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Iceberg Cold & Heat Technology Co., Ltd.

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1. Annual Work Report of the Company’s Board of Directors for 2011

 
	Document No. 1 for the 2011 Annual General Meeting 

 
	Annual Work Report of the Company’s Board of Directors for 2011 

 
	Dear Shareholders: 

 
	In 2011, the company proactively responded to new developments in the global economic landscape by placing scientific development at the core, focusing on quality and efficiency, and leveraging reform and innovation as the driving force. The company vigorously advanced modernization and transformation, aggressively expanded both domestic and international markets, systematically strengthened its internal control framework, and steadily improved labor productivity, thereby successfully achieving all major financial targets. Specifically, in 2011 the company recorded sales revenue of RMB 186,325 million, representing 117.85% of the 2011 operating plan target of RMB 158,100 million and reflecting a year-on-year increase of 24.59%; total profit reached RMB 13,028 million, or 104.22% of the 2011 operating plan target of RMB 12,500 million, up 5.44% from the previous year. 

 
	I. Review of the Company’s Operating Performance 

 
	1. Overview of the Company’s Overall Operating Performance for the Reporting Year 

 
	(1) Principal Business 

 
	During the reporting period, the Company seized the development opportunities presented by the 12th Five-Year Plan for cold-chain logistics, leveraged its strengths in turnkey engineering projects, and advanced the market penetration of large-scale, automated logistics cold storage facilities, thereby creating new market segments in the beer industry for energy conservation, emission reduction, and cold-storage facility upgrades and modernization. The Company intensified marketing efforts for new products, achieving a market growth rate of over 40% for its new series of screw compressor units, single-unit two-stage screw compressor units, and large-scale skid-mounted units. In addition, the Company proactively refined its sales strategies, accelerated cash recovery, and reduced operational risks. 

 
	During the reporting period, the Company remained committed to quality and efficiency as its core priorities and made concerted efforts to implement various reform initiatives. It undertook a reform of the compensation system and piloted a new job-performance-based pay structure. The Company refined its decadal production planning approach, promoted lean manufacturing, and advanced line production and delivery systems for key processes, thereby enhancing production efficiency and work quality. In addition, it strengthened quality management, further expanded the quality assurance system, and improved the quality of externally purchased and outsourced components. 

 
	During the reporting period, the Company remained closely aligned with market needs and focused on its core businesses of heating and cooling, ecological solutions, and environmental protection, while intensifying R&D on mid- to high-end products and the design of application-oriented solutions. The Company successfully developed more than ten new products, expanded its product portfolios to include new series of screw chillers and single-unit two-stage screw chiller units, and further strengthened its technological leadership in the cold-chain logistics sector. In addition, the Company enhanced the redesign and functional optimization of its existing products, thereby improving their cost-effectiveness. 

 
	(2) Sino-foreign joint ventures 

 
	In 2011, the Company accounted for its portfolio of Sino-foreign joint ventures using the equity method, reporting sales revenue of RMB 776,666 million, an increase of 8.63% year on year. 

 
	During the reporting period, three Sino-foreign joint ventures accounted for more than 10% of the company’s net profit in investment income. 

 
	During the reporting period, among the company’s equity-method investments in Chinese–foreign joint ventures, eight reported main-business revenue exceeding RMB 100 million, with three of them surpassing RMB 1 billion; five reported net profit exceeding RMB 10 million, including two that exceeded RMB 50 million. 

 
	During the reporting period, Dalian Sanyo Compressor leveraged technology to drive sales, expanded its market share among key customers such as Gree and Midea, and achieved approximately 20% growth in sales revenue. The company implemented a quality responsibility zone system, ensuring that production consistently maintained high quality while sustaining high output levels. It completed the development of 35 new scroll compressor models and commenced volume sales of DC inverter compressors. Additionally, 13 new refrigeration products were developed, leading to the launch of 27 new refrigeration models. However, rising prices of major raw materials resulted in a decline in product gross margin, which in turn led to a year-on-year decrease in net profit. 

 
	During the reporting period, Dalian Sanyo Cold Chain optimized its operational system, strengthened business-unit operations, adjusted its organizational structure and staffing, promoted customer-centric integrated solutions, and implemented value-based marketing, thereby achieving new growth across all business segments. The company accelerated product mix optimization by launching more than 100 new product developments, enhancing product quality, expanding the product portfolio, and meeting the diverse needs of customers. In response to cost pressures, the company vigorously pursued refined cost-reduction initiatives and achieved notable results. 

 
	During the reporting period, Dalian Sanyo Refrigeration seized policy opportunities to vigorously promote energy-saving and emission-reduction products and actively participate in energy-performance-contracting projects. The company continued to advance its Six Sigma management approach to reduce defect rates. In response to market demand for energy conservation and emission reduction, waste-heat utilization, larger-scale equipment, and multi-functionality, it developed a range of new products that met market needs and enhanced the company’s core competitiveness. 

 
	During the reporting period, Dayang Showa Automotive Air Conditioning secured the Volkswagen MQB platform condenser project amid intense competition. Through streamlined management practices, production efficiency was significantly enhanced, resulting in a substantial reduction in the production time per condenser unit. 

 
	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 throughout China. Overseas sales account for approximately 8% of the company’s main business revenue during the same period. 

 
	(2) Information on Major Suppliers and Major Customers 

 
	The company’s total procurement from its top five suppliers amounted to RMB 189.07 million, representing 11.44% of the annual total procurement. 

 
	The combined sales to the company’s top five customers totaled RMB 214.64 million, accounting for 11.52% of the company’s total sales. 

 
	3. Company Financial Condition 

 
	(1) Changes in Major Assets and Liabilities (Unit: RMB 10,000) 

Project Name	2011		2010		Changes
Project Name	Amount	Proportion of total assets	Amount	Proportion of total assets	Changes
Accounts receivable	41,335	13.54%	43,599	14.97%	-5.19%
Inventory	42,439	13.90%	34,702	11.92%	+22.30%
Investment property	0	0.00%	0	0.00%	0.00%
Long-term equity investments	Eighty-nine thousand seven hundred twenty	29.38%	One hundred thousand five hundred twelve	34.51%	-10.74%
Fixed assets	34,564	11.32%	35,862	12.31%	-3.62%
Construction in progress	3,420	1.12%	2,097	0.72%	+63.09%
Short-term loans	1,300	0.43%	6,300	2.16%	-79.37%
Long-term borrowings	0	0.00%	One thousand twenty	0.35%	-100.00%

 
	Explanation: 

 
	① The decrease in accounts receivable is primarily attributable to the company’s optimization of its sales strategy, which includes requiring full payment upon delivery, reducing the warranty deposit ratio, and replacing warranty deposits with bank guarantees, thereby accelerating cash collection. 

 
	② The increase in inventory was primarily attributable to the rise in turnkey project completions at our subsidiary, Wuhan New World Refrigeration Industry Co., Ltd., as well as to the decision to build up inventories of standard rotors during the year-end low-season. 

 
	③ The decrease in long-term equity investments was primarily attributable to the company’s transfer of its equity interest in Dalingwang Transportation Refrigeration Co., Ltd. during the reporting period, the removal of sale restrictions on shares of Xintai Technology Co., Ltd., which resulted in the reclassification of these shares from long-term equity investments to available-for-sale financial assets, and the impact of losses incurred by Dalian Sanyo Air-Conditioning Equipment Co., Ltd. 

 
	④ The increase in construction-in-progress is primarily attributable to higher expenditures related to the relocation and renovation of the casting workshop. 

 
	⑤ The reduction in short- and long-term borrowings was attributable to the company’s enhanced cash management and accelerated capital turnover, resulting in a decrease of RMB 60.2 million in loans during the reporting period. 

 
	(2) Expenses and Income Tax Situation (Unit: RMB 10,000) 

Project Name	Fiscal Year 2011	Fiscal Year 2010	Changes
Selling expenses	11,443	10,124	+13.03%
Administrative expenses	18,459	16,073	+14.84%
Financial expenses	185	356	-48.03%
Income tax	3,682	1,397	+163.56%

 
	Explanation: 

 
	① The increase in selling expenses is primarily attributable to higher wages and related payroll taxes, increased transportation costs, and higher travel allowances, which have led to a rise in travel expenses. 

 
	② The increase in administrative expenses is primarily attributable to higher wages and related payroll taxes, as well as increased investment in research and development. 

 
	③ The decrease in financial expenses was due to a reduction in loans during the reporting period, resulting in lower interest expense. 

 
	④ The increase in income tax is primarily attributable to higher gains from equity transfers in the current period, which in turn has led to a corresponding rise in taxable income. 

 
	(3) Composition of Cash Flows (Unit: RMB 10,000) 

Project Name	Fiscal Year 2011	Fiscal Year 2010	Changes
Net cash flow from operating activities	16,836	17,192	-2.07%
Net cash flow from investing activities	14,066	-3,005	+568.09%
Net cash flow from financing activities	-11,988	-5,332	-124.83%

 
	Explanation: 

 
	① The net cash flow from operating activities decreased, primarily due to a reduction in government subsidies received during the reporting period and an increase in tax payments, payroll expenses, and related surcharges. 

 
	② The net cash flow from investing activities increased, primarily due to the Company’s transfer of its equity interest in Dalingwang Transportation Refrigeration Co., Ltd. during the reporting period, as well as the realization of available-for-sale financial assets. 

 
	③ The net cash flow from financing activities decreased, primarily because the amount of borrowings this year was lower than last year, while the amount of repayments was higher than last year. 

 
	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 2011, its total assets amounted to RMB 70.94 million, its net assets were RMB 23.49 million, it recorded sales revenue of RMB 111.04 million, and its net profit was RMB 510,000. 

 
	② Dalian Bingshan Group Sales Co., Ltd. 

 
	The Company holds a 90% equity interest in this 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 2011, its total assets amounted to RMB 40.19 million, its net assets to RMB 25.30 million, its sales revenue reached RMB 44.24 million, and its net profit was RMB 2.15 million. 

 
	③ Dalian Bingshan Air-Conditioning Equipment Co., Ltd. 

 
	Our company holds a 70% equity stake in the entity. The company has a registered capital of JPY 700 million and primarily engages in the manufacturing and sales of air-conditioning terminal equipment, including fan coil units and air handling units. In 2011, its total assets amounted to JPY 144.27 million, with net assets of JPY 72.67 million; it recorded sales revenue of JPY 138.29 million and a net profit of JPY 4.34 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 2011, its total assets amounted to RMB 30.98 million, net assets stood at RMB 9.95 million, sales revenue reached RMB 34.52 million, and net profit was RMB 0.76 million. 

 
	⑤ Dalian Bingshan Metal Processing Co., Ltd. 

 
	The Company holds a 64.25% equity interest in the entity. The entity’s registered capital is USD 2.35 million, and it primarily engages in the production of sheet metal and stamped parts as supporting components for established joint ventures and for the Company itself. In 2011, its total assets amounted to RMB 35.26 million, its net assets to RMB 22.81 million, its sales revenue reached RMB 43.30 million, and its net profit was RMB 1.51 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 2011, its total assets amounted to RMB 16.02 million, with net assets of RMB 9.34 million; it recorded sales revenue of RMB 30.39 million and a net profit of RMB 3.66 million. 

 
	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 2011, its total assets amounted to RMB 484.99 million, its net assets stood at RMB 126.50 million, it recorded sales revenue of RMB 397.45 million, and its net profit was RMB 19.82 million. 

 
	(2) Major Equity-Linked Companies 

Major Equity-Linked Companies	Leading products	Principal business revenue (Ten thousand yuan)	Net profit (Ten thousand yuan)
Dalian Sanyo Compressor Co., Ltd.	Semi-hermetic piston and scroll compressors	221,530	9,865
Dalian Sanyo Cold Chain Co., Ltd.	Commercial Freezing and Refrigeration Equipment	197,263	3,864
Showa Automotive Air Conditioning (Dalian) Co., Ltd.	Car air conditioning	52,786	6,879

 
	II. Company Investment Situation 

 
	As of December 31, 2011, the company’s balance of long-term equity investments stood at RMB 897.2 million, a decrease of RMB 107.92 million, or 10.74%, compared with the end of the previous year. 

 
	During the reporting period, the Company did not raise any new capital, nor were there any instances of the utilization of funds raised prior to the reporting period that extended into the current reporting period. 

 
	During the reporting period, the Company leveraged its own funds totaling RMB 28.83 million to intensify technological upgrading, with a particular focus on the introduction of key processing equipment and the construction of new facilities for the Foundry Division. 

 
	III. Daily Operations of the Board of Directors 

 
	1. Meetings of the Board of Directors and the contents of their resolutions during the reporting period 

 
	(1) The Tenth Meeting of the Fifth Board of Directors 

 
	The Company’s Fifth Board of Directors held its tenth meeting on April 13, 2011, in the Company’s Eighth-Floor Conference Room. The announcement of the resolutions passed at this board meeting was published in the China Securities Journal and the Hong Kong Commercial Daily on April 15, 2011. 

 
	(2) The 11th Meeting of the 5th Board of Directors 

 
	The Company’s Fifth Board of Directors convened its 11th meeting by facsimile on June 7, 2011. The announcement of the resolutions passed at this board meeting was published in the China Securities Journal and the Hong Kong Commercial Daily on June 9, 2011. 

 
	(3) The 12th Meeting of the 5th Board of Directors 

 
	On August 23, 2011, the Fifth Board of Directors of the Company convened its twelfth meeting by facsimile. At this meeting, the Company’s 2011 Semi-Annual Report and its Summary were reviewed and approved. 

 
	(4) The 13th Meeting of the 5th Board of Directors 

 
	The Company’s Fifth Board of Directors convened its 13th meeting by facsimile on October 25, 2011. At this meeting, the Company’s Third Quarter 2011 Quarterly Report was reviewed and approved. 

 
	2. Implementation of Resolutions Adopted by the Shareholders’ Meeting by the Board of Directors 

 
	The Company’s Board of Directors has effectively implemented all resolutions passed at the 2010 Annual General Meeting. 

 
	The Company’s 2010 dividend distribution plan was fully implemented by the Board of Directors in July 2011. 

 
	3. Summary Report on the Performance of Duties by the Audit Committee of the Board of Directors 

 
	The Audit Committee of the Company’s Board of Directors performs its duties in accordance with the Company’s Implementing Rules for the Board Audit Committee and the Audit Committee Annual Report Work Procedures, overseeing the Company’s internal audit system and its implementation, reviewing the Company’s financial information and disclosures, and evaluating the work of external auditing firms. 

 
	In the development and evaluation of the company’s internal control framework, the Audit Committee has actively fulfilled its organizational, leadership, and oversight responsibilities. In accordance with the company’s criteria for identifying internal control deficiencies, the Committee reviewed and validated the consolidated table of internal control deficiency identifications prepared by the Internal Control Evaluation Team, examined the Company’s 2011 Internal Control Evaluation Report, and engaged Zhongzhun Certified Public Accountants to conduct an internal control audit. The audit concluded that the current state of the company’s internal control system complies with applicable requirements, is aligned with the company’s actual operations, and has been effectively implemented; moreover, the Company’s 2011 Internal Control Evaluation Report accurately reflects these findings. 

 
	During the Company’s 2011 audit, the Audit Committee maintained active communication and effective coordination with the auditing firm, Zhongzhun Certified Public Accountants. Prior to the auditors’ on-site engagement, the Committee discussed and reached consensus with the engagement partner of the auditing firm on matters such as the audit plan, schedule, and key issues requiring attention during the audit period. Throughout the audit process, the Committee kept abreast of progress and repeatedly urged the auditing firm to carry out the audit in a timely manner while maintaining high quality and ensuring that all deliverables met the required standards. Following completion of the audit, the Committee conducted a thorough review of the Company’s annual financial statements and annual report, concluding that the financial statements are comprehensive and accurate, and that the financial information disclosed to external parties is objective, truthful, and faithfully reflects the Company’s annual financial performance. 

 
	The Audit Committee is of the view that, in providing audit services for the Company for the year 2011, Zhongzhun Certified Public Accountants adhered to the professional standards of independence, objectivity, and impartiality; conducted the audit in strict accordance with the new accounting standards; demonstrated rigorous and well-structured planning and adequate staffing; proactively communicated with the Audit Committee and the independent directors; exercised due diligence and responsibility; and thereby successfully completed the Company’s 2011 audit engagement. The Committee therefore proposes that the Company re-engage Zhongzhun Certified Public Accountants as its auditor for the year 2012. 

 
	4. Summary Report on the Performance of the Board’s Compensation and Assessment Committee 

 
	The Compensation and Assessment Committee under the Company’s Board of Directors has performed its duties in accordance with the Company’s Implementing Rules for the Board of Directors’ Compensation and Assessment Committee, reviewing the annual compensation of the Company’s directors, supervisors, and senior management. The Committee concludes that the decision-making procedures and remuneration standards for the aforementioned personnel are in compliance with applicable laws and regulations as well as the Company’s internal policies, and that the compensation disclosed in the Company’s 2011 Annual Report is true and accurate. 

 
	IV. 2012 Business Plan 

 
	2012 Corporate Business Plan Targets: 

 
	Sales revenue: RMB 175,000 million, a 6% decrease compared with the RMB 186,325 million recorded in 2011, primarily due to insufficient market liquidity, resulting in reduced information flow, contract delays, and slower project progress. 

 
	Total profit: RMB 130 million, essentially unchanged from the RMB 130.28 million recorded in 2011. 

 
	To ensure the achievement of revenue and profit targets, the following key tasks will be prioritized in 2012: 

 
	1. Seize development opportunities and vigorously expand into two markets. 

 
	We must seize the development opportunities presented by the 12th Five-Year Plan for cold-chain logistics and successfully deliver model projects. We should explore new market segments for the comprehensive utilization of waste heat and residual heat resources and intensify efforts to expand markets in the energy-saving and environmental protection sectors. We need to advance energy-saving and automation upgrade projects for turnkey engineering contracts and comprehensively develop value-added services such as maintenance and after-sales support. Furthermore, we must formulate and refine sound sales policies, strengthen accounts-receivable collection, improve sales quality, and reduce operational risks. Finally, we should adopt a holistic marketing approach, enhance support from production, technical, and other functional departments for marketing activities, build rapid response capabilities, and improve the timeliness and effectiveness of our market services. 

 
	2. Enhance basic management and improve quality and efficiency. 

 
	First, we must achieve new breakthroughs in the compensation and performance-management system. Based on the company’s development needs, we will review and refine the departmental allocation and contracting mechanisms, clearly define the scope and content of contracts, and appropriately set evaluation metrics and parameters, shifting the focus from cost-based assessments to performance-based evaluations. 

 
	Second, we must achieve new breakthroughs in employee training. We will strengthen the coordinated leadership of training initiatives, clearly define training content and standards, and conduct comprehensive, targeted training for all employees. 

 
	Third, we must achieve new breakthroughs in labor productivity. We will implement standardized operations and systematically transition from collective work to assembly-line production. We will also refine our production management practices, fully leverage the capabilities of information-based management systems, and shorten product lead times through measures such as decadal planning. 

 
	Fourth, we must achieve new breakthroughs in quality-cost-effectiveness. We will enhance standardized management of turnkey projects and transform them into standardized products. We will strengthen end-to-end control over the entire product lifecycle—ranging from outsourced procurement and component sourcing to manufacturing and processing, lifting and transportation, and system installation—to comprehensively improve product quality. We will also reduce procurement costs for bulk materials and component design costs. In addition, we will reinforce accounts receivable and inventory management to ensure smooth working capital turnover while effectively mitigating operational risks. 

 
	3. Strengthen independent innovation and promote transformation and upgrading. 

 
	Accelerate the development of new products, using high- and mid-range offerings as the benchmark. Guided by principles of thermal comfort, ecological sustainability, and environmental protection, and adhering to standards of energy efficiency, low carbon emissions, and safety, we will intensify research on application-oriented products and technologies, expedite the adoption of environmentally friendly refrigerants such as carbon dioxide, and systematically advance the R&D of next-generation products. Leveraging our strengths in turnkey engineering projects, we will deliver comprehensive solutions and shift from a product-centric manufacturing model toward a service-oriented, integrated-solution provider. While meeting customers’ personalized needs, we will also enhance the standardization and modularity of non-standard designs. 