Business analysis of China Changcai Company

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CONTENT

Page

I.General Introduction¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­.¡­..1-

Do my essay on Business analysis of China Changcai Company CHEAP!

II.Business Environment & Strategy Analysis¡­¡­¡­¡­¡­.-6

III.Accounting Analysis¡­...¡­¡­¡­¡­¡­.¡­¡­¡­¡­¡­¡­¡­¡­7-1

IV.Financial Analysis ¡­¡­¡­¡­¡­...¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­

14-1

V.Prospective Analysis¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­0-1

VI.Conclusion & Suggestion.¡­¡­¡­...¡­¡­¡­¡­¡­¡­¡­¡­¡­

Appendix

1.Balance Sheet 1 ¨C 00¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­..¡­¡­¡­..

.Income Statement 1 ¨C 00¡­...¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­...4

.Cash Flow Statement 1 ¨C 00¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­....5

4.Pro forma Income Statement for 00¡­.....¡­¡­¡­¡­.¡­¡­¡­¡­¡­¡­.6

GENERAL INTRODUCTION

Background Of The Target Company

Changchai CO., Ltd. (000570) once acknowledged as one of the leading small-diesel-engine manufactory in the China. The company issued and listed its A share in Shenzhen Stock Exchange (SSE) in 14, and B share in 16. The Company's sales and assets enlarged hundreds times since its going public, followed with the company's performance sharply went up, the Company's stock price also keep rising. From 14 to 18, the company ranked as the Best list company in SSE consecutively.

Unfortunately, pressed under the industrial cut-throat competition, the company's performance comes down since 1, followed the sales drop, the company's profit decreased significantly, even for year 001 and 00 the company suffered huge losses in its financial statements. At April 11, 00, the company's stock was cataloged as ST (special treatment) by Shenzhen Stock exchange, that means in the following half year if the company's operating performance can not significantly improvement, the company's stock will be ceased for transaction and picked off from the main board of SSE.

The Purpose Of Our Analysis

Our analysis purpose is to find out, what are the reasons of the Company's operation and performance up and down? Can financial statement effectively reflect these impact and factors properly? Are those operating fluctuations can be easily found from analysis of the financial statements? How about the company's prospect? Will its stock be stopped transaction in the SSE in a half year?

The Framework of Analysis Report

Here, We set out our analysis outline for your reference,

Business Environment & Strategy analysis

Our purpose of this part is to identify key point drives and business success and risks, include Business Environment, Company Strategy Analysis (Industry, Competitive Company Analysis)

Accounting Analysis

The purpose of this section is to solve the comparability and distortion problem for financial statements, include introduce the Accounting policy adopted, Auditor's report & opinion and accounting adjustment suggested.

GENERAL INTRODUCTION

Finance Analysis

We will use ratio & cash flow analysis to assess the company's performance and sustainability, include analysis of Sources and Uses of fund, Profitability Analysis, Liquidity and Solvency, as well as Risk Analysis

Prospective Analysis

At this stage we will try to based on the above analysis and the latest information to make a pro forma financial statement for 00 and further forecasting the company's prospects

BUSINESS ENVIRONMENT & STRATEGY ANALYSIS

Business Environment

The effect of national policy

Following the direction of the 16th Party Congress and under the guidance of a series of national policies such as pushing the increase of domestic demand actively and motivating consumption, enlarging the investment in agriculture and improving the rural economics with efforts, the degree of mechanization in agriculture has been enhanced continuously and the collective demand in small type of diesel engine has been increased to a great extent from the beginning of 0s.

Under the circumstance of the stable increase of national macroeconomics, conducted by the west exploitation policy and affected by the rapid increase of national key projects investment, the total demand of small type of diesel engine begin to rise, which motivating and pushing the whole small type of diesel engine industry to keep stable development. The increase range is about 8% and the price index of total output and sales revenue is above 10%. In recent two years, with the competition becomes fiercer and fiercer, though there still has certain increase of total number of production and sales, the general economic efficiency of the whole industry has declined, for the low price and high cost.

Industry Analysis

General Situation in the Industry

The China's production and sales of small type of diesel engine rank the first in the world. The annual outputs reaches about 6.5 million sets, appropriately taking 70% of the world total output, also dominate the international market of small type of diesel engine. With decades of hard working, there has established almost completed production networks and it brought along many components and parts manufactures.

In 00, the enterprises of small type of diesel engine achieved industrial general production value (real price) 15.86 billion, sales 15.047 billion, industry addition value .46 billion, compared to the same period of last year with increase of 15%, 1.%, and 4.7%, respectively. The total output of diesel engine were 5.866 million sets and total sales were 5.854 million sets, compared to the same period of last year with increase of 8.7% and 7.8%, respectively. Among the total sales, the sales of single-cylinder diesel engine were 5.46 million sets and the sales of multi-cylinder diesel engine were .0 million sets, compared to the same period of last year with increase of 7.55% and 11.%.

BUSINESS ENVIRONMENT & STRATEGY ANALYSIS

Competitive Analysis

In China, there always exit problems of large output but slow technology innovation in the small type of diesel engine, and it leads to the low safety and heavy pollution. Last year, national relative departments frame new policy for the industry, aiming to solve some more obvious problems like heavy pollution of agricultural transport vehicle drove by single-cylinder diesel engine and the noise beyond the standard and so on. The problems of low grade, narrow variety, instable quality, low addition value and poor capability of new product development of our small type of diesel engines are still prominent, especially the lack of owning core technology and the famous trademark that has strong competition in the world market. There are two reasons making the gap one is because of late control of the polluted air in our country; the other is because of the weakness of our basic industries, laggard machine structure and low-level of research & development. The diesel engine manufactures in our country will be greatly influenced when foreign companies enter our market.

Competitors

The key domestic competitors of Changchai include Shandong Shifeng Group, Jiangdong Group and Jiangsu Changfa Group.

Shandong Shifeng Group has four areas of three-wheel agro-vehicle, four-wheel agro-vehicle, single-cylinder diesel engine and tractors ranked No. 1 domestically in 00. The sales of the Group achieved were 6.8 billion. The sales of three-wheel agro-vehicle were 870,000 sets and the sales of single-cylinder diesel engine were 1.01 million sets, which occupied 1/ and appropriate 1/6 shares in the industry, respectively. The Group is a typical monopoly enterprise with strong power in the industry. In addition, its products match each other along the upward and downward industry chain. The core superiority of the Group is procuring in large scale while producing with specialization.

Jiangsu Jiangdong Group is a national key enterprise specializing in the production of middle and small diesel engines. The trademark ¡®Jiangdong' has been a famous trademark in China, for its high quality and good service among many small types of diesel engines. The output in 00 were 887,600 sets and the sales were 1.6 billion.

Jiangsu Changfa Group is a multi-industrial corporation that mainly produces agricultural machines. It has about 4600 employees including more than 400 technicians and more than 100 senior engineers. The main subsidiaries are Changzhou Changfa Power Machinery Co., Ltd, Jiangsu Changfa Refrigeration Stocked Company and Changzhou Changfa Machinery Co., Ltd. The sales of the Group in 00 were 1.1 billion, earning $1.07 million by exporting.

Changzhou Changfa Power Machinery Co., Ltd, is specializing in the production of water-cooling diesel engine and walking tractor. The sales of the company in 00 were 600,000 sets and 740 million, earning $8 million. Changzhou Changfa Machinery Co., Ltd. is a Hi-tech enterprise specializing in environmental protection wind-cooling diesel engine, gasoline engine, dynamotor set and water pump set.

BUSINESS ENVIRONMENT & STRATEGY ANALYSIS

The Output & Sales volume in 00 for major domestic diesel engine manufactories

Unit£ºSet

Serial No. Company OutputSales Volume including£ºExport Weight%

1ɽ¶ ʱ·ç10155111 4 0.00

³£²ñ¹É·Ý 148105141710 4.5

½­¶¯¼¯ÍÅ 8876668718 1508517.4

4½­ËÕ³£·¢ 58855044700001.7

5ɽ¶ À³¶¯ 18874175 8.45

6È ²ñ¼¯ÍÅ 170405648510.76

7½­ËÕ³£¹¤ 10400407 11684.48

8ɽ¶ ¾ÞÁâ 514657114 14576556.6

½­ËÕ ÇÃÀ¿Â 085017661.17

10ËÄ ¨¶ ²ñ 1560447050411.5

11ɽ¶ ³£ÁÖ 184617586 5600 .8

1½­ËÕµ¤ 10584610457 65 6.4

1½­ËÕ½ð̳ 160147114104.17

14 ﶯ¹É·Ý 11801117604 000 7.65

15ºþÄϱõºþ 780 865 0.00

16Ãà ÐÂ ª 70884 778 41 5.80

17¸£½¨Á¦¼ 56875 570 11 1.6

18¹ãÎ÷ÄÏÄþ 475 465410868.1

1º ÄÏÐÂÏç 404 404 0.00

0ºþÄϳ ÖÝ 600 147 0.00

1Õã½­ÉÏ Ý 04 4678 1000 4.05

Total 58667 58541607651.6

Source Industry Association of Single Cylinder Diesel Engines and Academy of Statistics (00//16)

Nippon Yangma

Nippon Yangma Diesel Engine Co. is the very beginning company in the small type of diesel engine industry all over the world. The sales of the company last year were about RMB 5 billion. On the occasion of its 70th anniversary of first realizing the miniaturization and practicality of diesel engine in the world, this company that entered China market for a long time began the breakthrough cooperation with Shifeng Group which is in the same industry with Yangma and is the monopoly enterprise in China.

The two companies signed the formal contract on Jan. 18, 00. The total investment from both sides were USD 10 million, all of which are used to improve the production line of single-cylinder diesel engine in Shifeng, produce single-cylinder water-cooling diesel engine and multi-function tractor carrying single-cylinder diesel engine. Shifeng has 4% shares invested by current production line and human resource,

BUSINESS ENVIRONMENT & STRATEGY ANALYSIS

while Yangma has 51% shares mainly invested by cash and attached the mature and advanced technology on single-cylinder diesel engine. The objective in 004 of both sides is to achieve sales of 1 million sets of single-cylinder water-cooling diesel engine.

Suppliers

With the effect of price increase of raw material such as rolled steel, pig iron and coke, the price of the components and pars that the company purchasing from outside also increase widely, which cause the company face higher pressure of product cost and the profit room decline further.

Changchai Co., Ltd

ChangChai Co., Ltd (the company) formerly known as ChangZhou Diesel Engine Factory, was founded in 11 and has s history of 80 years. It was restructured as a publicly listed company on May 6, 14. The Company is one of the 50 key enterprises in China.

The Company now owns six branches as well as seven subsidiaries. The total shares of the company are 74 million (with par value of RMB 1 per share), 40.% of which is held by the government, .6% by corporation, .66% A shares and 6.7% B shares. At the end of 00, the total assets of the Company accumulated to RMB. billion, including net assets of RMB0.74 billion. By the end of 00, the Company has 451 employees.

The Company covers an area of 40,000 m. It has five diesel engine production bases and one foundry that are located in ChangZhou city and the suburb area nearby.

The Company has produced more than 10 million diesel engines and has established a well-developed marketing and sales network. The Company holds 46 sales service centers and 8 sales subsidiary companies all over the country. The Company has also built up a state-level technology center as well as a mobile postdoctoral center, which are equipped with advanced devices introduced from AVL, an Austrian Company.

The Companys main products include more than 10 models of ChangChai single-cylinder diesel engines e.g. model S15, S1100 etc.; Series products of multi-cylinder diesel engines e.g. Model 75,80,0,10 etc; ChangChai Robin miniature gasoline engines produced by the Joint Venture established by the Company, Fuji Heavy and Marubeni; Combined harvesters agro-vehicles and relevant products developed via joint investment. The registered trademark ChangChai is ranked as one of the most famous trademarks in China.

Web Site of ChangChai is http//www.changchai.com.cn

ACCOUNTING ANALYSIS

Accounting Policy

As a Chinese listed company, Changchai should adopt PRC General Accepted Accounting Police and related regulations to prepare its financial statement, meanwhile, Since the company also issued B shares in 16, according to the requirement of CSRC and SSE, the company also need to prepare its financial statement based on International Accounting Standard and a reconciliation of the Group's results and shareholders' equity under IAS and PRC accounting regulations is required to disclosure to both domestic and overseas investors.

Following the PRC accounting reform since 1 under China treasure department's push, up to now, most of the accounting principals issued is closely same with the IAS.

Auditors and auditor's opinion

Auditors

We set about below the auditors who conducted the auditing service for the Company during the past 8 years.

PeriodAuditor

14-16Jiangsu Province CPAs

16-1Price water house Coopers

000-001Arthur Andersen

00 to nowHorwath HK CPA Ltd.

During this period the Jiangsu CPAs still in charge for the statutory audit

The statutory audit in charged by Wuxi Gongzhen CPAs

From above schedule, we can found since the it's listed, the company has changed its auditors (both domestic and overseas) frequently, that in some aspects implied there existed argue or disagreement for the financial statement and information disclosure between the management and the auditors.

Auditor's opinion

There were a qualified audit opinion arising from disagreement over accounting treatment and limitation in audit scope for fiscal year 00.

ACCOUNTING ANALYSIS

In the auditor's report, the qualified opinion paragraph described the audit issue as following, As set out in more details in note to the consolidated financial statements, two of the Group's subsidiaries (the Unconsolidated Subsidiaries) ceased operations during the year and no reliable financial information of the Unconsolidated Subsidiaries is available. As of 1 December 00, the Group accounted for its interest in the Unconsolidated Subsidiaries using the cost method of accounting. Provision for impairment loss has been made at 1 December 00 to write down the Group's interests in the Unconsolidated Subsidiaries to their expected net realizable value of RMB Nil. In our opinion, the financial statements of the Unconsolidated Subsidiaries should have been consolidated into the Group's consolidated financial statements in accordance with International Accounting Standard IAS 7 Consolidated financial statements and accounting for investments in subsidiaries. However, there were no practical audit procedures that we could perform to verify (i) the amounts, which should have been consolidated; and (ii) the carrying value (before provision for impairment loss) of the Group's investment in the Unconsolidated Subsidiaries.

For the analysis purpose, we further pursued to the PRC auditor's report, all of the subsidiaries has been consolidated into the financial statement, for the two ceased subsidiaries which have been expected net realizable value of RMB Nil. Thus there are no further investigations needed.

In 00 April 10, the auditor issued an unqualified report but with an explanation paragraph for the 001 financial statement, says Without qualifying our opinion, we draw attention to Note to the consolidated financial statements. The Group incurred a loss of approximately RMB 41 million for the year ended December 1, 001. The Group's ability to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities as they fall due depends on the Group's future successful operations.

The most draw our attention is in 00, the company further incurred a heave loss to RMB 515 million, and the net assets accordingly deeply decreased, but the new appointed auditor didn't mentioned any more about the company's going concern issues and consideration.

ACCOUNTING ANALYSIS

Other Findings

The company's Accounting policy for Bed debt provision is Trade receivables are carried at anticipated realizable value. An estimate is made for doubtful receivables based on a review of all outstanding amounts at the year-end. Bad debts are written off during the year in which they are identified.

We found, expected for above-mentioned policy, Meanwhile under PRC report the bed debt provision policy been supplemented with following aging analysis method.

Aging Percentage of provision

Under one year%

One to two years5%

Tow to three years15%

Three to four years0%

Four to five years60%

Over five years100%

According to our understanding of the industrial practice, this provision policy based on aging analysis obviously understated the probability of the default from the debtors. We abstract the aging analysis from 00 annual report as following

Ageing 00.1.1 %Provision% 001.1.1%Provision%

With in 1 yr.15,75,8870.6648,8,555.684,166,718,840,156

1- Yrs174,84,616.748,158,0446.417,814,78401,04,86

- Yrs.00,75,7858.704,674,168.056,8,8840,11,574

Over Yrs.5,18,067.8155,61,1447.4140,5,661180,08,51457

1,044,545,751,46,1,048,800,5466,,70

There are some differ finding from above aging analysis,

1.The A/R with aging over years in 00 is 5,18K, but this category in the 001 its only 140,50K, the difference 116,6K more than the maximum 6,0K which disclosed in 001 as - years, so there are 0,074K gap.

.For year 00, the balance of accounts receivable keep the same lever compared with 001, but the provision has a big jump to 51,46K from 66,K in 001, there are 1% sharply increase. The bed debt provision for 00 is 411,4K (001 1,754K)

ACCOUNTING ANALYSIS

We assume the company has the same bed debt % since 001, as following,

Ageing 00.1.1 %Provision% 001.1.1%Provision%

With in 1 yr.15,75,8870.6648,8,555.684,166,7188,6,10.68%

1- Yr.174,84,616.748,158,0446.417,814,784016,1,1646.%

- Yr..00,75,7858.704,674,168.056,8,8865,55,868.05%

Over Yr.5,18,067.8155,61,1447.4140,5,6611101,74,4757.40%

1,044,545,751,46,1,048,800,5445,6,78

The provision for 001 should be 186,067K (45,7K-66,K) increased than that of disclosed. So, should do we need to make an adjustment to increase the provision for 001 and related to write down the profit? The answer is no, because it's obviously the company is highly suspected that it took a big bath in 00, the second loss year for the purpose to recover in the 00 and keep the qualification of listing.

Also from the closing balance of 00, we can find the A/R aging - years and over years is 65,6K, compared with 460,65K provision, it's hard to say whether its enough.

Item Analysis

CONSOLIDATED BALANCE SHEETS (RMB'000)

AssetsNoteFirst quarterly in 00000010001

Non-current assets

Land use rights8,465 78,874 84, 78,85 81,41

Property,plant and equipment5,87 574,157 614,154 71,45 65,41

Construction in progressa10,11 0,6 11,0 1,86 18,40

Investments in associatesb66,65 77,66 ,481 14,75

Other long-term investmentsb114,670 101,887 101, 105,44 88,67

Prepayment for investmentc57,000

Deferred asset, netd¡¡14,576

Total non-current assets845,8 1,06 1,047,67 1,10,885 1,04,0

Current assets

Inventories0,474 87,7 45,47 6,07 670,018

Value-added tax recoverable1, 4,08 64,745 57,87

Due from CGCe5,80 17, 11,6 0,6

Due from associates RPTe140,11 01,06 0,805 160,48

Trade and other receivablese675,88 46,7 77,44 6,40 4,60

Prepayments and other current assets1,476 1,047 15,4 81,801 10,

Short-term investment110 10 40,000

Pledged bank deposits51 10,7 1,4 8,4

Cash and cash equivalents1,074 60,561 0,4 4,67 58,11

Total current assets1,11,08 1,15,60 1,8,574 ,48,48 ,45,707

Total assets¡¡,056,16 ,7,6 ,47,11 ,610, ,46,7

a.The company kept such a huge construction in progress for over the five years, that must implied there are some issues raised for impairment loss or understatement of the depreciation.

b.Following the sales hit the new high of the history, the company extend its investment to the maximum, during the 000 and 001.

c.In 001, the company planned to invest in Lanzhou North-west Vehicle Co., Ltd, in which the company will contribute RMB 57 million for an equity interest of 57%(The business scope of Lanzhou North-west Vehicle Co., Ltd. includes manufacture and sale of agricultural vehicles and machineries). As the companys sales volume declined and most of its investment suffering the loss, considering the cash flow pressure, the company withdraw the investment in the following financial year, 00.

d.According to the annual report of 000, The deferred assets represents the staff quarters stated at purchase or construction cost less receivables from the staff, and are amortized on a straight line basis over 10 years prior to January1, 000. As the company had introduced a new housing subsidy plan, the Groups management considered that the deferred assets had no future benefit and therefore had written it off in 000. from this we can find, the management of the company set up a policy and change it in such a short time, this maybe a signal of the earning management and the suspected of financial statements true and fair.

e.Accounts receivable piled up during 1 and 000, mainly due to the company's credit sales policy for enlarge the sales purpose, this also incurred the bad debt risk, at the following year 001 and 00, the company with a big effort to settle down some receivables, include provided with big provision, the receivables from related party and Changchai Group Company also has a sharp reduce in 00.

ACCOUNTING ANALYSIS

CONSOLIDATED CASH FLOW STATEMENT (RMB'000)

Cash inflow from operating activitiesNote¡¡000010001

Cash generated from operations 14,4 175,10 (16,56)(10,844)

Interest paid (44,414)(45,057)(40,06)(50,15)

Income tax paid (1,776)(,88)(10,58)(6,555)

Net cash generated from operating activitiesa6,74 16,15 (47,4)(17,54)

Net cash used in investing activitiesb(50,47)(,78)(14,55)(1,40)

Net cash generated from/(used in) financing activitiesc4,850 (,60)4,075 ,08

Net increase in cash and cash equivalents50,67 ,7 (47,4)(7,16)

Cash and cash equi. , beginning of year0,4 10,67 58,11 556,05

Cash and cash equivalents, end of year¡¡60,561 0,4 10,67 58,11

a.During 1 and 000, for the purpose of enlarge the sales volume and market share, the company adopted a credit sales policy, thus the sales increased sharply, meanwhile the operation cash flow show a negative number, this also increased the bad debt risk (during that time the A/C sharply increased nearly 1 billion), then the management recognized such risk by the poor cash flow, and decided to tight up the A/R, in the following year 001 and 00, although the companys sales decreased and the operation suffering loss, with a big effort, the company settled 5% of the accounts receivable and made a big provision to lower down the bad debt risk, the net cash generated from operating activities began change to positive.

b.From the cash flow of the investing activities, we can find during the 1 and 000, followed the market overspread, the company invested hundred million into the PPE and subsidiaries, that lead to a heavy burden in the following year. For 00, the 51 millions cash flow out resulted from the disposal of subsidiaries.

c.The cash generated from /(used in) financing activities reflected the gap of the cash from operating and investing activities. As we analysis above for year 1 and 000, the cash flow from operating is negative, and the investment also need plenty of cash, thus the only way for the company to supplement the gap is to financing.

ACCOUNTING ANALYSIS

CONSOLIDATED INCOME STATEMENT (RMB'000)

¡¡NoteFirst quarterly in 0000 001 000 1

Revenue467,670 1,655,56 1,74,487 ,40,847 ,04,780

Cost of sales(8,051)(1,47,787)(1,57,44)(1,86,)(,5,48)

Gross profit6,61 18,775 164,045 44,614 501,7

Other operating income,114 1,110 (4,187)18,785 15,554

Selling expense(16,7)(114,64)(10,4)(170,606)(156,76)

General and administrative expense(6,8)(571,7)(47,5)(0,6)(11,6)

Loss from operations,617 (40,00)(407,80)(16,86)4,07

Finance income (cost),net(7,68)(5,085)(0,057)18,105 (11,470)

Investment income (loss)1,41 17,601 (45,41)(4,770)7,80

Gain on disposal of PPE (74)44 16,8 ,476

Impairment loss on PPE(4,760)

Other income (expense),net(,44)(,64)74 (,76)(4,081)

(Loss) profit from ordinary activities1,46 (546,65)(48,7),086 4,807

Income tax expense(11)(7)(,15)(5,6)(,6)

Net (loss) profit after taxation1,115 (546,686)(484,87),464 1,881

Miniority interests1,057 1,50 48,475 8,1 (,0)

Net (loss) profit after taxation but and miniority interests,17 (515,6)(46,51)11,587 16,67

In year 001 and 00, Changchai suffered a huge loss, the major reasons as following

First, giving the oversupply of the products, the selling price dramatically decreased, narrowed the net profit margin.

Second, the over adopted credit sales lead to working capital insufficient and finance expenses increased, meanwhile piled huge doubtful debt lead to provision inevitable.

Third, the investment of subsidiaries and project failure lead to further loss.

FINANCIAL ANALYSIS

Profitability Analysis

Under the traditional methodFirst

Quarterly in 00000010001

Net profit margin (ROS)4.74%-1.1%-5.04%0.5%0.54%

X Asset turnover0. 0.74 0.5 0.6 0.8

= Return on assets (ROA)1.08%-.1%-14.81%0.%0.48%

X Financial leverage.71 .08 .8 .17 .7

= Return on equity (ROE).%-71.17%-5.%0.6%1.14%

Using Decomposition methodFirst quarterly in 00000010001

Net operating profit margin.65%-.55%-6.1%1.06%0.%

¡ÁNet operating asset turnover0.50 1.65 1.05 1.0 1.67

= Operating ROA1.8%-5.67%-7.5%1.0%0.4%

Spread-4.55%-60.05%-.87%-5.5%-6.7%

¡ÁNet financial leverage.6%8.65%.5%0.6%6.5%

=Financial leverage gain-1.0%-.1%-11.6%-1.60%-1.6%

ROE=Operating ROA+Financial leverage gain0.80%-76.88%-8.5%-0.50%-1.1%

From above analysis we can find the result of ROE analysis under the traditional method and the Using decomposition method present different, and in some year the result even reversed, say like year 1 and 000, under the traditional method the company achieved a small positive return, but using the decomposition method, the result this negative, also for the first quarter in 00, the traditional method showed the company achieved nearly % return on equity, but under decomposition method the return even less than 1%.

What's reason for the difference accounted?

(i) Compared with the traditional method, under decomposition, firstly we decomposed out Operating ROA, it is a measure of how profitably a company is able to deploy its operating assets to generate operating profits, other than the ROA focus on the total assets under the traditional method, its more concern about the operating assets' generations.

FINANCIAL ANALYSIS

(ii) Spread is useful item under the decomposition method, it's the incremental economic effect from introducing debt into the capital structure. The economic effect of borrowing are negative show the above analysis, since the return on operating assets is less than the cost of borrowing, the company do not earn adequate operating returns to pay for interest cost reduce its ROE by borrowing.

(iii) Net financial leverage is Net debt divided by equity, financial leverage is total assets divided by equity.

Thus, the decomposition method further exclude the financing assets from the whole assets to do the further analysis for the operating assets' profitability, it show more accurate result of ROE for financial information users.

Common-Sized Income Statement and Profitability Ratios

¡¡NoteFirst quarterly in 00000010001

Line Items as a Percent of Sales

Revenue100.00%100.00%100.00%100.00%100.00%

Cost of salesa-85.11%-88.6%-0.5%-84.6%-8.80%

Other operating income0.67%0.7%-1.6%0.84%0.50%

Selling expenseb-.58%-6.%-10.%-7.61%-5.05%

General and administrative expensec-5.64%-4.51%-1.%-.5%-10.06%

Finance income (cost),net-1.6%-.1%-1.7%0.81%-0.7%

Investment income (loss)0.4%1.06%-.61%-0.1%0.5%

Gain on disposal of PPE0.00%-0.04%0.0%0.7%0.08%

Impairment loss on PPE0.00%-.10%0.00%0.00%0.00%

Other income (expense),net-0.5%-0.%0.00%-0.17%-0.1%

Income tax expense-0.07%0.00%-0.1%-0.5%-0.77%

Miniority interests0.%1.8%.78%0.6%-0.10%

Net (loss) profit after taxation¡¡4.74%-1.1%-5.04%0.5%0.54%

a. For the cost of sales, in 1 and 000, due to the company quickly enlarge the sales and production, that lead to a lower cost, but from 001, the company lower down the sales quantity and focus on the cash collected, the cost have some extent increase, but the situation has recovered in 00 first quarter.

FINANCIAL ANALYSIS

b. In 001 annual report, the company's management claimed, to reduce the pressure from sales promotion budget, they made a provision 5,000K, this a wrong record in the financial statement, that's way the company's selling expenses extremely high in 001, but the auditor no any comment for this issue.

c. The company make provision for bed debt 411,4K (001 1,754K), and impairment loss 4,75K(001 5,57K), lead to the G&A fluctuate in 00, we also suspect the company took a big bath in the second year of the loss.

Liquidity Ratios Analysis

¡¡NoteFirst quarterly in 00000010001

Current ratio8.5%.05%18.8%14.0%11.%

Quick ratio80.%56.5%76.84%74.80%67.5%

Cash ratio5.40%5.%.67%15.15%16.15%

Operating cash flow ratio¡¡.%6.77%.%-14.80%-10.70%

For the current ratio and quick ratio, even during the period 1 to 001 the result is more than 100%, due to the company's quickly expand, and the liquidity actually is reflected not so good, as lot of the accountant receivable is overstated, but from 00 to 00 the adjusted bed debt provision has lower down such indicator to a real situation that less than 100%, means the company has no enough ability to cover its liabilities from liquid assets.

For the cash ratio and operating cash flow ratio of first quarter in 00, the number is only for the quarterly, if we time 4 and transfer it to yearly, the number should be 101.6% and 11.5%, and it's really a big improvement for the company's liquidity capability compared with prior years.

Solvency Analysis

¡¡NoteFirst quarterly in 00000010001

Liabilities to equity1.7 .06 1.4 1.0 1.

Debt to equity0.64 0.0 0.60 0.46 0.47

Net debt to equity0. 0. 0.4 0.0 0.7

Debt to capital0.5 0.65 0.45 0.5 0.7

Net debt to net capital1.00 0. 0. 0. 0.8

Interest coverage (earning based). -11.1 -.7 1.18 1.87

FINANCIAL ANALYSIS

The interest coverage presented negative in 001 and 00. It indicated that Changchai was disable to covering its interest expense through its operating actives. This is a risky signal. Fortunately, the company's solvency capability is improved in 00 first quarter. But the overall capability of solvency is not too good.

Sustainable Growth Rate Analysis

¡¡NoteFirst quarterly in 00000010001

ROE.%-71.17%-5.%0.6%1.14%

Dividend payout ratio0.00%0.00%0.00%0.00%0.00%

Sustainable growth rate¡¡.%-71.17%-5.%0.6%1.14%

Given the unsatisfied performance results from 1 to 00, for the purpose of keep the cash and sustain the company's operation, the board of directors of Changchai hasn't made any resolution to pay the dividend for these years, thus there are no further analysis for Sustainable Growth Rate.

Profitability Compared with Major competitor-Jiangdong

DecompositionNoteChangchai

00Jiangdong 00

Net operating profit margin-.55%-8.%

¡ÁNet operating asset turnover1.65 1.7

= Operating ROA-5.67%-11.%

Spread-60.05%-18.1%

¡ÁNet financial leverage8.65%8.50%

=Financial leverage gain-.1%-1.55%

ROE=Operating ROA+Financial leverage gain-76.88%-1.88%

From above analysis results, both Changchai and Jiangdong's performance aren't good in 00, and Changchai's performance even worse compared with Jiangdong's.

First, Changchai presented huge loss, its net operating profit margin is negative .55 percent and Jiangdong's is only ¨C8. percent, although changchai's operating asset turnover is higher to 1.65 whereas Jiangdong's is only 1.7. As a result it show us with a worse NOPAT margin and a dramatically higher operating asset turnover.

Second, Changchai and Jinagdong are not able to create shareholder value through its financing strategy. They could not earn adequate operating returns to pay for interest cost reduces its ROE by borrowing. Under this circumstance, Changchai even have a higher financial leverage say 8.65%, that means Changchai have to pay for a large amount of interest cost, so its spread is -60.05%. Both these factors contributed to a net decrease of .1% to its ROE. Jiangdong spread is only ¨C18.1% and its net financial leverage is only 8.50%, leading to a 1.18% net decrease to ROE in 00.

FINANCIAL ANALYSIS

Common-Sized Income Statement and Profitability Ratios Compare

¡¡NoteChangchai

00Jiangdong 00

Line Items as a Percent of Sales

Revenue100.00%100.00%

Cost of sales-88.6%-8.5%

Other operating income0.7%0.1%

Selling expense-6.%-.00%

General and administrative expense-4.51%-15.0%

Finance income (cost),net-.1%-1.08%

Investment income (loss)1.06%-0.18%

Gain on disposal of PPE-0.04%0.00%

Impairment loss on PPE-.10%0.00%

Other income (expense),net-0.%-0.18%

Income tax expense0.00%-0.48%

Miniority interests1.8%0.4%

Net (loss) profit after taxation but and miniority interests-1.1%-8.0%

From above table, we can find that cost of sales of Changchai is larger than Jiangdong's, that indicated the competence of product from cost side, Changchai weaker, since the different company adopt different selling policy, the changchai's selling expenses is lower than Jiangdong. G&A expense is a major reason for Changchai's whole performance worse than Jiangdong's, the unusual huge amount provision accrued for bad debt of Changchai, as we analysis before the reason is the company take a bath at the 00

Liquidity Ratios Comparison

Changchai

00Jiangdong 00

Current ratio.05%157.%

Quick ratio56.5%118.%

Cash ratio5.%40.7%

Operating cash flow ratio6.77%-4.88%

Jianddong's current ratio and quick ratio are 157. percent and 118. percent respectively in 00, those indicators are better than Changchai's and achieved more than 100 percent, as a result of Jiangdong expanding quickly working operation. On the other hand, we also find Jiangdong's cash ratio is better than Changchai's. It indicated that Jiangdong ¡®s ability to cover liability is better than Changchai's in an emergency. But for the operating cash flow, the changchai is better than Jiangdong.

FINANCIAL ANALYSIS

Debt and Coverage Ratios

¡¡Changchai

00Jiangdong 00

Liabilities to equity.06 0.77

Debt to equity0.0 0.

Net debt to equity0. 0.0

Debt to capital0.65 0.6

Net debt to net capital0. 1.00

Interest coverage (earning based)-11.1 1.01

Since the Changchai have a larger liabilities to equity ratio, that further enlarged its loss to the unsatisfied performance. The interest coverage of Changchai is negative 11.1 percent and far less than Jiangdong's 1.01 percent. It showed that Jiangdong ¡®s ability to cover interest is better than Changchai's.

PROSPECTIVE ANALYSIS

In the company's first quarter financial statement, the company reported RMB 0.05 earning per share and .% return on equity, compared with that of prior increased 1866.67% and 87.5%.

Following we make a forecast for the Changchai's financial performance for 00 based on its performance on 00 and the first quarter in 00

¡¡NOTEFirst quarterly in 00First quarterly in 00Actual 00Forecast for 00

Revenuea418,10 467,670 1,655,56 1,851,8

Cost of salesb(66,80)(8,051)(1,47,787)(1,576,16)

Gross profit51,1 6,61 18,775 75,670

Other operating income6,787 ,114 1,110 6,015

Selling expensec(1,47)(16,7)(114,64)(18,)

General and administrative expensed(6,18)(6,8)(571,7)(4,76)

Loss from operations8,85 ,617 (40,00)(188,84)

Finance income (cost),nete(10,6)(7,68)(5,085)(5,)

Investment income (loss),5 1,41 17,601 8,68

Gain on disposal of PPE656 (74)

Impairment loss on PPEf(4,760)

Other income (expense),net(1,6)(,44)(,64)(4,61)

(Loss) profit from ordinary activities85 1,46 (546,65)(0,84)

Income tax expense(8)(11)(7)(00)

Net (loss) profit after taxation57 1,115 (546,686)(10,84)

Miniority interests55 1,057 1,50 4,68

Net (loss) profit1,1 ,17 (515,6)(175,585)

Above forecast for 00 are based on following assumption

a.According to forecast, Changchai will improve its sales performance this year as showed in the quarter one, and annual sales will achieved a same increase as its first quarter of 00.

b.Meanwhile, the company will strictly controls cost of produce, annual COGS lever will keep as the first quarter in 00.

c.The company's selling and promotion expenses will keep the same standard as 00.

d.The G&A expense have be separated into two parts, one is the normal G&A expense, and another one is the provisions for bad debt. As for the normal G&A expenses we assume it will keep 10% of the total sales, this percentage is based on our understanding of that expense from 1 to 00. as for the provision, we make a forecast as following table.

Ageing NOTE00 forecastProvision%

With in 1 yr.aa 41,8,68154,75,61 .68

1- Yr.bb15,75,887101,85,571 46.

- Yr..bb174,84,6118,85,175 68.05

Over Yr.bb65,5,8547,44,557 7.4

Total1,85,884,05 748,555,16 ¡¡

aa.For the A/R with ageing less than one year, we assume it keep the same percentage with 00.

bb.For the ageing over one year to over three years, we make a pessimistic estimate that all the A/R in different item will be carried to 00.

The % of provision will keep the same with 00.

Then we estimated the provision should increased 157,0K(748,556K minus 51,46K), add the 10% of the sales, the G&A should be 4,76K.

e.From the first quarter sales and cash collection performance, we concluded the company will be able to reduce its financial expense for 00 compared with that of in 00.

f.We assume the impairment loss for tangible assets have been fully accrued in 00, thus there are no further loss for 00.

The result from above forecast, for 00 Changchai will make a big improvement of its performance compared with 001 and 00, but the company still suffered in loss.

The major reason still is the bad debt loss for the heavy burden for the company to further development.

CONCLUSION & SUGGESTIONS

From above analysis we can find the key issue for the company is attribute to the piled accounts receivable from the give loose to the credit sales. A company to sacrifice the operation cash flow and only focus on sales volume is short sight even dangers.

Strictly control the credit policy is highly recommend, the management should do effort to lower down the accounts receivable' balance and settle the aged A/R as soon as possible, so as to mitigation the loss on it and to get cash back early, support the company's further development.

Following the market and competitors changes, the Changchai should further restructuring its product composition as well as its industry orientation, and input many efforts in research and development of high-speed multi-cylinder diesel engines, combine harvesters, agro-vehicles and light trucks. It also needs to explore opportunities to cooperate with famous domestic and foreign companies in term of product, technology asset restructuring, relevant business, and etc.

JOhn is a IMBA student in Lingnan(University)College of Sun Yat-sen University, China

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