##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF
1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 Commission file number 1-13522
 China Yuchai International Limited
  N/A
(Translation of Registrants Name Into English)
    
    Bermuda
(Jurisdiction of Incorporation or Organization)
 
 
 
  Title of Each Class
    
    Name of Each Exchange
on Which RegisteredCommon Stock, par value US$0.10 per share
    
    The New York Stock Exchange
 
 
   o þ
 o þ
  o þ
  o þ o
 o þ
 o þ




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TABLE OF CONTENTS
 CHINA YUCHAI INTERNATIONAL LIMITED
 PageCertain Definitions And Supplemental Information
    
    
    1Incorporation By Reference
    
    
    2Part I
    
    
    2Item 1. Identity Of Directors, Senior Management And Advisers
    
    
    2Item 2. Offer Statistics And Expected Timetable
    
    
    2Item 3. Key Information
    
    
    2Item 4. Information On The Company
    
    
    12Item 4A. Unresolved Staff Comments
    
    
    29Item 5. Operating And Financial Review And Prospects
    
    
    29Item 6. Directors, Senior Management And Employees
    
    
    41Item 7. Major Shareholders And Related Party Transactions
    
    
    47Item 8. Financial Information
    
    
    50Item 9. The Offer And Listing
    
    
    52Item 10. Additional Information
    
    
    52Item 11. Quantitative And Qualitative Disclosure About Market Risk
    
    
    64Item 12. Description Of Securities Other Than Equity Securities
    
    
    64Part II
    
    
    64Item 13. Defaults, Dividend Arrearages And Delinquencies
    
    
    64Item 14. Material Modifications To The Rights Of Security Holders And Use Of Proceeds
    
    
    64Item 15. Controls And Procedures
    
    
    64Item 16A. Audit Committee Financial Expert
    
    
    65Item 16B. Code Of Ethics
    
    
    65Item 16C. Principal Accountants Fees And Services
    
    
    65Item 16D. Exemption From The Listing Standards For Audit Committees
    
    
    66Item 16E. Purchases Of Equity Securities By The Issuer And Affiliated Purchasers
    
    
    66Part III
    
    
    66Item 17. Financial Statements
    
    
    66Item 18. Financial Statements
    
    
    66Item 19. Exhibits
    
    
    66Signatures
    
    
    68Exhibit Index
    
    
    69Consolidated
Financial Statements
    
    
    F-1Ex-8.1 Subsidiaries of the Registrant.Ex-12.1 Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act.Ex-13.1 Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act.Ex-14.1 Consent of Independent Registered Public Accounting Firm.
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Certain Definitions and Supplemental Information
     Cautionary Statements with Respect to Forward-Looking Statements
  
    
    political, economic and social conditions in China, including the Chinese governments
specific policies with respect to foreign investment, economic growth, inflation and the
availability of credit, particularly to the extent such current or future conditions and
policies affect the truck and diesel engine industries and markets in China, the Companys
diesel engine customers, the demand, sales volume and sales prices for the Companys diesel
engines and the Companys levels of accounts receivable;
    
    the effects of competition in the diesel engine market on the demand, sales volume and
sales prices for the Companys diesel engines;
    
    the Companys ability to collect and control its levels of accounts receivable;
    
    the Companys dependence on the Dongfeng Automobile Company and other major diesel truck
manufacturers controlled by or affiliated with the Dongfeng Automobile Company;
    
    the Companys ability to successfully manufacture and sell its 4108, 4110, 4110Q, 4110ZQ,
4112, 6105, 6108, 6112, 6L/6M (formerly referred to as 6113) heavy-duty diesel engines and
any new products;
    
    the Companys ability to finance its working capital and capital expenditure
requirements, including obtaining any required external debt or other financing;
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
    
    the effects of inflation on the Companys financial condition and results of operations,
including the effects on Yuchais costs of raw materials and parts and labor costs;
    
    the Companys ability to successfully implement the reorganization agreement which it
entered into with Yuchai and Coomber Investments Limited (Coomber) on April 7, 2005 (the
Reorganization Agreement), as amended in December 2005, relating to the implementation of
the restructuring contemplated in the earlier agreement dated July 19, 2003 between the
Company and Yuchai with respect to the Companys investment in Yuchai (the July 2003
Agreement);
    
    the Companys ability to control Yuchai and consolidate Yuchais financial results;
    
    the effects of Chinas political, economic and social conditions on the Companys
financial condition, results of operations, business or prospects;
    
    the effects of uncertainties in the Chinese legal system, which could limit the legal
protections available to foreign investors, including with respect to the enforcement of
foreign judgments in China; and
    
    the impact on the Companys business and results of operations as a result of Chinas
membership with the World Trade Organization (WTO).
 
 Incorporation by Reference
  
 PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
  
 ITEM 3. KEY INFORMATION.
 Selected Financial Data
     2




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As of and for the Year Ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(3)(in thousands)Statement of Income Data:Revenues, net
    
    
    1,783,329
    
    
    
    3,513,047
    
    
    
    4,569,950
    
    
    
    5,582,095
    
    
    
    5,829,431
    
    
    
    722,340Gross profit
    
    
    599,926
    
    
    
    1,141,967
    
    
    
    1,377,156
    
    
    
    1,575,209
    
    
    
    1,302,385
    
    
    
    161,382Research and development costs
    
    
    (44,721
    )
    
    
    (75,532
    )
    
    
    (94,594
    )
    
    
    (136,960
    )
    
    
    (123,876
    )
    
    
    (15,350
    )Provision for uncollectible loans to a related party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (205,000
    )
    
    
    (25,402
    )Operating income
    
    
    295,115
    
    
    
    640,307
    
    
    
    721,411
    
    
    
    779,929
    
    
    
    168,692
    
    
    
    20,903Income before income taxes and minority
interests
    
    
    269,189
    
    
    
    625,450
    
    
    
    696,906
    
    
    
    753,854
    
    
    
    117,242
    
    
    
    14,528Income tax benefit/(expense)
    
    
    63,584
    
    
    
    (83,242
    )
    
    
    (112,924
    )
    
    
    (105,165
    )
    
    
    (20,875
    )
    
    
    (2,587
    )Income before minority interests
    
    
    332,773
    
    
    
    542,208
    
    
    
    583,982
    
    
    
    648,689
    
    
    
    96,367
    
    
    
    11,941Minority interests in income of consolidated
subsidiaries
    
    
    (82,386
    )
    
    
    (129,775
    )
    
    
    (145,800
    )
    
    
    (157,292
    )
    
    
    (27,880
    )
    
    
    (3,455
    )Net income
    
    
    250,387
    
    
    
    412,433
    
    
    
    438,182
    
    
    
    491,397
    
    
    
    68,487
    
    
    
    8,486Basic and diluted earnings per common share
    
    
    7.09
    
    
    
    11.67
    
    
    
    12.40
    
    
    
    13.90
    
    
    
    1.88
    
    
    
    0.23Weighted average number of shares
    
    
    35,340
    
    
    
    35,340
    
    
    
    35,340
    
    
    
    35,340
    
    
    
    36,460
    
    
    
    36,460Balance Sheet Data (at year end):Working capital(1)
    
    
    1,100,462
    
    
    
    1,340,832
    
    
    
    1,031,830
    
    
    
    1,402,226
    
    
    
    959,401
    
    
    
    118,882Goodwill
    
    
    212,636
    
    
    
    212,636
    
    
    
    212,636
    
    
    
    212,636
    
    
    
    212,636
    
    
    
    26,348Total assets
    
    
    3,262,868
    
    
    
    3,985,459
    
    
    
    4,033,632
    
    
    
    5,384,248
    
    
    
    6,613,785
    
    
    
    819,532
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As of and for the Year Ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(3)(in thousands)Long-term
bank loans, excluding current instalments
    
    
    180,000
    
    
    
    50,000
    
    
    
    
    
    
    
    100,000
    
    
    
    50,000
    
    
    
    6,196Minority interests
    
    
    420,545
    
    
    
    487,491
    
    
    
    544,526
    
    
    
    724,311
    
    
    
    685,514
    
    
    
    84,944Common stock
    
    
    30,349
    
    
    
    30,349
    
    
    
    30,349
    
    
    
    30,349
    
    
    
    31,945
    
    
    
    3,958Stockholders equity
    
    
    1,805,045
    
    
    
    2,161,903
    
    
    
    1,991,687
    
    
    
    2,483,084
    
    
    
    2,667,041
    
    
    
    330,480Statement of Cash Flows Data:Net cash provided by operating activities
    
    
    59,273
    
    
    
    659,500
    
    
    
    1,075,274
    
    
    
    589,608
    
    
    
    242,674
    
    
    
    30,070Capital expenditures(2)
    
    
    43,043
    
    
    
    174,850
    
    
    
    372,775
    
    
    
    552,902
    
    
    
    515,359
    
    
    
    63,860Depreciation and amortization
    
    
    113,680
    
    
    
    118,872
    
    
    
    125,519
    
    
    
    132,789
    
    
    
    139,720
    
    
    
    17,313
 
 (1)
    
    Current assets (including cash) less current liabilities.(2)
    
    Purchase of property, plant and equipment, lease prepayment and payment for construction in
progress.(3)
    
    The Companys functional and reporting currency is Renminbi, and the translation of amounts
from Renminbi to U.S. dollars is solely for the convenience of the reader. Translation of
amounts from Renminbi to U.S. dollars has been made at the rate of Rmb 8.0702 = US$1.00, the
rate quoted by the Peoples Bank of China at the close of business on December 30, 2005. No
representation is made that the Renminbi amounts could have been, or could be, converted into
U.S. dollars at that rate or at any other rate prevailing on December 30, 2005 or any other
date. Dividends
  Dividend paid by the Company
    
    Dividend Paid by Yuchaito its shareholders
    
    to the Company(1)Period
    
    (per share)
    
    (in thousands)2001
    
    US$0.02
    
    Rmb 72,284 (US$8,720)2002
    
    US$0.19
    
    Rmb 245,766 (US$29,694)(2)2003
    
    US$2.08
    
    Rmb 61,433 (US$7,422)2004
    
    US$0.39
    
    Rmb 231,309 (US$27,906)(3)2005
    
    US$  Nil
    

Rmb
72,282 (US$8,957)(4)
 
 (1)
    
    Dividends paid by Yuchai to the Company, as well as to other shareholders of Yuchai, were
declared in Renminbi and paid in U.S. dollars (as shown in the parentheses) based on the
exchange rates at local designated foreign exchange banks on the respective payment dates. For
dividends paid for 2001, 2002, 2003, 2004 and 2005, the exchange rate used was Rmb 8.2894 =
US$1.00, Rmb 8.2767 = US$1.00, Rmb 8.2767 = US$1.00, Rmb 8.2765 = US$1.00 and Rmb 8.0702 =
US$1.00, respectively.(2)
    
    The dividends declared for 2002 by Yuchai were paid to the Company in 2003 following
execution of the July 2003 Agreement.(3)
    
    The dividends declared for 2004 by Yuchai were paid to the Company in 2005 following
execution of the Reorganization Agreement.(4)
    
    On June 26, 2006, Yuchai has declared dividends to all
shareholders in respect of the financial year ended December 31,
2005 and the amount attributable to the Company is Rmb 72.3 million
(US$9.0 million). This dividend was received by the Company on
July 28, 2006. Historical Exchange Rate Information
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Noon Buying Rate(1)(Rmb per US$1.00)Period
    
    High
    
    LowDecember 2005
    
    
    8.0808
    
    
    
    8.0702January 2006
    
    
    8.0702
    
    
    
    8.0596February 2006
    
    
    8.0616
    
    
    
    8.0415March 2006
    
    
    8.0505
    
    
    
    8.0167April 2006
    
    
    8.0248
    
    
    
    8.0040May 2006
    
    
    8.0300
    
    
    
    8.0005June 2006
    
    
    8.0225
    
    
    
    7.9943July 2006
    
    
    8.0018
    
    
    
    7.9690
 Noon Buying Rate(1)(Rmb per US$1.00)Period
    
    Period End
    
    Average
    
    High
    
    Low2001
    
    
    8.2766
    
    
    
    8.2772
    
    
    
    8.2786
    
    
    
    8.27632002
    
    
    8.2800
    
    
    
    8.2772
    
    
    
    8.2800
    
    
    
    8.27652003
    
    
    8.2767
    
    
    
    8.2771
    
    
    
    8.2800
    
    
    
    8.27652004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.27642005
    
    
    8.0702
    
    
    
    8.1734
    
    
    
    8.2765
    
    
    
    8.07022006
(through July 31, 2006)
    
    
    7.9690
    
    
    
    8.0200
    
    
    
    8.0702
    
    
    
    7.9690
 
 (1)
    
    The noon buying rate in New York for cable transfers payable in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York. Since April 1994, the
noon buying rate has been based on the rate quoted by the Peoples Bank of China. As a result,
since April 1994, the noon buying rate and the Peoples Bank of China rate have been
substantially similar. The Peoples Bank of China rate at the end of 2005 was Rmb 8.0702,
compared with Rmb 8.1734 for the noon buying rate (average).(2)
    
    Determined by averaging the rates on the last business day of each month during the relevant
period. Risk Factors
 Risks relating to our company and our business
 Our financial condition, results of operations, business and prospects may be adversely affected
if we are unable to implement the Reorganization Agreement.
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We
have and may continue to experience disagreements and difficulties
with the Chinese Shareholders in Yuchai.
  Our exposure to the Dongfeng Group has had, and could continue to have, a material adverse effect
on our business, financial condition and results of operation.
    Competition in China from other diesel engine manufacturers may adversely affect our financial
condition, results of operations, business or prospects.
  
    
    improvements in competitors products;
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
    
    increased production capacity of competitors;
    
    increased utilization of unused capacity by competitors; and
    
    price competition.
      Our financial condition, results of operations, business or prospects may be adversely affected
to the extent we are unable to continue our sales growth or adequately manage our growth.
  7




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
    
    obtaining the necessary supplies;
    
    hiring and training skilled production workers and management personnel;
    
    manufacturing and delivering products for increased orders in a timely manner;
    
    maintaining quality standards and prices; and
    
    controlling production costs.
  The diesel engine business in China is dependent in large part on the performance of the Chinese
economy, as well as Chinese government policy. As a result, our financial condition, results of
operations, business and prospects could be adversely affected by slowdowns in the Chinese
economy, as well as Chinese government policies that de-emphasize the use of diesel engines.
   If we are not able to continuously improve our existing engine products and develop new diesel
engine products, we may become less competitive, and our financial condition, results of
operations, business and prospects will be adversely affected.
  8




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We may be unable to obtain sufficient financing to fund our capital requirements, which could
limit our growth potential.
  Our controlling shareholders interests may differ from those of our other shareholders.
  We may experience a change of control as a result of offerings of shares by our controlling
shareholders.
  We could be exposed to the impact of interest rates and foreign currency movements with respect
to our future borrowings. In addition, a devaluation of the Renminbi will increase the Renminbi
cost of repaying our foreign currency denominated indebtedness and, therefore, could adversely
affect our financial condition, results of operations, business or prospects.
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We may be adversely affected by environmental regulations.
  Our insurance coverage may not be adequate to cover risks related to our production and other
operations.
  The market price for our common stock may be volatile.
  
    
    our interim operating results;
    
    the publics reaction to our press releases and announcements and our filings with the
Securities and Exchange Commission, or SEC;
    
    changes in financial estimates or recommendations by stock market analysts regarding us,
our competitors or other companies that investors may deem comparable;
    
    operating and stock price performance of our competitors or other companies that investors may deem comparable;
    
    changes in general economic conditions;
    
    future sales of our common stock in the public market, or the perception that such sales could occur;
    
    the announcement by us or our competitors of a significant acquisition; and
    
    increases in labor and other costs.
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Risks relating to Mainland China
  Adverse changes in the economic policies of the Chinese government could have a material adverse
effect on the overall economic growth of Mainland China, which could reduce the demand for our
products and adversely affect our competitive position.
  Adverse economic developments in China or elsewhere in the Asian region could have a material
adverse effect on our financial condition, results of operations, business or prospects.
  The Chinese legal system embodies uncertainties which could limit the legal protections available
to foreign investors.
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We may not freely convert Renminbi into foreign currency, which could limit our ability to obtain
sufficient foreign currency to satisfy our foreign currency requirements or to pay dividends to
shareholders.
   The admission of China into the WTO could lead to increased foreign competition.
  Outbreaks of infectious diseases, such as severe acute respiratory syndrome (SARS) and the bird
flu, in various parts of China and other countries may materially and adversely affect our
business and operations, as well as our financial condition and results of operations.
  
 ITEM 4. INFORMATION ON THE COMPANY.
 History and Development
 The Company
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Minority Investments
  TCL
      (a)
    
    an aggregate of 369,655,952 shares representing approximately 19.25% of the total number
of ordinary shares in issue in the capital of TCL; and
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(b)
    
    an aggregate of 52.9 million unsecured 2% convertible bonds due 2009 in the denomination
of S$0.80 each issued by TCL, which are capable of being converted into an aggregate of
529.3 million new TCL shares, representing approximately 20.2% of TCLs enlarged issued
share capital.
    LKN
  
    
    Grace Star Services Ltd. (Grace Star) acquired 191,413,465 ordinary shares representing
approximately 29.13% of the total number of ordinary shares in issue, and 123,010,555
redeemable convertible preference shares (the Existing LKN RCPS), in the capital of LKN;
and
    
    Venture Lewis Limited (Venture Lewis) acquired approximately S$129.4 million
(approximately US$79.9 million, based on an exchange rate of S$1.62 to US$1.00) in principal
amount of outstanding secured non-convertible bonds (the Existing LKN Bonds) issued by
LKN.
    14




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Yuchai
        15




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Recent Developments
     16




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Business Overview
 Product Development
 Overview
   17




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6105 Medium-Duty Diesel Engines
  6108 Medium-Duty Diesel Engines
   6112 Heavy-Duty Diesel Engines
    18




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6L Heavy-Duty Diesel Engines
  6M Heavy-Duty Diesel Engines
  4-Series Light-Duty Diesel Engines
      Products
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Type and TechnicalSpecifications
    
    4F Engine*
    
    4110ZQ Engine
    
    6105 Engine
    
    6108 Engine
    
    6112 Engine
    
    6L Engine*
    
    6M Engine*Type
    
    4-stroke,
    
    4-stroke,
    
    4-stroke,
    
    4-stroke,
    
    4-stroke,
    
    4-stroke,
    
    4-stroke,turbo-charged,
    
    turbo-charged,
    
    turbo-charged,
    
    Water-cooling,
    
    turbo-charged,
    
    turbo-charged,
    
    turbo-charged,inner-cooling or
    
    water-cooling,
    
    water-cooling,
    
    in-line vertical
    
    inner-cooling,
    
    inner-cooling or
    
    inner-cooling orwater-cooling,
    
    in-line vertical
    
    in-line vertical
    
    
    
    water-cooling,
    
    water-cooling,
    
    water-cooling,in-line vertical
    
    
    
    
    
    
    
    in-line vertical
    
    4 valve per
    
    4 valve percylinder in-line
    
    cylinder in-linevertical
    
    verticalRated Power
    
    115 horsepower
    
    136 horsepower
    
    230 horsepower
    
    240 horsepower
    
    270 horsepower
    
    350 horsepower
    
    390 horsepower(66  85 kw)
    
    (118 kw)
    
    (170 kw)
    
    (206 kw)
    
    (221 kw)
    
    (243 kw)
    
    (288 kw)Number of Cylinders
    
    4
    
    4
    
    6
    
    6
    
    6
    
    6
    
    6Cylinder Displacement
    
    2.66L
    
    4.257L
    
    6.494L
    
    7.255L
    
    7.8L
    
    8.424L
    
    9.84LRated Speed
    
    3200 r/min
    
    2800 r/min
    
    2500 r/min
    
    2300 r/min
    
    2400 r/min
    
    2200 r/min
    
    2100 r/minMaximum Torque
    
    300 N.m
    
    392 N.m
    
    810 N.m
    
    1100 N.m
    
    980 N.m
    
    1400 N.m
    
    1680 N.mSpeed at Maximum Torque
    
    2200 r/min
    
    1600 r/min
    
    1700 r/min
    
    1600 r/min
    
    1500 r/min
    
    1400 r/min
    
    1600 r/minBore x Stroke
    
    92 x 100 mm
    
    110 x 112 mm
    
    105 x 125 mm
    
    108 x 132 mm
    
    112 x 132 mm
    
    113 x 140 mm
    
    120 x 145 mmMinimum Fuel Consumption
    
    £ 203 g/kw.h
    
    < 200 g/kw.h
    
    < 200 g/kw.h
    
    < 196 g/kw.h
    
    < 195 g/kw.h
    
    < 198 g/kw.h
    
    < 193 g/kw.hConsumption Ratio of Oil to Fuel
    
    £ 0.2%
    
    < 0.5%
    
    < 0.1%
    
    < 0.15%
    
    < 0.1%
    
    < 0.1%
    
    < 0.1%Noise
    
    £ 96 dB(A)
    
    < 99 dB(A)
    
    < 99 dB(A)
    
    < 97 dB(A)
    
    < 97 dB(A)
    
    < 97 dB(A)
    
    < 96 dB(A)Smoke
    
    £ 2 Bosch
    
    < 3.5 Bosch
    
    < 2.5 Bosch
    
    < 2.5 Bosch
    
    < 2.5 Bosch
    
    < 2 Bosch
    
    < 2 BoschNet Machine Weight
    
    320 kg
    
    350 kg
    
    650 kg
    
    600 kg
    
    700 kg
    
    750 kg
    
    880 kgDimensions
    
    800 x 576 x
    
    950 x 600 x
    
    1226 x 803 x
    
    1234 x 800 x
    
    1184 x 823 x
    
    1330 x 800 x
    
    1343 x 651 x(length x width x height)
    
    767 mm
    
    750 mm
    
    1012 mm
    
    1100 mm
    
    1040 mm
    
    1100 mm
    
    1095 mm
 
 *
    
    Yuchais 6L and 6M engines have a rated power ranging from 280 to 390 horsepower.  2003
    
    
    2004
    
    
    2005% of
    
    
    Units
    
    
    
    
    
    
    % of
    
    
    Units
    
    
    
    
    
    
    % of
    
    
    UnitsProduct
    
    Revenues, net
    
    
    Revenues, net
    
    
    Sold
    
    
    Revenues, net
    
    
    Revenues, net
    
    
    Sold
    
    
    Revenues, net
    
    
    Revenues, net
    
    
    SoldRmb
    
    
    
    
    
    
    
    
    
    
    Rmb
    
    
    
    
    
    
    
    
    
    
    Rmb(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)Diesel engines6105
    
    
    911,190
    
    
    
    19.9
    %
    
    
    44,131
    
    
    
    1,143,535
    
    
    
    20.5
    %
    
    
    50,609
    
    
    
    1,748,847
    
    
    
    30.0
    %
    
    
    69,3796108
    
    
    1,504,140
    
    
    
    32.9
    %
    
    
    61,361
    
    
    
    1,372,073
    
    
    
    24.6
    %
    
    
    57,908
    
    
    
    810,859
    
    
    
    13.9
    %
    
    
    37,5606112
    
    
    1,003,791
    
    
    
    22.0
    %
    
    
    20,472
    
    
    
    1,203,558
    
    
    
    21.6
    %
    
    
    24,073
    
    
    
    786,989
    
    
    
    13.5
    %
    
    
    14,7886L
    
    
    3,697
    
    
    
    0.1
    %
    
    
    62
    
    
    
    60,056
    
    
    
    1.1
    %
    
    
    963
    
    
    
    46,603
    
    
    
    0.8
    %
    
    
    7826M
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,312
    
    
    
    0.6
    %
    
    
    818
    
    
    
    146,677
    
    
    
    2.5
    %
    
    
    3,4714-Series
    
    
    769,805
    
    
    
    16.8
    %
    
    
    46,022
    
    
    
    1,183,992
    
    
    
    21.2
    %
    
    
    71,562
    
    
    
    1,607,096
    
    
    
    27.6
    %
    
    
    103,598Diesel power
generators &
others(1)
    
    
    377,327
    
    
    
    8.3
    %
    
    
    171
    
    
    
    581,569
    
    
    
    10.4
    %
    
    
    695
    
    
    
    682,360
    
    
    
    11.7
    %
    
    
    650Total
    
    
    4,569,950
    
    
    
    100.0
    %
    
    
    172,219
    
    
    
    5,582,095
    
    
    
    100.0
    %
    
    
    206,628
    
    
    
    5,829,431
    
    
    
    100.0
    %
    
    
    230,228
 
 (1)
    
    Units sold relate mainly to agricultural and industrial
engines. 20




---



##### Table of Contents



Medium-Duty Diesel Engines
 6105 Engines
   6108 Engines
   Heavy-Duty Diesel Engines
   Light-Duty Diesel Engines
  21




---



##### Table of Contents



Other Products
 Diesel Power Generators
  Diesel Engine Parts
  Sales, Marketing and Services
 Sales and Marketing
     22




---



##### Table of Contents



2003
    
    
    2004
    
    
    2005Sales Revenue
    
    
    % of Sales Revenue
    
    
    Unit Sales
    
    
    Sales Revenue
    
    
    % of Sales Revenue
    
    
    Unit Sales
    
    
    Sales Revenue
    
    
    % of Sales Revenue
    
    
    Unit SalesRmb (000)
    
    
    
    
    
    
    
    
    
    
    Rmb (000)
    
    
    
    
    
    
    
    
    
    
    Rmb (000)Total Domestic Sales
    
    
    4,546,383
    
    
    
    99.48
    %
    
    
    171,769
    
    
    
    5,518,582
    
    
    
    98.86
    %
    
    
    204,812
    
    
    
    5,715,804
    
    
    
    98.05
    %
    
    
    226,073Total Export Sales
    
    
    23,567
    
    
    
    0.52
    %
    
    
    450
    
    
    
    63,513
    
    
    
    1.14
    %
    
    
    1,816
    
    
    
    113,627
    
    
    
    1.95
    %
    
    
    4,1554,569,950
    
    
    
    100.0
    %
    
    
    172,219
    
    
    
    5,582,095
    
    
    
    100.0
    %
    
    
    206,628
    
    
    
    5,829,431
    
    
    
    100.0
    %
    
    
    230,228
     Customer Service
     23




---



##### Table of Contents



Manufacturing
      24




---



##### Table of Contents



Capital Expenditures
  Seasonality
  Trademarks
  Competition
    25




---



##### Table of Contents



26




---



##### Table of Contents



Organizational Structure
  
 27




---



##### Table of Contents



Regulatory and Related Matters
 Governance, Operation and Dissolution of Yuchai
      Property, Plants and Equipment
  Environmental Matters
  28




---



##### Table of Contents



ITEM 4A. UNRESOLVED STAFF COMMENTS.
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
   Overview
   29




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##### Table of Contents



30




---



##### Table of Contents



Critical Accounting Policies
    
    
    Allowances for doubtful accounts;
    
    Realization of the carrying value of inventories;
    
    Product warranty obligations;
    
    Realization of deferred tax assets;
    
    Impairment of long-lived assets other than goodwill;
    
    Provision for loss contingency for guarantee granted by YEGCL; and
    
    Recoverability of carrying value of investment in TCL.
 Allowances for doubtful accounts
  31




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##### Table of Contents



December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(in thousands)Balance at beginning of year
    
    
    158,075
    
    
    
    94,423
    
    
    
    107,457
    
    
    
    13,315Add: Charged to consolidated statements of income
    
    
    
    
    
    
    13,034
    
    
    
    25,587
    
    
    
    3,171Less: Written back to consolidated statements of income
    
    
    (493
    )
    
    
    
    
    
    
    
    
    
    
    Doubtful debts written off
    
    
    (63,159
    )
    
    
    
    
    
    
    (63,997
    )
    
    
    (7,930
    )Balance at end of year
    
    
    94,423
    
    
    
    107,457
    
    
    
    69,047
    
    
    
    8,556
  Realization of the carrying value of inventories
   Product
warranty obligations
   December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(in thousands)Balance at beginning of year
    
    
    66,864
    
    
    
    101,215
    
    
    
    126,114
    
    
    
    15,627Add: Provision charged to
consolidated statements of
income
    
    
    162,369
    
    
    
    190,205
    
    
    
    179,184
    
    
    
    22,203Less: Amounts utilized
    
    
    (128,018
    )
    
    
    (165,306
    )
    
    
    (163,172
    )
    
    
    (20,219
    )Balance at end of year
    
    
    101,215
    
    
    
    126,114
    
    
    
    142,126
    
    
    
    17,611
  32




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##### Table of Contents



Realization of deferred tax assets
   Impairment of long-lived assets, other than goodwill
    Provision
for loss contingency for guarantee granted by YEGCL
  33




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##### Table of Contents



34




---



##### Table of Contents



Recoverability of carrying amount of investment in TCL
   Results of Operations
  Percentage of Net RevenuesYear Ended December 31,2003
    
    2004
    
    2005Revenues, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    69.9
    %
    
    
    71.8
    %
    
    
    77.7
    %Gross profit
    
    
    30.1
    %
    
    
    28.2
    %
    
    
    22.3
    %Research and
development costs
    
    
    2.1
    %
    
    
    2.5
    %
    
    
    2.1
    %Selling,
general and administrative expenses
    
    
    12.3
    %
    
    
    11.8
    %
    
    
    13.8
    %Provision for uncollectible loans to a related party
    
    
    
    
    
    
    
    
    
    
    3.5
    %Operating income
    
    
    15.8
    %
    
    
    14.0
    %
    
    
    2.9
    %Interest expense
    
    
    0.5
    %
    
    
    0.6
    %
    
    
    1.2
    %Other (expenses)/income, net
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.4
    %Income before income taxes and minority interests
    
    
    15.2
    %
    
    
    13.5
    %
    
    
    2.0
    %Income taxes
    
    
    2.5
    %
    
    
    1.9
    %
    
    
    0.4
    %Income before minority interests
    
    
    12.8
    %
    
    
    11.6
    %
    
    
    1.7
    %Minority interests in income of consolidated subsidiaries
    
    
    3.2
    %
    
    
    2.8
    %
    
    
    0.5
    %Net income
    
    
    9.6
    %
    
    
    8.8
    %
    
    
    1.2
    %
 35




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##### Table of Contents



2005 Compared to 2004
         2004 Compared to 2003
    36




---



##### Table of Contents



Inflation
  Liquidity and Capital Resources
    December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$(in thousands)Net cash provided by operating activities
    
    
    1,075,274
    
    
    
    589,608
    
    
    
    242,674
    
    
    
    30,070Net cash used in investing activities
    
    
    (372,373
    )
    
    
    (753,367
    )
    
    
    (677,215
    )
    
    
    (83,915
    )Net cash (used in)/provided by financing activities
    
    
    (714,163
    )
    
    
    254,493
    
    
    
    452,777
    
    
    
    56,105Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    (4,713
    )
    
    
    (584
    )Net (decrease)/increase in cash and cash equivalents
    
    
    (11,262
    )
    
    
    90,734
    
    
    
    13,523
    
    
    
    1,676
  37




---



##### Table of Contents



38




---



##### Table of Contents



Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years(in Rmb millions)Short-term debt
    
    
    913
    
    
    
    913
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    50
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    Purchase Obligations
regarding capital
expenditure
    
    
    214
    
    
    
    214
    
    
    
    
    
    
    
    
    
    
    
    Lease
Commitments
    
    
    6
    
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    Total
    
    
    1,183
    
    
    
    1,130
    
    
    
    53
    
    
    
    
    
    
    
    
  Off-Balance Sheet Arrangements
  Guarantee by YEGCL
  39




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##### Table of Contents



Outstanding bills discounted
  Outstanding letter of credits
   Recently Issued Accounting Standards
 Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 47
  FIN
No. 48
  Emerging Issues Task Force (EITF) 04-13
  SFAS No. 151
  SFAS No. 153
  SFAS No. 155
  SFAS
No. 156
  40




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##### Table of Contents



SFAS
No. 123 (revised 2004)
  Research and Development
  
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
 Directors and Senior Management of the Company
   Year First Elected orAppointed DirectorName
    
    Position
    
    or OfficerTEO Tong Kooi(1)
    
    President and Director
    
    2004GAO Jia Lin(1)
    
    Vice President and Director
    
    1995GAN Khai Choon
    
    Director
    
    1995Raymond C. K. HO(1)(2)(3)(4)(6)
    
    Director
    
    2004KWEK Leng Peck(1)(3)
    
    Director
    
    1994NEO Poh Kiat(2)(3)
    
    Director
    
    2005(5)TAN Aik-Leang(1)(2)(4)
    
    Director
    
    2005(5)Philip TING Sii Tien(1)
    
    Director and Chief Financial Officer
    
    1994WONG Hong Ren(1)(4)
    
    Director
    
    1994Sheila MURUGASU
    
    General Counsel
    
    2003Ira Stuart OUTERBRIDGE III
    
    Secretary
    
    2001
 
 (1)
    
    Also a director of Yuchai.(2)
    
    Member of the Audit Committee.(3)
    
    Member of the Compensation Committee.(4)
    
    Member of the Special Committee.(5)
    
    Appointed as director in 2005.(6)
    
    Mr. Ho has notified the Company that he will not be seeking re-election at the Companys
forthcoming annual general meeting of shareholders.    41




---



##### Table of Contents



42




---



##### Table of Contents



Audit Committee
  Compensation Committee
  Special Committee
  Directors and Executive Officers of Yuchai
   Year First Elected orAppointed DirectorName
    
    Position
    
    Position or OfficerYAN Ping
    
    Chairman of the Board of Directors
    
    2005GAO Jia Lin(1)
    
    Deputy Chairman of the Board of Directors
    
    1995Raymond C.K. HO(1)(2)
    
    Director
    
    2004LI Tiansheng
    
    General Manager and Director
    
    2001KWEK Leng Peck(1)
    
    Director
    
    2005TAN Aik-Leang(1)
    
    Director
    
    2005TEO Tong Kooi(1)
    
    Director
    
    2004TING Sii Tien, Philip(1)
    
    Director
    
    2004QIN Xiao Cong
    
    Director
    
    2003SHAO Qihui
    
    Director
    
    2003
 43




---



##### Table of Contents



Year First Elected orAppointed DirectorName
    
    Position
    
    Position or OfficerWONG Hong Ren(1)
    
    Director
    
    1993YUAN Xu Cheng
    
    Director
    
    2003GU Tangsheng
    
    Assistant to Chairman and Director
    
    2005GONG Hai
    
    Deputy General Manager
    
    2006LIM Poh Lea
    
    Financial Controller
    
    2004SHEN Jie
    
    Chief Engineer
    
    2002WU Qiwei
    
    Deputy General Manager
    
    2006YANG Weizhong
    
    Chief Accountant
    
    1992
 
 (1)
    
    Also a Director of the Company.(2)
    
    Mr. Ho has advised Yuchai that he will resign as a director of Yuchai concurrent with his
resignation as a director of the Company.             44




---



##### Table of Contents



45




---



##### Table of Contents



Compensation
 Company
   Yuchai
  46




---



##### Table of Contents



Employees
  Share Ownership
 Stock Option Plan
  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
 Major Shareholders
   Identity of Person or Group
    
    Number
    
    
    Percentage (%)Hong Leong Asia Ltd.(1)
    
    
    7,913,769
    
    
    
    21.2
    %The Yulin City Government(2)
    
    
    8,601,550
    
    
    
    23.1
    %Tai Tak Industries Pte Ltd(3)
    
    
    1,927,673
    
    
    
    5.2
    %
 
 (1)
    
    Information based upon a report on Schedule 13D jointly filed by HLA and its wholly-owned
subsidiaries, HLC, HLT, Flite Technology Industries Pte Ltd and Lydale Pte Ltd, with the SEC
on July 19, 2002, as amended on September 10, 2003, October 7, 2003, October 15, 2003 and
December 1, 2003, and other information provided by HLA to the Company.(2)
    
    Information based on a report on Schedule 13D filed by Coomber, Goldman, Zhong Lin and the
State Holding Company, with the SEC on December 16, 2002, as amended on June 23, 2003, July 9,
2003, December 23, 2003, March 15, 2004, February 15, 2005 and April 18, 2005. Based on
Amendment No. 4 to the Schedule 13D filed by Coomber and others with the SEC on December 23,
2003, Coomber is a wholly-owned subsidiary of Goldman, which is indirectly owned and
controlled by Yulin City Municipal Government, or Yulin City Government, in Guangxi Zhuang
Autonomous Region, PRC. Accordingly, the Yulin City Government is the ultimate beneficial
owner of the 8,601,550 shares of the Companys Common Stock held of record by Coomber. Coomber
has advised the Company of the following information. Coomber has entered into forward sale
agreements with a financial institution as a counterparty, with respect to a total of 47




---



##### Table of Contents



1,900,000 shares of the Companys Common Stock. On the respective settlement dates of these
forward sales agreements, Coomber will have the option to settle the forward sales by delivery
of cash or the Companys Common Stock. The counterparty may borrow the pledged shares from
Coomber in connection with that partys hedging of its exposure under the forward sale
arrangements. Coomber will temporarily cease to have voting rights with respect to any common
stock borrowed by the counterparty but will reacquire such voting rights when the counterparty
returns the borrowed shares to Coomber. In the event Coomber elects to settle the forward sale
agreement or agreements entirely by delivering shares of the Companys Common Stock, its
beneficial ownership of the Companys Common Stock could, depending on the number of shares of
the Companys Common Stock delivered, decrease to 6,701,550 shares, or approximately 18.0% of
the Companys Common Stock, or to 4,601,550 shares, or approximately 12.3% of the Companys
Common Stock, if it sells 2,100,000 shares pursuant to the Companys prospectus dated March
24, 2004.(3)
    
    Information based on a report on Schedule 13G jointly filed by Tai Tak Industries Pte Ltd and
its affiliate, Tai Tak Securities Pte Ltd, with the SEC on March 7, 2005 and as amended on
June 20, 2005.    The Special Share
   48




---



##### Table of Contents



Related Party Transactions
 Shareholders Agreement
   Registration Rights Agreement
   49




---



##### Table of Contents



Reorganization Agreement
  Other Transactions
      
 ITEM 8. FINANCIAL INFORMATION.
 Consolidated Financial Statements
  Legal Proceedings
  Proceedings with Yuchai
   50




---



##### Table of Contents



Other Legal Proceedings
   Policy on Dividend Distributions
    51




---



##### Table of Contents



ITEM 9. THE OFFER AND LISTING.
   US$
    
    US$Period
    
    High
    
    Low2001
    
    
    1.15
    
    
    
    0.302002
    
    
    5.95
    
    
    
    0.952003
    
    
    37.24
    
    
    
    4.452004
    
    
    34.00
    
    
    
    9.852005
    
    
    14.47
    
    
    
    7.022006 (through July 31, 2006)
    
    
    10.00
    
    
    
    4.64
 US$
    
    US$Period
    
    High
    
    Low2003 First Quarter
    
    
    7.10
    
    
    
    4.452003 Second Quarter
    
    
    9.20
    
    
    
    5.602003 Third Quarter
    
    
    19.30
    
    
    
    6.592003 Fourth Quarter
    
    
    37.24
    
    
    
    17.002004 First Quarter
    
    
    32.22
    
    
    
    18.532004 Second Quarter
    
    
    22.79
    
    
    
    15.802004 Third Quarter
    
    
    18.75
    
    
    
    9.852004 Fourth Quarter
    
    
    18.46
    
    
    
    12.652005 First Quarter
    
    
    13.55
    
    
    
    8.132005 Second Quarter
    
    
    13.89
    
    
    
    7.022005 Third Quarter
    
    
    14.47
    
    
    
    9.232005 Fourth Quarter
    
    
    10.40
    
    
    
    7.262006 First Quarter
    
    
    9.81
    
    
    
    6.812006 Second Quarter
    
    
    10.00
    
    
    
    6.26
 US$
    
    US$Period
    
    High
    
    LowDecember 2005
    
    
    8.94
    
    
    
    7.26January 2006
    
    
    8.36
    
    
    
    7.55February 2006
    
    
    9.81
    
    
    
    7.00March 2006
    
    
    7.88
    
    
    
    6.81April 2006
    
    
    10.00
    
    
    
    7.65May 2006
    
    
    9.00
    
    
    
    7.07June 2006
    
    
    7.75
    
    
    
    6.26July 2006
    
    
    7.42
    
    
    
    4.64
 
 ITEM 10. ADDITIONAL INFORMATION.
  Memorandum of Association and Bye-Laws
 Corporate Governance
  52




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##### Table of Contents



Standard for U.S. Domestic Listed Companies
    
    China Yuchai International Limiteds PracticeDirector Independence
    
    A majority of the board must consist of
independent directors.
    
    
    
    Three of the Companys nine directors, Messrs.
Raymond C.K. Ho, Neo Poh Kiat, Tan Aik-Leang, are
independent within the meaning of the NYSE standards.
Mr. Ho has notified the Company that he will not be
seeking re-election at the forthcoming annual general
meeting of the Company. The Company is currently
searching for a replacement independent director and,
until such person is appointed, the Company will have
only two independent directors within the meaning of
the NYSE standards.Independence is defined by various
criteria including the absence of a
material relationship between director
and the listed company. Directors who
are employees, are immediate family of
the chief executive officer or receive
over $100,000 per year in direct
compensation from the listed company are
not independent. Directors who are
employees of or otherwise affiliated
through immediate family with the listed
companys independent auditor are also
not independent.
    
    The non-management directors of each
company must meet at regularly scheduled
executive sessions without management.
    
    
    
    The Companys non-management directors do not
meet periodically without management directors.Audit Committee
    
    Listed companies must have an audit
committee that satisfies the requirements of
Rule 10A-3 under the Securities Exchange Act.
The rule requires that the audit committee (i)
be comprised entirely of independent directors;
(ii) be directly responsible for the
appointment, compensation and oversight of the
independent auditor; (iii) adopt procedures for
the receipt and treatment of complaints with
respect to accounting and auditing issues; (iv)
be authorized to engage independent
counsel and
    
    
    
    The Companys audit committee meets the
requirements of Rule 10A-3 under the Securities
Exchange Act.
 53




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Standard for U.S. Domestic Listed Companies
    
    China Yuchai International Limiteds Practiceother advisors it deems necessary in performing
its duties; and (v) be given sufficient
funding by the board of directors to compensate
the independent auditors and other advisors as
well as for the payment of ordinary
administrative expenses incurred by the
committee.
    
    The audit committee must consist of at
least three members, and each member must be
independent within the meaning established by
the NYSE.
    
    
    
    The Companys audit committee currently
consists of three members, each of whom is independent
within the meaning established by the NYSE. However,
Mr. Ho has notified the Company that he will not be
seeking re-election at the forthcoming annual general
meeting of the Company. The Company is currently
searching for a replacement independent director and,
until such person is appointed, the Companys Audit
Committee will consist of only two independent
members.
    
    The Companys audit committee must have
a written charter that addresses the
committees purpose and responsibilities.
    
    
    
    The audit committee has a charter outlining
the committees purpose and responsibilities, which
are similar in scope to those required of U.S.
companies.At a minimum, the committees purpose
must be to assist the board in the
oversight of the integrity of the
companys financial statements, the
companys compliance with legal and
regulatory requirements, the independent
auditors qualifications and independence
and the performance of the companys
internal audit function and independent
auditors.The audit committee is also required to
review the independent auditing firms
annual report, describing the firms
internal quality control procedures, any
material issues raised by the most recent
internal quality control review or peer
review of the firm and any steps taken to
address such issues. The audit committee
is also to assess the auditors
independence by reviewing all
relationships between the company and its
auditor. It must establish the companys
hiring guidelines for employees and
former employees of the independent
auditor.The committee must also discuss the
companys annual audited financial
statements and quarterly financial
statements with management and the
independent auditors, the companys
earnings press releases, as well as
financial information and earnings
guidance provided to analysts and rating
agencies, and policies with respect to
risk assessment and risk management. It
must also meet periodically with the
internal auditors and the board of
directors.
    
    Each listed company must have disclosed
whether their board of directors has identified
an Audit Committee Financial Expert, and if not
the reasons why the board has not done so.
    
    
    
    The Board of Directors has identified Mr. Tan
Aik-Leang as the Companys Audit Committee Financial
Expert.
    
    Each listed company must have an
internal audit function.
    
    
    
    The Companys internal audit function is
provided by HLA.
 54




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##### Table of Contents



Standard for U.S. Domestic Listed Companies
    
    China Yuchai International Limiteds PracticeCompensation Committee
    
    Listed companies must have a
compensation committee composed entirely of
independent board members as defined by the
NYSE listing standards.
    
    
    
    The Companys compensation committee currently
has three members, two of whom are independent within
the meaning of the NYSE standards. Upon the
resignation of Mr. Ho, the Companys Compensation
Committee will only have one independent member.
    
    The committee must have a written
charter that addresses its purpose and
responsibilities.
    
    These responsibilities include (i)
reviewing and approving corporate goals and
objectives relevant to CEO compensation; (ii)
evaluating CEO performance and compensation in
light of such goals and objectives for the CEO;
(iii) based on such evaluation, reviewing and
approving CEO compensation levels; (iv)
recommending to the board non-CEO compensation,
incentive compensation plans and equity-based
plans; and (v) producing a report on executive
compensation as required by the SEC to be
included in the companys annual proxy
statement or annual report. The committee must
also conduct an annual performance
self-evaluation.
    
    
    
    The Companys compensation committee reviews
among other things the Companys general compensation
structure, and reviews, recommends or approves
executive appointments, compensation and benefits of
directors and executive officers, subject to
ratification by the Board of Directors, and supervises
the administration of the Companys employee benefit
plans, if any.Nominating/Corporate Governance Committee
    
    Listed companies must have a
nominating/corporate governance committee
composed entirely of independent board members.
    
    
    
    The Company does not have a
nominating/corporate governance committee. However,
certain responsibilities of this committee are
undertaken by the Compensation Committee of the
Company, such as the review and approval of executive
appointments.
    
    The committee must have a written
charter that addresses its purpose and
responsibilities, which include (i) identifying
qualified individuals to become board member;
(ii) selecting, or recommending that the board
select, the director nominees for the next
annual meeting of shareholders; (iii)
developing and recommending to the board a set
of corporate governance principles applicable
to the company; (iv) overseeing the evaluation
of the board and management; and (v) conducting
an annual performance evaluation of the
committee.Equity-Compensation Plans
    
    Shareholders must be given the
opportunity to vote on all equity-compensation
plans and material revisions thereto, with
limited exceptions.
    
    
    
    The Company intends to have its shareholders
approve equity-compensation plans.Corporate Governance Guidelines
    
    Listed companies must adopt and
disclose corporate governance guidelines.
    
    
    
    The Company has formally adopted various
corporate governance guidelines, including Code of
Business Conduct and Ethics (described below); Audit
Committee Charter; Whistle-blowing Policy; Insider
Trading Policy; and Disclosure Controls and
Procedures.
 55




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##### Table of Contents



Standard for U.S. Domestic Listed Companies
    
    China Yuchai International Limiteds PracticeCode of Business Conduct and Ethics
    
    All listed companies, U.S. and foreign,
must adopt and disclose a code of business
conduct and ethics for directors, officers and
employees, and promptly disclose any waivers of
the code for directors or executive officers.
    
    
    
    The Company has adopted a Code of Business
Conduct and Ethics Policy, a copy of which is
available upon request from the Company.
 Directors
 Director Interests and Voting
  (a)
    
    a resolution regarding granting any security or indemnity for any money lent or
obligation incurred by such Director at the request, or for the benefit, of the Company or
any of its subsidiaries (or a company of which the Company is a beneficially wholly-owned
subsidiary);(b)
    
    a resolution regarding granting any security or indemnity to any third party for a debt
or obligation which is owed by the Company or any of its subsidiaries (or a company of which
the Company is a beneficially wholly-owned subsidiary) to the third party, for which such
Director has assumed responsibility in whole or in part under a guarantee or indemnity;(c)
    
    a resolution about an offer of shares, debentures or other securities of the Company or
any of its subsidiaries (or a company of which the Company is a beneficially wholly-owned
subsidiary) for subscription or purchase in which such Director is to be a participant in
the underwriting or sub-underwriting of the offer;(d)
    
    a resolution about any proposal involving any other company in which such Director is
interested, whether directly or indirectly and whether as an officer or shareholder or
otherwise, provided that such Director is not the holder of, or directly or indirectly
beneficially interested in, 5% or more of (i) any class of the equity share capital of such
company or in any third company through which such Directors interest is derived or (ii)
the voting rights in that company;(e)
    
    any contract arrangement or proposal for the benefit of employees of the Company under
which such Director benefits in a similar manner as the employees and does not receive any
privileges or advantages not provided to the employees; or(f)
    
    any proposal in which such Director is interested in the same manner as other holders of shares or debentures or other securities of the Company or any of its subsidiaries by virtue
only of such Directors interest in shares or debentures or other securities of the Company
or any of its subsidiaries.
  Remuneration and Pensions
   56




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##### Table of Contents



Borrowing Powers
  Qualification of Directors
  Rights of Holders of shares of Common Stock
  
    
    be entitled, on a show of hands, to one vote and, on a poll, to one vote per share;
    
    be entitled to such dividends as the Board of Directors of the Company may from time to time declare;
    
    in the event of a winding-up or dissolution of the Company, whether voluntary or
involuntary or for the purpose of the reorganization or otherwise or upon any distribution
of capital, be entitled to a return of the amount paid up on the Common Stock and thereafter
to the surplus assets of the Company; and
    
    generally, be entitled to enjoy all the rights attaching to shares.
  Rights of Holder of the Special Share
  
    
    to elect six Directors of the Company and to remove Directors so appointed; and
    
    no shareholder resolution may be passed without the affirmative vote of the holder of the
Special Share, including any resolution to amend the Memorandum of Association or Bye-Laws
of the Company.
   57




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##### Table of Contents



Modification of Shareholders Rights
 pari passu
 Annual General and Special General Meetings
   Limitations on Rights to Own Securities
    Exchange Controls
 Bermuda Exchange Controls
   58




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##### Table of Contents



China Exchange Controls
      59




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##### Table of Contents



Taxation
 Bermuda Taxation
   Peoples Republic of China Taxation
  Taxation of Dividends from Yuchai
  Taxation of Disposition of Yuchai Shares
   Income Tax
  60




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##### Table of Contents



Value-Added Tax
    United States Federal Income Taxation
  
    
    a financial institution,
    
    a dealer in securities,
    
    a trader in securities that elects to use a mark-to-market method of accounting for its securities holdings,
    
    a tax-exempt organization,
    
    an insurance company,
    
    a person liable for alternative minimum tax,
 61




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##### Table of Contents




    
    a person that actually or constructively owns 10% or more of the voting stock of the Company,
    
    a person that owns shares through a partnership or other pass-through entity,
    
    a person that holds shares as part of a straddle or a hedging or conversion transaction, or
    
    a person whose functional currency is not the U.S. dollar.
   
    
    a citizen or resident of the United States,
    
    a domestic corporation,
    
    an estate the income of which is subject to United States federal income tax regardless of its source, or
    
    a trust, if a United States court can exercise primary supervision over the trusts
administration and one or more United States persons are authorized to control all
substantial decisions of the trust.
 U.S. Holders should consult their own tax advisor regarding the United States federal, state
and local and other tax consequences of owning and disposing of shares in their particular
circumstances.
 Taxation of Dividends
    62




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##### Table of Contents



Taxation of Capital Gains
  PFIC Rules
 U.S. Holders are strongly advised to
consult their own tax advisors regarding the possibility of the Company becoming a PFIC as a result
of the implementation of the Reorganization Agreement and the potential United States tax
consequences to them.
 
    
    the excess distribution or gain will be allocated ratably over the U.S. Holders holding
period for the shares;
    
    the amount allocated to the current taxable year, and any taxable year prior to the first
taxable year in which the Company is treated as a PFIC, will be treated as ordinary income;
and
    
    the amount allocated to each other year will be subject to tax at the highest tax rate in
effect for that year and the interest charge generally applicable to underpayments of tax
will be imposed on the resulting tax attributable to each such year.
   Documents on Display
  63




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##### Table of Contents



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
    As of December 31, 2005
    
    As of December 31, 2004Total carrying
    
    Estimated
    
    Total carrying
    
    Estimated fairExpected maturity dates
    
    amount
    
    fair value(2)
    
    amount
    
    value(2)2006
    
    2007(Expressed in Rmb thousands, except interest rate)Floating rate debt:(i) Short-term bank loans denominated in Rmb
    
    
    812,835
    
    
    
    
    
    
    
    812,835
    
    
    
    812,835
    
    
    
    430,000
    
    
    
    430,000Weighted average interest rate(1)
    
    
    5.53
    %
    
    
    
    
    
    
    5.53
    %
    
    
    
    
    
    
    5.28
    %(ii) Long-term bank loans denominated in Rmb
    
    
    100,000
    
    
    
    50,000
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    100,000
    
    
    
    100,000Weighted average interest rate(1)
    
    
    5.22
    %
    
    
    5.85
    %
    
    
    5.43
    %
    
    
    
    
    
    
    5.22
    %
 
 (1)
    
    Weighted average interest rate is calculated based on the interest rates applicable to
individual bank loans outstanding as of December 31, 2005 and 2004.(2)
    
    Fair value was estimated based on the floating interest rates applicable to similar loan
instruments. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
  
 PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
  
 ITEM 15. CONTROLS AND PROCEDURES.
  64




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##### Table of Contents



ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
  
 ITEM 16B. CODE OF ETHICS.
  
 ITEM 16C. PRINCIPAL ACCOUNTANTS FEES AND SERVICES.
  Audit fees
    
    Audit-related fees
    
    Tax fees
    
    Others
    
    Total(Expressed in Rmb thousands)2004
    
    
    3,447
    
    
    
    331
    
    
    
    
    
    
    
    
    
    
    
    3,7782005
    
    
    4,404
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,404
 Audit fees
  Audit-related fees
  Tax fees
  Others
  65




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##### Table of Contents



ITEM 16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
  
 PART III
 
 ITEM 17. FINANCIAL STATEMENTS.
  
 ITEM 18. FINANCIAL STATEMENTS.
 Index to Financial Statements
 China Yuchai International Limited
 Report of Independent Registered Public Accounting Firm
    
    F2Consolidated Statements of Income for Years Ended December 31, 2003, 2004 and 2005
    
    F3Consolidated Balance Sheets as of December 31, 2004 and 2005
    
    F5Consolidated Statements of Stockholders Equity for Years Ended December 31, 2003, 2004 and 2005
    
    F7Consolidated Statements of Cash Flows for Years Ended December 31, 2003, 2004 and 2005
    
    F8Notes to Consolidated Financial Statements
    
    F12
 
 ITEM 19. EXHIBITS.
  1.1
    
    Memorandum of Association of China Yuchai International Limited (the Registrant)
(incorporated herein by reference to the Registration Statement on Form F-1, filed by the
Registrant on November 9, 1994 (File No. 33-86162) (the Form F-1)).1.2
    
    Bye-laws of the Registrant (incorporated herein by reference to the Form F-1).3.1
    
    Subscription and Shareholders Agreement of Diesel Machinery (BVI) Limited, dated November 9,
1994, among Diesel Machinery (BVI) Limited, Hong Leong Asia Ltd. (HLA) and China Everbright
Holdings Company Limited (EB Holdings) (incorporated herein by reference to the Form F-1).3.2
    
    Supplemental Subscription and Shareholders Agreement, dated January 21, 2002, between EB
Holdings and HLA (incorporated herein by reference to the Annual Report on Form 20-F for
fiscal year ended December 31, 2001, filed by the Registrant on June 25, 2002 (the Form 20-F
FY 2001).3.3
    
    Second Supplemental Subscription and Shareholders Agreement, dated May 17, 2002, between EB
Holdings and HLA (incorporated herein by reference to the Form 20-F FY 2001).4.1
    
    Contract for the Subscription of Foreign Common Shares in Guangxi Yuchai Machinery Company
Limited (Yuchai) and Conversion from a Joint Stock Limited Company into a Sino-Foreign Joint
Stock Limited Company, dated April 1, 1993, among Yuchai, Guangxi Yuchai Machinery Holdings
Company, Hong Leong Technology Systems (BVI) Ltd., Cathay
 66




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##### Table of Contents



Clemente Diesel Holdings Limited,
Goldman Sachs Guangxi Holdings (BVI) Ltd., Tsang & Ong Nominees (BVI) Ltd. and Youngstar
Holdings Limited, with amendments, dated May 27, 1994 and October 10, 1994 (incorporated
herein by reference to the Form F-1).4.2
    
    Subscription and Transfer Agreement (with Shareholders Agreement), dated April 1993, among
Cathay Clemente (Holdings) Limited, GS Capital Partners L.P., Sun Yuan Overseas Pte Ltd., HL
Technology Systems Pte Ltd. and Coomber Investments Limited (incorporated herein by reference
to the Form F-1).4.3
    
    Amended and Restated Shareholders Agreement, dated as of November 9, 1994 among the Cathay
Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems Pte. Ltd., Coomber
Investments Limited, owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd., and the
Registrant (incorporated herein by reference to the Form F-1).4.4
    
    Form of Amended and Restated Registration Right Agreement, dated as of November 9, 1994,
among the Cathay Investment Fund, Limited, GS Capital Partners L.P., HL Technology Systems
Pte. Ltd., Coomber Investments Limited, owners of shares formerly held by Sun Yuan Overseas
(BVI) Ltd., and the Registrant (incorporated herein by reference to the Form F-1).4.5
    
    Form of Subscription Agreement between the Registrant, its wholly-owned subsidiaries named
therein and Yuchai (incorporated herein by reference to the Form F-1).4.6
    
    Form of Term Loan Agreement between the Registrant and Yuchai (incorporated herein by
reference to the Form F-1).4.7
    
    Share Purchase and Subscription Agreement, dated as of November 9, 1994, between (i) the
Registrant, (ii) China Everbright Holdings Company Limited and (iii) Coomber Investments
Limited (incorporated herein by reference to the Form F-1).4.8
    
    Investment and Shareholders Agreement between CACG Limited IV and Guangxi Yuchai Machinery
Company Limited, dated July 14, 1994, with a First Amendment dated September 5, 1994
(incorporated herein by reference to the Form F-1).4.9
    
    Employment Agreement, dated September 5, 2003, between Yuchai and Wang Jianming (incorporated
herein by reference to the Annual Report on Form 20-F for fiscal year ended December 31, 2003,
filed by the Registrant on June 29, 2004 (the Form 20-F FY 2003).4.10
    
    Form of indemnification agreement entered into by the Company with each of Wrixon Frank
Gasteen, Gao Jia Lin, Gan Khai Choon, Raymond C. K. Ho, Kwek Leng Peck, Liu Chee Ming, Wong
Hong Ren, Philip Ting Sii Tien, Lim Poh Lea, Sheila Murugasu, Teo Tong Kooi, Neo Poh Kiat and
Tan Aik-Leang (incorporated herein by reference to the Form 20-F FY 2003).4.11
    
    Agreement between the Company and Yuchai, dated July 19, 2003 (incorporated herein by
reference to the Form 20-F FY 2003).4.12
    
    Reorganization Agreement between the Company, Coomber and Yuchai, dated April 7, 2005
(incorporated herein by reference to the Form 6-K filed by the Company on April 7, 2005).4.13
    
    Reorganization Agreement Amendment (No. 1) between the Company, Coomber and Yuchai, dated
December 2, 2005 (incorporated herein by reference to the Form 6-K filed by the Company on
December 6, 2005).8.1
    
    Subsidiaries of the Registrant.12.1
    
    Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act.13.1
    
    Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act.14.1
    
    Consent of Independent Registered Public Accounting Firm.
  67




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SIGNATURES
  CHINA YUCHAI INTERNATIONAL LIMITEDBy:
    
    /s/ Philip Ting Sii TienName: Philip TING Sii TienTitle:   Chief Financial Officer and Director
  68




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##### Table of Contents



Exhibit Index
 Exhibit Number
    
    Description of Exhibit1.1
    
    Memorandum of Association of China Yuchai International Limited (the
Registrant) (incorporated herein by reference to the Registration Statement
on Form F-1, filed by the Registrant on November 9, 1994 (File No. 33-86162)
(the Form F-1)).1.2
    
    Bye-laws of the Registrant (incorporated herein by reference to the Form F-1).3.1
    
    Subscription and Shareholders Agreement of Diesel Machinery (BVI) Limited,
dated November 9, 1994, among Diesel Machinery (BVI) Limited, Hong Leong Asia
Ltd. (HLA) and China Everbright Holdings Company Limited (EB Holdings)
(incorporated herein by reference to the Form F-1).3.2
    
    Supplemental Subscription and Shareholders Agreement, dated January 21, 2002,
between EB Holdings and HLA (incorporated herein by reference to the Form
20-F FY 2001).3.3
    
    Second Supplemental Subscription and Shareholders Agreement, dated May 17,
2002, between EB Holdings and HLA (incorporated herein by reference to the
Form 20-F FY 2001).4.1
    
    Contract for the Subscription of Foreign Common shares in Guangxi Yuchai
Machinery Company Limited (Yuchai) and Conversion from a Joint Stock
Limited Company into a Sino-Foreign Joint Stock Limited Company, dated April
1, 1993, among Yuchai, Guangxi Yuchai Machinery Holdings Company, Hong Leong
Technology Systems (BVI) Ltd., Cathay Clemente Diesel Holdings Limited,
Goldman Sachs Guangxi Holdings (BVI) Ltd., Tsang & Ong Nominees (BVI) Ltd.
and Youngstar Holdings Limited with amendments, dated May 27, 1994 and
October 10, 1994 (incorporated herein by reference to the Form F-1).4.2
    
    Subscription and Transfer Agreement (with Shareholders Agreement), dated
April 1993, among Cathay Clemente (Holdings) Limited, GS Capital Partners
L.P., Sun Yuan Overseas Pte Ltd., HL Technology Systems Pte Ltd. and Coomber
Investments Limited (incorporated herein by reference to the Form F-1).4.3
    
    Amended and Restated Shareholders Agreement, dated as of November 9, 1994
among The Cathay Investment Fund, Limited, GS Capital Partners L.P., HL
Technology Systems Pte. Ltd., Coomber Investments Limited, owners of shares
formerly held by Sun Yuan Overseas (BVI) Ltd. and the Registrant
(incorporated herein by reference to the Form F-1).4.4
    
    Form of Amended and Restated Registration Right Agreement, dated as of
November 9, 1994, among The Cathay Investment Fund, Limited, GS Capital
Partners L.P., HL Technology Systems Pte. Ltd., Coomber Investments Limited,
owners of shares formerly held by Sun Yuan Overseas (BVI) Ltd. and the
Registrant (incorporated herein by reference to the Form F-1).4.5
    
    Form of Subscription Agreement between the Registrant and its wholly-owned
subsidiaries named therein and Yuchai (incorporated herein by reference to
the Form F-1).4.6
    
    Form of Term Loan Agreement between the Registrant and Yuchai (incorporated
herein by reference to the Form F-1).4.7
    
    Share Purchase and Subscription Agreement, dated as of November 9, 1994,
between (i) the Registrant, (ii) China Everbright Holdings Company Limited
and (iii) Coomber Investments Limited (incorporated herein by reference to
the Form F-1).4.8
    
    Investment and Shareholders Agreement between CACG Limited IV and Guangxi
Yuchai Machinery Company Limited, dated July 14, 1994 with a First Amendment
dated September 5, 1994 (incorporated herein by reference to the Form F-1).4.9
    
    Employment Agreement, dated September 5, 2003, between Yuchai and Wang
Jianming (incorporated herein by reference to the Annual Report on Form 20-F
for fiscal year ended December 31, 2003, filed by the Registrant on June 29,
2004 (the Form 20-F FY 2003).
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Exhibit Number
    
    Description of Exhibit4.10
    
    Form of indemnification agreement entered into by the Company with each of
Wrixon Frank Gasteen, Gao Jia Lin, Gan Khai Choon, Raymond C. K. Ho, Kwek
Leng Peck, Liu Chee Ming, Wong Hong Ren, Philip Ting Sii Tien, Lim Poh Lea,
Sheila Murugasu, Teo Tong Kooi, Neo Poh Kiat and Tan Aik-Leang (incorporated
herein by reference to the Form 20-F FY 2003).4.11
    
    Agreement between the Company and Yuchai, dated July 19, 2003 (incorporated
herein by reference to the Form 20-F FY 2003).4.12
    
    Reorganization Agreement between the Company, Coomber and Yuchai, dated April
7, 2005 (incorporated herein by reference to the Form 6-K filed by the
Company on April 7, 2005).4.13
    
    Reorganization Agreement Amendment (No. 1) between the Company, Coomber and
Yuchai, dated December 2, 2005 (incorporated herein by reference to the Form
6-K filed by the Company on December 6, 2005).8.1
    
    Subsidiaries of the Registrant.12.1
    
    Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act.13.1
    
    Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act.14.1
    
    Consent of Independent Registered Public Accounting Firm.
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CHINA YUCHAI INTERNATIONAL LIMITED
 AND SUBSIDIARIES
 
 CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2003, 2004 AND 2005
 (With Report of Independent Registered Public Accounting Firm)
 Index to Financial Statements
 China Yuchai International Limited
 Report of Independent Registered Public Accounting Firm
    
    F 
    2Consolidated Statements of Income for Years Ended December 31, 2003, 2004 and 2005
    
    F 
    3Consolidated Balance Sheets as of December 31, 2004 and 2005
    
    F 
    5Consolidated Statements of Stockholders Equity for Years Ended December 31, 2003,
2004 and 2005
    
    F 
    7Consolidated Statements of Cash Flows for Years Ended December 31, 2003, 2004 and 2005
    
    F 
    8Notes to Consolidated Financial Statements
    
    F 
    12
 F - 1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
      /s/ KPMG Certified Public Accountants




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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005  (Rmb and US$ amounts expressed in thousands, except per share data)
 Years ended December 31,Note
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Revenues, net(a)
    
    
    3(k), 27, 28, 33
    
    
    
    4,569,950
    
    
    
    5,582,095
    
    
    
    5,829,431
    
    
    
    722,340Cost of goods sold(a)
    
    
    4, 27
    
    
    
    (3,192,794
    )
    
    
    (4,006,886
    )
    
    
    (4,527,046
    )
    
    
    (560,958
    )Gross profit
    
    
    
    
    
    
    1,377,156
    
    
    
    1,575,209
    
    
    
    1,302,385
    
    
    
    161,382Research and
development costs
    
    
    3(m)
    
    
    
    (94,594
    )
    
    
    (136,960
    )
    
    
    (123,876
    )
    
    
    (15,350
    )Selling, general and administrativeexpenses(a)
    
    
    3(m), 4, 14, 27

    
    
    
    (561,151
    )
    
    
    (658,320
    )
    
    
    (807,350
    )
    
    
    (100,041
    )Provision for uncollectible loans to a related party
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    (205,000
    )
    
    
    (25,402
    )Gain on transfer of
lease prepayment
to a related party
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    2,533
    
    
    
    314Operating income
    
    
    
    
    
    
    721,411
    
    
    
    779,929
    
    
    
    168,692
    
    
    
    20,903Interest expense
    
    
    3(s), 6, 28
    
    
    
    (23,624
    )
    
    
    (31,757
    )
    
    
    (70,527
    )
    
    
    (8,739
    )Equity in losses of
affiliates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,106
    )
    
    
    (633
    )Other (expenses)/income,
net(a)
    
    
    7
    
    
    
    (881
    )
    
    
    5,682
    
    
    
    24,183
    
    
    
    2,997Income before
income taxes and
minority interests
    
    
    
    
    
    
    696,906
    
    
    
    753,854
    
    
    
    117,242
    
    
    
    14,528Income taxes
    
    
    8
    
    
    
    (112,924
    )
    
    
    (105,165
    )
    
    
    (20,875
    )
    
    
    (2,587
    )Income before minority
interests
    
    
    
    
    
    
    583,982
    
    
    
    648,689
    
    
    
    96,367
    
    
    
    11,941Minority interests
in income of
consolidated
subsidiaries
    
    
    
    
    
    
    (145,800
    )
    
    
    (157,292
    )
    
    
    (27,880
    )
    
    
    (3,455
    )Net income
    
    
    
    
    
    
    438,182
    
    
    
    491,397
    
    
    
    68,487
    
    
    
    8,486
 F - 3




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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 Years ended December 31,Note
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Net earnings per
common shareBasic
    
    
    3
    (l)
    
    
    12.40
    
    
    
    13.90
    
    
    
    1.88
    
    
    
    0.23Diluted
    
    
    3
    (l)
    
    
    12.40
    
    
    
    13.90
    
    
    
    1.88
    
    
    
    0.23Weighted average
number of sharesBasic
    
    
    3
    (l)
    
    
    35,340,000
    
    
    
    35,340,000
    
    
    
    36,459,635
    
    
    
    36,459,635Diluted
    
    
    3
    (l)
    
    
    35,340,000
    
    
    
    35,340,000
    
    
    
    36,459,635
    
    
    
    36,459,635
  
 (a)
    
    Includes the following income and expenses resulting from transactions with related parties
in addition to those indicated above (see Note 5 and 27)
 2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Revenues, net
    
    
    24,957
    
    
    
    4,537
    
    
    
    7,646
    
    
    
    947Cost of goods sold
    
    
    (93,056
    )
    
    
    (250,549
    )
    
    
    (417,816
    )
    
    
    (51,772
    )Selling, general and
administrative
expenses
    
    
    (97,240
    )
    
    
    (90,790
    )
    
    
    (186,759
    )
    
    
    (23,141
    )Other (expenses)/income,
net
    
    
    
    
    
    
    
    
    
    
    11,922
    
    
    
    1,477
 F - 4




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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 AS OF DECEMBER 31,
2004 AND 2005  (Rmb and US$ amounts expressed in thousands, except per share data)
 December 31,Note
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$ASSETSCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    722,672
    
    
    
    736,195
    
    
    
    91,224Trade accounts receivable, net
    
    
    9, 18(a)
    
    
    
    875,565
    
    
    
    1,146,227
    
    
    
    142,032Amounts due from related parties
    
    
    10, 27
    
    
    
    85,614
    
    
    
    233,188
    
    
    
    28,895Loans to a related party
    
    
    5
    
    
    
    205,000
    
    
    
    
    
    
    
    Loans to customers, net
    
    
    11
    
    
    
    
    
    
    
    7,904
    
    
    
    979Inventories, net
    
    
    12
    
    
    
    1,346,545
    
    
    
    1,636,283
    
    
    
    202,756Prepaid expenses, net
    
    
    
    
    
    
    58,565
    
    
    
    138,322
    
    
    
    17,140Other receivables, net
    
    
    13
    
    
    
    115,414
    
    
    
    140,203
    
    
    
    17,373Income taxes recoverable
    
    
    
    
    
    
    
    
    
    
    43,526
    
    
    
    5,394Deferred income taxes
    
    
    8
    
    
    
    69,704
    
    
    
    88,783
    
    
    
    11,001Total current assets
    
    
    
    
    
    
    3,479,079
    
    
    
    4,170,631
    
    
    
    516,794Property, plant and equipment, net
    
    
    14, 18(a)
    
    
    
    1,158,931
    
    
    
    1,442,515
    
    
    
    178,746Construction in progress
    
    
    15
    
    
    
    379,035
    
    
    
    459,902
    
    
    
    56,988Lease prepayments, net
    
    
    16
    
    
    
    74,767
    
    
    
    70,608
    
    
    
    8,749Investments
    
    
    17
    
    
    
    7,053
    
    
    
    191,974
    
    
    
    23,788Goodwill
    
    
    
    
    
    
    212,636
    
    
    
    212,636
    
    
    
    26,348Deferred income taxes
    
    
    8
    
    
    
    72,747
    
    
    
    65,519
    
    
    
    8,119Total assets
    
    
    
    
    
    
    5,384,248
    
    
    
    6,613,785
    
    
    
    819,532LIABILITIES AND
STOCKHOLDERS EQUITYCurrent liabilitiesShort-term bank loans
    
    
    18(a)
    
    
    
    430,000
    
    
    
    812,835
    
    
    
    100,721Current instalments of long-term bank
loans
    
    
    18(b)
    
    
    
    
    
    
    
    100,000
    
    
    
    12,391Amount due to the holding company
    
    
    27
    
    
    
    4,143
    
    
    
    4,301
    
    
    
    533Amounts due to related parties
    
    
    10, 27
    
    
    
    42,686
    
    
    
    75,189
    
    
    
    9,317Trade accounts payable
    
    
    
    
    
    
    1,089,717
    
    
    
    1,642,980
    
    
    
    203,586Income taxes payable
    
    
    
    
    
    
    25,387
    
    
    
    4,208
    
    
    
    521Accrued expenses and other liabilities
    
    
    20
    
    
    
    484,920
    
    
    
    571,717
    
    
    
    70,843Total current liabilities
    
    
    
    
    
    
    2,076,853
    
    
    
    3,211,230
    
    
    
    397,912Long-term bank loans, excluding
current instalments
    
    
    18(b)
    
    
    
    100,000
    
    
    
    50,000
    
    
    
    6,196Total liabilities carried forward
    
    
    
    
    
    
    2,176,853
    
    
    
    3,261,230
    
    
    
    404,108
 F - 5




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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 December 31,Note
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Total liabilities brought forward
    
    
    
    
    
    
    2,176,853
    
    
    
    3,261,230
    
    
    
    404,108Minority interests
    
    
    
    
    
    
    724,311
    
    
    
    685,514
    
    
    
    84,944Stockholders equityCommon stock
    
    
    
    
    
    
    30,349
    
    
    
    31,945
    
    
    
    3,958Ordinary
shares US$0.10 par value:authorized 100,000,000 shares;
issued and outstanding 37,267,673
shares at December 31, 2005
(December 31, 2004: 35,340,000
shares)Special
share US$0.10 par value:authorized 1 share; issued and
outstanding 1 share at December 31,
2004 and 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Contributed surplus
    
    
    
    
    
    
    1,486,934
    
    
    
    1,692,251
    
    
    
    209,691Statutory reserves
    
    
    22
    
    
    
    266,229
    
    
    
    269,017
    
    
    
    33,335Accumulated other comprehensive income
    
    
    
    
    
    
    
    
    
    
    28,851
    
    
    
    3,575Retained earnings
    
    
    
    
    
    
    699,572
    
    
    
    644,977
    
    
    
    79,921Total stockholders equity
    
    
    
    
    
    
    2,483,084
    
    
    
    2,667,041
    
    
    
    330,480Commitments and contingencies
    
    23, 24Total liabilities and stockholders
equity
    
    
    
    
    
    
    5,384,248
    
    
    
    6,613,785
    
    
    
    819,532
  F - 6




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AND COMPREHENSIVE INCOME
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005  (Rmb and US$ amounts expressed in thousands, except per share data)
 Accumulatedother
    
    
    TotalCommon
    
    
    Contributed
    
    
    Statutory
    
    
    Retained
    
    
    comprehensive
    
    
    stockholdersNote
    
    
    stock
    
    
    surplus
    
    
    reserves
    
    
    earnings
    
    
    income
    
    
    equityRmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    RmbBalance at January
1, 2003
    
    
    
    
    
    
    30,349
    
    
    
    1,486,934
    
    
    
    170,806
    
    
    
    473,814
    
    
    
    
    
    
    
    2,161,903Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    438,182
    
    
    
    
    
    
    
    438,182Transfer to statutory
reserves
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    59,114
    
    
    
    (59,114
    )
    
    
    
    
    
    
    Dividend declared
(US$2.08 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (608,398
    )
    
    
    
    
    
    
    (608,398
    )Balance at December
31, 2003
    
    
    
    
    
    
    30,349
    
    
    
    1,486,934
    
    
    
    229,920
    
    
    
    244,484
    
    
    
    
    
    
    
    1,991,687Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491,397
    
    
    
    
    
    
    
    491,397Transfer to statutory
reserves
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    36,309
    
    
    
    (36,309
    )
    
    
    
    
    
    
    Balance at December
31, 2004
    
    
    
    
    
    
    30,349
    
    
    
    1,486,934
    
    
    
    266,229
    
    
    
    699,572
    
    
    
    
    
    
    
    2,483,084Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,487
    
    
    
    
    
    
    
    68,487Net unrealized
appreciation in
fair value of
investment securities
held by an affiliate,
net of nil tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,869
    
    
    
    38,869Foreign currency
translation
adjustment, net of
nil tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,018
    )
    
    
    (10,018
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,338Transfer to statutory
reserves
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    2,788
    
    
    
    (2,788
    )
    
    
    
    
    
    
    Shares issued in
connection with Conversion of 2% convertible debt, 1,927,673 shares
    
    
    19
    
    
    
    1,596
    
    
    
    205,317
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206,913Dividend declared
(US$0.39 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120,294
    )
    
    
    
    
    
    
    (120,294
    )Balance at December
31, 2005
    
    
    
    
    
    
    31,945
    
    
    
    1,692,251
    
    
    
    269,017
    
    
    
    644,977
    
    
    
    28,851
    
    
    
    2,667,041Balance at December
31, 2005 (in US$)
    
    
    
    
    
    
    3,958
    
    
    
    209,691
    
    
    
    33,335
    
    
    
    79,921
    
    
    
    3,575
    
    
    
    330,480
  F - 7




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005  (Rmb and US$ amounts expressed in thousands)
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Cash provided by
operating activitiesNet income
    
    
    438,182
    
    
    
    491,397
    
    
    
    68,487
    
    
    
    8,486Adjustments to reconcile
net income to net
cash provided by
operating activities: Depreciation and
amortization of
property, plant and
equipment, and lease
prepayments
    
    
    125,519
    
    
    
    132,789
    
    
    
    139,720
    
    
    
    17,313 Provision
for uncollectible loans to a related party
    
    
    
    
    
    
    
    
    
    
    205,000
    
    
    
    25,402 Impairment of property,
plant and equipment
    
    
    12,405
    
    
    
    
    
    
    
    
    
    
    
     Loss on disposal of
property, plant and
equipment
    
    
    3,359
    
    
    
    12,998
    
    
    
    10,474
    
    
    
    1,298 Gain on transfer of
land use rights
to a related party
    
    
    
    
    
    
    
    
    
    
    (2,533
    )
    
    
    (314
    ) Deferred income taxes
    
    
    6,253
    
    
    
    1,116
    
    
    
    (11,851
    )
    
    
    (1,468
    ) Provision for losses
on guarantees
    
    
    
    
    
    
    
    
    
    
    12,318
    
    
    
    1,526 Equity in losses of
affiliates
    
    
    
    
    
    
    
    
    
    
    5,106
    
    
    
    633
Dividend received from an affiliated company
    
    
    
    
    
    
    
    
    
    
    7,815
    
    
    
    968 Minority interests
    
    
    145,800
    
    
    
    157,292
    
    
    
    27,880
    
    
    
    3,455(Increase)/decrease in assets Inventories, net
    
    
    (34,105
    )
    
    
    (469,211
    )
    
    
    (289,738
    )
    
    
    (35,902
    ) Amounts due from related
parties, net
    
    
    (36,446
    )
    
    
    (5,534
    )
    
    
    (115,071
    )
    
    
    (14,259
    ) Trade accounts receivable, net
    
    
    153,524
    
    
    
    (25,954
    )
    
    
    (270,662
    )
    
    
    (33,538
    ) Prepaid expenses, net
    
    
    64,752
    
    
    
    (21,069
    )
    
    
    (79,757
    )
    
    
    (9,883
    ) Other receivables, net
    
    
    9,885
    
    
    
    (106,581
    )
    
    
    (24,789
    )
    
    
    (3,072
    )
 F - 8




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands)
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Increase/(decrease) in
liabilities Trade accounts payable
    
    
    103,065
    
    
    
    357,751
    
    
    
    553,263
    
    
    
    68,556 Income taxes payable
    
    
    (11,181
    )
    
    
    (21,842
    )
    
    
    (64,705
    )
    
    
    (8,018
    ) Accrued expenses and
other liabilities
    
    
    90,154
    
    
    
    88,521
    
    
    
    71,559
    
    
    
    8,867 Amount due to holding
company
    
    
    4,108
    
    
    
    (2,065
    )
    
    
    158
    
    
    
    20Net cash provided by
operating activities
    
    
    1,075,274
    
    
    
    589,608
    
    
    
    242,674
    
    
    
    30,070Cash flow from investing
activitiesPurchase of property, plant and
equipment, lease prepayments
and construction in progress
    
    
    (372,775
    )
    
    
    (552,902
    )
    
    
    (515,359
    )
    
    
    (63,860
    )Proceeds from disposal of
property, plant and equipment
    
    
    402
    
    
    
    5,883
    
    
    
    3,826
    
    
    
    474Proceeds from disposal of
land use rights
    
    
    
    
    
    
    
    
    
    
    3,580
    
    
    
    444Repayment of loans by a
related party
    
    
    
    
    
    
    
    
    
    
    205,000
    
    
    
    25,402Loans to a related party
    
    
    
    
    
    
    (205,000
    )
    
    
    (205,000
    )
    
    
    (25,402
    )Loans to customers, net
    
    
    
    
    
    
    
    
    
    
    (7,904
    )
    
    
    (979
    )Purchase of investments
    
    
    
    
    
    
    (1,348
    )
    
    
    (161,358
    )
    
    
    (19,994
    )Net cash used in investing
activities
    
    
    (372,373
    )
    
    
    (753,367
    )
    
    
    (677,215
    )
    
    
    (83,915
    )Cash flow from financing
activitiesProceeds from short-term
bank loans
    
    
    230,000
    
    
    
    330,000
    
    
    
    1,188,178
    
    
    
    147,230Proceeds from short-term
borrowing from a related
party
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
 F - 9




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands)
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Proceeds from long-term
bank loans
    
    
    
    
    
    
    100,000
    
    
    
    50,000
    
    
    
    6,196Proceeds from 2% convertible
bonds
    
    
    
    
    
    
    
    
    
    
    206,913
    
    
    
    25,639Repayment of short-term
bank loans
    
    
    (125,000
    )
    
    
    (190,000
    )
    
    
    (805,343
    )
    
    
    (99,792
    )Repayment of long-term
bank loans
    
    
    (130,000
    )
    
    
    
    
    
    
    
    
    
    
    Repayment of short-term
borrowing from
a related party
    
    
    
    
    
    
    (8,000
    )
    
    
    
    
    
    
    Capital contribution from
minority stockholders
    
    
    
    
    
    
    31,000
    
    
    
    
    
    
    
    Dividend paid by subsidiaries
to minority stockholders
    
    
    (88,765
    )
    
    
    (8,507
    )
    
    
    (66,677
    )
    
    
    (8,262
    )Dividend paid to stockholders
    
    
    (608,398
    )
    
    
    
    
    
    
    (120,294
    )
    
    
    (14,906
    )Net cash (used in)/provided
by financing activities
    
    
    (714,163
    )
    
    
    254,493
    
    
    
    452,777
    
    
    
    56,105Effect of foreign currency
exchange on cash and
cash equivalents
    
    
    
    
    
    
    
    
    
    
    (4,713
    )
    
    
    (584
    )Net (decrease)/increase
in cash and cash
equivalents
    
    
    (11,262
    )
    
    
    90,734
    
    
    
    13,523
    
    
    
    1,676Cash and cash equivalents
at beginning of year
    
    
    643,200
    
    
    
    631,938
    
    
    
    722,672
    
    
    
    89,548Cash and cash equivalents
at end of year
    
    
    631,938
    
    
    
    722,672
    
    
    
    736,195
    
    
    
    91,224
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands)
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Supplemental disclosures
of cash flow informationCash paid during the year
for: Interest, net of amount
capitalized
    
    
    23,624
    
    
    
    31,757
    
    
    
    70,527
    
    
    
    8,739 Income taxes
    
    
    117,852
    
    
    
    125,891
    
    
    
    97,431
    
    
    
    12,073
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005  (Rmb and US$ amounts expressed in thousands, except per share data)
 1
    
    Background and principal activitiesChina Yuchai International Limited (the Company) was incorporated under the laws of Bermuda
on April 29, 1993. The Company was established to acquire a controlling interest in Guangxi Yuchai
Machinery Company Limited (Yuchai), a Sino-foreign joint stock company which manufactures,
assembles and sells diesel engines in the Peoples Republic of China (the PRC). The principal
markets for Yuchais diesel engines are truck manufacturers in the PRC.The Company owns, through six wholly-owned subsidiaries, 361,420,150 shares or 76.41% of the issued
share capital of Yuchai (Foreign Shares of Yuchai). Guangxi Yuchai Machinery Group Company
Limited (State Holding Company), a state-owned enterprise, owns 22.09% of the issued share
capital of Yuchai (State Shares of Yuchai).In December 1994, the Company issued a special share (the Special Share) at par value of US$0.10
to Diesel Machinery (BVI) Limited (DML), a company controlled by Hong Leong Corporation Limited,
now known as Hong Leong (China) Limited (HLC). The Special Share entitles its holder to
designate the majority of the Companys Board of Directors (six of eleven). The Special Share is
not transferable except to Hong Leong Asia Ltd. (HLA), the holding company of HLC, or any of its
affiliates. During 2002, DML transferred the Special Share to HL Technology Systems Pte Ltd
(HLT), a subsidiary of HLC.Yuchai established three direct subsidiaries, Yuchai Machinery Monopoly Company Limited (YMMC),
Guangxi Yulin Yuchai Machinery Spare Parts Manufacturing Company Limited (GYSPM) and Yuchai
Express Guarantee Company Limited (YEGCL). YMMC and GYSPM were established in 2000, and are
involved in the manufacture and sale of spare parts and components for diesel engines in the PRC.
YEGCL, was established in 2004, and is involved in the provision of financial guarantees to
mortgage loan applicants in favour of banks in connection with the applicants purchase of
automobiles equipped with diesel engines produced by Yuchai. As at December 31, 2005, Yuchai held
an equity interest of 71.83%, 97.14% and 76.92% respectively in these companies. As at December
31, 2005, YMMC had direct controlling interests in twenty-one (2004: twenty-one) subsidiaries,
which are involved in the trading and distribution of spare parts of diesel engines and
automobiles, all of which are established in the PRC.In March 2005, the Company acquired 14.99% of the common stock of Thakral Corporation Limited (TCL).
TCL is a company listed on the main board of the Singapore Exchange Securities Trading Limited (the
Singapore Exchange) and is involved in the manufacture, assembly and distribution of high-end
consumer electronic products and home entertainment products in the PRC. Three directors out of ten directors on the board of TCL
are appointed by the Company. Based on the Companys shareholdings
and representation in the board of directors of TCL,
management has concluded that the company has the ability to exercise
significant influence over the operating and financial policies of TCL. Consequently,
the Companys consolidated financial statements included the
Companys share of the results of TCL, accounted for an equity
basis since acquisition. The Company acquired additional 1.00% of the
common stock of TCL in September 2005.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 2
    
    Basis of presentationThe accompanying consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (U.S. GAAP). This basis of accounting differs from
that used in the statutory financial statements of Yuchai, which are prepared in accordance with
the Accounting Standards for Business Enterprises and the Accounting Regulations for Business
Enterprises issued by the Ministry of Finance of the PRC (PRC GAAP).3
    
    Summary of significant accounting policies and practices(a)
    
    Principles of consolidationThe consolidated financial statements include the financial statements of the Company, its
majority-owned subsidiaries and those entities that the Company has determined it has a direct or
indirect controlling financial interests. All significant intercompany balances and transactions
have been eliminated in consolidation. In addition, the Company evaluates its relationships with
other entities to identify whether they are variable interest entities as defined by the Financial
Accounting Standard Board (the FASB) Interpretation (FIN) No. 46 (R), Consolidation of
Variable Interest Entities (FIN 46(R)) and to assess whether it is the primary beneficiary of
such entities. If the determination is made that the Company is the primary beneficiary, then that
entity is included in the consolidated financial statements in accordance with FIN 46(R). The
Company was not the primary beneficiary of any variable interest entities during the three years
ended December 31, 2005.(b)
    
    Cash and cash equivalentsCash includes cash on hand and demand deposits with banks. For purposes of the consolidated
statement of cash flows, the Company considered all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. None of the Companys cash is
restricted as to withdrawal. See Note 29 for discussion of restrictions on the Renminbi.(c)
    
    Trade accounts receivableTrade accounts receivable are recorded at the invoiced value of goods sold after deduction of
trade discounts and allowances, if any. Amounts collected on trade accounts receivable are
included in net cash provided by operating activities in the consolidated statement of cash flows.
The allowance for doubtful accounts is the Companys best estimate of the amount of probable
credit losses in the Companys existing accounts receivable. The Company determines the allowance
based on historical write-off experience by industry and national economic data.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 3
    
    Summary of significant accounting policies and practices (continued)(c)
    
    Trade accounts receivable (continued)The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days
and over a specified amount are reviewed individually for collectibility. All other balances are
reviewed on a pooled basis by aging of such balances. Account balances are charged off against
the allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet credit exposure related to its
customers, except for outstanding bills discounted with banks (see
Note 24(e)), that are subject
to recourse for non-payment.(d)
    
    Inventories, netInventories are stated at the lower of cost and market. Cost is determined using the weighted
average cost method. Cost of work in progress and finished goods comprises direct materials,
direct labor and an attributable portion of production overheads.(e)
    
    Property, plant and equipmentProperty, plant and equipment are stated at cost. Depreciation is calculated on the straight-line
method over the estimated useful lives of the assets, taking into account the estimated residual
value. The estimated useful lives are as follows:
 Buildings
    
    
    30 to 40 yearsMachinery and equipment
    
    
    5 to 15 years
 (f)
    
    Construction in progressConstruction in progress represents factories under construction and machinery and equipment
pending installation. All direct costs relating to the acquisition or construction of buildings
and machinery and equipment, including interest charges on borrowings, are capitalized as
construction in progress. No depreciation is provided in respect of construction in progress.Construction of plant is considered to be complete on the date when the plant is substantially
ready for its intended use notwithstanding whether the plant is capable of producing saleable
output in commercial quantities.(g)
    
    Lease prepaymentsLease prepayments represent land use rights paid to the PRC land bureau. Land use rights are
carried at cost and amortized on a straight-line basis over the respective periods of the rights
which are in the range of 15 to 50 years.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 3
    
    Summary of significant accounting policies and practices (continued)(h)
    
    InvestmentsAn affiliated company is an entity in which the Company has the ability to exercise significant
influence in its financial and operating policy decisions, but does not have a controlling
financial interest. Investments in affiliates are accounted for by equity method.Investments in available-for-sale equity securities are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of other comprehensive income/(loss) until
realized. Realized gains and losses from the sale of available-for-sale equity securities are
determined on a specific-identification basis. However, equity securities that are not traded in
an active market and whose fair values cannot be reliably estimated are accounted for at their
acquisition cost.The Company recognizes an impairment loss when the decline in fair value below the carrying value
of an investment is considered other than temporary.(i)
    
    Foreign currency transactions and translationTransactions denominated in currencies other than Renminbi are translated into Renminbi at the
exchange rates quotes by the Peoples Bank of China (the PBOC) prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies are translated
into Renminbi using the applicable exchange quoted by PBOC at the balance sheet dates. The
resulting exchange differences are recorded in the consolidated statements of income as part of the
related transaction amounts.During the year ended December 31, 2005, the exchange rate regime of Renminbi was reformed by
moving into a managed floating exchange regime based on market supply and demand with reference to
a basket of foreign currencies from the unified controlled exchange rate based on market supply and
demand.Assets and liabilities of foreign subsidiaries and affiliates whose functional currency is not
Renminbi are translated into Renminbi using the exchange rate on the balance sheet date. Revenues
and expenses are translated at average rates prevailing during the year. The gains and losses
resulting from translation of financial statements of foreign subsidiaries and affiliates are
recorded as a separate component of accumulated other comprehensive income/(loss) within
stockholders equity. Cumulative translation adjustments are recognized as income or expense upon
disposal or liquidation of a foreign subsidiary and affiliate.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 3
    
    Summary of significant accounting policies and practices (continued)(i)
    
    Foreign currency transactions and translation (continued)For the U.S. dollar convenience translation amounts included in the accompanying consolidated
financial statements, the Renminbi equivalent amounts were translated into U.S. dollars at the
exchange rate on the balance sheet date which is US$1.00 = Rmb8.0702, the rate quoted by the PBOC
at the close of business on December 30, 2005. No representation is made that the Renminbi amounts
could have been, or could be, converted into U.S. dollars at that rate or at any other certain rate
on December 30, 2005 or at any other date.(j)
    
    Income taxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets are reduced by a
valuation allowance to the extent the Company concludes it is more likely than not that the assets
will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates, if any, is recognized in the statements of income in the financial year that includes the
enactment date.(k)
    
    Revenue recognition(i)   Product salesRevenue is recognized in accordance with U.S. GAAP as described in the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104
generally requires that four basic criteria be met before revenue can be recognized: (i) persuasive
evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectibility is
reasonably assured; and (iv) product delivery has occurred. For the Company, these criteria are
generally considered to be met upon delivery and acceptance of products at the customer site.Product sales represent the invoiced value of goods, net of value added taxes (VAT), sales
returns, trade discounts and allowances. Yuchai and its subsidiaries are subject to VAT which is
levied on the majority of their products at the rate of 17% of the invoiced value of sales. Output
VAT is borne by customers in addition to the invoiced value of sales. VAT paid by Yuchai and its
subsidiaries on its purchases of materials and supplies is recoverable out of VAT collected from
sales to their customers.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 3
    
    Summary of significant accounting policies and practices (continued)(k)
    
    Revenue recognition (continued)(ii)   Guarantee fee incomeGuarantee fees received or receivable for a guarantee issued are recorded in Accrued expenses and
other liabilities based upon the estimated fair value of guaranty obligations, and are amortized
into revenue on a straight line basis over the respective terms of the guarantees. The Company will
record an adjustment to the carrying amount of its obligations through a charge to earnings if it
determines that it is probable that the Company will be required to perform under the guaranty.(iii)   Rental incomeRental income receivable under operating lease is recognized in the consolidated statements of
income in equal instalments over the period covered by the lease term.(l)
    
    Earnings per shareBasic earnings per share (EPS) is computed by dividing income attributable to common shares by
the weighted average number of common shares outstanding for the period.The reconciliation of the Companys EPS is as follows:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Net income attributable
to common shares
    
    
    438,182
    
    
    
    491,397
    
    
    
    68,487
    
    
    
    8,486Basic earnings per share Weighted average common
shares outstanding
during the year
    
    
    35,340,000
    
    
    
    35,340,000
    
    
    
    36,459,635
    
    
    
    36,459,635 Basic earnings per
share of common shares
    
    
    12.40
    
    
    
    13.90
    
    
    
    1.88
    
    
    
    0.23
 There were no potentially dilutive securities outstanding as of December 31, 2003, 2004 and 2005.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 3
    
    Summary of significant accounting policies and practices (continued)(m)
    
    Advertising, research and development costsAdvertising, research and development costs are expensed as incurred. Advertising cost included in
Selling, general and administrative expenses, amounted to Rmb40,961, Rmb48,725 and Rmb45,291
(US$5,612) respectively, for the years ended December 31, 2003, 2004 and 2005.Research and development expenses are shown net of a government subsidy of Rmb5,915 (US$733) for
the year ended December 31, 2005. No such government subsidy was received for the years ended
December 31, 2003 and 2004.(n)
    
    GoodwillGoodwill represents the excess of costs over fair value of net assets of businesses acquired.
Goodwill is not amortized, but instead is tested for impairment at least annually and when certain
circumstances indicate a possible impairment may exist. The Company evaluates the recoverability
of goodwill using a two-step impairment test approach at the reporting unit level at the end of
each year. In the first step, the fair value of the reporting unit is compared to its carrying
value including goodwill. The fair value of the reporting unit is determined based upon discounted
future cash flows. In the case that the fair value of the reporting unit is less than its carrying
value, a second step is performed which compares the implied fair value of the reporting units
goodwill to the book value of the goodwill. In determining the implied fair value of the reporting
unit goodwill, the fair values of the tangible net assets and recognized and unrecognized
intangible assets is deducted from the fair value of the reporting unit. If the implied fair value
of reporting unit goodwill is lower than its carrying amount, goodwill is considered impaired and
is written down to its implied fair value. The results of the impairment testing in 2003, 2004 and
2005 did not result in any impairment of goodwill.(o)
    
    Product warrantyThe Company provides, at the time the product is sold, for the estimated future costs to be
incurred under a warranty period or warranty mileage on various engine models, which the Company
provides free repair and replacement. Warranties generally extend for a duration (12 months to 18
months) or mileage (80,000 kilometres to 180,000 kilometres), whichever is the lower. Provisions
for warranty are primarily determined based on historical warranty cost per unit of engines sold
adjusted for specific conditions that may arise and the number of engines under warranty at each
financial year-end.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 3
    
    Summary of significant accounting policies and practices (continued)(p)
    
    Use of estimatesThe preparation of the consolidated financial statements in accordance with U.S. GAAP requires
management of the Company to make a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses
during the period. Significant items subject to such estimates and assumptions include the
recoverability of the carrying amount of long-lived assets including goodwill; realizable values
for inventories; valuation allowances for receivables; and obligations for warranty costs. Actual
results could differ from those estimates.(q)
    
    Impairment of long-lived assets, other than goodwillLong-lived assets to be held and used, such as property, plant and equipment, construction in
progress and lease prepayments, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets
to be disposed of would be separately presented in the consolidated balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 3
    
    Summary of significant accounting policies and practices (continued)(r)
    
    Commitments and contingenciesLiabilities for loss contingencies, arising from claims, assessments, litigation, fines and
penalties and other sources are recorded when it is probable that an obligation has been incurred
and the amount of the assessment and/or remediation can be reasonably estimated.(s)
    
    Sales of trade accounts receivableThe Company sells trade accounts and bills receivable to banks on an ongoing basis. The buyer is
responsible for servicing the receivables upon maturity of the trade accounts receivable. Sales of
the trade accounts receivable are accounted for under Statement of
Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. Accordingly, trade accounts and
bills receivable are derecognized, and the Company records a discount equal to the difference
between the carrying value of the trade accounts and bills receivable and cash received. The
Company has received proceeds for the sales of the trade accounts and bills receivable of
Rmb1,730,627, Rmb2,380,569 and Rmb3,423,296 (US$424,190), for the years ended December 31, 2003,
2004 and 2005, respectively. The Company has recorded discounts totalled of Rmb22,042, Rmb31,709
and Rmb44,362 (US$5,497) in respect of sold trade accounts and bills receivable for the years ended
December 31, 2003, 2004 and 2005, respectively, which have been included in interest expense.(t)
    
    Recently issued accounting standardsIn December 2004, the FASB issued SFAS No.123 (revised 2004), Share-Based Payment, which
addresses the accounting for transactions in which an entity exchanges its equity instruments for
goods or services, with a primary focus on transactions in which an entity obtains employee
services in share-based payment transactions. This statement is a revision to SFAS No. 123 and
supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. This statement will require measurement of
the cost of employee services received in exchange for stock compensation based on the grant-date
fair value of the employee stock options. Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be recognized. The Company will adopt this
statement on January 1, 2006 under the modified prospective method of application. Under that
method, the Company will recognize compensation costs for new grants of share-based awards, awards
modified after the effect date, and the remaining portion of the fair value of the unvested awards
at the adoption date. The initial adoption of this statement will not have any effect on the
Companys 2006 consolidated financial statements.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 3
    
    Summary of significant accounting policies and practices (continued)(t)
    
    Recently issued accounting standards (continued)In December 2004, the FASB issued SFAS No. 151, Inventory Costs, which clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Under this statement, such items will be recognized as current-period charges. In
addition, the statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This statement will be
effective for the Company for inventory costs incurred on or after January 1, 2006. The initial
adoption of this statement will not have a significant effect on the Companys 2006 consolidated
financial statements.In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which eliminates
an exception in APB Opinion No. 29, Accounting for Nonmonetary Transactions, for recognizing
nonmonetary exchanges of similar productive assets at fair value and replaces it with an exception
for recognizing exchanges of nonmonetary assets at fair value that do not have commercial
substance. This statement will be effective for the Company for nonmonetary asset exchanges
occurring on or after January 1, 2006. The adoption of this statement will not have a significant
effect on the Companys 2006 consolidated financial statements.In March 2005, the FASB issued FIN No. 47, Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for a
conditional asset retirement obligation if the fair value of the obligation can be reasonably
estimated. The types of asset retirement obligations that are covered by this interpretation are
those for which an entity has a legal obligation to perform an asset retirement activity, however
the timing and (or) method of settling the obligation are conditional on a future event that may or
may not be within the control of the entity. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset retirement obligation.
FIN 47 is effective no later than the end of fiscal years ended after December 15, 2005. The
initial adoption of FIN 47 did not have an impact on the Companys financial condition and
consolidated statements of income.In September 2005, the EITF issued EITF 04-13, Accounting for Purchases and Sales of Inventory
with the Same Counterparty. EITF 04-13 provides guidance as to when purchases and sales of
inventory with the same counterparty should be accounted for as a single exchange transaction.
EITF 04-13 also provides guidance as to when a nonmonetary exchange of inventory should be
accounted for at fair value. EITF 04-13 will be applied to new arrangements entered into, and
modifications or renewals of existing arrangements beginning in the first interim or annual
reporting beginning after March 15, 2006. The application of EITF 04-13 is not expected to have a
significant impact on the Companys consolidated financial statements.In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments  an amendment
of FASB Statements No. 133 and 140.  This statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues
addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.
This statement will be effective for the fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact of the statement to the
Companys consolidated financial statements.In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets  an amendment of FASB Statement No. 140.
This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation
to service a financial asset by entering into a servicing contract in certain situations and requires all separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable. The statement also provides guidelines to classification, disclosure and subsequent measurement of servicing assets and servicing liabilities. This
statement will be effective for the fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact of the statement to the Companys consolidated financial statements.In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in the Companys financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for the fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact of the provisions of FIN 48 to the Companys consolidated financial statements.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 4
    
    Depreciation, amortization, sales commissions, shipping and handling expensesDepreciation of property, plant and equipment and amortization of lease prepayments are included in
the following captions:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Cost of goods sold
    
    
    88,737
    
    
    
    84,907
    
    
    
    86,491
    
    
    
    10,717Selling, general and
administrative expenses
    
    
    36,782
    
    
    
    47,882
    
    
    
    53,229
    
    
    
    6,596125,519
    
    
    
    132,789
    
    
    
    139,720
    
    
    
    17,313
 Sales commissions to sales agents are included in the following caption:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Selling, general and
administrative expenses
    
    
    16,724
    
    
    
    11,564
    
    
    
    39,372
    
    
    
    4,879
 Sales related shipping and handling expenses not separately billed to customers are included in
the following caption:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Selling, general and
administrative expenses
    
    
    64,991
    
    
    
    86,163
    
    
    
    126,813
    
    
    
    15,714
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 5
    
    Provision for uncollectible loans to a related partyThe amount represents the recognition of specific doubtful debt provisions totaling Rmb205,000
(US$25,402) on the loans due from Yuchai Marketing and Logistic Company Limited (YMLC) as of
December 31, 2005. YMLC is wholly owned by Coomber Investment Limited (Coomber), a shareholder
of the Company and State Holding Company (collectively, the Chinese Shareholders).
 In March and May 2004, Yuchai granted interest-free
advances to YMLC at the request of the Yuchais PRC directors to provide YMLC with initial working capital for its start-up activities. YMLC was
set up with the intention of offering a complementary range of services including spare parts
distribution, insurance, vehicle financing and warranty servicing.
These advances were provided with the approval of the previous
Chairman of Yuchai but
without the prior approval by the majority of the shareholders of Yuchai.
 On December 2, 2004, these advances were converted into
formal loans and written agreements were executed between Yuchai and YMLC through an authorized financial institution in the PRC. Under
the terms of the loan agreements, the loans were payable in their entirety on December 2, 2005 and
interest, at the rate of 5.58% per annum, was payable on a monthly basis. Further, the loans were
secured by guarantees given by the Chinese Shareholders. Interest
income of Rmb11,922 (US$1,477)
was recognized in 2005 (see Note 7).
 Because the loans had already been disbursed, the Chinese Shareholders had issued guarantees for
these loans, and the Companys relationship with the Chinese
Shareholders was improving, the
Directors of Yuchai believed that it was in the Companys and
Yuchais best interest to ratify the loans. Consequently,
the loans were ratified by the Board of Directors of Yuchai in April 2005.
 In 2005, the Company discussed with the Chinese Shareholders the possibility of converting the
loans into an equity investment in YMLC, subject to the Yuchai
boards approval. This potential alternative was
incorporated within the terms of the reorganization agreement entered into by the Company with
Yuchai and Coomber on April 7, 2005 (Reorganization Agreement).
 When the loans became due in December 2005, Yuchai was requested to extend the maturity date for
the loans. However, the Company and Yuchai had been unable to access the financial statements of YMLC.
Consequently, the Directors from the Companys and Yuchais
boards had doubts about YMLCs ability to repay the loans. However, the
Companys and Yuchais board of directors considered the request to extend the loans based on representations received from the
Chinese Shareholders and management of YMLC concerning their respective abilities and intentions to
repay the loans and honor their guarantees, and therefore agreed to extend the repayment date of the
loans for an additional year. The extension of the loans was approved by the Board of Directors of
Yuchai on December 2, 2005. An agency bank was appointed under
PRC requirements to administer the Rmb205,000 loans and the legal method requires such loans to be
repaid and the funds re-disbursed. The new loans carry the same terms, including scheduled
maturity on December 1, 2006. New guarantees were also granted by the Chinese Shareholders for these
loans.
 Later in December 2005, after it was agreed to extend
the loans, based on mutual understandings between YMLC, the Chinese
Shareholders and Yuchai, access to financial records of YMLC were
made available. The Company conducted a due
diligence review, learned that YMLC was not profitable, and concluded
that YMLCs future prospects
were dim. The Company therefore decided not to pursue the conversion of loans into an equity
investment in YMLC and also concluded that YMLC will probably not have the financial resources to
repay the loans when they become due in December 2006.
 The Company discussed this matter with the Chinese Shareholders and management of YMLC and also
considered the financial position and financial resources of the State Holding Company and Coomber.
CYI management has made an assessment of the future cash flows of the State Holding Company and
Coomber and concluded that it is likely they will not be able to
honor their respective guarantees in the event
YMLC is unable to repay the loans when they become due.
 Consequently, CYI management has identified a number of possible courses of action in the event YMLC is
unable to repay the loans when they become due. These actions include:
 
    
    Taking actions to force YMLC to liquidate;
    
    Retaining portions of future dividends declared by Yuchai and payable to State Holding Company until the guarantee obligations are fulfilled; and
    
    Commencing legal action against YMLC and possibly the Chinese Shareholders.
 The Companys management has ruled out any form of legal or other enforcement action against the Chinese
Shareholders as management believes that Yuchai may not be the first preferred creditor entitled to
receive payment of the judgment debt. Moreover, management believes that the process for
enforcement of a judgment in China is complex and not as effective when compared with other
jurisdictions. In addition management believes that the commencement of legal or other enforcement
actions will likely lead to a deterioration in relations with the Chinese Shareholders which could
have a materially adverse impact on the Companys investment in Yuchai and could lead to the
impairment of shareholder value of the Company. Consequently, management believes that it is
currently beneficial to the Companys shareholders for management to continue their dialogue and
seek other possible arrangements with YMLC, Coomber and State Holding Company to resolve the
repayment of the Rmb205,000 (US$25,402) loans rather than for it to resort to legal and enforcement
actions described above. However, considering the financial condition and managements assessment
of the future prospects of YMLC and managements intention to not seek legal or enforcement actions
pertaining to the loans and related guarantees, management currently believes that it is probable
it will be unable to recover any portion of these loans.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 6
    
    Interest costThe Company capitalizes interest charges as a component of the cost of construction in
progress. The following is a summary of interest cost incurred during 2003, 2004 and 2005:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Interest cost capitalized
    
    
    12,146
    
    
    
    19,701
    
    
    
    20,991
    
    
    
    2,601Interest cost charged to
consolidated statements of
income
    
    
    23,624
    
    
    
    31,757
    
    
    
    70,527
    
    
    
    8,739Total interest cost incurred
    
    
    35,770
    
    
    
    51,458
    
    
    
    91,518
    
    
    
    11,340
 7
    
    Other (expenses)/income, netOther (expenses)/income, net consist of:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Interest
income (see Note 5)
    
    
    3,587
    
    
    
    3,286
    
    
    
    21,744
    
    
    
    2,695Foreign exchange
(loss)/gain, net
    
    
    (27
    )
    
    
    (38
    )
    
    
    607
    
    
    
    75Dividend income from
other investments
    
    
    
    
    
    
    4,591
    
    
    
    
    
    
    
    Rental income
    
    
    
    
    
    
    
    
    
    
    6,078
    
    
    
    753Others, net
    
    
    (4,441
    )
    
    
    (2,157
    )
    
    
    (4,246
    )
    
    
    (526
    )(881
    )
    
    
    5,682
    
    
    
    24,183
    
    
    
    2,997
 8
    
    Income taxesBermuda taxThe Company is incorporated under the laws of Bermuda and, under the current Bermuda laws, is not
subject to tax on income or capital gains.The Company has received an undertaking from the Minister of Finance in Bermuda pursuant to the
provisions of the Exempted Undertakings Tax Protection Act, 1966, which exempts the Company and its
stockholders, other than stockholders ordinarily resident in Bermuda, from any Bermuda taxes
computed on profit, income or any capital assets, gain or appreciation, or any tax in the nature of
estate duty or inheritance tax at least until the year 2016.PRC income taxAs Yuchai is a sino-foreign enterprise in the Western Region of the PRC that is engaged in an
encouraged industry, its PRC statutory income tax rate is 15% in 2003, 2004 and 2005 under the
relevant PRC income tax laws.The PRC income tax rates of Yuchais subsidiaries under the relevant PRC income tax laws are 15% to
33% in 2003, 2004 and 2005.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 8
    
    Income taxes (continued)Income tax expense in the consolidated statements of income consists of:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Current tax expense
    
    
    106,671
    
    
    
    104,049
    
    
    
    32,726
    
    
    
    4,055Deferred tax
expense/(benefit)
    
    
    6,253
    
    
    
    1,116
    
    
    
    (11,851
    )
    
    
    (1,468
    )112,924
    
    
    
    105,165
    
    
    
    20,875
    
    
    
    2,587
 Income tax expense reported in the consolidated statements of income differs from the amount
computed by applying the PRC income tax rate of 15% for the three years ended December 31, 2005 for
the following reasons:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Computed expected tax
expense
    
    
    104,536
    
    
    
    113,078
    
    
    
    17,586
    
    
    
    2,179Adjustments resulting from: Non-deductible expenses
    
    
    1,232
    
    
    
    471
    
    
    
    5,703
    
    
    
    707 Tax credits (see Note (i))
    
    
    
    
    
    
    (16,184
    )
    
    
    (43,535
    )
    
    
    (5,395
    ) Change in valuation
allowance
    
    
    
    
    
    
    
    
    
    
    45,231
    
    
    
    5,605 Rate differential of
subsidiaries
    
    
    7,156
    
    
    
    7,800
    
    
    
    (4,110
    )
    
    
    (509
    )Total tax expense
    
    
    112,924
    
    
    
    105,165
    
    
    
    20,875
    
    
    
    2,587
 
 Notes:(i)
    
    Amounts mainly represents tax credits relating to the purchase of domestic equipment for
technological improvement and the approved research and development costs.(ii)
    
    All taxable income and income tax expense are from PRC sources. F - 25




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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 8
    
    Income taxes (continued)The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets at December 31, 2004 and 2005 are presented below:
 December 31,2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Trade accounts receivable
    
    
    26,006
    
    
    
    22,900
    
    
    
    2,838Inventories
    
    
    6,678
    
    
    
    8,336
    
    
    
    1,033Property, plant and equipment
    
    
    69,247
    
    
    
    49,436
    
    
    
    6,126Accrued expenses and other liabilities
    
    
    37,020
    
    
    
    32,961
    
    
    
    4,084Tax losses carried forward
    
    
    3,500
    
    
    
    11,615
    
    
    
    1,439Tax credits
    
    
    
    
    
    
    43,535
    
    
    
    5,395Loans to a related party
    
    
    
    
    
    
    30,750
    
    
    
    3,810Total gross deferred tax assets
    
    
    142,451
    
    
    
    199,533
    
    
    
    24,725Less: Valuation allowance
    
    
    
    
    
    
    45,231
    
    
    
    5,605Net deferred tax assets
    
    
    142,451
    
    
    
    154,302
    
    
    
    19,120
 The following table represents the classification of the Companys net deferred tax assets:
 December 31,2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Net deferred tax assets comprise of:Current portion
    
    
    69,704
    
    
    
    88,783
    
    
    
    11,001Non-current portion
    
    
    72,747
    
    
    
    65,519
    
    
    
    8,119142,451
    
    
    
    154,302
    
    
    
    19,120
 As of December 31, 2005, a subsidiary of the Company was granted with tax credits amounted to
Rmb43,535 (US$5,395) in relation to the purchase of domestically produced equipment of which
Rmb12,502 (US$1,549) would expire in 2008 and the remaining amount would expire in 2009. According
to the relevant laws and regulations in the PRC, the amount entitled for deduction each year is
limited to the incremental current income tax expense of the subsidiary for the year compared to
the current income tax of the subsidiary in the year before the purchase of the equipment.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 8   Income taxes (continued)
 Certain subsidiaries of the Company had net operating loss carryforwards for PRC income tax
purposes of Rmb47,182 (US$5,846), which are available to offset future taxable income, if any. Of
which, Rmb13,328, Rmb13,630 and Rmb20,224 would expire in 2008, 2009 and 2010, respectively.
 In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
management considered that it is more likely than not that tax credits totalling Rmb33,834 (US$4,193) relating to the purchase of
domestic equipment cannot be fully utilized as the amount entitled for deduction each year is
limited to the incremental current income tax expense of the subsidiary compared to the current
tax of the subsidiary for the years 2003 and 2004, when the related domestic equipment was
purchased and the management forecasted future taxable income of the subsidiary will not be
sufficient to fully utilize the tax credits. In addition, one of the subsidiaries has been loss
making since its commencement of operations in 2004 and based on this, management has determined
that it is more likely than not that the benefit of deferred tax assets in this entity totalling Rmb11,397 (US$1,412) will not be
realized.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 9   Trade accounts receivable, net
 Trade accounts receivable, net comprise:
 December 31,2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Trade accounts receivable
    
    
    504,429
    
    
    
    574,018
    
    
    
    71,128Less: Allowance for doubtful accounts
    
    
    107,457
    
    
    
    69,047
    
    
    
    8,556396,972
    
    
    
    504,971
    
    
    
    62,572Bills receivable
    
    
    478,593
    
    
    
    641,256
    
    
    
    79,460875,565
    
    
    
    1,146,227
    
    
    
    142,032
 An analysis of the allowance for doubtful accounts for 2003, 2004 and 2005 is as follows:
 December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Balance at beginning of year
    
    
    158,075
    
    
    
    94,423
    
    
    
    107,457
    
    
    
    13,315Add:Charge to consolidated
statements of income
    
    
    
    
    
    
    13,034
    
    
    
    25,587
    
    
    
    3,171Less:Written back to consolidated
statements of income
    
    
    493
    
    
    
    
    
    
    
    
    
    
    
    Doubtful debts written off
    
    
    63,159
    
    
    
    
    
    
    
    63,997
    
    
    
    7,930Balance at end of year
    
    
    94,423
    
    
    
    107,457
    
    
    
    69,047
    
    
    
    8,556
 At December 31, 2004 and 2005, gross trade accounts receivable due from a major customer, Dongfeng
Automobile Company and its affiliates (the Dongfeng companies), were Rmb142,788 and Rmb161,930
(US$20,065), respectively. See Note 33 for further discussion of business concentration risk.
 As of December 31, 2005, certain trade accounts receivable totalling Rmb42,835 (US$5,308) were
pledged as security under certain loan arrangements (see Note 18(a)).
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 10
    
    Amounts due from/to related partiesAmounts due from related parties comprise:
 December 31,2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Due within one year
    
    
    85,614
    
    
    
    233,188
    
    
    
    28,895
 Amounts due to related parties comprise:
 December 31,2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Due within one year
    
    
    42,686
    
    
    
    75,189
    
    
    
    9,317
 Related parties include Hong Leong Management Services Pte, Limited, YMLC, State Holding Company
and their subsidiaries and affiliates. At December 31, 2005, the amounts due from/to related
parties are unsecured, interest free and arose principally from transactions as disclosed in Note
27. All amounts due from/to related parties are payable on demand.In June 2006, YMLC and State Holding Company entered into an
agreement with Yuchai to enable Yuchai and its subsidiaries to settle
the amounts due from/to YMLC, State Holding Company and their
subsidiaries on a net basis, i.e. the balance due from/to YMLC, State
Holding Company, their subsidiaries and affiliates as of
December 31, 2005 were offset.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 11
    
    Loans to customers, net
 Loans to customers, net refer to the designated loans lent by the Company through financial
institutions to customers. The terms of the loan agreements were designated by the Company. The
financial institutions assist the Company to release the principal to the borrowers and collect the
repayment on behalf of the Company without bearing the risk of default by customers, if any. The
loans carried interest rates ranged from 5.31% to 5.85% and were repayable in instalments within
one year. The loans are secured and guaranteed by independent third parties.
 12
    
    Inventories, net
 Inventories comprise:
 December 31,2004
    
    
    
    2005
    
    
    
    2005Rmb
    
    
    
    Rmb
    
    
    
    US$Raw materials
    
    
    699,132
    
    
    
    1,027,733
    
    
    
    127,349Work in progress
    
    
    141,659
    
    
    
    33,057
    
    
    
    4,096Finished goods
    
    
    505,754
    
    
    
    575,493
    
    
    
    71,3111,346,545
    
    
    
    1,636,283
    
    
    
    202,756
 13
    
    Other receivables, net
 Other receivables, net comprise:
 December 31,2004
    
    
    
    2005
    
    
    
    2005Rmb
    
    
    
    Rmb
    
    
    
    US$VAT recoverable (see Note (i))
    
    
    91,977
    
    
    
    96,151
    
    
    
    11,914Staff loans
    
    
    8,476
    
    
    
    18,075
    
    
    
    2,240Staff advances
    
    
    3,306
    
    
    
    1,726
    
    
    
    214Receivable for factoring (see Note (ii))
    
    
    6,845
    
    
    
    
    
    
    
    Others
    
    
    4,810
    
    
    
    24,251
    
    
    
    3,005115,414
    
    
    
    140,203
    
    
    
    17,373
 
 Notes:(i)
    
    The VAT recoverable mainly represents a delay in the input VAT approval by the local tax
bureau, totalling Rmb58,872 (US$7,295). The amount was subsequently settled in January 2006. F - 30




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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 13
    
    Other receivables, net (continued)
  Notes: (continued)(ii)
    
    In December 2004, Yuchai sold trade accounts receivable of Rmb64,827 to a commercial bank.
The balance represented 10% of the sales amount withheld by the bank that would be released to
the Company upon the settlement of the trade accounts receivable. The amount withheld
represented the full amounts which might be claimed by the bank pursuant to recourse
provisions. The amount was fully settled in 2005.
 14
    
    Property, plant and equipment, netProperty, plant and equipment, net comprise:
 December 31,2004
    
    
    
    2005
    
    
    
    2005Rmb
    
    
    
    Rmb
    
    
    
    US$Buildings
    
    
    634,544
    
    
    
    709,643
    
    
    
    87,934Machinery and equipment
    
    
    1,547,112
    
    
    
    1,888,567
    
    
    
    234,0172,181,656
    
    
    
    2,598,210
    
    
    
    321,951Less: Accumulated depreciation
    
    
    1,022,725
    
    
    
    1,155,695
    
    
    
    143,205Net property, plant and equipment
    
    
    1,158,931
    
    
    
    1,442,515
    
    
    
    178,746
 In 2003, management determined that certain property, plant and equipment would no longer be used
in production due to the introduction of new environmental regulations in 2003. These changes
required an impairment analysis to be performed in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. The estimated undiscounted future cash flows
generated from such property, plant and equipment were less than their carrying value. The
carrying value of such assets was therefore reduced to their estimated fair value. Impairment
loss of Rmb12,405 has been included in Selling, general and administrative expenses in 2003.
Management has conducted an impairment review on the conditions of the property, plant and
equipment in 2004 and 2005 and considered no impairment loss was deemed necessary in 2004 and
2005.All of Yuchai and its subsidiaries buildings are located in the PRC.As of December 31, 2004, certain plant and equipment of Yuchai with an aggregate carrying amount
of Rmb172,630, was pledged as security under certain loan
arrangements (see Note 18(a)). The
security was released in 2005.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 14
    
    Property, plant and equipment, net (continued)Loss on disposal of property, plant and equipment for the years ended December 31, 2003, 2004
and 2005 is included in Selling, general and administrative expenses as follows:
 December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Loss on disposal of property,
plant and equipment
    
    
    3,359
    
    
    
    12,998
    
    
    
    10,474
    
    
    
    1,298
 The Company has several non-cancellable operating leases, primarily for offices and warehouses that
expire over the next four years. These leases generally contain renewal options for periods
ranging from one year to four years.Future minimum lease payments under non-cancellable operating leases (with initial or remaining
lease terms in excess of one year) as of December 31, 2005 are:
 Rmb
    
    
    US$2006
    
    
    2,766
    
    
    
    3432007
    
    
    2,019
    
    
    
    2502008
    
    
    1,084
    
    
    
    1342009
    
    
    541
    
    
    
    676,410
    
    
    
    794
 Rental expense for operating leases is included in Selling, general and administrative expenses
as follows:
 December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Rental expense
    
    
    5,159
    
    
    
    9,232
    
    
    
    8,726
    
    
    
    1,081
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 15
    
    Construction in progress
 Construction in progress comprises capital expenditures and capitalized interest charges
relating to the following construction of facilities and assembly lines projects:
 December 31,2004
    
    2005
    
    2005Rmb
    
    Rmb
    
    US$Diesel engine production line and
facilities projects
    
    
    211,418
    
    
    
    286,050
    
    
    
    35,445Factories auxiliary facilities
    
    
    86,134
    
    
    
    95,230
    
    
    
    11,800Second foundry
    
    
    29,570
    
    
    
    26,047
    
    
    
    3,228Others
    
    
    51,913
    
    
    
    52,575
    
    
    
    6,515379,035
    
    
    
    459,902
    
    
    
    56,988
 16
    
    Lease prepayments, net
 December 31,2004
    
    2005
    
    2005Rmb
    
    Rmb
    
    US$Lease prepayments
    
    
    99,111
    
    
    
    98,157
    
    
    
    12,163Less: Accumulated amortization
    
    
    24,344
    
    
    
    27,549
    
    
    
    3,414Lease prepayments, net
    
    
    74,767
    
    
    
    70,608
    
    
    
    8,749
 The land on which the Companys buildings are erected is owned by the PRC Government. Yuchai and
its subsidiaries are granted the land use rights of 15 to 50 years in respect of such land.
 F - 33




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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 17
    
    Investments
 (a)
    
    Investments as of December 31, 2004 and 2005 are summarized as follows:
 December 31,2004
    
    
    
    2005
    
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Available-for-sale equity securities
(see Note)
    
    
    6,405
    
    
    
    6,355
    
    
    
    787Investments in affiliated companies
    
    
    648
    
    
    
    185,619
    
    
    
    23,0017,053
    
    
    
    191,974
    
    
    
    23,788
 
 Note:
    
    Available-for-sale equity securities are non-marketable equity securities and stated at
cost due to the lack of information to determine the fair value. The Company did not observe
any event or change in circumstances that would have result in the fair value being
significantly less than its carrying amount. (b)
    
    Investments in affiliated companies accounted for using the equity method as of December 31,
2004 and 2005 are as follows:
 December 31,2004
    
    
    
    2005
    
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Listed:TCL (see Note (i))
    
    
    
    
    
    
    185,021
    
    
    
    22,927Unlisted:Others (see Note (ii))
    
    
    648
    
    
    
    598
    
    
    
    74648
    
    
    
    185,619
    
    
    
    23,001
 
 Notes:(i)
    
    The Company acquired 264,000,000 shares and 17,795,664 shares of TCLs ordinary
shares on March 23, 2005 and September 5, 2005, representing 14.99% and 1.00% interests of
the enlarged share capital of TCL at a consideration of Singapore
dollars (S$) 30,880,000 (equivalent to Rmb152,133) and
S$1,400,000 (equivalent to Rmb6,890) respectively. As a result, the Company held a 15.99%
stake in TCL as of December 31, 2005. Among the 17,795,664
ordinary shares purchased in September 2005,
6,715,196 ordinary shares held by the Company as of December 31, 2005 are
subject to a call option which is exercisable by certain members of the Thakral family
(Thakral Family Members), who are stockholders of TCL. F - 34




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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 17
    
    Investments (continued)
 (b)
    
    Investments in affiliated companies accounted for using the equity method as of December
31, 2004 and 2005 are as follows: (continued)
 
 Notes: (continued)The option was granted only to Thakral Family Members by the participating creditors in
connection with a scheme of arrangement dated October 24, 2001 in relation to TCL
sanctioned by the High Court of Singapore on November 2, 2001 (the Scheme). The option
price payable per TCL share under the call option is S$0.25 plus an interest of Singapore
Interbank offer rate plus 0.5% from March 27, 2002 until the completion of the sale and
purchase of the shares pursuant to an exercise of the call option. The Company has
assessed the fair value of the options and determined that the value was not material. The
6,715,196 shares of TCL were held by a share escrow account on trust for the Company
pending release to the Company as of December 31, 2005, subject to the call option.
Assuming that the call option is not exercised by the Thakral Family Members, all the
6,715,196 shares of TCL will be released by the share escrow agent to the Company by August
31, 2006. As of December 31, 2005, the call option has not been exercised.The fair value, based on the quoted market price, of the TCL shares held by the Company was Rmb109,434 (US$13,560) as of December 31, 2005. Management considers the decline in
fair value below the carrying value to be not other than temporary as the Company has the ability and intent to hold its
investment in TCL for a period that should allow it to recover its carrying value.(ii)
    
    Others represent the Companys interest in certain entities in the PRC in which the Company
has the ability to exercise significant influence in its financial and operating policy
decisions, but does not have controlling financial interests. F - 35




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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 17
    
    Investments (continued)
 (c)
    
    Summarized financial information regarding TCL as of December 31, 2005 and for the period
from March 23, 2005 to December 31, 2005 is as follows:
 December 31,2005
    
    
    December 31,2005Rmb
    
    
    US$Financial positionCurrent assets
    
    
    932,008
    
    
    
    115,488Property, plant and equipment, net
    
    
    173,266
    
    
    
    21,470Other assets
    
    
    453,327
    
    
    
    56,173Total assets
    
    
    1,558,601
    
    
    
    193,131Current liabilities
    
    
    337,971
    
    
    
    41,879Non-current liabilities
    
    
    1,034
    
    
    
    128Long term debts
    
    
    32,076
    
    
    
    3,975Total liabilities
    
    
    371,081
    
    
    
    45,982Minority interests
    
    
    30,416
    
    
    
    3,769Stockholders equity
    
    
    1,157,104
    
    
    
    143,380Total liabilities and stockholders equity
    
    
    1,558,601
    
    
    
    193,131
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)


17   Investments (continued)


(c)
    
    Summarized financial information regarding TCL as of December 31, 2005 and for the period
from March 23, 2005 to December 31, 2005 is as follows: (continued)


Period from
    
    
    Period fromMarch 23, 2005
    
    
    March 23, 2005to December 31,
    
    
    to December 31,2005
    
    
    2005Rmb
    
    
    US$Results of operationsNet salesSupply chain
management
    
    
    1,531,913
    
    
    
    189,823Others
    
    
    109,526
    
    
    
    13,5721,641,439
    
    
    
    203,395Cost of goods sold
    
    
    (1,508,247
    )
    
    
    (186,890
    )Gross profit
    
    
    133,192
    
    
    
    16,505Selling, general and administrative expenses
    
    
    (191,161
    )
    
    
    (23,688
    )Operating loss
    
    
    (57,969
    )
    
    
    (7,183
    )Finance cost
    
    
    (9,338
    )
    
    
    (1,157
    )Other income
    
    
    34,906
    
    
    
    4,325Equity in profit of affiliates
    
    
    281
    
    
    
    35Loss before income taxes and minority interests
    
    
    (32,120
    )
    
    
    (3,980
    )Income tax
expense
    
    
    (6,086
    )
    
    
    (754
    )Loss before minority interests
    
    
    (38,206
    )
    
    
    (4,734
    )Minority interests in income of consolidated
subsidiaries
    
    
    6,232
    
    
    
    772Net loss
    
    
    (31,974
    )
    
    
    (3,962
    )


Other financial information: Interest revenue

    
    5,703
    
    
    
    707 Interest expenses

    
    9,338
    
    
    
    1,157 Depreciation and amortisation
    
    
    10,576
    
    
    
    1,311 Significant non-cash transactions:Bad
debt expense
    
    
    11,629
    
    
    
    1,441Provision
for inventory
write-down

    
    33,493
    
    
    
    4,150Impairment
loss to property, plant and equipment

    
    16,031
    
    
    
    1,986


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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 18
    
    Debt
 (a)
    
    Short-term bank loans
 Short-term bank loans were denominated in Renminbi as follows:
 December 31,2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Renminbi denominated loans
    
    
    430,000
    
    
    
    812,835
    
    
    
    100,721
 The weighted average interest rate of short-term bank loans at December 31, 2004 and 2005 was 5.28%
and 5.52% per annum, respectively.As of December 31, 2004, short-term bank loans of Rmb50,000, were secured by the pledge of certain
of Yuchais plant and equipment (see Note 14). The amount was fully repaid in 2005.As of December 31, 2005, short-term bank loans of Rmb42,835 (US$5,308), were secured by the pledge
of certain Yuchais trade accounts receivable (see Note 9).
 (b)
    
    Long-term bank loans
 Yuchais long-term bank loans comprise:
 Interest rateat December 31,
    
    December 31,2005
    
    2004
    
    
    2005
    
    
    2005(per annum)
    
    Rmb
    
    
    Rmb
    
    
    US$Renminbi denominated loans: due in 2006
    
    
    4.94% - 5.49
    %
    
    
    100,000
    
    
    
    100,000
    
    
    
    12,391 due in 2007
    
    
    5.85
    %
    
    
    
    
    
    
    50,000
    
    
    
    6,196Total long-term bank loans
outstanding
    
    
    
    
    
    
    100,000
    
    
    
    150,000
    
    
    
    18,587Less: Amounts due within
one year included
under current
liabilities
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    12,391Amounts due after one year
    
    
    
    
    
    
    100,000
    
    
    
    50,000
    
    
    
    6,196
 All long-term bank loans were unsecured as of December 31, 2004 and 2005.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 19
    
    Convertible debt
 On February 23, 2005, the Company issued US$25,000 (Rmb206,913) in principal amount of convertible
debt (the Convertible Debt) on a private placement basis. The Convertible Debt bear interest
rate of 2% per annum and mature in 2012, unless redeemed earlier in accordance with the terms of
the Convertible Debt. The Convertible Debt were fully exercised and converted to 1,927,673
ordinary shares on June 3, 2005, thereby increasing the Companys issued and outstanding shares
from 35,340,000 ordinary shares to 37,267,673 ordinary shares.
 20
    
    Accrued expenses and other liabilities
 Accrued expenses and other liabilities comprise:
 December 31,2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    US$Deposits from customers
    
    
    54,165
    
    
    
    96,936
    
    
    
    12,012Staff welfare payable (see Note)
    
    
    15,041
    
    
    
    15,041
    
    
    
    1,864Accrued product warranty (see Note 21)
    
    
    126,114
    
    
    
    142,126
    
    
    
    17,611Wages payable
    
    
    110,577
    
    
    
    98,732
    
    
    
    12,234Management bonus payable
    
    
    36,574
    
    
    
    19,092
    
    
    
    2,366Payable for construction in progress
    
    
    39,139
    
    
    
    39,330
    
    
    
    4,873Accrued research and development
expenses
    
    
    16,472
    
    
    
    24,952
    
    
    
    3,092Accrued advertising expense
    
    
    7,225
    
    
    
    3,817
    
    
    
    473Accrued legal fee and other professional
fees
    
    
    2,762
    
    
    
    5,050
    
    
    
    626Accrued expenses for litigation and
guarantees (see Notes 24(c) and (d))
    
    
    15,268
    
    
    
    18,921
    
    
    
    2,344Individual income tax withholding
    
    
    8,161
    
    
    
    10,250
    
    
    
    1,270Other accruals and liabilities
    
    
    53,422
    
    
    
    97,470
    
    
    
    12,078484,920
    
    
    
    571,717
    
    
    
    70,843
 
 Note:
    
    Staff welfare payable is determined by Yuchais Board of Directors. The payable can be
applied towards the payment of special bonuses or collective welfare benefits to staff and
workers of Yuchai, such as staff dormitories and staff welfare facilities. F - 39




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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 21
    
    Accrued product warranty
 An analysis of the accrued product warranty for 2003, 2004 and 2005 is as follows:
 December 31,2003
    
    
    
    2004
    
    
    
    2005
    
    
    
    2005Rmb
    
    
    
    Rmb
    
    
    
    Rmb
    
    
    
    US$Balance at beginning of year
    
    
    66,864
    
    
    
    101,215
    
    
    
    126,114
    
    
    
    15,627Allowance charged to
consolidated statements of
income
    
    
    162,369
    
    
    
    190,205
    
    
    
    179,184
    
    
    
    22,203Less: Allowance utilized
    
    
    (128,018
    )
    
    
    (165,306
    )
    
    
    (163,172
    )
    
    
    (20,219
    )Balance at end of year
    
    
    101,215
    
    
    
    126,114
    
    
    
    142,126
    
    
    
    17,611
 22
    
    Statutory reserves
 The Companys attributable share in the statutory reserves of Yuchai and its subsidiaries for
the three years ended December 31, 2005 is as follows:
 December 31,2003
    
    
    
    2004
    
    
    
    2005
    
    
    
    2005Rmb
    
     
    
    Rmb
    
    
    
    Rmb
    
    
    
    US$Statutory general reserve
(see Note (ii))Balance at January 1
    
    
    116,702
    
    
    
    156,111
    
    
    
    170,041
    
    
    
    21,070Transfer from consolidated
statements of income
    
    
    39,409
    
    
    
    13,930
    
    
    
    239
    
    
    
    30Balance at December 31
    
    
    156,111
    
    
    
    170,041
    
    
    
    170,280
    
    
    
    21,100Statutory public welfare
fund (see Note (iii))Balance at January 1
    
    
    28,398
    
    
    
    48,103
    
    
    
    70,482
    
    
    
    8,734Transfer from consolidated
statements of income
    
    
    19,705
    
    
    
    22,379
    
    
    
    2,549
    
    
    
    316Balance at December 31
    
    
    48,103
    
    
    
    70,482
    
    
    
    73,031
    
    
    
    9,050General surplus reserveBalance at January 1 and
December 31
    
    
    25,706
    
    
    
    25,706
    
    
    
    25,706
    
    
    
    3,185Total
    
    
    229,920
    
    
    
    266,229
    
    
    
    269,017
    
    
    
    33,335
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 22
    
    Statutory reserves (continued)
 
 Notes:(i)
    
    In accordance with the relevant regulations in the PRC, Yuchai and its subsidiaries are
required to provide certain statutory reserves which are designated for specific purposes
based on the net income reported in the PRC GAAP financial statements. The reserves are not
distributable in the form of cash dividends (see Note 30).(ii)
    
    In accordance with the relevant regulations in the PRC, a 10% appropriation to the statutory
general reserve based on the net income reported in the PRC financial statements is required
until the balance reaches 50% of the authorized share capital of Yuchai and its subsidiaries.
Statutory general reserve can be used to make good previous years losses, if any, and may be
converted into share capital by the issue of new shares to stockholders in proportion to their
existing shareholdings, or by increasing the par value of the shares currently held by them,
provided that the reserve balance after such issue is not less than 25% of the authorized
share capital.(iii)
    
    Yuchai and its subsidiaries shall determine to transfer 5% to 10% of its net income reported
in the PRC financial statements to the statutory public welfare fund. There is no limit on the
amount that may be allocated to this fund. This fund can only be utilized on capital
expenditure for the collective welfare of Yuchai and its subsidiaries employees, such as the
construction of dormitories, canteen and other welfare facilities, and cannot be utilized to
pay staff welfare expenses. The transfer to this fund must be made before the distribution of
a dividend to stockholders. 23
    
    Commitments
 At December 31, 2005, Yuchai had the following commitments:
 December 31,2005
    
    
    
    2005Rmb
    
    
    
    US$Authorized and contracted for:Improvement to existing production
facilities
    
    
    214,098
    
    
    
    26,529
 F - 41




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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 24
    
    Contingencies(a)
    
    Product liabilityThe General Principles of the Civil Law of China and the Industrial Product Quality Liability
Regulations imposes that manufacturers and sellers are liable for loss and injury caused by
defective products. Yuchai and its subsidiaries do not carry product liability insurance. Yuchai
and its subsidiaries have not had any significant product liability claims brought against them.(b)
    
    Environmental liabilityThe Groups production is subject to certain environment protection laws and regulations in the
PRC. In addition, the manufacture and sales of EURO I engines in major urban area became unlawful
after December 31, 2004. After that date, the engines equipped with EURO I engines cannot be sold
and used in major urban area. The Company considers that the compliance with applicable
environment protection laws will not have any material adverse impact to Yuchai and its
subsidiaries.(c)
    
    Dispute with Bank of ChinaIn 2003, the Yulin Branch of Bank of China (BOC) initiated legal proceedings to recover Rmb6,603
(US$818) from Yuchai based on an irrevocable letter of guarantee issued by Yuchai to the BOC in
1993 to secure a loan of US$550 to Great Wall Machinery Plant (Great Wall). At trial, a Yulin
court ruled that if Great Wall could not pay the loan, Yuchai would be liable to pay the guaranteed
sum to the BOC. Yuchai appealed unsuccessfully.In January 2004, the State Holding Company issued a letter of commitment confirming that it would
reimburse Yuchai in the event that Yuchai was required to pay on this guarantee.Based on the advice from the Companys Legal Counsel, the Company has recorded a loss contingency
equal to the amount of the claim. The amounts due to the BOC and from the State Holding Company
have been recorded in Accrued expenses and other liabilities and Amounts due from related
parties, respectively.In 2005, there were no new developments in this case.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 24
    
    Contingencies (continued)(d)
    
    GuaranteesYEGCL guaranteed borrowings of Rmb7,605 and Rmb178,480 (US$22,116) granted by commercial banks to
unrelated parties in 2004 and 2005, respectively. The borrowings are due in equal monthly or
quarterly instalments through one to two years. The guarantees were made to individual persons who
applied for mortgage loans from commercial banks to purchase automobiles equipped with diesel
engines produced by Yuchai. The guarantees are for the entire amount and term of the borrowings.
In return, YEGCL receives a premium fee amounted to 2% to 8% of the amount of borrowings. All
guarantees are secured by automobiles at a net book value totalling Rmb11,693 and Rmb242,216
(US$30,014) at December 31, 2004 and 2005, respectively. If the individual defaults on payment,
YEGCL would have to perform under the guarantees. It is reasonably possible that YEGCL would be
required to make payment under its guarantees. As of December 31, 2004 and 2005, the maximum
amount of undiscounted payments that YEGCL would have to make in the event of default is Rmb7,422
and Rmb134,235 (US$16,633). Pursuant to the requirements of FIN 45, the Company accrued Rmb220 and
Rmb16,811 (US$2,083) related to its stand ready obligation under the guarantee arrangement in 2004
and 2005, respectively. The amount recognized during the year ended December 31, 2004 and 2005
includes premium received or receivable, which is amortized on a straight line basis over the terms
of the guarantees, of Rmb220 and Rmb4,493 (US$557), respectively. The amount of premium being
amortized, which were recorded as revenue, for the year ended December 31, 2004 and 2005 were
amounted to Rmb 14 and Rmb 1,167 (US$145), respectively. The remaining balance of Rmb 12,318
(US$1,526) as of December 31, 2005 represents the provision for loss contingency related to the
guarantees where payment by the Company was probable.(e)
    
    Outstanding bills discountedAs of December 31, 2005, outstanding bills discounted with banks for which the Company has retained
a recourse obligation totalled Rmb1,373,723 (US$170,222).(f)
    
    Outstanding letters of creditAs of December 31, 2005, the Company issued irrevocable letters of credit totalled Rmb110,257
(US$13,662).(g)
    
    Other outstanding litigationIn addition to the matters disclosed in Note 24(c), the Company is involved in various other claims
and legal actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not have a material adverse effect on
the Companys consolidated financial position, results of operations, or liquidity.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 25
    
    Dispute with State Holding CompanyThe Company has from time to time in the period up to 2005 encountered difficulties in
obtaining the cooperation of the State Holding Company, and its former Chairman, Mr Wang Jianming,
in the daily management and operation of Yuchai, including obtaining payments of the Companys
share of the final 2001 dividend declared in August 2002. Mr Wang Jianming ceased to serve as the
Chairman, legal representative and chief executive officer of Yuchai,
as well as the Chairman and
legal representative of the State Holding Company, the principal Chinese shareholder of Yuchai with
effect from October 28, 2005. The new Chairman and legal representative of these companies is Mr Yan
Ping whose appointment was confirmed on December 2, 2005.The Chinese stakeholders had previously asserted that the transfer of ownership of shares with
respect to Yuchai in November 1994, in connection with the Companys initial public offering
(IPO), was not validly approved by the Chinese authorities, and that as a result the Companys
exercise of control over Yuchai has been improper.As a result of a number of meetings between the parties, the Company and Yuchai entered into an
agreement in July 2003 (the July 2003 Agreement) to work together in trying to jointly promote
mutual plans to enhance the Companys shareholder value.On April 7, 2005, the Company entered into a Reorganisation Agreement (Reorganisation Agreement)
with Yuchai and Coomber in furtherance of the terms of the July 2003 Agreement, and the terms of
this agreement were acknowledged and agreed to by the State Holding Company. The Reorganisation
Agreement was extended to December 31, 2006 by way of the Reorganisation Agreement Amendment No.1
dated December 2, 2005. The Reorganisation Agreement Amendment No.1 was similarly acknowledged and
agreed to by the State Holding Company.The principal terms contained in the Reorganisation Agreement relating to governance related issues
have been addressed by Yuchai.Yuchai has taken all necessary steps and submitted all necessary documents to enable the amended
and restated Articles of Association of Yuchai as approved by its directors and shareholders in
1996 incorporating the corporate governance guidelines approved by its directors and shareholders
on November 1, 2002 to be approved, formalized, endorsed, registered and filed with the relevant
governmental authorities. The formal approval of these amended Articles of Association is awaited
from the PRC Ministry of Commerce (MOC).Promptly upon receipt of the approval from the MOC of the Articles of Association, Yuchai would
formalize the implementation of the corporate governance guidelines approved by its directors and
shareholders on November 1, 2002 and establish an
appropriate corporate governance structure conforming to international custom and practice.Yuchai has begun to implement the compliance programme for the internal controls over financial
reporting of Yuchai with respect to section 404 of the Sarbanes-Oxley Act.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 25
    
    Dispute with State Holding Company (continued)Up to the date of this report:
 (i)
    
    the board and shareholders of Yuchai have, at a duly convened board meeting held on April 21,
2005 and a duly convened shareholders meeting held on May 16, 2005, approved the following
principal matters relating to the Reorganisation Agreement:
 -
    
    the proposed capitalization of YMLC was varied by the board of directors of
Yuchai at its meeting on April 21, 2005 and approved by its shareholders. Coomber has
assumed the obligation to return Rmb165,400 (US$20,495) of the authorized Rmb205,000
(US$25,402) loan that was made by Yuchai to YMLC and which had been guaranteed by
Coomber to Yuchai by December 6, 2005. The remaining Rmb39,600 (US$4,907) loan would
remain as a loan by Yuchai to YMLC and would only be injected as share capital of YMLC
after the successful spin-off of Yuchai in line with the terms of the Reorganisation
Agreement;-
    
    a dividend payment for the financial years ended December 31, 2003 and 2004
in the amount of Rmb302,713;-
    
    the establishment and appointment of members of three sub-committees under
the board, comprising the nominations committee, the remuneration committee and the
audit committee;-
    
    the establishment of a financial committee to approve all borrowings,
guarantees, loans issuance of company debt and investment;-
    
    the termination of the sales of the spare parts business of one of its
subsidiaries;-
    
    the payment of US$20,000 to the Company pursuant to the Reorganisation
Agreement;-
    
    the acceptance of the appointment of two independent directors of Yuchai
and confirmation of the appointment of three directors appointed by holders of States
Shares of Yuchai and six directors appointed by holders of Foreign Shares of Yuchai; and-
    
    the appointment of one independent director nominated by the holders of
State Shares of Yuchai, and three independent directors nominated by the holders of
Foreign Shares of Yuchai.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 25
    
    Dispute with State Holding Company (continued)
 (ii)
    
    an internationally reputable financial adviser had been engaged by Yuchai to assist Newco
(as defined below) to apply for the listing of its shares on the NYSE and assist the Company
with the implementation of spin-off. Pursuant to the Reorganization Agreement, a Bermuda
corporation (Newco) will be formed where (a) the Company will contribute its 76.4% indirect
interest in Yuchai to in exchange for a number of Newco shares equal to the number of
outstanding shares of the Company as of April 7, 2005; (b) its board of directors would
comprise of nominees from the Company and Yuchai in the same respective proportions to the
nominees of the holders of Foreign Shares of Yuchai and the holders of State Shares of Yuchai
on the Yuchai board of directors; and (c) its charter documents and officers would be mutually
agreeable to the Company and Yuchai and on the completion date of the Restructuring Exercise
(as described in the Reorganization Agreement) the Company shall have no appointees to its
board of directors. The appointment of the financial adviser was subsequently terminated
pending Yuchais ongoing review of the implementation of the corporate reorganization
contemplated in the Reorganization Agreement;(iii)
    
    the Yuchai board of directors subsequently directed a review of YMLCs financial position
and the implementation of the recapitalization plans for YMLC has been deferred pending the
successful spin-off of Yuchai in line with the terms of the Reorganisation Agreement;(iv)
    
    the Company has received payment of an advisory fee in the amount Rmb12,105 (US$1,500) from
Yuchai as provided for under the Reorganisation Agreement; and(v)
    
    the Company has received its share of the dividend declared and paid by Yuchai in respect of
the financial years ended December 31, 2003 and 2004 on May 24, 2005 for amount of Rmb225,207
(US$27,906).
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 25
    
    Dispute with State Holding Company (continued)The principal terms of the Reorganisation Agreement Amendment No.1 are as follows:
 (1)
    
    Clause 1.8 of the Reorganization Agreement was previously stated as:In consideration of CYIs agreement to ensure that Coomber will under the terms of the share
exchange described in clause 2.4 receive no less than 6,354,911 Newco shares, Yuchai shall,
within 5 business days from the date that an unqualified audit report is issued on CYIs
financial statements in the form substantially similar to that of the unaudited financial
statements filed by CYI in its Form 6K dated February 28, 2005, pay CYI an amount of
US$20.0 million in cash into such bank account as CYI shall notify Yuchai in writing.was deleted and replaced with the following text:In consideration of CYIs agreement to ensure that Coomber will under the terms of the share
exchange in Clause 2.4 receive no less that 6,354,911 Newco shares, Yuchai shall on the
earlier of (i) the date of the completion of the transactions described in Clause 2.6 and
(ii) December 31, 2006 pay CYI an amount of US$20.0 million in cash to such bank account as
CYI shall notify Yuchai in writing.(2)
    
    Clause 2.10 of the Reorganization Agreement, which was stated as:The parties acknowledge and accept that the CYI Group, as majority shareholders of Yuchai
and with majority control of the Board of Directors of Yuchai, may cause the employment of
Yuchais current Chief Executive Officer to be terminated in accordance with the terms of his
employment agreement. CYI acknowledges and accepts, however, that the successful
implementation of the Restructuring Exercise will require the continued uninterrupted
involvement and participation of Yuchais current Chief Executive Officer on and subject to
the terms (including remuneration) of his employment agreement. Accordingly, CYI agrees that
it will not, and will procure that its appointees to the Board of Directors of Yuchai do not,
take any action prior to the completion of the Restructuring Exercise that will interfere
with, or cause the termination of, the employment of Yuchais current Chief Executive Officer
except if he were to be prosecuted or convicted for any activities of a criminal nature.was deleted in its entirety with effect from October 27, 2005.(3)
    
    The Clause 4 of the Reorganization Agreement was previously stated as:In the event that the parties are unable to complete the events described in each of clauses
2.1, 2.2, 2.4, 2.5 and 2.6 above (not due to the default of either party) by
5:00p.m. on December 31, 2005 (or if such day is not a business day in Hong Kong, the
immediately succeeding business day)(or such other date to be mutually agreed between the
parties), the provision of this Agreement shall terminate and in such event no party shall
have any claim against any other party for any claims, damages, losses or other costs and
expenses arising from such termination.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 25
    
    Dispute with State Holding Company (continued)
 (3)
    
    The Clause 4 of the Reorganization Agreement was previously stated as: (continued)the date appearing in the third line of Clause 4 of the Reorganization Agreement was deleted
and substituted with the words December 31, 2006 or such other date as the parties may agree
in writing
 Yuchai, Coomber and the State Holding Company have at various times reaffirmed their respective
intentions of working with the Company to carry out their respective obligations under the
Reorganization Agreement.26
    
    Retirement and other postretirement benefitsAs stipulated by the regulations of the PRC, Yuchai and its subsidiaries participate in
defined contribution retirement plans organized by the Guangxi Regional Government and Beijing City
Government for its staff. All staff are entitled to an annual pension equal to a fixed proportion
of their final basic salary amount at their retirement date. For the years ended December 31,
2003, 2004 and 2005, Yuchai and its subsidiaries were required to make contributions to the
retirement plan at a rate of 20.0% of the basic salary of their staff. The Guangxi Regional
Government and Beijing City Government are responsible for the entire obligations of all Yuchai and
its subsidiaries retirees. Expenses incurred in connection with the plan were Rmb24,101,
Rmb29,868 and Rmb33,299 (US$4,126), respectively, for the years ended December 31, 2003, 2004 and
2005.Yuchai and its subsidiaries have no obligation for the payment of pension benefits or any other
postretirement benefits beyond the annual contributions described above.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 27
    
    Other related party transactionsIn addition to the loans to YMLC (as discussed in Note 5), the Company has undertaken other significant business transactions with related parties during the
three years ended December 31, 2005. The following is a summary of these transactions:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Sales of trucks from customers
to Guangxi Yuchai
Mechanical and Electronics
Company (GYMEC)
(see Note (i))
    
    
    1,346
    
    
    
    753
    
    
    
    
    
    
    
    Sales of diesel engines
to State Holding Company, its subsidiaries and
affiliates
(see Note (ii))
    
    
    23,611
    
    
    
    3,784
    
    
    
    7,646
    
    
    
    947Purchase of raw materials
and supplies from
subsidiaries and affiliates
of State Holding Company
(see Note (ii))
    
    
    (93,056
    )
    
    
    (142,829
    )
    
    
    (235,329
    )
    
    
    (29,160
    )Purchase of raw materials
and supplies from YMLC
(see Note (iii))
    
    
    
    
    
    
    
    
    
    
    (60,756
    )
    
    
    (7,528
    )Purchase of trucks from
YMLC (see Note (iii))
    
    
    
    
    
    
    (95,391
    )
    
    
    (77,324
    )
    
    
    (9,581
    )Processing fee to YMLC
(see Note (iv))
    
    
    
    
    
    
    (12,329
    )
    
    
    (44,407
    )
    
    
    (5,503
    )Delivery expense charged by
a subsidiary of YMLC
(see Note (iv))
    
    
    (62,206
    )
    
    
    (65,468
    )
    
    
    (126,028
    )
    
    
    (15,616
    )General and administrative
expenses charged by State
Holding Company
(see Note (v))
    
    
    (30,607
    )
    
    
    (21,180
    )
    
    
    (25,931
    )
    
    
    (3,213
    ) charged by HLA
(see Note (xii))
    
    
    (4,427
    )
    
    
    (4,142
    )
    
    
    (4,035
    )
    
    
    (500
    ) charged by an affiliate
of HLA (see Note (vi))
    
    
    
    
    
    
    
    
    
    
    (30,765
    )
    
    
    (3,812
    )
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 27
    
    Other related party transactions (continued)
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Gain on disposal of
land use rights to a
subsidiary of State
Holding Company
(See Note (vii))
    
    
    
    
    
    
    
    
    
    
    2,533
    
    
    
    314Loan from State Holding
Company (see Note (viii))
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    Assignment of debt to
GYMEC (see Note (ix))
    
    
    3,700
    
    
    
    
    
    
    
    
    
    
    
    Consultancy fee paid on
behalf of Coomber
(see Note (x))
    
    
    13,347
    
    
    
    
    
    
    
    
    
    
    
    
 
 Notes:(i)
    
    Sales of diesel trucks to GYMECGYMEC was formerly a subsidiary of State Holding Company. It became a subsidiary of
YMLC following a share transfer from State Holding Company to YMLC in 2004. During 2003 and
2004, Yuchai received diesel trucks from certain customers as part of the settlement of their
trade accounts receivable. Pursuant to an agreement between Yuchai and GYMEC, Yuchai sold
such diesel trucks at cost to GYMEC, which owns a business license for selling diesel trucks
in the PRC. Yuchai recorded a receivable from GYMEC in connection with the truck sales. The
amount due from GYMEC is unsecured, interest free and repayable on demand.(ii)
    
    Sale and purchase of raw materials, supplies and diesel engines to/from State Holding
Company, its subsidiaries and affiliates.Certain subsidiaries and affiliates of State Holding Company have acted as suppliers of
raw materials and supplies to the Company and certain subsidiaries of State Holding Company
have acted as sales agents of the Company. The Company considers that these transactions
were entered into in the normal course of business and expects that these transactions will
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 27
    
    Other related party transactions (continued)Notes: (continued)
 (iii)
    
    Purchase of raw materials, supplies and trucks from YMLCSince July 2004, subsidiaries of YMMC have engaged in the sale of trucks which were mainly
supplied by and purchased from YMLC. YMLC has also become a supplier of raw materials and
supplies to the Company since 2005. The Company considers that these transactions were
entered into in the normal course of business and expects that these transactions will
continue on normal commercial terms.(iv)
    
    Processing fee and delivery expense charged by YMLC and its subsidiariesThe fee is for the packaging and delivering of spare parts charged by YMLC, which was
recorded in Cost of goods sold and Selling, general and administrative expenses
respectively. The Company considers that these transactions were entered into in the normal
course of business and expects that these transactions will continue on normal commercial
terms.(v)
    
    General and administrative expensesState Holding Company charges Yuchai for certain general and administrative expenses in
respect of rental of certain office premises, property management services rendered by State
Holding Company. The expenses are charged to Yuchai and its subsidiaries by State Holding
Company on an actual incurred basis. The Company believes that the expenses charged to
Yuchai by State Holding Company would not have been materially different on a stand-alone
basis because Yuchai could provide these services for itself at approximately the same
amount.(vi)
    
    Service fee to an affiliate of HLAThe fee was paid to Hong Leong Management Services Pte Ltd., an affiliate of HLA. Service
fee includes Rmb9,167 (US$1,136) in relation to the consultancy services performed for the
acquisition of interests in TCL during 2005 and LKN-Princefield Limited (LKN) in 2006 (see
Note 34(a)). The remaining amounts were mainly in relation to secure additional credit
facilities and enter into the Reorganization Agreement. The transactions were approved by the
Board of Directors. The Company considers that the transactions were entered into in the
normal course of business.(vii)
    
    Gain on disposal of land use rights to a subsidiary of State Holding CompanyThe Company has disposed of certain land use rights with net book value of Rmb1,047 (US$130)
to a subsidiary of SHC for a consideration of Rmb3,580 (US$444). The Company considers that
the transaction was entered into in the normal course of business.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 27
    
    Other related party transactions (continued)Notes: (continued)
 (viii)
    
    Loan from State Holding CompanyIn 2003, GYSPM has entered into an agreement with State Holding Company for a borrowing of
Rmb8,000 for its operating activities as of December 31, 2003. As of December 31, 2003,
GYSPM pledged certain of its assets with net book value of Rmb17,132 against bank loan of
Rmb8,000 borrowed by State Holding Company. The terms set out in the loan agreement entered
into between State Holding Company and the bank and the loan agreement entered into between
GYSPM and State Holding Company are identical. The loan proceeds from the bank borrowed by
State Holding Company were solely lent to GYSPM. State Holding Company would make repayments
to the bank upon receipt of loan repayment from GYSPM. The loan was fully repaid in 2004.(ix)
    
    Assignment of debt to GYMECIn 2003, the Company entered into a deed of assignment (the Deed) whereby one of the
Companys customers assigned all the rights and liabilities of the outstanding amount due to
the Company totalling approximately Rmb15,000 to GYMEC. Pursuant to the Deed, GYMEC became
one of the sales agents of this customer who is principally engaged in manufacturing and
sales of motor vehicles. As of December 31, 2004, the outstanding balances due from GYMEC
related to this assignment was Rmb3,700 and the amount was fully repaid in 2005.(x)
    
    Consultancy fee paid on behalf of CoomberIn 2003, the Company entered into an agreement, totalling Rmb60,000 with a consultancy
company in connection with the design of an information system for YMLC to be undertaken by
Coomber pursuant to which Coomber has agreed to pay for all expenses incurred by the Company
in respect of this project on or before 31 December 2004. In 2003, the Company incurred
payments totalling Rmb13,347 in respect of the project, which have been recorded in amounts
due from related parties. The amount was subsequently repaid in 2004.(xi)
    
    Amounts due from/to related partiesAmounts due from/to related parties arise mainly from the transactions as stated above.In addition to the above, Yuchai also entered into transactions with other PRC Government
owned enterprises. The Company considers that these transactions
were entered into in the normal course of business and expects that these transactions will
continue on normal commercial terms. Balances with other PRC entities are excluded from this
caption.
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 27
    
    Other related party transactions (continued)Notes: (continued)
 (xii)
    
    Amount due to the holding companyAmount due to the holding company comprise mainly general and administrative expenses charged
by the holding company in relation to the management, financial planning and control and
other services provided to Yuchai. The balance is unsecured, interest free and repayable on
demand.
 28
    
    Segment information
 SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards for reporting information about
operating segments in financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance.The Companys operating segments are Yuchai and TCL for the year ended December 31, 2005. Prior to
the purchase of TCL, the Companys only operating segment was Yuchai.The segment result for Yuchai is based on income before
income taxes and minority interests.
The segment result for TCL is the Companys equity in the net
income or losses or TCL. Segment
assets for Yuchai are based on total assets of Yuchai. Segment assets
for TCL are based on the
Companys net investment in TCL. Substantially all of the Companys operations including TCL are in
the PRC. Consequentially no geographic information is presented. Further segment information about
TCL is included in Note 17(c).Following is the segment information for the year ended
December 31, 2005:
 Yuchai
    
    
    TCLRmb
    
    
    RmbSegment revenue from external customers
    
    
    5,829,431
    
    
    
    Interest revenue
    
    
    21,744
    
    
    
    Interest expenses
    
    
    70,527
    
    
    
    Depreciation
and amortization
    
    
    139,720
    
    
    
    Equity in losses of affiliates
    
    
    50
    
    
    
    Segment profit / (loss)
    
    
    171,585
    
    
    
    (5,056
    )Significant
non-cash items: Provision for uncollectible loans to a related party
    
    
    205,000
    
    
    
     Bad
debt expense
    
    
    25,587
    
    
    
    
Provision for inventory write-down
    
    
    15,990
    
    
    
     Provision for losses on guarantees
    
    
    12,318
    
    
    
    Segment assets
    
    
    6,168,814
    
    
    
    185,021Total expenditures for additions to long-lived assets
    
    
    515,359
    
    
    
    
 Reconciliation of segment information to the consolidated financial statements for the years ended
December 2003, 2004 and 2005.
 2003
    
    
    2004
    
    
    2005Rmb
    
    
    Rmb
    
    
    RmbTotal segment profit
    
    
    722, 341
    
    
    
    773, 571
    
    
    
    166, 529Service
fee to an affiliate of HLA (see Note 27)
    
    
    
    
    
    
    
    
    
    
    (30,765
    )Other corporate general and
administrative expenses
    
    
    (25,435
    )
    
    
    (19,717
    )
    
    
    (18,522
    )Consolidated income before income
taxes and minority interests
    
    
    696,906
    
    
    
    753,854
    
    
    
    117,242Total assets for reportable segment
    
    
    3,896,463
    
    
    
    5,268,660
    
    
    
    6,353,835Corporate cash and cash equivalents
    
    
    129,795
    
    
    
    108,514
    
    
    
    247,332Other corporate assets
    
    
    7,374
    
    
    
    7,074
    
    
    
    12,618Consolidated total assets
    
    
    4,033,632
    
    
    
    5,384,248
    
    
    
    6,613,785
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CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 28
    
    Segment information (continued)Revenues from external customers by product category are summarized as follows:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Revenues, net4108 Light-Duty Diesel
Engines
    
    
    174,173
    
    
    
    325,242
    
    
    
    688,265
    
    
    
    85,2854110 Light-Duty Diesel
Engines
    
    
    328,993
    
    
    
    544,297
    
    
    
    596,565
    
    
    
    73,9224112 Light-Duty Diesel
Engines
    
    
    266,639
    
    
    
    314,453
    
    
    
    322,266
    
    
    
    39,9336105 Medium-Duty Diesel
Engines
    
    
    911,190
    
    
    
    1,143,535
    
    
    
    1,748,847
    
    
    
    216,7046108 Medium-Duty Diesel
Engines
    
    
    1,504,140
    
    
    
    1,372,073
    
    
    
    810,859
    
    
    
    100,4756112 Heavy-Duty Diesel
Engines
    
    
    1,003,791
    
    
    
    1,203,558
    
    
    
    786,989
    
    
    
    97,5186113 Heavy-Duty Diesel
Engines
    
    
    3,697
    
    
    
    97,368
    
    
    
    193,280
    
    
    
    23,950Diesel Engine Parts
    
    
    228,500
    
    
    
    446,135
    
    
    
    489,480
    
    
    
    60,653Others *
    
    
    148,827
    
    
    
    135,434
    
    
    
    192,880
    
    
    
    23,9004,569,950
    
    
    
    5,582,095
    
    
    
    5,829,431
    
    
    
    722,340
 *
    
    Others mainly represent the revenues earned through sales of motor vehicle chassis and power
generators. 29
    
    Foreign currency exchangeThe Renminbi is not fully convertible into foreign currencies. All foreign exchange
transactions involving Renminbi must take place either through the PBOC or other institutions
authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange
transactions are the rates of exchange quoted by the PBOC which are determined largely by supply
and demand.Foreign currency payments, including the remittance of earnings outside of the PRC, must be
arranged through banks authorized to conduct foreign exchange business.30
    
    Distribution of profitsThe Companys sources of cash flow are its share of the dividends, if any, paid by Yuchai and
TCL to the Company. With respect to dividends by Yuchai, applicable PRC laws and regulations
require that, before it can distribute profit to its stockholders it must satisfy all tax
liabilities, recover losses in previous years and make contributions to certain statutory reserves
as discussed in Note 22. Such dividends may be paid partly in Renminbi and partly in foreign
currency. In the event that dividends are distributed in Renminbi, the dividends may be converted
into foreign currency and remitted in accordance with relevant PRC laws, regulations and policies
and to the extent permitted by PRC market conditions. Dividends of Yuchai are determined based on
distributable profit reported in its PRC GAAP financial statements, after appropriation to
statutory reserves. Such distributable profits differ from the amounts reported under U.S. GAAP.
No similar provisions were imposed with respect to dividends by TCL.Under the Companies Act of 1981 of Bermuda (as amended), the Companys contributed surplus is
available for distribution to stockholders.31
    
    Derivative instrument and hedging activitiesFor the periods presented, the Company and its subsidiaries did not enter into transactions
with respect to derivative instruments. The Company and its subsidiaries do not hedge risk
exposures or speculate using derivative instruments.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 
 32
    
    Fair value of financial instrumentsThe fair value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amount of cash and cash
equivalents, trade accounts receivable, bills receivable, short term amounts due from related
parties, prepaid expenses, other receivables, short-term bank loans, current instalments of
long-term bank loans, trade accounts payable, amount due to the holding company and amounts due to
related parties approximates their fair value because of the short maturity of these instruments.
It was not practicable for Yuchai to estimate the fair value of its equity investment for which a
quoted market price is not available because it has not yet obtained or developed the valuation
model necessary to make the estimate, and the cost of obtaining an independent valuation appears
excessive considering the materiality of the equity investment to Yuchai. Yuchai does not believe
the carrying value of the equity investment will be significantly different from its fair value.Cash and cash equivalents of Yuchai and its subsidiaries denominated in foreign currencies have
been translated at the balance sheet date into Renminbi at rates quoted by the PBOC. Yuchai does
not have and does not believe it will have any difficulty in exchanging its foreign currency cash
for Renminbi.The carrying amount of long-term bank loans approximates their fair value based on the borrowing
rates currently available for bank loans with similar terms and average maturities.33
    
    Significant concentrations and risks(a)
    
    Customer concentrationSubstantially all of the Companys customers are located in the PRC. The following are the
customers that individually comprise 10% or more of gross revenue in any of the relevant periods:
 Years ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Liuzhou Dongfeng
Automobile (see Note (i))
    
    
    391,086
    
    
    
    830,018
    
    
    
    385,049
    
    
    
    47,712Hubei Dongfeng
Automobile (see Note (ii))
    
    
    613,448
    
    
    
    344,910
    
    
    
    333,452
    
    
    
    41,319
 
 Notes:(i):
    
    Sales to Liuzhou Dongfeng Automobile for the year ended December 31, 2003, 2004 and 2005 was
approximately 8.6%, 14.9% and 6.6% of total sales.(ii):
    
    Sales to Hubei Dongfeng Automobile for the year ended December 31, 2003, 2004 and 2005 was
approximately 13.4%, 6.2% and 5.7% of total sales. F - 55




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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 33
    
    Significant concentrations and risks (continued)All the above customers are controlled by or affiliated with Dongfeng Automobile Company. At
December 31, 2004 and 2005, approximately 29% and 13% of gross trade accounts receivable,
respectively, were due from these customers. The Company considers its relationships with these
major customers to be good; however, the loss of one or more of the Companys major customers would
have a material adverse effect on the Companys results of operations.(b)
    
    Nature of operationsDuring periods of economic expansion, the demand of trucks, construction machinery and other
application of diesel engines generally increases. Conversely, during economic slowdowns the
diesel engine industry is generally adversely affected by a decline in demand. As a result, the
performance of Chinese economy will affect the Companys business and prospects by a significant
degree.(c)
    
    Transactions involving Yuchai's Chinese shareholdersAlthough the Company has proper legal ownerships and a
controlling financial interest of 76.41% interest in Yuchai, the Company has
from time to time encountered difficulties in obtaining the cooperation of the State Holding Company and Coomber. As part of the terms of
the Reorganization Agreement, Yuchai and State Holding Company acknowledged and reaffirmed the Companys continued rights as majority shareholder
to direct the management and policies of Yuchai through Yuchais board of directors. However, no assurance can be given that disagreements or
difficulties with Yuchais management of State Holding Company
and Coomber will not recur. In addition, as described in Note 5,
Yuchai has entered into transactions that involves the Chinese
Shareholders that have resulted in losses. No assurance can be given that future transactions
involving the State Holding Company, Coomber and their related parties will be conducted on an arm-length basis or otherwise be beneficial to the Company.
Consequently, such disagreements, or difficulties and transactions involving State Holding Company, Coomber and their related parties could have a material adverse impact on the Companys consolidated financial position, operating results and cash flows.34
    
    Subsequent events(a)
    
    Acquisition of debt and equity in an investment-holding companyIn February 2006, the Company acquired S$129 million (equivalent to Rmb 626 million) in
principal amount of secured bonds (the Bonds), 123,010,555 redeemable convertible preference
shares (the Preference Shares), and 191,413,465 ordinary shares (the Ordinary Shares) (collectively, the Sale
Securities) issued by LKN for an aggregate purchase consideration of approximately S$132 million
(equivalent to approximately Rmb639 million) (the Aggregate Purchase Consideration) from certain
banks, financial institutions, corporations and individuals (collectively the Sellers). Immediately following the purchase, the Company hold 29.13% of the Ordinary Shares based on LKNs total issued and
outstanding Ordinary Shares or approximately 40.30% of the Ordinary Shares of LKN assuming full
conversion of the 123,010,555 Preference Shares.LKN is a company listed on the Main Board of the Singapore Exchange and is primarily engaged in the
business of investment holding, including investing in rental property and hospitality business in
Asia.The Company initially intends to account for the
Ordinary Shares of LKN using equity method and the Bonds and Preference Shares as
available-for-sale securities.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 
 34
    
    Subsequent events (continued)(b)
    
    Right issue of LKNOn February 28, 2006, LKN announced a proposed renounceable rights issue of zero coupon unsecured
non-convertible bonds due 2009 (the New Bonds) and non-redeemable convertible cumulative preference shares
in the capital of LKN (the New NCCPS) (the Rights
Issue). The purpose of the Rights Issue of LKN is to raise funds for redeeming the existing Bonds and for
working capital purpose. The Company has provided LKN an irrevocable undertaking to subscribe in
full and by way of excess application, all New Bonds and New NCCPS not taken up by other
stockholders of LKN.On July 4, 2006, the Company was alloted 196,201,374 of
New NCCPS and S$130,800,917 of New Bonds at a consideration of
S$135 million (equivalent to approximately
Rmb655 million). Assuming full conversion
of the existing Preference Shares and New NCCPS, the Companys
equity interest in LKN would increase from 40.3% to 51.7%. In the
event the Company obtains a controlling financial interest in LKN,
then LKN would become a subsidiary of the Company and its financial
statement would be included in the consolidated financial statements
of the Company from that point forward.(c)
    
    Rights issue of TCLIn January 2006, TCL conducted a renounceable non-underwritten rights issue of new shares (Rights
Shares) at an issue price of S$0.08 (equivalent to approximately Rmb0.39) for each Rights Share;
and a renounceable non-underwritten rights issue of unsecured 2% convertible bonds due 2009
(Convertible Bonds) in the denomination of S$0.8 (equivalent to approximately Rmb3.9) for each
Convertible Bond.On February 16, 2006, the Company was allotted 87,860,288 Rights Shares and 52,933,440 Convertible Bonds in TCL
for an aggregate cash consideration of S$49,400,000 (equivalent to approximately Rmb239,758).As a result of the rights issues, the Companys equity interest in TCL increase from 15.99% to
19.36%, and would increase to 36.85% assuming full conversion of the Convertible Bonds held by the Company.
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##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 
 34
    
    Subsequent events (continued)(d)
    
    New bank facilityIn January to March 2006, the Company entered into additional unsecured credit facilities with certain banks for
approximately S$170 million (equivalent to approximately Rmb825 million). The facilities may only
be utilized by the Company in connection with certain limited circumstances relating to its
business expansion activities. The terms of the facilities require, among other things, that HLA
retains ownership of the Companys special share and that the Company remains a consolidated
subsidiary of HLA. The terms of the facilities also include certain financial covenants with
respect to the Companys tangible net worth and net gearing ratio throughout the tenor of the
facility, as well as negative pledge provisions and customary drawdown requirements and events of
default.(e)
    
    Issuance of corporate bonds by YuchaiIn March 2006, Yuchai applied to the PBOC to issue short term bonds
up to Rmb1,000,000 (US$123,912). The application was approved by PBOC on May
30, 2006 and the first tranche of bonds of Rmb500,000 (US$61,956) was
issued on June 12, 2006. The bonds were issued at a discount
and an amount totalling
Rmb488 million was received by Yuchai. The bonds mature on
March 9, 2007 and the funds will be used to pay off existing bank loans.
 F - 58