Document No. 1 for the 2005 Annual General Meeting

2005 Annual Report on the Work of the Board of Directors

Dear Shareholders:
     
In 2005, in the face of adverse factors such as national macroeconomic regulation, rising raw-material prices, RMB appreciation, and tariff reductions, the company established a rapid market-response mechanism, fully leveraged the Group’s integrated marketing strengths, effectively utilized the global sales networks of its joint-venture partners, and comprehensively implemented the “lean manufacturing” philosophy, achieving solid results. The company had planned to generate RMB 15 billion in principal business revenue for 2005, but actually recorded RMB 15.1105 billion, up 24.18% year on year; it had also targeted total profit of RMB 1.4 billion, which was ultimately realized at RMB 1.4329 billion, representing a year-on-year increase of 17.09%. Through concerted efforts, the company successfully met most of its key operational targets.
I. Review of the Company’s Operating Performance
1. Overview of the Company’s Overall Operating Performance for the Reporting Year
(1) Principal Business
In 2005, the company achieved remarkable success in turnkey projects, successfully completing a number of large-scale, complex turnkey projects characterized by substantial scope, tight schedules, and challenging construction conditions—such as the Ma’anshan Mengniu project and the Qingdao Shanfu Nissin Water project. These accomplishments earned high praise from clients and further solidified the company’s leading position in the turnkey engineering sector.
During the reporting period, the Company undertook 21 turnkey projects each with a contract value of RMB 5 million or more, including 8 large-scale turnkey projects valued at RMB 10 million or more and 2 ultra-large turnkey projects valued at RMB 30 million or more.
During the reporting period, the company achieved significant progress in the R&D of vacuum freeze-drying equipment, marine modular air-conditioning systems, seawater-source heat pumps, and other products. The “Bingshan” brand screw-type refrigeration and air-conditioning units were awarded the title of “China Famous Brand Product,” and “Bingshan” products were designated by the Ministry of Commerce as key Chinese export brands for prioritized cultivation and development during the 2005–2006 period.
During the reporting period, the Company fully leveraged national bonds and various policy supports to intensify technological upgrades in areas such as agricultural product industrialization and deep processing, completed the transformation project for the Machining Division, and enhanced its equipment manufacturing capabilities.
During the reporting period, the Company’s controlled subsidiary, Wuhan New World Refrigeration Industry Co., Ltd., took equity restructuring as an opportunity to vigorously implement a differentiation-based competitive strategy centered on product technological sophistication, product quality, and service differentiation. With a sales focus on the coal and water conservancy sectors, the company achieved substantial year-on-year increases in both sales revenue and profitability.
During the reporting period, the Company’s controlled subsidiary, Dalian Bingshan Jiade Automation Co., Ltd., developed embedded self-control software, configuration software, and remote network communication technologies that are protected by independent intellectual property rights. These innovations have enabled the full-system automation, intelligent operation, and networking of large-scale cold-storage turnkey projects and large-scale cryogenic stations in the petrochemical industry, thereby enhancing the technological core competitiveness of the Company’s products.
2) Sino-foreign joint ventures
At the end of 2005, the total assets of the company’s Sino-foreign joint ventures amounted to RMB 415,986 million, representing a year-on-year increase of 25.71%; total net assets stood at RMB 186,312 million, up 14.25% from the previous year.
In 2005, the company’s group of Sino-foreign joint ventures achieved sales revenue of RMB 532,313 million, a year-on-year increase of 50.72%, including RMB 178,059 million in export sales, up 156.05% from the previous year. The company also recorded investment income of RMB 10,298 million from its Sino-foreign joint ventures, representing a year-on-year increase of 11.07%.
During the reporting period, five Sino-foreign joint ventures accounted for more than 10% of the company’s net profit, namely Dalian Sanyo Air Conditioning Co., Ltd., Dalian Sanyo Compressor Co., Ltd., Dalian Sanyo Cold Chain Co., Ltd., Shenzhen Dalengwang Refrigeration Co., Ltd., and Dalian Sanyo Refrigeration Co., Ltd.
During the reporting period, among the company’s Sino-foreign joint ventures, five recorded year-on-year growth of more than 30% in principal business revenue, three reported year-on-year growth of more than 30% in net profit, and five achieved a return on equity of over 15%; furthermore, four reported principal business revenue exceeding RMB 500 million, and four reported net profit exceeding RMB 50 million.
During the reporting period, Dalian Sanyo Air Conditioning Co., Ltd. adhered to the business philosophy of “market-driven with management as the enabler,” promptly adjusted its marketing strategies in response to market demand, focused on developing untapped domestic markets, and vigorously expanded into international markets, resulting in its main business revenue surpassing RMB 1 billion for the first time. Leveraging a specially developed “one-to-one smart air conditioner for base stations,” the company successfully entered the telecommunications sector, securing contracts with China Mobile, China Telecom, and China Unicom. In addition to maintaining its existing export destinations, the company also newly penetrated the U.S. market.
During the reporting period, Sanyo Electric transferred all production of its C-series scroll compressors to Dalian Sanyo Compressor. As a result, Dalian Sanyo Compressor’s existing production capacity for C-series scroll compressors increased by 50%, laying a solid foundation for its development into a large-scale scroll compressor manufacturing base. Meanwhile, construction of the R&D center is progressing smoothly, and the company is on the verge of establishing an compressor technology research institute that will be at the world-leading level.
During the reporting period, Dalian Sanyo Cold Chain invested RMB 18 million to introduce environmentally friendly cyclopentane foaming equipment from Germany, thereby becoming the first in the domestic industry to complete the eco-friendly retrofitting of its entire product lineup. In line with a differentiated marketing strategy centered on “increasing the in-store penetration rate among high-quality customers,” the company developed over 100 new models, including large-scale parallel units and CZR master–slave cabinets, driving its core business revenue to surpass RMB 1 billion for the first time and achieving year-on-year growth of more than 30% for three consecutive years. However, intensifying industry competition, substantial price hikes in key raw materials such as non-ferrous metals, and the concentrated launch of new-product development projects—all of which increased costs—negatively impacted net profit performance.
During the reporting period, Dalian Sanyo Refrigeration completed construction of China’s largest GHP gas-fired heat pump production base, taking another step toward its goal of becoming a comprehensive manufacturer of refrigeration and air-conditioning equipment.
During the reporting period, Dalian Fuji Iceberg successfully obtained dual certification under the ISO 9001 quality management system and the ISO 14001 environmental management system. The company also established offices in the three major key cities of Beijing, Shanghai, and Guangzhou, further expanding its service coverage.
2. Analysis of the Company’s Principal Business
(1) Product and Geographical Segments of the Principal Business
The company’s principal business revenue is entirely derived from refrigeration and air-conditioning products.
The company’s products are manufactured in Dalian and Wuhan and sold nationwide, with no significant regional concentration. Overseas sales account for approximately 8% of the company’s main business revenue for the same period.
(2) Information on Major Suppliers and Major Customers
The company’s total procurement from its top five suppliers amounted to RMB 336.52 million, accounting for 30.71% of the annual total procurement.
The combined sales to the company’s top five customers totaled RMB 143.35 million, representing 9.49% of the company’s total sales.
3. Company Financial Condition and Operating Results
(1) Asset Composition (Unit: RMB 10,000)

Explanation:
① Accounts receivable and fixed assets experienced significant year-on-year changes, primarily due to the inclusion of Wuhan New World Refrigeration Industry Co., Ltd. in the consolidated financial statements.
② Construction-in-progress has undergone a significant year-on-year change, primarily due to the company’s intensified efforts in technological upgrading.
(2) Expenses and Income Tax Situation (Unit: RMB 10,000)

Explanation:
① Operating and administrative expenses changed significantly year over year, primarily due to the inclusion of Wuhan New World Refrigeration Industry Co., Ltd. in the consolidated financial statements.
② The year-on-year change in income tax was substantial, primarily due to the provision for asset impairment in 2005 and the subsequent payment of additional income tax resulting from dividends received from an associate.
(3) Composition of Cash Flows (Unit: RMB 10,000)

Explanation:
① The net cash flow from operating activities changed significantly year over year, primarily due to the company’s intensified efforts in collecting accounts receivable.
② The net cash flow from investing activities changed significantly year on year, primarily due to the addition of Wuhan New World Refrigeration Industry Co., Ltd. as a newly acquired controlled subsidiary.
③ The net cash flow from financing activities changed significantly year on year, primarily due to the repayment of bank loans.
4. Operating conditions and performance of major holding companies and equity-method investees
(1) Major Holding Companies
① Dalian Bingshan Group Refrigeration and Air-Conditioning Installation Company
The Company holds 100% equity in this entity. The entity’s registered capital is RMB 20.04 million, and its principal business is the installation and commissioning of complete sets of refrigeration equipment. In 2005, its total assets amounted to RMB 43.81 million, with sales revenue of RMB 88.10 million and a net profit of RMB 60,000.
② Dalian Bingshan Group Sales Co., Ltd.
The Company holds a 90% equity interest in the entity. The entity’s registered capital is RMB 18 million, and its principal business is the sales of products manufactured by member enterprises of the Dalian Bing Shan Group. In 2005, its total assets amounted to RMB 23.75 million, with sales revenue of RMB 110.17 million and net profit of RMB 2.37 million.
③ Dalian Bingshan Air-Conditioning Equipment Co., Ltd. The Company holds a 70% equity interest in this entity. With a registered capital of JPY 700 million, the company’s principal business is the manufacture and sale of air-conditioning terminal units, including fan coil units and air handling units. In 2005, its total assets amounted to RMB 123.96 million, with sales revenue of RMB 125.16 million and net profit of RMB 8.49 million.
④ Dalian Bingshan Lingse Quick-Freezing Equipment Co., Ltd.
Our company holds a 70% equity stake in the entity. The company’s registered capital is USD 1 million, and it primarily manufactures various types of quick-freezing equipment. In 2005, its total assets amounted to RMB 11.14 million, with sales revenue reaching RMB 21.97 million and net profit totaling RMB 140,000.
⑤ Dalian Bingshan Metal Processing Co., Ltd.
The Company holds a 64.3% equity interest in the entity. The entity has a registered capital of US$2.35 million and primarily engages in the production of sheet metal and stamped parts as supporting components for established joint ventures and for the Company itself. In 2005, its total assets amounted to RMB 38.59 million, with sales revenue reaching RMB 51.72 million and net profit totaling RMB 2.65 million.
⑥ Dalian Bingshan Jiade Automation Co., Ltd.
Our company holds a 60% equity stake in the entity. The company’s registered capital is GBP 210,000, and it primarily engages in automatic control for the refrigeration and related industries. In 2005, its total assets amounted to RMB 5.33 million, with sales revenue of RMB 11.26 million and a net profit of RMB 940,000.
⑦ Wuhan New World Refrigeration Industry Co., Ltd.
Our company holds a 51% equity interest in the entity. The company’s registered capital is RMB 30 million, and it primarily manufactures and sells screw-type refrigeration compressors. In 2005, its total assets amounted to RMB 240.96 million, with sales revenue of RMB 209.75 million and net profit of RMB 18.10 million.
(2) Major Equity-Linked Companies

II. Company Investment Situation
1. During the reporting period, the Company did not raise any new capital, nor did it continue to utilize capital raised prior to the reporting period.
2. Description of Non-Fundraising Investment Projects
During the reporting period, the Company, in addition to its existing 30% equity stake in Wuhan New World Refrigeration Industry Co., Ltd., acquired an additional 21% equity interest in the company using its own funds of RMB 8.75 million, thereby obtaining controlling interest.
During the reporting period, the company completed technological upgrading investments totaling RMB 38.6 million.
III. Daily Operations of the Board of Directors
1. Meetings of the Board of Directors and Resolutions Adopted During the Reporting Period
(1) Fourth Session of the Fourth Board of Directors
The Company’s Fourth Board of Directors held its fourth meeting on April 19, 2005, in the Company’s Sixth-Floor Conference Room. The announcement of the resolutions adopted at this board meeting was published in the China Securities Journal and Ta Kung Pao on April 21, 2005.
(2) Fifth Meeting of the Fourth Board of Directors The Company’s Fourth Board of Directors held its fifth meeting on August 16, 2005, in the Company’s Sixth-Floor Conference Room. The announcement of the resolutions adopted at this board meeting was published in the August 18, 2005 issues of China Securities Journal and Ta Kung Pao.
(3) Sixth Meeting of the Fourth Board of Directors
The Company’s Fourth Board of Directors held its sixth meeting on October 18, 2005, in the Company’s Sixth-Floor Conference Room. At this meeting, the Board reviewed and approved the Company’s Third-Quarter Report for 2005.
2. Implementation of Resolutions Adopted by the Shareholders’ Meeting by the Board of Directors
The Company’s Board of Directors effectively implemented all resolutions passed at the 2004 Annual General Meeting. The Company’s 2004 dividend distribution plan was fully executed by the Board in June 2005.
IV. Outlook for the Company’s Future Development
1. Industry Development Trends
The company operates in the refrigeration and air-conditioning industry. Refrigeration and air-conditioning equipment is widely used, with its service applications continually expanding. From industry, agriculture, construction, commerce, scientific research, national defense, and education, culture, and healthcare, to everyday aspects of people’s lives—clothing, food, housing, and transportation—none can do without such equipment. The rapid development of the national economy and the comprehensive drive to build a moderately prosperous society have created vast opportunities for growth in the refrigeration and air-conditioning sector, which serves as a supporting equipment-manufacturing industry for all sectors of the national economy.
With the deepening of reform and opening-up and the successive reductions in import tariffs following China’s accession to the WTO, products from international competitors have accelerated their entry into the Chinese market, placing considerable pressure on China’s refrigeration and air-conditioning industry.
2. Opportunities and Challenges Facing the Company
Broadly speaking, the company’s products serve both the investment sector and the consumer sector. It is precisely this comprehensive capability to provide integrated solutions across these two major domains—investment and consumption—that enables the company to exhibit strong counter-cyclical resilience and remain relatively unaffected by macroeconomic policy adjustments.
As a leading enterprise in China’s industrial refrigeration equipment sector, the company’s advantages over its domestic peers are primarily reflected in the following aspects: First, the company has raised more than RMB 700 million through direct financing in the securities market; second, it currently operates 20 joint ventures, all of which outperform competitors in terms of product quality, scale, and profitability; and third, the company has taken the lead in conducting industry-specific mergers and acquisitions by gaining controlling interest in Wuhan New World Refrigeration Industry Co., Ltd., thereby securing a first-mover advantage in market consolidation.
Compared with international competitors, the company still has a certain gap, primarily in terms of technological level. At the same time, the company enjoys several distinct competitive advantages, including a nationwide sales network, an extensive after-sales service network, a robust customer base, and an excellent price-performance ratio for its products.
3. Company Development Plan
Guided by the principles of “development, reform, innovation, and harmony,” the company will remain firmly focused on its core business of refrigeration and air conditioning. It will prioritize the research and development of high-tech, energy-efficient, and low-consumption products in the fields of cooling and heating, as well as ecological sustainability and environmental protection, with the aim of establishing a complete industrial value chain. Through these efforts, the company seeks to further expand its market share both domestically and internationally, thereby enhancing the reputation of China’s equipment manufacturing industry and contributing to the improvement of the human living environment.
4. Funding Requirements and Funding Source Plan
In 2006, the company anticipates a funding requirement of RMB 150 million, primarily to be financed through internal funds and debt financing.
In the upcoming 11th Five-Year Plan period, the company will also undertake projects in energy conservation, environmental protection, and new energy, and, subject to market affordability, we will consider additional financing.
5. 2006 Business Plan
2006 Corporate Business Plan Targets:
Sales revenue: RMB 160,000 million;
Total profit: RMB 150 million.
(1) Closely monitor adjustments to the national investment structure and emerging market demand trends, vigorously expand into key sectors receiving priority state support—such as agriculture, coal, hydropower, petrochemicals, and oil refining—and scale up and strengthen turnkey engineering projects to consolidate and further enhance the company’s leading position in this field. In 2006, the company will launch large-scale water-source heat pump projects that provide centralized cooling and heating for major building complexes, starting with the establishment of a pilot demonstration project in Dalian.
(2) Taking the enhancement of independent innovation capability as the central task, we will accelerate product structure adjustment, technological upgrading, and joint ventures and cooperation, striving for new breakthroughs in comprehensively enhancing the core competitiveness of enterprises.
(3) Strengthen corporate management and enhance the quality of economic operations. Fully and thoroughly promote “lean manufacturing” throughout the company and launch company-wide lean manufacturing initiatives.
(4) Ensure the completion of annual goals and tasks by leveraging the construction of the “Harmonious Iceberg” initiative as a safeguard.
     Please review the above report.
 

May 30, 2006