BUSINESS. Tianjin Port

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1 OVERVIEW We operate the longest established container terminal in China, which is the single-largest container terminal at the port of Tianjin as measured by throughput for the year ended 31 December We are the only terminal operator at the port of Tianjin capable of handling all types of general non-containerised solid cargo, and the only operator with a designated grain handling terminal and a specialised fruit and vegetable refrigeration warehouse. We currently operate two principal terminals, including a dedicated container terminal with four berths and a total quay length of 1,292 metres and a second container and noncontainerised cargo terminal with nine berths, two of which have been converted into a single container handling berth, and a total quay length of 1,757 metres. Together, our two terminals have a designed annual container throughput capacity of 1.92 million TEUs. We possess advanced equipment including super-panama class portainers with which we are capable of handling the largest containerships in service with capacities of up to 10,000 TEUs. We provide our customers with high quality and efficient port services including the loading and unloading of containerised and non-containerised cargo from shipping vessels, the stacking and warehousing of containers and cargo and various ancillary services such as container repair and maintenance, container transportation and shipping agency services. We have been acknowledged as one of China s five most efficient port operators by the China Ports Association. The port of Tianjin is strategically located at the locus of Bohai Bay, approximately 170 kilometres south-east of Beijing near the mouth of the Hai River and serves a vast hinterland covering north, north west and central China. The port of Tianjin was the ninth largest port in the world and the largest port in north China as measured by total throughput for the year 2004, as well as being the fifth largest container port in China and the eighteenth largest container port in the world. According to the Tianjin Statistical Year Book, container throughput at the port of Tianjin grew from approximately 700,000 TEUs in 1995 to approximately 3.8 million TEUs in 2004, representing a CAGR of over 20%. In 2005, the port of Tianjin recorded the highest growth in container throughput among all international ports in the Bohai Bay rim, including Dalian and the Jiaodong peninsula port of Qingdao. Recently, the PRC government set out its 11th Five Year Plan which designated the port of Tianjin as the principal gateway to the hinterland of north and northwest China. The 11th Five Year Plan also emphasises acceleration of the development of the Tianjin-Binhai Coastal Area, which encompasses the port of Tianjin, as a key element of advancing the regional economy. We believe that the clear policy statements made by the PRC government in relation to the development of the port of Tianjin into the international trading hub and logistics centre in northern China will present us with significant opportunities for our future development. 75

2 The following map shows the location of the port of Tianjin and highlights the provinces and regions for which the port of Tianjin usually handles seabound cargo: Xinjiang Gansu Qinghai Inner Mongolia Ningxia Shanxi Beijing Hebei Tianjin Port Shaanxi Henan Sichuan Tianjin Economic- Technological Development Area (TEDA) Tianjin Port Free Trade Zone Tianjin Port Areas for which the port of Tianjin is a sea access point Railway Highway Bohai Bay Tianjin- Binhai Coastal Area In line with the strong growth in throughput at the port of Tianjin, our turnover and net profits have grown steadily. The following table shows our container handling volume, noncontainerised cargo throughput, turnover and profit attributable to equity holders of the Company for the three years ended 31 December 2005: Year ended 31 December, CAGR (%) Throughput Container cargo (thousand TEUs) 1, , , Non-containerised cargo (million tonnes) Turnover (HK$ millions) Container handling Non-containerised goods stevedoring Storage and agency fees Total Profit attributable to equity holder of the Company (HK$ millions)

3 OUR STRENGTHS We believe that our historical success and future prospects are attributable to the following competitive strengths: We operate the container terminal that is the longest established in China and the single largest container terminal at the port of Tianjin We operate the longest established container terminal in mainland China. We are also one of the longest established operators of containerised and non-containerised stevedoring operations at the port of Tianjin. We began our non-containerised stevedoring business in 1968 and our container handling business in Currently, we are the single-largest container terminal company at the port of Tianjin as measured by TEU throughput for the year ended 31 December We also handled substantially all of the grain imports at the port of Tianjin and approximately one quarter of all steel and other non-containerised cargo for the same period. During our over 25 years experience in container and non-containerised cargo handling operations, we have established a comprehensive network of business relationships and end-customers covering the directly-administered municipalities of Beijing and Tianjin and numerous other provinces and autonomous regions of China. Major customers currently operating at our container terminals include COSCO Container Lines Co., Ltd., China Shipping Container Lines Company Limited, Sinotrans Limited, Hanjin Shipping Co., Ltd. and Swiss Mediterranean Shipping Company Limited. Major customers currently operating at our non-container terminals include Fu Long Cargo Transportation Company Limited, Shenhua Coal Trading Company Limited, Tianjin Port Oil and Foodstuffs Import and Export Company Limited and Hebei Hui Fu Oils and Foodstuffs Group Trade Company Limited. Our efficiency, high-quality services and responsiveness to vessel schedules are highly valued by our customers. Our experienced and efficient operations have resulted in many of our core customers, including international shipping companies, indicating to us that we are their preferred choice when using container handling services at the port of Tianjin. We possess advanced equipment to serve the largest containerships currently in service as well as stevedoring facilities to handle the broadest range of cargoes from large and small operators at the port of Tianjin Our dedicated container terminal is equipped with what are currently among the world s most advanced Super-Panama class cranes, which are capable of handling the largest container ships currently in service with capacities of up to 10,000 TEUs. We are capable of loading and unloading all types of inbound and outbound noncontainerised solid cargo and containers around the clock. Our principal cargo comprises coal, grains, steel, iron ore, machinery, fruits and vegetables and containerised cargo. We possess the only specialised grain handling terminal at the port of Tianjin, which is capable of handling large grain-shipping vessels up to a size of 70,000 deadweight tonnes, and is the primary channel for the import and export of grains for the areas of Beijing, Tianjin, north and north-west China and parts of north-east China. We also possess the only refrigerated storage warehouse at the port of Tianjin, which gives us the ability to 77

4 handle fruits, vegetables and other types of fresh food requiring refrigeration, hence capable of providing services to southern Chinese fruit and vegetable shipments to northern China as well as importers and exporters of fruit and vegetables. We currently handle substantially all of the grain imports at the port of Tianjin, approximately one quarter of all steel and other non-containerised cargo and approximately 40% of all containerised cargo. Our operational efficiency is the highest at the port of Tianjin and one of the highest among all terminal operators in China We have consistently been a leader in terms of efficiency among all Chinese port operators. Our container handling efficiency rate is comparable to those of modern international container terminal operators, enabling us to maintain a leading competitive position in the ports market. In 2004, our portainers were capable of handling an average of approximately 34.4 containers per hour, and we are able to handle up to 286 TEUs from a single vessel in an hour, meaning that we are capable of completing the loading and unloading of the largest container vessels (in terms of TEU capacity) within 24 hours. Our wholly-owned subsidiary, Tianjin Container, was one of only five Chinese port operators and the only operator at the port of Tianjin to be awarded the titles of Outstanding Containership Handling Efficiency Rate Terminal Operator and Outstanding Container Crane Operation Efficiency Rate Terminal Operator by the China Ports Association for its container handling operations during the year Our ranking in the top five Chinese container operators in terms of efficiency places us above a significant number of terminal operators throughout China. We operate modern, computerised terminals equipped with modern software and systems Our container handling operations use internationally advanced Cosmos operational software and all aspects of operations are computerised, resulting in a high level of management and operational efficiency. In turn, this enables us to offer competitive, efficient and high quality services to our customers. Our stevedoring operations also use production process control and visual control systems, GPS global positioning system, wireless visual monitoring system and invoice electronic data transfer exchange, ensuring that all actions at our terminals are conducted in a modern, standard and procedural manner. Our non-containerised cargo operations are equipped with modern and complete operational expertise capable of handling over-size, super-heavy and cumbersome equipment, thereby establishing an excellent reputation among customers as being an outstanding brand name in equipment handling at the port of Tianjin. We have a team of employees with extensive experience in both containerised and non-containerised cargo stevedoring We have a team of employees with extensive technical and operational experience, capable of loading and unloading all types of containerised and non-containerised cargo. In addition to guaranteeing our own operations, these employees also conduct training for a large number of business and operational employees of other ports in China. Our 78

5 Company places significant emphasis on management systems, having become one of the first batch of terminal operators in China to obtain ISO quality management system certification, with a stable foundation of quality and extensive experience in management. Our container and non-containerised cargo handling operations and management have obtained ISO9001:2000 quality management system certification and OHSAS18001 occupational health and safety management system certification. These certificates illustrate our commitment to operating our business in line with international standards. OUR STRATEGIES We aim to maximise shareholder value and participate in the continued growth in trade through the port of Tianjin. Our strategy is based on the following principal components: increasing our container handling capacity and efficiency; continuing to improve the level and quality of our services; continuing to expand our grain handling capacity and efficiency; establishing a steel distribution centre and improving production process to take advantage of the growth in steel, iron and metal cargoes; and establishing a fruit and vegetables distribution centre to attract more fruit and vegetables cargo and becoming an import and export base for fruit and vegetables in north China. Increasing our container handling capacity and efficiency In line with the continued trend towards containerisation and the growing role of containerised shipping at the port of Tianjin, we plan to increase our container handling capacity. We are currently at the approval stage of an investment in a new container handling facility at the Beigangchi ( ) area of the port of Tianjin that will be formed by way of joint-venture with two international port operators. We propose to obtain a 40% equity interest in this joint-venture, with the two international operators each taking a 30% equity interest. The new facility is proposed to have a total quay length of approximately 1,100 metres with four container handling berths and a container stacking yard in excess of 700,000 square metres. The new facility will have designed container handling capacity of 1.8 million TEUs per year. We currently propose to use a majority of the proceeds from the Share Offer towards our total contribution of RMB600 million (equivalent to approximately HK$576.9 million) to the registered capital of the joint-venture. We expect to contribute this amount in full by the end of

6 At the same time, we will continue to strive to improve the operating efficiency and capacity of our existing facilities by continuing to invest in advanced handling equipment and improving the efficiency of our loading, unloading and stacking operations. Our customers particularly value our efficiency, high-quality services and responsiveness to changing vessel schedules. Many of our core customers have indicated to us that we are their preferred choice when using container handling services at the port of Tianjin. Our aim is to continue to be the preferred choice of terminal operator for our core customers by offering timely, efficient and high quality services. Our actual container handling capacity is expected to double to approximately 4.0 million TEUs by late 2008 or early 2009, and eventually to approximately 4.5 million TEUs, as set out below: Annual Container Handling Capacity (1) F 2007F 2008F (in millions of TEUs) Existing facilities (2) New terminal at Beigangchi (3) 1.26 Total capacity Notes: (1) Figures above represent estimated container handling capacities and are not intended to be a projection of actual container handling throughput volumes for the above years. (2) Takes into account efficiency enhancements and planned investments in new equipment. (3) Our container terminal at Beigangchi is expected to be operational by late 2008 or early It will have an initial capacity of 1.26 million TEUs, and is expected to be able to operate at full designed capacity of 1.8 million TEUs by Continuing to improve the level and quality of our services We believe that our ability to consistently deliver high quality services in an efficient and timely manner is a key factor in our customers selecting us as their preferred terminal operator. Our subsidiary, Tianjin Container, has been recognised as one of the most efficient container operators in China and we are committed to continuing to invest in the most advanced equipment and technologies to continue to improve our operating efficiency. In addition, we constantly strive to deliver high quality services and responsive solutions to address the changing shipping schedules of our customers. 80

7 Continuing to expand our grain handling capacity and efficiency We currently handle all grain imports at the port of Tianjin. We propose to implement phase three of our grain terminal expansion project, which includes increasing the grain storage capacity by up to an additional 100,000 tonnes, reconstructing a specifically assigned berth, increasing grain throughput capacity to five million tonnes and our storage capacity to 210,000 tonnes. As a result, we expect to increase our overall grain handling efficiency and capacity and be able to attract additional business to our grain handling facilities. Establishing a steel distribution centre and improve production process to take advantage of growth in steel, iron and metal ore cargoes We will no longer be engaged in coal-related business after 2006, and instead will divert our focus to steel-related cargo businesses. We propose to construct a steel distribution centre at the port of Tianjin as part of our move away from coal handling to capture higher fee margins derived from handling steel and metal ores. We will carry out cargo despatch and delivery, streamlining production procedures and effectively reducing production costs. Our throughput for steel, iron and metal ore cargoes increased from approximately 3.8 million tonnes in 2003 to approximately 5.2 million tonnes in 2005, representing a CAGR of 17.9%. Our enhanced facilities and reduced cost structure will enable us to take advantage of this positive trend. Establishing a fruit and vegetables distribution centre to attract more fruit and vegetables cargo and become an import and export base for fruit and vegetables in northern China Our company owns the only refrigerated warehouse at the port of Tianjin that is specifically equipped to cater for fresh cargoes such as fruits and vegetables. We propose to construct a fruit and vegetables distribution centre in order to meet customer demand for temporary storage facilities for fruit and vegetables. Once completed, we believe that our new fruit and vegetable handling facilities will attract more customers. Our investment in Tianjin Port Green Channel Fruit & Vegetables Logistics Co., Ltd., which engages in, among other things, the storage and processing of fruits and vegetables and cargo agency services, will further position us to secure additional fruit and vegetable throughput to our facilities. OUR FACILITIES We operate two terminals and a total of 13 berths out of the 98 berths currently operational at the port of Tianjin, including six out of 13 container handling berths in the port of Tianjin, and seven non-containerised cargo berths. Our dedicated container terminal has one berth approximately 11 metres deep and three berths approximately 15.2 metres deep and a total quay length of 1,292 metres. This terminal is capable of berthing and handling the largest container vessels under construction with capacities up to 10,000 TEUs. This terminal has a designed annual capacity of approximately 1.6 million TEUs and an actual annual capacity of over 2.0 million TEUs. We have a second terminal with nine berths, two of which have been converted into a single container handling berth, with depths ranging from eight metres to 11 metres and a total quay length of 1,757 metres. This terminal is designed to handle a total capacity of 81

8 approximately 320,000 TEUs and approximately 18 million tonnes of non-containerised cargo per year, bringing our total designed annual capacity to 1.92 million TEUs. Two of the nine berths have been converted into a single container handling berth equipped for the loading and unloading of containers and are dedicated to serving smaller container ships, six berths are equipped for handling general cargo, and one is equipped as a non-containerised grain handling terminal. One of our general cargo berths is currently used primarily to handle coal. We will cease to operate our coal handling terminal by the end of 2006, after which we intend to use this berth to handle steel and metal ores. Our grain terminal is capable of docking grain vessels of up to 70,000 deadweight tonnes and is the only terminal in the port of Tianjin equipped with a specialised equipment line for loading and unloading bulk grain. The grain terminal s loading and unloading facilities include both a mechanical operation line as well as an automated operation line which delivers the unloaded grain from the ship either to the delivery trains or to one of our grain storage silos. The maximum annual handling capacity of our grain terminal is approximately 3.5 million tonnes and when phase three of its expansion is completed will reach 5 million tonnes. Our facilities also include: two primary container stacking yards with an aggregate area of approximately 450,000 square metres and a daily stacking capacity of 11,000 TEUs per stacking yard; three additional stacking yards specifically for stacking refrigerated containers with an aggregate area of approximately 14,400 square metres and a daily stacking capacity of up to 756 refrigerated container units; five large warehouses used for storing unloaded container cargo for long periods of time with an aggregate area of approximately 24,700 square metres; seven large-scale warehouses used for the storage of general cargo with an aggregate area of approximately 58,000 square metres; 26 silos for the storage of bulk grain with an aggregate capacity of approximately 110,000 tonnes; and 44 open-air store yards used for coal and other general cargo not requiring covered storage with an aggregate area of approximately 340,000 square metres. Our container berths are accessible by both road networks and railway networks. Our premises house four checking bridges with a total of 18 lanes which check in container cargo transported to our stacking yard via trucks. There are also 29 railway tracks with a total length of approximately 16 kilometres that connect directly to our container stacking yards and our non-containerised cargo berths. 82

9 OUR SERVICES Container Handling Operations We carry out our container handling services through Tianjin Container, which operates four dedicated container berths capable of berthing containerships with capacities up to 10,000 TEUs, and through Tianjin Second Stevedoring, which operates two berths (converted into one single container handling berth) designed to serve smaller container vessels for their docking as well as loading and unloading. Our container handling services consist of: loading and unloading containers between containerships and berths; providing storage and warehousing facilities for containers and container cargo; and ancillary services, such as container cargo assembly and disassembly and other container-related services, including through associated companies. The following table shows our container handling volumes for the periods indicated, as measured by TEUs: Year ended 31 December, CAGR ( ) (TEUs, unaudited) (%) Tianjin Container 1,351,130 1,546,691 1,750, Tianjin Second Stevedoring 140, , , Total 1,491,130 1,808,491 2,050, The utilization rates for our container handling berths during the three years ended 31 December 2005 were 68.4%, 62.6% and 63.6%, respectively while our total container handling volume increased from 1.49 million TEUs to 2.05 million TEUs over the same period. These utilization rates are based on the percentage of time during which our container berths are occupied by containerships, which is only one of the criteria that can be used in evaluating a container handling operation. Based on these utilization rates and our actual handling volumes for the respective periods, our implied maximum container handling capacities during the same periods, being the container handling capacity we would achieve if we loaded and unloaded containerships continuously during the period, were approximately 2.18 million TEUs, 2.89 million TEUs and 3.22 million TEUs, respectively. It should be noted that due to the substantial time involved in the docking and undocking of containerships at a container terminal berth, as well as other factors such as the flow of shipping traffic in the port and the capacities of container stacking and warehousing facilities, the Ministry of Communications has stated in its design codes that the standard maximum utilization for a containter terminal is between 50% and 70%, in turn depending on factors such as the number of berths at a terminal. We believe that the maximum utilization rate possible for our container berths may reach approximately 70%. We are constantly seeking further improvements in the operational efficiency of our container handling operations that will continue to increase our total container handling 83

10 capacity, which in turn will allow us to maintain a reasonable utilization rate despite increasing throughput. With efficiency enhancements, planned increases in our container handling equipment as described in the section headed Future Plans and Use of Proceeds and based on an estimate of our utilization rate gradually increasing from 63.6% to 64.0%, we currently estimate that our actual container handling capacities for the years ending 31 December 2006, 2007 and 2008, will be approximately 2.31 million TEUs, 2.51 million TEUs and 2.73 million TEUs, respectively. Though it is difficult to predict future volume growth with any certainty, based on our historical experience, we currently estimate that our utilization rate will gradually increase from 63.6% for the year ended 31 December 2005 to approximately 64.0% for the year ending 31 December We provide our loading and unloading services to shipping companies engaged in both the export of containerised goods from China as well as the importing of containerised goods from overseas. We also provide our loading and unloading services to domestic shipping companies conducting domestic trading and transportation services between Tianjin and other ports along the east coast of China. A small portion of our business comprises transhipment business, where containers are unloaded by us in Tianjin from a ship to await loading onto a second ship for transportation to another port. For outbound container movements, the containers are delivered to us either by truck or by railway in accordance with our Company s terminal operation schedule and must first pass through the checking station where the containers are inspected, weighed and assigned. After this, the containers are delivered to a designated outbound stacking yard using professional transtainers to offload these containers from delivery trucks and trains to the stacking yard. According to the particular shipping date, the containers are kept for loading onto the shipping vessel. After confirming that the relevant shipping company or agent has obtained all necessary customs clearances for the export of a container, we use professional transtainers to deliver the container from the stacking yard at the terminals to trucks and then to the designated berths, from where it will be loaded by computerised portainers onto the appropriate ship which is docked at the berth. For inbound shipments, shipping companies are required to notify us 72 hours prior to a vessel s scheduled arrival at our port as well as provide us with information regarding the contents of the vessel. The shipping companies then provide us with an updated schedule approximately 48 hours prior to arrival and a confirmation of the arrival time 24 hours prior to arrival. Once a ship has docked at one of our berths, computerised portainers lift the containers off the ship and onto transportation trucks. Transtainers then unload the containers into the stacking yard. Where requested by customers, the containers may be unpacked for pick-up or further storage. Once the owner of the container cargo or its agent arrives at the port to claim the shipment and has completed the cargo releasing formalities, we use transtainers to load the containers onto trucks or trains for onward transportation. Before leaving our premises, all containers and container cargo must pass through the checking station for inspection of all the necessary paperwork. Stacking and Warehousing In addition to the general loading and unloading of containers from shipping vessels, we also provide short-term container storage and longer-term storage of imported and unpacked container cargo at either our stacking yards or warehouses. Export containers awaiting loading and import containers awaiting pick-up are stored at the appropriate stacking yard for maximum periods of 48 hours and three days, respectively. Any containers that are not loaded 84

11 within these periods are transported to nearby designated stacking yards. Container cargoes that have been unpacked from their carrying containers but are not due to be picked up immediately are stored at one of our warehouses. To accommodate increasing demand, we have recently purchased a new container stacking yard with a total site area of 90,000 square metres located approximately 4.5 kilometres from our container terminal. This new stacking yard is connected to our terminal by road. Non-containerised Cargo Services We commenced our non-containerised operations in Our seven deep water berths, the largest of which can dock vessels of over 70,000 deadweight tonnes, makes us the largest stevedoring company (in terms of berth capacity) at the port of Tianjin. We are currently the only stevedoring company at the port of Tianjin with the ability and capacity to handle all types of general non-containerised cargo and the only stevedoring company with a dedicated grain handling terminal. For the year ended 31 December 2005, approximately 70.5% of the noncontainerised cargo we handled was domestic trade inbound and outbound cargo while approximately 29.5% was foreign trade inbound and outbound cargo. The principal types of non-containerised cargo we handle are coal, general cargo and bulk grain. The general cargo we handle consists primarily of metals (including iron, steel and metal ore), petrochemical fertilisers, bag cargoes and machinery and equipment. We have six berths dedicated to the handling of general cargo. The following table sets out our principal non-containerised cargo types handled for each of the three years 2003, 2004 and Year ended 31 December, CAGR Cargo type ( ) (10,000 tonnes, unaudited) (%) Grains Coke and Coal Metal ores Iron and steel Other (including fertilizer, machinery and equipment and fruits and vegetables) Total 1, , , The utilization rates for our non-containerised cargo handling berths during the three years ended 31 December 2005 were 79.1%, 84.7% and 81.0%, respectively. Based on these utilization rates and our actual handling volumes for the respective periods, our implied maximum non-containerised cargo handling capacities during the same periods were approximately million tonnes, million tonnes and million tonnes, respectively. Due to a variety of factors, such as the time involved in the docking and undocking of ships at a berth, the flow of traffic in a port, and equipment, storage and warehousing capabilities, the Ministry of Communications has stated in its design codes that the standard maximum 85

12 utilization for a non-containerised cargo terminal with over four berths ranges from 60% to 75%, which in turn is also dependent on the range and complexity of the cargoes being handled. General cargo for export is typically transported to us by truck or railway. After the cargo arrives at our facilities, we use forklift trucks, crane trucks and tow trucks to unload the cargo and transport it to one of our store yards or warehouses. General cargo that does not need to be covered will be transported to a store yard while cargo that needs to be covered will be transported to a warehouse. When the relevant ship arrives to pick up the cargo, we use specialised forklift trucks, crane trucks and tow trucks to transport the general cargo to the appropriate berth for loading. Gantry cranes equipped with the appropriate type of grab buckets are used to pick up and hoist the general cargo from the dockside onto the ship. Inbound general cargo undergoes similar handling procedures, with gantry cranes used to unload the cargo to the dock side and forklift trucks, crane trucks and tow trucks then used to transport the cargo to the appropriate store yard or warehouse to await pick-up. We have historically handled a high volume of coke and coal. However, out of environmental concerns, the Tianjin Government formulated a plan requiring all coke and coal handling operations to be moved to a specialised handling area at the Nanjiang ( ) port area of Tianjin. As a result, we ceased to handle coke at our facilities during 2003 and will cease to handle coal by the end of All of the coal we handle is for outbound shipments. As such, coal is generally transported via train to our open-air coal storeyard where it is unloaded and stacked in piles by special coal unloading machines. Once the ship has arrived at the berth, special loading machines are used to load the coal into trucks which then transport the coal to the assigned berth. These unloading trucks dump the coal along the dock of the berth where gantry cranes equipped with special grab buckets are used to pick up and hoist the coal from the dock into the designated compartment of the ship. Special care is taken to clean up and control loose coal particles by our staff through the use of water spraying procedures in effect at every stage of the coal handling process. As mentioned above, we expect to discontinue coal handling by the end of We plan to reallocate the berth currently used for coal handling to steel and metal ore handling thereafter, as handling these types of cargo carry higher prescribed per tonne handling charges than coal. We therefore expect this to have a positive impact on our future results of operations. We operate the only specialised grain terminal at the port of Tianjin. Approximately 90% of our grain handling services are for inbound shipments and the key grain product we handle is soy beans. Grain is unloaded onto a grain delivery system and is then transported to the measurement system for weighing. For on-time delivery, the lifter, a special facility of the measurement system, loads grain on the train after weighing. Grain to be delivered later will be stored in one of our grain silos. Grain is generally stored in a grain silo for an average period of four days, after which it is released through shafts that connect the grain silo to lifting equipment. Special grain handling cranes then transport the grain from the lifting equipment to the trucks or trains for inland delivery. Outbound grain shipments are handled in a similar fashion as outbound shipments of general cargo. We operate the only specialised vegetable and fruit handling operation in the port of Tianjin, including a warehouse with refrigeration facilities catering specifically to fruit and vegetable handling. 86

13 Ancillary Services We also provide a variety of services ancillary to our principal cargo handling operations that, in aggregate, are responsible for less than 2% of our Group s turnover. These include the basic unpacking of container cargo and the disassembly, cleaning and storage of containers. We also hold a 40% interest in a Sino-foreign joint-venture engaged in international cargo agency, container cargo assembly and maintenance. We also hold a 75% interest in a Sino-foreign jointventure engaged in container delivery services, including loading and unloading, within the port of Tianjin area. We also own controlling interests in several entities engaged in other container and non-container related businesses, as well as minority interests in several cooperative entities formed with State-owned companies situated in inland cities of China, which mainly operate shipping agency businesses in respect of general cargo and container cargo. The table below shows the PRC subsidiaries and associated companies of the Group and the ancillary services they provide: Major PRC subsidiaries and associated Interest Key businesses companies we own (%) operated Other shareholders Tianjin Chang Hao 90% domestic cargo agency and Tianjin Port Tax Concession transhipment services; Zone Sheng Di Er Co., Ltd. agency services in ( respect of cargo storage ), an independent and consultation services third party of the Group and on tax concession cargo holder of the remaining 10% transportation; simple processing services relating to international trade; sales of construction materials. Tianjin Gangkai 75% container reconfiguration Hong Kong Sun Hoi Enterprise services; container Company Limited ( transportation; ), an independent repair and maintenance third party of the Group and of loading and unloading holder of the remaining 25% equipment; other container related port services. Tianjin Gangxin 75% transcontainer services; Gold Prime Holdings Limited container disassembly, ( ), maintenance, stacking and an independent third party warehousing; of the Group and holder of the management of empty remaining 25% containers; operation of the Xinjiang Alashankou Transit Railway Transport business; other container related port services. 87

14 Major PRC subsidiaries and associated Interest Key businesses companies we own (%) operated Other shareholders Tianjin Gangshi 55% container stevedoring Singapore Pacific Shipping services; Company Limited ( transcontainer services; ), an independent container disassembly, third party of the Group and stacking and warehousing; holder of 25%; other container related Sinotrans Container Shipping port services. Company Limited ( ), an independent third party of the Group and holder of 20% Tianjin Jinli 50% agency services in respect of Encinal Terminals Inc., an container cargo transportation; independent third party of the customs declaration and Group and holder of 25%; inspection process services; Tianjin Port Container Freight storage and warehousing; Company Limited ( packing and disassembly of ), a subsidiary containers. of Tianjin Port Group and holder of 25% Tianjin Jin Hai 41% single cargo packing and Hong Kong Chang Hai processing services; Enterprise Company Limited agency services in respect ( ), of tax concession cargo an independent third party of transportation; the Group and holder of 40%; storage and warehousing; Tianjin Port Material Sourcing international trade; Co. Ltd. ( labour services; ), a subsidiary other shipping related services; of Tianjin Port Group and holder container overhauling. of 19% Tianjin Japan Container 40% assembly and disassembly of China Tianjin Ocean Shipping containers; Agency Company Limited ( cleaning and maintenance of ), containers; a subsidiary of Tianjin Port international cargo agency Group and holder of 15%; services; China Ocean Shipping Agency reefer container and ordinary Company ( ), container overhauling. an independent third party of the Group and holder of 15%; Japan Nihon Hoso Unyn Company Limited ( ), an independent third party of the Group and holder of 15%; Japan Maruzen Showa Unyu Company Limited ( ), an independent third party of the Group and holder of 15% 88

15 Major PRC subsidiaries and associated Interest Key businesses companies we own (%) operated Other shareholders Tianjin Lian Xing 40% cargo agency services Tianjin Railway Bureau Storage Transport Department ( ), an independent third party of the Group and holder of 40%; Beijing Jun Qu Tianjin Enterprise Bureau Tanggu Boat Disassembly Factory ( ), an independent third party of the Group and holder of 20% Tianjin Lian Tong Shipping 35% agency services in respect Tianjin Shipping Agent Company Co., Ltd. ( of customs declaration and ( ), ) inspection process; an independent third party of shipping and tax concession the Group and holder of 34%; cargo transportation; Worldship International Line international trade and labour Limited ( services. ), an independent third party of the Group and holder of 31% Tianjin ShengGang Container 32% machine and equipment Tianjin Tanggu State Asset maintenance services; Investment Management cargo loading and unloading Company Limited ( services; labour services and human ), an independent third party resources related consultation of the Group and holder of 35%; services. Tianjin Port Foreign Economic Cooperation Company ( ), a wholly-owned subsidiary of Tianjin Port Group and holder of 33% Tianjin Port Green Channel 30% storage services (excluding Tianjin ZhongTong International Fruit & Vegetable Logistics coal, dangerous and polluting Freight Agency Co., Ltd. ( Co., Ltd. ( goods); ) fruit and vegetable processing, ) an independent third party including for retail and of the Group and holder of 25%; wholesale; Tianjin Tanggu Guang Fa cargo agency services; Trading Company( labour services; ) an container maintenance services. independent third party of the Group and holder of 25%; Tiajin Kuang Da International Trade Service Co., Ltd. ( ) an independent third party of the Group and holder of 20% 89

16 Quality Certification In 1996, our container and non-containerised cargo operations were certified as being in compliance with the quality management systems standards as set out in GB/T ISO9001:2000. The occupational health and safety management system of our container and non-containerised cargo operations has also been also been certified as in conformity with OHSAS18001 standard requirements. OUR EQUIPMENT Stevedoring Equipment The primary equipment used in our container operations are our 16 sets of computerised portainers and 37 sets of computerised transtainers. Portainers are located next to container berths and are used to load and unload containers from shipping vessels and transtainers are used to move containers within the stacking yards. Our portainers have a maximum outreach of 63 metres and a maximum uplift of 39 metres. We also recently invested RMB40 million (equivalent to approximately HK$38.5 million) to purchase four bridge cranes for dualcontainer lifting with maximum capacities of 61 tonnes each that became operational in early Our equipment purchase contracts for portainers and transtainers typically provide a 20 year guarantee for the equipment with a 12 month guarantee for spare parts. We are generally required to order principal equipment six to 12 months in advance of the proposed delivery time, and make an upfront payment of 50% of the cost. Our current portainers and transtainers have been in use for periods ranging from a few months to 11 years and have useful lives of 15 to 25 years. Our non-containerised cargo operations are equipped to handle a wide variety of noncontainerised cargoes. As such, we also use a wide variety of professional equipment in our non-containerised cargo operations, including cranes, forklifts, tow trucks, loading machines and door type cranes. We have our own fleet of 53 trucks which are used to transport containers to and from shipping berths, container stacking yards and warehouses. IT and Computer Systems Professional IT systems are fundamental to ensuring that port operations, and in particular container terminal operations, run efficiently. We believe that our IT systems are comparable to those used in other modern terminals throughout the world and some of the systems are globally advanced systems. We use Cosmos container terminal production and management software system licensed from Cosmos N.V. to schedule and execute our container loading and unloading plans. We also have additional software for managing our shipping documentation and billing system. 90

17 In order to bring the technology used in our container terminal operations up to the latest international standards and further improve the efficiency of our operations, in late 2004 we installed a new operational system, known as 3C2S, linking our computers, communications, control systems, global positioning system (or GPS) and geographic information system (or GIS). The 3C2S system was implemented in conjunction with our existing COSMOS operational management software and IBM AS400 computer hardware network and became operational at the end of The 3C2S system allows our technical staff in our operations centre to efficiently monitor and control all aspects of our container operations through large digital light processing (or DLP) monitors. To monitor the management of the Company s loss cargos and consolidated cargos and standardize stacking and storage and to improve the cargo stacking yard management, we developed a computerized loss cargo and consolidated cargo production management system to provide more efficient and economic use of stacking yards. We have not, to date, experienced any system failure or difficulties with our IT and computer systems, or in the interface between our different systems. Maintenance We have detailed internal regulations and procedures with respect to the maintenance of our equipment. Our technical department is responsible for the maintenance of our principal cargo handling equipment. Our technical department carries out monthly inspections of our equipment to assess whether it is in good working order, while the daily operational staff are also responsible for undertaking ongoing inspections during the course of their day-to-day work and to report any maintenance issues. We also outsource equipment maintenance and repair services to independent third parties. The container management software license we entered into with Cosmos N.V. in respect of their software provides for regular maintenance to be provided by Cosmos N.V., and our other computer systems also undergo regular maintenance. For the three years ended 31 December 2005, our maintenance costs amounted to HK$26.2 million, HK$21.4 million and HK$20.6 million, respectively. Suppliers Shanghai Zhenhua Port Machinery Company Limited has been our main supplier of portainers and transtainers since Our principal suppliers of products and services used in our daily operations are, Le Ling Labour Service Development General Company, which provides us with labour services, and Tianjin Port Group, which provides utilities services including water and electricity used by our customers. In accordance with relevant PRC legal provisions, we are required to tender certain equipment purchase orders out to various potential suppliers prior to deciding on which supplier to use. For the three years ended 31 December 2005, payments made to our largest supplier amounted to 34.8 million, HK$39.9 million and HK$57.38 million, respectively, accounting for 18.6%, 17.0% and 14.0% of our total purchases. For the same periods, payments to our five largest suppliers amounted HK$106.0 million, HK$130.2 million and HK$91.5 million, respectively, accounting for 56.6%, 55.3% and 22.3% of our total purchases. None of our Directors or their respective associates (as defined in the Listing Rules), or our existing shareholders who, to the knowledge of Directors, own more than 5% of our issued share capital, has any interest in any of our five largest suppliers. Of our five largest suppliers for the 91

18 year ended 31 December 2005, one was Tianjin Port Group and two others were subsidiaries of Tianjin Port Group, namely, Tianjin Port Electricity and Tianjin Port Material Sourcing Co., Ltd. For further details of our historical and continuing transactions with Tianjin Port Group, please refer to the section headed Relationships with Tianjin Development and Tianjin Port Group Relationship with Tianjin Port Group. OUR CUSTOMERS As with many industries in the PRC, until very recently the level of control exercised by the government over the ports industry was significant. As stated in the prospectus of Tianjin Development published in 1997, most of our customers were coordinated and allocated to us by the Tianjin Port Authority and competition for customers within the port of Tianjin existed in terms of competition for allocation of business from the Tianjin Port Authority. At the time of the listing arrangement of Tianjin Development on the Stock Exchange, Tianjin Development entered into an agreement with the Tianjin Port Authority under which the Tianjin Port Authority undertook to allocate certain percentages of cargoes to us for so long as it retained the power to allocate cargoes. For further information in relation to the historical business allocation arrangement, please refer to the section headed Relationships with Tianjin Development and Tianjin Port Group Relationship with Tianjin Port Group Historical agreements with Tianjin Port Group. Our ability to provide our customers with an efficient, high quality and competitive service has always been fundamental to the continued success of our business. In part, this is because the business allocation undertakings given by the Tianjin Port Authority were stated not to apply in certain circumstances where our customers were not satisfied with the quality of the services we provide or our capacity being unable to handle the relevant cargo throughput. Over time these allocation undertakings became increasingly unimportant to us for a number of reasons: a large number of our key customers that were originally allocated to us continued their business relationships with us without formally going through a further process (or further processes) of allocation and notwithstanding that such customers have been free to transfer their businesses to other operators at the port of Tianjin at any time; we increasingly developed direct relationships with customers ourselves; we gradually developed our own sales and marketing capability and introduced our own marketing measures, such as providing various benefits to premium customers and the establishment of a website by Tianjin Container; in line with other industries in China, the port of Tianjin gradually changed from one that was subject to close control by the government (through the Tianjin Port Authority), to one in which state owned enterprises were increasingly recognised as independent business entities required to operate their businesses in an open market environment. This change in the nature of the port of Tianjin culminated in the establishment of Tianjin Port Group in July 2004, at which time the business allocation undertakings ceased to have legal effect. 92

19 As a result, our business has gradually evolved from one that relied on both the coordination of customers by the Tianjin Port Authority and the standard of service provided to customers, to one that relies solely on our competitiveness in the context of external commercial factors, including the standard of service we provide to customers, our marketing and sales capabilities and, in respect of our non-containerised business, pricing of our services. Our principal customers are international shipping companies, including COSCO Container Lines Co., Ltd., China Shipping Container Lines Company Limited, Sinotrans Limited, Hanjin Shipping Co., Ltd. and Swiss Mediterranean Shipping Company Limited. Our customers also include cargo importers and exporters, including, Fu Long Cargo Transportation Company Limited, Shenhua Coal Trading Company Limited, Tianjin Port Oils and Foodstuffs Import and Export Company Limited and Hebei Hui Fu Oils and Foodstuffs Group Trade Company Limited. For the three years ended 31 December 2005, turnover from our five largest customers amounted to HK$213.8 million, HK$193.9 million and HK$285.8 million, respectively, representing 29.5%, 24.2% and 31.8%, respectively, of our total turnover. For the same periods, our single largest customer amounted to HK$84.3 million, HK$57.3 million and HK$97.2 million, respectively, representing 11.6%, 7.2% and 10.8% of our total turnover. None of our Directors or their respective associates (as defined in the Listing Rules), or our existing shareholders who, to the knowledge of Directors, own more than 5% of our issued share capital, has any interest in any of our five largest customers. Containerised Cargo Customers Our principal containerised cargo customers are domestic and international shipping companies, including China Ocean Shipping Company, China Shipping Container Lines, Sinotrans Limited, Hanjin Shipping Co., Ltd. and Swiss Mediterranean Shipping Company Limited. Our customers place orders for each container shipment directly or through shipping and cargo agencies, which, on behalf of the shipping companies or cargo owners, coordinate the shipping orders and are responsible for other handling details for each shipment. Our fees in relation to our stevedoring charges, container collection fees and any other charges or fees imposed by the Ministry of Communications operation are paid by customers or their shipping and cargo agencies at the completion of each transaction through the customer-designated shipping and cargo agent. The fees for inland transport are paid by customers prior to their collection of imported containers. Non-containerised cargo customers Our non-containerised cargo customers primarily consist of domestic shipping companies as well as companies such as manufacturers and basic materials exporters. Most of these companies are located in the regions of Tianjin, Beijing, Hebei province, Henan province, Gansu province, and the Inner Mongolia and Xinjiang autonomous regions. We generally divide our non-containerised cargo customers into 3-star customers, 4-star customers, 5-star customers and other customers according to the annual volume of cargo or containers that we handle for them. Our 5-star customers are those for whom we handle an annual volume of at least 1 million tonnes of non-containerised cargo, our 4-star customers are 93

20 those for whom we handle an annual volume of at least 500,000 tonnes and our 3-star customers are those for whom we handle an annual volume of at least 300,000 tonnes. We offer our 3, 4 and 5-star customers additional benefits to those offered to our other customers, including dedicated storage areas, priority handling of cargo and containers, dedicated customer managers and regular visits to customer offices to discuss our services and elicit feedback. For the year ended 31 December 2005, we had three 5-star customers, five 4-star customers and seven 3-star customers. SALES AND MARKETING Fees and charges We derived 98.7%, 98.4% and 98.3% of our turnover for the three years ended 31 December 2005, respectively, from the fees and charges we charge our customers for our container handling and stevedoring services. These fees and charges are set by the Ministry of Communications and vary according to the type of cargo being handled as well as the type of service being provided (e.g., loading, unloading, warehousing or overtime services and other shipping operation fee like ship unmooring). Fees and charges for international trade were last adjusted by the Ministry of Communications in 2001 and prior to that in The most recent fees and charges for domestic trade were introduced by the Ministry of Communications in The Ministry of Communications does not have a fixed schedule for the adjustment of fees and charges. Current charges for loading or unloading a container are RMB425.5 (equivalent to approximately HK$409.1) for a regular TEU, RMB294.1 (equivalent to approximately HK$282.8) for an empty TEU, RMB467.9 (equivalent to approximately HK$449.9) for TEUs involving dangerous goods, RMB467.9 (equivalent to approximately HK$449.9) for refrigerated TEUs and RMB324.1 (equivalent to approximately HK$311.6) for empty refrigerated TEUs. Charges are approximately 50% higher for FEUs, as well as for transhipment containers. Fees for handling non-containerised cargoes are charged according to the type of cargo, with import cargo rates ranging from RMB6.4 (equivalent to approximately HK$6.2) per tonne up to over RMB125.2 (equivalent to approximately HK$120.4) per tonne. Handling rates for our principal foreign trade related non-containerised cargoes range from RMB13.5 (equivalent to approximately HK$13.0) per tonne for coal and metal ores, to RMB21.8 (equivalent to approximately HK$21.0) per tonne for steel, and from RMB27.0 to RMB30.0 (equivalent to approximately HK$26.0 to HK$28.8) per tonne for grain and soy beans. The handling rates for domestic trade related non-containerised cargo have been recently liberised and we generally charge lower handling fees for such cargo compared to those cargos that are foreign trade related. We generally collect our fees from customers at the time that we perform our services or, in many cases, in advance. For customers with good credit and long-term customers, we generally collect our fees within ten days from the completion of each transaction. For some of our larger customers we provide them with 30 days credit terms and, in some cases, 60 days to 90 days credit terms. 94