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Hengan International Group Company Limited2

Corporate Information

EXECUTIVE DIRECTORSSze Man Bok (Chairman)Hui Chi Lin (Deputy Chairman and

Chief Executive Officer)Yeung Wing ChunHung Ching ShanZhang Shi PaoPoon Fuk ChuenXu Da ZuoXu Chun Man

INDEPENDENT NON-EXECUTIVEDIRECTORSChan, HenryChu Cheng ChungGuan TaoWong Ying Kay, Ada

COMPANY SECRETARYPoon Fuk ChuenFCCA, AHKSA

AUTHORISED REPRESENTATIVESPoon Fuk ChuenHui Chi Lin

LEGAL ADVISERSHong KongRichards ButlerPRCGlobal Law OfficeCayman lslandsMaples and Calder Asia

AUDITORSPricewaterhouseCoopersCertified Public Accountants

REGISTERED OFFICEUgland HouseSouth Church StreetP.O. Box 309, George TownGrand CaymanCayman lslandsBritish West Indies

HEAD OFFICEHengan Industrial CityAnhai TownJinjiang CityFujian ProvincePRC

PLACE OF BUSINESS IN HONG KONGUnit 2101D, 21st FloorAdmiralty Centre, Tower 118 Harcourt RoadHong Kong

PLACE OF LISTING AND STOCK CODEThe Stock Exchange of Hong Kong LimitedStock Code: 1044

WEBSITEhttp://www.irasia.com/listco/hk/hengan

PRINCIPAL BANKERSPRCBank of China, Anhai Branch, Jinjiang, FujianConstruction Bank of China, Jinjiang Branch, FujianHong KongBank of China (Hong Kong)Bank of CommunicationThe Hong Kong and Shanghai Banking Corporation Limited

SHARE REGISTRAR AND TRANSFER OFFICEAbacus Share Registrars LimitedG/F, Bank of East Asia Harbour View Centre56 Gloucester RoadWan ChaiHong Kong

INVESTORS AND MEDIA RELATIONSiPR ASIA LTD20/F, Hing Wai Building36 Queen’s Road CentralHong Konghttp://www.iprasia.com

Annual Report 2002 3

Financial Highlights

Hengan International Group Company Limited

Analysis of Turnover by Product Type

2002

22.7%

7.1%

70.2%

2001

22%

7.2%

70.8%

Sanitary napkins

Disposable diapers

Others

2002 2001 2000 1999

Net profit margin (%) 17.9 18.6 18.0 27.0Earnings per share (HK cents) 20.1 22.8 20.9 29.9Shareholders’ fund (HK$) 1,690,702,000 1,670,080,000 1,621,606,000 1,624,952,000Finished goods turnover (days) 72 56 39 27Accounts receivable turnover (days) 28 28 40 49Current ratio (times) 7.3 5.7 5.8 3.5Gearing ratio (%) — — — 4.6


Five-Year Financial Summary

CONSOLIDATED RESULTS - FOR THE YEAR ENDED 31ST DECEMBER

2002 2001 2000 1999 1998HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Turnover 1,115,404 1,217,754 1,163,236 1,129,670 1,309,280

Profit before taxation 219,898 246,797 230,780 322,313 329,120Taxation (18,129) (18,212) (20,157) (18,545) (40,995)

Profit after taxation 201,769 228,585 210,623 303,768 288,125Minority interests (2,059) (1,353) (1,463) (1,254) (1,737)

Profit attributable to shareholders 199,710 227,232 209,160 302,514 286,388

Earnings per share (HK cents) 20.1 22.8 20.9 29.9 37.2

0

500

1,500

1,000

1998 1999 2000 2001 2002

1,250

750

250

Turnover

HK$’million

Profit Attributable to Shareholders

HK$’million

0

50

350

150

1998 1999 2000

100

250

300

200

2001 2002


Five-Year Financial Summary


CONSOLIDATED ASSETS AND LIABILITIES - AS AT 31ST DECEMBER

2002 2001 2000 1999 1998HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Assets

Intangible assets 4,711 — — — —Fixed assets 682,183 711,745 656,865 580,048 511,659Construction-in-progress 29,172 45,883 60,148 60,019 44,577Investments 23,054 100,878 100,878 100,878 —Cash and bank balances 709,751 546,782 502,410 596,945 855,760Other current assets 419,372 452,057 482,774 515,269 388,356

1,868,243 1,857,345 1,803,075 1,853,159 1,800,352

Liabilities

Current liabilities 155,104 175,568 168,835 215,630 298,473Minority interests 22,437 11,697 12,634 12,577 6,686

Total liabilities 177,541 187,265 181,469 228,207 305,159

Net assets 1,690,702 1,670,080 1,621,606 1,624,952 1,495,193

0

10

40

30

20

1998 1999 2000 20022001

Earnings per Share

HK cents


Chairman’s Statement

Well prepared for

challenges has been our

everlasting belief . We

shall aggressively guide

the Group to s t ep

forward and pos i t i on

the Group as a pioneer

in the personal hygiene

market.




Aiming at satisfying the needs of consumers, Hengan International pays much attention on market development, andstrives to bring in the most returns with its resources. With its mission of ‘Growing with you for a better life’, and settingcustomer-orientation and quality as its top priorities, the Group has evolved from being a manufacturer to a reputablepersonal hygiene corporation within a mere decade.

2002 was a challenging year for the Group. Competition of the hygiene products market in China remained keen,and the market was experiencing consolidation, which led a continual drop in products price. Given the situation, theGroup continued to strengthen its innovativeness, improved the quality of sanitary napkins and baby diapers andstrengthened centralized management and quality control, sales and promotions, etc., so as to increase the Group’score competitiveness, resulting in the improvement in cost-efficiency.

For the year ended 31st December 2002, turnover of the Group was HK$1,115,404,000 representing adecrease of 8.4% as compared with the previous year. Profit attributable to shareholders fell 12.1% toHK$199,710,000. Earnings per share was HK 20.1 cents per share (2001: HK 22.8 cents). The Board has resolvedto recommend the payment of a final dividend of HK 10 cents per share (2001: HK 10 cents). Taking into account theinterim dividend of HK 8 cents per share, the annual dividend amounted to HK 18 cents per share (2001: HK 20cents).

The main reason for the decline in results was the keen competition of the napkins and baby diapers market in China,which directly affected the sales for the products. In the past year, sanitary napkins (including pantiliners) continued tobe the main products of our corporation, contributing approximately 70.2% to the total turnover. Sale of baby diapersexperienced a slight decline and accounted for approximately 22.7% of the total turnover.

Upon entrance into the WTO, China’s economy kept growing at a steady pace. At the same time living standard ofcitizens has continued to improve. The sanitary napkins market is relatively matured with a penetration rate ofapproximately 53% and continue to grow with an annual rate of approximate 3-4%. However, attributed to arelatively low entry barrier with multinational enterprises targeting at the high-end market, coupled with the floodingof smaller manufacturers in the low-end market, sales of sanitary napkins continued experiencing a tough time.

Besides, after the two-year rapid expansion, thebaby diapers market was stagnant anddemand for the product has slowed down.Together with the entry of small manufacturersinto the market, the Group recorded a slightdecrease in turnover from this business segment.Given the low market penetration of the babydiapers and the rising household income,together with the general reduction in the priceof baby diapers, the product demand wouldcontinue to increase. Therefore, the Groupbelieves its diapers business still has itsdevelopment and growth potential.



To enrich the Group’s product series, theGroup acquired the brand name “Missmay”during the year and established Hengan Li RenTang (Jian) Cosmetics Co., Ltd. 囱安麗人堂 (吉安)

日化有限公司 for the sales and distribution ofskin care products, paving the path for theGroup to diversify its business.

Although facing strong competition, the Groupis confident about its future development andwill continue to implement its long-termobjectives. The Group strives to push thebrands “Anle”, “Anerle（安爾樂）”, “Anerle（安兒樂）”, “ElderJoy” and “Missmay” to become top choices for consumers, and maintain Hengan International’s leadingposition in China’s personal hygiene industry.

Well prepared for challenges has been Hengan International’s believe. The Group will closely monitor marketchanges and react to them appropriately, and will strive to optimize product quality and technology innovation.Simultaneously we shall develop unique products, enhance market share and profitability in different regions. We willfurther strengthen our logistics and human resources management, reinforce nationwide distribution channels, exerteven more effort in promotion and strengthen brand image in order to provide better products to consumers. At thesame time, we shall aggressively guide the Group back onto the right track, and position the Group as a pioneer inthe personal hygiene market.




In the coming years, China’s economic will continue to experience steady growth. While the consumer market isexpected to continue developing, competition is also expected to become more intense. Hengan International hasalready in the past competed with renowned international brand name enterprises and successfully recorded growth.The management strongly believes that the Group will only benefit when consumers continue chasing after higherproduct quality and taste.

Lastly, I would like to take this opportunity to express my gratitude to our shareholders, clients, consumers, businesspartners as well as our staff. Being an established enterprise that provides diversified personal hygiene products,Hengan International will continue to pursue its mission - “Growing with you for a better life”, to provide a healthy andaffluent living for consumers, and to bring satisfactory returns to our shareholders.

Sze Man Bok

Chairman

Hong Kong, 25th March 2003


Chief Executive Officer’s Report

In a market of dynamic

competition, we will pay

unrelenting effort in a

view of strengthening our

competitive edges, seeking

new business

opportunities and bring

better returns for our

shareholders.




“Growing with you for a better life”

OVERALL PERFORMANCE

The Chinese personal hygiene product industry faced a year with challenges and opportunities. The challenge wasfrom China’s accession into the WTO, and both multinational enterprises and small local manufacturers strive to keepthemselves ahead of the game, and market competition has become even more intense. At the same time, the industryalso encountered numerous opportunities coming from the change in domestic consumption pattern and increasingdemand for both quality and quantity for personal hygiene products. Existing within this dynamic market environment,the Group continuously made changes to its products, enhanced its innovativeness and improved quality. Throughsimplifying our production processes, developing stronger sales and marketing methods as well as enhancing brandname and product image, the Group strive to improve its competitiveness.

The Group completed substantially during the year the process improvement project that was conducted through theassistance of a professional consulting firm. After sixteen months’ of hard work and effort, not only internal control,but also communication between the management team and employees improved significantly. Furthermore, thesmoothened operation we now have is attributable to the reorganization of the Group’s human resources. We believethe Group has built itself a solid foundation following the company-wide restructuring, and is ready to face newchallenges.

During the year, the Group’s turnover amounted to HK$1,115,404,000 and profit attributable to shareholders wasHK$199,710,000, decreased 8.4% and 12.1% respectively as compared to last year. The drop in the Group’soverall results was mainly due to the fierce domestic competition within the sanitary napkin and diaper markets.Decline in sales volume of the Group’s products in certain regions, together with a decrease in prices we charged oncertain of our products, caused a decline in sales revenue. Average gross profit margin however increased 4.4percentage points, having benefited from lower material costs, improvement in production and purchasing logisticswhich lead to a decrease in production cost. During the year, the Group strengthened its sales and marketing programin order to enhance its sales and distribution capability, causing the sales and distribution costs to increase to 18.5%of the turnover (2001: 15.7%). In terms of general and administration costs, the Group paid consultancy fee inaddition to related costs arising as a result of the organization restructuring, overall expense level increased whencompared to the year before. We believe that following our internal corporate management system being graduallystrengthened, general and administrative costs would be under better control in the future.

BUSINESS REVIEW

During the year, sales of sanitary napkins recorded a decline to HK$783,259,000 (2001: HK$862,355,000). Salesof baby diapers saw a slow down after two years of rapid growth, sales declined slightly to HK$253,561,000(2001: HK$268,222,000). Sanitary napkins and baby diapers accounted for 70.2% and 22.7% of the Group’sturnover respectively.



Sanitary napkins

After over ten years of rapid expansion, China’s sanitary napkins market has become relatively matured, and marketpenetration has reached 53%. Market growth slowed down to 3-4% per annum. Because of the relatively low entrybarrier for this business segment, many companies, large and small, entered the market. With supply outgrowingdemand, market competition was intense. In view of this market environment, the Group believes that effectivepromotion and distribution channel remain the crucial factors for a company’s success. Therefore, during the year, theGroup consolidated its sales team and strengthened its distribution channel and dealer management, in order toestablish an efficient product distribution system.

Facing fierce market competition, the Group continued to fight off competition with its diverse and high qualityproduct series, together with its established brand name effect. Sales of winged sanitary napkins under the “Anle”brand recorded significant growth and that “Space 7” of the “Anerle” sanitary napkins also performed strongly,offsetting partly the decline in the sales of ordinary sanitary napkins. The Group will continue to keep itself alert ofmarket changes and consumer needs, and at the same time modify product function and style when appropriate, inorder to stay competitive in this market. During the year under review, major raw materials prices like fluff pulp was onaverage lower than the previous year. Furthermore, appropriate adjustments in the use of materials greatly reducedour production cost. Gross profit margin of sanitary napkin products improved by 6 percentage points over the yearbefore.

As the market demand for pantiliners grows, the Group has grasped on to the opportunities and sped up indeveloping new pantiliner products. The all-cotton pantiliner series launched during the year was widely accepted bythe market. Revenue from pantiliner sales achieved satisfactory results, increased 5.7% to HK$133,365,000.

Disposable diapers

Following an impressive sales growth in “Anerle” disposable diapers the year before, this business segment saw aconsolidation in the year under review. Since average household income level varies from region to region, growth inthe baby diaper market has been somewhat uneven. Moreover, with the aggressive sales strategies of multinationalbrands, and more and more smaller local manufacturers entering the market, competition continued to grow. Duringthe year under review, the Group’s disposable diaper business saw a slight drop in sales to HK$253,561,000.

Given the fact that the market penetration rate of baby diapers in China remains low, as household income increases,the baby diaper market will still have ample room for growth. The Group will continue improving its product qualityand functions and with our increased resources being put in promoting our products at the retail level coupled with anenhanced brand positioning, we are confident that our baby diaper sales will attain satisfactory growth in the comingyears.

On the other hand, as domestic demand for adult diapers is still relatively mild, “ElderJoy” contributes only aninsignificant amount to the Group’s revenue. Sales of adult diapers amounted to HK$10,827,000 during the year, ofwhich HK$5,747,000 were export sales. As the Chinese social welfare and healthcare system gradually improves,demand for adult diapers is believed to grow, and the Group is optimistic about the future of this market. In addition,the Group will develop further the Group’s export business in order to increase the sales of adult diapers.

Skin Care products business

During the year, the Group formally entered into the skin care products business by establishing Hengan Li RenTang (Jian) Cosmetics Co., Ltd.（囱安麗人堂（吉安）日化有限公司）. The products are traded under the brand name “Missmay”that broadens the Group’s product line into skin cleansing and care area.




Northern

South-western

Central

Fujian

EasternNorthern 2002 2001

Sales Value:(HK$ million) 165 160Percentage ofTotal Sales: 14.8% 13.1%

Eastern 2002 2001


Fujian 2002 2001


Central 2002 2001

Sales Value:(HK$ million) 155 159Percentage ofTotal Sales: 13.9% 13%

South-western 2002 2001


Turnover by Regions

Distribution business

In order to take full advantage of the establisheddomestic distribution network set up by theGroup, it continued to act as a distributor for arelated tissue paper manufacturer throughoutChina. With the gradual improvement in livingstandards, the demand for high-end tissue paperproducts increased. Having benefited from theimpressive sales of the tissue paper productsduring the year under review, commissionincome for the Group increased toHK$15,759,000 (2001: HK$6,562,000).



Sales and Marketing Strategies

Having to face such a competitive market environment, the Group puts much effort in increasing its alertness when itcomes to modifying its sales strategies. Already set foot in a nationwide sales network, the Group further enhanced itsdistribution channels. On the one hand, we strived to perfect our existing traditional distribution channels bybalancing our sales teams and building better partner relationship with distributors. In order to distinguish our uniquebrand image and product quality, the Group engaged Ms. Wang Nan, a table tennis Olympics champion, as ourproduct spokesperson. Driven by advertisements and promotions, the quality of our products was clearly brought outand that product image also drilled deep into the consumers’ minds as well as being recognized.

Furthermore, the Group will continue to build and establish a modern sales channel, focusing on management andcollaboration with the key accounts, strengthening shop and shelf space management and increasing sales throughthe modern distribution channels. In addition, the Group will seek to alter all existing product packaging, with the aimof strengthening product image and branding effect.

Human resources and management

As at 31st December 2002, the Group employed 7,650 employees. Staff cost was 6.8% of the total turnover (2001:6.7%). The Group has long been committed to providing employees with comprehensive staff training, including newstaff training and continual skill development courses. Employee remuneration are given and reviewed based onmarket norms, individual performance and experience. Awards and bonuses are considered based on the Group’sbusiness results and the employees’ individual contributions to the Group. The Group has set up a stock option planfor its executive directors and employees. However, during the year under review, no stock options were granted.

Financial position and use of funds

The Group’s financial position remained healthy. As at 31st December, 2002, the Group’s bank balances and cashamounted to HK$709,751,000 with no borrowings. During the year under review, the Group applied approximatelyHK$31,482,000 in the acquisition and upgrade of production equipment, office automation and construction ofproduction plants.

Future Prospects

China’s economy is growing with much anticipated opportunities arising. With a government that focuses on the forcebrought in by China’s accession into the WTO and country stability, we believe the Chinese market will remain strong.Moreover, the continuous economic development of most cities in China will help boost the consumer market. In thepast year, from product concept to distribution of final products to consumers, Hengan International has made variousimprovements in the operation processes. All these were done with the aim of building a more effective and solidfoundation in order to continue to survive in the competition and to grab onto the opportunities that arise so as to stayahead of the game.

In an effort to expand its product range and capture the immense market potential of family hygiene products in thePRC, the Company has entered into an acquisition agreement with Mr. Sze Man Bok, Mr. Hui Chi Lin and Mr. YeungWing Chun (“Vendors”) to acquire from the Vendors the shareholders’ loans and the entire issued share capital ofUnited Wealth International (Holdings) Limited (“United Wealth”) on 25th March 2003. The principal asset of UnitedWealth is an approximate 68.9% equity interest in Changde Hengan Paper Joint Stock Company Limited, who,including its subsidiaries (together known as the “Hearttex Group”), are principally engaged in the




manufacture and sale of packaged tissue paper products under a well-recognized trademark of “Hearttex” (心相印 ).Hearttex facial tissue paper products and hygiene tissue paper products were ranked No. 1 in terms of market share(about 17%) in 2001. The executive directors believe that the acquisition represents an invaluable opportunity for theCompany to expand its product range and capture the market potential in the tissue paper industry in the PRC.Completion of this acquisition is subject to independent shareholders’ approval in an extraordinary general meetingto be held on 2nd May 2003.

In order to cope with future competition, the Group’s strategy for the following year is as follows:

— Continue to launch products that satisfy market demand, to increase the role of technology in our products, toraise product competitiveness, in order to bring new energy into the Group

— Strengthen product image and brand name effect. The Group fully understands product design and superiorquality that satisfy consumer demands are important factors in the consumer product industry. The Group willcontinuously implement strategies that would raise brand awareness, in order for our products to hold a place inconsumers’ minds

— Continue to enrich our parallel distribution strategy in adopting both traditional and modern distributionchannels, in order to distribute the Group’s products in the most effective way

— Continue to strengthen our approach in product advertising, to bring out the uniqueness and quality of theGroup’s products. Our marketing department will systemize the management of nationwide and regionalpromotion of our products, so as to achieve higher promotion efficiency

— To further make use of the skills and expertise brought in by the consultants with whom we worked over the pastyear on process improvement. We will strive to reinforce internal control and corporate governance and toimplement effective cost and operation efficiency, so as to improve the Group’s overall efficiency and increasereturn for shareholders

Pro-active implementation of “new products, new market” will be a significant turning point for Hengan International’sbusiness. Being in a market filled with forceful competition, the Group will do everything it can to strengthen its corecompetitiveness, and at the same time seek for new business opportunities through synergetic mergers andacquisitions that can enhance the Group’s product range. In addition, the Group will continue its efforts in developingits exporting business, to better position its products in the integrated global market, and to bring even better returnsfor Hengan International’s shareholders.

Hui Chi LinChief Executive Officer



Directors and Senior Management Profiles

DIRECTORS

Executive Directors

Mr. Sze Man Bok, aged 53, is theChairman of the Group. He isresponsible for the Group’s overallcorporate direction and businessstrategy. Mr. Sze is one of thefounding shareholders of theCompany.

Mr. Hui Chi Lin, aged 49, is theDeputy Chairman and the ChiefExecutive Officer of the Group. Heis responsible for strategicplanning, human resources and theoverall management of the Group.

Mr. Hui is one of the founding shareholders of theCompany. Mr. Hui has the title of senior economist in thePRC and is a member of the National Committee of theChinese People’s Political Consultative Conference (the“NCCPPCC”) and a standing committee member of All-China Federation Of Industry and Commerce. He is alsothe deputy chairman of Fujian Province Industry andTrade Association and the chairman of Quanzhou CityTrade Association.

Mr. Yeung Wing Chun, aged 54, isthe Chief Operating Officer of theGroup responsible for monitoringdaily operations and productiontechnology of the Group. Mr.Yeung graduated from Fuzhou

University and has the title of engineer in the PRC. Mr.Yeung is one of the founding shareholders of Company.

Mr. Zhang Shi Pao, aged 59, is theDi rec tor o f Research andDevelopment. Prior to joining theGroup in 1990, Mr. Zhang servedas a Vice Governor in FujianJinjiang Anhai Town Governmentfor over 10 years and wasresponsible for supervising local enterprises in AnhaiTown.

Mr. Hung Ching Shan, aged 53, isthe Director of Supply ChainManagement of the Group. He isresponsible for the overall Strategyrelating to Group’s planning andpurchasing of raw materials andlogistic management. He has over 24 years ofexperience in raw materials procurement as well as inimport and export trading. Mr. Hung is one of thefounding shareholders of the Company.

Mr. Poon Fuk Chuen, aged 41, isthe Chief Financial Officer of theGroup and is also the CompanySecretary. Before joining the Groupin April 2000, Mr. Poon spent 13years in the auditing professionwith an international firm ofaccountants in Hong Kong. He has substantialexperience in assurance and business advisory work,company listing and merger and acquisition work inboth Hong Kong and the PRC. Mr. Poon graduated witha joint honour bachelor degree in Accounting andStatistics from the United Kingdom and is an associatemember of the Hong Kong Society of Accountants and afollow member of the Association of Chartered CertifiedAccountants.




Mr. Xu Da Zuo, aged 36, is theGroup’s Deputy Director of Financeand is responsible for overseeingand monitoring the accounting andfinance functions of the Group.Joined the Group in 1985, Mr. Xu

has over 18 years of experience in accounting andinternal audit. He is university graduate and has the titleof senior accountant in the PRC, Mr. Xu is the vice-chairman of the Youth Trade Association and a standingmember of an audit institution in the PRC.

Mr. Xu Chun Man, aged 28, is theGeneral Manager of Hengan(Shaanxi) Hygiene Products Co.,Ltd, a subsidiary in ShaanxiProvince. He is responsible for theoverall management, business

development and operations of the said subsidiary. Hejoined the Group after graduating from Fujian JinjiangVocational Institute in 1991. Mr. Xu has over 10 yearsof experience in business development and customerservice management.

Independent Non-Executive Directors

Mr. Chan, Henry, aged 37, is an Independent Non-executive Director of the Company appointed inOctober 1998. He is a member of the Audit Committee.Mr. Chan has over 16 years’ experience in the financialmarket and he is an executive director of SanfullSecurities Limited. Mr. Chan served as a director of theCouncil of the Stock Exchange of Hong Kong Limitedfrom 1994 to 2000, and also served as a director ofHong Kong Securities Clearing Co., Ltd. for a number ofyears. Mr. Chan is currently the vice-chairman of theHong Kong Stockbrokers Association Limited and a non-executive director of another listed (GEM board)company.

Mr. Chu Cheng Chung, aged 58, is an Independent Non-executive Director and a member of the AuditCommittee of the Company appointed in June 2002.Presently, he is a chief business consultant. He has over25 years of experience working in US corporations and10 years of which were with the Coca Cola CompanyGroup in the US and China. Mr. Chu joined the ThomasGroup as general manager in 2001 and later as thechief operating officer for Media Partners InternationalHoldings Inc., an outdoor media company in Shanghai.

Mr. Chu obtained his Master of Science degree fromTuskegee Institute in Chemistry and MBA from ChicagoLake Forest Management Graduate School. During histime in Shanghai, he was twice awarded the MagnoliaAward by the Shanghai Municipal Government.

Ms. Guan Tao, aged 69, is an Independent Non-executive Director of the Company appointed inOctober 1998, she is a member of the Audit Committee.Ms. Guan was a former member of the Secretariat of All-China Women’s Federation. Ms. Guan was a member ofthe Seventh NCCPPCC and a member of the StandingCommittee of the Eighth NCCPPCC.

Ms. Wong Ying Kay, Ada, aged 43, is an IndependentNon-executive Director of the Company appointed inOctober 1998, she is also a member of the AuditCommittee.

Ms. Wong has been a solicitor for more than 16 yearsand is a partner of Philip K. H. Wong, Kennedy Y. H.Wong & Co., Solicitors & Notaries. She is currently anelected member of the Wan Chai District Council andshe was a member of the Urban Council/ProvisionalUrban Council during March 1995 to December 1999.Ms. Wong also participates actively in other public andcommunity services.



Senior Management

Mr. Zhang Han Lai, aged 49, is the Director of Sales. Heis responsible for the development and implementationof the Group’s sales strategy and business operation.Before joining the Group in March 1997, Mr. Zhangwas the general manager of two large departmentstores in the PRC. Mr. Zhang has over 24 years ofexperience in management and marketing and sales ofconsumer products.

Mr. Cheng Yong, aged 39, is the Director ofManufacturing. He joined the Group in November2002 and is responsible for the Group’s manufacturing,operation facility and quality control management. Hehas over 14 years of experience in manufacturingmanagement and quality control.

Mr. Cheng graduated with a bachelor degree ofautomatic-control in Harbin Engineering University andreceived a MBA from Xiamen University. He has the titleof electric engineer in the PRC.

Mr. Zhong De Rong, aged 33, is the Deputy Director ofSales. He is responsible for key accounts, export salesconsumer and the sales in Fujian and GuangzhouProvinces. Mr. Zhong joined the group in 1993 and hasover 10 years of experience in sales and promotion forfast moving consumer products. He graduated fromHuaQiao University and has a MBA from SouthwestJiaoTong University in the PRC.

Mr. Chen Xun Sheng, aged 41, is the General Managerof the Group’s Internal Audit Department. He is in chargeof the Group’s internal audit. Prior to joining the Group inDecember 1998, he was an asset valuer and certifiedaccountant of a public accounting firm. He is a memberof The Chinese Institute of Certified Public Accountants(CICPA) and Certified Public Valuer (CPV). He has over16 years of experience in finance and audit.

Mr. Wang Xiang Yang, aged 34, is the Deputy Directorof Supply Chain Management responsible for theGroup’s raw material planning and procurement, andlogistics management. Prior to joining the Group in1999, he was the manager of international businessdepartment at Jinjiang branch of the Construction Bankof China. Mr. Wang graduated from HuaQiaoUniversity with a degree in science. He holds a title offinancial economist.

Mr. Huang Liang Zhen, aged 53, is the GeneralManager of the Marketing Department and also theacting Marketing Director. He is responsible for theformulation of the Group’s marketing strategy and day-to-day operations of the Marketing Department. Mr.Huang joined the Group in1985 and has over 18 yearsof experience in marketing and promotion.

Mr. Tong Lian Zhang, aged 38, is the General Managerof the Group’s Project Department and responsible forproject financing and investment strategy of the Group.Prior to joining the Group in May 1999, he served as anassistant to President in a PRC company. Mr. Tonggraduated with a bachelor degree from the University ofBeijing and a master degree from the University ofXiamen. He has over 14 years of experience inorganization management and investment.

Ms. Huang He Qing, aged 39, is the Director of HumanResources of the Group. Before joining the Group inDecember 2002, she was the human resources directorof a corporation and has over 10 years of experience inhuman resource. Ms.Huang obtained a bachelordegree of science with major in Physics from SichuanNormal University and a master degree of Science fromGuangzhou Jinan University.

Mr. Yang Zhen Yang, aged 51, is the General Managerof the Group’s Research and Development Department.He is responsible for the research and development ofthe Group’s product and production technology. Beforejoining the Group in May 1996, Mr. Yang worked aselectrical engineer in a number of manufacturingcompanies. Mr. Yang graduated as an electricalengineer from Fuzhou University and has over 25 yearsof experience in technical research and development.


Notice of Annual General Meeting


NOTICE IS HEREBY GIVEN that the Annual General Meeting of shareholders of the Company will be held at theHarcourt Room, Lower Lobby, Conrad International Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 2ndMay 2003 (Friday) at 10:00 a.m. for the following purposes:

1. To receive and consider the audited consolidated financial statements and the reports of the directors andauditors for the year ended 31st December 2002;

2. To declare a final dividend for the year ended 31st December 2002;

3. To re-elect directors and authorise the board of directors to fix their remuneration;

4. To re-appoint auditors and authorise the board of directors to fix their remuneration;

5. To consider and, if thought fit, pass with or without amendments, the following resolution as an OrdinaryResolution:

“THAT:

(a) subject to paragraph (c) below, the exercise by the directors of the Company during the Relevant Period ofall the powers of the Company to allot, issue or otherwise deal with additional shares in the capital of theCompany, and to make or grant offers, agreements and options which might require the exercise of suchpower, be and is hereby generally and unconditionally approved;

(b) the approval in paragraph (a) above shall authorise the directors of the Company during the RelevantPeriod to make or grant offers, agreements and options which might require the exercise of such power afterthe end of the Relevant Period;

(c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to beallotted by the directors of the Company pursuant to the approval in paragraph (a), otherwise than pursuantto (aa) Rights Issue; or (bb) the exercise of rights of subscription or conversion under the terms of anywarrants or other securities issued by the Company carrying a right to subscribe for or purchase shares ofthe Company; or (cc) the exercise of any option under any share option scheme of the Company adopted byits shareholders for the grant or issue to employees of the Company and/or any of its subsidiaries of optionsto subscribe for or rights to acquire shares of the Company; or (dd) any scrip dividend or other similarscheme implemented in accordance with the Articles of Association of the Company, shall not exceed 20%of the total aggregate nominal amount of the share capital of the Company in issue as at the date of thepassing this Resolution and the said approval be limited accordingly; and

(d) for the purpose of this Resolution, “Relevant Period” means the period from the date of the passing of thisResolution until whichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company; or

(ii) the expiration of the period within which the next annual general meeting of the Company is requiredby any applicable law or the Articles of Association of the Company to be held; or

(iii) the revocation or variation of the authority given under this Resolution by ordinary resolution of theshareholders in general meeting.”



“Rights Issue” means an offer of shares or other securities open for a period fixed by the directors of theCompany to holders of shares on the Register of Members of the Company on a fixed recorded date inproportion to their then holdings of such shares (subject to such exclusion or other arrangements thedirectors of the Company may deem necessary or expedient in relation to fractional entitlements of havingregard to any restrictions or obligations under the laws of, or the requirements of any recognised regulatorybody or any stock exchange in, any territory outside Hong Kong).


“THAT:

(a) subject to paragraph (b) below, the exercise by the directors of the Company during the Relevant Period ofall the powers of the Company to purchase shares of HK$0.10 each in the capital of the Company be and ishereby generally and unconditionally approved;

(b) the aggregate nominal of the shares to be purchased pursuant to the approval in paragraph (a) above shallnot exceed 10% of the aggregate nominal amount of the share capital of the Company in issue on the dateof the passing of this Resolution and the said approval shall be limited accordingly; and

(c) for the purpose of this Resolution, “Relevant Period” means the period from the date of the passing of thisResolution until whichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company; or

(ii) the expiration of the period within which the next annual general meeting of the Company is requiredby any applicable law or the Articles of Association of the Company to be held; or

(iii) the revocation or variation of the authority given under this Resolution by ordinary resolution of theshareholders in general meeting.”


“THAT the general mandate referred to in Resolution No. 5 above be and is hereby extended by the addition tothe aggregate nominal amount of share capital which may be allotted and issued or agreed conditionally orunconditionally to be allotted and issued by the directors of the Company pursuant to such general mandate ofan amount representing the aggregate nominal amount of share capital of the Company purchased by theCompany since the granting of the general mandate referred to in Resolution No. 6 above and pursuant to theexercise by the directors of the powers of the Company to purchase such shares provided that such extendedamount shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue onthe date of the passing of this Resolution.”





“THAT conditional upon the Listing Committee of the Stock Exchange of Hong Kong Limited (the “StockExchange”) granting listing of and permission to deal in the shares of the Company which may fall to be issuedpursuant to the New Scheme, the New Scheme be and is hereby approved and adopted and the board ofdirectors of the Company be and is hereby authorized to do all such acts and to enter into all such transactions,arrangements and agreements as may be necessary or expedient in order to give full effect to the New Schemeincluding but without limitation, to issue and allot shares of the Company pursuant to the New Scheme.

and accordingly THAT the existing share option scheme of the Company adopted on 10th November 1998 ishereby terminated with effect from the close of this meeting.”

By order of the BoardPoon Fuk Chuen

Company Secretary


Notes:

(i) A member entitled to attend and vote at the above meeting is entitled to appoint one or more proxies (who must be anindividual or individuals) to attend and vote instead of him. A proxy does not need to be a member of the Company.

(ii) The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed, or a notariallycertified copy of such power of attorney of authority, must be lodged with the Company’s share registrar, Abacus ShareRegistrars Limited, at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong forregistration not less than 48 hours before the time appointed for holding the meeting and any adjourned meeting.

(iii) The Register of Members of the Company will be closed from 28th April 2003 to 2nd May 2003, both days inclusive, duringwhich no transfer of shares can be registered. To qualify for the final dividend (which will be payable on or about 13th May2003) to be approved at the forthcoming Annual General Meeting, shareholders must ensure that all transfer documentsaccompanied by the relevant share certificates must be lodged with the Company’s share registrar, Abacus Share RegistrarsLimited, G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong for registration not laterthan 4:00 p.m. on 25th April 2003.

(iv) A circular containing details regarding Ordinary Resolution nos. 6 to 8 will be sent to shareholders together with the 2002Annual Report.


Report of the Directors

The Directors have pleasure in presenting herewith their report together with the audited accounts for the year ended31st December 2002.

PRINCIPAL ACTIVITIES AND GEOGRAPHICAL ANALYSIS OF OPERATIONS

The principal activity of the Company is investment holding. The principal activities of the subsidiaries aremanufacturing, distribution and sale of personal hygiene products comprising sanitary napkins and disposablediapers, mainly in the People’s Republic of China (the “PRC”).

(a) An analysis of the Group’s turnover and contribution to the operating profit by business segments is as follows:

2002 2001 Contribution to Contribution to

Turnover operating profit Turnover operating profitHK$’000 HK$’000 HK$’000 HK$’000

Sanitary napkins and disposable diapers 1,047,852 198,568 1,140,345 230,770Hygiene materials and others 67,552 5,182 77,409 7,948

1,115,404 203,750 1,217,754 238,718

(b) The geographical analysis of the Group’s turnover is shown as follows:

2002 2001Turnover Percentage Turnover Percentage

(HK$ million) of total sales (HK$ million) of total sales

The PRC

Northern 165 14.8 160 13.1Eastern 139 12.5 145 11.9Fujian 448 40.2 539 44.3Central 155 13.9 159 13.0South-western 197 17.7 209 17.2

Overseas 11 0.9 6 0.5

1,115 100 1,218 100

RESULTS AND APPROPRIATIONS

The results for the year are set out in the consolidated profit and loss account on page 29.

The Directors had declared an interim dividend of HK 8 cents per share, totalling HK$79,625,000, which was paidon 4th October 2002.

The Directors recommend the payment of a final dividend of HK 10 cents per share, totalling HK$99,531,000.




RESERVES

Details of the movements in reserves of the Group and the Company are set out in note 24 to the accounts.

DONATIONS

Chari table and other donat ions made by the Group during the year amounted to HK$3,777,000(2001: HK$1,286,000).

FIXED ASSETS

Details of the movements in fixed assets of the Group are set out in note 12 to the accounts.

SHARE CAPITAL

Details of the movements in share capital of the Company are set out in note 22 to the accounts.

FIVE-YEAR FINANCIAL SUMMARY

A summary of the consolidated results of the Group for the last five financial years and of its consolidated assets andliabilities as at the end of the last five financial years is set out on pages 4 and 5.

PURCHASE, SALE OR REDEMPTION OF SHARES

The Company did not redeem any of the Company’s shares during the year. Neither the Company nor any of itssubsidiaries had purchased or sold any of the Company’s shares during the year.

DIRECTORS

The Directors during the year were:

Executive Directors Independent Non-Executive Directors

Mr. Sze Man Bok Mr. Chan, HenryMr. Hui Chi Lin Mr. Chu Cheng Chung (appointed on 19th June 2002)Mr. Yeung Wing Chun Ms. Guan TaoMr. Hung Ching Shan Ms. Wong Ying Kay, AdaMr. Zhang Shi PaoMr. Poon Fuk ChuenMr. Xu Da ZuoMr. Xu Chun Man

In accordance with Articles 99 and 116 of the Company’s Articles of Association, Mr. Zhang Shi Pao, Mr. Xu Da Zuo,Mr. Xu Chun Man and Mr. Chu Cheng Chung retire, and being eligible, offer themselves for re-election.



DIRECTORS’ SERVICE CONTRACTS

Each of the Executive Directors has entered into a service contract with the Company for an initial term of three yearsand continuing thereafter on an annual basis until terminated by not less than three months’ notice in writing served byeither party.

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

Brief biographical details of Directors and senior management are set out on pages 16 to 18.

DIRECTORS’ INTERESTS IN CONTRACTS

No contracts of significance in relation to the Company’s business to which the Company or any of its subsidiarieswas a party and in which a Director had a material interest, whether directly or indirectly, subsisted at the end of theyear or at any time during the year.

CONNECTED TRANSACTIONS

1) The related party transactions entered into by the Group during the year ended 31st December 2002 asdisclosed in note 27 to the accounts constituted connected transactions under the Rules Governing the Listing ofSecurities on the Stock Exchange (the “Listing Rules”).

The transactions disclosed in note 27 to the accounts were conducted by the Group in accordance with thewaiver granted by the Stock Exchange. In respect of these transactions:

(a) The Independent Non-Executive Directors of the Company have reviewed and confirmed that:

(i) the transactions have been entered into in the ordinary and usual course of business of the Group;

(ii) the transactions have been entered into on an arm’s length basis and on normal commercial terms;

(iii) the transactions are on terms that are fair and reasonable so far as the shareholders of the Companyare concerned;

(iv) the transactions have been entered into either (1) in accordance with the terms of the agreementsgoverning such transactions, or (2) where there is no such agreement, on terms no less favourable thanterms available to third parties so far as the shareholders of the Company are concerned;

(v) in the year ended 31st December 2002, the aggregate amounts of tissue paper purchased by theGroup do not exceed 3% of the total cost of sales of the Group for that year; and

(vi) in the year ended 31st December 2002, the aggregate commission receivable by the Group from thedistribution of packaged tissue paper products does not exceed 3% of the Group’s consolidated auditednet tangible assets for that year.

(b) In the opinion of the Directors, the transactions have been entered into in the manner as stated in paragraph(a)(i) to (vi) above.




2) Pursuant to an acquisition agreement dated 25th March, 2003 (“Acquisition Agreement”) entered into betweenthe Company and Messrs. Sze Man Bok, Hui Chi Lin and Yeung Wing Chun (“Vendors”), the Company shallacquire from the Vendors the shareholders’ loans and the entire issued share capital of United WealthInternational (Holdings) Limited, principal assets of which is the holding of approximately 68.9% equity interestin Changde Hengan Paper Joint Stock Company Limited, a group of companies engaging in the manufactureand sale of packaged tissue paper products in the PRC.

Under the terms of the Acquisition Agreement, the consideration for the acquisition comprises an initialconsideration of HK$375,000,000 and an earn-out payment of up to HK$41,130,000. The initial considerationwill be satisfied by cash payment of HK$262,500,000 and the issue of a total of 44,554,455 considerationshares of the Company at HK$2.525 per share. The initial consideration represents a price-earnings multiple of6.884 times of the guaranteed 2003 profit of HK$54,472,000 undertaken by the Vendors.

The Executive Directors believe that this acquisition represents an invaluable opportunity for the Group to expandits product range and capture the market potential in the tissue paper industry in the PRC. The Acquisitionconstitutes a discloseable transaction for the Company under the Listing Rules and as the Vendors are alsoDirectors and, except for Mr. Yeung, substantial shareholders of the Company, the acquisition also constitutes aconnected transaction for the Company. Completion of this transaction is, amongst other things, subject toapproval by the independent shareholders in an extraordinary general meeting to be held on 2nd May, 2003.

DIRECTORS’ INTERESTS IN EQUITY OR DEBT SECURITIES

At 31st December 2002, the interests of the Directors in the shares, warrants and options of the Company, asrecorded in the register maintained by the Company under Section 29 of the Securities (Disclosure of Interests)Ordinance or as notified to the Company were as follows:

Ordinary share of HK$0.10 each of the Company

Number of Percentage of

Name of Directors shares Nature of interest interest

Mr. Sze Man Bok 220,286,000 Personal interest 22.1324%Mr. Hui Chi Lin 200,000,000 Personal interest 20.0942%

6,630,224* Family interest 0.6661%Mr. Yeung Wing Chun 41,250,000 Personal interest 4.1444%

45,619* Family interest 0.0046%Mr. Hung Ching Shan 9,120,000 Personal interest 0.9163%Mr. Zhang Shi Pao 14,644,027* Personal interest 1.4713%Mr. Xu Da Zuo 20,270,135* Personal interest 2.0366%Mr. Xu Chun Man 19,783,445* Personal interest 1.9877%

* These interests were held by Hengan International Investments Limited, a nominee company holding shares of the Company onbehalf of certain directors and senior management of the Group and their family members.

Apart from the above, at no time during the year was the Company or any of its subsidiaries a party to anyarrangement to enable the Directors of the Company to acquire benefits by means of the acquisition of shares in, ordebentures, of the Company or any other body corporate.



SHARE OPTION SCHEME

Under the existing share option scheme (“Existing Scheme”) approved by the shareholders of the Company on 10thNovember 1998, the Directors may, at their discretion, within a period of ten years from 10th November 1998, makeoffers to Executive Directors or employees of the Group to take up options to subscribe for shares of the Company,subject to the terms and conditions stipulated therein. Up to the date of this report, no options had been granted underthe Existing Scheme.

The Board considers that it is not appropriate (and can be misleading) to state the value of all options that can begranted under the Existing Scheme as if they had been granted on the latest practicable date as a number of variableswhich are crucial for the calculation of the option value cannot be determined. Such variables include the exerciseprice, exercise period, lock up period (if any), performance targets set (if any) and other relevant variables.

Consequential upon the amendments made to Chapter 17 of the Listing Rules which came into effect on 1st September2001, the Existing Scheme no longer complies with the amended rules governing the share option scheme. In order toenable the Company to reward or provide incentives to employees by way of having them acquiring ownershipinterests in the Company, the board of directors proposes to adopt a new share option scheme (“New Scheme”) thatwill be in compliance with the amended rules and at the same time, terminate the Existing Scheme. The New Schemewill become effective upon approval being obtained in the forthcoming annual general meeting. The New Schemewill remain in force for 10 years commencing on 2nd May 2003, the day of passing of the ordinary resolution. Themajor change in the terms of the rules, amongst other things, is the broadening of the class of participants to includeindependent non-executive directors and employees working on a part-time basis.

SUBSTANTIAL SHAREHOLDERS

At 31st December 2002, the register of substantial shareholders maintained under Section 16(1) of the Securities(Disclosure of Interests) Ordinance shows that the Company had not been notified of any substantial shareholders’interests, being 10% or more of the Company’s issued share capital, other than those of the Directors as disclosedabove.

MANAGEMENT CONTRACTS

No contracts concerning the management and administration of the whole or any substantial part of the business ofthe Company were entered into or existed during the year.

MAJOR CUSTOMERS AND SUPPLIERS

During the year, the Group purchased less than 30% of its goods and services from its five largest suppliers and soldless than 30% of its goods and services to its five largest customers.

CORPORATE GOVERNANCE

The Directors are of the opinion that the Company has been in compliance with the Code of Best Practice as set out inAppendix 14 of the Listing Rules throughout the year, except for Guideline 7 that non-executive directors of theCompany were not appointed for a specific term as they are subject to retirement by rotation and re-election at theCompany’s annual general meeting in accordance with the Company’s Articles of Assoication.




AUDIT COMMITTEE

The written terms of reference which describe the authority and duties of the Audit Committee were prepared andadopted with reference to “A Guide for the Formation of an Audit Committee” published by the Hong Kong Society ofAccountants.

The Audit Committee provides an important link between the Board and the Company’s auditors in matters comingwithin the scope of the group audit. It also reviews the effectiveness of both the external and internal audit and ofinternal controls and risk evaluation. The committee comprises four independent non-executive directors, namely Mr.Chan, Henry, Ms. Guan Tao, Ms. Wong Ying Kay, Ada and Mr. Chu Cheng Chung. Two meetings were held duringthe current financial year.

PRE-EMPTIVE RIGHTS

There is no provision for pre-emptive rights under the Company’s Articles of Association and there is no restrictionagainst such rights under the laws of the Cayman Islands.

PENSION SCHEME

The Group participates in defined contribution retirement schemes administered by local government in different partof China (“Central Schemes”). The Group also maintains a defined contribution pension scheme (“Hengan Scheme”)for those full time employees who wish to participate in the Hengan Scheme on a voluntary basis. Both the Group andthe employees are required to make cash contribution calculated as a percentage of the employees’ basic salaries toeither the Central Schemes or the Hengan Scheme. The funds of the Hengan Scheme are placed with a local financialinstitution and are managed by a representative committee of the Group’s employees.

With effect from 1st December 2000, the Group also operated the mandatory provident fund scheme (the “MPFScheme”) for its Hong Kong staff. The MPF Scheme is a defined contribution retirement benefit scheme administeredby independent trustees. The employer and the employee have to contribute in total an amount equal to 10% of therelevant income of the employee to the MPF Scheme. The maximum contribution by the Group and each relevantemployee is subject to a cap of HK$1,000 per month. Contributions from the employer are vested in the employees assoon as they are paid to the relevant MPF Scheme but all benefits derived from the mandatory contributions must bepreserved until the employee reaches the retirement age of 65 subject to a few exceptions.

The aggregate employer’s contributions under the above schemes dealt with in the profit and loss account of theGroup for the year ended 31st December 2002 amounted to approximately HK$1,718,000.

AUDITORS

The accounts have been audited by PricewaterhouseCoopers who retire and, being eligible, offer themselves for re-appointment.

On behalf of the BoardSze Man Bok

Chairman



Auditors’ Report

AUDITORS’ REPORT TO THE SHAREHOLDERS OF

HENGAN INTERNATIONAL GROUP COMPANY LIMITED

(incorporated in the Cayman Islands with limited liability)

We have audited the accounts on pages 29 to 60 which have been prepared in accordance with accountingprinciples generally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Company’s Directors are responsible for the preparation of accounts which give a true and fair view. In preparingaccounts which give a true and fair view it is fundamental that appropriate accounting policies are selected andapplied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those accounts and to report ouropinion to you.

BASIS OF OPINION

We conducted our audit in accordance with Statements of Auditing Standards issued by Hong Kong Society ofAccountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures inthe accounts. It also includes an assessment of the significant estimates and judgements made by the Directors in thepreparation of the accounts, and of whether the accounting policies are appropriate to the circumstances of theCompany and the Group, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considerednecessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the accounts arefree from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation ofinformation in the accounts. We believe that our audit provides a reasonable basis for our opinion.

OPINION

In our opinion, the accounts give a true and fair view of the state of affairs of the Company and of the Group as at31st December 2002 and of the profit and cash flows of the Group for the year then ended and have been properlyprepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

PricewaterhouseCoopersCertified Public Accountants



Consolidated Profit and Loss AccountFor the year ended 31st December 2002


Note 2002 2001HK$’000 HK$’000

Turnover 2 1,115,404 1,217,754Cost of sales (635,808) (747,832)

Gross profit 479,596 469,922Other revenues 2 37,486 35,956Distribution costs (205,940) (190,849)Administrative expenses (103,546) (67,818)Other operating income 12,652 —

Operating profit 3 220,248 247,211Finance costs 4 (350) (414)

Profit before taxation 219,898 246,797Taxation 5 (18,129) (18,212)

Profit after taxation 201,769 228,585Minority interests (2,059) (1,353)

Profit attributable to shareholders 6 199,710 227,232

Dividends 7 179,156 199,062

Earnings per share 8 20.1 cents 22.8 cents


Consolidated Balance SheetAs at 31st December 2002

Note 2002 2001HK$’000 HK$’000

Non-current assetsIntangible assets 11 4,711 —Fixed assets 12 682,183 711,745Construction-in-progress 13 29,172 45,883Investments 15 23,054 100,878

------------------ ------------------

Current assetsInventories 16 234,222 287,899Due from related companies 17 5,103 —Trade receivables 19 81,512 91,440Other receivables, prepayments and deposits 53,026 72,718Marketable securities 20 45,509 —Bank balances and cash 709,751 546,782

1,129,123 998,839------------------ ------------------

Current liabilitiesDue to related companies 789 9,797Trade payables 21 67,224 96,745Other payables and accrued charges 80,054 54,844Taxation payable 7,037 14,182

155,104 175,568------------------ ------------------

Net current assets 974,019 823,271------------------ ------------------

Total assets less current liabilities 1,713,139 1,681,777Minority interests 22,437 11,697

Net assets 1,690,702 1,670,080

Represented by:

Share capital 22 99,531 99,531Reserves

Proposed final dividend 24(a) 99,531 99,531Other reserves 24(a) 1,491,640 1,471,018

Shareholders’ funds 1,690,702 1,670,080

Sze Man Bok Hui Chi LinDirector Director


Balance SheetAs at 31st December 2002


Note 2002 2001HK$’000 HK$’000

Non-current assetsInterests in subsidiaries 14 1,184,551 1,123,412Investments 15 — 77,824

------------------ ------------------

Current assetsDue from subsidiaries 18 93,676 178,099Other receivables, prepayments and deposits 3,543 11,064Marketable securities 20 45,509 —Bank balances and cash 161,327 60,615

304,055 249,778

Current liabilitiesOther payables and accrued charges 5,087 4,909

Net current assets 298,968 244,869------------------ ------------------

Net assets 1,483,519 1,446,105

Represented by:

Share capital 22 99,531 99,531Reserves

Proposed final dividend 24(a) 99,531 99,531Other reserves 24(a) 1,284,457 1,247,043

Shareholders’ funds 1,483,519 1,446,105

Sze Man Bok Hui Chi Lin

Director Director


Consolidated Statement of Changes in EquityFor the year ended 31st December 2002

Note 2002 2001HK$’000 HK$’000

Total equity as at 1st January 1,670,080 1,621,606

Exchange differences arising on translation of theaccounts of foreign subsidiaries and subsidiariesin the People’s Republic of China (“PRC”) 24(b) 68 398

1,670,148 1,622,004

Profit for the year 24(b) 199,710 227,232Dividends 24(b) (179,156) (179,156)

Total equity as at 31st December 1,690,702 1,670,080


Consolidated Cash Flow StatementFor the year ended 31st December 2002


2002 2001HK$’000 HK$’000

Net cash inflow generated from operating activities 25(a) 311,376 313,814------------------ ------------------

Investing activitiesPurchase of intangible assets (4,711) —Purchase of fixed assets and construction-in-progress (31,482) (106,357)Sale of fixed assets 573 1,038Interest received 13,103 18,908Sale of investments in listed debt securities 44,967 —

Net cash inflow/(outflow) from investing activities 22,450 (86,411)------------------ ------------------

Net cash inflow before financing 333,826 227,403------------------ ------------------

Financing activitiesCapital injection by minority shareholders 25(b) 9,330 —Dividends paid 25(b) (179,156) (179,156)Dividends paid to minority shareholders of subsidiaries 25(b) (649) (2,290)

Net cash outflow from financing (170,475) (181,446)------------------ ------------------

Increase in bank balances and cash 163,351 45,957Bank balances and cash at 1st January 546,782 502,410Effect of foreign exchange rate changes (382) (1,585)

Bank balances and cash at 31st December 709,751 546,782


Notes to the Accounts

1 PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of these accounts are set out below:

(a) Basis of preparation

The accounts have been prepared in accordance with accounting principles generally accepted in HongKong and comply with accounting standards issued by the Hong Kong Society of Accountants (“HKSA”).They have been prepared under the historical cost convention except that, as disclosed in the accountingpolicies below, certain properties and marketable securities are stated at fair value.

In the current year, the Group adopted the following Statements of Standard Accounting Practice (“SSAPs”)issued by the HKSA which are effective for accounting periods commencing on or after 1st January 2002:

SSAP 1 (revised) : Presentation of financial statementsSSAP 11 (revised) : Foreign currency translationSSAP 15 (revised) : Cash flow statementsSSAP 34 : Employee benefits

The adoption of these new and revised SSAPs has no material effect on the Group’s results other thanpresentational changes in respect of the presentation of Consolidated Statement of Changes in Equity andConsolidated Cash Flow Statement. Certain comparative figures have been reclassified to conform with thecurrent year’s presentation.

(b) Basis of consolidation

(i) The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31stDecember.

Subsidiaries are those entities in which the company, directly or indirectly, controls more than one halfof the voting power; has the power to govern the financial and operating policies; to appoint orremove the majority of the members of the board of directors; or to cast majority of votes at themeetings of the board of directors.

The results of subsidiaries acquired or disposed of during the year are included in the consolidatedprofit and loss account from the effective date of acquisition or up to the effective date of disposal, asappropriate.

(ii) All significant intercompany transactions and balances within the Group are eliminated onconsolidation.

(iii) Minority interests represent the interests of outside shareholders in the operating results and net assetsof subsidiaries.

(iv) In the Company’s balance sheet the interests in subsidiaries are stated at cost less provision forimpairment losses. The results of subsidiaries are accounted for by the Company on the basis ofdividends received and receivable.




1 PRINCIPAL ACCOUNTING POLICIES (Continued)

(c) Intangible assets

Expenditure on acquired patents and trademarks is capitalised and amortised using the straight-line methodover their estimated useful lives, but not exceeding 20 years. Patents and trademarks are not revalued as thereis no active market for these assets.

(d) Fixed assets

(i) Leasehold land and buildings are stated at cost/valuation less accumulated depreciation andaccumulated impairment losses. It is the Group’s policy to review regularly the carrying value ofleasehold land and buildings on an individual basis and adjustment is made where there has been amaterial change. If it is considered appropriate, independent professional valuations are obtained.Increases in valuation are credited to property revaluation reserve. Decreases in valuation are firstoffset against increases on earlier valuations in respect of the same property and are thereafter debitedto operating profit. Any subsequent increases are credited to operating profit up to the amountpreviously debited. Upon the disposal of a property, the relevant portion of the revaluation reserverealised in respect of previous valuations is released from the property revaluation reserve to retainedearnings.

(ii) Other tangible fixed assets are stated at cost less accumulated depreciation and accumulatedimpairment losses.

(iii) Leasehold land is depreciated over the period of leases expiring from 2025 to 2063 while buildingsand other tangible fixed assets are depreciated at rates sufficient to write-off their cost or valuation lessaccumulated impairment losses over their estimated useful lives on a straight-line basis. The principalannual rates are as follows:

Buildings 5%Plant and machinery 10%Office equipment, furniture and fixtures 20%Motor vehicles 20%

(iv) The plant components are depreciated over the period to overhaul. Major costs incurred in restoringthe plant components to their normal working condition to allow continued use of the overall asset arecapitalised and depreciated over the period to the next overhaul.

(v) Improvements are capitalised and depreciated over their expected useful lives to the Group.




(e) Construction-in-progress

Construction-in-progress is stated at cost less accumulated impairment losses. Cost comprises all direct andindirect costs of acquisition or construction of buildings and plant and machinery. A plant is considered tobe commissioned when it is capable of producing saleable quality output in commercial quantities on anongoing basis.

(f) Impairment and gain or loss on sale

At each balance sheet date, both internal and external sources of information are considered to assesswhether there is any indication that assets included in intangible assets, fixed assets and construction-in-progress are impaired. If any such indication exists, the recoverable amount of the asset is estimated andwhere relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Suchimpairment losses are recognised in the profit and loss account except where the asset is carried atvaluation and the impairment loss does not exceed the revaluation surplus for that same asset, in which caseit is treated as a revaluation decrease.

The gain or loss on disposal of an intangible asset and fixed asset is the difference between the net salesproceeds and the carrying amount of the relevant asset, and is recognised in the profit and loss account.Any revaluation reserve balance remaining attributable to the relevant asset is transferred to retainedearnings and is shown as a movement in reserves.

(g) Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing companyare accounted for as operating leases. Payments made under operating leases net of any incentivesreceived from the leasing company are charged to the profit and loss account on a straight-line basis overthe lease periods.





(h) Investments

(i) Held-to-maturity securities

Held-to-maturity securities are stated in the balance sheet at cost plus/less any discount/premiumamortised to date. The discount or premium is amortised over the period to maturity and included asinterest income/expense in the profit and loss account. Provision is made when there is a diminution invalue other than temporary.

The carrying amounts of individual held-to-maturity securities or holdings of the same securities arereviewed at the balance sheet date, in order to assess the credit risk and whether the carrying amountsare expected to be recovered. Provisions are made when carrying amounts are not expected to berecovered and are recognised in the profit and loss account as an expense immediately.

(ii) Investment securities

Investment securities are stated at cost less provision for impairment losses.

The carrying amounts of individual investments are reviewed at each balance sheet date to assesswhether the fair values have declined below the carrying amounts. When a decline other thantemporary has occurred, the carrying amounts of such securities will be reduced to their fair value. Theimpairment loss is recognised as an expense in the profit and loss account. This impairment loss iswritten-back to the profit and loss account when the circumstances and events that led to the write-downs or write-offs cease to exist and there is persuasive evidence that the new circumstances andevents will persist for the foreseeable future.

(iii) Marketable securities

Trading securities are carried at fair value. At each balance sheet date, the net unrealised gains orlosses arising from the changes in fair value of trading securities are recognised in the profit and lossaccount. Profits or losses on disposal of trading securities, representing the differences between the netsales proceeds and the carrying amounts, are recognised in the profit and loss account as they arise.

(i) Inventories

Inventories, other than spare parts and consumables, are stated at the lower of cost and net realisablevalue. Cost, calculated on the weighted average basis, comprises materials, direct labour and anappropriate proportion of all production overhead expenditure. Net realisable value is determined on thebasis of anticipated sales proceeds less estimated selling expenses. Spare parts and consumables arestated at cost less provision for obsolescence.




(j) Accounts receivable

Provision is made against accounts receivable to the extent that they are considered to be doubtful.Accounts receivable in the balance sheet are stated net of such provision.

(k) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flowstatement, cash and cash equivalents comprise cash on hand, deposits held at call with banks and cashinvestments with a maturity of three months or less from date of investment.

(l) Deferred taxation

Deferred taxation is accounted for at the current taxation rate in respect of timing differences between profitas computed for taxation purposes and profit as stated in the accounts to the extent that a liability or anasset is expected to be payable or recoverable in the foreseeable future.

(m) Translation of foreign currencies

Transactions in foreign currencies are translated into Hong Kong dollars at exchange rates ruling at thetransaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet dateare translated into Hong Kong dollars at rates of exchange ruling at the balance sheet date. Exchangedifferences arising are dealt with in the profit and loss account.

The books and records of the Company’s subsidiaries established in the PRC are maintained in Renminbi.The balance sheet of overseas subsidiaries and subsidiaries in the PRC expressed in foreign currencies aretranslated into Hong Kong dollars at the rates of exchange ruling at the balance sheet date whilst the profitand loss account is translated at an average rate. Exchange differences are dealt with as a movement inreserves.

In prior years, the profit and loss account of foreign enterprises was translated at closing rate. This is achange in accounting policy, however, the translation of the profit and loss account of foreign enterprises inprior years has not been restated as the effect of this change is not material to the current and prior years.





(n) Revenue recognition

Revenue from the sale of goods, net of value added tax where applicable, is recognised on the transfer ofrisks and rewards of ownership, which generally coincides with the time when the goods are delivered tocustomers and title has passed.

Interest income is recognised on a time proportion basis, taking into account the principal amountsoutstanding and the interest rates applicable.

Government subsidy income and commission income are recognised when the right to receive payment isestablished.

Dividend income is recognised when the right to receive payment is established.

(o) Retirement benefit costs

The Group participates in defined contribution retirement schemes administered by local government indifferent part of China (“Central Schemes”). The Group also maintains a defined contribution pensionscheme (“Hengan Scheme”) for those full time employees who wish to participate in the Hengan Scheme ona voluntary basis. Both the Group and the employees are required to make cash contribution calculated asa percentage of the employees’ basic salaries to either the Central Schemes or the Hengan Scheme. Thefunds of the Hengan Scheme are placed with a local financial institution and are managed by arepresentative committee of the Group’s employees.

With effect from 1st December 2000, the Group also operated the mandatory provident fund scheme (the“MPF Scheme”) for its Hong Kong staff. The MPF Scheme is a defined contribution retirement benefit schemeadministered by independent trustees. The employer and the employee have to contribute in total an amountequal to 10% of the relevant income of the employee to the MPF Scheme. The maximum contribution by theGroup and each relevant employee is subject to a cap of HK$1,000 per month. Contributions from theemployer are vested in the employees as soon as they are paid to the relevant MPF Scheme but all benefitsderived from the mandatory contributions must be preserved until the employee reaches the retirement ageof 65 subject to a few exceptions.

The Group’s contributions to the defined contribution retirement schemes are expensed as incurred.

The assets of the schemes are held separately from those of the Group in independently administered funds.

(p) Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset thatnecessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as partof the cost of that asset. All other borrowing costs are charged to the profit and loss account in the year inwhich they are incurred.




(q) Segment reporting

In accordance with the Group’s internal financial reporting, the Group has determined that businesssegments be presented as the primary reporting format. No geographical analysis is presented as less than10% of the Group’s turnover are attributable to markets outside the PRC.

Unallocated costs represent corporate expenses. Segment assets consist primarily of intangible assets, fixedassets, inventories, receivables and operating cash, and exclude investments in securities. Segmentliabilities comprise operating liabilities and exclude taxation. Capital expenditure comprises additions tointangible assets, fixed assets and construction-in-progress.

2 TURNOVER, REVENUES AND SEGMENT INFORMATION

The Group is principally engaged in the manufacturing, distribution and sale of personal hygiene products in thePRC. Revenues recognised during the year are as follows:

2002 2001HK$’000 HK$’000

TurnoverSale of goods

Sanitary napkins and disposable diapers 1,047,852 1,140,345Hygiene materials and others 67,552 77,409

1,115,404 1,217,754------------------ ------------------

Other revenuesInterest income 13,103 18,908Government subsidy income 7,063 2,158Commission income from related companies 15,759 6,562Dividend income from unlisted investments 1,176 1,012Others 385 7,316

37,486 35,956------------------ ------------------

Total revenues 1,152,890 1,253,710

The Group is organised with two major business segments:

— Sanitary napkins and disposable diapers

-— Hygiene materials and others

No geographical analysis is provided as less than 10% of the Group’s turnover and consolidated trading resultsof the Group are attributable to markets outside the PRC.




2 TURNOVER, REVENUES AND SEGMENT INFORMATION (Continued)

Business segment analysis

Sanitary napkins Hygiene

and disposable materials

diapers and others Group

2002 2002 2002

HK$’000 HK$’000 HK$’000

Segment turnover 1,050,417 119,358 1,169,775

Inter-segment sales (2,565) (51,806) (54,371)

Turnover of the Group 1,047,852 67,552 1,115,404

Segment results 198,568 5,182 203,750

Unallocated costs (9,257)

Other operating income 12,652

Interest income 13,103

Operating profit 220,248

Finance costs (350)

Profit before taxation 219,898

Taxation (18,129)

Profit after taxation 201,769

Minority interests (2,059)

Profit attributable to shareholders 199,710

Segment assets 1,458,080 123,473 1,581,553

Investments and marketable securities 68,563

Unallocated assets 218,127

Total assets 1,868,243

Segment liabilities 115,332 25,725 141,057

Taxation payable 7,037

Unallocated liabilities 7,010

Total liabilities 155,104

Capital expenditure 29,505 6,688 36,193

Depreciation 69,079 6,274 75,353



2 TURNOVER, REVENUES AND SEGMENT INFORMATION (Continued)

Business segment analysis (Continued)

Sanitary napkins Hygieneand disposable materials

diapers and others Group2001 2001 2001

HK$’000 HK$’000 HK$’000

Segment turnover 1,141,064 123,214 1,264,278Inter-segment sales (719) (45,805) (46,524)

Turnover of the Group 1,140,345 77,409 1,217,754

Segment results 230,770 7,948 238,718

Unallocated costs (10,415)Interest income 18,908

Operating profit 247,211Finance costs (414)

Profit before taxation 246,797Taxation (18,212)

Profit after taxation 228,585Minority interests (1,353)

Profit attributable to shareholders 227,232

Segment assets 1,541,756 91,346 1,633,102Investments 100,878Unallocated assets 123,365

Total assets 1,857,345

Segment liabilities 128,989 15,587 144,576Taxation payable 14,182Unallocated liabilities 16,810

Total liabilities 175,568

Capital expenditure 93,987 12,370 106,357Depreciation 60,801 4,929 65,730




3 OPERATING PROFIT

Operating profit is stated after crediting and charging the following:

2002 2001HK$’000 HK$’000

CreditingGains on disposal of investments in listed debt securities 6,055 —Unrealised gains on marketable securities 6,597 —Reversal of provision for doubtful receivable — 13,908

ChargingDepreciation 75,353 65,730Loss on disposal/write-off of fixed assets 2,279 978Staff costs (note 9) 75,900 82,427Operating leases in respect of factory premises and

sales liaison offices 6,003 9,132Repairs and maintenance expenses 8,448 10,756Auditors’ remuneration 1,784 1,768Provision for doubtful debts 9,219 4,512

4 FINANCE COSTS

2002 2001HK$’000 HK$’000

Net exchange loss 257 303Other finance charges 93 111

350 414



5 TAXATION

2002 2001HK$’000 HK$’000

PRC income tax 18,129 18,212

No provision for Hong Kong profits tax has been made in the accounts as the Group has no assessable profits inHong Kong during the current year (2001: Nil).

PRC income tax represents tax charges on the assessable profits of the PRC subsidiaries of the Group at theprevailing tax rates applicable to the PRC subsidiaries of the Group. The PRC subsidiaries of the Group whichare categorised as foreign investment enterprises are entitled to preferrential tax treatments including fullexemption from PRC income tax for two years starting from their first profit-making year following by a 50%reduction for the next consecutive three years. In addition, two subsidiaries of the Group are welfare enterprisesand are entitled to full exemption from PRC income tax provided that certain conditions are satisfied.

No provision for deferred taxation has been made in the accounts for the years ended 31st December 2001 and2002 as the effect of timing differences is immaterial to the Group.

6 PROFIT ATTRIBUTABLE TO SHAREHOLDERS

Included in the profit attributable to shareholders is a profit of HK$216,570,000 (2001: HK$220,125,000),including dividends income from subsidiaries of HK$204,271,000 (2001: HK$220,768,000), which is dealtwith in the accounts of the Company.




7 DIVIDENDS

2002 2001HK$’000 HK$’000

Interim, paid, HK 8 cents (2001: HK 10 cents) per ordinary share 79,625 99,531Final, proposed, HK 10 cents (2001: HK 10 cents) per ordinary share 99,531 99,531

179,156 199,062

At a meeting held on 25th March 2003, the directors proposed a final dividend of HK 10 cents per ordinaryshare of the Company. This proposed dividend is not reflected as a dividend payable in these accounts, but willbe reflected as an appropriation of retained profits for the year ending 31st December 2003.

8 EARNINGS PER SHARE

The calculation of earnings per share is based on the Group’s profit attributable to shareholders ofHK$199,710,000 (2001: HK$227,232,000) and the weighted average number of 995,312,000 (2001:995,312,000) ordinary shares of the Company in issue during the year. There is no dilutive earnings per sharesince the Company has no dilutive potential ordinary shares.

9 STAFF COSTS

2002 2001HK$’000 HK$’000

Wages and salaries 74,182 81,175Retirement benefit costs 1,718 1,252

75,900 82,427



10 DIRECTORS’ EMOLUMENTS

(a) The aggregate amounts of emoluments payable to directors of the Company (the “Directors”) during theyear are as follows:

2002 2001HK$’000 HK$’000

Fees 680 680Other emoluments:

Basic salaries and other allowances 3,317 3,463Discretionary bonuses 504 367

4,501 4,510

Directors’ fees disclosed above include HK$200,000 (2001: HK$200,000) paid to independent non-executive directors of the Company.

The emoluments of the Directors fell within the following bands:

Emolument bands Number of directors

2002 2001

HK$ Nil to HK$1,000,000 11 10HK$1,500,001 to HK$2,000,000 1 1

12 11

(b) The five individuals whose emoluments were the highest in the Group for both years were also Directors andtheir emoluments are reflected in the analysis presented above.

11 INTANGIBLE ASSETS

Group

HK$’000

Patents and trademarksAcquisition at cost and as at 31st December 2002 4,711




12 FIXED ASSETS

Group

Office

Leasehold equipment,

land and Plant and furniture Motor

buildings machinery and fixtures vehicles Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Cost or valuation

At 1st January 2002 262,532 637,173 28,256 19,251 947,212Exchange adjustment 131 319 14 10 474Additions at cost 6,702 2,302 5,562 2,324 16,890Transfer from

construction-in-progress 5,493 25,833 — — 31,326Disposals/write-off (259) (5,921) (254) (2,119) (8,553)

At 31st December 2002 274,599 659,706 33,578 19,466 987,349

Accumulated depreciation

At 1st January 2002 24,822 193,426 7,233 9,986 235,467Exchange adjustment 5 39 1 2 47Charge for the year 12,136 54,478 6,115 2,624 75,353Disposals/write-off (20) (4,096) (167) (1,418) (5,701)

At 31st December 2002 36,943 243,847 13,182 11,194 305,166

Net book value

At 31st December 2002 237,656 415,859 20,396 8,272 682,183

At 31st December 2001 237,710 443,747 21,023 9,265 711,745



12 FIXED ASSETS (Continued)

(a) The analysis of cost or valuation at 31st December 2002 and 2001 of the above asset is as follows:

Office

Leasehold equipment,

land and Plant and furniture Motor

buildings machinery and fixtures vehicles Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At cost 136,535 659,706 33,578 19,466 849,285

At 1998 professionalvaluation (note (c)) 138,064 — — — 138,064

At 31st December 2002 274,599 659,706 33,578 19,466 987,349

At cost 124,468 637,173 28,256 19,251 809,148At 1998 Professional

valuation (note (c)) 138,064 — — — 138,064

At 31st December 2001 262,532 637,173 28,256 19,251 947,212

(b) The Group’s interests in leasehold land and buildings at their net book values are analysed as follows:

2002 2001HK$’000 HK$’000

In Hong Kong, held on:Lease over 50 years 9,944 10,505

Outside Hong Kong, held on:Leases over 50 years 23,937 11,691Leases between 10 to 50 years 203,775 215,514

237,656 237,710

(c) Certain of the Group’s leasehold land and buildings were revalued at 31st August 1998 by Chesterton PettyLimited, an independent firm of chartered surveyors, at open market value basis as set out in the prospectusfor the initial public offer of the shares of the Company dated 27th November 1998. The Directors are ofthe opinion that the aggregate net book value of leasehold land and buildings as at 31st December 2002was not materially different from their aggregate estimated open market value as at 31st December 2002.Had these leasehold land and buildings not been revalued, the carrying amount of leasehold land andbuildings as at 31st December 2002 would have been HK$188,164,000 (2001: HK$187,871,000),being costs of HK$232,236,000 (2001: HK$213,422,000) less accumulated depreciation ofHK$44,072,000 (2001: HK$25,551,000).




13 CONSTRUCTION-IN-PROGRESS

Group

2002 2001HK$’000 HK$’000

At 1st January 45,883 60,148Exchange adjustment 23 46Additions at cost 14,592 86,639Transfer to fixed assets (31,326) (100,950)

At 31st December 29,172 45,883

During the year ended 31st December 2002, there was no interest expense capitalised in construction-in-progress (2001: Nil).

The Group’s construction-in-progress in respect of leasehold land and buildings is analysed as follows:

2002 2001HK$’000 HK$’000

Outside Hong Kong, held on:Leases between 10 to 50 years 11,525 15,039

14 INTERESTS IN SUBSIDIARIES

Company

2002 2001HK$’000 HK$’000

Unlisted shares, at cost 894,343 838,158Due from subsidiaries 290,208 285,254

1,184,551 1,123,412

The particulars of the Company’s principal subsidiaries are set out in note 28 to the accounts.



15 INVESTMENTS

Group Company

2002 2001 2002 2001HK$’000 HK$’000 HK$’000 HK$’000

Held-to-maturity securitiesListed debt securitiesin Hong Kong, at cost plus/less discount/premium — 77,824 — 77,824

Investment securities Unlistedequity securities outsideHong Kong, at cost (Note) 23,054 23,054 — —

23,054 100,878 — 77,824

Note: The equity securities represent the Group’s 4.62% of the legal person shares in Shanghai Jiahua United Co., Ltd.(“Jiahua”), a PRC established company engaging in the manufacture and sale of personal care products with its “A”shares listed on the Shanghai Stock Exchange. The Company’s legal person shares are not freely traded on theShanghai Stock Exchange.

16 INVENTORIES

Group

2002 2001HK$’000 HK$’000

At cost:Finished goods 116,522 132,853Work-in-progress 3,216 2,928Raw materials 93,808 132,541Spare parts and consumables 20,676 19,577

234,222 287,899

17 DUE FROM RELATED COMPANIES

The balances represent trade related receivables from related companies (note 27). The amount outstanding at31st December 2002 is unsecured, interest-free and repayable on demand.

18 DUE FROM SUBSIDIARIES

The balances are unsecured, interest-free and repayable on demand.




19 TRADE RECEIVABLES

The majority of the Group’s sales is on open accounts with credit terms ranging from 30 days to 60 days.

At 31st December 2002, the ageing analysis of the trade receivables was as follows:

Group

2002 2001HK$’000 HK$’000

1-30 days 36,521 39,69231-180 days 41,761 44,217181-365 days 3,230 7,531

81,512 91,440

20 MARKETABLE SECURITIES

Group

2002 2001HK$’000 HK$’000

Debt securities:Listed in Hong Kong, at market value 45,509 —

21 TRADE PAYABLES

At 31st December 2002, the ageing analysis of the trade payables was as follows:

Group

2002 2001HK$’000 HK$’000

1-30 days 44,961 45,84831-180 days 20,040 38,707181-365 days 1,174 12,190Over 365 days 1,049 —

67,224 96,745



22 SHARE CAPITAL

Company

2002 2001HK$’000 HK$’000

Authorised3,000,000,000 ordinary shares of HK$0.10 each 300,000 300,000

Issued and fully paid995,312,000 ordinary shares of HK$0.10 each 99,531 99,531

23 SHARE OPTION SCHEME

Under the share option scheme approved by the shareholder of the Company on 10th November 1998, theDirectors may, at their discretion, within a period of ten years from 10th November 1998 make offers toExecutive Directors or employees of the Group to take up options to subscribe for shares of the Company subjectto the terms and conditions stipulated therein. No options had been granted under the share option scheme as at31st December 2001 and 2002.

24 RESERVES

(a) The reserves of the Group and the Company at 31st December 2002 are analysed as follows:

Group Company

2002 2001 2002 2001HK$’000 HK$’000 HK$’000 HK$’000

Reserves 1,491,640 1,471,018 1,284,457 1,247,043

Proposed final dividend (note 7) 99,531 99,531 99,531 99,531

Total reserves 1,591,171 1,570,549 1,383,988 1,346,574




24 RESERVES (Continued)

(b) GroupShare

premium Capital Capital Property Statutoryaccount reserve redemption revaluation reserves Exchange Retained

(Note (d)) (Note (e)) reserve reserve (Note (f)) reserve profits TotalHK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1st January 2001,as previously reported 625,308 517,705 1,807 50,896 91,996 15,418 139,320 1,442,450

Effect of changesin accounting policies — — — — — — 79,625 79,625

At 1st January 2001, as restated 625,308 517,705 1,807 50,896 91,996 15,418 218,945 1,522,075Appropriation to statutory reserves — — — — 9,322 — (9,322 ) —Profit attributable to shareholders — — — — — — 227,232 227,2322000 final dividend paid — — — — — — (79,625 ) (79,625 )2001 interim dividend paid — — — — — — (99,531 ) (99,531 )Translation of PRC subsidiaries’ accounts — — — — — 398 — 398

At 31st December 2001 625,308 517,705 1,807 50,896 101,318 15,816 257,699 1,570,549

At 1st January 2002 625,308 517,705 1,807 50,896 101,318 15,816 257,699 1,570,549

Appropriation to statutory reserves — — — — 14,830 — (14,830 ) —

Profit attributable to shareholders — — — — — — 199,710 199,710

2001 final dividend paid — — — — — — (99,531 ) (99,531 )

2002 interim dividend paid — — — — — — (79,625 ) (79,625 )

Translation of PRC subsidiaries’ accounts — — — — — 68 — 68

At 31st December 2002 625,308 517,705 1,807 50,896 116,148 15,884 263,423 1,591,171




(c) CompanyShare

premium Capitalaccount redemption Retained

(Note (d)) reserve profits TotalHK$’000 HK$’000 HK$’000 HK$’000

At 1st January 2001,as previously reported 1,210,308 1,807 13,865 1,225,980

Effect of changesin accounting policies — — 79,625 79,625

At 1st January 2001, as restated 1,210,308 1,807 93,490 1,305,605Profit for the year — — 220,125 220,1252000 final dividend paid — — (79,625) (79,625)2001 interim dividend paid — — (99,531) (99,531)

At 31st December 2001 1,210,308 1,807 134,459 1,346,574

At 1st January 2002 1,210,308 1,807 134,459 1,346,574

Profit for the year — — 216,570 216,570

2001 final dividend paid — — (99,531) (99,531)

2002 interim dividend paid — — (79,625) (79,625)

At 31st December 2002 1,210,308 1,807 171,873 1,383,988





(d) Under the Companies Law of the Cayman Islands, the share premium account is distributable to theshareholders of the Company provided that immediately following the date on which the dividend isproposed to be distributed, the Company will be in a position to pay off its debts as they fall due in theordinary course of business of the Company.

(e) The capital reserve of the Group represents the difference between the nominal value of the shares of thesubsidiaries acquired and the nominal value of the shares issued by the Company as consideration forshare exchange on merger in previous years.

(f) Statutory reserves comprise statutory surplus reserve and statutory public welfare fund of the subsidiarycompanies in the PRC and form part of shareholders funds.

(g) The Company’s reserves available for distribution comprise the share premium account and retained profits.At 31st December 2002, in the opinion of the Directors, the reserves of the Company available fordistribution to shareholders amounted to HK$1,382,181,000 (2001: HK$1,344,767,000), subject to therestrictions stated in note 24 (d) above.

25 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Reconciliation of profit before taxation to net cash inflow generated from operatingactivities

2002 2001HK$’000 HK$’000

Profit before taxation 219,898 246,797Depreciation 75,353 65,730Loss on disposal/write-off of fixed assets 2,279 978Gains on disposal of investments in listed debt securities (6,055) —Unrealised gains on marketable securities (6,597) —Interest income (13,103) (18,908)Decrease in inventories 53,677 12,675Decrease in trade receivables, other receivables,

prepayments and deposits, including amountsdue from related companies 24,517 18,042

(Decrease)/increase in trade payables, other payables andaccrued charges, including amounts due to related companies (13,319) 19,644

PRC income tax paid (25,274) (31,144)

Net cash inflow generated from operating activities 311,376 313,814



25 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (Continued)

(b) Analysis of changes in financing during the year

Minority interests

2002 2001HK$’000 HK$’000

At 1st January 11,697 12,634

Minority’s share of profits 2,059 1,353Capital injection by minority shareholders 9,330 —Dividends to minority shareholders (649) (2,290)

At 31st December 22,437 11,697

26 COMMITMENTS

At 31st December 2002, the Group had the following commitments:

(a) Capital commitments

Group

2002 2001HK$’000 HK$’000

Contracted but not provided for in respect ofPlant, machinery and equipment 7,831 2,356Land and buildings 123 500

Total 7,954 2,856

At 31st December 2002, the Company had no capital commitment (2001: Nil).




26 COMMITMENTS (Continued)

(b) Commitments under operating leases

At 31st December 2002, the Group had future aggregate minimum lease payments under non-cancellableoperating leases in respect of land and buildings and factory premises as follows:

Group

2002 2001HK$’000 HK$’000

Not later than one year 5,094 5,170Later than one year and not later than five years 13,463 11,620Later than five years 4,759 7,300

23,316 24,090

At 31st December 2002, the Company had no commitment under operating lease (2001: Nil).

27 RELATED PARTY TRANSACTIONS

During the year, the Group entered into the following transactions with companies controlled by the Directors,Messrs. Sze Man Bok, Hui Chi Lin and Yeung Wing Chun.

2002 2001HK$’000 HK$’000

Changde Hengan Paper Joint Stock Company Limited(“Changde Paper”)– Purchase of raw materials (note (a)) 12,501 15,978

United Wealth International (Holdings) Limited(“United Wealth”) and its subsidiaries– Commission income (note (b)) 15,759 6,562

(a) Pursuant to a supply agreement entered into by the Company and Changde Paper on 26th November 1998, the Groupwas granted a non-exclusive right to purchase tissue paper raw materials from Changde Paper at purchase price not lessfavourable than that offered to other independent parties in the PRC.

(b) Pursuant to an agency agreement entered into by the Company and United Wealth on 26th November 1998, the Groupwas granted a non-exclusive right to distribute the packaged tissue paper products manufactured by United Wealth andits subsidiaries through the Group’s sales network and earns a commission income calculated at a rate of 7.5% (2001:7.5%) on the total value of net sales.



28 SUBSIDIARIES

The following is a list of the principal subsidiaries of the Company at 31st December 2002 which, in the opinionof the Directors, were significant to the results of the year or form a substantial portion of the net assets of theGroup. To give details of other subsidiaries would, in the opinion of the Directors, result in particulars ofexcessive length.

Place of

incorporation/

establishment Particulars of

and kind of Principal activities issued share capital/ Interest

Company legal entity and place of operation registered capital held

%

Direct subsidiaries:

Hengan International Holdings British Virgin Investment holding in 1 ordinary share 100Limited Islands, limited Hong Kong of US$1 each

liability company

Indirect subsidiaries:

Hengan Industrial (Hong Hong Kong, Trading and procurement 2 ordinary shares 100Kong) Limited limited liability in Hong Kong of HK$1 each

company

Hengan (Anxiang) Hygiene PRC, wholly Manufacturing, distribution RMB22,000,000 100Products Co., Ltd. foreign-owned and sale of personal

enterprise hygiene products in PRC

Hengan (Binyang) Hygiene PRC, wholly Manufacturing, distribution RMB5,680,000 100Products Co., Ltd. foreign-owned and sale of personal


Hengan (Chongqing) Hygiene PRC, wholly Manufacturing, distribution US$620,000 100Supplies Co., Ltd. foreign-owned and sale of personal


Fujian Hengan Holding PRC, sino-foreign Manufacturing, distribution RMB147,360,000 98.32Co., Ltd. equity and sale of personal

joint venture hygiene products in PRC

Hengan (Fushun) Sanitary PRC, sino-foreign Manufacturing, distribution RMB28,700,000 75Products Co., Ltd. co-operative and sale of personal

joint venture hygiene products in PRC

Hefei Hengan Hygiene PRC, joint Manufacturing, distribution RMB3,680,000 99.98Products Factory operation and sale of personal


Hengan (Jiangxi) Hygiene PRC, wholly Manufacturing, distribution RMB7,420,000 100Products Co., Ltd. foreign-owned and sale of personal





28 SUBSIDIARIES (Continued)

Place of

incorporation/




%

Hengan (Fujian) Articles for PRC, sino-foreign Manufacturing, distribution RMB240,000,000 98.96Women and Children Use equity joint and sale of personalCo., Ltd. venture hygiene products in PRC

Hengan (Jinjiang) Hygiene PRC, wholly Manufacturing, distribution HK$50,000,000 100Products Co., Ltd. foreign-owned and sale of personal


Hengan (Luohe Linying) PRC, wholly Manufacturing, distribution US$1,200,000 100Hygiene Products Co., Ltd. foreign-owned and sale of personal


Hengan (Shaanxi) Hygiene PRC, wholly Manufacturing, distribution RMB3,980,000 100Products Co., Ltd. foreign-owned and sale of personal


Shangyu City Hengan PRC, joint Manufacturing, distribution RMB7,290,000 99.99Hygiene Products Co. operation and sale of personal


Hengan (Sichuan) Hygienic PRC, wholly Manufacturing, distribution US$1,380,000 100Products Co. Ltd. foreign-owned and sale of personal


Hengan (Tianjin) Hygiene PRC, wholly Manufacturing, distribution US$3,000,000 100Supplies Co., Ltd. foreign-owned and sale of personal


Hengan (Weifang) Hygienic PRC, wholly Manufacturing, distribution US$3,410,000 100Products Co., Ltd. foreign-owned and sale of personal


Hengan (Xiaogan) Hygiene PRC, wholly Manufacturing, distribution US$1,460,000 100Products Co., Ltd. foreign-owned and sale of personal


Jinjiang Hengan Hygiene PRC, wholly Manufacturing of personal US$10,000,000 100Material Co., Ltd. foreign-owned hygiene materials in PRC

enterprise



28 SUBSIDIARIES (Continued)

Place of

incorporation/




%

Hengan (Jinjiang) Household PRC, wholly Manufacturing, distribution US$12,000,000 100Products Co., Ltd. foreign-owned and sale of personal


Hengan (Jinjiang) Feminine PRC, wholly Manufacturing, distribution US$6,000,000 100Products Co., Ltd. foreign-owned and sale of personal


Jinjiang Hengan Antimicrobial PRC, wholly Manufacturing, distribution RMB10,000,000 100Science and Technology foreign-owned and sale of personalDevelopment Co., Ltd enterprise hygiene products in PRC

Hengan (Sichuan) Household PRC, wholly Manufacturing, distribution US$3,000,000 100Products Co., Ltd. foreign-owned and sale of personal


Hengan Li Ren Tang (Jian) PRC, sino-foreign Manufacturing, distribution RMB32,000,000 70Cosmetics Co., Ltd. equity joint and sale of personal

venture daily use products in PRC

吉安市囱祥商貿有限公司 PRC, limited Distribution and sale of RMB1,000,000 70liability personal daily use productscompany in PRC

None of the subsidiaries had any loan capital in issue at any time during the year ended 31st December 2002.

29 SUBSEQUENT EVENT

Pursuant to an acquisition agreement dated 25th March 2003 entered into between the Company and Mr. SzeMan Bok, Mr. Hui Chi Lin and Mr. Yeung Wing Chun, Directors and (except for Mr. Yeung Wing Chun)substantial shareholders of the Company, the Company shall acquire the shareholders’ loans and the entireissued share capital of United Wealth at an aggregate consideration of up to HK$416,130,000, comprising aninitial consideration of HK$375,000,000 and an earn-out payment of up to HK$41,130,000. The principalasset of United Wealth is the holding of approximately 68.9% equity interest in Changde Paper, a group ofcompanies engaging in the manufacture and sale of packaged tissue paper products in the PRC.

30 APPROVAL OF ACCOUNTS

The accounts were approved by the board of Directors on 25th March 2003.

hengan international group company...

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