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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 1934þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended:  December 31, 2003o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number: 1-11412 BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LIMITED   Not Applicable
    
    Bermuda(Translation of Registrants name into English)
    
    (Jurisdiction of Incorporation or Organization)
 Suites 1602-05, Chater House, 8 Connaught Road Central, Hong Kong   Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class
    
    Exchange on which registeredAmerican Depositary Shares
Ordinary Shares, par value US$0.01 per share
    
    New York Stock Exchange, Inc.
The Stock Exchange of Hong Kong Limited
 Securities registered or to be registered pursuant to Section 12(g) of the Act:None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None Number of outstanding shares of each of the issuers classes of capital or common stock as of December 31, 2003: 3,668,390,900 Ordinary Shares, par value US$0.01 per share 2,764,383 American Depositary Shares, each representing 100 Ordinary Shares Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ
    
    No  o
 Indicate by check mark which financial statement item the registrant has elected to follow. Item 17  o
    
    Item 18  þ




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CONTENTS PART IITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    1ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    12ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    38ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    53ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    60ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    67ITEM 9.
    
    THE OFFER AND LISTING
    
    
    70ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    72ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    84ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    85PART IIITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    86ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    86ITEM 15.
    
    DISCLOSURE CONTROLS AND PROCEDURES
    
    
    86ITEM 16.
    
    [RESERVED]
    
    
    86ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    86ITEM 16B.
    
    CODE OF ETHICS
    
    
    87ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    87ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
    
    
    88ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    88PART IIIITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    89ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    89ITEM 19.
    
    EXHIBITS
    
    
    89EX-4.6 PURCHASE AGREEMENT DATED OCT 28, 2003EX-4.7 TRUST DEED DATED NOV 28, 2003EX-4.8 EQUITY TRANSFER AGREEMENT DATED DEC 16,2003EX-4.9 EQUITY TRANSFER AGREEMENT DATED DEC 29,2003EX-4.10 EQUITY TRANSFER AGREEMENT DATED DEC 29, 03EX-4.11 EQUITY TRANSFER AGREEMENT DATED DEC 29, 03EX-4.12 LETTER OF GUARANTEE DATED DEC 2, 2003EX-7.1 STATEMENT EXPLAINING RATIO CALCULATIONEX-8.1 LIST OF SIGNIFICANT SUBSIDIARIESEX-12.1 SECTION 906 CERTIFICATIONEX-13.1 SECTION 302 CERTIFICATION OF CEOEX-13.2 SECTION 302 CERTIFICATION OF CFO
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FORWARD-LOOKING STATEMENTS Certain information contained in this annual report that does not relate
to historical financial information may be deemed to constitute forward-looking
statements. The words or phrases will likely result, are expected to,
will continue, is anticipated, estimate, project, believe or similar
expressions identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from historical results and those presently anticipated or
projected. Brilliance China Automotive wishes to caution readers not to place
undue reliance on any these forward-looking statements, which speak only as of
the date made. Among the factors that could cause Brilliance China
Automotives actual results in the future to differ materially from any
opinions or statements expressed with respect to future periods include:  
    
    unexpected adverse effects on the economy of the Peoples Republic
of China, or China, and Chinas automobile sector in particular;
    
    increased competition from other domestic and international automobile manufacturers;
    
    our relative inexperience in manufacturing and selling sedans;
    
    increased costs for raw materials and components;
    
    uncertainties relating to our joint venture with Bayerische Motoren
Werke Aktiengesellschaft, or BMW, for the production of BMW sedans in
China; and
    
    fluctuations in foreign exchange rates. When considering these forward-looking statements, you should keep in mind
the factors described in Item 3  Key Information  Risk Factors and other
cautionary statements appearing in Item 5  Operating and Financial Review and
Prospects of this annual report. These risk factors and statements describe
circumstances that could cause actual results to differ materially from those
contained in any forward-looking statement. CURRENCY TRANSLATION Unless otherwise specified, all references in this annual report to U.S.
dollars or US$ are to United States dollars; all references to Renminbi or
Rmb are to Renminbi, which is the legal tender currency of China; all
references to H.K. dollars or HK$ are to Hong Kong dollars, which is the
legal tender currency of Hong Kong and all references to Euro and Euros are
to the legal tender currency of the European Monetary Union. On December 31,
2003, the noon buying rates in New York City for cable transfers of Renminbi,
Hong Kong dollars and Euros, as certified for customs purposes by the Federal
Reserve Bank of New York was US$1.00 = Rmb 8.28, US$1.00 = HK$7.78 and Euro
1.00 = US$1.26. Translations of amounts from Renminbi, Hong Kong dollars and
Euros to U.S. dollars for the convenience of the reader have been made at those
rates. No representation is made that the Renminbi, Hong Kong dollar or Euro
amounts could have been, or could be converted into U.S. dollars at those rates
or at any other rates. In addition, all financial information presented herein
has been prepared in accordance with United States generally accepted
accounting principles, or U.S. GAAP. ii




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION Selected Financial Data Historical Financial Information of Brilliance China Automotive The following table presents the selected consolidated financial
information and operating information of Brilliance China Automotive and its
subsidiaries as of and for the years ended December 31, 1999, 2000, 2001, 2002
and 2003, which have been derived from our audited consolidated financial
statements. The selected financial information for the years ended December
31, 2001, 2002 and 2003 and as of December 31, 2002 and 2003 should be read in
conjunction with, and is qualified in its entirety by reference to, the
financial statements, prepared in accordance with U.S. GAAP, included elsewhere
in this annual report, the accompanying notes thereto and Item 5  Operating
and Financial Review and Prospects. The financial statements and footnotes
for the years ended December 31, 1999 and 2000 and as of December 31, 1999,
2000 and 2001 are not included in this annual report. (Amounts in millions,
    
    As of and for the years ended December 31,except per share/ADS and operating data)
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(Rmb, except operating data)
    
    (US$)Income Statement Data:Total Sales
    
    
    4,351.2
    
    
    
    6,306.4
    
    
    
    6,218.4
    
    
    
    7,319.5
    
    
    
    10,109.6
    
    
    
    1,221.0Cost of sales
    
    
    2,866.2
    
    
    
    4,436.2
    
    
    
    4,308.0
    
    
    
    5,411.3
    
    
    
    7,727.1
    
    
    
    933.2Gross Profit
    
    
    1,485.0
    
    
    
    1,870.3
    
    
    
    1,910.4
    
    
    
    1,908.1
    
    
    
    2,382.4
    
    
    
    287.7Selling, general and administrative
expenses
    
    
    505.8
    
    
    
    663.2
    
    
    
    673.4
    
    
    
    1,067.2
    
    
    
    1,410.1
    
    
    
    170.3Net income
    
    
    649.0
    
    
    
    870.0
    
    
    
    887.1
    
    
    
    610.5
    
    
    
    780.8
    
    
    
    94.3Balance Sheet Data:Total assets
    
    
    7,032.7
    
    
    
    10,552.4
    
    
    
    11,696.5
    
    
    
    13,853.7
    
    
    
    18,288.2
    
    
    
    2,208.7Current assets
    
    
    4,782.3
    
    
    
    6,076.7
    
    
    
    6,127.1
    
    
    
    8,263.0
    
    
    
    10,286.5
    
    
    
    1,242.3Current liabilities
    
    
    3,541.3
    
    
    
    6,177.7
    
    
    
    5,741.7
    
    
    
    7,332.7
    
    
    
    8,031.0
    
    
    
    969.9Capital stock
    
    
    12.3
    
    
    
    276.9
    
    
    
    303.2
    
    
    
    303.2
    
    
    
    303.4
    
    
    
    36.6Total shareholders equity
    
    
    2,549.0
    
    
    
    3,836.3
    
    
    
    5,419.8
    
    
    
    6,005.3
    
    
    
    6,886.3
    
    
    
    831.7Cash Flow Statement Data:Payment for capital expenditure
    
    
    929.9
    
    
    
    1,016.2
    
    
    
    782.5
    
    
    
    798.8
    
    
    
    955.9
    
    
    
    115.4Depreciation and amortization
    
    
    81.8
    
    
    
    114.0
    
    
    
    118.1
    
    
    
    270.6
    
    
    
    677.8
    
    
    
    81.9Net cash flows provided by operating
activities
    
    
    1,658.2
    
    
    
    201.4
    
    
    
    1,326.8
    
    
    
    1,913.0
    
    
    
    753.4
    
    
    
    91.0Net cash flows used in investing activities
    
    
    (2,894.2
    )
    
    
    (2,833.2
    )
    
    
    (1,398.8
    )
    
    
    (2,209.9
    )
    
    
    (2,491.3
    )
    
    
    (300.9
    )Net cash flows provided by (used in)
financing activities
    
    
    1,891.0
    
    
    
    2,597.8
    
    
    
    (45.8
    )
    
    
    365.9
    
    
    
    2,281.1
    
    
    
    275.5
 1




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(Amounts in millions,
    
    As of and for the years ended December 31,except per share/ADS and operating data)
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(Rmb, except operating data)
    
    (US$)Per Share/ADS Data:Basic earnings per share(1)
    
    
    0.24
    
    
    
    0.28
    
    
    
    0.25
    
    
    
    0.17
    
    
    
    0.21
    
    
    
    0.03Basic earnings per ADS(2)
    
    
    24.08
    
    
    
    27.61
    
    
    
    25.10
    
    
    
    16.65
    
    
    
    21.30
    
    
    
    2.57Diluted earnings per share(1)
    
    
    0.24
    
    
    
    0.27
    
    
    
    0.25
    
    
    
    0.17
    
    
    
    0.21
    
    
    
    0.03Diluted earnings per ADS(2)
    
    
    24.08
    
    
    
    26.80
    
    
    
    25.10
    
    
    
    16.65
    
    
    
    21.16
    
    
    
    2.56Cash dividends declared per ADS(2,3)
    
    
    0.40
    
    
    
    0.48
    
    
    
    0.96
    
    
    
    1.48
    
    
    
    2.12
    
    
    
    0.26Operating Data:Production volume (units)Minibus  Deluxe model
    
    
    7,697
    
    
    
    10,603
    
    
    
    9,413
    
    
    
    8,620
    
    
    
    9,291Minibus  Mid-priced model
    
    
    35,219
    
    
    
    50,617
    
    
    
    51,423
    
    
    
    56,959
    
    
    
    65,734Minibus  Standard model(4)
    
    
    1,212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal  Minibuses
    
    
    44,128
    
    
    
    61,220
    
    
    
    60,836
    
    
    
    65,579
    
    
    
    75,025Zhonghua Sedans(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,890
    
    
    
    27,054Total
    
    
    44,128
    
    
    
    61,220
    
    
    
    60,836
    
    
    
    74,469
    
    
    
    102,079Sales volume (units)Minibus  Deluxe model
    
    
    7,387
    
    
    
    10,145
    
    
    
    9,653
    
    
    
    9,017
    
    
    
    9,004Minibus  Mid-priced model
    
    
    33,547
    
    
    
    49,873
    
    
    
    53,356
    
    
    
    56,121
    
    
    
    65,614Minibus  Standard model(4)
    
    
    1,265
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal  Minibuses
    
    
    42,199
    
    
    
    60,018
    
    
    
    63,009
    
    
    
    65,138
    
    
    
    74,618Zhonghua Sedans(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,816
    
    
    
    25,600Total
    
    
    42,199
    
    
    
    60,018
    
    
    
    63,009
    
    
    
    73,954
    
    
    
    100,218
   (1)
    
    The weighted average number of shares outstanding for the years ended
December 31, 1999 and 2000 was adjusted to retrospectively take into
account the effect of the bonus share issuances effected in 1999 and on
April 14, 2000.(2)
    
    On April 14, 2000, Brilliance China Automotives shares traded on the New
York Stock Exchange, Inc. were converted to ADSs at a ratio of 100 shares
to 1 ADS. The calculation of earnings and cash dividends per ADS is based
on the weighted average number of ADSs outstanding during the years
presented. The weighted average number of ADSs outstanding is calculated
based on the assumptions that the ADS had been in existence throughout all
the years presented and that all of the outstanding shares were held in
the form of ADSs (at the ratio of 100 shares for each ADS).(3)
    
    Calculated at an exchange rate of US$1.00=Rmb 8.28, the noon buying rate
for Renminbi on December 31, 2003, as if ADSs were in issue during the
years presented. Brilliance China Automotive declared cash dividends per
ordinary share in each of 2003, 2002, 2001, 2000 and 1999. In 1999, the
dividends were paid in U.S. dollars, while in 2000, 2001, 2002 and 2003,
the dividends were paid in H.K. dollars.(4)
    
    Commercial production of standard minibuses ceased at the end of 1999.(5)
    
    Commercial production of Zhonghua sedans began in August 2002.   2




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Exchange Rate Information The following table sets forth certain information concerning exchange
rates between Renminbi and U.S. dollars for the periods indicated: Noon Buying Rate(1)Period
    
    Period End
    
    Average(2)
    
    High
    
    Low1999
    
    
    8.2795
    
    
    
    8.2785
    
    
    
    8.2800
    
    
    
    8.27702000
    
    
    8.2773
    
    
    
    8.2784
    
    
    
    8.2799
    
    
    
    8.27652001
    
    
    8.2761
    
    
    
    8.2769
    
    
    
    8.2776
    
    
    
    8.27612002
    
    
    8.2800
    
    
    
    8.2772
    
    
    
    8.2800
    
    
    
    8.27652003
    
    
    8.2767
    
    
    
    8.2771
    
    
    
    8.2800
    
    
    
    8.2765January 2004
    
    
    8.2768
    
    
    
    8.2769
    
    
    
    8.2772
    
    
    
    8.2768February 2004
    
    
    8.2769
    
    
    
    8.2771
    
    
    
    8.2773
    
    
    
    8.2769March 2004
    
    
    8.2770
    
    
    
    8.2772
    
    
    
    8.2774
    
    
    
    8.2767April 2004
    
    
    8.2771
    
    
    
    8.2769
    
    
    
    8.2772
    
    
    
    8.2768May 2004
    
    
    8.2769
    
    
    
    8.2771
    
    
    
    8.2773
    
    
    
    8.2768June 2004 (through June 21, 2004)
    
    
    8.2766
    
    
    
    8.2767
    
    
    
    8.2768
    
    
    
    8.2766
   Source:
    
    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.  (1)
    
    Since January 1, 1994, the date of the unification of Chinas foreign
currency exchange system, there have not been significant differences
between the noon buying rate, the Peoples Bank of China rate and the
Shanghai swap center rate.(2)
    
    Determined by averaging the rates on the last business day of each month
during the respective year and on the last business day of each week
during the respective month. 3




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Risk Factors Brilliance China Automotive is subject to various changing competitive,
economic, political and social conditions in China, as well as special concerns
and significant risks not usually encountered by a United States company.
These include the following: Risks Relating to Brilliance China Automotive Minibus and Sedan Businesses If demand for minibuses and sedans in China does not increase, and if Shenyang
Automotive does not increase its market share, the ability of Shenyang
Automotive to increase its sales volume will be adversely impacted. The success of Brilliance China Automotives business strategy will depend
on the ability of its 51%-owned subsidiary, Shenyang Brilliance JinBei
Automobile Co., Ltd., or Shenyang Automotive, to increase substantially its
sales volume. Such an increase can only be achieved if Shenyang Automotive
increases its market share or if there is an overall increase in the size of
the minibus and sedan markets in China. Shenyang Automotives sales of
minibuses increased by 24.3% from 60,018 units to 74,618 units, between 2000
and 2003, and overall sales of minibuses in China increased by 77.8% from
247,670 units in 2000 to 440,240 units in 2003. Shenyang Automotive also sold
8,816 units and 25,600 units of its Zhonghua sedan in 2002 and 2003,
respectively. Overall unit sales of sedans in China also increased between 2000
and 2003 by 223.1% from 610,138 units in 2000 to 1,971,601 units in 2003.
There has been recently reported a general decline in demand for automobiles in
China resulting from new economic measures instituted by the Chinese government
to slow the rate of growth of its economy. In light of this industry-wide
decline in demand, as well as other factors, there can be no assurance that
demand for Shenyang Automotives minibuses and sedans will continue to
increase. A decline in the rate of such demand relative to domestic minibus
and sedan production capacity could have an adverse impact on the ability of
Shenyang Automotive to increase its sales volume. Delays in the development of new products, lack of consumer acceptance of new
products and unforeseen shifts in consumer preferences may have a negative
effect on Brilliance China Automotives financial results. Meeting consumer demand with new vehicles developed over increasingly
shorter product development cycle times is critical to Brilliance China
Automotives continued success. Brilliance China Automotives ability to
strengthen its position within its traditional minibus segment while expanding
into additional market segments with new products, such as sedans, will play a
key role in determining its future success. In order to compete successfully
within its traditional markets, as well as enter new markets with new product
offerings, Brilliance China Automotive must assess trends in consumer
preferences, modify existing products or develop new products to match those
trends and deliver to market these newly developed or modified products before
such preferences change. Delays in the development of new products, lack of
consumer acceptance of new products and unforeseen shifts in consumer
preferences may have a negative effect on Brilliance China Automotives
financial results. There are significant risks involved in Shenyang Automotives recent commercial
introduction of new sedan models. The commercial introduction by Shenyang Automotive of new sedan models in
August 2002 involved and continues to involve significant risks, including the
ability of Brilliance China Automotive and Shenyang Automotive to obtain
adequate financing, dependence on components suppliers and competition from
other domestic and foreign passenger vehicle producers. While Shenyang
Automotive 4




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has been able to successfully develop, manufacture and launch its Zhonghua
sedans, there can be no assurance that Shenyang Automotive will be able to
continue to successfully market and sell these sedans. There are significant risks involved in Brilliance China Automotives joint
venture with BMW to produce BMW sedans in China. On March 27, 2003, Brilliance China Automotive, through its indirect
subsidiary, Shenyang JinBei Automotive Industry Holdings Company Limited, or
SJAI, entered into a joint venture contract with BMW Holding BV, or BMW
Holding, to assemble, produce and sell BMW designed and branded sedans in
China. Production began in September 2003 and the 3-Series and 5-Series sedans
were formally launched in China in October and November 2003, respectively.
There are significant risks involved in this joint venture, including, but not
limited to, the ability of the joint venture to obtain adequate financing as
and when necessary, obtain timely delivery of imported components and parts,
source necessary components at competitive prices, successfully develop,
manufacture, market and sell BMW sedans in China, and obtain appropriate
approvals for its new products from governmental authorities in China.
Brilliance China Automotive currently has a 49.0% effective interest in the
joint venture and provides guarantees for the performance of all obligations of
SJAI, including required capital contributions. The ownership of Brilliance China Automotive by its largest shareholder is
currently the subject of litigation. On January 21, 2003, a writ brought by Broadsino Finance Company Limited,
or Broadsino, as plaintiff was filed with the Supreme Court of Bermuda and an
ex parte court order dated January 22, 2003 granted by the Supreme Court of
Bermuda in favor of Broadsino was served on the registered office of Brilliance
China Automotive in Bermuda. Brilliance China Automotive and four directors of
Brilliance China Automotive, among others, are defendants in these proceedings.
The writ alleged that Brilliance China Automotive was aware that the interest
of the Chinese Financial Education Development Foundation, a former significant
shareholder, in 1,446,121,500 Shares, representing a 39.45% ownership interest
of the then outstanding share capital of Brilliance China Automotive, was held
in trust for Broadsino and was improperly transferred to Huachen Automotive
Group Holdings Company Limited, or Huachen, a company wholly owned by the
Liaoning Provincial Government. Upon application by Brilliance China
Automotive, the court order was discharged by a judgment of the Supreme Court
of Bermuda given on February 11, 2003. On March 10, 2003, Brilliance China
Automotive filed a summons at the Supreme Court of Bermuda to have Broadsinos
writ and statement of claim struck out. The strikeout proceedings were duly
heard before the Supreme Court of Bermuda on July 22 and 23, 2003. On December
31, 2003 the Supreme Court of Bermuda issued its judgment on the strike-out
proceedings, and struck out the writ in respect of legal proceedings brought by
Broadsino against Brilliance China Automotive. On March 4, 2004, Broadsino
submitted an application for leave to appeal to the Supreme Court of Bermuda,
but at the hearing of the application before the court on March 9, 2004,
Broadsinos application was refused. On June 17, 2004, Broadsino made an ex
parte application for leave to appeal to the Court of Appeal of the Supreme
Court of Bermuda. The Court of Appeal granted Broadsinos application for
leave and the matter has been adjourned for an inter partes hearing, which is
expected to take place in the November 2004 session of the Court of Appeal. On August 7, 2003, a lawsuit was filed in U.S. federal court by the former
Chairman of Brilliance China Automotive and others against the Liaoning
Provincial Government relating to Huachens ownership of Brilliance China
Automotive. Brilliance China Automotive is not a party to the lawsuit nor has
it received any notice or document relating to the lawsuit. Brilliance China
Automotive understands that the Liaoning Provincial Government has sought
advice from its legal advisors and is currently taking actions to defend the
claim. 5




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The directors of Brilliance China Automotive do not believe the recent
litigation in Bermuda or any other litigation based on similar claims in other
jurisdictions have had or will have a significant impact on the financial
position of Brilliance China Automotive. See Item 8 
Financial Information  Legal Proceedings for
further details of these litigation proceedings. Failure by Brilliance China Automotive to continue to form and maintain
alliances with foreign automobile manufacturers could adversely affect its
competitiveness. In order for Brilliance China Automotive to remain competitive and obtain
additional technology and financing, it is crucial that it enters into and
maintains alliances with foreign motor vehicle manufacturers. This is
particularly true since China entered the World Trade Organization, or the WTO,
in November 2001. As a result of the reduction in import restrictions, more
automobile manufacturers have been and will be entering Chinas motor vehicle
market. If Brilliance China Automotive cannot maintain its existing alliances
with Toyota and BMW or form strategic alliances with other foreign automobile
manufacturers regarding the establishment of joint ventures and the procurement
of necessary components on commercially beneficial terms, its competitive
position will be adversely affected. The inability of Shenyang Automotive to access Toyotas technical resources to
upgrade its products, or Toyotas provision of assistance to any of Shenyang
Automotives competitors could negatively impact Shenyang Automotives sales
and competitive position. Shenyang Automotive has historically relied to a significant extent on
Toyota for technical assistance for its minibuses. On December 17, 2001,
Shenyang Automotive entered into an agreement with Toyota for the technology
transfer of the fifth generation of the Toyota minibus  the
Granvia  for which
production based upon semi-knockdown kits from Toyota commenced in 2002. In the
first quarter of 2004, the Granvia, which is marketed under the brand name
Grace when sold in China by Brilliance China Automotive, entered into
commercial production, with more than 60% of its parts and components from
domestic sources. Although Shenyang Automotive has introduced new products,
including its successful mid-priced minibus, incorporating styling and
engineering refinements and modifications without assistance from Toyota, lack
of access to Toyotas technical resources may limit Shenyang Automotives
ability to upgrade significantly its existing Toyota-designed products. Failure
to update its existing models could eventually result in Shenyang Automotives
products becoming technologically inferior to its competitors products, which
could have an adverse impact on Shenyang Automotives sales. Although
Brilliance China Automotive has no knowledge of any intention of Toyota to
produce, or assist a current or potential competitor in the production of,
minibuses similar to those of Shenyang Automotive in China, neither Brilliance
China Automotive nor Shenyang Automotive could prohibit Toyota from doing so. As a result of equity restrictions on Sino-foreign joint ventures, Brilliance
China Automotives ability to increase its investments in its joint ventures
will be limited by the ability of its partners to contribute proportionate
funds, which could have a negative impact on the business prospects of these
joint ventures. Brilliance China Automotive owns currently equity interests of 51%, 50%
and 50%, respectively, in Shenyang Automotive, Mianyang Xinchen Engine Co.,
Ltd., or Mianyang Xinchen, and Shenyang Xinguang Brilliance Automobile Engine
Co., Ltd., or Shenyang Xinguang Brilliance, each of which is a Sino-foreign
equity joint venture. Shenyang Automotive was established as a Sino-foreign
equity joint venture enterprise in July 1991. In China, foreign ownership of
motor vehicle and motor vehicle engine manufacturers established subsequent to
the adoption of relevant government policies in 1994 is currently limited to
50%, although such restrictions are expected to be relaxed with respect to
Chinese automobile 6




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engine manufacturers as WTO requirements are implemented. As a result,
Brilliance China Automotive is not allowed to increase its percentage ownership
in these joint ventures. In the event any of these joint ventures requires
additional equity investment, Brilliance China Automotive would not be able to
make such investment unless the joint venture partner also proportionally
contributed in order to maintain their respective ownership interests. There
can be no assurance that sufficient funds will be available to Brilliance China
Automotives joint venture partners if and when Brilliance China Automotive
seeks to increase its investment in the joint ventures. In addition, to the
extent that Brilliance China Automotives joint venture partners do not agree
to additional equity investments or are unable to contribute proportionate
funds on a timely basis, capital expenditure plans preferred by Brilliance
China Automotive may have to be reduced or restructured and the business
prospects of these joint ventures may be adversely affected. Any delay or disruption in Shenyang Automotives ability to obtain engines from
Toyota could limit Shenyang Automotives ability to produce its deluxe
minibuses. While Shenyang Automotive is currently in the process of replacing the
Toyota engines used in some of its minibus models with Mitsubishi and Mianyang
Xinchen engines, currently most of the engines installed in Shenyang
Automotives deluxe minibuses are purchased from Toyota on a commercial basis.
Shenyang Automotive generally maintains an inventory of Toyota engines
sufficient to sustain two months of planned production. To date, Shenyang
Automotive has not experienced any material disruption to its supply of engines
from Toyota. Changes in regulatory requirements, tariffs and other trade
barriers and price or exchange controls could, however, hinder Shenyang
Automotives ability to import engines. An extended disruption or reduction in
Shenyang Automotives supply of Toyota engines would consequently limit
Shenyang Automotives ability to produce deluxe minibuses. Any delay or disruption in Shenyang Automotives ability to obtain Mitsubishi
engines could limit Shenyang Automotives ability to produce its Zhonghua
sedans. Currently all of the Mitsubishi engines installed in Brilliance China
Automotives Zhonghua sedans are purchased from Shenyang Aerospace Mitsubishi
Motors Engine Manufacturing Co., Ltd., or Shenyang Aerospace, on a commercial
basis. Shenyang Aerospace is an associated company of Brilliance China
Automotive, in which Brilliance China Automotive has a 12.8% equity interest.
See Item 4  Information on the Company 
Business Overview  Other Significant Subsidiaries, Jointly
Controlled Entities and Associated Companies  Shenyang Aerospace. Shenyang
Automotive is currently in discussions with other domestic and overseas engine
manufacturers, with a view to broadening its engine sourcing for the Zhonghua
sedans, including using foreign designs to produce domestically engines for
sedans and minibuses. Shenyang Automotive generally maintains an inventory of
Mitsubishi engines sufficient to sustain two months of planned production. To
date, Shenyang Automotive has not experienced any material disruption to its
supply of Mitsubishi engines from Shenyang Aerospace. However, there can be no
assurance that Shenyang Automotive will at all times be able to obtain a steady
supply of Mitsubishi engines from Shenyang Aerospace. An extended disruption
or reduction in Shenyang Aerospaces supply of Mitsubishi engines to Shenyang
Automotive would consequently limit Shenyang Automotives ability to produce
its Zhonghua sedans. If Brilliance China Automotive fails to upgrade the production facilities of
Shenyang Automotive in a timely and cost-efficient manner, its businesses,
financial condition and results of operation may be negatively affected. In order to maintain its competitive edge, Brilliance China Automotives
strategy is to continuously upgrade the production facilities of Shenyang
Automotive, including molding, welding, painting and assembly facilities. Any
failure or delay in implementing such upgrading plans in a timely 7




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and cost-efficient manner could limit Shenyang Automotives future growth
and have a material adverse effect upon Brilliance China Automotives
businesses, financial condition and results of operations. Shenyang Automotives competitors may have access to more advanced technology,
greater financial resources and more substantial support from the Chinese
government, which could negatively affect Shenyang Automotives competitive
position. Some of Shenyang Automotives competitors have formed joint ventures with,
or licensed technology from, foreign automobile manufacturers, and others may
do so in the future. These competitors may have access to greater financial
resources than Brilliance China Automotive or to technology and equipment that
are more advanced than the technology and equipment utilized by Brilliance
China Automotive. In addition, some of Shenyang Automotives potential
competitors may receive substantial support from the Chinese government,
including priority access to loans, favorable import quotas and tariffs,
expedited approvals of proposed projects and products and preferential tax
treatment. Such advantages may make it difficult for Shenyang Automotive to
compete with these other automobile manufacturers. Huachen, as Brilliance China Automotives substantial shareholder, may not
always act in the best interest of other shareholders. Huachen, a wholly owned subsidiary of the Liaoning Provincial Government,
currently owns 39.4% of the issued and outstanding shares of Brilliance China
Automotive, which it acquired from the Chinese Financial Education Development
Foundation in December 2002. Accordingly, Huachen is entitled to cast 39.4% of
the votes on all matters voted on by the shareholders of Brilliance China
Automotive (to the extent it is not required to abstain from exercising its
voting rights under the applicable laws and regulations), and therefore is able
to exert substantial influence over the election of Brilliance China
Automotives directors, the outcome of actions requiring majority shareholder
approval and the business in general of Brilliance China Automotive. Such
influence could preclude the ability of minority shareholders to influence
important business decisions of Brilliance China Automotive, and may result in
actions or omissions by Brilliance China Automotive that are not in the best
interest of the minority shareholders. Significant changes in the cost or availability of raw materials or components
may have a material adverse impact on Brilliance China Automotives results of
operations. Brilliance China Automotive has established stable relationships with over
400 suppliers in China and sources the majority of its important components and
raw materials from at least two different suppliers to ensure availability and
increase competition among suppliers. Brilliance China Automotive has also made
significant progress in increasing the domestic component content of its
products. However, certain principal components of Brilliance China
Automotives products, including those used in the BMW joint ventures sedan
production, continue to be imported from Toyota, BMW and other overseas
suppliers. Because certain components are imported from Toyota, BMW and other
suppliers in Japan and Europe, the costs as well as availability of such
components may be affected by foreign exchange, exchange rates, import
restrictions, customs clearance, shipment schedules and import duties and
consequently drive up Brilliance China Automotives costs of production. In
addition, unexpected disruptions in the supply of certain components,
particularly from foreign suppliers, may also require using alternative
suppliers or cause delays in the production process. Furthermore, increases in
the price of electricity or certain raw materials, such as steel, may result in
increased costs of production. Significant changes in the cost or availability
of raw materials or components may have an adverse impact on Brilliance China
Automotives results of operations. 8




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Product liabilities and recall claims may adversely affect Brilliance China
Automotives results of operation. Manufacturers and sellers of defective products in China may be subject to
liability for losses and injury caused by such defective products under Chinas
laws. However, there is currently no compulsory legal requirement for
automobile manufacturer to maintain insurance coverage in respect of production
interruption, product liability or damage to third party properties. Neither
Brilliance China Automotive nor Shenyang Automotive carries product liability
insurance or insurance against losses due to production insurance, product
recalls or damage to third party properties. Brilliance China Automotive cannot
guarantee that product liability claims will not be brought against Brilliance
China Automotive or its subsidiaries and affiliates in the future, and, if such
claims are successful, that such claims will not have a material adverse impact
upon Brilliance China Automotives results of operations, or that the Chinese
government will not impose new requirement for sufficient insurance to be
maintained to cover the risks associated with Brilliance China Automotives
China operations, including those of Shenyang Automotive and the BMW joint
venture. Brilliance China Automotive is required to comply with increasingly stringent
environmental standards applicable to its minibus and manufacturing facilities. Brilliance China Automotives production facilities are subject to
government pollution regulations enforced by the relevant local government. In
addition, the Chinese government has set vehicle safety, exhaust and
performance standards with which Brilliance China Automotive must comply.
Brilliance China Automotives operations are sensitive to changes in the
Chinese governments environmental policies relating to all aspects of the
automobile manufacturing. There is no assurance that changes in such policies
would not have an adverse effect on the revenue or results of operations of
Brilliance China Automotive. Risks Relating to the Minibus and Sedan Industries in China Competition in Chinas minibus and sedan industry could lead to further
competitive pricing pressure. Chinas minibus and sedan industry is highly competitive in terms of
vehicle quality, pricing, choice of models, reliability, safety, fuel economy,
customer service and financing terms. Many participants, particularly in the
sedan industry, have announced plans to increase production capacity in China.
Increasing capacity within the industry is likely to intensify further
competitive pricing pressure, particularly in the event of an economic downturn
in China. Reduced tariffs and import restrictions on foreign-made motor vehicles and
motor vehicle components
as a result of Chinas entry into the WTO may lead to increased competition for
Brilliance China Automotive. The Chinese government imposes restrictions, quotas and tariffs on the
import of foreign-made motor vehicles, as well as motor vehicle components.
However, as a result of Chinas admission to the WTO, which regulates trading
and tariffs among its signatory states, in November 2001, China has committed
to reducing its import restrictions on motor vehicles and motor vehicle
components. In addition, China will be required to conform its import tariffs
to the uniform tariffs under the WTO. Effective January 1, 2002, China reduced
its import tariffs on motor vehicles and automotive components from between 80%
to 100% and between 18% to 40%, respectively, to between 43.8% to 50.7% and
between 14% to 31.4%, respectively. This range was lowered further to between
4.8% and 25% for automotive components in 2003. In 2003, the average import
tariffs on automotive components for the 9




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deluxe minibuses, Grace minibuses, and Zhonghua sedans was 14.5%, 13.2%,
and 14.6%, respectively. In addition, tariffs on vehicles with nine seats or
less and engine sizes of three liters or below fell from 43.9% in 2002 to 38.2%
for 2003, while tariffs on vehicles with more than nine seats and engines of
more than three liters decreased from 50.7% in 2002 to 43.0% for 2003. Current
tariffs are 34.2% for vehicles with nine seats or less, and 37.6% for vehicles
with nine seats or more. All of these tariffs levels are scheduled to be
further reduced by 2006. Although lower tariffs and reduced import restrictions
may benefit Brilliance China Automotive in terms of lower cost of imported
components, lower tariffs and reduced import restrictions could also lead to a
substantial increase in the number of minibuses, sport utility vehicles, sedans
and other motor vehicles imported into China, thereby significantly increasing
competition in Brilliance China Automotives current and proposed markets. Extensive governmental regulations on the automobile industry in China may
limit the flexibility of Brilliance China Automotive to respond to market
conditions and competition. The Chinese government has implemented extensive policies and regulations
for the passenger automobile industry, including policies and regulations
relating to market entry, vehicle safety and emissions standards, exhaust and
performance standards, pollution levels of vehicle production facilities,
pricing, vehicle and component import tariffs and foreign ownership of
interests in vehicle and component manufacturers. In addition, every new
product type must be approved by the Chinese government before it can be
introduced into the market. This approval process can sometimes be lengthy, and
can impact the ability of Brilliance China Automotive to introduce new products
in a timely manner. This regulatory framework may limit the flexibility of
Brilliance China Automotive to respond to market conditions or competition. The
cost of complying with these policies and regulations can also be significant.
Brilliance China Automotives operations are sensitive to changes in the
Chinese governments policies relating to all aspects of the automobile
industry. There can be no assurance that changes in such policies would not
have an adverse effect on the revenue or results of operations of Brilliance
China Automotive. China automobile industry is significantly dependent upon the state of China
economy. Performance of China automobile industry is highly dependent on general
economic conditions and the purchasing power of consumers in China . Thus, the
revenue and profits of Brilliance China Automotive are subject to cyclical
fluctuations and may be adversely affected by any unfavorable changes in the
economic conditions in China. Risks Relating to Chinas Economy and Regulatory System Currency exchange risks could affect Brilliance China Automotives cross-border
transactions. Brilliance China Automotive is subject to risks associated with
cross-border transactions, including foreign currency exchange rate risks
relating to its purchase of automotive components from Toyota in Japan and
other overseas suppliers. During 2003, imported components comprised
approximately 24% of the total costs of deluxe minibuses (approximately 52% of
the total costs of the Grace deluxe minibus specifically) and approximately 26%
of the total costs of the Zhonghua sedan. Changes in foreign currency exchange
rates also affect the costs of foreign-manufactured components imported by
Chinese manufacturers of larger components, such as engines, which we purchase
domestically. Budgetary constraints on Chinas government entities and state enterprises
could affect Shenyang Automotives sales and pricing of products. 10




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Brilliance China Automotive believes that approximately 18% and 20% of
Shenyang Automotives 2003 revenues from minibuses and sedans, respectively,
were derived from sales to governmental agencies and certain state-run
enterprises. Because of Shenyang Automotives customer composition, sales and
pricing of its products can be affected by budgetary constraints applicable to
government entities and state enterprises. Brilliance China Automotives results of operations and financial position are
affected to a significant degree by economic, political and legal developments
in China. Substantially all of Brilliance China Automotives assets are located in
China and substantially all of Brilliance China Automotives revenues are
derived from China. Accordingly, Brilliance China Automotives results of
operations and financial position are subject to a significant degree to
economic, political and legal developments in China. Since 1978, the Chinese
government has been reforming its economic system. Many of the reforms are
unprecedented or experimental, and are expected to undergo future change. Other
political, economic and social factors, such as political changes, changes in
the rates of economic growth, changes in foreign exchange rate policies,
unemployment or inflation, or in the disparities in per capita wealth between
regions within China, could lead to further adjustment of the reform measures.
There can be no assurance that the reforms in the economic system in China will
continue or that Brilliance China Automotive will not be adversely affected by
changes in political, economic and social conditions in China, including
changes in political leadership or by the adoption of additional or revised
reform measures. Any significant disruption of Chinas banking system could materially and
adversely affect Brilliance China Automotives ability to obtain credit. Most major banks in China are owned by the Chinese government. Most of
these banks have historically extended significant amounts of loans according
to governmental policy rather than for commercial reasons. As a result, these
banks currently have significant loans outstanding to state-owned enterprises,
many of which have incurred recurring and material losses. Consequently, many
banks in the China have substantial levels of loans that are not current with
respect to payments of either interest or principal and may not have made
adequate provisions to cover potential losses on these loans. Any significant
disruption of Chinas banking system could materially and adversely affect
Brilliance China Automotives ability to obtain credit and the economic
environment in which it conducts its business and may also affect its customers
and distributors. Shenyang Automotives ability to obtain sufficient foreign exchange to satisfy
its requirements is dependent on authorization of the State Administration of
Foreign Exchange. Substantially all of the revenues of Brilliance China Automotive are
denominated in Renminbi, while some of their operating expenses and capital
expenditures are denominated in foreign currencies. The Renminbi currently is
not a freely convertible currency. The State Administration of Foreign
Exchange, under the authority of the Peoples Bank of China, regulates the
conversion of Renminbi into foreign currency. There can be no assurance that
the current authorizations for foreign-invested enterprises, such as Shenyang
Automotive, to retain their foreign exchange to satisfy foreign exchange
liabilities or to pay dividends in the future will not be limited or eliminated
or that Shenyang Automotive will be able to obtain sufficient foreign exchange
to pay dividends and to satisfy its other foreign exchange requirements. 11




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See
also Government Regulation and Environmental Matters in Item
4  Information on the Company, Item 5  Operating and Financial Review and
Prospects, Item 8  Financial Information  Legal Proceedings and Item
11  Quantitative and Qualitative Disclosures About Market Risk. 
 ITEM 4. INFORMATION ON THE COMPANY History and Development of Brilliance China Automotive Brilliance China Automotive Holdings Limited was established as an
exempted company with limited liability under the laws of Bermuda on June 9,
1992. Brilliance China Automotives principal place of business is Suites
1602-05, Chater House, 8 Connaught Road Central, Hong Kong, telephone number:
(852) 2523-7227. Brilliance China Automotive was initially established to hold a 51.0%
interest in Shenyang Brilliance JinBei Automobile Co., Ltd. (formerly known as
Shenyang JinBei Passenger Vehicle Manufacturing Company, Ltd.), or Shenyang
Automotive, currently the leading manufacturer and distributor of minibuses in
China and also the manufacturer of Zhonghua sedans. Shenyang Automotive was
established as a Sino-foreign equity joint venture enterprise on July 22, 1991.
The term of Shenyang Automotive is perpetual as a result of an amendment made
to Shenyang Automotives joint venture contract in February 2003. The other
49.0% of Shenyang Automotive was owned by Shenyang JinBei Automotive Company
Limited (formerly Shenyang Brilliance Automotive Company Limited and FAW-JinBei
Automotive Company Limited), or JinBei. On December 29, 2003, Brilliance China Automotive, through Shenyang
Xinjinbei Investment and Development Co., Ltd., or SXID, and Shenyang JinBei
Automotive Industry Holdings Co., Ltd., or SJAI, its 99.0% and 98.0% indirectly
owned subsidiaries, respectively, entered into agreements to acquire the entire
equity interests of Shenyang Automobile Industry Asset Management Company
Limited, or SAIAM, and Shenyang Xinjinbei Investment Co., Ltd, or SXI. SAIAM
and SXI own 29.9% and 11%, respectively, of the issued share capital of JinBei.
Upon receipt of the necessary governmental approvals for this transaction,
Brilliance China Automotive will have an effective interest of approximately
40.1% of JinBei, thereby increasing its effective interest in Shenyang
Automotive from 51.0% to approximately 70.7%. This acquisition is expected to
be completed in the second half of 2004. Prior to May 1998, Brilliance China Automotives sole operating asset was
its interest in Shenyang Automotive. On May 18, 1998, Brilliance China
Automotive acquired 50% and 51% equity interests, respectively, in Mianyang
Xinchen Engine Co., Ltd., or Mianyang Xinchen, a manufacturer of gasoline
engines for use in passenger vehicles and light duty trucks, and Ningbo Yuming
Machinery Industrial Co., Ltd., or Ningbo Yuming, a producer of automobile
windows and window molding and stripping. Mianyang Xinchen is a Sino-foreign
joint venture whose 50-year term will expire in 2048. Ningbo Yuming is a
wholly foreign-owned enterprise with a 50-year term that will expire in 2043. On October 12, 1998, June 9, 2000 and July 3, 2000, Brilliance China
Automotive established wholly owned subsidiaries (1) Shenyang XingYuanDong
Automobile Component Co., Ltd., or Xing Yuan Dong, (2) Ningbo Brilliance
Ruixing Auto Components Co., Ltd., or Ningbo Brilliance Ruixing, and (3)
Mianyang Brilliance Ruian Automotive Components Co., Ltd., or Mianyang
Brilliance Ruian, respectively, to centralize and consolidate the sourcing of
automotive parts and components for Shenyang Automotive, Ningbo Yuming, and
Mianyang Xinchen, respectively. In 2001, all three companies, in order to
maintain their preferential tax treatment from the Chinese government, also
began manufacturing automotive components as well. 12




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On December 11, 2000, Brilliance China Automotive acquired from Brilliance
Holdings Limited, an affiliated company, a 50.0% equity interest in Shenyang
Xinguang Brilliance Automobile Engine Co., Ltd., a Sino-foreign equity joint
venture manufacturer of gasoline engines for use in passenger vehicles and
light duty trucks. Shenyang Automotive is a major customer of each of these
companies. Brilliance China Automotive believes that the acquisition of these
components suppliers has enabled it to maintain the quality and ensure a stable
supply of certain key components required for the production needs of Shenyang
Automotive. At the end of 1998, Shenyang Automotive began to construct new production
lines for the manufacture of sedans and multi-purpose vehicles, or MPVs. These
new production lines were completed in mid-2002, and reached a total annual
production capacity of 100,000 sedans or MPVs as at the end of 2002. Beginning
in 1999, Shenyang Automotive implemented an expansion of its minibus facilities
that resulted in an increase in its annual production capacity for deluxe and
mid-priced minibuses from 40,000 units to 70,000 units in 2002 (based on two
shifts per day). The stamping and assembly workshops currently have annual
production capacities of 80,000 and 90,000 units, respectively, based on two
shifts of workers, and can be increased to 120,000 units based on three shifts.
In 2003, Shenyang Automotive constructed a new painting facility with a
capacity of 120,000 units per year. Under an acquisition agreement dated April 25, 1998 between Shenyang
Automotive and Shenyang State Assets Administration Bureau, Shenyang Automotive
was to acquire a 21.0% indirect interest in Shenyang Aerospace Mitsubishi
Motors Engine Manufacturing Co., Ltd., or Shenyang Aerospace, a Sino-foreign
equity joint venture. A revised agreement was subsequently signed on August
15, 1999 among Shenyang Automotive, Shenyang State Assets Administration
Bureau, Shanghai Brilliance Industrial Company Limited and Xing Yuan Dong,
under which Shenyang Automotives effective interest in Shenyang Aerospace was
reduced to 16.8% in exchange for cash consideration and the remaining 4.2%
effective interest was transferred to Xing Yuan Dong at cost. At the
completion of the transfer on May 25, 2000, Brilliance China Automotives
indirect effective interest in Shenyang Aerospace was 12.8%. On December 17, 2001, Shenyang Automotive entered into an agreement with
Toyota Motor Corporation for the transfer of technology relating to the fifth
generation of the Toyota minibus, the Granvia, which Shenyang Automotive
markets under the brand name Grace in China. Production of this minibus model
based on semi-knockdown kits from Toyota began in the second half of 2002 and
commercial production using domestic parts and components has commenced in the
first half of 2004. The Zhonghua sedan, designed by the world-renowned Italdesign, was
launched to the market in China in August 2002, after approval for production
and sale of the Zhonghua sedan was obtained from the Chinese government in May
2002. In December 2002, Xing Yuan Dong disposed of its entire equity interest in
the automobile-related product investment holding company, China Zhengtong
Investment Holdings Co., Ltd. to an affiliated company at cost, or Rmb 480.0
million. On March 27, 2003, Brilliance China Automotive, through its indirect
subsidiary, SJAI, entered into a joint venture contract with BMW Holding to
produce and sell BMW sedans in China. On April 28, 2003, Brilliance China
Automotive increased its effective interest in SJAI from 81% to 89.1% and
thereby increased its effective interest in the joint venture with BMW Holding
BV from 40.5% to 44.55%. On December 16, 2003, Brilliance China Automotive
further increased its effective interest in the joint venture to 49.0%. The
BMW joint venture received its business license on May 22, 2003 and introduced
the BMW designed and branded 3-Series and 5-Series sedans in October and
November of 2003, respectively, based on semi-knockdown kits supplied by BMW. 13




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Brilliance China Automotive currently has no acquisitions or divestitures
planned or pending. For additional information see Item 5  Operating and Financial Review and
Prospects  Liquidity and Capital Resources  Capital Expenditures. Business Overview Brilliance China Automotives core businesses are the manufacture and sale
of minibuses and Zhonghua sedans in China through its subsidiary, Shenyang
Automotive. We also have a joint venture with BMW to produce and sell 3-Series
and 5-Series sedans in China. In 2003, Shenyang Automotive sold a total of
74,618 minibuses and 25,600 Zhonghua sedans, representing approximately 16.9%
and 1.3% of all minibuses and sedans sold in China, respectively, during the
same period. This represented a 14.6% increase from the minibus sales volume
in 2002, and a significant increase in sedan sales due to the limited sedan
manufacturing period in 2002. Brilliance China Automotives 49%-indirectly
owned BMW joint venture also commenced production of the BMW-designed and
branded sedans and sold 4,359 of the 3-Series and 5-Series sedans in the last
quarter of 2003. Currently, Shenyang Automotive has an annual production
capacity of 80,000 units of deluxe and mid-priced minibuses (based on two
shifts per day), 120,000 units of deluxe and mid-priced minibuses (based on
three shifts per day), and 100,000 units of Zhonghua sedans (based on two
shifts per day). Shenyang Automotives production facilities are located in the industrial
city of Shenyang, the capital of Liaoning Province in northeastern China.
Shenyang Automotives principal products are the deluxe minibus, the mid-priced
minibus and the Zhonghua sedan. The mid-priced minibuses accounted for
approximately 49.1% of the total sales revenue of Shenyang Automotive and its
subsidiaries in 2003, compared with 62.8% of total sales revenue in 2002. This
percentage decrease is primarily due to the increase in sales of the Zhonghua
sedans in 2003 resulting from the first full year of production for the sedans.
The deluxe and mid-priced minibuses are 8 to 15-seat minibuses adapted from
Toyotas Hiace and Granvia minibuses. In early 2000, Shenyang Automotive successfully launched an electronic
fuel injection mid-priced minibus model, which passed the stricter gasoline
vehicle emission standards implemented on January 1, 2000 by Beijing, Tianjin
and Yunnan Province. These emission standards have since been adopted
nationwide in China. In early 2001, Shenyang Automotive began to install
multiple electronic fuel injection engines, which are currently used in all of
Shenyang Automotives mid-priced minibuses. With the installation of this
engine in the mid-priced minibus, currently all of Shenyang Automotives
minibuses meet European II emission standards. In 2004, the Chinese government
began to encourage its automobile manufacturers to meet the European III
emission standards. Shenyang Automotive expects both its minibuses and
Zhonghua sedans to meet European III emission standards in the second half of
2004. Shenyang Automotive commenced production of the fifth generation of the
Toyota minibus, the Granvia, based on semi-knockdown kits supplied by Toyota in
2003 and also commenced commercial production of the Granvia using domestic
parts and components in the first quarter of 2004. Shenyang Automotives sales volume grew 35.5% from 73,954 units in 2002 to
100,218 units in 2003. The 2003 figure includes 74,618 minibuses and 25,600
Zhonghua sedans. In addition to these sales, our joint venture, BMW Brilliance
Automotive Ltd., or BMW Brilliance, sold 4,359 BMW-branded sedans in 2003.
Shenyang Automotives sales growth in China has been supported by a substantial
network of more than 800 minibus distributors, including over 250 exclusive
minibus distributors, and over 110 sedan distributors, as well as over 330
after-sales service centers for minibuses and over 150 for 14




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sedans. Shenyang Automotive also continued to implement its 4S sales
center system, combining sales, after-sales service, spare parts and surveys in
one location. As of the end of 2003, Shenyang Automotive had over 80 4S
dealership outlets for minibuses and over 70 authorized 4S dealership outlets
for Zhonghua sedans nationwide. For the year ended December 31, 2003, Brilliance China Automotive reported
sales of Rmb 10,109.6 million (US$1,221.0 million) and net income of Rmb 780.8
million (US$94.3 million), representing an increase of approximately 38.1% and
27.9%, respectively, compared to 2002. Principal Products Shenyang Automotives principal products are (1) minibuses and (2)
Zhonghua sedans. Shenyang Automotives principal minibus products are the deluxe minibus
and the mid-priced minibus, which constituted approximately 12.7% and 49.1% of
total 2003 sales revenue, respectively. These vehicles are used primarily for
passenger transportation but can also be modified for use as police vans,
ambulances or other specialty vehicles. Shenyang Automotive sells all of its
minibuses under the JinBei brand name in a variety of models designed to meet
the requirements of particular market segments. Brilliance China Automotive
believes that Shenyang Automotives minibuses have established a reputation in
China for high quality and reliability that has enabled Shenyang Automotive to
maintain its market-leading position in recent years. Shenyang Automotive
commenced production of the high-end Grace model in 2002 based on
semi-knockdown kits from Toyota and now produces them using domestic parts and
components. Shenyang Automotives Zhonghua sedan was introduced to the commercial
market in China in August 2002 and constituted approximately 15.3% and 33.1% of
total sales revenue in 2002 and 2003, respectively. The initial model was a
five-seat manual transmission sedan with a 4-cylinder, 2.0-liter Mitsubishi
engine. Shenyang Automotive now also produces manual transmission Zhonghua
sedans with 2.4-liter engines and automatic transmission versions with both
2.0-liter and 2.4-liter engines. In 2003, Brilliance China Automotive has increased its market share in the
Chinese sedan market with both the increased sales of Shenyang Automotives
Zhonghua sedan and the launch of the BMW 3 and 5 Series sedans produced by the
BMW joint venture. 15




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##### Table of Contents



The following table sets forth certain information with respect to
Shenyang Automotives principal products as of the date of this annual report. DeluxeMinibus
    
    Deluxe
    
    
    
    
    
    Zhonghua
    
    Zhonghua(Granvia
    
    Minibus
    
    Mid-priced
    
    Sedan
    
    SedanGrace Model)
    
    (Hiace Model)
    
    Minibus
    
    Version 2.0
    
    Version 2.4Maximum numberof passengers
    
    7-8
    
    15
    
    15
    
    5
    
    5Engine type
    
    Toyota 4-cylinder2.7-liter gasolineengine
    
    Toyota 4-cylinder2.4-liter gasolineengine
    
    Mianyang Xinchenand ShenyangXinguang 4-cylinder2.2 liter gasolineengine
    
    Mitsubishi4-cylinder2.0 liter gasolineengine
    
    Mitsubishi4-cylinder2.4 liter gasolineengineHorsepower
    
    105
    
    100.6
    
    92.5
    
    122
    
    130Price Range in Rmb(1)
    
    180,000-363,000
    
    178,800-277,800
    
    73,800-159,800
    
    169,800
    
    188,800Fuel Consumption(Liters/100 km)(2)(3)
    
    10
    
    10
    
    9.8
    
    6.5 (MT)/7.6 (AT)
    
    6.8 (MT)/7.6 (AT)Maximum speed(3)
    
    158 km/hr
    
    130 km/hr
    
    130 km/hr
    
    190 km/hr (MT)/185 km/hr (AT)
    
    195 km/hr (MT)/185 km/hr (AT)Domestic component content
    
    60%
    
    80%
    
    100%
    
    70-75%
    
    70-75%Length
    
    4.7 m
    
    4.8 m
    
    4.8 m
    
    4.88 m
    
    4.88 m
   (1)
    
    Actual price depends on specific model.(2)
    
    Based on an average speed of 50-55 kilometers per hour for minibuses
and 80 kilometers per hour for sedans.(3)
    
    MT denotes manual transmission and AT denotes automatic transmission.   16




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##### Table of Contents



The following table sets forth certain information with respect to the BMW
joint ventures principal products as of the date of this annual report. BMW
    
    BMWJoint Venture 3-Series Sedan
    
    Joint Venture 5-Series SedanModels
    
    Series 318 and 325
    
    Series 520, 525 and 530Maximum number of passengers
    
    5
    
    5Engine types
    
    BMW 6-cylinder1.8 liter and 2.5 litergasoline engines
    
    BMW 6-cylinder2.0 liter, 2.5 liter and 3.0 litergasoline enginesHorsepower
    
    143 - 192 bhp
    
    170 - 231 bhpPrice range in Rmb(1)
    
    398,000 - 468,000
    
    578,000 - 698,000Fuel
Consumption(Liters/100 km)(2)
    
    8.1 - 9.5
    
    9.8 - 9.9Maximum speed
    
    218 - 240 km/hr
    
    230 - 250 km/hrLength
    
    4.47 m
    
    4.84 m
  (1)
    
    Actual price depends on specific model.(2)
    
    Based on an average speed of 80 kilometers per hour.
 Deluxe minibus. The deluxe minibus has historically been Shenyang
Automotives flagship product and is among the highest quality, most
technologically advanced minibuses currently produced in China. Shenyang
Automotives predecessor began assembling deluxe minibuses under license from
Toyota in 1989. The deluxe minibus is used primarily as a passenger vehicle
and features air conditioning, and optional power steering, power windows,
automatic locks, a rear window wiper, full interior carpeting and alternative
interior configurations. Shenyang Automotives high-end products have been further improved to
incorporate more user-friendly features to meet diversified customer demands.
In the deluxe line, Shenyang Automotive has introduced a locally developed
model, based on the Toyota 441N, which is equipped with an anti-lock braking
system, improved helix rear suspension and refined interior trim. It has the
highest technical content among Shenyang Automotives product lines. On December 17, 2001, Shenyang Automotive entered into an agreement with
Toyota for the technology transfer of the fifth generation of the Toyota
minibus  the Granvia  for which production based upon semi-knockdown kits
from Toyota commenced in 2002. Shenyang Automotive began producing the Granvia
using domestic parts in the first quarter of 2004. The Granvia is marketed
under the brand name Grace when sold in China by Shenyang Automotive. The
Grace minibus exhibits several improvements over the fourth generation minibus,
including more responsive performance when carrying heavy loads, better
handling, better maneuverability, 360-degree interior moveable seats, and a
more luxurious and comfortable interior. 17




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##### Table of Contents



Mid-priced minibus. The mid-priced minibus was developed by Shenyang
Automotive and was commercially introduced in the second half of 1996. Shenyang
Automotive produces two principal mid-priced minibus models, both of which are
based on the deluxe minibus and share the same styling and body of the deluxe
minibus, with the principal difference being the engine. By equipping the
majority of these models with a domestically manufactured Mianyang Xinchen or
Shenyang Xinguang engine, Shenyang Automotive is able to sell them for
significantly less than the deluxe minibus, yet still maintain function and
quality standards for these models that are only slightly lower than the deluxe
minibus. This has allowed the mid-priced minibus models to compete more
effectively in terms of price with other domestically produced products. See
 Competition below. These mid-priced models include the Aurora, a version
derived from a similar model from the deluxe line but with more local content,
and the Shuttler, which features a multi-point injection (MPI) system, improved
air conditioning and flexible seating that allows it to be used as both a
passenger and goods vehicle. In 2002, Shenyang Automotive introduced three new minibus models to the
market, including mid-priced minibuses that utilize Mitsubishi engines. In
September 2003, Shenyang Automotive launched the face-lift versions of these
minibus models. As a result, Shenyang Automotive has further consolidated its
position in the market place, while continuing to remain price competitive with
its rivals. In 2002, Shenyang Automotive invested approximately Rmb 129.0 million on a
mold for the new Grace minibus. In 2003, Shenyang Automotive invested
approximately Rmb 760.0 million (US$91.8 million) on new minibus painting
facilities, new molds for the Grace minibus, and upgrading the minibus welding
and assembling workshops. As of the end of 2003, the upgraded facilities and
workshops increased minibus capacity to 80,000 units per year (based on two
shifts) and 120,000 units per year (based on three shifts). Brilliance China
Automotive believes that its long-term interests require that Shenyang
Automotive continue to expand its production capacity. Any increase in
Shenyang Automotives future revenue will depend on its ability to continue to
expand in a similar manner. Realization of its production and sales goals is
also contingent upon other factors, including the development of new vehicle
models, the ability to continue to achieve overall cost reductions, ongoing
access to high-quality raw materials and domestic component manufacturers and
maintenance of a large well-trained labor force, an effective distribution
network and after-sales service capabilities. Zhonghua sedan.The Zhonghua sedan was designed by Italdesign and was
commercially introduced by Shenyang Automotive in August 2002 after receiving
approval from the Chinese government in May 2002. This sedan is designed to
target the mid-priced sedan market segment, including governmental
institutions, businesses and individual users in China. This sedan model was
specifically designed for the Chinese market and utilizes a high degree of
domestic component content, thereby offering cost advantages to consumers. In
2003, Shenyang Automotive spent approximately Rmb 200.0 million (US$24.2
million) on upgrading the Zhonghua production facilities and related dies and
tools. On March 27, 2001, Brilliance China Automotive entered into a three-year
technical assistance agreement with BMW under which BMW engineers provide
consulting services to help in the initial stages of production of Zhonghua
sedans at Shenyang Automotives sedan production facilities in Shenyang,
including assistance in achieving and maintaining the desired level of
production quality. This agreement expired in March 2004 and Brilliance China
Automotive and BMW are currently in discussions regarding a similar agreement
to be entered into directly between Shenyang Automotive and BMW to replace the
original agreement. 18




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The following table sets forth Brilliance China Automotives revenues by
category, for the years 2001 through 2003: 2001
    
    2002
    
    2003Revenue
    
    
    
    
    
    Revenue
    
    
    
    
    
    Revenue(Rmb million)
    
    %
    
    (Rmb million)
    
    %
    
    (Rmb million)
    
    %Minibus salesDeluxe minibus
    
    
    1,599
    
    
    
    25.7
    
    
    
    1,324
    
    
    
    18.1
    
    
    
    1,284
    
    
    
    12.7Mid-priced minibus
    
    
    4,375
    
    
    
    70.4
    
    
    
    4,600
    
    
    
    62.8
    
    
    
    4,962
    
    
    
    49.1Zhonghua
sedan(1)
    
    
    
    
    
    
    
    
    
    
    1,117
    
    
    
    15.3
    
    
    
    3,345
    
    
    
    33.1Subtotal
    
    
    5,974
    
    
    
    96.1
    
    
    
    7,042
    
    
    
    96.2
    
    
    
    9,591
    
    
    
    94.9Other
sources of income(2)
    
    
    244
    
    
    
    3.9
    
    
    
    277
    
    
    
    3.8
    
    
    
    519
    
    
    
    5.1Total
    
    
    6,218
    
    
    
    100.0
    
    
    
    7,319
    
    
    
    100.0
    
    
    
    10,110
    
    
    
    100.0
  (1)
    
    Commercial launch of the Zhonghua sedan occurred in August 2002.(2)
    
    Including sales of components. The following table sets forth the geographic breakdown of Shenyang
Automotives minibus and Zhonghua sedan sales revenue throughout China for the
years 2001 through 2003: 2001
    
    2002
    
    2003Province/
    
    Revenue
    
    
    
    
    
    Revenue
    
    
    
    
    
    RevenueMunicipality
    
    (Rmb million)
    
    %
    
    (Rmb million)
    
    %
    
    (Rmb million)
    
    %Beijing
    
    
    770
    
    
    
    12.9
    
    
    
    1,122
    
    
    
    15.9
    
    
    
    1,686
    
    
    
    17.6Guangdong
    
    
    1,855
    
    
    
    31.1
    
    
    
    1,445
    
    
    
    20.5
    
    
    
    1,502
    
    
    
    15.7Liaoning
    
    
    763
    
    
    
    12.8
    
    
    
    773
    
    
    
    11.0
    
    
    
    964
    
    
    
    10.1Shanghai
    
    
    1,072
    
    
    
    17.9
    
    
    
    1,129
    
    
    
    16.0
    
    
    
    720
    
    
    
    7.5Jiangsu
    
    
    47
    
    
    
    0.8
    
    
    
    303
    
    
    
    4.3
    
    
    
    660
    
    
    
    6.9Shandong
    
    
    222
    
    
    
    3.7
    
    
    
    238
    
    
    
    3.4
    
    
    
    465
    
    
    
    4.8Sichuan
    
    
    248
    
    
    
    4.2
    
    
    
    133
    
    
    
    1.9
    
    
    
    383
    
    
    
    4.0Tianjin
    
    
    98
    
    
    
    1.6
    
    
    
    115
    
    
    
    1.6
    
    
    
    257
    
    
    
    2.7Heilongjiang
    
    
    107
    
    
    
    1.8
    
    
    
    147
    
    
    
    2.1
    
    
    
    212
    
    
    
    2.2Henan
    
    
    87
    
    
    
    1.5
    
    
    
    80
    
    
    
    1.2
    
    
    
    168
    
    
    
    1.8Others
    
    
    705
    
    
    
    11.7
    
    
    
    1,557
    
    
    
    22.1
    
    
    
    2,574
    
    
    
    26.7Total
    
    
    5,974
    
    
    
    100.0
    
    
    
    7,042
    
    
    
    100.0
    
    
    
    9,591
    
    
    
    100.0
 19




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BMW Joint Venture On March 14, 2003, Brilliance China Automotive received formal approval
from the Chinese government with respect to the feasibility study for the
establishment of a joint venture between BMW Holding, a wholly owned subsidiary
of BMW AG, and SJAI, an indirect subsidiary of Brilliance China Automotive. On
March 27, 2003, SJAI entered into a joint venture contract with BMW Holding in
relation to the establishment of the joint venture in China. On April 28,
2003, Brilliance China Automotive, through its indirectly 90%-owned subsidiary,
SXID, entered into an agreement with the 10% shareholder of SJAI to acquire an
additional 9% interest in SJAI, thereby increasing its effective interest from
40.5% to 44.55%. On December 16, 2003, through Xing Yuan Dong, a wholly owned
subsidiary of the company, Brilliance China Automotive increased its indirect
interest in SJAI from 89.1% to 98.0% and thereby effectively further increased
its interest in the BMW joint venture to 49.0%. The registered capital and total investment cost of the joint venture is
Euro 150 million and Euro 450 million, respectively (equivalent to
approximately Rmb 1,564 million and Rmb 4,692 million, respectively). As of
December 31, 2003, Brilliance China Automotive injected Rmb 688.5 million into
the joint venture. The joint venture is to be 50%-owned by each of SJAI and BMW
Holding and has a term of 15 years starting from May 22, 2003, the date of
issuance of the joint ventures business license, which may be extended by
mutual consent of the parties to the joint venture. The business scope of the
joint venture is to produce and sell BMW-designed and branded passenger cars,
engines, parts and components and to provide after-sales services (including
repair and maintenance and spare parts) relating to its products. Profits of
the joint venture will be shared as to 50% by each of SJAI and BMW Holding, in
proportion to their respective contributions to the registered capital of the
joint venture. This joint venture contract prohibits Brilliance China
Automotive from entering into similar ventures with other automobile
manufacturers for the manufacture and sale of premium sedans in China. Brilliance China Automotive has agreed to provide a guarantee to BMW
Holding in relation to the performance by SJAI of its obligations under the
joint venture contract. A reciprocal guarantee has been provided by BMW AG to
SJAI in respect of the obligations of BMW Holding under the joint venture
contract. In addition, Brilliance China Automotive has been indemnified by
SAIAM and Shenyang JinBei Automobile Industry Company Limited with respect to
its liabilities under this guarantee to BMW Holding. On May 22, 2003, the business license for the joint venture was issued by
the Shenyang City Administration for Industry and Commerce. Commercial
production of BMW-designed and branded sedans commenced in September 2003 based
on knockdown kits supplied by BMW. The 3-Series BMW sedans were launched in
the market in October 2003 and the 5-Series were launched in November 2003. In
the first quarter of 2004, the BMW joint venture began incorporating
domestically produced components in its 3-Series sedans, but production of
these vehicles is still primarily based upon complete knockdown kits supplied
by BMW. The BMW joint ventures 5-Series sedans are still generally
manufactured using semi-knockdown kits from BMW. However, complete knockdown
kits are now being used for the manufacture of a portion of these 5-Series
sedans and these vehicles also began to include domestically produced
components in the second quarter of 2004. Production Process Minibus Production Process and Equipment  
    
    Stamping.Shenyang Automotive produces its own
semi-finished steel sheets for stamping on a roll,
drop and stack production line. Stamping is carried
out at nine production stations that utilize 38
domestic and imported presses, the largest of which
is calibrated at 3200 tons and is 20




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used to stamp roofs and side panels for the deluxe and mid-priced minibuses.
The 198 dies used for stamping and cutting body components for the deluxe
minibus and mid-priced minibus were purchased from Toyota. Substantially all
of the stamped metal vehicle components utilized in Shenyang Automotives
minibuses are produced in this stamping workshop.
    
    Welding.The welding workshop consists of ten
production stations that are each focused on a
different section of the minibus. These lines were
manufactured with Toyota technology and utilize a
combination of manual welding and automatic robotic
welding, the latter of which is utilized for the more
difficult welding points. Each welding station is
equipped with a domestically manufactured testing
machine. The annual production capacity based on two
shifts is 80,000 units and can be increased to
120,000 units based on three shifts.
    
    Painting.Shenyang Automotive currently operates a
48,600 square foot painting workshop that was set up
at the beginning of 2004 to enhance the production
capacity. The new painting workshop has three
floors, each with its own function. The new workshop
has an annual production capacity of 120,000 units,
with space reserved for expansion up to an annual
production capacity of 150,000. The new workshop uses
a painting method that combines the use of a
conveyor, automated machine and robotic machine.
Steps taken to prepare the vehicle body for painting
include de-greasing, rinsing, phosphatization and
electrophoretic coating. After each of the three
coats of paint is applied by sprayer to the minibus
body, it is dried in a heated drying chamber. The
specialized pre-painting preparation of the vehicle
allows the frame to withstand corrosion for 10 to 15
years. Also, the high standard of cleanliness in the
painting workshop and the advanced paint sprayers
used allow Shenyang Automotive to reduce
environmental pollution, provide better working
conditions for the painting workshop employees,
conserve raw materials and ensure that each minibus
receives three consistent, high-quality coats of
paint. Finally, various quality control tests are
conducted, including measurement of the luster and
thickness of the paint on each vehicle.
    
    Assembly.Shenyang Automotives final assembly
workshop is equipped with a combination single slot,
hanging and double slot conveyor. The conveyor is
570 meters long, has 86 separate workstations and is
capable of producing minibuses at the rate of one
every six minutes. Shenyang Automotive also
developed jointly with the Shenyang Automation
Research Center of the China Science Institute an
automated lifting system that is used in the assembly
of the power train, rear chassis and crank case, as
well as a computerized hydraulic machine for carrying
out the transfer from a single rail conveyor onto a
hanging line conveyor  the first of its kind to be
developed in China.
    
    Testing.Shenyang Automotive employs an advanced
comprehensive vehicle testing system to ensure that
each vehicle conforms to specifications, including
wheel alignment, exhaust emissions, steering, braking
and engine and transmission performance. All of
these final testing procedures are also supported by
a comprehensive quality control staff that monitors
each step of the production process. See  Business
Overview  Quality Control below. Zhonghua Sedan Production Process and Equipment  
    
    Stamping. At present, 104 pieces of large and medium parts of the
Zhonghua sedan are produced in the stamping (or pressing) workshop.
There are five large and medium pressing lines, among which the line
producing large (2,300 ton) parts was imported from Schuler of Germany
and is equipped with robots to handle automated production. There is
also a 6300KN uncoiling and blanking line from Schuler, which can
supply parts for up to seven production lines, as well as a 21




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100-ton die spotting press imported from Kawasaki of Japan. The other
pressing lines were purchased from a domestic equipment manufacturer.
    
    Welding. The welding workshop is required to assemble and weld 279
separate panels, 12 machined parts, 8 roll-pressed parts and 36
standard parts. This line was designed, manufactured and installed by
Kuka of Germany. The welding line consists of six zones and 223
stations, and is capable of spot-welding, carbon dioxide welding,
project welding, T-stud welding, sealing, brazing and hemming. At
present, there are 37 working robots in this workshop, which are used
to weld, seal and inspect at the most important stations on the line.
The SKID apparatus that transports components both on the ground and
overhead ADSs speed and efficiency to the welding process.
    
    Painting. Zhonghua sedans and the BMW-branded sedans share the
same painting line. All of equipment used in the painting line is
provided by Durr of Germany, and the paint supply system was imported
from Graco of the United States. Steps involved in the body painting
process include pre-treatment, E-coat, sealing, PVC, primer, top-coat
and cavity wax. The painting line is highly mechanized and automated,
with a central control system imported from Siemens. The painting line
may switch paints of different colors within 10 seconds and 15 paints
of different colors may be used in the same painting line. All of the
paints and other materials utilized in paint workshop are high quality
products sourced both from within China and abroad.
    
    Assembly and Testing. The performance of the assembly and testing
workshop is guided by an information system based on bar code
technology. The layout of the final assembly shop is designed by
Schenck Engineering of Germany and consists of the body buffer line,
main production line, test line, water proof line, finishing line and
marriage line, as well as various sub-lines and a rework area. The
assembly line utilizes a double-track conveyer system for transporting
the vehicles through each process. BMW Sedan Production Process The automotive production process employed by the BMW joint venture is
generally divided into four stages: welding, painting, assembly and testing. In
each stage, the BMW joint venture utilizes equipment primarily imported from
Germany. Each stage of the manufacturing process is also carefully monitored
both by quality control engineers and through specialized testing equipment to
ensure that the final product achieves the specified BMW Group quality
standards.  
    
    Welding.The manufacturing and welding process in the welding
workshop is performed according to the BMW Groups global standard. The
dimensional quality is checked with a state of the art CMM Machine from
Wenzel Company of Germany. The sourced welding equipment is from Edag
Company of Germany. The welding workshop contains stud welding, spot
welding, mig welding and sealing operations. The line operators have
been trained by BMW Group specialists and the process is controlled by
BMW Group specialists from Germany. The quality checks and audits are
consistent with those performed at other BMW Group plants.
    
    Painting.All of the equipment used in the painting line is
provided by Durr of Germany, and the paint supply system was imported
from Graco of the United States. Steps involved in the body painting
process are highly mechanized and automated, with a central control
system imported from Siemens. All of the paints and other materials
utilized in the paint workshop are high quality products sourced both
from within China and abroad. 22




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##### Table of Contents




    
    Assembly and Testing.The assembly workshop consists of two
assembly areas, one of which uses a conveyor system designed by the
German supplier AFT with 56 line stations in total, as well as handling
devices for heavy parts from Dalmec Company. The finishing and testing
equipment are located in the second area. A wide range of special
equipment used in BMW Group plants worldwide is used to test 100% of
the cars produced. Raw Materials and Components Raw Materials.To ensure its supply of high-quality domestic raw
materials, components and spare parts, Shenyang Automotive has established a
stable relationship with over 400 suppliers in China in 2003. Shenyang
Automotive sources the majority of its important components and raw materials
from at least two different suppliers to ensure availability and increase
competition among suppliers. In 2003, approximately 60.7% of Shenyang
Automotives components sourcing was handled through Xing Yuan Dong and Ningbo
Brilliance Ruixing, Brilliance China Automotives wholly owned subsidiaries. Steel is our principal raw material. Shenyang Automotive purchases steel
predominantly through the use of supply contracts. Since steel represented
only approximately 5% of Shenyang Automotives cost of goods sold in 2003, the
impact of rising steel prices on Shenyang Automotives overall production costs
was not significant. Furthermore, this small increase to the costs for raw
materials was more than offset by decreases in the costs of components due to
the larger economies of scale now employed in the manufacture of components
used in minibuses and an increase in the ratio of domestically produced
components used in the Zhonghua sedans. Components.Shenyang Automotive has adopted a system that regularly
evaluates its existing suppliers. These suppliers range from well-known
international suppliers to domestic suppliers with special technology and
know-how. In 2003, after conducting a comprehensive survey of its suppliers
against an array of criteria, such as quality problem feedback ratio,
production capacity, quality assurance systems and after-sales services,
Shenyang Automotive retained 405 suppliers out of 480. Implementing this
process has enabled Shenyang Automotive to build a stronger supplier network as
the foundation for future growth. The domestic component content of the deluxe minibuses is currently 80%
for the Hiace model and 60% for the Grace model. The principal components of
the deluxe minibus (Hiace model) that continue to be imported are the engine
and the rear axle, each of which is imported from Toyota. Shenyang Automotive
is currently in the process of developing deluxe minibuses that would utilize
Mitsubishi engines made by Shenyang Aerospace in order to offer a greater
variety of products to its customers. These new models would likely have a
higher domestic component ratio. Mitsubishi engines have already been
installed in a limited number of deluxe minibus (Hiace model) units. The mid-priced minibus uses 100% domestic parts and the domestic component
content of the Zhonghua sedan is over 70%. Brilliance China Automotive
calculates domestic component content by looking through larger components,
such as engines, produced by domestic Chinese entities to determine the
percentage of such components own components that were manufactured outside
China. Because certain components are imported from Toyota and other suppliers in
Japan and Europe, the availability of foreign exchange, exchange rates, import
restrictions and the level of import duties may affect the availability of
certain components and Shenyang Automotives costs of
production. See Item
5  Operating and Financial Review and Prospects  Liquidity and Capital
Resources. Shenyang Automotive is required to pay import duties on imported
automobile components. Shenyang Automotive was subject to an average tariff
rate of 13.0% to 15.0% on imported components 23




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used in its minibuses and Zhonghua sedans in 2003. During 2003, imported
components comprised approximately 24% of the total costs of all deluxe
minibuses. In addition, imported components comprised 26% of the total costs
of the Zhonghua sedan during 2003. Changes in foreign currency exchange rates
also affect the cost of foreign-manufactured components imported by Chinas
domestic manufacturers to make larger components, such as engines, which we
purchase domestically. The total aggregate import tariffs paid by Shenyang
Automotive for 2003 were approximately Rmb 104.6 million (US$12.6 million).
However, as a result of Chinas admission to the WTO, import tariffs on motor
vehicle components decreased to between 4.8% and 25% effective January 1, 2003.
A decrease in import tariffs will result in a decrease in the percentage of
the total cost of deluxe minibuses and sedans that imported components
comprise. Brilliance China Automotive intends to continue its efforts to increase
domestic component content for both deluxe minibuses and sedans, while at the
same time emphasizing quality. See Item 5  Operating and Financial Review and
Prospects. Other Significant Subsidiaries, Jointly Controlled Entities and Associated Companies Brilliance China Automotive believes that the acquisition of interests in
strategic components suppliers has and will continue to broaden its revenue
base, increase the reliability of the supply of certain core components of
Shenyang Automotives and the BMW joint ventures minibuses and sedans, enhance
their ability to monitor component quality and facilitate greater coordination
among the management and engineering personnel and their respective principal
suppliers. Mianyang Xinchen Mianyang Xinchen, directly and indirectly through Xing Yuan Dong (as
described below), accounted for 8.3% of Shenyang Automotives purchases of
parts and components in 2003. Mianyang Xinchens principal product is the 2.2
liter 491Q gasoline engine. In 2000, Mianyang Xinchen also began producing the
491QE electronic fuel injection engine on a mass production basis to satisfy
the markets demand for products that can meet new higher emission standards.
In 2001, Mianyang Xinchen developed three additional passenger vehicle gasoline
engines. As a result, Shenyang Automotive has access to engines suited to a
full range of light-duty passenger vehicles. Mianyang Xinchen had annual sales
of Rmb 819.8 million (US$99.0 million) in 2003. Shenyang Automotive, which
installs Mianyang Xinchens 491Q engine in most of its mid-priced minibuses,
accounted for 58.1% of Mianyang Xinchens sales in 2003. Mianyang Xinchens
overall annual sales of gasoline engines in 2003 increased by 24.2% from 2002.
In 2003, the after-sales repair ratio for Mianyang Xinchens products decreased
to 6.5% from 6.7% in 2002. Mianyang Xinchens current annual production
capacity is 100,000 to 120,000 gasoline engines (depending on number of
shifts). In March 2004, the technology center of Mianyang Xinchen was designated by
Chinese governmental authorities as a State-class enterprise technology center,
becoming only the second State-class enterprise technology center in China
automotive gasoline engine industry. Ningbo Yuming Ningbo Yuming, directly and indirectly through Xing Yuan Dong and Ningbo
Brilliance Ruixing (as described below), accounted for 4.8% of Shenyang
Automotives purchases of parts and components in 2003. Ningbo Yumings
principal products are automobile window molding and stripping, as well as a
front independent suspension system (including high performance front axle) for
use in light passenger vehicles. Ningbo Yuming had annual sales of Rmb 277.7
million (US$33.5 million) in 2003. Ningbo Yuming intends to further develop
front axles for use in different types of light goods vehicles to enlarge 24




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##### Table of Contents



its market share in the safety components market. Ningbo Yuming received
ISO-9002 accreditation in December 1999. Shenyang Automotive, which uses
Ningbo Yumings products in all of its deluxe minibuses, mid-priced minibuses
and Zhonghua sedans, accounted for approximately 97.3% of Ningbo Yumings sales
in 2003. Shenyang Automotive also granted Ningbo Yuming the status of Class A
Supplier in 1999, which it continues to hold. Shenyang Xinguang Shenyang Xinguang is principally engaged in the manufacture and sale of
gasoline engines for use in passenger vehicles and light duty trucks. In 2003,
engine purchases by Shenyang Automotive for use in mid-priced minibuses
accounted for 54.3% of Shenyang Xinguangs total sales, which amounted to Rmb
515.1 million (US$62.2 million). Shenyang Xinguang currently produces 491Q
engines and has a production capacity of 50,000 engines per year. It
manufactured and sold 51,092 and approximately 50,300 491Q engines,
respectively, in 2003. Shenyang Xinguang intends to further develop upgraded versions of the 491Q
engine in 2004. These new 16-valve engines will have greater power and will be
designed to satisfy European III emission standards. They will be suitable for
use in JinBei minibuses (models SY6480A) and Zhonghua sedans. Shenyang
Xinguang plans to produce this new engine by using part of its existing 491Q
facilities, together with a new production line. Planned capacity for this new
engine is 50,000 units per year, based on two daily shifts. Xing Yuan Dong, Ningbo Brilliance Ruixing and Mianyang Brilliance Ruian Xing Yuan Dong assists Shenyang Automotive in obtaining and developing a
reliable supply of domestically produced parts and components. Xing Yuan Dong
also facilitates development of locally produced automotive parts and
components and acts to improve the quality of these components. When a
customized component is needed, Xing Yuan Dong provides potential suppliers
with designs and specifications for the customized parts and components
required by Shenyang Automotive. These potential suppliers liaise with Xing
Yuan Dong and discuss details of production. Xing Yuan Dong then selects
appropriate suppliers and offers technical assistance and cost evaluations.
Xing Yuan Dong continuously strives to reduce the number of Shenyang
Automotives suppliers, lower costs, increase the efficiency and commitment of
the remaining suppliers, streamline the component purchasing process and ensure
a steady supply of high quality components. In 2001, Xing Yuan Dong, in order
to maintain its preferential tax treatment from the Chinese government, also
began manufacturing automotive components for Shenyang Automotive. In 2003,
100% of Xing Yuan Dongs sales were to Shenyang Automotive. Ningbo Brilliance Ruixing was established on June 9, 2000 as a wholly
owned subsidiary of Brilliance China Automotive to facilitate the trading and
development of automotive components between Ningbo Yuming and Shenyang
Automotive. In 2003, 100% of Ningbo Brilliance Ruixings sales were made to
Shenyang Automotive and 96.3% of Ningbo Brilliance Ruixings purchases were
from Ningbo Yuming. Beginning in 2001, Ningbo Brilliance Ruixing also began
manufacturing automotive components for Shenyang Automotive. Mianyang Brilliance Ruian was established on July 3, 2000 as a wholly
owned subsidiary of Brilliance China Automotive to facilitate the trading and
development of automotive components for Mianyang Xinchen. In 2003, 95.7% of
Mianyang Brilliance Ruians sales were made to Mianyang Xinchen. In 2001,
Mianyang Brilliance Ruian also began manufacturing automotive components for
Shenyang Automotive. 25




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##### Table of Contents



Shenyang Aerospace Shenyang Aerospace was formed for the purpose of manufacturing 2.0-liter,
122 horsepower and 2.4-liter, 130 horsepower Mitsubishi gasoline engines.
Shenyang Aerospace commenced trial operation in March 1999. Shenyang
Automotive uses these engines in its deluxe minibuses and in the Zhonghua
sedans. In addition, Shenyang Aerospaces engines are also suitable for sale
domestically to other passenger vehicle producers. Mitsubishi Motors
Corporation, Mitsubishi Corporation, China Aerospace Automotive Industry Group
Co., MCIC Holdings Sdn. Bhd. and Shenyang Jianhua Motors Engine Co. Ltd., or
Shenyang Jianhua, own equity interests of 25.0%, 9.3%, 30.0%, 14.7% and 21.0%,
respectively, in Shenyang Aerospace. With a 60.8% effective interest in
Shenyang Jianhua, Brilliance China Automotive currently has an effective
interest in Shenyang Aerospace of 12.8%. Upon completion of the acquisition of
additional shares of JinBei, Brilliance China Automotives effective interest
in Shenyang Jianhua will increase to 76.4% and consequently Brilliance China
Automotives effective interest in Shenyang Aerospace will increase to
approximately 16.0%. Dongxing Automotive and Xingchen Automotive Seats In December 2001, Brilliance China Automotive entered into an agreement
with Brilliance Holdings Limited for the acquisition of the entire issued share
capital of Key Choices Group Limited at a consideration of approximately Rmb
278.0 million. Key Choices is an investment holding company and its principal
assets are the 100% equity interest in the registered capital of Dongxing
Automotive and a 90% equity interest in the registered capital of Shenyang
Xingchen Automotive Seats Co., Ltd., or Xingchen Automotive Seats. Dongxing
Automotive is a foreign-invested enterprise established in China whose
principal products are automotive components for use in passenger vehicles.
Xingchen Automotive Seats is a Sino-foreign equity joint venture established in
China in December 2001 that formerly was principally engaged in the
manufacturing of automotive seats. However, Xinchen Automotive Seats ceased
its operations in the second half of 2002. Sales and Marketing The following tables set forth by vehicle model for the years 2001 through
2003 the number of Shenyang Automotive and BMW joint venture minibuses and
sedans sold and the percentage of unit sales represented by each model: Shenyang Automotive 2001
    
    2002
    
    2003Units Sold
    
    %
    
    Units Sold
    
    %
    
    Units Sold
    
    %Deluxe minibus
    
    
    9,653
    
    
    
    15.3
    
    
    
    9,017
    
    
    
    12.2
    
    
    
    9,004
    
    
    
    8.6Mid-priced minibus
    
    
    53,356
    
    
    
    84.7
    
    
    
    56,121
    
    
    
    75.9
    
    
    
    65,614
    
    
    
    62.7Zhonghua sedan(1)
    
    
    
    
    
    
    
    
    
    
    8,816
    
    
    
    11.9
    
    
    
    25,600
    
    
    
    24.5Total
    
    
    63,009
    
    
    
    100.0
    
    
    
    73,954
    
    
    
    100.0
    
    
    
    100,218
    
    
    
    95.8
  (1)
    
    Commercial launch of the Zhonghua sedan occurred in August 2002. 26




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##### Table of Contents



BMW Joint Venture 2001
    
    2002
    
    2003Units Sold
    
    %
    
    Units Sold
    
    %
    
    Units Sold
    
    %BMW
sedans(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,359
    
    
    
    4.2
  (2)
    
    Commercial launch of the BMW sedans was in the fourth quarter of 2003. Shenyang Automotives marketing efforts are supervised by its General
Manager and are conducted primarily through a regionalized sales program under
which Shenyang Automotive has divided China into six major sales regions and
three sales belts, each headed by an experienced senior executive. These
regions are further subdivided into 30 provincial sales regions for minibuses
and 26 provincial sales regions for sedans. Each of these sales regions
corresponds to a separate province in China. These units are responsible for
meeting defined sales targets, with the executives compensation linked to
performance. In addition, Shenyang Automotive implements a commission
compensation package for its sales personnel and rewards with bonuses its
non-sales personnel who develop customer leads that result in minibus sales.
The retail prices and commission scales are both nationally unified by Shenyang
Automotive, thereby preventing cross-regional sales and counter-productive
price wars. Shenyang Automotives minibuses and Zhonghua sedans are marketed
through a sales network of over 250 exclusive and over 600 non-exclusive
minibus distributors and over 110 exclusive sedan distributors nationwide, as
well as through annual automobile industry trade shows and at special sales
shows sponsored by JinBei and Shenyang Automotive. All of Shenyang
Automotives 2003 unit sales of minibuses and sedans were made to its
distributors. Shenyang Automotives sales growth in China has been supported by a
substantial network of over 250 exclusive minibus distributors and over 110
sedan distributors, as well as over 330 after-sales service centers for
minibuses and over 150 for sedans. Shenyang Automotive also continued to
implement its 4S sales center system, combining sales, service, spare parts and
surveys in one location. As of December 31, 2003, Shenyang Automotive had over
80 and over 70 dealership outlets for minibuses and sedans, respectively, which
had achieved the 4S dealership standard. Most of Shenyang Automotives minibus and sedan sales were made on a cash
basis in 2002. In addition, in order to incentivize customers and facilitate
sales, Shenyang Automotive also accepts three-month to six-month bank-endorsed
notes as payment for its minibuses and sedans. Shenyang Automotive has focused intensively on standardizing the sales and
marketing methods adopted by its over 210 first tier dealers (including over 70
authorized dealership outlets), over 110 second tier dealers and hundreds of
retailers. Shenyang Automotive has also revoked sales authorization from those
dealers that have not continued to follow these guidelines. Shenyang Automotive has 23 regional distribution centers in order to
shorten delivery lead-times. Also, by utilizing transportation methods such as
trucking, rail and shipping, Shenyang Automotive ensures that most vehicles are
not driven until they reach the end users. In 2003, all finished products were
delivered to customers with zero mileage. 27




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##### Table of Contents



The following table sets forth the geographic breakdown of Shenyang
Automotives minibus and sedan unit sales throughout China for the years 2001
through 2003: 2001
    
    2002
    
    2003Minibuses
    
    Minibuses
    
    Sedans
    
    Minibuses
    
    SedansProvince/
    Municipality
    
    Units
    
    %
    
    Units
    
    %
    
    Units
    
    %
    
    Units
    
    %
    
    Units
    
    %Guangdong
    
    
    18,595
    
    
    
    29.5
    
    
    
    14,067
    
    
    
    21.6
    
    
    
    1,302
    
    
    
    14.8
    
    
    
    13,000
    
    
    
    17.4
    
    
    
    3,158
    
    
    
    12.4Beijing
    
    
    8,257
    
    
    
    13.1
    
    
    
    10,994
    
    
    
    16.9
    
    
    
    955
    
    
    
    10.8
    
    
    
    15,679
    
    
    
    21.0
    
    
    
    2,876
    
    
    
    11.2Liaoning
    
    
    7,357
    
    
    
    11.7
    
    
    
    6,713
    
    
    
    10.3
    
    
    
    1,281
    
    
    
    14.5
    
    
    
    7,780
    
    
    
    10.4
    
    
    
    2,408
    
    
    
    9.4Shanghai
    
    
    11,527
    
    
    
    18.3
    
    
    
    11,030
    
    
    
    16.9
    
    
    
    987
    
    
    
    11.2
    
    
    
    6,571
    
    
    
    8.8
    
    
    
    1,301
    
    
    
    5.1Jiangsu
    
    
    535
    
    
    
    0.8
    
    
    
    2,113
    
    
    
    3.2
    
    
    
    872
    
    
    
    9.9
    
    
    
    5,415
    
    
    
    7.3
    
    
    
    1,550
    
    
    
    6.1Shandong
    
    
    2,055
    
    
    
    3.3
    
    
    
    2,063
    
    
    
    3.2
    
    
    
    395
    
    
    
    4.5
    
    
    
    2,221
    
    
    
    3.0
    
    
    
    2,114
    
    
    
    8.3Sichuan
    
    
    1,013
    
    
    
    1.6
    
    
    
    851
    
    
    
    1.3
    
    
    
    437
    
    
    
    5.0
    
    
    
    1,945
    
    
    
    2.6
    
    
    
    1,702
    
    
    
    6.6Tianjin
    
    
    979
    
    
    
    1.6
    
    
    
    1,147
    
    
    
    1.8
    
    
    
    84
    
    
    
    0.9
    
    
    
    1,683
    
    
    
    2.3
    
    
    
    870
    
    
    
    3.4Heilongjiang
    
    
    938
    
    
    
    1.5
    
    
    
    1,416
    
    
    
    2.2
    
    
    
    146
    
    
    
    1.7
    
    
    
    1,542
    
    
    
    2.1
    
    
    
    614
    
    
    
    2.4Henan
    
    
    828
    
    
    
    1.3
    
    
    
    733
    
    
    
    1.1
    
    
    
    108
    
    
    
    1.2
    
    
    
    1,013
    
    
    
    1.4
    
    
    
    614
    
    
    
    2.4Others
    
    
    10,925
    
    
    
    17.3
    
    
    
    14,011
    
    
    
    21.5
    
    
    
    2,249
    
    
    
    25.5
    
    
    
    17,769
    
    
    
    23.7
    
    
    
    8,393
    
    
    
    32.7Total
    
    
    63,009
    
    
    
    100.0
    
    
    
    65,138
    
    
    
    100.0
    
    
    
    8,816
    
    
    
    100.0
    
    
    
    74,618
    
    
    
    100.0
    
    
    
    25,600
    
    
    
    100.0
 Generally, Shenyang Automotives sales are the highest in the second and
fourth quarters of the year. In 2003, Shenyang Automotive recorded its highest
levels of sales in the second and third quarters. The Chinese government continues to encourage the development of the
relatively underdeveloped, resource-rich western provinces of China and
significant government resources have been allocated in the past to develop the
infrastructure of the western provinces. Brilliance China Automotive believes
the governments policy regarding western China will be conducive to the
development of the local automotive markets. Although Brilliance China
Automotives largest market today remains in the eastern coastal provinces,
Brilliance China Automotive believes that the market in the western provinces
of China represent substantial upward growth potential in the future.
Brilliance China Automotive will continue to expand its dealership system in
that region to tap into this potential growth. Approximately 20% of consolidated revenues in 2003 were generated from
Shanghai Shenhua Holdings Co., Ltd. (formerly known as Shanghai Brilliance
Group Co., Ltd. and Shanghai Shenhua Industrial Co., Ltd.) or Shanghai Shenhua.
Shanghai Shenhua is an affiliate of Brilliance China Automotive that serves as
the principal distributor of Shenyang Automotives products. Shanghai Shenhua
operates under substantially the same commercial terms and arrangements with
Shenyang Automotive as its other third party distribution agents. However, in
southern China, where it sells solely 28




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to distributors on an exclusive basis, Shanghai Shenhua receives
additional compensation for operating after-sales service centers, which was a
1% commission on sales until January 2003. Since January 2003, this
compensation has been paid in the form of a commission of Rmb 100 to Rmb 150
per vehicle sold. Shenyang Automotive uses a computerized sales monitoring system to
identify customer demographics with better accuracy, determine which products
and options are most in demand and improve inventory control. As Shenyang
Automotive brings more product options to market, Brilliance China Automotive
believes that this computer system will provide Shenyang Automotive with the
ability to track customer preferences in various regions and adjust its
production and distribution efforts accordingly. In 2003, Shenyang Automotive spent approximately Rmb 200.9 million
(US$24.3 million) on overall advertising, consisting primarily of Internet,
television and print advertising. Competition The Chinese minibus manufacturing industry is highly fragmented and
competitive. According to the China Automotive Technology & Research Center,
in 2003, approximately 53 manufacturers sold an aggregate of approximately
440,240 minibuses, with approximately 223,000 of such minibuses sold by five
manufacturers, each of which has the capacity to produce in excess of 30,000
minibuses per year and produced more than 30,000 minibuses in 2003.
Significant competitive factors in the industry include price, quality,
reliability and customer service. Brilliance China Automotive believes that
Shenyang Automotive competes favorably in all of these respects, and
particularly in terms of quality, although Shenyang Automotive has experienced
competition in recent years from other manufacturers producing lower priced,
mid-range minibuses. The Chinese sedan manufacturing industry is also very competitive and
fragmented. The top five brands account for 59.6% of the overall market based
on unit sales volume. The market shares of the three leading manufacturers
have been decreasing over the past several years. New models continue to be
introduced on an increasingly rapid basis as the number of new entrants into
the market has also increased. Unit sales of domestically produced sedans
totaled 1,971,601 units in 2003, making sedans the largest segment of the
Chinese automotive market, accounting for 44.9% of the overall market. It was
also the fastest growing segment, as unit sales of sedans increased by 75.3% in
2003 compared to 2002. Sedans are also widely expected to continue to be the
fastest growing segment of the Chinese automobile market over the next few
years. However, while vehicle ownership is expected to continue to increase
steadily in China as a result of increasing individual disposable income, there
is also expected to be increasing pricing pressure as tariff rates decline and
competition continues to grow from domestic, foreign and foreign-invested sedan
manufacturers. Historically, Chinese motor vehicle producers have been exposed to little
competition from non-Chinese enterprises, partly as a result of import
restrictions on foreign-made components and motor vehicles. However, as a
result of Chinas admission to the WTO, which regulates trading and tariffs
among its signatory states, in November 2001, China committed to reducing its
import restrictions on motor vehicles and motor vehicle components. In
addition, China will be required to conform its import tariffs to the uniform
tariffs under the WTO. Effective January 1, 2002, China has reduced its import
tariffs on motor vehicles and automotive components from between 80% to 100%
and between 18% to 40%, respectively, to between 43.8% to 50.7% and between
14.0% to 31.4%, respectively. This range was lowered further to between 4.8%
and 25% for automotive components effective January 1, 2003. In addition,
tariffs on vehicles with nine seats or less and engine sizes of three liters or
below fell from 43.9% in 2002 to 38.2% for 2003, and to 34.2% for 2004, while
tariffs on vehicles with more than nine seats and engines of more than three
liters decreased from 50.7% in 2002 to 43.0% for 2003, and to 29




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##### Table of Contents



37.6% for 2004. All of these tariffs levels are scheduled to be further
reduced by 2006. Such reductions in tariffs and import restrictions could
potentially increase the competition Brilliance China Automotive will face from
foreign manufacturers. Listed below are Shenyang Automotives current main competitors in the
Chinese minibus and sedan market. The data listed for each is based on
information published by the Chinese government regarding the Chinese
automotive industry: Minibus  
    
    Southeast Motors.Taiwan China Motors and Fujian Provincial
Automobile Industry Company established a 50-50 joint venture
company, Southeast Motors in November 1995. Southeast Motors has
launched over thirty different models of light passenger vehicles
under the Delica and Freeca brand names. Southeast Motors has an
annual production capacity of 60,000 light passenger vehicles. Its
sales volume in 2003 was 49,978 vehicles, which represents a 6.2%
increase from 2002. The Delica series includes seven-, eight- and
eleven-seat ordinary, luxury and super luxury models. The Freeca
series includes eight-seat standard, luxury and super luxury models.
    
    Nanjing Iveco.In 1995, Italys Fiat Auto Company and Yuejin Group
established Nanjing Iveco Automotive Company, Ltd., a 50-50 equity
joint venture, for the manufacture of 33 models of five-ton
passenger, goods and off-road vehicles in the Iveco S series. Models
currently in production include the A30, A40 and A49 passenger
vehicles, as well as a separate series of goods vehicles. Current
annual production capacity is 60,000 vehicles and 75,000 engines. In
2003, Nanjing Iveco sold 14,666 vehicles, which was third to
Brilliance China Automotive and Southeast Motors in Chinas minibus
market.
    
    Jiangling Motors.Jiangling Motors Corp. of Jiangxi Province, after
two years of cooperation with Ford Motor Company (which owns a
minority interest in Jiangling Motors), began producing the China
Transit, a Ford brand minibus, in December 1997. At present, the
vehicle is available in 15-seat, 12-seat and 9-seat versions. In
2003, Jiangling Motors sold a total of 11,510 vehicles. Production
capacity for 2003 was approximately 20,000 units per shift. Zhonghua Sedan Brilliance China Automotive considers the following companies to be its
main competitors in the market for sedans priced between Rmb 130,000 and Rmb
250,000, which includes the Zhonghua sedan:  
    
    First Auto Works Group of China.First Auto Works is one of the
largest automotive companies in China. First Auto Works Hongqi sedan
was launched in 2001 and is considered one of the Chinese governments
showcase China-made sedans. Its latest model is known as the Hongqi
Mingzhi, was launched in 2004, and has a 1.8-liter engine with four
doors. It is priced at approximately Rmb 149,800, similar to the
Zhonghua sedan. First Auto Works sold 18,978 and 17,265 Honqi Mingzhi
sedans in 2002 and 2003, respectively.
    
    Shanghai Volkswagen Automotive. Shanghai Volkswagen Automotive was
one of the original state-designed automobile manufacturers in China.
It is currently 40% owned by Volkswagen AG of Germany and 25% owned by
Shanghai Automotive Industry Corp. It still holds a dominant share of
the Chinese sedan market and competes with the Zhonghua sedan through
the Santana 2000 and Santana 3000 sedans. The Santana 2000 had a
1.8-liter engine and sells for approximately Rmb 145,000 to Rmb
174,000. In 2002 and 2003, Shanghai Volkswagen 30




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##### Table of Contents



Automotive sold 95,117 and 92,892 units of Santana 2000 sedans, respectively.
In March 2004, Shanghai Volkswagen Automotive launched the new Santana 3000,
which replaced the Santana 2000.  
    
    Beijing Hyundai. Beijing Hyundai was established in
2002 as a 50-50 joint venture between Beijing Auto
Investment and Hyundai Motor Co. of South Korea. It
currently produces and sells the Sonata 2.0-liter and
Sonata 2.7-liter, and the newly-introduced Elantra
1.6-liter and 1.8-liter models. The Sonata 2.0-liter
is priced between Rmb 172,800 and Rmb 188,000 for the
manual versions and between Rmb 182,800 and Rmb
212,800 for the automatic versions. The Elantra 1.8
liter sedan sells for approximately Rmb 156,000 and
Rmb 166,800 for the manual and automatic versions,
respectively. Beijing Hyundai had total sales of
52,128 units of these models in 2003. The 2.0-liter
Sonata sells for approximately Rmb 200,000 per unit. BMW Sedans Brilliance China Automotive currently does not consider there to be any
direct competitor to its BMW sedans in the domestic market for high-end luxury
cars produced in China in terms of quality, craftsmanship, price, performance
and technology but does consider Audi sedans, which are produced by FAW
Volkswagen, an indirect competitor in China. FAW Volkswagon is 10% owned by
Audi AG, 30% by Volkswagen AG and 60% by First Auto Works of China. FAW
Volkswagon produces and sells the Audi A4 and A6 sedans and the Volkswagen
Jetta and Bora sedans in China. FAW Volkswagons Audi sedans have a dominant
share of Chinas premium sedan market. In 2002 and 2003, FAW Volkswagon sold
34,962 and 53,108 units of Audi A6 sedans, respectively. The Audi A4 sedan was
formally launched in Chinas market in 2003 and had a total sales volume of
8,173 in 2003. In May 2003, DaimlerChrysler AG signed a project proposal with Beijing
Automotive Industry Holding Company Ltd., or BAIC, to manufacture Mercedes-Benz
C-Class and E-Class sedans in China. According to announcements by
DaimlerChrysler, the vehicles will be produced in a new facility in Beijing
with an initial production capacity of 25,000 units per year. Brilliance China Automotive does not consider current foreign importers of
luxury cars with similar quality, craftsmanship, performance and technology
(such as the Mercedes C-Class and E-Class sedans) to be direct competitors for
the BMW sedans as they are subject to import tariffs and restrictions and
cannot be priced competitively with the BMW joint ventures locally produced
BMW sedans. Governmental Regulation The automobile industry in China is controlled at the central government
level by the National Development and Reform Commission (formerly the State
Development and Planning Commission), or NDRC, and the Ministry of Commerce
(which subsumed some of the duties of the former Ministry of Foreign Trade and
Economic Cooperation). These entities were created as a result of the
governmental restructuring that commenced in March 2003. The NDRC generally
oversees and regulates the automobile industry in China and any new product or
new automobile production facility must obtain the prior approval of this body
before entering the market. Similarly, approval from the Ministry of Commerce
must be obtained prior to any changes to existing products or the expansion of
existing facilities. Both of these entities must also approve any Sino-foreign
joint venture for the production of automobiles. On June 2, 2004, the NDRC issued a new automobile policy to replace the
one that had been in place since 1994. Two of the policys stated goals are
industry consolidation and enhancement of 31




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corporate capacity for research and development. To further these goals,
the new policy sets minimum levels of investment for new plants and research
and development. Engine plant investments are now required to be over Rmb 1.5
billion (US$181 million) and new automobile manufacturing projects must be over
Rmb 2.0 billion (US$242 million). New automobile projects also must include a
product research and development investment of at least Rmb 500 million
(US$60.4 million). The new policy will treat semi-knocked down imports as complete vehicle
imports and therefore impose vehicle import tariffs instead of component
tariffs on them. Current vehicle import tariff levels are between 34.2% and
37.6% (scheduled to fall to 25% by July 2006) whereas current component tariff
levels are between 15% and 18% (scheduled to fall to 10% by July 2006). In contrast to the old regulations, foreign investors in the automobile
and motorcycle market will now be allowed to control more than 50% of a joint
venture with Chinese partners if the joint venture is located in an export
processing zone and plans to sell its products in overseas markets. The new
policy will also allow foreign investors to open more than two joint venture
plants in China to produce the same categories of vehicles if they do so with
their existing Chinese partners through acquisitions of other companies in
China. The new policy acknowledges the success of Chinas automobile industry and
seeks to encourage this pillar industry to foster further growth,
particularly of domestically produced and branded products and research and
development, through consolidation of smaller, less-efficient manufacturers and
increased foreign and domestic investment. In addition, the policy aims to
centralize or reorganize certain automobile-related sectors, such as consumer
loan services, to reduce overhead and administrative burdens on the industry
and allowing industry participants to focus on their core businesses. By encouraging industry consolidation and establishing clearer guidelines
for foreign investment, the policy, in the opinion of Brilliance China
Automotive, encourages existing players in the industry to grow and provides
incentives for targeted investment from both domestic and foreign sources.
However, the ultimate impact of the new policy on Brilliance China Automotive
and other industry participants remains uncertain and subject to more detailed
guidance and implementing regulations that are expected to be promulgated by
the NDRC in the future. Quality Control As a result of technical and managerial training from Toyota and technical
assistance from BMW, Shenyang Automotive has adopted a highly regimented
production quality management system for its minibuses and sedans. This
two-fold system concentrates both on the quality of the raw materials and other
production inputs and on the production process itself. In the production
process, the focal point of quality control is the production line worker, who
undergoes extensive training and testing to ensure that he or she performs the
assigned task to the highest quality standards and is qualified and able to
determine on his or her own whether or not the product meets the required
specifications. In addition, Shenyang Automotives specialized quality control
engineers are present at each step of the production process, with 33 separate
quality inspection points. In addition, Shenyang Automotive has established a quality improvement
unit to supervise and monitor after-sales service centers in major regional
sales bases, such as Guangzhou, Shanghai and Beijing, which also serve as
channels for information feedback on product quality. Designated personnel are
assigned to follow-up on finding remedies for recurring quality issues in a
timely manner. Shenyang Automotive was granted the internationally recognized ISO-9001-94
quality system certificate in October 1995, making it the first major
automobile manufacturer in China to be awarded 32




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such certificate. Shenyang Automotive has successfully obtained
recertification in each subsequent year by demonstrating a continued commitment
to upholding among the highest quality standards in Chinas automobile
industry. To date, over 120 of Shenyang Automotives over 260 component
suppliers achieved QS-9000 quality system certification and 260 are accredited
by ISO-9000. After-Sales Service Shenyang Automotives minibuses are sold with a 24-month or 50,000
kilometers (2002 and 2001: 18-month or 30,000 kilometers) first-to-occur
limited warranty. The Zhonghua sedans are sold with a 36-month or 60,000
kilometers (2002: 24-month or 40,000 kilometers) first-to-occur limited
warranty. In addition to these basic limited warranties, in 2003 Shenyang
Automotive also offered customers a broader warranty for its Zhonghua sedans.
During the warranty period, Shenyang Automotive pays service stations for parts
and labor covered by the warranty; thereafter, customers must pay for all parts
and labor. In 2003, total warranty costs for minibuses and sedans sold during
the year were approximately Rmb 33.3 million (US$4.0 million) and Rmb 54.1
million (US$6.5 million), respectively, or an average of Rmb 446 (US$54) per
minibus sold and Rmb 2,114 (US$255) per Zhonghua sedan sold. There are over 330 and over 150 service centers for Shenyang Automotive
minibuses and sedans, respectively, throughout China, with centers clustered in
areas that match distribution patterns of the vehicles. Such centers have been
granted authority by Shenyang Automotive to service its minibuses and sedans,
including the provision of repair services and the sale of spare parts. This
extensive service network has enabled Shenyang Automotive to adopt its current
policy of resolving routine customer complaints in all provincial capitals and
major cities within 24 hours and major problems within three days. To improve customer service, Shenyang Automotive continually reevaluates
its existing distributors based on certain criteria, including financial
soundness, customer service capabilities and customer complaint record.
Shenyang Automotive has also implemented a more advanced 4S sales center
system, which features sales, service, spare parts and survey in one location
at the point of sale. As of the end of 2003, Shenyang Automotive had over 80
and over 70 4S dealership outlets for its minibuses and sedans, respectively. The BMW joint venture currently has 23 distributors, out of which 18 are
4S dealership outlets, mainly located in first tier cities in China. The number
of distributors is expected to increase to over 40 by the end of 2004. Like
Shenyang Automotive, the BMW joint venture implemented the more advanced 4S
sales center system. 33




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Environmental Matters The Chinese government has set vehicle safety, exhaust and performance
standards with which Shenyang Automotive and the BMW joint venture must comply.
Brilliance China Automotive believes that Shenyang Automotives and the BMW
joint ventures minibuses and sedans currently meet the standards imposed by
the government. Their respective facilities are subject to government
pollution regulations enforced by the Shenyang municipal government. If
operations are found to be in violation, the government will allow a period of
time to remedy the problem. If it should fail to do so, the government can
force a shut-down of Shenyang Automotives or the BMW joint ventures
operations until such time as the violator complies with the regulations. To
date, neither Shenyang Automotive nor the BMW joint venture has been cited as
violating a government pollution regulation. On January 1, 2000, Beijing, Tianjin and Yunnan Province put into effect
emission standards that are significantly stricter than the then prevailing
gasoline vehicle emission standards. Since then, these emission standards have
been adopted nationwide. Shenyang Automotives electronic fuel injection
minibus, introduced in 1999, passed the emission standards tests at the China
National Automobile Testing Center in Tianjin in October 1999. This engine not
only produces cleaner emissions, but also achieved up to an 8% increase in fuel
economy and a 3% increase in horsepower. In early 2001, Shenyang Automotive
began to install multiple electronic fuel injection engines, which are
currently used in all of Shenyang Automotives mid-priced minibuses. With the
installation of this new engine in the mid-priced minibus, currently all of
Shenyang Automotives minibuses meet European II emission standards. All
Zhonghua and BMW sedans also meet these emission standards. In 2004, the
Chinese government began to encourage its vehicle manufacturers to meet the
European III standards. All the vehicles of both Shenyang Automotive and the
BMW joint venture are expected to meet the European III emission standards in
the second half of 2004. Insurance Shenyang Automotive and the BMW joint venture currently hold insurance
policies that Brilliance China Automotive believes are customary and standard
for companies of comparable size in comparable industries in China. Shenyang
Automotive does not carry product liability insurance, and Brilliance China
Automotive believes it is customary and standard in the Chinese automobile
industry for manufacturers not to carry product liability insurance. The BMW
joint venture has elected to purchase product liability insurance, in order to
conform with BMWs worldwide standards. 34




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##### Table of Contents



Organizational Structure The following chart sets forth the percentage ownership of significant
subsidiaries, associated companies and jointly controlled entities of
Brilliance China Automotive as of June 24, 2004. (ORGANIZATIONAL STRUCTURE CHART) 35




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##### Table of Contents



The following table lists information concerning the subsidiaries, jointly
controlled entities and associated companies of Brilliance China Automotive as
of December 31, 2003: EffectiveInterest held byJurisdiction of
    
    Brilliance ChinaSubsidiaries
    
    Incorporation
    
    AutomotiveShenyang Brilliance JinBei Automobile Co., Ltd.
    
    China
    
    
    51
    %Ningbo Yuming Machinery Industrial Co., Ltd.
    
    China
    
    
    51
    %Shenyang XingYuanDong Automobile Component Co., Ltd.
    
    China
    
    
    100
    %Shenyang Jianhua Motors Engine Co., Ltd.
    
    China
    
    
    60.8
    %Ningbo Brilliance Ruixing Auto Components Co., Ltd.
    
    China
    
    
    100
    %Mianyang Brilliance Ruian Automotive Components Co., Ltd.
    
    China
    
    
    100
    %Shenyang JinBei Automotive Industry Holdings Company Ltd.
    
    China
    
    
    98
    %Shenyang Xinjinbei Investment and Development Co., Ltd.
    
    China
    
    
    99
    %Shenyang Brilliance Dongxing Automotive Component Co., Ltd.
    
    China
    
    
    100
    %Shenyang JinDong Development Co., Ltd.
    
    China
    
    
    75.5
    %Shenyang ChenFa Automobile Component Co., Ltd.
    
    China
    
    
    100
    %China Brilliance Automotive Components Group Limited
    
    Bermuda
    
    
    100
    %Southern State Investment Limited
    
    BVI
    
    
    100
    %Beston Asia Investment Limited
    
    BVI
    
    
    100
    %Pure Shine Limited
    
    BVI
    
    
    100
    %Key Choices Group Limited
    
    BVI
    
    
    100
    %Brilliance China Automotive Finance Ltd.
    
    BVI
    
    
    100
    %Jointly Controlled EntitiesMianyang Xinchen Engine Co., Ltd.
    
    China
    
    
    50
    %Shenyang ChenBao Automotive Sales Service Co., Ltd.
    
    China
    
    
    49
    %Shenyang HuaBao Automotive Sales Service Co., Ltd.
    
    China
    
    
    49
    %Shenyang Xinguang Brilliance Automobile Engine Co., Ltd.
    
    China
    
    
    50
    %BMW Brilliance Automotive Ltd.
    
    China
    
    
    49
    %Associated Companies(1)Chongqing FuHua Automotive Sales Service Co., Ltd.
    
    China
    
    
    29.4
    %Shenyang Aerospace Mitsubishi Motors Engine Manufacturing
Co., Ltd.
    
    China
    
    
    12.8
    %
   (1)
    
    Brilliance China Automotives 8.6% indirect interest in Compass Pacific
has been reclassified as investment securities since Brilliance China
Automotive is unable to exert significant influence over Compass Pacific
and no longer has affiliates serving on the Compass Pacifics board of
directors. Property, Production Facilities and Equipment The Shenyang municipal government granted to Shenyang Automotive the right
to use three parcels of land situated in the northern, eastern and western
sectors of Shenyang with a total area of 36




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approximately 890,000 square meters, approximately 50% of which is
currently utilized by Shenyang Automotive and the BMW joint venture. These
land use rights are effective for the term of Shenyang Automotive, which
expires in 2021. The western parcel consists of 70,000 square meters, 40,000 square meters
of which is occupied by a mid-priced minibus production facility that is
capable of producing 12,000 vehicles per year. This facility is currently
utilized to produce a small number of special purpose minibuses and can also be
used to produce components as well. The northern parcel covers 40,000 square meters and is used by Shenyang
Automotive primarily as a technical training facility. The eastern parcel covers 780,000 square meters, including Shenyang
Automotives and the BMW joint ventures production facilities. Shenyang
Automotives minibus facility currently has a production capacity of 80,000
minibuses per year, using two shifts of workers. This facility is specially
designed for the manufacture and assembly of deluxe minibuses and mid-priced
minibuses and consists of four workshops. The stamping and assembly workshops
currently have annual production capacities of 80,000 and 90,000 units,
respectively, based on two shifts of workers, and can be increased to 120,000
units based on three shifts. The painting workshop currently has an annual
production capacity of 120,000, based on two shifts of workers. In 2003, Shenyang Automotive completed the construction of new
manufacturing facilities for sedans (including the Zhonghua sedan), which has a
production capacity of 100,000 units, based on two shifts per day. The new
manufacturing facilities are located adjacent to Shenyang Automotives
previously existing minibus production facilities in the eastern parcel and
include new pressing, welding, painting and final assembly lines. Dies and
other key production equipment were purchased from leading European equipment
manufacturers for the Zhonghua sedan. The total costs for completion of this
expansion project were approximately US$350.0 million, including new equipment,
construction costs and other expenditures, but excluding the design costs for
the sedans. See Item 5  Operating and Financial
Review and Prospects  Liquidity
and Capital Resources. Certain workshops in these new sedan manufacturing facilities are
currently shared with the BMW joint venture, including part of a welding
workshop for the 3-Series sedan, all of the painting facilities, and part of
the Zhonghua sedan assembly shop, which is currently used by the BMW joint
venture to test BMW sedans. Shenyang Automotive transferred legal titles and ownership of certain
buildings in its eastern parcel to the BMW joint venture for use in the
production of BMW sedans. The agreement also states that the BMW joint venture
will lease back a substantial portion of those buildings to Shenyang
Automotive. The BMW joint venture also has the option to require Shenyang
Automotive to purchase back such buildings at the purchase price less
depreciation upon the occurrence of certain events, including the passing of a
valid resolution pursuant to the joint venture contract by the board of
directors of the BMW joint venture. For financial reporting purposes, the
buildings were retained as fixed assets on the balance sheet of Brilliance
China Automotive and the portion of consideration received from the BMW joint
venture is treated as a financing and will be partially offset against the
lease rental payable in future years. In December 2003, the BMW joint venture purchased certain machinery and
equipment from Shenyang Automotive for use in the production of BMW sedans. The
agreement of sale includes an option for the BMW joint venture to require
Shenyang Automotive to purchase back such machinery and equipment at the
purchase price less depreciation upon the occurrence of certain events,
including the passing of a valid resolution pursuant to the joint venture
contract by the board of directors of the BMW 37




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joint venture. This machinery and equipment is maintained by the BMW
joint venture for the manufacturing of its products, as well as to provide
certain services to Shenyang Automotive upon the payment of a service fee,
which is a predetermined fixed charge per unit based on the number of Zhonghua
sedans produced by Shenyang Automotive using this machinery and equipment. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion should be read in conjunction with the rest of
this annual report, including the consolidated financial statements and notes
thereto contained elsewhere in this annual report. The results discussed below
are not necessarily indicative of the results to be expected in any future
periods. Overview Brilliance China Automotive is a holding company. Prior to 2002,
Brilliance China Automotives operating segment consisted solely of the
manufacture and sale of minibuses and automotive components through its
subsidiaries and associated companies within China. No separate financial
information and segment information was disclosed. In 2002 and 2003,
Brilliance China Automotive began manufacturing and selling Zhonghua sedans and
BMW sedans through Shenyang Automotive and the BMW joint venture, respectively,
which are managed separately because each of them represents a strategic
business unit that serves a different market in the automobile industry.
Therefore, Brilliance China Automotives reportable operating segments consist
of (1) the manufacture and sale of minibuses and automotive components, (2) the
manufacture and sale of Zhonghua sedans and (3) the manufacture and sale of BMW
sedans. The accounting policies of each operating segment are the same.
Brilliance China Automotive evaluates performance based on stand-alone
operating segment net income and generally accounts for intersegment sales and
transfers as if the sales or transfers were to third parties, that is, at
current market prices. Brilliance China Automotives activities are conducted
predominantly in China. Accordingly, no geographical segmentation analysis is
provided. Prior to May 1998, Brilliance China Automotives sole operating asset was
its interest in Shenyang Automotive. As a result, Brilliance China Automotives
historical results of operations had been primarily driven by the sales price,
sales volume and cost of production of Shenyang Automotives minibuses. With a
view to maintain quality, ensure a stable supply of certain key components and
develop new businesses and products, Brilliance China Automotive acquired
interests in various suppliers of components and established joint ventures in
China since May 1998. As a result of these additional investments and joint
ventures, Brilliance China Automotives income base has been broadened and its
future financial performance will differ from that of Shenyang Automotive. In May 1998, Brilliance China Automotive acquired indirect interests in
two components suppliers: (1) a 51% equity interest in Ningbo Yuming Machinery
Industrial Co., Ltd., a wholly foreign-owned Chinese enterprise primarily
engaged in the production of automobile window molding, stripping and other
auto components; and (2) a 50% equity interest in Mianyang Xinchen Engine Co.,
Ltd., a Sino-foreign joint venture manufacturer of gasoline engines for use in
passenger vehicles and light duty trucks. In October 1998, June 2000 and July 2000, Brilliance China Automotive
established Shenyang XingYuanDong Automobile Component Co., Ltd., Ningbo
Brilliance Ruixing Auto Components Co., Ltd. and Mianyang Brilliance Ruian
Automotive Components Co., Ltd., respectively, as its wholly owned subsidiaries
to centralize and consolidate the sourcing of auto parts and components for
Shenyang 38




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##### Table of Contents



Automotive. In 2001, all three companies, in order to maintain their
preferential tax treatment from the Chinese government, began manufacturing
automotive components as well. In December 2000, Brilliance China Automotive acquired a 50% equity
interest in Shenyang Xinguang Brilliance Automobile Engine Co., Ltd., a
Sino-foreign equity joint venture manufacturer of gasoline engines for use in
passenger vehicles. In December 2001, Brilliance China Automotive acquired a
100% equity interest in Shenyang Brilliance Dongxing Automotive Component Co.,
Ltd., a foreign-invested manufacturer of automotive components in China. In May 2002, Shenyang Automotive obtained the approval from the Chinese
government to produce and sell its Zhonghua sedans in China. The Zhonghua
sedans were launched in the market in August 2002. On March 27, 2003, Brilliance China Automotive, through its indirect
subsidiary, Shenyang JinBei Automotive Industry Holdings Co., Ltd., or SJAI,
entered into a joint venture contract with BMW Holding to produce and sell
BMW-designed and branded sedans in China. The registered capital and total
investment cost of the joint venture was Euro 150 million and Euro 450 million,
respectively. At that time, Brilliance China Automotives effective interests
in SJAI and the joint venture with BMW were 81% and 40.5%, respectively. On
April 28, 2003, Brilliance China Automotive increased its effective interest in
SJAI from 81% to 89.1% and thereby increased its effective interest in the
joint venture with BMW from 40.5% to 44.55%. On December 16, 2003, Brilliance
China Automotive further increased its effective interest in SJAI from 89.1% to
98.0% and thereby increased its effective interest in the joint venture with
BMW from 44.55% to 49.0%. On December 29, 2003, Brilliance China Automotive entered into agreements
in relation to the proposed acquisition of an indirect 40.1% interest in
Shenyang JinBei Automotive Company Limited, the joint venture partner of
Shenyang Automotive and a supplier of automotive components for Brilliance
China Automotives minibuses and sedans. Upon receipt of the necessary
governmental approvals for this transaction, Brilliance China Automotives
effective interest in Shenyang Automotive will be increased from 51% to
approximately 70.7%. This transaction is expected to be completed in the
second half of 2004. On November 28, 2003, Brilliance China Automotive, through its wholly
owned subsidiary, Brilliance China Automotive Finance Ltd., issued an aggregate
principal amount of US$200.0 million zero coupon convertible bonds due 2008.
These bonds are guaranteed by Brilliance China Automotive and are convertible
into fully paid ordinary shares par value US$0.01 of Brilliance China
Automotive at an initial conversion price of HK$4.60 per share at any time from
January 8, 2004 to November 14, 2008, unless the bonds have previously been
redeemed or matured. Brilliance China Automotive Finance Ltd. may redeem a
portion of the convertible bonds in certain circumstances at 100% of their
outstanding principal amount during the period from November 28, 2005 to
November 14, 2008. In addition, all or some of the bonds may redeemed at the
option of the holder at 102.27% of their principal amount on November 28, 2006
and upon certain events, such as the change of control of Brilliance China
Automotive or the shares of Brilliance China Automotive ceasing to be listed on
The Stock Exchange of Hong Kong, the bonds may be redeemed at the option of the
holder at 100% of their outstanding principal amount. These bonds rank equally
with all of Brilliance China Automotives senior, unsecured and unsubordinated
obligations. As of December 31, 2003, none of the bonds had been converted
into the ordinary shares of Brilliance China Automotive. The net proceeds of
the convertible bond offering were advanced to Brilliance China Automotive and
were then loaned to certain subsidiaries of Brilliance China Automotive for
their operating use. 39




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Production Volumes and Sales Brilliance China Automotive derives its revenues from the sale of
minibuses, sedans and automotive components in China. Consolidated net sales of
Brilliance China Automotive for the years ended December 31, 2003, 2002 and
2001 were Rmb 10,109.6 million (US$1,221.0 million), Rmb 7,319.5 million and
Rmb 6,218.4 million, respectively. The principal factor behind the overall
increase in the sales was the launch of the Zhonghua sedans and the offering of
more minibus models and features by Shenyang Automotive at competitive prices. The mid-priced minibus has proven to be Brilliance China Automotives most
popular and competitive product. Sales of deluxe minibuses, mid-priced
minibuses, Zhonghua sedans and components represented 12.7%, 49.1%, 33.1% and
5.1%, respectively, of Brilliance China Automotives total sales revenue in
2003. Brilliance China Automotive expects that the Mid-priced Minibuses
together with the Zhonghua sedans will continue to represent a significant
proportion of its total revenue. Costs and Expenses The major elements of Shenyang Automotives production costs in recent
years have been the purchase of automotive components, labor and depreciation
and amortization. Shenyang Automotive has significantly lowered its per unit
production costs by improving operating efficiency, increasing production
volume and increasing the domestic component content ratios of its deluxe and
mid-priced models. As a result, average per unit production costs (including
depreciation and amortization) for the deluxe model have been steadily
decreasing over the past several years. The domestic component ratio of the
Zhonghua sedan also increased from 60% in August 2002 to its current level of
over 70%. In 2003, per unit production costs for minibuses remained relatively
stable. The per unit production costs for the Zhonghua sedans decreased by
over 10%. Prices remained relatively the same in 2003 compared to 2002 levels
except that the price of the prior years model was discounted to clear old
inventory. Gross margin for minibuses remained relatively stable compared to
2002, while overall gross margin decreased from 26.1% in 2002 to 23.6% in 2003
owing to the ramp-up of the Zhonghua sedan, which had relatively lower start-up
gross margin. Imported components are generally more expensive than domestically
produced components and were subject to import duties that have ranged as high
as 120% since January 1992. However, as a result of Chinas entry into the WTO
in November 2001, import duties on automotive components have decreased to
between 14% and 31.4% effective January 1, 2002, and to between 5% and 25%
effective January 1, 2003. Currently, the import duties are between 5.0% and
22.9%. In 2003, Shenyang Automotive paid an average tariff of 14.5%, 13.2% and
14.6% on its minibus, Grace minibus and sedan components, respectively.
Shenyang Automotive intends to continue its efforts to increase the domestic
component content of its products, while at the same time emphasizing quality.
However, Brilliance China Automotive expects that future improvements in
domestic component content for its existing mid-priced and deluxe minibuses
(other than the Grace model) will be at a rate slower than in prior years due
to an already high domestic component content ratio, and the extent and rate of
any corresponding price reductions are expected to be lower than in prior
years. Brilliance China Automotive expects to increase the ratio of domestic
components in the Grace deluxe minibus and the Zhonghua sedan. Brilliance
China Automotive also expects the BMW joint venture to increase the domestic
components ratio in its BMW sedans. 40




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##### Table of Contents



Results of Operations Year ended December 31,2003
    
    2002
    
    2001(Thousands of Rmb)Sales to third parties
    
    
    7,797,054
    
    
    
    4,636,347
    
    
    
    2,552,780Sales to affiliated companies
    
    
    2,312,503
    
    
    
    2,683,108
    
    
    
    3,665,656Total sales
    
    
    10,109,557
    
    
    
    7,319,455
    
    
    
    6,218,436Cost of sales
    
    
    (7,727,125
    )
    
    
    (5,411,308
    )
    
    
    (4,307,988
    )Gross profit
    
    
    2,382,432
    
    
    
    1,908,147
    
    
    
    1,910,448Selling, general and administrative expenses
    
    
    (1,410,067
    )
    
    
    (1,067,154
    )
    
    
    (673,391
    )Interest expense
    
    
    (167,111
    )
    
    
    (171,286
    )
    
    
    (178,028
    )Interest income
    
    
    52,672
    
    
    
    43,617
    
    
    
    110,735Equity in earnings of associated companies and
jointly controlled entities, net
    
    
    109,471
    
    
    
    138,145
    
    
    
    40,043Subsidy income
    
    
    48,497
    
    
    
    
    
    
    
    Other income (expenses), net
    
    
    78,293
    
    
    
    1,009
    
    
    
    3,456Income before taxation and minority interests
    
    
    1,094,187
    
    
    
    852,478
    
    
    
    1,213,263Income taxes
    
    
    (144,140
    )
    
    
    (146,610
    )
    
    
    (116,250
    )Minority interests
    
    
    (169,205
    )
    
    
    (95,403
    )
    
    
    (209,936
    )Net income
    
    
    780,842
    
    
    
    610,465
    
    
    
    887,077
 Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Total sales of Brilliance China Automotive in the year ended December 31,
2003 were Rmb 10,109.6 million (US$1,221.0 million), representing a 38.1%
increase from Rmb 7,319.5 million in 2002. The increase in total sales was
primarily due to the increase in the unit sales of Shenyang Automotives
minibuses and Zhonghua sedans in 2003. As the Zhonghua sedans were not launched
until August 2002, the total sales for 2003 are not directly comparable to
those of 2002. Total sales of the minibuses and automotive components segment were Rmb
6,764.2 million (US$816.9 million) in the year ended December 31, 2003,
representing a 9.1% increase from Rmb 6,202.2 million in 2002. The increase in
total sales was primarily due to the increase in the unit sales Shenyang
Automotives minibuses and to a lesser extent, the increase in automotive
component sales. Shenyang Automotive sold a total of 74,618 minibuses in 2003, representing
a 14.6% increase over the 65,138 minibuses sold in 2002. Of these vehicles
sold, 65,614 were Mid-priced Minibuses, representing a 16.9% increase over the
56,121 Mid-priced Minibuses sold in 2002. Unit sales of the Deluxe Minibuses
decreased 0.1% from 9,017 units in 2002 to 9,004 units in 2003. Shenyang
Automotive also sold 25,600 Zhonghua sedans in 2003, compared to 8,816 sedans
sold during the last five months of 2002. Cost of sales increased 42.8% from Rmb 5,411.3 million in 2002 to Rmb
7,727.1 million (US$933.2 million) in 2003. This increase was primarily due to
the increase in the unit sales of minibuses 41




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and sales of the Zhonghua sedans in 2003. Cost of sales as a percentage of
sales was 76.4% in 2003, compared to 73.9% in 2002. Gross profit margin for
minibuses remained relatively stable compared to 2002, while the overall gross
profit margin of Brilliance China Automotive decreased from 26.1% in 2002 to
23.6% in 2003, as a result of the relatively lower start-up gross margin of the
Zhonghua sedans. Selling, general and administrative expenses increased 32.1% from Rmb
1,067.2 million, representing 14.6% of sales in 2002, to Rmb 1,410.1 million
(US$170.3 million), representing 13.9% of sales in 2003. The increase was
primarily due to the increase in staff costs, selling and other expenses in
relation to the full year production of the Zhonghua sedans and the increase in
stock-based compensation expense of Rmb 162.9 million (US$19.7 million) in
2003. As a result of call option agreements entered into in 2002, compensation
expense associated with the call options is being recognized by Brilliance
China Automotive on a straight-line basis from December 18, 2002 to August 6,
2003, the date that the call options became fully vested. Accordingly,
compensation expenses of approximately Rmb 173.2 million (US$20.9 million) and
Rmb 10.3 million were charged to the income statements for the years ended
December 31, 2003 and 2002, respectively. Interest expense net of interest income decreased by 10.4% from Rmb 127.7
million in 2002 to Rmb 114.4 million (US$13.8 million) in 2003 due to the
increase in interest income from bank deposits.
Net equity in earnings of associated companies and jointly controlled entities
decreased by 20.7% from Rmb 138.1 million in 2002 to Rmb 109.5 million (US$13.2
million) in 2003. The decrease was mainly due to the initial start-up loss of
the joint venture with BMW of Rmb 124.9 million (US$15.1 million) in 2003.
Excluding the net loss effects from the joint venture with BMW, the net equity
in earnings of associated companies and jointly controlled entities increased
69.7% from Rmb 138.1 million in 2002 to Rmb 234.4 million (US$28.3 million) in
2003. The increase was due to the strong performance of Brilliance China
Automotives associated companies and jointly controlled entities engaged in
engine manufacturing in 2003. In 2003, Brilliance China Automotive was granted subsidies in form of tax
refunds on reinvestments of Rmb 48.5 million (US$5.9 million) in relation to
Brilliance China Automotives reinvestment of dividends from certain
subsidiaries as additional capital contributions in 2003. Other income net of expenses increased from Rmb 1.0 million in 2002 to Rmb
78.3 million (US$9.5 million) in 2003. The increase was primarily due to the
increase in sales of scrap metals, moulds, and machineries in 2003. Income before taxation and minority interests increased 28.4% to Rmb
1,094.2 million (US$132.1 million) in 2003 from Rmb 852.5 million in 2002.
Income taxes decreased 1.7% to Rmb 144.1 million (US$17.4 million) in 2003 from
Rmb 146.6 million in 2002. As a result, net income increased 27.9% to Rmb 780.8 million (US$94.3
million) in 2003 from Rmb 610.5 million in 2002. Basic earnings per ADS were
Rmb 21.30 (US$2.57) in 2003, representing a 27.9% increase from Rmb 16.65 in
2002. Diluted earnings per ADS were Rmb 21.16 (US$2.56) in 2003. 42




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Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Consolidated net sales of Brilliance China Automotive for the year ended
December 31, 2002 were Rmb 7,319.5 million, a 17.7% increase from Rmb 6,218.4
million for the year ended December 31, 2001. The increase in sales was
primarily attributable to the launch of the Zhonghua sedan commencing in August
2002. Shenyang Automotive sold a total of 65,138 minibuses in 2002, a 3.4%
increase over the 63,009 minibuses sold in 2001. Shenyang Automotive sold
56,121 of its Mid-priced Minibuses in 2002, a 5.2% increase over the 53,356
units sold in 2001. Unit sales of the Deluxe Minibus decreased by 6.6% from
9,653 units in 2001 to 9,017 units in 2002. Shenyang Automotive also launched
the Zhonghua sedan in August 2002 and sold 8,816 sedans during the last five
months of the year 2002. Cost of sales, including depreciation and amortization, increased by 25.6%
to Rmb 5,411.3 million in 2002 from Rmb 4,308.0 million in 2001. This increase
was primarily due to the commencement of sedan production in 2002. Selling, general and administrative expenses were Rmb 1,067.2 million in
2002, representing 14.6% of sales, compared to Rmb 673.4 million in 2001,
representing 10.8% of sales. The increase was primarily due to the initial
start-up costs of the sedan production and the increase in research and
development expenses and selling and administrative expenses relating to the
launch of the sedans. Interest expense net of interest income increased from
Rmb 67.3 million in 2001 to Rmb 127.7 million in 2002 due to the decrease in
interest income from affiliated companies and the decrease in interest rates. Net equity in earnings of associated companies and jointly controlled
entities increased 245.0% from Rmb 40.0 million in 2001 to Rmb 138.1 million in
2002. The increase was due to the strong performance of Brilliance China
Automotives associated companies and jointly controlled entities engaged in
engine manufacturing in 2002. Income before taxation and minority interests
decreased by 29.7% from Rmb 1,213.3 million in 2001 to Rmb 852.5 million in
2002. However, income tax expenses increased from Rmb 116.3 million in 2001 to
Rmb 146.6 million in 2002 due to the increase in non-tax-deductible expenses
and corporate overhead in 2002. Net income decreased 31.2% to Rmb 610.5 million
in 2002 from Rmb 887.1 million in 2001. Basic earnings per ADS were Rmb 16.65
in 2002, compared to basic earnings per ADS of Rmb 25.10 in 2001. 43




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New Business Segment
 Manufacture and Sale of BMW Sedans BMW Brilliance Automotive Ltd., Brilliance China Automotives
49%-indirectly owned BMW joint venture, commenced production of the
BMW-designed and branded sedans and sold 4,359 of the 3-Series and 5-Series
sedans in the last quarter of 2003. Since Brilliance China Automotive only
owns a 49% equity interest in the BMW joint venture, the financial statements
of the BMW joint venture are not consolidated with those of Brilliance China
Automotive. The BMW joint venture is accounted for using the equity method and
its results are only recorded as Equity in earnings of associated companies
and jointly controlled entities, net in Brilliance China Automotives
consolidated financial statements of income and comprehensive income. However,
because separate financial information regarding BMW is available and evaluated
by Brilliance China Automotive management to assess the performance of the
joint venture and allocate resources to it, the manufacture and sale of BMW
sedans is a reportable operating segment under Statement of Financial
Accounting Standard, or SFAS, No. 131, in addition to manufacture and sale of
minibuses and manufacture and sale of Zhonghua sedans. Since sales of BMW
3-Series and 5-Series sedans commenced in October and November of 2003,
respectively, there are currently no comparative periods. See note 30 to the
consolidated financial statements for additional discussion on Brilliance China
Automotives reportable operating segments. Contingent Liabilities and Outstanding Guarantees Brilliance China Automotive and its subsidiaries had endorsed or
discounted bank notes which were not yet honored by the issuers as of December
31, 2003 and 2002 of approximately Rmb 1,492 million (US$180.2 million) and Rmb
1,414 million, respectively. These bank notes were used as a financing tool
primarily by Shenyang Automotive for the purchase of components from affiliated
companies and third parties and for other capital expenditures. As of December 31, 2003, subsidiaries of Brilliance China Automotive had
provided the following guarantees:  
    
    Corporate guarantees of approximately Rmb 690 million (US$83.3
million) for revolving bank loans and notes drawn by affiliated
companies of Shanghai Shenhua. The guarantee arose from the mutual
negotiation between Shenyang Automotive and Shanghai Shenhua.
Associated with the corporate guarantee, Shanghai Shenhua also provided
a cross guarantee for the bank facilities of Shenyang Automotive. The
guarantee was for revolving activities of Shanghai Shenhua and will be
terminated upon mutual agreements between Shenyang Automotive and
Shanghai Shenhua. If Shanghai Shenhua defaults on the repayment of its
bank loans or notes when they fall due, Shenyang Automotive is required
to repay the outstanding balance. There is no recourse or
collateralization provision in the guarantee. Default by Shanghai
Shenhua and its affiliated companies is considered remote by management
and therefore no liability for the guarantors obligation under the
guarantee existed as of December 31, 2003.
    
    A joint and several proportional guarantee with all the joint
venture partners of Shenyang Aerospace on a long-term bank loan of
approximately Rmb 344 million (US$41.5 million) drawn by Shenyang
Aerospace which will expire in 2008. The guarantee was provided by the
joint venture partners of Shenyang Aerospace for its long-term loan
financing needs during its start-up period. If Shenyang Aerospace
defaults on the repayment of its bank loan when it falls due, the joint
venture partners are jointly and severally liable to repay the
outstanding balance. There is no recourse or collateralization
provision in the guarantee. Default by Shenyang Aerospace is 44




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considered remote by management and therefore no liability for the
guarantors obligation under the guarantee existed as of December 31,
2003.
    
    Corporate guarantees for bank loans amounting to Rmb 300 million
(US$36.2 million) drawn by an affiliated company of Brilliance Holdings
Limited. The same amount of bank deposits were pledged as a collateral
for the corporate guarantees. However, default by the affiliated
company of Brilliance Holdings Limited is considered remote by
management and therefore no liability for the guarantors obligation
under the guarantee existed as of December 31, 2003.
    
    Corporate guarantees of bank loans amounting to Rmb 100 million
(US$12.1 million) drawn by JinBei. The same amount of bank deposits
were pledged as a collateral for the corporate guarantees. However,
default by JinBei is considered remote by management and therefore no
liability for the guarantors obligation under the guarantee existed as
of December 31, 2003.
    
    A guarantee to BMW Holdings BV guaranteeing the performance by SJAI
of its obligations under the joint venture agreement for establishment
of BMW Brilliance. However, default by SJAI is considered remote by
management and therefore no liability for the guarantors obligation
under the guarantee existed as of December 31, 2003. As of December 31, 2003, subsidiaries of Brilliance China Automotive had
issued letters of credit amounting to Rmb 32 million (US$3.9 million), compared
to Rmb 44 million in 2002. Approximately Rmb 7.2 million (US$0.9 million) of
the issued letters of credit was secured by pledged bank accounts. As of December 31, 2002, Shenyang Automotive had placed bank security
deposits amounting to approximately Rmb 48 million and issued
bank guarantees of Rmb 50 million at the request of the
General Administration of Customs, pending an assessment of the eligibility of
exemptions from VAT and custom duties for certain imported fixed assets. During
2003, Shenyang Automotive agreed with the relevant governmental authorities to
pay custom duties and VAT for those imported fixed assets to be used by
Shenyang Automotive while the imported fixed assets to be sold to the BMW joint
venture for their own use were to be exempt from custom duty and VAT
and the government authorities agreed to release all of the bank security deposits and bank guarantees. See also Item 8  Financial Information  Legal Proceedings for a
discussion of potential contingent liabilities relating to legal proceedings. Liquidity and Capital Resources The following table set forth our outstanding contractual and commercial
commitments as of December 31, 2003: Payments Due by Period(Amounts in thousands of Rmb)Less than
    
    1-3
    
    4-5
    
    More thanTotal
    
    1 year
    
    years
    
    years
    
    5 yearsOperating Leases (Relating to
Offices and Property)
    
    
    76,076
    
    
    
    11,526
    
    
    
    11,403
    
    
    
    6,460
    
    
    
    46,687Unconditional Purchase Obligations
    
    
    683,148
    
    
    
    673,148
    
    
    
    10,000
    
    
    
    
    
    
    
    Total Contractual Cash Obligations
    
    
    759,224
    
    
    
    684,674
    
    
    
    21,403
    
    
    
    6,460
    
    
    
    46,687
 45




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Cash Flows As of December 31, 2003, Brilliance China Automotive had Rmb 1,832.3
million (US$221.34 million) in cash and cash equivalents, Rmb 1,670.6 million
(US$201.8 million) in short-term bank deposits and Rmb 2,264.6 million
(US$273.56 million) in pledged short-term bank deposits, an increase of Rmb
543.1 million, Rmb 897.2 million and Rmb 914.6 million, respectively, from its
positions as of December 31, 2002. This increase was mainly due to the
increased payments in the form of cash and cash equivalents from Shenyang
Automotives customers and the issuance of the convertible bonds in 2003. Cash flow from operating activities decreased by 60.6% from Rmb 1,913.0
million for the year ended December 31, 2002 to Rmb 753.4 million (US$91.0
million) for the year ended December 31, 2003. The decrease in cash flows from
operating activities was primarily due to the inter-year changes in the
following current assets and current liabilities:  
    
    an increase in accounts receivable, due from affiliated
companies, notes receivable from third parties and
affiliated companies of Rmb 476.9 million (US$57.6 million) for the
year ended December 31, 2003 compared to a net decrease of
Rmb 84.2
million for the year ended December 31, 2002, as a result of the
growth in total sales of minibuses and Zhonghua sedans;
    
    a greater increase in inventory levels from Rmb 161.4 million
for the year ended December 31, 2002 to Rmb 460.0 million (US$55.6
million) for the year ended December 31, 2003 as a result of full
production and sale of Zhonghua sedans and the preparation of the
launch and full production of Grace minibuses in 2003;
    
    a smaller increase in accounts payable, due to affiliated
companies, and notes payable to affiliated companies of Rmb 646.7
million for the year ended December 31, 2002 to Rmb 54.4
million (US$6.6 million) for the year ended December 31, 2003 as
a result of an acceleration of the settlement of payables;
    
    a decrease in customer advances of Rmb 85.2
million (US$10.3 million) for the year ended December 31, 2003
compared to an increase of Rmb 218.5 million for the year ended
December 31, 2020;
    
    a decrease in accrued expenses and other current liabilities
of Rmb 69.5 million (US$8.4 million) for the year ended December 31,
2003 compared to an increase of Rmb 184.5 million for the year ended
December 31, 2002; and
    
    a decrease in import tariffs and taxes payable of Rmb 36.9
million (US$4.5 million) for the year ended December 31, 2003
compared to an increase of Rmb 109.2 million for the year ended
December 31, 2002 as a result of an acceleration of the settlement
periods. Cash used in investing activities increased by 12.7% from Rmb 2,209.9
million for the year ended December 31, 2002 to Rmb 2,491.3 million (US$301.0
million) for the year ended December 31, 2003. This increase was primarily
attributable to increases in pledged short-term bank deposits, the increase in
investments in associated companies and jointly controlled entities of Rmb
702.3 million (US$84.3 million) including investment in the BMW joint venture,
the prepayment for a long-term investment of Rmb 600.0 million (US$72.5
million) relating to the proposed acquisitions of SAIAM and SXI, and an
increase in other receivables, which consisted of an advance of Rmb 300.0
million (US$36.2 million) to SAIAM. This increase in cash used in investing
activities was partially offset by the Rmb 1,061.2 million (US$128.2 million)
decrease in advances to affiliated companies and the Rmb 500.0 million (US$60.4
million) decrease in other receivables arising from short-term investments in
2003, the latter of which represented the return by an investment company of a
deposit paid in 2002. In December 2002, Xing Yuan Dong disposed of its entire
equity interest in China Zhengtong Investment Holdings Co., Ltd., or Zhengtong,
to an affiliated company at its original purchase cost, or Rmb 480.0 million.
Rmb 460.0 million (US$55.6 million) of this amount was received by December 31,
2003, and the rest is scheduled to be repaid by the end of 2004. 46




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Net cash provided by financing activities increased from Rmb 365.9 million
for the year ended December 31, 2002 to Rmb 2,281.1 million (US$275.5 million)
for the year ended December 31, 2003. This significant increase is mainly
attributable to the US$200 million in gross proceeds received from the issuance
of convertible bonds in November 2003, as described below, as well as the
increased use of bank notes instead of short-term bank loans for financing
purposes due to the lower interest rates available for these notes. On May 25, 2001 arrangements were made for a private placement to
professional and institutional investors of 318,000,000 ordinary shares of
common stock of US$0.01 each at a price of HK$2.2 per share. Brilliance China
Automotive received net proceeds of Rmb 716.3 million from this placement,
which was completed in June 2001. As of December 31, 2002, Brilliance China
Automotive had utilized all of the proceeds received from this placement in the
construction of a new pressing facility and the new sedan production facilities
and for general working capital purposes. On November 28, 2003, Brilliance China Automotive, through its wholly
owned subsidiary, Brilliance China Automotive Finance Ltd., issued zero coupon
guaranteed convertible bonds due 2008 with an aggregate principal amount of
US$200.0 million (equivalent to approximately Rmb 1,654.3 million). The net
proceeds of the convertible bond offering were advanced to Brilliance China
Automotive and were then loaned to certain subsidiaries of Brilliance China
Automotive. For additional information on the convertible bonds, see
above  Overview and  Debt Changes below. Debt Changes On November 28, 2003, Brilliance China Automotive, through its wholly
owned subsidiary, Brilliance China Automotive Finance Ltd., issued zero coupon
guaranteed convertible bonds due 2008 with an aggregate principal amount of
US$200.0 million (equivalent to approximately Rmb 1,654.3 million). These
bonds are guaranteed by Brilliance China Automotive and are convertible into
fully paid ordinary shares par value US$0.01 of Brilliance China Automotive at
an initial conversion price of HK$4.60 per share at any time from January 8,
2004 to November 14, 2008, unless the bonds have previously been redeemed or
matured. Brilliance China Automotive Finance Ltd. may redeem a portion of the
convertible bonds in certain circumstances at 100% of their outstanding
principal amount during the period from November 28, 2005 to November 14, 2008.
In addition, all or some of the bonds may redeemed at the option of the holder
at 102.27% of their principal amount on November 28, 2006 and upon certain
events, such as the change of control of Brilliance China Automotive or the
shares of Brilliance China Automotive ceasing to be listed on The Stock
Exchange of Hong Kong, the bonds may be redeemed at the option of the holder at
100% of their outstanding principal amount. These bonds rank equally with all
of Brilliance China Automotives senior, unsecured and unsubordinated
obligations. As of December 31, 2003, none of the bonds had been converted
into the ordinary shares of Brilliance China Automotive. The net proceeds of
the convertible bond offering were advanced to Brilliance China Automotive and
were then loaned to certain subsidiaries of Brilliance China Automotive. In 2003, Brilliance China Automotive continued to maintain credit
facilities with banks to finance its working capital needs. As of December 31,
2003, direct bank borrowings and bank notes payable increased by 17.0% to Rmb
4,784.0 million (US$577.8 million), an increase of Rmb 696.6 million (US$84.1
million) from Rmb 4,087.4 million as of December 31, 2002. The bank loans and
bank notes payable were either secured by the property, plant and equipment,
pledged short-term bank deposits or notes receivables, or unsecured, with
maturity periods of less than one year. Brilliance China Automotive believes
that it will continue to have access to sufficient bank facilities to meet its
working capital requirements. Furthermore, Brilliance China Automotive
believes it maintains adequate reserves to manage unforeseen delays in
obtaining new financing, and had cash and cash equivalents of Rmb 1,832.3
million (US$221.3 million) as of December 31, 2003. 47




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Capital Expenditures Capital expenditures and operating expenses are funded internally in the
form of loans by Brilliance China Automotive to Shenyang Automotive, as well as
loans and notes payable borrowed by Shenyang Automotive from third parties.
Shenyang Automotives capital expenditures were Rmb 955.9 million (US$115.4
million) in 2003, an increase of Rmb 157.1 million (US$19.0 million) from the
2002 figure. Major items of expenditure included the molds, equipment and
machinery for the production of new versions of minibuses and sedans and new
minibus painting facilities. Shenyang Automotive is currently investing or
planning to invest in 2004 approximately Rmb 350 million (US$42.3 million) on
the expansion and development of the minibus, welding and assembly workshops
and molding for the shorter version of the Grace deluxe minibus, Rmb 300
million (US$36.2 million) for the development of the second generation of the
Zhonghua sedans and Rmb 500 million (US$60.3 million) on the development and
investment in its components and engines businesses. Of this total amount, Rmb
683.1 million (US$82.5 million) had already been contractually committed as of
December 31, 2003. Foreign Currency Requirements Brilliance China Automotive together with its associated companies and
jointly controlled entities expect to require an aggregate of approximately
Japanese Yen 1,200 million, US$100 million and Euro 667 million to purchase
imported equipment and components from Toyota of Japan, BMW of Germany and
other overseas suppliers for its minibuses and sedans in 2004. This estimate is
based upon Brilliance China Automotives 2004 production plans and the level of
domestic content expected for its minibuses and sedans in 2004. Brilliance
China Automotive believes that it will be able to obtain adequate amounts of
foreign currency to meet its planned requirements for 2004. Brilliance China
Automotive and its associated companies and jointly controlled entities does
not receive any foreign exchange through the sale of its products. However,
under the laws of China, Brilliance China Automotive and its associated
companies and jointly controlled entities in China are able to obtain necessary
foreign exchange in exchange for Renminbi upon approval from the State
Administration of Foreign Exchange, based on executed purchase contracts, joint
venture agreements, feasibility studies and other documents evidencing the
needs and proposed usage of such foreign exchange. Research and Development, Patents and Licenses, etc. During 2001, 2002 and 2003, Brilliance China Automotive and Shenyang
Automotive spent Rmb 26.9 million, Rmb 304.9 million and Rmb 162.6 million
(US$19.6 million), respectively, on research and development activities. In
2001 and 2002, these amounts were used for improvements to Shenyang
Automotives minibuses and preparing for the commencement of the production of
Zhonghua sedans. Additionally in 2002, these amounts were used for the
development of a new engine model in cooperation with a German engine
manufacturer and the development of a new safety system in cooperation with an
airbag manufacturer. In 2003, these amounts were used for the development of
improved versions of existing minibus models, the development of an improved
version of the Zhonghua sedan and the development of new engines, airbag
systems and other components. 48




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Trend information General trends that Brilliance China Automotive expects will have a
significant impact on its results of operations in the near future include the
following:  
    
    Increased Demand for Motor Vehicles.The rate of increase in
Chinas gross domestic product has been one of the highest in the
world over the past decade, and this growth has fueled demand for
automobiles. In fact, demand in the Chinese automobile industry has
been growing over the past several years at a faster rate than the
growth in Chinas gross domestic product. This trend is expected
to have a favorable impact on Brilliance China Automotives sales
volume for both minibuses and sedans, provided that unexpected
events such as an economic downturn in China or political
instability do not have an adverse impact on this trend. For
example, recent economic measures designed to slow overheated growth
in a number of industries in China have resulted in a general
downturn in demand for motor vehicles in China. Therefore, while
growth in demand for automobiles is expected to continue, it is
likely to increase at a slower rate than in prior years.
    
    Competition.As a result of Chinas entry into the WTO,
domestic production of automobiles (including minibuses and sedans)
is expected to increase, particularly through Sino-foreign joint
ventures that are being established for this purpose. This could
result in increased domestic competition for Brilliance China
Automotive and greater downward pressure on vehicle prices as
competitors begin to employ a higher ratio of domestically produced
components and as more competitors achieve economies of sale due to
increased volume of production.
    
    Price.Retail prices in the automotive market are expected
to continue to fall as a result of the localization of production
and sourcing of components as described immediately above as well as
increased competition. This expected decline in vehicle prices will
likely have an adverse effect on Brilliance China Automotives gross
income and profitability.
    
    Growth, Consolidation and Development. On June 2, 2004, the
NDRC issued a new automotive policy for China, which will likely
result in consolidation in the industry and further the development
and sophistication of the automobile industry in areas such as
consumer financing and research and development. The new policy
sets minimum levels of investment for new plants and research and
development, imposes vehicle import tariffs instead of component
tariffs on semi-knocked down imports and, under certain conditions,
allows foreign investors to control more than 50% of a joint venture
with Chinese partners and open more than two joint venture plants in
China to produce the same categories of vehicles. The new policy
acknowledges the success of Chinas automobile industry and seeks to
encourage this pillar industry to foster further growth,
particularly of domestically produced and branded products and
research and development, through consolidation of smaller,
less-efficient manufacturers and increased foreign and domestic
investment. In addition, the policy aims to centralize or
reorganize certain automobile-related sectors, such as consumer loan
services, to reduce overhead and administrative burdens on the
industry and allow industry participants to focus on their core
businesses. By encouraging industry consolidation and establishing
clearer guidelines for foreign investment, the policy encourages
existing players in the industry to grow and provides incentives for
targeted investment from both domestic and foreign sources.
However, the ultimate impact of the new policy on Brilliance China
Automotive is still uncertain and subject to more detailed guidance
and implementing regulations that are expected to be promulgated by
the NDRC in the future.
    
    Improvements in Chinas Infrastructure.China continues to
improve and expand its roadway system. By making automobile travel
a more practical and accessible mode of transportation for motorists in China, such improvements in Chinas infrastructure
will likely add to demand for automobiles. 49




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Critical Accounting Policies Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties and potentially result in materially
different results under different assumptions and conditions. Brilliance China Automotives consolidated financial statements have been
prepared in accordance with US GAAP. Brilliance China Automotives principal
accounting policies are set forth in note 3 to its consolidated financial
statements. US GAAP requires that Brilliance China Automotive adopt the
accounting policies and make estimates that its directors believe are most
appropriate in the circumstances for the purposes of giving a true and fair
view of its results of operations and financial condition. However, different
policies, estimates and assumptions in critical areas could lead to materially
different results. Brilliance China Automotive considers certain accounting policies,
including those related to revenue recognition, warranties, inventories,
investment in jointly controlled entities and associated companies, taxation,
related party transactions and impairment of long-lived assets, to be critical
accounting policies due to the estimation processes involved in each. Revenue Recognition Brilliance China Automotive recognizes revenue in accordance with SEC
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101) (as amended by Staff Accounting Bulletin No. 104, Revenue Recognition
(SAB 104)). SAB 101 and SAB 104 require that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been rendered; (3) the fee
is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) is based on managements judgments
regarding the fixed nature of the fee charged for services rendered and
products delivered, and the collectibility of those fees. Should changes in
conditions cause management to determine these criteria are not met for certain
future transactions, revenue recognized for any reporting period could be
adversely affected. Sales represent the invoiced value of goods, net of sales tax, discounts
and returns. Sales are recognized when goods are delivered to customers and
the significant risks and rewards of ownership of the goods have been
transferred to customers. Provisions for allowances and rebates are made at
the time of the sales of goods and are recognized as a reduction of sales. Warranties Shenyang Automotives minibuses are sold with a 24-month or 50,000
kilometers (2002 and 2001: 18-month or 30,000 kilometers) first-to-occur
limited warranty. The Zhonghua sedans are sold with a 36-month or 60,000
kilometers (2002: 24-month or 40,000 kilometers) first-to-occur limited
warranty. In addition to these basic limited warranties, in 2003 Shenyang
Automotive also offered customers a broader warranty for its Zhonghua sedans.
During the warranty period, Shenyang Automotive pays service stations for parts
and labor covered by the warranty; thereafter, customers must pay for all parts
and labor. The costs of the warranty obligation are accrued as selling
expenses at the time the sales are recognized, based on the estimated costs of
fulfilling the total obligations, including 50




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handling and transportation costs. The assumptions used to estimate
warranty expenses are reevaluated periodically in light of actual experience.
Actual warranty expense may be different from our estimates. Inventories Inventories are carried at the lower of cost and net realizable value.
Cost is calculated on a moving-average basis and comprises all costs of
purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition. Net realizable value is
the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the
sale. Provision for net realizable value from inventories is recognized when
the net realizable value of an inventory item falls below its cost. The amount
of any write-down of inventories are recognized as an expense in the period the
write-down or loss occurs. Estimates may differ from actual results. Impairment of long-lived assets Brilliance China Automotives long-lived assets include fixed assets,
construction-in-progress and intangible assets. In addition to the original
cost of these assets, their recorded value is impacted by a number of policy
elections made by Brilliance China Automotive, including estimated useful
lives, residual values and impairment charges. SFAS No. 142 provides that intangible assets that have indefinite useful
lives and goodwill will not be amortized but rather will be tested at least
annually for impairment. SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable from its undiscounted future
cash flow. Factors Brilliance China Automotive considers important, and that
could trigger an impairment review include the following:  
    
    significant underperformance relative to expected historical
or projected future operating results;
    
    significant changes in the manner of the use of the acquired
assets or the strategy for the overall business;
    
    significant negative industry or economic trends;
    
    significant drop in market share or gross profit margin in minibus and/or sedan sector(s);
    
    significant decline in Brilliance China Automotives share
price for a sustained period; and
    
    Brilliance China Automotives market capitalization relative
to net book value. In making the determinations of impairment charge of long-lived assets,
Brilliance China Automotive utilizes certain assumptions, including, but not
limited to: (i) estimated fair market value of the assets, and (ii) estimated
future cash flows expected to be generated by these assets, which are based on
additional assumptions such as asset utilization, length of service the asset
will be used in Brilliance China Automotives operations and estimated residual
values. The estimations made by management may differ from actual results. Investments in associated companies and jointly controlled entities An associated company is a company in which Brilliance China Automotive
and its subsidiaries have significant influence, but not control or joint
control, and thereby have the ability to participate in the investees
financial and operating policy decisions. A jointly controlled entity is a
company in which Brilliance China Automotive has joint control with the other
joint venture partners. Investments in associated companies and jointly
controlled entities are accounted for using the equity method. Goodwill 51




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arising from the acquisition of interests in associated companies and
jointly controlled entities is included in the carrying amount of the
investment. Deferred Taxation Deferred income tax is provided using the liability method, in which
deferred income taxes are recognized for temporary differences between the tax
and financial statement bases of assets and liabilities. The tax consequences
of those differences expected to occur in subsequent years are recorded as
assets and liabilities on the balance sheet. Estimates may differ from actual
results. Transactions with affiliated companies An affiliated company is a company in which one or more of the directors
or substantial shareholders of Brilliance China Automotive have direct or
indirect beneficial interests in the company or are in a position to exercise
significant influence over the company. Parties are also considered to be
affiliated if they are subject to common control or common significant
influence. The accounting treatment for transactions with these affiliated
companies, including sales and revenue recognition policies, is similar to
that for transactions with third parties. Recent Accounting Pronouncements In January 2003, the FASB issued FIN 46 Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. Management does not expect that the adoption of
FIN 46 will have a material effect on Brilliance China Automotives financial
position or results of operations. In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities. With certain exceptions, SFAS No. 133 is effective
for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. All provisions of SFAS No. 149
should be applied prospectively. Management does not expect that the adoption
of SFAS No. 149 will have a material effect on Brilliance China Automotives
financial position or results of operations. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or as an asset in some circumstances). It is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of non-public entities. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. Management does not expect that the adoption of SFAS No. 150 will have a material effect on Brilliance China
Automotives financial position or results of operations. 52




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES Directors and Senior Management At the annual general meeting on June 27, 2003, pursuant to the Bye-laws
of Brilliance China Automotive, independent non-executive directors, Mr. Wei
Sheng Hong and Mr. Huang Anjiang, retired by rotation, and as they did not
offer themselves for re-election, their retirement entered into effect from the
close of the annual general meeting. Following the close of the annual general
meeting, Mr. Xu Bingjin was appointed as an independent non-executive director,
and Mr. Wu Yong Cun and Mr. Lei Xiaoyang were appointed as non-executive
directors of Brilliance China Automotive. The appointments of Mr. Xu, Mr. Wu
and Mr. Lei took effect on June 27, 2003. The directors and senior executive officers of Brilliance China Automotive
as of December 31, 2003 are identified below. Year FirstElected or AppointedName
    
    Age
    
    Position
    
    Director or OfficerDirectorsWu Xiao An
    
    
    42
    
    
    Chairman of the Board and Executive Vice President
    
    
    1993Hong Xing
    
    
    41
    
    
    Vice Chairman, Executive Vice President and Company Secretary
    
    
    1993Su Qiang
    
    
    38
    
    
    Director, President and Chief Executive Officer
    
    
    1992He Tao
    
    
    32
    
    
    Director, Vice President and Chief Financial Officer
    
    
    1995Yang Mao Zeng
    
    
    68
    
    
    Director
    
    
    1994Non-Executive DirectorsWu Yong Cun
    
    
    41
    
    
    Director
    
    
    2003Lei Xiaoyang
    
    
    47
    
    
    Director
    
    
    2003Independent Non-Executive DirectorsYi Min Li
    
    
    42
    
    
    Director
    
    
    2001Xu Bingjin
    
    
    64
    
    
    Director
    
    
    2003
 Executive Directors Mr. WU Xiao An, age 42, has been Chairman of the Board of Brilliance China
Automotive since June 2002, and a director and an Executive Vice President
since 1993. He is responsible for the overall management and strategy of
Brilliance China Automotive. He was the Vice Chairman and the Chief Financial
Officer of Brilliance China Automotive from 1993 to June 2002. He is also a
director of Shenyang Automotive. Mr. Wu holds a Bachelor of Arts degree from
the Beijing Foreign Languages Institute and a Master of Business Administration
degree from Fordham University in New York. He served from 1988 to 1993 as
Deputy Manager of the Bank of China, New York Branch. 53




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Mr. HONG Xing, age 41, has been the Vice Chairman of Brilliance China
Automotive since June 2002, and a director and an Executive Vice President
since 1993. Mr. Hong also serves currently as Company Secretary. Mr. Hong is
also a director of Shenyang Automotive. He received a Bachelor of Arts degree
from the Beijing Foreign Languages Institute in 1984. He also received a
Doctor of Jurisprudence degree from the Columbia University School of Law in
New York and is a member of the Bar of the State of New York. From 1985 to
1986, Mr. Hong worked as an attaché in the Ministry of Foreign Affairs of
China. From 1986 to 1990, Mr. Hong was an international civil servant at the
United Nations headquarters in New York. Mr. SU Qiang, age 38, has been the President and the Chief Executive
Officer of Brilliance China Automotive since June 2002, and a director since
1992. He formerly served as an Executive Vice President of Brilliance China
Automotive and was General Manager of Shenyang Automotive from 1995 to 1997,
where he currently serves as Chairman . He is currently responsible for the
administrative and production management of Brilliance China Automotive. He
holds a Bachelor of Arts degree from the Peoples University of China, as well
as a graduation certificate from the Graduate School of the Peoples Bank of
China. Mr. HE Tao, age 32, has been the Chief Financial Officer of Brilliance
China Automotive since June 2002 and a director and a Vice President of
Brilliance China Automotive since November 1998. He is responsible for the
financial management of Brilliance China Automotive. He is also a director and
President of Shenyang Automotive, which he joined in 1995. Mr. He received a
Bachelor of Arts degree from the University of Finance and Economics in
Shanghai. From 1993 to 1995, he worked as the manager of the accounting
department of Brilliance China Machinery Co., Ltd. in Luoyang, China. Mr. YANG Mao Zeng, age 68, has been a director since 1995 and he was the
Vice President and the Chief Accounting Officer of Brilliance China Automotive
from 1995 to March 2002. He is responsible for the administrative and
financial management of Brilliance China Automotive. He graduated from Soochow
University and previously served as the General Manager of the Bank of China,
Grand Cayman Branch, in 1993. Non-Executive Directors Mr. WU Yong Cun, age 41, has been a non-executive director of Brilliance
China Automotive since June 2003. Mr. Wu has been the Vice President of Huachen
Automotive Group Holdings Company Limited, or Huachen, since December 2002. He
is responsible for business planning and development and production management
for Huachen. Mr. Wu has also served as the General Manager of Liaoning
Provincial Water Sources Utility Company, the Assistant Director of Liaoning
Provincial Development & Planning Commission and the Vice Chairman of Liaoning
Provincial Science and Technology Association between June 1988 and September
2002. Mr. Wu holds a Bachelor of Engineering degree and a Master of Engineering
degree from Dalian Science and Technology University as well as a Master of
Business Administration degree from California State University, Fullertan
School. Mr. Wu also holds the title of Senior Engineer. Mr. LEI Xiaoyang, age 47, has been a non-executive director of Brilliance
China Automotive since June 2003. Mr. Lei has been the Deputy Chief Economist
as well as General Manager of the Department of Asset Operations in Huachen
since January 2003. He was the Assistant President of Liaoning International
Trust and Investment Corporation from June 1996 to September 2002, and had been
in charge of the Financing Department, Accounting Department, Strategic
Planning Department and Securities Department. Mr. Lei holds a Bachelor of
Engineering degree from the Shenyang Polytechnic 54




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University and a Master of Science degree from Liaoning University as well
as a Master of Business Administration degree from Roosevelt University. Independent Non-Executive Directors Mr. YI Min Li, age 42, has been an independent non-executive director of
Brilliance China Automotive since February 2001. Since February 13, 2001, he
has also served as a member of the Audit Committee of Brilliance China
Automotive. Mr. Yi is a Professor in the School of International Business,
Southwest University of Finance and Economics, Chengdu, Sichuan, China. Mr. XU Bingjin, age 64, has been an independent non-executive director of
Brilliance China Automotive since June 2003. Since June 27, 2003, he has also
served as a member of the Audit Committee of Brilliance China Automotive. Mr.
Xu is currently the Chairman of The Association of Sino-European Economic and
Technical Cooperation. He was formerly an Assistant Minister of The Ministry of
Foreign Trade and Economic Cooperation, a director of the Office of National
Mechanic and Electronic Products Importation and Exportation and a Senior
Consultant of the World Trade Organization Research Association. Mr. Xu
received a Bachelor of Science degree in Engineering Economics from Jilin
University of Technology in 1964 and holds the title of Senior Engineer. The board of directors of Brilliance China Automotive currently consists
of nine members, one-third of whom are required to retire from office by
rotation at each annual general meeting in accordance with the terms of its
Bye-laws (except for any director holding office as Chairman). Those directors
that retire from office, however, may be immediately re-elected as directors by
the shareholders. There is no family relationship between any director or executive officer
of Brilliance China Automotive and any other director or executive officer. Compensation The aggregate amount of compensation, consisting of salary, allowances and
benefits in kind, paid by Brilliance China Automotive to its directors and
executive officers during 2003 was approximately Rmb 41.1 million (US$5.0
million). Board Practices Service Agreements On August 21, 2000, Brilliance China Automotive entered into service
agreements with each of its executive directors, except Mr. Yang Mao Zeng. The
services agreements have terms of five years beginning October 1, 2000. None
of the service agreements provide for any benefits or compensation upon
termination of employment other than statutory compensation. Audit Committee Brilliance China Automotive has established an audit committee whose
primary duties consist of reviewing and supervising the financial reporting
process of Brilliance China Automotive. The audit committee currently consists
of two independent non-executive directors, Mr. Yi Min Li and Mr. Xu Bingjin. 55




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Meetings Meetings of the audit committee shall be held at least twice per year, and
Brilliance China Automotives external auditors may request a meeting if they
consider that one is necessary. A quorum for a meeting of the audit committee
shall be two members. Brilliance China Automotives secretary shall serve as
secretary of the audit committee and shall circulate to all members of the
board the minutes from any audit committee meeting. Brilliance China
Automotives Chief Financial Officer and a representative of its external
auditors shall normally attend audit committee meetings as well. Other board
members also have the right to attend audit committee meetings. The audit
committee shall meet with Brilliance China Automotives external auditors at
least once per year. Authority and Duties The audit committee is authorized by the board to investigate any activity
within its scope of duty. It is authorized to seek any information it requires
from any employee and all employees are directed to cooperate with any request
made by the audit committee. The audit committee is authorized by the board to
obtain outside legal or other independent professional advice and to secure the
attendance of outsiders with relevant experience and expertise if it considers
this necessary. The duties of the audit committee are to:  
    
    consider the appointment of the external auditor, the
audit fee and any questions of resignation or dismissal by or of
the external auditor;
    
    discuss with the external auditor, before the audit
commences, the nature and scope of the audit, and ensure
coordination where more than one audit firm is involved;
    
    review the half-year and annual financial statements
before submission to the board, focusing particularly on:  
    
    any changes in accounting policies or practices;
    
    major judgment areas;
    
    significant adjustments resulting from the audit;
    
    the going concern assumption;
    
    compliance with accounting standards; and
    
    compliance with stock exchange and legal requirements;  
    
    discuss problems and reservations arising from the
interim and final audits, and any matters the auditors may wish
to discuss (in the absence of management where necessary);
    
    review the external auditors management letter and managements response;
    
    review the statement on internal control systems prior to endorsement by the board;
    
    consider the major findings of internal investigations and managements response;
    
    pre-approval of certain services and fees of the independent auditors; and
    
    consider other topics as defined by the board. The audit committee met in April 2002, 2003 and 2004, and September 2002
and 2003. 56




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Employees As of December 31, 2003, Brilliance China Automotive had 9 employees
located in Hong Kong, compared with 9 as of December 31, 2002 and 12 as of
December 31, 2001. These employees are primarily responsible for overseeing
the financial management and operations and for developing strategic business
plans, preparing financial statements and coordinating investor relations for
Brilliance China Automotive. As of December 31, 2003, Shenyang Automotive had a total of 6,704
employees (including part-time employees), compared with 6,639 as of December
31, 2002 and 6,906 as of December 31, 2001. The following chart sets forth the
number of Shenyang Automotives employees by functional area as of December 31,
2003: Functional Area
    
    Number of EmployeesAdministrative personnel
    
    
    1,066Technical personnel
    
    
    990Production workers
    
    
    4,648Total
    
    
    6,704
 Substantially all of Shenyang Automotives employees are based in
Shenyang, Liaoning Province, China. Shenyang Automotive has not experienced any strikes or other labor
disputes that materially affected Shenyang Automotives business activities.
Brilliance China Automotive considers its labor relations to be good. In
addition, Shenyang Automotive and the other subsidiaries, associated companies
and jointly controlled entities of Brilliance China Automotive consider their
labor relations to be good. 57




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Share Ownership The following chart sets forth the share ownership of all directors and
executive officers that own any shares in Brilliance China Automotive as of
December 31, 2003. Percentages ofNumber of
    
    Capital StockTitle of Class
    
    Identity of Person or Group
    
    Shares Owned
    
    Beneficially Owned(1)Ordinary shares
    
    He Tao
    
    
    45,000
    
    
    
    0.0
    %Ordinary shares
    
    Su Qiang
    
    
    14,500,000
    
    
    
    0.40
    %Ordinary shares
    
    Wu Xiao An
    
    
    
    
    
    
    Ordinary shares
    
    Hong Xing
    
    
    
    
    
    
    Ordinary shares
    
    Yang Mao Zeng
    
    
    
    
    
    
    
   (1)
    
    Percentage ownership is based on 3,668,390,900 shares outstanding as of
December 31, 2003. Employee Share Option Scheme Upon the listing of Brilliance China Automotives shares on The Stock
Exchange of Hong Kong Limited in September 1999, Brilliance China Automotive
adopted an employee share option scheme. Under the scheme, the board of
directors of Brilliance China Automotive has the right to grant options to
employees of Brilliance China Automotive and its subsidiaries to subscribe for
Brilliance China Automotives shares at a price which shall be higher of: (1) a
price being not less than 80% of the average closing price of the shares on the
relevant securities exchange for the five trading days immediately preceding
the relevant offer date in respect of such options; or (2) the nominal value of
the shares. If an employee decides to accept the offer of an option he or she
must pay HK$1.00 when the option is granted. The maximum number of shares in
respect of which options may be granted (including shares in respect of which
options, whether exercised or still outstanding, have already been granted)
under the scheme is the number that represents 10% of the issued ordinary share
capital of Brilliance China Automotive, excluding shares issued on exercise of
options previously granted. The period during which an option may be exercised
will be determined by the directors, except that no option may be exercised
more than ten years from the date of grant of the option. On June 2, 2001, share options were granted to certain directors and
employees of Brilliance China Automotive, entitling them to subscribe for a
total of 31,800,000 shares of Brilliance China Automotives ordinary shares at
HK$1.896 per share. The exercisable period of these options is from June 2,
2001 to June 1, 2011. The compensation expense associated with these grants
was approximately Rmb 15.5 million and was charged to income during the year
ended December 31, 2001. On October 13, 2003, 2,338,000 share options granted
to an employee of Brilliance China Automotive were exercised at an exercise
price of HK$1.896 per share in accordance with the terms of this share option
scheme. Accordingly, the common stock and additional paid-in capital were
increased by Rmb 0.2 million and Rmb 4.5 million, respectively. No options were
granted under this stock option plan in 2003. 58




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New Share Option Scheme On June 28, 2002, Brilliance China Automotive adopted a new share option
scheme, or the New Scheme in compliance with the amendments to the listing
rules and regulations of The Stock Exchange of Hong Kong Limited that became
effective on September 1, 2001. The New Scheme became effective on July 15,
2002 and the original share option scheme of Brilliance China Automotive
adopted in 1999 was terminated. Share options granted after July 15, 2002 are
subject to the terms of the New Scheme. Pursuant to the New Scheme, Brilliance
China Automotives Board of Directors may grant options to the participants
(including Brilliance China Automotives employees, non-executive directors,
suppliers and customers, etc.) to subscribe for Brilliance China Automotives
common stock at a price that shall not be lower than the higher of:  (a)
    
    the closing price of the common stock on the relevant stock
exchange as stated in such stock exchanges quotation sheet on the
date of grant, which must be a trading date;(b)
    
    the average closing price of the common stock on the relevant
stock exchange as stated in such stock exchanges quotation sheets
for the five trading days immediately preceding the date of grant;
or(c)
    
    the nominal value of the common stock. The New Scheme allows Brilliance China Automotive to grant options to a
wider category of participants. Under the New Scheme, the board would also
have the discretion to set a minimum period for which an option must be held
before the exercise of the subscription rights attached to that option, as well
as any performance targets it considers appropriate before an option can be
exercised. The purpose of the New Scheme is to provide incentives or rewards
to participants under the scheme for their contribution to Brilliance China
Automotive and its subsidiaries and to enable Brilliance China Automotive and
its subsidiaries to recruit and retain skilled employees. As of December 31, 2003, no share option had been granted under the New
Scheme. Call Option Agreements On December 18, 2002, Huachen entered into a principal agreement with the
Chinese Financial Education Development Foundation, the then substantial
shareholder, providing for the purchase from the Chinese Financial Education
Development Foundation of a total of 1,446,121,500 shares of common stock,
representing approximately 39.45% of the then issued share capital of
Brilliance China Automotive and the Chinese Financial Education Development
Foundations entire shareholding interest in Brilliance China Automotive.
Completion of the principal agreement took place at signing on December 18,
2002. In connection with the signing of the principal agreement and after
completion of the sale and purchase of the ordinary shares pursuant thereto,
each of Mr. Wu Xiao An, Mr. Su Qiang, Mr. Hong Xing and Mr. He Tao entered into
a call option agreement with Huachen. Pursuant to the terms of the call option
agreements, Huachen granted to each of these Directors a call option in respect
of a specified number of ordinary shares, totaling 346,305,630 shares in
aggregate and representing approximately 9.446% of the then issued share
capital of Brilliance China Automotive, at an exercise price of HK$0.95 per
share. Each call option is exercisable in whole or in part at any time during
the period of three years commencing August 6, 2003. As of December 31, 2003,
none of the call options had been exercised by the above directors. Under the terms of these call option agreements, each of Mr. Wu Xiao An,
Mr. Su Qiang, Mr. Hong Xing and Mr. He Tao may elect to pay the exercise price
in full or to pay 10% of the exercise price at the time of exercise of the
option. If these directors elect the latter payment option, the balance of the
exercise price will be payable, without interest, within a three-year period
after the date of completion of 59




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the purchase of the relevant ordinary shares, and the shares will be
pledged as security in favor of Huachen until full payment of the exercise
price. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Major Shareholders The following table sets forth certain information regarding ownership of
Brilliance China Automotives capital stock as of December 31, 2003 by all
persons who are known to Brilliance China Automotive to own beneficially more
than 5% of Brilliance China Automotives shares or ADSs. The voting rights of
Brilliance China Automotives major shareholders are identical to those of its
other shareholders. Number of
    
    Percent ofTitle of Class
    
    Identity of Person or Group
    
    Shares Owned
    
    Capital StockOrdinary Shares
    
    Huachen Automotive Group Holdings Company Limited(1)
    
    
    1,446,121,500
    
    
    
    39.42
    %Ordinary Shares
    
    J.P. Morgan Chase & Co.(2)
    
    
    320,936,741
    
    
    
    8.75
    %
   (1)
    
    Huachen Automotive Group Holdings Company Limited is a wholly owned
subsidiary of the Liaoning Provincial Government.(2)
    
    Includes ordinary shares beneficially owned through the following
controlled subsidiaries: J.P. Morgan Fleming Asset Management (Asia) Inc.;
J.P. Morgan Fleming Asset Management Holdings Inc.; JF Asset Management
Limited; JPMorgan Chase Bank; JF International Management Inc.; J.P.
Morgan International Finance Limited; J.P. Morgan International Inc.; J.P.
Morgan Whitefriars Inc.; and J.P. Morgan Overseas Capital Corporation. On December 19, 2001, Zhuhai Brilliance Holdings Company Limited, or
Zhuhai Brilliance, a Chinese company under the control of the Chinese Financial
Education Development Foundation, sold 300,000,000 shares in Brilliance China
Automotive to Shenzhen Zheng Guo Investment Co., Ltd., at the market price of
HK$1.60 per share, or an aggregate price of HK$480.0 million. These shares
were subsequently sold to the public in 2003. On December 18, 2002, Huachen, a wholly owned subsidiary of the Liaoning
Provincial Government, entered into a principal agreement with the Chinese
Financial Education Development Foundation, the then substantial shareholder of
Brilliance China Automotive, for the purchase from the Chinese Financial
Education Development Foundation of a total of 1,446,121,500 ordinary shares,
representing approximately 39.45% of the then issued share capital of
Brilliance China Automotive and the Chinese Financial Education Development
Foundations entire shareholding interest in Brilliance China Automotive.
Completion of the principal agreement took place at signing on December 18,
2002. Accordingly, as of December 31, 2003, Huachen is entitled to cast 39.42%
(diluted from the initial 39.45% due to the exercise of certain share options
during 2003) of the votes on all matters to be voted on by the shareholders of
Brilliance China Automotive (to the extent it is not required to abstain from
exercising its voting rights under the applicable laws and regulations), and
will therefore exert substantial influence over the election of Brilliance
China Automotives directors, the outcome of actions requiring 60




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majority shareholder approval and the business in general of Brilliance
China Automotive. See Item 8  Financial Information  Legal Proceedings for
a description of the litigation relating to this purchase. Related Party Transactions JinBei holds a 49% equity interest in Shenyang Automotive. Shenyang
Automotive began operating as a separate legal entity from JinBei in January
1992. Shenyang Automotive and JinBei are parties to a trademark license
agreement under which JinBei has granted to Shenyang Automotive the license to
use indefinitely the JinBei trademark on its products and marketing materials.
On December 29, 2003, Brilliance China Automotive, through Shengyang JinBei
Automotive Industry Holdings Co., Ltd., or SJAI, and Shenyang Xinjinbei
Investment and Development Co., Ltd., or SXID, its 98.0% and 99.0% indirectly
owned subsidiaries, respectively, entered into agreements to acquire the entire
equity interests of Shenyang Automobile Industry Asset Management Company
Limited, or SAIAM, and Shenyang Xinjinbei Investment Co., Ltd, or SXI, which
own 29.9% and 11%, respectively, of the issued share capital of JinBei. Upon
receipt of the necessary governmental approvals for this transaction,
Brilliance China Automotive will be effectively interested in approximately
40.1% of the issued share capital of JinBei, thereby increasing its effective
interest in Shenyang Automotive from its initial 51.0% to approximately 70.7%.
This acquisition is expected to be completed in the second half of 2004. In 2002, Brilliance China Automotive purchased Rmb 2,215.6 million of its
component parts from various affiliated companies. This figure represented an
increase of 55.5% from 2001. In 2003, this amount increased to Rmb 2,916.9
million (US$353.3 million), representing an increase of 31.7% over 2002.
Brilliance China Automotive believes that its purchases of such parts have been
on terms as favorable to Brilliance China Automotive as it could have obtained
from unrelated third parties on an arms-length basis. In December 2001, Brilliance China Automotive entered into an agreement
with Brilliance Holdings Limited for the acquisition of the entire issued share
capital of Key Choices Group Limited at a consideration of approximately Rmb
278.0 million. Key Choices is an investment holding company and its principal
assets are the 100% equity interest in the registered capital of Dongxing
Automotive and a 90% equity interest in the registered capital of Xingchen
Automotive Seats. Dongxing Automotive is a foreign-invested enterprise
established in China whose principal products are automotive components for the
use in passenger vehicles. Xingchen Automotive Seats is a Sino-foreign joint
venture established in China in December 2001 that formerly was principally
engaged in the manufacturing of automotive seats. However, Xingchen Automotive
Seats ceased its operations in the second half of 2002. In December 2001, Xing Yuan Dong entered into an agreement with two
affiliated companies to establish China Zhengtong Investment Holdings Co.,
Ltd., or Zhengtong. Pursuant to the agreement, Xing Yuan Dong contributed cash
amounting to Rmb 480.0 million to acquire a 47.06% equity interest in
Zhengtong. In December 2002, Xing Yuan Dong disposed of its entire equity
interest in Zhengtong to an affiliated company at cost, or Rmb 480.0 million. 61




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##### Table of Contents



Significant transactions between Brilliance China Automotive or its
subsidiaries and affiliated companies in the ordinary course of business during
2001, 2002 and 2003 are set forth below: 2003
    
    2002
    
    2001(Rmb 000)Sales to JinBei and its affiliated companies
    
    
    150,637
    
    
    
    56,438
    
    
    
    14,923Purchases from JinBei and its affiliated companies
    
    
    986,828
    
    
    
    712,061
    
    
    
    317,046Sales to Shanghai Shenhua and its affiliated companies
    
    
    1,984,715
    
    
    
    1,664,156
    
    
    
    907,232Purchases from Shanghai Shenhua and its affiliated companies
    
    
    222,940
    
    
    
    375,402
    
    
    
    164,323Sales to Shanghai Yuantong Automobile Sales and Service
Company Limited, or Shanghai Yuantong
    
    
    
    
    
    
    710,100
    
    
    
    2,622,002Advertising expenses reimbursed by Shanghai Yuantong
    
    
    
    
    
    
    
    
    
    
    64,070Sales to other affiliated companies of Brilliance Holdings
Limited
    
    
    504
    
    
    
    150,390
    
    
    
    59,816Purchases from other affiliated companies of Brilliance
Holdings Limited
    
    
    93,498
    
    
    
    99,514
    
    
    
    274,379Purchases from associated companies and jointly controlled
entities
    
    
    1,597,289
    
    
    
    1,014,057
    
    
    
    635,373Sales to affiliated companies of the joint venture partner
of Ningbo Yuming
    
    
    5,135
    
    
    
    
    
    
    
    Purchases from affiliated companies of the joint venture
partner of Ningbo Yuming
    
    
    16,338
    
    
    
    14,580
    
    
    
    33,524Sales to associated companies and jointly controlled entities
    
    
    171,512
    
    
    
    102,024
    
    
    
    61,683Research and development expenses to third parties under
contracts assumed from an affiliated company of Brilliance
Holdings Limited at original costs
    
    
    
    
    
    
    116,000
    
    
    
    Long-term prepayment for fixed assets to a third party under
a contract assumed from an affiliated company of Brilliance
Holdings Limited at original cost
    
    
    
    
    
    
    18,305
    
    
    
    Operating lease rental on machineries and equipment charged
by a jointly controlled entity
    
    
    12,000
    
    
    
    
    
    
    
    Acquisition of Key Choices from Brilliance Holdings Limited
    
    
    
    
    
    
    
    
    
    
    278,213Sales of fixed assets to an affiliated company of Brilliance
Holdings Limited
    
    
    
    
    
    
    
    
    
    
    5,558Sales of fixed assets to an associated company
    
    
    
    
    
    
    
    
    
    
    18,425Purchase of fixed assets and other assets from other
affiliated companies of Brilliance Holdings Limited
    
    
    
    
    
    
    
    
    
    
    41,984Purchases of moulds from an affiliated company of Shanghai
Shenhua
    
    
    
    
    
    
    
    
    
    
    35,750Management expenses reimbursed to and consulting fees paid
to Brilliance Holdings Limited
    
    
    
    
    
    
    5,182
    
    
    
    12,405Interest income from Brilliance Holdings Limited and its
affiliated companies
    
    
    
    
    
    
    
    
    
    
    23,709Interest income from Shanghai Yuantong
    
    
    
    
    
    
    
    
    
    
    15,930
 62




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##### Table of Contents



The above transactions were carried out after negotiations between
Brilliance China Automotive and its subsidiaries and the affiliated companies
in the ordinary course of business and on the basis of estimated market value
as determined by the directors of Brilliance China Automotive. Shenyang Automotive transferred the legal titles and ownership of certain
buildings with an aggregate net book value of approximately Rmb 225.2 million
(US$27.2 million) to the BMW joint venture in consideration of approximately
Rmb 248.7 million (US$30.0 million) and entered into an agreement with the BMW
joint venture to lease-back a substantial portion of the buildings. The
agreement of sale includes an option for the BMW joint venture to require
Shenyang Automotive to purchase back such buildings at the purchase price less
depreciation over a specified period upon the occurrence of certain events,
including the passing of a valid resolution pursuant to the joint venture
contract by the board of directors of the BMW joint venture. For financial
reporting purposes, the buildings were retained as fixed assets on the balance
sheet of Brilliance China Automotive and the portion of consideration received
from the BMW joint venture up to December 31, 2003 amounting to approximately
Rmb 74.6 million (US$9.0 million) is treated as a financing and will be
partially offset against the lease rental payable in future years. The
remaining balance of approximately Rmb 174.1 million (US$21.0 million) will be
received from the BMW joint venture when certain conditions specified in the
agreement of sale are fulfilled. During the year ended December 31, 2002, JinBei allowed Shenyang
Automotive to use certain components-related technology in the manufacturing of
the Zhonghua sedan. This technology was transferred from JinBei to Shenyang
Automotive in the form of an increase in the registered capital of Shenyang
Automotive in January 2003, and Shenyang Automotive thereby became the legal
owner of this components-related technology. In December 2003, the BMW joint venture purchased for Rmb 384.3 million
(US$46.4 million) certain machinery and equipment from Shenyang Automotive with
an aggregate net book value of Rmb 358.6 million (US$43.3 million) for use in
the production of BMW sedans. The agreement of sale includes an option for the
BMW joint venture to require Shenyang Automotive to purchase back such
machinery and equipment at the purchase price less depreciation upon the
occurrence of certain events, including the passing of a valid resolution
pursuant to the joint venture contract by the board of directors of the BMW
joint venture. This machinery and equipment is maintained by the BMW joint
venture for the manufacturing of its products and is also used by Shenyang
Automotive for a service fee based on the number of Zhonghua sedans produced by
Shenyang Automotive using this machinery and equipment. As of December 31,
2003, the basis for the service fees had not been finalized and service fees of
approximately Rmb 17.4 million (US$2.1 million) had accrued. The operating subsidiaries of Brilliance China Automotive have provided
the following outstanding guarantees to affiliated companies:  
    
    corporate guarantees of approximately Rmb 690 million
(US$83.3 million) (compared to Rmb 740 million in 2002) for
revolving bank loans and notes drawn by affiliated companies of
Shanghai Shenhua;
    
    a joint and several proportional guarantee with all the
initial joint venture partners of Shenyang Aerospace on a
long-term bank loan of approximately Rmb 344 million (US$41.5
million) (compared to Rmb 374.0 million in 2002) drawn by
Shenyang Aerospace that expires in 2008; 63




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##### Table of Contents




    
    corporate guarantees for bank loans amounting to Rmb 300 million
(US$36.2 million) drawn by an affiliated company of Brilliance Holdings
Limited. The same amount of bank deposits was pledged as a collateral
for the corporate guarantee;
    
    corporate guarantees for bank loans amounting to Rmb 100 million
(US$12.1 million) drawn by JinBei. The same amount of bank deposits was
pledged as a collateral for the corporate guarantee; and
    
    a guarantee to BMW Holdings BV guaranteeing the performance by SJAI
of its obligations under the joint venture agreement for establishment
of the BMW joint venture. Set forth below is information on amounts due from affiliated companies to
Brilliance China Automotive and its subsidiaries arising from trading
activities as of December 31, 2001, 2002 and 2003:  2003
    
    2002
    
    2001(Rmb 000)Notes receivable from affiliated companiesNotes receivable from affiliated companies of JinBei
    
    
    4,505
    
    
    
    6,613
    
    
    
    Notes receivable from Shanghai Shenhua
    
    
    487,770
    
    
    
    156,240
    
    
    
    536,859Notes receivable from Shanghai Yuantong
    
    
    
    
    
    
    3,325
    
    
    
    144,935Notes receivable from other affiliated companies of Brilliance
Holdings Limited
    
    
    
    
    
    
    20,807
    
    
    
    3,075Notes receivable from associated companies and jointly
controlled entities
    
    
    31,900
    
    
    
    26,000
    
    
    
    2,000Notes receivable from an affiliated company of the joint
    
    
    3,000
    
    
    
    
    
    
    
    venture partner of Ningbo Yuming
    
    
    
    
    
    
    
    
    
    
    Total(1)
    
    
    527,175
    
    
    
    212,985
    
    
    
    686,869Amounts due from affiliated companiesDue from affiliated companies of Brilliance Holdings Limited(3)
    
    
    
    
    
    
    41,675
    
    
    
    61,125Due from Shanghai Shenhua and its affiliated companies
    
    
    54,967
    
    
    
    63,608
    
    
    
    31,874Due from Shanghai Yuantong(2)
    
    
    355,835
    
    
    
    655,835
    
    
    
    439,411Due from affiliated companies of the joint venture partner of
Ningbo Yuming
    
    
    4,408
    
    
    
    280
    
    
    
    18,281Due from affiliated companies of JinBei
    
    
    53,242
    
    
    
    11,015
    
    
    
    35,071Due from associated companies and jointly controlled entities
    
    
    46,453
    
    
    
    11,376
    
    
    
    11,175Receivable arising from the disposal of machineries and
equipment to BMW joint venture(4)
    
    
    269,003
    
    
    
    
    
    
    
    Provision for doubtful receivables
    
    
    (9,720
    )
    
    
    (9,723
    )
    
    
    Total
    
    
    774,188
    
    
    
    774,066
    
    
    
    596,937
   (1)
    
    The notes receivable from affiliated companies are guaranteed by
banks in China and have maturities between one to six months. The fair
value of the notes receivable approximates their carrying value.(2)
    
    The amount due from Shanghai Yuantong during the year ended
December 31, 2001 bears interest at an annual rate of 5.4%. The amount
as of December 31, 2002 and 2003 was non-interest bearing. Subsequent
to December 31, 2003, Rmb 350 million of endorsed bank notes were
received from Shanghai Yuantong. 64




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##### Table of Contents



(3)
    
    As of December 31, 2001, included in the amounts due from
affiliated companies of Brilliance Holdings Limited is approximately
Rmb 56.0 million guaranteed by a shareholder of an affiliated company.
The amount was fully settled in 2002.(4)
    
    The outstanding balance is unsecured, non-interest bearing and will
be settled by the BMW joint venture when certain conditions specified
in the agreement of sale are fulfilled. As of December 31, 2003 and December 31, 2002, Brilliance China Automotive
had advanced approximately Rmb 3,528.1 million (US$426.1 million) and Rmb
3,031.3 million (US$366.1 million), respectively, to its subsidiaries, of
which approximately Rmb 2,288.9 million (US$276.5 million) and Rmb 699.3
million (US$84.5 million), respectively, bear interest at 5.0% to 5.8% and 5.0%,
respectively, per annum. There is no interest payable with respect to the
remaining balance. Set forth below is information on advances from Brilliance China
Automotive and its subsidiaries to affiliated companies as of December 31,
2001, 2002 and 2003: 2003
    
    2002
    
    2001(Rmb 000)Advances to affiliated companiesAdvances to JinBei and its affiliated companies
    
    
    69,748
    
    
    
    6,613
    
    
    
    2,163Advances to Brilliance Holdings Limited and its affiliated
companies:(i) CurrentInterest bearing
    
    
    
    
    
    
    
    
    
    
    40,000
    (1)Non-interest bearing
    
    
    172,955
    
    
    
    907,191
    (3)
    
    
    256,223(ii) Long-termInterest bearing (1)
    
    
    
    
    
    
    
    
    
    
    39,111
    (1),(2)Non-interest bearing
    
    
    
    
    
    
    
    
    
    
    5,693
    (2)Advances to Zhuhai Brilliance Holdings Company Limited
(non-interest bearing)
    
    
    
    
    
    
    360,000
    (4)
    
    
    Advances to other affiliated companies (non-interest bearing)
    
    
    779
    
    
    
    30,892
    (5)
    
    
    Total
    
    
    243,482
    
    
    
    1,304,696
    
    
    
    343,190
   (1)
    
    Interest bearing at annual rates of 5.5% in 2001.(2)
    
    The long-term portion of advances to an affiliated company of Brilliance
Holdings Limited as of December 31, 2001 were wholly repaid in 2002.(3)
    
    Approximately Rmb 810.0 million of the advances to Brilliance Holdings
Limited and its affiliated companies were settled subsequent to year end
2002.(4)
    
    The balance of Rmb 360.0 million was settled subsequent to year end 2002.(5)
    
    Rmb 30.0 million of the advances to other affiliated companies was
settled subsequent to year end 2002. Set forth below is information on advances from affiliated companies to
Brilliance China Automotive and its subsidiaries as of December 31, 2001, 2002
and 2003. 2003
    
    2002
    
    2001(Rmb 000)Advances from affiliated companiesAdvances from a joint venture partner of Shenyang Aerospace
    
    
    
    
    
    
    139,529
    
    
    
    Advances from affiliated companies of Brilliance Holdings Limited
    
    
    15,294
    
    
    
    13,951
    
    
    
    54,276
 65




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##### Table of Contents



2003
    
    2002
    
    2001(Rmb 000)Advances from an associated company
    
    
    
    
    
    
    1,264
    
    
    
    Advances from an affiliated company of Shanghai Shenhua
    
    
    
    
    
    
    1,586
    
    
    
    Advances from affiliated companies of JinBei
    
    
    516
    
    
    
    2,092
    
    
    
    Advances from affiliated companies of the joint venture partner
of Ningbo Yuming
    
    
    1,845
    
    
    
    3,998
    
    
    
    Advances from other affiliated companies
    
    
    382
    
    
    
    
    
    
    
    Financing received from BMW joint venture
    
    
    74,605
    
    
    
    
    
    
    
    Total
    
    
    92,642
    
    
    
    162,420
    
    
    
    54,276
 Aside from the financing received from BMW joint venture, the other
advances from affiliated companies are unsecured, non-interest bearing and have
no fixed repayment terms. Amounts due to affiliated companies arising from trading activities
consisted of the following: 2003
    
    2002
    
    2001(Rmb 000)Notes payable to affiliated companiesNotes payable to affiliated companies of JinBei
    
    
    27,272
    
    
    
    
    
    
    
    Notes payable to associated companies and jointly controlled entities
    
    
    8,059
    
    
    
    
    
    
    
    Notes payable to other affiliated companies
    
    
    100
    
    
    
    
    
    
    
    Total
    
    
    35,431
    
    
    
    
    
    
    
    Amounts due to affiliated companiesDue to JinBei and its affiliated companies
    
    
    216,559
    
    
    
    196,186
    
    
    
    107,095Due to other affiliated companies of Brilliance Holdings Limited
    
    
    2,478
    
    
    
    21,839
    
    
    
    32,340Due to Shanghai Shenhua and its affiliated companies
    
    
    84,417
    
    
    
    101,029
    
    
    
    173,636Due to affiliated companies of the joint venture partner of Ningbo
Yuming
    
    
    1,037
    
    
    
    10,225
    
    
    
    6,287Due to affiliated companies of the joint venture partner of Xinguang
Brilliance
    
    
    4,967
    
    
    
    1,567
    
    
    
    3,132Due to associated companies and jointly controlled entities
    
    
    375,396
    
    
    
    398,523
    
    
    
    169,589Total
    
    
    684,854
    
    
    
    729,369
    
    
    
    492,079
 The amounts due to affiliated companies are unsecured, non-interest
bearing, with no fixed repayment terms. As of December 31, 2003, included in prepayments and other current assets
were approximately Rmb 26.0 million (US$3.1 million) (compared to Rmb 263.0
million in 2002) of prepayment for purchases of raw materials made to an
affiliated company of Brilliance Holdings Limited. As of December 31, 2003, included in other receivables was Rmb 20 million
(US$2.4 million) (compared to Rmb 220.0 million in 2002) of outstanding
proceeds from the disposal of an associated company to an affiliated company. 66




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##### Table of Contents



ITEM 8. FINANCIAL INFORMATION Consolidated Statements and Other Financial Information See
Item 18  Financial Statements for a list of the financial statements
filed with this document. Legal Proceedings Broadsino Litigation On January 21, 2003, a writ brought by Broadsino, as plaintiff, was filed
with the Supreme Court of Bermuda and an ex parte court order dated January 22,
2003 granted by the Supreme Court of Bermuda in favor of Broadsino was served
on the registered office of Brilliance China Automotive in Bermuda. The writ
alleged that the interest of the Chinese Financial Education Development
Foundation, a former significant shareholder, in 1,446,121,500 shares of
Brilliance China Automotive, representing a 39.45% ownership interest, was held
in trust for Broadsino and was improperly transferred to Huachen. The Court
Order restrained Brilliance China Automotive from among other things: (a)
registering the transfer of these shares by the Chinese Financial Education
Development Foundation to Huachen and/or Huachen to certain directors of
Brilliance China Automotive; or (b) if such transfer has already been
registered, registering any further dealings in such shares, in each case
pending determination by the Supreme Court of Bermuda of the legal proceedings
initiated by Broadsino against Brilliance China Automotive, the Chinese
Financial Education Development Foundation, Huachen and certain directors of
Brilliance China Automotive. Broadsino claimed that Brilliance China
Automotive was aware of the trust arrangement and further alleged that
Brilliance China Automotive knowingly participated in a breach of that trust
arrangement by allowing the transfer of such shares from the Chinese Financial
Education Development Foundation to Huachen. Broadsino sought recovery of
these shares and, in the alternative, damages. Upon application by Brilliance China Automotive, the court order was
discharged by a judgment of the Supreme Court of Bermuda given on February 11,
2003. On February 26, 2003, a statement of claim was filed by Broadsino as a
procedural step in furtherance of the legal proceedings. On March 10, 2003,
Brilliance China Automotive took out a summons at the Supreme Court of Bermuda
to have this writ and statement of claim struck out. The strikeout proceedings
were duly heard before the Supreme Court of Bermuda on July 22 and 23, 2003.
On a judgement dated December 31, 2003, the Supreme Court of Bermuda struck out
the writ in respect of legal proceedings brought by Broadsino against
Brilliance China Automotive. On March 4, 2004, Broadsino submitted an
application for leave to appeal to the Supreme Court of Bermuda, but at the
hearing of the application before the court on March 9, 2004, Broadsinos
application was refused. On June 17, 2004, Broadsino made an ex parte
application for leave to appeal to the Court of Appeal of the Supreme Court of
Bermuda. The Court of Appeal granted Broadsinos application for leave and the
matter has been adjourned for an inter partes hearing, which is expected to
take place in the November 2004 session of the Court of Appeal. The directors
do not believe that this litigation has had or will have any significant impact
on the financial position of Brilliance China Automotive. 67




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##### Table of Contents



Yang Rong Employment Proceedings On or about October 25, 2002, Brilliance China Automotive was served with
a claim lodged by Mr. Yang Rong in the Labour Tribunal in Hong Kong against
Brilliance China Automotive. The claim was for approximately US$4.3 million
with respect to loss of salary plus bonuses, share options and damages for
alleged unreasonable dismissal. The claim was dismissed by the Labour Tribunal
in Hong Kong on January 28, 2003. Mr. Yang subsequently applied for a review of
this decision. At the review hearing on July 4, 2003, the Labour Tribunal
ordered that the case to be transferred to the High Court in Hong Kong. At a
directions hearing held on September 5, 2003, the High Court ordered Mr. Yang
to file and serve his Statement of Claim by September 19, 2003. On September
16, 2003, a Statement of Claim was served on Brilliance China Automotive. On
November 4, 2003, Brilliance China Automotive filed and served a Defence and
Counterclaim. Mr. Yang filed and served a Reply and Defense to Counterclaim on
April 26, 2004. No subsequent pleadings or documents have been filed with the
Court as at the date of approval of this annual report and no hearing of this
matter has been scheduled. Based on the claims set out in the Statement of
Claim, the directors of Brilliance China Automotive do not believe the action
has had or will have any significant impact on the financial position of
Brilliance China Automotive and the directors have defended and will continue
to defend this action vigorously. Dividends All dividends to holders of ADSs are declared and paid in U.S. dollars.
Interim dividends may be paid at the discretion of Brilliance China
Automotives board of directors based on its evaluation of the financial
condition of Brilliance China Automotive, while final dividends are subject to
the approval of the shareholders at a general meeting. Historically,
Brilliance China Automotive has paid a quarterly dividend at the rate of
US$0.02 per share in each quarter, commencing in the first quarter of 1993.
Brilliance China Automotive began to pay dividends on a semi-annual basis in
the second half of 1996. The amount of these dividend payments have been
adjusted on a pro rata basis to reflect Brilliance China Automotives 1999 and
2000 bonus share issuances as well as the increase in earnings per share. The
dividend per share and dividend per ADS amounts paid for 2003 were US$0.00242
per share and US$0.24 per ADS. Under Section 54 of the Companies Act 1981 of Bermuda (as amended), a
company shall not declare or pay a dividend, or make a distribution out of
contributed surplus, if there are reasonable grounds for believing that  
    
    Brilliance China Automotive is, or would after payment be,
unable to pay its liabilities as they become due; or
    
    the realizable value of Brilliance China Automotives assets
would thereby be less than the aggregate of its liabilities and its
issued share capital and share premium account. As a Bermuda
company, Brilliance China Automotive must abide by these criteria in
formulating its dividend policy. Applicable Chinese laws and regulations require that before a
foreign-invested enterprise distributes profits to investors it must:  
    
    satisfy all tax liabilities;
    
    provide for losses in previous years;
    
    in the case of a Sino-foreign joint venture, also make
appropriation, in proportions determined at the sole discretion of
the board of directors of the joint venture, to a general reserve
fund, an enterprise expansion fund and a staff welfare and employee
bonus fund. During the year ended December 31, 2003, Shenyang Automotive and
Ningbo Yuming were not required to and therefore did not make any
additional contributions into these funds. 68




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##### Table of Contents



Distributions of profits
to investors are required to be in proportion to each partys
shareholdings in the joint venture; and
    
    in the case of a wholly foreign owned enterprise, appropriate
10% of profit after providing for taxes and losses in previous years
to a general reserve fund until the balance of the fund reaches 50%
of its share capital. Any further appropriation thereafter is
optional. The appropriation to an enterprise expansion fund and a
staff welfare fund is at the sole discretion of the board of
directors of the wholly foreign owned enterprise. During the year
ended December 31, 2003, Xing Yuan Dong, Ningbo Brilliance Ruixing
and Mianyang Brilliance Ruian made an additional Rmb 100.0 million
(US$12.1 million) to the general reserve fund, enterprise expansion
fund and staff welfare fund. Significant Changes There have been no significant changes since December 31, 2003, the date
of the annual financial statements in this annual report. 69




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##### Table of Contents



ITEM 9. THE OFFER AND LISTING Brilliance China Automotives ordinary shares are listed on The Stock
Exchange of Hong Kong Limited under the stock code 1114, and Brilliance China
Automotives ADSs are listed on the New York Stock Exchange, Inc. under the
symbol CBA. The following table sets forth for the periods indicated the
reported high and low sales prices for the ordinary shares and the ADSs on The
Stock Exchange of Hong Kong Limited and the New York Stock Exchange, Inc.,
respectively: The StockExchange ofHong KongNew York Stock Exchange, Inc.
    
    Limited(US$)
    
    (HK$)Ordinary Shares
    
    ADSs
    
    Ordinary SharesCalendar Period
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    LowThrough
    
    Starting from
    
    Starting fromApril 14, 2000
    
    April 17, 2000
    
    October 22, 19991999: 1st quarter
    
    
    8 7/8
    
    
    
    6 3/16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2nd quarter
    
    
    11 1/8
    
    
    
    7 3/4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3rd quarter
    
    
    26 7/8
    
    
    
    10 9/16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4th quarter
    
    
    25 15/16
    
    
    
    3 1/16
    
    
    
    
    
    
    
    
    
    
    
    32.40
    
    
    
    26.402000: 1st quarter
    
    
    3 5/16
    
    
    
    2 5/16
    
    
    
    
    
    
    
    
    
    
    
    27.20
    
    
    
    21.202nd quarter (1)(2)
    
    
    4 3/16
    
    
    
    2 7/8
    
    
    
    19 15/16
    
    
    
    13 11/16
    
    
    
    28.20
    
    
    
    1.133rd quarter
    
    
    
    
    
    
    
    
    
    
    37 5/8
    
    
    
    17 1/4
    
    
    
    2.93
    
    
    
    1.354th quarter
    
    
    
    
    
    
    
    
    
    
    34 3/4
    
    
    
    25 5/8
    
    
    
    2.70
    
    
    
    2.052001: 1st quarter
    
    
    
    
    
    
    
    
    
    
    31.30
    
    
    
    23.50
    
    
    
    2.70
    
    
    
    1.802nd quarter
    
    
    
    
    
    
    
    
    
    
    33.85
    
    
    
    23.29
    
    
    
    2.65
    
    
    
    1.813rd quarter
    
    
    
    
    
    
    
    
    
    
    24.11
    
    
    
    11.66
    
    
    
    1.87
    
    
    
    0.844th quarter
    
    
    
    
    
    
    
    
    
    
    22.70
    
    
    
    14.80
    
    
    
    1.73
    
    
    
    1.142002: 1st quarter
    
    
    
    
    
    
    
    
    
    
    21.32
    
    
    
    16.20
    
    
    
    1.65
    
    
    
    1.272nd quarter
    
    
    
    
    
    
    
    
    
    
    18.50
    
    
    
    12.34
    
    
    
    1.49
    
    
    
    0.983rd quarter
    
    
    
    
    
    
    
    
    
    
    15.15
    
    
    
    12.10
    
    
    
    1.22
    
    
    
    1.014th quarter
    
    
    
    
    
    
    
    
    
    
    19.00
    
    
    
    10.65
    
    
    
    1.49
    
    
    
    0.802003: 1st quarter
    
    
    
    
    
    
    
    
    
    
    25.49
    
    
    
    18.11
    
    
    
    2.03
    
    
    
    1.422nd quarter
    
    
    
    
    
    
    
    
    
    
    29.29
    
    
    
    20.48
    
    
    
    2.28
    
    
    
    1.563rd quarter
    
    
    
    
    
    
    
    
    
    
    34.49
    
    
    
    26.80
    
    
    
    2.73
    
    
    
    2.104th quarter
    
    
    
    
    
    
    
    
    
    
    61.30
    
    
    
    34.20
    
    
    
    4.75
    
    
    
    2.652004: January
    
    
    
    
    
    
    
    
    
    
    62.75
    
    
    
    51.16
    
    
    
    4.85
    
    
    
    3.85February
    
    
    
    
    
    
    
    
    
    
    53.29
    
    
    
    44.50
    
    
    
    4.15
    
    
    
    3.48March
    
    
    
    
    
    
    
    
    
    
    50.55
    
    
    
    39.52
    
    
    
    3.95
    
    
    
    3.15April
    
    
    
    
    
    
    
    
    
    
    48.25
    
    
    
    36.25
    
    
    
    3.73
    
    
    
    2.78May
    
    
    
    
    
    
    
    
    
    
    40.30
    
    
    
    33.30
    
    
    
    3.20
    
    
    
    2.53June (through June 21)
    
    
    
    
    
    
    
    
    
    
    38.00
    
    
    
    29.12
    
    
    
    3.00
    
    
    
    2.15
   (1)
    
    On April 14, 2000, Brilliance China Automotive issued bonus shares to all
of its shareholders in the amount of nineteen bonus shares for each share
held. This bonus issuance resulted in a significant decrease in the share
prices after this date as shown in the table above.(2)
    
    On April 14, 2000, all ordinary shares of Brilliance China Automotive
traded through the New York Stock Exchange Inc. were converted into
American depositary shares at the ratio of 100 ordinary shares per ADS
(after taking into account the simultaneous bonus share issuance described
in note 1 above). 70




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To the best of Brilliance China Automotives knowledge, as of June 21,
2004, Brilliance China Automotive had 2,876,346 ADSs outstanding, which were
held by 93 registered holders of record in the United States (including
2,806,694 ADSs held by 3 nominee holders). One ADS is equivalent to 100
ordinary shares. Trading of Brilliance China Automotives shares in Hong Kong and ADSs in
New York was suspended on June 21, 2002 to allow Brilliance China Automotive to
confirm and clarify the reports of its change in management on June 18, 2002. Trading of Brilliance China Automotives shares in Hong Kong was suspended
on October 23, 2002 to allow Brilliance China Automotive to clarify issues
alleged by a former director regarding Brilliance China Automotive. Trading of Brilliance China Automotives shares in Hong Kong was suspended
from 10:00 a.m. Hong Kong time on November 11, 2002 to 9:30 a.m. Hong Kong time
on November 15, 2002, and trading of Brilliance China Automotives ADSs in New
York was suspended on November 11 through November 13, 2002, to allow
Brilliance China Automotive to clarify certain matters relating to a potential
sale of shares of Brilliance China Automotive held by the Chinese Financial
Education Development Foundation. Trading of Brilliance China Automotives shares in Hong Kong was suspended
from 10:01 a.m. Hong Kong time on December 18, 2002 through December 19, 2002,
and trading of Brilliance China Automotives ADSs in New York was suspended on
December 18, 2002 and December 19, 2002, pending the release of an announcement
in relation to a conditional mandatory cash offer by CLSA Limited on behalf of
Huachen Automotive Group Holdings Company Limited and certain directors of
Brilliance China Automotive, to acquire all issued shares, including shares
represented by ADSs, in the share capital of Brilliance China Automotive, other
than those already owned by these parties or parties acting in concert with
them. Trading of Brilliance China Automotives shares in Hong Kong was suspended
from January 24, 2003 through January 27, 2003 and trading of Brilliance China
Automotives ADSs in New York was also suspended on January 24, 2003 to allow
Brilliance China Automotive to clarify the impact of the court order obtained
by Broadsino Finance Company Limited against Brilliance China Automotive, the
Management Directors, the Chinese Financial Education Development Foundation
and Huachen Automotive Group Holdings Company Limited restraining the
registration of any sale or transfer of shares of Brilliance China Automotive. Trading of Brilliance China Automotives shares in Hong Kong was suspended
from 2:36 p.m. Hong Kong time October 2, 2003 through October 3, 2003 and trading of
Brilliance China Automotives ADSs in New York was suspended on October 2, 2003
pending the release of an announcement in relation to the placement of an
aggregate of 113,640,000 shares of Brilliance China Automotive by certain
directors of Brilliance China Automotive. Trading of Brilliance China Automotives shares in Hong Kong was suspended
on December 31, 2003 pending the release of an announcement in relation to the
acquisition by Brilliance China Automotive, through its indirectly owned
subsidiaries SJAI and SXID, of the entire equity interests of SAIAM and SXI. 71




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ITEM 10. ADDITIONAL INFORMATION Memorandum of Association and Bye-laws Described below is a summary of certain provisions of Brilliance China
Automotives memorandum of association and Bye-laws, as currently in effect. General Brilliance China Automotive was incorporated in Bermuda under the
Companies Act as an exempted company with limited liability on June 9, 1992.
Its headquarters are located at Suites 1602-05, Chater House, 8 Connaught Road
Central, Hong Kong and it is registered with the Registrar of Companies in Hong
Kong as an overseas company under Part XI of the Companies Ordinance. Brilliance China Automotives memorandum of association also sets out its
objects, including acting as a holding and investment company, and its powers,
including the powers set out in the First Schedule of the Companies Act. As an
exempted company, Brilliance China Automotive will be carrying on business
outside Bermuda, although it maintains a registered office in Bermuda.
Brilliance China Automotives Bye-laws were conditionally adopted on September
18, 1999. Directors Disclosure of interests in contracts with Brilliance China Automotive or its subsidiaries A director may not vote or be counted in the quorum on any resolution of
the board of directors concerning his own appointment as the holder of any
office or place of profit with Brilliance China Automotive or any other company
in which Brilliance China Automotive is interested. A director who to his knowledge is in any way, whether directly or
indirectly, interested in a contract or arrangement or proposed contract or
arrangement with Brilliance China Automotive must declare the nature of his
interest at the meeting of the board of directors at which the question of
entering into the contract or arrangement is first taken into consideration, if
he knows his interest then exists, or in any other case at the first meeting of
the board of directors after he knows that he is or has become so interested. Save as otherwise provided by the Bye-laws, a director may not vote (nor
be counted in the quorum) on any resolution of the board of directors in
respect of any contract, proposal or arrangement in which he is to his
knowledge materially interested, and if he does so his vote may not be counted
(nor shall he be counted in the quorum), but this prohibition will not apply to
any of the following matters:  
    
    any contract or arrangement for the giving by Brilliance
China Automotive of any security or indemnity to the director in
respect of money lent by him or obligations incurred or undertaken
by him at the request of or for the benefit of Brilliance China
Automotive or any of its subsidiaries;
    
    any contract or arrangement for the giving by Brilliance
China Automotive of any security to a third party in respect of a
debt or obligation of Brilliance China Automotive, or any of its
subsidiaries, for which the director has himself assumed
responsibility or guaranteed or secured in whole or in part whether
solely or jointly; 72




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
    
    any contract or arrangement concerning an offer of the shares, debentures or other securities of or by Brilliance China
Automotive or any other company which Brilliance China Automotive
may promote or be interested in for subscription or purchase where
the director is or is to be interested as a participant in the
underwriting or sub-underwriting of the offer;
    
    any contract or arrangement in which the director is
interested in the same manner as other holders of shares or
debentures or securities of Brilliance China Automotive by virtue
only of his interest in shares or debentures or other securities of
Brilliance China Automotive;
    
    any contract or arrangement concerning any other company in
which the director is interested directly or indirectly whether as
an officer or a member or in which the director is beneficially
interested in shares of that company, other than a company in which
the director together with any of his associates beneficially own 5%
or more of the issued shares of any class of shares of such company
(or of any third company through which his interest is derived) or
of the voting rights;
    
    any proposal or arrangement for the benefit of employees of
Brilliance China Automotive or its subsidiaries including the
adoption, modification or operation of a pension fund or retirement,
death or disability benefit scheme which relates both to directors
and employees of Brilliance China Automotive or any of its
subsidiaries and does not give the director any privilege not
generally accorded to the class of persons to whom such scheme or
fund relates; and
    
    any proposal or arrangement concerning the adoption,
modification or operation of any employees share scheme involving
the issue or grant of options over shares or other securities by
Brilliance China Automotive to, or for the benefit of, the employees
of Brilliance China Automotive or its subsidiaries under which the
director may benefit. Remuneration The directors are entitled to receive remuneration for their services a
sum determined by Brilliance China Automotive in general meeting, such sum
(unless otherwise directed by the resolution by which it is voted) to be
divided amongst the directors in such proportions and in such manner as the
board of directors may agree, or failing agreement, equally, except that in
such event any director holding office for less than the whole of the relevant
period in respect of which the remuneration is paid shall only rank in such
division in proportion to the time during the period for which he has held
office. Borrowing powers Subject to the provisions of the Companies Act, the board of directors may
exercise all the powers of Brilliance China Automotive to raise or borrow or to
secure the payment of any sum or sums of money for the purposes of Brilliance
China Automotive and to mortgage or charge its undertaking, property and
uncalled capital or any part thereof. The board of directors may raise or
secure the payment or repayment of such sum or sums in such manner and upon
such terms and conditions in all respects as it thinks fit and in particular by
the issue of debentures, debenture stock, bonds or other securities of
Brilliance China Automotive, whether outright or as collateral security for any
debt, liability or obligation of Brilliance China Automotive or of any third
party. 73




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Alterations to constitutional documents The memorandum of association of Brilliance China Automotive may, with the
consent of the Minister of Finance of Bermuda, be altered by Brilliance China
Automotive in general meeting. The Bye-laws may be amended by the directors
subject to the approval of Brilliance China Automotive in general meeting. The
Bye-laws state that a special resolution is required to alter the memorandum of
association on to approve any amendment of the Bye-laws. Variation of rights of existing shares or classes of shares If at any time the capital is divided into different classes of shares,
all or any of the special rights (unless otherwise provided for by the terms of
issue of that class) attached to any class may, subject to the provisions of
the Companies Act, be varied or abrogated either with the consent in writing of
the holders of not less than three-fourths in nominal value of the issued
shares of that class or with the sanction of a special resolution passed at a
separate general meeting of the holders of the shares of that class. To every
separate general meeting the provisions of the Bye-laws relating to general
meetings will apply, but so that the necessary quorum is not less than two
persons holding or representing by proxy one-third in nominal value of the
issued shares of the class, and that any holder of shares of the class present
in person or by proxy or by a duly authorized corporate representative may
demand a poll. Special resolutions  majority required A special resolution of Brilliance China Automotive must be passed by a
majority of not less than three-fourths of the votes cast of such members as,
being entitled so to do, vote in person, or by a duly authorized corporate
representative, or where proxies are allowed, by proxy at a general meeting of
which not less than 21 days notice, specifying the intention to propose the
resolution as a special resolution, has been duly given. However, if it is so
agreed by a majority in number of the members having a right to attend and vote
at such meeting, being a majority together holding not less than 95% in nominal
value of the shares giving that right, a resolution may be proposed and passed
as a special resolution at a meeting of which less than 21 days notice has
been given. Voting rights and right to demand a poll Subject to any special rights, privileges or restrictions as to voting
attached to any class or classes of shares, at any general meeting on a show of
hands every member who is present in person or by a duly authorized corporate
representative shall have one vote and on a poll, every member present in
person or by a duly authorized corporate representative or by proxy shall have
one vote for every share of which he is the holder which is fully paid up or
credited as fully paid (but so that no amount paid up or credited as paid up on
a share in advance of calls or installments is treated for the foregoing
purposes as paid up on the share). On a poll, a member entitled to more than
one vote need not use all his votes or cast all the votes in the same way. At any general meeting a resolution put to the vote of the meeting shall
be decided on a show of hands unless a poll is (before or on the declaration of
the result of the show of hands or on the withdrawal of any other demand for a
poll) demanded:  
    
    by the chairman of the meeting;
    
    by at least three members present in person, or by a duly
authorized corporate representative, or by proxy for the time being
entitled to vote at the meeting; 74




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
    
    by any member or members present in person, or by a duly
authorized corporate representative, or by proxy, and representing
not less than one-tenth of the total voting rights of all the
members having the right to vote at the meeting; or
    
    by a member or members present in person, or by a duly
authorized corporate representative, or by proxy and holding shares
in Brilliance China Automotive conferring a right to vote at the
meeting being shares on which an aggregate sum has been paid up
equal to not less than one-tenth of the total sum paid up on all the shares conferring that right. Requirements for annual general meetings An annual general meeting must be held once in every year and within not
more than fifteen months after the last preceding annual general meeting. Notices of annual general meetings An annual general meeting and any special general meeting at which it is
proposed to pass a special resolution must be called by at least 21 days
notice in writing and any other special general meeting shall be called by at
least 14 days notice in writing (in each case exclusive of the day on which
the notice is served or deemed to be served and of the day for which it is
given). The notice shall specify the place, the day and the hour of meeting
and, in the case of special business, the general nature of that business. Quorum for meetings and separate class meetings For all purposes the quorum for a general meeting shall be two members
present in person or by a duly authorized corporate representative or by proxy
and entitled to vote. In respect of a separate class meeting convened to
sanction the modification of class rights, the necessary quorum shall not be
less than two persons holding or representing by proxy or by a duly authorized
corporate representative one-third in nominal value of the issued shares of
that class and that any holder of shares of the class present in person by
proxy or by a duly authorized corporate representative may demand a poll. Dividends Brilliance China Automotive in general meeting may declare dividends in
any currency but no dividends may exceed the amount recommended by the board of
directors. Unless and to the extent that the rights attached to any shares or its
terms of issue otherwise provide, all dividends will be apportioned and paid
pro rata according to the amounts paid or credited as paid up on the shares
during any portion or portions of the period in respect of which the dividend
is paid. No amount paid upon a share in advance of calls will for this purpose
be treated as paid up on the shares. The board of directors may retain any
dividends or other moneys payable on or in respect of a share upon which
Brilliance China Automotive has a lien, and may apply the same in or towards
satisfaction of the debts, liabilities or engagements in respect of which the
lien exists. The board of directors may deduct from any dividend or bonus
payable to any member all sums of money, if any, presently payable by him to
Brilliance China Automotive on account of calls, installments or otherwise. Whenever the board of directors or Brilliance China Automotive in general
meeting has resolved that a dividend be paid or declared, the board of
directors may further resolve either: 75




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
    
    that such dividend be satisfied wholly or in part in the form
of an allotment of shares credited as fully paid up, on the basis
that the shares so allotted shall be of the same class or classes as
the class or classes of shares already held by the allottee,
provided that the members will be entitled to elect to receive such
dividend (or part of it) in cash in lieu of such allotment; or
    
    that the members entitled to such dividend will be entitled
to elect to receive an allotment of shares credited as fully paid up
in lieu of the whole or such part of the dividend as the board of
directors may think fit, on the basis that the shares so allotted
shall be of the same class or classes as the class or classes of shares already held by the allottee. Brilliance China Automotive may also, upon the recommendation of the board
of directors, by a special resolution resolve in respect of any one particular
dividend of Brilliance China Automotive that it may be satisfied wholly in the
form of an allotment of shares credited as fully paid up without offering any
right to members to elect to receive a dividend in cash in lieu of an
allotment. Whenever the board of directors or Brilliance China Automotive in general
meeting has resolved that a dividend be paid or declared the board of directors
may further resolve that such dividend be satisfied wholly or in part by the
distribution of specific assets of any kind. All dividends or bonuses unclaimed for one year after having been declared
may be invested or otherwise made use of by the board of directors for the
benefit of Brilliance China Automotive until claimed and Brilliance China
Automotive may not be constituted a trustee. All dividends or bonuses
unclaimed for six years after having been declared may be forfeited by the
board of directors and must revert to Brilliance China Automotive. Procedures on liquidation A resolution that Brilliance China Automotive be wound up by the court or
be wound up voluntarily must be a special resolution. If Brilliance China
Automotive is wound up, the surplus assets remaining after payment to all
creditors are to be divided among the members in proportion to the capital paid
up on the shares held by them respectively, and if the surplus assets are
insufficient to repay the whole of the paid up capital, they are to be
distributed so that, as nearly as may be, the losses shall be borne by the
members in proportion to the capital paid up on the shares held by them
respectively, all subject to the rights of any shares issued on special terms
and conditions. If Brilliance China Automotive is wound up (whether the liquidation is
voluntary or by the court) the liquidator may, with the sanction of a special
resolution, divide among the members in specie or kind the whole or any part of
the assets of Brilliance China Automotive and whether the assets consist of
property of one kind or consists of properties of different kinds and the
liquidator may, for such purposes, set such value as he deems fair upon any one
or more class or classes of property to be divided and may determine how such
division is to be carried out as between the members or different classes of
members and the members within each class. With the like sanction, the
liquidator may vest any part of the assets in trustees upon such trusts for the
benefit of members as the liquidator but so that no member shall be compelled
to accept any shares or other assets upon which there is a liability. Transfer of shares Subject to the Companies Act, all transfers of shares must be effected by
transfer in writing in the usual or common form or in any other form acceptable
to the board of directors and may be under hand or by means of mechanically
imprinted signatures or such other manner as the board of directors may
approve. An instrument of transfer must be executed by or on behalf of the
transferor and by or on behalf 76




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of the transferee and the transferor, providing that the board may
dispense with the execution of the instrument of transfer by the transferee in
any case in which it thinks fit, in its absolute discretion to do so, shall be
deemed to remain the holder of the share until the name of the transferee is
entered in the register of members. The board of directors may, in its absolute discretion, transfer any share
upon the principal register to any branch register or any share on any branch
register to the principal register or any other branch register. Unless the board of directors otherwise agrees, no shares on the principal
register shall be transferred to any branch register nor shall shares on any
branch register be transferred to the principal register or another branch
register. All transfers and other documents of title must be lodged for
registration and registered, in the case of shares on a branch register, at the
relevant registration office and, in the case of shares on the principal
register, at the transfer office in Bermuda. The board of directors may in its absolute discretion and without
assigning any reason, refuse to register any transfer of any shares (not being
fully paid shares) to a person of whom it does not approve, or any share issued
under any share option scheme for employees upon which a restraint on transfer
still applies, and it may refuse to register the transfer of any shares (not
being fully paid shares) on which Brilliance China Automotive has a lien. The
board of directors may also refuse to register a transfer of shares (whether
fully paid or not) in favor of more than four persons jointly. If the board of
directors refuses to register a transfer, it will within two months after the
date on which the transfer was lodged with Brilliance China Automotive send to
the transferor and transferee notice of the refusal. The board of directors may decline to recognize any instrument of transfer
unless:  
    
    the sum, if any, as the board of directors shall determine to
be paid to Brilliance China Automotive has been paid;
    
    the shares are free of any lien in favor of Brilliance China
Automotive;
    
    the instrument of transfer is properly stamped, is in respect
of only one class of share and is lodged at the relevant
registration or transfer office accompanied by the relevant share
certificate(s);
    
    other evidence as the board of directors may reasonably
require to show the right of the transferor to make the transfer has
been presented (particularly if the instrument of transfer is
executed by some other person on his behalf); and
    
    in some circumstances, the permission of the Bermuda Monetary
Authority has been obtained. The registration of transfers may, on giving notice by advertisement in an
appointed newspaper in Bermuda and in one or more newspapers circulating in
Hong Kong, be suspended at times and for periods as the board of directors may
determine and either generally or in respect of any class of shares. The
register of members must not be closed for more than thirty days in any year. 77




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Recent Amendments and Proposed Amendments to the Bye-laws Recent Amendments In 2003, the Companies Act 1981 of Bermuda (as amended) was amended to
permit companies to offer their shareholders a summary financial report in
place of the complete annual report and accounts. On February 17, 2002, The
Stock Exchange of Hong Kong Limited announced amendments to the Rules Governing
the Listing of Securities on The Stock Exchange of Hong Kong Limited, or the
Listing Rules, which will allow companies to distribute to their shareholders a
summary financial report instead of the longer report. On February 5, 2002,
The Stock Exchange of Hong Kong Limited also announced amendments to its
Listing Rules that will allow companies to distribute corporate communications
to their shareholders via electronic means. As a result of these amendments, the board of directors of Brilliance
China Automotive amended the Bye-laws of Brilliance China Automotive to permit
Brilliance China Automotive to take advantage of these changes to the Listing
Rules by allowing shareholders to choose to receive a summary financial report
in place of the longer, complete annual report and to receive copies of
corporate communications by electronic means or by relying on the versions of
those documents published on Brilliance China Automotives website instead of
printed copies of such documents. These amendments were approved by the shareholders of Brilliance China
Automotive by way of a special resolution at the special general meeting held
on June 28, 2002. Proposed Amendments The directors of Brilliance China Automotive propose to amend the Bye-laws
in order to reflect certain recent amendments to the Listing Rules, which came
into effect on March 31, 2004. A circular containing details of the proposed
amendments to the Bye-laws and a notice of the annual general meeting was
despatched to shareholders of Brilliance China Automotive on April 29, 2004. A
brief description of the proposed amendments to the Bye-laws is as follows:  
    
    Bye-law 1(A): To amend the existing definition of
associates and Clearing House and to add a new definition
for subsidiaries
    
    Bye-law 70: To reflect the requirement of voting by poll in
respect of certain transactions under the Listing Rules
    
    Bye-law 76: To provide for circumstances under which
shareholders are required to abstain from voting or restricted to
vote for or against any particular resolution as required by the
revised Appendix 3 to the Listing Rules
    
    Bye-laws 98(E), 98(H) and 98(K): To be consistent with the
provisions of the revised Appendix 3 to the Listing Rules so that,
subject to certain exceptions, a director shall abstain from voting
at the board meeting on any contract or arrangement in which he
and/or any of his associates has/have a material interest nor shall
he be counted towards the quorum of the relevant board meeting
    
    Bye-law 103: To be consistent with the revised Appendix 3 to
the Listing Rules which stipulates the minimum seven-day period for
lodgment by a shareholder of the notice to 78




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nominate a director and the nomination shall commence no earlier than
the day after the despatch of the notice of the general meeting
appointed for such election and end no later than seven days before
the date of such general meeting In light of the numerous changes listed above as well as those from prior
amendments, the directors also propose to adopt a fully restated set of the
Bye-laws incorporating all previous amendments thereto passed at the special
general meeting held on June 28, 2002 and the proposed amendments above, in
substitution for the existing Bye-laws. The proposed amendments to the
Bye-laws and the adoption of a restated set of Bye-laws are subject to the
approval of the shareholders by way of special resolutions at the annual
general meeting to be held on June 25, 2004. Material Contracts The following contracts, not being contracts in the ordinary course of
business, have been entered into by Brilliance China Automotive and/or its
subsidiaries within the two years preceding the date of this annual report and
are or may be material.  (a)
    
    Agreement, dated December 1, 2002, between Xing Yuan Dong and
an affiliated company relating to Xing Yuan Dongs disposal of its
interest in Zhengtong Holdings Co., Ltd.;(b)
    
    Capital Increase Agreement dated January 10, 2003 between
Brilliance China Automotive Holdings Limited and Shenyang JinBei
Automotive Company Limited relating to the capital increase of
Shenyang Brilliance JinBei Automobile Co., Ltd.;(c)
    
    Joint Venture Contract dated March 27, 2003 between SJAI and
BMW Holding relating to the proposed joint venture for the
production and sale of BMW-designed and branded sedans in China;(d)
    
    Agreement dated April 28, 2003 between Shenyang Xinjinbei
Investment and Development Co., Ltd. and Shenyang JinBei Automobile
Industry Company Limited relating to the acquisition of 9% of the
registered capital of SJAI;(e)
    
    Purchase Agreement, dated October 28, 2003, between
Brilliance China Automotive Finance Ltd. (formerly, Gainfair Finance
Limited), Brilliance China Automotive and Citigroup Global Markets
Limited relating to the sale of US$200 million in zero coupon
guaranteed convertible bonds due 2008 by Brilliance China Automotive
Finance Ltd.;(f)
    
    Trust Deed, dated November 28, 2003, between Brilliance China
Automotive Finance Ltd., Brilliance China Automotive and The Bank of
New York relating to the zero coupon guaranteed convertible bonds
due 2003 issued by Brilliance China Automotive Finance Ltd.;(g)
    
    Amended Joint Venture Agreement dated February 26, 2003
between Brilliance China Automotive Holdings Limited and Shenyang
JinBei Automotive Company Limited relating to Shenyang Brilliance
JinBei Automobile Co., Ltd.;(h)
    
    Equity Transfer Agreement dated December 16, 2003 between (i)
Shenyang Automobile Industry Asset Management Company Limited
(SAIAM), (ii) Shenyang XingYuanDong Automobile Component Co., Ltd.
(Xing Yuan Dong) and (iii) Shenyang JinBei Automotive Industry Co.,
Ltd. (SJAI), regarding the transfer of SAIAMs 9% and 1% ownership
interests in Shenyang Xinjinbei Investment and Development Co. Ltd.
(SXID) to Xing Yuan Dong and SJAI, respectively.; 79




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(i)
    
    Equity Transfer Contract dated December 29, 2003 between
Shenyang Industry State-owned Asset Management Co., Ltd., SJAI and
SXID regarding transfer of 90% and 10% of the equity interest of
SAIAM to SJAI and SXID, respectively;(j)
    
    Equity Transfer Contract dated December 29, 2003 between
Shenyang JinSheng Enterprise Group Co., Ltd. (SJEG) and SXID,
regarding the transfer of SJEGs 10% ownership interest in SXI to
SXID;(k)
    
    Equity Transfer Contract dated December 29, 2003 between
Shenyang Automobile Industry Equity Investment Co., Ltd. (SAIEIC)
and SJAI regarding the transfer of SAIEICs 90% ownership interest
in SXI to SJAI; and(l)
    
    Letter of Guarantee dated as of December 2, 2003 between
Brilliance China Automotive and BMW Holding, regarding Brilliance
China Automotives guarantee of the performance by SJAI of its
obligations under the joint venture contract; Exchange Controls Brilliance China Automotive has been designated as a non-resident for
exchange control purposes by the Bermuda Monetary Authority, whose permission
was obtained for the issue of the ordinary shares and ADSs of Brilliance China
Automotive to persons not resident in Bermuda for exchange control purposes. The transfer of shares between persons regarded as residents outside
Bermuda for exchange control purposes and the issue of shares to or by such
persons may be effected without specific consent under the Exchange Control Act
1972 of Bermuda (as amended) and regulations thereunder. Issues and transfers
of shares involving any person regarded as resident in Bermuda for exchange
control purposes require specific prior approval under the Exchange Control
Act. There are no limitations on the rights of non-Bermuda owners of Brilliance
China Automotives capital stock to hold or vote their shares. Because
Brilliance China Automotive has been designated as a non-resident for Bermuda
exchange control purposes, there are no restrictions on its ability to transfer
funds in and out of Bermuda or to pay dividends to United States residents who
are holders of Brilliance China Automotives ordinary shares, other than in
respect of local Bermuda currency. In accordance with Bermuda law, share certificates are only issued in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, Brilliance
China Automotive is not bound to investigate or incur any responsibility in
respect of the proper administration of any such estate or trust. Brilliance China Automotive will take no notice of any trust applicable to
any of its shares whether or not it had notice of such trust. 80




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As an exempted company, Brilliance China Automotive is exempted from
Bermuda laws that restrict the percentage of share capital that may be held by
non-Bermudians, but as an exempted company, Brilliance China Automotive may not
participate in certain business transactions, including:  
    
    the acquisition or holding of land in Bermuda (except that
required for its business and held by way of lease or tenancy for
terms of not more than 50 years) without the express authorization
of the Bermuda legislature;
    
    the taking of mortgages on land in Bermuda to secure an
amount in excess of BD$50,000 without the consent of the Minister of
Finance of Bermuda;
    
    the acquisition of securities secured on any land in Bermuda,
other than certain types of Bermuda government securities; or
    
    the carrying on of business of any kind in Bermuda, except in
furtherance of the business of Brilliance China Automotive carried
on outside Bermuda or under a license granted by the Minister of
Finance of Bermuda. The Bermuda government actively encourages foreign investment in
exempted entities such as Brilliance China Automotive that are based in
Bermuda but do not operate in competition with local business. In addition to
having no restrictions on the degree of foreign ownership, Brilliance China
Automotive is subject neither to taxes on its income or dividends nor to any
foreign exchange controls in Bermuda. In addition, there is no capital gains
tax in Bermuda, and profits can be accumulated by Brilliance China Automotive,
as required, without limitation. The Chinese government imposes control over its foreign currency reserves
in part through direct regulation of the conversion of Renminbi into foreign
exchange and through restrictions on foreign trade. Effective January 1, 1994,
the dual foreign exchange system in China was abolished in accordance with the
notice of the Peoples Bank of China concerning future reform of the foreign
currency control system issued December 1993. The conversion of Renminbi into
U.S. dollars in China currently must be based on the Peoples Bank of China
rate. The Peoples Bank of China rate is set based on the previous days
Chinese interbank foreign exchange market rate and with reference to current
exchange rates on the world financial markets. 81




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Taxation Income tax Brilliance China Automotive is an exempted company incorporated in Bermuda
with limited liability, but conducts its operations primarily in China. In
Bermuda, there are no taxes on profits, income or dividends, nor is there any
capital gains tax, estate duty or death duty. Furthermore, Brilliance China
Automotive has received from the Minister of Finance of Bermuda under the
Exempted Undertakings Tax Protection Act of 1966, as amended, an undertaking
that, in the event that Bermuda enacts any legislation imposing tax computed on
profits or income, or computed on any capital asset, gain or appreciation, or
any tax in the nature of estate duty or inheritance tax, then the imposition of
such tax shall not be applicable to Brilliance China Automotive or any of its
operations, or the shares, debentures or other obligations of Brilliance China
Automotive, until March 28, 2016. This assurance does not, however, prevent
the imposition of any such tax or duty on such persons as are ordinarily
resident in Bermuda and holding such shares, debentures or obligations of
Brilliance China Automotive or on land in Bermuda leased or let to Brilliance
China Automotive. As an exempted company, Brilliance China Automotive is liable to pay to
the Bermuda government an annual government fee calculated on a sliding-scale
basis by reference to its assessable capital, that is, its authorized capital
plus any share premium as at August 31st of the preceding year. On the basis
that Brilliance China Automotives assessable capital exceeds US$100,000,001,
but does not exceed US$500,000,000, Brilliance China Automotive is required to
pay the government fee at an annual rate of US$16,695. Brilliance China Automotive also provides for Hong Kong profits tax at the
rate of 17.5% based on estimated assessable profit arising in Hong Kong. Shenyang Automotive is subject to state and local income taxes in China at
standard rates of 15% and 3%, respectively, based on the taxable income
reported in its statutory financial statements in accordance with the relevant
state and local income tax laws applicable to Sino-foreign joint venture
enterprises. Shenyang Automotive is exempted from the local income tax of 3% as
it was designated as a Technologically-Advanced Enterprise. As a result,
Shenyang Automotives effective tax rate was 15% for the years 2001, 2002, and
2003. Ningbo Yuming is subject to state and local income taxes in China at
standard rates of 15% and 1.5%, respectively, based on the taxable income
reported in its statutory financial statements in accordance with the relevant
state and local income tax laws applicable to foreign-invested enterprises.
Under the relevant income tax laws in China, Ningbo Yuming was fully exempted
from state enterprise income tax for two years starting from the year ended
December 31, 1997, followed by a 50% reduction of enterprise income tax for the
following three years. In addition, Ningbo Yuming is also fully exempted from
local enterprise income tax for the same five-year period. This tax holiday
expired at the end of 2001. As a result, Ningbo Yumings effective income tax
rate was 7.5% in 2001 and 16.5% in 2002 and 2003. Xing Yuan Dong is subject to state and local income taxes in China at
standard rates of 30% and 3%, respectively, based on the taxable income
reported in its statutory financial statements in accordance with the relevant
state and local income tax laws applicable to foreign-invested enterprises.
During 1999, Xing Yuan Dong received official designation by the local tax
authorities as a New and Technologically-Advanced Enterprise. In 2001, Xing
Yuan Dong was further designated by the local authority to be a
foreign-invested enterprise engaged in manufacturing activities. As a result,
the effective combined state and local enterprise income tax rate for Xing Yuan
Dong was 7.5% in 2001, 2002 and 2003. 82




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Mianyang Brilliance Ruian is subject to state and local income taxes in
China at standard rates of 30% and 3%, respectively, based on the taxable
income reported in its statutory financial statements in accordance with
enterprise income tax laws. In 2001, Mianyang Brilliance Ruian received
official designation by the local tax authority as a foreign-invested
enterprise engaged in manufacturing activities. Under relevant income tax laws
in China, Mianyang Brilliance Ruian is exempted from state and local enterprise
income tax for two years starting from the first profitable year followed by a
50% reduction of enterprise income tax for the next three years. As a result,
the effective tax rate for Mianyang Brilliance Ruian was 15% in 2003 and
Mianyang Brilliance Ruian was exempted from income tax in 2001 and 2002. Dongxing Automotive is subject to state and local income taxes in China at
standard rates of 30% and 3%, respectively, based on the taxable income
reported in its statutory financial statements in accordance with enterprise
income tax laws applicable to New and Technologically-Advanced Enterprises.
In addition, Dongxing Automotive also received official designation by the
local tax authority as a foreign-invested enterprise engaged in manufacturing
activities. Under relevant income tax laws in China, Dongxing Automotive is
exempted from state enterprise income tax for two years starting from the first
profitable year in 1999 followed by a 50% reduction of state enterprise income
tax for the next three years. In addition, Dongxing Automotive is also fully
exempted from local enterprise income tax for the same five-year period. As a
result, the effective tax rate for Dongxing Automotive was 7.5% in 2001, 2002
and 2003. Other subsidiaries in China are subject to state and local income taxes
within China at standard rates of 30% and 3%, respectively, based on the
taxable income reported in their statutory financial statements in accordance
with the relevant state and local income tax laws applicable to
foreign-invested enterprises. Value Added Tax and Consumption Tax Under the Provisional Regulations on Value Added Tax in the Peoples
Republic of China, which came into effect on January 1, 1994, all subsidiaries
are subject to value added tax, which is the principal indirect tax on the sale
of tangible goods. The general value added tax rate applicable to sales and
purchases of minibuses, sedans and automotive components in China is 17%.
Sales of minibuses and sedans are also subject to consumption tax at standard
rates ranging from 3% to 8%. Customs Duties See Item 11  Quantitative and Qualitative Disclosures About Market Risk
 Tariff Reductions for a discussion of the import tariffs that generally
apply to Brilliance China Automotive and its subsidiaries. As of December 31, 2002, Shenyang Automotive had placed bank security
deposits amounting to approximately Rmb 48 million and issued
bank guarantees of Rmb 50 million at the request of the
General Administration of Customs, pending an assessment of the eligibility of
exemptions from VAT and custom duties for certain imported fixed assets. During
2003, Shenyang Automotive agreed with the relevant governmental authorities to
pay custom duties and VAT for those imported fixed assets to be used by
Shenyang Automotive while the imported fixed assets to be sold to the BMW joint
venture for their own use were to be exempt from custom duty and VAT and the
governmental authorities agreed to release all of the bank security deposits
and bank guarantees. 83




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Documents on Display Brilliance China Automotive is subject to the informational requirements
of the U.S. Securities and Exchange Act of 1934, as amended, or the Exchange
Act, and, in accordance with the Exchange Act, Brilliance China Automotive
files annual reports on Form 20-F within six months of its fiscal year end, and
submit other reports and information under cover of Form 6-K with the SEC. You
may read and copy this information at the SECs public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Recent filings and reports are
also available free of charge through the EDGAR electronic filing system at
www.sec.gov. You can also request copies of the documents, upon payment of a
duplicating fee, by writing to the public reference section of the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference room or accessing documents through EDGAR. As a foreign
private issuer, Brilliance China Automotive is exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements to
shareholders. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Exchange Rates In the year ended December 31, 2003, approximately 4.4%, 3.5% and 0.9% of
Shenyang Automotives costs of sales were denominated in Japanese Yen, U.S.
dollars and Euros, respectively. These costs related primarily to the purchase
and importation of equipment and components from foreign suppliers. Shenyang
Automotive pays a Japanese Yen price for the components and spare parts
imported from Toyota through Japanese Yen-denominated letters of credit issued
by the Bank of China and other Chinese banks. Because the Renminbi is not
directly convertible into Japanese Yen, these letters of credit are funded by
Shenyang Automotive in U.S. dollars. However, because Shenyang Automotives
products are sold in China primarily in Renminbi transactions, its revenues and
profits are predominantly in Renminbi, requiring Shenyang Automotive to convert
a portion of its Renminbi earnings into U.S. dollars and Euros. Accordingly,
Shenyang Automotive is exposed to Renminbi/U.S. dollar exchange rate risk, U.S.
dollar/Japanese Yen exchange rate risk and U.S. dollar/Euro exchange rate risk. The value of the Japanese Yen and the Euro relative to the U.S. dollar
have both increased in 2003. The U.S. dollar/Renminbi exchange rate has
remained stable over the past year and the prospect of a devaluation of the
Renminbi has been repeatedly ruled out by the Chinese government. In fact,
countries such as Japan and the United States have recently been lobbying the
Chinese government to allow the Renminbi to appreciate. An appreciation of the
Renminbi versus the Japanese Yen, U.S. dollar or Euro would make purchases of
foreign-produced components and payments denominated in foreign currency less
expensive for Shenyang Automotive in Renminbi terms, thereby marginally
improving its results of operations. A devaluation of the Renminbi would have
the opposite effect. While there can be no assurance that the exchange rates
will continue their current trends or that a devaluation or appreciation of the
Renminbi will not occur, Brilliance China Automotive does not believe that such
occurrences would, in any event, have any material adverse effect on Brilliance
China Automotives earnings. Other than US$200 million zero coupon convertible bonds issued in 2003,
Brilliance China Automotive and its subsidiaries currently have no foreign
currency-denominated borrowings from third parties, but have outstanding
letters of credit of Yen 92.3 million and US$2.0 million and Euro 0.2 million
from local banks. Brilliance China Automotive also advanced shareholders
loans to its subsidiaries in the amounts of approximately HK$1,704 million and
US$208 million in 2003. 84




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Since Brilliance China Automotive does not believe that exchange rate
fluctuations have any material effect on the overall financial performance of
Brilliance China Automotive, and the amount of foreign currency that it
requires is not significant, Brilliance China Automotive does not enter into
any hedging transactions with respect to its exposure to foreign currency
movements. Interest Rates Funds not required by Brilliance China Automotive in the short term are
kept as temporary demand or time deposits in commercial banks. Brilliance
China Automotive does not hold any market risk-sensitive instruments for
trading purposes. As of December 31, 2003, Brilliance China Automotive had no
bank loans outstanding. The average annual rate for discounting notes
receivables with banks in 2003 was approximately 0.25% per month, which rate is
fixed separately for each transaction. Brilliance China Automotive did not
have any variable rate loans or commitments outstanding as of December 31,
2003. For the year ended December 31, 2003, Brilliance China Automotives
interest income was Rmb 52.7 million (US$6.4 million) and its interest expense
was Rmb 167.1 million (US$20.2 million). A 10% change in interest rates would
result in a change in interest income of approximately Rmb 5.3 million (US$0.6
million) and a change in interest expense of approximately Rmb 16.7 million
(US$2.0 million). Tariff Reductions The Chinese government imposes restrictions, quotas and tariffs on the
import of foreign-made motor vehicles, as well as motor vehicle components.
However, as a result of Chinas admission to the WTO, which regulates trading
and tariffs among its signatory states, in November 2001, China committed to
reducing its import restrictions on motor vehicles and motor vehicle
components. In addition, China will be required to conform its import tariffs
to the uniform tariffs under the WTO. Effective January 1, 2002, China has
reduced its import tariffs on motor vehicles and automotive components from
between 80% to 100% and between 18% to 40%, respectively, to between 43.8% to
50.7% and between 14% to 31.4%, respectively. This range was lowered further
to between 4.8% and 25% for automotive components effective January 1, 2003.
In addition, tariffs on vehicles with nine seats or less and engine sizes of
three liters or below fell from 43.9% in 2002 to 38.2% for 2003, while tariffs
on vehicles with more than nine seats and engines of more than three liters
decreased from 50.7% in 2002 to 43.0% for 2003. All of these tariffs levels
are scheduled to be further reduced by 2006. Although lower tariffs and
reduced import restrictions may benefit Brilliance China Automotive in terms of
lower cost of imported components, lower tariffs and reduced import
restrictions could also lead to a substantial increase in the number of
minibuses, sport utility vehicles, sedans and other motor vehicles imported
into China, thereby significantly increasing competition in Brilliance China
Automotives current and proposed markets. Except as described above, Brilliance China Automotives management
believes that at present and in its normal course of business, Brilliance China
Automotive is not subject to any other market-related risks. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 85




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PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Material Modifications to the Rights of Security Holders None. Use of Proceeds Not applicable. 
 ITEM 15. DISCLOSURE CONTROLS AND PROCEDURES The Chief Executive Officer and Chief Financial Officer of Brilliance
China Automotive are responsible for establishing and maintaining disclosure
controls and procedures (as defined in the Exchange Act Rules 13a-14(c) and
15d-14(c)). Within 90 days prior to the date of this annual report, the
management of Brilliance China Automotive carried out an evaluation, under the
supervision and with the participation of its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of Brilliance China Automotives
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, they have concluded that these disclosure controls and
procedures are effective to ensure that material information required to be
included in our periodic SEC reports relating to Brilliance China Automotive,
is made known to them. There have been no significant changes in internal controls, or in factors
that could significantly affect internal controls, subsequent to the date the
Chief Executive Officer and Chief Financial Officer completed their evaluation. 
 ITEM 16. [RESERVED] 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT The Board of Directors of Brilliance China Automotive has determined that
Brilliance China Automotive does not have an audit committee financial expert,
as defined by the SEC, serving on its audit committee. Brilliance China
Automotive has commenced a search for a director who would serve as the audit
committee financial expert on the audit committee, however as of the date of
this annual report, no suitable candidate has been identified. 86




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ITEM 16B. CODE OF ETHICS Brilliance China Automotive has not adopted a code of ethics that applies
to the principal executive officer, the principal financial officer and the
principal accounting officer or controller. However, the board of directors of
Brilliance China Automotive has adopted or follows the following written
standards for purposes of corporate governance:  
    
    The Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong, including the Model Code for Securities
Transactions by Directors of Listed Issuers and the Code of Best
Practice;
    
    Non-Statutory Guidelines on Directors Duties issued by the
Hong Kong Companies Registry in January 2004;
    
    Guide for Independent Non-Executive Directors issued by The
Hong Kong Institute of Directors in 2000; and
    
    Guidelines for Directors issued by The Hong Kong Institute of
Directors in 1995. 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES PricewaterhouseCoopers acted as Brilliance China Automotives independent
auditors for the fiscal years ended December 31, 2003 and 2002. The chart below
sets forth the total amount billed to us by PricewaterhouseCoopers. Total Fees2003
    
    2002Rmb '000
    
    Rmb '000Audit fees
    
    
    3,807
    
    
    
    2,664Audit-related fees
    
    
    662
    
    
    
    952Tax fees
    
    
    11
    
    
    
    11Other fees
    
    
    248
    
    
    
    Total
    
    
    4,728
    
    
    
    3,627
 Audit Fees Audit fees are the aggregate fees billed by PricewaterhouseCoopers for the
annual financial statement audit and other procedures required to be performed
by the auditors so as to form an opinion on Brilliance China Automotives
annual financial statements. Audit fees also include fees billed in connection
with the issuance of comfort letters. Audit-Related Fees Audit-related fees are the aggregate fees billed by PricewaterhouseCoopers
in relation to agreed-upon procedures performed on Brilliance China
Automotives interim financial statements and internal control reviews. 87




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Tax Fees Tax fees are the aggregate fees billed by PricewaterhouseCoopers for tax
compliance on Hong Kong profits tax matters. Other Fees Other fees are the aggregate fees billed by PricewaterhouseCoopers in
relation to the delivery of a training session to Brilliance China Automotive
on high-level risk and control assessment. Pre-Approval Policies and Procedures As
part of its duties, the Audit Committee considers the appointment of
the external auditor and the audit fee and discusses with the
external auditor, before the audit commences, the nature and scope of
the audit. The Audit Committee pre-approves the fees and services
provided by the external auditor through written resolutions
presented to the Board of Directors. 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE Not applicable. 
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not applicable. 88




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PART III 
 ITEM 17. FINANCIAL STATEMENTS Brilliance China Automotive has elected to provide the financial
statements and related information specified in Item 18 in lieu of Item 17. 
 ITEM 18. FINANCIAL STATEMENTS See pages F-1 to F-45 following Item 19. 
 ITEM 19. EXHIBITS The following exhibits are furnished along with annual report or are
incorporated by reference as indicated.  1.1
    
    Bye-Laws of Brilliance China Automotive, as adopted on September 18, 1999.*1.2
    
    Amendment to Bye-Laws of Brilliance China Automotive, dated June 28, 2002.***4.1
    
    Service Agreement for Executive Director, dated August 21, 2000 between Brilliance
China Automotive and each of its directors in relation to the terms and conditions
of the executive directors employment.**4.2
    
    Capital Increase Agreement dated January 10, 2003 between Brilliance China
Automotive Holdings Limited and Shenyang JinBei Automotive Company Limited relating
to the capital increase of Shenyang Brilliance JinBei Automobile Co., Ltd.***4.3
    
    Amended Joint Venture Agreement dated February 26, 2003 between Brilliance China
Automotive and Shenyang JinBei Automotive Company Limited relating to Shenyang
Brilliance JinBei Automobile Co., Ltd.***4.4
    
    Joint Venture Contract dated March 27, 2003 between SJAI and BMW Holding, relating
to the proposed joint venture for the production and sale of BMW-designed and
branded sedans in China.***4.5
    
    Agreement dated April 28, 2003 between Shenyang Xinjinbei Investment and Development
Co., Ltd. and Shenyang JinBei Automobile Industry Company Limited relating to the
acquisition of 9% of the registered capital of SJAI.***4.6
    
    Purchase Agreement, dated October 28, 2003, between Brilliance China Automotive
Finance Ltd. (formerly, Gainfair Finance Limited), Brilliance China Automotive and
Citigroup Global Markets Limited relating to the sale of US$200 million in zero
coupon guaranteed convertible bonds due 2008 by Brilliance China Automotive Finance
Ltd.4.7
    
    Trust Deed, dated November 28, 2003, between Brilliance China Automotive Finance
Ltd., Brilliance China Automotive and The Bank of New York relating to the zero
coupon guaranteed convertible bonds due 2003 issued by Brilliance China Automotive
Finance Ltd. 89




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4.8
    
    English translation of Equity Transfer Agreement dated December 16, 2003 between (i)
Shenyang Automobile Industry Asset Management Company Limited (SAIAM), (ii) Shenyang
XingYuanDong Automobile Component Co., Ltd. (Xing Yuan Dong) and (iii) Shenyang
JinBei Automotive Industry Co., Ltd. (SJAI) regarding the transfer of SAIAMs 9% and
1% ownership interests in Shenyang Xinjinbei Investment and Development Co. Ltd.
(SXID) to Xing Yuan Dong and SJAI, respectively.4.9
    
    English translation of Equity Transfer Agreement dated December 29, 2003 between
Shenyang Industry State-owned Asset Management Co., Ltd., SJAI and SXID regarding
transfer of 90% and 10% of the equity interest of SAIAM to SJAI and SXID,
respectively.4.10
    
    English translation of Equity Transfer Agreement dated December 29, 2003 between
Shenyang JinSheng Enterprise Group Co., Ltd. (SJEG) and SXID regarding the transfer
of SJEGs 10% ownership interest in SXI to SXID.4.11
    
    English translation of Equity Transfer Agreement dated December 29, 2003 between
Shenyang Automobile Industry Equity Investment Co., Ltd. (SAIEIC) and SJAI regarding
the transfer of SAIEICs 90% ownership interest in SXI to SJAI.4.12
    
    Letter of Guarantee dated as of December 2, 2003 between Brilliance China Automotive
and BMW Holding regarding Brilliance China Automotives guarantee of the performance
by SJAI of its obligations under the joint venture contract.7.1
    
    Statement explaining how certain ratios were calculated in the annual report.8.1
    
    List of significant subsidiaries, jointly controlled entities and associated
companies of Brilliance China Automotive as of December 31, 2003.12.1
    
    Section 906 Certification of the Chief Executive Officer and Chief Financial Officer.13.1
    
    Section 302 Certification of the Chief Executive Officer.13.2
    
    Section 302 Certification of the Chief Financial Officer.   *
    
    Incorporated by reference from the Registrants Annual Report on Form 20-F filed
with the SEC on June 27, 2000.**
    
    Incorporated by reference from the Registrants Annual Report on Form 20-F filed
with the SEC on June 27, 2002.***
    
    Incorporated by reference from the Registrants Annual Report on Form 20-F filed
with the SEC on June 26, 2003. 90




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INDEX TO FINANCIAL STATEMENTS BRILLIANCE CHINA AUTOMOTIVE HOLDINGS LIMITED AND SUBSIDIARIES PageReport of Independent Auditors of PricewaterhouseCoopers, dated April 22, 2004
    
    
    F-2Report of Independent Auditors of Arthur Andersen & Co, dated April 25, 2002
    
    
    F-3Consolidated Statements of Income and Comprehensive Income for the years ended December
31, 2003, 2002 and 2001
    
    
    F-4Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and
2001
    
    
    F-7Consolidated Statements of Changes in Shareholders Equity for the years ended December
31, 2003, 2002 and 2001
    
    
    F-11Notes to Consolidated Financial Statements
    
    
    F-12
 F-1




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Report of Independent Auditors To the Shareholders of
Brilliance China Automotive Holdings Limited We have audited the accompanying consolidated balance sheets of Brilliance
China Automotive Holdings Limited (a Bermuda corporation) and its subsidiaries
(the Group) as of December 31, 2003 and 2002, and the related consolidated
statements of income and comprehensive income, cash flows and changes in
shareholders equity for the years ended December 31, 2003 and 2002. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of the Group for the year ended December
31, 2001 were audited by other independent auditors who have ceased operations.
Those independent auditors expressed an unqualified opinion on those statements
in their report dated April 25, 2002. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. In our opinion, the 2003 and 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Brilliance China Automotive Holdings Limited and its subsidiaries as of
December 31, 2003 and 2002, and the results of their operations and their cash
flows for the years ended December 31, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America. PricewaterhouseCoopersCertified Public Accountants Hong Kong,
April 22, 2004 F-2




---



##### Table of Contents



Report of Independent
Auditors (Continued) The following report is a copy of a report previously issued by Arthur Andersen
& Co and has not been reissued by
Arthur Andersen & Co. To the Shareholders of
Brilliance China Automotive Holdings Limited We have audited the accompanying consolidated balance sheets of Brilliance
China Automotive Holdings Limited (a Bermuda corporation) and its subsidiaries
as of December 31, 2001 and 2000, and the related consolidated statements of
income and comprehensive income, cash flows and changes in shareholders equity
for the years ended December 31, 2001, 2000 and 1999, expressed in Chinese
Renminbi (RMB). These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. In our opinion, the
financial statements referred to above present fairly, in all material
respects, the financial position of Brilliance China Automotive Holdings
Limited and its subsidiaries as of December 31, 2001* and 2000*, and the
results of their operations and their cash flows for the years ended December
31, 2001, 2000* and 1999*, in conformity with generally accepted accounting
principles in the United States of America. ARTHUR ANDERSEN &
CO
Hong Kong April 25, 2002 The consolidated balance sheets as of December 31, 2001 and 2000 and the
consolidated statements of income and cash flows for the years ended December
31, 2000 and 1999 are not required to be presented in the 2003 annual report. F-3




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##### Table of Contents



Consolidated Statements of Income and Comprehensive IncomeFor the years ended December 31, 2003, 2002 and 2001 Year ended December 31,2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000(except for share and ADS data)Sales to third parties
    
    
    7,797,054
    
    
    
    4,636,347
    
    
    
    2,552,780Sales to affiliated companies
    
    
    2,312,503
    
    
    
    2,683,108
    
    
    
    3,665,656Total sales
    
    
    10,109,557
    
    
    
    7,319,455
    
    
    
    6,218,436Cost of sales
    
    
    (7,727,125
    )
    
    
    (5,411,308
    )
    
    
    (4,307,988
    )Gross profit
    
    
    2,382,432
    
    
    
    1,908,147
    
    
    
    1,910,448Selling, general and administrative expenses
    
    
    (1,410,067
    )
    
    
    (1,067,154
    )
    
    
    (673,391
    )Interest expense
    
    
    (167,111
    )
    
    
    (171,286
    )
    
    
    (178,028
    )Interest income
    
    
    52,672
    
    
    
    43,617
    
    
    
    110,735Equity in earnings of associated companies
and jointly controlled entities, net
    
    
    109,471
    
    
    
    138,145
    
    
    
    40,043Subsidy income
    
    
    48,497
    
    
    
    
    
    
    
    Other income (expenses), net
    
    
    78,293
    
    
    
    1,009
    
    
    
    3,456Income before taxation and minority interests
    
    
    1,094,187
    
    
    
    852,478
    
    
    
    1,213,263Income taxes
    
    
    (144,140
    )
    
    
    (146,610
    )
    
    
    (116,250
    )Minority interests
    
    
    (169,205
    )
    
    
    (95,403
    )
    
    
    (209,936
    )Net income
    
    
    780,842
    
    
    
    610,465
    
    
    
    887,077Basic earnings per share
    
    
    RMB0.2130
    
    
    
    RMB0.1665
    
    
    
    RMB0.2510Basic earnings per ADS
    
    
    RMB21.30
    
    
    
    RMB16.65
    
    
    
    RMB25.10Diluted earnings per share
    
    
    RMB0.2116
    
    
    
    RMB0.1665
    
    
    
    RMB0.2510Diluted earnings per ADS
    
    
    RMB21.16
    
    
    
    RMB16.65
    
    
    
    RMB25.10Weighted average number of shares outstanding
    
    
    3,666,539,983
    
    
    
    3,666,052,900
    
    
    
    3,533,552,900Weighted average number of ADSs outstanding
    
    
    36,665,400
    
    
    
    36,660,529
    
    
    
    35,335,529Net income adjusted for the dilutive effect
of convertible bonds
    
    
    783,515
    
    
    
    N/A
    
    
    
    N/AWeighted average number of shares
outstanding adjusted for dilutive effect of
stock options and convertible bonds
    
    
    3,702,398,310
    
    
    
    3,666,052,900
    
    
    
    3,533,552,900Weighted average number of ADSs outstanding
adjusted for dilutive effect of stock
options and convertible bonds
    
    
    37,023,983
    
    
    
    36,660,529
    
    
    
    35,335,529
 The accompanying notes are an integral part of these consolidated statements of
income and comprehensive income. F-4




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##### Table of Contents



Consolidated Balance SheetsAs of December 31, 2003 and 2002 2003
    
    2002RMB000
    
    RMB000AssetsCurrent assetsCash and cash equivalents
    
    
    1,832,298
    
    
    
    1,289,150Short-term bank deposits
    
    
    1,670,596
    
    
    
    773,389Pledged short-term bank deposits
    
    
    2,264,584
    
    
    
    1,350,000Deferred expenses  current portion
    
    
    8,920
    
    
    
    Notes receivable
    
    
    827,452
    
    
    
    469,744Notes receivable from affiliated companies
    
    
    527,175
    
    
    
    212,985Accounts receivable, net
    
    
    90,017
    
    
    
    15,275Due from affiliated companies
    
    
    774,188
    
    
    
    774,066Inventories, net
    
    
    1,228,364
    
    
    
    788,365Other receivables
    
    
    500,887
    
    
    
    848,146Prepayments and other current assets
    
    
    318,523
    
    
    
    437,135Advances to affiliated companies
    
    
    243,482
    
    
    
    1,304,696Total current assets
    
    
    10,286,486
    
    
    
    8,262,951Property, plant and equipment
    
    
    3,863,384
    
    
    
    3,555,875Intangible assets
    
    
    1,220,476
    
    
    
    624,966Investments in associated companies and jointly controlled entities
    
    
    1,723,411
    
    
    
    919,446Investment securities
    
    
    17,305
    
    
    
    17,305Goodwill
    
    
    414,464
    
    
    
    414,464Long-term prepayment for fixed assets
    
    
    
    
    
    
    18,305Prepayment for a long-term investment
    
    
    600,000
    
    
    
    Deferred tax assets
    
    
    39,555
    
    
    
    38,041Deferred expenses  non-current portion
    
    
    34,193
    
    
    
    Long-term prepayment for rental of land
    
    
    71,972
    
    
    
    Other long-term assets
    
    
    16,990
    
    
    
    2,328Total assets
    
    
    18,288,236
    
    
    
    13,853,681
 F-5




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##### Table of Contents



Consolidated Balance Sheets (Continued)As of December 31, 2003 and 2002 2003
    
    2002RMB000
    
    RMB000Liabilities and shareholders equityCurrent liabilitiesShort-term bank loans
    
    
    
    
    
    
    150,000Notes payable
    
    
    4,783,966
    
    
    
    3,937,403Notes payable to affiliated companies
    
    
    35,431
    
    
    
    Accounts payable
    
    
    1,124,053
    
    
    
    1,075,592Due to affiliated companies
    
    
    684,854
    
    
    
    729,369Customer advances
    
    
    216,833
    
    
    
    302,039Other payables
    
    
    563,735
    
    
    
    352,574Dividends payable to joint venture partners
    
    
    
    
    
    
    21,618Dividends payable
    
    
    34,117
    
    
    
    Accrued expenses and other current liabilities
    
    
    188,774
    
    
    
    258,248Taxes payable
    
    
    306,612
    
    
    
    343,483Advances from affiliated companies
    
    
    92,642
    
    
    
    162,420Total current liabilities
    
    
    8,031,017
    
    
    
    7,332,746Convertible bonds
    
    
    1,655,487
    
    
    
    Commitments and contingencies (Note 21)
    
    
    
    
    
    
    Total liabilities
    
    
    9,686,504
    
    
    
    7,332,746Minority interests
    
    
    1,715,425
    
    
    
    515,633Shareholders equityCapital stockCommon stock (5,000,000,000 shares of US$0.01
each authorized and 3,668,390,900 and
3,666,052,900 shares of US$0.01 each issued
and outstanding as of December 31, 2003 and
2002 respectively)
    
    
    303,388
    
    
    
    303,194Additional paid-in capital
    
    
    2,325,690
    
    
    
    2,321,183Deferred stock compensation
    
    
    
    
    
    
    (173,213
    )Other comprehensive income
    
    
    39,179
    
    
    
    39,179Dedicated capital
    
    
    112,168
    
    
    
    132,179Capital reserve
    
    
    120,000
    
    
    
    Retained earnings
    
    
    3,985,882
    
    
    
    3,382,780Total shareholders equity
    
    
    6,886,307
    
    
    
    6,005,302Total liabilities and shareholders equity
    
    
    18,288,236
    
    
    
    13,853,681
 The accompanying notes are an integral part of these consolidated balance
sheets. F-6




---



##### Table of Contents



Consolidated Statements of Cash FlowsFor the years ended December 31, 2003, 2002 and 2001 Year ended December 31,2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Cash flows from operating activities:Net income
    
    
    780,842
    
    
    
    610,465
    
    
    
    887,077Adjustments to reconcile net income to net cash provided by
operating activities:Deferred income tax
    
    
    (1,514
    )
    
    
    (38,041
    )
    
    
    Depreciation of fixed assets
    
    
    447,094
    
    
    
    213,776
    
    
    
    111,922Amortization of long-term prepayment for rental of land
    
    
    2,153
    
    
    
    
    
    
    
    Amortization of intangible assets
    
    
    227,077
    
    
    
    56,784
    
    
    
    Amortization of goodwill of subsidiaries
    
    
    
    
    
    
    
    
    
    
    6,200Amortization of deferred expenses
    
    
    1,486
    
    
    
    
    
    
    
    Minority interests in net income of consolidated subsidiaries
    
    
    169,205
    
    
    
    95,403
    
    
    
    209,936Provision for doubtful debts
    
    
    4,825
    
    
    
    18,921
    
    
    
    1,352Provision for doubtful debts written back
    
    
    (5,679
    )
    
    
    (265
    )
    
    
    (19,147
    )Provision for impairment of property, plant and equipment
    
    
    6,027
    
    
    
    2,547
    
    
    
    30,950Provision for impairment of investment securities
    
    
    
    
    
    
    8,500
    
    
    
    (Gain)/Loss on disposal of fixed assets
    
    
    (14,004
    )
    
    
    5,147
    
    
    
    4,539Gain on disposal of an associated company
    
    
    
    
    
    
    (6,014
    )
    
    
    Amortization of deferred compensation expenses
    
    
    173,213
    
    
    
    10,329
    
    
    
    15,461Equity in earnings of associated companies and jointly
controlled entities, net
    
    
    (109,471
    )
    
    
    (138,145
    )
    
    
    (40,043
    )
 F-7




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##### Table of Contents



Consolidated Statements of Cash Flows (Continued)For the years ended December 31, 2003, 2002 and 2001 Year ended December 31,2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000(Increase)/decrease in operating assets net
of effects from the purchase of subsidiaries
in 2001:Accounts receivable
    
    
    (73,888
    )
    
    
    8,279
    
    
    
    8,566Notes receivable
    
    
    (357,708
    )
    
    
    (234,577
    )
    
    
    (93,090
    )Notes receivable from affiliated companies
    
    
    (314,190
    )
    
    
    473,884
    
    
    
    (237,190
    )Due from affiliated companies
    
    
    268,881
    
    
    
    (163,354
    )
    
    
    (477,136
    )Inventories
    
    
    (460,040
    )
    
    
    (161,396
    )
    
    
    171,639Other receivables
    
    
    (40,307
    )
    
    
    11,486
    
    
    
    826,859Prepayments and other current assets
    
    
    118,612
    
    
    
    (88,568
    )
    
    
    (109,967
    )Increase in non-current assets
    
    
    (13,786
    )
    
    
    
    
    
    
    Increase/(decrease) in operating liabilities
net of effects from the purchase of
subsidiaries in 2001:Accounts payable
    
    
    48,461
    
    
    
    409,376
    
    
    
    181,361Due to affiliated companies
    
    
    (29,516
    )
    
    
    237,290
    
    
    
    133,968Notes payable to affiliated companies
    
    
    35,431
    
    
    
    
    
    
    
    Commercial notes payable
    
    
    
    
    
    
    
    
    
    
    (350,000
    )Customer advances
    
    
    (85,206
    )
    
    
    218,480
    
    
    
    45,786Other payables
    
    
    81,715
    
    
    
    68,928
    
    
    
    33,251Accrued expenses and other current liabilities
    
    
    (69,474
    )
    
    
    184,518
    
    
    
    8,317Import tariff and taxes payable
    
    
    (36,871
    )
    
    
    109,215
    
    
    
    (23,855
    )Net cash provided by operating activities
    
    
    753,368
    
    
    
    1,912,968
    
    
    
    1,326,756
 F-8




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##### Table of Contents



Consolidated Statements of Cash Flows (Continued)For the years ended December 31, 2003, 2002 and 2001 Year ended December 31,2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Cash flows from investing activities:Capital expenditures
    
    
    (955,887
    )
    
    
    (798,759
    )
    
    
    (782,520
    )Proceeds from disposal of fixed assets
    
    
    118,301
    
    
    
    15,600
    
    
    
    25,085(Increase)/decrease in short-term bank deposits
    
    
    (897,207
    )
    
    
    (773,389
    )
    
    
    492,355(Increase)/decrease in pledged short-term bank deposits
    
    
    (914,584
    )
    
    
    575,805
    
    
    
    (1,020,277
    )Decrease/(increase) in advances to affiliated companies
    
    
    1,061,214
    
    
    
    (987,516
    )
    
    
    90,566Increase in other long-term assets
    
    
    (874
    )
    
    
    (1,684
    )
    
    
    Net cash acquired from the purchase of a subsidiary
    
    
    
    
    
    
    
    
    
    
    6,805Decrease/(increase) in other receivables arising from
short-term investments
    
    
    500,000
    
    
    
    (500,000
    )
    
    
    Increase in investments in associated companies and
jointly controlled entities
    
    
    (702,278
    )
    
    
    
    
    
    
    (480,000
    )Decrease in advances to associated companies and
jointly controlled entities
    
    
    
    
    
    
    
    
    
    
    269,170Prepayment for a long-term investment
    
    
    (600,000
    )
    
    
    
    
    
    
    Increase in other receivables
    
    
    (300,000
    )
    
    
    
    
    
    
    Proceeds received from disposal of investment in an
associated company
    
    
    200,000
    
    
    
    260,000
    
    
    
    Net cash used in investing activities
    
    
    (2,491,315
    )
    
    
    (2,209,943
    )
    
    
    (1,398,816
    )
 F-9




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##### Table of Contents



Consolidated Statements of Cash Flows (Continued)For the years ended December 31, 2003, 2002 and 2001 Year ended December 31,2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Cash flows from financing activities:Proceeds from short-term bank loans
    
    
    
    
    
    
    1,746,930
    
    
    
    950,683Repayment of short-term bank loans
    
    
    (150,000
    )
    
    
    (2,002,430
    )
    
    
    (1,592,412
    )Issuance of bank notes payable
    
    
    8,674,563
    
    
    
    7,658,304
    
    
    
    8,080,000Repayment of bank notes payable
    
    
    (7,828,000
    )
    
    
    (7,020,901
    )
    
    
    (7,997,318
    )(Decrease)/Increase in advances from affiliated companies
    
    
    (144,383
    )
    
    
    108,144
    
    
    
    1,965Financing received from a jointly controlled entity
    
    
    74,605
    
    
    
    
    
    
    
    Proceeds from issuance of common stock
    
    
    4,701
    
    
    
    
    
    
    
    716,266Dividends paid
    
    
    (43,634
    )
    
    
    (35,295
    )
    
    
    (35,306
    )Dividends paid to joint venture partners
    
    
    (113,284
    )
    
    
    (88,853
    )
    
    
    (169,630
    )Proceeds from issuance of convertible bonds
    
    
    1,654,300
    
    
    
    
    
    
    
    Payment of direct expenses incurred in connection with
the issuance of convertible bonds
    
    
    (44,599
    )
    
    
    
    
    
    
    Capital contributions from joint venture partners
    
    
    196,826
    
    
    
    
    
    
    
    Net cash provided by/(used in) financing activities
    
    
    2,281,095
    
    
    
    365,899
    
    
    
    (45,752
    )Net increase/(decrease) in cash and cash equivalents
    
    
    543,148
    
    
    
    68,924
    
    
    
    (117,812
    )Cash and cash equivalents, beginning of year
    
    
    1,289,150
    
    
    
    1,220,226
    
    
    
    1,338,038Cash and cash equivalents, end of year
    
    
    1,832,298
    
    
    
    1,289,150
    
    
    
    1,220,226
 The accompanying notes are an integral part of these consolidated statements of
cash flows. F-10




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##### Table of Contents



Consolidated Statements of Changes in Shareholders EquityFor the years ended December 31, 2003, 2002 and 2001 Additional
    
    Deferred
    
    OtherNumber of
    
    
    
    
    
    Paid-in
    
    Stock
    
    Comprehensive
    
    Dedicated
    
    Capital
    
    RetainedShares
    
    Amount
    
    Capital
    
    Compensation
    
    Income
    
    Capital
    
    Reserve
    
    Earnings
    
    TotalIssued
    
    RMB000
    
    RMB000
    
    RMB000
    
    RMB000
    
    RMB000
    
    RMB000
    
    RMB000
    
    RMB000(Note 31)Balance at December
31, 2000
    
    
    3,348,052,900
    
    
    
    276,891
    
    
    
    1,432,217
    
    
    
    
    
    
    
    39,179
    
    
    
    5,191
    
    
    
    
    
    
    
    2,082,827
    
    
    
    3,836,305Issuance of shares
    
    
    318,000,000
    
    
    
    26,303
    
    
    
    689,963
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    716,266Deferred
compensation
related to stock
options
    
    
    
    
    
    
    
    
    
    
    15,461
    
    
    
    (15,461
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
deferred
compensation
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,461Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    887,077
    
    
    
    887,077Transfer to
dedicated capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,165
    
    
    
    
    
    
    
    (66,165
    )
    
    
    Dividends declared
and paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,306
    )
    
    
    (35,306
    )Balance at
December 31, 2001
    
    
    3,666,052,900
    
    
    
    303,194
    
    
    
    2,137,641
    
    
    
    
    
    
    
    39,179
    
    
    
    71,356
    
    
    
    
    
    
    
    2,868,433
    
    
    
    5,419,803Deferred
compensation
related to stock
options
    
    
    
    
    
    
    
    
    
    
    183,542
    
    
    
    (183,542
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
deferred
compensation
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,329Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    610,465
    
    
    
    610,465Transfer to
dedicated capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,823
    
    
    
    
    
    
    
    (60,823
    )
    
    
    Dividends declared
and paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,295
    )
    
    
    (35,295
    )Balance at
December 31, 2002
    
    
    3,666,052,900
    
    
    
    303,194
    
    
    
    2,321,183
    
    
    
    (173,213
    )
    
    
    39,179
    
    
    
    132,179
    
    
    
    
    
    
    
    3,382,780
    
    
    
    6,005,302Issuance of shares
    
    
    2,338,000
    
    
    
    194
    
    
    
    4,507
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,701Amortization of
deferred
compensation
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,213Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    780,842
    
    
    
    780,842Transfer to
dedicated capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,989
    
    
    
    
    
    
    
    (99,989
    )
    
    
    Capitalization of
dedicated capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120,000
    )
    
    
    120,000
    
    
    
    
    
    
    
    Dividends declared
and paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,751
    )
    
    
    (77,751
    )Balance at
December 31, 2003
    
    
    3,668,390,900
    
    
    
    303,388
    
    
    
    2,325,690
    
    
    
    
    
    
    
    39,179
    
    
    
    112,168
    
    
    
    120,000
    
    
    
    3,985,882
    
    
    
    6,886,307
 The accompanying notes are an integral part of these consolidated statements of
changes in shareholders equity. F-11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    ORGANIZATION, PRINCIPAL ACTIVITIES AND OPERATING ENVIRONMENT Brilliance China Automotive Holdings Limited (the Company) was incorporated
in Bermuda on June 9, 1992 with limited liability. The Companys ADSs and
shares are traded on The New York Stock Exchange Inc. and The Stock Exchange of
Hong Kong Limited (SEHK), respectively. The Company is an investment holding
company. The principal activities of the Companys subsidiaries are the
manufacture and sale of minibuses, sedans and automotive components in the
Peoples Republic of China (the PRC). Details of the Companys principal subsidiaries as of December 31, 2003 are as
follows: Percentage of equityinterest/voting rightattributable to thePlace of
    
    CompanyName
    
    establishment/incorporation
    
    Directly
    
    Indirectly
    
    Principal activitiesShenyang Brilliance
JinBei Automobile
Co., Ltd.
(Shenyang Automotive)
    
    Shenyang, the PRC
    
    
    51
    %
    
    
    
    
    
    Manufacture,
assembly and sale
of minibuses and
sedansNingbo Yuming
Machinery
Industrial Co.,
Ltd. (Ningbo Yuming)
    
    Ningbo, the PRC
    
    
    
    
    
    
    51
    %
    
    Manufacture and
sale of automotive
componentsShenyang
XingYuanDong
Automobile
Component Co., Ltd.
(Xing Yuan Dong)
    
    Shenyang, the PRC
    
    
    100
    %
    
    
    
    
    
    Manufacture and
trading of
automotive
componentsNingbo Brilliance
Ruixing Auto
Components Co.,
Ltd. (Ningbo
Ruixing)
    
    Ningbo, the PRC
    
    
    100
    %
    
    
    
    
    
    Manufacture and
trading of
automotive
componentsMianyang Brilliance
Ruian Automotive
Components Co.,
Ltd. (Mianyang
Ruian)
    
    Mianyang, the PRC
    
    
    100
    %
    
    
    
    
    
    Manufacture and
trading of
automotive
componentsShenyang Brilliance
Dongxing Automotive
Component Co., Ltd.
(Dongxing
Automotive)
    
    Shenyang, the PRC
    
    
    
    
    
    
    100
    %
    
    Manufacture and
trading of
automotive
componentsBrilliance China
Automotive Finance
Ltd.
    
    British Virgin Islands
    
    
    100
    %
    
    
    
    
    
    FinancingShenyang ChenFa
Automobile
Component Co., Ltd.
    
    Shenyang, the PRC
    
    
    100
    %
    
    
    
    
    
    Development,
manufacture and
sale of engines
componentsShenyang Xinjinbei
Investment and
Development Co.,
Ltd. (SXID)
    
    Shenyang, the PRC
    
    
    
    
    
    
    99
    %
    
    Investment holdingShenyang JinBei
Automotive Industry
Holdings Co., Ltd.
(SJAI)
    
    Shenyang, the PRC
    
    
    
    
    
    
    98
    %
    
    Investment holding
 F-12




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) In December 2001, the Company entered into an agreement with Brilliance
Holdings Limited (BHL), an affiliated company, for the acquisition of the
entire issued share capital of Key Choices Group Limited (Key Choices) at a
consideration of approximately RMB278 million. Key Choices is an investment
holding company and its principal assets are the 100% equity interest in the
registered capital of Dongxing Automotive and 90% equity interest in the
registered capital of Shenyang Xingchen Automotive Seats Co., Ltd. (Xingchen
Automotive Seats). Dongxing Automotive is a foreign-invested enterprise
established in the PRC whose principal products are automotive components for
the use in passenger vehicles. Xingchen Automotive Seats is a Sino-foreign
equity joint venture established in the PRC in December 2001 and principally
engaged in the manufacturing of automotive seats. The operations of Xingchen
Automotive Seats ceased in 2002. In December 2001, Xing Yuan Dong entered into an agreement with two affiliated
companies to establish China Zhengtong Investment Holdings Co., Ltd.
(Zhengtong). Pursuant to the agreement, Xing Yuan Dong contributed cash
amounting to RMB480 million to acquire a 47.06% equity interest in Zhengtong.
Zhengtongs principal activity is investment holding. In December 2002, Xing
Yuan Dong disposed of its entire equity interest in Zhengtong to an affiliated
company at a consideration of RMB480 million. Details of the Groups investment in associated companies and jointly
controlled entities are included in Note 13. For the year ended December 31, 2003, no consolidated revenue was generated
from Shanghai Yuantong Automobile Sales and Service Company Limited (Shanghai
Yuantong), an affiliated company. For the years ended December 31, 2002 and
2001, approximately 10% and 42% of the consolidated revenue was generated from
Shanghai Yuantong. For the years ended December 31, 2003, 2002 and 2001,
approximately 20%, 23% and 15% of the consolidated revenue was generated from
Shanghai Shenhua Holdings Co., Ltd. (Shanghai Shenhua), an affiliated
company.  2.
    
    BASIS OF PRESENTATION The financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America (U.S. GAAP). The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. This basis of accounting differs from that used in the
statutory financial statements of the Companys subsidiaries, which were
prepared in accordance with the relevant accounting principles and financial
reporting regulations applicable to foreign investment enterprises as
established by the Ministry of Finance in the PRC. Certain accounting
principles stipulated under U.S. GAAP are not applicable in the PRC. The principal adjustments made to conform the statutory financial statements to
U.S. GAAP included the following:  
    
    Reclassification of certain items, designated as prepayments and
construction-in-progress in the statutory financial statements, as
property, plant and equipment;
    
    Reclassification of certain items, designated as reserves
appropriated from net income in the statutory financial statements,
as charges to income;
    
    Recognition of deferred income taxes;
    
    Recognition of provision for impairment loss of long-lived assets;
    
    Amortization of intangible assets;
    
    Recognition of research and development expenditures; and
    
    Recognition of stock-based compensation. F-13




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (a)
    
    Basis of consolidation The consolidated financial statements of the Group include the financial
statements of the Company and the enterprises that it controls. This control is
normally evidenced when the Group has the power to govern the financial and
operating policies of an enterprise so as to benefit from its activities. The
results of subsidiaries acquired or disposed of during the period are
consolidated from or to their effective dates of acquisition or disposal. The
equity and net income attributable to minority shareholders interests are
shown separately in the Groups balance sheet and income statement
respectively. Intragroup balances and transactions, including sales to companies within the
Group and resulting unrealized profits, are eliminated in full. Unrealized
losses resulting from intragroup transactions are eliminated unless the cost
cannot be recovered. Consolidated financial statements are prepared using
uniform accounting policies for like transactions and other events in similar
circumstances.  (b)
    
    Sales Sales represent the invoiced value of goods, net of consumption tax, discounts
and returns, and are recognized when goods are delivered to the customers and
the significant risks and rewards of ownership of the goods have been
transferred to customers. Provisions for sales allowances and rebates are made
at the time of sales of goods and are recognized as a reduction of sales.  (c)
    
    Cash, cash equivalents and short-term bank deposits Cash represents cash on hand and deposits with financial institutions which are
repayable on demand. Cash equivalents represent short-term, highly liquid
investments which are readily convertible into known amounts of cash and which
are subject to an insignificant risk of changes in value. Bank deposits with original maturity between three and twelve months are
classified as short-term deposits.  (d)
    
    Inventories Inventories are carried at the lower of cost or net realizable value. Cost is
calculated on the moving-average basis and comprises all costs of purchase,
costs of conversion and other costs incurred in bringing the inventories to
their present location and condition. Net realizable value is the estimated
selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs of sale. Provision for inventories is
recognized when the net realizable value of an inventory item falls below its
cost. The amount of any write-down of inventories to net realizable value and
all losses of inventories are recognized as an expense in the period the
write-down or loss occurs. When inventories are sold, the carrying amount of those inventories is
recognized as an expense in the period in which the related revenue is
recognized.  (e)
    
    Property, plant and equipment and long-term prepayment for rental of land Property, plant and equipment are stated at cost less accumulated depreciation.
The cost of an asset comprises its purchase price and any directly attributable
costs of bringing the asset to its working condition and location for its
intended use. Expenditure incurred after the assets have been put into
operation, such as repairs and maintenance and overhaul costs, is normally
charged to the income statement in the period in which it is incurred. In
situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to be obtained
from the use of the assets beyond its originally assessed standard of
performance, the expenditure is capitalized as an additional cost of the
assets. F-14




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) Depreciation is calculated on a straight-line basis, at annual rates estimated
to write off the cost less estimated residual value of 10% of each asset over
its expected useful life. The annual rates are as follows: Buildings
    
    
    5
    %Machinery and equipment
(excluding special tools and moulds)
    
    
    10
    %Furniture, fixtures and office equipment
    
    
    20
    %Motor vehicles
    
    
    20
    %
 The costs of special tools and moulds included in machinery and equipment are
amortized over their estimated productive periods. When fixed assets are sold or retired, their cost and accumulated depreciation
are eliminated from the accounts and any gain or loss resulting from their
disposal is included in the income statement. Construction-in-progress consists of factories and office buildings under
construction and machinery pending installation and includes the costs of
construction, machinery and equipment, and any interest charges arising from
borrowings used to finance these assets during the period of construction or
installation. No provision for depreciation is made on construction-in-progress
until such time as the relevant assets are completed and ready for their
intended use. Long-term prepayment for rental of land is amortized on a straight-line basis
over the term of lease.  (f)
    
    Intangible assets Intangible assets are stated at cost less accumulated amortization.
Amortization is calculated on a straight-line basis over the estimated useful
life of 7 years.  (g)
    
    Impairment of long-lived assets Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable from its undiscounted future cash flow. If such assets are
considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the
assets.  (h)
    
    Goodwill Goodwill represents the excess of the purchase price over the fair value of the
net assets resulting from the Companys acquisitions of interests in its
subsidiaries. Before the adoption of Statement of Financial Accounting Standard
(SFAS) No. 142 Goodwill and other Intangible Assets by the Group on January
1, 2002, goodwill is amortized on a straight-line basis over the expected
future economic life, being the shorter of 40 years or the remaining life of
the respective subsidiaries. In July 2002, the Financial Accounting Standards
Board (FASB) issued SFAS No. 142, which addresses financial accounting and
reporting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets which have indefinite
future economic life and goodwill will not be amortized but rather will be
tested at least annually for impairment. Intangible assets with a finite life
shall continue to be amortized over the estimated future economic life. The
Company adopted SFAS No. 142 effective January 1, 2002. Upon adoption, the
Company ceased amortizing goodwill.  (i)
    
    Investments in associated companies and jointly controlled entities An associated company is a company in which the Group has significant
influence, but not control or joint control, and thereby has the ability to
participate in the investees financial and operating policy decisions. A
jointly controlled entity is a company in which the Group has joint control
with the other joint venture partners. Investments in associated companies and
jointly controlled entities are accounted for using the equity method. Goodwill
arising on the acquisition of interests in associated companies and jointly
controlled entities is included in the carrying cost of the investment.  (j)
    
    Investment securities The Groups investment securities consist of marketable available-for-sale
securities and are carried at fair value. Any unrealized gains or losses are
reported as a component of comprehensive income. F-15




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  (k)
    
    Taxation Income Tax The Company was incorporated under the laws of Bermuda and 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 shareholders, other than shareholders ordinarily residing in
Bermuda, from any Bermuda taxes computed on profit, income or any capital asset
gain or appreciation, or any tax in the nature of estate duty or inheritance
tax, at least until year 2016. The Company also provides for Hong Kong profits tax at the rate of 17.5% (2002
and 2001: 16%) based on estimated assessable profit arising in Hong Kong. The subsidiaries are subject to state and local income taxes in the PRC at
their respective tax rates, based on the taxable income reported in their
statutory financial statements in accordance with the relevant state and local
income tax laws applicable. Shenyang Automotive is subject to state and local income taxes in the PRC at
standard rates of 15% and 3%, respectively, in accordance with enterprise
income tax laws applicable to Sino-foreign equity joint venture enterprises.
Shenyang Automotive is exempted from local income tax of 3% as it was
designated as a Technologically-Advanced Enterprise. As a result, the
effective enterprise income tax rate for Shenyang Automotive was 15% for the
years ended December 31, 2003, 2002 and 2001. Ningbo Yuming is subject to state and local income taxes in the PRC at standard
rates of 15% and 1.5%, respectively, in accordance with enterprise income tax
laws applicable to foreign-invested enterprises. Pursuant to the relevant
income tax laws in the PRC, Ningbo Yuming is fully exempted from state
enterprise income tax for two years starting from the year ended December 31,
1997, followed by a 50% reduction of enterprise income tax for the next three
years thereafter. In addition, Ningbo Yuming is also fully exempted from local
enterprise income tax for the five-year period. As a result, the effective tax
rate for Ningbo Yuming was 16.5% for the years ended December 31, 2003 and 2002
and 7.5% for the year ended December 31, 2001. Xing Yuan Dong is subject to state and local income taxes in the PRC at
standard rates of 30% and 3%, respectively, in accordance with enterprise
income tax laws. Xing Yuan Dong received official designation by the local tax
authorities as a New and Technologically-Advanced Enterprise in 1999. During
2001, Xing Yuan Dong was further designated by the local tax authority as a
foreign-invested enterprise engaged in manufacturing activities. As a result,
the effective combined state and local enterprise income tax rate for Xing Yuan
Dong was 7.5% for the years ended December 31, 2003, 2002 and 2001. Mianyang Ruian is subject to state and local income taxes in the PRC at
standard rates of 30% and 3% respectively in accordance with enterprise income
tax laws. During 2001, Mianyang Ruian received official designation by the
local tax authority as a foreign-invested enterprise engaged in manufacturing
activities. Pursuant to the relevant income tax laws in the PRC, Mianyang Ruian
is exempted from state and local enterprise income tax for two years starting
from the first profitable year followed by a 50% reduction of enterprise income
tax for the next three years. In addition, Mianyang Ruian is also exempted from
local enterprise income tax for the same five-year period. As a result, the
effective tax rate for Mianyang Ruian was 15% for the year ended December 31,
2003. For the years ended December 31, 2002 and December 31, 2001, Mianyang
Ruian was exempted from income tax. Dongxing Automotive is subject to state and local income taxes in the PRC at
standard rates of 30% and 3%, respectively, in accordance with enterprise
income tax laws. Dongxing Automotive received official designation by the local
tax authorities as a New and Technologically-Advanced Enterprise and a
foreign-invested enterprise engaged in manufacturing activities. Pursuant to
the relevant income tax laws in the PRC, Dongxing Automotive is exempted from
state enterprise income tax for two years starting from the first profitable
year in 1999 followed by a 50% reduction of state enterprise income tax for the
next three years. In addition, Dongxing Automotive is also exempted from local
enterprise income tax for the same five-year period. As a result, the effective
tax rate for Dongxing Automotive was 7.5% for the years ended December 31,
2003, 2002 and 2001. Other subsidiaries in the PRC are subject to state and local income taxes in
the PRC at standard rates of 30% and 3%, respectively, based on the respective
taxable income reported in their statutory financial
statements in accordance with the relevant state and local income tax laws
applicable to foreign-invested enterprises. F-16




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) Value Added Tax (VAT) and Consumption Tax The general VAT rate applicable to sales and purchases of minibuses, sedans and
automotive components in the PRC is 17%. Sales of minibuses and sedans are also subject to consumption tax at standard
rates of 3% to 8%.  (l)
    
    Deferred taxation Deferred income taxes are provided using the liability method in which deferred
income taxes are recognized for temporary differences between the tax and
financial statement bases of assets and liabilities. The tax consequences of
those differences expected to occur in subsequent years are recorded as assets
and liabilities on the balance sheet. A valuation allowance is provided to reduce the amount of deferred tax assets
if it is considered more likely than not that some portion of, or all of, the
deferred tax assets will not be realized.  (m)
    
    Foreign currency translation The functional currency of the Company and its subsidiaries is RMB.
Transactions denominated in foreign currencies are translated into RMB at the
unified exchange rates quoted by the Peoples Bank of China prevailing at the
dates of the transactions. Monetary assets and liabilities denominated in
foreign currencies are translated into RMB using the applicable unified
exchange rates prevailing at the balance sheet dates. The resulting exchange
differences are included in the determination of income. Non-monetary assets
and liabilities denominated in foreign currencies are translated into RMB using
the applicable exchange rates prevailing at the time of transaction. Foreign currency translation adjustments in other comprehensive income arose
from the Companys change in functional currency in previous years.  (n)
    
    Warranty A provision is recognized when an enterprise has a present obligation (legal or
constructive) as a result of a past event and it is probable (i.e. more likely
than not) that an outflow of resources embodying economic benefits will be
required to settle the obligation, and a reliable estimate can be made of the
amount of the obligations. Provisions are reviewed at each balance sheet date
and adjusted to reflect the current best estimate. Where the effect of the time
value of money is material, the amount of a provision is the present value of
the expenditures expected to be required to settle the obligation. Shenyang
Automotives minibuses are sold with a 24-month or 50,000 kilometers
(2002 and 2001: 18-month or 30,000 kilometers) first-to-occur limited warranty.
The Zhonghua sedans are sold with a 36-month or 60,000 kilometers (2002:
24-month or 40,000 kilometers) first-to-occur limited warranty plus any
extended warranty specially offered by Shenyang Automotive during the year.
During the warranty period, Shenyang Automotive pays service stations for parts
and labor covered by the warranty. The costs of the warranty obligation are accrued at the time the sales are
recognized, based on the estimated costs of fulfilling the total obligations,
including handling and transportation costs. The factors used to estimate
warranty expenses are reevaluated periodically in light of actual experience. F-17




---



##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) The reconciliation of the changes in the warranty obligation is as follows: 2003
    
    2002RMB000
    
    RMB000Balance as of January 1
    
    
    18,854
    
    
    
    8,852Accrual for warranties issued during the year
    
    
    87,405
    
    
    
    31,127Settlement made during the year
    
    
    (82,616
    )
    
    
    (21,125
    )Balance as of December 31
    
    
    23,643
    
    
    
    18,854
  (o)
    
    Advertising expenses Advertising expenses are written off as incurred. For the years ended December
31, 2003, 2002 and 2001, advertising expenses of approximately RMB201.1
million, RMB123.6 million and RMB35.7 million (see also Note 25(f)),
respectively, have been charged to selling, general and administrative
expenses.  (p)
    
    Research and development expenses Research and development expenses are expensed as incurred. For the years ended
December 31, 2003, 2002 and 2001, research and development expenses of
approximately RMB191.4 million, RMB304.9 million and RMB26.9 million,
respectively, have been charged to selling, general and administrative
expenses.  (q)
    
    Operating leases Leases where substantially all the rewards and risks of ownership remain with
the lessor are accounted for as operating leases. Payment made under operating
leases net of any incentives received from the lessor are charged to the income
statement on a straight-line basis over the period of the relevant leases. Assets leased out under operating leases are included in property, plant and
equipment in the balance sheet. They are depreciated over the expected useful
lives on a basis consistent with similar owned fixed assets. Rental income (net
of any incentives given to lessees) is recognized on a straight-line basis over
the lease terms.  (r)
    
    Stock based compensation The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25 Accounting for Stock Issued to Employee, which states that
compensation expense related to employee stock options is recorded if, on the
date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company adopted the disclosure-only requirements of SFAS No. 123
Accounting for Stock-Based Compensation and the related amendments under the
provisions of SFAS No. 148 Accounting for Stock-Based Compensation, Transition
and Disclosure which allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro-forma net income or loss and pro-forma
earnings or loss per share disclosures for employee stock grants as if the
fair-value-based method of accounting as prescribed in SFAS No. 123 and SFAS
No. 148 was adopted. F-18




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) Had compensation cost for the Companys stock options granted been determined
based on the fair value of the stock options at the grant date, consistent with
the provisions of SFAS No. 123 and SFAS No. 148, the Companys net income and
earnings per share for the years ended December 31, 2003, 2002 and 2001 would
have been adjusted to the pro-forma amounts indicated below: 2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Net income as reported
    
    
    780,842
    
    
    
    610,465
    
    
    
    887,077Add: Adjustments for APB Opinion No. 25
    
    
    173,213
    
    
    
    10,329
    
    
    
    15,461Less: Fair value of stock options
    
    
    (210,711
    )
    
    
    (12,565
    )
    
    
    (76,857
    )Pro-forma net income
    
    
    743,344
    
    
    
    608,229
    
    
    
    825,681
 2003
    
    2002
    
    2001RMB
    
    RMB
    
    RMBBasic earnings per ADS:As reported
    
    
    21.30
    
    
    
    16.65
    
    
    
    25.10Pro-forma
    
    
    20.27
    
    
    
    16.59
    
    
    
    23.37Diluted earnings per ADS:As reported
    
    
    21.16
    
    
    
    16.65
    
    
    
    25.10Pro-forma
    
    
    20.15
    
    
    
    16.59
    
    
    
    23.37Basic earnings per share:As reported
    
    
    0.2130
    
    
    
    0.1665
    
    
    
    0.2510Pro-forma
    
    
    0.2027
    
    
    
    0.1659
    
    
    
    0.2337Diluted earnings per share:As reported
    
    
    0.2116
    
    
    
    0.1665
    
    
    
    0.2510Pro-forma
    
    
    0.2015
    
    
    
    0.1659
    
    
    
    0.2337
  (s)
    
    Earnings per share and earnings per ADS The calculation of basic earnings per share is based on the net income for the
year and the weighted average number of shares of common stock outstanding
during the year. The calculation of diluted earnings per share is based on the net income for
the year and the weighted average number of shares of common stock mentioned
above and adjusted for the effects of all dilutive potential shares of common
stock outstanding during the year. F-19




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) A reconciliation of the net income used in calculation of basic and diluted
earnings per share/ADS is as follows: 2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Net income during the year
    
    
    780,842
    
    
    
    610,465
    
    
    
    887,077Add: accrued interest expense
related to the
convertible bonds
    
    
    1,187
    
    
    
    
    
    
    
    amortization of deferred expenses
    
    
    1,486
    
    
    
    
    
    
    
    Net income during the year adjusted for
accrued interest expense related to the
convertible bonds and amortization of
deferred expenses
    
    
    783,515
    
    
    
    610,465
    
    
    
    887,077
 A reconciliation of the weighted average number of shares of common stock used
in calculation of basic and diluted earnings per share is as follows: 2003
    
    2002
    
    2001Weighted average number of shares
of common stock used in calculation
of basic earnings per share
    
    
    3,666,539,983
    
    
    
    3,666,052,900
    
    
    
    3,533,552,900Dilutive effect of stock options
    
    
    3,338,970
    
    
    
    
    
    
    
    Dilutive effect of convertible bonds
    
    
    32,519,357
    
    
    
    
    
    
    
    Weighted average number of shares
of common stock adjusted for
dilutive effect of stock options
and convertible bonds used in
calculation of diluted earnings per
share
    
    
    3,702,398,310
    
    
    
    3,666,052,900
    
    
    
    3,533,552,900
 The effect of the assumed conversion of the potential common stock outstanding
for the years ended December 31, 2002 and 2001 is anti-dilutive. The calculation of earnings per ADS is based on the weighted average number of
ADSs outstanding during the years presented. The weighted average number of ADS
outstanding is calculated based on the assumption that all of the outstanding
ordinary shares were held in the form of ADSs (at the ratio of 100 shares for
each ADS). A reconciliation of the weighted average number of ADSs for
calculation of basic and diluted earnings per ADS is as follows: 2003
    
    2002
    
    2001Weighted average number of ADSs
used in calculation of basic
earnings per ADS
    
    
    36,665,400
    
    
    
    36,660,529
    
    
    
    35,335,529Dilutive effect of stock options
    
    
    33,390
    
    
    
    
    
    
    
    Dilutive effect of convertible bonds
    
    
    325,193
    
    
    
    
    
    
    
    Weighted average number of ADSs
adjusted for dilutive effect of
stock options and convertible bonds
used in calculation of diluted
earnings per ADS
    
    
    37,023,983
    
    
    
    36,660,529
    
    
    
    35,335,529
  (t)
    
    Segmental information Segmental information is presented in accordance with SFAS No. 131 Disclosures
about Segments of an Enterprise and Related Information which establishes
standards for reporting information about operating segments on a basis
consistent with the Companys internal organization structure as well as
information about geographic areas and major customers. Disclosure of segmental
information in accordance with SFAS No. 131 is made in Note 30. F-20




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  (u)
    
    Comprehensive income SFAS No. 130 Reporting Comprehensive Income requires the components of
comprehensive income to be disclosed in the financial statements. Comprehensive
income consists of net income and other gains and losses affecting
shareholders equity that, under generally accepted accounting principles, are
excluded from net income. There was no other comprehensive income or loss for the years ended December
31, 2003, 2002 and 2001 other than net income for the three years.  (v)
    
    Convertible bonds Convertible bonds were issued at par and are stated in the balance sheet at
face value plus accrued interest expense. Direct expenses in connection with
the issuance of convertible bonds are capitalized as deferred expenses on the
balance sheet and are amortized over the life of the convertible bonds.  (w)
    
    Guarantees Guarantee issued by the Group are initially recognized on the balance sheet as
a liability at the fair value, or market value, of the obligations the Group
assumed under that guarantee in accordance with FASB Interpretation No. (FIN)
45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 is applicable
on a prospective basis to guarantees issued or modified after December 31,
2002. FIN 45 also contains disclosure provisions surrounding existing
guarantees, which are effective for financial statements with periods ended
after December 15, 2002. Please refer to Note 3(n) and Note 21(b) for details.  (x)
    
    Other new accounting pronouncements In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003, except as stated in the statement and for
hedging relationships designated after June 30, 2003. In addition, except as
stated in the statement, all provisions of this statement should be applied
prospectively. Management believes the adoption of SFAS No. 149 does not have a
material effect on the Groups financial position or results of operations. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
established standards for how an issuer classifies and measures in its balance
sheets certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of non-public entities. Management believes
the adoption of SFAS No. 150 does not have a material effect on the Groups
financial position or results of operations.  4.
    
    SUBSIDY INCOME In 2003, the Company was granted subsidies in the form of tax refunds on
re-investments amounting to approximately RMB48,497,000 in relation to the
Companys re-investment of the dividends declared by certain subsidiaries of
the Company to those subsidiaries as additional capital contributions by
foreign investors. Such subsidies were approved by the relevant local tax
bureaus in accordance with the relevant income tax laws in the PRC. All of the
approved subsidies were received by the Group during the year and were recorded
as income. F-21




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  5.
    
    INCOME TAXES For the years ended December 31, 2003, 2002 and 2001, certain of the Companys
subsidiaries were subject to income taxes in the PRC at the applicable
statutory tax rates on taxable income as reported in the statutory financial
statements adjusted for the reduced tax rates and exemptions described in Note
3(k). The amount of income taxes charged to the consolidated income statement
represents: 2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Current taxation
    
    
    145,654
    
    
    
    184,651
    
    
    
    116,250Deferred taxation
    
    
    (1,514
    )
    
    
    (38,041
    )
    
    
    144,140
    
    
    
    146,610
    
    
    
    116,250
 The reconciliation of the Groups effective income tax rate (based on income
before taxes and minority interests) to its statutory income tax rate for years
ended December 31, 2003, 2002 and 2001 are as follows: 2003
    
    2002
    
    2001Average statutory tax rate (including state and local income tax)
    
    
    21.71
    %
    
    
    18.58
    %
    
    
    18.93
    %Effect of statutory tax holiday
    
    
    (12.66
    %)
    
    
    (9.30
    %)
    
    
    (7.72
    %)Effect of non-deductible expenses
    
    
    1.18
    %
    
    
    5.91
    %
    
    
    Others, not individually significant
    
    
    2.94
    %
    
    
    2.01
    %
    
    
    (1.63
    %)Effective tax rate
    
    
    13.17
    %
    
    
    17.20
    %
    
    
    9.58
    %
 The average statutory tax rates for the relevant periods represented the
weighted average tax rates of the Companys subsidiaries calculated on the
basis of the relative amount of net income and the applicable statutory tax
rate of each subsidiary. As of December 31, 2003 and 2002, deferred tax assets mainly arose from the
following items which were not fully deductible as of respective year end but
will be available for deduction in future years: 2003
    
    2002RMB000
    
    RMB000Pre-operating expenses
    
    
    
    
    
    
    16,829Accruals and provisions
    
    
    30,181
    
    
    
    21,212Amortization of intangible assets
    
    
    6,623
    
    
    
    Others
    
    
    2,751
    
    
    
    39,555
    
    
    
    38,041
  6.
    
    PLEDGED SHORT-TERM BANK DEPOSITS As of December 31, 2003 and 2002, approximately RMB2,264.6 million and
RMB1,350.0 million, respectively, of the short-term bank deposits were pledged
as security for banking facilities, corporate guarantees for bank loans drawn
by affiliated companies and letter of credits issued (Notes 18 and 21). F-22




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  7.
    
    ACCOUNTS RECEIVABLE, NET Accounts receivable consist of: 2003
    
    2002RMB000
    
    RMB000Accounts receivable
    
    
    136,289
    
    
    
    67,024Less: Allowance for doubtful debts
    
    
    (46,272
    )
    
    
    (51,749
    )90,017
    
    
    
    15,275
 Movements of allowance for doubtful debts during the years ended December 31, 2003 and 2002 are: 2003
    
    2002RMB000
    
    RMB000Balance, beginning of year
    
    
    51,749
    
    
    
    53,059Additional provision
    
    
    4,825
    
    
    
    835Write-back of provision
    
    
    (5,679
    )
    
    
    (265
    )Written off against accounts receivable
    
    
    (4,623
    )
    
    
    (1,880
    )Balance, end of year
    
    
    46,272
    
    
    
    51,749
  8.
    
    NOTES RECEIVABLE Notes receivable are primarily notes received from customers for the settlement
of trade receivable balances. As of December 31, 2003 and 2002, all notes
receivable were guaranteed by established banks in the PRC and have maturities
of six months or less. The fair value of the notes receivable approximated
their carrying value. Approximately RMB281 million (2002: Nil) of the notes
receivable were pledged for the issuance of notes payable (Note 18).  9.
    
    OTHER RECEIVABLES Included in other receivables as of December 31, 2003 was an amount of RMB300
million advanced to Shenyang Automobile Industry Asset Management Company
Limited (SAIAM) which will become a subsidiary of the Group after the
completion of the proposed acquisition of SAIAM as detailed in Note 15. During 2002, Xing Yuan Dong disposed of its entire equity interest in Zhengtong
to an affiliated company at original investment cost of Xing Yuan Dong of
RMB480 million (the Consideration). As of December 31, 2003 and 2002, other
receivables include outstanding Consideration of RMB20 million and RMB220
million respectively. As of December 31, 2002, included in other receivables was an amount of RMB500
million deposited with an investment company during 2002. This arrangement was
terminated by the end of 2002 and the deposit was fully refunded in 2003 at the
original amount.  10.
    
    INVENTORIES Inventories
consist of:
    
    2003
    
    2002RMB000
    
    RMB000Raw materials
    
    
    709,996
    
    
    
    395,033Work-in-progress
    
    
    111,459
    
    
    
    126,202Finished goods
    
    
    406,909
    
    
    
    267,1601,228,364
    
    
    
    788,365
 F-23




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  11.
    
    PROPERTY, PLANT AND EQUIPMENT AND LONG-TERM PREPAYMENT FOR RENTAL OF LAND Property, plant and equipment consist of: 2003
    
    2002RMB000
    
    RMB000Buildings
    
    
    1,040,460
    
    
    
    794,371Machineries and equipment
    
    
    3,105,226
    
    
    
    2,965,625Motor vehicles
    
    
    93,867
    
    
    
    75,765Furniture, fixtures and office equipment
    
    
    292,840
    
    
    
    145,357Construction-in-progress
    
    
    570,233
    
    
    
    453,0285,102,626
    
    
    
    4,434,146Less: Provision for impairment losses
    
    
    (37,949
    )
    
    
    (31,922
    )5,064,677
    
    
    
    4,402,224Less: Accumulated depreciation
    
    
    (1,201,293
    )
    
    
    (846,349
    )Net book value
    
    
    3,863,384
    
    
    
    3,555,875
  (a)
    
    Buildings amounting to approximately RMB41,022,000 and long-term
prepayment for rental of land amounting to approximately RMB64,405,000
were injected by Shenyang JinBei Automotive Company Limited (JinBei),
the joint venture partner of Shenyang Automotive, as part of its
additional capital contributions to Shenyang Automotive during the year
ended December 31, 2003 (see Note 28(i)).  (b)
    
    During the years ended December 31, 2003, 2002 and 2001, capitalized
interest expenses amounted to approximately Nil, RMB0.8 million and
RMB49.2 million, respectively.  (c)
    
    As of December 31, 2002, certain buildings and machineries and equipment
of Shenyang Automotive with net book value of RMB150,000,000 were secured
against its short-term bank loans (See Note 20).  (d)
    
    In December 2003, Shenyang Automotive disposed of certain machineries and
equipment with an aggregate net book value of approximately RMB358,643,000
to the Groups jointly controlled entity, BMW Brilliance Automotive Ltd
(BMW Brilliance), at a consideration of approximately RMB384,290,000,
which was mutually agreed by both parties. The agreement of sale includes
an option for BMW Brilliance to require Shenyang Automotive to purchase
back such machineries and equipment at the purchase price less
depreciation over a specified period upon the occurrence of certain
events, including the passing of a valid resolution pursuant to the joint
venture contract by the board of directors of BMW Brilliance. These
machineries and equipment are maintained and operated by BMW Brilliance
for the manufacturing of its products. BMW Brilliance will provide certain
services to Shenyang Automotive upon the payment of a service fee which is
determined based on the number of Zhonghua sedans produced by Shenyang
Automotive using these machineries and equipment at a predetermined
formulated unit charge. As of the date of approval of these financial
statements, the basis of service fees has not yet been finalized and
service fees of approximately RMB17,438,000 have been accrued as of
December 31, 2003. F-24




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)    (e)
    
    Shenyang Automotive transferred the legal titles and ownership of certain
buildings with an aggregate net book value of approximately RMB225,185,000
to BMW Brilliance in consideration of approximately RMB248,684,000 and
entered into an agreement with BMW Brilliance to lease-back a substantial
portion of the buildings. The agreement of sale includes an option for BMW
Brilliance to require Shenyang Automotive to purchase back such buildings
at the purchase price less depreciation over a specified period upon the
occurrence of certain events, including the passing of a valid resolution
pursuant to the joint venture contract by the board of directors of BMW
Brilliance. For financial reporting purposes, the buildings were retained
as fixed assets on the balance sheet of the Group and the portion of
consideration received from BMW Brilliance up to December 31, 2003
amounting to approximately RMB74,605,000 is treated as a financing and
will be partially offset against the lease rental payable in future years.
The remaining balance of approximately RMB174,079,000 will be received
from BMW Brilliance when certain conditions specified in the agreement of
sale are fulfilled. Such amount will be accounted for as additional
financing.  12.
    
    INTANGIBLE ASSETS 2003
    
    2002RMB000
    
    RMB000CostBeginning of year
    
    
    681,750
    
    
    
    681,100Additions
    
    
    822,587
    
    
    
    650End of year
    
    
    1,504,337
    
    
    
    681,750Accumulated amortizationBeginning of year
    
    
    (56,784
    )
    
    
    Amortization for the year
    
    
    (227,077
    )
    
    
    (56,784
    )End of year
    
    
    (283,861
    )
    
    
    (56,784
    )Net book valueEnd of year
    
    
    1,220,476
    
    
    
    624,966Beginning of year
    
    
    624,966
    
    
    
    681,100
 Included in the intangible assets were mainly:  (a)
    
    Sedan design right with original cost of RMB681.1 million representing
rights, titles and interests in certain design and engineering agreements
and technical assistance agreement in relation to Zhonghua sedans
acquired from an affiliated company of BHL in 2000; and  (b)
    
    Components and parts technology right with original cost of RMB820
million representing rights, title and interests in the design of the
components and spare parts for Zhonghua sedans. It was injected by
JinBei, the joint venture partner of Shenyang Automotive, as part of its
additional capital contributions to Shenyang Automotive during the year at
an agreed fair value of RMB820 million (see Note 28(i)). For each of the five years ending December 31, 2008, the estimated amortization
expense of the intangible assets in existence as of December 31, 2003 will be
approximately RMB227 million. F-25




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  13.
    
    INVESTMENTS IN ASSOCIATED COMPANIES AND JOINTLY CONTROLLED ENTITIES Investments in associated companies and jointly controlled entities as of
December 31, 2003 consist of: Place of
    
    Percentage of equityestablishment/
    
    interest/voting rightName of company
    
    incorporation
    
    held indirectly
    
    Principal activitiesAssociated companies:Shenyang Aerospace
Mitsubishi Motors Engine
Manufacturing Co., Ltd.
(Shenyang Aerospace)
    
    Shenyang, the PRC
    
    
    12.77
    %
    
    Manufacture and
sale of automotive
enginesChongqing FuHua Automotive
Sales Service Co., Ltd.
(Chongqing Fuhua)
    
    Chongqing, the PRC
    
    
    30
    %
    
    Trading of BMW
sedansJointly controlled entities:Mianyang Xinchen Engine
Co., Ltd.
(Mianyang Xinchen)
    
    Mianyang, the PRC
    
    
    50
    %
    
    Manufacture and
sale of automotive
engines for
minibuses and light
duty trucksShenyang Xinguang
Brilliance Automobile
Engine Co., Ltd.
(Xinguang Brilliance)
    
    Shenyang, the PRC
    
    
    50
    %
    
    Manufacture and
sale of automotive
engines for
minibuses and light
duty trucksBMW Brilliance Automotive
Ltd.
(BMW Brilliance)
    
    Shenyang, the PRC
    
    
    49.005
    %
    
    Manufacture and
sale of BMW sedansShenyang HuaBao Automotive
Sales Service Co., Ltd.
(Huabao)
    
    Shenyang, the PRC
    
    
    50
    %
    
    Trading of BMW
sedansShenyang ChenBao Automotive
Sales Service Co., Ltd.
(Chenbao)
    
    Shenyang, the PRC
    
    
    50
    %
    
    Trading of BMW
sedans
 F-26




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) The carrying values of investments in associated companies and jointly
controlled entities are: 2003
    
    2002RMB000
    
    RMB'000Investments in associated companies:Shenyang Aerospace
    
    
    321,636
    
    
    
    187,697Chongqing Fuhua
    
    
    4,276
    
    
    
    325,912
    
    
    
    187,697Investments in jointly controlled entities:Mianyang Xinchen
    
    
    358,368
    
    
    
    287,829Xinguang Brilliance
    
    
    478,864
    
    
    
    443,920Huabao
    
    
    7,735
    
    
    
    Chenbao
    
    
    2,500
    
    
    
    BMW Brilliance
    
    
    550,032
    
    
    
    1,397,499
    
    
    
    731,7491,723,411
    
    
    
    919,446
 SJAI and BMW Holdings BV, a wholly owned subsidiary of BMW AG, established a
joint venture, BMW Brilliance, on May 23, 2003. BMW Brilliance is 50%-owned by
each of SJAI and BMW Holdings BV. The business scope of BMW Brilliance is to
produce and sell BMW passenger cars, engines, parts and components and to
provide after-sales services (including repair and maintenance and sale of
spare parts) relating to its products. Profit or loss for BMW Brilliance will
be shared as to 50% by each of SJAI and BMW Holdings BV, in proportion to their
respective proportionate contributions to the registered capital of BMW
Brilliance. The acquisitions of associated companies and jointly controlled entities have
been accounted for using the purchase method of accounting. The tangible assets
were valued in the acquisitions at their estimated fair values. The excess of
the purchase price over the fair values of the net assets acquired has been
accounted for as goodwill. The carrying values of goodwill of the acquired
associated companies and jointly controlled entities, which are included in the
carrying amount of investments in associated companies and jointly controlled
entities, are: 2003
    
    2002RMB000
    
    RMB000Shenyang Aerospace
    
    
    31,983
    
    
    
    31,983Mianyang Xinchen
    
    
    91,410
    
    
    
    91,410Xinguang Brilliance
    
    
    299,694
    
    
    
    299,694423,087
    
    
    
    423,087
 Before the adoption of SFAS No. 142 as of January 1, 2002, equity method
goodwill was amortized on a straight-line basis over the expected future
economic life. Since January 1, 2002, goodwill ceased to be amortized.
Pro-forma disclosures for goodwill are presented in Note 14. F-27




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) The equity shares in the income (loss) of the associated companies and jointly
controlled entities in 2003 and 2002 are: 2003
    
    2002RMB000
    
    RMB000Associated companies:Compass Pacific Holdings Limited (Compass Pacific)
    
    
    
    
    
    
    (3,989
    )Zhengtong
    
    
    
    
    
    
    (6,014
    )Shenyang Aerospace
    
    
    132,331
    
    
    
    33,937Chongqing Fuhua
    
    
    526
    
    
    
    132,857
    
    
    
    23,934Jointly controlled entities:Mianyang Xinchen
    
    
    68,662
    
    
    
    66,955Xinguang Brilliance
    
    
    33,388
    
    
    
    47,256Huabao
    
    
    235
    
    
    
    BMW Brilliance
    
    
    (125,671
    )
    
    
    (23,386
    )
    
    
    114,211109,471
    
    
    
    138,145
 Since November 2002, certain directors of the Company ceased to be directors of
Compass Pacific, a formerly associated company. As such, the directors consider
that the Company can no longer exert significant influence over Compass
Pacific, and the investment in Compass Pacific was reclassified as investment
securities. Combined unaudited financial information of the associated
companies is summarized as follows: 2003
    
    2002RMB000
    
    RMB000Revenue
    
    
    2,343,593
    
    
    
    1,061,799Profit before taxation, net
    
    
    635,046
    
    
    
    168,916Net income
    
    
    631,546
    
    
    
    168,916Current assets
    
    
    1,156,831
    
    
    
    1,071,457Non-current assets
    
    
    1,194,894
    
    
    
    641,660Total assets
    
    
    2,351,725
    
    
    
    1,713,117Current liabilities
    
    
    (531,350
    )
    
    
    (383,179
    )Long-term liabilities
    
    
    (431,791
    )
    
    
    (585,402
    )Total liabilities
    
    
    (963,141
    )
    
    
    (968,581
    )Total shareholders equity
    
    
    1,388,584
    
    
    
    744,536
 F-28




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) Combined unaudited financial information of the jointly controlled entities is
summarized as follows: 2003
    
    2002RMB000
    
    RMB000Revenue
    
    
    3,211,424
    
    
    
    1,025,520(Loss)/profit before taxation, net
    
    
    (31,905
    )
    
    
    240,830Net (loss)/income, net
    
    
    (47,943
    )
    
    
    222,857Current assets
    
    
    4,668,626
    
    
    
    808,159Non-current assets
    
    
    1,268,248
    
    
    
    171,093Total assets
    
    
    5,936,874
    
    
    
    979,252Current liabilities
    
    
    (4,297,464
    )
    
    
    (475,033
    )Total shareholders equity
    
    
    1,639,410
    
    
    
    504,219
  14.
    
    GOODWILL Before the adoption of SFAS No. 142 as of January 1, 2002, goodwill was
amortized on a straight-line basis over the expected future economic life.
Since January 1, 2002, goodwill ceased to be amortized. Pro-forma disclosures of net income and earnings per share in all periods
presented excluding amortization of goodwill arising from acquisition of
subsidiaries, associated companies and jointly controlled entities in
accordance with SFAS No. 142 are as follows: 2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Reported net income
    
    780,842
    
    610,465
    
    887,077Goodwill amortization
    
    
    
    
    
    6,200Equity method goodwill amortization
    
    
    
    
    
    11,313Adjusted net income
    
    780,842
    
    610,465
    
    
    904,590Reported basic earnings per share
    
    RMB0.2130
    
    RMB0.1665
    
    RMB0.2510Goodwill amortization
    
    
    
    
    
    RMB0.0018Equity method goodwill amortization
    
    
    
    
    
    RMB0.0032Adjusted basic earnings per share
    
    RMB0.2130
    
    RMB.0.1665
    
    RMB0.2560
 2003
    
    2002
    
    2001Reported diluted earnings per share
    
    RMB0.2116
    
    RMB0.1665
    
    RMB0.2510Goodwill amortization
    
    
    
    
    
    
    
    
    
    RMB0.0018Equity method goodwill amortization
    
    
    
    
    
    
    
    
    
    RMB0.0032Adjusted diluted earnings per share
    
    RMB0.2116
    
    RMB.0.1665
    
    RMB0.2560
 F-29




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  15.
    
    PREPAYMENT FOR A LONG-TERM INVESTMENT On December 29, 2003, SJAI (a 98.01% indirectly-owned subsidiary of the
Company) and SXID (a 99.0% indirectly-owned subsidiary of the Company) entered
into the agreements with the respective sellers in relation to the acquisition
of the entire equity interests of SAIAM and Shenyang XinJinBei Investment Co.,
Ltd. (SXI), respectively. SAIAM and SXI are interested in 29.9% and 11% of
the issued share capital of JinBei, respectively. The consideration for the
acquisitions was RMB600 million and was determined after arms length
negotiations between the parties taking into account the net liabilities
position and net asset value of SAIAM and SXI, respectively. The transfer of the entire interest of SAIAM is subject to the approval of
State-Owned Assets Supervision and Administration Commission of the State
Council and the acquisitions are subject to the granting of a waiver to SXID
and SJAI from making an offer for all of the shares of JinBei under Regulation
on Acquisitions of Listed Companies by the China Securities Regulatory
Commission. Upon completion of the acquisitions, the Group will be effectively
interested in an aggregate of approximately 40.1% of the issued share capital
of JinBei. As of December 31, 2003, the Group has paid RMB600 million to the shareholders
of SAIAM and SXI and the amount was recorded as prepayment for a long-term
investment by the Group.  16.
    
    CONVERTIBLE BONDS 2003
    
    2002RMB000
    
    RMB000Convertible bonds issued at par
    
    
    1,654,300
    
    
    
    Accrued interest expense
    
    
    1,187
    
    
    
    1,655,487
    
    
    
    
 On November 28, 2003, the Company, through its wholly owned subsidiary,
Brilliance China Automotive Finance Ltd., issued zero coupon guaranteed
convertible bonds (the Bonds) due 2008 with principal amount of
US$200,000,000 (equivalent to approximately RMB1,654.3 million). The Bonds are
listed on the Luxembourg Stock Exchange. The Bonds are convertible into fully paid ordinary shares of US$0.01 each of
the Company at an initial conversion price of HK$4.60 per share, subject to the
following two events, at any time on or after January 8, 2004, and up to and
including November 14, 2008, unless the Bonds previously have been redeemed or
previously have matured.  (i)
    
    The Bonds will mature on November 28, 2008. At any time from November 28,
2005 through November 14, 2008, all, or from time to time, some of the
aggregate outstanding principal amount of the Bonds is redeemable at the
option of Brilliance China Automotive Finance Ltd. at the early redemption
amount if the closing price of the shares on the SEHK for each of the last
20 consecutive trading days has been at least 130% of the conversion price
or if at least 90% in principal amount of the Bonds has been converted,
redeemed or purchased and cancelled. Unless previously converted, redeemed
or purchased and cancelled, the Bonds will be redeemed at 100% of their
outstanding principal amount on November 28, 2008.  (ii)
    
    All or some of the Bonds may be redeemed at the option of the relevant
holder on November 28, 2006 at 102.27% of their principal amount. The
Bonds may also be redeemed, in whole or in part, at the option of the
holders at the Early Redemption Amount on the occurrence of a change of
control of the Company. The Bonds may also be redeemed at the option of
the holders if the shares of the Company cease to be listed or admitted
for trading on the SEHK. As of December 31, 2003, none of the Bonds had been converted into the ordinary
shares of the Company. F-30




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  17.
    
    DEFERRED EXPENSES 2003
    
    2002RMB000
    
    RMB000Direct expenses incurred in connection with the
issuance of convertible bonds (Note 16)
    
    
    44,599
    
    
    
    Amortization of deferred expenses
    
    
    (1,486
    )
    
    
    43,113
    
    
    
    Deferred expenses  current portion
    
    
    (8,920
    )
    
    
    Deferred expenses 
non-current portion
    
    
    34,193
    
    
    
    
  18.
    
    NOTES PAYABLE As of December 31, 2003 and 2002, certain notes payable were bank notes secured
by short-term bank deposits of approximately RMB1,857 million and RMB1,350
million, respectively, and notes receivable of approximately RMB281 million and
Nil, respectively.  19.
    
    TAXES PAYABLE Taxes payable consist of: 2003
    
    2002RMB000
    
    RMB000VAT payable
    
    
    24,942
    
    
    
    54,314Income taxes payable
    
    
    115,887
    
    
    
    133,920Others
    
    
    165,783
    
    
    
    155,249306,612
    
    
    
    343,483
  20.
    
    SHORT-TERM BANK LOANS Short-term bank loans were drawn for working capital purposes and to finance
construction-in-progress, and are denominated in Renminbi and U.S. Dollars. The
loans are repayable within one year and bear interest at the prevailing lending
rates in the PRC, which ranged from 5.31% to 5.841% per annum during the year
ended December 31, 2002, and from 5.58% to 8.53% per annum during the year
ended December 31, 2001. The weighted average borrowing rate as of December 31,
2002 and 2001 was 5.487% and 6.002%, respectively. There were no short-term
bank loans as of December 31, 2003. As of December 31, 2002, the Groups short-term bank loans were secured by
certain of the Groups buildings and machineries and equipment with net book
value of RMB150 million.  21.
    
    COMMITMENTS AND CONTINGENCIES  (a)
    
    Commitments As of December 31, 2003, the Group had approximately RMB1,742.8 million (2002:
RMB1,021.9 million) in outstanding commitments of which certain items are
denominated in Deutsch Marks, Japanese Yen, U.S. Dollars and Euros. The amount
included contracted but not provided for capital commitment for construction
projects, investment and acquisition, purchase of equipment, and others
amounting to approximately RMB683.1 million (2002: RMB710.9 million), future
aggregate minimum lease payments under non-cancellable operating leases
regarding leased properties amounting to approximately RMB76.1 million (2002:
RMB85.6 million), and authorized but not contracted for capital commitment
amounting to approximately RMB983.6 million (2002: RMB225.4 million). F-31




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) The future aggregate minimum lease payments under non-cancellable operating
leases regarding leased properties are detailed as follows: 2003RMB000Within one year
    
    
    11,526One to two years
    
    
    7,810Two to three years
    
    
    3,593Three to four years
    
    
    3,230Four to five years
    
    
    3,230Over five years
    
    
    46,68776,076
  (b)
    
    Contingent liabilities  (i)
    
    The Group had endorsed or discounted bank notes which were not yet
honored by the issuers as of December 31, 2003 and 2002 amounting to
approximately RMB1,492 million and RMB1,414 million, respectively.  (ii)
    
    As of December 31, 2003, certain subsidiaries of the Group had provided
the following guarantees:  (1)
    
    Corporate guarantees of approximately RMB690 million (2002:
RMB740 million) for revolving bank loans and notes drawn by affiliated
companies of Shanghai Shenhua: The guarantee arose from the mutual negotiation between Shenyang
Automotive and Shanghai Shenhua. Associated with the corporate
guarantee, Shanghai Shenhua also provided a cross guarantee for the
bank facilities of Shenyang Automotive. The guarantee was for
revolving activities of Shanghai Shenhua and will be terminated upon
mutual agreements between Shenyang Automotive and Shanghai Shenhua. If
Shanghai Shenhua defaults on the repayment of its bank loans or notes
when they fall due, Shenyang Automotive is required to repay the
outstanding balance. There is no recourse or collateralization
provision in the guarantee. As of December 31, 2003, the guarantee
provided for the bank loans and notes drawn by affiliated companies of
Shanghai Shenhua was approximately RMB690 million (2002: RMB740
million), which is also the maximum potential amount of future
payments under the guarantee as of December 31, 2003. However, default
by Shanghai Shenhua and its affiliated companies is considered remote
by management and therefore no liability for the guarantors
obligation under the guarantee existed as of December 31, 2003.  (2)
    
    A joint and several proportional guarantee with all the joint
venture partners of Shenyang Aerospace on a long-term bank loan of
approximately RMB344 million (2002: RMB374 million) drawn by Shenyang
Aerospace which will expire in 2008: The guarantee was provided by the joint venture partners of Shenyang
Aerospace for its long-term loan financing needs during its start-up
period. If Shenyang Aerospace defaults on the repayment of its bank
loan when it falls due, the joint venture partners are jointly and
severally liable to repay the outstanding balance. There is no
recourse or collateralization provision in the guarantee. As of
December 31, 2003, the guarantee provided for the outstanding bank
loan of Shenyang Aerospace was RMB344 million (2002: RMB374 million),
which is also the maximum potential amount of future payments under
the guarantee as of December 31, 2003. However, default by Shenyang
Aerospace is considered remote by management and therefore no
liability for the guarantors obligation under the guarantee existed
as of December 31, 2003.  (3)
    
    Corporate guarantees for bank loans amounting to RMB300 million
drawn by an affiliated company of BHL. The same amount of bank
deposits were pledged as a collateral for the corporate guarantees.
However, default by the affiliated company of BHL is considered remote
by management and therefore no liability for the guarantors
obligation under the guarantee existed as of December 31, 2003. F-32




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued)  (4)
    
    Corporate guarantees of bank loans amounting to RMB100 million
drawn by JinBei. The same amount of bank deposits were pledged as a
collateral for the corporate guarantees. However, default by JinBei is
considered remote by management and therefore no liability for the
guarantors obligation under the guarantee existed as of December 31,
2003.  (5)
    
    A guarantee to BMW Holdings BV guaranteeing the performance by
SJAI of its obligations under the joint venture agreement for
establishment of BMW Brilliance. However, default by SJAI is
considered remote by management and therefore no liability for the
guarantors obligation under the guarantee existed as of December 31,
2003.  (iii)
    
    As of December 31, 2003, subsidiaries of the Group had issued letter of
credits amounting to approximately RMB32 million (2002: RMB44 million).
Approximately RMB7.2 million (2002: Nil) of the issued letter of credits
was secured by pledged bank deposits.  (iv)
    
    On January 21, 2003, a writ dated January 21, 2003 (the Writ) brought
by Broadsino Finance Company Limited (Broadsino), the Plaintiff, was
filed with the Supreme Court of Bermuda and an ex parte Court Order dated
January 22, 2003 (the Court Order) granted by the Supreme Court of
Bermuda in favour of Broadsino was served on the registered office of the
Company in Bermuda. The Writ alleged that the interest of the Chinese
Financial Education Development Foundation (the Foundation), the then
substantial shareholder of the Company, in 1,446,121,500 shares of the
Company (the Sale Shares) was held in trust for Broadsino and was
improperly transferred to Huachen Automotive Group Holdings Company
Limited (Huachen). The Court Order restrained the Company from among
other things: (a) registering the transfer of the Sale Shares by the
Foundation to Huachen and/or Huachen to certain directors of the Company;
or (b) if such transfer has already been registered, registering any
further dealings in such Sale Shares, in each case pending determination
by the Supreme Court of Bermuda of the legal proceedings initiated by
Broadsino against the Company, the Foundation, Huachen and certain
directors of the Company. Broadsino claims that the Company was aware of
the trust arrangement and further alleges that the Company knowingly
participated in a breach of that trust arrangement by allowing the
transfer of the Sale Shares from the Foundation to Huachen. Broadsino
seeks recovery of the Sale Shares and, in the alternative, damages. Upon application by the Company, the Court Order was discharged by a
judgement of the Supreme Court of Bermuda given on February 11, 2003. On
February 26, 2003, a statement of claim was filed by Broadsino as a
procedural step in furtherance of the legal proceedings. On March 10, 2003,
the Company has taken out summons (the Strikeout Summons) at the Supreme
Court of Bermuda to have the Writ and the statement of claim struck out.
The strike-out proceedings were duly heard before the Supreme Court of
Bermuda on July 22 and 23, 2003. On December 31, 2003 the Supreme Court of
Bermuda issued its judgement on the strike-out proceedings, and struck-out
the Writ in respect of legal proceedings brought by Broadsino against the
Company. On March 4, 2004, Broadsino submitted an application for leave to
appeal to the Supreme Court of Bermuda, but at the hearing of the
application before the court on March 9, 2004, Broadsinos application was
refused. The directors of the Company do not believe this litigation to have any
significant impact on the financial position of the Company or the Group.  (v)
    
    On or about October 25, 2002, the Company was served with a claim lodged
by Mr. Yang Rong (Mr. Yang) in the Labour Tribunal in Hong Kong against
the Company. The claim was for approximately US$4.3 million (equivalent to
approximately RMB35.6 million) with respect to loss of salary plus
bonuses, share options and damages for alleged unreasonable dismissal. The
claim was dismissed by the Labour Tribunal in Hong Kong on January 28,
2003. Mr. Yang subsequently applied for a review of this decision. At the
review hearing on July 4, 2003, the Labour Tribunal ordered the case to be
transferred to the High Court in Hong Kong. The claim has therefore been
transferred to the High Court and registered as High Court Action No. 2701
of 2003 (the Action). At a directions hearing held on September 5, 2003,
the High Court ordered Mr. Yang to file and serve his statement of claim
by September 19, 2003. On September 16, 2003, a statement of claim was
served on the Company. On November 4, 2003, the Company filed the defence
and counterclaim with the High Court. Further affirmations were filed by
Mr. Yang in December 2003, January 2004 and March 2004. The Company also
filed additional affirmations in February 2004. Neither court judgement
nor hearing has been scheduled up to the date of approval of these
financial statements. Based on the claims set out in the statement of
claim, the directors of the Company do not believe the Action has had or
will have any significant impact on the financial position of the Company or the Group.
The directors of the Company intend to defend the Action vigorously. F-33




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued)  22.
    
    CAPITAL STOCK 2003
    
    2002
    
    2001Number of shares
    
    Amount
    
    Number of shares
    
    Amount
    
    Number of shares
    
    Amount000
    
    000
    
    000
    
    000
    
    000
    
    000Authorized:Common stock of
US$0.01 each
    
    
    5,000,000
    
    
    US$
    50,000
    
    
    
    5,000,000
    
    
    US$
    50,000
    
    
    
    5,000,000
    
    
    US$
    50,000Issued and fully
paid:Common stock of
US$0.01 each
    
    
    3,668,391
    
    
    RMB303,388
    
    
    3,666,053
    
    
    RMB303,194
    
    
    3,666,053
    
    
    RMB303,194
 During 2003, an employee of the Group exercised certain of his stock options
and as a result 2,338,000 shares of common stock of US$0.01 each were issued at
a price of HK$1.896 per share (Note 23). These new shares ranked pari passu
with existing shares.  23.
    
    STOCK OPTIONS Original share option scheme approved in 1999 Upon the listing on the Companys shares on the SEHK, the Company adopted an
employee share option scheme (the Scheme). Pursuant to the Scheme, the
Companys Board of Directors may grant options to employees of the Group to
subscribe for the Companys common stock at a price which shall be the higher
of:  (a)
    
    a price being not less than 80%, of the average closing price of the
common stock on the relevant stock exchange as stated in such stock
exchanges quotation sheets for the five trading days immediately
preceding the relevant date in respect of such options; and  (b)
    
    the nominal value of the common stock. The maximum number of shares on which options may be granted may not exceed 10%
of the issued share capital of the Company excluding any shares issued on the
exercise of the option from time to time. On June 2, 2001, share options were granted to certain directors and employees
of the Group, entitling them to subscribe for a total of 31,800,000 shares of
the Companys common stock at HK$1.896 per share. The exercisable period of
these options is from June 2, 2001 to June 1, 2011. The compensation expense
associated with these grants was approximately RMB15.5 million and was charged
to income during the year ended December 31, 2001. As a result, the additional
paid-in capital for the year ended December 31, 2001 was increased by RMB15.5
million. During the year ended December 31, 2003, 2,338,000 (2002: Nil) shares
of the above share options were exercised. Accordingly, the common stock and
additional paid-in capital were increased by approximately RMB194,000 and
RMB4,507,000, respectively. No option was granted under this scheme in 2003 and
2002. No. of stock options(000)As of January 1, 2002
    
    
    31,800Granted
    
    
    Exercised
    
    
    Cancelled/lapsed
    
    
    (13,972
    )As of December 31, 2002
    
    
    17,828Granted
    
    
    Exercised
    
    
    (2,338
    )Cancelled/lapsed
    
    
    As of December 31, 2003
    
    
    15,490
 F-34




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) New share option scheme approved in 2002 On June 28, 2002, the Company adopted a new share option scheme (the New
Scheme) in compliance with the amendments to the listing rules and regulations
of SEHK which came into effect on September 1, 2001. The New Scheme has come
into effect on July 15, 2002 and the original share option scheme adopted by
the Company on September 18, 1999 (as described above) was terminated. Any new
share option granted after July 15, 2002 will be in accordance with the terms
of the New Scheme, but the outstanding share options granted in 2001 will not
be affected. Pursuant to the New Scheme, the Companys Board of Directors may
grant options to the participants (include the Groups employees, non-executive
directors, suppliers and customers, etc.) to subscribe for the Companys common
stock at a price which shall not be lower than the higher of:  (a)
    
    the closing price of the common stocks on the relevant stock exchange as
stated in such stock exchanges quotation sheet on the date of grant,
which must be a trading date;  (b)
    
    the average closing price of the common stocks on the relevant stock
exchange as stated in such stock exchanges quotation sheets for the five
trading days immediately preceding the date of grant; and  (c)
    
    the nominal value of the common stock. As of December 31, 2003, no share option was granted under the New Scheme. Call Option Agreements On December 18, 2002, Huachen entered into a principal agreement (the
Principal Agreement) with the Foundation to purchase from the Foundation a
total of 1,446,121,500 shares of common stock, representing approximately
39.446% of the then issued share capital of the Company and the Foundations
entire shareholding interest in the Company. Completion of the Principal
Agreement took place upon signing. On December 18, 2002, each of Mr. Wu Xiao An, Mr. Su Qiang, Mr. Hong Xing and
Mr. He Tao (the Management Directors) entered into a call option agreement
(Call Option Agreements) with Huachen, immediately after the Principal
Agreement was entered into and after completion of the sale and purchase of the
common stocks pursuant thereto. Pursuant to the terms of the Call Option
Agreements, Huachen granted to each of the Management Directors a call option
in respect of a specified number of shares of common stock, totaling
346,305,630 shares in aggregate and representing approximately 9.446% of the
then issued share capital of the Company, at an exercise price of HK$0.95 per
share. Each call option is exercisable in whole or in part at any time during
the period of 3 years commencing from the date falling 6 months after February
6, 2003, the closing date of the general offer made to the remaining
shareholders by Huachen and the Management Directors dated December 18, 2002. Under the terms of the Call Option Agreements, the Management Directors may
elect to pay the exercise price in full or to pay 10% of the exercise price at
the time of exercise of the option. If the Management Directors elect the
latter payment option, the balance of the exercise price will be payable,
without interest, within a 3-year period after the date of completion of the
purchase of the relevant common stock, and the shares will be pledged as
security in favor of Huachen until full payment of the exercise price. As a result of the Call Option Agreements entered into between Huachen and the
Management Directors, compensation expense associated with these call options
is being recognized by the Company on a straight-line basis from December 18,
2002 to August 6, 2003, the date that the call options become fully vested.
Accordingly, compensation expenses of approximately RMB173.2 million and
RMB10.3 million were charged to the income statements for the years ended
December 31, 2003 and 2002, respectively. As of December 31, 2003, none of the call options had been exercised. F-35




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) Pro-forma disclosures setting forth compensation expense assuming the Company
had determined it based on the fair value of the stock options in accordance
with SFAS No. 123 and No. 148 are presented in Note 3(r). The fair value of each option granted is estimated using the Black-Scholes
option pricing model. The weighted average assumptions used for grants of share
options made in 2002 and 2001 are as follows: 2002
    
    2001Risk-free interest rate
    
    
    4.96
    %
    
    
    5.71
    %Expected option life (days of share option outstanding) Exercised on August 12, 2000
    
    
    N/A
    
    
    
    N/A Exercised on August 18, 2000
    
    
    N/A
    
    
    
    N/A Exercised on August 29, 2000
    
    
    N/A
    
    
    
    N/A Issued on June 2, 2001
    
    
    N/A
    
    
    10 years Issued on December 18, 2002
    
    1 
year
    
    
    N/AExpected dividend yield
    
    
    4.11
    %
    
    
    3.98
    %Volatility
    
    
    48.01
    %
    
    
    75.88
    %
  24.
    
    DISTRIBUTION OF PROFIT As stipulated by the relevant laws and regulations for foreign-invested
enterprises in the PRC, the Companys subsidiaries are required to maintain
discretionary dedicated capital, which includes a general reserve fund, an
enterprise expansion fund and a staff welfare and incentive bonus fund. The
dedicated capital is to be appropriated from statutory net income as stipulated
by statute or by the board of directors of respective subsidiaries and recorded
as a component of shareholders equity. For the years ended December 31, 2003,
2002 and 2001, the subsidiaries of the Company appropriated approximately
RMB100.0 million, RMB60.8 million and RMB66.2 million, respectively, to the
general reserve fund. No appropriation to the enterprise expansion fund was
made by the subsidiaries for the years ended December 31, 2003, 2002 and 2001. As approved by the board of directors of Xing Yuan Dong in accordance with the
relevant laws and regulations, dedicated capital of Xing Yuan Dong amounting to
RMB120 million was released for capitalization as paid-in capital of Xing Yuan
Dong. Such release was credited to the capital reserve, which represents the
capitalization of the retained earnings of Xing Yuan Dong and is a
non-distributable reserve of the Group. Dividends declared by the Companys subsidiaries are based on the distributable
profits as reported in the statutory financial statements and amounted to
RMB673.5 million, RMB1,567.1 million and RMB250.2 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Distributions received from the
Companys subsidiaries are denominated in U.S. Dollars and are translated at
the prevailing unified exchange rate in the PRC. Total accumulated
distributable profits of the Companys subsidiaries amounted to RMB647.3
million and RMB325.8 million as of December 31, 2003 and 2002, respectively.
The distributable profits of subsidiaries are different from the amounts
reported under U.S. GAAP. The Companys share of undistributed earnings
retained in the associated companies and jointly controlled entities amounted
to approximately RMB29.8 million and RMB271.2 million as of December 31, 2003
and 2002, respectively. Dividends declared by the Company during 2003 and 2002 consist of: 2003
    
    2002RMB000
    
    RMB0002002 and 2001 final dividends of HK$0.01 and HK$0.005 per share, respectively
    
    
    39,210
    
    
    
    19,6052003 and 2002 interim dividends of HK$0.01 and HK$0.004 per share,
respectively
    
    
    38,541
    
    
    
    15,69077,751
    
    
    
    35,295
 F-36




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) On April 22, 2004, the Company proposed a final dividend of HK$0.01 per share
totaling approximately RMB38,885,000.  25.
    
    RELATED PARTY TRANSACTIONS An affiliated company is a company in which one or more of the directors or
substantial shareholders of the Company have direct or indirect beneficial
interest in the Company or are in a position to exercise significant influence
over the Company. Parties are also considered to be affiliated if they are
subject to common control or common significant influence. Save as disclosed
elsewhere in the financial statements, particulars of significant transactions
with affiliated companies (these affiliated companies and the Company have
certain directors in common and/or other relationships as specified) are
summarized below:  (a)
    
    Amounts due from affiliated companies arising from trading activities: 2003
    
    2002RMB000
    
    RMB000Due from Shanghai Yuantong (Note (i))
    
    
    355,835
    
    
    
    655,835Due from Shanghai Shenhua and its affiliated companies
    
    
    54,967
    
    
    
    63,608Due from affiliated companies of BHL
    
    
    
    
    
    
    41,675Due from affiliated companies of JinBei
    
    
    53,242
    
    
    
    11,015Due from affiliated companies of the joint venture partner of Ningbo Yuming
    
    
    4,408
    
    
    
    280Due from associated companies and jointly controlled entities
    
    
    46,453
    
    
    
    11,376Receivable arising from the disposal of machineries and equipment to BMWBrilliance (Note (ii))
    
    
    269,003
    
    
    
    783,908
    
    
    
    783,789Provision for doubtful debts
    
    
    (9,720
    )
    
    
    (9,723
    )774,188
    
    
    
    774,066
  (i)
    
    Subsequent to December 31, 2003, RMB350 million of endorsed bank notes
were received.  (ii)
    
    The outstanding balance is unsecured, non-interest bearing and will be
settled by BMW Brilliance when certain conditions specified in the
agreement of sale are fulfilled (See also Note 11(d)). Except for (ii) above, the amounts due from affiliated companies are unsecured,
non-interest bearing and have no fixed repayment terms.  (b)
    
    Notes receivable from affiliated companies arising from trading
activities consisted of the following: 2003
    
    2002RMB000
    
    RMB000Notes receivable from affiliated companies of JinBei
    
    
    4,505
    
    
    
    6,613Notes receivable from Shanghai Shenhua
    
    
    487,770
    
    
    
    156,240Notes receivable from Shanghai Yuantong
    
    
    
    
    
    
    3,325Notes receivable from affiliated companies of the joint venture partner
of Ningbo Yuming
    
    
    3,000
    
    
    
    Notes receivable from other affiliated companies of BHL
    
    
    
    
    
    
    20,807Notes receivable from associated companies and jointly controlled entities
    
    
    31,900
    
    
    
    26,000527,175
    
    
    
    212,985
 All the notes receivable from affiliated companies are guaranteed by banks in
the PRC and have maturities of six months or less. The fair value of the notes
receivable approximates their carrying value. F-37




---



##### Table of Contents



Notes to Consolidated Financial Statements (Continued)  (c)
    
    As of December 31, 2003, included in prepayments and other current assets
were approximately RMB26 million (2002: RMB263 million) of prepayments for
purchases of raw materials made to an affiliated company of BHL. As of December 31, 2003, included in other receivables were outstanding
proceeds of RMB20 million (2002: RMB220 million) arising from the disposal
of an associated company to an affiliated company in December 2002 (Note
9).  (d)
    
    Amounts due to affiliated companies arising from trading activities
consisted of the following: 2003
    
    2002RMB000
    
    RMB000Due to associated companies and jointly controlled entities
    
    
    375,396
    
    
    
    398,523Due to Shanghai Shenhua and its affiliated companies
    
    
    84,417
    
    
    
    101,029Due to JinBei and its affiliated companies
    
    
    216,559
    
    
    
    196,186Due to other affiliated companies of BHL
    
    
    2,478
    
    
    
    21,839Due to affiliated companies of the joint venture partner of Ningbo Yuming
    
    
    1,037
    
    
    
    10,225Due to
affiliated companies of the joint venture partner of Xinguang
Brilliance
    
    
    4,967
    
    
    
    1,567684,854
    
    
    
    729,369
 The amounts due to affiliated companies are unsecured, non-interest bearing and
have no fixed repayment terms. F-38




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued)  (e)
    
    Notes payable to affiliated companies arising from trading activities
consisted of the following: 2003
    
    2002RMB000
    
    RMB000Notes payable to affiliated companies of JinBei
    
    
    27,272
    
    
    
    Notes payable to associated companies and jointly controlled entities
    
    
    8,059
    
    
    
    Notes payable to other affiliated companies
    
    
    100
    
    
    
    35,431
    
    
    
    
  (f)
    
    Save as disclosed elsewhere in the financial statements, significant
transactions with affiliated companies consisted of: 2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Sales to JinBei and its affiliated companies
    
    
    150,637
    
    
    
    56,438
    
    
    
    14,923Purchases from JinBei and its affiliated companies
    
    
    986,828
    
    
    
    712,061
    
    
    
    317,046Sales to Shanghai Shenhua and its affiliated companies
    
    
    1,984,715
    
    
    
    1,664,156
    
    
    
    907,232Purchases from Shanghai Shenhua and its affiliated companies
    
    
    222,940
    
    
    
    375,402
    
    
    
    164,323Sales to other affiliated companies of BHL
    
    
    504
    
    
    
    150,390
    
    
    
    59,816Purchases from other affiliated companies of BHL
    
    
    93,498
    
    
    
    99,514
    
    
    
    274,379Sales to Shanghai Yuantong
    
    
    
    
    
    
    710,100
    
    
    
    2,622,002Sales to associated companies and jointly controlled entities
    
    
    171,512
    
    
    
    102,024
    
    
    
    61,683Purchases from associated companies and jointly controlled entities
    
    
    1,597,289
    
    
    
    1,014,057
    
    
    
    635,373Sales to affiliated companies of the joint venture partner of
Ningbo Yuming
    
    
    5,135
    
    
    
    
    
    
    
    Purchases from affiliated companies of the joint venture partner
of Ningbo Yuming
    
    
    16,338
    
    
    
    14,580
    
    
    
    33,524Operating lease rental on machineries and equipment charged by a
jointly controlled entity
    
    
    12,000
    
    
    
    
    
    
    
    Research and development expenses to third parties under contracts
assumed from an affiliated company of BHL at original cost
    
    
    
    
    
    
    116,000
    
    
    
    Long-term prepayment for fixed assets to a third party under a
contract assumed from an affiliated company of BHL at original
cost
    
    
    
    
    
    
    18,305
    
    
    
    Acquisition of Key Choices from BHL
    
    
    
    
    
    
    
    
    
    
    278,213Sales of fixed assets to an affiliated company of BHL
    
    
    
    
    
    
    
    
    
    
    5,558Sales of fixed assets to an associated company
    
    
    
    
    
    
    
    
    
    
    18,425Purchases of fixed assets and other assets from other affiliated
companies of BHL
    
    
    
    
    
    
    
    
    
    
    41,984Purchases of moulds from an affiliated company of Shanghai Shenhua
    
    
    
    
    
    
    
    
    
    
    35,750Advertising expenses reimbursed by Shanghai Yuantong
    
    
    
    
    
    
    
    
    
    
    64,070Management expenses reimbursed to and consultancy fees paid to BHL
    
    
    
    
    
    
    5,182
    
    
    
    12,405Interest income from Shanghai Yuantong
    
    
    
    
    
    
    
    
    
    
    15,930Interest income from BHL and its affiliated companies
    
    
    
    
    
    
    
    
    
    
    23,709
 The above transactions were carried out after negotiations between the Group
and the affiliated companies in the ordinary course of business and on the
basis of estimated market value as determined by the directors. During the year ended December 31, 2002, JinBei allowed Shenyang Automotive to
use the technology of components in the manufacturing of Zhonghua sedans. F-39




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) Other significant transactions with affiliated companies consisted of:  i.
    
    Trademark license Pursuant to a trademark license agreement, JinBei granted Shenyang Automotive
the right to use the JinBei trademark on its products and marketing materials
indefinitely.  ii.
    
    Guarantees provided to affiliated companies Please refer to Note 21 (b) (ii) for details of the guarantees provided to
affiliated companies.  (g)
    
    The advances to affiliated companies consisted of: 2003
    
    2002RMB000
    
    RMB000Advances to BHL and its affiliated companies
    
    
    172,955
    
    
    
    907,191Advance to Zhuhai Brilliance Holding Company Limited
    
    
    
    
    
    
    360,000Advances to affiliated companies of JinBei
    
    
    69,748
    
    
    
    6,613Advances to other affiliated companies
    
    
    779
    
    
    
    30,892243,482
    
    
    
    1,304,696
 The advances to affiliated companies are unsecured, non-interest bearing and
have no fixed repayment terms.  (h)
    
    The advances from affiliated companies consisted of: 2003
    
    2002RMB000
    
    RMB000Advances from a joint venture partner of Shenyang Aerospace
    
    
    
    
    
    
    139,529Advances from affiliated companies of BHL
    
    
    15,294
    
    
    
    13,951Advances from an associated company
    
    
    
    
    
    
    1,264Advances from an affiliated company of Shanghai Shenhua
    
    
    
    
    
    
    1,586Advances from affiliated companies of JinBei
    
    
    516
    
    
    
    2,092Advances from affiliated companies of the joint venture
partner of Ningbo Yuming
    
    
    1,845
    
    
    
    3,998Advances from other affiliated companies
    
    
    382
    
    
    
    Financing received from BMW Brilliance
(Note 11(e))
    
    
    74,605
    
    
    
    92,642
    
    
    
    162,420
 Save for the financing received from BMW Brilliance as detailed in Note 11(e),
other advances from affiliated companies are unsecured, non-interest bearing
and have no fixed repayment terms.  (i)
    
    As of December 31, 2003 and 2002, the Company had advanced approximately
RMB3,528.1 million and RMB3,031.3 million, respectively, to its
subsidiaries, of which approximately RMB2,288.9 million and RMB699.3
million bear interest at 5.0% to 5.8% per annum and 5.0% per annum,
respectively.  26.
    
    RETIREMENT PLAN AND EMPLOYEES BENEFIT As stipulated by the regulations of the PRC government, the Companys
subsidiaries in the PRC have defined contribution retirement plans for their
employees. The PRC government is responsible for the pension liability to these
retired employees. The Companys subsidiaries are required to make specified
contributions for the state-sponsored retirement plan at 22% to 23.5% of the
basic salary costs of their staff for 2003 (2002: 23.5% to 25%; 2001: 20% to
23.5%) payable to a Chinese insurance company. The retirement plan
contributions payable for the years ended December 31, 2003, 2002 and 2001 were
approximately RMB50.4 million, RMB26.8 million and RMB21.2 million,
respectively. In addition to the pension contributions, pursuant to the
relevant laws and regulations of the PRC, the Companys subsidiaries are required to provide benefits such as housing funds, medical
insurance and unemployment insurance for their PRC employees. These provisions,
which were approximately RMB46.5 million, RMB21.2 million and RMB10.4 million
for the years ended December 31, 2003, 2002 and 2001, respectively, were
calculated at a certain percentage (approximately 13% to 18% in 2003, 11% to
18.9% in 2002 and 9.8% to 10.9% in 2001) of the employees basic salaries. F-40




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) The Groups Hong Kong employees are covered by the mandatory provident fund
which is managed by an independent trustee. The Group and its Hong Kong
employees each makes monthly contribution to the scheme at 5% of the employees
cash income with maximum contributions by each of the Group and the employees
limited to HK$1,000 per month. The retirement benefit scheme cost charged to
the income statement represents contributions payable by the Company to the
fund. During the years ended December 31, 2003, 2002 and 2001, contributions
amounting to approximately HK$150,000, HK$146,000 and HK$160,000, respectively,
were made.  27.
    
    EXECUTIVE BONUS PLAN Certain officers of the Company are participants in the Executive Bonus Plan
(the Plan). The Plan provides that up to 5% of the Companys net income be
set aside each year for distribution among plan participants based upon
performance as determined by the Companys board of directors. The allocation
of bonuses among participants is determined at the discretion of the President
of the Company. For the year ended December 31, 2001, no bonus was allocated.
For the years ended December 31, 2003 and 2002, the Company accrued RMB34.4
million and RMB21.6 million, respectively, under the Plan.  28.
    
    SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Year ended December 31,2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Cash paid for:Interest
(net of amount capitalized: 2003: RMB Nil; 2002: RMB800,000; 2001: RMB49,164,000)
    
    
    165,924
    
    
    
    202,968
    
    
    
    178,028Income taxes
    
    
    163,687
    
    
    
    112,579
    
    
    
    183,845
 During the years ended December 31, 2003, 2002 and 2001, major non-cash
transactions included:  (i)
    
    As approved by the joint venture partners of Shenyang Automotive, the
registered capital and total investment of Shenyang Automotive was
increased by approximately RMB2,260 million, which was contributed by the
Company and JinBei in proportion to their original equity interests in
Shenyang Automotive. The Company contributed 51% of the increase in
paid-in capital by way of capitalization of its dividend receivable from a
subsidiary amounting to approximately RMB1,152.6 million. JinBei
contributed the remaining 49% of the paid-in capital by injecting
buildings amounting to approximately RMB41.0 million (Note 11(a)),
long-term prepayment for rental of land amounting to approximately RMB64.4
million (Note 11(a)), components and parts technology right amounting to
RMB820 million (Note 12(b)) and approximately RMB182 million in cash.  (ii)
    
    During the year ended December 31, 2001, purchase consideration amounting
to approximately RMB278 million for the acquisition of an indirect equity
interest in a subsidiary was offset against certain receivable balances
from affiliated companies.  (iii)
    
    During the year ended December 31, 2001, amounts due from and due to
affiliated companies of approximately RMB87 million were offset after
agreement among the parties.  (iv)
    
    During the year ended December 31, 2001, the Company acquired a 100%
equity interest in Key Choices. In conjunction with the acquisition,
assets and liabilities were assumed as follows: F-41




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued)   RMB000Cash paid for the acquisition
    
    
    
    
    
    
    278,213Fair value of net assets acquiredAssets
    
    
    111,165Liabilities
    
    
    (24,219
    )(86,946
    )Goodwill arising from acquisition
    
    
    
    
    
    
    191,267
  29.
    
    OTHER SUPPLEMENTAL INFORMATION The following items are charged to the consolidated statements of income: Year ended December 31,2003
    
    2002
    
    2001RMB000
    
    RMB000
    
    RMB000Import tariffs
    
    
    104,598
    
    
    
    68,168
    
    
    
    66,394Research and development costs
    
    
    191,433
    
    
    
    304,936
    
    
    
    26,825Foreign exchange (gains)/losses
    
    
    (120
    )
    
    
    2,786
    
    
    
    11,608Provision for impairments of property, plant and equipment
    
    
    6,027
    
    
    
    2,547
    
    
    
    30,950Provision for impairment of investment securities
    
    
    
    
    
    
    8,500
    
    
    
    Provision for doubtful debts
    
    
    4,825
    
    
    
    18,921
    
    
    
    1,352
  30.
    
    SEGMENT INFORMATION SFAS No. 131 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. Before 2002, the Groups operating segment consisted solely of the manufacture
and sale of minibuses and automotive components through its subsidiaries within
the PRC. No separate financial information and segment information was
disclosed. In 2002 and 2003, the Group began manufacturing and selling Zhonghua sedans
and BMW sedans, respectively, which are managed separately because each of them
represents a strategic business unit that serves a different market in the
automobile industry. Therefore, the Groups reportable operating segments
consist of i) manufacture and sale of minibuses and automotive components; ii)
manufacture and sale of Zhonghua sedans; and iii) manufacture and sale of BMW
sedans. The accounting policies of each operating segment are the same as those
described in the summary of significant accounting policies. The Group
evaluates performance based on stand-alone operating segment net income and
generally accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices. The Groups
activities are conducted predominantly in the PRC. Accordingly, no geographical
segmentation analysis is provided. F-42




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) Business segments  2003 Manufacture andsale of minibuses
    
    Manufacture and
    
    Manufacture andand automotive
    
    sale of
    
    sale ofcomponents
    
    Zhonghua sedans
    
    BMW sedans
    
    TotalRMB000
    
    RMB000
    
    RMB000
    
    RMB000Total revenues from
reportable segments
    
    
    6,942,411
    
    
    
    3,345,332
    
    
    
    
    
    
    
    10,287,743Elimination of
intersegment
revenues
    
    
    (178,186
    )
    
    
    
    
    
    
    
    
    
    
    (178,186
    )Revenues from
external customers
    
    
    6,764,225
    
    
    
    3,345,332
    
    
    
    
    
    
    
    10,109,557Segment income
(loss) before
taxation and
minority interests
    
    
    1,386,980
    
    
    
    133,614
    
    
    
    (124,910
    )
    
    
    1,395,684Unallocated amounts
 corporate
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (301,497
    )Income before
taxation and
minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,094,187Segment assets as
of December 31,
2003
    
    
    12,030,065
    
    
    
    5,555,963
    
    
    
    564,543
    
    
    
    18,150,571Unallocated amounts
 corporate assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137,665Total assets as of
December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,288,236Other disclosures:Depreciation of
fixed assets
    
    
    197,073
    
    
    
    250,021
    
    
    
    
    
    
    
    447,094Amortization of
long-term
prepayment for
rental of land
    
    
    2,153
    
    
    
    
    
    
    
    
    
    
    
    2,153Amortization on
intangible assets
    
    
    1,546
    
    
    
    225,531
    
    
    
    
    
    
    
    227,077Interest income
    
    
    49,535
    
    
    
    3,137
    
    
    
    
    
    
    
    52,672Interest expense
    
    
    166,074
    
    
    
    1,037
    
    
    
    
    
    
    
    167,111Capital expenditure
    
    
    1,023,356
    
    
    
    1,005,709
    
    
    
    
    
    
    
    2,029,065Equity in earnings
of associated
companies and
jointly controlled
entities
    
    
    102,050
    
    
    
    132,331
    
    
    
    (124,910
    )
    
    
    109,471Equity
method goodwill (Note 13)Goodwill
(Note 14)
    
    
    391,104
    
    
    
    31,983
    
    
    
    
    
    
    
    423,087414,464
    
    
    
    
    
    
    
    
    
    
    
    414,464
 F-43




---



##### Table of Contents



Notes to
Consolidated Financial Statements (Continued) Business segments  2002 Manufacture andsale of minibuses
    
    Manufacture andand automotive
    
    sale of Zhonghuacomponents
    
    sedans
    
    TotalRMB000
    
    RMB000
    
    RMB000Total revenue from reportable
segments
    
    
    6,283,700
    
    
    
    1,117,283
    
    
    
    7,400,983Elimination of intersegment
revenues
    
    
    (81,528
    )
    
    
    
    
    
    
    (81,528
    )Revenues from external customers
    
    
    6,202,172
    
    
    
    1,117,283
    
    
    
    7,319,455Segment income (loss) before
taxation and minority interests
    
    
    1,295,322
    
    
    
    (316,276
    )
    
    
    979,046Unallocated amounts  corporate
expenses
    
    
    
    
    
    
    
    
    
    
    (126,568
    )Income before taxation and
minority interests
    
    
    
    
    
    
    
    
    
    
    852,478Segment assets as of December
31, 2002
    
    
    9,340,061
    
    
    
    4,022,489
    
    
    
    13,362,550Unallocated amounts  corporate
assets
    
    
    
    
    
    
    
    
    
    
    491,131Total assets as of December 31,
2002
    
    
    
    
    
    
    
    
    
    
    13,853,681Other disclosures:Depreciation of fixed assets
    
    
    95,823
    
    
    
    117,953
    
    
    
    213,776Amortization of intangible assets
    
    
    
    
    
    
    56,784
    
    
    
    56,784Interest income
    
    
    42,983
    
    
    
    634
    
    
    
    43,617Interest expense
    
    
    171,158
    
    
    
    128
    
    
    
    171,286Capital expenditure
    
    
    451,781
    
    
    
    244,942
    
    
    
    696,723Equity in earnings of associated
companies and jointly controlled
entities
    
    
    104,208
    
    
    
    33,937
    
    
    
    138,145Equity method goodwill (Note 13)
    
    
    391,104
    
    
    
    31,983
    
    
    
    423,087Goodwill (Note 14)
    
    
    414,464
    
    
    
    
    
    
    
    414,464
 F-44




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##### Table of Contents



Notes to
Consolidated Financial Statements (Continued)  31.
    
    OTHER COMPREHENSIVE INCOME SFAS No. 130 requires the components of comprehensive income to be disclosed in
the financial statements. Comprehensive income consists of net income and other
gains and losses affecting shareholders equity that, under generally accepted
accounting principles, are excluded from net income. For the Group,
comprehensive income only represents its net income for the years ended
December 31, 2003, 2002 and 2001. Foreign CurrencyTranslation
    
    Accumulative OtherAdjustments
    
    Comprehensive IncomeRMB000
    
    RMB000Balance at December
31, 2001
    
    
    39,179
    
    
    
    39,179Current year change
    
    
    
    
    
    
    Balance at December
31, 2002
    
    
    39,179
    
    
    
    39,179Current year change
    
    
    
    
    
    
    Balance at December
31, 2003
    
    
    39,179
    
    
    
    39,179
  32.
    
    APPROVAL OF FINANCIAL STATEMENTS The financial statements were approved by the board of directors on April 22,
2004. F-45




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##### Table of Contents



SIGNATURE The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. BRILLIANCE CHINA AUTOMOTIVE
HOLDINGS LIMITED/s/ Wu Xiao An
     WU Xiao An
     ChairmanDate: June 24, 2004
 3