##### Table of Contents



UNITED STATES
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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 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
 For the transition period from  to
 Commission file number 1-13522
 
 China Yuchai International Limited
 (Exact Name of Registrant as Specified in Its Charter)
 
 Not Applicable
    
    Bermuda(Translation of Registrants Name Into English)
    
    (Jurisdiction of Incorporation or Organization)
 16 Raffles Quay #26-00
Hong Leong Building
Singapore 048581
65-6220-8411
(Address and Telephone Number of Principal Executive Offices)
 
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value US$0.10 per share
    
    The New York Stock Exchange
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act
None
(Title of Class)
 
    o þ
 o þ
  o þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  U.S. GAAP þ
    
    International Financial Reporting Standards as issued o
by the International Accounting Standards Board
    
    Other o
 o þ
 o þ
   o o




---



##### 



TABLE OF CONTENTS
 CHINA YUCHAI INTERNATIONAL LIMITED
 PageCertain Definitions and Supplemental Information
    
    
    2Cautionary Statements with respect to Forward-Looking Statements
    
    
    2Part IItem 1.
    
    Identity of Directors, Senior Management and Advisers.
    
    
    4Item 2.
    
    Offer Statistics and Expected Timetable.
    
    
    4Item 3.
    
    Key Information.
    
    
    4Item 4.
    
    Information on the Company.
    
    
    18Item 4A.
    
    Unresolved Staff Comments.
    
    
    34Item 5.
    
    Operating and Financial Review and Prospects.
    
    
    34Item 6.
    
    Directors, Senior Management and Employees.
    
    
    49Item 7.
    
    Major Shareholders and Related Party Transactions.
    
    
    56Item 8.
    
    Financial Information.
    
    
    59Item 9.
    
    The Offer and Listing.
    
    
    60Item 10.
    
    Additional Information.
    
    
    61Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    71Item 12.
    
    Description of Securities Other Than Equity Securities.
    
    
    73Part IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies.
    
    
    74Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds.
    
    
    74Item 15.
    
    Controls and Procedures.
    
    
    74Item 16A.
    
    Audit Committee Financial Expert.
    
    
    77Item 16B.
    
    Code of Ethics.
    
    
    77Item 16C.
    
    Principal Accountants Fees and Services.
    
    
    78Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees.
    
    
    78Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
    
    
    78Part IIIItem 17.
    
    Financial Statements.
    
    
    79Item 18.
    
    Financial Statements.
    
    
    79Item 19.
    
    Exhibits.
    
    
    79Signatures
    
    
    81Exhibit Index
    
    
    82Consolidated 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.
  1




---



##### Table of Contents



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, our diesel engine customers, the demand, sales volume and sales prices for our
diesel engines and our levels of accounts receivable;
    
    the effects of unfavourable economic and market conditions and the current volatility
in stock markets around the world adversely impacting the entire financial industry and
capital markets resulting in a worldwide economic slowdown, on our business, operating
results and growth rates;
    
    the effects of competition in the diesel engine market on the demand, sales volume
and sales prices for our diesel engines;
    
    the effects of existing material weaknesses in our internal control over financial
reporting and our ability to implement and maintain effective internal control over
financial reporting;
    
    our ability to collect and control our levels of accounts receivable;
    
    our dependence on the Dongfeng Automobile Company and other major diesel truck
manufacturers controlled by or affiliated with the Dongfeng Automobile Company;
    
    our ability to successfully manufacture and sell our 4108, 4110, 4110Q, 4112, 4F,
4G, 6105, 6108, 6112, 6L/6M (formerly referred to as 6113) heavy-duty diesel engines and
any new products;
 2




---



##### Table of Contents




    
    our ability to finance our working capital and capital expenditure requirements,
including obtaining any required external debt or other financing;
    
    the effects of inflation on our financial condition and results of operations,
including the effects on Yuchais costs of raw materials and parts and labor costs;
    
    our ability to successfully implement the Reorganization Agreement, as amended by
the Cooperation Agreement (both as defined in Item 4. Information on the Company 
History and Development  Reorganization Agreement) (See Item 4.
Information on the Company  History and Development 
Cooperation Agreement);
    
    our ability to control Yuchai and consolidate Yuchais financial results;
    
    the effects of Chinas political, economic and social conditions on our financial
condition, results of operations, business or prospects;
    
    the effects of uncertainties in the Chinese legal system, which could limit the
legal protection available to foreign investors, including with respect to the
enforcement of foreign judgments in China;
    
    the effects of adverse economic conditions in consumer spending patterns and its
impact on the demand for the TCL groups consumer electronics products;
    
    the ability of TCL to obtain shareholders and regulatory approvals for, and
successfully implement, its announced strategy of repositioning its principal business
from consumer electronics distribution to real estate and related infrastructure
investment in the pan-Asian region;
    
    the effects of our disagreement with the other major shareholders of TCL over the
running of TCL groups operations and its proposed change in its strategy from consumer
electronics to real estate and related infrastructure investment in the pan-Asian region;
    
    the effects of changes to the international, regional and economic climate and
market conditions in countries where the HLGE groups hospitality operations are located,
as well as related global economic trends that adversely impact the travel and tourism
industries;
    
    the outbreak of communicable diseases, such as the Avian flu, if not contained, and
its potential effects on the operations of the HLGE group and its business in the
hospitality industry; and
    
    the impact of terrorism, terrorist events, airline strikes, hostilities between
countries or increased risk of natural disasters or viral epidemics that may affect
travel patterns and reduce the number of travelers and tourists to the HLGE groups
hospitality operations.
  3




---



##### Table of Contents



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
      Year ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    US$(1)(in thousands except earnings per share)Selected Consolidated Statement of Operations Data:Revenues, net
    
    
    4,569,950
    
    
    
    5,582,095
    
    
    
    5,816,740
    
    
    
    6,920,528
    
    
    
    9,556,303
    
    
    
    1,398,224Gross profit
    
    
    1,377,156
    
    
    
    1,575,209
    
    
    
    1,143,383
    
    
    
    1,272,121
    
    
    
    1,944,718
    
    
    
    284,540Research and development costs
    
    
    (94,594
    )
    
    
    (136,960
    )
    
    
    (123,793
    )
    
    
    (167,653
    )
    
    
    (153,146
    )
    
    
    (22,407
    )Provision for uncollectible loans to a
related party
    
    
    
    
    
    
    
    
    
    
    (202,950
    )
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    721,411
    
    
    
    779,929
    
    
    
    26,020
    
    
    
    304,479
    
    
    
    841,556
    
    
    
    123,132Other income/(expense), net
    
    
    (881
    )
    
    
    5,682
    
    
    
    25,449
    
    
    
    38,856
    
    
    
    53,554
    
    
    
    7,836Equity in income/(loss), net of affiliates
    
    
    
    
    
    
    
    
    
    
    (6,032
    )
    
    
    (22,449
    )
    
    
    14,048
    
    
    
    2,055Earnings / (loss) before income taxes and
minority interests
    
    
    696,906
    
    
    
    753,854
    
    
    
    (25,090
    )
    
    
    203,395
    
    
    
    783,914
    
    
    
    114,698Income taxes
    
    
    (112,924
    )
    
    
    (105,165
    )
    
    
    (10,148
    )
    
    
    (30,466
    )
    
    
    (68,518
    )
    
    
    (10,025
    )Income / (loss) before minority interests
    
    
    583,982
    
    
    
    648,689
    
    
    
    (35,238
    )
    
    
    172,929
    
    
    
    715,396
    
    
    
    104,673Minority
interests in (income) / losses of
consolidated subsidiaries
    
    
    (145,800
    )
    
    
    (157,292
    )
    
    
    2,947
    
    
    
    (61,645
    )
    
    
    (189,927
    )
    
    
    (27,789
    )Net income / (loss)
    
    
    438,182
    
    
    
    491,397
    
    
    
    (32,291
    )
    
    
    111,284
    
    
    
    525,469
    
    
    
    76,884Basic and diluted earnings / (loss) per
common share
    
    
    12.40
    
    
    
    13.90
    
    
    
    (0.89
    )
    
    
    2.99
    
    
    
    14.10
    
    
    
    2.06Weighted average number of shares
    
    
    35,340
    
    
    
    35,340
    
    
    
    36,460
    
    
    
    37,268
    
    
    
    37,268
    
    
    
    37,268
 As of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    US$(1)(in thousands)Selected Consolidated Balance Sheet Data:Working capital(2)
    
    
    1,031,830
    
    
    
    1,402,226
    
    
    
    823,324
    
    
    
    457,449
    
    
    
    1,028,732
    
    
    
    150,518Property, plant and equipment, net
    
    
    735,641
    
    
    
    1,158,931
    
    
    
    1,440,712
    
    
    
    1,795,405
    
    
    
    2,158,246
    
    
    
    315,782Trade
accounts and bills receivable, net
    
    
    849,611
    
    
    
    875,565
    
    
    
    1,178,853
    
    
    
    1,480,918
    
    
    
    3,107,785
    
    
    
    454,714Short-term
bank loans
    
    
    240,000
    
    
    
    430,000
    
    
    
    812,835
    
    
    
    1,009,134
    
    
    
    819,164
    
    
    
    119,855Trade
accounts payable
    
    
    731,966
    
    
    
    1,089,717
    
    
    
    1,800,443
    
    
    
    2,132,798
    
    
    
    2,509,962
    
    
    
    367,243
 4




---



##### Table of Contents



As of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    US$(1)(in thousands)Total assets
    
    
    4,033,632
    
    
    
    5,384,248
    
    
    
    6,679,630
    
    
    
    7,961,357
    
    
    
    9,579,184
    
    
    
    1,401,572Long-term bank loans, excluding current installments
    
    
    
    
    
    
    100,000
    
    
    
    50,000
    
    
    
    675,454
    
    
    
    767,929
    
    
    
    112,359Minority interests
    
    
    544,526
    
    
    
    724,311
    
    
    
    654,687
    
    
    
    693,296
    
    
    
    849,527
    
    
    
    124,299Total stockholders equity
    
    
    1,991,687
    
    
    
    2,483,084
    
    
    
    2,566,263
    
    
    
    2,728,399
    
    
    
    3,294,465
    
    
    
    482,027
 Year ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    US$(1)(in thousands)Selected Consolidated Statement of Cash Flows Data:Net cash provided by operating activities
    
    
    1,075,274
    
    
    
    589,608
    
    
    
    234,770
    
    
    
    634,146
    
    
    
    84,554
    
    
    
    12,371Capital expenditures(3)
    
    
    372,775
    
    
    
    552,902
    
    
    
    515,359
    
    
    
    323,781
    
    
    
    265,258
    
    
    
    38,811
 
 (1)
    
    The Companys functional currency is the U.S. dollar and its reporting currency is Renminbi.
The functional currency of Yuchai is Renminbi. Translation of amounts from Renminbi to US
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 6.8346 = US$1.00, the rate quoted by the
Peoples Bank of China at the close of business on December 31, 2008. 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 31, 2008 or any other date. The rate
quoted by the Peoples Bank of China at the close of business on December 31, 2007 was Rmb
7.3046 = US$1.00. The Renminbi has appreciated against the U.S. dollar since December 31, 2007.(2)
    
    Current assets less current liabilities.(3)
    
    Purchase of property, plant and equipment and payment for construction in
progress. Dividends
      Dividend paid by the Company
    
    Dividend paid/declared by Yuchaito its shareholders
    
    to the Company(1)Period
    
    (per share)
    
    (in thousands)2003
    
    US$2.08
    
    Rmb 61,433 (US$7,422)2004
    
    Nil
    
    Rmb 231,309 (US$27,906)(2)2005
    
    US$0.39
    
    Rmb 72,282 (US$9,039)(3)2006
    
    US$0.02 (4)
    
    Rmb 72,284 (US$9,598)(5)2007
    
    US$0.10(6)
    
    Rmb 108,313 (US$15,811)(7)2008
    
    US$0.10(8)
    
    Not yet declared
 5




---



##### Table of Contents



(1)
    
    Dividends paid by Yuchai to us, as well as to other shareholders of Yuchai, were declared in
Renminbi and paid in US dollars (as shown in parentheses) based on the exchange rates at local
designated foreign exchange banks on the respective payment dates. For dividends paid for
2003, 2004, 2005, 2006 and 2007, the exchange rate used was Rmb 8.2767 = US$1.00, Rmb 8.2765 =
US$1.00, Rmb 7.9967 = US$1.00, Rmb 7.5310 = US$1.00 and Rmb 6.8357 = US$1.00, respectively.(2)
    
    The dividend declared for 2004 by Yuchai was paid to us in 2005 following the execution of
the Reorganization Agreement (as defined in Item 4. Information on the CompanyHistory and
DevelopmentReorganization Agreement).(3)
    
    On June 26, 2006, Yuchai declared a dividend to all shareholders in respect of the fiscal
year ended December 31, 2005 and the amount attributable to the Company was Rmb 72.3 million.
We received this dividend on July 28, 2006.(4)
    
    On December 4, 2006, we declared an interim dividend to all shareholders in respect of the
fiscal year ended December 31, 2006. This dividend was paid to the shareholders on December
28, 2006.(5)
    
    The dividend declared for 2006 by Yuchai was paid to us on September 17, 2007.(6)
    
    On September 28, 2007, we declared a second interim dividend of US$0.10 per ordinary share
amounting to US$3.7 million to all shareholders in respect of the fiscal year ended December
31, 2006. This dividend was paid to the shareholders on October 24, 2007.(7)
    
    The dividend declared for 2007 by Yuchai was paid to us on August 22, 2008.(8)
    
    On August 25, 2008, we declared an interim dividend of US$0.10 per ordinary share amounting
to US$3.7 million to all shareholders in respect of the fiscal year ended December 31, 2007.
This dividend was paid to the shareholders on September 19, 2008. Historical Exchange Rate Information
   Noon Buying Rate(1)(Rmb per US$1.00)Period
    
    High
    
    LowDecember 2007
    
    
    7.4120
    
    
    
    7.2946January 2008
    
    
    7.2946
    
    
    
    7.1818February 2008
    
    
    7.1973
    
    
    
    7.1100March 2008
    
    
    7.1075
    
    
    
    7.0105April 2008
    
    
    7.0185
    
    
    
    6.9840May 2008
    
    
    7.0000
    
    
    
    6.9377June 2008
    
    
    6.9633
    
    
    
    6.8591July 2008
    
    
    6.8632
    
    
    
    6.8104August 2008
    
    
    6.8705
    
    
    
    6.7800September 2008
    
    
    6.8510
    
    
    
    6.7810October 2008
    
    
    6.8521
    
    
    
    6.8171November 2008
    
    
    6.8373
    
    
    
    6.8220December 2008
    
    
    6.8842
    
    
    
    6.8225
 Noon Buying Rate(1)(Rmb per US$1.00)Period
    
    Period End
    
    Average(2)
    
    High
    
    Low2002
    
    
    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
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.29462008 (through December 31, 2008)
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    7.2946
    
    
    
    6.7800
 
 (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 PBOC. As 6




---



##### Table of Contents



a result, since April 1994,
the noon buying rate and the PBOC rate have been substantially similar. The PBOC rate at the
end of 2007 was Rmb 7.3046, compared with Rmb 7.5806 for the noon buying rate (average) for
the year ended December 31, 2007. The PBOC rate at the end of
2008 was Rmb 6.8346, compared with Rmb 6.9193 for the noon
buying rate (average) for the year ended December 31, 2008.(2)
    
    Determined by averaging the rates on the last business day of each month during the relevant
period. Risk Factors
 Risks relating to our shares and share ownership
 Our controlling shareholders interests may differ from those of our other shareholders.
  We may experience a change of control as a result of sale or disposal of shares of our Common Stock
by our controlling shareholders.
   The market price for our Common Stock may be volatile.
  
    
    our interim operating results;
    
    the availability of raw materials used in our engine production, particularly steel
and cast iron;
    
    the publics reaction to our press releases and announcements and our filings with
the Securities and Exchange Commission;
    
    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, especially the impact of the global
financial crisis on economic growth;
    
    future sales of our Common Stock in the public market, or the perception that such
sales could occur; or
 7




---



##### Table of Contents




    
    the announcement by us or our competitors of a significant acquisition.
  Risks relating to our company and our business
 The diesel engine business in China is dependent in large part on the performance of the
Chinese and the global 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 and the global economy, as well as Chinese government policies affecting our
business.
   (Source: China
Automotive Industry Newsletter for 2006) (Source: China Automotive
Industry Newsletter for 2007)
 8




---



##### Table of Contents



Our financial condition, results of operations, business and prospects may be adversely affected if
we are unable to implement the Reorganization Agreement and the Cooperation Agreement.
   We have and may continue to experience disagreements and difficulties with the Chinese shareholders
in Yuchai.
  9




---



##### Table of Contents



We have identified material weaknesses in our internal control over financial reporting and cannot
assure you that additional material weaknesses will not be identified in the future. Our failure to
implement and maintain effective internal control over financial reporting could result in material
misstatements in our financial statements which could require us to restate financial statements in
the
future, or cause us not to be able to provide timely financial information, which may cause
investors to lose confidence in our reported financial information and have a negative effect on
our stock price.
   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.
    10




---



##### Table of Contents



Competition in China from other diesel engine manufacturers may adversely affect our financial
condition, results of operations, business or prospects.
  
    
    improvements in competitors products;
    
    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.
  11




---



##### Table of Contents




    
    obtaining the necessary supplies, including the availability of raw materials;
    
    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;
    
    controlling production costs; and
    
    obtaining adequate funding on commercially reasonable terms for future growth.
  If we are not able to continuously improve our existing engine products and develop new diesel
engine products or successfully enter into other market segments, we may become less competitive,
and our financial condition, results of operations, business and prospects will be adversely
affected.
    We may be unable to obtain sufficient financing to fund our capital requirements which could limit
our growth potential.
  12




---



##### Table of Contents



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.
   If Chinas inflation increases or the prices of energy or raw materials increase, we may not be
able to pass the resulting increased costs to our customers and this may adversely affect our
profitability or cause us to suffer operating losses.
  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.
  13




---



##### Table of Contents



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 protection available to
foreign investors.
  14




---



##### Table of Contents



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.
   Outbreaks of infectious diseases, such as severe acute respiratory syndrome (SARS) and the Avian
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.
  Risks relating to our investments in HLGE and TCL
  The HLGE groups hotel ownership and management business may be adversely affected by risks
inherent in the hotel industry.
  15




---



##### Table of Contents




    
    changes to the international, regional and local economic climate and market
conditions (including, but not limited to; changes to regional and local populations,
changes in travel patterns and preferences, and oversupply of or reduced demand for hotel
rooms that may result in reduced occupancy levels and performance for the hotels it
operates);
    
    changes to the political, economic, legal or social environments of the countries
in which the HLGE group operates (including developments with respect to inflation,
interest rates, currency fluctuations, governmental policies, real estate laws and
regulations, taxation, fuel costs, expropriation, including the impact of the current
global financial crisis);
    
    increased threat of terrorism, terrorist events, airline strikes, hostilities
between countries or increased risk of natural disasters or viral epidemics that may
affect travel patterns and reduce the number of travelers and tourists;
    
    changes in laws and governmental regulations (including those relating to the
operation of hotels, preparation and sale of food and beverages, occupational health and
safety working conditions and laws and regulations governing its relationship with
employees);
    
    competition from other international, regional and independent hotel companies,
some of which may have greater name recognition and financial resources than the HLGE
group (including competition in relation to hotel room rates, convenience, services or
amenities offered);
    
    losses arising out of damage to the HLGE groups hotels, where such losses may not
be covered by the insurance policies maintained by the HLGE group;
    
    increases in operating costs due to inflation, labor costs (including the impact of
unionization), workers compensation and health-care related costs, utility costs,
insurance and unanticipated costs such as acts of nature and their consequences;
    
    fluctuations in foreign currencies arising from the HLGE groups various currency
exposures;
    
    dependence on leisure travel and tourism;
    
    the outbreak of communicable diseases, such as the Avian flu, which if not
contained, could potentially adversely affect the operations of the HLGE group and its
business in the hospitality industry; and
    
    adverse effects of a downturn in the hospitality industry.
  The hospitality business is a regulated business.
  TCL groups proposed new strategy of repositioning its principal business from consumer electronics
distribution to real estate and related infrastructure investment in pan-Asian region may not be
successful.
  16




---



##### Table of Contents



The TCL groups principal business involves the distribution of third party branded and proprietary
branded consumer electronic products with operations mainly in the PRC (including Hong Kong). This
business is highly competitive and faces significant competition from other renowned brands.
     Both the HLGE group and the TCL group may need to raise additional capital.
  The HLGE group may be unable to raise sufficient funds to pay their debt obligations to us.
  17




---



##### Table of Contents



ITEM 4. INFORMATION ON THE COMPANY.
 History and Development
 The Company
         
    
    Through our 76.4% interest in Yuchai, we primarily conduct our manufacturing and
sale of diesel engines which are mainly distributed in the PRC market;
    
    As of December 31, 2008, we had a 45.39% equity interest in HLGE. The HLGE group is
engaged in hospitality and property development activities conducted mainly in the PRC
and Malaysia; and
    
    As of December 31, 2008, we had a 34.42% equity interest in TCL as a result of
issuance of additional ordinary shares by TCL pursuant to the exercise of options and
convertible securities. As of December 31, 2007, we had a 34.42% interest in
 18




---



##### Table of Contents



TCL. The TCL
group primarily conducts distribution of consumer electronic products with operations
mainly in the PRC (including Hong Kong). TCL also has other business activities relating
to contract manufacturing, property development and investment in the PRC.
    Yuchai
       19




---



##### Table of Contents



Reorganization Agreement
   Cooperation Agreement
   20




---



##### Table of Contents



Products and Product DevelopmentYuchai
   New Products
        21




---



##### Table of Contents



SeriesTrucks
    
    YC4D, YC4E, YC4F, YC4G, YC6A, YC6GBus
    
    YC6M Mono-fuel, YC6M, YC6L, YC6J, YC6J mono-fuel, YC6GConstruction
    
    YC4B, YC4F, YC6J125G, YC6M, YC4108G/ZG, YC6108G/ZGAgriculture
    
    YC4AT, YC4BT, YC6AT, YC6BT, YC4BT, YC4FMarine
    
    YC6112, YC6015/08, YC4108C, YC6M, YC6A/6BG-Drive
    
    YC4D, YC6A190D(A8100), YC6A225D(A8500), YC6B125D, YC6B145D, YC6B180D, YC6B150D, YC6M,
YC6T600L
 Light-Duty Diesel Engines
 4-Series Light-Duty Diesel Engines
  
    
    The 4110Q engines were developed primarily to compete in the
light-duty diesel
engine market. Sales of the 4110 engines in 2000 were weak due to strong competition,
minor technical problems and a high pricing structure.
    
    The 4108 engine was launched in the market in 2001 based on the 6105 and the 6108
engines. The 4108 engine is designed for light trucks and passenger vehicles and
commercial production of the 4108 engine began in 2001.
 22




---



##### Table of Contents




    
    The 4112 engine was primarily based on the 6112 engine and is designed for use in
light to medium-duty cargo trucks and buses. The 4112 engine also features a low
emission level that is compliant with Euro II standards. Commercial production of the
4112 engine began in late 2001.
    
    The 4F/4G engine is a four-cylinder, four-stroke engine with a rated power ranging
from 90 to 115 horsepower. The 4F/4G diesel engines were developed based on technologies
from Germany and Japan for mini buses, trucks and passenger cars. Trial production of 4F
engines commenced in mid-2004.
  Medium-Duty Diesel Engines
 6105 Medium-Duty Diesel Engines
  6108 Medium-Duty Diesel Engines
   Heavy-Duty Diesel Engines
 6112 Heavy-Duty Diesel Engines
    23




---



##### Table of Contents



6L Heavy-Duty Diesel Engines
  6M Heavy-Duty Diesel Engines
  Industrial Engines
  Other Products
 Diesel Power Generators
  Special Vehicles
  Diesel Engine Parts
  Sales
   24




---



##### Table of Contents



2005
    
    2006
    
    2007% of
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    % ofRevenues,
    
    Revenues,
    
    Units
    
    Revenues,
    
    Revenues,
    
    Units
    
    Revenues,
    
    Revenues,
    
    Unitsnet
    
    net
    
    Sold
    
    net
    
    net
    
    Sold
    
    net
    
    net
    
    SoldRmb (in thousands)
    
    Rmb (in thousands)
    
    Rmb (in thousands)Diesel engines6105
    
    
    1,744,953
    
    
    
    30.0
    %
    
    
    69,379
    
    
    
    1,705,399
    
    
    
    24.6
    %
    
    
    66,627
    
    
    
    2,132,590
    
    
    
    22.3
    %
    
    
    80,5676108
    
    
    809,054
    
    
    
    13.9
    %
    
    
    37,560
    
    
    
    991,190
    
    
    
    14.3
    %
    
    
    45,562
    
    
    
    1,424,391
    
    
    
    14.9
    %
    
    
    64,2486112
    
    
    785,236
    
    
    
    13.5
    %
    
    
    14,788
    
    
    
    725,288
    
    
    
    10.5
    %
    
    
    14,150
    
    
    
    643,373
    
    
    
    6.7
    %
    
    
    12,7416L
    
    
    46,501
    
    
    
    0.8
    %
    
    
    782
    
    
    
    98,060
    
    
    
    1.4
    %
    
    
    1,526
    
    
    
    312,268
    
    
    
    3.3
    %
    
    
    5,0796M
    
    
    146,349
    
    
    
    2.5
    %
    
    
    3,471
    
    
    
    267,657
    
    
    
    3.9
    %
    
    
    6,654
    
    
    
    564,909
    
    
    
    5.9
    %
    
    
    14,2964-Series
    
    
    1,551,319
    
    
    
    26.7
    %
    
    
    103,598
    
    
    
    2,222,531
    
    
    
    32.1
    %
    
    
    148,941
    
    
    
    3,258,449
    
    
    
    34.1
    %
    
    
    206,558Diesel power generators &
others(1)
    
    
    733,328
    
    
    
    12.6
    %
    
    
    650
    
    
    
    910,403
    
    
    
    13.2
    %
    
    
    123
    
    
    
    1,220,323
    
    
    
    12.8
    %
    
    
    1885,816,740
    
    
    
    100.0
    %
    
    
    230,228
    
    
    
    6,920,528
    
    
    
    100.0
    %
    
    
    283,583
    
    
    
    9,556,303
    
    
    
    100.0
    %
    
    
    383,677
 
 (1)
    
    Others mainly represent the revenues earned through sales of motor vehicle chassis
and power generators, and from guarantee fees. Production
    2003
    
    2004
    
    2005
    
    2006
    
    2007% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % oftotal
    
    
    
    
    
    total
    
    
    
    
    
    total
    
    
    
    
    
    total
    
    
    
    
    
    totalUnits
    
    units
    
    Units
    
    units
    
    Units
    
    units
    
    Units
    
    units
    
    Units
    
    unitsDiesel Engines:6105
    
    
    43,325
    
    
    
    24.0
    %
    
    
    55,910
    
    
    
    24.4
    %
    
    
    70,052
    
    
    
    29.2
    %
    
    
    66,439
    
    
    
    23.9
    %
    
    
    82,345
    
    
    
    21.4
    %6108
    
    
    64,054
    
    
    
    35.5
    %
    
    
    62,394
    
    
    
    27.2
    %
    
    
    35,627
    
    
    
    14.8
    %
    
    
    39,057
    
    
    
    14.1
    %
    
    
    66,526
    
    
    
    17.3
    %6112
    
    
    22,024
    
    
    
    12.2
    %
    
    
    27,410
    
    
    
    12.0
    %
    
    
    15,990
    
    
    
    6.7
    %
    
    
    14,358
    
    
    
    5.2
    %
    
    
    12,996
    
    
    
    3.4
    %6L
    
    
    129
    
    
    
    0.1
    %
    
    
    1,444
    
    
    
    0.6
    %
    
    
    1,008
    
    
    
    0.4
    %
    
    
    1,366
    
    
    
    0.5
    %
    
    
    5,618
    
    
    
    1.5
    %6M
    
    
    55
    
    
    
    0.0
    %
    
    
    1,594
    
    
    
    0.7
    %
    
    
    5,991
    
    
    
    2.5
    %
    
    
    7,331
    
    
    
    2.6
    %
    
    
    15,830
    
    
    
    4.1
    %4-Series
    
    
    50,836
    
    
    
    28.2
    %
    
    
    80,458
    
    
    
    35.1
    %
    
    
    111,393
    
    
    
    46.4
    %
    
    
    149,347
    
    
    
    53.7
    %
    
    
    201,204
    
    
    
    52.3
    %Total
    
    
    180,423
    
    
    
    100.0
    %
    
    
    229,210
    
    
    
    100.0
    %
    
    
    240,061
    
    
    
    100.0
    %
    
    
    277,898
    
    
    
    100.0
    %
    
    
    384,519
    
    
    
    100.0
    %
 25




---



##### Table of Contents



Procurement
  Engine Block
  Pump
   Raw Materials
  Imports
   Quality Assurance, Control & Safety
   Manufacturing Capacity Expansions
   26




---



##### Table of Contents



Research and Development
  Future Products
   Sales, Marketing and Services
 Sales and Marketing
     27




---



##### Table of Contents



2005
    
    2006
    
    2007% of
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    % ofSales
    
    Sales
    
    Unit
    
    Sales
    
    Sales
    
    Unit
    
    Sales
    
    Sales
    
    UnitRevenue
    
    Revenue
    
    Sales
    
    Revenue
    
    Revenue
    
    Sales
    
    Revenue
    
    Revenue
    
    SalesRmb
    
    
    
    
    
    
    
    
    
    Rmb
    
    
    
    
    
    
    
    
    
    Rmb(in thousands)
    
    
    
    
    
    
    
    
    
    (in thousands)
    
    
    
    
    
    
    
    
    
    (in thousands)Total Domestic
Sales
    
    
    5,703,360
    
    
    
    98.05
    %
    
    
    226,073
    
    
    
    6,893,551
    
    
    
    99.6
    %
    
    
    282,516
    
    
    
    9,533,767
    
    
    
    99.8
    %
    
    
    382,810Total Export
Sales
    
    
    113,380
    
    
    
    1.95
    %
    
    
    4,155
    
    
    
    26,977
    
    
    
    0.4
    %
    
    
    1,067
    
    
    
    22,536
    
    
    
    0.2
    %
    
    
    8675,816,740
    
    
    
    100.0
    %
    
    
    230,228
    
    
    
    6,920,528
    
    
    
    100.0
    %
    
    
    283,583
    
    
    
    9,556,303
    
    
    
    100.0
    %
    
    
    383,677
     Customer Service
   28




---



##### Table of Contents



Trademarks
  Competition
     29




---



##### Table of Contents



The HLGE group
   Investment holding activities
  Hospitality operations
  
    
    Hotel Equatorial ShanghaiHotel Equatorial Shanghai is located in the heart of Shanghai. The property has more
than 500 saleable guest rooms which have all been fully refurbished over the last 18
months and a new lounge. Other facilities comprise six food and beverage outlets,
ballroom space and a health club.
    
    Copthorne Hotel QingdaoThe property is located in the commercial district of Qingdao. The property has
approximately 450 saleable guest rooms, and has restaurants and bars, ball rooms and
function rooms, entertainment facilities, offices and retail space.
    
    Changning Equatorial Service ApartmentsThe property comprises a 16-storey building located in the downtown Shanghai. The
property has approximately 125 apartment units, a self-service launderette, meeting
rooms and a business centre. In September 2008, the business operation was temporarily
closed for major renovations and is anticipated to re-open in June 2009.
    
    Hotel Equatorial Cameron
 30




---



##### Table of Contents



The property is a tudor styled resort comprising more than 100 self-contained low-rise
and high-rise units. Each suite is equipped with a living room, a kitchenette and a
balcony. The hotel tower comprises 270 saleable guest rooms.
 Renovation and maintenance
 The TCL group
  Third party branded products
  Proprietary branded products
  Distribution network
  Competition
  Other businesses
  31




---



##### Table of Contents



Organizational Structure
  
 32




---



##### Table of Contents



Regulatory and Related Matters
 Governance, Operation and Dissolution of Yuchai
  force majeure
  Property, Plant and Equipment
  Environmental Matters
  33




---



##### Table of Contents



ITEM 4A. UNRESOLVED STAFF COMMENTS.
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
    Business Expansion and Diversification Plan
  Thakral Corporation Ltd (TCL)
 
    
    The first step in implementing this plan occurred in March 2005 when through our
wholly-owned subsidiary, Venture Delta, we acquired a 15.0% equity interest in TCL for a
consideration of approximately S$30.9 million. In September 2005, Venture Delta acquired
an additional 1.0% equity interest in TCL for a consideration of S$1.4 million. As a
result, we held a 16.0% stake in TCL as of December 31, 2005.
    
    In February 2006, we increased our interest in TCL to 19.4% through an acquisition
by Venture Delta of ordinary shares and convertible bonds of TCL pursuant to a rights
issue by TCL for an aggregate cash consideration of approximately S$49.4 million
(approximately US$36.3 million). Venture Delta converted all of its TCL convertible bonds
into TCL ordinary shares in August 2006 and, as a result of the conversion, triggered the
mandatory conditional cash offers under The Singapore Code on Take-over and Mergers for
all of the TCL ordinary shares and TCL bonds which Venture Delta did not already own,
control or agree to acquire. The mandatory offers lapsed on October 20, 2006 and no
securities were purchased by Venture Delta.
    
    As of December 31, 2006, our interest in TCL was 36.6% of TCLs outstanding
ordinary shares and our aggregate investment in TCL amounted to approximately S$81.7
million (approximately US$60.0 million), before taking into account dividends and
interest income of approximately S$1.9 million (approximately US$1.4 million), in the
aggregate, earned from these investments.
    
    As of December 31, 2007, our interest in TCL was 34.4% of TCLs outstanding
ordinary shares and our aggregate investment in TCL amounted to approximately S$81.7
million (approximately US$60.0 million), before taking into account dividends and
interest income of approximately S$1.9 million (approximately US$1.4 million), in the
aggregate, earned from these investments. On September 2, 2008, Venture Delta transferred
0.04% interest in TCL to Grace Star. As of December 31, 2008, our interest in TCL
remained unchanged.
 34




---



##### Table of Contents




    
    TCL announced in May 2008 that it plans to reposition its principal business from
consumer electronics distribution to real estate and related infrastructure investment in
the pan-Asian region. TCL also announced that TCL may divest those assets that will no
longer form part of its core activity going forward. This plan is subject to TCL
receiving any required regulatory and shareholders approvals. On December 3, 2008, TCL
announced that its Board of Directors had approved by a majority vote, with the nominee
directors of Venture Delta and Grace Star voting against, the
execution of the MOU with Payce Consolidated Limited, to enter into transactions in
connection with certain properties located in Sydney, Australia. The investment amount by
TCL is to be funded through a combination of cash, the issue of new shares in TCL and
options to subscribe for TCL shares, and external debt. The MOU is subject to definitive
agreements being entered into as well as fulfillment of certain conditions precedent
including regulatory and shareholders approval, completion of satisfactory due diligence
and obtaining of financing on acceptable terms. There is no assurance that such approvals
will be obtained. Even if such approvals are obtained, there is no assurance that this
repositioning of TCLs business will be successful or profitable. As a result of our
disagreement with this new proposed strategy of TCL and the unsuccessful outcome of an
extraordinary general meeting requisitioned by us which was convened on October 15, 2008,
the Company is currently considering its options in relation to its investment in the TCL
group. See Item 3  Risk Factors  Risks relating to our investments in HLGE and
TCL.
    
    We continue to account for our investment in TCL using the equity method and we
have continued to reflect our proportionate share of the TCL groups results in our
consolidated statement of operations since March 2005.
 HL Global Enterprises Limited (formerly known as HLG Enterprise Limited) (HLGE)
 
    
    In February 2006, through the following wholly-owned subsidiaries, we also acquired
debt and equity securities in HLGE for an aggregate consideration of approximately
S$132.0 million (approximately US$96.7 million):
 (a)
    
    Grace Star acquired
 i.
    
    191,413,465 ordinary shares representing approximately
29.1% of the total number of HLGEs ordinary shares at that time,ii.
    
    15,376,318 Series A redeemable convertible preference
shares in the capital of HLGE, or the Existing HLGE RCPS A. The Existing
HLGE RCPS A are mandatorily redeemable by HLGE upon the disposal of certain
properties and upon any new issue of HLGE ordinary shares with the purpose
of raising funds for the redemption of Existing HLGE RCPS A. Any outstanding
Existing HLGE RCPS A will be mandatorily redeemed in March 2015. The
Existing HLGE RCPS A can also be converted into ordinary shares at the
conversion ratio of 1:1 upon the passing of a special resolution at a
meeting of the holders of Existing HLGE RCPS A at any time prior to March
2015.iii.
    
    107,634,237 Series B redeemable convertible preference
shares in the capital of HLGE, or the Existing HLGE RCPS B (and together
with the Existing HLGE RCPS A, the Existing HLGE RCPS). The Existing HLGE
RCPS B are neither mandatorily redeemable nor redeemable at the option of
the Company. Any Existing HLGE RCPS B, which are not redeemed prior to March
2010, are mandatorily converted to ordinary shares at the conversion ratio
of 1:1 in March 2010. The Existing HLGE RCPS B are redeemable upon the
disposal of certain properties and upon any new issue of HLGE ordinary
shares with the purpose of raising funds for the redemption of Existing HLGE
RCPS B. The Existing HLGE RCPS B can also be converted into ordinary shares
at the conversion ratio of 1:1 upon the passing of a special resolution at a
meeting of the holders of Existing HLGE RCPS B at any time prior to March
2010.
 (b)
    
    Venture Lewis acquired approximately S$129.4 million (approximately
US$95.1 million) in principal amount of outstanding secured non-convertible bonds
issued by HLGE, or the Existing HLGE Bonds.
 
    
    In June and December of 2006, HLGE partially redeemed a portion of Existing HLGE
RCPS A and Existing HLGE RCPS B as required by the terms of the preference share
agreement as a result of the disposals of certain assets. The proceeds from the partial
redemptions amounted to approximately S$2.4 million (approximately US$1.6 million) and
resulted in a reduction in the number of Existing HLGE RCPS that we held from 123,010,555
to 113,159,191.
    
    In July 2006, pursuant to a rights issue by HLGE, through Grace Star and Venture
Lewis, respectively, we were allotted 196,201,374 non-redeemable convertible cumulative
preference shares, or the New HLGE NCCPS, and S$130,800,917 in principal amount of zero
coupon unsecured non-convertible bonds due 2009 in HLGE, or the New HLGE Bonds, for an
aggregate consideration of approximately S$135.0 million (approximately US$99.0 million).
In conjunction with the allotment, the Existing HLGE Bonds were redeemed by HLGE at their
principal value of S$129.4 million. At settlement,
 35




---



##### Table of Contents



the aggregate consideration payable by the Company to HLGE of S$134.7 million was partially offset against S$129.4 million
payable by HLGE to the Company, and the balance of S$5.3 million (approximately US$3.9
million) was paid by the Company in cash.
    
    In November 2006, Grace Star converted all of its 196,201,374 New HLGE NCCPS into
HLGE ordinary shares resulting in an increase in its equity interest in HLGE from 29.1%
to 45.42% thereby triggering the mandatory conditional cash offers under The Singapore
Code on Take-over and Mergers for all the HLGE ordinary shares, the Existing HLGE RCPS
and the New HLGE NCCPS which Grace Star did not already own, control or agree to acquire.
The mandatory offers lapsed on December 27, 2006 and no securities were purchased by Grace
Star.
 
    
    As of December 31, 2006, we held (i) 387,614,839 HLGE ordinary shares,
representing approximately 45.42% of the total number of HLGE ordinary shares; (ii)
113,159,191 Existing HLGE RCPS; and (iii) S$130,800,917 in principal amount of the New
HLGE Bonds. Our aggregate investment in HLGE to-date amounted to approximately S$136.9
million (approximately US$100.6 million), before taking into account previous interest
income earned from these investments and partial redemption of the Existing HLGE RCPS
of approximately S$6.7 million (approximately US$4.9 million) in aggregate.
    
    On June 19, 2007, HLGE made a partial redemption of the New HLGE Bonds. The
principal amount redeemed was approximately S$17.9 million (approximately US$13.2
million) and resulted in a reduction in the principal amount of the New HLGE Bonds
that we held from S$130,800,917 to S$112,886,727. The Company had engaged an
independent professional valuer, to value the financial instruments acquired as at
June 19, 2007 (before redemption) and as at December 31, 2007. The fair value is
determined by discounting the expected payments to the valuation date using a discount
rate commensurate with the risk of the payments.
 
    
    As of December 31, 2007, we held (i) 387,614,839 HLGE ordinary shares, representing
approximately 45.39% of the total number of HLGE ordinary shares;
(ii) 13,957,233 Existing HLGE RCPS A; (iii) 99,201,958 Existing HLGE RCPS B; and (iv) S$112,886,727 in
principal amount of the New HLGE Bonds. Our aggregate investment in HLGE to-date amounted
to approximately S$136.5 million (approximately US$100.6 million), before taking into
account previous interest income earned from these investments and partial redemption of
the Existing HLGE RCPS of approximately S$6.7 million (approximately US$4.9 million) in
aggregate.
    
    In April 2008, HLGE made an additional partial redemption of the Existing HLGE
RCPS B. The redemption amount we received amounted to approximately S$0.98 million
(approximately US$0.7 million) on April 30, 2008 and resulted in a reduction in the
number of Existing HLGE RCPS that we held from 113,159,191 to 107,186,403.
    
    In June 2008, HLGE made another partial redemption of the New HLGE Bonds. The
principal amount redeemed was approximately S$28.5 million
(approximately US$20.9 million) and resulted in a reduction in the principal amount of the New HLGE Bonds that
we held from S$112,886,727 to S$87,010,673.We account for our investment in HLGE ordinary shares using the equity method and have
reflected our proportionate share of the HLGE groups results in our consolidated
statement of operations since February 2006.
    
    Assuming the full conversion of the Existing HLGE RCPS held by Grace Star, which
would trigger the full conversion of the Existing HLGE RCPS by the other holders of the
Existing HLGE RCPS, and assuming that none of the other holders of the New HLGE NCCPS
convert their New HLGE NCCPS, our equity interest in HLGE would
increase from 45.39% as
of December 31, 2008 to 51.7%. In the event we obtain a majority of the voting
equity interest in HLGE, we would likely have to consolidate HLGE in
our financial statements.
    
    Venture Lewis is currently in discussions with HLGE on the options available upon
expiry of the new HLGE Bonds in July 2009. See Item 3. Key
Information  Risk Factors  Risks relating to our
investments in HLGE and TCL  The HLGE Group may be unable to
raise sufficient funds to pay their debt obligations to us.
 Overview
   36




---



##### Table of Contents



37




---



##### Table of Contents



Critical Accounting Policies
    
    
    allowances for doubtful accounts and loans receivable;
    
    realization of the carrying value of inventories;
    
    product warranty obligations;
    
    recoverability of the carrying values of equity method investments and other
investments;
    
    realization of deferred tax assets;
    
    impairment of long-lived assets; and
    
    provision for loss contingency for guarantees granted by YEGCL.
 38




---



##### Table of Contents



Allowances for doubtful accounts
   December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$(in thousands)Balance at beginning of year
    
    
    107,457
    
    
    
    69,047
    
    
    
    90,365
    
    
    
    13,222Add: Charge/(credit) to consolidated
statements of operations
    
    
    25,587
    
    
    
    21,582
    
    
    
    (11,008
    )
    
    
    (1,611
    )Less: Written off
    
    
    (63,997
    )
    
    
    (264
    )
    
    
    (14,464
    )
    
    
    (2,116
    )Balance at end of year
    
    
    69,047
    
    
    
    90,365
    
    
    
    64,893
    
    
    
    9,495
    Realization of the carrying value of inventories
   Product warranty obligations
  39




---



##### Table of Contents



December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$(in thousands)Balance at beginning of year
    
    
    126,114
    
    
    
    142,126
    
    
    
    163,701
    
    
    
    23,952Add: Provision charged to consolidated statements of operations
    
    
    179,184
    
    
    
    200,892
    
    
    
    233,838
    
    
    
    34,214Less: Amounts utilized
    
    
    (163,172
    )
    
    
    (179,317
    )
    
    
    (202,641
    )
    
    
    (29,650
    )Balance at end of year
    
    
    142,126
    
    
    
    163,701
    
    
    
    194,898
    
    
    
    28,516
  Recoverability of carrying values of equity method investments and other investments
    Realization of deferred tax assets
   40




---



##### Table of Contents



Impairment of long-lived assets, other than goodwill
   Provision for loss contingency for guarantees granted by YEGCL
     41




---



##### Table of Contents



Results of Operations
  Percentage of Net RevenuesYear Ended December 31,2005
    
    2006
    
    2007Revenues, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    80.3
    %
    
    
    81.6
    %
    
    
    79.6
    %Gross profit
    
    
    19.7
    %
    
    
    18.4
    %
    
    
    20.4
    %Research and development costs
    
    
    2.1
    %
    
    
    2.4
    %
    
    
    1.6
    %Selling,
general and administrative (SG&A) expenses
    
    
    13.6
    %
    
    
    11.5
    %
    
    
    10.0
    %Provision for uncollectible loans to a related party
    
    
    3.5
    %
    
    
    
    
    
    
    Operating income
    
    
    0.4
    %
    
    
    4.4
    %
    
    
    8.9
    %Interest expense
    
    
    1.2
    %
    
    
    1.7
    %
    
    
    1.3
    %Equity in
net income/(losses), net of affiliates
    
    
    0.1
    %
    
    
    0.3
    %
    
    
    Other income, net
    
    
    0.4
    %
    
    
    0.5
    %
    
    
    0.6
    %Earnings / (loss) before income taxes and minority interests
    
    
    (0.4
    )%
    
    
    2.9
    %
    
    
    8.2
    %Income taxes
    
    
    (0.2
    )%
    
    
    (0.4
    )%
    
    
    (0.7
    )%Income / (loss) before minority interests
    
    
    (0.6
    )%
    
    
    2.5
    %
    
    
    7.5
    %Minority
interests in (income) / loss of consolidated subsidiaries
    
    
    0.1
    %
    
    
    (0.9
    )%
    
    
    (2.0
    )%Net income / (loss)
    
    
    (0.6
    )%
    
    
    1.6
    %
    
    
    5.5
    %
 2007 Compared to 2006
     42




---



##### Table of Contents



(US$5.1
million)
  2006 Compared to 2005
   43




---



##### Table of Contents



Inflation
  Seasonality
  44




---



##### Table of Contents



Liquidity and Capital Resources
     45




---



##### Table of Contents



For Year ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$(in thousands)Net cash provided by operating activities
    
    
    234,770
    
    
    
    634,146
    
    
    
    84,554
    
    
    
    12,371Net cash used in investing
activities
    
    
    (669,311
    )
    
    
    (1,289,944
    )
    
    
    (168,503
    )
    
    
    (24,654
    )Net cash provided/(used in) by financing
activities
    
    
    452,777
    
    
    
    670,640
    
    
    
    (135,061
    )

    
    
    (19,762
    )Effect of foreign currency exchange on
cash and cash equivalents
    
    
    (4,713
    )
    
    
    (5,104
    )
    
    
    (5,978
    )
    
    
    (874
    )Net increase/(decrease) in cash and cash
equivalents
    
    
    13,523
    
    
    
    9,738
    
    
    
    (224,988
    )
    
    
    (32,919
    )
         46




---



##### Table of Contents



Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 YearsRmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb(in millions)Short-term
debt(1)
    
    
    829.0
    
    
    
    829.0
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt(1)
    
    
    820.0
    
    
    
    480.5
    
    
    
    339.5
    
    
    
    
    
    
    
    Purchase obligations regarding capital expenditures
    
    
    112.9
    
    
    
    112.9
    
    
    
    
    
    
    
    
    
    
    
    Purchase of
Yulin Hotel Company(2)
    
    
    245.6
    
    
    
    245.6
    
    
    
    
    
    
    
    
    
    
    
    Lease commitments
    
    
    12.1
    
    
    
    5.4
    
    
    
    6.7
    
    
    
    
    
    
    
    Total
    
    
    2,019.6
    
    
    
    1,673.4
    
    
    
    346.2
    
    
    
    
    
    
    
    
 
 (1)
    
    Includes contractual interest payments(2)
    
    This purchase obligation was settled in March 2008 through
offset of certain loans and receivables due from YMCL. Capital Expenditures
  47




---



##### Table of Contents



Off-Balance Sheet Arrangements
    Research and Development
  Recently Issued Accounting Standards
 SFAS No. 157
  SFAS No. 159
  EITF
Issue No. 07-3
 Accounting for Nonrefundable Advance
Payment for Goods or Services Received for Use in Future Research and Development Activities
 48




---



##### Table of Contents



SFAS No. 141
  SFAS No. 160
  SFAS No. 161
  FSP
EITF 03-6-1
  
 ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.Directors and Executive Officers of the Company
  49




---



##### Table of Contents



Year First Elected orAppointed DirectorName
    
    Position
    
    or OfficerTEO Tong Kooi(1)(2) (5)
    
    President and Director
    
    2004GAN Khai Choon (1) (5)
    
    Director
    
    1995KWEK Leng Peck(1)(3)
    
    Director
    
    1994NEO Poh Kiat (1)(3)(4)
    
    Director
    
    2005TAN Aik-Leang(1)(4)
    
    Director
    
    2005Matthew RICHARDS(3)(4)
    
    Director
    
    2006YAN Ping(1)
    
    Director
    
    2007ZHANG Shi Yong(1)
    
    Director
    
    2007
 Year First Elected orAppointed DirectorName
    
    Position
    
    or OfficerTAN Wan Hong(1) (6)
    
    Chief Operating Officer
    
    2008HOH Weng Ming
    
    Chief Financial Officer
    
    2008FOO Shing Mei Deborah
    
    General Counsel
    
    2007Ira Stuart OUTERBRIDGE III
    
    Secretary
    
    2001
 
 Mr. Gao Jia Lin resigned as a director and Vice- President of the Company on November 21,
2008 and as a director of Yuchai on November 20, 2008.(1)
    
    Also a Director of Yuchai.(2)
    
    Also a Director of TCL.(3)
    
    Member of the Compensation Committee.(4)
    
    Member of the Audit Committee.(5)
    
    Also a Director of HLGE.(6)
    
    Redesignated from Group General Manager to Chief Operating Officer with effect from November
21, 2008.     50




---



##### Table of Contents



51




---



##### Table of Contents



Audit Committee
  Compensation Committee
  Directors and Executive Officers of Yuchai
   Year First Elected orAppointed DirectorName
    
    Position
    
    Position or OfficerYAN Ping(1)
    
    Chairman of the Board of Directors
    
    2005TAN Wan
Hong(5) (6)
    
    Deputy Chairman and Director
    
    2008LI Tiansheng
    
    Director and General Manager
    
    2001GAN Khai Choon (1) (4)
    
    Director
    
    2007KWEK Leng Peck(1)
    
    Director
    
    2005NEO Poh Kiat (1) (5)
    
    Director
    
    2008TAN Aik-Leang(1)
    
    Director
    
    2005TEO Tong Kooi(1)(2)(4)
    
    Director
    
    2004HOH Weng Ming*
    
    Director
    
    2008YUAN Xucheng
    
    Director
    
    2003GU Tangsheng
    
    Assistant to Chairman and Director
    
    2005ZHANG Shi Yong(1) (3)
    
    Director and Secretary
    
    2005ZENG Shi Qiang
    
    Assistant Director
    
    1999KEAN
Alex(6)
    
    Chief Business Official
    
    2008TAY Hui Boon Kelly(6)
    
    Financial Controller
    
    2008WU Qiwei
    
    Deputy General Manager
    
    2006YAN Jie
    
    Deputy General Manager
    
    2003LI Cheng Jie
    
    Deputy General Manager
    
    2007QIN Xiaohong
    
    Chief Accountant
    
    2007SHEN Jie
    
    General Engineer
    
    2002
 
 *
    
    Mr. GAO Jia Lin resigned as a director of Yuchai on November 20, 2008.*
    
    Mr. HOH Weng Mings appointment as a director took
effect on December 26, 2008. 52




---



##### Table of Contents



(1)
    
    Also a Director of the Company.(2)
    
    Also a Director of TCL.(3)
    
    Appointed a Director of Yuchai since April 12, 2007.(4)
    
    Also a Director of HLGE.(5)
    
    Appointed a Director of Yuchai since March 28, 2008.(6)
    
    Secondees of the Company, whose salaries and expenses are paid by the Company.             Yuchai
  53




---



##### Table of Contents



54




---



##### Table of Contents



Compensation
 Company
    Yuchai
   Employees
    55




---



##### Table of Contents



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)
    
    
    6,709,322
    
    
    
    18.0
    %Tai Tak Industries Pte Ltd(3)
    
    
    1,927,673
    
    
    
    5.2
    %Shah Capital Management (4)
    
    
    2,178,000
    
    
    
    5.8
    %
 
 (1)
    
    Information based upon a report on Schedule 13D jointly filed by Hong Leong Asia and its
wholly-owned subsidiaries, Hong Leong China, HL Technology, 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 Hong
Leong Asia to the Company. Hong Leong Asia is the beneficial owner of and exercises control
over the 7,913,769 shares of Common Stock or approximately 21.2% of the total number of shares
of Common Stock and the special share held by its wholly-owned subsidiaries, HL Technology and
Well Summit Investments Limited. See also Related Party Transactions  Shareholders
Agreement. Other than as described under Item 3. Key Information  Risk Factors  Risks
relating to our company and our business  We may experience a change of control as a result
of offerings of shares by our controlling shareholders and  The Special Share, we are not
aware of any arrangement which may, at a subsequent date, result in a change of control of 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, April 18, 2005, August 9, 2006
and September 29, 2006. 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 6,709,322 shares of the Companys Common Stock held of
record by Coomber.(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.(4)
    
    Information based on a report on Schedule 13D filed by Shah Capital Management with the SEC
on November 24, 2008 and as amended on December 31, 2008.  The Special Share
  56




---



##### Table of Contents



Related Party Transactions
 Shareholders Agreement
   Registration Rights Agreement
  57




---



##### Table of Contents



Reorganization Agreement and Cooperation Agreement
   Other Transactions
     58




---



##### Table of Contents



ITEM 8. FINANCIAL INFORMATION.
 Consolidated Financial Statements
  Legal Proceedings
  Proceedings with Yuchai
    59




---



##### Table of Contents



Proceedings with the HLGE group
  Other Legal Proceedings
      
 ITEM 9. THE OFFER AND LISTING.
   US$
    
    US$Period
    
    High
    
    Low2003
    
    
    37.24
    
    
    
    4.402004
    
    
    34.00
    
    
    
    9.852005
    
    
    14.47
    
    
    
    7.022006
    
    
    10.00
    
    
    
    4.532007
    
    
    13.85
    
    
    
    6.872008
(through December 31, 2008)
    
    
    11.98
    
    
    
    2.49
 60




---



##### Table of Contents



US$
    
    US$Period
    
    High
    
    Low2006 First Quarter
    
    
    9.81
    
    
    
    6.812006 Second Quarter
    
    
    10.00
    
    
    
    6.262006 Third Quarter
    
    
    7.46
    
    
    
    4.532006 Fourth Quarter
    
    
    8.40
    
    
    
    5.422007 First Quarter
    
    
    9.45
    
    
    
    6.872007 Second Quarter
    
    
    11.88
    
    
    
    7.822007 Third Quarter
    
    
    12.75
    
    
    
    7.182007 Fourth Quarter
    
    
    13.85
    
    
    
    8.802008 First Quarter
    
    
    10.22
    
    
    
    7.072008 Second Quarter
    
    
    11.98
    
    
    
    8.282008 Third Quarter
    
    
    11.66
    
    
    
    7.112008 Fourth Quarter
    
    
    7.69
    
    
    
    2.49
 US$
    
    US$Period
    
    High
    
    LowMay 2008
    
    
    11.98
    
    
    
    9.00June 2008
    
    
    11.62
    
    
    
    9.71July 2008
    
    
    10.23
    
    
    
    8.24August 2008
    
    
    11.66
    
    
    
    8.62September 2008
    
    
    10.57
    
    
    
    7.11October 2008
    
    
    7.69
    
    
    
    4.00November 2008
    
    
    5.50
    
    
    
    2.49December 2008
    
    
    4.44
    
    
    
    3.50
 
 ITEM 10. ADDITIONAL INFORMATION.
  Memorandum of Association and Bye-Laws
 Corporate Governance
   61




---



##### Table of Contents



Standard for US Domestic Listed Companies
    
    China Yuchai International Limiteds PracticeDirector Independence
    
    A majority of the
board must consist
of independent
directors.
    
    
    
    Three of our eight
directors, Messrs. Neo
Poh Kiat, Tan
Aik-Leang and Matthew
Richards are
independent 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.
    
    
    
    Our 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
Exchange Act. The
rule requires that
the audit committee
(i) be comprised
entirely of
independent
directors; (ii) be
directly responsible
for the appointment,
compensation,
retention and
oversight of the
independent auditor;
(iii) adopt
procedures for the
receipt and
treatment of
complaints with
respect to
accounting, internal
accounting controls
or auditing matters;
(iv) be authorized
to engage
independent counsel
and other advisors
it deems necessary
in performing its
duties; and (v) be
given sufficient
funding by the
company to
compensate the
independent auditors
and other advisors
as well as for the
payment of ordinary
administrative
expenses incurred by
the committee.
    
    
    
    Our audit committee
meets the requirements
of Rule 10A-3 under
the Exchange Act.
    
    The audit committee
must consist of at
least three members,
and each member
meets the
independence
requirements of both
the NYSE rules and
Rule 10A-3 under the
Exchange Act.
    
    
    
    Our audit committee
currently consists of
three members, each of
whom meets the
independence
requirements of both
the NYSE rules and
Rule 10A-3 under the
Exchange Act.
    
    The audit committee
must have a written
charter that
addresses the
committees purpose
and
responsibilities.
    
    
    
    Our audit committee
has a charter
outlining the
committees purpose
and
responsibilities,
which are similar in
scope to those
required of US
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,
or by any recent
governmental inquiry
or investigation,
and any steps taken
to address such
issues.
 62




---



##### Table of Contents



Standard for US Domestic Listed Companies
    
    China Yuchai International Limiteds PracticeThe audit committee
is also required 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
separately,
periodically, with
management, the
internal auditors
and the independent
auditors.
    
    Each listed company
must disclose
whether its 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 our
Audit Committee
Financial Expert.
    
    Each listed company
must have an
internal audit
function.
    
    
    
    We are a holding
company and the
majority of business
is done at our main
subsidiary, Guangxi
Yuchai Machinery
Company Limited (Yuchai). Our
group transactions,
fees and expenses
are reviewed by the
Internal Audit
Department of Hong
Leong Asia. In
addition, Yuchai
maintains an
independent internal
audit function,
headed by an
internal audit
manager who reports
to the Audit
Committee of
Yuchais Board which
approves the audit
plans, reviews
significant audit
issues and monitors
corrective actions
taken by management.Compensation Committee
    
    Listed companies
must have a
compensation
committee composed
entirely of
independent board
members as defined
by the NYSE listing
standards.
    
    
    
    Our compensation
committee currently
has three members,
two of whom are
independent within
the meaning of the
NYSE standards.
    
    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.
    
    
    
    Our 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
our employee benefit
plans, if any.Nominating/Corporate Governance Committee
    
    Listed companies
must have a
nominating/corporate
governance
committee composed
entirely of
independent board
members.
    
    
    
    We do not have a
nominating/corporate
governance
committee. However,
certain
responsibilities of
this committee are
undertaken by our
Compensation
Committee, such as
the review and
approval of
executive
appointments and
all other functions
are performed by
the Board of
Directors.
 63




---



##### Table of Contents



Standard for US Domestic Listed Companies
    
    China Yuchai International Limiteds Practice
    
    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.
    
    
    
    We intend to have
our shareholders
approve
equity-compensation
plans.Corporate Governance Guidelines
    
    Listed companies
must adopt and
disclose corporate
governance
guidelines.
    
    
    
    We have 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.Code of Business Conduct and Ethics
    
    All listed
companies, US and
foreign, must adopt
and disclose a code
of business conduct
and ethics for
directors, officers
and employees, and
promptly disclose
any amendment to or waivers of the
code for directors
or executive
officers.
    
    
    
    We adopted a Code of Business Conduct and Ethics Policy in May 2004, which was revised on December
9, 2008. The text of the Code is posted on our internet website at
http://www.cyilimited.com/invest_govt.asp. We intend to promptly disclose any
amendment to or waivers of the Code for directors or executive officers.
 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 our subsidiaries (or a company of which we are 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 our subsidiaries (or a company
of which we are 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 we are 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 our employees 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 our shares or our debentures or our other securities or any of our
subsidiaries by virtue only of such Directors interest in our shares or our debentures
or our other securities or any of our subsidiaries.
 64




---



##### Table of Contents



Remuneration and Pensions
    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, whether ordinary or special resolution, may be passed
without the affirmative vote of the holder of the Special Share.
   65




---



##### Table of Contents



Modification of Shareholders Rights
 pari passu
 Annual General and Special General Meetings
   Limitations on Rights to Own Securities
  inter alia
  Exchange Controls
 Bermuda Exchange Controls
  66




---



##### Table of Contents



China Exchange Controls
      67




---



##### 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
  68




---



##### 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,
    
    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 US dollar.
  69




---



##### Table of Contents




    
    a citizen or resident of the United States,
    
    a US 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.
 US 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
    Taxation of Capital Gains
  70




---



##### Table of Contents



PFIC Rules
  
    
    at least 75% of its gross income is passive income, or
    
    at least 50% of the value of its assets (based on an average of the quarterly
values of the assets during a taxable year) is attributable to assets that produce or
are held or the production of passive income (the asset test).
   
    
    the excess distribution or gain will be allocated ratably over the US 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
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  71




---



##### Table of Contents



As of December 31, 2006
    
    As of December 31, 20072008
    
    2009
    
    2010
    
    Total carrying
    
    Estimated fair
    
    Total carrying
    
    Estimated fairExpected maturity dates
    
    amount
    
    value(1)
    
    amount
    
    value(1)Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb(in thousands, except interest rate)Floating rate debt:(i)
    Short-term bank loans
denominated in Rmb
    
    
    819,164
    
    
    
    
    
    
    
    
    
    
    
    806,506
    
    
    
    806,506
    
    
    
    819,164
    
    
    
    819,164Weighted average
interest
rate(2)
    
    
    4.03
    %
    
    
    
    
    
    
    
    
    
    
    4.07
    %
    
    
    
    
    
    
    4.03
    %(ii)
    Short-term bank loans
denominated in S$
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202,628
    
    
    
    202,628
    
    
    
    
    
    
    
    Weighted average
interest
rate(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.97
    %
    
    
    
    
    
    
    (iii)
    Long-term bank loans
denominated in Rmb
    
    
    
    
    
    
    
    
    
    
    85,000
    
    
    
    100,000
    
    
    
    100,000
    
    
    
    85,000
    
    
    
    85,000Weighted average
interest
rate(2)
    
    
    
    
    
    
    
    
    
    
    5.85
    %
    
    
    5.85
    %
    
    
    
    
    
    
    5.85
    %(iv)
    Long-term bank loans
denominated in US$
    
    
    457,787
    
    
    
    
    
    
    
    225,142
    
    
    
    575,454
    
    
    
    575,454
    
    
    
    682,929
    
    
    
    682,929Weighted average
interest
rate(2)
    
    
    3.01%-3.24
    %
    
    
    
    
    
    
    2.68%-3.01
    %
    
    
    3.89
    %
    
    
    
    
    
    
    3.03
    %
 
 (1)
    
    Fair value was estimated based on the floating interest rates applicable to similar loan
instruments.(2)
    
    Weighted average interest rate is calculated based on the interest rates applicable to
individual bank loans outstanding as of December 31, 2006 and 2007.  72




---



##### Table of Contents



Gross unrealized
    
    Carrying value
    
    Carrying valueInitial
fair value
    
    holding gains
    
    (Fair value)
    
    (Fair value)Rmb
    
    Rmb
    
    Rmb
    
    US$(in thousands)Unsecured bonds of
HLGE
    
    
    461,645
    
    
    
    97,207
    
    
    
    558,852
    
    
    
    81,768RCPS A of HLGE
    
    
    8,513
    
    
    
    4,223
    
    
    
    12,736
    
    
    
    1,864470,158
    
    
    
    101,430
    
    
    
    571,588
    
    
    
    83,632
   Carrying value
    
    Carrying value(Fair value)
    
    (Fair value)Rmb
    
    US$(in thousands)Due after one year
through five years
    
    
    558,852
    
    
    
    81,768Due after five years
through ten years
    
    
    12,736
    
    
    
    1,864
   Value as atNumber of
    
    31 Decembershares
    
    2007Rmb(in thousands)TCL
    
    
    898,990,352
    
    
    
    387,930HLGE
    
    
    387,614,839
    
    
    
    112,648
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
  73




---



##### Table of Contents



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.
 Evaluation of Disclosure Controls and Procedures
   Managements Assessment of Internal Control over Financial Reporting
  
    
    pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP;
    
    provide reasonable assurance that receipts and expenditures are
being made only in accordance with our managements and/or our Board of
Directors authorization; and
    
    provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our assets that
could have a material effect on our consolidated financial statements.
  74




---



##### Table of Contents



Material Weakness
 Insufficient U.S. GAAP knowledge and resources
  Equity method accounting
  Financial statement closing process
  Related party transactions
  Inventory data maintenance
  Selling price maintenance
  Information technology
  Provision
for warranty costs
  Approvals
and authorizations
  75




---



##### Table of Contents



Remediation Measures
    Insufficient U.S GAAP knowledge and resources
  Equity method accounting
  Financial statement closing process
  Related party transactions
  Inventory data maintenance
  
    
    Independent checks to ensure accurate and complete input of purchase prices in the SAP
system, based on approved purchase orders and contracts;
    
    Purchase orders, material issuance, man hour costs and production overheads costs
entered in the SAP system are independently checked against source documents;
    
    Information on the Goods Received Notes is reconciled to the records in the SAP system
to ensure accurate and complete recording of goods purchased;
    
    Inventory master data maintained in the SAP system is independently checked against
source documents;
    
    All purchase returns are reviewed and approved by authorized personnel; and
    
    Variances between standard costs and actual costs are analyzed and reported to proper
management on a timely basis.
 76




---



##### Table of Contents



Selling price maintenance
  Information technology
  Provision for warranty costs
  Approvals
and authorizations
    Remediation Measures to address Material Weaknesses identified in 2005 and 2006
   GRIR balance
  Sales
discount calculations
   Report of Independent Registered Public Accounting Firm on internal Controls
  Changes in Internal Control over Financial Reporting
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
  
 ITEM 16B. CODE OF ETHICS.
 http://www.cyilimited.com/invest_govt.asp
 77




---



##### Table of Contents



ITEM 16C.
    
    PRINCIPAL ACCOUNTANTS FEES AND SERVICES.
  Audit fees
    
    Audit-related fees
    
    Tax fees
    
    Others
    
    TotalRmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb(in thousands)2006
    
    
    22,484
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    22,5532007
    
    
    12,986
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,986
 
 *
    
    There was an increase in the 2006 audit fee by Rmb10.05 million from the amount previously
disclosed in our annual report for fiscal year 2006 as such additional fee was only billed after
the filing of our annual report for fiscal year 2006.     Audit fees
  Audit-related fees
   
 ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.Not Applicable.
 
 ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.Not Applicable.
 78




---



##### Table of Contents



PART III
 
 ITEM 17.
    
    FINANCIAL STATEMENTS.The Company has elected to provide the financial statements and related information
specified in Item 18 in lieu of Item 17.
 
 ITEM 18.
    
    FINANCIAL STATEMENTS.
 Index to Financial Statements
 China Yuchai International Limited
 Reports of Independent Registered Public Accounting Firms
    
    F-2Consolidated Statements of Operations for Years Ended December 31, 2005, 2006 and 2007
    
    F-5Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    F-6Consolidated Statements of Stockholders Equity and Comprehensive Income/(loss) for
Years Ended December 31, 2005, 2006 and 2007
    
    F-8Consolidated Statements of Cash Flows for Years Ended December 31, 2005, 2006 and 2007
    
    F-10Notes to Consolidated Financial Statements
    
    F-12
 
 ITEM 19.
    
    EXHIBITS.
 Exhibits to this Annual Report:1.1
    
    Memorandum of Association of China Yuchai International Limited or the
Registrant (incorporated herein by reference to Amendment No. 1 to the
Registration Statement on Form F-1, filed by the Registrant on December 8,
1994 (File No. 33-86162), or 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., or Hong Leong Asia, and China Everbright Holdings Company Limited, or
China Everbright Holdings (incorporated herein by reference to Amendment no.
2 to the Registration Statement on Form F-1, filed by the Registrant on
December 14, 1994 (File No. 33-86162)).3.2
    
    Supplemental Subscription and Shareholders Agreement, dated January 21, 2002,
between China Everbright Holdings and Hong Leong Asia (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 (File No. 001-013522), or
Form 20-F FY2001).3.3
    
    Second Supplemental Subscription and Shareholders Agreement, dated May 17,
2002, between China Everbright Holdings and Hong Leong Asia (incorporated
herein by reference to the Form 20-F FY2001).4.1
    
    Contract for the Subscription of Foreign Common shares in Guangxi Yuchai
Machinery Company Limited, or 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 Registration
Statement on Form F-1, filed by the Registrant on November 9, 1994 (File No.
33-86162)).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, Hong Leong Asia Ltd., Coomber Investments
Limited, China Everbright Holdings Company Limited, Diesel Machinery (BVI)
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
 79




---



##### Table of Contents



formerly held by Sun Yuan Overseas (BVI) Ltd. and the
Registrant (incorporated herein by reference to Amendment No. 3 to the
Registration Statement on Form F-1, filed by the Registrant on December 15,
1994 (File No. 33-86162)).4.5
    
    Form of Subscription Agreement between the Registrant and its wholly-owned subsidiaries
named therein and Yuchai (incorporated herein by reference to Amendment No. 2 to the
Registration Statement on Form F-1, filed by the Registrant on December 14, 1994 (File no.
33-86162)).4.6
    
    Form of Term Loan Agreement between the Registrant and Yuchai (incorporated herein by
reference to Amendment No. 2 to the Registration Statement on Form F-1, filed by the
Registrant on December 14, 1994 (File No. 33-86162)).4.7
    
    Share Purchase and Subscription Agreement, dated as of November 9, 1994, between the
Registrant, China Everbright Holdings Company Limited and Coomber Investments Limited
(incorporated herein by reference to the Form F-1).4.8
    
    Form of indemnification agreement entered into by the Registrant with its officers and
directors (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, or Form 20-F
FY2003).4.9
    
    Agreement between the Registrant and Yuchai, dated July 19, 2003 (incorporated herein by
reference to the Form 20-F FY2003).4.10
    
    Reorganization Agreement between the Company, Coomber and Yuchai, dated April 7, 2005
(incorporated herein by reference to the Current Report on Form 6-K filed by the Registrant
on April 7, 2005 (File No. 001-13522)).4.11
    
    Reorganization Agreement Amendment (No. 1) between the Registrant, Coomber and Yuchai,
dated December 2, 2005 (incorporated herein by reference to the Current Report on Form 6-K
filed by the Registrant on December 6, 2005 (File No. 001-13522)).4.12
    
    Reorganization Agreement Amendment (No. 2) between the Registrant, Coomber and Yuchai,
dated November 30, 2006 (incorporated herein by reference to the Current Report on Form 6-K
filed by the Registrant on November 30, 2006 (File No. 001-13522)).4.13
    
    Cooperation Agreement among the Registrant, Yuchai, Coomber and Guangxi Yuchai Machinery
Group Company Limited, dated June 30, 2007 (incorporated herein by reference to the Current
Report on Form 6-K filed by the Registrant on July 5, 2007 (File No. 001-13522)).8.1
    
    Subsidiaries of the Registrant. (Filed herewith)12.1
    
    Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act. (Filed herewith)13.1
    
    Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. (Filed herewith)
  80




---



##### Table of Contents



SIGNATURES
  CHINA YUCHAI INTERNATIONAL LIMITEDBy:
    /s/ Teo Tong KooiName:
    Teo Tong KooiTitle:
    President and DirectorDate: January 30, 2009 81




---



##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Memorandum of Association of China Yuchai International Limited or the
Registrant (incorporated herein by reference to Amendment No. 1 to the
Registration Statement on Form F-1, filed by the Registrant on December 8,
1994 (File No. 33-86162), or 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., or Hong Leong Asia, and China Everbright Holdings Company Limited, or
China Everbright Holdings (incorporated herein by reference to Amendment no.
2 to the Registration Statement on Form F-1, filed by the Registrant on
December 14, 1994 (File No. 33-86162)).3.2
    
    Supplemental Subscription and Shareholders Agreement, dated January 21, 2002,
between China Everbright Holdings and Hong Leong Asia (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 (File No. 001-013522), or
Form 20-F FY2001).3.3
    
    Second Supplemental Subscription and Shareholders Agreement, dated May 17,
2002, between China Everbright Holdings and Hong Leong Asia (incorporated
herein by reference to the Form 20-F FY2001).4.1
    
    Contract for the Subscription of Foreign Common shares in Guangxi Yuchai
Machinery Company Limited, or 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 Registration
Statement on Form F-1, filed by the Registrant on November 9, 1994 (File No.
33-86162)).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, Hong Leong Asia Ltd., Coomber Investments
Limited, China Everbright Holdings Company Limited, Diesel Machinery (BVI)
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 Amendment No. 3 to the
Registration Statement on Form F-1, filed by the Registrant on December 15,
1994 (File No. 33-86162)).4.5
    
    Form of Subscription Agreement between the Registrant and its wholly-owned subsidiaries
named therein and Yuchai (incorporated herein by reference to Amendment No. 2 to the
Registration Statement on Form F-1, filed by the Registrant on December 14, 1994 (File no.
33-86162)).4.6
    
    Form of Term Loan Agreement between the Registrant and Yuchai (incorporated herein by
reference to Amendment No. 2 to the Registration Statement on Form F-1, filed by the
Registrant on December 14, 1994 (File No. 33-86162)).4.7
    
    Share Purchase and Subscription Agreement, dated as of November 9, 1994, between the
Registrant, China Everbright Holdings Company Limited and Coomber Investments Limited
(incorporated herein by reference to the Form F-1).4.8
    
    Form of indemnification agreement entered into by the Registrant with its officers and
directors (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, or Form 20-F
FY2003).4.9
    
    Agreement between the Registrant and Yuchai, dated July 19, 2003 (incorporated herein by
reference to the Form 20-F FY2003).
 82




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.10
    
    Reorganization Agreement between the Company, Coomber and Yuchai, dated April 7, 2005
(incorporated herein by reference to the Current Report on Form 6-K filed by the Registrant
on April 7, 2005 (File No. 001-13522)).4.11
    
    Reorganization Agreement Amendment (No. 1) between the Registrant, Coomber and Yuchai,
dated December 2, 2005 (incorporated herein by reference to the Current Report on Form 6-K
filed by the Registrant on December 6, 2005 (File No. 001-13522)).4.12
    
    Reorganization Agreement Amendment (No. 2) between the Registrant, Coomber and Yuchai,
dated November 30, 2006 (incorporated herein by reference to the Current Report on Form 6-K
filed by the Registrant on November 30, 2006 (File No. 001-13522)).4.13
    
    Cooperation Agreement among the Registrant, Yuchai, Coomber and Guangxi Yuchai Machinery
Group Company Limited, dated June 30, 2007 (incorporated herein by reference to the Current
Report on Form 6-K filed by the Registrant on July 5, 2007 (File No. 001-13522)).8.1
    
    Subsidiaries of the Registrant. (Filed herewith)12.1
    
    Certifications furnished pursuant to Section 302 of the Sarbanes-Oxley Act. (Filed herewith)13.1
    
    Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. (Filed herewith)
  83




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED
AND SUBSIDIARIES
 
 CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2005, 2006 AND 2007
 Index to Financial Statements
 China Yuchai International Limited
 Reports of Independent Registered Public Accounting Firms
    
    
    F-2Consolidated Statements of Operations for Years Ended
December 31, 2005, 2006 and 2007
    
    
    F-5Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    
    F-6Consolidated Statements of Stockholders Equity and
Comprehensive Income/ (Loss) for Years Ended December 31,
2005, 2006 and 2007
    
    
    F-8Consolidated Statements of Cash Flows for Years Ended
December 31, 2005, 2006 and 2007
    
    
    F-10Notes to Consolidated Financial Statements
    
    
    F-12
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
   Internal Control-Integrated Framework Managements Assessment of Internal Control Over Financial
Reporting.
      Internal Control-Integrated Framework
     F-2




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
        Internal Control
 Integrated Framework
    F-3




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
 F-4




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 (Rmb and US$ amounts expressed in thousands, except per share data)
 Years ended December 31,Note
    
    2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Revenues, net(a)
    
    
    3(k),27,28,33
    (a)
    
    
    5,816,740
    
    
    
    6,920,528
    
    
    
    9,556,303
    
    
    
    1,398,224Cost of goods sold(a)
    
    
    4, 27
    
    
    
    (4,673,357
    )
    
    
    (5,648,407
    )
    
    
    (7,611,585
    )
    
    
    (1,113,684
    )Gross profit
    
    
    
    
    
    
    1,143,383
    
    
    
    1,272,121
    
    
    
    1,944,718
    
    
    
    284,540Research and development costs
    
    
    3(m)
    
    
    
    (123,793
    )
    
    
    (167,653
    )
    
    
    (153,146
    )
    
    
    (22,407
    )Selling, general and administrative
expenses(a)
    
    
    3(m),4,14,27
    
    
    
    (793,153
    )
    
    
    (801,830
    )
    
    
    (951,589
    )
    
    
    (139,231
    )Provision for uncollectible loans to a
related party
    
    
    5
    
    
    
    (202,950
    )
    
    
    
    
    
    
    
    
    
    
    Gain on transfer of land use rights to a
related party
    
    
    27
    
    
    
    2,533
    
    
    
    1,841
    
    
    
    1,573
    
    
    
    230Operating income
    
    
    
    
    
    
    26,020
    
    
    
    304,479
    
    
    
    841,556
    
    
    
    123,132Interest expense
    
    
    6, 28
    
    
    
    (70,527
    )
    
    
    (117,491
    )
    
    
    (125,244
    )
    
    
    (18,325
    )Equity in net income/(loss),net of affiliates
    
    
    17
    
    
    
    (6,032
    )
    
    
    (22,449
    )
    
    
    14,048
    
    
    
    2,055Other income, net(a)
    
    
    7,27
    
    
    
    25,449
    
    
    
    38,856
    
    
    
    53,554
    
    
    
    7,836Earnings/(loss) before income taxes and
minority interests
    
    
    
    
    
    
    (25,090
    )
    
    
    203,395
    
    
    
    783,914
    
    
    
    114,698Income taxes
    
    
    8
    
    
    
    (10,148
    )
    
    
    (30,466
    )
    
    
    (68,518
    )
    
    
    (10,025
    )Income/(loss) before minority interests
    
    
    
    
    
    
    (35,238
    )
    
    
    172,929
    
    
    
    715,396
    
    
    
    104,673Minority interests in (income)/loss of
consolidated subsidiaries
    
    
    
    
    
    
    2,947
    
    
    
    (61,645
    )
    
    
    (189,927
    )
    
    
    (27,789
    )Net income/(loss)
    
    
    
    
    
    
    (32,291
    )
    
    
    111,284
    
    
    
    525,469
    
    
    
    76,884
 Years ended December 31,Note
    
    2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Earnings/ (loss) per common shareBasic
    
    
    3
    (l)
    
    
    (0.89
    )
    
    
    2.99
    
    
    
    14.10
    
    
    
    2.06Diluted
    
    
    3
    (l)
    
    
    (0.89
    )
    
    
    2.99
    
    
    
    14.10
    
    
    
    2.06Weighted average number of sharesBasic
    
    
    3
    (l)
    
    
    36,459,635
    
    
    
    37,267,673
    
    
    
    37,267,673
    
    
    
    37,267,673Diluted
    
    
    3
    (l)
    
    
    36,459,635
    
    
    
    37,267,673
    
    
    
    37,267,673
    
    
    
    37,267,673
 (a)
    
    Includes the following income and expenses resulting from transactions with related parties
in addition to those indicated above (see Notes 5 and 27)
 2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Revenues, net
    
    
    7,646
    
    
    
    86,652
    
    
    
    94,901
    
    
    
    13,885Cost of goods sold
    
    
    (417,816
    )
    
    
    (592,535
    )
    
    
    (573,926
    )
    
    
    (83,974
    )Selling, general and administrative expenses
    
    
    (186,759
    )
    
    
    (124,376
    )
    
    
    (149,964
    )
    
    
    (21,942
    )Other income, net
    
    
    11,922
    
    
    
    10,622
    
    
    
    11,664
    
    
    
    1,707
  F-5




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2007
 (Rmb and US$ amounts expressed in thousands, except per share data)
 As of December 31,Note
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$ASSETSCurrent assetsCash and cash equivalents
    
    
    33(g)
    
    
    
    745,933
    
    
    
    520,945
    
    
    
    76,222Trade accounts and bills receivable, net
    
    
    9
    
    
    
    1,480,918
    
    
    
    3,107,785
    
    
    
    454,714Amounts due from related parties
    
    
    10, 27
    
    
    
    158,512
    
    
    
    143,652
    
    
    
    21,018Loans receivable from a related party, net
    
    
    5
    
    
    
    2,050
    
    
    
    2,050
    
    
    
    300Loans to customers, net
    
    
    11
    
    
    
    11,486
    
    
    
    3,361
    
    
    
    492Inventories
    
    
    12
    
    
    
    1,565,183
    
    
    
    1,647,025
    
    
    
    240,983Prepaid expenses
    
    
    
    
    
    
    93,977
    
    
    
    31,752
    
    
    
    4,646Other receivables, net
    
    
    13
    
    
    
    140,069
    
    
    
    97,074
    
    
    
    14,203Income taxes recoverable
    
    
    
    
    
    
    10,750
    
    
    
    27,990
    
    
    
    4,095Deferred income taxes
    
    
    8
    
    
    
    112,779
    
    
    
    114,361
    
    
    
    16,733Total current assets
    
    
    
    
    
    
    4,321,657
    
    
    
    5,695,995
    
    
    
    833,406Property, plant and equipment, net
    
    
    14, 34
    
    
    
    1,795,405
    
    
    
    2,158,246
    
    
    
    315,782Construction in progress
    
    
    15
    
    
    
    288,559
    
    
    
    184,921
    
    
    
    27,057Lease prepayments
    
    
    16, 34
    
    
    
    124,944
    
    
    
    168,002
    
    
    
    24,581Investments in affiliates
    
    
    17
    
    
    
    508,246
    
    
    
    505,009
    
    
    
    73,890Other investments
    
    
    17
    
    
    
    640,192
    
    
    
    615,201
    
    
    
    90,013Goodwill
    
    
    3(n)
    
    
    
    212,636
    
    
    
    218,311
    
    
    
    31,942Deferred income taxes
    
    
    8
    
    
    
    69,718
    
    
    
    33,499
    
    
    
    4,901Total assets
    
    
    
    
    
    
    7,961,357
    
    
    
    9,579,184
    
    
    
    1,401,572LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS
EQUITYCurrent liabilitiesShort-term bank loans
    
    
    18(a)
    
    
    
    1,009,134
    
    
    
    819,164
    
    
    
    119,855Amounts due to the holding company
    
    
    27
    
    
    
    3,226
    
    
    
    5,278
    
    
    
    772Amounts due to related parties
    
    
    5, 10, 27
    
    
    
    77,911
    
    
    
    380,521
    
    
    
    55,676Trade accounts payable
    
    
    
    
    
    
    2,132,798
    
    
    
    2,509,962
    
    
    
    367,243Income taxes payable
    
    
    
    
    
    
    1,789
    
    
    
    5,663
    
    
    
    829Accrued expenses and other liabilities
    
    
    20
    
    
    
    639,350
    
    
    
    946,675
    
    
    
    138,512Total current liabilities
    
    
    
    
    
    
    3,864,208
    
    
    
    4,667,263
    
    
    
    682,887Long-term bank loans, excluding current installments
    
    
    18(b)
    
    
    
    675,454
    
    
    
    767,929
    
    
    
    112,359Total liabilities
    
    
    
    
    
    
    4,539,662
    
    
    
    5,435,192
    
    
    
    795,246
 F-6




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER, 2006 AND 2007 (CONTINUED)  (Rmb and US$ amounts expressed in thousands, except per share data)
 As of December 31,Note
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Total liabilities brought forward
    
    
    
    
    
    
    4,539,662
    
    
    
    5,435,192
    
    
    
    795,246Minority interests
    
    
    
    
    
    
    693,296
    
    
    
    849,527
    
    
    
    124,299Stockholders equityCommon stock
    
    
    
    
    
    
    31,945
    
    
    
    31,945
    
    
    
    4,674Ordinary shares US$0.10 par value: authorized 100,000,000
shares; issued and outstanding 37,267,673 shares at December
31, 2006 and 2007Special share US$0.10 par value: authorized 1 share; issued
and outstanding 1 share at December 31, 2006 and 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Contributed surplus
    
    
    
    
    
    
    1,692,251
    
    
    
    1,692,251
    
    
    
    247,601Statutory reserves
    
    
    22
    
    
    
    267,586
    
    
    
    270,339
    
    
    
    39,555Accumulated other comprehensive income, net
    
    
    
    
    
    
    85,643
    
    
    
    154,580
    
    
    
    22,617Retained earnings
    
    
    
    
    
    
    650,974
    
    
    
    1,145,350
    
    
    
    167,580Total stockholders equity
    
    
    
    
    
    
    2,728,399
    
    
    
    3,294,465
    
    
    
    482,027Commitments and contingencies
    
    
    5, 23, 24
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities, minority interests and stockholders equity
    
    
    
    
    
    
    7,961,357
    
    
    
    9,579,184
    
    
    
    1,401,572
  F-7




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME/(LOSS)
FOR YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 (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, 2005
    
    
    
    
    
    
    30,349
    
    
    
    1,486,934
    
    
    
    266,229
    
    
    
    699,572
    
    
    
    
    
    
    
    2,483,0842005Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,291
    )
    
    
    
    
    
    
    (32,291
    )Net unrealized gains on
investment securities held by
an affiliate, net of nil tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,869
    
    
    
    38,869Foreign currency translation
adjustments, net of nil tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,018
    )
    
    
    (10,018
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,440
    )Transfer to statutory reserves
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    357
    
    
    
    (357
    )
    
    
    
    
    
    
    Shares issued in connection with Conversion of convertible
debt into 1,927,673 common
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
    
    
    
    266,586
    
    
    
    546,630
    
    
    
    28,851
    
    
    
    2,566,2632006Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,284
    
    
    
    
    
    
    
    111,284Net unrealized gains on
investment securities, net of
nil tax and reclassification
adjustments(a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,840
    
    
    
    56,840Net unrealized gains on
investment securities held by
an affiliate, net of nil tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,201
    
    
    
    3,201Foreign currency translation
adjustments, net of nil tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,249
    )
    
    
    (3,249
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168,076Transfer to statutory reserves
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    
    
    
    
    Dividend declared (US$0.02 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,940
    )
    
    
    
    
    
    
    (5,940
    )Balance at December 31, 2006
    
    
    
    
    
    
    31,945
    
    
    
    1,692,251
    
    
    
    267,586
    
    
    
    650,974
    
    
    
    85,643
    
    
    
    2,728,399
 F-8




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME/(LOSS)
FOR YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 (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
    
    Rmb2007Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    525,469
    
    
    
    
    
    
    
    525,469Net unrealized gains on
investment securities, net of
nil tax
(a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,612
    
    
    
    80,612Net unrealized gains on
investment securities held by
an affiliate, net of nil tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,283
    
    
    
    13,283Foreign currency translation
adjustments, net of nil tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,958
    )
    
    
    (24,958
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    594,406Transfer to statutory reserves
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    2,753
    
    
    
    (2,753
    )
    
    
    
    
    
    
    Dividend declared (US$0.10
per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,340
    )
    
    
    
    
    
    
    (28,340
    )Balance at December 31, 2007
    
    
    
    
    
    
    31,945
    
    
    
    1,692,251
    
    
    
    270,339
    
    
    
    1,145,350
    
    
    
    154,580
    
    
    
    3,294,465Balance at December 31, 2007
(in US$)
    
    
    
    
    
    
    4,674
    
    
    
    247,601
    
    
    
    39,555
    
    
    
    167,580
    
    
    
    22,617
    
    
    
    482,027(a) Components of
net unrealized gains on investment
securities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2006
    
    
    
    2007Unrealized holdings
gains arising
during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,332
    
    
    
    98,090Redemption of
investment
securities in an
affiliate taken to
net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,550
    )
    
    
    (17,478
    )Investment in
affiliate upon
conversion (Note 17
(b)(i))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,942
    )
    
    
    Net unrealized
gains on investment
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,840
    
    
    
    80,612
  F-9




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 (Rmb and US$ amounts expressed in thousands)
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Cash provided by operating activitiesNet income/ (loss)
    
    
    (32,291
    )
    
    
    111,284
    
    
    
    525,469
    
    
    
    76,884Adjustments to reconcile net income/ (loss) to net cash provided by
operating activities: Depreciation and amortization of property, plant and equipment
    
    
    141,333
    
    
    
    142,860
    
    
    
    223,304
    
    
    
    32,673 Lease prepayment charged to expense
    
    
    3,339
    
    
    
    3,328
    
    
    
    4,702
    
    
    
    688 Provision for uncollectible loans to a related party
    
    
    202,950
    
    
    
    
    
    
    
    
    
    
    
     Impairment of property, plant and equipment
    
    
    
    
    
    
    2,346
    
    
    
    781
    
    
    
    114 Loss on disposal of property, plant and equipment
    
    
    10,474
    
    
    
    1,598
    
    
    
    5,926
    
    
    
    867 Gain on transfer of land use rights to a related party
    
    
    (2,533
    )
    
    
    (1,841
    )
    
    
    (1,573
    )
    
    
    (230
    )
Deferred income tax expense/(benefit)
    
    
    (20,050
    )
    
    
    (19,996
    )
    
    
    34,637
    
    
    
    5,068 Provision for losses/(recoveries) on guarantees
    
    
    12,318
    
    
    
    (7,410
    )
    
    
    (4,237
    )
    
    
    (620
    ) Equity in losses/(income) of affiliates, net
    
    
    6,032
    
    
    
    21,261
    
    
    
    (14,048
    )
    
    
    (2,055
    ) Dividend received from other investments
    
    
    7,815
    
    
    
    
    
    
    
    
    
    
    
     Minority interests
    
    
    (2,947
    )
    
    
    61,645
    
    
    
    189,927
    
    
    
    27,789 Gain on redemption of other investments
    
    
    
    
    
    
    (28,457
    )
    
    
    (17,478
    )
    
    
    (2,557
    ) Loss on dilution of investments in affiliates
    
    
    
    
    
    
    1,188
    
    
    
    2,591
    
    
    
    378 Net loss/(gain) on changes in fair value of embedded derivatives
    
    
    
    
    
    
    3,617
    
    
    
    (6,139
    )
    
    
    (898
    ) Exchange loss on financing activities
    
    
    
    
    
    
    38,388
    
    
    
    38,622
    
    
    
    5,651 Bad debt expense/(credit)
    
    
    25,587
    
    
    
    21,582
    
    
    
    (11,008
    )
    
    
    (1,611
    )(Increase)/decrease in assets Inventories
    
    
    (321,890
    )
    
    
    103,252
    
    
    
    (81,842
    )
    
    
    (11,975
    ) Amounts due from related parties, net
    
    
    (115,074
    )
    
    
    77,401
    
    
    
    52,088
    
    
    
    7,621 Trade accounts and bills receivable
    
    
    (328,875
    )
    
    
    (323,647
    )
    
    
    (1,615,859
    )
    
    
    (236,423
    ) Prepaid expenses
    
    
    (79,757
    )
    
    
    44,345
    
    
    
    62,225
    
    
    
    9,104 Other receivables, net
    
    
    (20,237
    )
    
    
    (4,417
    )
    
    
    50,804
    
    
    
    7,433 Loans to customers, net
    
    
    (7,904
    )
    
    
    (3,582
    )
    
    
    8,125
    
    
    
    1,189 Income taxes recoverable/(payable), net
    
    
    (67,232
    )
    
    
    32,885
    
    
    
    (13,366
    )
    
    
    (1,956
    )Increase/(decrease) in liabilities Trade accounts payable
    
    
    710,726
    
    
    
    332,355
    
    
    
    377,164
    
    
    
    55,185 Accrued expenses and other liabilities
    
    
    112,828
    
    
    
    25,236
    
    
    
    271,687
    
    
    
    39,752 Amount due to holding company
    
    
    158
    
    
    
    (1,075
    )
    
    
    2,052
    
    
    
    300Net cash provided by operating activities
    
    
    234,770
    
    
    
    634,146
    
    
    
    84,554
    
    
    
    12,371Cash flow from investing activitiesPurchase of property, plant and equipment and
construction in progress (includes interest
capitalized)
    
    
    (515,359
    )
    
    
    (323,781
    )
    
    
    (265,258
    )
    
    
    (38,811
    )Proceeds from disposal of property, plant and equipment
    
    
    3,826
    
    
    
    2,134
    
    
    
    5,236
    
    
    
    766Proceeds from disposal of land use rights
    
    
    3,580
    
    
    
    2,394
    
    
    
    2,125
    
    
    
    311Repayment of loans by a related party
    
    
    205,000
    
    
    
    
    
    
    
    
    
    
    
    Loans to a related party
    
    
    (205,000
    )
    
    
    
    
    
    
    
    
    
    
    Purchase of investments
    
    
    (161,358
    )
    
    
    (923,101
    )
    
    
    
    
    
    
    Proceeds from disposal of other investments










773



113Prepayments for land use right
    
    
    
    
    
    
    (59,497
    )
    
    
    (31
    )
    
    
    (4
    )Proceeds from redemption of investment securities
    
    
    
    
    
    
    11,907
    
    
    
    88,652
    
    
    
    12,971Net cash used in investing activities
    
    
    (669,311
    )
    
    
    (1,289,944
    )
    
    
    (168,503
    )
    
    
    (24,654
    )Cash flow from financing activitiesProceeds from short-term bank loans
    
    
    1,188,178
    
    
    
    974,978
    
    
    
    649,164
    
    
    
    94,982
 F-10




---



##### Table of Contents



Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Proceeds from long-term bank loans
    
    
    50,000
    
    
    
    687,473
    
    
    
    197,044
    
    
    
    28,830Proceeds from issuance of convertible debt
    
    
    206,913
    
    
    
    
    
    
    
    
    
    
    
    Repayments of short-term and long term bank loans
    
    
    (805,343
    )
    
    
    (962,835
    )
    
    
    (933,533
    )
    
    
    (136,589
    )Dividends paid by subsidiaries to minority stockholders
    
    
    (66,677
    )
    
    
    (23,036
    )
    
    
    (22,316
    )
    
    
    (3,265
    )Dividends paid to stockholders
    
    
    (120,294
    )
    
    
    (5,940
    )
    
    
    (28,340
    )
    
    
    (4,147
    )Capital contributions from minority interests










2,920




427Net cash provided by/(used in) financing activities
    
    
    452,777
    
    
    
    670,640
    
    
    
    (135,061
    )
    
    
    (19,762
    )Effect of foreign currency exchange on cash and cash
equivalents
    
    
    (4,713
    )
    
    
    (5,104
    )
    
    
    (5,978
    )
    
    
    (874
    )Net increase/(decrease) in cash and cash equivalents
    
    
    13,523
    
    
    
    9,738
    
    
    
    (224,988
    )
    
    
    (32,919
    )Cash and cash equivalents at beginning of year
    
    
    722,672
    
    
    
    736,195
    
    
    
    745,933
    
    
    
    109,141Cash and cash equivalents at end of year
    
    
    736,195
    
    
    
    745,933
    
    
    
    520,945
    
    
    
    76,222
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Supplemental disclosures of cash flow informationCash paid during the year for: Interest, net of amount capitalized
    
    
    70,527
    
    
    
    117,491
    
    
    
    125,860
    
    
    
    18,415 Income taxes
    
    
    97,431
    
    
    
    21,012
    
    
    
    47,247
    
    
    
    6,913
 Significant non-cash investing and financing transactions
     F-11




---



##### Table of Contents



CHINA YUCHAI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007 (Rmb and US$ amounts expressed in thousands, except per share data)
 1
    
    Background and principal activities
 China Yuchai International Limited (the Company) was incorporated under the laws of Bermuda
on April 29, 1993. The Company was established to acquire a controlling financial 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 Accessories Manufacturing Company Limited (YAMC) (previously
known Guangxi Yulin Yuchai Machinery Spare Parts Manufacturing Company Limited) and Yuchai
Express Guarantee Co., Ltd (YEGCL). YMMC and YAMC 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 favor of banks in connection with the applicants purchase of
automobiles equipped with diesel engines produced by Yuchai. In 2006, YEGCL ceased granting
new guarantees with the aim of servicing the remaining outstanding guarantee commitments to
completion, expected to be in 2009. As at December 31, 2007, Yuchai held an equity interest of
71.83%, 97.14% and 76.92% respectively in these companies. As at December 31, 2006 and 2007,
YMMC had direct controlling interests in twenty-one and twenty-five subsidiaries respectively,
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 December
2007, Yuchai purchased a fourth subsidiary, Guangxi Yulin Hotel Company
Ltd (Yulin Hotel Company) (see Note 34).In March 2005, the Company acquired 14.99% of the ordinary shares of Thakral Corporation
Ltd (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 eleven 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 include the Companys share of the results of TCL,
accounted for under the equity method. The Company acquired an additional 1.00% of the
ordinary shares of TCL in September 2005. As a result of the rights issue of 87,260,288 rights
shares on February 16, 2006, the Companys equity interest in TCL increased to 19.36%. On
August 15, 2006, the Company exercised its right to convert all of its 52,933,440 convertible
bonds into 529,334,400 new ordinary shares in the capital of TCL. Upon the issue of the new
shares, the Companys interest in TCL has increased to 36.61% of the total issued and
outstanding ordinary shares. During the year ended December 31, 2007, the Company did not
acquire new shares in TCL. However, as a result of conversion of convertible bonds into new
ordinary shares by TCLs third party bondholders, the Companys interest in TCL was diluted to
34.42%.On February 7, 2006, the Company acquired 29.13% of the
ordinary shares of HL Global Enterprises Limited (formerly known as HLG Enterprise
Limited (HLGE). HLGE is a public company listed on the main board of the Singapore
Exchange. HLGE is primarily engaged in investment holding, and through its group companies,
invests in rental property, hospitality and property developments in Asia. On November 15,
2006, the Company exercised its right to convert all of its 196,201,374 non-redeemable
convertible cumulative preference shares into 196,201,374 new ordinary shares in the capital
of HLGE. Upon the issue of the new shares, the Companys equity interest in HLGE has increased
to 45.42% of the enlarged total number of ordinary shares in issue. Three directors out of
seven directors on the board of HLGE are appointed by the Company. Based on the Companys
shareholdings and representation in the board of directors of HLGE, management has concluded
that the Company has the ability to exercise significant influence over the operating and
financial policies of HLGE. Consequently, the Companys consolidated financial statements
include the Companys share of the results of HLGE, accounted for under the equity method.
During the year ended December 31, 2007, the Company did not acquire new shares in HLGE.
However, new ordinary shares were issued by HLGE arising from the third partys conversion of
non-redeemable convertible cumulative preference shares, and the Companys interest in HLGE
was diluted to 45.39%.
 F-12




---



##### Table of Contents



2
    
    General
 (a)
    
    Basis of presentationThe accompanying consolidated financial statements are prepared in accordance with United
States of America generally accepted accounting principles (U.S. GAAP).
 (b)
    
    Restatement of 2005 consolidated financial statements
 The Companys consolidated financial statements for the year ended December 31, 2005 were
previously restated on May 30, 2008 to reflect certain adjustments to correct accounting
errors for such period. The most significant adjustment was to correct accounting errors for
the understatement of accounts payable of Rmb167.8 million by Yuchai at December 31, 2005. The
accompanying 2005 consolidated financial statements reflect those previously restated
financial statements of the Company and its subsidiaries.
 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 that it has a
direct or indirect controlling financial interest in (collectively, referred to as the
Group). All significant intercompany balances and transactions have been eliminated in
consolidation. In addition, the Company evaluates the Groups 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 Group is the primary beneficiary, then
that entity is included in the consolidated financial statements in accordance with FIN 46(R).
The Group was not the primary beneficiary of any variable interest entities during the three
years ended December 31, 2007.
 (b)
    
    Cash and cash equivalents
 Cash includes cash on hand and demand deposits with banks. For purposes of the consolidated
statements of cash flows, management considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents. None of the Groups cash
is restricted as to withdrawal. See Note 29 for discussion of restrictions on the Renminbi.
 (c)
    
    Trade accounts receivable, loans receivable and bills receivable, net
 Trade accounts receivable are recorded at the invoiced value of goods sold after deduction of
trade discounts and allowances, if any. The allowance for doubtful accounts is managements
best estimate of the amount of probable credit losses in the Groups accounts receivable.
Management determines the allowance based on specific account identification and historical
write-off experience by industry and national economic data.Management reviews the Groups allowance for doubtful accounts monthly. Past due balances over
90 days and over a specified amount are reviewed individually for collectability. 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 Group does not have any off-balance-sheet
credit exposure related to its customers, except for outstanding bills discounted with banks
(see Note 24(e)) and off-balance-sheet credit exposure of YEGCL (see Note 24(d)), that are
subject to recourse for non-payment.The Group 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 a discount equal to the difference between the carrying value of the
trade accounts and bills receivable and cash received is recorded. The Group received proceeds
from the sales of the trade accounts and bills receivable of Rmb3,423,296, Rmb4,485,221 and Rmb4,403,828 (US$644,343), for
the years ended December 31, 2005, 2006 and 2007, respectively. The Group has recorded
discounts totaling Rmb44,362, Rmb54,720 and Rmb75,193 (US$11,002) in respect of sold trade
accounts and bills receivable for the years ended December 31, 2005, 2006 and 2007,
respectively, which has been included in interest expense.Loans receivables primarily relate to initial working capital financing provided to Yuchai
Marketing Company Limited (YMCL), a related party (see Note 5). The allowance
for doubtful accounts is managements best estimate of the amount of credit losses in these
existing loans. A loan is considered impaired pursuant to FASB Statement No.114, Accounting
by Creditors for Impairment of a Loan. A loan is impaired if it is probable that the Company
will not collect all principal and interest contractually due. The Company does not accrue
interest when a loan is considered impaired. The Company has elected to recognize interest
income on a cash basis.
 F-13




---



##### Table of Contents



(d)
    
    Inventories
 Inventories 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. Management routinely reviews
its inventory for salability and indications of obsolescence to determine if inventory
carrying values are higher than market values. If market conditions or future product
enhancements and developments change, inventories would be written down to reflect the
estimated realizable value.
 (e)
    
    Property, plant and equipment, net
 Property, plant and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over their estimated useful lives of
the assets, taking into account their estimated residual value. The estimated useful lives are
as follows:
 Buildings
    
    30 to 40 yearsMachinery and equipment
    
    5 to 15 yearsOffice and computer equipment
    
    4 to 5 yearsLeasehold improvements
    
    shorter of estimated useful life or remaining lease terms
 The Group capitalizes interest with respect to major assets under installation or construction
based on the average cost of the Groups borrowings. Repairs and maintenance of a routine
nature are expensed while those that extend the life of assets are capitalized. Upon
retirement or disposal of assets, the cost and related accumulated depreciation are removed
from the consolidated balance sheets and any gain or loss is included in the consolidated
statements of operations.Construction 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 completed 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.
 (f)
    
    Lease prepayments
 Lease prepayments represent payments to the PRC land bureau for land use rights, which are
charged to expense on a straight-line basis over the respective periods of the rights which
are in the range of 15 to 50 years.
 (g)
    
    Guarantees
 The fair value of a guarantee provided by the Group for the obligation of others is recognized
at fair value at inception as a liability in accordance with FIN No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees including Indirect Guarantees of
Indebtedness of Others. If the guarantee was issued in a stand-alone transaction for a fee, the fair value of the
liability recognized generally would offset the cash received by the Group, which is included
in Accrued expenses and other liabilities and amortized to revenue over the period of
guarantee.After initial measurement and recognition of the liability for obligations under the
guarantee, management periodically evaluates outstanding guarantees and accounts for potential
loss contingencies associated with the guarantees based on estimated losses from default in
accordance with SFAS No. 5, Accounting for Contingencies, under which the liability is
adjusted for further loss that is probable and when the amount of the loss can be reasonably
estimated.
 (h)
    
    Investments
 AffiliatesAn affiliate is an entity in which the Company or the Group 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 using the equity
method. The Groups share of earnings and losses of affiliate, adjusted to eliminate
intercompany gains and losses and to account for the difference between the cost of investment
and the underlying equity in net assets of the affiliates, is included in the consolidated
results.Management assesses impairment of its investments in affiliates when adverse events or changes
in circumstances indicate that the carrying amounts may not be recoverable. A loss in value of
investments in affiliate which is considered other than a temporary decline is recognized as
an impairment charge.
 F-14




---



##### Table of Contents



Other investmentsInvestments in available-for-sale securities, including convertible preference shares of an
affiliate that are mandatorily redeemable, are carried at fair value. Unrealized holding gains
and losses, net of related tax effect, on available-for-sale securities are included in
accumulated other comprehensive income/(loss), a separate component of stockholders equity,
until realized. Realized gains and losses from the disposal of available-for-sale securities
are determined on a specific-identification basis.Investments in convertible preference shares of an affiliate that are neither mandatorily
redeemable by the issuer nor redeemable at the option of the investor, and that do not have a
readily determinable fair value are accounted for under the cost method.The Group recognizes an impairment loss when the decline in fair value below the carrying
value of an available-for-sale or cost method investment is considered other than temporary.
In determining whether a decline in fair value is other than temporary, management considers
various factors including market price of underlying holdings when available, investment
ratings, the financial conditions and near term prospect of the investees, the length of time
and the extent to which the fair value has been less than cost and the Groups intent and
ability to hold the investment for a reasonable period of time sufficient to allow for any
anticipated recovery of the fair value.Equity derivatives embedded in the available-for-sale debt securities are recorded at fair
values through income.
 (i)
    
    Foreign currency transactions and translation
 The Companys functional currency is the US dollar. The functional currency of the Companys
subsidiaries and certain of its affiliated companies located in the PRC is the Renminbi.
Transactions denominated in currencies other than Renminbi are recorded based on exchange
rates at the time such transactions arise, such as the Renminbi exchange rates quoted 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 the functional
currency using the applicable exchange rates at the balance sheet dates. The resulting
exchange differences are recorded in the consolidated statements of operations as part of
Other income, net.The Companys reporting currency is the Renminbi. Assets and liabilities of the Company and
its subsidiaries whose functional currency is not the 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 are recorded in accumulated other comprehensive income/(loss), a separate component
within stockholders equity. Cumulative translation adjustments are recognized as income or
expenses upon disposal or liquidation of foreign subsidiaries and affiliates.For the US dollar convenience translation amounts included in the accompanying consolidated
financial statements, the Renminbi equivalent amounts have been translated into U.S. dollars
at the rate of Rmb 6.8346 = US$1.00, the rate quoted by the PBOC at the close of business on
December 31, 2008. 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
31, 2008 or any other date.
 (j)
    
    Income taxes
 Income 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 management 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 operations in
the period that includes the enactment date.Beginning with the adoption of FASB Interpretation No.48, Accounting for Uncertainty in
Income Taxes (FIN 48) as of January 1, 2007, the Company recognizes the effect of income
tax positions only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50% likely of
being realized. Changes in recognition or measurement are reflected in the period in which the
change in judgment occurs. Prior to the adoption of FIN 48, the Company recognized the effect
of income tax positions only if such positions were probable of being sustained.The Company records interest related to unrecognized tax benefits in interest expense, and
penalties in selling, general and administrative expenses in the consolidated statements of
operations.
 (k)
    
    Revenue recognition
 (i)
    
    Product sales
 Revenue is recognized in accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No.
104, Revenue Recognition (SAB 104). SAB 104 requires that, among other conditions, four
basic criteria be met before revenue can be recognized:
 F-15




---



##### Table of Contents



(i) persuasive evidence of an
arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is
reasonably assured; and (iv) product delivery has occurred. For the Group, 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.
 (ii)
    
    Guarantee fee income
 Guarantee fees received or receivable for a guarantee issued are recorded in Accrued expenses
and other liabilities based upon the estimated fair value at the inception of such guarantee
obligations, and are recognized as revenue on a straight line basis over the respective terms
of the guarantees.
 (l)
    
    Earnings/(loss) per share
 Basic earnings/(loss) per share is computed by dividing income/(loss) attributable to common
shares by the weighted average number of common shares outstanding for the period. Diluted
earnings/(loss) per share is calculated by dividing net earnings/(loss) by the weighted
average number of common shares outstanding and the number of additional common shares that
would be outstanding if any potential common shares that are dilutive are issued. For 2005,
the convertible debt issued by the Company was outstanding and no adjustment has been made as
the effect would have been anti-dilutive.The Companys basic and diluted earnings/(loss) per share are as follows:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Net income/(loss) attributable to common shares
    
    
    (32,291
    )
    
    
    111,284
    
    
    
    525,469
    
    
    
    76,884Earnings/(loss) per share Weighted average common shares outstanding
during the yearBasic
    
    
    36,459,635
    
    
    
    37,267,673
    
    
    
    37,267,673
    
    
    
    37,267,673Diluted
    
    
    36,459,635
    
    
    
    37,267,673
    
    
    
    37,267,673
    
    
    
    37,267,673 Earnings/(loss) per common shareBasic
    
    
    (0.89
    )
    
    
    2.99
    
    
    
    14.10
    
    
    
    2.06Diluted
    
    
    (0.89
    )
    
    
    2.99
    
    
    
    14.10
    
    
    
    2.06
 There were no potentially dilutive common shares during the years ended December 31, 2006 and
2007.
 (m)
    
    Advertising, research and development costs
 Advertising, research and development costs are expensed as incurred. Advertising costs
included in Selling, general and administrative expenses, amounted to Rmb45,291, Rmb42,636
and Rmb17,248 (US$2,524) respectively, for the years ended December 31, 2005, 2006 and 2007.Research and development expenses are shown net of government subsidies of Rmb5,915, Rmb7,858
and Rmb4,730 (US$692) for the years ended December 31, 2005, 2006 and 2007, respectively.
 (n)
    
    Goodwill
 Goodwill 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 or whenever
certain circumstances indicate a possible impairment may exist. Management 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 are deducted from the
fair value of the reporting unit. If the implied fair value of reporting units goodwill is
lower than its carrying amount, goodwill is considered
 F-16




---



##### Table of Contents



impaired and is written down to its
implied fair value. The results of the impairment testing in 2005, 2006 and 2007 did not
result in any impairment of goodwill.
 (o)
    
    Product warranty
 The Group recognizes a liability at the time the product is sold, for the estimated future
costs to be incurred under the lower of a warranty period or warranty mileage on various
engine models, on which the Group provides free repair and replacement. Warranties extend for
a duration (generally 12 months to 24 months) or mileage (generally 80,000 kilometers to
250,000 kilometers), 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. In previous
years, warranty claims have typically not been higher than the relevant provisions made in our
consolidated balance sheet. If the nature, frequency and average cost of warranty claims
change, the accrued liability for product warranty will be adjusted accordingly.
 (p)
    
    Use of estimates
 The preparation of the consolidated financial statements in accordance with U.S. GAAP requires
management of the Group 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,
estimated fair value of investments and other financial instruments, realizable values for
inventories, valuation allowances for receivables and loans to related parties, obligations
for warranty costs, and probable losses on loan guarantees of YEGCL. Actual results could
differ from those estimates.
 (q)
    
    Impairment of long-lived assets, other than goodwill
 Long-lived assets to be held and used, such as property, plant and equipment and construction
in progress 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 in 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 sheets and
reported at the lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated.
 (r)
    
    Commitments and contingencies
 Liabilities 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)
    
    Defined contribution plans
 The Group participates in the national pension schemes as defined by the laws of the countries
in which it has operations. Yuchai and its subsidiaries make contributions to the defined
contribution retirement plans, organized by the Guangxi Regional Government and Beijing City
Government, at a fixed proportion of the basic salary of the staff. Contributions are
recognized as compensation expense in the period in which the related services are performed.
 (t)
    
    Leases
 Where the Company has the use of assets under operating leases, payments made under the leases
are recognized in the consolidated statement of operations on a straight-line basis over the
term of the lease. Lease incentives received are recognized in the consolidated statement of
operations as an integral part of the total lease payments made. Contingent rentals are
charged to the consolidated statement of operations in the accounting period in which they are incurred.
 (u)
    
    Comparative information
 Certain immaterial presentation corrections have been made to
prior years financial statements to conform to presentation
used in the current year. These include re-presentation of summarized
financial statements for an affiliate.
 F-17




---



##### Table of Contents



(v)
    
    Recently issued accounting standards
 In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expenses disclosures about fair value measurements. SFAS No. 157
does not require any new fair value measurements and eliminates inconsistencies in guidance
found in various prior accounting pronouncements. SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and states that a fair value
measurement should be determined based on the assumptions that market participants would use
in pricing the asset or liability. In February 2008, the FASB Staff Position, or FSP, SFAS No.
157-1, Application of FASB SFAS No. 157 to SFAS No. 13 and its Related Interpretive
Accounting Pronouncements That Address Leasing Transactions, and FSP SFAS No. 157-2,
Effective Date of SFAS No. 157. FSP SFAS No. 157-1 excludes from the scope of SFAS No.157
certain leasing transactions accounted for under SFAS No. 13, Accounting for Leases. FSP
SFAS No. 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all non
financial assets and non financial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually). The
provisions of SFAS No. 157 will be applied prospectively to fair value measurements and
disclosures for financial assets and financial liabilities and non financial assets and non
financial liabilities recognized or disclosed at fair value in the financial statements on at
least an annual basis beginning in the first quarter of 2008. Management does not believe the
adoption of SFAS No. 157 will have a material impact on the consolidated financial statements
at this time and will monitor any additional implementation guidance that may be issued.In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and
Financial Liabilities. Under SFAS No. 159, entities will be permitted to measure various
financial instruments and certain other assets and liabilities at fair value on an
instrument-by-instrument basis (the fair value option). SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. The Company
has elected not to adopt the fair value option for the eligible items as of January 1, 2008.In June 2007, the FASB ratified EITF Issue No.07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and Development Activities.
The EITF requires non-refundable advance payments to acquire goods or pay for services that
will be consumed or performed in a future period in conducting R&D activities should be
recorded as an asset and recognized as an expense when the R&D activities are performed. The
EITF is to be applied prospectively to new contractual arrangements entered into beginning in
fiscal 2009. The Company currently recognizes these non-refundable advanced payments, if any,
as an expense upon payment. The adoption of EITF 07-3 is not expected to have a significant
effect on the Companys financial position or results of operations.In December 2007, the FASB issued SFAS No. 141 (revised 2007), or SFAS No. 141R, Business
Combination which replaces SFAS No. 141. SFAS No. 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. The Statement also establishes disclosure requirements
which will enable users to evaluate the nature and financial effects of the business
combination. This Statement is effective as of the beginning of an entitys first fiscal year
beginning after December 15, 2008. The impact of the adoption of SFAS No. 141R on the
Companys consolidated financial positions and consolidated results of operations is dependent
upon the specific terms of any applicable future business combinations.In December 2007, the FASB issued SFAS No. 160, Non Controlling Interests in Consolidated
Financial StatementsAmendments of ARB No. 51. SFAS No. 160 states that accounting and
reporting for minority interests will be recharacterised as non controlling interests and
classified as a component of equity. The statement also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non controlling owners. SFAS No. 160 applies
to all entities that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding non controlling
interest in one or more subsidiaries or that deconsolidate a subsidiary. The Company is
required to adopt this statement in the first quarter of fiscal year 2009 and management is
currently assessing the impact of adopting SFAS No. 160. Earlier adoption is prohibited. This
Statement shall be applied prospectively as of the beginning of the fiscal year in which this
Statement is initially applied, except for the presentation and disclosure requirements. The
presentation and disclosure requirements shall be applied retrospectively for all periods
presented. Management is presently evaluating the impact of the newly required disclosures.
 F-18




---



##### Table of Contents



In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. This Statement requires enhanced disclosures about an entitys derivative
and hedging activities and thereby improves the transparency of financial reporting. This
Statement applies to all entities and is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early application encouraged.
The Company intends to provide the additional disclosures under this Statement in fiscal 2009
if it applies.In June 2008, the FASB issued FASB Staff Position (FSP) no. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF
03-6-1). EITF 03-6-1 clarifies whether instruments granted in share-based payment transactions
should be included in the computation of EPS using the two-class method prior to vesting. The
Company is in the process of analyzing the impact of FSP EITF03-6-1, which is effective for
financial statements issued for fiscal years beginning after December 15, 2008. The Company
does not expect the initial adoption of FSP EITF 03-6-1 to have a material impact on its 2009
financial statements.4
    
    Depreciation and amortization, sales commissions, and shipping and handling expensesDepreciation and amortization of property, plant and equipment are included in the following
captions:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Cost of goods sold
    
    
    90,354
    
    
    
    94,215
    
    
    
    163,909
    
    
    
    23,982Selling, general and administrative expenses
    
    
    50,979
    
    
    
    48,645
    
    
    
    59,395
    
    
    
    8,691141,333
    
    
    
    142,860
    
    
    
    223,304
    
    
    
    32,673
 Sales commissions to sales agents are included in the following caption:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Selling, general and administrative expenses
    
    
    39,372
    
    
    
    32,172
    
    
    
    58,719
    
    
    
    8,591
 Sales related shipping and handling expenses not separately billed to customers are included in
the following caption:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Selling, general and administrative expenses
    
    
    126,813
    
    
    
    116,570
    
    
    
    154,807
    
    
    
    22,650
 5
    
    Provision for uncollectible loans to a related party and subsequent contingent recoveryThe amount represents the recognition of specific impairment provisions totaling Rmb202,950 on
the loans with an aggregate principal amount of Rmb205 million due from Yuchai Marketing Company
Limited (YMCL) as of December 31, 2005. YMCL 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 YMCL at the request of Yuchais
PRC directors to provide YMCL with initial working capital for its start-up activities. YMCL
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 prior approval by the
majority of the shareholders of Yuchai.On December 2, 2004, these advances were converted into formal loans and written agreements and
were executed between Yuchai and YMCL 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, Rmb10,512 and Rmb11,548 (US$1,690) was received and recognized in 2005, 2006 and 2007,
respectively (see Note 7).
 F-19




---



##### Table of Contents



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 YMCL, 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 YMCL. Consequently, the Directors from the Companys and Yuchais boards had
doubts about YMCL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 YMCL 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 million 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. The maturity date of the loans was subsequently extended to June 1, 2007 and
further extended to May 30, 2008.The Company discussed this matter with the Chinese Shareholders and management of YMCL and
also considered the financial position and financial resources of the State Holding Company
and Coomber. CYI management made an assessment of the future cash flows of the State Holding
Company and Coomber and concluded that it was likely they will not be able to honor their
respective guarantees in the event YMCL is unable to repay the loans when they become due.Consequently, at that time, CYI management identified a number of possible courses of action
in the event YMCL is unable to repay the loans when they become due. These actions included:
 
    
    Taking actions to force YMCL 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 YMCL and possibly the Chinese Shareholders.
 The Companys management ruled out any form of legal or other enforcement action against the
Chinese Shareholders as management believed that Yuchai may not be the first preferred creditor
entitled to receive payment of the judgment debt. Moreover, management believed that the process
for enforcement of a judgment in China is complex and not as effective when compared with other
jurisdictions. In addition, management believed that the commencement of legal or other
enforcement actions would 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
believed that it was beneficial to the Companys shareholders for management to continue their
dialogue and seek other possible arrangements with YMCL, Coomber and State Holding Company to
resolve the repayment of the Rmb205 million loans rather than for it to resort to legal and
enforcement actions described above.In July 2007, Yuchais Board of Directors agreed in principle to a proposal by the State Holding
Company to settle the loans due from YMCL, along with various other accounts receivable from YMCL
(collectively, the receivables), by forgiving the receivables in exchange for the transfer of 100%
of the equity ownership in a hotel in Yulin, PRC and YMCLs central office building in Guilin, PRC.
On December 25, 2007, Yuchai, pursuant to the execution of a share transfer contract with YMCL, Coomber
and State Holding Company, acquired all the outstanding share capital of Guangxi Yulin Hotel Company Ltd
(Yulin Hotel Company) for Rmb245.6 million. As of December 31, 2007 the purchase consideration for this
acquisition had not been settled and is included in Amounts due to related parties on the consolidated
balance sheet. Agreements were entered into by
Yuchai on March 31, 2008 to effect the repayment of the
Rmb205 million loans against the liability of Rmb245.6 million arising from the purchase of 100% equity
interest in Yulin Hotel Company with the balance settled through
offset of certain trade receivables due from YMCL, the Guarantors and
other related parties. Under the terms of these agreements, Yuchais purchase price
obligation of Rmb245.6 million was
legally extinguished through the offsetting of this liability.
 F-20




---



##### Table of Contents



As of December 31, 2007, the transfer of the 100% equity interest in Yulin Hotel Company was
subject to approval from the provincial government regulatory agency in charge of state-owned
assets administration in China. Yuchais Board of Directors and shareholders had approved an
extension of time for obtaining of approval from November 30, 2008 to June 30, 2009 failing which,
Yuchai would have had the right to sell to the State Holding Company, who would have been obligated
to buy, 100% of the equity in Yulin Hotel Company at the original purchase price of Rmb245.6
million. This condition is contained in a guarantee letter provided by the original shareholders of
Yulin Hotel Company. However, management of the Company was uncertain whether State Holding
Company had the financial ability to purchase Yulin Hotel Company for the full contractual amount
of Rmb245.6 million. Consequently, no recovery of the previously recorded impairment loss on the
loans due from YMCL has been recognized in the Companys consolidated financial statements as of
December 31, 2007. Such recovery will only be recognized in the Companys consolidated financial
statements in the period when a) approval is obtained from the provincial government regulatory
agency in charge of state-owned assets administration in China for its acquisition of the 100%
equity interest in Yulin Hotel Company, or b) the Company is able to resolve the uncertainty about
the recovery through other means. On January 13, 2009, Yuchai received approval from the
provincial government regulatory agency in charge of state-owned assets administration in China for
its acquisition of the 100% equity interest in Yulin Hotel Company.An analysis of the allowance for doubtful loans for 2005, 2006 and 2007 is as
follows:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Balance at beginning of year
    
    
    
    
    
    
    202,950
    
    
    
    202,950
    
    
    
    29,695Add: Charge to consolidated statements of operations
    
    
    202,950
    
    
    
    
    
    
    
    
    
    
    
    Less: Write-offs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of year
    
    
    202,950
    
    
    
    202,950
    
    
    
    202,950
    
    
    
    29,695
 6
    
    Interest costThe Group capitalizes interest charges as a component of the cost of construction in progress.
The following is a summary of interest cost incurred during 2005, 2006 and 2007:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Interest cost capitalized
    
    
    20,991
    
    
    
    18,057
    
    
    
    12,367
    
    
    
    1,809Interest cost charged to consolidated statements of operations
    
    
    70,527
    
    
    
    117,491
    
    
    
    125,244
    
    
    
    18,325Total interest cost incurred
    
    
    91,518
    
    
    
    135,548
    
    
    
    137,611
    
    
    
    20,134
 7
    
    Other income, netOther income, net consists of:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Interest income
    
    
    21,744
    
    
    
    47,124
    
    
    
    54,205
    
    
    
    7,931Foreign exchange gain/(loss), net
    
    
    607
    
    
    
    (41,940
    )
    
    
    (37,172
    )
    
    
    (5,438
    )Dividend income from other investments
    
    
    7,815
    
    
    
    
    
    
    
    4,897
    
    
    
    717Rental income
    
    
    6,078
    
    
    
    1,766
    
    
    
    1,499
    
    
    
    219Loss on dilution of equity interests in affiliates
    
    
    
    
    
    
    (1,188
    )
    
    
    (2,591
    )
    
    
    (379
    )Gain on redemption of other investments (Note 17(b)(ii))
    
    
    
    
    
    
    28,457
    
    
    
    17,478
    
    
    
    2,557Net gain/(loss) on changes in fair value of embedded
derivatives (Note 17(b))
    
    
    
    
    
    
    (3,617
    )
    
    
    6,139
    
    
    
    898Others, net
    
    
    (10,795
    )
    
    
    8,254
    
    
    
    9,099
    
    
    
    1,33125,449
    
    
    
    38,856
    
    
    
    53,554
    
    
    
    7,836
 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
 F-21




---



##### Table of Contents



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 2005, 2006 and 2007 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 2005, 2006 and 2007.Pursuant to the income tax law of the PRC concerning foreign investment and foreign enterprises
(the FEIT Law), the applicable income tax rate through December 31, 2007 of Yuchai was 15%. Since
January 1, 2002, Yuchai was subject to tax at a rate of 15% so long as it continued to qualify
as a foreign-invested enterprise eligible for tax reductions under PRC income tax law.In 2007, the National Peoples Congress approved and promulgated a new tax law, Chinas Unified
Enterprise Income Tax Law (CIT law), which became effective January 1, 2008. Under the CIT
law, foreign invested enterprises and domestic companies are subject to a uniform tax rate of
25%. The CIT law provides a five-year transition period from its effective date for those
enterprises which were established before the promulgation date of the CIT law and which were
entitled to a preferential lower tax rate under the then-effective tax laws or regulations. In
accordance with a grandfathering provision, the CIT law also provides for a graduated tax rate
increase over a five-year period from an existing reduced tax rate to the uniform tax rate of
25%.In 2008, Yuchai has continued to fulfill the requirements to qualify for an extension to the
reduced tax rate of 15% which will continue to 2010 in accordance with transitional
arrangements in the CIT law. Subsequent to this, Yuchai can apply for other programs which may
be available to provide a reduced rate. In the event that Yuchai is ineligible for either an
extension to the existing tax rate reduction or the transitional graduated rates noted above,
Yuchai would be subject to tax at a rate of 25%. For all of
Yuchais subsidiaries that were
previously subjected to tax at a rate of 33%, the rate has been lowered to 25% following the
CIT law.The CIT law also provides for a tax of 10% to be withheld from dividends paid to foreign
investors of PRC enterprises. This withholding tax provision does not apply to dividends paid
out of profits earned prior to January 1, 2008. Beginning on
January 1, 2008, a 10% withholding tax will be imposed on
dividends paid to CYI, a non-PRC resident enterprise, unless an
applicable tax treaty provides for a lower tax rate and the Company
will recognize withholding taxes payable for profits accumulated after December
31, 2007 as the Company does not plan to indefinitely reinvest these
earnings.Earnings/(loss) before income taxes and minority interests comprise the following:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$PRC
    
    
    17,942
    
    
    
    292,359
    
    
    
    845,239
    
    
    
    123,671Non-PRC
    
    
    (43,032
    )
    
    
    (88,964
    )
    
    
    (61,325
    )
    
    
    (8,973
    )Total
    
    
    (25,090
    )
    
    
    203,395
    
    
    
    783,914
    
    
    
    114,698
 Income tax expense in the consolidated statements of operations consists of:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$PRCCurrent tax expense
    
    
    30,198
    
    
    
    50,462
    
    
    
    33,881
    
    
    
    4,958Deferred tax expense/(benefit)
    
    
    (20,050
    )
    
    
    (19,996
    )
    
    
    34,637
    
    
    
    5,06710,148
    
    
    
    30,466
    
    
    
    68,518
    
    
    
    10,025
 F-22




---



##### Table of Contents



Income tax expense reported in the consolidated statements of operations differs from the
amount computed by applying the PRC income tax rate of 15% for the three years ended December
31, 2007 for the following reasons:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Computed expected tax expense/(benefit)
    
    
    (3,764
    )
    
    
    30,509
    
    
    
    117,587
    
    
    
    17,205Adjustments resulting from: Non-deductible expenses related to errors
correction (see Note (ii))
    
    
    10,623
    
    
    
    7,795
    
    
    
    
    
    
    
     Non-deductible expenses
    
    
    5,703
    
    
    
    4,053
    
    
    
    8,411
    
    
    
    1,231
Effect of change in tax law on allowance for doubtful loans to a related party (see Note (iii))
    
    
    
    
    
    
    
    
    
    
    27,650
    
    
    
    4,045 Tax credits on purchase of property,
plant and equipment (see Note (i))
    
    
    (43,535
    )
    
    
    (6,895
    )
    
    
    (70,877
    )
    
    
    (10,370
    ) Tax credits on purchase
of property, plant and equipment forfeited
    
    
    
    
    
    
    
    
    
    
    8,861
    
    
    
    1,296 Tax
credits for R& D expense (see Note (i))
    
    
    
    
    
    
    (10,386
    )
    
    
    (11,877
    )
    
    
    (1,738
    ) Change in valuation allowance
    
    
    45,231
    
    
    
    (6,492
    )
    
    
    (34,699
    )
    
    
    (5,077
    ) Tax rate differential
    
    
    (4,110
    )
    
    
    11,882
    
    
    
    18,314
    
    
    
    2,680 Other
    
    
    
    
    
    
    
    
    
    
    5,148
    
    
    
    753Actual tax expense
    
    
    10,148
    
    
    
    30,466
    
    
    
    68,518
    
    
    
    10,025
 
 Notes:(i)
    
    Amounts mainly represent tax credits relating to the purchase of domestic equipment
for technological improvement and for approved research and development costs.(ii)
    
    Amount relates to non-deductible permanent differences from the restatement of the
Companys 2005 financial statements as at May 15, 2008 as such expenses are not expected
to be deductible in accordance with PRC regulations.(iii)
    
    Amount pertains to the elimination of the deferred tax asset
previously recognized on a loan loss provision to a related party
(see Note 5), which is no longer considered to be a deductible
temporary difference due to a change in CIT law in 2007. The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets at December 31, 2006 and 2007 are presented below:
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Trade accounts receivable
    
    
    36,806
    
    
    
    31,836
    
    
    
    4,658Inventories
    
    
    23,251
    
    
    
    19,124
    
    
    
    2,798Property, plant and equipment
    
    
    26,982
    
    
    
    31,407
    
    
    
    4,595Accrued expenses and other liabilities
    
    
    49,384
    
    
    
    68,381
    
    
    
    10,005Tax losses carried forward
    
    
    5,075
    
    
    
    1,152
    
    
    
    169Tax credits
    
    
    50,434
    
    
    
    
    
    
    
    Loans to a related party
    
    
    29,304
    
    
    
    
    
    
    
    Total gross deferred tax assets
    
    
    221,236
    
    
    
    151,900
    
    
    
    22,225Less: Valuation allowance (see Note (i))
    
    
    38,739
    
    
    
    4,040
    
    
    
    591Net deferred tax assets
    
    
    182,497
    
    
    
    147,860
    
    
    
    21,634
 
 Note:(i)
    
    An analysis of the valuation allowance for 2006 and 2007 is as follows: December 312006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Balance at beginning of year
    
    
    45,231
    
    
    
    38,739
    
    
    
    5,668Less:
 F-23




---



##### Table of Contents



December 312006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Reduction in valuation allowance for forfeited unused tax credits
    
    
    
    
    
    
    (8,861
    )
    
    
    (1,297
    )Realization
of deferred tax assets in the current year
    
    
    
    
    
    
    (25,838
    )
    
    
    (3,780
    )Reduction in
valuation allowance for changes in circumstances that caused a change
in judgment about the realizability of deferred tax assets
    
    
    (6,492
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    38,739
    
    
    
    4,040
    
    
    
    591
 The following table represents the classification of the Groups net deferred tax assets:
 December 312006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Net deferred tax assets comprise:Current portion
    
    
    112,779
    
    
    
    114,361
    
    
    
    16,733Non-current portion
    
    
    69,718
    
    
    
    33,499
    
    
    
    4,901182,497
    
    
    
    147,860
    
    
    
    21,634
 As of December 31, 2007, Yuchai was granted tax credits amounting to
Rmb11,877 (US$1,738) in relation to approved research and development costs and
Rmb70,877 (US$10,370) relating to the purchase of certain domestic equipment. According to the
relevant laws and regulations in the PRC prior to the new CIT law, the amount of credits
relating to the purchase of certain domestic equipment entitled for deduction each year is
limited to the incremental current income tax expense of the subsidiary for the year compared
to the income tax expense of the subsidiary in the year immediately prior to the year the
credit was approved. All the approved tax credits, including credits of Rmb50,434 (US$7,379)
relating to the purchase of certain domestic equipment carried over from prior years, were
fully utilized against current income taxes in 2007, except for Rmb8,861 (US$1,296) that have been
forfeited as of December 31, 2007 due to provisions of the new CIT law, which no longer allows
such tax credits to be accrued and existing credits unused as of December 31, 2007 are not
permitted to be carried forward.As at December 31, 2007, one of the subsidiaries of the Company had tax loss carry forwards for
PRC income tax purposes of Rmb4,608 (US$674), which are available to offset future taxable
income, if any, and will expire if unused by 2010. This subsidiary has been loss making since
its commencement of operations in 2004 and management deems it more likely than not that the
deferred tax assets relating to the tax loss carry forwards as well as other
deductible temporary differences of this subsidiary will not be
realized. A total valuation
allowance of Rmb4,040 (US$591) has been provided for all of its deferred tax assets as at
December 31, 2007. The reduction in valuation allowance in 2007
primarily arises from the reversal of a
valuation allowance for tax credits of Rmb18,241 carried forward from 2005 that have been utilized in 2007 due to unforseeable positive results actually achieved during the current year, for unused tax credits of Rmb8,861 that were forfeited as of December 31, 2007, and for deferred tax assets of other subsidiaries that were previously loss making but have now become profitable. Management believes that it is more likely than not that the results of future operations in the
next four years will generate sufficient taxable income to allow the
realization of the tax benefit of the
deferred tax assets at December 31, 2007.The Company and its subsidiaries adopted the provisions of FIN 48 on January 1, 2007, and there
was no material effect on the consolidated financial statements. As a result, the Company and its
subsidiaries did not record any cumulative effect adjustment related to adopting FIN 48.As of January 1, 2007, and for the 12-month period ended December 31, 2007, the Company and its subsidiaries
did not have any material unrecognized tax benefits and thus, no significant interest and penalties related to
unrecognized tax benefits were recognized. In addition, the Company and its subsidiaries do not expect that the
amount of unrecognized tax benefits will change significantly within the next 12 months.In the event of under-reporting of taxable income as a result of filing method, that is
based on management accounts instead of the audited financial statements, the tax bureau can
claw back the underpaid taxes within three years and impose late payment surcharges. If the
accumulative underpaid tax would be more than Rmb100, the claw back period could be extended to
five years.In 2006, the provincial tax bureau completed an examination
of Yuchais PRC income tax returns
for 2001 through 2005. The tax bureau did not make any adjustment to
Yuchais tax positions, and
no surcharge or penalty was imposed. The income tax returns of Yuchai
for the years ended December 31, 2005 through 2007
remain subject to examination by the PRC tax authorities. For all other PRC subsidiaries, the income tax
returns for the years ended December 31, 2003 through 2007 are open to examination.
 F-24




---



##### Table of Contents



9
    
    Trade accounts and bills receivable, netTrade accounts and bills receivable, net comprise:
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Trade accounts receivable
    
    
    517,130
    
    
    
    732,682
    
    
    
    107,203Less: Allowance for doubtful accounts
    
    
    90,365
    
    
    
    64,893
    
    
    
    9,495426,765
    
    
    
    667,789
    
    
    
    97,708Bills receivable
    
    
    1,054,153
    
    
    
    2,439,996
    
    
    
    357,0061,480,918
    
    
    
    3,107,785
    
    
    
    454,714
 An analysis of the allowance for doubtful accounts for 2005, 2006 and 2007 is as follows:
 December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Balance at beginning of year
    
    
    107,457
    
    
    
    69,047
    
    
    
    90,365
    
    
    
    13,222Add:Charge
(credit) to consolidated statements of operations
    
    
    25,587
    
    
    
    21,582
    
    
    
    (11,008
    )
    
    
    (1,611
    )Less:Written off
    
    
    (63,997
    )
    
    
    (264
    )
    
    
    (14,464
    )
    
    
    (2,116
    )Balance at end of year
    
    
    69,047
    
    
    
    90,365
    
    
    
    64,893
    
    
    
    9,495
 At December 31, 2006 and 2007, gross trade accounts receivable due from a major customer,
Dongfeng Automobile Company and its affiliates (the Dongfeng companies) were Rmb121,336 and
Rmb117,728 (US$17,225), respectively. See Note 33(a) for further discussion of customer
concentration risk.As of December 31, 2006 and 2007, no trade accounts receivable was pledged as security under
loan arrangements (see Note 18(a)).10
    
    Amounts due from/(to) related parties
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Amounts due from:SHC & subsidiaries
    
    
    54,987
    
    
    
    88,207
    
    
    
    12,906YMCL & subsidiaries
    
    
    96,547
    
    
    
    27,459
    
    
    
    4,018Others
    
    
    6,978
    
    
    
    27,986
    
    
    
    4,094Due within one year
    
    
    158,512
    
    
    
    143,652
    
    
    
    21,018
 An analysis of the allowance for doubtful accounts due from related parties for 2005, 2006 and 2007 is as follows:
 December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Balance at beginning of year
    
    
    
    
    
    
    
    
    
    
    33,170
    
    
    
    4,853Add:Charge to consolidated
statements of operations in current
year
    
    
    
    
    
    
    33,170
    
    
    
    
    
    
    
    Less:Written off
    
    
    
    
    
    
    
    
    
    
    (3,863
    )
    
    
    (565
    )Balance at end of year
    
    
    
    
    
    
    33,170
    
    
    
    29,307
    
    
    
    4,288
 F-25




---



##### Table of Contents



December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Amounts due to:SHC & subsidiaries
    
    
    64,761
    
    
    
    183,595
    
    
    
    26,863YMCL & subsidiaries
    
    
    3,863
    
    
    
    191,184
    
    
    
    27,973HLMS
    
    
    9,287
    
    
    
    5,742
    
    
    
    840Due within one year
    
    
    77,911
    
    
    
    380,521
    
    
    
    55,676
 Related parties include Guangxi Yuchai Mechanical and Electronics Company (GYMEC), Hong Leong
Management Services Pte. Ltd. (HLMS), TCL, HLGE, YMCL
(excluding YMCL loans disclosed in Note 5), State Holding Company (SHC) and
their subsidiaries and affiliates. At December 31, 2007, the amounts due from/to related
parties are unsecured, interest free and arose principally from transactions as disclosed in
Note 27 and from the purchase of all of the share capital of Yulin
Hotel Company (see Note 34). All amounts due from/to related parties are payable on demand.In June 2006, YMCL and State Holding Company entered into an agreement with Yuchai to enable
Yuchai and its subsidiaries to settle the amounts due from/to YMCL, State Holding Company and
their subsidiaries on a net basis, i.e. the balance due from/to YMCL, State Holding Company,
their subsidiaries and affiliates as of December 31, 2006 and 2007 were offset for settlement
purposes only.11
    
    Loans to customers, netLoans to customers, net refers to the designated loans lent by YEGCL through financial
institutions to customers. The terms of the loan agreements were designated by the Group. The
financial institutions assist the Group to release the principal to the borrowers and collect
the repayment on behalf of the Group without bearing the risk of default by customers, if any.
The loans carried interest rates ranging from 5.31% to 7.49% per annum and are repayable in
installments within one year. The loans are secured and guaranteed by independent third
parties.12
    
    InventoriesInventories are comprised of:
 December 312006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Raw materials
    
    
    1,058,619
    
    
    
    942,798
    
    
    
    137,945Work in progress
    
    
    24,251
    
    
    
    17,647
    
    
    
    2,581Finished goods
    
    
    482,313
    
    
    
    686,580
    
    
    
    100,4571,565,183
    
    
    
    1,647,025
    
    
    
    240,983
 F-26




---



##### Table of Contents



13
    
    Other receivables, net
 Other receivables, net comprise:
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$VAT recoverable
    
    
    66,005
    
    
    
    8,063
    
    
    
    1,180Staff loans
    
    
    6,602
    
    
    
    3,406
    
    
    
    498Staff advances
    
    
    4,803
    
    
    
    4,665
    
    
    
    682Amounts due under guarantee contracts, net (see Note 24(d))
    
    
    15,189
    
    
    
    10,440
    
    
    
    1,528Land deposit
    
    
    5,000
    
    
    
    5,000
    
    
    
    732Interest receivable from affiliates
    
    
    19,658
    
    
    
    50,599
    
    
    
    7,403Others
    
    
    22,812
    
    
    
    14,901
    
    
    
    2,180140,069
    
    
    
    97,074
    
    
    
    14,203
 14
    
    Property, plant and equipment, net
 Property, plant and equipment, net comprise:
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Buildings, including leasehold improvements
    
    
    854,241
    
    
    
    1,096,622
    
    
    
    160,452Machinery and equipment
    
    
    2,119,912
    
    
    
    2,426,938
    
    
    
    355,096Office and computer equipment
    
    
    97,342
    
    
    
    106,995
    
    
    
    15,6543,071,495
    
    
    
    3,630,555
    
    
    
    531,202Less: Accumulated depreciation and amortization
    
    
    1,276,090
    
    
    
    1,472,309
    
    
    
    215,420Property, plant and equipment, net
    
    
    1,795,405
    
    
    
    2,158,246
    
    
    
    315,782
 Loss on disposal of property, plant and equipment for the years ended December 31, 2005, 2006
and 2007 is included in Selling, general and administrative expenses as follows:
 December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Loss on disposal of property, plant and equipment
    
    
    10,474
    
    
    
    1,598
    
    
    
    5,926
    
    
    
    867
 15
    
    Construction in progress
 Construction in progress consists of capital expenditures and capitalized interest charges
relating to the construction of facilities and assembly lines projects as follows:
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Diesel engine production line and facilities projects
    
    
    172,278
    
    
    
    86,543
    
    
    
    12,662Factories auxiliary facilities
    
    
    47,680
    
    
    
    47,068
    
    
    
    6,887Second foundry
    
    
    8,704
    
    
    
    12,034
    
    
    
    1,761Others
    
    
    59,897
    
    
    
    39,276
    
    
    
    5,747288,559
    
    
    
    184,921
    
    
    
    27,057
 F-27




---



##### Table of Contents



16
    
    Lease prepayments
 The lease prepayments are summarized as follows:
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Gross payments for land use rights
    
    
    155,596
    
    
    
    203,127
    
    
    
    29,721Less: Amounts charged to expense
    
    
    30,652
    
    
    
    35,125
    
    
    
    5,140Lease prepayments
    
    
    124,944
    
    
    
    168,002
    
    
    
    24,581
 The land on which the Group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.
Lease prepayment represents those amounts paid for land use rights to the PRC government. The
prepayments are charged ratably to expense over the term of the land use agreement. In the
event that land use rights are sold or transferred, the remaining balance of the prepayment is
derecognized and any resulting gain or loss is recorded. Lease prepayments charged to expense
were Rmb3,339, Rmb3,328 and Rmb4,702 (US$688) for the years ended December 31, 2005, 2006 and
2007, respectively.
 17
    
    Investments
 (a)
    
    Investments as of December 31, 2006 and 2007 are summarized as follows:
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Investments in affiliates under the equity method
    
    
    508,246
    
    
    
    505,009
    
    
    
    73,890Other investments in debt and equity securities
of affiliates(see Note 17 (e))
    
    
    640,192
    
    
    
    615,201
    
    
    
    90,0131,148,438
    
    
    
    1,120,210
    
    
    
    163,903
 (b)
    
    Investments in affiliates accounted for using the equity method as of December 31, 2006 and
2007 are as follows:
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Listed:TCL (see Note (i))
    
    
    385,583
    
    
    
    387,930
    
    
    
    56,760HLGE (see Note (ii))
    
    
    117,360
    
    
    
    112,648
    
    
    
    16,482Unlisted:Others (see Note (iii))
    
    
    5,303
    
    
    
    4,431
    
    
    
    648508,246
    
    
    
    505,009
    
    
    
    73,890
  
 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 (Rmb152,133)
and S$1,400,000 (Rmb6,890) respectively. As a result, the Company held a 15.99% equity interest in
TCL as of December 31, 2005.In February 2006, the Company acquired an additional 3.37% interest in TCL and S$52,933,440
principal amount of convertible bonds of TCL pursuant to a rights issue by TCL for an
aggregate cash consideration of S$49.4 million (Rmb243,230). The total purchase consideration
has been allocated to the ordinary shares, the bond host instrument and the embedded
conversion option based on their respective fair values of S$7 million (Rmb34,626), S$33.3
million (Rmb163,924) and S$9.1 million (Rmb44,680). The Company has separately accounted for
the conversion option as an embedded derivative instrument subject to fair value adjustment
through earnings. The remaining host instrument of the convertible bonds has been accounted
for as an available-for-sale debt security through August 2006, at which time the Company
exercised its option and converted the bonds into 529,334,400 ordinary shares of TCL.
 F-28




---



##### Table of Contents



Immediately prior to the conversion, the fair value of the bond host instrument had increased
by S$3.3 million (Rmb20,942), which was reclassified from Accumulated other comprehensive
income/(loss) and included as a part of the cost of the additional equity interest in TCL
acquired as a result of the conversion. The decrease in fair value of the embedded conversion
option of S$1.2 million (Rmb5,662) has been recorded as a charge
in the 2006 consolidated
statement of operations. The fair value of the embedded conversion option immediately prior to
the conversion of S$7.9 million (Rmb39,984) has also been included in the cost of the
additional interest in TCL. The conversion resulted in CYI increasing its interest in TCL by a
further 17.25%. As of December 31, 2006, the Companys equity interest in TCL was 36.61%.During the year ended 2007, the Company did not acquire new shares in TCL. However, as a
result of the conversion of convertible bonds into new ordinary shares by TCLs third party
bondholders, the Companys interest in TCL has been diluted to 34.42%. The loss in dilution
was Rmb2,591 (US$379). As of December 31, 2007, the Company held 898,990,352 shares (2006:
898,990,352 shares) of TCLs ordinary shares.As of December 31, 2006 and 2007, the Companys underlying equity in net assets of TCL
exceeded the carrying amount of its investment in TCL by Rmb64,897 and Rmb66,063 (US$9,666),
respectively, primarily related to the differences between the fair value and book value of
certain assets of TCL at the time of the respective acquisitions.The fair value, based on the quoted market price, of the TCL shares held by the Company was
S$80.9 million (Rmb405,560) and S$49.4 million (Rmb 235,047) as of December 31, 2007 and
December 31, 2008 respectively. It is reasonably possible that
in 2008 the Company will need to recognize an other than temporary
impairment charge pertaining to its investment in TCL.(ii)
    
    On February 3, 2006, the Company acquired a portfolio of debt and equity securities of HLGE
for an aggregate purchase consideration of approximately S$132 million (Rmb653,178) from
several unrelated parties. The portfolio consisted of:
 
    
    191,413,465 ordinary shares, representing 29.13% of the total issued and
outstanding ordinary shares of HLGE;
    
    S$129,428,256 in principal amount of secured bonds (the Secured Bonds);
    
    15,376,318 Series A mandatorily redeemable convertible preference shares of par
value S$0.05 each (RCPS A); and
    
    107,634,237 Series B redeemable convertible preference shares of par value
S$0.05 each (RCPS B).
 With the investments in the ordinary shares of HLGE, the Company is able to exercise
significant influence over the operating and financing policies of HLGE. The investment in the
ordinary shares of HLGE has been accounted for under the equity method.The Secured Bonds were accounted for as available-for-sale securities. The Secured Bonds were
due to mature in March 2010, and the interest payable on the bonds was calculated based on the
actual net cashflows derived from the assets on which the bonds are secured. The secured bonds were
redeemed on July 4, 2006, as described below.The RCPS A are mandatorily redeemable by HLGE and are more akin to a debt instrument. As such,
the conversion option is not clearly and closely related to the host instrument and is
therefore accounted for separately as an embedded derivative instrument, subject to the fair
value adjustment through earnings. The RCPS A host instrument, other than the embedded
conversion option, has been accounted for as an available-for-sale debt security.RCPS A is redeemable upon the disposal of certain properties and upon any new issue of HLGE
ordinary shares with the purpose of raising funds for the redemption of RCPS A. Any
outstanding RCPS A will be mandatorily redeemed in March 2015. RCPS A can also be converted
into ordinary shares at the conversion ratio of 1:1 upon the passing of a special resolution
at a meeting of the holders of the RCPS A any time prior to March 2015.The RCPS B are neither mandatorily redeemable nor redeemable at the option of the Company and
are akin to an equity instrument. The embedded conversion option is deemed to be clearly and
closely related to the host instrument and as the RCPS Bs fair value is not readily
determinable, the instrument in its entirety has been accounted for under the cost method.RCPS B is redeemable upon the disposal of certain properties and upon any new issue of HLGE
ordinary shares with the purpose of raising funds for the redemption of RCPS B. RCPS B which
are not redeemed prior to March 2010, shall be mandatorily converted to ordinary shares at the
conversion ratio of 1:1 in March 2010. RCPS B can also be converted into ordinary shares at
the conversion ratio of 1:1 upon the passing of a special resolution at a meeting of the
holders of the RCPS B any time prior to March 2010.
 F-29




---



##### Table of Contents



The aggregate purchase consideration of S$132 million was allocated to the above instruments
based on their respective fair values as follows:
 Fair valueS$000Secured bonds
    
    
    109,543RCPS A
    
    
    1,948RCPS AEmbedded equity derivatives
    
    
    137RCPS B
    
    
    7,221Ordinary shares
    
    
    12,766131,615
 In June and December of 2006, HLGE partially redeemed a portion of RCPS A and RCPS B as
required by the terms of the preference share agreement as a result of the disposals of
certain assets. The proceeds from the partial redemptions amounted to S$2.4 million
(Rmb11,907), resulting in a gain of S$1.7 million (Rmb8,907).On February 28, 2006, HLGE announced a proposed renounceable rights issue of zero coupon
unsecured non-convertible bonds due in July 2009 (the New Bonds) and non-redeemable
convertible cumulative preference shares in the capital of HLGE (the NCCPS) to raise funds
for the purpose of redeeming existing Secured Bonds and for working capital purposes. On July
4, 2006, in connection with the rights issue, the Company was allotted 196,201,374 of NCCPS
and S$130,800,917 in principal amount of the New Bonds at a total consideration of S$135
million (Rmb677,010). In conjunction with the allotment, the Secured Bonds were redeemed at
their principal value of S$129.4 million.At the date of settlement, the fair value of the newly acquired NCCPS and New Bonds was S$8
million and S$109.3 million, respectively, the sum of which exceeded the aggregate of the
S$5.3 million cash payment by the Company and the fair value of the Secured Bonds of S$109
million, resulting in a net gain of approximately S$3 million. The gain primarily related to
an unrealized gain of S$2.3 million (Rmb19,550) immediately prior to the redemption of the
Secured Bonds, which had been included in Accumulated other comprehensive income/ (loss) and
was reclassified and included in Other income, net upon redemption.The New Bonds have been accounted for as available-for-sale debt securities. The investment in
NCCPS, which does not have a readily determinable fair value, was accounted for using the cost
method. On November 15, 2006, the Company exercised its right to convert all of its
196,201,374 NCCPS into 196,201,374 new ordinary shares of HLGE. As a result of the conversion
of the NCCPS, the Companys interest in HLGE increased to 45.42% of the total issued and
outstanding ordinary shares of HLGE.On June 19, 2007, HLGE partially redeemed the New Bonds. The proceeds from the partial
redemption amounted to S$18.7 million (Rmb88,652), resulting in a gain of Rmb17,478
(US$2,557), from the reclassification into earnings of previously unrealized gains that were
included in Accumulated Other Comprehensive Income. The principal amount of the New Bonds was
S$130,800,917 before redemption and S$112,886,727 after redemption.During the year ended 2007, the Company did not acquire new shares in HLGE. However, new
ordinary shares were issued by HLGE arising from the third partys conversion of
the NCCPS, and the Companys interest in HLGE
has been diluted to 45.39% (2006: 45.42%). There was an insignificant loss recognized in earnings
in 2007 resulting from this dilution. As of December 31, 2007, the Company held 387,614,839
shares (2006: 387,614,839 shares) of HLGEs ordinary shares. Assuming full conversion of the
existing Preference Shares held by the Company which would trigger
the full conversion of the existing preference shares held by the
other holders, and assuming that none of the other holders of the
NCCPS convert their NCCPS, the
Companys equity interest in HLGE would increase from 45.39% to
51.68%.As of December 31, 2006 and 2007, the Companys carrying value of its investments in HLGE
exceeded its underlying equity in HLGEs net assets by Rmb148,145 and Rmb139,937 (US$20,475),
respectively, primarily related to the differences between the fair value and book value of
the certain assets and liabilities of HLGE. These differences will be amortized over the respective
periods consistent with the manner in which the underlying assets and liabilities are
depreciated or otherwise accreted to HLGEs earnings, as adjustments to the Companys share of
earnings or loss of HLGE.The fair value, based on the quoted market price, of the HLGE ordinary shares held by the
Company was S$89.2 million (Rmb446,874) and S$21.3 million
(Rmb101,344) as of December 31,
2007 and December 31, 2008 respectively. The fair values of its other debt and equity
investments in HLGE at December 31, 2008 have not yet been determined.It is reasonably possible that in 2008 the Company will need to recognize an other than temporary
impairment charge pertaining to its investments in HLGE.
 F-30




---



##### Table of Contents



(iii)
    
    Represents the Companys interests 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 do not have the controlling financial interests. The Companys equity in net loss of these
PRC entities amounts to Rmb198 (US$29).
 (c)
    
    Summarized consolidated financial information of TCL as of December 31, 2006 and 2007, and
the years ended December 31, 2006 and 2007 is as follows:
 December 31,
    
    December 31,
    
    December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Financial positionCurrent assets
    
    
    979,767
    
    
    
    941,398
    
    
    
    137,740Property, plant and equipment, net
    
    
    113,457
    
    
    
    96,405
    
    
    
    14,105Other assets
    
    
    369,498
    
    
    
    407,627
    
    
    
    59,642Total assets
    
    
    1,462,722
    
    
    
    1,445,430
    
    
    
    211,487Current liabilities
    
    
    139,208
    
    
    
    102,736
    
    
    
    15,032Long term debt
    
    
    65,497
    
    
    
    1,549
    
    
    
    227Total liabilities
    
    
    204,705
    
    
    
    104,285
    
    
    
    15,259Minority interests
    
    
    27,256
    
    
    
    22,165
    
    
    
    3,243Stockholders equity
    
    
    1,230,761
    
    
    
    1,318,980
    
    
    
    192,985Total liabilities, minority interests and stockholders equity
    
    
    1,462,722
    
    
    
    1,445,430
    
    
    
    211,487
 Year ended
    
    Year ended
    
    Year endedDecember 31, 2006
    
    December 31, 2007
    
    December 31, 2007Rmb
    
    Rmb
    
    US$Statement of operationsRevenue
    
    
    1,225,028
    
    
    
    1,451,188
    
    
    
    212,330Gross profit
    
    
    62,796
    
    
    
    88,446
    
    
    
    12,941Operating profit/(loss)
    
    
    (97,426
    )
    
    
    25,915
    
    
    
    3,792Income tax credit/(expense)
    
    
    9,089
    
    
    
    (9,011
    )
    
    
    (1,319
    )Income/(loss) before minority interest
    
    
    (88,337
    )
    
    
    16,904
    
    
    
    2,473Minority interests in income of
consolidated subsidiaries
    
    
    4,997
    
    
    
    2,367
    
    
    
    346Net income/(loss)
    
    
    (83,340
    )
    
    
    14,537
    
    
    
    2,127The Companys equity in income/(loss) of TCL
    
    
    (23,923
    )
    
    
    5,925
    
    
    
    867
 The Companys equity in income/(loss) of TCL, net of nil
tax, is determined as follows:
 Year ended
    
    Year ended
    
    Year endedDecember 31, 2006
    
    December 31, 2007
    
    December 31, 2007Rmb
    
    Rmb
    
    US$Based on the
respective equity interest
    
    
    (24,448
    )
    
    
    4,997
    
    
    
    731Adjustment
to account for the basis difference
    
    
    525
    
    
    
    928
    
    
    
    136(23,923
    )
    
    
    5,925
    
    
    
    867
 F-31




---



##### Table of Contents



(d)
    
    Summarized consolidated financial information of HLGE as of December 31, 2006 and 2007 and for
the period from February 3, 2006 to December 31, 2006 and the year ended December 31, 2007 is as follows:
 December 31,
    
    December 31,
    
    December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Financial positionCurrent assets
    
    
    371,762
    
    
    
    356,135
    
    
    
    52,108Property, plant and equipment, net
    
    
    92,278
    
    
    
    86,331
    
    
    
    12,632Other assets
    
    
    347,807
    
    
    
    303,193
    
    
    
    44,361Total assets
    
    
    811,847
    
    
    
    745,659
    
    
    
    109,101Current liabilities
    
    
    62,065
    
    
    
    51,850
    
    
    
    7,586Non-current liabilities
    
    
    817,560
    
    
    
    753,930
    
    
    
    110,311Total liabilities
    
    
    879,625
    
    
    
    805,780
    
    
    
    117,897Stockholders deficit
    
    
    (67,778
    )
    
    
    (60,121
    )
    
    
    (8,796
    )Total liabilities and stockholders deficit
    
    
    811,847
    
    
    
    745,659
    
    
    
    109,101
 Period fromFebruary 3, 2006 to
    
    Year ended
    
    Year endedDecember 31, 2006
    
    December 31, 2007
    
    December 31, 2007Rmb
    
    Rmb
    
    US$Statement of operationsRevenue
    
    
    37,110
    
    
    
    30,065
    
    
    
    4,399Gross profit
    
    
    19,133
    
    
    
    18,009
    
    
    
    2,635Operating profit
    
    
    (2,556
    )
    
    
    22,502
    
    
    
    3,293Income tax expense
    
    
    (265
    )
    
    
    (2,376
    )
    
    
    (348
    )Income before minority interest
    
    
    (2,821
    )
    
    
    20,126
    
    
    
    2,945Equity in net income/(loss), net of affiliates
    
    
    (18,853
    )
    
    
    8,751
    
    
    
    1,280Profit/(loss) from continuing operations
    
    
    (21,674
    )
    
    
    28,877
    
    
    
    4,225Income from discontinued operations
    
    
    44,213
    
    
    
    
    
    
    
    Net income
    
    
    22,539
    
    
    
    28,877
    
    
    
    4,225The Companys equity in income of HLGE
    
    
    1,395
    
    
    
    8,321
    
    
    
    1,218
 The Companys equity in income of HLGE, net of nil tax, is determined as follows:
 Period fromFebruary 3, 2006
    
    Year ended
    
    Year endedto December 31,
    
    December 31,
    
    December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Based on the respective equity interest
    
    
    6,865
    
    
    
    11,716
    
    
    
    1,715Adjustment to account for the basis difference
    
    
    (5,470
    )
    
    
    (3,395
    )
    
    
    (497
    )1,395
    
    
    
    8,321
    
    
    
    1,218
 F-32




---



##### Table of Contents



(e)
    
    Other investments as of December 31, 2006 and 2007 not described above are summarized as
follows:
 2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Available for sale securities, at fair value:Unsecured bonds
    
    
    589,637
    
    
    
    558,852
    
    
    
    81,768RCPS A
    
    
    10,646
    
    
    
    12,736
    
    
    
    1,864Embedded derivativesRCPS A  Embedded equity derivatives
    
    
    1,505
    
    
    
    7,383
    
    
    
    1,080Investment securities, at cost:Unquoted equity securities
    
    
    6,355
    
    
    
    6,255
    
    
    
    915RCPS B
    
    
    32,049
    
    
    
    29,975
    
    
    
    4,386640,192
    
    
    
    615,201
    
    
    
    90,013
 The maximum loss that would be incurred arising from all financial instruments in the event
that HLGE failed to perform according to terms of the contracts, would be represented by their
fair values of Rmb608,946 (US$89,097) (2006: Rmb633,837).Initial fair value, gross unrealized holding gain, and period-end fair value of
available-for-sale securities as of December 31, 2007, were as follows:
 Gross unrealized
    
    Carrying value
 
    Carrying valueInitial
fair value
    
    holding gains
    
    (Fair value)
 
    (Fair value)Rmb
    
    Rmb
    
    Rmb
 
    US$Unsecured bonds of HLGE
    
    
    461,645
    
    
    
    97,207
    
    
    
    558,852
    
    
    
    81,768RCPS A of HLGE
    
    
    8,513
    
    
    
    4,223
    
    
    
    12,736
    
 
    
    1,864470,158
    
    
    
    101,430
    
    
    
    571,588
    
 
    
    83,632
 The fair values of available-for-sale securities are estimated using the discounted cash flow
methodology.Maturities of securities classified as available-for-sale were as follows as of December 31,
2006 and 2007:
 December 31,
    
    December 31,
    
    December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Due after one year through five years
    
    
    589,637
    
    
    
    558,852
    
    
    
    81,768Due after five years through ten years
    
    
    10,646
    
    
    
    12,736
    
    
    
    1,864
 18
    
    Bank debt
 (a)
    
    Short-term bank loansShort-term bank loans are denominated as follows:
 December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Renminbi denominated loans
    
    
    806,506
    
    
    
    819,164
    
    
    
    119,855Singapore dollars denominated loans
    
    
    202,628
    
    
    
    
    
    
    
    1,009,134
    
    
    
    819,164
    
    
    
    119,855
 The weighted average interest rate of short-term bank loans at December 31, 2006 and 2007 was
4.05% and 4.03% per annum, respectively.As of December 31, 2006, short-term bank loans consist of unsecured loans of Rmb512,628
(US$74,737) and unsecured bonds of Rmb496,506 (US$72,386).As of December 31, 2007, short-term bank loans consist of unsecured loans of Rmb170,000
(US$24,873) and unsecured bonds of Rmb649,164 (US$94,982).
 F-33




---



##### Table of Contents



(b)
    
    Long-term bank loans
 Long-term bank loans comprise:
 Interest rateat December 31,
    
    December 31,2007
    
    2006
    
    2007
    
    2007(per annum)
    
    Rmb
    
    Rmb
    
    US$US$ denominated loans (unless
otherwise stated):Due in 2008 (multi-currency)
    
    
    3.01% - 3.24%
    
    
    
    575,454
    
    
    
    457,787
    (a),(c)&(d)
    
    
    66,981Due in 2010 (multi-currency)
    
    
    2.68% - 3.01%
    
    
    
    
    
    
    
    225,142
    (e)
    
    
    32,941Due in 2010 (RMB denominated loans)
    
    
    5.85%
    
    
    
    100,000
    
    
    
    85,000
    
    
    
    12,437Total long-term bank loans outstanding
    
    
    
    
    
    
    675,454
    
    
    
    767,929
    
    
    
    112,359Less: Amounts due within one year
included under current liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amounts due after one year
    
    
    
    
    
    
    675,454
    
    
    
    767,929
    
    
    
    112,359
 All long-term bank loans are unsecured. 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.
 
 Notes:(a)
    
    The debt is classified as long term because the Company has entered into a
financing agreement that clearly permits the Company to refinance the short-term
obligation on a long term basis.(b)
    
    Unused commitments for total bank facilities was Rmb2,658,071
(US$388,914) as at December 31, 2007. The commitment fee
incurred was Rmb191 (US$28).(c)
    
    US$50.0 million credit facility with Sumitomo Mitsui Banking Corporation, Singapore
Branch (Sumitomo):  (d)
    
    US$25.0 million credit facility with Bank of Tokyo-Mitsubishi, UFJ Ltd, Singapore
Branch (BOTM):  F-34




---



##### Table of Contents



(e)
    
    US$40.0 million credit facility with Sumitomo:  (f)
    
    S$60.0 million credit facility with Oversea-Chinese Banking Corporation Limited
(OCBC):  19
    
    Convertible debt
 On February 23, 2005, the Company issued US$25,000 (Rmb206,913) in principal amount of
convertible debt on a private placement basis. The convertible debt bore an interest rate of
2% per annum and was due to mature in 2012, unless redeemed earlier in accordance with the
terms of the convertible debt. The convertible debt was 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 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Deposits from customers
    
    
    57,577
    
    
    
    32,951
    
    
    
    4,821Staff welfare payable (see Note (i))
    
    
    15,041
    
    
    
    15,041
    
    
    
    2,201Accrued product warranty (see Note 21)
    
    
    163,701
    
    
    
    194,898
    
    
    
    28,516Wages payable
    
    
    127,382
    
    
    
    153,270
    
    
    
    22,426Management bonus payable (see Note (ii))
    
    
    15,035
    
    
    
    94,312
    
    
    
    13,799Payable for construction in progress
    
    
    49,147
    
    
    
    67,707
    
    
    
    9,907Accrued research and development expenses
    
    
    26,947
    
    
    
    8,559
    
    
    
    1,252Accrued advertising expense
    
    
    4,165
    
    
    
    13,096
    
    
    
    1,916Accrued legal fee and other professional fees
    
    
    3,421
    
    
    
    14,298
    
    
    
    2,092Accrued expenses for litigation and guarantees (see Notes 24(c) and (d))
    
    
    7,849
    
    
    
    7,102
    
    
    
    1,039Individual income tax withholding
    
    
    3,890
    
    
    
    10,124
    
    
    
    1,481VAT payable
    
    
    
    
    
    
    13,816
    
    
    
    2,021Guarantee deposit
    
    
    
    
    
    
    10,000
    
    
    
    1,463Accrued sales discount
    
    
    59,769
    
    
    
    94,055
    
    
    
    13,762Accrued interest
    
    
    2,749
    
    
    
    2,133
    
    
    
    312Other payables
    
    
    20,764
    
    
    
    628
    
    
    
    92
 F-35




---



##### Table of Contents



December 31,2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Accrued retirement benefits
    
    
    5,747
    
    
    
    5,747
    
    
    
    841Other accruals and liabilities
    
    
    76,166
    
    
    
    208,938
    
    
    
    30,571639,350
    
    
    
    946,675
    
    
    
    138,512
 
 Note (i):
    
    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.(ii):
    
    Yuchai has a management bonus plan for its executives under
which annual incentive bonuses in an aggregate amount of 3.5% to 10%
of Yuchais after-tax
profit will be paid upon Yuchai achieving the required budgeted after-tax profit as
approved by Yuchais Board of Directors. There are no benefits provided to the directors
of the Company or Yuchai upon their termination of employment. F-36




---



##### Table of Contents



21
    
    Accrued product warranty
 An analysis of the accrued product warranty for 2005, 2006 and 2007 is as follows:
 December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Balance at beginning of year
    
    
    126,114
    
    
    
    142,126
    
    
    
    163,701
    
    
    
    23,952Allowance charged to consolidated statements of
operations
    
    
    179,184
    
    
    
    200,892
    
    
    
    233,838
    
    
    
    34,214Less: Amounts utilized
    
    
    (163,172
    )
    
    
    (179,317
    )
    
    
    (202,641
    )
    
    
    (29,650
    )Balance at end of year
    
    
    142,126
    
    
    
    163,701
    
    
    
    194,898
    
    
    
    28,516
 22
    
    Statutory reserves
 The Companys attributable share in the statutory reserves of Yuchai and its subsidiaries for the three years ended December
31, 2007 is as follows:
 December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Statutory general reserve (see Note (ii))Balance at January 1
    
    
    170,041
    
    
    
    170,280
    
    
    
    171,280
    
    
    
    25,061Transfer from retained earnings
    
    
    239
    
    
    
    1,000
    
    
    
    2,753
    
    
    
    403Balance at December 31
    
    
    170,280
    
    
    
    171,280
    
    
    
    174,033
    
    
    
    25,464Statutory public welfare fund (see Note (iii))Balance at January 1
    
    
    70,482
    
    
    
    70,600
    
    
    
    70,600
    
    
    
    10,330Transfer from retained earnings
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31
    
    
    70,600
    
    
    
    70,600
    
    
    
    70,600
    
    
    
    10,330General surplus reserveBalance at January 1 and December 31
    
    
    25,706
    
    
    
    25,706
    
    
    
    25,706
    
    
    
    3,761Total
    
    
    266,586
    
    
    
    267,586
    
    
    
    270,339
    
    
    
    39,555
 
 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. Since January 1, 2006, in accordance with the amended Companys
policy, the contribution to the fund ceased. F-37




---



##### Table of Contents



23
    
    Commitments
 At December 31, 2007, the Group had the following commitments:
 December 31,2007
    
    2007Rmb
    
    US$Authorized and contracted for:Improvement to existing production facilities
    
    
    112,880
    
    
    
    16,516
 The Group 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, 2007 are:
 Rmb
    
    US$2008
    
    
    5,398
    
    
    
    7902009
    
    
    3,338
    
    
    
    4882010
    
    
    2,451
    
    
    
    3592011
    
    
    866
    
    
    
    1272012 and thereafter
    
    
    24
    
    
    
    312,077
    
    
    
    1,767
 Rental expense for operating leases is included in Selling, general and administrative
expenses as follows:
 December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Rental expense
    
    
    8,726
    
    
    
    10,113
    
    
    
    10,780
    
    
    
    1,577
 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 liability
 China adopted its Environmental Protection Law in 1989, and the State Council and the State
Environmental Protection Agency promulgate regulations as required from time to time. The
Environmental Protection Law addresses issues relating to environmental quality, waste
disposal and emissions, including air, water and noise emissions. Environmental regulations
have not had a material impact on Yuchais results of operations. Yuchai delivers, on a
regular basis, burned sand and certain other waste products to a waste disposal site approved
by the local government and makes payments in respect thereof. Yuchai expects that
environmental standards and their enforcement in China will, as in many other countries,
become more stringent over time, especially as technical advances make achievement of higher
standards more feasible. Yuchai has built an air filter system to reduce the level of dust and
fumes resulting from its production of diesel engines. The PRC emission standard equivalent to
Euro III is expected to be implemented progressively throughout China from 2008. Yuchai
believes it will be able to comply with the new standard.In addition, the manufacture and sales of Euro I engines in major urban area became unlawful
after August 31, 2004. After that date, the engines equipped with Euro I engines cannot be
sold and used in major urban area. The manufacture and sale of Euro II engines is expected to
be progressively phased out starting June 30, 2008 and the PRC emission standard equivalent to
Euro III has been implemented progressively throughout China from July 1, 2008. There can be
no assurance that Yuchai will be able to comply with these emission standards or that the
introduction of these and other environmental regulations will not result in a material
adverse effect on our business, financial condition and results of operations.
 F-38




---



##### Table of Contents



Yuchai is subject to Chinese national and local environmental protection regulations which
currently impose fees for the discharge of waste substances, require the payment of fines for
pollution, and provide for the closure by the Chinese government of any facility that fails to
comply with orders requiring Yuchai to cease or improve upon certain activities causing
environmental damage. Due to the nature of its business, Yuchai produces certain amounts of
waste water, gas, and solid waste materials during the course of its production. Yuchai
believes its environmental protection facilities and systems are adequate for it to comply
with the existing national, provincial and local environmental protection regulations.
However, Chinese national, provincial or local authorities may impose additional or more
stringent regulations which would require additional expenditure on environmental matters or
changes in our processes or systems.
 (c)
    
    Dispute with Bank of China
 In 2003, the Yulin Branch of Bank of China (BOC) initiated legal proceedings to recover
Rmb6,603 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, 2006 and 2007, there were no new developments in this case.
 (d)
    
    Guarantees
 YEGCL provides guarantees of loans granted by commercial banks in the PRC to unrelated
third-party individuals who have obtained the loans to purchase automobiles equipped with
diesel engines produced by Yuchai. During the years ended December 31, 2005 and 2006, YEGCL
guaranteed new borrowings of Rmb153,538 and Rmb88,991, respectively. YEGCL ceased issuing
guarantees on new borrowings from late 2006. The guarantees cover the entire principal amount
of the loan, which generally has a term of one to two years with equal monthly or quarterly
installment payments by the borrower. The guarantees are secured by cash deposits from the
individual to YEGCL and by the automobile. In the event of defaults on payment, YEGCL would be
required under its guarantee to make payments to the banks on behalf of the borrowers.In return for issuing the guarantee, YEGCL receives a premium fee ranging from 1% to 3% of the
loan amount for the years ending December 31, 2005, 2006 and 2007, respectively, which is
considered to be the fair value of YEGCLs guarantee at its inception and is recorded as a
liability in accordance with the provisions of FIN 45. The Group received Rmb4,268, Rmb4,250
and Rmb nil (US$nil) of premium fees in 2005, 2006 and 2007, respectively, which are included
in Accrued expenses and other liabilities and recognized as revenue on a straight line basis
over the terms of the respective guarantee. Guarantee fees recognized as revenue in 2005, 2006
and 2007 amounted to Rmb1,167, Rmb4,718 and Rmb2,176 (US$318), respectively. As of December 31, 2005,
2006 and 2007, deferred guarantee fee revenue amounted to Rmb3,326, Rmb2,858 and Rmb682
(US$100), respectively.Subsequent to initial measurement and recognition of the liability for YEGCLs obligations
under with these loan guarantees, management evaluates YEGCLs guarantee portfolio and
accounts for potential loss contingencies associated with the guarantees based on the
estimated losses resulting from known and expected defaults. Each guarantee is secured by a
cash deposit from the borrower and a security interest in the automobile purchased by the
borrower. As of December 31, 2006 and 2007, YEGCL had gross receivables of Rmb26,896 and
Rmb20,162 (US$2,950), respectively, relating to payments made by YEGCL to the banks in
conjunction with loans that had been defaulted and to be recovered from the individual
borrowers. YEGCL recorded a bad debt allowance in the amount of Rmb12,467 and Rmb9,722
(US$1,422) for other receivables, and Rmb2,611 and Rmb1,119 for potential losses associated
with the guarantee at December 31, 2006 and 2007 respectively. The net receivable amount of
Rmb15,189 and Rmb10,440 (US$1,528), is included in Other
receivables, net  in the accompanying
consolidated balance sheets (See Note 13).As of December 31, 2006 and 2007, the maximum potential amount future undiscounted payments
YEGCL could be required to make under the guarantees was Rmb132,345 and Rmb43,701 (US$6,394),
respectively. YEGCL held cash deposits of Rmb12,389 and Rmb9,999 as of December 31, 2006 and
2007 and security interests in automobiles with an aggregate initial purchase value of
Rmb431,781 and Rmb380,080 as of December 31, 2006 and 2007, respectively. If, in the event of
default the cash deposits and the amount of recoveries, if any, from repossession of the
automobiles may not entirely mitigate YEGCLs losses then, YEGCL accumulates the total
expected risk against the total expected recoverable amount and provides for any expected
shortfall. Accordingly, management recorded an accrual for potential losses associated with
the guarantees in the amount of Rmb2,611 and Rmb1,119 (US$164) as of December 31, 2006 and
2007, respectively, included in Accrued expenses and other liabilities.
 F-39




---



##### Table of Contents



An analysis of reserves for potential losses associated with the guarantees including amounts
paid to banks in connection with guarantees issued by YEGCL is as follows:
 December 312006
    
    2007
    
    2007Rmb
    
    Rmb
    
    US$Balance at beginning of year
    
    
    13,571
    
    
    
    15,078
    
    
    
    2,206Charged/(credited) to consolidated statements of operations
    
    
    1,507
    
    
    
    (4,237
    )
    
    
    (620
    )Balance at end of year
    
    
    15,078
    
    
    
    10,841
    
    
    
    1,586Balance allocated to:Allowance for uncollectible other receivables
    
    
    12,467
    
    
    
    9,722
    
    
    
    1,422Potential losses associated with the guarantees
    
    
    2,611
    
    
    
    1,119
    
    
    
    16415,078
    
    
    
    10,841
    
    
    
    1,586
 (e)
    
    Outstanding bank bills discounted
 As of December 31, 2007, outstanding bills receivable discounted with banks for which the
Group has retained a recourse obligation totaled Rmb171,221 (US$25,052). Management has
assessed the fair value of the recourse obligation arising from these discounted bank bills to
be immaterial based on the Companys default experience and the credit status of the issuing
banks.
 (f)
    
    Outstanding letters of credit
 As of December 31, 2007, the Group issued irrevocable letters of credit totaling Rmb82,149
(US$12,020).
 (g)
    
    Other outstanding litigation
 In addition to the matters disclosed in Note 24(c), the Group 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.
 25
    
    Dispute with State Holding Company
 The Company has from time to time in the period up to 2006 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 Reorganization Agreement (Reorganization
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 Reorganization Agreement was extended to December 31, 2006 by way of the Reorganization
Agreement Amendment No.1 dated December 2, 2005 and then extended to June 30, 2007 by way of
the Reorganization Agreement Amendment No.2 dated November 30, 2006. The Reorganization
Agreement Amendments No.1 and No.2 were similarly acknowledged and agreed to by the State
Holding Company.On June 30, 2007, the Company entered into the Cooperation Agreement with Yuchai, Coomber and
the State Holding Company. The Cooperation Agreement amends certain terms of the
Reorganization Agreement, as amended, among CYI, Yuchai and Coomber, and as so amended,
incorporates the terms of the Reorganization Agreement. The Reorganization Agreement was
terminated on June 30, 2007. The Cooperation Agreement provides that the parties will explore
new business opportunities and ventures for the growth and expansion of Yuchais existing
businesses. Although the parties to the Cooperation Agreement expect to work towards its
implementation as expeditiously as possible, no assurance can be given as to when the
transactions contemplated therein will be consummated.
 F-40




---



##### Table of Contents



The principal terms contained in the Reorganization Agreement Amendments No.1 and No. 2 and
the Co-operation Agreement relating to governance related issues are being adhered to by
Yuchai.
 26
    
    Retirement and other postretirement benefits
 As 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, 2005, 2006 and 2007, 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 Rmb33,299, Rmb42,254 and Rmb48,107 (US$7,039), respectively, for the years ended
December 31, 2005, 2006 and 2007.Yuchai and its subsidiaries have no obligation for the payment of pension benefits or any
other postretirement benefits beyond the annual contributions described above.
 27
    
    Other related party transactions
 In addition to the loans to and interest income from YMCL and
the purchase of 100% of the share capital of Yulin Hotel Company (as
discussed in Note 5 and 34), the Group
has undertaken other significant business transactions with related parties during the three
years ended December 31, 2007. The following is a summary of these transactions:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Sales of diesel engines to State
Holding Company, its subsidiaries
and affiliates (see Note (i))
    
    
    7,646
    
    
    
    20,923
    
    
    
    59,521
    
    
    
    8,709Sales of raw
materials to YMCL
(see Note (i))
    
    
    
    
    
    
    65,729
    
    
    
    35,380
    
    
    
    5,177Purchase of raw materials and
supplies from subsidiaries and
affiliates of State Holding
Company (see Note (i))
    
    
    (235,329
    )
    
    
    (377,129
    )
    
    
    (571,393
    )
    
    
    (83,603
    )Purchase of raw materials and
supplies from YMCL (see Note (ii))
    
    
    (60,756
    )
    
    
    (201,802
    )
    
    
    
    
    
    
    Purchase of
trucks from YMCL (see
Note (ii))
    
    
    (77,324
    )
    
    
    
    
    
    
    
    
    
    
    Processing fee to a subsidiary of
YMCL (see Note (iii))
    
    
    (44,407
    )
    
    
    (13,604
    )
    
    
    (2,533
    )
    
    
    (371
    )Delivery expense charged by a
subsidiary of YMCL (see Note
(iii))
    
    
    (126,028
    )
    
    
    (90,840
    )
    
    
    (115,500
    )
    
    
    (16,899
    )General and administrative expenses charged by State Holding
Company (see Note (iv))
    
    
    (25,931
    )
    
    
    (19,821
    )
    
    
    (21,447
    )
    
    
    (3,138
    ) charged by HLA (see Note (v))
    
    
    (4,035
    )
    
    
    (4,061
    )
    
    
    (12,471
    )
    
    
    (1,825
    ) charged by an affiliate of HLA
(see Note (vi))
    
    
    (30,765
    )
    
    
    (9,654
    )
    
    
    (546
    )
    
    
    (80
    )Interest earned from balance due
from an affiliate of HLA
    
    
    70
    
    
    
    110
    
    
    
    116
    
    
    
    17
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Gain on disposal of land use rights to a
subsidiary of State Holding Company (See Note (vii))
    
    
    2,533
    
    
    
    1,841
    
    
    
    1,573
    
    
    
    230
 
 Notes:(i)
    
    Sale and purchase of raw materials, supplies, scraps 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 Group. The State Holding Company also
purchased scraps from the Group. Management considers that these transactions were
entered into in the normal course of business and expects that these transactions will
continue on normal commercial terms.(ii)
    
    Purchase of raw materials, supplies and trucks from YMCL F-41




---



##### Table of Contents



From January 2005 to April 2006, subsidiaries of YMMC engaged in the sale of trucks
which were mainly supplied by and purchased from YMCL. YMCL has also become a supplier
of raw materials and supplies to the Group since 2005. Management considers that these
transactions were entered into in the normal course of business. In April 2006, the
above procurement and distribution arrangement between Yuchai and YMCL was stopped and
YMCL sold the remaining inventory and some ancillary fixed assets back to YMMC.(iii)
    
    Processing fee and delivery expense charged by YMCL and its subsidiariesThe fee is for the packaging and delivery of spare parts
charged by YMCL, which were
recorded in Cost of goods sold and Selling, general and administrative expenses
respectively. Management considers that these transactions were entered into in the
normal course of business and these transactions continued on normal commercial terms.
The packaging contract was terminated in April 2006.(iv)
    
    General and administrative expenses charged by State Holding CompanyState 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. Management 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.(v)
    
    General and administrative expenses charged by HLAThis relates to management fee charged by HLA to the Company.(vi)
    
    General and administrative expenses charged by an affiliate of HLAThe fee was paid to Hong Leong Management Services Pte Ltd., an affiliate of HLA. In
2006, there was service fee that includes Rmb9,654 in relation to the consultancy
services performed for the acquisition of interests in TCL during 2005 and HLGE in 2006. The
remaining amounts in 2006 were mainly in relation to securing additional credit
facilities and entering into the Reorganization Agreement. These transactions were
approved by the Board of Directors. In 2007, there was service fee of
Rmb546 (US$80) in
relation to administrative filings of the Companys subsidiaries. Management considers
that all of the above 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 Group has disposed of certain land use rights with net book value of Rmb 1,047,
Rmb552 and Rmb552 (US$81) to a subsidiary of the State Holding Company for a
consideration of Rmb3,580, Rmb2,394 and Rmb2,125 (US$311) in the years ended December
31, 2005, 2006 and 2007 respectively.In addition to the above, Yuchai also entered into transactions with other PRC Government
owned enterprises. Management 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.Amounts 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, TCL and HLGE for the years ended December 31,
2006 and 2007. Prior to the purchase of HLGE, the Companys operating segments were Yuchai
and TCL.The segment result for Yuchai is based on earnings before income taxes and minority
interests. The segment result for TCL and HLGE is the Companys equity in the net income or
losses of these affiliates. Segment assets for Yuchai are based on total
 F-42




---



##### Table of Contents



assets of Yuchai.
Segment assets for TCL and HLGE are based on the Companys net investment in the affiliates.
Substantially all of the Companys operations including TCL are in the PRC. Further segment
information about TCL and HLGE is included in Note 17(c) and Note 17(d).
 Following is the segment information for the years ended December 31, 2005, 2006 and 2007:
 2005
    
    2006
    
    2007Yuchai
    
    TCL
    
    Yuchai
    
    TCL
    
    HLGE
    
    Yuchai
    
    TCL
    
    HLGERmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    Rmb
    
    RmbSegment revenue
from external
customers
    
    
    5,816,740
    
    
    
    
    
    
    
    6,920,528
    
    
    
    
    
    
    
    
    
    
    
    9,556,303
    
    
    
    
    
    
    
    Interest income
    
    
    21,744
    
    
    
    
    
    
    
    16,329
    
    
    
    
    
    
    
    
    
    
    
    3,139
    
    
    
    
    
    
    
    Interest expense
    
    
    70,527
    
    
    
    
    
    
    
    89,119
    
    
    
    
    
    
    
    
    
    
    
    99,504
    
    
    
    
    
    
    
    Depreciation and
amortization
    
    
    144,672
    
    
    
    
    
    
    
    146,188
    
    
    
    
    
    
    
    
    
    
    
    227,960
    
    
    
    
    
    
    
    Equity in
income/(losses) of
affiliates
    
    
    50
    
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    (198
    )
    
    
    
    
    
    
    Segment profit /
(loss)
    
    
    30,179
    
    
    
    (5,982
    )
    
    
    292,359
    
    
    
    (23,923
    )
    
    
    1,395
    
    
    
    845,239
    
    
    
    5,925
    
    
    
    8,321Significant
non-cash items: Provision for
uncollectible loans
to a related party
    
    
    202,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
     Other
adjustments to
provisions and
allowances
    
    
    53,895
    
    
    
    
    
    
    
    98,352
    
    
    
    
    
    
    
    
    
    
    
    4,726
    
    
    
    
    
    
    
    Segment assets
    
    
    6,235,585
    
    
    
    184,095
    
    
    
    6,479,886
    
    
    
    385,583
    
    
    
    117,360
    
    
    
    7,843,056
    
    
    
    387,930
    
    
    
    112,648Total expenditures
for additions to
long-lived assets
    
    
    515,359
    
    
    
    
    
    
    
    323,781
    
    
    
    
    
    
    
    
    
    
    
    536,660
    
    
    
    
    
    
    
    
 The segment result for Yuchai for 2006 was corrected in the current year to exclude certain
corporate expenses to conform with the current years presentation. The Company recorded a
decrease in segment profit for Yuchai of Rmb2,423 and a corresponding increase in other corporate
general and administrative expenses as compared with the amounts previously reported in the
Companys 2006 consolidated financial statements.Reconciliation of segment information to the consolidated financial statements for the years ended
December 2005, 2006 and 2007.
 2005
    
    2006
    
    2007
 
    2007Rmb
    
    Rmb
    
    Rmb
 
    US$Total segment profit
    
    
    24,197
    
    
    
    269,831
    
    
    
    859,485
    
 
    
    125,755Service fee to an affiliate of HLA (see Note 27)
    
    
    (30,765
    )
    
    
    (9,654
    )
    
    
    (546
    )
    
    
    (80
    )Other corporate general and administrative expenses
    
    
    (18,522
    )
    
    
    (56,782
    )
    
    
    (75,025
    )
 
    
    (10,977
    )Consolidated earnings/(loss) before income taxes and minority interests
    
    
    (25,090
    )
    
    
    203,395
    
    
    
    783,914
    
 
    
    114,698Total segment assets
    
    
    6,419,680
    
    
    
    6,982,829
    
    
    
    8,343,634
    
    
    
    1,220,794Corporate cash and cash equivalents
    
    
    247,332
    
    
    
    100,990
    
    
    
    81,257
    
    
    
    11,889Other
investments
(long-term)(a)
    
    
    
    
    
    
    633,837
    
    
    
    608,946
    
    
    
    89,098Assets
acquired from Yulin Hotel Company (Note 34)
    
    
    
    
    
    
    
    
    
    
    272,397
    
    
    
    39,856Other corporate assets(b)
    
    
    12,618
    
    
    
    243,701
    
    
    
    272,950
    
    
    
    39,935Consolidated total assets
    
    
    6,679,630
    
    
    
    7,961,357
    
    
    
    9,579,184
    
    
    
    1,401,572
 
 Note (a): includes HLGE unsecured
bonds (Rmb558,852), RCPS A (Rmb20,119), RCPS B (Rmb29,975) (see
Note 17(e)).Note (b): includes corporates property, plant and equipment, goodwill and other receivables. F-43




---



##### Table of Contents



Note (b): includes HLGE
unsecured bonds (Rmb558,852), RCPS A (Rmb20,119), RCPS B (Rmb29,975)
(See Note 17(e)). Revenues from external customers by product category are summarized as follows:
 Years ended December 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Revenues, net4F Light-Duty Diesel Engines
    
    
    
    
    
    
    264,335
    
    
    
    380,601
    
    
    
    55,6874108 Light-Duty Diesel Engines
    
    
    634,532
    
    
    
    941,657
    
    
    
    1,218,838
    
    
    
    178,3334110 Light-Duty Diesel Engines
    
    
    595,239
    
    
    
    644,116
    
    
    
    1,189,995
    
    
    
    174,1134112 Light-Duty Diesel Engines
    
    
    321,548
    
    
    
    372,423
    
    
    
    469,015
    
    
    
    68,6246105 Medium-Duty Diesel Engines
    
    
    1,744,953
    
    
    
    1,705,399
    
    
    
    2,132,590
    
    
    
    312,0296108 Medium-Duty Diesel Engines
    
    
    809,054
    
    
    
    991,190
    
    
    
    1,424,391
    
    
    
    208,4096112 Heavy-Duty Diesel Engines
    
    
    785,236
    
    
    
    725,288
    
    
    
    643,373
    
    
    
    94,1356113 Heavy-Duty Diesel Engines
    
    
    192,850
    
    
    
    365,717
    
    
    
    877,177
    
    
    
    128,344Diesel Engine Parts
    
    
    488,414
    
    
    
    875,453
    
    
    
    1,218,147
    
    
    
    178,232Guarantee fees
    
    
    244,914
    
    
    
    34,950
    
    
    
    2,176
    
    
    
    3185,816,740
    
    
    
    6,920,528
    
    
    
    9,556,303
    
    
    
    1,398,224
 Revenues from customers based on their geographical location for the years ended December 31,
2005, 2006 and 2007 (in Rmb thousands) are as follows:
 2005
    
    2006
    
    2007Sales
    
    SalesRevenue
    
    Revenue
    
    Sales RevenueRmb
    
    Rmb
    
    Rmb
    
    US$(in thousands)
    
    (in thousands)
    
    (in thousands)
    
    (in thousands)China
    
    
    5,703,360
    
    
    
    6,893,551
    
    
    
    9,533,767
    
    
    
    1,394,927Other countries
    
    
    113,380
    
    
    
    26,977
    
    
    
    22,536
    
    
    
    3,2975,816,740
    
    
    
    6,920,528
    
    
    
    9,556,303
    
    
    
    1,398,224
 29
    
    Foreign currency exchange
 The 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 is the rate 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 profits
 The Companys sources of cash flow for the purposes of distribution of profits to its
shareholders are its share of the dividends, if any, paid by Yuchai, HLGE 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
 F-44




---



##### Table of Contents



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 profits 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
and HLGE.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 activities
 For 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.
 32
    
    Fair value of financial instruments
 The 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 management to estimate the fair value of its
equity investments 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 is considered excessive in relation to the significance of
the equity investments to the Group. Management does not believe the carrying value of the
equity investments will be significantly different from their fair value. Management estimated
the fair value of its financial investments by obtaining an independent valuation of the
investments by a professional valuer.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 concentration
 Substantially all of the Group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 31,2005
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    US$Liuzhou Dongfeng Automobile (see Note (i))
    
    
    385,049
    
    
    
    453,090
    
    
    
    658,585
    
    
    
    96,360Hubei Dongfeng Automobile (see Note (ii))
    
    
    333,452
    
    
    
    238,400
    
    
    
    333,612
    
    
    
    48,812
 
 Notes:(i):
    
    Sales to Liuzhou Dongfeng Automobile for the year ended December 31, 2005, 2006 and 2007 was
approximately 6.6%, 6.5% and 6.9% of total sales.(ii):
    
    Sales to Hubei Dongfeng Automobile for the year ended December 31, 2005, 2006 and 2007 was
approximately 5.7%, 3.4% and 3.5% of total sales. Both customers are controlled by or affiliated with Dongfeng Automobile Company. At December
31, 2006 and 2007, approximately 23.5% and 16.1% of gross trade accounts receivable,
respectively, were due from these customers. Management considers its relationships with these
major customers to be good; however, the loss of one or more of the Groups major customers
would have a material adverse effect on the Companys consolidated financial position, results
of operations and cash flows.
 (b)
    
    Product concentration
 See note 28 Revenues from external customers by product category.
 (c)
    
    Supplier concentration
 Yuchai/ASIMCO Components Company Limited, or Yuchai/ASIMCO, is one of Yuchais principal
suppliers of fuel injection pumps through two of its related companies. Yuchai/ASIMCO is a
joint venture between Yuchai and a subsidiary of Asian
 F-45




---



##### Table of Contents



Strategic Investments Corporation, or
ASIMCO, that invests in factories in China that produce parts and components for diesel
engines. ASIMCO is a joint venture among The Pacific Alliance Group Limited, Dean Witter
Capital Corporation and TCW Capital Investment Corporation.
 (d)
    
    Material supply concentration
 Yuchai manufactures engine blocks, cylinder heads, crankshaft, camshaft and certain other key
parts. Third party suppliers provide the remaining engine parts. The production process
involves the complete assembly and testing of the finished product. The key components for
6105, 6108 and 6112 are manufactured internally. A large portion of its engine blocks used in
production were casted and molded internally, and contingent supply came from a long term
domestic supplier. Raw materials, principally steel and cast iron, were purchased from
domestic suppliers.
 (e)
    
    Nature of operations
 During 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 Groups business and prospects to a
significant degree.
 (f)
    
    Transactions involving Yuchais Chinese shareholders
 Although the Company has proper legal ownership over 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 as described in Note 25, 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 involved 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.On June 30, 2007, we entered into the Cooperation Agreement with Yuchai, Coomber and the State
Holding Company. The Cooperation Agreement amends certain terms of the Reorganization
Agreement, as amended, among CYI, Yuchai and Coomber, and as so amended, incorporates the
terms of the Reorganization Agreement. The Reorganization Agreement was terminated on June
30, 2007.The Cooperation Agreement provides that the parties will explore new business opportunities
and ventures for the growth and expansion of Yuchais existing businesses. Although the
parties to the Cooperation Agreement expect to work towards its implementation as
expeditiously as possible, no assurance can be given as to when the transactions contemplated
therein will be consummated.
 (g)
    
    Cash and cash equivalents
 Cash and cash equivalents denominated in various currencies are held in bank accounts in the
following countries:
 December 312006
    
    2006
    
    2007
    
    2007Rmb
    
    Rmb
    
    Rmb
    
    RmbPRC
    
    Singapore
    
    PRC
    
    SingaporeRmb
    
    
    644,944
    
    
    
    
    
    
    
    439,689
    
    
    
    USD
    
    
    
    
    
    
    99,506
    
    
    
    
    
    
    
    79,872SGD
    
    
    
    
    
    
    1,483
    
    
    
    
    
    
    
    1,384644,944
    
    
    
    100,989
    
    
    
    439,689
    
    
    
    81,256
 34
    
    Acquisitions
 Acquisition of Yulin Hotel CompanyAs previously described in Note 5 to these consolidated financial statements, on December
25, 2007, Yuchai, pursuant to the execution of a share transfer contract with YMCL,
Coomber and State Holding Company, acquired all the outstanding share capital of Yulin
Hotel Company for Rmb245.6 million. On January 13, 2009,
Yuchai received approval from the provincial government regulatory
agency in charge of state owned assets administration in China for
its acquisition of 100% equity in Yulin Hotel Company. Prior to this
approval, management of the
Company has concluded that Yuchai is the legal owner of the shares in Yulin Hotel Company
and hence Yuchai also bears the risks and rewards of the ownership in the corresponding
operations of Yulin Hotel Company as of December 25, 2007. Consequently, the acquisition
has been accounted for under the purchase method as of December 25, 2007. The results of
operations and cash flows of Yulin Hotel Company were immaterial during the period
December 25, 2007 to December 31, 2007, and therefore are not included in the Companys
consolidated statements of operations or cash flows. The Yulin Hotel Company will be
included in Yuchais operating segment beginning in 2008.Assets acquired and liabilities assumed have been recorded in the consolidated balance sheet
at their estimated fair values as of December 25, 2007, and the Company recognized goodwill of Rmb
5,675. The principal assets of Yulin Hotel Company were the Yulin
Hotel and YMCLs central office building in Guilin. The Company is in the process of finalizing, through internal studies and third-party
valuations, the fair values of the property and equipment. Consequently, the purchase price
allocation set forth below is preliminary and subject to adjustment as additional information is
obtained. When the allocation process is completed, adjustments to recorded values may result. The
following table summarizes the preliminary allocation of the purchase
price assigned to the fair values of the assets
acquired and liabilities assumed as of the date of acquisition:
 Fair
valuesRmb000Current assets
    
    
    7,809Property and equipment
    
    
    210,502Construction in progress
    
    
    130Lease prepayments
    
    
    48,281Goodwill
    
    
    5,675Total assets acquired
    
    
    272,397Amounts due to related parties
    
    $
    19,782Other current liabilities
    
    
    7,015Total liabilities assumed
    
    
    26,797Net assets acquired
    
    $
    245,600
 No pro forma income statement has been provided because
management believes the pro forma
effects are immaterial to the Companys consolidated results of operations for the years
ending December 31, 2006 and 2007.
 F-46




---



##### Table of Contents



35
    
    Subsequent events
 (a)
    
    Multi-currency Revolving Credit Facility
 On March 20, 2008, the Company entered into a new facility agreement with BOTM to re-finance
the existing revolving credit facility. The new unsecured, multi-currency revolving credit
facility has a committed aggregated value of S$21.5 million with a one year duration. The new
facility will be used to finance the Companys long-term general working capital requirements.
Among other things, the terms of the facility require that Hong Leong Asia Ltd. (HLA)
retains ownership of the Companys special share and that the Company remains a consolidated
subsidiary of HLA. The terms of the facility also include certain financial covenants with
respect to the Companys tangible net worth (as defined in the agreement) as at June 30 and
December 31 of each year not being less than US$120 million and the ratio of the Companys
total net debt (as defined in the agreement) to tangible net worth as at June 30 and December
31 of each year not exceeding 2.0 times, as well as negative pledge provisions and customary
drawdown requirements.
 (b)
    
    DBS S$50m bridging loan
 On August 28, 2008, the Company entered into a bridging loan agreement of up to S$50 million
for a 12 months duration, with DBS Bank Ltd., (DBS) of Singapore, to partially re-finance
the US$50m revolving credit facility with Sumitomo Mitsui Banking Corporation, Singapore
Branch which expired on 6 September 2008. The new facility will also be used to finance the
Companys long-term general working capital requirements. The terms of the facility include
certain financial covenants as well as negative pledge and default provisions. The Company has
also undertaken to make available to DBS, within 180 days after the end of its financial year,
copies of its audited consolidated accounts as at the end of each financial year. Compliance
with this undertaking in relation to the production of the 2007 audited consolidated accounts
will be no later than February 28, 2009.
 (c)
    
    Repayment of Short Term Bonds of Rmb650 million by Yuchai
 On April 18, 2007, Yuchai issued the second tranche of short term
bonds of Rmb 650.0 million (US$95.1 million) under approval given by
PBOC on May 30, 2006 and the funds were used to pay off the short term
loans from three local banks. The bonds were issued at discount and an
amount totaling Rmb 633.0 million (US$92.6 million) was received by Yuchai. The bonds
matured and were fully repaid in April, 2008.
 (d)
    
    Partial Redemption of New Bonds by HLGE
 In June 2008, HLGE partially redeemed the New Bonds. The principal amount redeemed was
approximately S$25.9 million (US$18.0 million) and resulted in a reduction in the principal
amount of the New HLGE Bonds held by the Company from
S$112.9 million (US$78.5 million) to
S$87.0 million (US$60.5 million). The proceeds from the partial redemption amounted to S$28.5
million (US$19.8 million).
 (e)
    
    RCPS B Redemption by HLGE
 In April 2008, HLGE made an additional partial redemption of the Existing HLGE RCPS B. The
redemption amount we received amounted to approximately S$0.98 million (US$0.7 million) and
resulted in a reduction in the number of Existing HLGE RCPS that held by the Company from
113,159,191 to 107,186,403.
 (f)
    
    Joint Venture Company with Geely and YinlunIn December 2007, Yuchai entered into an Equity Joint Venture Agreement with Geely and Yinlun to
establish a joint venture company in Jining, Shandong Province to engage in the
development, production and sales of a proprietary diesel engine and its parts for passenger
vehicles. As of December 31, 2008, the joint venture company has been duly incorporated
with registered capital of Rmb 150 million and paid-up capital of Rmb 45 million, out of
which Yuchai has already contributed Rmb 23.4 million.(g)
    
    Joint Venture Company with Geely and YinlunIn December 2007, Yuchai entered into an Equity Joint Venture Agreement with Geely and Yinlun to
establish a joint venture company in Tiantai, Zhejiang Province to engage in the
development, production and sales of a proprietary diesel engine and its parts for passenger
vehicles. And as of December 31, 2008, the joint venture company has been duly incorporated
with a registered capital of Rmb 100 million and paid up capital of Rmb 30 million, out of
which Yuchai has already contributed Rmb 15.6 million.
 F-47