long-term assets 409,796 459,895 Cash paid for investments 12,365 Net increase in pledged loans Net cash paid for acquisition of subsidiaries and other business units Cash paid for other investing activities Sub-total of cash outflows from investing activities 409,796 472,260 Net cash flows from investing activities (346,943) (441,067) III. Cash flows from financing activities: Cash received from investments 368,879 23,251 Including: Cash received by subsidiaries as minority shareholders’ investments Cash from borrowings 551,000 655,000 Cash received in connection with other financing activities 540,792 266,583 Sub-total of cash inflows from financing activities 1,460,671 944,834 Cash paid for repayment of debts 469,497 562,863 Cash paid for dividends, profit distributions or interest payment 38,037 44,850 Including: Dividend and profit paid to minority shareholders by subsidiaries Cash paid for other financing activities 364,534 176,902 Sub-total of cash outflows from financing activities 872,068 784,615 Net cash flows from financing activities 588,603 160,219 IV. Effect of foreign exchange rate changes on cash and cash equivalents 24 14 V. Net increase in cash and cash equivalents 383,330 (140,556) Add: Balance of cash and cash equivalents at the beginning of the period 248,235 388,791 VI. Balance of cash and cash equivalents at the end of the period 631,565 248,235 ANNUAL REPORT 2020 83 84 2020 Attributable to shareholders of the parent company Minority Total Other equity instruments Other Special Surplus Provisions for Retained shareholders’ shareholders’ Share capital Capital Less: treasury comprehensive Preferred Perpetual Others Sub-total equity equity reserves shares reserves reserves general risk earnings Item shares bonds Others income RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 I. Balance at the end of the previous year 190,681 531,119 23,251 43,387 483,471 1,225,407 1,225,407 Add: Change in accounting policies Prior period error correction As at 31 December 2020 Business combination under the common control (Expressed in Renminbi Yuan) Others II. Balance at the beginning of the year 190,681 531,119 23,251 43,387 483,471 1,225,407 1,225,407 III. Increase/decrease amount during the LANZHOU ZHUANGYUAN PASTURE CO LTD period (decrease amount is indicated by “-”) 43,000 323,460 (34) 366,426 366,426 (I) Total comprehensive income 10,453 10,453 10,453 (II) Invested and reduced capitals of owners 43,000 323,460 366,460 366,460 1. Common share contributed by owners 43,000 325,879 368,879 368,879 2. Capital contributed by other equity instrument holders 3. Amount of share-based payment included in owners’ equities (2,418) (2,418) (2,418) 4. Others 0 0 (III) Appropriation of profits (10,487) (10,487) (10,487) 1. Withdrawl of surplus reserve 0 0 0 2. Withdrawl of Provisions for general risk 0 0 0 3. Distributions to owners (or shareholders) (10,487) (10,487) (10,487) 4. Others (IV) Internal carry-over of owners’ equity 1. Paid-in capitals (or share capital) transferred with capital reserves 2. Paid-in capitals (or share capital) transferred with surplus reserves 3. Surplus reserve to cover the losses 4. Balance of defined benefits plan Consolidated Statement of Changes in Equity transferred to retained earnings 5. Other comprehensive income transferred to retained earnings 6. Others (V) Special reserve 1. Withdraw amount in the period 2. Utilized amount in the period (VI) Others IV. Balance at the end of the period 233,681 854,580 23,251 43,387 483,437 1,591,834 1,591,834 2019 Attributable to shareholders of the parent company Minority Total Other equity instruments Other Special Surplus Provisions for Retained shareholders’ shareholders’ Share capital Capital Less: treasury comprehensive Preferred Perpetual Others Sub-total equity equity reserves shares reserves reserves general risk earnings Item shares bonds Others income RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 I. Balance at the end of the previous year 187,340 508,791 37,194 451,082 1,184,407 1,184,407 Add: Change in accounting policies Prior period error correction Business combination under the common control Others II. Balance at the beginning of the year 187,340 508,791 37,194 451,082 1,184,407 1,184,407 III. Increase/decrease amount during the period (decrease amount is indicated by “-”) 3,341 22,328 23,251 6,193 32,389 41,000 41,000 (I) Total comprehensive income 51,321 51,321 51,321 (II) Invested and reduced capitals of owners 3,341 22,328 23,251 2,418 2,418 1. Common share contributed by owners 3,341 19,910 23,251 2. Capital contributed by other equity instrument holders 3. Amount of share-based payment included in owners’ equities 2,418 2,418 2,418 4. Others (III) Appropriation of profits 6,193 (18,932) (12,739) (12,739) 1. Withdrawl of surplus reserve 6,193 (6,193) 2. Withdrawl of Provisions for general risk 3. Distributions to owners (or shareholders) (12,739) (12,739) (12,739) 4. Others (IV) Internal carry-over of owners’ equity 1. Paid-in capitals (or share capital) transferred with capital reserves 2. Paid-in capitals (or share capital) transferred with surplus reserves 3. Surplus reserve to cover the losses 4. Transferred the balance of defined benefits plan to retained earnings 5. Transferred other comprehensive income to retained earnings 6. Others (V) Special reserve 1. Withdraw amount in the period 2. Utilized amount in the period (VI)Others IV.Balance at the end of the period 190,681 531,119 23,251 43,387 483,471 1,225,407 1,225,407 ANNUAL REPORT 2020 (Expressed in Renminbi Yuan) As at 31 December 2020 Consolidated Statement of Changes in Equity (Continued) 85 Income Statement of the Parent Company For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 2020 2019 Item RMB’000 RMB’000 I. Operating revenue 498,214 501,789 Less: Operating cost 403,534 355,401 Taxes and surcharges 2,881 2,094 Selling expenses 42,777 52,897 Administrative expenses 26,065 36,688 Research and development expenses 7,930 5,084 Financial expenses 21,393 19,509 Including: Interest expenses 24,910 18,184 Interest income 5,152 2,243 Add: Other income 3,024 1,806 Investment income (loss is indicated by “ — ”) (2,592) Including: Investment income from associated enterprises and joint ventures Income from derecognition of financial assets at amortised cost (loss is indicated by “ — ”) (2,592) Net exposure to hedging gains (loss is indicated by “-”) Gains from changes in fair value (loss is indicated by “ — ”) 20,412 Impairment losses on Credit (loss is indicated by “-”) (80) (8) Impairment loss on Assets (loss is indicated by “-”) (30,000) Gains from asset disposal (loss is indicated by “ — ”) 278 (2) II. Operating profit (loss is indicated by “ — ”) (33,144) 49,731 Add: Non-operating income 7,865 22,984 Less: Non-operating expenses 11,100 270 III. Total profit (total loss is indicated by “ — ”) (36,380) 72,446 Less: Income tax expenses (1,921) 10,516 IV. Net profit (net loss is indicated by “ — ”) (34,459) 61,930 (I) Net profit from continuing operations (net loss is indicated by “ — ”) (34,459) 61,930 (I) Net profit from discontinued operations (net loss is indicated by “ — ”) V. Other net comprehensive income after tax (I) Other comprehensive income that cannot be reclassified into profit or loss 1. Changes arising from re-measurement of the defined benefit plan 2. Other comprehensive income that cannot be reclassified into profit or loss under the equity method 3. Changes in fair value of other equity instruments investment 4. Change in fair value of the enterprise’s own credit risk 5. Others 86 LANZHOU ZHUANGYUAN PASTURE CO LTD Income Statement of the Parent Company (continued) For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 2020 2019 Item RMB’000 RMB’000 (II) Other comprehensive income that will be reclassified into profit or loss 1. Other comprehensive income that can be reclassified into profit or loss under the equity method 2. Change in fair value of other debt investments 3. Financial assets reclassified into other comprehensive income 4. Credit impairment provision for other debt investments 5. Reserve for cash flow hedging 6. Exchange rate differences of financial statements denominated in foreign currency 7. Others VI. Total comprehensive income (34,459) 61,930 VII. Earnings per share: (I) Basic earnings per share (II) Diluted earnings per share ANNUAL REPORT 2020 87 Balance sheet of the Parent Company As at 31 December 2020 (Expressed in Renminbi Yuan) 31 December 2020 31 December 2019 Item RMB’000 RMB’000 Current assets: Cash at bank and on hand 468,006 359,427 Financial assets held for trading 20,412 Derivative financial assets Bills receivable Accounts receivable 15,097 13,002 Receivables financing Prepayments 5,312 14,464 Other receivables 495,026 593,144 Including: Interests receivable Dividends receivable Inventories 27,705 21,362 Contract assets Assets held for sale Non-current assets due within 1 year Other current assets 10,731 17,117 Total current assets 1,021,877 1,038,928 Non-current assets: Debt investments Other debt investments Long-term receivables Long-term equity Investment 1,002,734 533,789 Other equity instruments investment 44 44 Other non-current financial assets Investment properties Fixed assets 486,667 529,887 Construction in progress 18,260 Bearer biological assets Oil & gas assets Right-of-use assets 2,669 4,033 Intangible assets 56,460 56,927 Research & development expenses Goodwill 88 LANZHOU ZHUANGYUAN PASTURE CO LTD Balance sheet of the Parent Company (Continued) As at 31 December 2020 (Expressed in Renminbi Yuan) 31 December 2020 31 December 2019 Item RMB’000 RMB’000 Long-term deferred expenses 4,246 6,946 Deferred income tax assets 2,348 2,933 Other non-current assets 20,544 29,735 Total non-current assets 1,593,973 1,164,294 Total assets 2,615,849 2,203,222 Current liabilities: Short-term borrowings 282,268 315,184 Financial liabilities held for trading Derivative financial liabilities Bills payable 431,160 283,014 Accounts payable 78,542 123,726 Advances from customers Contract liabilities 8,375 12,377 Employee remuneration payable 3,358 2,013 Taxes payable 3,937 2,872 Other payables 120,867 61,442 Including: Interests payable Dividends payable Liabilities held for sale Non-current liabilities due within 1 year 43,795 33,566 Other current liabilities 1,108 Total current liabilities 973,409 834,193 Non-current liabilities: Long-term borrowings 185,129 227,327 Bonds payable Including: Preferred shares Perpetual bonds Lease liabilities 1,879 3,122 Long-term payables Long-term employee remuneration payable Estimated liabilities 6 44 Deferred income 15,036 16,598 Deferred income tax liabilities 1,215 4,277 ANNUAL REPORT 2020 89 Balance sheet of the Parent Company (Continued) As at 31 December 2020 (Expressed in Renminbi Yuan) 31 December 2020 31 December 2019 Item RMB’000 RMB’000 Other non-current liabilities Total non-current liabilities 203,265 251,368 Total liabilities 1,176,674 1,085,561 Owners’ equity: Share capital 233,681 190,681 Other equity instruments Including: Preferred shares Perpetual bonds Capital reserves 877,091 553,631 Less: Treasury stocks 23,251 23,251 Other comprehensive income Special reserves Surplus reserves 43,387 43,387 R etained earnings 308,266 353,213 Total owners’ equity 1,439,175 1,117,662 Total liabilities and owners’ equity 2,615,849 2,203,222 90 LANZHOU ZHUANGYUAN PASTURE CO LTD Cash Flow Statement of the Parent Company For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 2020 2019 Item RMB’000 RMB’000 I. Cash flows from operating activities: Cash from sale of goods and rendering of services 557,214 567,125 Tax rebates received 914 Cash received in connection with other operating activities 252,167 270,004 Sub-total of cash inflow from operating activities 810,295 837,129 Payment for goods and services 249,586 324,606 Cash paid to and for employees 29,181 29,051 Payment of various taxes 16,472 48,386 Cash paid for other operating activities 127,846 136,217 Sub-total of cash outflows from operating activities 423,085 538,260 Net cash flows from operating activities 387,211 298,868 II. Cash flows from investing activities: Cash received upon recovery of investments Cash received from return on investments Net cash received from disposal of fixed assets, intangible assets and other long-term assets 576 10 Net cash received upon disposal of subsidiaries and other business units Cash received from other investing activities 22,333 Sub-total of cash inflows from investing activities 22,910 10 Cash paid for acquisition of fixed assets, intangible assets and other long-term assets 67,782 327,395 Cash paid for investments 498,945 21,365 Cash paid for acquisition of subsidiaries and other business units, net Cash paid for other investing activities Sub-total of cash outflows from investing activities 566,727 348,759 Net cash flows from investing activities (543,817) (348,749) III. Cash flows from financing activities: Cash received from investments 368,879 23,251 Cash from borrowings 385,000 655,000 Cash received in connection with other financing activities 160,792 15,446 Sub-total of cash inflows from financing activities 914,671 693,697 Cash paid for repayment of debts 450,777 522,243 Cash paid for dividends, profit distributions or interest payment 35,398 43,535 Cash paid for other financing activities 212,991 171,985 Sub-total of cash outflows from financing activities 699,166 737,763 ANNUAL REPORT 2020 91 Cash Flow Statement of the Parent Company (Continued) For the year ended 31 December 2020 (Expressed in Renminbi Yuan) 2020 2019 Item RMB’000 RMB’000 Net cash flows from financing activities 215,505 (44,066) IV. Effect of foreign exchange rate changes on cash and cash equivalents 24 14 V. Net increase in cash and cash equivalents 58,923 (93,933) Add: Balance of cash and cash equivalents at the beginning of the period 193,920 287,852 VI. Balance of cash and cash equivalents at the end of the period 252,842 193,920 92 LANZHOU ZHUANGYUAN PASTURE CO LTD 2020 Other equity instruments Less: Other Total Item Share capital Preferred Perpetual Capital treasury comprehensive Special Surplus Retained shareholders’ shares bonds Others reserves shares income reserves reserves earnings Others equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 I. Balance at the end of the previous year 190,681 553,631 23,251 43,387 353,213 1,117,662 Add: Change in accounting policies Prior period error correction Others II. Balance at the beginning of the year 190,681 553,631 23,251 43,387 353,213 1,117,662 III. Increase/decrease amount during the period (decrease amount is indicated by “-”) 43,000 323,460 (44,947) 321,513 (I) Total comprehensive income (34,459) (34,459) (II) Invested and reduced capitals of owners 43,000 323,460 366,460 1. Common share contributed by owners 43,000 325,879 368,879 2. Capital contributed by other equity instrument holders 0 3. Amount of share-based payment included in owners’ equities (2,418) (2,418) 4. Others 0 (III) Appropriation of profits (10,487) (10,487) 1. Withdrawl of surplus reserve 2. Distributions to owners (or shareholders) (10,487) (10,487) 3. Others (IV) Internal carry-over of owners’ equity 1. Paid-in capitals (or share capital) transferred with capital reserves 2. Paid-in capitals (or share capital) transferred with surplus reserves 3. Surplus reserve to cover the losses 4. Balance of defined benefits plan transferred to retained earnings 5. Other comprehensive income transferred to retained earnings 6. Others (V) Special reserve 1. Withdraw amount in the period 2. Utilized amount in the period (VI) Others IV. Balance at the end of the period 233,681 877,091 23,251 43,387 308,266 1,439,175 ANNUAL REPORT 2020 (Expressed in Renminbi Yuan) As at 31 December 2020 Statement of Changes in Equity of the Parent Company 93 94 2019 Other equity instruments Less: Other Total Item Share capital Preferred Perpetual Capital treasury comprehensive Special Surplus Retained shareholders’ shares bonds Others reserves shares income reserves reserves earnings Others equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 I. Balance at the end of the previous year 187,340 531,302 37,194 310,215 1,066,052 Add: Change in accounting policies As at 31 December 2020 Prior period error correction Others (Expressed in Renminbi Yuan) II. Balance at the beginning of the year 187,340 531,302 37,194 310,215 1,066,052 III. Increase/decrease amount during the period (decrease amount is LANZHOU ZHUANGYUAN PASTURE CO LTD indicated by “-”) 3,341 22,328 23,251 6,193 42,998 51,609 (I) Total comprehensive income 61,930 61,930 (II) Invested and reduced capitals of owners 3,341 22,328 23,251 2,418 1. Common share contributed by owners 3,341 19,910 23,251 2. Capital contributed by other equity instrument holders 3. Amount of share-based payment included in owners’ equities 2,418 2,418 4. Others (III) Appropriation of profits 6,193 (18,932) (12,739) 1. Withdrawl of surplus reserve 6,193 (6,193) 2. Distributions to owners (or shareholders) (12,739) (12,739) 3. Others (IV) Internal carry-over of owners’ equity 1. Paid-in capitals (or share capital) transferred with capital reserves 2. Paid-in capitals (or share capital) transferred with surplus reserves 3. Surplus reserve to cover the losses 4. Balance of defined benefits plan transferred to retained earnings 5. Other comprehensive income transferred to retained earnings 6. Others (V) Special reserve 1. Withdraw amount in the period 2. Utilized amount in the period (VI) Others IV. Balance at the end of the period 190,681 553,631 23,251 43,387 353,213 1,117,662 Statement of Changes in Equity of the Parent Company (Continued) Notes to the Financial Statements 1 January 2020 - 31 December 2020 I. COMPANY STATUS Lanzhou Zhuangyuan Pasture Co., Ltd. (hereinafter referred to as “the Company”) was incorporated in Gansu, Lanzhou, PRC on 25 April 2000. On 19 April 2011, the Company was converted into a joint stock company. The registered address is at Sanjiaocheng Village, Sanjiaocheng Town, Yuzhong Country. The legal representative is Ma Hongfu and the operating cycle is from 25 April 2000 to 24 April 2050. The Company was listed on the Main Board of Hong Kong Stock Exchange on 15 October 2015, and listed on the SME Board of Shenzhen Stock Exchange on 31 October 2017. The ultimate controller of the Company is Mr. Ma Hongfu, a natural person. The Company has 11 subsidiaries incorporated into the consolidation scope as of 31 December 2020. For details, please refer to Note VII. “Interests in other entities”. The Company is primarily engaged in the manufacturing and selling of dairy products and breeding of dairy cows. II. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS The financial statements have been prepared on the going-concern basis in accordance with the requirements of Accounting Standards for Business Enterprises — Basic Standards (promulgated by Decree No. 33 of the Ministry of Finance and Decree No. 76 of the Ministry of Finance) issued by the Ministry of Finance on the basis of actual transactions and events, 42 specific accounting standards, the application guidelines for corporate accounting standards, the interpretation of accounting standards for business enterprises and other relevant regulations issued and revised by the Ministry of Finance on 15 February 2006 (hereinafter collectively referred to as the “Accounting Standards for Business Enterprises”) and No. 15 General Rules for the Preparation of Financial Reports — Rules for the Information Disclosure of Companies Publicly Issuing Securities (revised in 2014) of the China Securities Regulatory Commission and the requirements of Hong Kong Companies Ordinance and the Hong Kong Listing Rules. ANNUAL REPORT 2020 95 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (I) Statements on compliance with accounting standards for business enterprises These financial statements have been prepared in accordance with the requirements of Accounting Standards for Business Enterprises or referred to as China Accounting Standards (“CAS”) issued by the Ministry of Finance (“MOF”) present truly and completely the financial position of the Company as at 31 December 2020, and financial performance and cash flows of the Company for the year of 2020. These financial statements, in all material aspects, comply with the disclosure requirements of “Regulation on the Preparation of Information Disclosures by Companies Issuing Securities, No. 15: General Requirements for Financial Reports” as revised by the China Securities Regulatory Commission (“CSRC”) in 2014. These financial statements also comply with the applicable requirements of the Hong Kong Companies Ordinance and Hong Kong Listing Rules. (II) Accounting period Accounting year of the Company is the calendar year from 1 January to 31 December. (III) Operating cycle The Company takes the period from the acquisition of assets for processing to the ultimate realization of cash or cash equivalents as a normal operating cycle. The operating cycle of the Company is 12 months and the Company regards it as the basis of determining the liquidity of assets and liabilities. (IV) Functional currency The Company’s functional currency is Renminbi and these financial statements are presented in Renminbi. Functional currency is determined by the Company and its subsidiaries on the basis of the currency in which major income and costs are denominated and settled. 96 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (V) Business combination Business combination refers to the transaction or events of two or more separate enterprises combining into a reporting entity. Business combination is divided into the business combination under the common control and business combination not under the common control. 1. Business combination under the common control In case the consideration for the long-term equity investments resulted from the business combination under common control is paid by way of cash, transfer of non-cash assets or assumption of debts, the Company will, on the date of combination, recognize the acquiree’s share in the carrying amount in the ultimate controlling party’s consolidated financial statements being absorbed as initial investment cost of long-term equity investments. In case the acquirer pays the combination consideration by issuing equity instruments, the aggregate nominal value of shares issued will be recognized as share capital. The difference between the initial investment cost of long-term equity investments and the carrying amount of combination consideration (or aggregate nominal value of shares issued) shall be adjusted under capital reserve. If the capital reserve is not sufficient to absorb the difference, any excess shall be adjusted against retained earnings. The acquiree’s direct expenses incurred from business combination shall be included in the current profits and losses when incurred ANNUAL REPORT 2020 97 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (V) Business combination (Continued) 2. Business combination not under the common control A business combination not under the common control is a business combination in which all of the combining entities are not ultimately controlled by the same party or parties both before and after the combination. For a business combination not under the common control, the party that, on the acquisition date, obtains control of another entity participating in the combination is the acquirer, while that other entity participating in the combination is the acquiree. The acquisition date is the date on which the acquirer effectively obtains control of the acquire. As for business combination not under the common control, the combination costs include the assets paid by the acquirer, the liabilities accrued and assumed, as well as the fair value of the equity security issued for obtaining control right on the acquiree on the purchase date; the intermediary fees, such as auditing, legal service and evaluation and consulting, and other related management fees for the business combination shall be included in the current profits and losses when occurred. The purchaser’s transaction expenses of equity securities or debt securities issued as consolidation price shall be counted into the initially recognised amount of equity securities or debt securities. Contingent consideration involved shall be included in the combination costs according to the fair value at the purchase date; if new or further proofs appearing within 12 months after the purchase date show that the contingent consideration needs to be adjusted, the combination goodwill shall be adjusted correspondingly. The purchasing party’s combination costs and obtained identifiable net assets during the merger shall be measured according to the fair value on the purchase date. If the combination cost is larger than difference of the fair value share of the acquiree’s identifiable net assets obtained on the purchase date during combination, it shall be recognised as goodwill. If the merger cost is lower than the fair value share of the acquiree’s identifiable net assets obtained during merging, the measurement of the various identifiable assets of the acquiree obtained, liabilities or fair value with contingent liabilities and the merger costs shall be re-examined firstly, and then if the merger cost is still lower than the fair value share of the acquiree’s identifiable net assets obtained during merging, the difference shall be included in the current profits and losses. 98 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (V) Business combination (Continued) 2. Business combination not under the common control (Continued) If the deductible temporary difference of the purchased party gained by purchasing party fails to be recognised on the purchasing date due to not conforming to the recognition condition of deferred income taxes assets, and new or further information obtained indicates the relevant conditions on the purchase date have existed within 12 months after the purchasing date, and it’s predicted that the purchased party can realize the economic benefits brought by deductible temporary differences on the purchasing date, relevant deferred income taxes assets shall be recognised, at the same time, the goodwill shall be reduced; if the goodwill is insufficient for offsetting, the differential section shall be recognised as the current profits and losses. Except for the foregoing conditions, the deferred income tax assets which are related to the business combination will be recognised in the current profits and losses. The sum of book value of the acquiree’s equity investment held prior to the purchase date and the newly-increased investment cost on the purchase date in the individual financial statement shall be regarded as the initial investment cost of such investment. If the acquiree’s equity held prior to the purchase date involves the other comprehensive income , the same basis that the acquiree directly disposes relevant asset or liabilities with other relevant comprehensive income to conduct the accounting treatment when handling the investment (namely, except the variable corresponding share incurred due to defined benefit plan net liability or net assets measured again by the acquiree according to the equity method, other shares shall be transferred in current investment income) will be adopted. In the consolidated financial statements, the equity of the acquiree held before the purchase date is re-measured according to the fair value of the equity on the purchase date, and the difference between the fair value and the book value is included in the current investment income. If the acquiree’s equity held prior to the purchase date involves the other comprehensive income , the same basis that the acquiree directly disposes relevant asset or liabilities with other relevant comprehensive income to conduct the accounting treatment (namely, except the variable corresponding share incurred due to defined benefit plan net liability or net assets measured again by the acquiree according to the equity method, other shares shall be transferred in current investment income on the purchasing date) will be adopted. ANNUAL REPORT 2020 99 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (VI) Preparation method of the consolidated financial statements 1. Determination principles of consolidated financial statement scope The scope of consolidated financial statements is based on control and the consolidated financial statements comprise the Company and its subsidiaries. Control exists when the investor has all of the following: power over the investee; exposure, or rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The consolidation scope shall cover the Company and allsubsidiaries. The subsidiary refers to the subject under the control of the Company. The Company will re-evaluate if the change in the relevant facts and circumstances leading to the change of the relevant elements involved in the above definition of control. 2. Preparation method of the consolidated financial statements From the date of obtaining actual control right of the subsidiaries’ net assets and production operation decision, the Company will commence to include it into the consolidation scope. Similarly, it will terminate to include into the consolidation scope from the date when the Company loses its actual control right. As for the disposal of subsidiaries, the operation results and cash flow before disposal date have been properly included in the consolidated income statement and consolidated cash flow statement. As for subsidiaries disposed in the current period, the opening balance of the consolidated balance sheets will not be adjusted. As for the increased subsidiaries through the business combination not under the common control, its operating results and cash flow after the purchase date have been properly included in the consolidated income statement and consolidated cash flow statement, and the opening balance and contrast balance of the consolidated financial statement shall be not adjusted. As for the increased subsidiary through the business combination under the common control and the merged party under consolidation by merger, the operating results and cash flow from the beginning of the current period of merge to the merge date have been properly included in the consolidated cash flow statement, and the opening balance and contrast balance, and the contrast balance of the consolidated financial statement shall be adjusted simultaneously. Where the subsidiary and the Company adopts different accounting policies or accounting periods, when preparing the consolidated financial statement, the necessary adjustment shall be made to the subsidiary’s financial statements according to this company’s accounting policies and accounting period. As for the subsidiaries which are obtained by the business combination not under the common control, the financial statements will be adjusted on the basis of the fair value of the identifiable net assets on the purchase date. 100 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (VI) Preparation method of the consolidated financial statements (Continued) 2. Preparation method of the consolidated financial statements (Continued) All significant current balances, transactions and unrealized profits of the Company will be offset when the consolidated financial statement is prepared. Moreover, the subsidiaries’ parts which don’t belong to the Company in the shareholders’ equity and current net profit will be separately presented on the shareholders’ equity and net profit as specified in the consolidated financial statement as the profits and losses which belong to the minority shareholders. Meanwhile, the minority shareholders’ equity in the current net profit and losses will be presented in the “minority shareholders’ profits and losses” under the net profit items in the consolidated income statement. The losses of the subsidiary minority shareholders shared is more than the share of minority shareholders enjoying in the subsidiary’s shareholders’ equities at the beginning of period, shall write down minority shareholders’ equities. If the control right to original subsidiary has been lost due to the disposal of partial equity investments or other reasons, for the remaining equities, the re-measurement shall be conducted based on the fair value on the date of losing the control right. The sum of the consideration obtained from the disposal of the equity and the fair value of the remaining equity, minus the proportion of the original assets that should be enjoyed by the original subsidiaries from the purchase date, the difference shall be included in the investment income of the current period of loss of control power. Other comprehensive income related to the equity investment of original subsidiary shall adopt the same basis with purchased party directly disposing related assets or liabilities for accounting treatment when losing control right (namely, except the change caused by original subsidiary company’s re-measurement of net liabilities or net assets of defined benefit plan, others are transferred to the current investment incomes). Thereafter, the remaining equity rights shall be provided with follow-up measurement according to Accounting Standards for Business Enterprises No. 2— Long-Term Equity Investment or Accounting Standards for Business Enterprises No. 22— -Recognition and Measurement of Financial Instruments. As for details, please refer to Note III (XII) “Long-term equity investments” or the Note III (IX) “Financial instruments”. ANNUAL REPORT 2020 101 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (VII) Recognition standard for cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits that can be readily withdraw on demand, and short-term (usually due within three months from the date of acquisition), highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of change in value. (VIII) Translation of foreign currency transactions and financial statements denominated in foreign currency 1. Translation of foreign currency transactions When the Company receives capital in foreign currencies from investors, the capital is translated to Renminbi at the spot exchange rate at the date of the receipt. Other foreign currency transactions are, on initial recognition, translated to Renminbi at the spot exchange rates on the dates of the transactions. Monetary items denominated in foreign currencies are translated to Renminbi at the spot exchange rate at the balance sheet date. The resulting exchange differences are generally recognised in profit or loss, unless they arise from the re-translation of the principal and interest of specific borrowings for the acquisition, and construction or production of qualifying assets. Non-monetary items that are measured at historical cost in foreign currencies are translated to Renminbi using the exchange rate at the transaction date. Non-monetary items that are measured at fair value in foreign currencies are translated using the exchange rate at the date the fair value is determined. The resulting exchange differences are recognised in profit or loss, except for the differences arising from the re-translation of available-for-sale financial assets, which are recognised in other comprehensive income. (IX) Financial instruments 1. Classification and reclassification of financial instruments A financial instrument is the contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. 102 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (IX) Financial instruments (Continued) 2. Classification, recognition and measurement of financial assets According to business mode of financial asset management and contract cash flow characteristics of financial assets, the Company classified financial assets into: financial assets at amortized cost; financial assets measured at changes in fair value through other comprehensive income; financial assets measured at changes in fair value through profits or losses. Financial assets shall be measured at the fair value at the initial recognition. For financial assets measured at changes in fair value through profits or losses, the related transaction expenses shall be directly accounted for profits or losses in the current period. For other categories of financial assets, the related transaction expenses thereof shall be recorded in the initial recognition amount. As for accounts receivable or bills receivable produced from promoting products or rendering of service, excluding or taking no account of significant financing components, the Company takes amount of consideration anticipated to be collected as initial recognised amount. Financial assets at amortized cost The business mode of the Company to manage the financial assets targets at collecting the contractual cash flow. In addition, the contractual cash flow characteristics of the financial assets are consistent with the basic lending arrangement, that is, the cash flow generated in the specific date is the payment of the interest based on the principal and outstanding principal amount. This kind of financial assets shall be subsequently measured based on the amortized cost and effective interest method, and the gains or losses arising from the amortization, impairment shall be included in current profit and loss. ANNUAL REPORT 2020 103 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (IX) Financial instruments (Continued) 2. Classification, recognition and measurement of financial assets (Continued) financial assets measured at changes in fair value through other comprehensive income Business mode for managing financial assets of the Company takes contract cash flow collected as target and selling as target and contract cash flow characteristics of such financial assets are consistent with basic lending arrangement. The Company calculates such financial assets measured at changes in fair value through other comprehensive income, but impairment loss or gain, exchange gain or loss and interest income calculated as per actual interest rate method are included in current profits or losses. Furthermore, the Company designates partial non-tradable equity vehicle investment as financial asset measured at changes in fair value through other comprehensive income. The Company includes related dividend income of such financial assets into current profits and losses with the change in fair value through other comprehensive income. At the time of derecognition of such financial assets, accumulated gain or loss included in other comprehensive income before will be shifted to retained earnings from other comprehensive income but not included in current profits and losses. Financial assets measured at changes in fair value through profits or losses The Company classifies financial assets except for above-mentioned financial assets measured at amortized cost and financial assets measured at changes in fair value through other comprehensive income into financial assets measured at changes in fair value through profits or losses. 3. Classification, recognition and measurement of financial liabilities The financial liabilities of the Company are classified as financial liabilities measured at changes in fair value through profits or losses and other financial liabilities upon initial recognition. For financial liabilities measured at changes in fair value through profits or losses, relevant transaction expenses shall be included in current profits and losses directly; for other financial liabilities, relevant transaction expenses thereof shall be included in the amount of initial recognition. 104 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (IX) Financial instruments (Continued) 3. Classification, recognition and measurement of financial liabilities (Continued) Financial liabilities measured at changes in fair value through profits or losses Financial liabilities measured at changes in fair value through profits or losses include trading financial liabilities (containing derivative instruments of financial liabilities) and financial liabilities measured at changes in fair value through profits or losses at the time of initial recognition. Trading financial liabilities (including derivative instruments of financial liability) is subject to subsequent measurement at fair value. Except for related to hedge accounting, he change in fair value is included in current profits or losses. Other financial liabilities Other financial liabilities except for financial liabilities formed due to transfer of financial assets unqualified for derecognition condition or continuously involved in transferred financial assets and financial guarantee contract are classified into financial liabilities measured at amortized cost and subject to subsequent measurement based on amortized cost. Gains or losses generated from derecognition or amortization are included in current profits and losses. 4. Recognition basis and measurement method of financial assets transfer The derecognition shall be made for financial assets in case of one of the following conditions: (i) the contractual rights which will charge the financial assets’ cash flow will be terminated; (ii) the financial assets have been transferred, and the Company has transferred almost all of the risks and rewards of ownership of financial assets to the transferee; and (iii) the financial assets have been transferred, and although this Company has neither transferred nor reserved almost all he risks and rewards of ownership of financial assets, it has waived the control on the financial assets. If the enterprise neither transfers nor retains almost all the risks and remunerations of ownership of financial assets, and does not waive the control on the financial assets, it shall comply with the degree of its continued involvement in the transferred financial assets to recognise the related financial assets and recognise relevant liabilities accordingly. The transferred financial assets degree refers to the risk level which is faced by the enterprises due to the financial asset value changes. ANNUAL REPORT 2020 105 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (IX) Financial instruments (Continued) 4. Recognition basis and measurement method of financial assets transfer (Continued) If the overall transferring of financial assets can satisfy the conditions of derecognition, the balance difference between the consideration which is caused by transferring the book value of financial assets and the fair value changes which are included in the other comprehensive income shall be included in the current profits and losses. When the partial transferring of financial assets can satisfy the derecognition conditions, the book value of the transferred financial assets shall be amortized according to the relative fair value between the recognition and failing recognition, moreover, the difference in value between the amortized book value as above and the sum of the consideration caused by the financial assets transferring and the original value which shall be included in fair value changes of other comprehensive income shall be included in the current profits and losses The Company will recognise whether almost all risks and remunerations about the financial assets ownership will be transferred after selling the financial assets in the recourse right way or transferring the held financial assets endorsement. When almost all risks and remunerations about the financial assets ownership have been transferred to the transferee, the financial assets shall be subject to derecognition; if almost all risks and remunerations about the financial assets ownership have been retained, the financial assets will not be derecognized. Supposing that almost all risks and remunerations about the ownership of the financial assets have not been transferred and retained, the accounting treatment will be whether the enterprise has retained the control of the assets and carry out the accounting treatment according to the above-mentioned principles. 106 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (IX) Financial instruments (Continued) 5. Derecognition of financial liabilities In case of current obligation of financial liabilities (or partial financial liabilities) being terminated, derecognition of such financial liabilities (or partial financial liabilities) is conducted by the Company. If the Company (borrower) signs an agreement with the lender to replace original financial liabilities with new financial liabilities and contract terms of new financial liabilities are different from those of original financial liabilities, derecognition of original financial liabilities and recognition of new financial liabilities shall be conducted. In case of material alteration of contract terms of original financial liabilities (partial financial liabilities) by the Company, derecognition of original financial liabilities and recognition of new financial liabilities as per modified terms shall be conducted. In case of derecognition of financial liabilities (or partial financial liabilities), the Company includes the balance between its book value and payment consideration (including non-cash assets transferred out or borne liabilities) into current profits and losses. 6. Offset of financial assets and liabilities When the Company has the legal right to offset the recognised financial assets and financial liabilities and is entitled to perform the aforesaid legal right at the present, and meanwhile when the Company intends to settle or sell off the financial assets and pay off the financial liabilities by the net amount, the financial assets and financial liabilities shall be presented in the balance sheet with the amount after the mutual offset. Besides, the financial assets and financial liabilities are listed in the balance sheet respectively and are not offset with each other. ANNUAL REPORT 2020 107 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (IX) Financial instruments (Continued) 7. Determination methods of fair value of financial assets and liabilities The fair value refers to the price which is caused by selling the assets or transferring the liabilities during the orderly transaction of the market participants on the measurement date. The fair value of the financial instruments that exist in the active market shall be recognised by the quotation in the active market by the Company. The quotations in the active market refer to the prices, which are easily available from the exchanges, brokers, industry associations, pricing service institutions, etc. at a fixed term, and represent the price of market transactions actually occurring in the fair dealing. If there is no active market for financial instruments, the Company uses the valuation techniques to determine its fair value. The valuation technique includes referring prices adopted by the parties who are familiar with the condition and willing to conduct the transaction in the latest market transaction, the current fair value of other substantially same financial instruments, the discounted cash flow method and the option pricing models, etc. In valuation, the Company adopted applicable valuation techniques supported by sufficient utilizable data and other information in current circumstances, selected input values consistent with asset or liability characteristics considered in relevant asset or liability transactions of market participators and prioritized applying relevant observable input values. Unobservable input values shall not be applied unless relevant observable input values are not accessible or feasible. 8. Equity instrument Equity instrument refers to the contract which can prove to hold the residual equity in the assets after deducting all liabilities. Issuance (including refunding), repurchase, selling or writing off of instrument by the Company is regarded as handling of changes in equity and transaction expenses related to equity transaction are deducted from the equity. The Company does not recognise the fair value change of equity instruments. In case of the equity instrument of the Company distributing dividends during the period of existence (including “interest” produced from the tool classified into equity instrument), appropriation of profits processing will be deemed. 108 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (X) Impairment of financial assets Financial assets with impairment loss recognised by the Company are financial assets measured with amortized cost, debt instrument investment measured as per fair value whose change is included in debt instrument investments and rental receivables under other comprehensive income, mainly including bill receivable, accounts receivable, other receivables, creditors’ investment, other creditors’ investment and long-term receivables. Moreover, as for contract assets and financial guarantee contract, it’s necessary to calculate and withdraw provision for diminution in value and recognize credit impairment losses pursuant to accounting policies set forth in this part. 1. Recognition method of provision for impairment in value The Company recognizes credit impairment losses based on expected credit loss, and calculates and withdraws above-mentioned various items. Credit loss refers to the difference between all contractual cash flows discounted as per the original effective interest rate and receivable from the contract and all cash flows expected to be received by the Company, namely, the present value of a shortage of cash. Wherein, the purchased or underlying financial assets with impairment on credit of the Company shall be discounted as per effective interest rate based on credit adjustment. The Company evaluates whether credit risk of financial assets has significantly increased after initial recognition on each balance sheet date. In case of credit risk having significantly increased after initial recognition, the Company will measure loss allowance as per the amount equivalent to expected credit loss in the whole period of existence. In case of credit risk failing to significantly increase after initial recognition, the Company will measure loss allowance as per the amount equivalent to expected credit loss in the next 12 months. At the time of evaluating expected credit loss, the Company considers all reasonable and well-founded information, including forward-looking information. 2. Standard for judging whether credit risk has significantly increased after initial recognition In case that probability of default of one financial asset recognised on the balance sheet date in the expected period of existence is obviously higher than that in the expected period of existence recognised at the moment of initial recognition, it indicates that credit risk of such financial asset significantly increases. ANNUAL REPORT 2020 109 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (X) Impairment of financial assets (Continued) 3. Selection of simplified treatment method As for receivables and contract assets excluding significant financing components, the Company measures loss allowance as per the amount equivalent to expected credit loss in the whole period of existence. As for receivables, contract assets and rental receivables including significant financing components, the Company always chooses to measure loss allowance based on the amount equivalent to expected credit loss in the period of existence. For the financial instrument with a lower credit risk on the balance sheet date, the Company assumes that its credit risks have not increased significantly since the initial recognition, and measures the loss allowance according to the expected credit losses of the future 12 months. 4. Combinatorial method of appraising future credit risk based on combination The Company appraises the credit risk of the financial asset item of significantly different credit risks, such as: receivables disputed with the opposite side or involving litigation or arbitration; there have been obvious signs showing that the debtor possibly is not able to perform the repayment obligations of receivable amounts, etc. Except financial assets of separately appraised credit risk, the Company classifies financial assets into different groups based on the account aging characteristic and appraises credit risks based on combination. 110 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XI) Inventories Inventories of the Company include raw materials, goods in stock, goods in transit, consumable biological assets, etc. 1. Consumable biological assets Consumable biological assets held by the Company comprise male calves available for sale. Consumable biological assets are measured at their fair values less costs to sell at the end of the year. Any resultant gain or loss arising from changes in fair value less costs to sell is charged to the profit or loss for the period in which the gain or loss arises. 2. Other inventories Other inventories are initially measured at cost. Cost of inventories comprises all costs of purchase, costs of conversion and other expenditure incurred in bringing the inventories to their present location and condition. Borrowing costs directly related to the production of qualifying inventories are also included in the cost of inventories (see Note III. (XV). Borrowing costs). In addition to the purchase cost of raw materials, work in progress and finished goods include direct labour costs and an appropriate allocation of production overheads. Agricultural products generated from the Company’s biological assets are raw milk. Agricultural products are initially recognised as inventories at their fair values less costs to sell at the point of harvest, which are determined based on their market prices quoted in the local area. Any gain or loss arising on initial recognition of such fair values (i.e. the difference between the fair values less costs to sell of the agricultural products at the point of generation and the breeding costs) is recognised in the profit or loss in the period of generation. Upon subsequent sales, such amount of the inventories initially recognised at fair value is charged to the cost of sales. Cost of inventories recognised is calculated using the weighted average method. ANNUAL REPORT 2020 111 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XI) Inventories (Continued) At the balance sheet date, inventories are carried at the lower of cost and net realisable value. Net realisable value is the estimated selling price of inventories in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale and relevant taxes. The net realisable value of materials held for use in the production is measured based on the net realizable value of the finished goods in which they will be incorporated. The net realisable value of the inventory held to satisfy sales or service contracts is measured based on the contract price, to the extent of the quantities specified in sales contracts, and the excess portion of inventories is measured based on general selling prices. Any excess of the cost over the net realisable value of each category of inventories is recognised as a provision for obsolete inventories, and is recognised in profit or loss. The Company maintains a perpetual inventory system. (XII) Long-term equity investment The long-term equity investments refer to the long-term equity investments that the Company has control, joint control or significant impacts on the invested entity. The Company does not have long- term equity investments of controlling, common controlling or significant impacts on the invested entity. As for financial assets measured at changes in fair value through profits or losses, if such assets are not transactional, the Company may specify these capitals as financial assets which are measured at changes in fair value through current profits or losses upon initial recognition. Relevant accounting policies please see Note III. (IX) “Financial Instruments”. Under the common control means that the common control of the Company for certain arrangement in accordance with relevant agreements; activities relevant to the arrangement cannot be decided until obtaining the unanimous approval of participants sharing the control right. The significant impact refers to that the Company has the right to participate in the decision-making of financial and business policy of the invested entity, but can’t control or commonly control together with other parties the preparation of these policies. 112 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XII) Long-term equity investment (Continued) 1. Determination of investment cost For the long-term equity investments acquired through the business combination under the common control, the shares of merged party’s book value of owners’ equity in the final controlling party consolidated financial statements obtained on the merger date shall act as the initial investment cost of long-term equity investments. The capital reserves shall be adjusted according to the balance between the initial investment cost of long-term equity investments and cash paid, non-cash assets transferred as well as the book value of debts; if the capital reserves are insufficient to offset, the retained earnings will be adjusted. In the case of issued equity securities treated as consolidation consideration, share of book value of owner’s equity of merged party in a combined financial statement of the final controlling party is regarded as initial investment cost of long-term equity investments on the merger date; capital reserve shall be adjusted in accordance with taking total nominal value of issued share as capital stock, and the difference between the initial investment cost of long-term equity investments and total book value of issued shares; if the capital reserves are insufficient to offset, the retained earnings will be adjusted The long-term equity investments obtained from the business merger under the non-unitary control will be used as the initial investment cost of long-term equity investments according to the combined cost on the purchase date. The combined cost includes the sum of fair value of assets or liabilities of the purchasing party or the equity securities issued. The audit, legal service and appraisal consultation fees and other intermediary fees as well as other relevant management fees of the merger party or acquirer for business combination will be included in current profit and loss when occurred. ANNUAL REPORT 2020 113 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XII) Long-term equity investment (Continued) 2. Methods for the subsequent measurement and the profit and loss recognition The long-term equity investments implementing the joint control (except constituting the joint operator) or significant impact upon the invested entity adopts the equity method for accounting. Besides, the Company’s financial statement adopts the long-term equity investments accounted by the cost method and implementing the control upon the investee. Long-term equity investment accounted by cost method When the cost method is adopted for the accounting, the long-term equity investments shall be valued according to the initial investment cost and the long-term equity investments cost shall be adjusted by increasing or recovering the investment. The current investment income shall be recognized by the cash dividends or profits announced and issued by the invested entity, except the actual price paid when the investment is obtained or the cash dividends or profits which have been declared but not issued in the consideration. Long-term equity investment accounted by equity method When the equity method is used for the accounting, and the initial investment cost of the long-term equity investments is more than the fair value share of the investee’s identifiable net assets which shall be enjoyed at the time of the investment, the initial investment cost of the long-term equity investments may not be adjusted. In case that the initial investment cost is less than the attributable share of the fair value of the investee’s net identifiable assets, the balance shall be included in current profits and losses and the cost of the long-term equity investments shall be adjusted. 114 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XII) Long-term equity investment (Continued) 2. Methods for the subsequent measurement and the profit and loss recognition (Continued) Long-term equity investment accounted by equity method (Continued) Under the equity method, the investment income and other comprehensive income are recognized in accordance with the proportion of the net profit or loss and other comprehensive income of the invested entity attributable to the investor, and adjusting the carrying value of long-term equity investment; it shall be decreased of the carrying value of longterm equity investment according to the portion of the declaration of dividend or cash dividends; it shall adjust the carrying value of long-term equity investment and recognize in capital reserve if there is any other changes besides net profit or loss,other comprehensive income and profit distribution of the shareholders’ equity. The invested entity’s profit or loss shall be adjusted on the basis of the fair value of all identifiable assets of the invested entity at the acquisition date and adjusted to comply with the accounting policies and accounting periods adopted by theinvestor. All inter-group unrealized profits from the jointly ventures and associates attributable to the Group shall be eliminated to recognize the investment income. If there are differences in the accounting policies and accounting period between the Company and the invested company, the financial statements shall be adjusted according to the Company, and the investment income and other comprehensive income shall be recognized. However, if the unrealized inter-group loss constitutes impairment of the transferred assets, the losses shall not be adjusted. The Company discontinues recognizing its share of net losses of the investee after the carrying amount of the long-term equity investment and any long-term interest that in substance forms part of the company’s net investment in the investee is reduced to zero, except to the extent that the company has an obligation to assume additional losses. Where net profits are subsequently made by the investee, the Company resumes recognizing its share of those profits only after its share of the profits equals the share of losses not recognized. ANNUAL REPORT 2020 115 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XII) Long-term equity investment (Continued) 2. Methods for the subsequent measurement and the profit and loss recognition (Continued) Acquisition of the minority equity When preparing the consolidated financial statements, the Company shall adjust the capital reserve due to the balance between the newly-increased long-term equity investments from the purchase of the minority holding and the net asset shares enjoyed according to the newly-increased shareholding proportion of the subsidiary continuously calculated from the purchase date (or the merger date); in case that the capital reserve is not sufficient to offset, the Company shall adjust the retained earnings. Disposal of the long-term equity investments The parent company partially disposes the long-term equity investments of the subsidiaries in the case of not losing the control rights in consolidated financial statement. The balance between disposal price and subsidiaries’ net assets enjoyed corresponding to the disposal of long-term equity investments will be included in the shareholders’ equities. Supposing that the parent company loses the control right for the subsidiary due to the partial disposal of the long-term equity investments for the subsidiary, the accounting treatment will be made according to the related accounting policies as specified in the Note III. (VI) “Preparation Method for Consolidated Financial Statement”. As for the disposal of the long-term equity investments under other circumstances, the balance between the book value of the disposed equity and the actually-obtained price shall be included in current profit and loss. For the long-term equity investments accounted by the equity method, if the residual equity after the disposal shall still be accounted by the equity method, upon the disposal, the part of the other comprehensive income that is originally included in the shareholders’ equities shall have the accounting treatment on the same basis of the invested entity’s directly disposing the relevant assets or liabilities according to the corresponding proportion. However, the other owners’ equity which is recognized according to the investee’s other owners’ equity changes shall be reckoned in the current profit and loss according to the related proportion, except for the net profit and loss, other comprehensive income and appropriation of profits. 116 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XII) Long-term equity investment (Continued) 2. Methods for the subsequent measurement and the profit and loss recognition (Continued) Disposal of the long-term equity investments (Continued) For the long-term equity investments accounted with the cost method, the residual equities after disposal are still accounted for with the cost method. Other comprehensive income recognised due to adopting the equity method to make accounting or adopting the financial instrument recognition and measurement standards to make accounting before obtaining control of invested entity, shall be conducted with the accounting treatment on the same basis of the invested entity’s directly disposing the relevant assets or liabilities, and shall be carried down to current profit and loss according to the proportion. Except for the net profit and loss, the other comprehensive income and appropriation of profits, the other owners’ equities in the invested entity’s net assets which are accounted and recognized in the equity method shall be reckoned in the current profit and loss according to the related proportion. (XIII) Fixed assets 1. Recognition of fixed assets Fixed assets represent the tangible assets held by the Company for use in production of goods or for administrative purposes with useful lives over one accounting year. The cost of a purchased fixed asset comprises the purchase price, related taxes, and any directly attributable expenditure for bringing the asset to working condition for its intended use. The cost of self constructed assets is measured in accordance with the policy set out in Note III. (XIV) “Construction in progress”. Where the parts of an item of fixed assets have different useful lives or provide benefits to the Company in a different pattern, thus necessitating use of different depreciation rates or methods, each part is recognised as a separate fixed asset. Any subsequent costs including the cost of replacing part of an item of fixed assets are recognised as assets when it is probable that the economic benefits associated with the costs will flow to the Company, and the carrying amount of the replaced part is derecognised. The costs of the day-to-day maintenance of fixed assets are recognised in profit or loss as incurred. Fixed assets are stated in the balance sheet at cost less accumulated depreciation and impairment losses. ANNUAL REPORT 2020 117 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XIII) Fixed assets (Continued) 2. Classification and depreciation of fixed assets Depreciation of fixed assets is accrued in the service life by adopting the straight-line method from the next month when they reach the expected conditions for use. The estimated useful lives, residual value rates and depreciation rates of each class of fixed assets are as follows: Estimated net Estimated useful residual value rate Annual depreciation Asset type lives (year) % rate % Plant and buildings 30~50 years 3.00% 1.94%~3.23% Machinery and equipment 5 ~ 10 years 5.00% 9.50% ~ 19.00% Motor vehicles and transportation equipment 4 years 5.00% 23.75% Other equipment 5 years 5.00% 19.00% 3. Impairment test method and provision method of the impairment reserve of fixed assets For further details of the impairment test method and the provision method of impairment reserve of fixed asset, please refer to Note III. (XVIII) “Long-term Asset Impairment”. 4. Other explanations The subsequent expenditures related to fixed asset shall be included in fixed asset cost and the book value of the substitution part shall be derecognised if economic benefits related to such fixed asset may flow in and its cost can be reliably measured. Other subsequent expenditures except for the above said shall be included in the current profits and losses once incurred. When the fixed asset is disposed or cannot be expected to produce economic interests through use or disposal, the recognition of that asset should be ceased. The balance of the amount left after deducting book value and relevant taxes from the disposal income obtained from the sale, transfer, abandonment or damage of the fixed assets shall be included in current profits and losses. The Company shall review the service life, expected net residual value and depreciation method of the fixed assets at least by the end of the year. In case of any change, it shall be deemed as changes in accounting estimates. 118 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XIV) Construction in process The cost of self-constructed assets includes the cost of materials, direct labour, capitalised borrowing costs, and any other costs directly attributable to bringing the asset to working condition for its intended use. A self-constructed asset is classified as construction in progress and transferred to fixed asset when it is ready for its intended use. No depreciation is provided against self-constructed assets being classified as construction in progress. Construction in progress is stated in the balance sheet at cost less accumulated impairment losses (see Note III.(XVIII) Impairment of long-term asset). (XV) Borrowing costs Recognition principle of borrowing costs capitalisation Borrowing costs incurred directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of the asset. Other borrowing costs are recognised as financial expenses when incurred. During the capitalisation period, the amount of interest (including amortisation of any discount or premium on borrowing) to be capitalised in each accounting period is determined as follows: Where funds are borrowed specifically for the acquisition, construction or production of a qualifying asset, the amount of interest to be capitalised is the interest expense calculated using effective interest rates during the period less any interest income earned from depositing the borrowed funds or any investment income on the temporary investment of those funds before being used on the asset To the extent that the Company borrows funds generally and uses them for the acquisition, construction or production of a qualifying asset, the amount of borrowing costs eligible for capitalisation is determined by applying a capitalisation rate to the weighted average of the excess amounts of cumulative expenditure on the asset over the above amounts of specific borrowings. The capitalisation rate is the weighted average of the interest rates applicable to the general-purpose borrowings. The effective interest rate is determined as the rate that exactly discounts estimated future cash flow through the expected life of the borrowing or, when appropriate, a shorter period to the initially recognised amount of the borrowings. ANNUAL REPORT 2020 119 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XV) Borrowing costs (Continued) Recognition principle of borrowing costs capitalisation (Continued) The capitalisation period is the period from the date of commencement of capitalisation of borrowing costs to the date of cessation of capitalisation, excluding any period over which capitalisation is suspended. Capitalisation of borrowing costs commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities of acquisition, construction or production that are necessary to prepare the asset for its intended use or sale are in progress, and ceases when the assets become ready for their intended use or sale. Capitalisation of borrowing costs is suspended when the acquisition construction or production activities are interrupted abnormally for a period of more than three months. (XVI) Biological assets The bearer biological assets of the Company are calves, heifers and milkable cows, which are raised or grown by the Company for the purposes of producing raw milk. Bearer biological assets are measured at the end of the year at their fair values less costs to sell. Any resultant gain or loss arising on initial recognition and from changes in fair value less costs to sell is charged to the profit or loss for the period in which the gain or loss arises. The feeding costs and other related costs such as staff costs, depreciation and amortisation expenses and utilities cost incurred for raising calves and heifers are capitalised until they begin to produce milk and being transferred to the group of milkable cows. Such costs incurred for milkable cows are also capitalised while upon milking, the costs incurred to bring the raw milk are transferred to inventories (see Note III.(XI).Inventories). 120 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XVII) Intangible assets 1. Measurement method of intangible assets Intangible assets of the Company are initially measured at cost. The actual cost of a purchased intangible asset includes the considerations and relevant expenses paid. The actual cost of an intangible asset contributed by investors is the price contained in the investment contract or agreement. If the price contained in the investment contract or agreements is not a fair value, the fair value of the intangible asset is regarded as the actual cost. The cost of a self-developed intangible asset is the total expenditures incurred in bringing the asset to its intended use. Subsequent measurement of the Company’s intangible assets: intangible assets with finite useful lives are amortized on a straight-line basis over the useful lives of the intangible assets; at the end of each year, the useful lives and amortization policy are reviewed, and adjusted accordingly if there are variance with original estimates; intangible assets with indefinite useful lives are not amortized and the useful lives are reviewed at the end of each year. If there is objective evidence that the useful life of an intangible asset is finite, the intangible asset is amortized using the straight line method according to the estimated useful life. Asset type Useful lives (year) Amortization method Land Use Right 47 – 50 years Straight-line method Computer Software 10 years Straight-line method ANNUAL REPORT 2020 121 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XVII) Intangible assets (Continued) 2. Determination basis of infinite useful life An intangible asset is regarded as having an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate economic benefits for the Company or it has no definite useful life. The judgment basis of intangible assets with indefinite useful life: derived from the contractual rights or other legal rights but the contract or the law does not specify certain useful life; in light of the conditions of the competitors and the opinions of relevant experts, the specific period that intangible asset generating economic benefits to the Company still can not be determined. At the end of each year, the useful life shall be reviewed for those intangible assets with indefinite useful life by mainly using the bottom-up method. The relevant department that uses intangible asset will perform the basic review and evaluate whether there are changes in the basis for judgments of the indefinite useful life, etc. 3. Basis for research and development phases for internal research and development project and basis for capitalization of expenditure incurred in development stage Expenditure during the research stage of the internal research and development projects are charged to the current profit or loss as incurred. Expenditure during the development stage are transferred to intangible assets if the conditions for recognition of intangible assets are met. 122 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XVIII) Impairment of long-term assets For fixed assets, construction in progress, intangible assets, long-term equity investments in subsidiaries, joint ventures and associated enterprises and other noncurrent or nonfinancial assets, the Company judges the existence of depreciation on the balance sheet date. If there are signs of impairment, the recoverable amount shall be estimated and impairment test shall be carried out. As for intangible assets with indefinite goodwill and service life and the intangible assets which have not yet reached the serviceable condition, impairment test shall be conducted every year no matter whether there are signs of impairment. If the impairment test result indicates that the recoverable amount of assets is lower than the book value thereof, impairment reserve shall be withdrawn according to the difference and it will be included in impairment losses. The recoverable amount shall be the higher one between the net amount of the fair value of the assets minus the disposal expenses and the expected present value of the future cash flow of the assets. The fair value of the asset is determined according to the sales agreement in the fair transaction; if there is no sales agreement but there is an active market of assets, the fair value is determined according to buyer’s price of the asset; if the sales agreement and the active market of assets do not exist, and the fair value of assets shall be estimated based on the best information available. The disposal expenses shall include the legal expenses related to the asset disposal, relevant taxes, carriage expenses as well as the direct expenses for achieving the availableforsale status. The present value of the expected future cash flow of assets shall be determined by the discounted cash with an appropriate discount rate, on the basis of the expected future cash flow generated during the continued use and final disposal of assets. The asset impairment reserve shall be calculated and recognized on the basis of a single asset. If it is hard to assess the recoverable amount of a single asset, the recoverable amount of the asset group shall be determined according to the asset group including the assets. Asset group refers to the minimum asset portfolio that is capable of independently generating cash inflow. Goodwill separately presented on the financial statements is tested for impairment at least every year, irrespective of whether there is any indication that the asset may be impaired. For the purpose of impairment testing, the carrying amount of goodwill is allocated to asset groups or sets of asset groups expected to benefit from the synergy of business combination. The test result indicates that if the recoverable amount of the asset group or portfolio that includes the apportioned goodwill is less than its book value, corresponding impairment loss shall be recognized. The amount of the impairment loss shall firstly be deducted from the book value of the goodwill of the mentioned asset group or portfolio of asset group, then be deducted from the book value of various other assets in the book value in proportion of various other assets in the asset group or portfolio of asset group except goodwill. Once the above-mentioned asset impairment losses are determined, the part whose value can be recovered shall not be reversed in subsequent periods. ANNUAL REPORT 2020 123 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XIX) Long-term deferred expenses Long-term deferred expenses are amortised using a straight-line method within the benefitperiod. Long-term deferred expenses of the Company primarily represent decoration costs, with a amortization period of 10 years. (XX) Employee benefits Employee benefits are all forms of rewards or compensation provided by the Company in exchange for services rendered by employees or for the termination of employment. Employee benefits mainly include short-term benefits, post-employment benefits, termination benefits and other long-term employee benefits. 1. Short-term benefits Employee wages or salaries, bonuses, social security contributions such as medical insurance, work injury insurance, maternity insurance and housing fund, measured at the amount incurred or accured at the applicable benchmarks and rates, are recognised as a liability as the employee provides services, with a corresponding charge to profit or loss or included in the cost of assets where appropriate 2. Post-employment benefits Pursuant to the relevant laws and regulations of the People’s Republic of China, the Company participated in a defined contribution basic pension insurance plan in the social insurance system established and managed by government organisations. The Company makes contributions to basic pension insurance plans based on the applicable benchmarks and rates stipulated by the government. Basic pension insurance contributions payable are recognized as a liability as the employee provides services, with a corresponding charge to profit or loss or include in the cost of assets where appropriate. 124 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XX) Employee benefits (Continued) 3. Termination benefits When the Company terminates the employment with employees before the employment contracts expire, or provides compensation under an offer to encourage employees to accept voluntary redundancy, a provision is recognised with a corresponding expense in profit or loss at the earlier of the following dates: When the Company cannot unilaterally withdraw the offer of termination benefits because of an employee termination plan or a curtailment proposal; When the Company has a formal detailed restructuring plan involving the payment of termination benefits and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. (XXI) Estimated liabilities Estimated liabilities are recognised for obligations related to contingencies if the Company has a present obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Estimated liabilities are initially measured at the best estimate of the expenditure required to settle the related present obligation. Where the effect of the time value of money is material, estimated liabilities are determined by discounting the expected future cash flows. Factors pertaining to a contingency such as the risks, uncertainties and time value of money are taken into account as a whole in reaching the best estimate. Where there is a continuous range of possible outcomes for the expenditure required, and each possible outcome in that range is as likely as any other, the best estimate is the mid-point of that range. In other cases, the best estimate is determined according to the following circumstances: Where the contingency involves a single item, the best estimate is the most likely outcome. Where the contingency involves a large population of items, the best estimate is determined by weighting all possible outcomes by their associated probabilities. The Company reviews the carrying amount of a provision at the balance sheet date and adjusts the carrying amount to the current best estimate. ANNUAL REPORT 2020 125 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXII) Share-based payments 1. Accounting treatment for share-based payments Share-based payments are transactions that grant equity instruments or assume equityinstrument based liabilities for receiving services rendered by employees or other parties. Equity-settled share-based payments Equity-settled share-based payments made in exchange for services rendered by employees are measured at the fair value on the date of grant of equity instruments granted to employees. If vesting is conditional upon completion of services in the pending period or fulfillment of performance conditions, the amount of such fair value, based on the best estimates of the number of equity instruments that can be vested during the pending period, is charged to relevant costs or expenses (computed using the straight-line method). Instruments which are vested immediately upon the grant are charged to relevant costs or expenses on the date of grant and the capital reserve is credited accordingly. At each balance sheet date during the pending period, the Company, based on the latest subsequent information such as the latest update on the change in the number of entitled employees, makes best estimates to adjust the expected number of equity instruments that can be vested. The effect of the above estimate is included in relevant costs or expenses for the period and the capital reserve is adjusted accordingly. Equity-settled share-based payments in exchange for services rendered by other parties are measured at the fair value of the services rendered by other parties on the receiving date if such fair value can be reliably measured. If the fair value of the services rendered by other parties cannot be reliably measured, equity-settled share-based payments in exchange for services rendered by other parties are measured at the fair value of equity instruments on the date of receiving services and charged to relevant costs or expenses and shareholders’ equity is credited accordingly, provided that the fair value of equity instruments can be reliably measured. 126 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXII) Share-based payments (Continued) 1. Accounting treatment for share-based payments (Continued) Cash-settled share-based payments Cash-settled share-based payments are measured at the fair value of the liabilities (share- based or other equity instrument-based) assumed by the Company. Instruments which are vested immediately upon the grant are charged to relevant costs or expenses on the date of grant and liabilities are increased accordingly. If vesting is conditional upon completion of services in the pending period or fulfillment of performance conditions, at each balance sheet date during the pending period, based on the best estimates of the vesting situation, according to the amount of fair value of the liabilities assumed by the Company, the services received for the period are charged to costs or expenses and liabilities are increased accordingly. At each balance sheet date and settlement date before the relevant liabilities are settled, the fair value of liabilities are re-measured and the resulting changes are included in the profit and loss for the period. 2. Accounting treatment in relation to share-based payment plan modification and termination When the Company modifies the share-based payment plan, and if such modification increases the fair value of the equity instruments granted, the increase in services received will be recognised accordingly following the increase in fair value of the equity instruments. The increase in fair value of the equity instruments refers to the difference in fair value on the date of modification before and after the modification in respect of the equity instruments. If the modification reduces the total fair value of the share-based payments or adopts any form that is unfavorable to employees, accounting treatment will be continued to be conducted in respect of the services received and the modification will be deemed to have never occurred, unless the Company had cancelled part or all of the equity instruments granted. During the pending period, if the equity instruments granted are cancelled, the Company will undertake an accelerated vesting in respect of the cancelled equity instruments that had been granted, include the remaining amount that shall be recognised during the pending period in the profit and loss for the period immediately and recognise capital reserve accordingly. Where employees or other parties are permitted to choose to fulfill non-vesting conditions but have not fulfilled during the pending period, the Company will treat the granted equity instruments as cancelled. ANNUAL REPORT 2020 127 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXII) Share-based payments (Continued) 3. Accounting treatment for share-based payments involving the Company and the shareholders of the Company or the actual controller For share-based payment transactions involving the Company and the shareholders of the Company or the actual controller, the settlement enterprise and the enterprise receiving services (one is with the combination scope of the Company while another is not)shall follow the requirements below to conduct accounting treatment in the Company’s consolidated financial statements: For settlement enterprises settling through their own equity instruments, such sharebased payment transaction will be treated as equity-settled share-based payment; except for this, such share-based payment transaction will be treated as cash-settled share-based payment. Where a settlement enterprise is an investor of an enterprise receiving services, the fair value of the equity instruments on the date of grant or the fair value of the liabilities that shall be assumed are recognised as long-term equity investment in the enterprise receiving services, at the same time, capital reserve (other capital reserve) or liabilities are recognized. Where an enterprise receiving services has no settlement obligations or grants its own equity instruments to employees, such share-based payment transaction will be treated as equity-settled share-based payment; where an enterprise receiving services has settlement obligations and grants equity instruments (other than its own) to employees, such share-based payment transaction will be treated as cash-settled share-based payment. For a share-based payment transaction occurring between each enterprise with the combination scope of the Company where the enterprise receiving services and the settlement enterprise are not the same enterprise, such share-based payment transaction shall be recognised and measured in each of the respective financial statements of the enterprise receiving services and the settlement enterprise (as compared with the above principles). 128 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXIII) Revenue Where the contract between the Company and its clients can meet the following conditions at the same time, the revenue shall be recognised when the client owns the relevant control right of the commodity: Each concerned party of the contract has agreed on the contract and promised that they will assume their obligations; The contract has specified rights and obligations of each concerned party related to commodity transfer or labor provision; The contract has specified the payment terms related to commodity transfer; The contract is of the commercial essence, which means that performance of the contract will change the risk, time distribution or amount of future cash flow of the Company; The Company may recover the consideration for which the Company is entitled to obtain for transferred commodities to clients. On the contract beginning date, the Company identifies the individual performance obligation specified in the contract and amortizes the transaction price to each individual performance obligation based on the relative proportion of the individual sales price of the commodity guaranteed in individual performance obligation. Variable consideration, major financing in the contract, non-cash consideration, consideration for coping with clients and other factors have been taken into account the transaction price. ANNUAL REPORT 2020 129 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXIII) Revenue (Continued) As for each individual performance obligation in the contract, if one of the following conditions are met, the Company recognises the transaction price which is amortized into the individual performance obligation based on the performance progress within a relevant performance period as the revenue: The client obtains and consumes the economic benefits while the Company fulfills the performance obligation. The client manages to control the assets under construction while the Company fulfills the performance obligation. Commodities produced during the performance period have irreplaceable purposes and the Company is entitled to charge money for the performance accumulated and has been finished until the current time within the whole contract period. The performance progress shall be recognised based on the property of the commodity transferred by virtue of the input method or the output method. When the performance progress cannot be recognised reasonably, if it is predicted that the incurred cost of the Company can be compensated, the income shall be recognised based on the incurred cost amount until the performance progress can be recognised reasonably. If one of the above conditions cannot be met, the Company recognises the transaction price amortized to the individual performance obligation at the time when the client obtains the control right of relevant commodities as the revenue. When judging whether the client has obtained the control right of the commodity, the Company can consider the following signs: The enterprise has the current collection right of the commodity, namely the client is responsible for current payment obligation of the commodity; The enterprise has transferred the legal ownership of the commodity to the client, namely the client has possessed the legal ownership of the commodity; The enterprise has transferred the real commodity to the client, namely the client has possessed the real commodity; The enterprise has transferred main risks and remuneration of the commodity to the client, namely the client has obtained the main risks and remuneration related to the ownership of the commodity; The client has accepted the commodity; Other signs indicating that the client has obtained the control right of the commodity. The operating income of the Company mainly includes the sales revenue of the dairy products. The Company recognises the revenue at the time of performing the performance obligation in the contract, namely the client obtains the control right of relevant commodities. 130 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXIII) Revenue (Continued) When meeting general recognition conditions of above-mentioned revenue or the following conditions at the same time, the Company shall recognise revenue from sales of goods: The sales modes of the Company include direct selling, distribution and dealing. Under the direct sale model, the Company is responsible for arranging for the third party logistics provider to deliver goods to the site designated by the direct selling customers in general, and recognises the goods receiving when the goods are delivered to the direct selling customers. Under the distribution model (mainly adopted in Lanzhou, Xining and Xi’an area), the distributors arranges the goods transport voluntarily and shall voluntarily undertake the loss if the goods are damaged in the transit. The Company recognises the goods receiving when the distributors extract the goods from warehouse. Under the dealing model (mainly adopted in area out of Lanzhou, Xining and Xi’an), if the Company arranges for the third party logistics provider to deliver goods, the Company recognises the goods receiving when the goods are delivered to the dealer; If the dealer voluntarily arranges the transport of goods, the dealer shall voluntarily undertake the loss due to damage of products in the transport, and the Company recognises the goods receiving when the dealer withdraws the goods from the warehouse. The Company measures the sales amount of commodity as per the anticipated consideration that it is entitled to obtain due to commodity transfer to customers. ANNUAL REPORT 2020 131 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXIV) Government grants 1. Types of government grants and accounting treatment Government grants are non-reciprocal transfers of monetary or non-monetary assets from the government to the Company except for capital contributions from the government in the capacity as an investor in the Company. A government grant is recognised when there is reasonable assurance that the grant will be received and that the Company will comply with the conditions attaching to the grant. If a government grant is in the form of a transfer of a monetary asset, it is measured at the amount received or receivable. If a government grant is in the form of a transfer of a nonmonetary asset, it is measured at fair value. Government grants related to assets are grants whose primary condition is that the Company qualifying for them should purchase, construct or otherwise acquire long-term assets. Government grants related to income are grants other than those related to assets A government grant related to an asset is recognised as deferred income and amortised over the useful life of the related asset on a reasonable and systematic manner as profit or loss. The government grants related to business activities are recognized as other income in the light of the nature of such business. The government grants non-related to business activities are recognized as non-operating income or expense. The interest subsidies obtained is offset against related interest expense. 2. Timing for recognition of governmental grants A government grants shall be recognised when the enterprise fulfills the conditions attaching to the grant and the enterprise can receive the grant. The governmental grants measured at the amount receivable will be recognized when there is unambiguous evidence suggesting the conformance to related conditions as provided in financial support policies and financial support fund is expected to be received. Other government grants other than those measured at the amount receivable will be recognized at the actual time of receiving such grants. 132 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXV) Income tax Current tax and deferred tax are recognised in profit or loss except to the extent that they relate to a business combination or items recognised directly in equity (including other comprehensive income). Current tax is the expected tax payable calculated at the applicable tax rate on taxable income for the year, plus any adjustment to tax payable in respect of previous years At the balance sheet date, current tax assets and liabilities are offset only if the Company has a legally enforceable right to set them off and also intends either to settle on a net basis or to realise the asset and settle the liability simultaneously Deferred tax assets and deferred tax liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases, which include the deductible tax losses and tax credits carried forward to subsequent periods. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised At the balance sheet date, deferred tax is measured based on the tax consequences that would follow from the expected manner of recovery or settlement of the carrying amounts of the assets and liabilities, using tax rates enacted at the reporting date that are expected to be applied in the period when the asset is recovered or the liability is settled. The carrying amount of a deferred tax asset is reviewed at each balance sheet date, and is reduced to the extent that it is no longer probable that the related tax benefits will be utilised. Such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available. At the balance sheet date, deferred tax assets and deferred tax liabilities are offset if all of the following conditions are met: The taxable entity has a legally enforceable right to offset current tax liabilities and current tax assets; Those relate to income taxes levied by the same tax authority on either: the same taxable entity; or different taxable entities which intend either to settle the current tax liabilities and current tax assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or deferred tax assets are expected to be settled or recovered. ANNUAL REPORT 2020 133 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXVI) Leases Lease is a contract in which the Company transfers or obtains the right of use of an identified asset or several identified assets under control for the exchange or payment of consideration within a certain period of time. 1. As lessee The major category of lease assets of the Group is land, machinery and equipment. Initial measurement At the commencement date, the Company recognizes an asset that represents its right to use an underlying asset for the lease term as the right-of-use asset and recognizes the lease liability at the present value of the lease payments that are not paid at that date, except for short-term lease and low-value lease. The lease payments are discounted using the interest rate implicit in the lease when calculating the present value of the lease payments. If that rate cannot be readily determined, the Company uses its incremental borrowing rate as the discount rate. Lease term is the non-cancellable period for which the Company has the right to use an underlying asset, together with both: periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option; and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option. The Company reassesses the lease term upon the occurrence of a significant event or a significant change in circumstances that is within the control of the Company and affects whether the Company is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term. 134 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXVI) Leases (Continued) 1. As lessee (Continued) Subsequent measurement The Company depreciates right-of-use assets using straight-line method. If the lease transfers ownership of the underlying asset to the Company by the end of the lease, the Company depreciates the right-of-use asset from the commencement date to the end of the useful life of the underlying asset. Otherwise, the Company depreciates the right- of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. Interest on the lease liability in each period during the lease term is the amount that produces a constant periodic rate of interest on the remaining balance of the lease liability and is recognized in profit or loss. After the commencement date, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the in-substance fixed lease payments, a change in the amounts expected to be paid under residual value guarantees, a change in future lease payments arising from change in an index or rate, or a change in assessment or result to purchase the underlying asset, to extend the lease or to terminate the lease. The Company remeasures the lease liability to reflect changes to the lease payments, and recognizes the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. If the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, the Company recognizes any remaining amount of the remeasurement in profit or loss. For short-term leases and leases of low-value assets, the Company applies simplification method to account for the relevant asset costs or current profit and loss in each period during the lease term using the straight-line method or other systematic method. ANNUAL REPORT 2020 135 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXVI) Leases (Continued) 2. As lessor On the commencement date of the lease term, all leases with risks and rewards incident to the ownership of the leased assets are substantially transferred into finance leases, and all other leases are operating leases. (XXVII) Held-for-sale assets and disposal group If the Company collects the book value mainly through selling (including substantially commercial nonmonetary assets exchange, similarly hereinafter) rather than continuously use as a non-current asset or disposal group, the non-current asset or disposal group shall be divided into held-for-sale. Specific standard refers to meeting the following conditions at the same time: one non-current asset or disposal group can be immediately sold under the current situation pursuant to the convention for selling such asset or disposal group in similar transaction; the Company has made a resolution about sale plan and the commitment of purchase is recognised; it’s predicted that selling will be completed within one year. Wherein, the disposal group refers to one group of assets as a whole disposed by selling or in other way in a transaction as well as liabilities directly related to such assets and transferred in the process of such transaction. In case of asset group where disposal group is or asset group portfolio apportioning the goodwill obtained from business merger as per No. 8 Accounting Standards for Business Enterprises. Impairment of Asset, such disposal group shall include goodwill apportioned to disposal group. 136 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXVII) Held-for-sale assets and disposal group (Continued) If there are non-current assets or disposal groups purchased under agreements to resell during initial measurement or on the balance sheet day based on remeasurement of this Company, if the book value is higher than the net amount by deducting the selling expenses with the fair value, the book value shall be written down and be equal to the net amount by deducting the selling expenses with the fair value. The write-down amount shall be recognised as the loss of depreciation of assets and shall be included in the current profits and losses. At the same time, the impairment reserve of the held-forsale assets should be calculated and withdrawn. For the disposal group, deduct the book value of the goodwill in the disposal group with the asset depreciation losses recognised, then deduct the book value of each non-current asset in the disposal group conforming to the measurement regulations of Accounting Standards for Business Enterprises No. 42 — non-current Assets Purchased and under Agreements to Resell, Disposal Group and Operation Termination (herein after referred to as “the Standard for Assets Purchased and under Agreements to Resell”). If the net amount by deducting the selling expenses with the fair value of the disposal group purchased and under agreements to resell on the subsequent balance sheet date, the previous write-down amount shall be recovered and shall be reversed within the asset depreciation losses amount of the non-current recognised as per regulation of the Standard for Assets Purchased and under Agreements to Resell after being classified into the category purchased and under agreements to resell. The reverse amount shall be included in the current profits and losses, and the book value shall be added as per the proportion of the book value of each non-current asset in the disposal group applicable to the Standard for Assets Purchased and under Agreements to Resell except for the goodwill. The goodwill book value deducted and the asset depreciation losses of the noncurrent assets applicable to the measurement regulations of the Standard for Assets Purchased and under Agreements to Resell before its recognition of being classified into the category purchased and under agreements to resell shall not be reversed. Depreciation or amortization in the non-current assets purchased and under agreements to resell or the non-current assets in the disposal group shall not be calculated or withdrawn. Interests of liabilities and other expenses in the disposal group purchased and under agreements to resell shall be recognised continuously. When the non-current assets or the disposal groups do not continue to be divided into the heldforsale category because they do not meet the division conditions for the held-for-sale category or the non- current assets are removed from the held-for-sale groups, the lower as follows shall be measured: (1) the amount of the book value before they are divided into the held-for-sale category adjusted according to the depreciation, amortization or impairment which should be recognised in the condition of assuming they are not divided into the held-for-sale category; (2) recoverable amount. ANNUAL REPORT 2020 137 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXVIII) Dividend distributions Dividend or profit distributions proposed in the profit appropriation plan, which will be approved after the balance sheet date, are not recognised as a liability at the balance sheet date but are disclosed in the notes separately. (XXIX) Related parties If a party has the power to control, jointly control or exercise significant influence over another party, or vice versa, or where two or more parties are subject to common control or joint control from another party, they are considered to be related parties. Related parties may be individuals or enterprises. Enterprises with which the Company is under common control only from the State and that have no other related party relationships are not regarded as related parties. In addition, the Company determines related parties based on the disclosure requirements of Administrative Procedures on the Information Disclosures of Listed Companies issued by the CSRC. (XXX) Segment reporting Reportable segments are identified based on operating segments which are determined based on the structure of the Company’s internal organisation, management requirements and internal reporting system after taking the materiality principle into account. Two or more operating segments may be aggregated into a single operating segment if the segments have the similar economic characteristics and are same or similar in respect of the nature of each segment’s products and services, the nature of production processes, the types or classes of customers for the products and services, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Inter-segment revenues are measured on the basis of the actual transaction prices for such transactions for segment reporting. Segment accounting policies are consistent with those for the consolidated financial statements. 138 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 III. SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (Continued) (XXXI) Key accounting estimates and judgments The preparation of the financial statements requires management to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates as well as underlying assumptions and uncertainties involved are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Except for accounting estimates relating to depreciation and amortization of assets such as fixed assets, intangible assets ,right-of-use assets and long-term deferred expenses (see Notes III(XIII), (XVII), (XXVI) and (XIX)), fair value estimates of biological assets and contingent consideration (see Note III (XVI) and (IX)) and provision for impairment of various types of assets (see Notes III(X), (XVIII), Notes V (III), (IV), (VI), (IV), (X), (XIII), and (XIV)) and Notes XV (I), (II), (III) and (IV)) and recognition of deferred tax assets (see Note V.(XVI)), there are no other key accounting estimates. (XXXII) Changes in key accounting policies and statement on changes of accounting estimates Nil ANNUAL REPORT 2020 139 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 IV TAXATION (I) Main types of taxes and corresponding tax rates Tax type Details of tax rates Tax rate Value-added tax (VAT) Output VAT is calculated on product sales and taxable 13%/9% services revenue. The basis for VAT payable is to deduct input VAT from the output VAT for the period Urban maintenance Based on VAT paid 7%/5%/1% and construction tax Education surcharges Based on VAT paid 3%/2% Enterprise income tax Based on taxable profits 15% (II) Important tax preferences and approvals (1) VAT During the period, the wholly-owned subsidiaries of the Company, Qinghai Shengya Plateau Pasture Co., Ltd., Qinghai Shengyuan Pasture Co., Ltd., Linxia County Ruiyuan Pasture Co., Ltd., Wuwei Ruida Pasture Co., Ltd., Lanzhou Ruixing Farming Co., Ltd., Gansu Ruijia Animal Husbandry Co., Ltd., Yuzhong Ruifeng Pasture Co., Ltd., Linxia County Ruian Pasture Co., Ltd. and Shaanxi Duoxian Animal Husbandry Co., Ltd. were exempted from VAT for dairy cows breeding in accordance with Article 15 of the Provisional Regulations of the People’s Republic of China on Valueadded Tax. During the period, Ningxia Zhuangyuan Pasture Co., Ltd., a wholly-owned subsidiaries of the Company, was exempted from VAT for sales of feed in accordance with Article 15 of the Provisional Regulations of the People’s Republic of China on Value-added Tax. 140 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 IV TAXATION (Continued) (II) Important tax preferences and approvals (Continued) (2) Enterprise income tax In accordance with Article 27, Paragraph 1 of Corporate Income Tax Law of the People’s Republic of China, Article 86, Paragraph 1 (7) of Implementation Regulations for the Corporate Income Tax Law of the People’s Republic of China and Notice of the Ministry of Finance and State Administration of Taxation on Announcing the Scope of Primary Processing of Agricultural Products Covered by Preferential Policies on Corporate Income Tax (for Trial Implementation) (CS 2008 No. 149), the Company and its subsidiaries such as Qinghai Lake Dairy Industry Co., Ltd. and Xi’an Dongfang Dairy Co., Ltd. are exempted from the enterprise income tax for initial processing of dairy products, which include pasteurised milk and UHT milk, during the Period. In accordance with Article 2 of Announcement of the Ministry of Finance, the General Administration of Customs, the State Administration of Taxation on Issues Concerning Corporate Income Tax Related to Enhancing the Western Region Development Strategy (CS [2011] No. 58) and Notice of the Gansu Provincial Local Taxation Bureau on Implementing the Enterprise Income Tax Issues Related to the Western Development (Gandhi Tax Letter [2012] No. 136), the Company and its wholly-owned subsidiaries Qinghai Qinghai Lake Dairy Co., Ltd and Xi’an Dongfang Dairy Co., Ltd. are entitled to a reduced corporate income tax rate of 15%. In accordance with Article 27 (1) of Regulation on the Implementation of the Corporate Income Tax Law of the People’s Republic of China, the wholly-owned subsidiaries of the Company, Qinghai Shengya Plateau Pasture Co., Ltd., Qinghai Shengyuan Pasture Co., Ltd., Yuzhong Ruifeng Pasture Co., Ltd., Linxia County Ruiyuan Pasture Co., Ltd., Linxia County Ruian Pasture Co., Ltd., Wuwei Ruida Pasture Co., Ltd., Ningxia Zhuangyuan Pasture Co., Ltd., Lanzhou Ruixing Farming Co., Ltd., Gansu Ruijia Animal Husbandry Co., Ltd. and Shaanxi Duoxian Animal Husbandry Co., Ltd. are exempted from corporate tax. ANNUAL REPORT 2020 141 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (1) Cash at bank and on hand Balance at the Balance at the end beginning of the period of the period Item RMB’000 RMB’000 Cash on hand 4 16 Bank deposits 631,560 248,218 Other cash at bank and on hand 215,164 165,507 Including: earnest money 215,164 165,507 Total 846,729 413,742 Including: total amount deposited overseas 371 649 Note: Other cash at banks and on hand include bank acceptance bill and bank deposit, whose usage was restricted; The cash at bank and on hand ot the Company increased significantly compared with previous year, mainly attributable to RMB 377,540,000.00 raised by the Company through issuing 43 million RMB ordinary shares to specific investors on 23 December 2020. (II) Trading financial assets Balance at the Balance at the end beginning of the period of the period Item RMB’000 RMB’000 1. Classified as financial assets measured at changes in fair value through profits or losses 20,412 Including: financial assets arising from contingent consideration recognized during the business combination not under common control 20,412 2. Designated as financial assets measured at changes in fair value through profits or losses Total 20,412 142 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (III) Accounts receivable 1. Category of accounts receivable Balance at the end of the period Provision for bad and Balance of carrying value doubtful debts Amount Percentage (%) Amount Percentage (%) Item RMB’000 RMB’000 Accounts receivable with single provision for bad and doubtful debts Accounts receivable with provision for bad and doubtful debts on a group basis 42,912 100.00 1,326 3.09 Including: aging group 42,912 100.00 1,326 3.09 Total 42,912 100.00 1,326 3.09 (Continued) Balance at the beginning of the period Provision for bad and Balance of carrying value doubtful debts Amount Percentage (%) Amount Percentage (%) Item RMB’000 RMB’000 Accounts receivable with single provision for bad and doubtful debts Accounts receivable with provision for bad and doubtful debts on a group basis 30,527 100.00 878 2.87 Including: aging group 30,527 100.00 878 2.87 Total 30,527 100.00 878 2.87 ANNUAL REPORT 2020 143 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (III) Accounts receivable (Continued) 1. Category of accounts receivable (Continued) (1) Accounts receivable with provision for bad and doubtful debts on a group basis Balance at the end of the period Balance at the beginning of the period Provision Provision Balance of expected for bad and Balance of expected for bad and carrying credit loss doubtful carrying credit loss doubtful value % debts value % debts Aging RMB’000 RMB’000 RMB’000 RMB’000 Within one year 41,052 152 29,261.13 Including: 0-6 months 38,021 29,261.13 7-12 months 3,031 5.00 152 1 to 2 years 727 20.00 145 236.68 20.00 47.34 2 to 3 years 208 50.00 104 397.50 50.00 198.75 Over 3 years 925 100.00 925 631.53 100.00 631.53 Total 42,912 — 1,326 30,526.84 — 877.61 Note: the sales model of the Company includes direct selling, reselling and distribution. Under the model of direct selling, the revenue was recognized and the aging was calculated when the goods were delivered to customers and the receipt was obtained. Under the model of reselling and distribution, the revenue was recognized and the aging was calculated after the signature of delivery list by customers. (2) Provision for bad debts made, recovered or reversed during this period The provision for bad and doubtful debts made during the period was RMB449,000. 144 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (III) Accounts receivable (Continued) 1. Category of accounts receivable (Continued) (3) Five largest accounts receivable by debtor by balance at the end of the period Percentage of total closing Closing balance Balance at balance of of the provision the end of the accounts for bad and the period receivable (%) doubtful debts Name of entity RMB’000 RMB’000 Entity 1 9,299 21.67 469 Entity 2 7,878 18.36 Entity 3 3,231 7.53 63 Entity 4 1,970 4.59 Entity 5 1,405 3.27 Total 23,784 55.42 533 (IV) Prepayments 1. Prepayments by ageing Balance at the end of Balance at the beginning of the period the period Ageing Amount Percentage (%) Amount Percentage (%) Within 1 year 7,976 99.73 16,185 100.00 1-2 years 22 0.27 Total 7,998 100.00 16,185 100.00 ANNUAL REPORT 2020 145 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (IV) Prepayments (Continued) 2. Five largest accounts receivable by prepayments Percentage of the total Balance at the end prepayments of the period (%) Name of entity RMB’000 RMB’000 Entity 1 1,908 23.85 Entity 2 1,011 12.65 Entity 3 745 9.32 Entity 4 499 6.24 Entity 5 363 4.54 Total 4,527 56.60 146 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (V) Other receivables Balance at the Balance at the end beginning of the of the period period Item RMB’000 RMB’000 Other receivables 21,547 19,386 Less: provisions for bad and doubtful debts 755 1,691 Total 20,792 17,694 1. Other receivables (1) Category of other receivables by nature Balance at the Balance at the end beginning of the of the period period Nature of accounts RMB’000 RMB’000 Amounts due from disposal of cows 648 Deposit and earnest money 813 2,647 Loans to employees 2,836 2,433 Performance compensation 14,106 8,702 Current accounts and others 3,791 4,956 Subtotal 21,547 19,386 Less: provisions for bad and doubtful debts 755 1,691 Total 20,792 17,694 ANNUAL REPORT 2020 147 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (V) Other receivables (Continued) 1. Other receivables (Continued) (2) Aging analysis on other receivables Balance at the end of the Balance at the beginning period of the period Balance of Balance of carrying Percentage carrying Percentage value (%) value (%) Aging RMB’000 RMB’000 Within one year 20,685 96.00 16,499 85.11 1 to 2 years 2,263 11.68 2 to 3 years 238 1.11 20 0.10 Over 3 years 624 2.89 604 3.11 Total 21,547 100.00 19,386 100.00 (3) Provisions for bad and doubtful debts Stage 1 Stage 2 Stage 3 Total Lifetime Lifetime ECL over ECL — not ECL — the next credit- credit- 12 months impaired impaired Provisions for bad and doubtful debts RMB’000 RMB’000 RMB’000 RMB’000 Balance at the beginning of the period 1,088 603 1,691 Balance at the beginning of the period after reassessment in the period 1,088 603 1,691 Provision during the period 64 1,000 1,064 Reversal during the period Written off during the period 2,000 2,000 Other changes (1,000) 1,000 Balance at the end of the period 152 603 755 148 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (V) Other receivables (Continued) 1. Other receivables (Continued) (4) The provision for bad and doubtful debts during the period was RMB 1,063,990.60, and RMB 0.00 of The provision for bad and doubtful debts ws reversed. (5) Important information on other receivables actually written off during the reporting period Whether rising from related Name of entity Nature Amount Reason Model transactions RMB’000 Sichuan Qiaogeli Machinery Amount of 2,000 Can’t be recovered a pproval process No Equipment Company equipments Limited Total 2,000 (6) Five largest other receivables by debtor of balance at the end of the period Percentage of total other balance receivables at Provision for at the end the end of bad and Name of debtor Nature of amount of the period ageing the period (%) doubtful debts RMB’000 RMB’000 Entity 1 Performance 11,215 0-6 months 52.05 compensation Entity 2 Performance 2,891 0-6 months 13.42 compensation Entity 3 Loans to employees 506 0-6 months 2.35 Entity 4 Loans to employees 500 0-6 months 2.32 Entity 5 Cattle insurance 410 0-6 months 1.90 Total — 15,522 — 72.04 Note: Details of performance compensation receivable is set out in Note 2 to V. (L) Non-operating income. ANNUAL REPORT 2020 149 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (VI) Inventories 1. Category of inventories balance at the end balance at the beginning of the period of the period Balance of Provision Balance of carrying for Carrying carrying Provision for Carrying value depreciation value value depreciation value Item RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Raw materials 101,410 101,410 83,424 83,424 Commodities in stock (finished goods) 11,787 11,787 10,822 10,822 Commodities shipped 390 390 552 552 Consumable biological assets 38 38 34 34 Total 113,625 113,625 94,832 94,832 (VII) Other current assets balance at the balance at the end beginning of the of the period period Item RMB’000 RMB’000 Input tax to be deducted and without invoice 10,730 17,544 Cost of return receivable 8 51 Total 10,738 17,595 150 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (VIII) Other equity instrument investment Accumulative profit or loss during the year transferred Dividend from other balance at income comprehensive the balance at recognised income to Investment beginning of the end of during retained Reason for Item cost the period the period the period earnings transferring RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Gansu Yuzhong Rural Cooperative Bank 44 44 Total 44 44 (IX) Fixed assets balance at the balance at the end beginning of of the period the period Item RMB’000 RMB’000 Fixed assets 1,254,643 1,256,878 Less: impairment provision 75,106 9,239 Total 1,179,537 1,247,639 ANNUAL REPORT 2020 151 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (IX) Fixed assets (Continued) 1. Fixed assets (1) Fixed assets Houses and Mechanical Transportation buildings equipments equipments Others Total Item RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 I. Original carrying value 1. Balance at the beginning of the period 1,098,306 591,085 9,728 33,662 1,732,782 2. Increase for the year 73,708 14,850 1,763 9,881 100,201 (1) acquisition 7,149 10,838 1,763 9,881 29,630 (2) transferred from construction in progress 66,559 2,730 69,289 (3) others 1,282 1,282 3. Decrease for the year 14,696 38,411 1,258 897 55,263 (1) Disposal or scrapping 14,696 38,411 1,258 897 55,263 (2) others 4. Balance at the end of the period 1,157,318 567,524 10,233 42,646 1,777,721 II. Accumulated depreciation 1. Balance at the beginning of the period 180,339 262,569 7,159 25,837 475,904 2. Increase for the year 32,491 49,444 2,675 6,064 90,675 (1) provisions 32,491 48,958 2,675 6,064 90,188 (2) others 0 486 486 3. Decrease for the year 5,570 35,883 1,195 852 43,501 (1) disposal or scrapping 5,570 35,883 1,195 852 43,501 (2) others 4. Balance at the end of the period 207,260 276,130 8,639 31,050 523,078 III. Impairment provision 1. Balance at the beginning of the period 9,239 9,239 2. Increase for the year 63,093 2,774 65,867 (1) provisions 63,093 2,774 65,867 3. Decrease for the year (1) disposal or scrapping 4. Balance at the end of the period 72,332 2,774 75,106 4. Carrying value 1. Closing balance of carrying value 877,727 288,620 1,594 11,596 1,179,537 2. Opening balance of carrying value 908,729 328,516 2,570 7,825 1,247,639 152 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (IX) Fixed assets (Continued) 1. Fixed assets (Continued) (2) Details of fixed assets without the certificate of title Reasons for failure of obtaining the certificate Carrying value of title Item RMB’000 Lanzhou Zhuangyuan Office Building 50,986 In progress Total 50,986 — (3) Provisions for impairment on fixed assets As disclosed in Note XIV. (III), in response to the recent development of compesations for each of subsidiaries, provisions for assets impairment for Ningxia Zhuangyuan amounted to RMB3,086,000; and provisions for assets impairment for Qinghai Shengyuan amounted to RMB8,534,000. The Company plans to gradually discontinue the operation of its subsidiary Qinghai Shengya Pasture. There is material impairement indication for the fixed assets of Qinghai Shengya, for which the external experts engaged by the Management conducted impairement tests and made impairement provisions for fixed assets amounting to RMB54,057,000. ANNUAL REPORT 2020 153 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (X) Construction in progress Balance at the Balance at the beginning end of the period of the period Item RMB’000 RMB’000 Construction in progress 152,093 59,188 Total 152,093 59,188 1. Construction in progress 1 Details of construction in progress Balance at the end Balance at the beginning of the period of the period Balance of carrying Impairment Carrying Balance of Impairment Carrying value provision value carrying value provision value Item RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Ruijia Jinchang construction project 136,333 136,333 49,017 49,017 Others 15,760 15,760 10,171 10,171 Total 152,093 152,093 59,188 59,188 2 Changes to construction in progress of the year Amount of fixed assets Other Balance Balance at transferred decrease at the Amount the end of Increase of during during beginning Name of Project of Budget the period the period the year the year period (RMB0’000) RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Ruijia Jinchang construction project 29,000.00 49,017 151,402 56,397 7,688 136,333 Others 10,171 18,481 12,892 15,760 Total 29,000.00 59,188 169,882 69,289 7,688 152,093 154 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (X) Construction in progress (Continued) 1. Construction in progress (Continued) 2 Changes to construction in progress of the year (Continued) Percentage of accumulative project Including: investment Accumulative amount of Interests accounting Project amount of interests capitalization for the budget progress interests capitalization rate of the Source Name of Project (%) (%) capitalization of the year year (%) of funds RMB’000 RMB’000 Ruijia Jinchang 75.18 75.18 2,070 2,070 4.15 Own capital construction project and bank loan Others Total 75.18 75.18 2,070 2,070 4.15 ANNUAL REPORT 2020 155 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XI) Bearer biological assets 1. Biological assets carried at fair value Bearer biological assets of the Company are dairy cows held to produce raw milk. The Company’s dairy cows are milkable cows held for milk production and heifers and calves that have not reached the age to produce raw milk. 1 The number of cows held by the Company as at the date of the statements is as follows: Unit: Heads Balance at the Balance at the end beginning of Category of the period the period Calves 3,550 1,380 Heifers 4,308 6,472 Milkable cows 8,236 5,560 Total 16,094 13,412 In general, the heifers are inseminated when they reach approximately 14 months old. After a gestation period of approximately 10 months, a calf is born and the heifers begin to produce raw milk and the lactation periods begin. The heifers, at this time, will be transferred to the group of milkable cows. A milkable cow is typically milked for approximately 300 days in each lactation period. The male calves newly born are sold while the female calves are bred for 6 months and then transferred to the group of heifers for preparation of insemination. 156 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XI) Bearer biological assets (Continued) 1. Biological assets carried at fair value (Continued) 2 The Company is mainly subject to the following operating risks in respect of the bearer biological assets: Regulatory and environmental risks The Company is obliged to comply with the laws and regulations in effect at the place of the pasture. The Company has already formulated the environmental policies and procedures specific to the compliance with the local environment and other laws. The management has conducted regular review to identify the environmental risk and ensure that those regulations formulated shall sufficiently manage such risks. Climate, disease and other natural risks The Company’s biological assets are subject to the destruction risks from the climate changes, disease and other natural forces. The Company has already taken various measures to monitor and mitigate such risk, including regular review, disease control, investigation and insurance. 3 Value of the Company’s bearer biological assets Milkable Item Calves Heifers Cows Total RMB’000 RMB’000 RMB’000 RMB’000 Balance at the beginning of the period 15,712 155,117 189,266 360,095 Plus: cows purchasing costs 11,845 11,845 Breeding costs Note 1 19,888 66,922 180,276 267,086 Transfer among group of cows Transfer-in 12,528 108,005 120,533 Transfer-out (12,528) (108,005) (120,533) Transferred to inventories at the time of milking (180,276) (180,276) Decrease due to elimination and sales (2,068) (10,952) (25,302) (38,322) Profit and loss from fair value change Note 2 22,774 (15,470) 66,959 74,263 Balance at the end of the period 43,778 111,986 338,928 494,691 ANNUAL REPORT 2020 157 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XI) Bearer biological assets (Continued) 1. Biological assets carried at fair value (Continued) 3 Value of the Company’s bearer biological assets (Continued) Note 1: The cows breeding costs mainly include the feed costs, labour costs, depreciation and amortization expenses and the amortization of public fees. Note 2: The profit and loss from fair value change consists of two parts: loss from changes in fair value less costs to sell of bearer biological assets, and gain arising on initial recognition of agricultural produce at fair value less costs to sell at the point of harvest. The Company has already hired certain independent and professional evaluators to conduct evaluation on the fair value of biological assets as at the balance sheet date. Methods for valuation as adopted for the purpose of determination of the fair value and main parameters of the valuation model are disclosed in Note IX. Disclosure of fair value. 158 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XII) Right-of-use assets Machinery and equipment Land use right Total Item RMB’000 RMB’000 RMB’000 I. Original carrying value 1. Balance at the beginning of the period 9,858 38,358 48,216 2. Increase for the period 15,374 15,374 1 new lease 15,374 15,374 3. Decrease for the period 1,282 1,282 1 disposal 2 others 1,282 1,282 4. Balance at the end of the period 8,576 53,732 62,308 II. Accumulated depreciation 1. Balance at the beginning of the period 1,446 3,333 4,779 2. Increase for the period 805 3,426 4,231 1 provisions 805 3,426 4,231 2 others 3. Decrease for the period 486 486 1 disposal 2 others 486 486 4. Balance at the end of the period 1,765 6,759 8,524 III. Impairment provision 1. Balance at the beginning of the period 2. Increase for the period 1 provisions 3. Decrease for the period 1 disposal 4. Balance at the end of the period IV. Carrying value 1. Closing balance of carrying value 6,811 46,973 53,784 2. Opening balance of carrying value 8,411 35,026 43,437 ANNUAL REPORT 2020 159 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XIII) Intangible assets 1. Conditions of intangible assets Computer Land use right software Total Item RMB’000 RMB’000 RMB’000 I. Original carrying value 1. Balance at the beginning of the period 91,786 4,629 96,414 2. Increase for the period 8,199 1,145 9,344 1 acquisition 8,199 1,145 9,344 2. Decrease for the period 1 disposal 4. Balance at the end of the period 99,985 5,774 105,759 II. Accumulated amortization 1. Balance at the beginning of the period 3,944 1,861 5,805 2. Increase for the period 1,891 906 2,798 1 provisions 1,891 906 2,798 3. Decrease for the period 1 disposal 4. Balance at the end of the period 5,835 2,767 8,602 III. Impairment provision 1. Balance at the beginning of the period 2. Increase for the period 1 provisions 3. Decrease for the period 1 disposal 4. Balance at the end of the period IV. Carrying value 1. Closing balance of carrying value 94,149 3,007 97,156 2. Opening balance of carrying value 87,842 2,768 90,609 160 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XIV) Goodwill 1. Original carrying value of goodwill Balance at the Balance beginning at the end of the of the Item period Increase for the period Decrease for the period period Resulting from business combination Others Disposal Others RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Xi’an Dongfang Dairy Company Limited 58,691 58,691 Total 58,691 58,691 2. Impairment provisions for goodwill Balance at the Balance beginning at the end of the of the period Increase for the period Decrease for the period period provisions Others Disposal Others Item RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Xi’an Dongfang Dairy Company Limited 48,719 9,971 58,691 Total 48,719 9,971 58,691 ANNUAL REPORT 2020 161 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XIV) Goodwill (Continued) 3. Conditions of goodwill impairment Unit RMB0’000 Item Asset group Balance of carrying value for goodwill 5,869.05 Balance of impairment provisions for goodwill 5,869.05 Carrying value of goodwill - Goodwill value not recognized as attributable to minority equity Carrying value of overall goodwill after adjustment = + Carrying value of the asset group 24,328.45 Carrying value of the asset group that contains overall goodwill = + 30,197.50 P re s e n t v a l u e o f e x p e c t e d f u t u re c a s h f l o w o f t h e a s s e t g ro u p (recoverable amount) 24,309.53 Impairment loss of goodwill (when it is greater than 0) 5,869.05 Impairment loss of fixed assets = - - 18.92 Total 1 Information on the asset group or the portfolio of asset groups to which the goodwill is attributable On 31 October 2018, the Company acquired 82% equity of Xi’an Dongfang Dairy Company Limited (hereafter referred to as “Dongfang Dairy Co.,”) and made it become a wholly-owned subsidiary of the Company. This acquisition generated goodwill of RMB58,690,500. The identification of asset groups by the Company is consistent with that of the previous years. 162 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XIV) Goodwill (Continued) 3. Conditions of goodwill impairment (Continued) 2 Process and method of goodwill impairment test The Company engaged Beijing Yatai Lianhua Assets Appraisal Co., Ltd. to conduct impairment test on goodwill and took the conclusion of income approach as the recoverable amount of the asset group. The measurement process and key parameters of goodwill impairment are as follows: The present value of the future cash flow of the asset group to which the goodwill is attributable is determined based on the financial budget for 2021 to 2025 approved by the management, and the cash flow for over 5 years of the asset group is calculated on a perpetual basis at the budget amount of 2025. Due to the impact of the epidemic, the Company expects that the revenue in 2020 will decline significantly, there will be a restorative growth in 2021 and the revenue will remained basically stable compared with that in 2019, the average growth rate from 2022 to 2025 will be approximately 3.82%, the discount rate in from 2021 to 2030 will be 10.93%, and the discount rate in 2031 to the perpetual period will be 12.84%. The proportion of the net cash flow before tax accounting for the operating revenue is 13.31%. 3 Results of goodwill impairment test A provision to be made for goodwill impairment was RMB58,690,500. The Company made a provision for impairment of RMB4,8719,000 for the year 2019, and RMB9,971,200 for the current year. (XV) Long-term deferred expenses Balance at Amount of Balance at the beginning Increase for amortization Other the end of the period the period of the period decrease of the period Type RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Office building renovation expenses 4,660 583 4,078 Warehouse under short-term lease 220 142 78 Sewage treatment fee 192 192 Amortization of guarantee expenses 2,066 18 1,994 90 Total 7,138 18 2,910 4,246 ANNUAL REPORT 2020 163 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XVI) Deferred income tax assets, deferred income tax liabilities 1. Deferred income tax assets and deferred income tax liabilities are not shown as net after set-off Balance at the end Balance at the beginning of the period of the period Deferred Deductible/ Deferred Deductible/ income taxable income taxable tax assets/ temporary tax assets/ temporary liabilities differences liabilities differences Item RMB’000 RMB’000 RMB’000 RMB’000 Deferred income tax assets: Impairment provisions on assets 247 1,647 360 2,402 Deferred income 2,255 15,036 3,296 21,972 Deductible losses 2,625 17,500 Expenses of restricted shares 363 2,418 Sub-total 2,502 16,683 6,644 44,293 Deferred income tax liabilities: Changes in the fair value of trading financial instruments and derivative financial instruments 3,062 20,412 Changes in the fair value of financial assets included in other comprehensive income 1,215 8,099 1,215 8,099 Asset appraisal appreciation arising from the business combination not under common 4,418 29,453 4,750 31,669 Sub-total 5,633 37,552 9,027 60,180 164 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XVI) Deferred income tax assets, deferred income tax liabilities (Continued) 2. Breakdown of unrecognized deferred tax assets Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Provision for bad and doubtful debts 269 Deferred income 4,568 Deductible losses 29,272 Total 34,109 3. Deductible tax losses that are not recognized as deferred tax assets will expire in the following years Balance at Balance at the end the beginning of the period of the period Remarks Year RMB’000 RMB’000 RMB’000 2020 2021 2022 2023 20,169 2024 2025 9,102 Total 29,272 ANNUAL REPORT 2020 165 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XVII) Other non-current assets Balance at Balance at the end the beginning Item of the period of the period RMB’000 RMB’000 Prepayment for long-term asset purchased 5,249 10,234 Prepayment for cows purchased 49,788 27,418 Purchase of land 20,200 Total 55,037 57,852 (XVIII) Short-term borrowings 1. Category of short-term borrowings Balance at Balance at the end the beginning of the period of the period Conditions of loans RMB’000 RMB’000 Mortgaged loan 156,500 180,000 Guaranteed loan 115,000 115,000 Credit loan 50,000 20,000 Plus: interest payable 837 184 Total 322,337 315,184 Note: For details of the mortgage of short-term borrowings, please refer to this Note V. XXXXXV. 166 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XIX) Bills payable Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Bank acceptance bill 431,160 283,014 Total 431,160 283,014 (XX) Accounts payable 1. Classifying by ageing Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Within 1 year (inclusive of 1 year) 203,441 213,499 1-2 years (inclusive of 2 years) 9,369 12,618 2-3 years (inclusive of 3 years) 786 1,106 Over 3 years 508 997 Total 214,105 228,221 Note: After the Company confirmed the completion of purchase (if the goods were placed into the warehouse for acceptance or met the acceptance conditions), the unpaid purchase amount was included in the accounts payable and we started to calculate the ageing at the same time. The significant increase in the Company’s payable is due to an increase in the payable of its subsidiary, Ruijia Pasture’s construction project. ANNUAL REPORT 2020 167 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XX) Accounts payable (Continued) 2. Large amount of accounts payable with ageing of over 1 year Balance at the end of the period Reasons for Name of entity with creditor’s rights RMB’000 outstanding payment Entity 1 2,414 Final payment of project Entity 2 2,392 Final payment of project Entity 3 1,467 Final payment of equipments Entity 4 610 Payment of packaging material Entity 5 564 Final payment of project Total 7,447 — (XXI) Contractual liabilities Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Within 1 year (inclusive of 1 year) 10,669 16,470 Total 10,669 16,470 Note: RMB14,955,083.19 of balance of contractual liabilities at the beginning of the period was recognised as operating income. 168 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXII) Employee benefits payable 1. List of employee benefits payable Balance at Balance at the beginning Increase for Decrease for the end of the period the period the period of the period Item RMB’000 RMB’000 RMB’000 RMB’000 Short-term benefits 2,621 69,466 65,861 6,226 Post-employment benefits — defined benefits plan 990 990 Dismissal benefit 665 665 Total 2,621 71,121 67,516 6,226 2. Conditions of short-term employee benefits Balance at Balance at the beginning Increase for Decrease for the end Item of the period the period the period of the period Wages, bonus, subsidies and allowances 2,581 64,305 60,741 6,144 Employees benefits 1,513 1,490 24 Social insurance fees 2,075 2,075 Including: medical insurance fees 2,029 2,029 Injuries insurance fees 27 27 Maternity insurance fees 19 19 Housing provident fund 1,167 1,167 Trade union funds and employees education funds 40 406 388 58 Total 2,621 69,466 65,861 6,226 ANNUAL REPORT 2020 169 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXII) Employee benefits payable (Continued) 3. Conditions of defined benefit plan Balance at Balance at the beginning Increase for Decrease for the end of the period the period the period of the period Item RMB’000 RMB’000 RMB’000 RMB’000 Basic pension insurance 955 955 Unemployment insurance fees 35 35 Total 990 990 (XXIII) Taxes payable Balance at Balance at the end the beginning of the period of the period Categories of taxes RMB’000 RMB’000 VAT 2,504 2,748 Enterprise income tax 2,711 4,163 Environmental protection tax 546 94 Individual income tax 159 87 Urban maintenance and construction tax 145 134 Education surcharges 79 59 Local education surcharges 51 38 Stamp tax 33 20 Other taxes and fees 191 161 Total 6,419 7,504 170 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXIV) Other payables Balance at Balance at the end the beginning of the period of the period Category RMB’000 RMB’000 Dividends payable Other payables 52,990 50,725 Total 52,990 50,725 1. Other payables 1 Classifications by nature of amount Balance at Balance at the end the beginning of the period of the period Nature of amount RMB’000 RMB’000 Government grants charged but not satisfying the ancillary conditions 3,982 3,982 Deposit due to the third party 15,828 19,132 Professional service fee payable 946 800 Restricted share repurchase business (see Note XI for details) 23,251 23,251 Others 8,984 3,560 Total 52,990 50,725 ANNUAL REPORT 2020 171 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXIV) Other payables (Continued) 1. Other payables (Continued) 2 Explanation on the conditions of large amount of other payables with the ageing of over 1 year Balance at the end Reasons for of the period outstanding payment Name of entity RMB’000 1 9,300 Performance compensation 2 2,300 Outstanding earnest money 3 661 Prematurity repayment 4 298 Prematurity repayment 5 252 Prematurity repayment Total 12,810 — (XXV) Non-current liabilities due within one year Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Long-term borrowings due within 1 year 42,377 50,863 Lease liabilities due within 1 year 6,045 5,386 Total 48,422 56,249 172 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXVI) Other non-current liabilities Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Amount of tax in items to be resold 1,448 Total 1,448 (XXVII) Long-term borrowings 1. Classification of long-term borrowings Balance at Balance at the end the beginning Range of of the period of the period interest rate Conditions of borrowings RMB’000 RMB’000 Mortgaged loan 352,937 277,937 4.15%-5.70% Plus: interest payable 721 253 Less: long-term borrowings due within 1 year (Note V. XXV) 42,377 50,863 Total 311,281 227,327 — Note: For details of the mortgage conditions of long-term borrowings, please refer to the Note “V.(XXXXXV)”. ANNUAL REPORT 2020 173 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXVII) Long-term borrowings (Continued) 2. Repayment term of the long-term borrowings of over 1 year Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 1 to 2 years 72,377 42,243 2 to 5 years 147,130 176,729 Over 5 years 91,054 8,103 Total 310,561 227,074 (XXVIII) Lease liabilities Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Minimum lease payment 68,323 60,143 Less: unrecognised finance expenses 21,794 23,811 Less: lease liabilities due within 1 year (Note V. XXV) 6,045 5,386 Total 40,483 30,946 174 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXIX) Leases 1. The Company as the leasee 1 Please refer to this Note V. (XII), (XXVIII) for the conditions of right-of-use assets and lease liabilities 2 Conditions of being included in gain or loss and related asset costs for the year Being included in gain or loss Being included in related for the period asset costs Presented item Amount Presented item Amount Item RMB’000 RMB’000 Depreciation of right-of-use Operating cost/General assets and administrative expenses 3,574 Interest Financial expenses 2,139 3 Cash outflow associated with leases Category of Amount for cash flow the period Item RMB’000 Cash paid for repayment of principal Cash outflow from financing and interest of lease liabilities activities 4,789 Total — 4,789 ANNUAL REPORT 2020 175 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXIX) Leases (Continued) 1. The Company as the leasee (Continued) 4 Other information Nature of lease activities Leased Volume Lease term Category property (acre/unit) (year) Zhuangyuan Pasture Land 9.28 5-6 Dongfang Dairy Land 93.60 30 Duoxian Dairy Land 212.91 30 Shengya Pasture Land 461.75 24-30 Ruiyuan Pasture Land 309.28 24-30 Ruida Pasture Land 759.38 19-30 Ruian Pasture Land 220.13 23-30 Ruifeng Pasture Land 308.46 30 Shengyuan Pasture Land 160.00 30 Ruijia Pasture Land 1531.00 20 Ningxia Zhuangyuan Land 200.00 30 Zhuangyuan Pasture Machinery equipment 1 3-5 Note 1 The lease term of the lands of the Company is relatively long, and it is generally agreed in the contracts to renew the lease at fair value. The management reasonably judges that the lease will not be renewed when it expires, so as far as the lease term is concerned, the option of renewal is not considered. Note 2 There is variable lease consideration in a part of the land lease of the Company, and the rent is determined by “the price of wheat for the current month of payment and the price of spring wheat on 15 August in the current year” and belongs to the index and rate-linked rent under the lease standards. The Company will consider the importance of the amount and adjust the lease liabilities and lease assets when there are relevant price changes during the lease execution period. 176 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXX) Estimated liabilities Balance at Balance at the beginning Increase for Decrease for the end Reasons of the period the period the period of the period for formation Item RMB’000 RMB’000 RMB’000 RMB’000 Returns payment payable 51 1 40 13 Accrued returns payment Reclamation expense 463 14 478 Reclamation expense for lease lands Total 515 16 40 490 — ANNUAL REPORT 2020 177 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXXI) Government grants 1. General information of government grants Amount included in profit or loss Amounts Presented item of the period Category RMB’000 RMB’000 Special funds for optimizing the business environment and expanding utilization of foreign investment from Lanzhou Municipal Bureau of Commerce 200 Deferred income 8 Grants for resource utilization of livestock and poultry manure from Liangzhou District Agriculture, Husbandry and Rural Bureaus 600 Deferred income 25 Project on Utilization of Fecal Resources from Livestock and Poultry in 2019 500 Deferred income 4 Central Agricultural Production Development in 2019 Dairy Farming Cooperation in 2019 200 Deferred income 2 Interest grants for loans granted to enterprises of civilian trade and goods from 2018 to 2019 4,000 Financial expenses 4,000 Interest grants for loans granted to leading enterprises of agricultural industrialization in 2019 50 Financial expenses 50 Innovation Funds of Enterprises granted by Finance Bureau of Yuzhong County 71 Non-operating income 71 Funds for 2020 Grain-to-feed Project 365 Non-operating income 365 Skill enhancement through work-based training 260 Non-operating income 260 Payment for the second tranche of agricultural transfer in 2020 120 Non-operating income 120 Fund for Central Agricultural Production Development in 2020 370 Non-operating income 370 Fund for promoting ethnic unity and progress 10 Non-operating income 10 Subsidy from Management Committee of Industrial Park as Development Award for the First Quarter of 2020 in Supporting Key Industrial Enterprises 180 Other income 180 Special fund for provincial development of agricultural production in 2019 500 Other income 500 Subsidy from Management Committee of Industrial Park as Development Award for the Second Quarter of 2020 in Supporting Key Industrial Enterprises 190 Other income 190 Subsidy for the Third Quarter of 2020 in Supporting Key Industrial Enterprises 100 Other income 100 2020 Modern Silk Road Dry Agriculture and Modern Animal Husbandry Development Project Fund 1,000 Other income 1,000 Grants for employment stabilization granted by Provincial Department of Human Resources and Social Security in 2020 233 Other income 233 Others 240 Other income 240 Total 9,189 — 7,728 178 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXXI) Government grants (Continued) 2. Conditions on the refund of government grants Nil (XXXII) Deferred income 1. Deferred income listed by category Balance at Balance at the beginning Increase for Decrease for the end Reasons for of the period the period the period of the period formation Item RMB’000 RMB’000 RMB’000 RMB’000 Government grants 39,518 1,500 3,959 37,059 Government grants Total 39,518 1,500 3,959 37,059 — 2. Conditions of projects of government grants Amount Balance included at the Increase of in gain or Balance at Related beginning of grants for loss for Other the end of to assets/ the period the period the period changes the period revenue Item RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Dairy farming project 21,932 200 2,187 19,945 Related to assets Dairy product production project 5,205 507 4,698 Related to assets Biogas engineering project 4,127 377 3,750 Related to assets Others 8,254 1,300 888 8,666 Related to assets Total 39,518 1,500 3,959 37,059 — ANNUAL REPORT 2020 179 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXXIII) Share capital Balance at the beginning Balance at the end of the period Increase and decrease for this time (+, -) of the period Conversion Issuing of reserve Percentage new Grant funds into Percentage Amount % shares of shares shares Others Subtotal Amount % Item RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 I. Shares subject to lock-up 81,433 42.71 43,000 (53,944) (10,944) 70,489 30.16 Including: domestic corporate shares 45,895 24.07 37,932 (45,895) (7,963) 37,932 16.23 Domestic natural person shares 35,538 18.64 5,068 (8,049) (2,981) 32,557 13.93 II. Shares not subject to lock-up 109,248 57.29 53,944 53,944 163,192 69.84 1. RMB ordinary shares 74,118 38.87 53,944 53,944 128,062 54.81 2. Overseas listing foreign shares 35,130 18.42 35,130 15.03 III. Total number of shares 190,681 100.00 43,000 43,000 233,681 100.00 According to the approval form Reply on Approval of Non-public Issuance of Shares by Lanzhou Zhuangyuan Pasture Co., Ltd.* (Zheng Jian Xu Ke [2020] No. 1864) issued by China Securities Regulatory Commission, the Company issued 43 million RMB ordinary shares (par value of RMB1 per share) to 4 investors, namely Gansu Agricultural Reclamation Assets Management Co., Ltd., Xie Kai, Gao Aiping and Su Guimin bu the end of 2020. The total amount of raised funds was RMB 377,540,000.00, deducting related expenses of RMB8,661,213.21, the actual available raised funds were RMB368,878,786.79, of which RMB43,000,000.00 was included in the share capital of the Company and RMB325,878,786.79 was included in the capital reserve. 180 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXXIV) Capital reserve Balance at Balance at the beginning Increase for Decrease for the end of the period the period the period of the period Item RMB’000 RMB’000 RMB’000 RMB’000 I. Capital premium 528,701 325,879 854,580 Including: capital reserve of restricted share scheme 19,910 19,910 II. Other capital reserve 2,418 2,418 Including: equity incentive cost amortization 2,418 2,418 Total 531,119 325,879 2,418 854,580 For the details of the increase in capital reserve for the period, please refer to Note(XXXIII)“Share capital”; For the details of the decrease in other capital reserve, please refer to Note XI “Share-based payment”. (XXXV) Treasury share Balance at Balance at the beginning Increase for Decrease for the end of Reasons for of the period the period the period the period the change Item RMB’000 RMB’000 RMB’000 RMB’000 Restricted share scheme 23,251 23,251 Total 23,251 23,251 For the Company’s obligation to repurchase the restricted shares, the treasury share and other payable recognized at the agreed repurchase price were RMB23,251,000 respectively. ANNUAL REPORT 2020 181 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXXVI) Surplus reserve Balance at Balance at the beginning Increase for Decrease for the end of the period the period the period of the period Category RMB’000 RMB’000 RMB’000 RMB’000 Statutory surplus reserve 43,387 43,387 Total 43,387 43,387 Note: In accordance with the Company Law and the Articles of Association, the Company withdrew 10% of its net profit as the statutory surplus reserve. Where the accumulative amount of statutory surplus reserve reaches more than 50% of the Company’s registered capital, no profit shall be withdrawn. (XXXVII) Retained earnings Balance at the end of the period Proportion of withdrawal or Amount allocation Item RMB’000 Retained earnings at the end of the previous period prior to the adjustments 483,471 Total amount of retained earnings at the beginning of the period of adjustment (“+” for increase, “-” for decrease) Retained earnings at the beginning of the period after the adjustment 483,471 Add: net profit attributable to the owners of the parent company during the period 10,453 Less: withdrawal of statutory surplus reserve Withdrawal of discretional surplus reserve Ordinary share dividends payable 10,487 Ordinary share dividends changed into share capital Other decreases Retained earnings at the end of the period 483,437 Note: On 23 April 2020, the Company passed the resolutions at board meeting that on the basis of the total share capital of 190,680,600 shares as of 31 December 2019, cash dividend of RMB0.55 (including tax) for every 10 shares are paid to all shareholders with the distributable profit realized in 2019, being cash distribution of RMB10,487,000 in total. 182 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XXXVIII) Operating income and costs Incurred during this period Incurred in previous period Income Costs Income Costs Item RMB’000 RMB’000 RMB’000 RMB’000 I. Subtotal of principal business 722,152 525,938 792,315 547,090 II. Subtotal of other business 17,669 7,005 21,240 12,566 Total 739,821 532,944 813,554 559,656 (XXXIX) Taxes and surcharges Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Environmental protection tax 2,199 1,320 Urban maintenance and construction tax 1,109 1,088 Land use tax 655 571 Charges for water resources 35 135 Education surcharges 549 518 Stamp tax 727 796 Local education surcharges 366 346 Property tax 2,078 1,371 Water conservancy construction funds 25 123 Total 7,745 6,267 ANNUAL REPORT 2020 183 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XL) Selling expenses Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Staff cost 25,314 19,160 Freight and miscellaneous charges 20,446 23,358 Low cost and short-lived consumable items 10,627 11,875 Promotional fees 6,893 12,734 Depreciation and amortization 2,635 2,843 Travel expenses 2,207 2,646 Rents and property management fees 1,458 2,324 Others 3,541 6,645 Total 73,121 81,584 184 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XLI) Administrative expenses Incurred during Incurred in this period previous period Item RMB’000 RMB’000 Staff cost 20,652 24,575 Depreciation and amortization 9,678 9,267 Maintenance fees 13,923 11,162 Professional service fees 4,410 5,885 Environmental protection and discharge fees 3,297 3,941 Administrative expenses 4,925 4,683 Property insurance expenses 1,353 1,477 Water, electricity and heat expenses 1,927 2,459 Test fees 1,286 1,375 Equity incentive expenses (2,418) 2,418 Audit fees 1,811 1,792 Business entertainment expenses 864 732 Travel expenses 1,594 2,019 Freight and miscellaneous charges 746 1,258 Others 4,766 4,347 Total 68,815 77,390 ANNUAL REPORT 2020 185 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XLII) Research and development expenses Incurred during Incurred in this period previous period Item RMB’000 RMB’000 Research and development of new products 9,103 9,462 Total 9,103 9,462 (XLIII) Financial expenses Incurred during Incurred in this period previous period Item RMB’000 RMB’000 Interest expenses from loans and payables 29,620 30,738 Including: interest expenses 33,670 32,738 Interest subsidies for policy-related preferential loans (4,050) (2,000) Less: borrowing costs capitalized 2,070 9,742 Net exchange losses/(gains) 5,470 2,553 Net exchange losses/(gains) (8) 57 Others 1,820 3,702 Total 23,891 22,201 186 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XLIV) Other income Incurred during Incurred in Related to this period previous period assets/revenue Item RMB’000 RMB’000 Amortization of deferred income 3,959 4,210 Related to assets Government grants received during the year 2,443 3,162 Related to revenue Others 101 Related to revenue Total 6,503 7,372 — Note: See Note V.(XXXI) for details of government grants. (XLV) Investment income Incurred during Incurred in this period previous period Type RMB’000 RMB’000 Gains from derecognition of financial assets at amortized cost (12,925) (8,823) Total (12,925) (8,823) ANNUAL REPORT 2020 187 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XLVI) Gains from changes in fair value Incurred during Incurred in this period previous period Source of gains from changes in fair value RMB’000 RMB’000 1. Bearer biological assets 74,263 26,840 Including: loss from changes in fair value less costs to sell of bearer biological assets 59,148 10,721 Gain arising on initial recognition of agricultural produce at fair value less costs to sell at the point of harvest 15,115 16,119 2. Trading financial assets 0 20,412 Including: Profits and losses of changes in fair value arising from contingent consideration 0 20,412 Total 74,263 47,252 The Company’s bearer biological assets are the cows. On the balance sheet date, the Company hired certain qualified and professional assets valuer to determine the fair value of these cows. Any change over each period is included in the profit or loss of the current period. The agricultural products received by the Company from the bearer biological assets are the raw milk. At the time of harvest, the fair value of such agricultural products less the selling expenses (subject to the quotation in the local market) is recognized as the initial costs of the inventory. Any profit or loss (that is, the fair value of agricultural products at the time of harvest less the selling expenses and farming costs) generated from the recognition based on such fair value on the date of harvest shall be recognized in the income statement. Thereafter, during the sales, the inventory amount initially recognized based on such fair value is transferred to selling costs. 188 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XLVII) Credit impairment loss Incurred during Incurred in this period previous period Item RMB’000 RMB’000 Credit impairment loss of accounts receivable (“ — ” for loss) (449) (65) Credit impairment loss of other receivables (“ — ” for loss) (1,064) (927) Total (1,513) (992) (XLVIII) Asset impairment loss Incurred during Incurred in this period previous period Item RMB’000 RMB’000 Loss on inventories depreciation (“ — ” for loss) Impairment loss of fixed assets (“ — ” for loss) (65,867) (9,239) Impairment loss of goodwill (“ — ” for loss) (9,971) (48,719) Total (75,838) (57,958) ANNUAL REPORT 2020 189 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (XLIX) Gains from disposal of assets Incurred during Incurred in this period previous period Item RMB’000 RMB’000 Gains from disposal of fixed assets (“ — ” for loss) 313 2 Total 313 2 (L) Non-operating income Amounts included in the non-recurring profit or loss Incurred during Incurred in of the this period previous period current period Item RMB’000 RMB’000 RMB’000 Government grants irrelevant to the daily activities 1,195 512 1,195 Gains on destruction and scrapping of non-current assets 4 Performance compensation 7,325 22,333 7,325 Others 485 1,979 485 Total 9,006 24,828 9,006 Note 1: See Note V. (XXXI) for details of government grants. 190 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (L) Non-operating income (Continued) Note 2: Details of income of performance compensation are as follow: On 31 October 2018, the Company acquired 82% equity of Dongfang Dairy Company and made it become a wholly-owned subsidiary of the Company. The original shareholders undertook to the Company that the net profit in 2018, 2019 and 2020 (the net profit attributable to the owners of the parent company after deducting non-recurring gain or loss shall prevail) would be no less than RMB18,000,000, RMB22,000,000 and RMB250,000,000. During the undertaking period, the performance promissory shall compensate the Company in the form of cash if the accumulative net profit of Dongfang Dairy Company as of the end of the current period is less than the accumulative undertaken net profit as of the end of the current period. In 2018, Dongfang Dairy Company realized a net profit after deducting non-recurring profit or loss of RMB18,456,415.57; in 2019, Dongfang Dairy Company failed to fulfill the performance undertaking and realized a net profit after deducting non-recurring profit or loss of RMB12,518,529.08; the Company forecasted that Xi’an Dongfang would be still unable to fulfill the performance undertaking in 2020 and it was expected to realize a net profit of RMB13,790,928.19. During the current period, the Company confirmed that the performance compensation income for 2019 due from the original shareholders of Dongfang Dairy Company of RMB22,333,249.24 was included in the non-operating income of the current period in accordance with the performance compensation agreement at the time of acquisition. The Company also recognized closing trading financial assets and the gains and losses from changes in fair value totaling RMB20,412,321.24 by forecasting of the results for 2020. The company received performance compensation of RMB22,333,249.24 in May 2020. According to the net profit achieved by Dongfang Dairy Company in 2020, the Company confirmed the performance compensation income for 2020 due from the original shareholders of Dongfang Dairy Company of RMB27,737,779.41, of which RMB20,412,321.24 were included in the gains and losses from changes in fair value for the 2019, and accordingly confirmed non-operating income-performance compensation of RMB7,325,458.17 in 2020. As of 31 December, 2020, after deducting the earnest money, the Company shall receive RMB 14,106,479.42 from the original shareholders of Dongfang Dairy Company. ANNUAL REPORT 2020 191 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (LI) Non-operating expenses Amounts included in the non-recurring profit or loss Incurred during Incurred in of the this period previous period current period Item RMB’000 RMB’000 RMB’000 External donations 56 155 56 Loss on destruction and scrapping of non-current assets 11,446 2,861 11,446 Fines expenses 100 149 100 Other expenses 48 528 48 Total 11,650 3,693 11,650 (LII) Income tax expenses 1. Breakdown of income tax expense Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 Income tax expenses for the current period calculated in accordance with tax laws and relevant regulations 1,160 10,135 Deferred income tax expenses 747 3,523 Total 1,907 13,658 192 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (LII) Income tax expenses (Continued) 2. Reconciliation of accounting profit and income tax expenses Amount Item RMB’000 Total amount of profit 12,361 Income tax expenses calculated based on statutory/applicable tax rate 1,854 Effect of application of different tax rates on subsidiaries (1,121) Effect of adjustment of income tax for the prior period Effect of non-taxable income (283) Effect of non-deductible costs, expenses and losses 59 Effect of using deductible temporary difference or deductible losses on unrecognized deferred income tax assets for the prior period Effect of deductible temporary difference or deductible losses of unrecognized deferred income tax assets at the end of the period 1,398 Income tax expenses 1,907 (LIII) Cash flow statement 1. Cash received or paid from/for other operating activities Incurred during Incurred in this period previous period Item RMB’000 RMB’000 Cash received from other operating activities 43,869 41,347 Including: Earnest money 7,049 4,518 Accounts payable received from E-commerce platform 6,371 16,581 Government grants 9,181 9,239 Others 21,269 11,008 Cash paid for other operating activities 94,000 89,465 Including: Office travelling expenses 4,794 7,695 Maintenance fees 13,932 13,524 Freight and miscellaneous charges 20,446 23,305 Professional service fees 6,198 6,791 Promotional fees 5,966 5,419 Others 42,665 32,730 ANNUAL REPORT 2020 193 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (LIII) Cash flow statement (Continued) 2. Cash received or paid from/for other investing activities Incurred during Incurred in this period previous period Item RMB’000 RMB’000 Cash received from other investing activities 41,233 2,553 Including: Recovery of performance compensation 22,333 Recovery of the cost of land acquisition in the previous period 18,900 Interests income from bank deposits 2,553 Cash paid for other investing activities Including: Increase in pledged deposit 3. Cash received or paid from/for other financing activities Incurred during Incurred in this period previous period Item RMB’000 RMB’000 Cash received from other financing activities 540,792 266,583 Including: Restricted shares 1,146 Recovery of earnest money 160,792 14,300 Bill discount 380,000 251,137 Cash paid for other financing activities 364,534 176,902 Including: Cash paid relating to leases 4,789 6,620 Guarantee fees paid 1,150 4,775 Bank bill settlement 148,146 Increase in pledged deposit 210,449 165,507 194 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (LIV) Supporting information about cash flow statement 1. Supporting information about cash flow statement Incurred during Incurred in this period previous period Item RMB’000 RMB’000 1. Adjustment of net profit to cash flow of operating activities Net profit 10,453 51,321 Plus: Credit impairment loss 1,513 992 Asset impairment loss 75,838 57,958 Fixed assets and right-of-use assets depreciation 94,419 75,006 Intangible assets amortization 2,798 2,038 Long-term deferred expenses amortization 2,910 3,963 Loss on disposal of fixed assets, intangible assets and other long-term assets (“— ” for gains) (313) 2 Loss on scrapping of fixed assets (“—” for gains) 11,446 2,857 Loss on changes to the far value (“—” for gains) (59,148) (31,133) Financial expenses (“ — ” for gains) 27,550 20,996 Loss on investment (“ — ” for gains) 12,925 8,823 Decrease of deferred income tax assets (“—” for increase) 4,142 793 Increase of deferred income tax liabilities (“—” for decrease) (3,394) 2,729 Decrease of inventories (“—” for increase) (18,793) (5,911) Decrease of operating items receivable (“—” for increase) (20,983) (643) Increase of operating items payable (“—” for decrease) 285 (49,515) Others Net amount of cash flow generated from operating activities 141,647 140,277 2. Major investing and financing activities irrelevant to cash income and expenses Conversion of debts into capital Convertible corporate bonds to become due within one year Acquisition of fixed assets under finance leases 3. Net changes to cash and cash equivalents Balance of cash at the end of the period 631,565 248,235 Less: balance of cash at the beginning of the period 248,235 388,791 Plus: balance of cash equivalents at the end of the period Less: balance of cash equivalents at the beginning of the period Net increase of cash and cash equivalents 383,330 (140,556) ANNUAL REPORT 2020 195 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (LIV) Supporting information about cash flow statement (Continued) 2. Cash and cash equivalents Balance at Balance at the end the beginning of the period of the period Item RMB’000 RMB’000 I. Cash 631,565 248,235 Including: cash on hand 4 16 Bank deposits immediately available for payment 631,560 248,218 Other cash at bank and on hand as immediately available for payment Amount available for payment and deposited in the Central Bank Deposit in other financial Institutions Loans to other financial Institutions II. Cash equivalents Including: debenture investment to become due within 3 months III. Balance of cash and cash equivalents at the end of the year 631,565 248,235 IV. Use of restricted cash and cash equivalents by the Parent Company or the subsidiaries of the Company 165,507 196 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 (V) IMPORTANT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (LV) Assets with restricted ownership or use right Carrying value at the end Reasons of the period for restriction Item RMB’000 Cash at bank and on hand 211,164 Bills earnest money Cash at bank and on hand 4,000 Mortgage loan earnest money Fixed assets 454,810 Long-term and short-term mortgage loan Intangible assets 82,152 Long-term mortgage loan Long-term equity investment — Xi’an Dongfang Dairy Co., Ltd. 35,300 Long-termmortgage loan Total 787,426 — VI. CHANGES OF SCOPE OF CONSOLIDATION (I) Business combination not under the common control occurred during the period None (II) Business combination under the common control occurred during the period None (III) Disposal of equity in subsidiaries during the period None ANNUAL REPORT 2020 197 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 VII. INTERESTS IN OTHER ENTITIES (I) Interests in subsidiaries 1. Composition of group members Issued and Actual Interests Held as at Fully Paid- 31 December up Registered Place of Incorporation and Capital Main Business and Name of Subsidiaries Type of Legal Entity RMB0’000 2020 2019 Place of Business Qinghai Qinghai Lake Dairy Xining City, Qinghai Province, China Limited 3000 100.00% 100.00% Dairy products production and Co., Ltd. liability company sales in China Xi’an Dongfang Dairy Co., Xi’an City, Shaanxi Province, China Limited 3530 100.00% 100.00% Dairy products production and Ltd. liability company sales in China Qinghai Shengyuan Pasture Huangyuan County, Xining City,Qinghai 3000 100.00% 100.00% Closed by the government's Co., Ltd. Province, China Limited liability company request to relocate Qinghai Shengya Plateau Huangzhong County, Xining City, Qinghai 3000 100.00% 100.00% Dairy farming in China Pasture Co., Ltd. Province, China Limited liability company Yuzhong Ruifeng Pasture Yuzhong County, Lanzhou City, Gansu 2000 100.00% 100.00% Dairy farming in China Co., Ltd Province, China Limited liability company Linxia County Ruiyuan Linxia County, Linxia Prefecture, Gansu 3000 100.00% 100.00% Dairy farming in China Pasture Co., Ltd. Province, China Limited liability company Linxia County Ruian Pasture Linxia County, Linxia Prefecture, Gansu 2000 100.00% 100.00% Dairy farming in China Co., Ltd. Province, China Limited liability company Wuwei Ruida Pasture Co., Wuwei City, Gansu Province, China Limited 2000 100.00% 100.00% Dairy farming in China Ltd. liability company Ningxia Zhuangyuan Pasture Wuzhong City, Hui Autonomous Region, 2000 100.00% 100.00% Closed by the government's Co., Ltd. Ningxia, China Limited liability company request to relocate Lanzhou Ruixing Animal Yongdeng County, Lanzhou City, Gansu 1000 100.00% 100.00% Dairy farming in China Husbandry Co., Ltd. Province, China Limited liability company Gansu Ruijia Animal Jinchang City, Gansu Province, China 30000 100.00% 100.00% Dairy farming in China Husbandry Co., Ltd. Limited liability company 198 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 VIII. RISKS RELATED TO FINANCIAL INSTRUMENTS The Company’s financial instruments mainly include borrowings, accounts receivable and accounts payable, for details of these financial instruments please refer to Note V. For risks related to these financial instruments and the risk management policies adopted by the Company for the purpose of mitigating such risks, please see below. The Company’s management shall manage and monitor these risk exposures to ensure that the aforesaid risks may be controlled within the restricted scope. (I) Risk management objectives and policies The Company implements risk management to keep proper balance between the risks and gains and attempt to reduce the adverse impacts of these financial risks on its financial performance. Based on such risk management objective, the Company has already worked out the risk management policy to identify and analyze its risk, set appropriate acceptable level of risk and design corresponding internal control process to monitor its risk level. The Company will also regularly review these risk management policies and internal control system so as to adapt to the market situations or changes to its business activities. The Company’s internal auditing department will also regularly or at any time check whether the implementation of its internal control system is in compliance with the risk management policy. 1. Credit risk On 31 December 2020, the biggest credit risk exposure resulting in the Company’s financial loss mainly results from the failure by the other party to the contract to perform the obligations, thus, the Company suffers from any loss on the financial assets and has to provide the financial guarantee, specifically including the cash at bank and on hand and the accounts receivable. In order to reduce the credit risk, the Company’s management will continuously monitor these credit risk exposures. The Company’s cash at bank and on hand other than the cash is mainly deposited in the banks with higher credit rating, therefore, the management considers that there is no existence of higher credit risk and expects no loss to the Company arising from the default of the other party. ANNUAL REPORT 2020 199 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 VIII. RISKS RELATED TO FINANCIAL INSTRUMENTS (Continued) (I) Risk management objectives and policies (Continued) 1. Credit risk (Continued) As for the accounts receivable, the Company’s management has already worked out the credit policy based on the actual situations and conduct credit evaluation on the customers to determine the credit limit and period. The credit evaluation depends on the customer’s financial status. The accounts receivable will become due 30 days after the statement of accounts is issued or no later than 1 year. The debtor with overdue accounts receivable will be required to first repay any and all of the outstanding balance and then can obtain the further credit limit. Generally, the Company will not request the customer for provision of any mortgaged item. In addition, the Company will review the recovery of each accounts receivable on the date of each balance sheet to ensure the sufficient provision for bad and doubtful debts based on the estimated credit loss on such assets. Therefore, the Company’s management considers that its credit risk has already been significantly reduced. The Company’s credit risk is mainly affected by the characteristic of each customer but not the industry or country and region of such customer. Therefore, the significant credit risk mainly results from the significant accounts receivable by the Company from the individual customer. On the balance sheet date, the accounts receivable from the Company’s top 5 customers account for 55.42% (50.01% in 2019) of the total amount of accounts receivable by the Company; in addition, those accounts receivable by the Company that have not become overdue or been impaired mainly involve multiple customers without default records in recent times. As for other receivables, the Company’s management will implement management based on the nature of the receivables. With respect to the credit risk in connection with other receivables, the Company has already taken the net amount after loss on impairment into consideration and listed in the balance sheet. The Company’s largest credit risk exposure is the book amount of each financial asset listed in the balance sheet. The Company has adopted the necessary policy to ensure that all the sale customers keep good credit records. 200 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 VIII. RISKS RELATED TO FINANCIAL INSTRUMENTS (Continued) (I) Risk management objectives and policies (Continued) 2. Liquidity risk Liquidity risk means while performing the obligations by way of settlement in cash or other financial assets, the enterprise suffers from the risk of lack of funds. The Company and each of its subsidiaries are responsible for their respective cash management work, including the cash surplus short-term investment and loan financing to meet the requirements for projected cash payable (if the amount of loan exceeds the upper limit authorized by certain presupposition, approval should be obtained from the Company’s Board of Directors). The Company’s policy is to regularly monitor short-term and long-term liquidity requirements and whether it meets the requirements of the loan agreement to ensure that sufficient cash reserves are maintained. Meanwhile, it obtains the commitments from major financial institutions for provision of sufficient reserve funds so as to satisfy the short- and long-term requirements for the current funds. The following tables set out the remaining contractual maturities at the balance sheet date of the Group’s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at 31 December) and the earliest date the Group can be required to pay: Contractual undiscounted cash flow at 31 December2020 Carrying value Within 1 year Over 1 year Over 2 years on the or on but within but within balance Item demand 2 years 5 years Over 5 years Total sheet date RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Short-term borrowings 327,694 327,694 322,337 Bills payable 431,160 431,160 431,160 Accounts payable 214,105 214,105 214,105 Other payables 52,990 52,990 52,990 Long-term borrowings 58,827 85,466 169,259 92,977 406,529 311,282 Lease liabilities 6,045 3,654 9,734 48,520 67,953 40,483 Total 1,090,821 89,120 178,993 141,497 1,500,431 1,372,357 ANNUAL REPORT 2020 201 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 IX. FAIR VALUE The following table includes the fair value information of the Company’s assets and liabilities sustainably measured by the fair value on each balance sheet date at the end of the period of such report and the level of such measurement. The level of fair value measurement results depends on the input at the lowest level that significantly affects the fair value in general. Three levels of input are defined as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; Level 3 inputs are unobservable inputs for the asset or liability. (I) Fair value of assets and liabilities measured by fair value at the end of the year Fair value as at 31 December 2020 Fair value Fair value Fair value measurement measurement measurement at Level 1 at Level 2 at Level 3 Total Item RMB’000 RMB’000 RMB’000 RMB’000 Sustainable fair value measurement 494,691 494,691 Bearer biological assets 494,691 494,691 Trading financial assets (Continued) Fair value as at 31 December 2019 Fair value Fair value Fair value measurement measurement measurement at Level 1 at Level 2 at Level 3 Total Item RMB’000 RMB’000 RMB’000 RMB’000 Sustainable fair value measurement 380,507 380,507 Bearer biological assets 360,095 360,095 Trading financial assets 20,412 20,412 The carrying value of consumable biological assets on each balance sheet date during the report period is relatively minor, which is approximate to the fair value. 202 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 IX. FAIR VALUE (Continued) (II) Qualitative and quantitative information over the valuation technology and important parameters adopted by the evaluation on fair value of bearer biological assets 1. Quantitative information over fair value measurement at Level 3: Relationship between the key unobservable inputs and fair Category Methods for valuation Key unobservable inputs value measurement Calves and The fair value of 14-month old heifer is The average market price of 14-month old domestic When the market price is heifers calculated by reference to the market price heifer this year is RMB20,000 (RMB18,300 in increased, it is estimated of the active transaction market. 2019); and the average market price of 14-month that the fair value will be old imported heifer is RMB23,000 (RMB21,400 in increased. 2019). Milkable cows The fair value of milkable cows is determined As for the quantity of milkable cows, it is assumed It is estimated that when the according to the multi period-excess- that the existing number of milkable cows is rejection rate is increased, earnings and based on the discounted decreased at the end of the related period arising the fair value will be future cash flow generated by the milkable from the rejection rate due to natural or unnatural decreased. cows. factors (including disease, difficult delivery, low milk production or end of all the gestation periods), it is estimated that the overall rejection rate this year will be 5.0%~100% as increase of the gestation period (5%~100% in 2019). Each milkable cow has 5~6 gestation periods to the It is estimated that when the maximum extent. It is estimated that in the self- production volume of raw operated pastures of 7 wholly-owned subsidiaries, milk is increased, the fair within each gestation period of this year, each value will be increased. cow will averagely produce 9.12 tons of raw milk (the output of raw milk of the seven self-operated pastures varies, namely Ruixing (8.28~ 10.43 tons); Wuwei Ruida (8.57~11.39 tons); Shengya (8.09~9.74 tons); Ruijia (7.47 tons); Ruiyuan (8.36~9.91 tons); Ruifeng (5.96 tons); and Shaanxi Duoxian (9.15~9.55 tons)) (the output of raw milk of the five self-operated pastures was 8.66 tons in 2019), depending on the number of times during the gestation period and the individual health status. It is estimated in this year that the future local market It is estimated that when the price of each ton of the raw milk is RMB4,305/ future local market price of ton(the price of the seven self-operated pastures the raw milk is increased, the varies, namely Ruixing (RMB4,429/ton); Wuwei fair value will be increased. Ruida (RMB4,202/ton); Shengya (RMB4,294/ton); Ruijia (RMB4,288/ton); Ruiyuan (RMB4,284/ton); Ruifeng (RMB4,223/ton); and Shaanxi Duoxian (RMB4,413/ton)) (RMB4,046/ton in 2019). Calculated as per the capital asset pricing model, the When the discount rate is discount rate of this year is 10.75% (12.01% in increased, it is estimated 2019). that the fair value will be decreased. ANNUAL REPORT 2020 203 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 X. RELATED PARTIES AND RELATED TRANSACTIONS (I) Parent company of the Company The Company has no parent company, and its ultimate controlling party is a natural person, Mr. Ma Hongfu. (II) Subsidiary of the Company For details please refer to “Note VII. Interest in the Subsidiaries”. (III) Other related parties of the Company Name of other related parties Relationship between other related parties and the Company Linxia County Ruihua Pasture Co., Ltd. Entity under the common control of spouses of family members of the controlling shareholder, Ma Hongfu Gansu Nongken Tianmu Dairy Company Jointly controlled by the same party with shareholders Limited holding more than 5% of the Company’s shares (IV) Related transactions 1. Related transactions such as purchase and sales of commodities and provision and acceptance of labor service The Company purchased 150.90 tons of raw milk from the related party Gansu Nongken Tianmu Dairy Company Limited for a total of RMB754,500.00 during the year. 2. Remuneration of key management personnel Incurred during Incurred in this period previous period Remuneration of key management personnel RMB’000 RMB’000 Total 1,852 2,523 3. Other related transactions None 204 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XI. SHARE-BASED PAYMENT (1) Overall Conditions of Share-based Payment According to the “Proposal on the 2019 Restricted Share Incentive Scheme (Draft) of Lanzhou Zhuangyuan Pasture Co., Ltd. and its Summary” considered and passed at the first extraordinary general meeting of the Company held on 23 May 2019 and the “Proposal on Adjusting Matters Related to the 2019 Restricted Share Incentive Scheme” and the “Proposal on the First Grant of Restricted Stock to Incentive Targets” considered and passed at the 21th meeting of the third session of the Board of the Company held on 21 June 2019, the number of restricted shares granted under the adjusted 2019 Restricted Share Incentive Scheme was 3,940,600 shares, including 3,340,600 shares in the first grant and 600,000 shares reserved, the total number of the incentive targets in the first grant was 84 individuals, and the price of grant was RMB6.96 per share. The targets of the incentive scheme included the Directors, senior management, middle-level management and core technicians (sales staff) of the Company. Source of shares: RMB common A-shares of Lanzhou Zhuangyuan Pasture Co., Ltd. issued to the incentive targets of the Company; date of grant: 21 June 2019; price of the grant: RMB6.96 per share; number of the grant: 3,340,600 shares; number of grantees: 84 individuals. Lock-up Arrangement The unlocking arrangement under the first grant of the restricted shares is set out in the table below: Unlocking Unlocking arrangement Unlocking time proportion First unlocking Commencing on the first trading day after expiry of the 30% period 18-month period from the record date and ending on the last trading day of the 30-month period from the record date Second unlocking Commencing on the first trading day after expiry of the 30% period 30-month period from the record date and ending on the last trading day of the 42-month period from the record date Third unlocking Commencing on the first trading day after expiry of the 40% period 42-month period from the record date and ending on the last trading day of the 54-month period from the record date ANNUAL REPORT 2020 205 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XI. SHARE-BASED PAYMENT (Continued) (1) Overall Conditions of Share-based Payment (Continued) Unlocking conditions During the unlocking period, the restricted shares granted to the incentive targets if the following conditions of grant are satisfied: A. There is no occurrence of any of the following events on the part of the Company issue of an auditors’ report with adverse opinion or which indicates an inability to give opinion by a certified public accountant with respect to the financial report of the Company for its most recent accounting year; issue of an auditors’ report with adverse opinion or which indicates an inability to give opinion by a certified public accountant with respect to the internal control of the financial report of the Company for its most recent accounting year; failure to conduct profit distribution in accordance with laws and regulations, the Articles of Association and public undertakings during the 36 months after listing; prohibition from implementation of a share incentive scheme by laws and regulations; any other circumstances as determined by the CSRC. 206 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XI. SHARE-BASED PAYMENT (Continued) (1) Overall Conditions of Share-based Payment (Continued) Unlocking conditions (Continued) B. There is no occurrence of any of the following events on the part of the Incentive Participants: being subject to any identification as an ineligible personnel by a stock exchange in the last 12 months; being subject to any identification as an ineligible personnel by the CSRC and its resident agencies in the last 12 months; imposition of administrative penalties or measures prohibiting the Incentive Participants from entering into the market by the CSRC and its resident agencies in the last 12 months due to material non-compliance of laws or regulations; circumstances under which the Incentive Participant is prohibited from acting as a director and a member of the senior management of the Company pursuant to the Company Law; circumstances under which the Incentive Participants are not allowed by the laws and regulations to participate in share incentive schemes of a listed company; any other circumstances as determined by the CSRC. In case the Company has any of the circumstances specified in the above sub- paragraph (1) during the implementation of the Incentive Scheme, all the restricted shares that have been granted to the Incentive Participants under the Incentive Scheme but have not been unlocked shall be repurchased and cancelled by the Company and the repurchase price shall be the sum of the grant price and the interests on the bank deposits of the same term; in case any Incentive Participant has any of the circumstances specified in the above sub-paragraph (2), the Company will terminate its right to participate in the Incentive Scheme, and the restricted shares that have been granted to the Incentive Participant under the Incentive Scheme but have not been unlocked shall be repurchased and cancelled by the Company and the repurchase price shall be the grant price. ANNUAL REPORT 2020 207 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XI. SHARE-BASED PAYMENT (Continued) (1) Overall Conditions of Share-based Payment (Continued) Unlocking conditions (Continued) C. Performance appraisal targets at the Company level The Incentive Scheme is subject to evaluation once an accounting year. The performance appraisal targets of the First Grant are as follows: Unlocking periodPerformance appraisal targets First unlocking period On the basis of the operating income after reasonable adjustments in 2018, the growth rate of the operating income for 2019 shall not be lower than 10% Second unlocking period On the basis of the operating income after reasonable adjustments in 2018, the growth rate of the operating income for 2020 shall not be lower than 20% Third unlocking period On the basis of the operating income after reasonable adjustments in 2018, the growth rate of the operating income for 2021 shall not be lower than 30% In the event the Company fails to meet the performance appraisal targets above, all restricted shares which can be unlocked by the Incentive Participants in the respective assessment year shall not be unlocked and shall be repurchased and cancelled by the Company at the grant price plus the interest rate of bank deposits of the same term. 208 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XI. SHARE-BASED PAYMENT (Continued) (1) Overall Conditions of Share-based Payment (Continued) Unlocking conditions (Continued) D. Performance appraisal requirements at the Incentive Participant level Incentive Participants can only unlock restricted shares if the Company achieved the abovementioned performance appraisal targets and individuals’ post performance appraisal standards in the previous year. The specific unlocking ratio shall be determined based on the individual performance appraisal results of the Incentive Participants. The individual performance appraisal of the Incentive Participants shall be conducted annually in accordance with the Assessment Management Measures for Implementation of the 2019 Incentive Scheme for Restricted Shares of Lanzhou Zhuangyuan Pasture Co., Ltd. ( 2019 ). The assessment results shall be determined in accordance with individuals’ performance appraisal and evaluation indicators. In principle, the performance evaluation results are classified into four grades, i.e. excellent (A), good (B), general (C), and poor (D), of which, A/B/C are qualified and D is unqualified. The appraisal and evaluation form is applicable to the assessment objects. Appraisal results Qualified Unqualified Standard grade Excellent (A) Good (B) General (C) Poor (D) Standard coefficient 1.0 1.0 0.8 0 Individuals’ actual unlock limit for the current year = standard coefficient limit planned to be unlocked by individuals in the current year. The restricted shares which cannot be unlocked by the Incentive Participants in the year of appraisal shall be repurchased and cancelled by the Company. ANNUAL REPORT 2020 209 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XI. SHARE-BASED PAYMENT (Continued) (2) Equity-settled share-based payment Basis of the determination of the number of equity instruments expected to vest: At each balance sheet date during the vesting period, the Group makes the best estimation according to the latest information of the number of employees who are granted to vest and revises the number of equity instruments expected to vest. On vesting date, the estimate shall be equal to the number of equity instruments that ultimately vested. Method to determine the fair value of equity instruments at the date of grant: the Company selected the closing price on the date of granting the restrictive Shares (RMB13.14 per Share) to determine the fair value of the restrictive Shares, and the total fair value of the equity instruments at the date of grant was RMB20,644,908.00, details of which are set out in the table below: Item Phase I Phase II Phase III Total Fair value per restrictive shares (RMB) 6.18 6.18 6.18 Unlocked shares (RMB’000) 1,002 1,002 1,336 3,341 Total cost of restrictive shares for the current period (RMB’000) 6,193 6,193 8,258 20,645 210 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XI. SHARE-BASED PAYMENT (Continued) (3) Cost of equity-settled share-based payment actually recognized during the year A. In 2020, the Company failed to complete the performance appraisal targets of the second batch restricted shares, did not recognize the share-based payment cost and reversed the second batch share-based payment cost recognized in 2019. B. The Company predicts that it will not be able to complete the third batch shares appraisal targets in 2021, and did not recognize the third batch share-based payment cost and reversed the third batch share payment cost recognized in 2019. The actual share-based payment cost recognized during the year was RMB(2,418,000). The amortization of restricted shares costs recognized in 2019 to 2022 by the Company based on the forecast that the third batch equity incentives cannot meet the performance conditions, is set out in the table below: 2019 2020 2021 2022 Total Item RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Costs of the restrictive shares 2,418 (2,418) As of 31 December 2020, the Company expected the number of equity instruments would be 0 shares in the future and the accumulated amount of the equity-settled share-based payment included in the capital reserve for the current period was RMB0. ANNUAL REPORT 2020 211 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XII. COMMITMENTS AND CONTINGENT MATTERS (I) Commitments Matters (1) Capital Commitments Closing balance Opening balance Item RMB’000 RMB’000 Capital commitments contracted but not recognized in the financial statement 12,479 25,874 — Commitment to the construction of long-term assets 12,479 25,874 Total 12,479 25,874 (II) Contingency None XIII. EVENTS AFTER THE BALANCE SHEET DATE 1. On 22 January 2021, Mr. Ma Hongfu, the de facto controller of the Company, Mr. Hu Kaisheng, the shareholder of the Company, and Gansu Nongken Group Limited Liability Company signed the “The Agreement among Ma Hongfu, Hu Kaisheng and Gansu Nongken Group Limited Liability Company Regarding the Share Transfer of Lanzhou Zhuangyuan Investment Co., Ltd.”, such transaction involves the change of the Company’s controlling shareholder and de facto controller. Such share transfer is still subject to the passing the review of concentration of operators by the State Administration for Market Regulation, and obtaining the approval by Gansu SASAC on the share transfer. 2. On 15 January 2021, the Company held the 46th meeting of the third session of the Board of Directors and the 31st meeting of the third session of the Board of Supervisors to consider and approve the Proposal on the Repurchase and Cancellation of All Restricted Shares in the First Release of Locked Period under the 2019 Restricted Shares Incentive Scheme, Such repurchase and cancellation of some restricted shares by the Company will reduce the registered capital from RMB233,680,600 to RMB232,381,032. 3. On 29 March 2021, the Company considered and approved the “Proposal on the Company’s 2020 Profit Distribution” at the 51st meeting of the third session of the Board of Directors, pursuant to which it is proposed to distribute a cash dividend of RMB0.2 (tax inclusive, the actual distribution amount may vary slightly due to rounding) for every 10 shares, the total proposed cash dividend will be RMB4,673,612.00. Such matters is still subject to be considered at the general meeting. 212 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XIV. OTHER IMPORTANT MATTERS (I) Segment reporting Considering the framework of internal organization, management requirements and internal reporting system, the Company has determined two reportable segments, which are dairy farming and dairy products production. Each reportable segment is a separate business unit which offers different products and services, and is managed separately because they acquire different technology and market strategies. The financial information of the different segments is regularly reviewed by the Company’s management to determine the allocation of resources and assess the performance. Name of segment Principal activities of segments Dairy farming Breeding dairy cows to produce and sell raw milk Dairy products production Production and sales of Pasteurized Milk, UHT Milk, Modified Milk, Yogurt and Other Dairy Products 1. Profit or loss, assets and liabilities of reportable segments For the purposes of assessing segment performance and allocating resources between segments, the Company’s management regularly reviews the assets, liabilities, revenue, expenses and financial performance, attributable to each reportable segment on the following bases: Segment assets include all tangible, intangible, other long-term assets and current assets, such as receivable, with the exception of deferred tax assets and other unallocated corporate assets (if any). Segment liabilities include current and non-current liabilities, such as payables, bank borrowings, attributable to the individual segments, but exclude deferred tax liabilities (if any). ANNUAL REPORT 2020 213 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XIV. OTHER IMPORTANT MATTERS (Continued) (I) Segment reporting (Continued) Financial performance is operating income (including operating income from external customers and inter-segment operating income) after deducting operating costs, taxes and surcharges, selling and distribution expenses, general and administrative expenses, financial expenses and non-operating income and expenses attributable to the individual segments but exclude unallocated corporate expenses (if any). Transfer pricing of income among reportable segments is in accordance with the similar terms of transaction with external parties. Information regarding the Company’s reportable segments set out below is the measure of segment profit or loss and segment assets and liabilities reviewed by the Company’s management or is otherwise regularly provided to the Company’s management, even if not included in the measurement of segment profit or loss and segment assets and liabilities: Dairy Products Production Dairy farming Segment Segment Elimination among Segments Total Incurred Incurred Incurred Incurred Incurred in previous Incurred in previous Incurred in previous Incurred in previous in the year year in the year year in the year year in the year year Item RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Operating income from external customers 70,800 40,936 669,021 772,619 739,821 813,554 Inter-segment operating income 213,957 216,971 (213,957) (216,971) Depreciation and amortization 35,802 24,501 61,415 52,542 97,217 77,043 Interests income 253 187 5,218 2,366 5,470 2,553 Interests expense 4,345 3,158 23,205 17,838 27,550 20,996 Total amount of profit/(losses) (66,792) (10,452) 79,152 75,430 12,361 64,979 Income tax expense 1,907 13,657 1,907 13,657 Net profit/(losses) (66,792) (10,452) 77,245 61,773 10,453 51,321 Total assets 1,520,434 970,763 2,203,694 2,189,997 (643,571) (668,033) 3,080,558 2,492,727 Total liabilities 893,338 775,821 1,238,957 1,159,532 (643,571) (668,033) 1,488,724 1,267,320 Additions on non-current assets 154,282 57,489 2,191 334,649 156,473 392,138 214 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XIV. OTHER IMPORTANT MATTERS (Continued) (I) Segment reporting (Continued) 2. Geographic information As the Company’s revenue is derived from customers located in the Mainland of China and non-current assets are mainly taken from and wholly located in Mainland China and all the branches are managed on a national basis due to their similar customer classifications or classification and similar regulatory environment in all regions, no information has been provided to the management of the Group by geographical area in mainland China. 3. Major customers In 2020 and 2019, there is no case in which revenue to a single customer exceeds 10% of the total revenue of the Company. (II) Remuneration of directors, supervisors and employees 1. Remuneration of directors and supervisors Salaries, allowances Pension and benefits scheme Total Total Fees in kind contributions remuneration remuneration RMB RMB RMB RMB RMB 2020 Executive Directors Mr. Ma Hongfu 98,100.00 212,400.00 10,517.76 321,017.76 Mr. Wang Guofu 90,240.00 269,760.00 10,517.76 370,517.76 Mr. Chen Yuhai* 50,040.00 69,960.00 7,888.32 127,888.32 Ms. Zhang Qianyu 69,140.00 114,960.00 10,517.76 194,617.76 Independent Non-Executive Directors Ms. Liu Zhijun 30,000.00 30,000.00 Mr. Zhao Xinmin 30,000.00 30,000.00 Mr. Wong Cho Hang Stanley 102,000.00 102,000.00 Supervisors: Mr. Wei Lin 30,000.00 30,000.00 Mr. Sun Chuang 0.00 Ms. Du Wei 78,300.00 63,746.29 10,517.76 152,564.05 Total 1,358,605.65 * Mr. Chen Yuhai resigned as executive Director on 6 March 2020. ** Mr. Song Xiaopeng resigned as non-executive Director on 22 December 2020. ANNUAL REPORT 2020 215 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XIV. OTHER IMPORTANT MATTERS (Continued) (II) Remuneration of directors, supervisors and employees (Continued) 1. Remuneration of directors and supervisors (Continued) Wages, housing subsidies, other Directors and subsidies Retirement Supervisors and physical Discretionary scheme Category of personnel Fees benefits bonus contributions Total RMB RMB RMB RMB RMB 2019 Executive directors Mr. Ma Hongfu 147,600.00 201,882.24 10,517.76 360,000.00 Mr. Wang Guofu 89,570.00 259,962.24 10,517.76 360,050.00 Mr. Chen Yuhai 100,130.00 261,402.24 10,517.76 372,050.00 Ms. Zhang Qianyu 68,227.00 105,162.24 10,517.76 183,907.00 Independent non-executive directors Ms. Liu Zhijun 30,000.00 30,000.00 Mr. Zhao Xinming 30,000.00 30,000.00 Mr. Wong Cho Hang Stanley 105,381.10 105,381.10 Supervisors Mr. Wei Lin 30,000.00 30,000.00 Mr. Sun Chuang Ms. Du Wei 78,685.55 62,741.69 10,517.76 151,945.00 Total 195,381.10 484,212.55 891,150.65 52,588.80 1,623,333.10 There was no arrangement under which a director waived or agreed to waive any remuneration during the year. 216 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XIV. OTHER IMPORTANT MATTERS (Continued) (II) Remuneration of directors, supervisors and employees 2. Five Highest Paid Individuals The five highest paid individuals of the Company during the year are shown as follows: Incurred during No. Name this period RMB’000 1 Feng Jun 494 2 Wang Guofu 371 3 Ma Hongfu 321 4 Zhang Qianyu 195 5 Du Wei 153 The five highest paid employees during the year included three directors (2019: three), details of whose remuneration are set out above. Details of the remuneration for the year of the one (2019: one) highest paid employee who are neither a director nor chief executive of the Company are as follows: 2020 2019 RMB RMB Salaries, allowances and benefits in kind 483,528.75 354,767.35 Pension scheme contributions 10,517.76 10,517.76 494,046.51 365,285.11 The number of these non-director, highest paid employees whose remuneration fell within the following bands is as follows: 2020 2019 Nil to HK$1,000,000 1 1 HK$1,000,001 to HK$1,500,000 — — 1 1 ANNUAL REPORT 2020 217 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XIV. OTHER IMPORTANT MATTERS (Continued) (III) Legal proceedings 1. On 13 February 2018, according to the Notice on the Closing and Relocation of Livestock Farms in the Livestock and Poultry Prohibited Area ( ) issued by the People’s Government of Litong District of Wuzhong City, Ningxia Zhuangyuan Pasture Co., Ltd. a wholly-owned subsidiary of the Company, was listed as the livestock farms planned to be closed and relocated, and the Company responded positively to the government’s work arrangement and carried out the closure work. The Company has been actively negotiating compensation matters with the Litong District People’s Government, but has not yet signed a compensation agreement with the People’s Government of Litong District till the date of this announcement. The Company filed a lawsuit with the Intermediate People’s Court of Wuzhong City and requested the People’s Court to order the People’s Government of Litong District of Wuzhong City to fullfil statutory obligations in accordance with the requirements of the Article 25 of the Regulations on the Prevention and Control of Pollution Caused by Scale Livestock and Poultry ( ) and the Regulations on Expropriation and Compensation of Houses on State-owned Land ( ) and make compensation for the loss caused by the closure and relocation of the Company’s farms. Ningxia Zhuangyuan recently received the Administrative Judgment ((2020) Ning 03 Xingchu No. 6) served by the People’s Court of Wuzhong City of Ningxia Hui Autonomous Region. The main content of the Judgment is that “the People’s Government of Litong District of Wuzhong City as defendant shall compensate Ningxia Zhuangyuan Pasture as plaintiff for the closure and relocation within 60 days from the date on which this Judgment takes effect”. As of the date of this report, compensation for demolition and relocation is still in the process of negotiation and communication. 218 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XIV. OTHER IMPORTANT MATTERS (Continued) (III) Legal proceedings (Continued) 2. On 25 July 2017, according to the notice on the Plan for Delineation of the Prohibited Area and Restricted Area of Livestock and Poultry in Xining City (Trial) (Ningzhengban 2017 No. 143) ( ) issued by the General Office of the People ’s Government of Xining City, Qinghai Shengyuan Plateau Pasture Co., Ltd. a subsidiary of the Company, was included in the scope of the prohibited area. The Company respected environmental protection work arrangements, stopped the operations of farm and responded actively to close the relevant farm. The Company has requested the People’s Government of Huangyuan County of Xining City to compensate for the relocation losses but has not yet received any response. To this end, the Company submitted an administrative complaint to the Intermediate People’s Court of Xining City in Qinghai Province in accordance with the requirements of the Article 25 of the Regulations on the Prevention and Control of Pollution Caused by Scale Livestock and Poultry ( ) and the Regulations on Expropriation and Compensation of Houses on State-owned Land ( ), requesting the People’s Government of Huangyuan County of Xining City to make compensation. On 31 August 2020, Qinghai Shengyuan received the Administrative Judgment ((2020) Qing 01 Xingchu No. 16) served by the Intermediate People’s Court of Xining City of Qinghai Province. The main content of the Judgment is that “the People’s Government of Huangyuan County of Xining City as defendant shall compensate Qinghai Shengyuan Pasture Co., Ltd. as plaintiff for the closure and relocation within 60 days from the date on which this Judgment takes effect”. As of the date of this report, compensation for demolition and relocation is still in the process of negotiation and communication. ANNUAL REPORT 2020 219 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XV. NOTES TO FINANCIAL STATEMENTS OF THE PARENT COMPANY (I) Accounts receivable 1. Category of accounts receivable Closing balance Provision for bad and Balance of carrying value doubtful debts Percentage Percentage Amount (%) Amount (%) Category RMB’000 RMB’000 Accounts receivable with provision for bad and doubtful debts on an individual basis Accounts receivable with provision for bad and doubtful debts on a group basis 15,184 100.00 87 0.57 Of which: aging portfolio 15,184 100.00 87 0.57 Total 15,184 100.00 87 0.57 (continued) Opening balance Provision for bad and Balance of carrying value doubtful debts Percentage Percentage Amount (%) Amount (%) Item RMB’000 RMB’000 Accounts receivable with provision for bad and doubtful debts on an individual basis Accounts receivable with provision for bad and doubtful debts on a group basis 13,054 100.00 52 0.40 Of which: aging portfolio 13,054 100.00 52 0.40 Total 13,054 100.00 52 0.40 220 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XV. NOTES TO FINANCIAL STATEMENTS OF THE PARENT COMPANY (Continued) (I) Accounts receivable (Continued) 1. Category of accounts receivable (Continued) (1) Accounts receivable with provision for bad and doubtful debts on a group basis Closing balance Opening balance Provision Provision for bad for bad Balance of Expected and Balance of Expected and carrying credit loss doubtful carrying credit loss doubtful value rate % debts value rate % debts Aging RMB’000 RMB’000 RMB’000 RMB’000 Within 1 year 15,174 85 12,950 Of which: 0-6 months 13,470 12,950 7-12 months 1,703 5.00 85 Over 1 year but within 2 years 10 20.00 2 Over 2 years but within 3 years 50.00 104 50.00 52 Over 3 years 100.00 Total 15,184 — 87 13,054 — 52 2. Provision for bad and doubtful debts made, recovered or reversed in the current period The amount of provision for bad and doubtful debts made in the current period was RMB35,000. ANNUAL REPORT 2020 221 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XV. NOTES TO FINANCIAL STATEMENTS OF THE PARENT COMPANY (Continued) (I) Accounts receivable (Continued) 3. Accounts receivable with top five closing balance by debtor Balance of Percentage of provision for total accounts bad and Closing balance receivable (%) doubtful debts Name of entity RMB’000 RMB’000 Entity 1 3,231 21.28 63 Entity 2 2,160 14.22 6 Entity 3 1,136 7.48 Entity 4 976 6.43 Entity 5 641 4.22 Total 8,144 53.63 69 (II) Other receivables Closing balance Opening balance Category RMB’000 RMB’000 Other receivables 495,553 593,626 Less: provision for bad and doubtful debts 527 483 Total 495,026 593,143 222 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XV. NOTES TO FINANCIAL STATEMENTS OF THE PARENT COMPANY (Continued) (II) Other receivables (Continued) (1) Category of other receivables by nature Closing balance Opening balance Nature of accounts RMB’000 RMB’000 Amounts due from disposal of cows 648 Deposit and earnest money 244 2,066 Reserve funds for employees 1,641 878 Current accounts from related parties 477,653 580,282 Performance compensation 14,106 8,702 Current accounts and others 1,909 1,050 Subtotal 495,553 593,626 Less: provision for bad and doubtful debts 527 483 Total 495,026 593,143 (2) Aging analysis of other receivables Closing balance Opening balance Balance of Balance of carrying Percentage carrying Percentage value (%) value (%) Aging RMB’000 RMB’000 Within 1 year 494,952 99.88 593,025 99.90 Over 1 year but within 2 years 148 0.02 Over 2 years but within 3 years 148 0.03 Over 3 years 453 0.09 453 0.08 Total 495,553 100.00 593,626 100.00 ANNUAL REPORT 2020 223 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XV. NOTES TO FINANCIAL STATEMENTS OF THE PARENT COMPANY (Continued) (II) Other receivables (Continued) (3) Provision for bad and doubtful debts Stage 1 Stage 2 Stage 3 Total Expected credit Lifetime Lifetime losses ECL ECL over the (no credit (credit next impairment impairment 12 months occurred) occurred) Provision for bad and doubtful debts RMB’000 RMB’000 RMB’000 RMB’000 Opening balance of 2019 30 453 483 Opening balance of 2019 reassessed in the current period 30 453 483 Provided in the current period 44 44 Reversed in the current period Written-off in the current period Other changes Closing balance 74 453 527 224 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XV. NOTES TO FINANCIAL STATEMENTS OF THE PARENT COMPANY (Continued) (II) Other receivables (Continued) (4) Other receivables with top five closing balance by debtor Percentage of the total Balance of closing balance provision for Nature of of other bad and Name of debtor accounts Closing balance Aging receivables (%) doubtful debts RMB’000 RMB’000 Linxia Ruiyuan Pasture Co., Ltd. Current accounts 133,034 within one year 26.85 Qinghai Shengya Plateau Pasture Co., Ltd. Current accounts 94,702 within one year 19.11 Wuwei Ruida Pasture Co., Ltd. Current accounts 71,893 within one year 14.51 Yuzhong Ruifeng Pasture Co., Ltd. Current accounts 53,651 within one year 10.83 Lanzhou Ruixing Pasture Co., Ltd. Current accounts 41,820 within one year 8.44 Total — 395,100 — 79.74 (III) Long-term equity investment Closing balance Opening balance Balance of Provision for Carrying Balance of Provision for Carrying carrying value impairment value carrying value impairment value Item RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Investment in subsidiaries 1,032,734 30,000 1,002,734 533,789 533,789 Total 1,032,734 30,000 1,002,734 533,789 533,789 ANNUAL REPORT 2020 225 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XV. NOTES TO FINANCIAL STATEMENTS OF THE PARENT COMPANY (Continued) (III) Long-term equity investment (Continued) 1. Investment in subsidiaries Provision for Increase Decrease impairment Impairment in the in the in the provision Opening current current Closing current Closing balance period period balance period balance Invested Entity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Qinghai Qinghai Lake Dairy Co., Ltd. 53,014 53,014 Qinghai Shengya Plateau Pasture Co., Ltd. 30,000 30,000 30,000 30,000 Qinghai Shengyuan Pasture Co., Ltd. 30,000 30,000 Linxia Ruiyuan Pasture Co., Ltd. 30,000 30,000 Yuzhong Ruifeng Pasture Co., Ltd. 20,000 20,000 Linxia County Ruian Pasture Co., Ltd. 20,000 20,000 Wuwei Ruida Pasture Co., Ltd. 20,000 20,000 Ningxia Zhuangyuan Pasture Co., Ltd. 20,000 20,000 Lanzhou Ruixing Animal Husbandry Co., Ltd. 10,000 10,000 Xi’an Dongfang Dairy Co., Ltd. 290,775 290,775 Gansu Ruijia Animal Husbandry Co., Ltd. 10,000 498,945 508,945 Total 533,789 498,945 30,000 1,002,734 30,000 30,000 226 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XV. NOTES TO FINANCIAL STATEMENTS OF THE PARENT COMPANY (Continued) (IV) Operating income and operation cost 1. Operating income and operation cost by main category Incurred during this period Incurred in previous period Income Cost Income Cost Item RMB’000 RMB’000 RMB’000 RMB’000 I. subtotal of principal business 497,314 402,785 496,970 353,374 II. subtotal of other business 900 749 4,819 2,027 Total 498,214 403,534 501,789 355,401 ANNUAL REPORT 2020 227 Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XVI. SUPPORTING INFORMATION (I) Statement of non-recurring profit or loss of the current period Amount Remark Item RMB’000 1. Profit or loss from disposal of non-current assets, including the write-off portion Mainly represents the for which provision for impairment of assets is made (11,133) disposal of fixed assets 2. Tax rebates and deductions exceeding the approval, or without formal approval or incidentally incurred 3. Government grants included in the current profit or loss, however, except for mainly represents the those which are closely related to the enterprise’s business and are granted with government grants specific quota or amount according to the national unified standards 11,748 received by the Company 4. Funds occupation fees included in the current profit or loss and charged from non-financial enterprises 5. Profit or loss when the investment cost of the enterprise for the purpose of acquisition of the subsidiaries, associates and joint ventures is lower than the fair value of net identifiable assets of the invested entity as entitled at the time of receipt of the investment 6. Profit or loss from exchange of non-monetary assets 7. Profit or loss from investment or management of assets by the others 8. Provision for asset impairment due to force majeure factors, such as natural disasters 9. Profit or loss from debts restructuring 10. Enterprise restructuring fees, such as the expenses for employees settlement and the integration fees 11. Profit or loss exceeding the fair value and generated from the transaction of which the transaction price is obviously unfair 12. Net profit or loss in the current period of the subsidiaries generated from business combination under the same control from the beginning of the year to the date of consolidation 13. Profit or loss from contingent issues irrelevant to the Group’s normal business 14. Except for the efficient hedging related to the Company’s normal business, profit or loss from changes in fair value as generated from financial assets held-for- trading and financial liabilities held-for-trading and profit or loss from investment arising from disposal of financial assets held-for-trading, other non-current financial assets and financial liabilities held-for-trading 15. Reversals of provision for impairment of receivables that is tested separately for impairment 16. Profit or loss from entrusted loans 17. Profit or loss from changes in fair value of the investment property that is subsequently measured by adopting the fair value mode 18. Impacts on the current profit or loss by the one-time adjustments to profit or loss over the current period under the tax, accounting and other laws and regulations 19. Trusteeship fees income from entrusted operation mainly represents the performance 20. Other non-operating income and expenses other than the aforesaid items 7,606 compensation 21. Other profit or loss items as defined by the non-recurring profit or loss 22. Amount of impact on income tax (985) 23. Amount of impact on minority shareholders Total 7,237 Note: As for the figures in the non-recurring profit or loss column, “+” represents the gains and income, “-” represents the loss or expense. The Company recognizes non-recurring profit or loss items according to the Explanatory Announcement No.1 on Information Disclosure for Companies Offering Their Securities to the Public-Non-recurring Gains and Losses (ZJHGG 2008 No. 43). 228 LANZHOU ZHUANGYUAN PASTURE CO LTD Notes to the Financial Statements (Continued) 1 January 2020 - 31 December 2020 XVI. SUPPORTING INFORMATION (Continued) (II) Rate of return on net assets and earnings per share Rate of return on weighted average net assets % Earnings per share Basic earnings per share (RMB/ Diluted earnings per Share share) (RMB/share) Profit during The current The previous The current The previous The current The previous the report period year year year year year year Net profit attributable to the Company’s ordinary shareholders 0.85 4.24 0.05 0.27 0.05 0.27 Net profit attributable to the ordinary shareholders of the Company after a deduction of non- recurring profit or loss 0.26 0.65 0.02 0.04 0.02 0.04 LANZHOU ZHUANGYUAN PASTURE CO LTD 29 March 2021 ANNUAL REPORT 2020 229 Financial Summary Financial summary of audited financial statements of the Group for the respective years are set out below. Years ended 31 December 2020 2019 2018 2017 2016 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Operating income 739,821 813,554 657,732 628,374 665,823 Profit for the year 10,453 51,321 63,533 68,352 75,910 Attributable to equity shareholders of the Company 10,453 51,321 63,533 68,352 75,910 Earnings per share (RMB)(1) 0.05 0.27 0.34 0.46 0.54 Proposed dividend per share (RMB) 2.00 cents 5.50 cents 6.80 cents 7.30 cents 7.42 cents Total assets 3,080,558 2,492,727 2,048,109 1,803,718 1,341,588 Total liabilities 1,488,724 1,267,320 863,702 676,053 581,353 Total equity attributable to equity shareholders of the Company 1,591,834 1,225,407 1,184,407 1,127,665 760,235 (1) Please refer to Note 16 on page 229 for calculation of earnings per share. 230 LANZHOU ZHUANGYUAN PASTURE CO LTD