Annual Report2003

Table of Contents

The Board of the Company and its directors warrant that there are no misrepresentations nor misleading

statements or deliberate omissions contained in this report, and severally and jointly accept full responsibility

for the authenticity, accuracy and completeness of the information presented in this report.

Entrusted by Director He Wenbo, Director Xu Lejiang attended and voted on his behalf; entrusted by Director

Gao Shangquan, Director Shan Weijian attended and voted on his behalf; entrusted by Director Daniel Liew,

Director Ouyang Yingpeng attended and voted on his behalf; where an independent non-executive director must

air his or her opinions separately, Director Hong Ying was authorized to voted on her behalf.

Ms. Xie Qihua, Board Chairwoman and legal representative of Baosteel, Ms. Chen Ying, Financial Supervisor in

charge of the accounting operation, and Mr. Wang Mingdong, Chief of Finance and Accounting Division and

principal of accounting organs, all ensure the authenticity and completeness of the financial and accounting

statements in the Annual Report.

Important Statement

I. Company Profile 2

II. Summary of Accounting Data 3

III. Changes in Capital Stock and Shareholders 6

IV. Directors, Supervisors, Senior Management, and Employees 8

V. Corporate Governance Structure 10

VI. Shareholders’ General Meetings 11

VII. Report by the Board of Directors 13

VIII. Report by the Board of Supervisors 29

IX. Significant Events 31

X. Financial Reports 37

XI. Catalogue of Documents for Reference 88

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I. Company Profile

1. Chinese Name��� !"#$%&'

Chinese Abbreviation��� !

English Name: Baoshan Iron & Steel Co., Ltd.

English Abbreviation: Baosteel

2. Legal Representative: Xie Qihua

3. Secretary to Board of Directors: Chen Ying

Representative of securities affairs: Yu Hong

Address: Guoyuan, Fujin Road Baoshan District, Shanghai

Telephone: 86-21-26647000

Fax: 86-21-26646999

E-mail: ir@baosteel.com

4. Registered Address: Guoyuan, Fujin Road, Baoshan District, Shanghai

Office Address: Guoyuan, Fujin Road, Baoshan District, Shanghai

Zip Code: 201900

Website: http://www.baosteel.com

5. Newspapers for Information Disclosure: China Securities News, Shanghai Securities News, Securities Times

Designated Internet Website for the Annual Report: http://www.sse.com.cn

Copies of Annual Report Available at: Board of Directors’ Office, Guoyuan, Fujin Road Baoshan District, Shanghai

6. Stock Listed at: Shanghai Stock Exchange

Stock Name: Baosteel

Stock Code: 600019

7. Initial Registration Date: 3rd February 2000

Initial Registration Place: Guoyuan, Fujin Road, Baoshan District, Shanghai

Changed Registration Date: 30th November 2000

Enterprise Legal Business License Registration No: 3100001006333

Taxation Registration No: 310041631696382

Name of Certified Accountants’ Office Engaged: Ernst & Young Hua Ming

Office Address of Certified Accountants’ Office Engaged: Level 16, Office E3, Economic & Trade Tower Oriental Plaza, No. 1 East

Chang An Ave., Dongcheng District, Beijing, China

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II. Summary of Accounting Data

1. Principal Accounting Data

Unit: RMB million

Item Amount

Gross profit 9,929

Net profit 6,976

Net profit with non-recurring gains and losses deducted 7,048

Profit from principal operations 13,273

Profit from other operations 64

Operating profit 10,049

Investment income 40

Net non-operating incomes and expenses -160

Net cash flows from operating activities 14,631

Net increase/decrease of cash and cash equivalents -1,811

Non-recurring gains and losses

Unit: RMB million

Item Amount

Investment income 46

Non-operating income 4

Reverse of provision for bad debts 3

Non-operating expenditures 160

Income tax 35

Total number of non-recurring gains and losses -72

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2. Principal Accounting Data for Last Three Years

Unit: RMB million

Item 2003 2002 2001

Income from principal operations 44,460 33,877 29,171

Gross profit 9,929 5,942 3,710

Net profit 6,976 4,272 2,561

Net profit with non-recurring gains and losses deducted 7,048 4,356 2,562

Item Ended 2003 Ended 2002 Ended 2001

Total Assets 60,918 61,489 58,042

Shareholders’ equity35,466 28,185 26,290(excluding minority shareholders’ equity) (before adjustment)

Shareholders’ equity35,466 30,687 27,854(excluding minority shareholders’ equity) (after adjustment)

Net cash flows from operating activities 14,631 10,790 9,038

3. Principal Financial Indicators for Last Three Years

Item 20032002 2001

Before adjustment After adjustment Before adjustment After adjustment

Earnings per share (RMB) 0.56 0.34 0.34 0.20 0.20

Net cash flows per share by operating activities (RMB) 1.17 0.86 0.86 0.72 0.72

Return on net assets (%) (diluted) 19.67 15.16 13.92 9.74 9.20

Returns on net assets (%) (weighted) 21.46 15.03 14.76 9.64 9.57

Returns on net assets with non-recurring gains/19.87 15.45 14.19 9.75 9.20losses deducted (%) (diluted)

Returns on net assets with non-recurring gains/21.68 15.32 15.05 9.65 9.57losses deducted (%) (weighted)

Item Ended 2003Ended 2002 Ended 2001

Before adjustment After adjustment Before adjustment After adjustment

Net assets per share (RMB) 2.83 2.25 2.45 2.10 2.23

Adjusted net assets per share (RMB) 2.83 2.25 2.45 2.10 2.23

Note: according to the pertinent regulations of “Accounting Standards for Business Enterprises J Items after the Date of Balance Sheet” revised, the pre-

distributed cash dividends confirmed in the profit distribution proposal passed by the Board of Directors each year have been changed to being listed

in shareholders’ equity from the original dividend payable in adjustment items. That is why the net assets and relative indexes of the Company each

year have been affected.

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4. Alterations to Shareholders’ Equity

Unit: RMB million

Item Beginning of the year Increase in the year Decrease in the year End of the year

Capital stock 12,512 – – 12,512

Capital reserve 11,689 305 – 11,994

Surplus reserve 2,269 2,154 – 4,423

Including: statutory public welfare funds 977 718 – 1,695

Undistributed profits 4,217 6,976 4,656 6,537

Shareholders’ equity 30,687 9,435 4,656 35,466

Reasons for the alterations

The capital reserve has increased due to transferred-in of shared capital for construction of dock amounting to RMB 282 million and provision

for equity investment derived from the acquisition of Yantai Lubao Steel Tube Co., Ltd. amounting to RMB 22 million; the increase of surplus

reserve, statutory public welfare funds, and undistributed profits have resulted from the profits gained and the distribution of the profits this year.

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III. Changes in Capital Stock and Shareholders

1. Changes in Capital Stock

(1) Share changes of the CompanyUnit:100 million shares

Before changes Increase/decrease After changes

1. Non-negotiable shares

(1) Sponsor’s shares

Including: stated-owned shares 106.35 – 106.35

Shares held by domestic legal persons

Shares held by overseas legal persons

Others

(2) Legal person shares raised

(3) Staff and workers’ share

(4) Preferred shares or others

Total number of non-negotiable shares 106.35 – 106.35

2. Negotiable Shares

(1) RMB common shares (A shares) 18.77 – 18.77

(2) Domestically-listed foreign shares (B shares)

(3) Overseas-listed foreign shares

(4) Others

Total number of listed negotiable shares 18.77 – 18.77

3. Total Number of Shares 125.12 – 125.12

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(2) Issue and listing of shares

After obtaining the approval of the China securities Regulatory Commission (CSRC) (Document [2000]No.140),

by ways of off-line rationing and on-line pricing, the Company successfully completed the issue of 1,877 million

RMB common shares with a par value of RMB 1.00 Yuan per share during the period of 6th-24th November 2000.

Among which, 450 million shares were for general investors by on-line pricing, and 1,427 million shares for 461

legal person investors, including 10 strategic investors by off-line rationing. The issue price was RMB 4.18 million;

the P/E ratio on issue was 18.66 times (fully diluted). The net funds raised were RMB 7,703 million (excluding the

issue expenses). The 980 million shares rationed to the general legal person investors (including the securities

investment fund) would be listed and negotiable either three months or four months after the registration date.

The 447 million shares rationed to the strategic investors would be listed and become negotiable six months after

the registration date (the registration date was 29th Nov. 2000)

Agreed by the Listing Affirmation of Shanghai Stock Exchange on 12th December 2000. The 943 million shares with

a lock-up period of four months, both rationed to the general legal person investors (including the securities invest-

ment fund), were listed and negotiable at Shanghai Stock Exchange respectively on 1st Mar. and 29th March 2001.

The 447 million shares rationed to the strategic investors were listed and became negotiable on 29th May 2001.

2. Shareholders

(1) The total number of shareholders ended the report period is 208,585.

(2) Shareholdings of principal shareholders

All shareholders Negotiable Name of shareholder Increase/decrease Shares held by the end Percentage Category Characteristicsshareholders in the year (Unit: Share) of the year (Unit: Share) =(%)

1 – Shanghai Baosteel Group Corporation – 10,635,000,000 85.00 Non-negotiable State-owned

2 1 UBS Ltd. +87,514,474 87,514,474 0.70 Negotiable QFII

3 2 Hua An innovation securities investment fund +19,832,379 39,245,895 0.31 Negotiable

4 3 Ke Rui securities investment fund +21,679,849 33,192,088 0.27 Negotiable

5 4 Tong Sheng securities investment fund +31,509,534 31,953,434 0.26 Negotiable

6 5 Tong Yi securities investment fund +28,144,868 29,764,868 0.24 Negotiable

7 6 Yin Feng securities investment fund +22,432,517 25,132,517 0.20 Negotiable

8 7 Tian Yuan securities investment fund +17,006,735 22,500,002 0.18 Negotiable

9 8 Bo Shi value increase securities investment fund +15,250,000 16,000,000 0.13 Negotiable

10 9 E Fund strategic Growth Securities Investment Fund +15,645,400 15,645,400 0.13 Negotiable

11 10 Jin Tai securities investment fund +12,718,357 14,718,357 0.12 Negotiable

Both Ke Rui securities investment fund and E Fund strategic growth securities investment fund belong to E Fund

Management Co., Ltd.; and both Tong Sheng securities investment fund and Tong Yi securities investment fund

belong to Chang Sheng Fund Management Co., Ltd. The remaining shareholders of the company are not known

to have any connection or concerted action relationship among them.

SBGC, the parent company of Baosteel, is a state-authorized investment body and a state holding company. Its

main business activities involve the operation of the state-owned assets within the scope of the authorization by

the State Council as well as some relevant businesses. Among its business activities are iron & steel, metallurgical

and mining products, coal, chemicals (excluding dangerous articles), electricity, wharves, warehousing, transpor-

tation and iron-and-steel-related businesses, technology development, technology transfer, technological services,

and technology management consultation, import & export businesses approved by MOFTEC, and domestic and

overseas trades (excluding special provisions) and services. The legal representative of the Company is Xie Qihua.

The registered capital is RMB 45,800 million. The Company was established on November 11th 1998. Shares

held by SBGC are not pledged or frozen.

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IV. Directors, Supervisors, Senior Management, and Employees

1. Directors, Supervisors, and Senior Management

(1) Basic information

Name Position Gender Age Tenure of office

Xie Qihua Chairwoman of the Board of Directors F 60 2003.04-2006.04

Ai Baojun Vice Chairman, President M 43 2003.04-2006.04

Ouyang Yingpeng Vice Chairman M 53 2003.04-2006.04

Li Haiping Director, Vice President M 53 2003.04-2006.04

Xu Lejiang Director M 44 2003.04-2006.04

He Wenbo Director M 48 2003.04-2006.04

Zhu Yiming Director M 46 2003.04-2006.04

Shan Weijian Independent Director M 50 2003.04-2006.04

Daniel liew Independent Director M 37 2003.04-2006.04

Gao Shangquan Independent Director M 74 2003.04-2006.04

Hong Ying Independent Director F 53 2003.04-2006.04

Zhao Ruyue Chairman of the Board of Supervisors M 60 2003.04-2006.04

Chen Delin Supervisor M 48 2003.04-2006.04

Wang Chenran Supervisor M 44 2003.04-2006.04

Zhou Shichun Supervisor M 42 2003.07-2006.04

Zhang Jianzhong Supervisor M 48 2003.07-2006.04

Shan Xuyi Supervisor M 39 2003.04-2006.04

Sun Haiming Independent Supervisor M 47 2003.04-2006.04

Sun Chiping Independent Supervisor M 45 2003.04-2006.04

Li Qiming Independent Supervisor M 57 2003.04-2006.04

Zhao Zhouli Vice President M 47 2003.04-2006.04

Cui Jian Vice President M 43 2003.07-2006.04

Zhu Junsheng Vice President M 43 2003.07-2006.04

Chen Ying Financial Supervisor, Secretary to the Board of Directors F 32 2003.10-2006.04

Note: The term of office will end at the closing date of the 2006 Annual Shareholders’ Meetings.

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(2) Positions with shareholding company

Name Name of shareholding company Positions with shareholding company Tenure of office

Xie Qihua Shanghai Baosteel Group Corp. (SBGC) Chairwoman of the board of Directors, President 2003.02-

Ai Baojun SBGC Director 2001.03-

Ouyang Yingpeng SBGC Director 2003.03-

Xu Lejiang SBGC Director, Vice President 1998.11-

He Wenbo SBGC Director, Vice President 1998.11-

Zhao Ruyue SBGC Secretary to the discipline Inspection Committee 1998.11-

Chen Delin SBGC Secretary to the Board of Directors, Chief Legal Consultant 2003.06-

Wang Chengran SBGC Vice chief of assets management department 2003.06-

2. Annual Emoluments

The total emolument in 2003 for all directors, supervisors, and senior management are RMB 10.16 million. Among

whom, three have received payments between RMB 0.8 million and RMB 0.9 million, eight between RMB 0.7million and

RMB 0.8 million, one about RMB 0.45 million, and 7 about RMB 0.20 million. The top three directors (holding concur-

rent post as senior management) have received a total of RMB 2.56 million.

The annual subsidies for the independent directors and independent supervisors are respectively RMB 0.2 million.

In addition, the traveling and accommodation expenses incurred for the independent directors and independent super-

visors attending the Company meetings are borne by the Company.

Xie Qihua`Xu Lejiang

`He Wenbo

`Zhao Ruyue

`Chen Delin

`Wang Chengran have been paid emoluments by SBGC

instead of by the Company.

3. Election and alteration of directors, supervisors and senior management during the report period

On April 24th 2003, at the 2002 Shareholders’ General Meeting, the proposal of Election at Expiration of Office Terms in the

Board Directors was reviewed and approved, Xie Qihua, Ai Baojun, Ouyang Yingpeng, Li Haiping, Xu Lejiang, He Wenbo, Ge

Honglin, Zhu Yiming, Shan Weijian, Liu Huaijing, Gao Shangquan, Hong Ying were elected directors to the 2nd Board of the

Company, among whom, Shan Weijian, Daniel Liew, Gao Shangquan, and Hong Ying were elected independent directors.

On April 24th 2003, at the 2002 Shareholders’ General Meeting, the proposal of “Election at Expiration of Office Terms in the

Board of Supervisors” was reviewed and approved, Zhao Ruyue, Chen Delin, Wang Chengran, Sun Haiming, Li Qiming, Sun

Chiping were elected supervisors to the 2nd Board of Supervisors of the Company.

Through July 14th to 16th, the 4th Interim Session of the 1st Workers’ Congress was held. In the meeting, it was approved

that Lin An and Lou Dingbo were dismissed from the post of workers’ representative supervisors for another assignment.

Zhang Jianzhong and Zhou Shichun were elected workers’ representative supervisors to the 2nd Board of Supervisors.

On July 21st 2003, at the 2nd session of the 2nd Board of Directors, Ge Honglin was approved to resign as director for

another assignment; Cui Jian and Zhu Junsheng were elected vice president; and Dai Zhihao was approved to resign as vice

president for another assignment.

On October 29th 2003, at the 4th session of the 2nd Board of Directors, Jia Yanlin was approved to resign as financial

supervisor for another assignment; Lu Guoqing was approved to resign as secretary to the Board of Directors for another

assignment and Chen Ying was appointed as financial supervisor and secretary to the Board of Directors.

On October 29th 2003, at the 1st Interim Shareholders’ Meeting in 2003, Ge Honglin was approved to resign as director for

another assignment.

4. Employees

The Company has a total of 15,325 employees, of whom, 11,032 are engaged in production, 3,111 technical personnel, and

1,182 management employees. 4,752 have received college education or above. And at the end of the year, there have been

178 semi-retired employees who are financially supported by the Company.

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V. Corporate Governance Structure

1. Improvement of Corporate Governance Structure

Strictly pursuant to the Company Law, the Securities Law, the Relevant Regulations of China Securities Regulatory Commission, and the Share

Listing Rules of Shanghai Stock Exchange, the Company has set up a well-conceived corporate governance structure, standardized its operations.

With rigorous and effective internal and external auditing supervision, timely, accurate and consistent information disclosure, as well as sound

and interactive investor relations management, the Company has been honest in operation and transparent in management.

As one of the first companies to have set up independent director and supervisor systems, the ratio of the independent directors and the

supervisors respectively in the Board of Directors and the Board of Supervisors has reached 1/3.

The Board of Directors has set up two special committees: Emoluments and Appraisal Committee, and Auditing Committee, in which indepen-

dent directors are all key members and principals. In the report period, the Company set up a new strategic committee as well.

The Company will continuously improve the establishment of special committees, and perfect the performance evaluation, the motivation

mechanism and, gradually, the voting system.

2. Independent Directors’ Performance of Duty

Independent directors performed their duties honestly and diligently. They actively attended all meetings of the Board of Directors, participated in

the establishment and decision-making process of the Board Special Committees, performed the special duties and responsibilities granted by

the Articles of Association, reviewed and approved the Company’s major connected transactions, provided professional and constructive sugges-

tions for important corporate decisions, supervised the work of the management, and safeguarded the legal interests of the Company and the

shareholders.

3. Independence of the Company and Holding Shareholders

In terms of staff, the Company’s labor force, personnel matters, and payroll management are totally independent of Baosteel Group. The

president, vice presidents, financial supervisor, and secretary to the Board of Directors have not concurrently held any positions in Shanghai

Baosteel Group Corporation.

In regard to assets integration, the Company owns its own complete technological processes including raw materials engineering, sintering,

coking, iron smelting, steel making, and steel rolling. It has its own wharves, ship fleet, and relevant public utilities. In addition, the Company has

set up its complete systems of scientific research, production, purchasing, and marketing. Pursuant to the Patents Transfer Agreement and the

Trademark Transfer Agreement signed with SBGC, the Company has gone through relevant patent transfer procedures and it is expected that in

the first half of 2004, the relevant trademark transfer procedures will be completed.

With regard to the organization independence, the Company is wholly detached from SBGC with no overlapped segments.

In terms of businesses, the Company has its own independent and integrated businesses and autonomous operation ability.

As for financial independence, the Company has set up its own independent financial departments and independent accounting, auditing, and

financial management systems. It also has separate bank accounts, and separately pays taxes according to relevant laws.

4. Appraisal of Senior Management and Establishment & Implementation of Rewarding Systems

The senior management hold themselves responsible to the Board. The Board appraises and rewards the senior management in line

with the production and operational targets of the year approved by the shareholders’ general meetings.

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VI. Shareholders’ General Meetings

1. Notices to and Convening of the Shareholders’ Meeting

(1) The 2002 Shareholders’ Meeting

On February 28th 2003, the 13th meeting of the 1st Board of Directors was held and decided to hold the

Company’s 2002 annual shareholders’ meeting. The above decision was announced on China Securities News,

Shanghai Securities News, and Securities Times on March 4th 2003.

The Company published the notice to the alteration of address of the 2002 annual shareholders’ meeting on

Shanghai Securities News, China Securities News and Securities Times on March 11th 2003.

The Company published the notice to the alteration of address of the 2002 annual shareholders’ meeting on

Shanghai Securities News, China Securities News and Securities Times on April 22nd 2003.

The Company’s 2002 annual shareholders’ meeting was held at Baosteel’s headquarter in the morning of April

24th 2003.

(2) The 1st Interim Shareholders’ Meeting of 2003

The Company’s 3rd meeting of the 2nd Board of Directors decided to hold the 1st interim shareholders’ meeting

of 2003 on October 29th 2003 and publicized the decision in Shanghai Securities News, China Securities News

and Securities Times on September 12th 2003.

The Company’s 1st interim shareholders’ meeting of 2003 was held in Dalian on October 29th 2003.

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2. Resolutions of the Shareholders’ Meeting, Disclosure and Disclosure Date

(1) The following resolutions were reviewed and passed in the 2002 annual Shareholders’ Meeting on April 24th 2003 (no resolutions

voted down):

Profit distribution plan for 2002,

Financial final accounts report for 2002,

Financial budget program for 2003,

The 2002 work report by the Board of Directors,

The 2002 work report by the Board of Supervisors,

The 2002 report by the outside supervisors,

Proposals on election at expiration of office terms with the Company’s Board of Directors,

Proposals on election at expiration of office terms with the Company’s Board of Supervisors,

Proposals on agreements (model version) to be approved by the Company’s Shareholders’ Meeting on appointing

directors and supervisors,

Reassignment of Ernst & Young Hua Ming as the independent auditor of the Company for 2003.

Announcements of the above resolutions were published on China Securities News, Shanghai Securities News

and Securities Times on April 25th 2003.

(2) The following resolutions was reviewed and passed in the 1st Interim Shareholders’ Meeting of 2003 held on October 29th 2003

(no resolutions voted down):

Proposals on the acquisition of Yichang Steel Sheets, Lubao Steel Tube and partial assets of SBGC,

Proposals on the budget adjustment of 2003 of Baoshan Iron & Steel Co., Ltd.,

Setting up a strategic committee for the Board of Directors of Baoshan Iron & Steel Co., Ltd.,

Approval on Ge Honglin’s resignation as director of Baoshan Iron & Steel Co., Ltd.

Announcements of the above resolutions were published on China Securities News, Shanghai Securities News

and Securities Times on October 31st 2003.

(3) Election and removal of the Company’s directors and supervisors

See Item 3 of Chapter IV for details.

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VII. Report of the Board of Directors

Growth rate of downstream industries in 2003

CRU Global Steel Price Index Curve

1. Management Discussions and Analyses

(1) Review of the external environmentIn 2003, China’s economy withstood the attack of SARS and its GDP rose 9.1 percent, entering a new round of fast growing period. Upgrading

and renewal of consumption structure and construction of a large amount of infrastructure have brought about group fast-growing industries,

including automobile, construction, household appliances, machine manufacturing and communication, etc., which has driven the high-speed

growth of steel industry.

The following bar chart shows the growth of the main downstream consumers of steel in 2003 compared to that of 2002:

(Data source: State Statistical Bureau)

But the development of the iron and steel industry is not all smooth sailing. With the imposition of “ Section 201”, steel protection policy, by U.S.A

in March 2002, steel trade protectionism had been heightened in the world. When U.S.A announced the abolition of “Section 201” in December

2003, it expressed that it would consider adopting the steel import license system and anti-dumping measures. In view of the rapid changes in

the trading environment and the competitive situation of the industry, steel enterprises are seeking, on one hand, the acquisition, merger,

restructuring and strategic cooperation within the industry and on the other hand, expediting on strategic alliances with upstream and down-

stream sectors to improve their competitiveness in the market.

China is becoming increasingly a driving force in the progress of the global steel industry. Data with International Iron & Steel Institution (IISI) show

crude steel capacity worldwide increased about 6.7 percent in 2003, up about 60 million tons compared to that of 2002, of which 65 percent was

contributed by China. Effective demands for continuous increase in downstream sectors have driven the rapid development of China’s steel industry.

China’s crude steel capacity was 220 million tons in 2003, up 21.2 percent compared to that of 2002, accounting for 23 percent of the crude steel

worldwide. Meanwhile, the steel was trading at a historic high price. The following graph shows the curve of CRU global steel price index.

14

Nevertheless, we should realize that the rapid development of the steel industry has brought along new problems. Early in 2003, bulk

raw material and fuel market showed an overall strained situation and the price kept rising as a result of an undersupply of iron ore,

coal, scrap and ferroalloy, etc. along with insufficient transportation capacity. In the meantime, all sorts of capital flooded into steel

industry. This investment craze in the steel industry has caught the attention of the state departments concerned. At the end of 2003,

the state departments concerned introduced policies to restrict the haphazard funding in steel industry, low-level repetitive construc-

tion and illegal operation.

(2) Company’s strategy and business scope

Taking “Becoming the major steel producer worldwide dedicated to providing value-added products and service to society” as its

mission and “Becoming the most competitive steel enterprise worldwide” as its strategic objective, the Company is implementing the

“leapfrogging” development strategy and “Target focus” competitive strategy, concentrating on dominant product group, strategic

product group and customer group. To realize the aforesaid targets the Company is quickening its development steps and the

construction of the key projects such as 1800 cold rolling mill and heavy plate mill, etc. persisting in innovative change, optimizing

business operation flow and continuously improving its ability to satisfy the customer’s needs. On the basis of new operation plan, the

Company compiled and completed Development Plan for Years 2004-2009 in 2003, drawing a further development blue print for the

Company.

Focusing on the steel industry and being the leading carbon steel plate producer in the China market, the Company’s principal

business consists of cold-rolled sheets and coils, hot-rolled sheets and coils, seamless steel tubes, high-speed wires & rods, widely

used in automobiles, household appliances, petroleum, high-grade buildings and metal products, etc., enjoying dominent market

share in sectors like automobiles, household appliances, petroleum pipelines, etc.

(3) Major work focused by the Company

In the complicated and volatile market, through concerted efforts made by the employees as a whole, performance increased greatly

in 2003, achieving the sales revenue RMB 44.46 billion, up 31.24% compared to that of the preceding year, pre-tax profits RMB

9.929 billion, up 67.10% over the same period of the preceding year. On top of the factor of periodic increases in steel prices, the

Company’s major undertakings led to the large increase in the business performance and will have an impact on the company’s

future business performance.

Strategic cooperation and alliance

Customers in downstream sectors: Shanghai Baosteel Group Corporation (SBGC) has signed strategic cooperation agreements with

NO.1 Automobile, Shanghai Automobile and DONG FENG Automobile successively, cooperating strategically in steel product supply,

technology development, steel product deep processing and customer service. We have preliminarily formed a strategic upstream

and downstream relationship between the steel industry and the auto industry and offered a good operation platform to satisfy the

needs of auto customers.

Steel peers: in December 2003, the Company held a ceremony on signing the contract of a joint venture of 1800 cold rolling mill

producing auto sheets with NIPPON STEEL CORPORATION and ARCELOR. This project will further enhance the Company’s competi-

tiveness in auto sheet manufacturing and customer service. Meanwhile, the Company has built Shanghai BAOSTEEL ARCELOR

Laser Tailor Welded Co., Ltd. jointly with Arbed, Luxemburg (hereinafter referred to as Arbed), Shanghai Volkswagen United Develop-

ment Company and Shanghai Baosteel International Economic & Trading Co., Ltd. (hereinafter referred to as BAOSTEEL International),

which will improve the Company’s comprehensive capability of supplying auto sheets when the project is completed.

Supply of raw material in upstream sector: SBGC has set up mining joint ventures successively with Brazilian CVRD, Australian

Harmsley , Henan Yongcheng Coal Mine, Henan Ping Dingshan Coal Mine, securing a long-term, stable supply of resources. The

Company has also signed long-term agreements on iron ore supply with several mining companies and long-term agreements on

transportation with several world-renowned ship owners to secure the stable supply of raw material resources and ensure transporta-

tion capability.

The strategic cooperation and alliance with major enterprises along the supply chain will greatly consolidate and improve the Company’s

long-term competitiveness in the market.

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Sale, certification and quality improvement of auto sheets

Auto sheets are the company’s leading products. To satisfy the rapid development of the domestic auto industry, the Company is

dedicating itself to persistently increasing and improving the production capacity and quantity of auto sheets. In 2003, the Company’s

sales volume of cold rolled auto sheets amounted to 1.239 million tons, up 26% over the year 2002. Certification work of the key auto

sheets is going smoothly and 142 parts and components and steel grades for major car models have been certified. At present, the

Company supplies auto sheets for main domestic car models in batches and has for the first time supplied trial products to FORD

automobile in Europe, opening a new channel for exporting auto sheets. In 2003, the Company developed high strength steel grades

for three new car models, improved another 12 high strength steel grades and implemented over 20 quality improvement projects,

greatly increasing the qualification rate of product performance and improved quality stability. The progress of auto sheets is a result

of the Company’s quick market response, powerful product R&D, sound quality management, persistent quality improvement and

perfected customer service.

System innovation of the enterprise

Along with the rapid development of information technology, the operation and organization pattern of conventional enterprises is

making a great impact. To fit itself in the new and fluid operational environment, the Company put forward the enterprise system

innovation project: taking customers’ needs as the focus, business flow as a pivot, management system as a guarantee, normaliza-

tion and transparency as a condition, information technology as a support, improved system effectiveness and operation efficiency

as an objective, to finally establish a streamlined process flow system driven by customers, responding quickly to external factors and

being highly coordinating internally. By the end of 2003, three major production-sale projects of “agile manufacturing system of

Phase I ”, “Secondary development of product design” and “Web marketing system” had been put into operation, which had

enabled the Company to realize a leap from ERP management application to supply chain management application. Simultaneously,

three process flow reengineering projects in human resources, finance and procurement were being carried out comprehensively.

6 � lean operation

To form a sustainable, improving system compatible with the company’s strategy of “Leapfrogging Development”, further cultivate

enterprise-wide culture, that is “Customer Oriented, Process Coordinated, Value Driven and Data-based, the Company has intro-

duced two optimal managerial tools of 6 � and lean operation into practice. Based on the sound results decision making and

experiments carried out in the hot rolling unit in 2002, the Company organized and implemented 62 projects of 6� lean operation

in 2003, cultivated 112 star workers, 66 black bands and 110 green bands.

Cost cuts and efficiency improvement

Continuously rising prices in raw materials and fuels has brought considerable pressure on the operation. In view of that, the

Company has carried out the activities in order to cut cost and increase efficiency thoroughly. By working on aspects such as capacity

expansion, product mix optimization, unplanned shutdown time reduction, product quality stability, new product R&D and compre-

hensive resource utilization. 18 company-level projects achieved RMB 1.47 billion in 2003.

Credit rating

In October 2003, S&P Rating Services announced the first credit rating of the Company as “BBB”, on a par with the then sovereignty

rating with a “stable” outlook. The rating has not only improved the transparency in the Company’s credit, but is of great significance

for the Company to promote the international strategy and to establish a good reputation in the international capital market.

Capital acquisition

On October 31st 2003, the Company acquired 90% stock equity from Shanghai Baosteel Yichang Steel Sheet Co., Ltd. (hereinafter

referred to as Yichang Steel Sheet), 79.82% stock equity from Yantai Lubao Steel Tube Co., Ltd. (hereinafter referred to as Lubao Steel

Tube) and part of assets from SBGC, in an effort to improve market control, perfect strategic deployment, further enhance R&D

capability and increase comprehensive competitiveness.

16

2. Operation of the Company

(1) Business performance

The Company’s principal business income hit a historic new high in 2003, achieving RMB 44.460 billion, up

31.24% over last year, of which sales volume of commercial products was up 3.19% over 2002, amounting to

11.1042 million tons, with unit price up 22.79% over 2002.

Compared with 2002, sales volume of cold rolled products increased 12.84%, hot rolled plates and coils dropped

1.87%, seamless tubes up 3.09%, wires & rods up 3.4% and steel billets down 23.04%.

In 2003, the profit of core business was RMB 13.273 billion, up 45.03% over the preceding year. Gross profit rate

of the core business rose from 27.81% in 2002 to 30.67% in 2003, up 2.86 percentage points mainly because the

cost increase of 26.05% in core business over the preceding year was lower than the margin increase in core

business income. The increase in core business cost was due mainly to a 26.27% rise in the cost of raw materials.

Depreciation increased 32.59%.

In 2003, business profit was RMB 10.049 billion, up 64.39% over the preceding year. As a result of expansion in

the scope of business. Operating cost and overhead increased 12.10% and 11.24% respectively in 2003. Financial

expenses decreased 3.66% as the Company continued to increase repayment of loans.

In 2003, pre-tax profit was RMB 9.929 billion, up 67.10% over last year. Investment yield was RMB 40 million

because the Company cut down the routine capital balance and carried out short-term investment.

In 2003, net profit was RMB 6.976 billion, up 63.29% over last year. According to tax laws and regulations of the

state, the Company is expected to enjoy a reduction and exemption of income tax amounting to RMB 323 million

for fiscal year 2003.

(2) Distribution of industry

The Company’s principal business is manufacturing and selling of steel products as well as the sale and service of its by-products. The sales of steel

products accounted for 91.60% of the principal business income. See the following table for the operation income, operation cost and gross profit

margins by industry.

Unit: RMB million

IndustryPrincipal operation Principal operation Gross profit Rise & fall (%) of principal operation Rise & fall (%) of principal operation Rise & fall of gross profit

income cost rate income over last year cost over last year rate over last year

Steel industry 40,724 27,111 33.43% 26.36 18.50 4.42%

Others 3,737 3,715 0.60% 126.82 135.58 - 3.69%

Comparable increase or decrease ratio of commercial billet material sales in 2003

Cold rolled

Hot rolled

Seamless tubes Wires & Rods

Steel billets

17

Distribution of commercial billet material sales in 2003

Cold rolled products

In 2003, sales volume of cold rolled products was 5.4930 million tons, up

12.84% over last year, accounting for 49.47% of the total sales volume of the

Company. Cold rolled products include standard cold rolled, hot-galvanized,

electric steel, color-coated, electro-tinned and electro-galvanized sheets, etc.

mainly used in automobiles, household appliances and food packing industry.

The Company occupies the largest share in the domestic market of cold

rolled products, of which sales volume of cold rolled auto sheets was 1.239

million tons, around 45% domestic market share and sales volume of house-

hold appliances was 1.21 million tons, around 53% shares in the market.

The Company has also developed high-grade electro-galvanized exposed sheets

for cars and is supplying for domestic high-grade cars steadily on a large

scale. To adapt itself to the developing trends in the world of environmentally

friendly steel products, it has developed chrome-free anti-finger-print prod-

ucts for household appliances.

Hot rolled products

In 2003, sales volume of hot rolled products was 3.34 million tons, down 1.87% from last year, accounting for 30.08% of the total sales volume. Hot

rolled products are mainly used for pipelines, railway vehicles, buildings and containers, etc. In 2003, sales volume of pipeline steel was 510,000

tons, accounting for 56% in domestic market share. The Company has developed high strength weather-proof steel for railway vehicles, which makes

it a unique producer and supplier in China, and was authorized by the Railway Ministry to draft the standard for high strength railway vehicle steel.

Seamless tubes

In 2003, sales volume of steel tubes was 828,200 tons, up 3.09% over last year, accounting for 7.46% of the total sales volume. Seamless tubes

contain oil well tubes, high-pressure boiler tubes and general tubes, mainly used in petrol-chemical, boiler and machining industries. The Company

is one of the important suppliers of oil well tubes in China. It has developed high-alloy and anti-corrosive 13Cr steel tubes in China for the first time

and produces high-alloy T91 high-pressure boiler tubes for supercritical boilers, which makes it a unique supplier on a large scale in China.

Wires & rods

In 2003, sales volume of wires & rods was 569,900 tons, up 3.40% over last year, accounting for 5.13% of the total sales volume. Wires & rods

contain cold-headed steel, pre-stressing wires and tire cords, etc. mainly used in the machine building industry. In 2003, tire cords were certified by

Micheline Company, accepted in its global procuring system, and awarded “Supplier of the Quickest Progress” issued by Bekaert Group.

Steel billets

In 2003, sales volume of steel billets was 873,100 tons, down 23.04% from last year, accounting for 7.86% of the total sales volume. Steel billets

mainly contain die steel, car axle billets and oxygen bottles, etc.

(3) Main products

The Company focuses on the production of high quality and high value-added products and occupies a large share of high-end market. Steel products

are cold rolled products such as standard cold rolled, hot-dip galvanized, electric steel, color-coated, electro-tinned and electro-galvanized sheets, hot

rolled sheets and coils, wires & rods and steel slabs.

HRC

Wires & Rods

Steel billets

Seamless tubes

CRC

18

CRC

HRC

Seamless tubes

Wires & Rods

Steel billets

See the following table for products with income and cost accounting for over 10% of the principal business:

Unit: RMB million

ProductsPrincipal operation Principal operation

Gross marginRise & fall (%) of principal operation Rise & fall (%) of principal operation Rise & fall of gross margin

income cost income over last year cost over last year over last year

CRC 23,444 15,402 34.30% 41.81 29.61 6.19%

HRC 9,723 5,949 38.82% 20.38 9.62 6.00%

(4) Major market

The majority of steel products the Company sold were within the territory of China to meet the growing demands for high quality steel products from

downstream industries while, around 10% products were sold overseas each year, which not only increases the recognition of the Company in the

world, but also is of advantage in the tracking of advanced technological development around the globe, and continuously improving product quality

and customer service through high standard requirements from international customers. In 2003, commercial slabs accounted for 88.16% of sales

volume in domestic market and 11.84% in overseas market.

See the following table for sales revenue and cost by territory.

Unit: RMB million

TerritoryPrincipal operation Principal operation

Gross marginRise & fall (%) of principal operation Rise & fall (%) of principal operation Rise & fall of gross margin

income cost income over last year cost over last year over last year

Domestic market 35,843 23,528 34.36% 29.40 20.75 4.70%

Overseas market 4,269 3,238 24.13% 7.88 7.13 0.54%

Domestic market

Commercial products of the Company are mainly sold in the domestic market. In 2003, sales in the domestic market accounted for 89.36%, with

sales volume amounting to 9.7896 million tons. Orientating towards the high-end product market, the Company has supplied high-value added

products to the customers, with 70% of product sold to direct-supply customers and strategic customers.

Overseas market

In 2003, sales income of commercial products in overseas market accounted for 10.64% and sales volume amounted to 1.3146 million tons. Over

years of development, the Company has expanded its export areas and improved its export products grade, gradually making a shift from hot rolled

products to cold rolled products. The convenience of order placing for overseas customers has been greatly improved and now 100% of overseas

customers can place orders through the web.

See the following table for sales volume of commercial products in different

overseas areas:

Area Year 2003 Year 2002

East Asia 39% 33%

South-east Asia 21% 18%

America 9% 16%

Europe and Africa 31% 33%

Total 100% 100%

Sales volume of export of commercial products

19

(5) Major changes in profitability of principal business

(6) Main holding companies

Shanghai Baosteel Yichang Steel Sheet Co., Ltd.

By the end of 2003, the Company had owned 90% stock equity of the above-said company and will complete the merger before April

2004. The said company has a registered capital of RMB 646 million, with production, sale and development of cold rolled sheets

and coils, tin sheets and coils and other galvanized and coated sheets and coils as its main business. Main products are rolled hard

coils, cold rolled sheets and coils and tin sheets and coils. By the end of 2003, the said company had achieved RMB 1.971 billion in

asset scale, achieving RMB 163 million of net profit within the fiscal year.

Yantai Lubao Steel Tube Co., Ltd.

By the end of 2003, the Company had owned 79.82% stock equity of the above-said company. The said company has a registered

capital of RMB 100 million with processing and sale of seamless tubes as its main business scope. Its main products are structural

seamless tubes, low and medium pressure boiler seamless tubes, liquid transport seamless tubes, hydraulic column seamless tube,

high-pressure boiler seamless tubes, petroleum cracking seamless tubes, fertilizer equipment seamless tubes, geological drilling

tubes, petroleum tubes and oxygen bottle tubes, etc. By the end of 2003, the said company had achieved RMB 471 million of asset

scale, achieving RMB 27 million of net profit within the fiscal year.

(7) Major suppliers and customers

To stabilize the supply, effectively control and cut down costs and strengthen management on core purchasing business, the

Company shares risks and interests with its major suppliers and has formed strategic supply relationships. In 2003, the Company

purchased from the top five suppliers a sum accounting for 50.12% of the total amount purchased in the year as a whole.

The Company has been making a constant effort to expand the percentage of its direct-supply consumers, it has over 300 direct-

supply consumers, mainly from such sectors as automobiles, household appliances, petroleum tubes and pipelines, shipping containers,

metal products and packaging industry, etc. In 2003, the top five consumers accounted for 77.42% of total sales in principal

business income.

(8) Difficulties encountered in the operation and their solutions

In the first half of 2003, the outbreak of SARS had a considerable impact on China’s macro economy. Tourism, communication,

restaurants and entertainment industry were greatly hit, but steel industry as a foundation of raw materials was relatively less

impacted. The main impact was on technical exchanges, construction projects progress, and business travel. Against the challenge

of the epidemic, the Company, on one hand, actively took powerful preventive measures, and on the other hand, made full use of

electronic commerce, such as teleconference, network orders and E-mail to carry out business, and effectively reduced the influence

of the epidemic on business operations.

In the last two years, along with the acceleration of our national industrialization progress, the downstream sectors of steel industry

have developed quickly, which contributes to a fast rise in our target customer group. Taking cars as an example, the data with China

Auto Industry Society show that the volume of production increased 83% in 2003 on the basis of 53% increase in 2002. Compara-

tively speaking, the development of the Company is falling behind the growth of consumers. To this end, the Company is pushing on

agile manufacturing and lean operation, tapping production potentials, optimizing product mix and upgrading products on one hand

while expediting the construction of key projects such as 1800 cold rolling mill and heavy plate mill, to meet the growing demands of

domestic high-grade customers.

Unit: RMB million

No. Items Year 2003 Year 2002 Rise & fall compared to last year

1 Principal operation income 44,460 33,877 31.24%

2 Principal operation cost 30,825 24,456 26.05%

3 Gross margin 30.67% 27.81% 2.86%

See (A) of item 2, Chapter VII for detailed analysis.

20

3. Investments

(1) Use of proceeds

The Company raised a net amount of RMB 7,703 million (deducting the issuing expenses) through an IPO. An

accumulated sum of RMB 7,703 million has been used by 31st December 2003. During the report period, the

amount of proceeds used is RMB 97 million, of which RMB 78 million was for technical renovation projects and

RMB 19 million for replenishing the circulating fund after the completion of projects.

Renovation of auto sheet production equipment system

On 25th April 2002, the Shareholders’ General Meeting adopted a motion on “Regarding the Alteration of the use

of partial proceeds for Auto-sheet Project”. An amount of RMB 377 million is to be used after the adjustment, and

an accumulated sum of RMB 358 million from the public offerings had been used by the end of June 2003. At the

end of the report period, the following projects have been completed and put into operation: 2030 mm CR

CM05-4# line revamping, the de-silicon device of 2# blast furnace, the 2050 mm HR thickness and crown

measuring system, and the CR finishing mill CM05-2# cut-to-length line and the 2030 mm CR CAPL line. The

earning from these projects can be reflected in the earnings of the Company as a whole.

(2) Use of non-proceeds

In 2003, RMB 4973 million was invested in technical renovation and infrastructure projects. 1800 mm CR strip

mill, heavy plate mill and its supporting project of continuous-casting are under construction smoothly: equipment

foundation is basically completed and majority of the building’s steel structure is completed as well. Cranes have

been installed and commissioned. Equipment has been installed or is ready to be installed soon; 2# blast furnace

relocation overhaul project has been started on schedule. At present, frameworks are being installed and furnace

shell is being pre-assembled. CR 3# coating line, newly-added flue gas de-sulphurizer of 2# line of power plant,

and 1# and 2# sintering machine capacity expansion project have been essentially started; newly-added CR de-

greasing line, 1550 mm CR silicon steel speed-rise renovation (first stage), 2050 mm HR mill line process com-

puter renovation, 2# air separation of energy department, renovation of electricity, instrument and computer of

blooming mill and 3# sintering machine capacity expansion have been completed and put into operation. Newly-

added converter de-phosphorization project of steel making department is in the stage of equipment optimization

commissioning.

On October 31st 2003, the Company acquired 90% stock equity from Yichang Steel Sheet Co., Ltd. (acquisition

and merge will made before April 2004), 79.82% stock equity from Lubao Steel Tube Co., Ltd. and part of assets

from SBGC, with transaction value amounting to RMB 1,920 million.

In addition, the Company has set up Shanghai Baosteel Arcelor Laser Tailor Welded Co., Ltd. jointly with Arbed,

Shanghai Volkswagen United Development Co., Ltd. and Baosteel International Trading Co., of which the Com-

pany owns 28% stock equity and RMB 34 million is financial contribution payable, of which RMB 17 million has

been contributed according to rules and regulations of contract of equity joint venture.

21

4. Material Change of Financial Performance and Operation Achievements

(1) Operation achievements and cash flowUnit: RMB million

Items Year 2003 Year 2002 Rise & fall to last year (%)

Profit from principal operations 13,273 9,152 45.03

Net profit 6,976 4,272 63.29

Net cash flows from operation activities 14,631 10,790 35.60

The profit of the Company’s principal operations increased 45.03% in 2003 over the year 2002, mainly because:

(1) sales volume of commercial products increased 3.19% over last year as a result of the expansion of operation

scale; (2) the Company timely made full use of market opportunities to increase the price of commercial slabs by

22.79% over last year through improved product quality, optimized marketing management and enhanced cus-

tomer service to increase customer’s satisfaction and loyalty; (3)the Company takes all kinds of cost-cutting

measures to increase efficiency and controls the rise in cost of the principal operations at 26.05% even as the

price of raw materials and fuel is steeply rising.

In 2003, net profit increased 63.29% over the year 2002. Because of the expansion in business scope, the

expenses during the period increased 7.48% over last year.

Net amount of cash flows generated from operating activities in 2003 increased 35.60% over the year 2002

mainly because the Company had a fairly good operating environment and attached great importance to cash

flow management and retrival rate of payment for goods.

(2) Assets & liabilitiesUnit: RMB million

Items By the end of 2003 By the end of 2002 Rise & fall to last year (%)

Total assets 60,918 61,489 -0.39

Shareholders’ equity 35,466 30,687 15.57

Monetary fund 1,796 3,606 -50.21

Net amount of inventory 4,643 3,372 37.70

Accounts payable 2,486 1,625 52.92

Taxes payable 766 1,028 -25.52

Long-term loans 6,006 8,768 -31.50

Long-term accounts payable 9,400 12,600 -25.40

22

To reduce capital cost, the Company increased repayments. The monetary fund fell by 50.21% compared to that of the

beginning of the year.

Net inventory amount rose by 37.70% compared to that of the beginning of the year mainly because: (1) the strained supply

of and price rise in raw materials and fuels compelled, the Company to appropriately increase the inventory of raw materials

and fuels; (2) price rise in raw materials and fuels resulted in cost rise of manufacturing and the cost of semi-finished

products on stock increased compared to that of the beginning of the year.

Accounts payable rose by 52.92% compared to the beginning of the year as a result of price rise in raw materials and fuels

in 2003. And because most of settlements were made at the end of the year, accounts payable for ore and coal increased.

Maintenance cost payable also increased as a result of maintenance carried out at the end of the year.

Because the Company increased pre-settlement of income taxes, taxes payable was down 25.52% compared to the

beginning of the year.

And because the Company increased repayments, long-term loans were down 31.50% compared to the beginning of the

year.

Long-term accounts payable fell by 25.40% amounting to RMB 3.2 billion compared to the beginning of the year in order to

pay asset acquisition accounts of SBGC as scheduled.

(3) Changes in accounting policies and estimates

(A) According to the notice from the Ministry of Finance, “Accounting Standards for Business Enterprises- items after the Date of

Balance Sheet ”, regarding cash dividends distributed to the investors in profit distribution plan formulated by the Board of

Directors between the date of balance sheet and the approval date of the financial report, the Company altered the original

dividends payable in adjustment items to being listed in shareholders’ equity. The alteration of the above financial policy

adopted retroactive adjustment method and had no influence on the net profits of the year 2003 and 2002.

(B) According to the Enterprise Accounting Principles for Fixed Assets, the service life of the fixed assets should be reviewed

periodically, and if there is a material discrepancy between the expected life cycle and the original estimation, the years of

depreciation should be adjusted accordingly. After reviewing the expected life cycle of the fixed assets, the Company found

there was a material discrepancy between the actual service life of some fixed assets (mainly fixed assets of transportation)

and the original estimation, Due to factors such as expansion of production capacity, shortage in maintenance spare parts

of imported transportation equipment resulted from rapidly upgrading overseas equipment and improved standards for

pollution discharge. The following resolutions were made at the first meeting of the second Board of Directors: that from

January 1st 2003 on, adjustment should be made to the depreciation period and depreciation rate of those fixed assets. The

annual depreciation rate was 9.6% - 16%, and the annual depreciation expenses were RMB 487 million before the adjustment.

After the adjustment, the annual depreciation rate would be 9.6% - 19.2%, and the depreciation expenses apportioned to the

current year would be RMB 2,394 million. The Company’s calculation basis for the change in accounting estimation is future

applicable method, and this change in accounting estimation led to a reduction of RMB 1,906 million in profit of this year

prior to the adjustment.

(C) According to the stipulations of Accounting Regulations for Enterprise Accounting - “Enterprise should, periodically or at least

at the end of each fiscal year, examine comprehensively its accounts receivable and estimate bad debts possible with all

accounts receivable, the Company has found that the percentages of allowances for provision of bad debts of 1-3 years are

a little bit lower after examining bad debt risks of accounts receivable and taking some factors into consideration such as the

current sale environment, sales policy and risks of receiving. The following resolutions were made at the 4th meeting of the

second Board of Directors that, starting from the third quarter of 2003, percentages of allowances for provision of bad debts

of accounts receivable would be adjusted from 10% to 30% for account ages of 1-2 years and from 20% to 60% for account

ages of 2-3 years. The Company’s calculation basis for the change in accounting estimation is future applicable method, and

this change in accounting estimation led to a reduction of RMB 630,000 in profit of this year compared to before the

adjustment.

23

5. Major Influence of the Environmental Changes

(1) Steel trading environment

In recent years, the worldwide environment for steel trade has changed quite a bit.

In March 2002, U.S.A. imposed “Section 201”, which triggered agitation of steel trade protection in the world. To protect the

steel market and let it operate in a normal order, Chinese government implemented the temporary guarantee measures

and put it into formal operation in November of that year. On December 12, U.S.A. announced the abolition the “Section

201” and adoption of a steel import license system and anti-dumping system. Later, the Chinese government also cancelled

the steel protection measures in December.

In March 2002, the original Ministry of Cooperation for Foreign Trade and Economy announced an investigation against the

dumping of imported cold rolled sheets and coils that have originated in the countries of Russia, Korea, Ukraine and

Kazakhstan and the region of Taiwan. In September 2003, the Ministry of Commerce arbitrated that dumping was estab-

lished and decided not to take anti-dumping measures in view of the special situations at that time. In January 2004, the

Committee of Customs Regulations with the State Council decided to levy anti-dumping duties starting from January 14th

2004 valid for five years, retroactive from September 23rd 2003.

The effective steel protection measures under the framework of WTO taken in a timely manner by the Chinese government

have played an active role in maintaining the healthy and orderly development in the domestic steel market. The anti-

dumping duties levied on cold rolled products are conducive to maintaining the normal order of import steel trade, promoting

an upgrading in the domestic steel product structure, exerting positive impact upon the business operations of the

Company.

(2) Supply of raw materials and fuels

Starting from the beginning of the year 2003, and affected by the sharp rise of the domestic steel market as a whole, the bulk

raw materials and fuels market exhibited strain. The supply of iron ore in the international market fell short of demand and

the coal market also reported an emergency. Some of the domestic steel plants even had to shut down blast furnaces due

to the shortage of iron ore and coke resources. Because of a reduction in the total supply in the international market and

growing demand in the domestic market, the price of scrap continued to increase sharply. In addition, due to tight transpor-

tation capacity in the international shipping market, freight rate soared. The domestic shipping market also showed strain.

Having signed long-term agreements with principal iron ore and coal suppliers and renowned ship owners, SBGC has

secured raw material resources and transportation resources to guarantee raw material supply to the Company. SBGC owns

Majishan harbor, which further fortifies the control of resources for the Company. Meanwhile, by implementing cost cutting

and efficiency improving measures, the Company partially reduced cost pressures. As a result, the supply of raw materials

and fuels has not affected the normal production and operation of the Company.

(3) Investment in the steel industry

With all kinds of capital pouring into the steel industry, a new round of investment craze has grown in intensity in the last two

years, which has drawn the attention of the state departments concerned. On December 23rd 2003, the general office of the

State Council sent out an urgent notice appealing for the prevention of haphazard investment in the steel industry and

pointed out that haphazard investment, low-level repetitive construction and illegitimate production might lead to overcapacity,

market disorder, resource waste and environmental pollution, and called for taking measures to contain the tendency of the

haphazard investment by working on project approval, environmental supervision and inspection, land administration,

technical standards and credit policy.

The implementation of the measures is conducive to easing the steel investment craze, upgrading the domestic steel product

composition and increasing the competitiveness of the steel industry in China.

24

6. Operation Plan for 2004

(1) Operation environment analysis for 2004

It is expected that the steel industry in 2004 will have a sound macro-economic environment. China’s economy is

entering into a new fast-growing period while the world economy is gradually recovering. The world manufacturing

industry is gradually moving to China while upgrading and renewal of the domestic industrial structure have

brought along rigid demand growth for steel products, which provides a space and momentum for rapid growth in

the steel industry. Nevertheless, steel enterprises will encounter more and more challenges. With the intensifying

competition inside the industry and raw materials and fuels falling in short supply, the change in the world steel

trade environment will bring more pressure on steel enterprises. In the Company, a new round of development

plans will enter into their implementation stage; construction of key projects will come to a peak, follow-up projects

will start successively, and completed projects are preparing for production, so the Company is in a phase of

production and construction progressing in tandem.

(2) General policy, target and main budget figures for operation in 2004

Aiming at the operation environment in 2004, the Company insists on the general operation policy of “facing

consumers, responding quickly, lifting core competence, meeting challenges, deepening reengineering and pursu-

ing value maximization”. We have advanced the general operation target of “selling 4.85 million tons of strategic

products, achieving sales RMB 46,300 million, carrying out 100 6� projects, fulfilling RMB 6,100 million invest-

ment in key projects and applying for 185 patents.

In 2004, the Company plans to produce iron 10.13 million tons, steel 11.47 million tons and sell commercial

products 11.35 million tons, budget RMB 46,300 million for principal operation income and RMB 33,500 million

for principal operation cost.

(3) Main work of the Company

In 2004, the Company will push on 6 � lean operation in a comprehensive manner, improve operation levels,

optimize supply chain management, cultivate leading competence in the market, deepen science and technology

innovation mechanism, foster self-innovation, advance key project construction according to schedule, carry out

the preparation of followed-up projects, further optimize financial management process flow, upgrade decision

support power, enhance the management of investor relations, perfect legal entity governing structure, optimize

human resource configuration, create an enterprise-wide human-oriented atmosphere, strengthen basic adminis-

trative work and maintain sustainable development of the Company.

25

7. Details of the Board Meetings Convened in 2003

(1) Board meetings and resolutions during the report period

(A) The following resolutions were reviewed and passed at the 12th meeting of the 1st Board on January 28th 2003:

Provision for the impairment loss of assets for 2002;

Profit distribution plan for 2002;

The 2002 Work Report by the Board of Directors;

The 2002 Annual Report (both the full text and summary);

Reassignment of Ernst & Young Hua Ming as the independent auditor of the Company for 2003.

(B) The following resolutions were reviewed and passed at the 13th meeting of the 1st Board on February 28th 2003:

Election at expiration of office terms of the Board;

Financial final accounts report for 2002;

Financial budget plan for 2003;

The 2002 work report by the president;

The 2002 emoluments report of directors, supervisors and senior management;

Revision of “Rules of Procedure of the Board” regarding the power limit of authority;

Approving director and supervisor assignment agreement (model version) by the Shareholders’ General Meeting;

The convention of 2002 Shareholders’ General Meeting.

(C) The following resolutions were reviewed and passed at the 1st meeting of the 2nd Board of Directors on April 24th

2003:

Election of chairman, vice chairman and assignment of president for the 2nd Board;

Election of special committee members of the 2nd Board;

Assignment of vice president, finance controller (financial supervisor);

Assignment of secretary of the Board and representative of securities affairs;

Rewarding plan at expiration of office terms in the Board of directors and supervisors;

Transfer of the provision for impairment loss of assets for the 1st quarter of 2003;

Adjustment of the depreciation period for transportation fixed assets;

Report for the 1st quarter of 2003.

(D) The following resolutions were reviewed and passed at the 2nd meeting of the 2nd Board of Directors on January

21st 2003:

Appointment and dismissal of vice president of the Company;

Ge Honglin approved to resign as director;

Setting up the clerk’s room for the Board, administrative division of legal affairs and audit office;

Transfer of provision for impairment loss of assets for the 1st half of 2003;

The 2003 Annual Report (both the full text and summary);

The joint venture of 1800 mm cold rolling project with NSC;

The joint venture of laser tailor welded sheets.

26

(E) The following resolutions were reviewed and passed at the 3rd meeting of the 2nd Board of Directors on September

11th 2003:

Acquisition of equity of Yichang Steel Sheet Co., Lubao Steel Tube Co. and partial assets of SBGC;

Adjustment of budget for 2003;

Establishment of the strategic committee of the Board;

The convening of the 1st extraordinary General Meeting of Shareholders for 2003.

(F) The following resolutions were reviewed and passed at the 4th meeting of the 2nd Board of Directors on October

29th 2003:

Alteration of the secretary of the Board;

Alteration of the financial supervisor;

Adjustment of percentages of allowance for provision of bad debts;

Transfer of provision for impairment loss of assets for the 3rd quarter of 2003;

Report of the 3rd quarter of 2003;

Sale of movable properties of steel off-line checking, environment checking and measuring and indigenous fur-

nace maintenance;

Covering liability insurance for directors, supervisors and senior management;

Self-checking report on the Company’s investor relations management.

(2) The Board’ implementation of resolutions

(A) Acquisition of Yichang Steel Sheet, Lubao Steel Tube and SBGC

See Point (1) of Item 2, Chapter IX for details.

(B) In line with the 2002 Shareholder’s General Meeting on 24th April, 2003, the 2002 profit distribution plan was to

distribute cash dividend RMB 0.20 Yuan per share (before tax) to all shareholders based on the total 12,512

million share capital at the end of 2002, totally amounting to RMB 2502.4 million. The real cash dividend after tax

for the negotiable shares held by individuals was RMB 0.16 Yuan per share; the real cash dividend for state-owned

shares and negotiable shares held by institutional investors was RMB 0.20 Yuan per share. On 12th June 2003,

the Board publicized dividend distribution information in China Securities News, Shanhai Securities News, and

Securities Times, and fixed 17th June 2003 as the equity registration date, 18th June 2003 as the ex-dividend

date, and 24th June 2003 as the dividend distribution date. The dividend recipients were all the shareholders

registered at the Shanghai Branch China Securities Registration and Clearing Co., Ltd. after the closing of trans-

action on 17th June 2003.

8. Proposed Profit Appropriation

The Company (unconsolidated) has realized a net profit of RMB 7,014 million in 2003, with 10% for RMB 701

million transferred to the statutory surplus reserve fund, 10% for RMB 701 million transferred to the statutory

public welfare fund, 10% for RMB 701 million transferred to free surplus reserve fund, and plus RMB 4,217 million

of undistributed profit at the beginning of the report period, the total amount of cash dividend available for

distribution in 2002 is RMB 2,502 million and surplus profit available for distribution at the end of the report

period was RMB 6,625 million.

The 2003 profit appropriation has been on the basis of total capital stock of 12,512 million ended on 31st

December 2003, the amount to a sum of RMB 3,128 million has been proposed to be distributed to all sharehold-

ers in the form of cash dividend and in the ratio of RMB 2.50 Yuan per 10 shares (before income tax).

There is no proposed transfer from capital reserve to capital stock in 2003.

27

9. Special Account for use of Funds by Related Parties and External Guarantee

(1) All the independent directors of the Company reached the same opinion on that Baoshan Iron & Steel Co., Ltd. has

no cases of external guarantee.

(2) The following statement is made by Ernst & Yong Hua Ming regarding the occupation of funds by related parties

and guarantee:

Regarding the Large Shareholder and Related parties occupying the Funds of Baoshan Iron & Steel Co., Ltd. and guarantee offered to shareholders

and shareholders’ affiliates

To all shareholders of Baoshan Iron & Steel Co., Ltd.,

Entrusted by Baoshan Iron & Steel Co., Ltd (hereinafter referred to as the Company), we have audited the Company’s balance sheet and consolidated

balance sheet dated 31 December 2003, profit statement, profit distribution sheet and consolidated profit statement and profit distribution sheet and

cash flow statement and consolidated cash flow statement for 2003, and issued the standard clean-opinion Auditing Report. The auditing was made

in accordance with the “Independent Auditing Standards for Chinese Certified Public Accountants” issued by the Ministry of Finance of People’s

Republic of China.

Based on financial accounting of 2003 of the Company and its holding subsidiaries, we, herein, regarding accounts receivable by the Company and

its holding subsidiaries from the large shareholder and other related parties, and guarantee offered by the Company and its holding subsidiaries to the

Company’s shareholder and shareholder’s affiliated enterprises, make a special account. Disclosing faithfully this information and being responsible

for authenticity, legitimacy and completeness of it are the obligation of the Company and its holding subsidiaries. The following information and data

have been completely extracted from the Company’s financial accounting for 2003. We have not carried out any other extra audit procedure except

for that being made for issuing the auditing report on the aforesaid financial statements.

1. Accounts Receivable by the Company and its Holding Subsidiaries from the Large Shareholder and other Related Parties

(1) Accounts receivable of the Company and its holding subsidiaries form the large shareholder and other related parties ended on December 31st 2003

Unit: RMB million

Name of debtorsRelationship with Balance at the beginning Balance at the end Way of occupation

the Company of the year of the year of funds

Shanghai Baosteel International Economic & TradingConnected 469.42 436.68 Balance due in normal buying and selling

Co., Ltd and its affiliated subsidiaries and branches

Shanghai Baosteel Group Corp. Holding – 10.32 Balance due in normal buying and selling

Shanghai Baosteel Chemical Co., Ltd. Connected 0.02 108.87 Balance due in normal buying and selling

Others Connected 29.99 66.68 Balance due in normal buying and selling

Total – 499.43 622.55 –

(2) Accounts receivable refunded by the large shareholder and other related parties to the Company and its holding subsidiaries in 2003

Unit: RMB million

Name of debtors Amount refunded in the year Way of refund Remarks

Shanghai Baosteel International Economic & Trading22,662.30 Cash –

Co., Ltd and its affiliated subsidiaries and branches

Shanghai Baosteel Group Corp. 27.89 Cash –

Shanghai Baosteel Chemical Co., Ltd. 955.60 Cash –

Others 1,031.33 Cash –

Total 24,677.12 – –

28

(3) Increase in accounts receivable by the Company and its holding subsidiaries in 2003 from the large shareholder and other related parties

Unit: RMB million

Name of debtors Increase for the year Way of occupation Reasons

Shanghai Baosteel International Economic & Trading22,629.56 Balance due in normal buying and selling Selling products

Co., Ltd and its affiliated subsidiaries and branches

Shanghai Baosteel Group Corp. 38.21 Balance due in normal buying and selling Selling products

Shanghai Baosteel Chemical Co., Ltd. 1,064.45 Balance due in normal buying and selling Selling products

Others 1,068.02 Balance due in normal buying and selling Selling products

Total 24,800.24 – –

2. Currency and fund deposited by the Company and its holding subsidiaries in the place of the holding shareholder and other related parties

Till December 31st 2003, balance held on deposits by the Company and its holding subsidiaries, including deposits in Baosteel Group Finance Co.,

Ltd., amounted to RMB 986,408,748.88 Yuan, of which RMB 947,758,748.88 Yuan was current deposits, with annual interest rate of 1.44% and

500,000,000.00 Japanese yen (equivalent to RMB 38,650,000.00 Yuan) was deposits entrusted with annual interest rate of 0.03%.

3. Guarantee offered by the Company and its holding subsidiaries to the Company’s holding shareholder and its affiliates

Based on the information ended on December 31st 2003, supplied by the Company and its holding subsidiaries, the Company and its holding

subsidiaries have not offered any guarantee to the Company’s holding shareholder and its affiliates.

This special account is used only by the Company to report to the institutions concerned in China Securities Regulatory Committee and stock

exchange. The aforesaid account must not be publicized or consulted publicly in any forms or used for any other purposes without the written consent

of our office.

Ernst&Young Hua Ming Certified Public Accountants

Beijing P.R.China Registered in P.R.China

Zhang Xiaodong

Yang Jun

26th February, 2004

29

VIII. Report by the Board of Supervisors

1. Details of the Supervisors’ Meetings

(1) During the report period, the Board of Supervisors of the company has carried out its duties in accordance with the Company Law and the Articles of Association

of the Company, and focused its supervision on such areas as the legal operations, the duty fulfillment by directors, managers, and other senior management

personnel, and the financial inspections.

(2) The Supervisors’ Meetings:

In 2003, the Board of Supervisors has participated in the twelfth, thirteenth meetings of the 1st board, the first, second, third, fourth meetings of the 2nd board,

totaling six meetings, and held six meetings of the board of supervisors to supervise and examine the legality and the procedures of proposals by the Board as well

as the financial state of the company. The following proposals have been reviewed and passed:

(A) On January 28, 2003, the eleventh meeting of 1st board was held where the following proposals were reviewed and passed:

“Comments by Board of Supervisors on ‘Annual Report 2002’ and the related proposals”

“Report of Board of Supervisors”

“Report of Board of Supervisors”

“Comments by Board of Supervisors to Baoshan Iron & Steel Co., Ltd. on altering accounting estimate”

“Work Report of 2002 by Board of Supervisors”

(B) On February 28, 2003, the twelfth meeting of the 1st board was held where the following proposals were reviewed and

passed:

“Reviewing opinion by Board of Supervisors regarding the Company’s final financial accounts for 2002 and financial budget

for 2003”

“Summary of 1st Board of Supervisors”

“Motion for re-election of the Board of Supervisors”

“Proposal regarding appointment agreement (standard form) of supervisors and Independent supervisors”

(C) On April 24, 2003, the 1st meeting of the 2nd Board of Supervisor was held where the following proposals were reviewed and

passed.

“Proposal regarding election of Chairman for 2nd Board of Supervisors of the Company”

“Comments by Board of Supervisors on transfer of provision for impairment loss of assets for the 1st quarter of 2003”

“Comments by Board of Supervisors on adjustment in depreciation period for the fixed assets of transportation category”

“Board of Supervisors’ Comments on Company’s Report for 1st quarter of 2003 as Reviewed”

(D) On July 21, 2003, the 2nd meeting of 2nd Board of Supervisors was held, in which “Resolution made in 4th interim session

of the 1st Employee’s Representatives Conference of Baoshan Iron & Steel Co., Ltd.” was announced and explanation to

matters involving altering candidacy of supervisor served by employee representative for 2nd Board of Supervisors was given.

And the following proposals were reviewed and passed:

30

“Comments by Board of Supervisors on transfer of provision for impairment loss of assets for the first half year of 2003”

“Board of Supervisors’ Comments on Company’s report as reviewed for the first half year of 2003”

“Comments by Board of Supervisors on reviewing joint investment in Baosteel’s 1800 cold rolling construction with Nippon

Steel Corporation”

“Comments by Board of Supervisors on reviewing Company’s Investment into the laser tailor welding joint venture project”

(E) On September 11, 2003, the 3rd meeting of the 2nd board of supervisors was held where the following proposals were

reviewed and passed:

“Comments by Board of Supervisors to the proposal to acquire equity of Yichang Sheet Co., Ltd. and Lubao Tube Co., Ltd.

and assets of Baosteel Group technical center etc”

(F) On October 29, 2003, the 4th meeting of the 2nd Board of Supervisors was held where the following proposals were reviewed

and passed:

“Comments by Board of Supervisors on reviewing provision percentage for bad accounts preparation to be adjusted by the

Company”

“Comments by Board of Supervisors on transfer of provision for impairment loss of assets for the 3rd quarter then ended of

2003”

“Comments by Board of Supervisors on reviewing company’s report of the 3rd quarter of 2003”

“Comments by Board of Supervisors on reviewing Company’s proposal in selling such chattel as environment testing

equipment and among things”

“Fiduciary control system governing Board of Supervisors of Baoshan Iron & Steel Co., Ltd.”

2. The Board of Supervisors Made the Following Statement to the Company for the Work Done in 2003

(1) A well-improved internal control system is established. The corporate policy-making process is in accordance with law. The

company observes strictly the national laws and statutes and operates on the standard procedures in control of the listed

companies while its directors, officers and other senior managerial staff exercise the duty of utmost diligence and care in

carrying out the resolutions made by shareholders and/or Board of Directors. None of behaviors on the part of the above-

mentioned personnel is found in violation of laws, statutes and Articles of Association or anything that is done to the

detriment of Company’s interests when they perform acting on behalf of the Company.

(2) Within the reported period the Company secured its production and management with its well proven financial standing and

standardized financial control in addition to its internal control regulations being honestly observed and being ever improved.

The financial statement for 2003 has authentically reflected the corporate financial position and operating results and

therefore auditing report issued by ERNST & YOUNG HUA MING accounting firm is proved to be objective and impartial.

(3) Within the reported period the fund raised for the investment projects as intended in the Company’s Share Subscription was

properly and duly used by the Company by the end of first half of the year. Resolution of modification with respect to

adjustment of fund that was raised for the first time, in part of auto-panel projects, was reviewed and passed in the

shareholders meeting on April 25, 2002. The procedure for modification is lawfully effective.

(4) Within the reported period transactions involving acquiring equities of Yichang Sheet Co., Ltd. and Lubao Steel Tube Co., Ltd.

and purchasing the assets such as Baosteel Group technical center as well as selling such chattel as environment testing

equipment etc. were all concluded with reasonable price, without any inside dealings found, without impairment ever caused

to shareholder’s interests or causing the company to a loss in assets.

(5) Within the reported period the connected transactions that were conducted by Company, following the revised regulations by

Baoshan Iron & Steel Co., Ltd. governing the affiliated associations agreed in shareholders meeting in 2001 were concluded

with fair price, free and clear of any impairment to the Company’s interests.

31

IX. Significant Events

1. The Company has not been Involved in Any Material Litigation or Arbitration During the Report Period.

2. Summary of Asset Buying & Selling, M&A, and Consolidations

(1) The proposal to acquire equities of Yichang Sheet Co., Ltd. and Lubao Steel Tube Co., Ltd. and part of assets under Baosteel Group

was passed in both the 3nd meeting of 2nd Board of Directors held on September 11, 2003 and the first extraordinary shareholder

meeting in 2003 called for in October 29, 2003. The subject matter of acquisition in contemplation implies entire equities of

Yichang Sheet Co., Ltd., 79.82% of overall Lubao Steel Tube Co., Ltd. and a part of assets under Baosteel Group.

1.1 Acquisition of Shanghai Baosteel Yichang Steel Sheet Co., Ltd.

Yichang Sheet Co., Ltd. has, at the reference day for evaluation, a net asset of RMB 1421 million Yuan, which is finally recognized as RMB 1394 million Yuan,

in reference to the equity assignment agreement concluded with shareholding party of Yichang Sheet Co., Ltd. that states that certain degree of deduction will

be given to the evaluated value of the asset which is purchased at the reference day as is specified in the Asset Evaluation Report. The acquisition was completed

of 90% equity of Yichang Sheet Co., Ltd. on October 31 of 2003 and a sum worth RMB 1254 million Yuan, as purchasing payment was paid off at the beginning

of December by the Company. It is expected of the Company to effectuate the absorption and merger of Yichang Sheet Co., Ltd. before April of 2004.

The Company’s acquisition of Yichang Sheet Co., Ltd. makes it possible to expand its production capacity in sheet product, to increase its market share, to

adjust the cold rolling capacity with more flexibility and to widen its coverage of market.

1.2 Acquisition of Yantai Lubao Steel Tube Co., Ltd. equities

Net asset Lubao Steel Tube Co., Ltd. possessed was RMB 308 million at the reference day for evaluation, which was finally recognized as RMB 221 million

Yuan, for purchasing price in reference to the equity assignment agreement concluded with Baosteel Group that states that certain deduction will be allowed

to the evaluated value of asset that is purchased at reference day for evaluation as specified in Asset Evaluation Report.

Company’s acquisition of Lubao Steel Tube Co., Ltd. would serve well to increase the market share in tube product thus forming the product series, to supply

in complete set and bring synergy into full play.

1.3 Acquisition of partial assets under Baosteel Group

Assets under SBGC to be assigned at the reference day for evaluation was RMB 502 million Yuan, which was finally recognized as RMB 444 million Yuan, a

product that is based on RMB 452 million obtained, according to asset assignment agreement concluded with Baosteel Group, after certain deduction is given

to the evaluated value of asset that is purchased at reference day for evaluation as specified in Asset Evaluation Report, less the value worth of depreciation to

be provided from original account value in between the reference day for evaluation and clearing day. The asset under Baosteel Group was cleared on October

31 of 2003 and a purchasing price worth RMB 444 million Yuan was paid off in November.

The Company’s acquisition of partial assets of SBGC is beneficial for the Company in unified planning, coordinated layout, thus securing its sustainable

development; in structuring a research and development base that is self-owned and self- reliant whereby to enhance the corporate capability in respect thereto,

to produce its own intellectual property.

(2) The company has not sold any significant assets during the report period.

32

3. Significant Connected Transactions

The company’s related parties refer to SBGC and its subsidiaries. Significantly connected transactions conducted during the report period are as

follows:

(1) Purchases and sales of products, provision of labor services

(A) Sales of iron & steel products

Some iron & steel products of the Company have been sold through Baosteel International Economic & Trading

Co., Ltd. (Baosteel International) and its subsidiaries. The sales of the category in the period is RMB 29.695 billion

Yuan (RMB 23.373 billion Yuan in the same period of 2002), accounting 66.79% of the principle business income

of the company in the period.

In order to pay the commission, the Company has sold products to them at prices of 1%-5% lower than those to

a third independent party. Based on the price differences, the Company has paid a commission of RMB477million

(2002:RMB416million) to Baosteel International and its subsidiaries.

Also, the Company has sold iron & steel products to the Group and its subsidiaries at the market prices worth RMB

2,874 million (2002:RMB1, 898million), representing 6.46% of the principal operating income during the report

period.

The above mentioned transactions have been settled in cash or notes.

(B) Purchases of part of raw materials, auxiliary materials and spare parts.

Portions of raw materials, auxiliary materials and spare parts have been purchased from Baosteel International

and its subsidiaries. During the report period, The transaction volume of the category of the company in the period

is RMB 7.339 billion Yuan ( RMB 4.317 billion Yuan in the same period of 2002).

In order to pay the commission, the Company has purchased raw materials, fuel, auxiliary materials and spare

parts from them at prices of 1%~2.5% higher than those from the third independent supplier. Based on the price

difference, the company has paid a commission of RMB 96million (2002:RMB 61million) to Baosteel Interna-

tional and its subsidiaries. Also, the commission paid by the Company directly to them for their domestic pur-

chases amounts to RMB187 million (2002:RMB 177million).

During the report period, the amount of purchases of raw materials, auxiliary materials and spare parts through

Baosteel International and its subsidiaries accounts for 37.38% of the total amount of purchases of raw materials,

auxiliary materials and spare parts.

The above mentioned transactions have been settled in cash.

It is an internationally accepted practice for enterprises to purchase materials and sell products through trade

agents. This method has effectively utilized Baosteel International’s scale advantage and expertise for better

management efficiency, customer service, lower transaction costs and operating risks.

33

(C) Others

RMB: million

Connected party Transaction Pricing Amount

Shanghai Baosteel Group Corporation (SBGC) Sales of energy and materials Market Price or Agreement Price 33

Subsidiaries of SBGC Sales of materials Market Price 23

Baosteel International Sales of metallurgical coke, by-product, energy, materials Market Price 513

SBGC Shanghai No.1 Iron & Steel Co., Ltd. Sales of metallurgical coke & energy Market Price 506

Shanghai Baosteel Chemical Co., Ltd. Sales of spare parts, energy and accessory materials Market Price 1,165

Shanghai Baosteel Engineering Technology Co. Ltd. (Baosteel Engineering) Sales of energy, materials and by-product Market Price 25

Baosteel Group Enterprise Development Co. (Baosteel Development) Sales of energy, materials and by-product Market Price or Agreement Price 157

Baosteel Group Shanghai Pudong Iron & Steel Co., Ltd. (Pudong Steel) Sales of energy Market Price 2

Industrial Co., Ltd. Sales of energy Market Price or Agreement Price 48

Shanghai Baosteel Chemical Company Purchase of accessory materials Market Price 53

Shanghai Baosteel Chemical Co., Ltd. Purchase of energy Agreement Price 1,209

Baosteel Development Company Purchase of spare parts, materials and equipment Market Price 660

Baosteel Engineering Company Purchase of spare parts, materials and equipment Market Price 261

Shanghai Baosteel Equipment Overhaul Co., Ltd. Purchase of spare parts Market Price 7

Shanghai Baosteel Equipment Overhaul Co., Ltd. Purchase of materials Market Price 26

Shanghai Baosight Software Co., Ltd. (Baosight Company) Purchase of equipment and spare parts Market Price 85

Yichang Steel Purchase of materials Market Price 41

Nantong Baosteel Xinri Steel Co., Ltd. Purchase of materials Market Price 200

Shanghai Baosteel Industrial Development Co., Ltd. Purchase of materials Market Price 6

Baosteel Group Shanghai No. 1 Iron & Steel Co. Purchase of materials Market Price 185

Baosteel Group Pudong Iron & Steel Co., Purchase of materials Market Price 269

SBGC Payment for education and training fee Agreement Price 20

Baosteel International Payment for commission of products sales Market Price 56

Baosteel Development CompanyPayment for logistic service, maintenance, transportation,

Agreement Price 553engineering, material processing fees

Baosteel Group Baoshan Hotel Payment for property management and R& D Agreement Price 20

Baosteel International Payment for transportation, maintenance, R & D, material processing fees Agreement Price 94

Baosight Co., Ltd. Payment for IT service Agreement Price 153

BSEE Payment for engineering, maintenance, material processing fees Agreement Price 262

Shanghai Baosteel Equipment Maintenance Co. Ltd, Payment for maintenance Market Price 330

Shanghai Baosteel Equipment Detection Co., Ltd. Payment for maintenance & warehousing, transport Market Price 140

Shanghai Baosteel Construction Co., Ltd. Payment for engineering expenses Agreement Price 17

SBGC Payment for house rent and land leasing fee Agreement Price 130

Baosteel Development Company Providing transporting service Agreement Price 20

Baosteel International Providing transport service Agreement Price 11

Subsidiaries of SBGC Providing technological service Agreement Price 33

Baosteel Engineering Company Collecting equipment rent Agreement Price 4

SBGC Interest expense Agreement Price 120

Baosteel Group Finance Co. Ltd. Interest expense Market Price 10

Baosteel Group Finance Co. Ltd. Interest income Market Price 10

34

The above-mentioned transactions have all been settled in cash or notes.

The Regulation on the Connected Transaction Management of Baoshan Iron & Steel Co., Ltd. (hereinafter referred to as the

Regulation) was revised and later approved at the 2001 Shareholders’ Meeting. Please consult specific details from the full

text of the Regulation at Shanghai Stock Exchange Website (www.sse.Com.cn). During the report period, all the relevant

connected transactions issues shall be handled in strict accordance with the Regulation.

(2) Connected transactions of assets and equity transfer

The proposal on the Acquisition of Stock Ownership of Yichang Sheet and Lubao Tube and Parts of Assets from the Group

Corporation has been discussed and passed in the 3rd conference of the 2nd Board of Directors on 11 September 2003 and

at the 1st interim general meeting of stockholders on 29 October 2003. See Part IX 2(1) for details.

According to the Asset Acquisition Agreement, the Company purchased some assets, including the technological center, the

land for development and outbuildings, from the Group Corporation at an agreed price of 444 million RMB Yuan on 31

October 2003. On the same day, the Company acquired 57.55% of the equities of Yichang Sheet from the Group Corpora-

tion and No. 1 Steel Company at an agreed price of 802 million RMB Yuan, and 79.82% of the equities of Lubao Tube from

the Group Corporation at an agreed price of 221 million RMB Yuan, for which 989 million RMB Yuan was paid to the Group

Corporation and 35 million RMB Yuan was paid to No. 1 Steel Company all together.

(3) The creditor’s rights and the debts between the Company and the related parties have been caused by the operating accounts

payable and received from the purchase-sale connected transactions and the long-term account payable to the holding company

from the acquisition of parts of assets from the Group Corporation.

The Baosteel Group Finance Co. Ltd. (hereinafter referred to as Finance Company) provides guarantee for the 641 million

RMB Yuan of the Company’s long-term loans in foreign exchange.

The above actions apply no great influences to the Company’s operation.

(4) Other material connected transactions

During the report period, the Company signed an agreement on management of exclusive assets by entrustment with

Finance Co. on the Company’s temporarily idle funds totaled 200 million RMB Yuan according to the relevant approval

procedures, as brings an 1 million RMB Yuan return. See Part IX 4 (3)

4. Materials Contracts

(1) During the report period, the Company does not have any trusteeship, contract or lease for assets with a 10% profit of the year

from any other party or do the other companies have any trust-ship, contract or lease for assets from the listed company.

(2) The Company does not have any material guarantee matters for the year ended 31st December 2003.

(3) The company does not enter into or carry on any trust arrangement of cash assets management during the year ended 31st

December.To effectively maintain and increase the values of the Company’s temporarily idle funds, the Company signed an agreement

on management of exclusive assets by entrustment with Finance Company on the Company’s temporarily idle funds totaled

200 million RMB Yuan according to the relevant approval procedures. This agreement, coming into force on 23 June 2003,

reads that the Finance Company must administer the entrusted assets under the management mode defined by the

Company (limited to requesting and purchasing bonds and new shares) in a steady and cautious manner without circulating

them for other purposes, manage these funds with an exclusive account and present transaction vouchers and breakdown

check sheets of the exclusive account to the Company on time. By engaging in the entrusted asset administration, the

Finance Company will collect no administration charges from the earning after the deduction of relevant normal transaction

charges (including transaction commissioning and stamp duty) if the annual investment earning rate is lower than 3.5%,

otherwise, the Finance Company will collect 60% of the earnings beyond the 3.5% as the management charges and the

Company can get the remaining earnings.

This entrusted asset management came to an end on 25 September 2003 with the Company gaining all the 200 million

RMB Yuan principal and earnings.

35

(4) Other material contracts during the report period

(A) Joint venture contract for the 1800mm cold rolling project

The Company signed officially with the Japan Nippon Steel Corporation (hereinafter referred to as NSC) and the

Luxemburg Arcelor Company (hereinafter referred to as Arcelor) a joint venture contract for the 1800mm cold

rolling project in Shanghai on 23 December 2003. Prior to that, the 1800mm cold rolling project in form of a joint

venture was approved in the Company’s 2nd conference of the 2nd Board of Directors on 21 July 2003 and the

letter of intent for the joint venture was signed by and between the Company and NSC on the following day. The

joint venture company, named Shanghai Baosteel-NSC / Arcelor Automotive Steel Sheets Co., Ltd., adopts the

organization form of limited liability company and has a time limit for 20 years. With a total investment up to 6.5

billion RMB Yuan and the registered capital at 3.0 billion RMB Yuan, it is shared by the Company, NSC and Arcelor

with an investment proportion respectively at 50%, 38% and 12%. Its main operational objectives are producing

cold rolled steel sheets and galvanized steel sheets for automobiles and auto parts and mainly selling these

products in mainland China. According to the relevant state approval procedures on enterprise with Chinese and

foreign investment, the joint venture contract is subject to the approval of the relevant department of the govern-

ment before it is officially put into operation.

The 1800mm cold rolling project has been under construction since 23 December 2002 and most of its equip-

ment foundations have been completed and the rolling mill equipment is being erected. It is planned that the

project can come on line in May 2005 and has a production scale up to 1.7 million tons per year, including 0.9

million tons of cold rolled steel sheets and 0.8 million tons of hot-dip galvanized steel sheets. After the setup of

joint venture company, the Company will contribute on-site assets valued 1.5 billion RMB Yuan (hereinafter

referred to as contribution in kind) to the joint venture company as the equity investment and transfer the rest of

on-site assets to the joint venture.

(B) Joint venture contract for laser tailor metals

In view of the growing demands for the laser tailor metals by the domestic automobile industry and with the

approval in the 2nd conference of the 2nd Board of Directors, the Company concluded a joint venture contract

with Shanghai Volkswagen United Development Co., Ltd., Arbed and Baosteel International in Shanghai on 27

September 2003. According to the contract, a joint venture company was to be set up for mainly processing laser

tailor metals of automobiles.

The joint venture, named as Shanghai Baosteel-Arcelor Tailor Metal Co., Ltd., was established after registration in

Shanghai on 30 October 2003. With a total investment up to 243 million RMB Yuan and registered capital at 121.5

million RMB Yuan, it is shared by the Company, Shanghai Volkswagen United Development Co., Ltd., Arbed and

Baosteel International with an investment proportion respectively at 28%, 37%, 25% and 10%. The negotiations on

contract of introducing main facilities and technologies for the joint venture company have been completed and

the joint venture company will come on line in 2004 according to the plan.

(C) Acquisition of Yichang Sheet, Lubao Tube and partial assets from SBGC

See description in Part IX 9 (2) for details.

36

5. Commitments of the Company or Its Shareholders with over 5% of the Company’s Shares

SBGC made two commitments upon the founding of the Company:

(1) SBGC committed that the connected transactions with the Company would be undertaken in accordance with

relevant state laws, administrative regulations and stipulations of relative departments in charge without infringe-

ment on the legal interests of the Company and its non-holding shareholders.

(2) SBGC committed no direct participation into operations or activities competitive to the Company, nor would it

directly hold the equity of competitive entities. But SBGC could hold shares of the Company and continue or

develop its existing businesses (including businesses that were or may be competitive to the Company).

On 13thJune, 2001 and 6thSeptember, 2002, more commitments were made by SBGC to the Company:

After Baosteel’s partial acquisition of PhaseIII Project assets and some remaining assets from SBGC, the above

two commitments would still be effective subject to the following conditions: (A) The Company goes public through

Hong Kong Settlement & Stock Exchange Co., Ltd or any stock exchanges on the territory of P.R.C. (B) SBGC

holds no less than 30%of Baosteel’s issued shares.

During the year ended 31st December, 2003,SBGC does not breach any of above commitments as publicized in

China Securities News, Shanghai Securities News, and Securities Times respectively on 21st June, 2001 and 12th

September, 2002.

6. Engagement and Dismissal of Audit Firm

The Company has continued to assign Ernst & Young Hua Ming as its auditor. The latter has already provided its

auditing services for the Company for four years in succession. Ernst & Young Hua Ming has been paid as follows:

(1) The emoluments for auditors, and the way of payments have been decided by the shareholders’ meeting and the

emoluments for auditors appointed by the Board of Directors decided by the Board of Directors with a unanimous

agreement of the independent directors.

(2) In 2003,the Company has paid a sum of RMB 1.78million to Ernst & Young Hua Ming for its financial auditing

services, the amount in 2002 was 1.78 million.

(3) The Company has borne the expenses paid in advance by Eunst & Young Hua Ming in the process of auditing.

(4) Ernst & Young Hua Ming provided special auditing services to the company for acquisition of Yiuchang Steel,

Lubao Tube and part of Baosteel Group’s assets. The expense of auditing is 1.1 million Yuan.

(5) The signatory accountants of Ernst & Young Hua Ming in 2003 are Zhang Xiaodong and Yang Jun and the

signatory accountants of Ernst & Young Hua Ming in 2002 were Ge Ming and Yang Jun.

7. Neither the Company, nor the Board of Directors or any individual director of the Company had experienced any

reprimand by the China Securities Regulatory Commission or Shanghai Stock Exchange during the year.

37

X. Financial Reports

Auditing Report

To all shareholders of Baoshan Iron & Steel Co. Ltd.,

We have audited the attached consolidated balance sheet dated 31 December 2003, consolidated profit statement and distribution sheet as well as consolidated

statement of cash flow of the Baoshan Iron & Steel Co., Ltd. (hereinafter referred as “the Company”) and its subsidiaries for the year 2003. Also we have audited

the attached Company’s balance sheet dated 31 December 2003, profit statement and distribution sheet as well as statement of cash flow for the year 2003. The

Company administrative authority is responsible for these financial reports. Out responsibility is to express an auditing opinion on these financial reports based on

out auditing work.

We have planned and conducted our auditing in accordance with the “Independent Auditing Standards for Chinese Certified Public Accountants” to rationally

affirm whether there is any serious misreport in the financial reports. Our auditing tasks include verification of the amount and disclosed arguments in the

financial reports on the basis of percentage check, evaluation of the accounting policy and essential estimations taken by the administrative authority in preparing

the financial reports as well as appraisement of the overall reflection of the financial reports. We believe that our auditing lays a rational foundation for giving

following opinion.

In our opinion, the above-mentioned financial reports have bee in line with the relevant requirements of the Accounting Standards for Business Enterprises and the

Accounting Regulations for Business Enterprises. The financial reports have also presented fairly, in all material respects, the Company’s financial position on 31

December 2003, and its operating results and cash flows for the year then ended.

Ernst & Young Hua Ming Certified Public Accountants

Beijing P.R.China Registered in P.R.China

Zhang Xiaodong

Yang Jun

26th February, 2004

38

Consolidated Balance Sheet

31 December 2003

Unit: RMB

Assets Note 5 31 December 2003 31 December 2002

Current assets

Cash in bank and on hand (1) 1,795,504,266.74 3,606,077,011.96

Short-term investment (2) 176,226,375.25 –

Notes receivable (3) 3,289,688,149.87 3,299,127,938.04

Accounts receivables (4) 1,336,612,482.60 1,303,094,311.74

Other receivables (5) 34,344,193.06 13,316,225.73

Advance payments (6) 160,819,427.15 17,967,083.57

Inventories (7) 4,642,823,052.21 3,371,656,555.40

Total current assets 11,436,017,946.88 11,611,239,126.44

Long-term investments

Long-term equity investments (8) 253,959,451.37 15,553,310.72

Long-term investment in debentures (8) 10,000,000.00 –

Total long-term investments 263,959,451.37 15,553,310.72

Including: consolidation difference (8) 212,432,739.05 –

Fixed assets (9)

Original price of fixed assets 102,928,888,177.94 100,159,630,283.33

Less: Accumulated depreciation 59,388,856,262.30 51,939,106,555.12

Net value of fixed assets 43,540,031,915.64 48,220,523,728.21

Less: Provision for impairment loss of fixed Assets 45,203,437.79 40,611,777.23

Net amount of fixed assets 43,494,828,477.85 48,179,911,950.98

Construction in progress (10) 5,641,329,376.96 1,682,488,625.22

Total fixed assets 49,136,157,854.81 49,862,400,576.20

Intangible assets and other assets

Long-term deferred charge (11) 3,564,984.90 –

Total intangible assets and other assets 3,564,984.90 –

Deferred tax

Deferred tax debits (12) 77,874,804.22 –

Total assets 60,917,575,042.18 61,489,193,013.36

39

Liabilities Note 5 31 December2003 31 December 2002

Current liabilities

Short-term loans (13) 256,440,000.00 50,000,000.00

Notes payable (14) 307,971,621.20 447,979,848.85

Accounts payable (15) 2,485,604,822.17 1,625,396,871.76

Advances from customers (16) 1,303,437,267.98 1,487,286,646.36

Wages payable 210,919,401.31 92,259,911.70

Welfare charge payable 6,796,776.01 –

Dividend payable (17) 8,484,070.91 –

Taxes payable (18) 765,546,681.52 1,027,802,399.17

Other debits (19) 20,193,429.08 20,362,755.92

Other payables (20) 289,705,429.95 361,875,948.39

One-year-due long-term liabilities (21) 835,256,473.13 918,106,860.88

Accounts payable to holding companies (22) 130,480,000.00 202,179,774.78

One-year-due long-term accounts payable to holding companies (23) 3,200,000,000.00 3,200,000,000.00

Total current liabilities 9,820,835,973.26 9,433,251,017.81

Long-term liabilities

Long-term loans (21) 6,006,281,211.16 8,768,407,074.58

Long-term accounts payable 196,885.29 –

Long-term accounts payable to holding companies (23) 9,400,000,000.00 12,600,000,000.00

Total long-term liabilities 15,406,478,096.45 21,368,407,074.58

Deferred tax

Deferred tax credits (12) – 71,148.00

Total liabilities 25,227,314,069.71 30,801,729,240.39

Minority interest 224,164,444.79 –

Shareholders’ equity

Capital stock (24) 12,512,000,000.00 12,512,000,000.00

Capital reserve (25) 11,994,541,602.95 11,689,233,828.11

Surplus reserves (26) 4,422,538,204.25 2,269,095,494.74

Including statutory public welfare fund 1,695,488,355.04 977,238,184.30

Undistributed profits (27) 6,537,016,720.48 4,217,134,450.12

including: Cash dividend approved by the Board of3,128,000,000.00 2,502,400,000.00 Directors after the date of annual accounts

Total shareholders’ equities 35,466,096,527.68 30,687,463,772.97

Total liabilities and shareholders’ equities 60,917,575,042.18 61,489,193,013.36

Legal Representative: Xie Qihua Financial Supervisor: Chen Ying Principal of Accounting Division: Wang Mingdong

The notes to the financial statements form part of these financial statements.

40

Consolidated Profit & Profit Distribution Statement

2003

Unit: RMB

Note 5 2003 2002

Income from principal operations (28) 44,460,368,905.54 33,876,605,792.62

Less: cost of principal operations (29) 30,825,425,445.56 24,455,584,465.27

Taxes and other expenses of principal operations (30) 362,288,812.16 269,443,836.83

Profit from principal activities 13,272,654,647.82 9,151,577,490.52

Plus: other operating profit 63,839,913.00 20,155,422.46

Less: operating expenses 367,750,118.89 328,057,988.90

Administration expenses 2,157,944,281.86 1,939,969,073.88

Financial expenses (32) 761,529,543.21 790,490,156.17

Operating profit 10,049,270,616.86 6,113,215,694.03

Plus: gains from investment (33) 39,630,874.88 1,457,872.05

Subsidy income 150,000.00 –

Non-operating income 4,050,413.04 4,844,120.70

Less: non-operating expenses 164,504,012.78 177,764,380.16

Gross Profit 9,928,597,892.00 5,941,753,306.62

Less: income tax 2,953,783,591.37 1,669,820,876.37

Plus: Minority shareholders’ income 910,679.24 –

Net profit 6,975,724,979.87 4,271,932,430.25

Plus: undistributed earnings at BOY 4,217,134,450.12 2,363,588,505.93

Others transferred in Distributable profit 11,192,859,429.99 6,635,520,936.18

Less: transferred to statutory surplus reserve (27) 718,250,170.74 427,193,243.03

Transferred to statutory public welfare fund (27) 718,250,170.74 427,193,243.03

Withdrawal of reserve fund (27) 718,015.99 –

Withdrawal of enterprise development fund (27) 143,603.20 –

Profit distributable to investors 9,755,497,469.32 5,781,134,450.12

Less: Withdrawal of voluntary earnings surplus (27) 716,080,748.84 –

Common dividend payable (27) 2,502,400,000.00 1,564,000,000.00

Undistributed profit (27) 6,537,016,720.48 4,217,134,450.12

Legal Representative: Xie Qihua Financial Supervisor: Chen Ying Principal of Accounting Division: Wang Mingdong

Note: Please consult the notes appended to XI for the supplementary material for the profit sheet.

The notes to the financial statements form part of these financial statements.

41

Consolidated Cash Flow Statement

2003

Unit: RMB

Note 5 2003 2002

1. Cash flows from operating activities:

Cash from sales of goods and labor services provided 51,502,168,711.43 37,777,445,411.05

Refund of tax received 150,000.00 –

Subtotal of cash inflows 51,502,318,711.43 37,777,445,411.05

Cash paid for goods and services received 25,532,865,189.01 19,175,761,871.44

Cash paid to and on behalf of employees 2,539,336,777.10 1,805,243,469.32

Various taxes paid 7,407,600,187.51 3,949,436,038.82

Other cash paid relating to operating activities 1,391,717,455.20 2,056,992,846.37

Subtotal of cash flows 36,871,519,608.82 26,987,434,225.95

Net cash flows from operating activities 14,630,799,102.61 10,790,011,185.10

2. Cash flows from investment activities

Cash received from return of investment 536,751,547.00 –

Cash received from gains of investment 49,183,099.73 1,428,709.00

Net cash received from disposal of fixed assets, intangible assets and other long-term assets 25,782,595.88 17,296,124.16

Other cash received relating to investment activities 24,455,647.01 25,649,606.90

Subtotal of cash inflows 636,172,889.62 44,374,440.06

Cash paid to acquire fixed assets, intangible assets and other long-term assets 5,228,971,284.53 2,060,842,569.32

Cash paid to acquire investment 658,178,547.00 –

Cash paid in the purchase of phase III assets – 800,000,000.00

Cash paid to acquire a part of assets of Baosteel Group Corporation (34) 444,228,045.03 –

Cash paid to acquire Yichang Steel Co., (35) 1,039,640,746.12 –

Cash paid to acquire Lubao Steel Tube Co., (36) 208,311,391.51 –

Cash paid in the purchase of part of trusted assets – 967,367,133.09

Other cash paid relating to investment activities 677,753.00 –

Subtotal of cash outflows 7,580,007,767.19 3,828,209,702.41

Net cash flows from investment activities -6,943,834,877.57 -3,783,835,262.35

3. Cash flows from financing activities

Cash received from borrowings 11,226,264,600.00 15,526,787,474.71

Other cash received relating to financing activities – 123,600,000.00

Subtotal of cash inflows 11,226,264,600.00 15,650,387,474.71

Cash Repayments of debts 14,567,513,796.52 18,658,388,508.87

Cash paid for distribution of dividends, profits and payment of interests 2,973,246,350.22 2,064,273,829.55

Cash paid relating to other financing activities 3,200,000,000.00 –

Subtotal of cash outflows 20,740,760,146.74 20,722,662,338.42

Net cash flows from financing activities -9,514,495,546.74 -5,072,274,863.71

4. Effect of foreign exchange fluctuation on cash 16,958,576.48 3,340,486.52

5. Net increase or decrease in cash and cash h equivalents -1,810,572,745.22 1,937,241,545.56

42

Supplementary Data

2003 2002

1. Reconciliation of net profit to cash flows from operating activities

Net profit 6,975,724,979.87 4,271,932,430.25

Add: transfer of provision for Impairment loss of assets 4,921,506.07 69,929,101.43

Depreciation of fixed assets 7,414,617,955.65 5,382,303,990.55

Amortization of long-term deferred expense 75,539.99 –

Decrease in deferred expense 20,702.87 –

Decrease in accrual expense -33,321,064.35 –

Loss on disposal of fixed asset, intangible assets and other long-term assets 120,687,219.34 126,702,851.38

Financial expenses 757,292,313.65 786,806,062.96

Investment income -39,630,874.88 -1,457,872.05

Minority shareholders’ income -910,679.24 –

Deferred tax credits (Less: debits) -61,833,095.87 24,700,000.00

Decrease of inventories (less: increase) -923,831,787.29 585,123,084.88

Decrease in operating receivable (less: increase) 198,790,831.71 -1,920,453,974.76

Increase in operating Payables 217,393,955.89 1,464,425,510.46

Others 801,599.20 –

Net cash flows from operating activities 14,630,799,102.61 10,790,011,185.10

2. Investment and financing activities unrelated to cash income and expenses

Debt converted to capital reserve 976,415.90 1,902,929.17

3.Increase/decrease in cash and cash equivalents

Remaining sum in bank and on hand at the end of the year 1,795,504,266.74 3,606,077,011.96

Less: remaining sum in bank and on hand at the beginning of the year 3,606,077,011.96 1,668,835,466.40

Net increase/decrease in cash and cash equivalents -1,810,572,745.22 1,937,241,545.56

Legal Representative: Xie Qihua Financial Supervisor: Chen Ying Principal of Accounting Division: Wang Mingdong

The notes to the financial statements form part of these financial statements.

43

Consolidated Increase/decrease of Shareholders’ Equities

2003

Unit: RMB

2003 2002

Capital stock

Balance at the beginning and end of the year 12,512,000,000.00 12,512,000,000.00

Capital reserve

Balance at the beginning of the year 11,689,233,828.11 11,563,730,898.94

Increase in the year 305,307,774.84 125,502,929.17

Including: provision for acceptance of non-cash donation Note5 (25) 1,946.78 –

Transfer from appropriation Note5 (25) 282,300,314.37 123,600,000.00

Equity investment reserve Note5 (25) 22,029,097.79 –

Other capital reserves Note5 (25) 976,415.90 1,902,929.17

Balance at the end of the year 11,994,541,602.95 11,689,233,828.11

Surplus reserve

Balance at the beginning of the year 2,269,095,494.74 1,414,709,008.68

Increase in the year 2,153,442,709.51 854,386,486.06

Including: transfer from net profit 2,153,442,709.51 854,386,486.06

of which: statutory surplus reserve 718,250,170.74 427,193,243.03

Statutory public welfare fund 718,250,170.74 427,193,243.03

Discretionary surplus reserve 716,080,748.84 –

Enterprise development fund 143,603.20 –

Reserve fund 718,015.99 –

Balance at the end of the year 4,422,538,204.25 2,269,095,494.74

Among: statutory surplus reserve 1,695,488,355.04 977,238,184.30

Statutory public welfare fund 1,695,488,355.04 977,238,184.30

Discretionary surplus reserve 1,030,699,874.98 314,619,126.14

Enterprise development fund 143,603.20 –

Reserve fund 718,015.99 –

Undistributed profits

Originally reported undistributed profits at the beginning of the year Note2 (18) 1,714,734,450.12 799,588,505.93

Influence due to change in accounting policy 2,502,400,000.00 1,564,000,000.00

Restated undistributed profits at the beginning of the year 4,217,134,450.12 2,363,588,505.93

Net profit of the year 6,975,724,979.87 4,271,932,430.25

Profit distribution this year -4,655,842,709.51 -2,418,386,486.06

Undistributed profits at the end of the year 6,537,016,720.48 4,217,134,450.12

Legal Representative: Xie Qihua Financial Supervisor: Chen Ying Principal of Accounting Division: Wang Mingdong

The notes to the financial statements form part of these financial statements.

44

Balance Sheet

31 December 2003

Unit: RMB

Assets Note 5 31December 2003 31 December 2002

Current assets

Cash in bank and on hand (1) 1,603,550,538.89 3,606,077,011.96

Short-term investments (2) 136,626,874.00 –

Notes receivable (3) 3,196,006,657.13 3,299,127,938.04

Accounts receivables (4) 1,280,063,974.49 1,303,094,311.74

Other receivables (5) 22,306,556.44 13,316,225.73

Advance payments (6) 28,450,872.16 17,967,083.57

Inventories (7) 4,221,740,313.31 3,371,656,555.40

Total current assets 10,488,745,786.42 11,611,239,126.44

Long-term investments

Long-term equity investments (8) 1,529,623,681.79 15,553,310.72

Total long-term investments 1,529,623,681.79 15,553,310.72

Fixed assets (9)

Original price of fixed assets 100,835,141,893.36 100,159,630,283.33

Less: Accumulated depreciation 58,400,276,567.50 51,939,106,555.12

Net value of fixed assets 42,434,865,325.86 48,220,523,728.21

Less: Provision for impairment loss of fixed assets 42,109,587.69 40,611,777.23

Net amount of fixed assets 42,392,755,738.17 48,179,911,950.98

Construction in progress (10) 5,575,400,558.37 1,682,488,625.22

Total fixed assets 47,968,156,296.54 49,862,400,576.20

Deferred tax

Deferred tax debits (12) 63,829,269.30 –

Total assets 60,050,355,034.05 61,489,193,013.36

45

Liabilities and shareholders’ equities Note 5 31 December 2003 31 December 2002

Current liabilities

Short-term loans (13) – 50,000,000.00

Notes payable (14) 269,138,621.20 447,979,848.85

Accounts payable (15) 2,387,101,093.83 1,625,396,871.76

Advances from customers (16) 1,123,115,560.79 1,487,286,646.36

Wages payable 204,500,000.00 92,259,911.70

Taxes payable (18) 714,946,615.87 1,027,802,399.17

Other debits (19) 20,061,703.19 20,362,755.92

Other payables (20) 255,112,770.92 361,875,948.39

One-year-due long-term liabilities (21) 835,256,473.13 918,106,860.88

Accounts payable to holding companies (22) 130,480,000.00 202,179,774.78

One-year-due long-term accounts payable to holding companies (23) 3,200,000,000.00 3,200,000,000.00

Total current liabilities 9,139,712,838.93 9,433,251,017.81

Long-term liabilities

Long-term loans (21) 6,006,281,211.16 8,768,407,074.58

Long-term accounts payable to holding companies (23) 9,400,000,000.00 12,600,000,000.00

Total long-term liabilities 15,406,281,211.16 21,368,407,074.58

Deferred tax

Deferred tax credits (12) – 71,148.00

Total liabilities 24,545,994,050.09 30,801,729,240.39

Shareholders’ equity

Capital stock (24) 12,512,000,000.00 12,512,000,000.00

Capital reserve (25) 11,994,541,602.95 11,689,233,828.11

Surplus reserves (26) 4,373,292,325.60 2,269,095,494.74

Including statutory public welfare fund 1,678,637,127.92 977,238,184.30

Undistributed profits (27) 6,624,527,055.41 4,217,134,450.12

Including: Cash dividends approved by the Board of3,128,000,000.00 2,502,400,000.00 Directors after the date of annual accounts

Total shareholders’ equities 35,504,360,983.96 30,687,463,772.97

Total liabilities and shareholders’ equities 60,050,355,034.05 61,489,193,013.36

Legal Representative: Xie Qihua Financial Supervisor: Chen Ying Principal of Accounting Division: Wang Mingdong

The notes to the financial statements form part of these financial statements.

46

Profit & Profit Distribution Statement

2003

Unit: RMB

Note 5 2003 2002

Income from principal operations (28) 44,158,462,917.12 33,876,605,792.62

Less: cost of principal operations (29) 30,536,505,884.52 24,455,584,465.27

Taxes and other expenses of principal operations (30) 362,272,156.54 269,443,836.83

Profit from principal activities 13,259,684,876.06 9,151,577,490.52

Plus: other operating profit 63,010,733.67 20,155,422.46

Less: operating expenses 362,106,137.15 328,057,988.90

Administration expenses 2,134,730,518.93 1,939,969,073.88

Financial expenses (32) 759,453,916.37 790,490,156.17

Operating profit 10,066,405,037.28 6,113,215,694.03

Plus: gains from investment (33) 44,683,966.81 1,457,872.05

Subsidy income 150,000.00 –

Non-operating income 3,749,756.15 4,844,120.70

Less: non-operating expenses 162,985,512.41 177,764,380.16

Gross profit 9,952,003,247.83 5,941,753,306.62

Less: income tax 2,938,013,811.68 1,669,820,876.37

Net profit 7,013,989,436.15 4,271,932,430.25

Plus: undistributed earnings at BOY 4,217,134,450.12 2,363,588,505.93

Others transferred in Distributable profit 11,231,123,886.27 6,635,520,936.18

Less: transferred to statutory surplus reserve (27) 701,398,943.62 427,193,243.03

Transferred to statutory public welfare fund (27) 701,398,943.62 427,193,243.03

Profit distributable to investors 9,828,325,999.03 5,781,134,450.12

Less: Withdrawal of voluntary surplus reserve (27) 701,398,943.62 –

Common dividend payable (27) 2,502,400,000.00 1,564,000,000.00

Undistributed profit (27) 6,624,527,055.41 4,217,134,450.12

Legal Representative: Xie Qihua Financial Supervisor: Chen Ying Principal of Accounting Division: Wang Mingdong

Note: Please consult the notes appended to XI for the supplementary material for the profit sheet

The notes to the financial statements form part of these financial statements.

47

Cash Flow Statement

2003

Unit: RMB

Note 5 2003 2002

1. Cash flows from operating activities

Cash from sales of goods and labor services provided 50,945,478,283.64 37,777,445,411.05

Refund of tax received 150,000.00 –

Subtotal of cash inflows 50,945,628,283.64 37,777,445,411.05

Cash paid for goods and services received 25,121,512,572.44 19,175,761,871.44

Cash paid to and on behalf of employees 2,520,207,967.86 1,805,243,469.32

Various taxes paid 7,398,061,591.16 3,949,436,038.82

Other cash paid relating to operating activities 1,360,850,460.14 2,056,992,846.37

Subtotal of cash outflows 36,400,632,591.60 26,987,434,225.95

Net cash flows from operating activities 14,544,995,692.04 10,790,011,185.10

2. Cash flows from operating activities

Cash received from return of investments 502,751,547.00 –

Cash received from gains of investment 48,282,600.98 1,428,709.00

Net cash received from disposal of fixed assets, intangible assets and other long-term assets 17,346,373.14 17,296,124.16

Other cash received relating to investment activities 23,614,766.20 25,649,606.90

Subtotal of cash inflows 591,995,287.32 44,374,440.06

Cash paid to acquire fixed assets, intangible assets and other long-term assets 5,156,439,072.29 2,060,842,569.32

Cash paid to acquire investments 658,178,547.00 –

Cash paid in the purchase of phaseIII assets – 800,000,000.00

Cash paid to acquire part of assets of Baosteel Group Corporation (34) 444,228,045.03 –

Cash paid to acquire Yichang Steel Co., (35) 1,254,687,000.00 –

Cash paid to acquire Lubao Co., (36) 221,414,900.00 –

Cash paid in the purchase of part of trusted assets – 967,367,133.09

Other cash paid relating to investment activities 677,753.00 –

Subtotal of cash of outflows 7,735,625,317.32 3,828,209,702.41

Net cash flows from investment activities -7,143,630,030.00 -3,783,835,262.35

3. Cash flows from financing activities

Cash received from borrowings 11,212,824,600.00 15,526,787,474.71

Other cash received relating to financing activities – 123,600,000.00

Subtotal of cash inflows 11,212,824,600.00 15,650,387,474.71

Cash repayments of debts 14,455,513,796.52 18,658,388,508.87

Cash paid for distribution of dividends, profits and payment of interests 2,978,193,180.05 2,064,273,829.55

Cash paid relating to other financing activities 3,200,000,000.00 –

Subtotal of cash outflows 20,633,706,976.57 20,722,662,338.42

Net cash flows from financing activities -9,420,882,376.57 -5,072,274,863.71

4. Effect of foreign exchange fluctuation on cash 16,990,241.46 3,340,486.52

5. Net increase or decrease in cash and cash equivalents -2,002,526,473.07 1,937,241,545.56

48

Supplementary Data

2003 2002

1. Reconciliation of net profit to cash flows from operating activities

Net profit 7,013,989,436.15 4,271,932,430.25

Add: transfer of provision for impairment loss of assets 8,318,146.78 69,929,101.43

Depreciation of fixed assets 7,390,170,350.90 5,382,303,990.55

Loss on disposal of fixed assets 119,930,094.77 126,702,851.38

Financial expenses 755,040,985.73 786,806,062.96

Investment income -44,683,966.81 -1,457,872.05

Deferred tax credits (less: debits) -63,900,417.30 24,700,000.00

Decrease of inventories (less: increase) -871,858,737.37 585,123,084.88

Decrease in operating receivable (less: increase) 108,131,367.92 -1,920,453,974.76

Increase in operating Payables 129,858,431.27 1,464,425,510.46

Net cash flows from operating activities 14,544,995,692.04 10,790,011,185.10

2. Investment and financing activities unrelated to cash income and expenses

Debt transfer to capital reserve 976,415.90 1,902,929.17

3. Increase/decrease in cash and cash equivalents

Remaining sum in bank and on hand at the end of the year 1,603,550,538.89 3,606,077,011.96

Less: remaining sum in bank and on hand at the beginning of the year 3,606,077,011.96 1,668,835,466.40

Net increase/decrease in cash and cash equivalents -2,002,526,473.07 1,937,241,545.56

Legal Representative: Xie Qihua Financial Supervisor: Chen Ying Principal of Accounting Division: Wang Mingdong

The notes to the financial statements form part of these financial statements.

49

Increase/decrease of Shareholders’ Equities

2003

Unit: RMB

2003 2002

Capital stock

Balance at the beginning and end of the year 12,512,000,000.00 12,512,000,000.00

Capital reserve

Balance at the beginning of the year 11,689,233,828.11 11,563,730,898.94

Increase in the year 305,307,774.84 125,502,929.17

Including: provision for acceptance of non-cash donation Note5 (25) 1,946.78 –

Transfer from appropriation Note5 (25) 282,300,314.37 123,600,000.00

Equity investment reserve Note5 (25) 22,029,097.79 –

Other capital reserves Note5 (25) 976,415.90 1,902,929.17

Balance at the end of the year 11,994,541,602.95 11,689,233,828.11

Surplus reserve

Balance at the beginning of the year 2,269,095,494.74 1,414,709,008.68

Increase in the year 2,104,196,830.86 854,386,486.06

Including: transfer from net profit 2,104,196,830.86 854,386,486.06

of which: statutory surplus reserve 701,398,943.62 427,193,243.03

Statutory public welfare fund 701,398,943.62 427,193,243.03

Discretionary surplus reserve 701,398,943.62 –

Balance at the end of the year 4,373,292,325.60 2,269,095,494.74

Among: statutory surplus reserve 1,678,637,127.92 977,238,184.30

Statutory public welfare fund 1,678,637,127.92 977,238,184.30

Discretionary surplus reserve 1,016,018,069.76 314,619,126.14

Undistributed profits

Originally reported undistributed profits at the beginning of the year Note2 (18) 1,714,734,450.12 799,588,505.93

Influence due to change in accounting policy 2,502,400,000.00 1,564,000,000.00

Restated undistributed profits at the beginning of the year 4,217,134,450.12 2,363,588,505.93

Net profit of the year 7,013,989,436.15 4,271,932,430.25

Profit distribution this year -4,606,596,830.86 -2,418,386,486.06

Undistributed profits at the end of the year 6,624,527,055.41 4,217,134,450.12

Legal Representative: Xie Qihua Financial Supervisor: Chen Ying Principal of Accounting Division: Wang Mingdong

The notes to the financial statements form part of these financial statements.

50

NOTES TO THE FINANCIAL REPORTS

31 December 2003

RMB yuan

1. Company Profile

Baoshan Iron & Steel Co., Ltd (the “Company”) has been established on the territory of the People’s Republic of China (the

“PRC”) as a limited company in line with PRC laws. Approved by the Economic and Trade Commission of PRC (Guo Jin Mao

Qi Gai[1999] No.1266), sponsored by Shanghai Baosteel Group Corporation (“SBGC”), The Company was formally estab-

lished on 3rd February 2000 with registration No.3100001006333. After obtaining the approval of the China Securities

Regulatory Commission (CSRC) (Zheng Jian Fa Xing Zi [2000] No.140), by either off-line rationing or on-line pricing, the

Company successfully completed its issue of 1,877 million RMB common shares (A share) with a par value of RMB 1.00

yuan per share during the period of November 6th-24th, 2000. The issue price per share was RMB 4.18 yuan.

The principal operations of the Company cover not only the iron-and-steel-related businesses like smelting and processing

of iron & steel, electricity, coal, production of industrial gases, wharves, warehousing, and transportation, but also technol-

ogy development, technology transfer, technological services and technology management consultation. Also, the Com-

pany has involved in such businesses as auto repairs, exports of its own products and technologies, imports needed for the

production and scientific research including raw and auxiliary materials, instruments & apparatus, mechanical equipment,

spare parts, and technologies (excluding businesses confined to companies and the goods and technologies forbidden for

import &export by the state), and material processing.

51

2. Significant Accounting Policies, Estimates and Preparation Method for Consolidated Accounting Report

The significant accounting policies, estimates and preparation method for consolidated accounting reports adopted in the preparation of the financial reports are

in conformity with the Accounting Standards for Business Enterprises and Accounting Regulations for Business Enterprises, some relevant supplementary

documents and relevant standards, regulations and stipulations issued by the Ministry of Finance of the PRC.

(1) Accounting Regulations

The Company and its subsidiaries adopt Accounting Standards for Business Enterprises and Accounting Regulations for

Business Enterprises.

(2) Accounting Year

The accounting year of the Company and its subsidiaries commence from 1 January to 31 December according to the

Gregorian calendar.

(3) Currency in Bookkeeping

The Company and its subsidiaries keep their accounts with the currency of Renminbi (RMB)

(4) Basis of Bookkeeping

The Company and its subsidiaries’ financial reports have been prepared on the accrual basis and at historical cost upon the

obtaining of assets. Regular checks have been carried out for all assets to stipulate the transfer of provisions for relevant

impairment losses in conformity with the Accounting Regulations for Business Enterprises.

(5) Foreign Currencies

Transactions denominated in foreign currencies have been translated into RMB at the standard exchange rates (“the

standard exchange rates “) set by the People’s Bank of China on the 1st day of that month. At the settlement date, the

foreign currencies from credits and debits as well as cash are translated and adjusted at the standard exchange rates set at

the end of the year. Exchange differences arising from these translations are accounted for as current profits and losses.

Foreign exchange gains and losses relating to the funds borrowed for the construction of fixed assets are dealt with based

on the principle of capitalization of loans.

(6) Cash Equivalents

Cash equivalents refer to the investments made by the Company and its subsidiaries that are short-termed (3-month-due

from the purchase date), highly liquid, readily convertible to known amounts of cash, and insignificant risk of changes in

value.

(7) Short-term Investment

Short-term investment refers to the variable investments to be held for less than one year, including stock investments,

bonds and funds. It is counted as per the actual investment cost after deduction of the proclaimed cash dividends yet not

collected as well as the due bond interests yet not collected.

It is the cash dividends or interests received from the investes during the holding period of short-term investment that will be

used as the investment return at the actual receipt time, excluding the cash dividends or interests already booked in the

account receivable at this time, to balance the book value of short-term investments. While handling the short-term investments,

the current investment balance is defined as the difference between the above book value and the actual received amount.

Individual valuation is applied to carrying forward the investment cost.

The ending short-term investments of the company and its subsidiaries are counted as per the lower figures between the

costs and the market prices of classified investments. If a market price is lower than its related cost, the with drawable short-

term investment depreciation is to be prepared in accordance with the difference.

52

(8) Provisions for Bad Debts

(A) The Company has recognized bad debts in the following cases:

- The debtor has gone bankrupt or died, the debts are uncollectible even after the liquidation of the debtor’s bankrupted

properties and legacies;

- The debts are overdue and there is a conclusive proof that the debts are un-collectible or in the least probability.

Before confirmation, the Company adopted an allowance method for the bad debts recognized, but upon confirmation, the

accounts receivable and other receivables are written off against the allowance for un-collectible accounts.

(B) The allowance method has been adopted by the Company and its subsidiaries for the calculation of the bad debts would be

made. Special bad debts and common bad debt are made based on the specific identification method and aging analysis

method respectively. The allowance for special bad debts refers to the allowance made based on the judgment by the

Company’s management on the payment of certain account receivable and then the transfer of relevant provision for the

bed debts is decided. The allowance for common bad debts refers to the allowance, except the special one, made by the

Company’s management based on the aging of accounts for the ending balance of the remaining accounts receivable. The

percentages of the allowances are as follows:

Age of accounts Percentage of allowance for bad debts (%)

Within 1 year 5

1 to 2 30

2 to 3 60

3 years and over 100

(9) Inventories

Inventories consist of raw material, goods in process, finished goods and spare parts. Each kind of inventory is accounted

for at historical costs as obtained. The daily accounting is based in the historical cost. Inventory delivered is by means of the

weighted-average cost method.

The ending Inventory is accounted for based on the lower-of-cost-or-net-realizable-value rule. The transfer of allowance for

price declining loss of the inventory is based on the difference after the deduction of the estimated completion costs and the

estimated sales expenses from the estimated selling price during the Company’s normal course of business.

(10) Long-term Equity Investments

The long-term equity investment is counted as per the original investment cost at the time it is obtained. The equity method

is applied to accounting the company’s investments which take up 20% or above of the total investments attributed to the

voting power in the invested company or take up less than 20% of the same but the company enjoys great influence to the

invested company. The cost method is applied to accounting the company’s investments which take up less than 20% of

the total investments attributed to the voting power in the invested company or take up 20% or above of the same but the

company enjoys little influence to the invested company.

When the equity method is adopted for the long-term equity investments, the difference between the original investment

cost and the owner’s equity share of the invested company is recognized as “equity investment difference” which is

amortized within the investment period as stipulated in the contract. If there is no investment period, the amortization will

be made on the basis of the debtor’s difference, which is no more than 10 years. while the credit’s difference will be directly

reckoned into the capital surplus under the subject of the equity investment preparation.

For long-term bond investment, original investment cost is the actual cost when it is obtained. Interest return is settled by

calculating the nominal value and nominal rate by terms. Bond premiums and reduced values are amortized while settling

interest return within bond duration.

Long-term equity investments ended the period are stated based on the lower-of-book-value-or-recoverable-amount rule. The

transfer of allowance for impairment loss of long-term investments is made when the recoverable amount of the invest-

ments is lower than the book value.

53

(11) Fixed Assets

Fixed assets refer to tangible assets with high unit value and a useful life of more than one year for producing goods, providing labor

services, leasing and operating management.

Fixed assets are accounted for at historical cost as obtained. The interest of special loan and the exchange difference from conversion

of foreign currency loans for acquiring the fixed assets before available to the users shall be capitalized. Successive expenses related to

fixed assets expected to bring about more economic benefits than those had originally been estimated shall be included in book value.

Other successive expenses are stated as current expenses.

Fixed asset depreciation will be calculated in straight line method, at a rate determined on different fixed asset category at its original

price, expected years of use and expected residual value (4% of the original value), as follows:

Class Estimated useful life Annual depreciation rate

Building and Structures 15 - 35 2.7% - 6.4%

Machinery and equipment 7 - 18 5.3% - 13.7%

Transportation vehicles 5 - 10 9.6% - 19.2%

Office and other facilities 5 - 9 10.7% - 19.2%

Transfer of fixed asset depreciation is made on a monthly basis. The fixed asset, if accrued in this month, will be accounted for

depreciation from next month; if deleted in this month, will be stopped of depreciation transfer in the next month.

At the end of a year the fixed asset will be examined on an item by item basis where the difference of sum receivable being lower than

the book value may be treated as fixed asset depreciation preparation, entered in current profit/loss. The sum receivable refers to the

higher one in price by net sales price versus utility value of the fixed asst. The utility value means the cash value, expected to be accrued

in disposition of the asset when it ends in continuous utility and service, and used to estimate the cash flow in the future.

The net gains or losses from assets surplus, shortages, retirement, damages, transfers, and sales are counted as non-operating income

or expenses.

(12) Construction in Process

Construction in process refers to the capital asset under construction or during installation, recognized according to the actual expenditures,

comprising direct materials and payrolls, equipment to be installed, installation costs, management fees, net gains/losses from the trial

run and capitalized loan expenses. Construction in process transfers into fixed assets when they reach the desired usable conditions.

Construction in process is checked item by item in detail when the period is ends. The transfer oft the allowance for impairment loss

is made when the construction in progress has been discontinued for a long period of time and is not expected to restart in three years’

time, or the construction project has become functionally or technologically obsolete, and an uncertainty exists as to whether the project

can bring any future economic benefits to the enterprise.

At the end of a year the fixed asset will be examined on a item by item basis where the difference of sum receivable being lower than

the book value may be treated as fixed asset depreciation preparation, entered in current profit/loss. The sum receivable refers to the

higher one in price by net sales price versus utility value of the fixed asst. The utility value means the cash value, expected to be accrued

in disposition of the asset when it ends in continuous utility and service, and used to estimate the cash flow in the future.

(13) Borrowing Costs

Borrowing cost refers to the interest, deduction/premium amortization, auxiliary expenditure and foreign currency exchange difference

that are accrued on the loan by this company and its subsidiaries. The special borrowing cost is the borrowed fund dedicated for

purchasing/constructing fixed asset, which will be accounted for as cost to that asset so long as it satisfies the following three conditions

and starts capitalization:

(1) Asset expenditure have already accrued

(2) Borrowing cost have already accrued

(3) Necessary construction activities that intend the asset to reach the expected conditions of utility began.

54

If the acquisition of fixed assets suspends abnormally for three months in succession, the capitalization of the borrowing costs

suspends until the restart of the acquisition and borrowing costs are recognized as expenses during the current period.

The capitalization of the borrowing costs ceases when the acquired fixed assets have reached their expected usable conditions. The

borrowing costs incurred thereafter are recognized as the gain and loss during the current period.

For the borrowing cost, the capitalized sum to be established in each year will include the interest cost amortized with premium/

deduction, calculated at a weighted average of accumulative spending for purchasing and constructing fixed asset and an average

weighted interest rate relating to that loan when the current interest actually accrued is not exceeded and is within the range of

amortization for price with premium/deduction. The exchange difference for special loan in foreign currency and the auxiliary cost to

the significant, special loan will be directly recognized as capitalized sum based on the sum actually accrued.

Other borrowing costs are recognized as financing cost directly during current period.

(14) Long-term Amortization Cost

The long-term amortization refers to the cost or expenditures that are already spent by the Company and its subsidiaries, yet it is

amortized over at least one year. The long-term amortization cost will be amortized pro rata in the years of benefit therein created.

(15) Revenue Recognition Principle

In Transaction of commodities, revenues from commodity sales are recognized when the significant risk and the rewards of the

ownership of products are transferred to the buyer; the Company and its subsidiaries retains neither the continuing managerial

involvement nor the effective control over the commodity; the relevant economic benefits arising from the transaction can flow into the

Company; and when the cost related to the sales of the commodity can be reliably measured, the realization of sales revenue is

confirmed. Revenues from commodity sales and labor services is entered in accounting item in conformity to the contract signed

between the Company and the buyer of the products or the receiver of the services, agreed amount, or amount acceptable to both

parties (excluding the sales tax of the value added tax). Income of the period is directly written off against the sales rebates, and the

sales discount. (Goods sold before and at the balance sheet date, and goods returned between the balance sheet date and the

approval date of the financial reports, are recognized as matters for adjustment after the balance sheet date.) Cash discount is

recognized as financial expenses during the current period.

Service income is recognized when service is rendered and completed in the same accounting year, the related economic benefits can

flow into the Company, and both the service and cost can be reliably measured. For services started and completed in different

accounting years, the completion percentage method at the balance sheet date shall be used to recognize the service revenue if the

outcome of the services can be estimated reliably. In cases the service results cannot be estimated reliably, the service income is

recognized as the estimated returnable part of the service cost incurred at the balance sheet date, and the same amount shall be

transferred into cost. The unreturnable part is recognized as expenses during the current period.

Interest income is calculated on the basis of the time and the applicable interest rate of the transferred cash use right. The income from

the utilization fee is calculated in accordance with the time and rates agreed or stipulated I the relevant contract.

(16) Income Tax

Income tax is provided using the tax effect accounting method. The current income tax expenses are recognized based on the

aggregate from the current income payable plus the amount arising from the effect of time differences on the income tax. The liability

method is used while recognizing the amount arising from the effect of time differences on the income tax.

(17) Hedging Tools

Hedging tools include the currency swap transactions of foreign exchange liability and the interest rate swap transactions. At the

balance sheet date, the Company would, on the basis of year-end market foreign exchange rates, adjust the swap future nominal cash

income and the expenditure flows in order to recognize the hedging tools’ book assets and the liabilities in net value. Both the realized

and the unrealized profits and losses are recognized as exchange profits and losses.

If the hedging tool has been sold out or stopped, the hedging tool will be sold after the adjustment of its book assets and liabilities in net

value, or the exchange profits and losses of the period shall be stopped.

55

(18) Alteration to the Accounting Policy

The cash dividend to investors as intended in the profit allocation plan made by Board of Directors of the Company in the period from

day of balance sheet publication to the day of publication of financial report approved will be listed under shareholders equity as an

entry of dividend payable, in lieu of an item originally specified as to be adjusted. This is done in accordance with the relevant provisions

in [Enterprise Accounting Rules --- Matters Subsequent to Balance Sheet]. The retrospective adjustment is made for this accounting

policy alteration with the result that the comparative financial statements by our Company for 2002 are accordingly re-described. The

accumulative impact created by this accounting policy alternation are demonstrated as follows:

The change of the accounting policy has no influence on the net profits of 2003 and 2002.

(19) Changes in Accounting Estimates

(A) It was originally estimated by our Company of the transportation vehicles to be serving for 6 to 10 years. Yet in this year it is limited to

5 years for all but large transportation equipment (of which the time length for depreciation is 10 years) based on investigation into the

factual situation for the fixed asset. As a result the years of depreciation and depreciation rate for above-mentioned fixed asset is thus

changed by our Company starting from January 1, 2003:

The changes in accounting estimates should be accounted for by using the future applicable method. It would lead to a total profit

decrease of RMB 1,906,326,545.37yuan for the year.

(B) Having taken into account as a whole the sale environment in current steel market, corporate sales policies and recovery of sum

receivable in the Company and its subsidiaries in 2003, the Company and its subsidiaries make adjustment to the transfer percentage

of general bad debt preparation for the sums receivable, as follows:

The changes in accounting estimates should be accounted for by using the future applicable method. It would lead to a total profit

decrease of RMB 632,877.63yuan for the year.

(20) Preparation of the Consolidated Financial ReportsThe consolidated financial reports are compiled in accordance with the relevant stipulations of the Interim Provisions on Consolidated

Financial Report promulgated by the Ministry of Finance and the Letter to the Request for Introduction of Consolidation Range of

Consolidated Financial Reports (FA2 (1996) No.2) by the same. According to these stipulations, the invested companies are within the

consolidation range if their investing company is holding over 50% of their equities or the actual control power even with equities less

than 50% of the same. All the internal transactions and balances among the essential companies and subsidiaries are used to strike

and cancel out for balance.

This year, the Company acquired 90% of the equities of Shanghai Baosteel Yichang Thin Sheet Co., Ltd (Yichang Sheet) and 79.82%

of the equities of Yantai Lubao Steel Tube Co., Ltd. (Lubao Tube) with the equity account day on 31 October 2003. From this day on,

the Yichang Sheet and Lubao Tube have become the subsidiaries of the Company. The consolidated financial reports hereof have

included the balance sheets of these companies dated 31 December 2003 and the profit & profit distribution statements and cash flow

statements of the same for the period from 1 November 2003 to 31 December 2003.

Undistributed profits at the beginning of the year2003 2002

Originally reported amount 1,714,734,450.12 799,588,505.93

Impact due to change of accounting policies 2,502,400,000.00 1,564,000,000.00

Restated amount 4,217,134,450.12 2,363,588,505.93

After changes Before changes

Annual depreciation rate 9.6% & 19.2% 9.6% &16%

Depreciation charge for the year 2,393,526,454.30 487,199,908.93

AgePercentage of allowance for bad debts (%)After changes Before changes

Within 1 year 5 5

1 to 2 year 30 10

2 to 3 year 60 20

3 years and above 100 100

56

3. Taxes

The principal types of taxes and tax rates applicable to the Company and its subsidiaries are as follows:

(1). Value added tax (VAT) The Company’s sales revenue from the taxable products is subject to the sales tax at the rates of 17% and

13%. The VAT payable is the net difference between the sales tax and the deductible input item tax during the

current period.

(2). Business tax (BT) The Company is subject to BT at 3%to 5% of its taxable operating revenue.

(3). City maintenance and construction tax (CMCT) The Company is subject to CMCT at 7% of the sum of value added tax and business tax paid.

(4). Education tax (ET) The Company is subject to ET at 3% of the sum of VAT and BT paid.

(5). Embankment maintenance tax (EMT) The Company is subject to EMT at 1% of the sum of VAT and BT paid. According to Hu Fu Ban Wen [2000] No. 26 issued

by the General Office under Shanghai Municipal Government, the EMT was abandoned from 1st June 2002 on.

(6). Riverway management tax (RMT) The Company is subject to RMT at 0.25% of the sum of VAT and BT paid. According to Hu Fu Ban Wen [2000]

No.27 issued by the General Office under Shanghai Municipal Government, the tax rate is adjusted to 1% from

1st June 2002 on.

(7). House property tax (HPT) The Company is subject to HPT at the rate defined by the State. HPT payable is the proprietary estate of the

Company.

(8). Enterprise income tax(EIT) The Company is subject to EIT at 33% of its taxable income. As a productive enterprise with foreign investment

registered in the waterfront open city, the Baosteel Yichang Huangshi Aluminized Sheet Co., Ltd. (hereinafter

referred to as Huangshi Aluminized Sheet) is paying the EIT as per 24% and has enjoyed the preferential policies

of “tax exemption for first two years and tax deduction by half for the following three years”. Therefore, the EIT

of suitable enterprises in the 2002 and 2003 were 12%.

(9). Personnel income tax (PIT) From the salaries paid by the Company and its subsidiaries to their personnel, the former will withhold and remit

the PIT in accordance with the provisions of tax law.

57

4. Holding Subsidiaries and Related Companies

Registered capitalName of invested company

CurrencyBusiness scope Shareholding ratio Notes

Bsteel. com 80,000,000 RMB E-business 30%

Shanghai Baosteel-Arcelor Tailor Metal Co., Ltd.121,500,000 RMB

Producing and selling laser tailored

(Laser Tailor Metal Co.) metallic compound for automotives28% (Note1)

Shanghai Baosteel Yichang Thin Steel Sheet Co., Ltd. 646,000,000 RMB Producing and selling cold rolled sheets etc. 90% (Note2)

Yantai Lubao Steel Tube Co., Ltd. 100,000,000 RMB Producing and selling steel tubes 79.82% (Note2)

Baosteel Yichang Huangshi Aluminized Sheet Co., Ltd. 8,000,000 USD Producing and selling galvanized sheets, etc. 39.37% (Note3)

Yantai Lubao Industrial Trade Co. Ltd. (Lubao Industrial Trade) 1,650,000 RMB Selling steel tubes 100% (Note3)

Baosteel Group Shanghai Lubao Steel Tube Agency (Lubao Agency) 500,000 RMB Selling steel tubes 100% (Note3)

Note 1: The Company, together with the Shanghai Volkswagen United Development Co., Ltd., Luxemburg Arbed and Shanghai Baosteel International Trade

Co., Ltd., contributed to establish the Shanghai Baosteel-Arcelor Tailor Metal Co., Ltd., on 31 October 2003. Equity method is adopted for the

valuation of the investments to the joint venture company, which is still in the stage of startup for operation.

Note 2: These companies are holding subsidiaries newly acquired by the Company in the year with the equity account day on 31 October 2003. The

consolidated profit & profit distribution statement and the consolidated cash flow statement reflect the business performance and cash flow of these

companies in November and December 2003.

Note 3: According to the company chart of the Huangshi Aluminized Sheet, the Yichang Sheet has an equity investment proportion of 39.37% and the voting

power of half of the directors in the meeting of Board of Directors. Therefore, the Huangshi Aluminized Sheet complies with the norm of to be

consolidated in the financial reports with a proportion of 39.7%.

As the sole subsidiaries of Lubao Tube, the Lubao Industrial Trade and Lubao Agency impose no great influences on the financial status and

business performance of Lubao Tube in terms of sales income, net profits and total assets. According to the relevant regulations, these companies

may not be included in the consolidation range and are hence valuated in the equity method.

58

5. Major Notes to the Financial Reports

(1) Cash in Bank and on Hand

The Company and its subsidiaries The Company2003 2002 2003 2002

Cash on hand 130,136.23 17,396.81 13,898.97 17,396.81

Cash in bank

RMB 623,035,854.82 517,529,480.26 436,967,878.90 517,529,480.26

US dollar 183,258,092.37 23,476,894.31 177,506,786.44 23,476,894.31

Japanese Yen 2,005,337.15 529,699.34 2,005,337.15 529,699.34

Euro 647,888.55 85,949.53 647,888.55 85,949.53

Baosteel Group Finance Co. Ltd. cash in bank

RMB 940,142,513.36 1,886,177,854.94 940,142,513.36 1,886,177,854.94

US Dollar 5,549,047.63 779,186,848.33 5,549,047.63 779,186,848.33

Japanese Yen 1,319,948.90 3,694,243.72 1,319,948.90 3,694,243.72

Euro 747,238.99 3,563,944.72 747,238.99 3,563,944.72

Others

Baosteel Group Finance Co., Ltd. 38,650,000.00 – 38,650,000.00 –

Bank – 391,814,700.00 – 391,814,700.00

Total 1,795,504,266.74 3,606,077,011.96 1,603,550,538.89 3,606,077,011.96

The deposits of Baosteel Co., Ltd. in Baostel Group Finance Co., Ltd. Include US Dollar 670,442.04 (US Dollar 94,135,388.15

in 2002), Japanese Yen 17,075,665.00 (8.2773 in 2002), and Euro72,278.71 (412,684.66 in 2002). The foreign exchange

rates are respectively RMB8.2767 yuan for US Dollar to RMB (RMB 8.2773 in2002), RMB 0.0773 yuan for Japanese Yen to

RMB (RMB 0.069 in 2002), and RMB10.3383 yuan for Euro to RMB (RMB 8.6360 in 2002).

Other cash on hand and in bank includes short-term foreign currency trusted deposits due within 21 days in Baosteel

Finance Co., Ltd, the amounts of which are Japanese Yen 500,000,000.00, due within 21days respectively, and the interest

rate per annum is 0.03%. The foreign exchange rates are RMB 0.0773 yuan for Japanese Yen to RMB (RMB 0.069 in 2002).

(2) Short-term Investments

The Company & its subsidiaries The Company2003 2002 2003 2002

Convertible bond investment 8,417,000.00 – 8,417,000.00 –

Fund investment 167,809,375.25 – 128,209,874.00 –

Total 176,226,375.25 – 136,626,874.00 –

On 31 December 2003, the Company and its subsidiaries have the bond investments and fund investments totaled 189,

442,749.06 RMB yuan in the market prices. Included in these investments is also the balance of investment on open funds

of Baokang series, 39,599,501.25 RMB yuan, bought by the Yichang Sheet and its subsidiaries before the Company’s

acquisition of the Yichang Sheet.

The Company and its subsidiaries believe as of 31 December 2003 that there is no need to withdraw the provision for short-

term investment depreciation and no great restriction on realization on liquidity.

59

(3) Bills Receivable

The Company and its subsidiaries The Company2003 2002 2003 2002

Bank bills of acceptance 904,159,416.90 664,398,750.83 805,674,188.08 664,398,750.83

Trade bills of acceptance 2,385,528,732.97 2,634,729,187.21 2,390,332,469.05 2,634,729,187.21

Including: trade bills of acceptance by related parties 2,345,528,732.97 2,593,539,187.21 2,350,332,469.05 2,593,539,187.21

Total 3,289,688,149.87 3,299,127,938.04 3,196,006,657.13 3,299,127,938.04

On 31 December 2003, the Company and its subsidiaries have no commercial acceptance notes discounted or notes receivable under mortagage. The balance

at the end of the year does not include the arrears of the shareholders with 5% or above of equity contributing voting powers.

(4) Accounts Receivable

The Company & its subsidiaries The Company2003 2002 2003 2002

Accounts Receivables 1,513,929,213.77 1,493,212,204.75 1,456,776,424.95 1,493,212,204.75

Less: the allowance of bad debts 177,316,731.17 190,117,893.01 176,712,450.46 190,117,893.01

1,336,612,482.60 1,303,094,311.74 1,280,063,974.49 1,303,094,311.74

The aging analysis of accounts payable is as follows:

The Company & its subsidiaries

2003-12-31 2002-12-31

Balance Percentage Allowance Balance Percentage Allowance

Within 1 year 1,402,552,166.27 92.64% 67,330,307.73 1,367,184,987.62 91.56% 68,359,249.38

1 to 2 years 310,500.00 0.02% 93,150.00 2,636,848.17 0.18% 263,684.82

2 to 3 years 2,633,721,22 0.18% 1,460,447.16 77,217,105.96 5.17% 75,321,695.81

3 years and over 108,432,826.28 7.16% 108,432,826.28 46,173,263.00 3.09% 46,173,263.00

Total 1,513,929,213.77 100% 177,316,731.17 1,493,212,204.75 100% 190,117,893.01

The Company

2003-12-31 2002-12-31

Balance Percentage Allowance Balance Percentage Allowance

Within 1 year 1,346,606,154.59 92.44% 67,330,307.73 1,367,184,987.62 91.56% 68,359,249.38

1 to 2 years 310,500.00 0.02% 93,150.00 2,636,848.17 0.18% 263,684.82

2 to 3 years 1,426,944.08 0.10% 856,166.45 77,217,105.96 5.17% 75,321,695.81

3 years and above 108,432,826.28 7.44% 108,432,826.28 46,173,263.00 3.09% 46,173,263.00

Total 1,456,776,424.95 100% 176,712,450.46 1,493,212,204.75 100% 190,117,893.01

60

The analysis of bad debt preparation for the debts receivable at the end of the year:

The Company & its subsidiaries The Company2003 2002 2003 2002

Balance at the beginning of the year 190,117,893.01 132,163,642.67 190,117,893.01 132,163,642.67

Acquisition of Yichang Sheet and Lubao Tube 648,693.12 – – –

Balance striking and writeoff of the writeback bad debts preparation of the previous years 1,608,646.69 – 1,608,646.69 –

Drawing in the writeoff bad debts 2,923,499.85 – 2,923,499.85 –

Withdraw/(balance back striking) of the year -17,920,053.82 59,955,838.24 -17,875,641.41 59,955,838.24

Balance striking and writeoff of the bad debt preparation -61,947.68 -2,001,587.90 -61,947.68 -2,001,587.90

Balance at the end of the year 177,316.731.17 190,117,893.01 176,712,450.46 190,117,893.01

The top 5 debts receivable of the Company and its subsidiaries and the Company at the end of the year total respectively 495,682,919.80 RMB yuan, 32.74% of

the total debts receivable of the company and its subsidiaries, and 472,749,935.28 RMB yuan, 32.45% of the total debts receivable of the Company along. The

balance at the end of year includes the arrears of shareholders with 5% or above of equity contributing voting powers - Shanghai Baosteel Group Corporation. The

breakdown of debts receivable from the associated companies is as follow:

The Company & its subsidiaries The Company2003 2002 2003 2002

Shanghai Baosteel Group Corporation (SBGC) 10,323,304.88 – 10,323,304.88 –

Shanghai Baosteel Chemical Co., Ltd. 108,830,613.60 – 108,830,613.60 –

Shanghai Baosteel Pudong International Trade Co. Ltd 7,466,029.23 5,682,069.29 7,466,029.23 5,682,069.29

Water Slag Sales Dep. of Shanghai Baosteel Production Assistance Co., 8,885,217.28 6,309,960.24 8,885,217.28 6,309,960.24

Shanghai Baosteel Business & Trade Co. Ltd. 55,157,806.83 100,484,350.04 55,157,806.83 100,484,350.04

Shanghai Baosteel International Economic & Trading Co., Ltd. – 97,619,458.29 – 97,619,458.29

Baosteel American Inc. 68,584,232.36 58,744,300.64 68,584,232.36 58,744,300.64

Baosteel European Trading Co. 121,381,365.65 110,610,438.36 98,448,381.13 110,610,438.36

How Trading Co. Ltd. 87,705,590.01 51,704,428.10 87,705,590.01 51,704,428.10

Baosteel Singapore Trading Co. 38,966,125.72 36,280,723.81 30,817,885.15 36,280,723.81

Shanghai Baosteel Magnetic Industry Development Co. Ltd. 3,183,204.61 6,705,875.52 3,183,204.61 6,705,875.52

Others 51,662,615.53 18,551,168.44 39,685,553.23 18,551,168.44

Total 562,146,105.70 492,692,772.73 519,087,818.31 492,692,772.73

The accounts receivable of the related companies include those of the holding company, Shanghai Baosteel Group Corporation. All the accounts receivable of the

related companies aged within one year are non-secured, free of interest, and should be paid on demand.

61

(5) Other Receivables

The Company & its subsidiaries The Company2003 2002 2003 2002

Other receivables 40,974,479.75 14,017,195.98 23,480,585.73 14,017,195.98

Less: allowance for bad debts 6,630,286.69 700,970.25 1,174,029.29 700,970.25

34,344,193.06 13,316,225.73 22,306,556.44 13,316,225.73

The aging analysis of other receivables is as follows:

The Company & its subsidiaries

2003-12-31 2002-12-31Balance Percentage Allowance Balance Percentage Allowance

Within 1 year 35,461,181.51 85.09% 1,174,029.29 14,014,986.92 99.98% 700,749.34

1to 2 years 34,840.84 0.09% – 2,209.06 0.02% 220.91

2 to 3 years 217,202.88 0.53% 195,002.88 – – –

3 years and above 5,261,254.52 14.29% 5,261,254.52 – – –

Total 40,974,479.75 100% 6,630,286.69 14,017,195.98 100% 700,970.25

The Company

2003-12-31 2002-12-31Balance Percentage Allowance Balance Percentage Allowance

Within 1 year 23,480,585.73 100% 1,174,029.29 14,014,986.92 99.98% 700,749.34

1 to 2 years – – – 2,209.06 0.02% 220.91

2 to 3 years – – – – – –

3 years and above – – – – – –

Total 23,480,585.73 100% 1,174,029.29 14,017,195.98 100% 700,970.25

The analysis of bad debt provision for other accounts receivable at the end of the year is as follows:

The Company & its subsidiaries The Company2003 2002 2003 2002

Balance at the beginning of the year 700,970.25 427,055.75 700,970.25 427,055.75

Acquisition of Yichang Steel & Lubao Steel Tube 5,703,939.33 – – –

Increase in the period 225,377.11 273,914.50 473,059.04 273,914.50

Balance at the end of the year 6,630,286.69 700,970.25 1,174,029.29 700,970.25

At the end of the year, the sum of top 5 other receivables amounts to RMB 26,711,146.88 yuan and RMB 18,721,216.66 yuan, accounting for 65.11% of the total

accounts receivable of the company and its subsidiaries and 79.73% of other accounts receivable of the company. There is no amount due from shareholders who

are holding 5% or more voting-right shares of the Company include in the year-end balance of other receivables.

62

(6) Advance Payments

The aging of all the advance payments are within one year. There is no amount from shareholders who are holding 5% or more voting-right shares of the Company

included in the year-end balance of advance payments. The details of the accounts receivable of the related companies in the year-end balance are as follows:

The Company & its subsidiaries The Company2003 2002 2003 2002

Shanghai Baosteel Pudong International Trade Co., Ltd. 11,684,988.53 – 11,684,988.53 –

Shanghai Baosteel Steel Product Trading Co., Ltd. 31,400,788.02 – – –

Shanghai Baosteel International Economic & Trading Co., Ltd 6,277,900.00 – – –

Baoteel Changzhou Roller Manufacture Co. Ltd. – 1,508,600.00 – 1,508,600.00

Others 854,122.86 – 373,819.51 –

Total 50,217,799.41 1,508,600.00 12,058,808.04 1,508,600.00

(7) Inventories

The Company & its subsidiaries

2003 2002Balance of book value Provision for price decrease Net book value Balance of book value Provision for price decrease Net book value

Raw materials 1,630,477,838.82 1,847,426.42 1,628,630,412.40 1,035,969,669.91 – 1,035,969,669.91

Goods in process 1,702,314,574.54 24,747,408.64 1,677,567,165.90 1,130,067,291.68 8,644,641.87 1,121,422,649.81

Finished goods 288,824,627.83 26,225.07 288,798,402.76 232,023,780.50 85,985.38 231,937,795.12

Spare parts &others 1,068,735,817.73 20,908,746.58 1,047,827,071.15 982,326,440.56 – 982,326,440.56

Total 4,690,352,858.92 47,529,806.71 4,642,823,052.21 3,380,387,182.65 8,730,627.25 3,371,656,555.40

The Company

2003 2002Balance of book value Provision for price decrease Net book value Balance of book value Provision for price decrease Net book value

Raw materials 1,381,494,018.11 1,847,426.42 1,379,646,591.69 1,035,969,669.91 – 1,035,969,669.91

Goods in process 1,656,643,921.83 24,747,408.64 1,631,896,513.19 1,130,067,291.68 8,644,641.87 1,121,422,649.81

Finished goods 216,126,876.86 26,225.07 216,100,651.79 232,023,780.50 85,985.38 231,937,795.12

Spare parts &others 997,981,103.22 3,884,546.58 994,096,556.64 982,326,440.56 – 982,326,440.56

Total 4,252,245,920.02 30,505,606.71 4,221,740,313.31 3,380,387,182.65 8,730,627.25 3,371,656,555.40

The analysis of allowance for market diminution in value of inventory is as follows:

The company and its subsidiaries The company2003 2002 2003 2002

Opening balance 8,730,627.25 32,060,484.16 8,730,627.25 32,060,484.16

Acquisition of Yuichang Steel and Lubao Steel Tube 20,128,746.37 – – –

Increase for the current period 21,774,979.46 31,610,218.84 21,774,979.46 31,610,218.84

Offset for the current period (3,104,546.37) (54,940,075.75) – (54,940,075.75)

Closing balance 47,529,806.71 8,730,627.25 30,505,606.71 8,730,627.25

The inventory of the company and its subsidiaries in the year increased by RMB 1,309,965,676.27 yuan, mainly owing to raw material purchasing price increase

and steel slab inventory increase to meet the production requirement in the year.

63

(8) Long-term Investments

The Company & its subsidiaries

2003-1-1Acquisition of Yichang

IncreaseDecrease

2003-12-31 Steel& Lubao Tube /Amortisation

Long-term equity investments

Share investment: (i)

Investment cost – 980,000.00 – – 980,000.00

Bsteel online: (ii)a

Investment cost 20,000,000.00 4,000,000.00 – – 24,000,000.00

Profit and loss adjustment (4,446,689.28) (1,000,000.00) 240,287.78 – (5,206,401.50)

15,553,310.72 3,000,000.00 240,287.78 – 18,793,598.50

Laser Tailor: (ii)b

Investment cost – – 17,010,000.00 – 17,010,000.00

Lubao Industrial & Trading: (ii)c

Investment cost – 1,650,000.00 – – 1,650,000.00

Profit and loss adjustment – 1,711,186.98 90,094.78 – 1,801,281.76

– 3,361,186.98 90,094.78 – 3,451,281.76

Lubao Sales:(ii)c

Investment cost – 500,000.00 – – 500,000.00

Profit and loss adjustment – 764,830.97 27,001.09 – 791,832.06

– 1,264,830.97 27,001.09 – 1,291,832.06

Balance of equity investment

/Consolidation difference: (iii)

Yichang Steel Sheet – – 200,430,077.81 (6,681,002.59) 193,749,075.22

Huangshi Alumi – 19,721,644.99 – (1,037,981.16) 18,683,663.83

– 19,721,644.99 200,430,077.81 (7,718,983.75) 212,432,739.05

Subtotal of long-term equity investment:

Investment cost 20,000,000.00 7,130,000.00 17,010,000.00 – 44,140,000.00

Profit & loss adjustment (4,446,689.28) 1,476,017.95 357,383.65 – (2,613,287.68)

Balance of equity investment

/Consolidation difference– 19,721,644.99 200,430,077.81 (7,718,983.75) 212,432,739.05

15,553,310.72 28,327,662.94 217,797,461.46 (7,718,983.75) 253,959,451.37

Less:Long-term equity investment – – – – –

Allowance for diminution in value

Total 15,553,310.72 28,327,662.94 217,797,461.46 (7,718,983.75) 253,959,451.37

The Company & its subsidiaries

Long-term bond investment

Long-term bond investment: (iv) – 10,000,000.00 – – 10,000,000.00

Less: long-term bond allowance for diminution – – – – –

Total – 10,000,000.00 – – 10,000,000.00

64

(i) Equity investment

Equity Investment by cost

Name of invested company Type of investment share Number of share Ratio to the total equity of the invested company Amount

Changjiang Economy Joint Development (Group) Co., Ltd. legal person share 700,000 0.1% 980,000.00

(ii) Equity investments valuated in equity method

(ii)a Bsteel.com

The Company owns 25% of the equities of Bsteel.com by investing 20,000,000 RMB yuan to the same in 2000. On 31

October 2003, the Company acquired the Yichang Sheet who owned 5% of the equities of Bsteel.com. Valuating the

investment on Bsteel.com in equity method, the Company had a net gain of 432,085.44 RMB yuan in 2003 (116,652.20

in 2002). The accounting values of long-term investments of the Company and its subsidiaries should be increased as per

30% of the net gains (of which the Yichang Sheet is calculated as per 5% of the net gains by the Bsteel.com in November

and December of 2003).

(ii)b Laser Tailor Metal Co.

The Company, together with the Shanghai Volkswagen United Development Co., Ltd., Luxemburg Arbed and Shanghai

Baosteel International Trade Co., Ltd., contributed to establish the Shanghai Baosteel-Arcelor Tailor Metal Co., Ltd., on 31

October 2003. The Company owns 28% of the equities of the joint venture company, which has a registered capital of 121.5

million RMB yuan, and should contribute 34.02 million RMB yuan to the same. By the end of this year, the Company has

made the primary investment totaled 17.01 million RMB yuan to the joint venture company. Equity method is adopted for

the valuation of the investments to the joint venture company, which is still on the stage of startup for operation.

(ii)c Lubao Industrial Trade and Lubao Agency

At the day of working out the balance sheet, Lubao Industrial Trade and Lubao Agency have relatively small amount of total

assets, sales income and net profits, which imposes no great influences on the Company and its subsidiaries. Therefore,

these subsidiary companies are not included in the consolidated reports of the Company and its subsidiaries.

(iii) Equity investment differentials/consolidated differentials

Invested company Reasons Amortization term Initial sum Acquisition of Yichang Amortized in the year Remains after amortizationcarry over amount 2003-12-31

Yichang Steel Sheet Note1 5 year 200,430,077.81 – 6,681,002.59 193,749,075.22

Huangshi Aluminzing Note2 6 year – 19,721,644.99 1,037,981.16 18,683,663.83

200,430,077.81 19,721,644.99 7,718,983.75 212,432,739.05

Note 1: The Company bought 90% of the equities of Yichang Sheets at a purchase price of 1,254,348,000.00 RMB yuan on 31 October 2003. The

differential between the equity investment by the Company and the Company’s amount in the owners’ equity at the account day of the equities of

Yichang Sheet is booked under this subject.

Note 2: The Yichang Sheet acquired 39.37% of the equities of Huangshi Aluminized Sheet at a purchase price of 49,621,800.00 RMB yuan on 8 January

2001. The differential between the equity investment by the Yichang Sheet and its amount in the owners’ equity at the account day of the equities

of Huangshi Aluminized Sheet is booked under this subject. With the Company’s acquisition of the equities of Yichang Sheet, the net face value of

above differential is consolidated into that of the Company and its subsidiaries.

65

2003-12-31

Investment accounted by equity method

Investment on subsidiaries 1,303,203,274.49

Including: Yichang Steel Sheet 1,059,484,557.52

Lubao Steel Tube 243,718,716.97

Investment on associated enterprise 32,671,332.08

Including: Bsteel Online 15,661,332.08

Laser Tailor Metal Co., 17,010,000.00

Equity investment balance 193,749,075.22

Including: Yichang Steel Sheet 193,749,075.22

Total 1,529,623,681.79

When the equity method is adopted, the accounting policies of the company have no significant differences with those of

the above-mentioned subsidiaries and associated enterprises.

(iv) Long-term bond investments include:

Bond type Face value Annual rate Purchased amount Maturity Interest of this period Ending balance

Baosteel Bond 10,000,000.00 4% 10,000,000.00 Aug. 10, 2005 400,000.00 10,000,000.00

The bonds came into being by the acquisition of Yichang Sheet in 2002.

The Company and its subsidiaries believe that the long-term investment does not necessarily include the depreciation preparation at the day of working out the

balance sheet.

The Company

The details of the company’s long-term investment is as follows:

66

(9) Fixed Assets

The company and its subsidiaries

Houses and buildings Machinery and equipment Vehicles Office facilities and vehicles Total

Cost

1st January 2003 19,103,254,193.91 62,637,796,908.03 9,360,261,053.31 9,058,318,128.08 100,159,630,283.33

Acquisition of Yichang Steel and Lubao Tube 409,625,495.46 1,481,437,140.60 75,572,819.86 115,475,767.14 2,082,111,223.06

Purchased from related companies 324,254,495.28 61,681,437.73 4,779,927.74 34,397,861.69 425,113,722.44

Purchased 457,000.00 44,261,891.44 106,322,091.73 47,278,477.32 198,319,460.49

Reclassification – -104,064,509.74 83,996,408.65 20,068,101.09 –

Transferred from construction in process 23,738,130.84 705,076,365.74 37,828,327.84 379,774,710.40 1,146,417,534.82

Disposal to related companies -3,168,219.96 -19,658,403.87 -18,327,473.11 -18,263,401.31 -59,417,498.25

Decrease -5,887,224.42 -677,411,178.47 -124,275,692.12 -215,712,452.94 -1,023,286,547.95

31st December 2003 19,852,273,871.11 64,129,119,651.46 9,526,157,463.90 9,421,337,191.47 102,928,888,177.94

Accumulated depreciation

1st January 2003 -7,633,731,183.02 -33,278,679,865.49 -5,739,303,928.94 -5,287,391,577.67 -51,939,106,555.12

Acquisition of Yichang Steel and Lubao Tube -131,473,817.48 -706,804,046.88 -57,085,579.40 -72,907,142.39 -968,270,586.15

Transferred for the period -800,943,890.29 -3,039,724,101.74 -2,426,925,590.37 -1,147,024,373.25 -7,414,617,955.65

Disposal to related companies 2,753,623.77 10,799,610.02 12,817,727.36 12,746,664.39 39,117,625.54

Decrease 4,801,591.49 580,082,249.43 115,134,806.87 194,002,561.29 894,021,209.08

31st December 2003 -8,558,593,675.53 -36,434,326,154.66 -8,095,362,564.48 -6,300,573,867.63 -59,388,856,262.30

Net value

31st December 2003 11,293,680,195.58 27,694,793,496.80 1,430,794,899.42 3,120,763,323.84 43,540,031,915.64

1st January 2003 11,469,523,010.89 29,359,117,042.54 3,620,957,124.37 3,770,926,550.41 48,220,523,728.21

67

The Company

Houses and buildings Machinery and equipment Vehicles Office facilities and vehicles Total

Cost

1st January 2003 19,103,254,193.91 62,637,796,908.03 9,360,261,053.31 9,058,318,128.08 100,159,630,283.33

Purchase from related companies 324,254,495.28 61,681,437.73 4,779,927.74 34,397,861.69 425,113,722.44

Purchased 40,000.00 41,995,241.04 106,322,091.73 47,188,447.32 195,545,780.09

Reclassification – -104,064,509.74 83,996,408.65 20,068,101.09 –

Transferred from construction in process 21,985,468.84 696,155,500.21 37,828,327.84 376,827,554.65 1,132,796,851.54

Disposal to related companies -3,168,219.96 -19,658,403.87 -18,327,473.11 -18,263,401.31 -59,417,498.25

Decrease -5,769,593.09 -673,811,435.73 -124,009,172.12 -214,937,044.85 -1,018,527,245.79

31st December 2003 19,440,596,344.98 62,640,094,737.67 9,450,851,164.04 9,303,599,646.67 100,835,141,893.36

Accumulated Depreciation

1st January 2003 -7,633,731,183.02 -33,278,679,865.49 -5,739,303,928.94 -5,287,391,577.67 -51,939,106,555.12

Transferred for the period -798,453,964.00 -3,021,112,406.24 -2,426,202,905.88 -1,144,401,074.78 -7,390,170,350.90

Disposal to related companies 2,753,623.77 10,799,610.02 12,817,727.36 12,746,664.39 39,117,625.54

Decrease 4,762,461.37 576,946,158.47 114,895,040.37 193,279,052.77 889,882,712.98

31st December 2003 -8,424,669,061.88 -35,712,046,503.24 -8,037,794,067.09 -6,225,766,935.29 -58,400,276,567.50

Net Value

31st December 2003 11,015,927,283.10 26,928,048,234.43 1,413,057,096.95 3,077,832,711.38 42,434,865,325.86

1st January 2003 11,469,523,010.89 29,359,117,042.54 3,620,957,124.37 3,770,926,550.41 48,220,523,728.21

This year, the Company purchased the technological center and some buildings from the Shanghai Baosteel Group Corporation.

See the notes (34) to the main items in the financial reports for details. On the day of working out the balance sheet, the

transfer of ownership for the buildings, included in the above assets, with a net value of 321,585,359.32 RMB Yuan was still

in process.

The analysis of allowance for diminution in value of fixed assets is as follows:

The Company & its subsidiaries The Company2003 2002 2003 2002

Balance at the beginning of the year 40.611,777.23 6,651,951.69 40,611,777.23 6,651,951.69

Acquisition of Yichang Steel and Lubao Tube 3,093,850.10 – – –

Increase for the current period 3,945,749.69 35,923,385.47 3,945,749.69 35,923,385.47

Decrease for the current period (2,447,939.23) (1,963,559.93) (2,447,939.23) (1,963,559.93)

Balance at the end of the year 45,203,437.79 40,611,777.23 42,109,587.69 40,611,777.23

68

(10) Construction in process

The Company & its subsidiaries

Project name Budgeted amount Year begun Acquisition of Yichang Steel Increase for the year Acquisition of part of Transfer of fixed Year end Source of funding Percentageand Lubao Tube Baosteel Group’s assets assets for the year completion

Renovation of manufacture Proceeds fromsystem for auto plated

310,030,000.00 184,729,626.11 78,200,098.80 – -262,929,724.91 – share issue

100%

Technical renovation andconstruction project 16,988,022,600.00 1,497,758,999.11 4,928,394,363.30 19,114,322.59 -869,867,126.63 5,575,400,558.37 Self financing 0.1%~99.40%

Others – 34,948,874.40 44,600,627.47 – -13,620,683.28 65,928,818.59

Total 1,682,488,625.22 34,948,874.40 5,051,195,089.57 19,114,322.59 -1,146,417,534.82 5,641,329,376.96

The Company and its subsidiaries hold that no transfer of allowance for impairment loss should be made in respect of construction in process at the balance

sheet date. The amount of construction in process of the company and its subsidiaries at the end of the year increased RMB 3,958,840,751.74 yuan comparing

to that at the beginning of the year. It is mainly due to the increased project cost for 1800mm cold rolling steel strip project of the company and acquisition of part

of Baosteel Group Corporation’s assets.

The Company

Project name Budgeted amount Year begun Increase for Acquisition of part of Transfer of fixed Year end Source of funding Percentagethe year Baosteel Group Corp.’s assets assets for the year completion

Renovation of manufacture Proceeds fromsystem for auto plates

310,030,000.00 184,729,626.11 78,200,098.80 -262,929,724.91share issue

100%

Technical renovation andconstruction project 16,988,022,600.00 1,497,758,999.11 4,928,394,363.30 19,114,322.59 -869,867,126.63 5,575,400,558.37 Self financing 0.1%~99.40

Total 1,682,488,625.22 5,006,594,462.10 19,114,322.59 -1,132,796,851.54 5,575,400,558.37

(11) Long-term Deferred Charges

The company and its Subsidiaries Amount at Acquisition of Increase Amortization Amount atbeginning of the year Yichang abd Lubao for the year for the year end of the year

Subsidy for power supply – 1,344,244.10 – (36,114.26) 1,308,129.84

Land requisition fee and land leveling fee – 1,720,804.19 – (31,287.30) 1,689,516.89

Managerial information system – 87,170.60 488,306.00 (8,138.43) 567,338.17

Total – 3,152,218.89 488,306.00 (75,539.99) 3,564,984.90

(12) Deferred Tax Debits/credits

The Company & its subsidiaries Year begunAcquisition of Yichang Steel Sheet Increase Decrease

and Lubao Steel Tube for the year for the yearYear ended

Allowance for asset diminution in value – 9,084,682.99 63,829,269.30 -1,158,874.41 71,755,077.88

Donated non-cash fixed assets -71,148.00 – – 71,148.00 –

Others – 7,028,173.36 – -908,447.02 6,119,726.34

Total -71,148.00 16,112,856.35 63,829,269.30 -1,996,173.43 77,874,804.22

The Company Amount at Increase Decrease Amount atbeginning of the year for the year for the year end of the year

Allowance for asset diminution in value – 63,829,269.30 – 63,829,269.30

Donated non-cash fixed assets (71,148.00) – 71,148.00 –

Total (71,148.00) 63,809,269.30 71,148.00 63,829,269.30

69

(13) Short-term Loans

All the short-term loans are bank credit loan, among which the annual interest rate for short-term loan of RMB 255,000,000yuan is 4.536% and the other are the

interest-free loans acquired for Lubao Steel Tube.

(14) Bills Payable

All the bills payables are trade bills of acceptance, among which RMB 83,612,273.58 yuan of trade bill of acceptance should be paid by the company and its

subsidiaries to the related companies and RMB44,779,273.58 yuan (RMB44,107,025.14 yuan for 2002) of trade bill of acceptance should be paid by the

company to the related companies. There is no amount due to shareholders who are holding 5% or more voting-right shares of the Company included in the bills

payable.

(15) Accounts Payable

There are no accounts payable aged over three years, and there is no amount due to shareholders who are holding 5% or more voting-right shares of the Company

included I the year-end balance of the accounts payable. The details of the accounts payable to the related companies in the year-end balance are as follows:

The Company & its subsidiaries The Company2003 2002 2003 2002

Baosteel International Economic & Trading Co. Ltd. 858,603,808.05 192,413,782.85 858,600,217.27 192,413,782.85

Baosteel Equipment Detection Company 12,925,851.47 4,932,322.62 12,925,851.47 4,932,322.62

Baosteel Group Enterprise Development Co., Ltd. 6,124,246.00 12,620,226.00 6,124,246.00 12,620,226.00

Shanghai Baosteel Automobile Detection and Repair Co., Ltd. 561,600.00 4,680,176.44 561,600.00 4,680,176.44

Shanghai Baosteel Labor Protection Articles Factory 1,212,417.69 4,475,885.92 1,212,417.69 4,475,885.92

Shanghai Lubao Garden Construction Cooperation Company 19,444.00 4,353,456.00 – 4,353,456.00

Shanghai Baosteel Industry Company 9,643,908.40 4,240,993.89 9,643,908.40 4,240,993.89

Shanghai Baosteel Comprehensive Development Company 4,669,283.99 3,923,434.85 4,669,283.99 3,923,434.85

Shanghai Baosteel Production Cooperation Company 6,317,414.01 3,890,227.86 6,317,414.01 3,890,227.86

Shanghai Baosteel Building Maintenance Company 12,138,060.38 3,881,848.71 12,138,060.38 3,881,848.71

Packing Material Branch of Baosteel International Economic & Trading Co., Ltd. 6,359,913.10 3,704,199.38 6,359,913.10 3,704,199.38

Shanghai Baosteel Changshou Mechanical Factory 1,960,978.04 3,698,653.50 1,960,978.04 3,698,653.50

Shanghai Baosteel New Enterprise Development Co., Industrial Maintenance Branch 19,984,706.80 3,605,905.97 19,984,706.80 3,605,905.97

Baosteel Group Suzhou Metallurgical Factory 3,530,720.70 3,450,940.48 3,530,720.70 3,450,940.48

Shanghai Baotie Warehousing & shipping Company 2,435,573.02 2,841,448.86 2,435,573.02 2,841,448.86

Shanghai Kaibao Refractory Material Co., Ltd. 719,532.00 2,612,900.90 719,532.00 2,612,900.90

Shanghai Baosteel Compute System Engineering Co., Ltd. – 2,502,078.70 – 2,502,078.70

Baosteel Equipment Overhaul Co., Ltd. 55,431,401.63 2,398,059.46 50,751,401.63 2,398,059.46

Baosteel Engineering Tech. Co., Ltd. Baosteel Mechanical Factory 34,953,709.44 2,195,623.17 34,354,908.21 2,195,623.17

Shanghai Baosteel Industrial Co., Ltd. 68,590,377.30 – 68,590,377.30 –

Shanghai Baosteel Chemical Co., Ltd. 108,924,580.42 – 108,924,580.42 –

Shanghai Baosight Software Co., Ltd. 27,382,552.17 – 26,277,552.17 –

Shanghai No.3 Steel Co., Ltd. 20,681,247.99 1,400,841.33 20,681,247.99 1,400,841.33

Shanghai Baosteel New Enterprise Development Company 18,741,149.31 1,081,372.29 18,741,149.31 1,081,372.29

SBGC Shanghai No.1 Iron & steel Co. 14,908,254.32 – 14,908,254.32 –

Others 117,212,776.75 15,586,091.66 112,585,125.35 15,586,091.66

Total 1,414,033,506.98 284,490,470.84 1,402,999,019.57 284,490,470.84

The accounts payable to the related companies are non-mortgaged and free of interest, and should be paid on demand.

70

(16) Receipts in Advance

There is no account payable aged over one year, and there is no amount due from shareholders who are holding 5% or more voting-right shares of the Company

included in the year-end balance of receipts in advance. The details of the receipts in advance from the related companies in the year-end balance are as follows:

The Company& its subsidiaries The Company2003 2002 2003 2002

Guangzhou Baosteel South Trade Co., Ltd. 252,342,317.89 388,811,835.51 222,600,927.48 388,811,835.51

Tianjin Baosteel North Trade Co., Ltd. 285,930,678.03 324,970,149.57 250,335,814.73 324,970,149.57

Shanghai Baosteel Industrial Co., Ltd. 133,349,828.61 221,670,633.32 133,349,828.61 221,670,633.32

Shanghai Baosteel Yichang Steel Sheet Co., Ltd. – 163,196,049.92 150,187,446.44 163,196,049.92

Baosteel Group No.2 Iron & steel Co., Ltd. 9,127,754.20 44,678,734.96 9,127,754.20 44,678,734.96

Baosteel Group Shanghai Pudong Iron & steel Co., Ltd. – 35,324,496.68 – 35,324,496.68

Shanghai Baosteel Steel Trade Co., Ltd. 71,735,988.60 32,204,015.65 11,958,000.16 32,204,015.65

Shanghai Baosteel Industry Company 16,112,678.35 15,037,258.17 16,112,678.35 15,037,258.17

Baosteel Group Shanghai Lubao Steel Rube Sales Branch 4,494,883.31 12,301,209.86 2,060.33 12,301,209.86

Shanghai Shenjia Metal Manufacture Company 3,998,444.60 11,922,109.49 3,998,444.60 11,922,109.49

Shanghai Baosteel New Enterprise Development Company – 11,712,783.02 – 11,712,783.02

Qingdao Baosteel Steel Delivery CO., Ltd,Jinan Branch 4,648,173.53 9,004,155.47 4,648,173.53 9,004,155.47

Shanghai Baostel Changshou Industrial Service Company 4,478,501.96 6,424,574.38 4,478,501.96 6,424,574.38

Shanghai Special Steel Tube Co., Ltd. – 5,346,401.65 – 5,346,401.65

Chengdu Baosteel Southwest Trade Co., Ltd. 108,482,221.53 – 85,576,510.53 –

Yantai Lubao Steel Tube Co., Ltd. – – 15,759,263.42 –

Shanghai Baosteel Business &Trade Co., Ltd. 45,186,890.12 – – –

Others 58,052,127.50 10,037,261.86 46,093,934.20 10,037,261.86

Total 997,940,488.23 1,292,641,669.51 954,229,338.54 1,292,641,669.51

The accounts in advance to the related companies are non-mortgaged and free of interest, and should be paid on demand.

(17) Dividend Payable

The Company & its subsidiaries The Company2003 2002 2003 2002

Minority dividends payable to Huangshi Aluminized 8,484,070.91 – – –

(18) Taxes Payable

The Company & its subsidiaries The Company2003 2002 2003 2002

Value added tax 496,946,353,22 508,367,799.82 500,796,595.86 508,367,799.82

Business tax 906.989.59 858,754.68 903,639.59 858,754.68

Income tax 205,346,734.97 437,761,846.03 152,364,064.08 437,761,846.03

House property tax 25,865,930.55 45,168,125.59 25,763,285.63 45,168,125.59

Urban maintenance and construction tax 35,128,751.14 35,645,873.05 35,119,030.71 35,645,873.05

Others 1,351,922.05 – – –

Total 765,546,681.52 1,027,802,399.17 714,946,615.87 1,027,802,399.17

Please refer to note 3 to the financial reports for the details of the transfer standards of various taxes and the tax rates of taxes payable.

71

(19) Other Amounts Payable

The Company & its subsidiaries The Company2003 2002 2003 2002

Education surcharge 15,178,840.53 15,276,802.45 15,051,012.90 15,276,802.45

Embankment maintenance fee 6,921.54 – – –

River management tax 5,007,667.01 5,085,953.47 5,010,690.29 5,085,953.47

Total 20,193,429.08 20,362,755.92 20,061,703.19 20,362,755.92

Please refer to note 3 to the financial reports for the details of the transfer standards of various taxes and the fee rates of other payable.

(20) Other Payables

The Company & its subsidiaries The Company2003 2002 2003 2002

Harbor Construction Sharing Fund(a) – 219,099,958.07 – 219,099,958.07

Staff welfare (staff education funds and social security contributions etc.) 54,600,313.09 20,754,952.82 50,010,291.04 20,754,952.82

Bonus 20,752,238.21 20,290,067.43 20,731,339.08 20,290,067.43

Communication fee, Pig iron processing fee, and repair fee – 21,251,959.79 – 21,251,959.79

Harbor construction fee 19,342,527.80 6,611,033.80 19,342,527.80 6,611,033.80

Transportation fee 3,869,343.43 3,247,293.79 3,869,343.43 3,247,293.79

New business logistic management fee – 3,348,829.70 – 3,348,829.70

Final payment for wire rod project of the Blooming Mill 1,113,351.69 2,608,813.90 1,113,351.69 2,608,813.90

Security of contract 2,347,391.90 100,000.00 2,347,391.90 100,000.00

Research fee 3,690,000.00 – 3,690,000.00 –

Employees’ withholding or payment commissioned 88,372,207.92 38,154,956.44 88,228,244.93 38,154,956.44

Special security deposit for steel product export after processing 50,000,000.00 – 50,000,000.00 –

Others 45,618,055.91 26,408,082.65 15,780,281.05 26,408,082.65

Total 289,705,429.95 361,875,948.39 255,112,770.92 361,875,948.39

Note:

(a) Harbor Construction Sharing Fund represents the return of the harbor construction fee received. According to the Harbor Construction Fee Utilization

Management Provisions issued by the Ministry of Finance and the Ministry of Communications, the refunded fee will be used to set up the harbor

infrastructure, and should be used specifically. Considering that the Harbor Construction Sharing Fund of the company should be used in the

construction of infrastructure of harbor, the company transferred in the report period the above-mentioned return received accumulatively into capital

reserve.

(b) There is no creditor aged over three years except the final payment for the high-speed wire rod project left by the Blooming Mill, and there is no amount

due from shareholders who are holding 5% or more voting-right shares of the Company included in the year-end balance of other creditors.

72

(21) Long-term Loans

The Company & its subsidiaries

Bank of loans Currency2003 2002 Period of Interest rate

Original currency RMB Original currency RMB loans (year) per annum

Industrial and Commercial Bank RMB 2,265,000,000.00 2,665,000,000.00 2-5 4.54%

Construction Bank RMB 1,265,000,000.00 2,028,000,000.00 2-5 4.54%

Transportation Bank RMB 50,000,000.00 – 5 4.54%

Bank of China US Dollar – – 28,227,473.75 233,647,268.46 13 6.23%

Industrial and Commercial Bank US Dollar 4,449,275.39 36,825,317.58 9,094,741.37 75,279,902.79 9-13 6.25%

Industrial and Commercial Bank Japanese Yen 10,562,095,499.77 816,449,982.13 13,783,998,931.15 951,095,926.25 5-14 3.8%~LIBOR+0.25%

Construction Bank Japanese Yen – – 1,570,519,698.35 108,365,859.18 8-13 2.6%~LIBOR+0.7%

Construction Bank US Dollar 85,142,555.27 704,699,387.15 86,184,262.58 713,372,996.68 3-14 6.35%~LIBOR+0.3%

Construction Bank Euro 73,827,162.36 763,247,352.59 155,920,5 07.36 1,346,529,501.53 12-14 FIBOR/LIBOR+0.33%

Bank of China Euro 30,063,242.48 310,802,819.64 – – 4 LIBOR+0.3%

Transportation Bank Japanese Yen 3,004,284,931.50 232,231,225.20 4,210,409,863.35 290,518,280.57 5 LIBOR+0.25%

Baosteel Group

Finance Co., Ltd. US Dollar 48,000,000.00 397,281,600.00 154,000,000.00 1,274,704,200.00 5 LIBOR+0.3%

Total 6,841,537,684.29 9,686,513,935.46

Less: one-year-due long-term loans

US Dollar 38,749,529.31 320,718,229.26 47,324,447.66 391,718,650.59

Japanese Yen 4,264,797,727.43 329,668,864.33 4,854,142,170.00 334,935,809.73

Euro 17,881,990.23 184,869,379.54 22,169,106.13 191,452,400.56

Total of one-year-due long-term loans 835,256,473.13 918,106,860.88

As long-term loans 6,006,281,211.16 8,768,407,074.58

All the long-term loans are credit loans except that loans of Japanese Yen 6,556,322,744.82 (RMB 506,803,748.17 yuan) have been secured by Industrial and

Commercial Bank of China Shanghai Branch, US Dollar 9,249,914.46 (RMB 76,558,767.01 yuan), and Euro 54,577,162.36 (RMB 564,235,077.63 yuan) have

been secured by Baosteel Group Finance Co., Ltd. The relevant foreign exchange rates are RMB 8.2767 yuan (RMB 8.2773 yuan in 2002) for US Dollar to RMB,

RMB 0.0773 yuan (RMB 0.0690 yuan in 2002) for Japanese Yen to RMB, and RMB 10.3383 yuan (RMB 8.6360 yuan in 2002) for Euro to RMB.

The Company has signed interest rate swap agreements with the Bank of China, Industrial and Commercial Bank of China and China Construction Bank for five-

year loans with principals respectively at 6 billion Japanese yen, 8 billion Japanese yen and 6 billion Japanese yen - totaled 20 billion Japanese yen. At the day of

working out the balance sheet, the balance of above principals under interest rate swap totals 10 billion Japanese yen - 3 billion Japanese yen for the Bank of

China, 4 billion Japanese yen for the Industrial and Commercial Bank of China and 3 billion Japanese yen for the China Construction Bank. In addition, the

Company has also concluded interest rate swap agreements with the Industrial and Commercial Bank of China and China Construction Bank for loans with

principals respectively at 40 million U.S. dollars (four-year loan) and 35 million U.S. dollars (three-year loan) - totaled 75 million U.S. dollars. At the day of working

out the balance sheet, the balance of above principals under interest rate swap totals 60 million U.S. dollars - 30 million U.S. dollars for the Industrial and

Commercial Bank of China and 30 million U.S. dollars for the China Construction Bank.

At the balance sheet date, the balance of long-term loans, including the commercial loans transferred from overseas banks by the Bank of China, Industrial and

Commercial Bank of China and China Construction Bank, totals 1,147,597,592.71 RMB Yuan.

Line of credit from bank loans

In 2001, the Company was granted by the China Construction Bank and the Industrial and Commercial Bank of China lines of credit respectively up to

9,748,736,000 RMB Yuan and 9,830,000,000 RMB Yuan. In 2003, the Company was granted by the Communication Bank a credit line up to 0.5 billion RMB

Yuan or the equivalent in foreign exchanges with a validity period up to 2008, the Yichang Sheet signed with the Baosteel Group Finance Co., Ltd. the loan contract

of short-term line up to 0.1 billion RMB Yuan with a validity period up to 2004. By the end of 31 December 2003, these lines of credits have been used respectively

by 2,126,148,275.00 RMB Yuan ( 2,690,184,000 RMB Yuan in 2002), 2,574,200,000.00 RMB Yuan (3,051,400,000 RMB Yuan in 2002), 281,900,000.00 RMB

Yuan (0.00 RMB Yuan in 2002)and 40,000,000.00 RMB Yuan (0.00 RMB Yuan in 2002).

73

(22) Accounts with Holding Companies

All the accounts with the holding companies are aged within the three months, and are non-mortgaged and free of interest, and should be paid on demand.

(23) Long-term Payables to Holding Companies

The Company & its subsidiaries

2003 2002

Phase III asset acquisition payment 10,200,000,000.00 12,800,000,000.00

Partial trustee assets acquisition payment 2,400,000,000.00 3,000,000,000.00

Total 12,600,000,000.00 15,800,000,000.00

Less: One-year-due partial

Phase III asset Acquisition payment 2,600,000,000.00 2,600,000,000.00

And Partial trustee assets Acquisition payment 600,000,000.00 600,000,000.00

3,200,000,000.00 3,200,000,000.00

As long-term payables to holding companies

Phase III assets acquisition payment 7,600,000,000.00 10,200,000,000.00

Partial acquisition payment for trustee assets 1,800,000,000.00 2,400,000,000.00

9,400,000,000.00 12,600,000,000.00

The payments for the Phase III assets acquisition are not mortgaged, and should be paid by installments from 2003 to 2009, in accordance with the Agreement

of Baosteel Phase III Assets Acquisition and the Supplementary Agreement of Baosteel Phase III Assets Acquisition signed with the SBGC, with RMB 2,600,000,000.00

yuan paid each year from 2003 to 2006, and RMB 800,000,000.00 yuan paid each year from 2007 to 2009. The payments will be free of interest from 2003 to

2005. The interests for the amounts payable during 2006-2009, totaling RMB 800,000,000.00 Yuan, are paid in succession on the last 5 workdays of December

of each year from 2002 to 2009. By the end of 31 December 2003, the Company has already paid interest of RMB 172,000,000.00 Yuan with RMB 120,000,000.00

Yuan paid this year (RMB 52,000,000.00 Yuan paid in 2002).

The payments for the acquisition of partial entrusted assets are not mortgaged, and free of interest. The payments should be paid by installments from 2003 to

2007 in accordance with the Agreement of Assets Acquisition signed on 29thOctober, 2002 with the holding company, Shanghai Baosteel Group Corporation,

with RMB 600,000,000 yuan paid each year from 2003 to 2007. RMB 600,000,000 yuan has been paid in the year.

(24) Capital Stock

The registered and fully paid capital stock of the Company amounts to RMB12,512,000,000 yuan with a par value of RMB 1.00 per share. The types and

structures of shares are as follows:

Beginning of year Increase for the year Decrease for the year End of year

1. Non-negotiable

Sponsor’s shares-

State-owned shares(held by SBGC) 10,635,000,000 – – 10,635,000,000

Total 10,635,000,000 – – 10,635,000,000

2. Negotiable shares

RMB common shares 1,877,000,000 – – 1,877,000,000

3. Total of capital stock 12,512,000,000 – – 12,512,000,000

The Company publicly issued 1,877,000,000 RMB common shares with a par value of RMB 1.00 yuan per share during the period of 6th-24th November, 2000.

74

(25) Capital Reserves

The Company & its subsidiaries

2003-1-1 Increase for the year Decrease for the year 2003-12-31

Differences of conversion of state-owned shares 5,726,556,609.73 – – 5,726,556,609.73

Capital stock premium 5,825,894,676.00 – – 5,825,894,676.00

Receipts of allowance for Donated non-cash assets 144,452.00 1,946.78 – 146,398.78

Appropriation transfer in 123,600,000.00 282,300,314.37 – 405,900,314.37

Equity investment reserve – 22,029,097.79 – 22,029,097.79

Other capital reserve 13,038,090.38 976,415.90 – 14,014,506.28

Total 11,689,233,828.11 305,307,774.84 – 11,994,541,602.95

(i) The annual fund appropriation transferred-in is mainly the harbor construction fund received (Note V (20)).

(ii) The allowance for equity investment is mainly equity investment credit side discrepancy derived from the acquisition of Lubao Tube.

(iii) The increase of other capital reserves is mainly due to the written-off of some accounts payable unpayable for a long time.

(26) Surplus Reserves

The Company& its subsidiaries

Beginning of year Increase for the year End of year

Statutory surplus reserve 977,238,184.30 718,250,170.74 1,695,488,355.04

Statutory public welfare fund 977,238,184.30 718,250,170.74 1,695,488,355.04

Discretionary Surplus reserve 314,619,126.14 716,080,748.84 1,030,699,874.98

Enterprise development fund – 143,603.20 143,603.20

Reserve fund – 718,015.99 718,015.99

Total 2,269,095,494.74 2,153,442,709.51 4,422,538,204.25

The Company

Beginning of year Increase for the year End of year

Statutory surplus reserve 977,238,184.30 701,398,943.62 1,678,637,127.92

Statutory public welfare fund 977,238,184.30 701,398,943.62 1,678,637,127.92

Discretionary Surplus reserve 314,619,126.14 701,398,943.62 1,016,018,069.76

Total 2,269,095,494.74 2,104,196,830.86 4,373,292,325.60

Pursuant to the China Company Law (CCL) and the Company’s Articles of Association (CAA), the Company is qualified to transfer a statutory surplus reserve

amount by 10% of its net profit, as determined under the China Accounting Principles and regulations applicable to the Company, until the accumulated amount

reaches 50% of its registered capital. In accordance with the CCL and CAA, partial statutory surplus reserve can be converted into capital stock of the Company.

If the Company converts statutory surplus reserve into capital stock upon the approval of the shareholders’ general meeting, a distribution of new shares or an

increase of the par value per share may be made to the shareholders according to their original shareholdings. The retained statutory surplus reserve cannot be

less than 25% of the registered capital.

Pursuant to the CCL, the Company is qualified to transfer an amount of statutory public welfare fund by 5% to 10% of its net profit, as determined under the China

Accounting Principles and regulations applicable to the Company. This fund can only be utilized as capital expenditures for the staff welfare facilities that are

reserved as assets of the Company.

If the statutory public welfare fund is to be used, it means that the lower amount of the assets cost or the balance of the statutory public welfare fund should be

transferred to the discretionary surplus reserve from the statutory public welfare fund. The fund cannot be distributed unless a disbandment of the Company takes

place. If certain assets are sold, the formerly transferred discretionary surplus reserve from the statutory public welfare should be written back.

75

(27) Undistributed Profits

The Company & its subsidiaries

2003 2002

Originally reported undistributed profits at the beginning of the year 1,714,734,450.12 799,588,505.93

Impact due to the change of accounting policies 2,502,400,000.00 1,564,000,000.00

Restated undistributed profits at the beginning of the year 4,217,134,450.12 2,363,588,505.93

Increase of the year 6,975,724,979.87 4,271,932,430.25

Less: distributed profits of the year

-Transfer to statutory surplus reserve 718,250,170.74 427,193,243.03

- Transfer to statutory public welfare fund 718,250,170.74 427,193,243.03

- Voluntary surplus reserve 716,080,748.84 –

- Reserve fund 718,015.99 –

- Enterprise development fund 143,603.20 –

- Dividends of common shares 2,502,400,000.00 1,564,000,000.00

Undistributed profits at the end of the year 6,537,016,720.48 4,217,134,450.12

The Company

2003 2002

Originally reported undistributed profits at the beginning of the year 1,714,734,450.12 799,588,505.93

Impact due to the change of accounting policies 2,502,400,000.00 1,564,000,000.00

Restated undistributed profits at the beginning of the year 4,217,134,450.12 2,363,588,505.93

Increase in the year 7,013,989,436.15 4,271,932,430.25

Less: Profit distribution of the year

- Transfer to statutory surplus reserve 701,398,943.62 427,193,243.03

- Transfer to statutory public welfare fund 701,398,943.62 427,193,243.03

- Voluntary surplus reserve 701,398,943.62 –

- Dividends of common shares 2,502,400,000.00 1,564,000,000.00

Undistributed profits at the end of the year 6,624,527,055.41 4,217,134,450.12

Please refer to Note II (18) to the financing reports for the impact due to the change of accounting policies on the undistributed profits at the beginning of the year.

76

(28) Principal Operation Income

The Company & its subsidiaries The Company2003 2002 2003 2002

Primary steel products 40,111,588,041.32 31,655,863,377.88 39,809,682,052.90 31,655,863,377.88

Other steel products 611,943,204.63 573,218,043.95 611,943,204.63 573,218,043.95

Energy and services 3,736,837,659.59 1,647,524,370.79 3,736,837,659.59 1,647,524,370.79

Total 44,460,368,905.54 33,876,605,792.62 44,158,462,917.12 33,876,605,792.62

The total sales revenues of the company and its subsidiaries and the 5 largest customers of the company in 2003 are RMB 34,419,844,874.56 Yuan and

34,359,562,469.57 Yuan respectively (In 2002:RMB 25,721,350,412.34 Yuan, accounting for 77.42% of the total principle business revenue of the company and

its subsidiaries in 2003 and 77.81% of the total principle business revenue of the company in 2003 (In 2002: 75.93%).

(29) Principal Operation Costs

The Company & its subsidiaries The Company2003 2002 2003 2002

Primary steel products 26,766,192,952.10 22,507,290,823.66 26,477,273,391.06 22,507,290,823.66

Other steel products 344,529,770.38 371,428,562.61 344,529,770.38 371,428,562.61

Energy and services 3,714,702,723.08 1,576,865,079.00 3,714,702,723.08 1,576,865,079.00

Total 30,825,425,445.56 24,455,584,465.27 30,536,505,884.52 24,455,584,465.27

(30) Principal Operations Taxes and Surcharges

The Company & its subsidiaries The Company2003 2002 2003 2002

Business tax 3,168,435.72 1,666,025.69 3,168,435.72 1,666,025.69

Urban construction and Maintenance tax 251,383,992.00 179,946,959.53 251,372,604.56 179,946,959.53

Education tax 107,736,384.44 77,120,125.52 107,731,116.26 77,120,125.52

Embankment maintenance – 10,710,726.09 – 10,710,726.09

Total 362,288,812.16 269,443,836.83 362,272,156.54 269,443,836.83

Please refer to Note 3 to the financial reports for the details of the payment standards for various taxes and tax rates in terms of the principal operation taxes and

surcharges.

(31) Sub-trades Information

The business revenue, operation cost and gross profit of the sub-trades with a business income of 10% or more of the principal operation revenue are listed as follows:

The Company & its subsidiaries

RMB thousand

Business revenue Operation cost Gross profit2003 2002 2003 2002 2003 2002

Iron &steel industry 40,723,531 32,229,081 27,110,723 22,878,719 13,612,808 9,350,362

Others 3,736,838 1,647,525 3,714,702 1,576,865 22,136 70,660

Total 44,460,369 33,876,606 30,825,425 24,455,584 13,634,944 9,421,022

The Company

RMB thousand

Business revenue Operation cost Gross profit2003 2002 2003 2002 2003 2002

Iron & steel industry 40,421,625 32,229,081 26,821,804 22,878,719 13,599,821 9,350,362

Others 3,736,838 1,647,525 3,714,702 1,576,865 22,136 70,660

Total 44,158,463 33,876,606 30,536,506 24,455,584 13,621,957 9,421,022

77

2003-10-31

RMB yuan

Fixed assets 425,113,722.44

Construction in process 19,114,322.59

Total 444,228,045.03

(32) Financial Expenses

The Company & its subsidiaries The Company2003 2002 2003 2002

Interest expenses 470,846,350.22 502,012,619.22 468,042,720.22 502,012,619.22

Less: interest income 23,777,894.01 25,649,606.90 22,937,013.20 25,649,606.90

Foreign exchange losses 310,223,857.44 310,443,050.64 310,192,192.46 310,443,050.64

Others 4,237,229,56 3,684,093.21 4,156,016.89 3,684,093.21

Total 761,529,543.21 790,490,156.17 759,453,916.37 790,490,156.17

(33) Investment Income

The Company & its subsidiaries The Company2003 2002 2003 2002

Earning from investments on national debts and enterprise bonds 45,040,951.86 1,428,709.00 45,040,951.86 1,428,709.00

Earning in the affiliated companies’ gain and the non-consolidated357,383.65 29,163.05 4,872,494.42 29,163.05

profits of subsidiary companies

Amortization for equity investment differentials (7,718,983.75) – (6,681,002.59) –

Earning from entrusted asset administration 1,451,523.12 – 1,451,523.12 –

Income from investments of other equities 500,000.00 – – –

Investment income 39,630,874.88 1,457,872.05 44,683,966.81 1,457,872.05

(i) The earnings taken up by the Company and its subsidiaries in the affiliated companies’ gains and the non-consolidated

profits of subsidiary companies in the year refer to the net gains against the total net gains of the Bsteel.com, Lubao

Industrial and Trade and Lubao Sales Agency mentioned in the Note 5 (8) of the financial reports.

(ii) The amortization for equity investment differentials refers to the amortization amount of the current year for the equity

investment differentials caused by the Company’s acquisition of 90% of the equities of Yichang Sheet mentioned in the note

5 (9) of the financial reports.

(iii) There is no great restriction on repatriation of the investment incomes in the Company and its subsidiaries on the day of

working out the balance sheet.

(34) Cash Paid for Acquisition of Partial Assets

According to the Asset Acquisition Agreement concluded between the Company and the Shanghai Baosteel Group Corporation,

the Company acquired partial assets, including the technological center, land for development and outbuildings as well as

the minor items buildings owned by the Group Corporation but in the Company’s plant area, from the Group Corporation at

a final settlement price of 444,228,045.03 RMB yuan on 31 October 2003. By the end of 31 October 2003, the Company

had already paid for these assets in cash.

Purchasing price of parts of assets at the account day:

78

2003-10-31

RMB YuanMonetary fund 215,046,253.88

Short-term investment 40,000,000.00

Notes receivable 29,789,608.20

Accounts receivable 66,231,612.77

Accounts prepaid 25,763,136.85

Other receivables 9,834,946.57

Un-amortized expenditure 20,702.87

Inventory 310,760,801.92

Long-term bond investment due within one year 34,000,000.00

Long-term investment 33,701,644.99

Original cost of fixed asset 1,860,161,848.89

Accumulated depreciation (859,873,113.68)

Net value of fixed assets 1,000,288,735.21

Less: provision for impairment losses of fixed asset 3,093,850.10

Net amount of fixed assets 997,194,885.11

Projects under construction 28,869,499.75

Long-term un-amortized expenditure 3,065,048.53

Deferred tax debit 14,056,456.09

Total assets 1,808,334,597.53

Short-term borrowings (355,000,000.00)

Notes receivable (101,761,900.25)

Accounts payable (53,466,103.43)

Accounts prepaid (128,328,002.35)

Employee benefits cost (5,551,983.31)

Dividend payable (6,003,655.00)

Taxes payable (44,332,745.07)

Others unpaid 12,104.59

Others payable (19,984,560.80)

Wages and salaries payable (7,900,000.00)

Provision for expenses (27,108,284.09)

Long-term payables (196,885.29)

Minority interest (163,543,267.96)

Total liabilities (913,165,282.96)

Net assets 895,169,314.57

Purchase consideration

Cash (trade service charge paid RMB 339,000 Yuan) 1,254,687,000.00

Other payables 627,174.00

Internal accounts with the Company on the prompt day of equity

Accounts prepaid 5,444,379.69

Accounts pre-collected (165,159,161.31)

Difference in equity investment 200,430,077.81

Analysis of net out-flows of cash and equivalents resulted from the acquisition of Yichang Steel:

Cash payment 1,254,687,000.00

Acquired cash and balance at bank (215,046,253.88)

Net cash out-flows 1,039,640,746.12

(35) The acquisition of Yichang Steel

According to the resolution formed on the 1st interim Shareholders’ General Meeting of 2003 held on October 29th 2003

with regard to the assets and equity acquisition, and the Agreement on Equity Transfer of Shanghai Yichang Steel Sheet

signed by the Company on September 12th 2003 respectively with SBGC, China Material Development Investment Corpo-

ration (“Material Development”), Shanghai International Trust & Investment Corporation (“International Trust”), Shanghai

Jiu Shi Company (“Jiu Shi”) and SBGC Shanghai No.1 Iron & Steel Co., Ltd. (“No. 1 Iron & Steel), the Company acquired

90% equity of Yichang Steel Sheet, a subsidiary of SBGC with a sum amounted to RMB 1,254.348 million on October 31st

2003.

See the following for the net assets of Yichang Steel Sheet (including subsidiaries) ended on the day of equity:

79

2003-10-31

RMB YuanMonetary fund 13,103,508.49

Notes receivable 18,263,800.00

Accounts receivable 22,037,744.47

Accounts prepaid 196,425,452.47

Other receivables 6,772,182.11

Inventory 55,244,340.69

Long-term investments 4,626,017.95

Original cost of fixed assets 221,949,374.17

Accumulated depreciation (108,397,472.47)

Net value of fixed assets 113,551,901.70

Projects under construction 6,079,374.65

Long-term un-amortized expenditure 87,170.60

Deferred tax debit 2,056,400.26

Total assets 438,247,893.39

Accounts payable (30,233,460.97)

Advances from customers (65,716,317.41)

Employee benefits cost (1,040,996.77)

Dividend payable (2,480,415.91)

Taxes payable (16,668,129.77)

Others unpaid (195,309.02)

Other payables (6,818,897.51)

Wages and salaries payable (5,562,007.64)

Provision for expenses (6,212,780.26)

Minority interest (61,497,856.07)

Total liabilities (196,426,171.33)

Net assets 241,821,722.06

Purchase consideration

Cash 221,414,900.00

Others payable 110,707.45

Internal accounts with the Company on the prompt day of equity

Accounts pre-collected (1,426,983.18)

Difference in equity investment (21,723,097.79)

Analysis of net out-flows of cash and equivalents resulted from the acquisition of Lubao Steel Tube:

Cash expenditure 221,414,900.00

Acquired cash and balance at bank (13,103,508.49)

Net cash outflows 208,311,391.51

(36) The Acquisition of Lubao Steel Tube

According to the resolution formed on the 1st interim Shareholders’ General Meeting of 2003 held on October 29th 2003

with regard to the assets and equity acquisition, and the Agreement on Equity Transfer of Lubao Steel Tube Co., Ltd. signed

by the Company on September 12th 2003 with SBGC, the Company acquired 79.82% equity of Lubao Steel Tube Co., Ltd.

(Lubao Steel Tube), a subsidiary of SBGC with a sum amounted to RMB 221.4,149 million on October 31st 2003.

See the following for the net assets of Lubao Steel Tube ended on the day of equity:

80

6. Related Parties and Connected Transaction

(1) Holding Related Parties

Enterprise name Registered address Principle operation Relationship with company Type of legal entity Legal representative

Shanghai Baosteel Group Corporation Shanghai Manufacture, process, sales and R&D of Iron &steel products Holding company State-owned Xie Qihua

Shanghai Baosteel YichangShanghai Production of cold-rolled sheets (coils), etc. Holding subsidiaries Limited-liability Zhao Kun

Steel Sheet Co., Ltd.

Huangshi Aluminized Sheet Huangshi Production of galvanized sheets, etc. Holding subsidiaries Joint-venture Zhu Hong

Lubao Steel Tube Co., Ltd. Yantai Production and sales of steel tubes Holding subsidiaries Limited-liability Zhang Ruxin

Lubao Industrial and Trading Co., Ltd. Yantai Sales of steel tubes Holding subsidiaries Limited-liability Wang Xuwu

Lubao Sales Agency Shanghai Sales of steel tubes Holding subsidiaries State-owned Lin Zhimin

Shanghai Baosteel Group Corporation (SBGC), which holds 85% voting-right shares of the Company, is the holding company of the Company.

All those having controlling relations with SBGC are co-controlling related companies or of major effect on the Company.

(2) Registered Capital and Changes of Holding Related Parties

RMB thousand

Enterprise name Beginning of year Increase for year Decrease for year End of year

Shanghai Baosteel Group Corporation 45,800,000,000 – – 45,800,000,000

Shanghai Baosteel Yichang Steel Sheet Co., Ltd. 646,000,000 – – 646,000,000

Huangshi Aluminized Sheet $8,000,000 – – $8,000,000

Lubao Steel Tube Co., Ltd. 100,000,000 – – 100,000,000

Lubao Industrial and Trading Co., Ltd. 1,650,000 – – 1,650,000

Lubao Sales Agency 500,000 – – 500,000

(3) Changes in Shareholdings and Equity of Holding Related Parties

Enterprise nameBeginning of year End of year

RMB thousand % RMB thousand %

Shanghai Baosteel Group Corporation 10,635,000,000 85.00% 10,635,000,000 85.00%

Shanghai Baosteel Yichang Steel Sheet Co., Ltd. 581,400,000 90.00% – –

Huangshi Aluminized Sheet $3,149,600 39.37% – –

Lubao Steel Tube Co., Ltd. 79,820,000 79.82% – –

Lubao Industrial and Trading Co., Ltd. 1,650,000 100.00% – –

Lubao Sales Agency 500,000 100.00% – –

(4) Related Parties Having no Controlling Relations with the Company

All those involved in connected transactions but having no controlling relations with the Company are the subsidiaries of SBGC.

81

(5) Major Connected Transactions with SBGC and the Related Parties

A. Details of sales to related parties

RMB thousand

Related company name Note 2003 2002

Shanghai Baosteel Group Corp. (1)a 33,346 522,725

Shanghai Baosteel International Economic & Trading Co. Ltd. and its subsidiaries and branches (1)b 30,207,578 23,476,376

Baosteel Group Shanghai Pudong Iron & Steel Co., Ltd. (1)c 241,433 328,531

Baosteel Group Shanghai No.1 Iron & Steel Co., Ltd. (1)c 506,170 78,344

Baosteel Group Shanghai Ergang Co., Ltd. (1)c 658,006 781,148

Baosteel Group Shanghai Steel Tube Co., Ltd. (1)c 68,382 58,926

Lubao Steel Tube Co., Ltd. (1)c 127,078 206,263

Baosteel Group Enterprises Development Corporation and its subsidiaries (1)c 424,537 419,591

Shanghai Baosteel Engineering & Equipment Co., Ltd. (1)c 29,841 21,409

Shanghai Baosteel Business Development Co., Ltd. (1)c 47,953 44,853

Shanghai Baosteel Chemical Co., Ltd. (1)c 1,164,621 436,899

Shanghai Baosteel Technological & Economic Development Co., Ltd. (1)c – 23,432

Baosteel Group Shanghai No.5 Steel Co., Ltd. (1)c 5,917 15,339

Shanghai Baosteel Yichang Steel Sheet Co., Ltd. (1)c 1,497,040 33,918

Others (1)c 26,982 84,727

Total 35,038,884 26,532,481

B. Details of purchases from related parties

RMB thousand

Related company name Note 2003 2002

Shanghai Baosteel Group Corp. (2)a – 2,912,750

Shanghai Baosteel International Economic & Trading Co., Ltd. and its subsidiaries and branches (2)b 7,526,524 4,474,591

Shanghai Baosteel Chemical Co., Ltd. (2)c 1,262,470 1,013,948

Shanghai Baosight Software Co., Ltd. and its subsidiaries (2)d 84,901 33,603

Shanghai Baosteel Engineering & Equipment Co., Ltd.. (2)d 261,324 66,767

Baosteel Group Enterprises Development Co., Ltd. and its subsidiaries (2)d 660,264 245,174

Baosteel Group Shanghai No.1 Iron & Steel Co., Ltd. (2)d 184,951 –

Baosteel Group Shanghai Pudong Iron & Steel Co., Ltd. (2)d 268,746 –

Nantong Baosteel Xinri Steel Co., Ltd. (2)d 199,922 –

Shanghai Baosteel Business Development Co., Ltd. (2)d 6,270 –

Shanghai Baosteel Yichang Steel Sheet Co., Ltd. (2)d 41,059 –

Shanghai Baosteel Equipment Testing Co., Ltd. (2)d 26,319 –

Shanghai Baosteel Equipment Maintenance Co., Ltd. (2)d 6,727 –

Total 10,529,477 8,746,833

82

C. Major connected transactions with SBGC and the related parties

RMB thousand

Company name Note 2003 2002

Provision of transportation services (3)a 30,650 33,209

Provision of loading and unloading services (3)b – 1,651

Provision of technological services (3)c 33,251 –

Payment of utilization of raw material wharf dues (3)d – 59,130

Payment of overhaul dues (3)e 557,015 473,483

Payment of detection dues (3)f,t 52,808 38,243

Payment of technology development and maintenance dues (3)g 154,994 75,926

Payment of processing (3)h 60,802 62,688

Payment of training fees (3)i 19,733 8,141

Payment of logistic services (3)j 449,217 435,520

Payment of transportation (3)k 46,403 8,726

Payment of sales commission (3)l 56,495 78,738

Payment of land use fees (3)m 126,540 109,800

Payment of house rental fees (3)m 3,940 14,655

Interest income (3)n 10,040 4,432

Interest expense (3)n 9,860 14,057

Entrusted financing (3)o 200,000 –

Entrusted financing investment yield (3)o 1,452 –

Management income (3)p 226 8,494

Interest expense of Phase III assets acquisition (3)q 120,000 52,000

Project expenses (3)r 160,137 153,450

Buy-in projects – 24,841 –

Equipment rental income (3)s 3,547 3,500

Sales of assets (3)t 20,523 13,125

Material warehousing and shipping (3)t 87,164 27,193

Acquisition of partial entrusted assets (3)u – 3,967,367

Acquisition of partial SBGC partial assets (3)v 444,228 –

Acquisition of the equity of Yichang Steel Sheet and Lubao Steel Tube (3)w 1,023,501 –

83

Notes:

A. Sales to the Related Parties

(a) The company used to sell mainly coking coal, iron ore, hot metal, con-cast square billet, slabs, etc. to SBGC. However, apart from a few sales of materials and spare

units, the above sales no longer exist after the acquisition of Phase III assets and part of the entrusted assets from SBGC in 2002 .The details are as follows:

(i) From its founding to the end of 2001,the Company sold coking coal and iron ore, and processing at the price of coal plus 5.5% addition. From 2001, the prices

were at cost plus 4%~6% through the annual consultation. After the Phase III acquisition in 2001, the Company no longer sold coking coal and iron ore to

SBGC. After the acquisition of partial entrusted assets including the coking system in 2002, these connected transactions no longer exist (cost of the coking

coal processing in 2001 is RMB 83,417,775 yuan).

(ii) From its founding, the Company sold to SBGC water for daily use at the market price, and industrial water, pure water, filtered water, electricity, and other

energy media at the agreed prices. After the acquisition of partial entrusted assets, these connected transactions no longer exist. (In 2002, RMB 397, 985,264

yuan)

(iii) From its founding, the Company sold raw material and auxiliary material to SBGC. After the acquisition of Phase III assets, the sale of raw material to SBGC

sharply declined. After acquisition of partial entrusted assets including the coking system, there are only a few transactions in energy, auxiliary material and

spare parts totally worth RMB 33,345,635 yuan. ( In 2002: RMB 41,321,439 yuan).

(b) Shanghai Baosteel International Economic & Trading Co, Ltd. (Baosteel International) is a wholly- owned subsidiary of SBGC. Parts of the iron and steel products of

the Company have been sold through Baosteel International and its subsidiaries and branches. In order to pay the commission for their agent sales services, the

Company has sold these products to them at the prices 1%~5% lower than the prices sold to an independent third party customers.

In 2003, the Company sold to Shanghai Baosteel International Economic & Trading Co., Ltd. and its subsidiaries and branches the iron & steel products worth RMB

29,694,216 yuan. (In 2002: RMB 23, 373,374,953 yuan). Based on the above price difference standard, the Company has in effect paid them the commission of

RMB 476,679,826 yuan. (In 2002: RMB 415,727,952).

After the acquisition of partial entrusted assets in 2002, the Company has added the connected transaction of selling metallurgical coke at the market price to Baosteel

International. In 2003, the Company sold metallurgical coke to Shanghai Baosteel International Economic & Trading Co., Ltd. worth RMB 440,554,388 yuan. (In

2002: RMB 98,935,024).

In addition, the Company has added the connected transactions of selling energy media to the subsidiary of Baosteel International at the agreed price worth RMB

2, 726,314 yuan and its raw material, spare parts and sintered ore at market price worth respectively RMB 34,565,470 yuan, RMB 7,284,884 yuan and RMB

27,514,672 yuan.

(c) In 2003, the Company sold at the market price its principle iron & steel products and byproducts to some subsidiaries of SBGC worth RMB 3,009,039,194 yuan (In

2002:RMB 1,898,173,507), and its material worth RMB 85,809,080 (In2002: RMB 119,780,829 yuan)

The Company has sold to some subsidiaries of SBGC water for daily use at the market price, and industrial water, pure water, filtered water, electricity and other energy

media at the agreed prices. In 2003, the Company sold energy media to SBGC worth RMB 392,274,160. (In 2002, RMB 392,284,826)

After the acquisition of partial entrusted assets in 2002, the Company has added the connected transaction of selling metallurgical coke at the market price to SBGC

Shanghai No.1 Iron & Steel Co., Ltd. In 2003, the Company sold metallurgical coke worth RMB 477,422,369 yuan (In 2002: RMB 49,242,243 yuan).

After the acquisition of partial entrusted assets in 2002, the Company has added the connected transaction of selling spare parts to some subsidiaries of SBGC. In

2003, the Company sold spare parts at market price to some subsidiaries of SBGC worth RMB 41,861,118 yuan. (In 2002: RMB 10,714,495 yuan )

After the acquisition of partial entrusted assets in 2002, the Company has added the connected transaction of selling crude gas at the agreed price to Shanghai

Baosteel Chemical Co., Ltd. In 2003,the Company sold crude gas to Shanghai Baosteel Chemical Co., Ltd. worth RMB791,554,826 yuan.( In 2002: RMB

97,250,608 yuan )

B. Purchase from Related Parties

(a) The Company used to purchase mainly coke, tube blank, slab, square billet, energy media, odd auxiliary material, and spare parts from SBGC. After the acquisitions

of Phase III assets and partial entrusted assets from SBGC in 2002, the above -mentioned purchases no longer existed. The details are as follows:

(i) Since 2001, the prices of metallurgical coke and other coke products were at cost plus 4%~6% through annual consultation. After acquisition of partial

entrusted assets in 2002 including coking system, these connected transactions no longer exists (In 2002: RMB 1,736,066,144 yuan).

(ii) SBGC sold spare parts at the market price to the Company. After acquisition of partial entrusted assets in 2002 including the warehouse of spare parts, this

connected transaction no longer exists. (In 2002: RMB 1,060,859,088 yuan)

(b) The Company purchases part of raw and auxiliary materials, spare parts and equipment from Baosteel International and its subsidiaries and branches at the prices

1%~2.5% higher than what they got from the independent third supplier. In 2003, the Company purchased raw and auxiliary material worth RMB 7,339,306,036

yuan (In 2002: RMB 4,316,595,899 yuan). According to the above price difference standard, the Company has in effect paid commission of RMB 95,577,094. (In

2002: RMB 60,672,638 yuan). In addition, the Company has paid commission of RMB 60,672,638 yuan directly to Baosteel International and its subsidiaries.( In

2002: RMB 157,995,500 yuan)

84

(c) In 2003, the Company purchased at the agreed price well-refined gas worth RMB 1,109,442,709 yuan from Shanghai Baosteel Chemical Co., Ltd., a wholly-owned

subsidiary of SBGC.( In 2002: RMB 1,103,947,632 yuan)

After acquisition of partial entrusted assets from SBGC in 2002, the Company has added the connected transaction of purchasing material from Shanghai Baosteel

Chemical Co., Ltd. In 2003, the Company purchased material from Shanghai Baosteel Chemical Co., Ltd. worth RMB 53,026,851 yuan.

(d) In 2003, the Company purchased at the market price odd fixed assets and equipment from some subsidiaries of SBGC worth RMB 146,642,341 yuan.( In 2002:RMB

33,603,410 yuan).

After acquisition of partial entrusted assets from SBGC in 2002, the Company has added the connected transaction of purchasing spare parts and material from

SBGC. In 2003, the Company additionally purchased the material for deep processing and infrastructure projects from some subsidiaries of SBGC, mainly pig iron and

ferroalloy

The Company purchased spare parts and material from some subsidiaries of SBGC at the market prices worth RMB 274,997,138 yuan, (in 2002: RMB 70,856,900

yuan) and RMB 1,318,843,644 yuan (in 2002: RMB 241,083,790 yuan) respectively.

C. Other Principal Connected Transactions

(a) The Company has provided SBGC and its subsidiaries with transportation service within the plant area in Baoshan. Since 2001, the Company provided transportation

services to SBGC at the price of cost plus 4%~6% addition through annual consultation and to its subsidiaries at the agreed prices. After the acquisition of partial

entrusted assets in 2002, the Company no longer provides transportation services to SBGC.

(b) The Company has provided SBGC with loading and unloading service at the finished goods wharf and within the plant area. Since its founding, the Company charged

SBGC at cost plus 5.5% for loading and unloading service. After acquisition of partial entrusted assets from SBGC, these connected transactions no longer exist.

(c) The Company has provided R&D projects, quality detection, and other technological services to some subsidiaries of SBGC at the agreed price.

(d) The Company has unloaded and transported its purchased raw material at the raw material wharf of Shanghai Baosteel Group Corporation. Since 2001, the price was

at cost plus 4%~6% through annual consultation. After acquisition of partial entrusted assets including the raw material wharf, this connected transaction no longer

exists.

(e) Shanghai Baosteel Equipment Maintenance Co., Ltd. (“SBEMC”), Shanghai Baosteel Engineering & Equipment Co., Ltd. (“BSEE”), Baosteel Group Enterprise

Development Corporation (“Development Corp.”), Shanghai Baosteel Technological & Economic Development Co., Ltd. (“SBTEDC”), Shanghai Baosteel Business

Development Co., Ltd. (“Business Co.”), and Shanghai Baosight Software Co., Ltd. (“Baosight”) are the wholly-owned subsidiaries of Shanghai Baosteel Group

Corporation. SBEMC, BSEE, Development Corp., SBTEDC, Business Co., Baosteel International, Baosight and their subsidiaries have provided maintenance, repair

and rush repair of equipment and spare parts for the production line, mechanical equipment, electronic equipment, instruments, structural parts and civil construc-

tion for the Company, and charged the Company with service fee at market price.

(f) Shanghai Baosteel Equipment Detection Company. (Detection Company), a wholly -owned subsidiary of SBGC, has provided regular detection service for the

Company in the production facilities. From its foundation, the service charge has been at the market price.

(g) Baosteel Group Baoshan Hotel (“Baoshan Hotel”) is a wholly-owned subsidiary of Shanghai Baosteel Group Corporation. Baosteel International and Baoshan Hotel

have provided the service related to R&D for the Company, and charged the Company with service fee at the agreed price. Baosight has provided the Company with

the service of operation, regular inspection, maintenance and system development of computer system.

(h) BSEE has processed the hot metal and bloom produced by the Company into the ingot mould for steel-making and charged the Company with the ingot mould

processing fee at the agreed price. Baosteel International and Development Corp. have provided the Company with the recovery, processing and supply service of iron

slag and steel slag produced during the slag treatment of the Company, and charged the Company with processing fee at the agreed price.

(i) SBGC has provided training services for the staff and workers of the Company at the agreed price.

(j) Baosteel Group Enterprise Development Corporation (Development Corp.) and its subsidiaries have provided the Company with its services at the agreed prices in

such areas as renovation, environmental sanitation, transportation, catering, property management, non-production maintenance, medical care, production assis-

tance and cleaning. In accordance with the Frame Agreement on Comprehensive Logistic Service revised in July, 2002, the other related parties, besides Development

Corp. and its subsidiaries, such as Baosteel Group Baoshan Hotel, a wholly -owned subsidiary of SBGC, could also provide the logistic service for the Company. From

July, 2002 on, Baosteel Group Baoshan Hotel has provided at the agreed price the Administrative Building with the property management service transferred from the

Development Corp.

(k) The subsidiaries of Shanghai Baosteel International Economic & Trading Co., Ltd. and Baosteel Group Enterprise Development Corporation charged the Company

with the service fee for various transportation at the agreed price.

(l) The Company has sold part of the iron & steel products to consumers through Baosteel International and its subsidiaries and branches. The Company has paid

commission for their sales at 1%~5% of the price of 3rd independent parties.

(m) Upon its founding, the Company signed a 20-year land lease agreement with SBGC for the plant area land use. In September 2001, another 20-year land lease

agreement under the Phase III assets acquisition project was signed. According to the above agreements, the annual rents for the plant area land use and the land

use under the Phase III acquisition project were respectively RMB 74,000,000 yuan and RMB 32,000,000 yuan .In November 2002, the Company signed another

20-year land lease agreement for the plant area land use of newly acquired partial entrusted assets, the annual rent of which is RMB 22,800,000 yuan. In May, 2003,

the price of land use for this part was adjusted to RMB 20,540,000 yuan.

85

Upon the founding of the Company, SBGC signed a 10-year land lease agreement with the Company to lease some buildings to the Company at the annual rent of

RMB 8,000,000 yuan. After acquisition of partial entrusted assets in 2002, the annual rent had been adjusted to RMB 4,730,000 yuan. Before acquiring part of the

assets such as the Technological Center in the year, the Company had paid totally RMB 3,940,000 yuan for rents. After acquisition, the rents for these building no

longer exist. Besides, the Company rented office building from Baoshan Hotel in 2002, and paid RMB 7,199,789 yuan for the rent.

(n) Baosteel Group Finance Co., Ltd. (Finance Co.), a holding subsidiary of SBGC, received deposits of the Company and paid interests. The interest income has been

calculated based on the interest regulated by the People’s Bank of China. In addition, Finance Co., Ltd. has provided foreign exchange loans to the Company, and the

Company has calculated and paid the interest according to 0.3% plus the internationally accepted London Inter-bank Offered Rate.

(o) In order to effectively realize the value maintenance and appreciation of temporarily idle funds on hand, after being granted approval, the Company signed an

entrusted management agreement for special items of assets with Finance Co. on June 23, 2003, which specified that Finance Co. shall steadily and prudently

manage the entrusted assets with management methods designated by the Company (limited to bonds and new stock subscription), and can not divert the funds to

other purpose. Meanwhile, Finance Co. must manage the funds entrusted by the Company under special account, and provide timely transaction documents and

breakdown check sheet for special account. Finance Co. will not charge management fee if the annual rate of investment return is below 3.5% after deducting the

relevant normal transaction costs (including commission and stamp duty) from the earning ratio generated from the entrusted management business of the assets;

if the annual rate of return for the entrusted funds is above 3.5%, Finance Co. will charge the Company a service fee according to 60% of the part exceeding 3.5%, the

remaining earning belong to the Company. In 2003, the Company received totally RMB 1,451,523 yuan for the earning from the entrusted financing. The agreement

expired on September 25, 2003.

(p) From the founding of the Company, SBGC paid an annual management fee of RMB 35,000,000 yuan to the Company in line with the Agreements of Trust

Management and Purchase Right. After the Phase III assets acquisition, according to the newly -signed Agreement on Trust Management and Purchase Right with

SBGC in 2001, the annual management fee was RMB 9,949,239 yuan, and SBGC should pay 1% of the gross margin for the year to the Company in case of the gross

margin derived from the operation of entrusted assets. After the acquisition of partial entrusted assets, according to Agreement of Trust Management and Purchase

Right re-signed between the Company and SBGC in November 2002, SBGC paid annually 1% of the net margin realized on the entrusted assets for the year to the

Company as a management fee from 2003 on. The fee decreased sharply after the Company acquired partial entrusted assets in 2002.

(q) In accordance with the Supplementary Agreement on Baosteel Phase III Assets Acquisition, the Company paid SBGC a deferred interest for the Phase III acquisition.

Interest derived from the payments for the above acquisition is not and will not be counted during the 2003-2005 period. The total amount of interest will be RMB

800,000,000,00 counted from 2006 to 2009’s payments. The Company should pay interests within the last five workdays of each December from 2003-2009.

Please consult the details in Note (23) for major items to the financial reports.

(r) Baosight and BSEE have provided engineering design services for the Company at the agreed prices. Shanghai Baosteel Equipment Maintenance Co,.Ltd, has

provided the Company with construction installation services in the technical renovation of equipment at the agreed price.

Shanghai Baosteel Construction Co., Ltd. (“Baosteel Construction”) is a wholly-owned subsidiary of SBGC. Development Corp. and Baosteel Construction have

provided construction service to the technical revamping project of the Company, and charged the Company a service fee at the agreed prices.

(s) In 2003, the Company has rented equipment to Baosteel Group Changzhou Roller Manufacture Company, a subsidiary of Engineering Company, at the agreed

rents.

(t) Shanghai Baosteel Equipment Detection Company. (“Detection Company”) is a wholly-owned subsidiary of SBGC. The Company implemented main and auxiliary

business separation for material warehousing business in August 2002, and the employee was separated together with the business, since then Detection Company

provided the Company with material warehousing and transportation service, and the Company paid warehousing costs according to the salary and cost level at the

time of business transfer, for which the Company paid RMB 87,164,200 yuan in 2003 (In 2002: RMB 27,193,333 yuan).

In 2003, the Company sold the fixed assets related to material warehouse, environmental detection and regular inspection and maintenance of indigenous furnaces

to Detection Company. Since the sales was completed, Detection Company has undertaken the inspection and maintenance of indigenous furnaces and environmen-

tal detection for the Company, and the Company paid detection fee according to the salary and cost level at the time of business transfer.

(u) On Novermber1st, 2002, the Company acquired partial entrusted assets from SBGC at the agreed price worth RMB 3,967,367,133.09 yuan.

(v) In accordance with the relevant assets acquisition agreements, the Company acquired the Technological Center, land for development and affiliated buildings of

Baosteel Group, and minor items of buildings owned by Baosteel Group within the plant area of the Company at the price of RMB 444,228,045.03 yuan on October

31, 2003.

(w) The Company acquired 57.55% equity of Shanghai Baosteel Yichang Steel Sheet Co., Ltd. from SBGC and Baosteel Group Shanghai No.1 Iron & Steel Co., Ltd. at

the agreed price of RMB 802,085,900 yuan and 79.82% equity of Yantai Lubao Steel Tube Co., Ltd. from SBGC at the agreed price of RMB 221,414,900 on October

31, 2003. The amount paid for the equity owned by SBGC totaled RMB 988,936,500 yuan and the amount paid for the equity owned by Baosteel Group Shanghai

No.1 Iron & Steel Co., Ltd. totaled RMB 34,564,300 yuan.

(x) The Company has used free of charge the trademark and property technologies of SBGC.

(y) Baosteel Group Finance Co., Ltd. has provided a guarantee for the Company’s commercial loan of RMB 640,793,844,64 yuan from overseas banks.

(6) Balance of Accounts Receivable and Payable of Related Parties and Cash in Bank and on Hand with Related Parties.

Please refer to Note (1)`(3)

`(4)

`(6)

`(14)

`(15)

`(16)

`(21)

`(22) and (23).

86

7. Contingent Items

Till the balance sheet date, the Company had no principle contingent items.

8. Commitments

(1) Capital commitments

Company and its subsidiaries2003 2002

Contracted for but not allocated 11,073,945,903 12,509,710,000

Approved but not contracted for 911,936,383 3,193,360,000

Total 11,985,882,286 15,703,070,000

(2) Operating lease commitments

The yearly minimum lease payments under irrevocable operating leases for the first three accounting years immediately after the balance sheet date are

respectively as follows:

Company and its subsidiaries2003 2002

First year 127,165,114 128,800,000

Second year 127,165,114 128,800,000

Third year 127,165,114 128,800,000

Years follows 1,763,797,482 1,933,466,000

Total 2,145,292,824 2,319,866,000

9. Items after the Balance Sheet Date

The 2003 profit appropriation has been on the basis of total capital stock of 12,512 million ended on 31st December 2003, the amount to a sum of RMB 3,128

million has been proposed to be distributed to all shareholders in the form of cash dividend and in the ratio of RMB 2.50 Yuan per 10 shares (before income tax).

10. Other Principle Items

Till the date of the approval of the financial reports, the Company items after the balance sheet date.

11. Supplementary for Income Statement

Company and its subsidiaries

Item 2003 2002

Loses from sale and disposal of segments and units invested – –

Loses from natural calamities – –

Increase/decrease of gross profits by accounting policy changes – –

Increase/Decrease of gross profits by accounting estimation changes (1,906,959,423.00) (634,990,140.36)

Loses from debt restructuring – –

12. Comparable Numbers

Some comparable numbers have been rearranged for the presentation of this year.

13. Approval of the Financial Reports

The financial reports were passed and approved by the Board of Directors on Feb. 26, 2004.

87

Supplementary Data

1. Returns on Net Assets and Earnings Per Share

2003

Profits during the report periodReturns on net assets Earnings per share (yuan)

Fully diluted Weighted average Fully diluted Weighted average

Profits from principal operations 37.42% 40.83% 1.06 1.06

Operating profits 28.33% 30.91% 0.80 0.80

Net profits 19.67% 21.46% 0.56 0.56

Net profit after deduction of non-recurring losses and gains 19.87% 21.68% 0.56 0.56

The above returns on net assets and earning per share were calculated based on the formula published in No.9 Formatting Rules for Information Disclosure for

Stock-issuing Companies, which was issued by China Securities Regulatory Commission on 19 January, 2001.

2. Details of Provisions for Impairment Losses of Assets

Item 2002-12-31 Increase in the year Written back for the year 2003-12-31

1. Total allowance for bad debts 190,818,863.26 11,110,156.10 (17,982,001.50) 183,947,017.86

2. Total provision for decrease in price of inventories 8,730,627.25 41,903,725.83 (3,104,546.37) 47,529,806.71

3. Total provision for impairment losses of fixed assets 40,611,777.23 7,039,599.79 (2,447,939.23) 45,203,437.79

88

XI. Catalog of Documents for Reference

1. The original financial reports signed and sealed by the legal representative, financial supervisor, and accounting organ chief.

2. The original auditing report sealed by the certified accountants’ office, and signed and sealed by the public certified accountants.

3. All the original copies of documents and announcements published in the newspapers stipulated by the CRSC during the report

period.

Baoshan Iron & Steel Co., Ltd.

The Board of Directors

February 26, 2004