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Summary of Content
Geely Automobile Holdings Limited 重新定義 R ED EF IN IN G Annual Report 2018 Room 2301, 23rd Floor, Great Eagle Centre, 23 Harbour Road, Wanchai, Hong Kong 香港灣仔港灣道 23 號鷹君中心 23 樓 2301 室 (Incorporated in the Cayman Islands with limited liability) (Stock Code : 0175) MOMENTS Annual Report 2018 C ON TE N TS Key Figures Five Year Financial Summary 3 Editorial Chairman’s Statement 7 Management Report Performance & Governance Directors and Senior Management Profiles Corporate Governance Report Directors’ Report 11 29 35 60 Accounts Independent Auditor’s Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 91 97 98 99 101 103 105 Our Company Corporate Information 227 K EY FIG UR ES Geely Automobile Holdings Limited Annual Report 2018 KEY FIGURES FIVE YEAR FINANCIAL SUMMARY Profit attributable to equity holders of the Company Equity attributable to equity holders of the Company (RMB Million) (RMB Billion) 14 15 17 18 14 44.9 34.5 24.4 19.5 17.3 5,112 16 2,261 1,431 30.1 21.7 53.7 10,634 92.8 106.6 (RMB Billion) 12,553 Revenue 15 16 17 14 18 15 16 17 18 A summary of the results and the assets and liabilities of the Group for the last five financial years, as extracted from the audited financial statements, is set out below: 2018 RMB’000 2017 RMB’000 2016 RMB’000 2015 RMB’000 2014 RMB’000 106,595,133 92,760,718 53,721,576 30,138,256 21,738,358 Profit before taxation Taxation 14,958,973 (2,284,575) 12,773,961 (2,038,572) 6,203,943 (1,033,755) 2,874,805 (586,143) 1,943,405 (494,177) Profit for the year 12,674,398 10,735,389 5,170,188 2,288,662 1,449,228 Attributable to: Equity holders of the Company Non-controlling interests 12,553,207 121,191 10,633,715 101,674 5,112,398 57,790 2,260,529 28,133 1,430,588 18,540 12,674,398 10,735,389 5,170,188 2,288,662 1,449,128 91,460,980 84,980,752 67,582,836 42,292,460 37,280,150 (46,086,262) (50,169,918) (42,896,587) (22,552,937) (19,813,800) Total equity 45,374,718 34,810,834 24,686,249 19,739,523 17,466,350 Represented by: Equity attributable to equity holders of the Company Non-controlling interests 44,943,977 430,741 34,467,047 343,787 24,437,227 249,022 19,523,816 215,707 17,287,996 178,354 45,374,718 34,810,834 24,686,249 19,739,523 17,466,350 Revenue Assets and liabilities Total assets Total liabilities 003 Geely Automobile Holdings Limited Annual Report 2018 FIVE YEAR FINANCIAL SUMMARY 15.7 15 16 17 18 Total debt(4)/Total capital(5) 17 18 14 15 Total debt/EBITDA (%) 8.9 19.9 3.6 29.3 7.0 49.4 8.3 8.9 13.0 91.6 (%) 16 14 15 16 17 18 14 15 16 17 18 (1) EBITDA is calculated by adding taxes, depreciation and amortization, and finance cost, excluding other income other than government subsidies to profit for the year. (2) EBITDA margin is calculated by dividing EBITDA by revenue for the relevant year, expressed as a percentage. (3) CAPEX includes cash outlays on additions to property, plant and equipment, intangible assets and land lease prepayments. (4) Total debt is the sum of current and non-current borrowings, convertible bonds, bonds payables and senior notes. (5) Total capital includes total current and non-current borrowings plus total equity. 004 17 18 3,244 2,421 7,644 3,709 13.0 15 14.2 12.6 14 3,907 2,741 14 7,523 (RMB Million) 16.2 CAPEX(3) (%) 17,242 EBITDA Margin(2) (RMB Million) 14,550 EBITDA(1) 7,642 OTHER KEY FINANCIAL FIGURES 16 Geely Automobile Holdings Limited Annual Report 2018 KEY EDITORIAL FIGURES FIVE YEAR FINANCIAL SUMMARY (%) EBITDA/Interest expense 18 89.7 7.1 17 14 66.2 37.8 198 320 33.7 4,400 6 8.2 6,908 11.1 12.3 151.3 CAPEX/Revenue (RMB Million) 9,719 EBITDA-CAPEX 15 16 17 18 14 15 16 Formula For the year Revenue (RMB’000) Profit attributable to equity holders of the Company (RMB’000) Per share Basic earning per share (RMB) Diluted earning per share (RMB) Dividend per share (HK$) Net asset value (NAV) per share (RMB) At year end Equity attributable to equity holders of the Company (RMB’000) Total assets (RMB’000) Borrowings (including bonds payable) (RMB’000) Number of shares in issue Share price during the year – High (HK$) – Low (HK$) Financial ratios Gearing ratio = (Borrowings/Equity attributable to equity holders of the Company) Return on total assets Return on equity attributable to equity holders of the Company (1) (2)/(5) (2) (3) (4) (5) (4)/(2) (1)/(3) (1)/(2) 14 15 16 17 18 2018 2017 Change in Percentage Increase/ (Decrease) 106,595,133 12,553,207 92,760,718 10,633,715 15 18 1.40 1.37 0.35 5.00 1.19 1.16 0.29 3.84 18 18 21 30 44,943,977 91,460,980 3,423,102 8,981,612,540 34,467,047 84,980,752 1,296,460 8,970,514,540 30 8 164 0 28.75 12.84 29.80 7.39 (4) 74 7.6% 13.7% 27.9% 3.8% 12.5% 30.9% 100 10 (10) 005 E DI TO R IA L EDITORIAL Geely Automobile Holdings Limited Annual Report 2018 CHAIRMAN’S STATEMENT OUR PROFIT ATTRIBUTABLE TO EQUITY HOLDERS FOR 2018 INCREASED BY 18% OVER 2017 TO RMB12.55 BILLION, MAINLY ATTRIBUTABLE TO THE INCREASE IN SALES VOLUME AND THE CONTINUOUS IMPROVEMENT IN PRODUCT MIX DURING THE YEAR. BUSINESS OVERVIEW China’s passenger vehicle market experienced a 4% decline in 2018, after strong growth over the past few year driven by government stimulus ended 31 December 2017. The deterioration of consumer confidence in China caused by increased political and economic uncertainties also affected demand for passenger vehicles during the year. LI SHU FU Chairman Despite the overall downward trend for China’s passenger vehicle market, we continued to increase our market share and strengthen our leading position in China’s passenger vehicle segment in 2018, helped by the good sales performance of our A-segment sedans and Sport Utility Vehicle (“SUV”), making us the largest indigenous brand vehicle manufacturer in China in terms of sales volume and maintaining our position as the third largest passenger vehicle brand in China. The launch of our newest A-segment sedan model “Bin Rui” (繽 瑞) and new compact SUV model “Bin Yue” (繽越) towards the end of the year further enhanced our product portfolio. As a result, we achieved a 19% growth in domestic sales volume (including the sales volume of “Lynk&Co” vehicles sold by our 50%-owned joint venture) in 2018. Our group’s export sales volume also exhibited a strong rebound of 136% year-on-year (“YoY”) increase in 2018 as a result of the introduction of more updated products to the export markets. Our group sold a total of 1,500,838 units of vehicles (including the sales volume of “Lynk&Co” vehicles sold by our 50%-owned joint venture) in 2018, up 20% from 2017. Despite the much weaker passenger vehicle demand in China towards the end of 2018, our group’s 2018 sales volume is only 5% below the target we set at the beginning of 2018, reflecting the strong underlying demand for the group’s products. 007 Geely Automobile Holdings Limited Annual Report 2018 CHAIRMAN’S STATEMENT FINANCIAL REVIEW Our group’s financial performance in 2018 met the management’s expectations with total revenue increased by 15% to RMB106.6 billion for the year ended 31 December 2018. Total net profit of our group grew 18% from RMB10.74 billion in 2017 to RMB12.67 billion in 2018 due to increase in overall sales volume and operational cash inflow with our group’s total cash level (bank balances and cash + pledged bank deposits) increased further by 17% to RMB15.76 billion at the end of 2018. better profit margin during the year. After accounting for non-controlling interests, our net profit attributable to shareholders was up 18% from RMB10.63 billion in 2017 to RMB12.55 billion in 2018. Diluted earnings per share was up 18% to RMB1.37. As a result of the launch of a few lower-priced compact SUV models since the second half of 2017 and the exclusion of the higher-priced DIVIDEND In view of the strong operational cash inflow in 2018 and the current high cash level, our board of directors decided to increase our dividend payout ratio and recommend the payment of a final dividend of HK$0.35 (2017: HK$0.29) per share for 2018. the calculation, our group’s average exfactory selling price (“ASP”) was up only 1% compared to the same period last year. During the year, our manufacturing operations continued to generate good enhance brand image. 2018 was the first year the group fully entered into the new energy vehicle era. Cooperating with partners around the world, the group is moving to build a global industrial value chain that could provide customers with highly competitive new energy and “Lynk&Co” vehicles, which were sold under our 50%-owned joint-venture, from strengthen after-sale services and PROSPECTS electrified vehicles. This will ensure that With our group’s core mission of ‘Building goal as stated in its “20200 strategy”. Refined Cars for Everyone’ (造每個人 This year, the group’s sales volume 的精品車), we will continue to improve our product quality, invest in innovation, the group could achieve its long-term exceeded 1.5 million units, with a good balance between sedans and SUV models, most of which have become market leaders in their respective segments in China. Meanwhile, Lynk&Co Investment Co., Ltd. or “Lynk&Co JV”, the group’s 50%-owned joint-venture with members of Volvo Car Corporation (“VCC”) and 浙江吉利控股集團有限公司 (Zhejiang Geely Holding Group Company Limited or “Geely Holding”), launched a series of new models, attracting an increasingly young consumer base to this new brand. 008 Geely Automobile Holdings Limited Annual Report 2018 EDITORIAL CHAIRMAN’S STATEMENT In 2019, we shall face even greater challenges, but also greater opportunities. As long as we could identify the right direction, firm up our confidence and make appropriate decision, we could seize the opportunities to ensure a bright future for the group. Automobile remains the group’s core business. We should therefore focus our resources to further strengthen and expand our automobile business with an aim to become a leading global automobile group with international competitiveness. The 21st century is an era characterized by technological revolution, industrial transformation and business reshaping. It is a period dominated by cross-sector In the years ahead, disruptive “Lynk&Co” brand and thus initial success integration, resource sharing, win-win technologies will continue to sweep in penetrating the higher end passenger partnership and cooperation. The bigger through the automobile industry and vehicle market in China, I firmly believe our circle of friends, the better our reward affect the wider mobility sector. Changes that the group is on the track of becoming will be. will happen everywhere. In the world of a leading global automobile group, and Internet of Everything and with the rapidly achieving our long term annual sales rising power of artificial intelligence chips, volume target of 2 million units (including vehicles of the future will no longer be the sales volume of “Lynk&Co” vehicles just a transportation tool but a mobile sold by our 50%-owned joint venture) by computing hub, a central storage centre year 2020. This should allow us to sustain and a highly integrated on-line and off-line our growth and continue to provide good intelligent and mobile space and terminal. return to our shareholders in the years To cope with these big changes, there ahead. Finally, I would like to pay tribute is an urgent need for greater solidarity to all our staff for their hard work and and cooperation among automobile achievements and to our shareholders for companies. their continued support during the year. Given our tremendous achievement in enriching our products portfolio, gaining significant market share and enhancing customer satisfaction in the Li Shu Fu China market over the past few years Chairman and the successful launch of our new 21 March 2019 009 M AN AGE M EN R E P T O RT Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE 010 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT PERFORMANCE & GOVERNANCE OVERALL PERFORMANCE The overall performance of Geely Automobile Holdings Limited (the “Company”, together with its subsidiaries, collectively the “Group”) was in line with the management’s expectation in 2018. The demand for its new models launched over the past few years was encouraging, while sales of other existing models remained stable. Despite the lower demand for passenger vehicles in China in 2018, the Group’s sales volume in the China market was still up 19% from 2017, compared with 4.1% yearon-year (“YoY”) decline in the overall China’s passenger vehicle in total expenses in relation to the research and development activities (as detailed below). These, coupled with additional profit contribution from the Lynk&Co JV during the year, the Group’s profit attributable to the equity holders increased by 18% YoY to RMB12.55 billion in 2018. Diluted earnings per share (“EPS”) was up 18% to RMB1.37. In 2018, government grants and subsidies were up 10% to RMB0.99 billion from 2017. The government grants and subsidies during the year were mainly cash subsidies from the governments in respect of the Group’s operating and research and development activities. market in 2018 according to China Association of Automobile Manufacturers (“CAAM”). The stronger performance of the Group is mainly due to its better products offering, technologies, product quality, after-sale services and brand image. As a result of the Group’s introduction of more updated products to the export markets, the export sales volume of the Group increased significantly by 136% YoY to 27,768 units in 2018, compared with 16.8% YoY growth of China’s overall vehicle exports according to CAAM. Overall, the Group sold a total of 1,500,838 units of vehicles (including the sales volume of “Lynk&Co” vehicles sold by the Group’s 50%-owned joint venture, namely 領克投資有限公司 (Lynk&Co Investment Co., Ltd. or “Lynk&Co JV”)) in 2018, up 20% from 2017. Despite the respectful results, the Group’s sales volume in 2018 was 5% below FORMATION OF JV COMPANY WITH AISIN SEIKI TO ENGAGE IN THE MANUFACTURE AND SALES OF THE FRONT-WHEEL DRIVE 6-SPEED AUTOMATIC TRANSMISSIONS AND RELATED PARTS AND COMPONENTS On 24 April 2018, 浙江吉利動力總成有限公司 (Zhejiang Geely Powertrain Company Limited or “Zhejiang Powertrain”, formerly known as 浙江吉利羅佑發動機有限公司 (Zhejiang Geely Luoyou Engine Company Limited)), an indirect 99% owned subsidiary of the Company, entered into a joint venture agreement with AISIN AW Co., Ltd. (“AISIN AW” (愛信AW株 式會社)), a limited liability company incorporated in Japan and the annual sales volume target of 1,580,000 units set at the beginning of 2018. The shortfall was due to the sharp deterioration of consumer sentiment during the last few months of 2018 and the Group’s strategic decision to proactively adjust dealers’ inventory to healthier levels at the end of 2018. Total revenue increased by 15% to RMB106.6 billion in 2018. Gross margin ratio improved during the year due to better product mix (i.e. higher proportion of higher-margin models) and economies of scale. The 12% increase in selling and distribution expenses was well controlled with the increase in revenue. The 29% increase in administrative expenses during the year was primarily attributable to the increase 011 Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE In recent years, major vehicle manufacturers are incorporating more advanced transmissions with higher fuel efficiency in their products in order to meet the more stringent regulatory requirements on fuel consumption standards. With the increasing demand for advanced transmissions, the formation of the JV Company could leverage on the strength, resources and expertise of both parties in the manufacturing of automatic transmissions and related parts and components in the PRC, which in turn will ensure a stable supply of the advanced transmissions to the Group in the future. is a subsidiary of AISIN SEIKI Company Limited (a company ACQUISITIONS OF THREE MANUFACTURING PLANTS IN DAJIANGDONG OF HANGZHOU, GUANSHANHU OF GUIYANG AND HANGZHOU BAY OF NINGBO incorporated in Japan with limited liability, the shares of which On 18 July 2018, 浙江吉潤汽車有限公司 (Zhejiang Jirun are listed on the Tokyo Stock Exchange (stock code: 7259)). Automobile Company Limited or “Jirun Automobile”), an Pursuant to the joint venture agreement, both parties agreed indirect 99% owned subsidiary of the Company, entered into to establish a joint venture company (“JV Company”) to an acquisition agreement with 杭州吉利汽車部件有限公司 principally engage in the manufacture and sales of the front- (Hangzhou Geely Automobile Components Company Limited wheel drive 6-speed automatic transmissions and related parts or “Hangzhou Components”), a wholly owned subsidiary of 浙 and components (the “Products”). The JV Company is owned 江吉利汽車有限公司 (Zhejiang Geely Automobile Company as to 40% by Zhejiang Powertrain and as to 60% by AISIN AW. Limited or “Zhejiang Geely”), which in turn is owned as to (i) The registered capital of the JV Company is US$117,000,000 88.32% by 浙江吉利控股集團有限公司 (Zhejiang Geely Holding (equivalent to RMB733,590,000), and will be contributed as Group Company Limited or “Geely Holding”, and together to 40% (US$46,800,000 or equivalent to RMB293,436,000) in with its subsidiaries, the “Geely Holding Group”), a company cash by Zhejiang Powertrain and as to 60% (US$70,200,000 beneficially wholly owned by Mr. Li Shu Fu (“Mr. Li” who is the or equivalent to RMB440,154,000) in cash by AISIN AW. As chairman and the substantial shareholder of the Company) unanimous resolution of all directors of the JV Company for and his associate; and (ii) 11.68% by other Mr. Li’s interested certain key corporate matters is needed, the JV Company is a entities. Pursuant to the agreement, Jirun Automobile agreed to joint venture company of the Group and its financial results will acquire, and Hangzhou Components agreed to sell, the entire be accounted for in the consolidated financial statements of the registered capital of 杭州吉利汽車有限公司 (Hangzhou Geely Group using the equity method. Automobile Company Limited or “Hangzhou Automobile”), for a cash consideration of around RMB930,620,000; Jirun Automobile entered into an acquisition agreement with 貴 州吉利新能源汽車有限公司 (Guizhou Geely New Energy Automobile Company Limited or “Guizhou New Energy”), a wholly owned subsidiary of Zhejiang Geely, pursuant to which 012 MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE Jirun Automobile agreed to acquire, and Guizhou New Energy of mid-end to high-end electric vehicles, sedans, sport utility agreed to sell, the entire registered capital of 貴州吉利汽車部 vehicles and multi-purpose vehicles. Upon the commencement 件有限公司 (Guizhou Geely Automobile Components Company of commercial production of the Target Companies, the new Limited or “Guizhou Automobile”), for a cash consideration of models to be built at these plants should expand the Group’s around RMB1,074,309,000; and Jirun Automobile entered products offering and enhance the overall competitive strength into an acquisition agreement with Zhejiang Geely, pursuant to of the Group’s products in the market and become one of the which Jirun Automobile agreed to acquire, and Zhejiang Geely key drivers of the Group for future profitability. Total planned agreed to sell, the entire registered capital of 寧波吉潤汽車部 production capacity of the three manufacturing facilities would 件有限公司 (Ningbo Jirun Automobile Components Company be 690,000 units per annum. Limited or “Ningbo Jirun”), for a cash consideration of around RMB1,169,399,000. The considerations for the acquisitions of Hangzhou Automobile, Guizhou Automobile and Ningbo Jirun (collectively the “Target Companies”) were determined after arm’s length negotiations between the respective purchaser and vendors with reference to the respective net asset value of the Target Companies prepared under the Hong Kong Financial Reporting Standards (“HKFRS”) as at 31 May 2018, the valuation premium over the carrying value of the property entitled to the Target Companies as at 31 May 2018. On 4 September independent shareholders of the Company at the extraordinary PROTON LICENSING AGREEMENT AND PROTON SALES AGREEMENT general meeting and the acquisitions had been subsequently On 24 September 2018, the Company entered into a licensing completed by end of September 2018. Upon completion of agreement with Geely Holding pursuant to which the Group the acquisitions, each of the Target Companies becomes an agreed to license the intellectual properties (“Intellectual indirect subsidiary of the Company and its financial results are Properties”) including, among other things, patents, inventions, consolidated into the financial statements of the Group. designs, copyrights, etc. associated with the NL-3 Model (also 2018, the acquisitions had been duly approved by the known as “Geely Boyue” (吉利博越)), the SX11 Model and The acquisitions should provide an opportunity for the Group the VF11 Model (“Licensed Models”), and any subsequent to expand its manufacturing capacity to meet the increasing enhancement, development, update and revision on the demand of automobiles in the PRC, as well as to enhance Intellectual Properties developed by either parties to the the production capabilities of the Group for the manufacture licensing agreement (“Foreground Intellectual Properties”) to 013 Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE Geely Holding for the design, development, manufacture, sale, The Group has been or will be manufacturing, selling, marketing marketing and distribution of the Licensed Models within Negara and distributing the Licensed Models in the PRC under the Brunei Darussalam, Republic of Indonesia, Malaysia, Republic “Geely” brand. On the other hand, the Group has not been of Singapore, Thailand and other regions to be agreed between selling any of the Licensed Models in the Licensed Regions. The the Company and Geely Holding (“Licensed Regions”) during licensing agreement will provide an opportunity for the Group the licensed period for each Licensed Model, which will be 10 to export its technology in addition to exporting its products, years from the date of the licensing agreement or the date on and to generate additional income for the Group. Furthermore, which the production of the relevant Licensed Model in the the entering into of the Proton Sales Agreement will allow the Licensed Regions commences, whichever is later (“Licensed Group to expand its revenue sources by selling its products to Period”). The total license fee for the Intellectual Properties is the Geely Holding Group and ultimately to the Proton Group RMB1,344,000,000, which will be settled by Geely Holding in for sale in markets in which the Group currently does not have five equal annual installments over the course of five years from operations. the date on which the Licensed Period for the relevant Licensed Model commences. The license fee for the Intellectual Properties Company and Geely Holding with reference to (i) the actual ACQUISITIONS OF TWO ENGINE PLANTS IN TAIZHOU AND GUIYANG research and development costs (including labour costs, design On 5 October 2018, Zhejiang Powertrain, an indirect 99% and testing costs, prototype costs, etc.) incurred by the Group owned subsidiary of the Company, entered into an acquisition in developing the Intellectual Properties; and (ii) the estimated agreement with 台州吉利羅佑發動機有限公司 (Taizhou Geely market size of the Licensed Models in the Licensed Regions. Luoyou Engine Company Limited or “Taizhou Engine”), a wholly was determined after arm’s length negotiations between the owned subsidiary of Zhejiang Geely, pursuant to which Zhejiang Also on 24 September 2018, the Company entered into a Powertrain agreed to acquire, and Taizhou Engine agreed to master agreement with Geely Holding for the sale of CBUs, sell, the entire registered capital of 台州濱海吉利發動機有限公 CKDs and related after-sales parts of the Licensed Models 司 (Taizhou Binhai Geely Engine Company Limited or “Binhai by the Group to the Geely Holding Group (“Proton Sales Engine”), for a cash consideration of about RMB781,274,000; Agreement”) with the largest annual cap amount of around Zhejiang Powertrain entered into an acquisition agreement with RMB4,148 million for the three years ending 31 December 貴陽吉利發動機有限公司 (Guiyang Geely Engine Company 2020. The Intellectual Properties and the Foreground Intellectual Limited or “Guiyang Engine”), a 88.64% owned subsidiary of Properties to be licensed to Geely Holding pursuant to the Zhejiang Geely, pursuant to which Zhejiang Powertrain agreed licensing agreement, and the CBUs, CKDs and related after- to acquire, and Guiyang Engine agreed to sell, the entire sales parts of the Licensed Models to be procured by the registered capital of 貴州吉利發動機有限公司 (Guizhou Geely Geely Holding Group pursuant to the Proton Sales Agreement Engine Company Limited or “Guizhou Engine”), for a cash are for the ultimate use by Proton Holdings Berhad, a 49.9% consideration of about RMB484,003,000. owned associate of Geely Holding Group, and its subsidiaries (collectively the “Proton Group”) for their design, development, The considerations for the acquisitions of Binhai Engine and manufacture, sale, marketing and distribution of the Licensed Guizhou Engine (collectively the “Target Engines Companies”) Models in the Licensed Regions. were determined after arm’s length negotiations between 014 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT PERFORMANCE & GOVERNANCE the respective purchaser and vendors with reference to the 司 (Contemporary Amperex Technology Company Limited respective net asset value of the Target Engines Companies or “CATL Battery”), a company incorporated in the PRC with prepared under the HKFRS as at 31 August 2018, the valuation limited liability, the shares of which are listed on the Shenzhen premium over the carrying value of the property entitled to Stock Exchange (stock code: 300750). Pursuant to the the Target Engines Companies as at 31 August 2018. On 7 agreement, both parties agreed to establish an associate December 2018, the acquisitions had been duly approved company (the “Associate Company”) to principally engage by the independent shareholders of the Company at the in the research and development, manufacture and sale of extraordinary general meeting and the acquisitions had been battery cells, battery modules and battery packs (the “Battery subsequently completed by end of December 2018. Upon Products”). The registered capital of the Associate Company completion of the acquisitions, each of the Target Engines will be RMB1,000,000,000, and will be contributed as to 49% Companies becomes a wholly owned subsidiary of Zhejiang (equivalent to RMB490,000,000) in cash by Jirun Automobile Powertrain, and its financial results are consolidated into the and as to 51% (equivalent to RMB510,000,000) in cash by financial statements of the Group. CATL Battery. The Associate Company is an associate of the Group and its financial results will be accounted for in the It is expected that the vehicle engines to be manufactured by consolidated financial statements of the Group using the equity the Target Engines Companies will mainly be sold to the Geely method. Holding Group for use in the Volvo-branded vehicles and to the Lynk&Co JV and its subsidiaries (collectively the “LYNK&CO It is expected that the reliable supply of advanced and high Group”) for use in the “Lynk&Co” vehicles, and will also be used performance battery cells, battery modules and battery packs in the Group’s future top-end vehicle model at a later stage. for new energy vehicles is indispensable for the execution of the The vehicle engines to be manufactured by the Target Engines new energy vehicle strategy of the Group. The establishment of Companies will possess superior performance in terms of power the Associate Company will leverage on the strength, resources output and fuel consumption as well as characteristics of low and expertise of both parties in the manufacturing of battery carbon emission, which are targeted to meet the needs of the cells, battery modules and battery packs for new energy Group, the LYNK&CO Group and the Geely Holding Group for vehicles in the PRC, which in turn will ensure a stable supply of high performance and multi-functional vehicles. Total planned the Battery Products to the Group in the future. production capacity of the two engine production facilities would be 720,000 units of engines per annum. FORMATION OF ASSOCIATE COMPANY WITH CATL BATTERY TO ENGAGE IN THE RESEARCH AND DEVELOPMENT, MANUFACTURE AND SALE OF BATTERY CELLS, BATTERY MODULES AND BATTERY PACKS ISSUANCE OF US$300 MILLION 3.625% BONDS DUE 2023 In January 2018, the Company issued US$300 million bonds bearing an interest rate of 3.625% per annum payable semiannually in arrears due 2023 (the “Bonds”) commencing on 23 July 2018, raising the net proceeds of around US$297,296,000 (equivalent to approximately RMB1,927,161,000). On 20 December 2018, Jirun Automobile entered into an investment agreement with 寧德時代新能源科技股份有限公 015 Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE As at the date of this report, the net proceeds of the Bonds have been fully utilized as below: RMB’000 Finance costs 69,063 Business development – Acquisitions of three subsidiaries from Geely Holding Group (Note) 1,846,730 – General corporate purposes 11,368 Total 1,927,161 Note: level of RMB12.88 billion six months ago. At the end of 2018, the For details of the acquisitions, please refer to the Company’s Group’s total borrowings were solely denominated in US$, which announcement and circular dated 18 July 2018 and 16 August aligned with the currency mix of the Group’s revenues from export 2018, respectively. business. In addition, net notes receivable (notes receivables – notes payables) at the end of 2018 amounted to RMB14.91 billion, FINANCIAL RESOURCES Total capital expenditures (excluding acquisitions through business combinations) on property, plant and equipment, intangible assets (i.e. capitalised product development costs) and land lease prepayments for the Group amounted to RMB7.5 billion in 2018, which was within the budgeted amount of RMB11.5 billion fixed at the beginning of the year. Working capital (inventories + trade and other receivables – trade and other payables) decreased by about RMB6,449 million to deficit RMB14,476 million at the end of 2018. If excluding the working capital effect from the acquisitions through business combinations, the working capital decreased by RMB619 million in 2018 mainly due to significant decrease in trade and notes receivables. Further, as a result of the good operational cash inflow from the Group’s manufacturing operations and the issuance of the Company’s US$300 million 5-year bonds, the group’s total cash level (bank balances and cash + pledged bank deposits) increased by 17% YoY to RMB15.76 billion at the end of 2018. The Group’s total borrowings (included bank borrowings and bonds payables) also increased by 164% to RMB3.42 billion. Despite this, interest expense was down 30% in 2018 due to lower funding cost driven by improved credit ratings and success in restructuring debt during the year. At the end of 2018, the financial position of the Group remained strong with net cash on hand (total cash level – borrowings) of RMB12.33 billion versus a net cash 016 which could provide the Group with additional cash reserves when needed through discounting the notes receivables with the banks. The Group has been assigned credit ratings from both Standard & Poor’s Ratings Services and Moody’s Investors Service. Standard & Poor’s corporate credit rating on the Group is currently “BBB-/ Stable”. On 28 August 2018, Moody’s Investors Service upgraded the Group’s credit rating outlook to positive from stable and affirmed the Group’s corporate family rating of “Ba1”. Budgeted capital expenditures (excluding acquisitions through business combinations) of the Group amount to about RMB11.6 billion in 2019, including the funding for the research and development of new vehicle platforms and models and the financing of the expansion and upgrading of production facilities at existing plants. In 2019, the Group plans to acquire an engine plant in Yiwu City, Zhejiang Province, the PRC from Geely Holding. Details of which will be announced by the Company whenever necessary. The Group plans to fund capital expenditures from its operational cash flow, cash reserve, additional bank borrowings, and fund raising exercises in the international capital market. As at the date of this report, the Company has no definite plan or schedule on raising funds in the international capital market. Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT PERFORMANCE & GOVERNANCE RESEARCH AND DEVELOPMENT During the year ended 31 December 2018, the Group recognised a total expense of RMB1,926 million (2017: RMB1,478 million) in relation to its research and development activities and such expense was included in “Administrative expenses” in the consolidated income statement. Further details were illustrated in the table below: 2018 2017 RMB(’000) RMB(’000) YoY change (%) 1,377,705 1,147,257 20 548,653 331,241 66 1,926,358 1,478,498 30 Amortisation of intangible assets (i.e. capitalised product development costs) Research and development costs (i.e. not qualified for capitalisation) Total research and development costs charged to profit or loss Cash and Bank Balances Total Borrowings (Including pledged bank deposits) (Including Bonds Payables/Senior Notes but excluding Convertible Bonds) RMB Billion (At 31 December) RMB Billion (At 31 December) 15.76 18 17 16 15.08 9.21 15 14 17 13.45 7.25 3.42 18 1.30 16 15 14 2.24 1.93 2.51 017 Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE VEHICLE MANUFACTURING The Group sold a total of 1,500,838 units of vehicles (including the sales volume of “Lynk&Co” vehicles sold by its 50%-owned joint venture, namely the Lynk&Co JV) in 2018, still up a respectful 20% from 2017 despite negative growth in passenger vehicles demand in China during the period. In 2018, the Group’s sales volume of sedans grew 6% to 647,220 units in 2018, while its SUV sales volume grew 34% to 853,618 units in 2018 from 2017. The Group’s domestic sales volume posted a relatively robust growth of 19% in 2018 to 1,473,070 units, compared to the 4.1% decline of China’s passenger vehicle market during the year. According to the CAAM, the Group’s market share in China’s passenger vehicle market was up from 5.0% in 2017 to 6.2% in 2018, making the Group one of the very few major passenger vehicle makers managed to gain market share in 2018. In terms of 2018 sales volume, the Group ranked number 5 amongst the top ten passenger vehicle manufacturers in China, and ranked number 3 in China’s top passenger vehicle brands only after “Volkswagen” and “General Motors”. Export sales volume of the Group increased by 136% to 27,768 units in 2018 and accounted for 1.9% of the Group’s total sales volume during the year. The Group’s share of China’s total export of passenger vehicles increased from 1.8% in 2017 to 3.7% in 2018 according to the CAAM. The Group maintained its leading position in China’s sedan market in 2018, being the only indigenous brand amongst China’s top ten sedan manufacturers during the year. In terms of 2018 sales volume, the Group ranked number 5 amongst China’s top sedan manufacturers. In China’s SUV market, the Group’s ranking rose further in 2018. In terms of annual sales volume, the Group moved from number 3 in 2017 to number 2 amongst China’s top SUV manufacturers in 2018. 018 On a model by model basis, the Group’s top SUV model “Geely Boyue” (吉利博越) remained the Group’s most popular model and accounted for 15% of the Group’s total sales volume in 2018. The total sales volume of the Group’s SUV models, which included three mid-size SUV models namely “Geely Boyue” (吉 利博越), “Vision SUV” and “Lynk&Co01”, four compact SUV models “Vision X3”, “Vision X1”, “Vision S1” and “Bin Yue” (繽越), and two cross-over models “Emgrand GS” and “Lynk&Co02”, amounted to 853,618 units in 2018, increased about 34% from 2017. During the year, “Geely Boyue” (吉利博越), “New Emgrand”, “New Vision”, “Emgrand GS” and “Emgrand GL” were the Group’s top five models in terms of sales volume in 2018. As a result of the launch of a few lower-priced compact SUV models since the second half of 2017 and the exclusion of the higherpriced “Lynk&Co” vehicles from the calculation, the Group’s average ex-factory selling price was up only 1% YoY in 2018. If “Lynk&Co” vehicles and their revenues were included for the calculation, the Group’s average ex-factory selling price grew 8% in 2018 from the previous year. In 2018, the Group further strengthened its sales and marketing system in China, enabling it to provide better sales and aftersale services to its customers. The Group’s products are currently sold under the “Geely” brand and the “Lynk&Co” brand (through distribution channel under the Lynk&Co JV), targeting at different market segments. “Geely” brand is the Group’s main stream mass market brand, while “Lynk&Co” is a joint-venture brand between the Group and Volvo Car Corporation (“VCC”), which is majority-owned by Geely Holding, targeting at global premium market. By the end of 2018, the Group had more than 978 dealers in China, marketing Geely brand vehicles. The Lynk&Co JV adopted a different marketing and distribution system in China. It served its customers via 222 Lynk&Co Centres and 17 Lynk&Co Spaces in China. Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT PERFORMANCE & GOVERNANCE To further enhance customer interface and connectivity in our vehicles, the Group launched and installed the Geely Smart Ecosystem “GKUI” in the new version of “Geely Boyue” (吉利 Average Pre-tax Ex-Factory Prices RMB 博越) in March 2018. Key features in “GKUI” smart ecosystem comprises the cloud storage, a desktop environment similar to 79,510 18# the smartphone, a driver unique identification and an app-based ecosystem. The platform offers powerful speech recognition 17# 73,895 capability and is designed to be used exactly like a smartphone, a format most users are familiar with, creating a comfortable, easy-to-use app-based experience and transforming the 16 42,375 vehicle into a smart mobility solution for the users. “GKUI” smart ecosystem will be installed in all major vehicle models of the 15 56,564 Group in phases. 14 In “J.D. Power 2018 China Customer Service Index (CSI) # : 51,536 Including the sales of “Lynk&Co” vehicles Study ”, which analyzed and measured service experiences SM and customer satisfaction of vehicle owners with the dealer service, “Geely” brand was among the top ten brands in the mass market segment, ranking number nine in the survey with a score of 719 in 2018 when compared with the mass market average score of 704. Annual Sales Volume Unit 1,500,838 18* 17* 1,247,116 16 15 14 *: 765,970 510,097 417,851 Including the sales volume of “Lynk&Co” vehicles 019 Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE EXISTING PRODUCTION FACILITIES Usable Annual Name Interests Production Capacity Models (Units Per Double Shift) Luqiao plant 99% 150,000 Geely Kingkong Series (1.5L) Vision X3 (1.5L) New Emgrand (1.5L, 1.8L,1.3T) Ningbo/Cixi plants 99% 300,000 Vision S1 (1.4T, 1.5L) Emgrand EV, Emgrand HEV, Emgrand PHEV Binrui (1.4T) Geely GC9 (1.8L, 2.4L) Chunxiao plant 99% 160,000 Borui GE PHEV, Borui GE MHEV Geely Boyue(1.8T, 2.0L) Vision Series (1.5L, 1.8L) Xiangtan plant 99% 240,000 Jinan plant 99% 50,000 Vision X1 (1.3L) Chengdu plant 99% 130,000 Vision SUV (1.3T,1.4T,1.8L) Baoji plant 99% 200,000 Geely Boyue(1.8T, 2.0L) Linhai plant 99% 300,000 Binyue(1.0T, 1.5T) Emgrand GL (1.4T, 1.8L) Emgrand GL PHEV Emgrand GS (1.3T, 1.4T, 1.8L) Jinzhong plant Total 020 99% 180,000 1,710,000 Emgrand GS (1.3T, 1.8L), Emgrand GSe Emgrand EV, Emgrand HEV, Emgrand PHEV Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT PERFORMANCE & GOVERNANCE NEW ENERGY VEHICLES STRATEGY The Group began the implementation of its New Energy Vehicle (“NEV”) strategy namely “Blue Geely Initiatives” in November 2015. “Blue Geely Initiatives” is a 5-year campaign demonstrating the Group’s dedication in transforming into the industry leader in NEV technologies. The initiatives’ target is to ensure that up to 90% of the Group’s total sales volume would be in the form of new energy and electrified vehicles (“NEEVs”), which include the electric vehicles (“EVs”), battery electric vehicles (“BEVs”), hybrid electric vehicles (“HEVs”), mild hybrid electric vehicles (“MHEVs”) and plug-in hybrid electric vehicles (“PHEVs”) by 2020. Following the commercial launch of the Group’s first electric vehicle model: “Emgrand EV” in 2015, the Group had introduced more NEEV models in the past few years including “Emgrand PHEV”, “Emgrand GL PHEV” and “Borui GE PHEV/ MHEV”, “Emgrand GSe” to offer more choices of NEEV for Chinese customers. These NEEV models has so far achieved good customer satisfaction in China in terms of their quality and performance. This should help to put the Group in a good position to achieve the ambitious target set under the “Blue Geely Initiatives”. In 2018, the Group sold a total of 67,069 units of NEEV models (including the sales volume of “01 PHEV” sold by the Lynk&Co JV), up 165% from 2017. Amongst the NEEVs sold in 2018, the best-selling models were “Emgrand EV”, “Borui GE MHEV” and “Borui GE PHEV”, which together accounted for around 82% of the total sales volume of NEEVs. The Group’s sales volume of NEEVs only accounted for 5% of its total sales volume in 2018 as NEEV versions were only available in some of the Group’s major vehicle models. The proportion of NEEVs has been significantly higher in the Group’s higher-end vehicle models like the Group’s B-segment sedan model “Borui” where NEEVs accounted for over 80% of its total sales volume since its new energy version was launched in the second quarter of 2018. With the launches of more NEEV models in 2019 and the expected promulgation of more government policies to promote the use of NEEVs in China, it is expected the sales of NEEVs will account for a much higher proportion of our total sales volume in the coming few years. NEW PRODUCTS In 2019, the Group’s focus is to further supplement its existing product portfolio with new products in vehicle segments like MPV and sub-compact SUV segments, where the Group has not offered any product at the moment, aiming to ensure that all the major segments in China’s passenger vehicle market would be fully covered by the Group’s product portfolio. Further, the Group also plans to significantly increase its new model offerings in the new energy sector, adding MHEV, PHEV and BEV models for all its major existing models, and launching brand new NEEV models to tailor for needs from Chinese customers. For other brand new models of the Group, new energy version will be offered at the same time as the ICE (“Internal Combustion Engine”) version. Meanwhile, the Group will upgrade its existing powertrain (mainly engines and transmissions) with a new generation of powertrain jointly developed between the Group and VCC. According to the Group’s preliminary plan, the following new models are expected to be offered to the market in 2019: 021 Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE Under the “Geely” brand: Despite the increasing competitions from other financial • Two multi-purpose vehicle (MPV) models; institutions like commercial banks and financial leasing • A new version of mid-size sporty SUV under the “Boyue” companies and the challenges in securing additional funding to family; support the rapid growth in demand for auto loans and liquidity • A pure electric sedan model; management, Genius AFC still achieved its annual target for the • A sub-compact SUV model; year of 2018. • Upgraded versions of all major existing models; • “NEEV” versions for all major existing models In order to support the rapid growth of the auto finance business, Genius AFC’s registered capital increased from Under the “Lynk&Co” brand (to be offered by the Group’s RMB900 million to RMB2 billion by the end of 2018. The Group 50%-owned joint venture, namely the Lynk&Co JV): contributed 80% (or RMB880 million) of the additional capital • A brand new model of “Lynk&Co”; injection according to its shareholding in Genius AFC. Besides, • “NEEV” versions for “Lynk&Co02” and “Lynk&Co03” Genius AFC secured more external funds through various models means like syndicated loans, bilateral bank facilities, and two successful asset-backed security (“ABS”) issuances in 2018. GENIUS AFC Genius Auto Finance Company Limited (“Genius AFC”), the LYNK&CO JV Group’s 80%-owned vehicle financing joint-venture formed Lynk&Co JV, the Group’s 50%-owned joint venture with with BNP Paribas Personal Finance, commenced operation members of VCC and Geely Holding, was incorporated in since September 2015. Located in Shanghai, Genius AFC is October 2017 to facilitate the development, manufacture, sales principally engaged in the provision of auto wholesales financing and servicing of high-end passenger vehicles in both the China solutions to auto dealers and retail financing solutions to end and international markets under the “Lynk&Co” brand. customers, mainly supporting three key auto brands in Geely Holding Group, including “Geely”, “Lynk&Co” and “Volvo Car”. Positioned as a global brand with the state-of-the-art design Helped by the growth in the overall sales volume of the Group and manufacturing capabilities, Lynk&Co JV aims to target and the increase in retail financing businesses, Genius AFC’s at the premium mobility market segment globally through the auto finance business registered significant growth in the year provision of both passenger vehicles and mobility services. The of 2018 with its total outstanding loan assets almost doubled innovative business model of Lynk&Co JV is supported by new from RMB9.65 billion at the end of 2017 to RMB19.26 billion at vehicle models developed from Compact Modular Architecture the end of year 2018. With a healthy level of interest rate spread (“CMA”), which is jointly developed by Geely Holding and VCC and a negligibly low default rate as a result of enhanced sales and licensed to the Lynk&Co JV. management and effective risk control, Genius AFC achieved good earnings performance with its net profit increasing 352% YoY to RMB216.65 million during the year. 022 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT PERFORMANCE & GOVERNANCE The first vehicle model of the Lynk&Co JV called “01” was offered to the China market at the end of 2017. In 2018, two more new models namely “02” and “03” and the first NEEV model called “01 PHEV” were launched in the China market. During the year, Lynk&Co JV recorded a total sales volume of 120,414 units, meeting the management’s expectations. Despite its first full-year operation and the initial manufacturing capacity constraints, Lynk&Co JV managed to post a net profit of RMB667.61 million in 2018. In view of Chinese consumers’ current preference over physical dealer shops to support sales and services, Lynk&Co JV has so far set up a dealer network with over 222 stores called “Lynk&Co Centres” and 17 display and customer service centres called “Lynk&Co Spaces” in China. In “J.D. Power 2018 China Initial Quality StudySM (IQS)”, which analysed and measured new vehicle quality, “Lynk&Co” brand vehicles achieved very good results, ranking number three in the mass market segment with a score of 94 problems per 100 vehicles (“PP100”), compared with mass market average of 107 PP100. The survey covered 285 vehicle models under 77 vehicle brands in China. EXPORTS The Group’s export business staged a strong turnaround in 2018. This was mainly supported by the Group’s introduction of more updated products to the exports markets and the recovery of demand in some of the Group’s major export markets. The Group exported 27,768 units of vehicles in 2018, up 136% from 2017. Exports accounted for only 1.9% of the Group’s total sales volume during the year. The Group’s share of China’s total exports of passenger vehicles increased from 1.8% in 2017 to 3.7% in 2018 according to the CAAM. “Geely Boyue” (吉利博越), “New Emgrand” and “Kingkong”, were the most popular export models in terms of sales volume in 2018, accounting for 49%, 14% and 14%, respectively, of the Group’s total exports during the year. Developing countries in the Eastern Europe, Middle East and Africa were the most important export markets of the Group in 2018. In addition to export of vehicles from China, the Group also assembles some models sold overseas using contract manufacturing arrangements with local partners. At the end of 2018, the Group exported its products to 24 countries through 24 sales agents and 336 sales and service outlets. 023 Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE As the majority of the Group’s costs are denominated in RMB, and most of the Group’s export sales are denominated Breakdown of Sales Volume by Models in 2018 Unit in United States Dollar (“US$”), meaning that fluctuation of Binrui 40,632 RMB exchange rates against US$ could significantly affect the profitability of the Group’s export business. As most of the Vision S1 67,908 Group’s products are retailing at the export markets in local currencies, the devaluation of the local currencies against US$ and RMB could also affect the Group’s competitiveness and Lynk&Co 01 78,235 therefore its sale volume in these markets. To alleviate the Vision SUV 122,809 Group’s exposure to the currency risk, the Group has embarked on plans to build additional overseas plants to increase the Others 148,342 Geely Boyue 226,160 New Emgrand 223,068 Vision X3 136,997 Vision Series 160,168 Emgrand GL 144,181 Emgrand GS 152,338 proportion of its costs in local currencies. If needed, the Group would also employ currency forward contracts from time to time to contain its foreign currency risk to acceptable levels. Further, to compensate for higher costs in export markets, the Group has speeded up the renewal of its export models, and Breakdown of Export Sales Volume by Models in 2018 has started to streamline its export operations with an aim to Unit achieve higher customer satisfaction, better operating efficiency Geely GC9 1,049 Others 64 and economies of scale in its export markets. Vision SUV 3,530 Emgrand EC7 3,767 Geely Kingkong Series 3,963 Emgrand GS 1,769 024 Geely Boyue 13,626 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT PERFORMANCE & GOVERNANCE Nowadays, our Group is already a market leader in China’s Export Sales Volume passenger vehicle market, equipped with completed range Unit of core technologies and expertise, sustainable development capabilities, marketing our products under a variety of brands for different market segments. The Group’s annual sales volume 27,768 18 exceeded 1.5 million units in 2018 and its market share in the 17 China’s passenger vehicle market increased from 5% in 2017 11,755 to 6.2% in 2018, making the Group the third largest passenger 16 vehicle brands in China in terms of annual sales volume. In 21,779 addition, the Group’s financial position has strengthened considerably as a result of the strong operational cash-flow 15 25,734 generated over the past few years. This should enable the Group to continue investing for the future and respond to the 14 59,721 OUTLOOK huge market changes in the coming years. In 2019, the Group will significantly increase the proportion of NEEVs in its sales volume by introducing more competitive The prevailing political and economic uncertainties should NEEV products. The amount of new product offerings should continue to affect the passenger vehicle market in China and stay at high levels at least over the next two years, providing could cause the current slowdown in motor vehicle demand sufficient momentum to sustain the Group’s strong sales to continue into the 2019. This, together with the intense volume growth during the period. This, together with our proven market competition in China would continue to put pressure competitive advantages in product standards, quality and on the sales performance and profitability of Chinese vehicle technologies should enable the Group to compete effectively manufacturers in 2019. Although the competition would be in different segment of China’s passenger vehicle market. As a further intensified with the increased entry of new vehicle makers result, the Group is in a good position to secure higher market in the China market, especially in the NEEV segment, the vast share in China’s passenger vehicle market in the years ahead. interests demonstrated by these new comers to squeeze into To alleviate capacity constraints which have hindered the sales the already very crowded market should also suggest that performance of some of the Group’s new products, the Group the Chinese vehicle market still offer huge growth potential completed the acquisitions of three manufacturing plants ahead. Despite the increased competition, huge changes and and two engine plants in 2018. All of which will commence complications they have brought into the market, these new production in phases over the next 12 months. It also set up two vehicle makers should also bring with them huge additional investing entities with leading suppliers in the areas of automatic resources, specific expertise and innovation, new idea and transmissions, battery cells, battery modules and battery packs, technologies into the automobile industry, thus enabling us aiming to ensure reliable supply of key components and parts. to serve and satisfy our customers better. Long-term, these The Group therefore should be in a good position to sell more changes should bode well for the future success of China’s passenger vehicles once the Chinese vehicle market started to automobile industry. recover. 025 Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE Additional growth could be provided by the Lynk&Co JV, which The few major acquisitions in the automobile sector by the is a key element of the Group’s strategy to expand into the Group’s parent, namely Geely Holding, over the past few premium vehicle segment in China and the global automobile years has started to created synergies and huge opportunities market. With more comprehensive product ranges, equipped for the Group in both its existing automobile business and with both traditional ICE and electrified powertrain, its own other new business areas. The partnership created by these manufacturing facilities since mid 2018, and an innovative acquisitions should provide the Group substantial opportunities distribution system largely completed by the end of 2018, the for technologies and costs sharing, economies of scale and joint-venture is ready to significantly expand its sales volume new market penetration. Longer-term, these acquisitions should from 2019 onwards. provide additional sources for growth of the Group. The Group’s major export markets should continue to show Given the prevailing uncertainties in China’s passenger significant recovery in 2019, in view of the current suppressed vehicle market, the Group’s board of directors preliminarily level of sales and the introduction of more updated products to set the Group’s sales volume target for the year of 2019 at a these markets. The Group had largely completed the rebranding conservative level of 1,510,000 units (including the sales volume and restructuring of its distribution channels in its major export target for “Lynk&Co” vehicles), in line with the overall sales markets. Localisation of production to reduce costs and volume achieved in 2018. currency risk has started to yield positive results in markets like Belarus and Malaysia, where customer feedback and demand for the Group’s products significantly improved recently. In a few years’ time, exports would not only become a key driver to the Group’s growth, but also help to further enhance the Group’s economies of scale. 026 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT PERFORMANCE & GOVERNANCE CAPITAL STRUCTURE AND TREASURY POLICIES The Group funds its short-term working capital requirement mainly through its own operational cash flow, short-term bank loans from commercial banks in China and Hong Kong and the payment credit from its suppliers. For its longerterm capital expenditures including product and technology development costs, investment in the construction, expansion and upgrading of production facilities, the Group’s strategy is to fund these longer-term capital commitments by a combination of its operational cash flow, bank borrowings and fund raising exercises in the capital market. As at 31 December 2018, the Group’s shareholders’ funds amounted to approximately additional overseas plants to increase the proportion of its costs in local currencies to engage in local business activities. Also, to compensate for higher costs in export markets, the Group has speeded up the renewal of its export models, and has started to streamline its export operations displaying comparative advantages with an aim to achieve higher customer satisfaction, better operating efficiency and economies of scale in its export markets. The Group’s management would also closely monitor the market situation and might consider tools to manage foreign exchange risk whenever necessary. RMB44.9 billion (As at 31 December 2017: approximately RMB34.5 billion). The Company issued 11.098 million ordinary shares upon exercise of share options during the year. LIQUIDITY AND FINANCIAL RESOURCES As at 31 December 2018, the Group’s current ratio (current assets/current liabilities) was about 0.98 (As at 31 December EXPOSURE TO FOREIGN EXCHANGE RISK During the year, the Group’s operations were principally related to domestic sales of automobiles and related automobile parts and components in China and the Group’s assets and liabilities were mainly denominated in Renminbi (RMB), the functional currency of the Company and its key subsidiaries. In terms of export operations, most of the Group’s export sales were denominated in United States dollars (US$) during the year. Also, the Group could face foreign exchange risk, particularly in emerging markets if it had local subsidiaries, associates or joint ventures in overseas export markets. The devaluation of local currencies in overseas markets could result in foreign exchange 2017: 1.06) and the gearing ratio of the Group was about 7.6% (As at 31 December 2017: 3.8%) which was calculated on the Group’s total borrowings (excluding trade and other payables) to total shareholders’ equity (excluding non-controlling interests). As at 31 December 2018, the substantial decrease in receivables (in particular, the notes receivables) was (a) mainly due to the deterioration of consumer confidence in China arising from the increased political and economic uncertainties, which in turn adversely affected the customers’ demand for passenger vehicles in the fourth quarter of the current year (i.e. the traditional peak seasons for the automobile industry) and the Group received lesser notes receivables from its customers which did not mature by the end of December 2018; and (b) losses and affect the Group’s competitiveness and therefore its sales volume in these markets. To mitigate the foreign exchange risk, the Group has embarked on plans to build 027 Geely Automobile Holdings Limited Annual Report 2018 PERFORMANCE & GOVERNANCE thanks to the relatively low interest environment and strong net cash level, the Group did not opt to discount these notes receivables without recourse but wait to hold them until maturity during most of the times in 2018. Accordingly, it resulted in a slight decrease in current ratio at the end of year 2018 over the previous year. Total borrowings (excluding trade and other payables) as at 31 December 2018 amounted to approximately RMB3.4 billion (As at 31 December 2017: approximately RMB1.3 billion) were mainly the Group’s borrowings and bonds payables. At the end of 2018, the Group’s total borrowings were denominated in United States Dollars (US$). They were well matched by the currency mix of the Group’s revenues, which were mainly denominated in US$. For the borrowings, they were unsecured, interest-bearing and repaid on maturity. The increase in gearing ratio during the year was mainly due to the issue of bonds payables in the principal amount of US$300 million, which was partially offset by the increase in equity as a result of profit attained by the Group during the year of 2018. Should other opportunities arise requiring additional funding, the Directors believe the Group is in a good position to obtain such financing. 028 EMPLOYEES’ REMUNERATION POLICY As at 31 December 2018, the total number of employees of the Group was about 52,400 (As at 31 December 2017: 41,600). Employees’ remuneration packages are based on individual experience and work profile. The packages are reviewed annually by the management who takes into account the overall performance of the working staff and market conditions. The Group also participates in the Mandatory Provident Fund Scheme in Hong Kong and state-managed retirement benefit scheme in the PRC. In addition, employees are eligible for share options under the share option scheme adopted by the Company. MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS AND SENIOR MANAGEMENT PROFILES EXECUTIVE DIRECTORS Mr. Li Shu Fu, aged 55, joined the Company and its subsidiaries (collectively the “Group”) on 9 June 2005 as the Chairman (the “Chairman”) of the board of directors of the Company (the “Board”) and Executive Director, and is responsible for the overall strategic planning, Board leadership, corporate governance and formulation of the corporate policies of the Group. Mr. Li holds a Master’s Degree in Engineering from Yan Shan University. Presently, Mr. Li is the controlling shareholder, founder, chairman of the board of directors of Zhejiang Geely Holding Group Company Limited (“Geely Holding”) (a company incorporated in the PRC, and is ultimately owned by Mr. Li and his associate, a substantial shareholder of the Company). Geely Holding and its subsidiaries are principally engaged in the sale of automobiles and related parts and components wholesale and retail business. Mr. Li has over 32 years of experience in the investment and management of the automobile manufacturing business in the PRC. Mr. Li is a member of the Chinese People’s Political Consultative Conference. Mr. Li was accredited as one of the “50 Most Influential Persons in China’s Automotive Industry in the 50 Years” by China Automotive News (中國汽車報). Mr. Yang Jian, aged 57, joined the Group on 9 June 2005 as an Executive Director, and is responsible for assisting the Chairman in Board leadership and corporate governance of the Group. Mr. Yang was appointed Vice Chairman of the Board on 1 July 2008 whereas he was appointed the vice chairman of the board of directors of Geely Holding on 29 December 2011. Mr. Yang was also the chairman of the four 99%-owned key operating subsidiaries of the Group, namely, Zhejiang Jirun Automobile Company Limited (“Jirun Automobile”), Shanghai Maple Guorun Automobile Company Limited, Zhejiang Ruhoo Automobile Company Limited and Hunan Geely Automobile Components Company Limited. Mr. Yang, who graduated from Zhejiang Radio and Television University with focus on production management, holds Senior Economist and Senior Engineer designations. Since joining Geely Holding in 1996, Mr. Yang was involved in a number of different job functions within the group including product R&D, engineering and construction, manufacturing, quality improvement, marketing, after-sales service and the operation and management of the Group in the PRC and overseas. Mr. Li Dong Hui, Daniel, aged 49, joined the Group in July 2016 as an Executive Director and Vice Chairman of the Board. Mr. Li was appointed an executive vice president and Chief Financial Officer (“CFO”) of Geely Holding in June 2016, a board member of Geely Holding in April 2011, and a member of the board of directors of Volvo Car Corporation in April 2012. Mr. Li is also a director of certain subsidiaries of the Group. He is responsible for the overall strategic planning of the Group’s accounting and financing system which includes accounting and financial management, cost control management, budget management, accounting reconciliation, accounting control, internal control review, taxation management, cash flow management, capital operation management, operational risk control, and investment and financing activities monitoring, etc.. Mr. Li was a vice president and CFO of Geely Holding from April 2011 to March 2014, and an executive director of the Company from May 2011 to March 2014. Mr. Li has extensive professional 029 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS AND SENIOR MANAGEMENT PROFILES and senior managerial experiences with both the PRC and Mr. Gui Sheng Yue, aged 55, joined the Group on 9 June sino-foreign multinational companies, particularly in the fields 2005 as an Executive Director and is responsible for the overall of accounting and financial management, financing structure, administration, risk management and compliance of the Group. strategic planning and business development. Prior to joining Mr. Gui was appointed the Chief Executive Officer (“CEO”) of Geely Holding, he held key accounting, financing and corporate the Company with effect from 23 February 2006. Mr. Gui was management positions as vice president, CFO, general manager also the chairman of a former wholly-owned subsidiary of the and business development director in the PRC companies Company. He is an independent non-executive director of including Guangxi Liugong Machinery Company Ltd. (2010) Eagle Ride Investment Holdings Limited (Stock Code of HKEx: and China Academy of Post and Telecommunication (1991), 901). Mr. Gui has over 32 years of experience in administration and sino-foreign multinational companies including headquarter and project management. Mr. Gui had also worked with China of Cummins Inc., and its China Division (2006-2009), BMW Resources (Holdings) Company Limited. Mr. Gui holds a Brilliance Automotive Ltd (2001-2005), ASIMCO Braking System Bachelor of Science Degree in Mechanical Engineering from (Guangzhou) Co., Ltd., ASIMCO Braking System (Zhuhai) Co., Xi’an Jiaotong University and a Master’s Degree in Business Ltd. (1997-2001) and Danfoss (Tianjin) Ltd. (1996); his last Administration from University of San Francisco. position was the vice chairman and the president (finance) of 北 京東方園林生態股份有限公司 (Beijing Orient Landscape Co., Mr. An Cong Hui, aged 49, joined the Group on 30 December Ltd.) (Stock Code of Shenzhen Stock Exchange: 002310) (2014- 2011 as an Executive Director, and is responsible for the overall 2016). Mr. Li graduated from the Kelley School of Business of administration of the Group. Mr. An has been a vice president Indiana University in the USA with a Master’s Degree in Business of Geely Holding since 2003, and has been appointed the Administration in 2010 and graduated from the Beijing Institute president of Geely Holding with effect from 29 December 2011. of Machinery in the PRC with a Master’s Degree in Management Mr. An is currently the chairman of the principal operating Engineering with a major in Financial Management in 1997. subsidiary, namely Jirun Automobile, and a director of certain Also, Mr. Li graduated from the Renmin University of China in subsidiaries of the Group. Mr. An was previously in charge of the the PRC with a Bachelor’s Degree in Philosophy in 1991. He is overall operation under the “Emgrand” product brand following currently the independent director of 中青旅控股股份有限公司 the implementation of multi-brand strategy by the Group and (China CYTS Tours Holding Co., Ltd.) (Stock Code of Shanghai production of gearboxes, engines and drivetrain systems of the Stock Exchange: 600138) and independent non-executive Group. Mr. An has extensive professional knowledge and senior director of YTO Express (International) Holdings Limited (Stock managerial experience in the automotive industry, particularly Code of Hong Kong Stock Exchange (“HKEx”): 6123). in the field of automotive engineering. He joined Geely Holding since 1996 after graduation from Hubei University of Economic and Management with a Diploma in Contemporary Accounting. From 1996 to now, Mr. An has held various key positions in Geely Holding including chief engineering officer and general manager. 030 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS AND SENIOR MANAGEMENT PROFILES Mr. Ang Siu Lun, Lawrence, aged 59, joined the Group on 23 February 2004 as an Executive Director and is mainly responsible for the international business development, capital market and investors’ relationship of the Group. Mr. Ang holds a Bachelor of Science Degree in Physics and Computer Science and a Master of Business Administration Degree from the Chinese University of Hong Kong. Prior to joining the Group, Mr. Ang worked in a number of major international investment banks for seventeen years with extensive experience in equity research, investment banking and financial analysis. Mr. Ang is a non-executive director of Honbridge Holdings Limited (Stock Code of HKEx: 8137). He was an independent non-executive director of Genvon Group Limited (Stock Code of HKEx: 2389). Ms. Wei Mei, aged 50, joined the Group on 17 January 2011 as an Executive Director. Ms. Wei is a vice president of Geely Holding and is responsible for the human resources management and training of Geely Holding since June 2009. Ms. Wei holds a Doctoral Degree in Management from the Northwest A&F University, a Master’s Degree in Management and a Bachelor’s Degree in Science from the Ocean University of China. From 2003 to 2007, Ms. Wei was the group human resources director of Beiqi Foton Motor Co., Ltd. (“Foton Motor”) and focused on Foton Motor’s human resources management, control and training. Prior to that, Ms. Wei worked in the group of Qingdao Haier Co., Ltd. (“Qingdao Haier”) from 1991 to 2002 and served a number of positions in the department of integration and dishwashers business unit of Qingdao Haier Refrigerator Co., Ltd., participating in the development, diversification and globalization of Qingdao Haier. Ms. Wei was in charge of organizational management, operation appraisal, quality system management and human resources and was also directing the operation management of Haier dishwashers and other small appliances. NON-EXECUTIVE DIRECTOR Mr. Carl Peter Edmund Moriz Forster, aged 64, joined the Group on 9 January 2013 as a Non-executive Director. Mr. Forster is the chief advisor to a member of Geely Holding and he has been appointed a member of the board of directors of Volvo Car Corporation since February 2013. Mr. Forster has over 33 years of professional experience in the global automotive industry, particularly in the fields of automotive products and development as well as strategic planning and general management. Mr. Forster held various senior management/CEO positions and directorship in many international consultancy and automobile corporates including McKinsey & Company, Inc., BMW (he was the chief project manager of one of its bestselling models of “BMW 5-Series”, and later the head of global manufacturing), General Motors Europe, Rolls-Royce Holdings plc (Stock Code of London Stock Exchange (“LSE”): RR) and Tata Motors Limited, Mumbai (the group steered Jaguar Land Rover into profit). Mr. Foster obtained a Diploma in Economics from the Rheinische Friedrich-Wilhelm University in Bonn in 1976 and a Diploma in Aeronautical Engineering from the Technical University in Munich in 1982. Mr. Forster is currently a non-executive director of IMI plc, Birmingham (Stock Code of LSE: IMI), the chairman of Chemring Group Plc (Stock Code of LSE: CHG), the chairman of the supervisory board, member of the investment committee and partner of Lead Equities AG, a member of the Verwaltungsrat and a substantial shareholder of The Mobility House AG, a member of the board of Geely UK, the chairman of Friedola Tech Gmbh, the chairman of London Electric Vehicle Company (formerly known as London Taxi Corporation), a non-executive director of Cosworth Ltd., a nonexecutive director of Gordon Murray Design, and a member of the board of Emerald Automotive Ltd.. He was the chairman of the supervisory board and a substantial shareholder of ZMDi AG, and a non-executive director of Rexam plc (Stock Code of LSE: REX). 031 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS AND SENIOR MANAGEMENT PROFILES INDEPENDENT NON-EXECUTIVE DIRECTORS Mr. Lee Cheuk Yin, Dannis, aged 48, joined the Group as an Independent Non-executive Director on 28 June 2002. He obtained the Bachelor of Business Administration from Texas A & M University, the USA. He is an associate member of the Hong Kong Institute of Certified Public Accountants and a member of the American Institute of Certified Public Accountants. He possesses over 26 years of experience in accounting and auditing field. Mr. Lee is currently a managing director of DLK Advisory Limited, and is an independent nonexecutive director of each of Tiangong International Company Limited (Stock Code of HKEx: 826), Southern Energy Holdings Group Limited (formerly known as China Unienergy Group Limited; Stock Code of HKEx: 1573) and CMBC Capital Holdings Limited (formerly known as Skyway Securities Group Limited, Stock Code of HKEx: 1141). He was an executive director of both Guojin Resources Holdings Limited (Stock Code of HKEx: 630) and AMVIG Holdings Limited (Stock Code of HKEx: 2300), a non-executive director of Kam Hing International Holdings Limited (Stock Code of HKEx: 2307), and an independent non-executive director of U-Home Group Holdings Limited (Stock Code of HKEx: 2327). Mr. Yeung Sau Hung, Alex, aged 69, joined the Group as an Independent Non-executive Director on 6 June 2005. Mr. Yeung was appointed as a non-executive director of GRST Investment (BVI) Limited, a research and manufacturing company focusing on battery technology, on 25 November 2016. He was the CEO in March 2012 and later became the Responsible Officer of LW Asset Management Advisors Ltd., a regulated fund management company. After his resignation in May 2016, he currently is the Responsible Officer of another regulated fund management company and a non-executive director of GRST Technology Research Company. Mr. Yeung entered the fund management and financial consultant profession after his retirement from the role of chief executive officer of DBS Vickers (Hong Kong) Limited (“DBS Vickers”). Mr. Yeung is a MBA graduate from the University of Southern California and brings with him more than 36 years of experience in the financial services industry. Prior 032 to joining DBS Vickers, Mr. Yeung was the deputy chairman of the management committee of a listed consumer electronics company for four years. Before that, he was the country head of the division of Greater China Equities and the managing director of Deutsche Securities Hong Kong. Mr. An Qing Heng, aged 74, joined the Group as an Independent Non-executive Director on 17 April 2014. Mr. An has extensive professional and management experience in the automotive industry, particularly in the fields of automotive engineering and manufacturing. Since after graduation from the Faculty of Agricultural Machinery (currently known as the Faculty of Automotive Engineering) of Tsinghua University with a professional qualification in automotive tractors and engines in 1968, he had worked with Beijing Gear Works Factory (北京齒輪總廠), Beijing United Automobile and Motorcycle Manufacturing Company (北京汽車摩托車聯合製造公司) and Beijing Automotive Industry Company (北京汽車工業總公司) in various important positions as vice factory director, chief engineer and general manager. He then served as the chairman and the Communist Party Committee Secretary (黨委書記) of Beijing Automotive Industry Holding Company Limited (北京 汽車工業控股有限責任公司); and was once concurrently the chairman of Beiqi Foton Motor Company Limited (北汽福田 汽車股份有限公司), Beijing Jeep Corporation (北京吉普汽車 有限公司) and Beijing Benz Automotive Company Limited (北 京奔馳汽車有限公司). Mr. An has been a member of Beijing Political Consultative Conference (北京市政治協商委員會) (the 8th and 10th sessions), a representative of Beijing Municipal People’s Congress (北京市人民代表大會) (the 11th session), and a member of the Standing Committee of Beijing Association for Science and Technology (北京市科學技術協會常委會) (the 4th, 5th, 6th and 7th sessions). Mr. An is currently the director of the Advisory Committee of China Automotive Industry (中國汽車工業諮詢委員會). Mr. An has also obtained the qualification of Senior Engineering (Professor Level) accredited by the Senior Vocational Title Inspecting Committee of Beijing Municipality (北京市高級專業技術職務評審委員會). Mr. An was the independent director of Yechiu Metal Recycling (China) MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS AND SENIOR MANAGEMENT PROFILES Limited (A Share Stock Code of Shanghai Stock Exchange: 601388), Liaoning SG Automotive Group Co., Ltd. (A Share Stock Code of Shanghai Stock Exchange: 600303) and Henan Province Xixia Automobile Water Pump Co., Ltd. (Stock Code of Shenzhen Stock Exchange: 002536). Mr. Wang Yang, aged 44, joined the Group as a Non-executive Director on 15 September 2010 and he has been re-designated to an Independent Non-executive Director of the Company with effect from 17 May 2012. Mr. Wang is presently a partner of Primavera Capital Group. Mr. Wang holds a Bachelor of Engineering dual-degree in Management Engineering and Computer Science and a Master of Science Degree in Management Science and Engineering from the Shanghai Jiaotong University. Mr. Wang used to work in Goldman Sachs (“Goldman Sachs”) Principal Investment Area as a managing director. From 2006 to 2010, working in Goldman Sachs, he focused on private equity investments in the PRC. During the period, he led the Goldman Sachs’ US$245 million convertible bond investment transaction in the Company. Prior to that, Mr. Wang worked in China International Capital Corporation (“CICC”) investment banking division as a vice president from 2002 to 2006, focusing on China-based companies’ initial public offerings and restructurings. Mr. Wang served major stateowned enterprises in various sectors during this period. Prior to CICC’s investment banking division, Mr. Wang worked in CICC’s Private Equity Group from 2000 to 2001. SENIOR MANAGEMENT Mr. Cheung Chung Yan, David, aged 43, joined the Group as the Financial Controller and Company Secretary on 17 May 2005. Mr. Cheung was also a director of a former wholly-owned subsidiary of the Company and was an independent nonexecutive director of Ourgame International Holdings Limited (Stock Code of HKEx: 6899). Mr. Cheung holds a Bachelor’s Degree in Business Administration in Accounting from the Hong Kong University of Science and Technology. He is a fellow member of the Association of Chartered Certified Accountants and a member of The Hong Kong Institute of Directors. Mr. Cheung has over 21 years of experience in auditing, accounting and financial management. Mr. Dai Yang, Daniel, aged 64, joined the Group on 5 May 2005 and is the head of the investor relation department of the Company, mainly responsible for the investor relation and international business in Hong Kong. Mr. Dai holds a Master’s Degree of Linguistics from Beijing Foreign Language Institute and a Bachelor’s Degree of Arts from Beijing Normal College. Mr. Dai started his career with China Resources (Holdings) Co. Ltd. in Hong Kong in 1986 and his last position was an assistant general manager of China Resources Investment Co. Ltd. Then, Mr. Dai joined Da Fang Investment Co. Ltd. in Hong Kong as a general manager. Prior to joining the Company, Mr. Dai has mainly focused his career on projects investment. 033 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS AND SENIOR MANAGEMENT PROFILES Mr. Poon Chi Kit, aged 39, joined the Group on 1 July 2011. He was appointed as the Head of Internal Audit of the Company with effect from 1 October 2015 and is in charge of risk assessment and monitoring, internal audit, and internal control infrastructure development of the Group. Mr. Poon was the Group Financial Controller of Kandi Electric Vehicles Group Co., Ltd., a former joint venture of the Group. Mr. Poon holds a Bachelor’s Degree in Civil Engineering from the National University of Singapore. He is a fellow of the Hong Kong Institute of Certified Public Accountants. Mr. Poon has over 13 years of experience in auditing, accounting and financial management. Mr. Chiu Yeung, Adolph, aged 34, joined the Group on 18 August 2010 as a management trainee in support of the senior management and the Board. He was appointed the Vice President responsible for investment and capital market since October 2015. Mr. Chiu holds a few professional accreditations granted by Hong Kong Securities and Investment Institute. Mr. Chiu obtained a Bachelor of Science Degree from University of Science and Technology of China Special Class for the Gifted Young, and once carried out scientific research and worked as teaching assistant in University of Florida. 034 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT CORPORATE GOVERNANCE REPORT Geely Automobile Holdings Limited (the “Company”) and its For the year ended 31 December 2018, the Company has subsidiaries (collectively the “Group”) strive for a high standard complied with the code provisions (“CPs”) of the Corporate of corporate governance with a view to upholding a strong Governance Code and Corporate Governance Report (“CG and balanced board of directors of the Company (the “Board”) Code”), as set out in Appendix 14 to the Rules Governing the and maintaining a transparent and creditable communication Listing of Securities on the Stock Exchange (the “Listing Rules”), channel with the Company’s shareholders (the “Shareholders”). except for CPs A.2.7, A.6.5 and E.1.2. This report further illustrates as to how the CG Code has been applied, inclusive Besides the corporate governance aspect, which will be further of the considered reasons for any deviation, in the year under discussed in this report below, more details of the Group’s review. environmental, social and governance (“ESG”) measures including the relevant policies and performance in the areas of environmental, employment and labour standards, operating A. DIRECTORS practices, and community, as well as the compliance with the The directors of the Company (the “Directors”) all relevant laws and regulations that have a significant impact on possess extensive experience in the automobile industry, the Group will be covered in the Group’s ESG report, which will commercial management and the operation of the capital be published no later than three months after the publication of market. The Board, with its diverse composition, can annual report, on the websites of The Stock Exchange of Hong provide the management with viewpoints and advices Kong Limited (the “Stock Exchange”) and the Company. in all material aspects for effective decision making. For Directors’ biographical information, please refer to pages 29 to 33 of this annual report. The table below illustrates the major duties and responsibilities of the Directors together with their positions held in the Board and its committees, and the dates of their initial appointment and last re-election at the general meetings of the Company. 035 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT Date of Initial Date of Last Name of Directors Position(s) Appointment Re-election Major Duties/Experience/Skills Mr. Li Shu Fu Chairman of the Board 9 June 2005 25 May 2017 Directs overall corporate strategic direction, (the “Chairman”) & ED1 Board leadership and corporate governance of the Group Mr. Yang Jian 9 June 2005 Vice Chairman & ED1 25 May 2017 Assists the Chairman in Board leadership and corporate governance of the Group Mr. Li Dong Hui, 15 July 2016 Vice Chairman & ED1 25 May 2017 Oversees the overall strategic planning of the Group’s accounting and financing system Daniel which includes accounting and financial management, cost control management, budget management, accounting reconciliation, accounting control, internal control review, taxation management, cash flow management, capital operation management, operational risk control, and investment and financing activities monitoring, etc. Mr. Gui Sheng Yue Chief Executive Officer, ED & member of NC 1 9 June 2005 25 May 2018 Oversees administrative management (Hong Kong), risk management (excluding China), 6 compliance and internal controls of the Group Mr. An Cong Hui 30 December 2011 ED1 25 May 2018 Oversees operational and risk management (China) of the Group Mr. Ang Siu Lun, 23 February 2004 ED1 27 May 2016 Oversees international business development, capital market and investor relation activities Lawrence of the Group Ms. Wei Mei ED1 & member of RC5 17 January 2011 25 May 2018 Oversees human resources management of the Group Mr. Carl Peter Edmund 9 January 2013 NED2 27 May 2016 Mr. Lee Cheuk Yin, Dannis INED3, chairman of AC4, member of RC5 & member of NC 036 Provides independent consultancy advice on strategic planning to the Board Moriz Forster 6 28 June 2002 25 May 2017 Provides independent advice on financial and auditing activities to the Board Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT CORPORATE GOVERNANCE REPORT Date of Initial Date of Last Name of Directors Position(s) Appointment Re-election Major Duties/Experience/Skills Mr. Yeung Sau Hung, INED3, chairman of RC5, 6 June 2005 27 May 2016 Provides independent advice on corporate Alex member of AC4 & member of NC Mr. An Qing Heng finance and investment to the Board 6 INED3 & member of AC4 17 April 2014 25 May 2018 Provides independent advice on automobile industry and strategic deployment to the Board Mr. Wang Yang INED3, chairman of NC6, 15 September 2010 25 May 2017 Provides independent advice on corporate member of AC4 & finance, investments and merger & acquisitions member of RC to the Board 5 Notes: In order to ensure every newly appointed Director to keep abreast of his/her responsibilities and conduct 1 ED: Executive Director (especially in the cases of non-executive Directors and 2 NED: Non-executive Director independent non-executive Directors as to bringing 3 INED: Independent Non-executive Director independent judgments to the Board), and to obtain 4 AC: Audit Committee a general understanding of the Company’s business 5 RC: Remuneration Committee activities and development, the Company would arrange 6 NC: Nomination Committee a comprehensive, formal and tailored induction for him/ her upon appointment. There was no new appointment Responsibilities of Directors The Directors acknowledge their responsibilities to apply of Director and thus no induction training had been arranged during the year. their relevant levels of skill, care and diligence when discharging duties. The Board also understands where potential conflicts of interests arise, the non-executive Directors (including the independent non-executive Directors) will lead in discussing the relevant transactions being contemplated when there is a Director or any of his associates having a material interest in the transactions and will abstain from voting. 037 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT The Directors disclose to and update the Company In addition, as the Directors are geographically the number and nature of offices they hold in public dispersed, the Company provided them with listing companies or organizations and other significant compliance updates including, amongst other things, commitments, together with the time involved every year; e-training for listed companies’ directors hosted by any change of such during the year would be properly the Stock Exchange and the recent development on disclosed in due course. All Directors confirmed that they continuing connected transactions during the year. had given sufficient time and attention to the Group’s The Company received written confirmations from the affairs during the year. The independent non-executive Directors about their full understanding of such training Directors and the non-executive Director also declared material. Records of the Directors’ participation in other their independence to make constructive and informed CPD or training sessions provided, if any, are maintained comments as to the development of the Company’s by the Company Secretary of the Company (the strategy and policies by discharging their duties. The “Company Secretary”). Board reviewed the relevant disclosure, confirmation and declaration together with their actual time contribution, and agreed that all Directors had taken active interests in the Group’s affairs during the year. Supply of and Access to Information The Company provides the Directors with adequate information in a timely manner that will enable them to make informed decisions and discharge their duties and Continuous Professional Development responsibilities properly. The Company ensures that CP A.6.5 provides that the Company should be individual Director will have separate and independent responsible for arranging and funding suitable training, access to the senior management whenever necessary, placing an appropriate emphasis on the roles, functions and any queries raised by the Directors should receive a and duties of a listed company director. During the year, prompt and full response. the Company did not host a continuous professional development (“CPD”) session for the Directors as the For the notices, intended agendas, papers and materials Company has made alternative arrangement so that the related to the meetings of the Board and its committees, Directors may elect to participate in courses and topics the management team provides complete, reliable and of their own interests. To accommodate the Directors’ timely information to the Directors with proper briefing in development and to refresh their knowledge and skills, respect of the matters and issues being contemplated so as to ensure that their contribution to the Board would by the Directors at the meetings of the Board and its remain informed and relevant, the Directors can submit committees. The Company also keeps the Directors well their applications with details of the curriculum and the informed of the execution status and latest developments relevant course fees to the Chief Executive Officer of of the respective matters and issues resolved by them in the Company (“CEO”). Once the training is considered a timely manner. In addition to regular Board meetings, acceptable, the course fees will be fully reimbursed when the Company also provides reports in relation to the valid payment receipts are presented. Group’s consolidated management accounts, sales volume and investor relation activities on a monthly basis, and press releases together with share price performance on an ad-hoc basis to the Board. 038 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT CORPORATE GOVERNANCE REPORT Securities Transactions of the Directors and the The Company also implements an internal policy on Senior Management handling inside information which is consistent with the During the year, the Company adopted the Model relevant applicable requirements of the Listing Rules. Code for Securities Transactions by Directors of Listed The policy sets out measures and procedures for the Issuers (the “Model Code”) set out in Appendix 10 to Directors and other relevant officers of the Company the Listing Rules as its own guidelines for dealings in the to assume duty when dealing with inside information Company’s securities by its relevant employees. and preservation of its confidentiality before proper disclosure. It also sets out guidelines for the Board to The Directors, having been enquired specifically, disclose timely any material inside information according confirmed their compliance with the required standard to the relevant statutory and regulatory requirements. set out in the Model Code during the year and there had been no cases of non-compliance reported. As at 31 Insurance for Directors and Senior Management December 2018, the details of Directors’ holding of the During the year, the Company arranged liability insurance Company’s securities are set out on pages 67 to 69 of for the Directors and senior management to provide this annual report. Mr. Chiu Yeung, Adolph (“Mr. Chiu”) appropriate coverage based upon performance of duties was interested in 1,550,000 shares of the Company by such persons; the Board considered the insured as at 31 December 2018. Save for Mr. Chiu, other amount was adequate. The insured amount is subject to senior management members of the Company whose an annual review by the Board and the Audit Committee. profiles being set out on pages 33 to 34 of this annual report, declared that they did not hold any shares of the Company as at 31 December 2018. In addition, the Company issues notices to all Directors and relevant employees of the Group reminding them to comply with the Model Code 60 days prior to the publication of the annual results, 30 days prior to the B. THE BOARD The Company is headed by the Board effectively through its strong leadership in the strategic orientations and balanced control over the overall management of the business operations. publication of the interim results, and any time when they are in possession of or privy to any unpublished inside information of the Group before it is properly disclosed. 039 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT Corporate Governance Duties Composition of the Board The Board performed (including but not limited to) the The Company appoints independent non-executive following corporate governance duties during the year: Directors representing at least one-third of the Board (i) reviewed the existing policies of the Company on and one of whom must have appropriate professional corporate governance including Whistleblowing Policy, qualifications or accounting or related financial Remuneration Policy, Shareholders’ Communication management expertise. As at 31 December 2018, Policy, Director Nomination Policy, Board Diversity the Board comprised seven executive Directors, one Policy, and adopted a policy on payment of dividends; non-executive Director and four independent non- (ii) reviewed the coverage of knowledge and skills in executive Directors, namely Mr. Lee Cheuk Yin, Dannis the CPD arrangements made for the Directors and/ (an associate member of the Hong Kong Institute of or senior management by the Company; (iii) reviewed Certified Public Accountants and a member of the the effectiveness of internal procedures for overseeing American Institute of Certified Public Accountants), Mr. timely disclosure of material inside information and Yeung Sau Hung, Alex, Mr. An Qing Heng and Mr. Wang perseverance of its confidentiality; (iv) monitored the Yang. Details of the compositions of the Board and its compliance of Model Code by the Directors and committees are set out on page 227 of this report. relevant employees of the Group; and (v) reviewed the Company’s compliance with the CG Code and The independent non-executive Directors should be disclosure in this report. identified in all corporate communications that disclose the names of Directors. An updated list of Directors and Management Functions Delegated by the Board The Board has delegated the responsibilities of the execution of strategies and decision making for dayto-day operation and administration functions of the Company to the management team headed by the CEO. their roles and functions is maintained on the Company’s website (http://www.geelyauto.com.hk) under the “Investor Centre” of the section headed “Environmental, Social and Corporate Governance” and on the website of the Stock Exchange (http://www.hkexnews.hk) for Shareholders’ inspection. The Board has set out written guidelines for the management team as to when final authority should Appointments and Re-election of Directors rest with the Board and its prior approval should be All Directors, including non-executive Directors, are obtained before making decisions or entering into any appointed for a specific term of not more than three commitments; issues of such include but not limited years and are subject to retirement by rotation at least to any proposed notifiable transactions, connected once every three years at the Company’s general transactions, significant domestic and/or overseas meetings. Directors appointed to fill a casual vacancy investments, major business decisions related to should also be subject to election by Shareholders at the operation and business strategy, change of key first general meeting after appointment. management of the Group, and disclosure of inside information. 040 MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT In accordance with Article 116 of the Company’s Articles Most of the meetings of the Board and its committees of Association (the “Articles of Association”), Mr. Yang were duly attended by a majority of the Directors through Jian, Mr. Ang Siu Lun, Lawrence, Mr. Carl Peter Edmund electronic means pursuant to the Articles of Association Moriz Forster and Mr. Yeung Sau Hung, Alex will retire as most of the Directors’ business engagements were by rotation and being eligible, will offer themselves in the PRC. During the year, the Directors attended the for re-election at the Company’s forthcoming annual meetings of the Board and its committees by themselves general meeting. No Directors proposed for re-election and they did not appoint any alternate director. For at the forthcoming annual general meeting has a service any Board resolution approving contract, arrangement contract which is not determinable by the Group within or any other proposal in which a Director or any of his one year without payment of compensation (other than associates has a material interest (“Interested Director”), statutory compensation). the Interested Director abstained from voting at such Board meetings and the relevant meetings of the Board As Mr. Yeung Sau Hung, Alex has served the Company committees, where presence of the non-interested for more than 9 years, his further appointment should independent non-executive Directors should be assured. be subject to a separate resolution to be approved by Shareholders. By taking into account his independent The following table illustrates the attendance of status in the Board in the past years, and that he is not each Director at the meetings of the Board and its involved in the day-to-day management of the Company, committees, and general meetings of the Company. the Board believes he is still independent and should be The denominators indicate the number of respective re-elected as the Company’s independent non-executive meetings held during the year that each Director is Director; such reason shall be set out in the circular of entitled to attend to reflect the effective attendance rate the forthcoming annual general meeting of the Company applicable to any Director(s) whom appointed and/or for Shareholders’ consideration. resigned part way during the year. Meetings of the Board As required by business needs, the Company held a total of 5 regular Board meetings, 15 ad hoc Board meetings, 81 meetings of the executive committee of the Board (“EC”), 3 meetings of the Audit Committee (“AC”), 4 meetings of the Remuneration Committee (“RC”), 1 meeting of the Nomination Committee (“NC”), 1 annual general meeting (“AGM”) and 3 extraordinary general meetings (“EGM”) for the financial year ended 31 December 2018. 041 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT Attendance Rate for Meetings Regular Ad hoc Board Board EC AC RC NC Meetings Meetings Meetings Meetings Meetings Meeting AGM EGMs Mr. Li Shu Fu (Chairman) 5/5 15/15 – – – – 1 0/3 Mr. Yang Jian (Vice Chairman) 4/5 15/15 – – – – 1 1/3 5/5 15/15 – 2 – – 1 3/3 Mr. Gui Sheng Yue (CEO) 5/5 15/15 81/81 – – 1/1 1 3/3 Mr. An Cong Hui 5/5 15/15 – – – – 1 0/3 Mr. Ang Siu Lun, Lawrence 5/5 15/15 81/81 2 – – 1 3/3 Ms. Wei Mei 4/5 15/15 – – 4/4 – 0 0/3 5/5 15/15 – – – – 1 3/3 Mr. Lee Cheuk Yin, Dannis 5/5 15/15 – 3/3 4/4 1/1 1 2/3 Mr. Yeung Sau Hung, Alex 5/5 15/15 – 3/3 4/4 1/1 0 0/3 Mr. An Qing Heng 5/5 15/15 – 3/3 – – 1 3/3 Mr. Wang Yang 5/5 15/15 – 3/3 4/4 1/1 1 3/3 Name of Directors Executive Directors Mr. Li Dong Hui, Daniel (Vice Chairman) Non-executive Director Mr. Carl Peter Edmund Moriz Forster Independent Non-executive Directors 042 MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT Relation of the Board Members Chairman and Chief Executive Officer None of the members of the Board has any relationship The roles of the Chairman and the CEO are assumed by (including financial, business, family or other material/ Mr. Li Shu Fu and Mr. Gui Sheng Yue, respectively, to relevant relationship(s)) with each other and in particular, ensure a balance of power and authority. with the Chairman and the CEO. The Chairman provides leadership for the effective Non-executive Director and Independent Nonexecutive Directors Each of the non-executive Director and independent non-executive Directors entered into a term of service of three years with the Company under a formal letter of appointment and is subject to retirement by rotation at least once every three years and offer himself for reelection at the annual general meeting of the Company. Having received annual confirmation from the four independent non-executive Directors for the year ended 31 December 2018 confirming that they had not been involved in any business which might fall under the factors for assessing their independence set out in Rule 3.13 of the Listing Rules, the Company considers all of the independent non-executive Directors are still independent and they have the character, integrity, independence and experience to fulfill their roles effectively. When a matter should be resolved in a meeting involving a substantial Shareholder or a Director having conflict of interest that determined to be material by the Board, the independent non-executive Directors who have no material interest in the subject matter would attend the meetings of the Board and its committees and lead the discussions. running of the Board by delegating the Company Secretary to facilitate the proper convening of the meetings of the Board and its committees and the dissemination of adequate information, in order to ensure that the Directors would be properly briefed on issues being discussed at the meetings of the Board and its committees and that they are encouraged to discuss all key and appropriate issues of the Group timely. The Chairman has delegated the Company Secretary to draw up the agenda of the relevant meetings and circulate it to the Directors for comments, if appropriate, agenda items proposed by the Directors will then be included in the relevant meetings for further discussion. A culture of openness and a constructive relation between executive and non-executive Directors are promoted. CP A.2.7 provides that the Chairman should at least annually hold meetings with the independent nonexecutive Directors without the presence of other Directors. During the year ended 31 December 2018, a formal meeting could not be arranged between the Chairman and the independent non-executive Directors without the presence of other Directors due to the tight schedules of the Chairman and the independent nonexecutive Directors. Although such meeting was not held during the year, the Chairman has delegated the Company Secretary to gather any concerns and/or questions that the independent non-executive Directors might have and report to him for setting up follow-up meetings, whenever necessary. 043 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT The CEO is primarily responsible for the daily operations on their decisions made or recommendations given, if of the Group with the assistance from other executive applicable, at least once every year. During the year, the Directors and the management team. The division of Executive Committee held 81 meetings. Full minutes responsibilities between the Board and the management of the Executive Committee are kept by the Company team was clearly established in writing. Secretary and were sent to all committee members for their comment and records, within a reasonable time The Chairman has also endorsed the Company after the meeting. The attendance record, on a named Secretary to draft relevant policies and guidelines as to basis, at those meetings is set out in the table on page upholding good corporate governance practices and 42 of this report. procedures of the Group, such as the Shareholders’ Communication Policy and Director Nomination Policy for maintaining effective communication with Shareholders and directing their views to the Board as a whole. For details of Shareholders’ rights, please refer to pages 53 to 55 of this report. Remuneration Committee The role and function of the Remuneration Committee is to determine the policy for the remuneration package of executive Directors and senior management with access to independent professional advice at the Company’s expense if necessary; to assess the performance of C. BOARD COMMITTEES executive Directors and senior management; to approve the terms of service contracts of executive Directors and The Company currently has four Board committees, namely Executive Committee, Remuneration Committee, Nomination Committee and Audit Committee. The written terms of reference of Remuneration Committee, Nomination Committee and Audit Committee are published on the Company’s website (http://www.geelyauto.com.hk) under the “Investor Centre” of the section headed “Environmental, Social and Corporate Governance” and the Stock Exchange’s website (http://www.hkexnews.hk) for Shareholders’ inspection. senior management; and to make recommendations to the Board on the remuneration of non-executive Directors. The remuneration packages of executive Directors and senior management should include benefits in kind, pension rights and compensation payments (including any compensation payable for loss or termination of their office or appointment at a reasonable and appropriate level); levels of which should be sufficient to attract, retain and/or compensate Directors and senior management to run the Company successfully without paying more than necessary. The updated terms of reference of the Remuneration Committee are published on the Company’s website Executive Committee (http://www.geelyauto.com.hk) under the “Investor An Executive Committee comprising Mr. Gui Sheng Centre” of the section headed “Environmental, Social Yue and Mr. Ang Siu Lun, Lawrence was established in and Corporate Governance” and the Stock Exchange’s 2015 pursuant to the Articles of Association. Specific website (http://www.hkexnews.hk) for Shareholders’ written terms of reference of which was set out to enable inspection. the committee to perform its functions properly. The Executive Committee should report back to the Board 044 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT CORPORATE GOVERNANCE REPORT Proceedings of the Remuneration Committee • Approved grant of share options to employees of the Company; and The Remuneration Committee being chaired by an independent non-executive Director currently comprises members of three independent non-executive Directors (including the chairman of the committee himself) and • Reviewed the Company’s Remuneration Policy and the terms of reference of the committee. one executive Director. Details of the compositions of the Board and its committees are set out on page 227 of Disclosure of Remuneration Payable to Directors this report. and Senior Management During the year, the Remuneration Committee held 4 meetings. Full minutes of the Remuneration Committee are kept by the Company Secretary and were sent to all committee members for their comment and records, within a reasonable time after the meeting. The attendance record, on a named basis, at those meetings is set out in the table on page 42 of this report. The Remuneration Committee considered the following proposals and made recommendation to the Board during the year: • Reviewed the adjustment factors for remuneration of the senior management of the Company; • Reviewed the basic monthly salary, benefits and year-end bonus of individual executive Directors with reference to their past contribution, experience and duties as well as the Company’s Remuneration Policy and prevailing market conditions; The Remuneration Committee adopts the model described in CP B.1.2(c)(i), which is to determine, with delegated responsibility, the remuneration packages of the Directors, in particular, the executive Directors, and the senior management. In determining the remuneration packages of the Directors, the Remuneration Committee ensures no Director or any of his/her associate is involved in deciding his/her own remuneration. The Directors conducted the self-evaluation on their individual performance and contribution to both the Board and the Group during the year. Under the Company’s Remuneration Policy, the remuneration packages of the Directors and senior management are made up of the following two tiers: 1) on short-term basis – basic monthly salaries and discretionary year-end bonus; and 2) on long-term incentive basis – share option scheme and retirement benefits. The diversified remuneration package can reflect the market value of the relevant duties of the Directors and senior management; encourage relevant Directors and senior management to achieve the corporate goal; attract and retain the experienced human resources of the Group; and provide competitive retirement protection. 045 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT For the year ended 31 December 2018, the remuneration payable to members of senior management was within the following bands: Number of Individuals HK$500,001 – HK$1,000,000 1 HK$1,000,001 – HK$1,500,000 2 HK$2,500,001 – HK$3,000,000 1 4 The aggregate of the emoluments in respect of the above members of senior management was as follows: RMB’000 Basic salaries and allowances 4,625 Retirements benefits and scheme contributions 87 Share-based payment expenses 395 5,107 For details of Directors’ remuneration, please refer to pages 153 to 155 of this annual report. Nomination Committee Proceedings of the Nomination Committee The role and function of the Nomination Committee is to The Nomination Committee being chaired by an determine the policy for the nomination of Directors with independent non-executive Director currently comprises the right to seek independent professional advice at the members of three independent non-executive Directors Company’s expense if necessary. The updated terms of (including the chairman of the committee himself) and reference of the Nomination Committee are published one executive Director. Details of the compositions of on the Company’s website (http://www.geelyauto.com. the Board and its committees are set out on page 227 of hk) under the “Investor Centre” of the section headed this report. “Environmental, Social and Corporate Governance” and the Stock Exchange’s website (http://www.hkexnews. hk) for Shareholders’ inspection. 046 MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT The Nomination Committee reviews the composition further, again using the evaluation criteria described of the Board on a regular basis so as to ensure that above. The Nomination Committee receives input on the Board has a good balance of expertise, skills, such director candidates from other directors, including knowledge and experience which can complement the the Chairman, and recommends director candidates to corporate strategy of the Company. When selecting the full Board for nomination. and recommending candidates for directorship, the committee takes into account the qualification, ability, The Nomination Committee may engage a third party to working experience, leadership, professional ethics and assist in the search for director candidates or to assist independence (as the case may be) of the candidates in gathering information regarding a director candidate’s before nominating the candidates with high caliber to the background and experience. If the Committee engages Board for selection and appointment. a third party, the Nomination Committee approves the fee that the Company pays for such services. During the year, the Nomination Committee held 1 meeting. The committee reviewed the existing structure, size and composition of the Board in accordance with the Board Diversity Policy; reviewed the independence of the existing four independent non-executive Directors; and reviewed the terms of reference of the committee. The attendance record, on a named basis, at those meetings is set out in the table on page 42 of this report. Board Diversity Policy With a view to achieving a sustainable and balanced development, the Company regards increasing diversity at the Board level as an essential element. The Board Diversity Policy of the Company is published on the Company’s website (http://www.geelyauto.com.hk) under the “Investor Centre” of the section headed “Environmental, Social and Corporate Governance”. Procedures and Process for Nomination of Director by the Nomination Committee In order to enhance the quality of the performance of Upon identifying a director candidate, the Nomination the Board and achieve a sustainable and balanced Committee initially determines the need for additional or development of the Group, the Board ensures that replacement Board members and evaluates the director board diversity will be considered from various aspects candidate under a range of objective criteria based on when designing the Board’s composition and that the information the Nomination Committee receives with the nomination and selection of candidates as Board the recommendation or otherwise possesses, which may member will be considered against objective criteria be supplemented by certain inquiries. If the Nomination based on a range of diversity perspectives. The Committee determines, in consultation with other Board also reviews the Board Diversity Policy at least Board members, including the Chairman, that a more annually or whenever as appropriate, to ensure its comprehensive evaluation is warranted, the Nomination effectiveness. Taking into account the vast development Committee may then obtain additional information about of the consumer products market, a range of diversity the director candidate’s background and experience, perspectives was analyzed for the Board’s composition including by means of interviews. The Nomination during the year as set out in the pie charts below. Committee will then evaluate the director candidate 047 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT By Gender By Ethnicity German Lady Chinese Gentlemen By Length of Service with the Company (years) By Age Range (years old) 40-45 1-5 ≥51 46-50 ≥11 6-10 Audit Committee seek independent professional advice at the Company’s The role and function of the Audit Committee is to expense if necessary. The Audit Committee also acts investigate any activity within its terms of reference as the key representative body for overseeing the fairly and independently and take appropriate follow- Company’s relations with the external auditor. The up action if necessary; to seek any information it updated terms of reference of the Audit Committee requires from any employee(s), whereas all employees are published on the Company’s website (http://www. are directed to cooperate with any request made by geelyauto.com.hk) under the “Investor Centre” of the the committee; and to review and ensure that proper section headed “Environmental, Social and Corporate arrangements are in place for the Company’s employees Governance” and the Stock Exchange’s website (http:// to use, in confidence, to raise concerns about possible www.hkexnews.hk) for Shareholders’ inspection. improprieties in financial reporting, internal controls or other matters. The Audit Committee has the right to 048 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT CORPORATE GOVERNANCE REPORT Proceedings of the Audit Committee • Reviewed the internal audit findings conducted The Audit Committee being chaired by an independent by the Internal Audit Department of the Company non-executive Director, who is an associate member of and assessed the effectiveness of the internal the Hong Kong Institute of Certified Public Accountants control system of the Group; and and a member of the American Institute of Certified Public Accountants, currently comprises four members (including the chairman of the committee himself), solely • Reviewed the Whistleblowing Policy and the terms of reference of the committee. the independent non-executive Directors. Details of the compositions of the Board and its committees are set out on page 227 of this report. During the year, the Audit Committee held 3 meetings. Full minutes of the Audit Committee are kept by the Company Secretary and were sent to all committee members for their comment and records, within a reasonable time after the meeting. The attendance record, on a named basis, at those meetings is set out in the table on page 42 of this report. The Audit Committee considered the following businesses and/or made recommendation to the Board during the year: • Reviewed the Group’s audited annual results for the year ended 31 December 2017 including the major accounting issues raised by the external auditor; • Relationship with the external auditor Apart from meeting with the Company’s external auditor twice a year for approving the interim results and the annual results, the Audit Committee also meets with the external auditor in the absence of the management team of the Company, including executive Directors, whenever necessary to discuss any issues related to the audit (e.g. nature and scope of the audit, key audit matters, reporting obligations, audit fee, nature and scope of nonaudit service provided, and those arising from the audit (e.g. judgment used in the financial reporting, compliance with financial reporting and auditing standards), etc.) so as to review and monitor the independence and objectivity of the Company’s external auditor, and the effectiveness of the audit process in accordance with applicable standards. Reviewed the Group’s interim results for the six Risk Management and Internal Control months ended 30 June 2018; For the year ended 31 December 2018, the Board conducted an annual review of the effectiveness of the • Assessed the independence and objectivity of the Group’s risk management and internal control systems Company’s external auditor and approved the based on the confirmation made by the management annual audit fee for the year ended 31 December and inputs from the Audit Committee. The Board 2018; considered the risk management and internal control systems of the Group, including the adequacy of • Approved the insurance of the Directors’ and resources, staff qualifications and experience, training officers’ liabilities of the Company and confirmed programmes and budget of the Group’s accounting, the adequacy of insurance coverage; internal audit and financial reporting functions, effective and adequate during the year. 049 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT The Board has an overall and ongoing responsibility When the Board and the Audit Committee express for the Group’s risk management and internal control concerns over the risk management and internal control systems, and reviewing their effectiveness. It is matters of the Group, the Internal Audit Department acknowledged that risk management and internal control of the Company will investigate and communicate systems are designed to manage rather than eliminate the findings with and make recommendations to the the risk of failure to achieve business objectives, and management. The Internal Audit Department of the can only provide reasonable and not absolute assurance Company also maintains an effective communication against material adverse change or damage. with the external auditor of the Company on the Group’s internal control system during interim review and annual The Board, through its risk oversight role, ensures audit. that the management establishes an effective risk management, consistent with the Group’s strategy The Group has a policy for handling and dissemination and risk appetite. The management establishes risk of inside information including relevant control processes management policies and internal control processes to and safeguards. The processes and safeguards are identify, evaluate and manage risks. Each business unit implemented on a monthly basis and as needed by implements such policies and processes in the daily relevant department heads and the management operations and reports significant risks identified to the involved in the handling and dissemination of inside management regularly. The management assesses and information. evaluates these significant risks reported then allocates sufficient resources to address these risks and monitors the risk management status reported from the relevant D. ACCOUNTABILITY AND AUDIT business unit from time to time. The management The Directors were provided with major financial will communicate the risk management and internal information and the related explanation and information control findings to the Board for its assessment of the of the Company that would enable them to make an effectiveness of the relevant risk management and informed assessment. Such information would be internal control systems of the Group. provided on a monthly basis which includes but not limited to the background or explanatory information The Internal Audit Department of the Company reviews relating to disclosure, budgets, forecasts and other material internal control aspects of the Group, including relevant internal financial information, such as financial, operational and compliance controls as well consolidated financial statements of the Company. as risk management function and reports the findings to the Audit Committee at least twice a year and on The Directors acknowledge their responsibility for ad-hoc basis. The findings are communicated with the preparing the accounts of each financial period, management and actions are taken to resolve defects as which should give a true and fair view of the operating and when identified. No material internal control defects results and financial conditions of the Company, and were identified during the year. for monitoring the integrity of the Company’s financial statements and corporate communications. The 050 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT CORPORATE GOVERNANCE REPORT Directors are also aware that a balanced, clear and • Increase in sales volume through broadening understandable assessment in the Company’s annual product range and expansion geographically in and interim reports and other financial disclosures both domestic and international markets; required by the Listing Rules, other regulatory and statutory requirements should be presented. In • preparing the financial statements for the year ended Focus on quality, technology, customer services and satisfaction; 31 December 2018, the Directors have selected appropriate accounting policies and applied them • Organic expansion to be supplemented by consistently; made judgements and estimates that are mergers and acquisitions and strategic alliances; prudent and reasonable; and prepared accounts on a and going concern basis. The reporting responsibilities of the independent external auditor of the Company regarding • Preservation of its competitive strength in cost the consolidated financial statements of the Company for effectiveness, flexibility and intellectual property the year ended 31 December 2018 in the independent resources. auditor’s report set out on pages 91 to 96 of this annual report. External Auditor and their Remuneration During the year, the Directors were not aware of any material uncertainties relating to events or conditions that may cast significant doubt upon the Company’s ability to continue as a going concern. The Board also conducted an annual review on the effectiveness of the internal control system of the Group. Besides, the Company has been announcing the monthly sales volume figures on a voluntary basis since January 2010 to improve the information transparency. Grant Thornton Hong Kong Limited, the independent external auditor of the Company, has declared its reporting responsibilities regarding the consolidated financial statements of the Company for the year ended 31 December 2018 in the independent auditor’s report set out on pages 91 to 96 of this annual report. In 2018, there was no disagreement between the Board and the Audit Committee on the re-appointment of Grant Thornton Hong Kong Limited as well as their fees and terms of engagement after the assessment of their Long-term Strategy independence and objectivity conducted by the Audit The Company’s long-term objective is to deliver Committee. Grant Thornton Hong Kong Limited will sustainable growth in Shareholders’ return and become hold office until re-election by the Shareholders at the a leading global automobile group with good reputation forthcoming annual general meeting of the Company. and integrity, winning respects from its customers. The strategies employed to achieve these goals include: • Achieving economies of scale through expansion of sales volume and production capacity; 051 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT For the year ended 31 December 2018, the remuneration laws, rules and regulations. The Directors could obtain for the provision of audit and non-audit services by advice and services from the Company Secretary for any the auditor (including any entity that is under common updates and developments in corporate governance, control, ownership or management with the audit firm applicable laws and regulations when necessary. Upon or any entity that a reasonable and informed third party reasonable request by the Directors, the Company having knowledge of all relevant information would Secretary is delegated by the Board to seek independent reasonably conclude as part of the audit firm nationally professional advice in appropriate circumstances at or internationally) to the Group was as follows: the Company’s expense to assist the Directors in discharging their duties. 2018 RMB’000 The Company Secretary, as delegated by the Chairman, is responsible for preparing meeting agendas and serving notices to the Board and its committees at least Audit Service Annual audit 14 days before the regular meetings or at a reasonable 6,175 time for other ad hoc meetings, as well as ensuring the management’s provision of relevant Board papers to the Directors at least 3 days before the meetings. By doing Non-audit Services Interim review 625 Issue of bonds payables 403 so, the Directors would receive adequate, accurate, clear, complete and reliable information in a timely manner for effective and informed decision making. 1,028 The Company Secretary also ensures that the meetings Total 7,203 of the Board and its committees are convened and constituted in accordance with all applicable laws, regulations and the procedural requirements set out E. COMPANY SECRETARY in the Articles of Association and/or the relevant terms of reference at all times. In addition, the Company The Company Secretary is an employee of the Company Secretary will take minutes of the meetings and circulate and is involved in the Company’s affairs. He took more them to the Directors for comments at a reasonable than 15 hours’ professional training for the year ended time after the meetings. Minutes of the meetings record 31 December 2018. in sufficient detail the matters considered and decisions reached, including any concerns raised or dissenting 052 Reporting to the Chairman and/or the CEO, the views expressed by Directors. After incorporating Company Secretary plays an important role in ensuring Directors’ comments, the executed version of the proper Board procedures are tailored to the Company’s minutes will be maintained by the Company Secretary business needs and compliance with all applicable and are available for Directors’ inspection upon request. Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT CORPORATE GOVERNANCE REPORT F. SHAREHOLDERS’ RIGHTS more than one-half of their total voting rights in aggregate may convene the general meeting themselves, provided that any meeting so The Company had posted the Shareholders’ convened will not be held after the expiration Communication Policy, which sets out its policy of of three months from the date of deposit of the maintaining communications with Shareholders, requisition; Shareholders’ rights and the procedures that Shareholders can use to propose a person for election as a Director, on its website (http://www.geelyauto.com.hk) 4. The requisitionist(s) must convene the general meeting in the same manner, as nearly as under the “Investor Centre” of the section headed possible, as that in which meetings may be “Environmental, Social and Corporate Governance” for convened by the Board and all reasonable Shareholders’ inspection. expenses incurred by the requisitionist(s) as a result of the failure of the Board will be How can Shareholders convene an extraordinary reimbursed to them by the Company; and general meeting and put forward proposals at the general meetings? 5. If the Board fails to give Shareholders sufficient notice (i.e. not less than 21 days for the annual All general meetings other than the annual general general meeting and/or for passing of special meeting are called extraordinary general meetings. An resolution(s) at the extraordinary general meeting, extraordinary general meeting may be convened at the or not less than 14 days for passing of ordinary request of Shareholders under the following conditions: resolution(s) at the extraordinary general meeting), the meeting is deemed not to have been duly 1. On the written requisition of any two or more convened. Shareholders holding as at the date of the requisition not less than 10 per cent of the paid- If Shareholders would like to put forward proposals up capital of the Company which carries the right at the general meetings, they have to sign a written of voting at a general meeting of the Company; proposal specifying the details of the proposal and their contact details (e.g. name, telephone number, email 2. The requisition must specify the objects of the address, etc.) and addressing it to the Board (care of the meeting, be signed by the requisitionists, and be Company Secretary) then deposit it at the Company’s deposited at the principal place of business of the principal place of business in Hong Kong, not less than Company in Hong Kong as set out on page 228 32 days before the upcoming general meeting at the of this annual report under the section headed time. The Board will take into account the details of the “Corporate Information”; proposal and reply to the Shareholders concerned by writing of when and how the proposal is considered, 3. If the Board does not within 21 days from the or if applicable, why the proposal not accepted in due date of deposit of the requisition proceed to course. Contact details of the Company’s principal place convene the meeting to be held within a further of business are set out on page 228 of this annual report 21 days, the requisitionist(s) representing under the section headed “Corporate Information”. 053 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT Enquiries to be properly directed to the Board Board as a whole. In addition, the external auditor will The Company’s Investor Relations Department being be invited to attend the annual general meeting of the led by an executive Director, namely Mr. Ang Siu Lun, Company to answer questions about the conduct of Lawrence (“Mr. Ang”), is responsible for responding to the audit, the preparation and content of the auditor’s general enquiries on the Company’s business operations report, accounting policies and auditor’s independence. from Shareholders. Mr. Ang is delegated by the Board to handle enquiries from the Shareholders and report to the The Company held its annual general meeting (“AGM”) Board on enquiries gathered for further discussions from on 25 May 2018. Due to conflict of his schedules and time to time, so as to ensure that those enquiries are other prior business engagement in the PRC, Mr. Li properly directed. Shu Fu, the Chairman, was unable to attend the general meeting in person but he participated the meeting When dealing with enquiries, the Investor Relations via conference call. Two executive Directors, one Department of the Company is in strict compliance with independent non-executive Director and the Company’s the internal policy of the Company on inside information external auditor attended and answered questions at all times. Contact details of the Company’s principal raised by the Shareholders at the meeting physically. place of business are set out on page 228 of this annual Two independent non-executive Directors, one non- report under the section headed “Corporate Information”. executive Director and four executive Directors (including the Chairman) participated the meeting via conference Communication with Shareholders CP E.1.2 provides that the Chairman and the chairman call. Record of the attendance of the relevant Directors who physically attended the AGM or participated via conference call is set out on page 42 of this report. of respective Board committees should attend the annual general meeting of the Company. During the year ended 31 December 2018, the Chairman did not attend Voting by Poll the annual general meeting of the Company in person For any resolutions proposed by the Company at due to conflict of his schedules and other prior business the general meetings, bundling resolutions should engagement in the PRC. If the Chairman could not be avoided. The Listing Rules stipulate that any vote attend the general meeting of the Company in person, of shareholders at all general meetings would be all he would assign an executive Director, who does not taken by poll except where the chairman of the general have a material interest in the businesses contemplating meetings, in good faith, decides to allow a resolution in the meeting and should report to him on any enquiries which relates purely to a procedural or administrative Shareholders might have, to attend such general matter to be voted by a show of hands. meeting on his behalf. Further, the Company would facilitate a conference call for Shareholders and the The chairman of the general meetings will ensure that Directors who are unable to attend in person (including an explanation is provided with the detailed procedures the Chairman) to discuss any specific enquiries with for conducting a poll and answer any questions from the respect to the businesses contemplating in the general Shareholders on voting by poll to ensure that they are meeting. Through these measures, views of the familiar with the procedures. Shareholders would be properly communicated to the 054 MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT The Company arranges for the notice to Shareholders No dividend shall be declared or payable except out of to be sent for annual general meetings at least 20 clear the profits and reserves of the Company lawfully available business days before the meeting and to be sent at least for distribution, including share premium. No dividend 10 clear business days for all other general meetings. shall carry interest against the Company. The Board may, before recommending any dividend, set aside out Policy on Payment of Dividends Subject to the Cayman Companies Law, the Company may from time to time in general meeting declares dividends in any currency to be paid to the members of the Company whose names appear on the register of members of the Company on a pre-determined date at the Board’s discretion as the record date for the purpose of determining the entitlement to receive payment of any dividend but no dividend shall be declared in excess of the amount recommended by the Board. The Board may also, without convening a general meeting, from time to time declare interim dividends as appear to the Board to be justified by the profits of the Company, and, in particular (but without prejudice to the generality of the foregoing), if at any time the share capital of the Company is divided into different classes, the Board may pay such interim dividends in respect of those shares in the capital of the Company which confer on the holders thereof deferred or non-preferential rights as well as in respect of those shares which confer on the holders thereof preferential rights with regard to dividend. The Board may also pay half-yearly or at other intervals to be selected by it any dividend which may be payable at a fixed rate if the Board is of the opinion that the profits available for distribution justify the payment. The Board may in addition from time to time declare and of the profits of the Company such sums as it thinks fit as a reserve or reserves which shall, at the discretion of the Board, be applicable for meeting claims on or liabilities of the Company or contingencies or for paying off any loan capital or for equalising dividends or for any other purpose to which the profits of the Company may be properly applied, and pending such application may, at the like discretion, either be employed in the business of the Company or be invested in such investments as the Board may from time to time think fit, and so that it shall not be necessary to keep any reserves separate or distinct from any other investments of the Company. The Board may also without placing the same to reserve carry forward any profits which it may think prudent not to distribute by way of dividend. Whenever the Board or the Company in general meeting has resolved that a dividend be paid or declared on the share capital of the Company, the Board may further resolve that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that the shareholders entitled thereto will be entitled to elect to receive such dividend (or part thereof) in cash in lieu of such allotment. In case of the Board elects to pay the dividend in shares, the Company shall abide by the provisions of the Articles of Association on scrip dividends. pay special dividends on shares of any class of such amounts and on such dates as they think fit. 055 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT G. INVESTOR RELATIONS Constitutional documents of the Company The Company’s memorandum and articles of association is maintained on its website (http://www.geelyauto.com.hk) under the “Investor Centre” of the section headed “Environmental, Social and Corporate Governance” and on the website of the Stock Exchange (http://www.hkexnews.hk) for Shareholders’ inspection. During the year, no changes have been made to the Company’s memorandum and articles of association. Details of substantial Shareholders by aggregate shareholding Details of Shareholders having a substantial interest in the Company’s securities as defined in the Securities and Futures Ordinance as at the date of this report are set out on pages 72 to 73 of this annual report. Details of the last AGM and EGMs in 2018 Event Date & Time Venue Major items discussed Voting results AGM on 25 May Regus Conference Centre, (i) received and considered all resolutions were 2018 (Friday) at 35/F., Central Plaza, 18 report of the directors, duly passed by the HKT 4:00 p.m. Harbour Road, Wanchai, audited financial Shareholders as ordinary Hong Kong statements and auditor’s resolutions by way of poll report (ii) declared a final dividend (iii) re-election of directors (iv) authorised the Board to fix the remuneration of the directors (v) re-appointed Grant Thornton Hong Kong Limited as the auditor of the Company (vi) granted a general mandate to the directors to issue and allot new shares 056 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT CORPORATE GOVERNANCE REPORT Event Date & Time Venue Major items discussed Voting results EGM on 4 Room 2301, 23/F., Great approved, ratified and the resolutions were September 2018 Eagle Centre, 23 Harbour confirmed the DJD duly passed by the (Tuesday) at HKT Road, Wanchai, Hong Acquisition Agreement, the independent Shareholders 5:00 p.m. Kong GY Acquisition Agreement as ordinary resolutions by and the DMA Acquisition way of poll Agreement (details are set out in the Company’s circular dated 16 August 2018) and the respective transactions contemplated thereunder EGM on 7 December Room 2301, 23/F., Great approved, ratified and (i) as more than 50% of the 2018 (Friday) at Eagle Centre, 23 Harbour confirmed the renewal votes were cast against HKT 4:00 p.m. Road, Wanchai, Hong of Volvo Financing the renewal of Volvo Kong Arrangements and the EV Financing Arrangements Financing Arrangements and the annual cap (details are set out in the amounts thereunder, Company’s circular dated the resolution was 20 November 2018) and not passed by the respective annual cap the independent amounts thereunder Shareholders as an ordinary resolution by way of poll; and (ii) the resolution for the EV Financing Arrangements and the annual cap amounts thereunder was duly passed by the independent Shareholders as an ordinary resolution by way of poll 057 Geely Automobile Holdings Limited Annual Report 2018 CORPORATE GOVERNANCE REPORT Event Date & Time Venue Major items discussed Voting results EGM on 7 December Room 2301, 23/F., Great (i) approved, ratified and the resolutions were 2018 (Friday) at Eagle Centre, 23 Harbour confirmed the Services duly passed by the HKT 4:30 p.m. Road, Wanchai, Hong Agreement, the Electric independent Shareholders Kong Vehicle Agreement, the as ordinary resolutions by Automobile Components way of poll Procurement Agreement (details are set out in the Company’s circular dated 20 November 2018, the “Circular”) and the respective annual cap amounts thereunder; and (ii) ratified and confirmed the TZ Acquisition Agreement and GZ Acquisition Agreement (details are set out in the Circular) and the transactions contemplated thereunder 058 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT CORPORATE GOVERNANCE REPORT Indication of important dates for the Shareholders in 2018/2019 Event Closure of the Company’s register of members Date : 22 May 2019 (Wednesday) to 27 May 2019 (Monday) : 27 May 2019 (Monday) at HKT 4:00 p.m. at Regus (“Book Close”) for entitlement of voting rights at the forthcoming annual general meeting Forthcoming annual general meeting Conference Centre, 35/F, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong Ex-entitlement date for final dividend : 14 June 2019 (Friday) Book Close for entitlement of final dividend : 18 June 2019 (Tuesday) – 21 June 2019 (Friday) Record date for final dividend entitlement : 21 June 2019 (Friday) Final dividend distribution : July 2019 2019 interim results announcement : Late August 2019 (to be confirmed) Financial year end : 31 December 2019 (Tuesday) 2019 annual results announcement : Late March 2020 (to be confirmed) 059 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT The directors of the Company (the “Directors”) present Particulars of important events affecting the Group that have their annual report together with the audited consolidated occurred since the end of the year ended 31 December financial statements of Geely Automobile Holdings Limited 2018 are set out in the Management Report – Performance & (the “Company”, together with its subsidiaries, collectively the Governance on pages 11 to 28. “Group”) for the year ended 31 December 2018. The principal risks and uncertainties facing the Group are PRINCIPAL ACTIVITIES The Company is an investment holding company. The principal activities of the Company’s subsidiaries are set out in note 37 to the consolidated financial statements. discussed below: 1. It is not certain that the Group may be able to identify or offer popular models to meet changing trends and consumer demands, or to gain market acceptance of the new models RESULTS The results of the Group for the year ended 31 December 2018 are set out in the consolidated income statement and consolidated statement of comprehensive income on page 97 and page 98, respectively of the annual report. The directors recommend the payment of a final dividend of HK$0.35 per ordinary share to the shareholders on the register of members on 21 June 2019, amounting to approximately RMB2,767,091,000. Market trends, consumer demands and needs in the markets where the Group operates change and depend upon various factors, some of which are beyond the Group’s control, such as prevailing economic conditions, consumption patterns, disposable income and inherent uncertainty in market. It is believed that the Group’s ability to anticipate, identify and respond to those trends in a timely manner is critical to the Group’s success. However, it is uncertain that the Group may accurately anticipate the shifts in customer needs, or fail to timely offer new models that meet those changing trends. BUSINESS REVIEW A fair review of the Group’s business including an analysis using financial key performance indicators and the likely future development in the Group’s business is set out in the Chairman’s Statement on pages 7 to 9 and the Management Report – Performance & Governance on pages 11 to 28 of this annual report. An account of the Group’s key relationships with its customers and suppliers, and on which the Group’s success depends is set out on page 86 of this annual report and notes 21 and 24 to the consolidated financial statements. Such disclosure forms part of this directors’ report. To broaden the Group’s model portfolio, the Group plans to continue upgrading its existing models, and in the meantime, to develop new models. The Group plans to launch several new models in 2019 whilst a series of new models to be innovated from the technologies of a new modular architecture and set of components based upon its platform strategy, standardization, and shared modularization in product development is scheduled to be launched in the coming years. In the future, the Group plans to provide more advance powertrain options to its customers. However, it is not assured that the Group’s model development will accurately reflect the prevailing market trends or customer needs at any given time, or that the new models to be launched will 060 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT be well received by the market. If the new models fail of platform strategy, standardization, and shared to gain market acceptance, the Group’s brand image, modularization in product development, which, in turn, a business, financial condition, results of operations and new modular architecture and set of components have prospects will be materially and adversely affected. been established; based upon which, a series of new models of the Group will be introduced to strengthen 2. the Group’s competitiveness in the automobile market. It is not certain that the Group’s research and In the meantime, the Group will speed up its products development capabilities, on which the Group’s offering on new energy vehicles to prepare itself for the continued growth depends, and its research and challenge of the stringent statutory requirement on fuel development efforts may be successful consumption standard in the future and the booming The automobile market is characterized by changing new energy vehicle market. technologies, periodic new model introductions and evolving end-user customer and industry requirements. The Group’s competitors are continuously developing 3. The Group is subject to product liability exposure automobiles that have adopted advanced technologies which could harm its reputation and materially to operate more efficiently and cost effectively. The and adversely affect its business, financial Group’s continued success, therefore, depends on condition and results of operations its ability to continue developing new products that The Group’s products can be exposed to potential can successfully compete with those offered by the product liability claims if they fail to perform as expected, Group’s competitors in terms of design, performance or are proven to be defective, or if their use causes, and price, which, in turn, depends largely on its research results in or is alleged to have caused or resulted in and development capabilities. In addition, the Group’s personal injuries, project delays or damage or other research and development efforts may not be successful adverse effects. The Group currently does not maintain or yield the anticipated level of economic benefits. Even product liability insurance to cover potential product if the Group’s research and development efforts are liability arising from the use of its products and may be successful, the Group may not be able to apply these unable to obtain sufficient product liability insurance newly developed technologies to products that will be coverage on commercially reasonable terms, or at all. accepted by the market or apply them in a timely manner Furthermore, certain product liability claims may be the to take advantage of the opportunities presented in the result of defects from parts and components purchased market. from third party suppliers. Such third party suppliers may not indemnify the Group for defects as to such The Group has strengthened the technological parts and components or would only provide the Group cooperation with Volvo Car Corporation (“VCC”), which with limited indemnification that is insufficient to cover is majority-owned by the Group’s parent company, the Group’s damages resulting from the product liability Zhejiang Geely Holding Group Company Limited (浙江 claim. 吉利控股集團有限公司 or “Geely Holding”), and has so far achieved remarkable progress in this regard. The cooperation enables both parties to further optimizing resource utilization, and speed up the implementation 061 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT Product liability claims, with or without merit, may result If there is any significant increase in the prices of raw in significant negative publicity and thus materially materials, parts or components or if their supply is and adversely affect the marketability of the Group’s disrupted, the Group may incur additional costs to products and its reputation, as well as its business, maintain its production schedules, which, in turn, may financial condition and results of operations. Moreover, decrease its profitability and materially and adversely a material design, manufacturing or quality-related failure affect its business, financial condition and results of or defect in the Group’s products or other safety issues operations. could warrant a product recall by the Group and result in increased product liability claims. If authorities in the In order to remain competitive, the Group tries to manage jurisdictions in which the Group sells its products decide the costs efficiently and aims to produce products that its products fail to conform to applicable quality and at competitive costs. The Group has plan to further safety requirements and standards, the Group could be reduce the costs in purchasing raw materials, parts and subject to regulatory actions. components for production through the implementation of cost control policies such as streamlining the supply The Group regularly monitors the quality of its products chain and localisation of production. via the collection of quality feedback from its customers and conduct of extensive product testing. Protective measures such as product recalls will be taken to rectify any concerns if product quality issues were to be found to mitigate further warranty liability and ensure the compliance of the relevant product safety regulations. The Group will continuously strengthen the selection of suppliers to ensure high quality automobile components are used to minimize the occurrence of product quality and safety issues. 5. Increasing competition in the PRC automobile market and volatility of consumer demand could have a material adverse effect on the Group’s ability to maintain competitiveness Increasing consumer purchasing power in the PRC has resulted in significant growth in the demand for automobiles. Such growth in the automobile market has encouraged, and is likely to continue to encourage, foreign competitors, sino-foreign equity joint ventures established in the PRC and new domestic automobiles 4. The Group’s business, financial condition companies to further expand their production capacity. and results of operations may be materially The Group’s current market share and profit margin may and adversely affected if it fails to manage its be diluted or reduced if there is increasing competition purchase costs or obtain raw materials, parts and for vehicles or further price reductions caused by components on a timely basis or at reasonable increased competition. The pricing, recognition and prices loyalty to the Group’s brand of products and the financial Although the Group usually sources important raw and technical resources allocated to the Group’s materials and parts and components from multiple products may be materially and adversely affected if suppliers in order to achieve a stable supply, it cannot competing automobile products, domestic or foreign, assure that the suppliers can always adequately serve its gain a competitive advantage. needs in a timely manner or at reasonable prices. 062 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT Despite the growing trend in the PRC automobile The Group is committed to continuously develop market, demand for automobiles in China and the rest of products with improvement in quality and more the world is cyclical in nature and is affected by various advanced technologies and powertrain as well as factors, including sales and financing incentives, costs enhancing its production efficiency. A series of new of raw materials, parts and components, cost of fuel, products to be developed from the aforementioned environmental concerns and governmental regulations, technologies of the new modular architecture and set including tariffs, import regulation and other taxes. of components, and new energy vehicle products will Fluctuations in demand may lead to lower vehicle sales broaden the Group’s model portfolio. Meanwhile, the and increased inventory, which may result in further Group has a robust sales and marketing strategy to downward price pressure which will inevitably adversely respond to the dynamic market. Diversified campaigns affect the Group’s financial condition and results of and extensive development of sales network will operations. continue to develop the brand image and provide better outreach to the Group’s consumers. Over the years, the Group has increased the Group’s production capacities in anticipation of a continuous increase in demand for automobiles in the PRC. Any slowdown in demand for automobiles and the intense competition in the PRC may lead to an inventory surplus and could result in a significant under-utilization of the Group’s production capacity, which would in turn, result in diminished returns to the substantial resources invested in the expansion of the Group’s production capacities. If these events occur, the Group’s results of operations and financial condition could be materially and adversely affected. On the other hand, the market response to the Group’s products may exceed the Group’s expectation. Thus, the Group may not have sufficient production capacity to fulfil the customers’ demands and as a result, suffer from loss of revenue as the Group cannot deliver the products in a timely manner. 6. The production and profitability of the PRC automobile manufacturers may be materially and adversely affected by changes in the regulatory environment The implementation of more stringent regulatory requirements in fuel efficiency, product warranty, product recall and emissions standards in the PRC could put tremendous cost pressure on indigenous brands in the PRC. Further, more major cities in the PRC are expected to introduce local policies to restrict new car licenses to ease traffic and combat air pollution, thus restricting the demand for passenger vehicles. The impact could be even bigger for indigenous brands, where their major competitive edges in pricing could be seriously undermined by the introduction of an auction and lottery system to curb the growth of new vehicles. The Group is committed to its new energy vehicles strategy to respond to the challenge in the fuel efficiency and emission standards as well as taking advantage of the exemption of auction and lottery system granted to the new energy vehicles. The Group will also continue its development in powertrain technologies on the conventional vehicles to comply with the regulatory requirements. 063 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT The Group continues its company mission of “Make The Group keeps watch on the environment-friendly good cars that are the safest, most environment-friendly performance of its complete buildup unit products and most efficient. Let Geely cars go around the whole in terms of product research and development and world.” with an aim to build up the core value of “Happy technology. Moreover, it also realizes energy-saving Life, Geely Drive!”. The Group hopes to demonstrate its and emission reduction to each of its production and insight on the sustainable development of vehicle market, operating area. Choosing locations with scientific national economy and society and present happiness approach, harnessing energy-saving technologies to every individual. In this respect, the Group details its and standardizing emission management, the Group manufacture from strength to strength through research mitigates the pressure exerted to the external during the and development on and design of vehicles. For the year course of its operation. ended 31 December 2018, the Group complied with the relevant laws and regulations that have a significant In addition to refining the Group’s business strategies, impact on the Group. the development goal requires participation of every staff member, customer, supplier and stakeholder. The Environment-friendly performance of complete buildup Group hopes to become the pioneer to demonstrate the units has always been the one of the priorities of Geely. sustainable development of the vehicle industry, national The Group pursues excellent environment-friendly economy and society. performance for each of its products by conducting in-depth researches on and exercising rigorous The particulars of the Group’s environment protection controls in terms of power research and development, policies, behavior and compliance with the relevant laws vehicle recycling and environmental adaptation in and regulations that impose material influence on the compliance with national standards. The requirements Group are set out in Corporate Social Responsibility of our complete buildup units are stricter than that Report (also known as “Environmental, Social and of the national standards. In November 2015, the Governance Report”) of Geely Holding which will be Group announced the “Blue Geely” initiative, a new published on the website of Stock Exchange and the energy strategy, which is in line with the international websites of Geely Holding and the Company within three development and central government’s efforts put months after the publication of the annual report. in response to environmental problems. The Group believes that development of new energy and electrified vehicles is the right way for sustainability. 064 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT CLOSING OF REGISTER OF MEMBERS SHARE CAPITAL The register of members of the Company will be closed from During the year, details of the share capital of the Company are 22 May 2019 to 27 May 2019, both dates inclusive, during set out in note 27 to the consolidated financial statements. which period no transfer of shares will be registered. In order to establish entitlements of attending and voting at the forthcoming annual general meeting of the Company to be held on 27 May BORROWINGS 2019, all completed transfer forms accompanied by the relevant Particulars of borrowings of the Group as at 31 December 2018 share certificates must be lodged with the Company’s Share are set out in notes 23 and 25, respectively, to the consolidated Registrar in Hong Kong, Union Registrars Limited, at Suites financial statements. 3301-04, 33/F., Two Chinachem Exchange Square, 338 King’s Road, North Point, Hong Kong, for registration not later than 4:00 p.m. on 21 May 2019. RETIREMENT SCHEMES Particulars of the retirement schemes are set out in note 30 to The register of members of the Company will be closed from 18 the consolidated financial statements. June 2019 to 21 June 2019, both dates inclusive, during which period no transfer of shares will be registered. In order to qualify for the proposed final dividend, all completed transfer forms RESERVES accompanied by the relevant share certificates must be lodged During the year, details of the movements in the reserves of with the Company’s Share Registrar in Hong Kong, Union the Group and the reserves of the Company are set out in the Registrars Limited, at Suites 3301-04, 33/F., Two Chinachem consolidated statement of changes in equity on page 102 and Exchange Square, 338 King’s Road, North Point, Hong Kong, on page 218 of the annual report, respectively. for registration not later than 4:00 p.m. on 17 June 2019. As at 31 December 2018, the aggregate amount of reserves FINANCIAL SUMMARY available for distribution to equity holders of the Company was RMB3,337,594,000 (2017: RMB3,592,041,000). After A summary of the results and assets and liabilities of the Group the reporting date, the directors proposed a final dividend of for the past five financial years is set out on page 3 of the annual HK$0.35 (2017: HK$0.29) per ordinary share amounting to report. RMB2,767,091,000 (2017: RMB2,159,774,000). The final dividend proposed has not been recognised as a liability at the PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS reporting date as set out in note 11 to the consolidated financial statements. During the year, details of movements in the property, plant and equipment and intangible assets of the Group are set out in notes 14 and 15, respectively, to the consolidated financial statements. 065 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT DIRECTORS The directors of the Company during the year and up to the date of this report were: The independent non-executive directors all have a fixed term of 3-year service and will be subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the Company’s Articles of Association. Executive directors: The Company has received from each of the independent non- Mr. Li Shu Fu (Chairman) executive directors an annual confirmation of independence Mr. Yang Jian (Vice Chairman) pursuant to Rule 3.13 of the Listing Rules and considers all the Mr. Li Dong Hui, Daniel (Vice Chairman) independent non-executive directors to be independent. Mr. Gui Sheng Yue (Chief Executive Officer) Mr. An Cong Hui Mr. Ang Siu Lun, Lawrence Ms. Wei Mei Non-executive director: Mr. Carl Peter Edmund Moriz Forster DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORT POSITIONS IN THE SECURITIES OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS As at 31 December 2018, the interests and short positions of the directors in the securities of the Company and its associated corporations, within the meaning of Part XV of the Securities Independent non-executive directors: and Futures Ordinance (the “SFO”), which were required to Mr. Lee Cheuk Yin, Dannis be notified to the Company and The Stock Exchange of Hong Mr. Yeung Sau Hung, Alex Kong Limited (the “Stock Exchange”) pursuant to Part XV of Mr. An Qing Heng the SFO, including interest and short positions which they were Mr. Wang Yang deemed or taken to have under such provisions of the SFO, or which are required, pursuant to Section 352 of the SFO, to be In accordance with Article 116 of the Company’s Articles of entered in the register referred to therein, or which are required, Association, Mr. Yang Jian, Mr. Ang Siu Lun, Lawrence, Mr. Carl pursuant to the Model Code for Securities Transactions by Peter Edmund Moriz Forster and Mr. Yeung Sau Hung, Alex Directors of Listed Companies contained in the Rules Governing shall retire by rotation and being eligible, shall offer themselves the Listing of Securities on the Stock Exchange (the “Listing for re-election at the forthcoming annual general meeting of Rules”) to be notified to the Company and the Stock Exchange the Company. No director proposed for re-election at the were as follows: forthcoming annual general meeting has a service contract which is not determinable by the Group within one year without payment of compensation (other than statutory compensation). 066 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT (I) Interests and short positions in the shares of the Company Approximate percentage or attributable Name of director Nature of interests Number or attributable percentage of number of shares shareholding Long position Short position (%) 3,964,448,000 – 44.14 Shares Mr. Li Shu Fu (Note 1) Interest in controlled corporations Mr. Li Shu Fu Personal 23,140,000 – 0.26 Mr. Yang Jian Personal 14,475,000 – 0.16 Mr. Li Dong Hui, Daniel Personal 4,200,000 – 0.05 Mr. Gui Sheng Yue Personal 14,300,000 – 0.16 Mr. An Cong Hui Personal 16,280,000 – 0.18 Mr. Ang Siu Lun, Lawrence Personal 4,270,000 – 0.05 Ms. Wei Mei Personal 4,170,000 – 0.05 Mr. Lee Cheuk Yin, Dannis Personal 550,000 – 0.006 Mr. Yeung Sau Hung, Alex Personal 350,000 – 0.004 Note: 1. Proper Glory Holding Inc. (“Proper Glory”) and its concert parties in aggregate hold interests of 3,964,448,000 shares, representing approximately 44.14% of the total issued share capital of the Company as at 31 December 2018. Proper Glory is a private company incorporated in the British Virgin Islands and is owned as to 68% by Geely Holding and as to 32% by Geely Group Limited. 067 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT (II) Interests and short positions in the derivatives of the Company Name of director Nature of interests Approximate percentage or attributable percentage of shareholding Number or attributable number of shares Long position Short position (%) 85,220,000 – 0.95 Share Options 068 Mr. Li Shu Fu (Note 1) Interest in controlled corporations Mr. Yang Jian Personal 9,000,000 (Note 2) – 0.10 Mr. Li Dong Hui, Daniel Personal 3,500,000 (Note 3) – 0.04 Mr. Gui Sheng Yue Personal 11,500,000 (Note 2) – 0.13 Mr. Gui Sheng Yue Personal 6,000,000 (Note 4) – 0.07 Mr. An Cong Hui Personal 4,700,000 (Note 2) – 0.05 Mr. Ang Siu Lun, Lawrence Personal 11,000,000 (Note 2) – 0.12 Mr. Ang Siu Lun, Lawrence Personal 5,000,000 (Note 4) – 0.06 Ms. Wei Mei Personal 900,000 (Note 2) – 0.01 Ms. Wei Mei Personal 5,000,000 (Note 3) – 0.06 Mr. Carl Peter Edmund Moriz Forster Personal 1,000,000 (Note 4) – 0.01 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT Name of director Approximate percentage or attributable percentage of shareholding Number or attributable number of shares Nature of interests Long position Short position (%) Mr. Lee Cheuk Yin, Dannis Personal 100,000 (Note 2) – 0.001 Mr. Lee Cheuk Yin, Dannis Personal 250,000 (Note 4) – 0.003 Mr. Yeung Sau Hung, Alex Personal 100,000 (Note 2) – 0.001 Mr. Yeung Sau Hung, Alex Personal 250,000 (Note 4) – 0.003 Mr. An Qing Heng Personal 630,000 (Note 4) – 0.007 Mr. Wang Yang Personal 1,000,000 (Note 4) – 0.01 Notes: (1) Mr. Li Shu Fu and his concert parties in aggregate hold (3) The interest relates to share options granted on 23 derivatives’ interest of 85,220,000 shares, representing March 2012 by the Company to the Directors. The approximately 0.95% of the total issued share capital of share options are exercisable at a subscription price the Company as at 31 December 2018. of HK$4.07 for each share during the period from 23 March 2012 to 22 March 2022. The percentage (2) of shareholding is calculated on the basis that (i) the The interest relates to share options granted on 18 options are fully exercised; and (ii) the number of issued January 2010 by the Company to the Directors. The share capital of the Company when the options are share options are exercisable at a subscription price exercised is the same as that as 31 December 2018. of HK$4.07 for each share during the period from 18 January 2010 to 17 January 2020. The percentage of shareholding is calculated on the basis that (i) the options are fully exercised; and (ii) the number of issued share capital of the Company when the options are exercised is the same as that as 31 December 2018. (4) The interest relates to share options granted on 9 January 2015 by the Company to the Directors. The share options are exercisable at a subscription price of HK$2.79 for each share during the period from 9 January 2016 to 8 January 2020. The percentage of shareholding is calculated on the basis that (i) the options are fully exercised; and (ii) the number of issued share capital of the Company when the options are exercised is the same as that as 31 December 2018. 069 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT (III) Interests and short positions in the securities of the associated corporations of the Company Approximate Name of director Name of the associated Number of shares in the percentage of corporations associated corporations shareholding Mr. Li Shu Fu Proper Glory Holding Inc. Mr. Li Shu Fu Geely Group Limited Mr. Li Shu Fu Zhejiang Geely Holding Group Long position Short position (%) (Note 1) – (Note 1) 50,000 – 60 (Note 2) – (Note 2) (Note 3) – (Note 3) (Note 4) – (Note 4) (Note 5) – (Note 5) (Note 6) – (Note 6) (Note 7) – (Note 7) (Note 8) – (Note 8) (Note 9) – (Note 9) (Note 10) – (Note 10) (Note 11) – (Note 11) (Note 12) – (Note 12) (Note 13) – (Note 13) (Note 14) – (Note 14) Company Limited Mr. Li Shu Fu Zhejiang Geely Automobile Company Limited Mr. Li Shu Fu Shanghai Maple Automobile Company Limited Mr. Li Shu Fu Zhejiang Haoqing Automobile Manufacturing Company Limited Mr. Li Shu Fu Zhejiang Jirun Automobile Company Limited Mr. Li Shu Fu Shanghai Maple Guorun Automobile Company Limited Mr. Li Shu Fu Zhejiang Ruhoo Automobile Company Limited Mr. Li Shu Fu Hunan Geely Automobile Components Company Limited Mr. Li Shu Fu Chengdu Gaoyuan Automobile Industries Company Limited Mr. Li Shu Fu Jinan Geely Automobile Company Limited Mr. Li Shu Fu Baoji Geely Automobile Components Company Limited Mr. Li Shu Fu Shanxi Geely Automobile Components Company Limited Mr. Li Shu Fu Zhejiang Jirun Chunxiao Automobile Components Company Limited 070 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT Notes: (1) Proper Glory Holding Inc. is a private company (7) Shanghai Maple Guorun Automobile Company Limited incorporated in the British Virgin Islands and is owned (“Shanghai Maple”) is incorporated in the PRC and is as to 68% by Zhejiang Geely Holding Group Company 1%-owned by Shanghai Maple Automobile. Limited (“Geely Holding”) and as to 32% by Geely Group Limited. Geely Group Limited is a private (8) Zhejiang Ruhoo Automobile Company Limited is company incorporated in the British Virgin Islands and incorporated in the PRC and is 1%-owned by Zhejiang is owned as to 60% by Mr. Li Shu Fu, as to 35.85% by Haoqing. Mr. Li Xu Bing, an elder brother of Mr. Li Shu Fu, and as to 4.15% by Mr. An Cong Hui, an executive director (9) Hunan Geely Automobile Components Company of the Company. Geely Holding is a private company Limited is incorporated in the PRC and is 1%-owned by incorporated in the PRC and is beneficially wholly Zhejiang Haoqing. owned by Mr. Li Shu Fu and his associate. (10) (2) (3) (4) Chengdu Gaoyuan Automobile Industries Company Geely Holding is a private company incorporated in the Limited is a private company incorporated in the PRC PRC and is beneficially wholly owned by Mr. Li Shu Fu and is owned as to 90% by Jirun Automobile and as to and his associate. 10% by Shanghai Maple. Zhejiang Geely Automobile Company Limited (“Zhejiang (11) Jinan Geely Automobile Company Limited is a private Geely”) is a private company incorporated in the PRC company incorporated in the PRC and is owned as to and is owned as to 88.32% by Geely Holding and as to 90% by Jirun Automobile and as to 10% by Shanghai 11.68% by other Mr. Li Shu Fu’s interested entities. Maple. Shanghai Maple Automobile Company Limited (12) Baoji Geely Automobile Components Company Limited (“Shanghai Maple Automobile”) is a private company is a private company incorporated in the PRC is incorporated in the PRC and is beneficially wholly 1%-owned by Zhejiang Geely. owned by Mr. Li Shu Fu and his associate. (13) (5) Shanxi Geely Automobile Components Company Zhejiang Haoqing Automobile Manufacturing Company Limited is a private company incorporated in the PRC is Limited (“Zhejiang Haoqing”) is a private company 1%-owned by Zhejiang Geely. incorporated in the PRC and is owned as to 98.5% by Geely Holding and as to 1.5% by other Mr. Li Shu Fu’s interested entities. (14) Zhejiang Jirun Chunxiao Automobile Components Company Limited is a private company incorporated in the PRC is 1%-owned by Zhejiang Geely. (6) Zhejiang Jirun Automobile Company Limited (“Jirun Automobile”) is incorporated in the PRC and is 1%-owned by Zhejiang Geely. 071 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT Save as disclosed above, as at 31 December 2018 none of the Directors nor the chief executives of the Company and their associates had or was deemed to have any interests or short positions in the shares, underlying shares or debentures of the Company and any of its associated corporations (within the meaning of the SFO) which were required: (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV and the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or which are required, (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or which are required, (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of listed issuers contained in the Listing Rules. INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES OF OTHER PERSONS As at 31 December 2018 according to the register of interests maintained by the Company pursuant to section 336 of the SFO and so far as is known to the Directors or the chief executives of the Company, the persons, other than the Directors or the chief executives of the Company, who had interests or a short positions in the Shares and underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who were, directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company and any other members of the Group and the amount of each of such persons’ interests in such securities, together with any options in respect of such capital, were as follows: Substantial shareholders (as defined in the SFO) Approximate percentage of Name Nature of interests Number of shares held shareholding Long position Short position (%) Proper Glory Holding Inc. (Note 1) Beneficial owner 2,636,705,000 – 29.36 Geely Holding (Notes 1 & 2) Interest in controlled 4,049,581,000 – 45.09 87,000 – 0.001 2,636,705,000 – 29.36 796,562,000 – 8.87 corporation Geely Group Limited (Note 1) Beneficial owner Interest in controlled corporation Zhejiang Geely (Note 3) 072 Beneficial owner Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT Save as disclosed above, as at 31 December 2018, the Notes: directors and the chief executives of the Company are not (1) Proper Glory Holding Inc. (“Proper Glory”) is a private company aware of any other person (other than the directors and the incorporated in the British Virgin Islands and is owned as to chief executives of the Company) who had, or was deemed to 68% by Zhejiang Geely Holding Group Company Limited (“Geely have, interests or short positions in the shares or underlying Holding”) and as to 32% by Geely Group Limited. Geely Group Limited is a private company incorporated in the British Virgin Islands and is owned as to 60% by Mr. Li Shu Fu, as to 35.85% by Mr. Li Xu Bing, a brother of Mr. Li Shu Fu, and as to 4.15% by Mr. An Cong Hui, an executive director of the Company. Geely Holding is a private company incorporated in the PRC (2) shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, who was, directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances and is beneficially wholly owned by Mr. Li Shu Fu and his at general meetings of the Company and of any other member associate. of the Group. The shares held by Geely Holding as of 31 December 2018 included derivative interests. EQUITY-LINKED AGREEMENTS Details of the equity-linked agreements entered into during the (3) Zhejiang Geely Automobile Company Limited (“Zhejiang Geely”) year or subsisting at the end of the year are set out below: is a private company incorporated in the PRC and is beneficially wholly owned by Mr. Li Shu Fu and his associate. SHARE OPTIONS Mr. Li Shu Fu is a director of each of Proper Glory, Geely Holding, Zhejiang Geely and Geely Group Limited. Mr. Yang Jian is a director of each of Geely Holding and Zhejiang Geely. Mr. Li Dong Hui, Daniel is a director of Geely Holding. Mr. An Particulars of the Company’ share option scheme and the accounting policy are set out in notes 31 and 4(n) to the consolidated financial statements, respectively. Cong Hui is a director of each of Geely Holding and Zhejiang Geely. 073 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT The following table discloses movements in the Company’s share options during the year: Exercisable period Outstanding Granted Exercised Forfeited Outstanding Exercise as at during during during as at price 1.1.2018 the year the year the year 31.12.2018 HK$/share Directors Mr. Yang Jian 18.1.2010 – 17.1.2020 4.07 9,000,000 – – – 9,000,000 Mr. Li Dong Hui, Daniel 23.3.2012 – 22.3.2022 4.07 3,500,000 – – – 3,500,000 Mr. Gui Sheng Yue 18.1.2010 – 17.1.2020 4.07 11,500,000 – – – 11,500,000 9.1.2016 – 8.1.2020 2.79 6,000,000 – – – 6,000,000 18.1.2010 – 17.1.2020 4.07 4,700,000 – – – 4,700,000 Mr. Ang Siu Lun, Lawrence 18.1.2010 – 17.1.2020 4.07 11,000,000 – – – 11,000,000 9.1.2016 – 8.1.2020 2.79 5,000,000 – – – 5,000,000 18.1.2010 – 17.1.2020 4.07 900,000 – – – 900,000 23.3.2012 – 22.3.2022 4.07 5,000,000 – – – 5,000,000 9.1.2016 – 8.1.2020 2.79 1,000,000 – – – 1,000,000 4.07 200,000 – (100,000) – 100,000 2.79 500,000 – (250,000) – 250,000 4.07 200,000 – (100,000) – 100,000 9.1.2016 – 8.1.2020 2.79 500,000 – (250,000) – 250,000 Mr. An Qing Heng 9.1.2016 – 8.1.2020 2.79 750,000 – (120,000) – 630,000 Mr. Wang Yang 9.1.2016 – 8.1.2020 2.79 1,000,000 – – – 1,000,000 Mr. An Cong Hui Ms. Wei Mei Mr. Carl Peter Edmund Moriz Forster Mr. Lee Cheuk Yin, Dannis 18.1.2010 – 17.1.2020 9.1.2016 – 8.1.2020 Mr. Yeung Sau Hung, Alex 18.1.2010 – 17.1.2020 074 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT Outstanding Exercisable period Granted Exercised Forfeited Outstanding Exercise as at during during during as at price 1.1.2018 the year the year the year 31.12.2018 HK$/share Continuous contract 18.1.2010 – 17.1.2020 4.07 159,477,000 – (8,928,000) (415,000) 150,134,000 21.4.2010 – 20.4.2020 4.07 4,710,000 – – (500,000) 4,210,000 23.3.2012 – 22.3.2022 4.07 6,450,000 – (200,000) (400,000) 5,850,000 9.1.2016 – 8.1.2020 2.79 8,820,000 – (1,150,000) – 7,670,000 2.6.2016 – 1.6.2020 4.08 800,000 – – – 800,000 7.9.2019 – 6.9.2023 15.96 – 600,000 – – 600,000 2.6.2016 – 1.6.2020 4.08 11,450,000 – – – 11,450,000 12.22 5,500,000 – – – 5,500,000 257,957,000 600,000 (11,098,000) (1,315,000) 246,144,000 employees Other eligible participants 31.3.2018 – 30.3.2022 ARRANGEMENTS TO PURCHASE SHARES OR DEBENTURES PERMITTED INDEMNITY PROVISION Other than the share options disclosed above, at no time during Hong Kong) and the Companies Law of the Cayman Islands, the year was the Company, its holding companies or any of its every director is entitled under the Company’s articles of subsidiaries, a party to any arrangements to enable the directors association to be indemnified out of the assets of the Company of the Company to acquire benefits by means of the acquisition against all costs, charges, expenses, losses and liabilities which of shares in, or debentures of, the Company or any other body he or she may sustain or incur in or about the execution or corporate. discharge of his or her duties and/or the exercise of his or her Subject to the Companies Ordinance (Cap. 622 of the Laws of powers and/or otherwise in relation to or in connection with his or her duties, powers or office. To the extent permitted by law, the Company has taken out insurance against the liability and costs associated with defending any proceedings which may be brought against directors of companies in the Group during the year and up to the date of this report. 075 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT DIRECTORS’ INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS Details of transactions between the Group and other companies under the control of Mr. Li Shu Fu during the year are set out in note 32 to the consolidated financial statements. Save as disclosed above, no other transaction, arrangement or contract of significance to which the Company, any of its holding companies, its subsidiaries, or fellow subsidiaries was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. CONNECTED TRANSACTIONS Acquisition of the entire registered capital of the Hangzhou Automobile Pursuant to the acquisition agreement dated 18 July 2018, 浙江 吉潤汽車有限公司 (Zhejiang Jirun Automobile Company Limited or “Jirun Automobile”), an indirect 99% owned subsidiary of the Company, entered into a transaction with 杭州吉利汽車部件有 限公司 (Hangzhou Geely Automobile Components Company Limited or “Hangzhou Components”), pursuant to which Jirun Automobile agreed to acquire and Hangzhou Components agreed to sell the entire registered capital of 杭州吉利汽車 有限公司 (Hangzhou Geely Automobile Company Limited or “Hangzhou Automobile”) for a consideration of approximately CONNECTED TRANSACTIONS & CONTINUING CONNECTED TRANSACTIONS During the year, the Group entered into certain related party RMB930,620,000. Such acquisition had been subsequently approved by the independent shareholders of the Company at the extraordinary general meeting on 4 September 2018. transactions which also constitute connected transactions under Chapter 14A of the Listing Rules. All the connected transactions Acquisition of the entire registered capital of the and continuing connected transactions with disclosure Guizhou Geely requirements under the Listing Rules during the year were listed Pursuant to the acquisition agreement dated 18 July 2018, 浙江 below and these transactions were also set out in note 32 to the 吉潤汽車有限公司 (Zhejiang Jirun Automobile Company Limited consolidated financial statements. The directors of the Company or “Jirun Automobile”), an indirect 99% owned subsidiary of the confirm they have complied with the disclosure requirements in Company, entered into a transaction with 貴州吉利新能源汽 accordance with Chapter 14A of the Listing Rules. 車有限公司 (Guizhou Geely New Energy Automobile Company Limited or “Guizhou New Energy”), pursuant to which Jirun Automobile agreed to acquire and Guizhou New Energy agreed to sell the entire registered capital of 貴州吉利汽車部件有限公 司 (Guizhou Geely Automobile Components Company Limited or “Guizhou Automobile”) for a consideration of approximately RMB1,074,309,000. Such acquisition had been subsequently approved by the independent shareholders of the Company at the extraordinary general meeting on 4 September 2018. 076 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT Acquisition of the entire registered capital of the Ningbo Licensing of the intellectual properties and the Jirun foreground intellectual properties Pursuant to the acquisition agreement dated 18 July 2018, 浙江 Pursuant to the licensing agreement dated 24 September 2018, 吉潤汽車有限公司 (Zhejiang Jirun Automobile Company Limited the Company entered into a transaction with 浙江吉利控股集 or “Jirun Automobile”), an indirect 99% owned subsidiary of 團有限公司 (Zhejiang Geely Holding Group Company Limited the Company, entered into a transaction with 浙江吉利汽 or “Geely Holding”), pursuant to which the Group agreed to 車有限公司 (Zhejiang Geely Automobile Company Limited license the intellectual properties and the foreground intellectual or “Zhejiang Geely”), pursuant to which Jirun Automobile properties to Geely Holding for the design, development, agreed to acquire and Zhejiang Geely agreed to sell the entire manufacture, sale, marketing and distribution of the licensed registered capital of 寧波吉潤汽車部件有限公司 (Ningbo Jirun models within the licensed regions during the licensed period. Automobile Components Company Limited or “Ningbo Jirun”) Pursuant to the licensing agreement, Geely Holding is permitted for a consideration of approximately RMB1,169,399,000. to sub-license the intellectual properties and the foreground Such acquisition had been subsequently approved by the intellectual properties to the Proton Group for their design, independent shareholders of the Company at the extraordinary development, manufacture, sale, marketing and distribution general meeting on 4 September 2018. of the licensed models within the licensed regions during the licensed period. The total license fee for the intellectual Acquisition of the assets properties is RMB1,344,000,000. Pursuant to the acquisition agreement dated 5 October 2018, the Company entered into a transaction with 浙江吉利控股集 Acquisition of the entire registered capital of the Binhai 團有限公司 (Zhejiang Geely Holding Group Company Limited Engine or “Geely Holding”), pursuant to which the Group agreed to Pursuant to the acquisition agreement dated 5 October 2018, 浙 acquire and the Geely Holding Group agreed to sell the assets 江吉利動力總成有限公司 (Zhejiang Geely Powertrain Company comprising predominantly imported equipment for use in the Limited or “Zhejiang Powertrain”) (formerly known as 浙江吉利 Group’s production and research and development, as well as 羅佑發動機有限公司 (Zhejiang Geely Luoyou Engine Company a small amount of office equipment and software system for a Limited)), an indirect 99% owned subsidiary of the Company, maximum consideration of approximately RMB679,871,000. entered into a transaction with 台州吉利羅佑發動機有限公司 (Taizhou Geely Luoyou Engine Company Limited or “Taizhou Engine”), pursuant to which Zhejiang Powertrain agreed to acquire and Taizhou Engine agreed to sell the entire registered capital of 台州濱海吉利發動機有限公司 (Taizhou Binhai Geely Engine Company Limited or “Binhai Engine”) for a consideration of approximately RMB781,274,000. Such acquisition had been subsequently approved by the independent shareholders of the Company at the extraordinary general meeting on 7 December 2018. 077 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT Acquisition of the entire registered capital of the The aforesaid continuing connected transactions Guizhou Engine have been reviewed by the independent non- Pursuant to the acquisition agreement dated 5 October executive directors of the Company. The 2018, 浙江吉利動力總成有限公司 (Zhejiang Geely Powertrain independent non-executive directors confirmed Company Limited or “Zhejiang Powertrain”) (formerly known as that the aforesaid connected transactions were 浙江吉利羅佑發動機有限公司 (Zhejiang Geely Luoyou Engine entered into (a) in the ordinary and usual course Company Limited)), an indirect 99% owned subsidiary of the of business of the Group; (b) either on normal Company, entered into a transaction with 貴陽吉利發動機有 commercial terms or on terms no less favourable 限公司 (Guiyang Geely Engine Company Limited or “Guiyang to the Group than terms available to or from Engine”), pursuant to which Zhejiang Powertrain agreed to independent third parties; (c) in accordance acquire and Guiyang Engine agreed to sell the entire registered with the relevant agreements governing them capital of 貴州吉利發動機有限公司 (Guizhou Geely Engine on terms that are fair and reasonable and in the Company Limited or “Guizhou Engine”) for a consideration of interests of the shareholders of the Company approximately RMB484,003,000. Such acquisition had been as a whole; and (d) had been determined to be subsequently approved by the independent shareholders of the RMB90,056 million for sales of CKDs and vehicle Company at the extraordinary general meeting on 7 December tool kits which did not exceed the annual cap 2018. of RMB121,444 million for sales of CKDs and vehicle tool kits for the year ended 31 December 2018 as approved by the Stock Exchange and CONTINUING CONNECTED TRANSACTIONS 1. the independent shareholders of the Company. Services agreement between the Company and Geely Holding (the services agreement has an effective term until 31 December 2020) • Sales of complete buildup units (“CBUs”), automobile parts and components; and provision of process manufacturing services • Sales of complete knock down kits (“CKDs”) and vehicle tool kits from the Group to the Geely Holding and its subsidiaries (“Geely Holding Group”) Pursuant to the services agreement dated 27 November 2009 and the Company’s announcements dated 13 November 2015, 18 Pursuant to the services agreement dated October 2016 and 7 November 2017, the Geely 27 November 2009 and the Company’s Holding Group agreed to sell to the Group the announcements dated 13 November 2015, 18 CBUs, automobile parts and components; and October 2016 and 7 November 2017, the Group to provide process manufacturing services to agreed to supply to the Geely Holding Group the Group in accordance with the product and the complete knock down kits (“CKDs”) and service specifications set out in the services vehicle tool kits in accordance with the product agreement with an aggregate largest annual specifications set out in the services agreement cap of RMB153,395,431,000 for the three years with an aggregate largest annual cap of ended 31 December 2018. RMB121,443,520,000 for the three years ended 31 December 2018. 078 from the Geely Holding Group to the Group Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT The aforesaid continuing connected transactions The aforesaid continuing connected transactions have have been reviewed by the independent non- been reviewed by the independent non-executive executive directors of the Company. The directors of the Company. The independent non- independent non-executive directors confirmed executive directors confirmed that the aforesaid that the aforesaid connected transactions were connected transactions were entered into (a) in the entered into (a) in the ordinary and usual course ordinary and usual course of business of the Group; (b) of business of the Group; (b) either on normal either on normal commercial terms or on terms no less commercial terms or on terms no less favourable favourable to the Group than terms available to or from to the Group than terms available to or from independent third parties; (c) in accordance with the independent third parties; (c) in accordance with relevant agreement governing them on terms that are fair the relevant agreements governing them on terms and reasonable and in the interests of the shareholders that are fair and reasonable and in the interests of the Company as a whole; and (d) had been of the shareholders of the Company as a whole; determined to be RMB870 million which, did not exceed and (d) had been determined to be RMB107,031 the annual cap of RMB1,500 million for the year ended million for purchases of CBUs, automobile parts 31 December 2018 as approved by the Stock Exchange and components and provision of process and the independent shareholders of the Company. manufacturing services which did not exceed the annual cap of RMB153,395 million for purchases of CBUs, automobile parts and components and provision of process manufacturing services for the year ended 31 December 2018 as approved by the Stock Exchange and the independent shareholders of the Company. 3. Existing EV agreement and the supplemental EV agreement between the Company and Geely Holding (both the existing EV agreement and the supplemental EV agreement have an effective term until 31 December 2018) Pursuant to the existing EV agreement dated 13 November 2015 and the supplemental EV agreement 2. Loan guarantee agreement between the Company dated 5 October 2016, the Group agreed to sell the and Geely Holding (the loan guarantee agreement CBUs for electric vehicles to the Geely Holding Group in has an effective term until 31 December 2018) accordance with the product and service specifications Pursuant to the loan guarantee agreement dated 13 set out in the existing EV agreement with the largest November 2015 and the Company’s announcement annual cap being RMB9,487,180,000 for the three years dated 13 November 2015, the Group agreed to provide ended 31 December 2018. guarantees (including the pledge of certain lands, buildings and facilities of the Group) on loans obtained or to be obtained by the Geely Holding Group on behalf of the Group’s subsidiaries in relation to the manufacture and research and development of vehicles of the Group with the largest annual cap being RMB1,500,000,000. 079 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT The aforesaid continuing connected transactions have The aforesaid continuing connected transactions have been reviewed by the independent non-executive been reviewed by the independent non-executive directors of the Company. The independent non- directors of the Company. The independent non- executive directors confirmed that the aforesaid executive directors confirmed that the aforesaid connected transactions were entered into (a) in the connected transactions were entered into (a) in the ordinary and usual course of business of the Group; ordinary and usual course of business of the Group; (b) (b) either on normal commercial terms or on terms no either on normal commercial terms or on terms no less less favourable to the Group than terms available to favourable to the Group than terms available to or from or from independent third parties; (c) in accordance independent third parties; (c) in accordance with the with the relevant agreement governing them on terms relevant agreement governing them on terms that are fair that are fair and reasonable and in the interests of the and reasonable and in the interests of the shareholders shareholders of the Company as a whole; and (d) had of the Company as a whole; and (d) had been been determined to be RMB5,338 million which, did not determined to be RMB69.2 million which, did not exceed exceed the annual cap of RMB9,487 million for the year the annual cap of RMB70.8 million for the year ended ended 31 December 2018 as approved by the Stock 31 December 2018 as approved by the Stock Exchange Exchange and the independent shareholders of the and the independent shareholders of the Company. Company. 5. 4. IT services agreement between the Company and Company and Geely Holding (the business travel Geely Holding (the IT services agreement has an services agreement has an effective term until 31 effective term until 31 December 2018) December 2018) Pursuant to the IT services agreement dated 13 Pursuant to the business travel services agreement dated November 2015, the Geely Holding Group agreed to 13 November 2015, the Geely Holding Group agreed to provide certain information technology (“IT”) services provide business travel and related services to the Group to the Group with the largest annual cap being with the largest annual cap being RMB126,732,000 for RMB70,827,000 for the three years ended 31 December the three years ended 31 December 2018. 2018. 080 Business travel services agreement between the Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT The aforesaid continuing connected transactions have The aforesaid continuing connected transactions been reviewed by the independent non-executive have been reviewed by the independent non- directors of the Company. The independent non- executive directors of the Company. The executive directors confirmed that the aforesaid independent non-executive directors confirmed connected transactions were entered into (a) in the that the aforesaid connected transactions were ordinary and usual course of business of the Group; entered into (a) in the ordinary and usual course (b) either on normal commercial terms or on terms no of business of the Group; (b) either on normal less favourable to the Group than terms available to commercial terms or on terms no less favourable or from independent third parties; (c) in accordance to the Group than terms available to or from with the relevant agreement governing them on terms independent third parties; (c) in accordance with that are fair and reasonable and in the interests of the the relevant agreements governing them on terms shareholders of the Company as a whole; and (d) had that are fair and reasonable and in the interests been determined to be RMB125.6 million which, did not of the shareholders of the Company as a whole; exceed the annual cap of RMB126.7 million for the year and (d) had been determined to be RMB4,758 ended 31 December 2018 as approved by the Stock million which, did not exceed the annual cap Exchange and the independent shareholders of the of RMB49,000 million for the year ended 31 Company. December 2018 as approved by the Stock Exchange and the independent shareholders of 6. the Company. The Volvo finance cooperation agreements amongst Genius AFC, VCDC and ZJSH (currently renamed as 沃爾沃汽車(亞太)投資控股有限公司 • Retail loan cooperation agreement between (Volvo Car (Asia Pacific) Investment Holding Co., Genius AFC and Volvo retail consumers (the Ltd.)) (the Volvo finance cooperation agreements retail loan cooperation agreement has an have an effective term until 31 December 2018) effective term until 31 December 2018) (capitalised terms were defined in the circular of Pursuant to the retail loan cooperation agreement the Company dated 28 January 2016) dated 11 December 2015, dealers of Volvo shall • Wholesale facility agreement between Genius AFC and Volvo wholesale dealers (the wholesale facility agreement has an effective term until 31 December 2018) Pursuant to the wholesale facility agreement recommend the retail consumers to use Genius AFC for obtaining vehicle loans to finance their purchase of Volvo-branded vehicles with the largest annual cap being RMB11,000 million for the three years ended 31 December 2018. dated 11 December 2015, Genius AFC will provide vehicles financing to Volvo wholesale dealers to facilitate their purchase of Volvobranded vehicles with the largest annual cap being RMB49,000 million for the three years ended 31 December 2018. 081 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT The aforesaid continuing connected transactions The aforesaid continuing connected transactions have have been reviewed by the independent non- been reviewed by the independent non-executive executive directors of the Company. The directors of the Company. The independent non- independent non-executive directors confirmed executive directors confirmed that the aforesaid that the aforesaid connected transactions were connected transactions were entered into (a) in the entered into (a) in the ordinary and usual course ordinary and usual course of business of the Group; (b) of business of the Group; (b) either on normal either on normal commercial terms or on terms no less commercial terms or on terms no less favourable favourable to the Group than terms available to or from to the Group than terms available to or from independent third parties; (c) in accordance with the independent third parties; (c) in accordance with relevant agreement governing them on terms that are fair the relevant agreements governing them on terms and reasonable and in the interests of the shareholders that are fair and reasonable and in the interests of the Company as a whole; and (d) had been of the shareholders of the Company as a whole; determined to be RMB85 million which, did not exceed and (d) had been determined to be RMB1,306 the annual cap of RMB318 million for the year ended 31 million which, did not exceed the annual cap December 2018 as approved by the Stock Exchange of RMB11,000 million for the year ended 31 and the independent shareholders of the Company. December 2018 as approved by the Stock Exchange and the independent shareholders of the Company. 8. EV CKD supply agreement between the Company and Geely Holding (the EV CKD supply agreement has an effective term until 31 December 2018) 7. Kandi automobile parts supply agreement Pursuant to the EV CKD supply agreement dated between the Company and Kandi JV (the Kandi 25 July 2016, the Group agreed to sell to the Geely automobile parts supply agreement has an Holding Group CKDs in accordance with the product effective term until 31 December 2018) specifications set out in the EV CKD supply agreement Pursuant to the Kandi automobile parts supply with the largest annual cap being RMB1,185,914,000 for agreement dated 25 July 2016, the Group agreed to sell the three years ended 31 December 2018. automobile parts and components to the Kandi JV with the largest annual cap being RMB317,991,000 for the three years ended 31 December 2018. 082 Geely Automobile Holdings Limited Annual Report 2018 MANAGEMENT REPORT DIRECTORS’ REPORT The aforesaid continuing connected transactions have The aforesaid continuing connected transactions have been reviewed by the independent non-executive been reviewed by the independent non-executive directors of the Company. The independent non- directors of the Company. The independent non- executive directors confirmed that the aforesaid executive directors confirmed that the aforesaid connected transactions were entered into (a) in the connected transactions were entered into (a) in the ordinary and usual course of business of the Group; (b) ordinary and usual course of business of the Group; either on normal commercial terms or on terms no less (b) either on normal commercial terms or on terms no favourable to the Group than terms available to or from less favourable to the Group than terms available to independent third parties; (c) in accordance with the or from independent third parties; (c) in accordance relevant agreement governing them on terms that are fair with the relevant agreement governing them on terms and reasonable and in the interests of the shareholders that are fair and reasonable and in the interests of the of the Company as a whole; and (d) had been shareholders of the Company as a whole; and (d) had determined to be RMB175 million which, did not exceed been determined to be RMB1,248 million which, did not the annual cap of RMB1,107 million for the year ended exceed the annual cap of RMB9,180 million for the year 31 December 2018 as approved by the Stock Exchange ended 31 December 2018 as approved by the Stock and the independent shareholders of the Company. Exchange and the independent shareholders of the Company. 9. Powertrain sales agreement among the Company, 領克投資有限公司 (LYNK & CO Investment Company Limited) (“LYNK & CO”) and Geely Holding (the powertrain sales agreement has an effective term until 31 December 2020) Pursuant to the powertrain sales agreement dated 7 November 2017, the Group agreed to sell vehicle engines, transmissions and related after-sales parts manufactured by it to LYNK & CO and its subsidiaries and the Geely Holding Group with the largest annual cap being RMB15,661,070,000 for the three years ending 31 December 2020. 083 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT 10. LYNK & CO finance cooperation agreement independent third parties; (c) in accordance between Genius AFC and 領克汽車銷售有限公 with the relevant agreements governing them 司 (LYNK & CO Auto Sales Company Limited) on terms that are fair and reasonable and in the (the LYNK & CO finance cooperation agreement interests of the shareholders of the Company has an effective term until 31 December 2020) as a whole; and (d) had been determined to (capitalised terms were defined in the circular of be RMBNil which, did not exceed the annual the Company dated 8 December 2017) cap of RMB13,215 million for the year ended • 31 December 2018 as approved by the Stock Wholesale facility agreements between Exchange and the independent shareholders of Genius AFC and the LYNK & CO Dealers (as the Company. defined in the circular of the Company dated 8 December 2017) (the wholesale facility agreements have an effective term until 31 December 2020) Pursuant to the LYNK & CO finance cooperation agreement dated 3 November 2017, Genius AFC will provide vehicle financing to the LYNK & CO Dealers to facilitate their purchase of LYNK • Retail loan cooperation agreements between Genius AFC and LYNK & CO Dealers (as defined in the circular of the Company dated 8 December 2017) (the retail loan cooperation agreements have an effective term until 31 December 2020) & CO-branded vehicles with the largest annual Pursuant to the LYNK & CO finance cooperation cap being RMB24,450 million for the three years agreement dated 3 November 2017, Genius ending 31 December 2020. AFC agreed to enter into retail loan cooperation agreements with the LYNK & CO Dealers The aforesaid continuing connected transactions pursuant to which the LYNK & CO Dealers shall have been reviewed by the independent non- recommend the retail consumers to use Genius executive directors of the Company. The AFC for the obtaining of vehicle loans to finance independent non-executive directors confirmed their purchase of LYNK & CO-branded vehicles that the aforesaid connected transactions were with the largest annual cap being RMB23,295 entered into (a) in the ordinary and usual course million for the three years ending 31 December of business of the Group; (b) either on normal 2020. commercial terms or on terms no less favourable to the Group than terms available to or from 084 MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT The aforesaid continuing connected transactions The aforesaid continuing connected transactions have have been reviewed by the independent non- been reviewed by the independent non-executive executive directors of the Company. The directors of the Company. The independent non- independent non-executive directors confirmed executive directors confirmed that the aforesaid that the aforesaid connected transactions were connected transactions were entered into (a) in the entered into (a) in the ordinary and usual course ordinary and usual course of business of the Group; (b) of business of the Group; (b) either on normal either on normal commercial terms or on terms no less commercial terms or on terms no less favourable favourable to the Group than terms available to or from to the Group than terms available to or from independent third parties; (c) in accordance with the independent third parties; (c) in accordance with relevant agreement governing them on terms that are fair the relevant agreements governing them on terms and reasonable and in the interests of the shareholders that are fair and reasonable and in the interests of the Company as a whole; and (d) had been of the shareholders of the Company as a whole; determined to be RMB254 million which, did not exceed and (d) had been determined to be RMB1,398 the annual cap of RMB399 million for the year ended 31 million which, did not exceed the annual cap December 2018 as approved by the Stock Exchange of RMB9,544 million for the year ended 31 and the independent shareholders of the Company. December 2018 as approved by the Stock Exchange and the independent shareholders of The Company has engaged its auditor to report on the Company. the aforesaid continuing connected transactions in accordance with Hong Kong Standard on Assurance 11. Proton sales agreement between the Company and Geely Holding (the Proton sales agreement has an effective term until 31 December 2020) Pursuant to the Proton sales agreement dated 24 September 2018, the Group agreed to sell to the Geely Holding Group CBUs, CKDs and related after-sales parts of the Licensed Models (as defined in the announcement of the Company dated 24 September 2018) with the largest annual cap being RMB4,147,700,048 for the three years ending 31 December 2020. Engagements 3000 (Revised) “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” and with reference to Practice Note 740 “Auditor’s Letter on Continuing Connected Transactions under the Hong Kong Listing Rules” issued by the Hong Kong Institute of Certified Public Accountants. The auditor has issued their unqualified letter containing their findings and conclusions in respect of the continuing connected transactions set out above in accordance with Rule 14A.56 of the Listing Rules. A copy of the auditor’s letter has been provided by the Company to the Stock Exchange. 085 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS MAJOR CUSTOMERS AND SUPPLIERS During the year, the Company adopted the Model Code for five largest suppliers and the largest supplier are 30.6% and Securities Transactions by Directors of Listed Issuers (the “Model 19.7%, respectively, of the Group’s total purchases for the year. Code”) as set out in Appendix 10 of the Listing Rules as its own Zhejiang Geely Automobile Parts and Components Company Code for Securities Transactions by the Officers (the “Code”). Limited (浙江吉利汽車零部件採購有限公司), a related company All directors of the Company have confirmed their compliance controlled by the substantial shareholder of the Company, was during the year with the required standards set out in the Model the Group’s largest supplier for the year. The percentage of purchases attributable to the Group’s Code and the Code. The percentage of revenue attributable to the Group’s five PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES largest customers and the largest customer are 6.5% and 4.2% respectively, of the Group’s total revenue for the year. Hangzhou Geely New Energy Automobile Sales Company Limited (杭州吉 Neither the Company nor any of its subsidiaries purchased, sold 利新能源汽車銷售有限公司), a related company controlled by or redeemed any of the Company’s listed securities during the the substantial shareholder of the Company, was the Group’s year ended 31 December 2018. largest customer for the year. EMOLUMENT POLICY Save as disclosed above, at no time during the year did the directors, their associates, or shareholders of the Company, The emolument policy of the employees of the Group is set up which to the knowledge of the directors own more than 5% by the human resources department of the Group on the basis of the Company’s share capital, have an interest in any of the of their merits, qualifications and competence. Group’s five largest customers or suppliers. The emolument policy of the directors of the Company is decided by the remuneration committee of the Board of CORPORATE GOVERNANCE REPORT Directors of the Company, having regard to the Company’s Details of the Corporate Governance Report are set out on operating results, individual duties and performance and pages 35 to 59 of the annual report. comparable market statistics. The Company has adopted a share option scheme as an incentive to directors and eligible employees, details of the scheme are set out in note 31 to the AUDIT COMMITTEE consolidated financial statements. The Company has an audit committee which was established in accordance with the requirements of the Listing Rules for the PRE-EMPTIVE RIGHTS purpose of reviewing and providing supervision over the Group’s financial reporting processes and internal controls. The audit There are no provisions for pre-emptive rights under the committee comprises Mr. Lee Cheuk Yin, Dannis, Mr. Yeung Company’s Articles of Association, or the laws of Cayman Sau Hung, Alex, Mr. An Qing Heng and Mr. Wang Yang who Islands, which would oblige the Company to offer new shares are the independent non-executive directors of the Company. on a pro-rata basis to existing shareholders. 086 MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT FACILITY AGREEMENT WITH COVENANT OF THE CONTROLLING SHAREHOLDERS COMPETING BUSINESSES On 31 October 2017, the Company as the borrower entered marketing and sales of automobiles and related automobile into a facility agreement (the “Facility Agreement”) with The components in the PRC. Geely Holding, which is ultimately Hongkong and Shanghai Banking Corporation Limited (the owned by Mr. Li Shu Fu (“Mr. Li”) and his associate, has signed “Agent”) as the coordinator and agent for a syndicate of banks agreements or been in negotiations with local governments pursuant to which a term loan facility in the principal amount of in the PRC and other entities to set up production plants for up to US$200,000,000 has been granted to the Company for a the manufacturing and distribution of Geely automobiles. The term of two years. The purpose of the loan facility is to refinance potential production and distribution of Geely automobiles the existing indebtedness of the Group. by Geely Holding may constitute competing businesses The Group is principally engaged in the research, production, (the “Competing Businesses”) to those currently engaged Pursuant to the Facility Agreement, it will be an event of default by the Group. Mr. Li has undertaken to the Company (the if Mr. Li Shu Fu is (i) no longer the single largest beneficial “Undertaking”) on 20 November 2008 that upon being notified of shareholder of the Company, or (ii) no longer beneficially owns any decision by the Company pursuant to a resolution approved at least 25% of the entire issued share capital of the Company. by a majority of the independent non-executive Directors, he In case of an event of default, the Agent may by notice to the will, and will procure his associates (other than the Group) to, Company (a) cancel the loan facility, (b) declare that all or part sell to the Group all of the Competing Businesses and related of the loan, together with accrued interest, be immediately due assets, subject to compliance with applicable requirements of and payable, and/or (c) declare that all or part of the loans be the Listing Rules and other applicable laws and regulations upon payable on demand. terms to be mutually agreed as fair and reasonable. In addition, it is required that Mr. Li informs that Group of all potential SUFFICIENCY OF PUBLIC FLOAT Competing Businesses carried out by him or his associates. Rule 8.08 of the Listing Rules requires at least 25% of the issued share capital of the Company to be held in public hands. Based on the information available and within the knowledge of the directors as at the latest practicable date prior to the issue of the annual report, the Company has maintained the prescribed public float as required under the Listing Rules. 087 Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT In August 2010, Geely Holding completed the acquisition of In May 2017, Geely Holding has entered into a heads of Volvo Car Corporation, which manufactures Volvo cars, a range agreement for the acquisition of 49.9% equity interests in Proton of family sedans, wagons and sport utility cars, and has 2,500 Holdings Bhd (the “Proton Acquisition”). Proton is a producer of dealerships in 100 markets (the “Volvo Acquisition”). Although a range of family sedans which is active in the Southeast Asia the Group is not a party to the Volvo Acquisition nor in any market and is a potential competitor of the Group. The Proton discussions with Geely Holding to cooperate with Geely Holding Acquisition has been completed in October 2017. Although in relation to the Volvo Acquisition, Geely Holding has provided the Group is not a party to the Proton Acquisition, to protect an irrevocable undertaking to the Company on 27 March 2010 the interests of the Group, Geely Holding has provided an to the effect that upon being notified of any decision by the irrevocable undertaking to the Company on 29 November 2017 Company pursuant to a resolution approved by a majority of to the effect that upon being notified of any decision by the the independent non-executive Directors, Geely Holding will, Company pursuant to a resolution resolved by a majority of the and will procure its associates (other than the Group) to sell to independent non-executive Directors, Geely Holding will, and the Group all or any part of the businesses and related assets will procure its associates (other than the Group) to transfer to of the Volvo Acquisition, and such transfer will be subject to the the Group all or any part of the equity/businesses and related terms and conditions being fair and reasonable, and being in assets of the Proton Acquisition, and such transfer will be compliance with applicable requirements of the Listing Rules, subject to the terms and conditions being fair and reasonable, other applicable laws and regulations and other necessary and being in compliance with applicable requirements of the approvals and consents on terms to be mutually agreed. Despite Listing Rules, other applicable laws and regulations and other the fact that the Geely Holding Group is principally engaged in necessary approvals and consents on terms to be mutually similar business activities as the Group, their respective product agreed. Although the vehicles being produced by Proton offerings do not overlap as the Geely Holding Group’s product Holdings Bhd occupy the same market segment as that of the mix consists of premium automobiles (such as the Volvo brand), Group, they could be distinguished from the products of the which cater for consumers with relatively higher spending Group in that they are right-hand drive vehicles and are primarily power and hence, the Geely Holding Group is considered to being market to right-hand drive markets in Southeast Asia. The operate in a different market segment when compared to the Group is currently not producing any right-hand drive vehicles Group. Premium automobiles, which mainly represent Geely and does not possess any right-hand drive models. As such, Holding Group’s product mix, generally refer to vehicles with Proton is considered to be operating in a different market that higher quality, better performance, more precise construction, can be distinguished from the business of the Group. technologically innovative functions, or features that convey prestige and a strong brand name, whereas economy Saved as disclosed above, as at 31 December 2018, none of automobiles, which mainly represent the Group’s product mix, the Directors nor any of their respective associates had any generally refer to automobiles that are practical, lightweight business or interest in a business which competes or is likely to and relatively inexpensive for consumers when compared to compete, either directly or indirectly, with the business of the premium automobiles. Although the Group manufactures sport Group. utility vehicles, they are still not yet compatible to premium automobiles in terms of vehicle class, construction, brand image and pricing. As such, the Competing Businesses of the Geely Holding Group can be defined and delineated from the business of the Group by different products offering (i.e. premium versus economy automobiles) and brand names. 088 MANAGEMENT REPORT Geely Automobile Holdings Limited Annual Report 2018 DIRECTORS’ REPORT AUDITOR Grant Thornton Hong Kong Limited retires, and being eligible, offers themselves for re-appointment. A resolution will be submitted to the forthcoming annual general meeting to reappoint Messrs. Grant Thornton Hong Kong Limited as the auditor of the Company. On behalf of the Board Li Shu Fu Chairman 21 March 2019 089 A CC OU NT S ACCOUNTS Geely Automobile Holdings Limited Annual Report 2018 INDEPENDENT AUDITOR’S REPORT To the members of Geely Automobile Holdings Limited (incorporated in the Cayman Islands with limited liability) Opinion We have audited the consolidated financial statements of Geely Automobile Holdings Limited (“the Company”) and its subsidiaries (“the Group”) set out on pages 97 to 226 which comprise the consolidated statement of financial position as at 31 December 2018, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018 and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have been properly prepared in compliance with the disclosure requirements of Hong Kong Companies Ordinance. Basis for opinion We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA. Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report. We are independent of the Group in accordance with the HKICPA’s “Code of Ethics for Professional Accountants” (“the Code”) and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 091 Geely Automobile Holdings Limited Annual Report 2018 INDEPENDENT AUDITOR’S REPORT Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Impairment assessment of intangible assets Refer to note 15 to the consolidated financial statements and the accounting policies as set out in note 4(e) to the consolidated financial statements. The key audit matter How the matter was addressed in our audit We identified the impairment of intangible assets as a key Our audit procedures to assess the impairment testing audit matter due to the judgement being made about future of the Group’s intangible assets by the Company’s results of the business in assessing the recoverability of management included the following: intangible assets. As at 31 December 2018, intangible assets of RMB14,993,188,000 consisted of capitalised product – development costs related to multiple cash-generating units Assessing the valuation methodology adopted by the management. (“CGUs”). – Comparing the current year actual cash flows with The Company’s management performed impairment the prior year cash flow projections to consider if assessment of the Group’s intangible assets by allocating the the projections included any assumptions that were intangible assets to CGUs, the recoverable amount of each overly optimistic. CGU was determined based on value-in-use calculations using future cash flow projections. Based on the results – Assessing the reasonableness of key assumptions, of the impairment assessment which involved significant including growth rates and discount rates, based on management’s judgement and key assumptions, including our knowledge of the business and industry. growth rates and discount rates applied to the value-in-use calculations, the Company’s management has concluded – Reconciling input data to supporting evidence, that there was no impairment of intangible assets for the year such as approved budgets and considering the ended 31 December 2018. reasonableness of these budgets. 092 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS INDEPENDENT AUDITOR’S REPORT Key Audit Matters (Continued) Revenue recognition Refer to note 6 to the consolidated financial statements and the accounting policies as set out in note 4(l) to the consolidated financial statements. The key audit matter How the matter was addressed in our audit Revenue recognition is identified as a key audit matter Our audit procedures in relation to revenue recognition because of its financial significance to the consolidated included the following: financial statements and is one of key performance indicators of the Group. Accordingly, there may be risks of material – misstatements related to revenue recognition. Reviewing sales agreements, on a sample basis, to understand the terms of the sales transactions to assess whether the Group’s accounting policies in relation to revenue recognition were applied appropriately and consistently throughout the year. – Performing analytical review on revenue and gross margin by automobile products categories to identify significant or unusual fluctuation on revenue. – Assessing, on a sample basis, whether specific revenue transactions around the reporting date had been recognised in the appropriate period by comparing the transactions selected with relevant underlying documentation, including customers’ receipts, goods delivery notes and the terms of sales as set out in the distributor agreements. – Sending confirmations to distributors, and performing inventory count, on a sample basis, at the reporting date. 093 Geely Automobile Holdings Limited Annual Report 2018 INDEPENDENT AUDITOR’S REPORT Other information The directors are responsible for the other information. The other information comprises all the information included in the 2018 annual report of the Company, but does not include the consolidated financial statements and our auditor’s report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the consolidated financial statements The directors are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the disclosure requirements of the Hong Kong Companies Ordinance and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. The directors are assisted by the Audit Committee are responsible for overseeing the Group’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. 094 ACCOUNTS Geely Automobile Holdings Limited Annual Report 2018 INDEPENDENT AUDITOR’S REPORT Auditor’s responsibilities for the audit of the consolidated financial statements (Continued) As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. 095 Geely Automobile Holdings Limited Annual Report 2018 INDEPENDENT AUDITOR’S REPORT Auditor’s responsibilities for the audit of the consolidated financial statements (Continued) We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards. From the matters communicated with the Audit Committee, we determined those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Grant Thornton Hong Kong Limited Certified Public Accountants Level 12 28 Hennessy Road Wanchai Hong Kong 21 March 2019 Chiu Wing Ning Practising Certificate No.: P04920 096 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2018 Note 2018 2017 RMB’000 RMB’000 (Note) Revenue 6 Cost of sales Gross profit Other income 8 Distribution and selling expenses Administrative expenses, excluding share-based payments 106,595,133 92,760,718 (85,081,727) (74,779,337) 21,513,406 17,981,381 1,236,985 1,229,147 (4,523,278) (4,055,728) (3,777,155) (2,922,798) (14,594) (27,724) Share-based payments 31 Finance income/(costs), net 9(a) 78,992 (35,233) Share of results of associates 18 (59,949) 39,211 Share of results of joint ventures 19 504,566 3,143 – 562,562 Gain on disposal of subsidiaries Profit before taxation 9 14,958,973 12,773,961 Taxation 10 (2,284,575) (2,038,572) 12,674,398 10,735,389 12,553,207 10,633,715 121,191 101,674 12,674,398 10,735,389 Profit for the year Taxation 10 Attributable to: Equity holders of the Company Non-controlling interests Profit for the year Earnings per share Basic 12 RMB1.40 RMB1.19 Diluted 12 RMB1.37 RMB1.16 Note: The Group has initially applied HKFRS 9 and HKFRS 15 at 1 January 2018. Under the transition methods chosen, comparative information is not restated. See note 3. The notes on pages 105 to 226 are an integral part of these consolidated financial statements. Details of dividends payable to equity holders of the Company attributable to the profit for the year are set out in note 11. 097 Geely Automobile Holdings Limited Annual Report 2018 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2018 2018 2017 RMB’000 RMB’000 (Note) Profit for the year 12,674,398 10,735,389 92,418 14,680 12,766,816 10,750,069 12,644,665 10,648,293 122,151 101,776 12,766,816 10,750,069 Other comprehensive income (after tax of RMBNil) for the year: Items that may be reclassified subsequently to profit or loss: – Exchange differences on translation of financial statements of    foreign operations Total comprehensive income for the year Attributable to: Equity holders of the Company Non-controlling interests Total comprehensive income for the year Note: The Group has initially applied HKFRS 9 and HKFRS 15 at 1 January 2018. Under the transition methods chosen, comparative information is not restated. See note 3. The notes on pages 105 to 226 are an integral part of these consolidated financial statements. 098 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2018 Note 2018 2017 RMB’000 RMB’000 (Note) Non-current assets Property, plant and equipment 14 23,422,617 14,052,943 Intangible assets 15 14,993,188 10,551,773 Land lease prepayments 16 3,268,035 2,123,909 Goodwill 17 26,414 16,079 Interests in associates 18 404,669 369,360 Interests in joint ventures 19 5,917,618 4,435,530 - 21,650 26 642,959 401,325 48,675,500 31,972,569 Available-for-sale financial assets Deferred tax assets Current assets Land lease prepayments 16 66,538 47,810 Inventories 20 4,097,380 6,027,312 Trade and other receivables 21 22,864,974 33,478,308 Income tax recoverable – 4,072 Pledged bank deposits 19,392 36,043 15,737,196 13,414,638 42,785,480 53,008,183 Bank balances and cash Current liabilities Trade and other payables 24 41,438,036 47,532,529 Bank borrowings 25 1,375,280 1,296,460 947,085 1,072,958 43,760,401 49,901,947 (974,921) 3,106,236 47,700,579 35,078,805 Income tax payable Net current (liabilities)/assets Total assets less current liabilities 099 Geely Automobile Holdings Limited Annual Report 2018 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2018 Note 2018 2017 RMB’000 RMB’000 (Note) CAPITAL AND RESERVES Share capital 27 164,470 164,286 Reserves 28 44,779,507 34,302,761 44,943,977 34,467,047 430,741 343,787 45,374,718 34,810,834 Equity attributable to equity holders of the Company Non-controlling interests Total equity Non-current liabilities Bonds payables 23 2,047,822 - Deferred tax liabilities 26 278,039 267,971 2,325,861 267,971 47,700,579 35,078,805 Approved and authorised for issue by the Board of Directors on 21 March 2019. Note: Li Shu Fu Gui Sheng Yue Director Director The Group has initially applied HKFRS 9 and HKFRS 15 at 1 January 2018. Under the transition methods chosen, comparative information is not restated. See note 3. The notes on pages 105 to 226 are an integral part of these consolidated financial statements. 100 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Attributable to equity holders of the Company Share Share Balance at 1 January 2017 Profit for the year Share Capital Statutory Translation option NonAccumulated controlling capital premium reserve reserve reserve reserve profits Sub-total interests Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (note 27) (note 28(a)) (note 28(c)) (note 28(b)) (note 28(d)) (note 28(e)) (note 28(f)) 162,708 6,212,325 164,790 170,420 (138,153) 478,714 17,386,423 24,437,227 249,022 24,686,249 – – – – – – 10,633,715 10,633,715 101,674 10,735,389 – – – – 14,578 – – 14,578 102 14,680 – – – – 14,578 – 10,633,715 10,648,293 101,776 10,750,069 – – – 9,167 – – (9,167) – – – 1,578 428,877 – – – (116,598) – 313,857 – 313,857 – – – – – 27,724 – 27,724 – 27,724 – – – – – (7,942) 7,942 – – – – – – – – – – – (7,011) (7,011) – – – – – – (960,054) (960,054) – (960,054) 1,578 428,877 – 9,167 – (96,816) (961,279) (618,473) (7,011) (625,484) 164,286 6,641,202 164,790 179,587 (123,575) 381,898 27,058,859 34,467,047 343,787 34,810,834 Other comprehensive income: Exchange differences on translation of financial statements of foreign operations Total comprehensive income for the year Transactions with owners: Transfer of reserves Shares issued under share option scheme Equity settled share-based payments (note 31) Transfer upon forfeiture of share options Disposal of subsidiaries Dividends paid to equity holders of the Company (note 11) Total transactions with owners Balance at 31 December 2017 (Note) 101 Geely Automobile Holdings Limited Annual Report 2018 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Attributable to equity holders of the Company Share option Accumulated Share Share Capital Statutory Translation reserve profits capital premium reserve reserve reserve RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (note 27) (note 28(a)) (note 28(c)) (note 28(b)) (note 28(d)) (note 28(e)) (note 28(f)) Balance at 31 December 2017 (Note) Impact on initial application of HKFRS 9 (note 3) Adjusted balance at 1 January 2018 Profit for the year Other comprehensive income: Exchange differences on translation of financial statements of foreign operations Total comprehensive income for the year Transactions with owners: Capital contribution from noncontrolling interests Transfer of reserves Shares issued under share option scheme Equity settled share-based payments (note 31) Transfer upon forfeiture of share options Dividends paid to equity holders of the Company (note 11) Dividends paid to non-controlling interests Total transactions with owners Balance at 31 December 2018 Note: Total RMB’000 164,286 6,641,202 164,790 179,587 (123,575) 381,898 27,058,859 34,467,047 343,787 34,810,834 – – – – – – (34,313) (34,313) (197) (34,510) 164,286 6,641,202 164,790 179,587 (123,575) 381,898 27,024,546 34,432,734 343,590 34,776,324 – – – – – – 12,553,207 12,553,207 121,191 12,674,398 – – – – 91,458 – – 91,458 960 92,418 – – – – 91,458 – 12,553,207 12,644,665 122,151 12,766,816 – – – – – – – 130,811 – – – – – (153,609) – (22,798) 1,030 – 1,030 (22,798) 184 51,095 – – – (15,669) – 35,610 – 35,610 – – – – – 14,594 – 14,594 – 14,594 – – – – – (2,727) 2,727 – – – – – – – – – (2,160,828) (2,160,828) – (2,160,828) – – – – – – – – (36,030) (36,030) 184 51,095 – 130,811 – (3,802) (2,311,710) (2,133,422) (35,000) (2,168,422) 164,470 6,692,297 164,790 310,398 (32,117) 378,096 37,266,043 44,943,977 430,741 45,374,718 The Group has initially applied HKFRS 9 and HKFRS 15 at 1 January 2018. Under the transition methods chosen, comparative information is not restated. See note 3. The notes on pages 105 to 226 are an integral part of these consolidated financial statements. 102 Noncontrolling interests Sub-total RMB’000 RMB’000 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2018 Note 2018 2017 RMB’000 RMB’000 (Note) Cash flows from operating activities Profit before taxation 14,958,973 12,773,961 2,219 67,371 – (3,402) 2,413,161 1,938,008 Adjustments for: Bad debts written off Bargain purchase gain arising from acquisition of a subsidiary 9(c) 8 Depreciation and amortisation Equity settled share-based payments 31 14,594 27,724 Finance costs 9(a) 113,930 162,290 – (1,192) – (562,562) Gain on disposal of an associate 8 Gain on disposal of subsidiaries Impairment loss on trade and other receivables 9(c) 9,659 – Interest income 9(a) (192,922) (127,057) 225,520 (4,105) 64,482 34,074 Net foreign exchange loss/(gain) Net loss on disposal of property, plant and equipment Share of results of associates Share of results of joint ventures Operating profit before working capital changes Inventories 9(c) 59,949 (39,211) (504,566) (3,143) 17,164,999 14,262,756 2,175,291 (2,870,040) 11,664,380 (4,238,240) (14,458,627) 6,597,957 Cash generated from operations 16,546,043 13,752,433 Income taxes paid (2,620,921) (1,758,931) Net cash generated from operating activities 13,925,122 11,993,502 Trade and other receivables Trade and other payables 103 Geely Automobile Holdings Limited Annual Report 2018 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2018 2018 RMB’000 2017 RMB’000 (Note) (2,312,931) 104,723 – (178,985) (5,031,452) (95,258) (880,000) (97,522) 4,644 16,651 (3,063,151) – – (3,451,567) 55,790 129 (240,128) (3,949,951) (38,131) – (3,750,000) 6,439 3,261 (1,728,634) 1,040,728 13,860 21,650 192,922 – 127,057 (11,318,709) (11,911,147) (2,160,828) (36,030) 1,030 1,927,161 35,610 – – – (73,298) (960,054) – – – 313,857 1,296,460 (174,375) (2,033,536) (126,950) (306,355) (1,684,598) Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of foreign exchange rate changes 2,300,058 13,414,638 22,500 (1,602,243) 15,045,493 (28,612) Cash and cash equivalents at the end of the year, represented by bank balances and cash 15,737,196 13,414,638 Note Cash flows from investing activities Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Proceeds from disposal of available-for-sale financial assets Additions of land lease prepayments Additions of intangible assets Additional capital injection in an associate Additional capital injection in a joint venture Investment in a joint venture Proceeds from disposal of intangible assets Change in pledged bank deposits Net cash outflows on acquisition of subsidiaries Net cash inflows on disposal of subsidiaries Proceeds from disposal of an associate Proceeds from disposal of financial assets at fair value through profit or loss Interest received 16 15 18 19 19 33 Net cash used in investing activities Cash flows from financing activities Dividends paid Dividends paid to non-controlling interests Capital contribution from non-controlling interests Proceeds from issuance of bonds, net of transaction costs Proceeds from issuance of shares upon exercise of share options Proceeds from bank borrowings Repayments of bank borrowings Redemption of senior notes Interest paid 11(b) 22 27 22 22 22 22 Net cash used in financing activities Note: The Group has initially applied HKFRS 9 and HKFRS 15 at 1 January 2018. Under the transition methods chosen, comparative information is not restated. See note 3. The notes on pages 105 to 226 are an integral part of these consolidated financial statements. 104 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 1. GENERAL INFORMATION Geely Automobile Holdings Limited (“the Company”) was incorporated in the Cayman Islands as an exempted company with limited liability. The Company’s shares are listed on the Main Board of The Stock Exchange of Hong Kong Limited (the “SEHK”). The addresses of the registered office and principal place of business of the Company are disclosed in “Corporate Information” section to the annual report. As at 31 December 2018, the directors consider the immediate holding company of the Company is Proper Glory Holding Inc., which is incorporated in British Virgin Islands (the “BVI”). The ultimate holding company of the Company is Zhejiang Geely Holding Group Company Limited# 浙江吉利控股集團有限 公司, which is incorporated in the People’s Republic of China (the “PRC”) and is beneficially owned by Mr. Li Shu Fu and his associates. The Company is an investment holding company. The principal activities of the Company’s subsidiaries are set out in note 37 to the consolidated financial statements. # 2. The English translation of the name of the company established in the PRC is for reference only. The official name of the company is in Chinese. STATEMENT OF COMPLIANCE These consolidated financial statements on pages 97 to 226 have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”), and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These consolidated financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the SEHK (the “Listing Rules”). Significant accounting policies adopted by the Company and its subsidiaries (together referred to as the “Group”) is set out in note 4 below. The HKICPA has issued certain new and amended HKFRSs that are first effective or available for early adoption for the current accounting period of the Group. Note 3 provides information on any changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these consolidated financial statements. 105 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 3. ADOPTION OF NEW AND AMENDED HKFRSs AND CHANGES IN ACCOUNTING POLICIES 3.1 New and amended HKFRSs adopted as at 1 January 2018 The HKICPA has issued a number of new HKFRSs and amendments to HKFRSs that are first effective for the current accounting period of the Group. Of these, HKFRS 9 “Financial Instruments” (“HKFRS 9”) and HKFRS 15 “Revenue from Contracts with Customers” (“HKFRS 15”) are relevant to the Group’s financial statements. The Group has early adopted the amendments to HKFRS 9 “Prepayment Features with Negative Compensation” at the same time as the adoption of HKFRS 9 as at 1 January 2018. The Group has been impacted by HKFRS 9 in relation to classification of financial assets and measurement of credit losses. Details of the changes in accounting policies are discussed in note 3.1(a) for HKFRS 9 and note 3.1(b) for HKFRS 15. Under the transition methods chosen, the Group recognises cumulative effect of the initial application of HKFRS 9 as an adjustment to the opening balance of equity at 1 January 2018. Comparative information is not restated. The following table gives a summary of the opening balance adjustments recognised for each line item in the consolidated statement of financial position that has been impacted by HKFRS 9: As at Impact on initial 31 December application of As at 2017 HKFRS 9 1 January 2018 RMB’000 RMB’000 RMB’000 Trade and other receivables 33,478,308 (37,993) 33,440,315 Total current assets 53,008,183 (37,993) 52,970,190 401,325 3,483 404,808 Total non-current assets Deferred tax assets 31,972,569 3,483 31,976,052 Net assets 34,810,834 (34,510) 34,776,324 Reserves 34,302,761 (34,313) 34,268,448 34,467,047 (34,313) 34,432,734 343,787 (197) 343,590 34,810,834 (34,510) 34,776,324 Equity attributable to equity holders of the Company Non-controlling interests Total equity Further details of these changes are set out in sub-sections (a) and (b) of this note. 106 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 3. ADOPTION OF NEW AND AMENDED HKFRSs AND CHANGES IN ACCOUNTING POLICIES (Continued) 3.1 New and amended HKFRSs adopted as at 1 January 2018 (Continued) (a) HKFRS 9 including the amendments to HKFRS 9 “Prepayment Features with Negative Compensation” HKFRS 9 replaces HKAS 39 “Financial Instruments: Recognition and Measurement” (“HKAS 39”). It sets out the requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. The Group has applied HKFRS 9 retrospectively to items that existed at 1 January 2018 in accordance with the transition requirements. According to the transitional relief, the Group has recognised the cumulative effect of initial application as an adjustment to the opening equity at 1 January 2018. Therefore, comparative information continues to be reported under HKAS 39. The following table summarises the impact of transition to HKFRS 9 on accumulated profits, noncontrolling interests and the related tax impact as at 1 January 2018. RMB’000 Accumulated profits Recognition of additional expected credit losses on financial assets measured at amortised cost (37,762) Related taxation 3,449 Net decrease in accumulated profits as at 1 January 2018 (34,313) Non-controlling interests Recognition of additional expected credit losses on financial assets measured at amortised cost and decrease in non-controlling interests as at 1 January 2018 (197) 107 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 3. ADOPTION OF NEW AND AMENDED HKFRSs AND CHANGES IN ACCOUNTING POLICIES (Continued) 3.1 New and amended HKFRSs adopted as at 1 January 2018 (Continued) (a) HKFRS 9 including the amendments to HKFRS 9 “Prepayment Features with Negative Compensation” (Continued) Further details of the nature and effect of the changes of the previous accounting policies and the transition approach are set out below: (i) Classification of financial assets and financial liabilities HKFRS 9 categorises financial assets into three principal classification categories: measured at amortised cost, at fair value through other comprehensive income (“FVOCI”) and at fair value through profit or loss (“FVPL”). These supersede HKAS 39’s categories of held-to-maturity investments, loans and receivables, available-for-sale financial assets and financial assets measured at FVPL. The classification of financial assets under HKFRS 9 is based on the business model under which the financial asset is managed and its contractual cash flow characteristics. Under HKFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are not separated from the host. Instead, the hybrid instrument as a whole is assessed for classification. The following table shows the original measurement categories for each class of the Group’s financial assets under HKAS 39 and reconciles the carrying amounts of those financial assets determined in accordance with HKAS 39 to those determined in accordance with HKFRS 9. 108 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 3. ADOPTION OF NEW AND AMENDED HKFRSs AND CHANGES IN ACCOUNTING POLICIES (Continued) 3.1 New and amended HKFRSs adopted as at 1 January 2018 (Continued) (a) HKFRS 9 including the amendments to HKFRS 9 “Prepayment Features with Negative Compensation” (Continued) (i) Classification of financial assets and financial liabilities (Continued) HKAS 39 carrying amount as at 31 December 2017 Reclassification Remeasurement RMB’000 RMB’000 RMB’000 Financial assets carried at amortised cost Trade and other receivables (excluding prepayment to suppliers and VAT and other taxes receivables) Pledged bank deposits Bank balances and cash HKFRS 9 carrying amount as at 1 January 2018 RMB’000 30,624,347 36,043 13,414,638 – – – (37,993) – – 30,586,354 36,043 13,414,638 44,075,028 - (37,993) 44,037,035 Financial assets measured at FVPL Unlisted equity securities (note) – 21,650 – 21,650 Financial assets classified as available-for-sale financial assets under HKAS 39 (note) 21,650 (21,650) – – Note: Under HKAS 39, unlisted equity securities not held for trading were classified as available-for-sale financial assets. These equity securities are classified as FVPL under HKFRS 9. For an explanation of how the Group classifies and measures financial assets and recognises related gains and losses under HKFRS 9, see respective accounting policy notes in notes 4(h) and 4(k). The measurement categories for all financial liabilities remain the same. The carrying amounts for all financial liabilities as at 1 January 2018 have not been impacted by the initial application of HKFRS 9. 109 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 3. ADOPTION OF NEW AND AMENDED HKFRSs AND CHANGES IN ACCOUNTING POLICIES (Continued) 3.1 New and amended HKFRSs adopted as at 1 January 2018 (Continued) (a) HKFRS 9 including the amendments to HKFRS 9 “Prepayment Features with Negative Compensation” (Continued) (ii) Credit losses HKFRS 9 replaces the “incurred loss” model in HKAS 39 with the “expected credit loss” (“ECL”) model. The ECL model requires an ongoing measurement of credit risk associated with a financial asset and therefore recognises ECLs earlier than under the “incurred loss” accounting model in HKAS 39. The Group applies the new ECL model to the financial assets measured at amortised cost (including bank balances and cash, pledged bank deposits and trade and other receivables). Financial assets measured at fair value, including unlisted equity securities measured at FVPL, are not subject to the ECL assessment. For further details on the Group’s accounting policy for accounting for credit losses, see note 4(h). As a result of this change in accounting policy, the Group has recognised additional ECLs amounting to RMB37,993,000, which decreased accumulated profits by RMB34,313,000 and non-controlling interests by RMB197,000 and increased gross deferred tax assets by RMB3,483,000 as at 1 January 2018. The following table reconciles the closing loss allowance determined in accordance with HKAS 39 as at 31 December 2017 with the opening loss allowance determined in accordance with HKFRS 9 as at 1 January 2018. RMB’000 Loss allowance as at 31 December 2017 under HKAS 39 110 – Additional credit loss recognised as at 1 January 2018 on trade receivables 37,993 Loss allowance as at 1 January 2018 under HKFRS 9 37,993 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 3. ADOPTION OF NEW AND AMENDED HKFRSs AND CHANGES IN ACCOUNTING POLICIES (Continued) 3.1 New and amended HKFRSs adopted as at 1 January 2018 (Continued) (a) HKFRS 9 including the amendments to HKFRS 9 “Prepayment Features with Negative Compensation” (Continued) (iii) Transition Changes in accounting policies resulting from the adoption of HKFRS 9 have been applied retrospectively, except as described below: – Information relating to comparative periods has not been restated. Differences in the carrying amounts of financial assets resulting from the adoption of HKFRS 9 are recognised in accumulated profits as at 1 January 2018. Accordingly, the information presented for 2017 continues to be reported under HKAS 39 and thus may not be comparable with the current period. – The following assessments have been made on the basis of the facts and circumstances that existed as at 1 January 2018 (the date of initial application of HKFRS 9 by the Group): – – The determination of the business model within which a financial asset is held. If, at the date of initial application, the assessment of whether there has been a significant increase in credit risk since initial recognition would have involved undue cost or effort, a lifetime ECL has been recognised for that financial instrument. (b) HKFRS 15 Sales of automobiles and automobile parts and components HKFRS 15 establishes a comprehensive framework for recognising revenue and some costs from contracts with customers. HKFRS 15 replaces HKAS 18 “Revenue”, which covered revenue arising from sale of goods and rendering of services, and HKAS 11 “Construction Contracts”, which specified the accounting for construction contracts. HKFRS 15 also introduces additional qualitative and quantitative disclosure requirements which aim to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. 111 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 3. ADOPTION OF NEW AND AMENDED HKFRSs AND CHANGES IN ACCOUNTING POLICIES (Continued) 3.1 New and amended HKFRSs adopted as at 1 January 2018 (Continued) (b) HKFRS 15 (Continued) Sales of automobiles and automobile parts and components (Continued) Revenue are generally recognised at a point in time when the customers obtain possession of and control of the promised goods in the contract. A receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. A contract liability is recognised when a customer pays consideration, or is contractually required to pay consideration and the amount is already due, before the Group recognises the related revenue. The Group recognised its contract liabilities under “Trade and other payables” as receipts in advance from customers in the consolidated statement of financial position. The directors of the Company consider that the adoption of HKFRS 15 has no material impact on the Group’s financial position and results of operation. 3.2 Issued but not yet effective HKFRSs Up to the date of issue of these financial statements, the HKICPA has issued a number of new and amended HKFRSs which are not yet effective for the year ended 31 December 2018 and which have not been adopted in these financial statements. These include the following which may be relevant to the Group. HKFRS 16 Leases1 Amendments to HKFRS 10 and HKAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture2 Amendments to HKAS 28 Long-term Interests in Associates and Joint Ventures1 Amendments to HKFRSs Annual Improvements to HKFRSs 2015-2017 Cycle1 HK(IFRIC) – Int 23 Uncertainty over Income Tax Treatments1 1 2 112 Effective for annual periods beginning on or after 1 January 2019 Effective date not yet determined Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 3. ADOPTION OF NEW AND AMENDED HKFRSs AND CHANGES IN ACCOUNTING POLICIES (Continued) 3.2 Issued but not yet effective HKFRSs (Continued) The Group is in the process of making an assessment of what the impact of these new and amended HKFRSs is expected to be in the period of initial application. So far the Group has identified some aspects of HKFRS 16 “Leases” (“HKFRS 16”) which may have a significant impact on the consolidated financial statements. Further details of the expected impacts are discussed below. Other new and amended HKFRSs are not expected to have a material impact on the Group’s consolidated financial statements. While the assessment has been substantially completed for HKFRS 16, the actual impact upon the initial adoption of this standard may differ as the assessment completed to date is based on the information currently available to the Group. The Group may also change its accounting policy elections, including the transition options, until the standard is initially applied in that financial report. HKFRS 16 As discussed in the note 4(p), currently the Group classifies leases into operating leases. The Group enters into some leases as the lessor and others as the lessee. HKFRS 16 is not expected to impact significantly on the way that lessors account for their rights and obligations under a lease. However, once HKFRS 16 is adopted, lessees will no longer distinguish between finance leases and operating leases. Instead, subject to practical expedients, lessees will account for all leases in a similar way to current finance lease accounting, i.e. at the commencement date of the lease, the lessee will recognise and measure a lease liability at the present value of the minimum future lease payments and will recognise a corresponding “right-of-use” asset. After initial recognition of this asset and liability, the lessee will recognise interest expense accrued on the outstanding balance of the lease liability, and the depreciation of the right-of-use asset, instead of the current policy of recognising rental expenses incurred under operating leases on a systematic basis over the lease term. As a practical expedient, the lessee can elect not to apply this accounting model to short-term leases (i.e. where the lease term is 12 months or less) and to leases of low-value assets, in which case the rental expenses would continue to be recognised on a systematic basis over the lease term. HKFRS 16 will primarily affect the Group’s accounting as a lessee of leases for office and factory premises which are currently classified as operating leases. The application of the new accounting model is expected to lead to an increase in both assets and liabilities and to impact on the timing of the expense recognition in the consolidated income statement over the period of the lease. HKFRS 16 is effective for annual periods beginning on or after 1 January 2019. As allowed by HKFRS 16, the Group plans to use the practical expedient to grandfather the previous assessment of which existing arrangements are, or contain, leases. The Group will therefore apply the new definition of a lease in HKFRS 16 only to contracts that are entered into on or after the date of initial application. In addition, the Group plans to elect the practical expedient for not applying the new accounting model to short-term leases and leases of low-value assets. Furthermore, the Group plans to elect to use the modified retrospective approach for the adoption of HKFRS 16 and will recognise the cumulative effect of initial application as an adjustment to the opening balance of equity at 1 January 2019 and will not restate the comparative information. 113 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 3. ADOPTION OF NEW AND AMENDED HKFRSs AND CHANGES IN ACCOUNTING POLICIES (Continued) 3.2 Issued but not yet effective HKFRSs (Continued) HKFRS 16 (Continued) However, based on an initial assessment, the Group expects that the adoption of HKFRS 16 will not materially affect the Group’s consolidated financial statements. 4. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation The consolidated financial statements for the year ended 31 December 2018 comprise the Group and the Group’s interests in associates and joint ventures. The measurement basis used in the preparation of the consolidated financial statements is the historical cost basis except that financial assets at fair value through profit or loss (see note 4(h)) are stated at fair value. The consolidated financial statements have been prepared on a going concern basis, although the Group was in net current liabilities position as at 31 December 2018, the directors consider the cash inflow of the profitable operations and the stand-by bank facilities available which the Group has sufficient financial resources to meet its present requirements. The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of HKFRSs that have significant effect on the consolidated financial statements and major sources of estimation uncertainty are discussed in note 5. The consolidated financial statements are presented in thousands of Renminbi (“RMB’000”), which is also the functional currency of the Company. 114 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (b) Basis of consolidation Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. A subsidiary is an entity, directly or indirectly, controlled by the Group. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (i.e., existing rights that give the Group the current ability to direct the relevant activities of the investee). When assessing whether the Group has power over the entity, only substantive rights relating to the entity (held by the Group and others) are considered. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and consolidated statement of comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary. Intra-group transactions, balances and unrealised gains and losses on transactions between group companies are eliminated in preparing the consolidated financial statements. Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from the Group’s perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Company, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. For each business combination, the Group can elect to measure any non-controlling interests either at fair value or at their proportionate share of the subsidiary’s net identifiable assets. The Group elects to measure any non-controlling interest in the subsidiary at the noncontrolling interest’s proportionate share of the subsidiary’s identifiable net assets for all business combinations. Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from the equity attributable to equity holders of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated income statement and consolidated statement of comprehensive income as an allocation of the total profit or loss and total comprehensive income for the year between non-controlling interests and equity holders of the Company. 115 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (b) Basis of consolidation (Continued) Changes in the Group’s interests in subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised. When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interests in that subsidiary. The profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. Where certain assets of the subsidiary are measured at revalued amounts or fair values and the related cumulative gain or loss has been recognised in other comprehensive income and accumulated in equity, the amounts previously recognised in other comprehensive income and accumulated in equity are accounted for as if the Group had directly disposed of the related assets (i.e., reclassified to profit or loss or transferred directly to accumulated profits). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under HKFRS 9 or, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. In the Company’s statement of financial position, investments in subsidiaries are carried at cost less any impairment loss (see note 4(j)) unless the investments are held for sale or included in a disposal group. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investments. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable at the reporting date. All dividends whether received out of the investee’s pre or post-acquisition profits are recognised in the Company’s profit or loss. (c) Goodwill Goodwill arising on a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the Group’s previously held equity interest in the acquiree, if any, over the Group’s interest in the net fair value of the acquiree’s identifiable assets and liabilities measured as at the acquisition date. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets and liabilities measured exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree, if any, the excess is recognised immediately in profit or loss as a bargain purchase gain. 116 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Goodwill (Continued) Goodwill is stated at cost less accumulated impairment losses (see note 4(j)). Goodwill arising on a business combination is allocated to each cash-generating unit or groups of cash-generating units, which is expected to benefit from the synergies of the combination and is tested at least annually for impairment. In respect of associates and joint venture, the carrying amount of goodwill is included in the carrying amount of the interests in associates and joint ventures. On disposal of a cash-generating unit or an associate and a joint venture, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal. (d) Interests in associates and joint ventures An associate is an entity over which the Group or the Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions. A joint venture is an arrangement whereby the Group or the Company and other parties contractually agree to share control of the arrangement, and have rights to the net assets of the arrangement. An investment in an associate or a joint venture is accounted for in these consolidated financial statements using the equity method. Under the equity method, an investment in an associate or a joint venture is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group’s share of losses of an associate or a joint venture exceeds the Group’s interests in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate or joint venture), the Group discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate or joint venture. Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities measured and contingent liabilities assumed of an associate or a joint venture recognised at the date of acquisition is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets and liabilities measured over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the determination of the Group’s share of the associate or joint venture’s profit or loss in the period in which the investment is acquired. Where a group entity transacts with an associate or a joint venture of the Group, profits and losses are eliminated to the extent of the Group’s interests in the relevant associate and joint venture. Where unrealised losses on assets sales between the Group and its associate or joint venture are reversed on equity accounting, the underlying asset is also tested for impairment from the Group’s perspective. 117 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (d) Interests in associates and joint ventures (Continued) Where necessary, adjustments are made to the financial statements of associates and joint ventures to bring their accounting policies in line with those used by the Group. After the application of equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group’s investments in its associates or joint ventures. At each reporting date, the Group determines whether there is any objective evidence that the investment in an associate or a joint venture is impaired. If such indications are identified, the Group calculates the amount of impairment as being the difference between the recoverable amount (higher of value in use and fair value less costs of disposal) of the associate or joint venture and its carrying amount. In determining the value in use of the investment, the Group estimates its share of the present value of the estimated future cash flows expected to be generated by the associate or joint venture, including cash flows arising from the operations of the associate or joint venture and the proceeds on ultimate disposal of the investment. The Group discontinues the use of equity method from the date when it ceases to have significant influence over an associate or joint control over a joint venture. If the retained interest in that former associate or joint venture is a financial asset, the retained interest is measured at fair value, which is regarded as its fair value on initial recognition as a financial asset in accordance with HKFRS 9. The difference between (i) the fair value of any retained interest and any proceeds from disposing of the interest in the associate or joint venture; and (ii) the carrying amount of the investment at the date the equity method was discontinued, is recognised in the profit or loss. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation to that associate or joint venture on the same basis as they would have been required if the associate or joint venture had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by the investee would be reclassified to profit or loss on the disposal of the related assets or liabilities, the entity reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued. If an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate, the Group continues to apply the equity method and does not remeasure the retained interest. In the Company’s statement of financial position, interest in a joint venture is stated at cost less impairment losses (see note 4(j)), unless classified as held for sale (or included in a disposal group that is classified as held for sale). 118 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (e) Intangible assets (other than goodwill) Intangible assets acquired separately are recognised initially at cost. After initial recognition, intangible assets with finite useful lives are carried at cost less accumulated amortisation and any accumulated impairment losses (see note 4(j)). Amortisation for intangible assets with finite useful lives is charged to profit or loss on a straight-line basis over their estimated useful lives. Amortisation begins when the asset is available for use (i.e. when it is in the location and condition necessary for it to be capable of operation). Research and development costs Costs associated with research activities are recognised as an expense in the period in which it is incurred. Costs that are directly attributable to the development phase are recognised as intangible assets provided they meet the following recognition requirements: (i) demonstration of technical feasibility of the prospective product for internal use or sale; (ii) there is an intention to complete the intangible asset and use or sell it; (iii) the Group’s ability to use or sell the intangible asset is demonstrated; (iv) the intangible asset will generate probable economic benefits through internal use or sale; (v) sufficient technical, financial and other resources are available for completion; and (vi) the expenditure attributable to the intangible asset can be reliably measured. The costs capitalised include employee costs incurred on development along with an appropriate portion of relevant overheads. The costs of internally generated product developments are recognised as intangible assets. They are subject to the same subsequent measurement method as externally acquired intangible assets. Capitalised product development costs are amortised over 3 to 10 years. All other development costs are recognised as an expense in the period in which it is as incurred. Both the period and method of amortisation are reviewed annually. 119 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (f) Inventories Inventories are stated at the lower of cost and net realisable value. Cost, which comprises all costs of purchase and, where applicable, cost of conversion and other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average method. Net realisable value represents the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. (g) Foreign currency translation In preparing the financial statements of each individual group entity, foreign currency transactions are translated into the functional currency of the individual group entity at exchange rates prevailing at the dates of the transactions. At each reporting date, monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rate ruling at the transaction dates and not retranslated. Exchange differences arising on the settlement of monetary assets and liabilities, and on the translation of monetary assets and liabilities, are recognised in profit or loss in the period in which they arise, except for exchange differences arising on a monetary assets and liabilities that forms part of the Company’s net investment in a foreign operation, in which case such exchange differences are recognised in other comprehensive income. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included profit or loss for the period except for differences arising on the retranslation of nonmonetary items in respect of which gains and losses are recognised directly in other comprehensive income, in which cases, the exchange differences are also recognised directly in other comprehensive income. 120 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (g) Foreign currency translation (Continued) For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Company (i.e. Renminbi (“RMB”)) at the exchange rates prevailing at the reporting date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the year, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in a separate component of equity (i.e. the translation reserve). Such exchange differences are reclassified from equity to profit or loss as a reclassification adjustment in the period in which the foreign operation is disposed of. (h) Financial instruments Financial assets and financial liabilities are recognised in the consolidated statement of financial position when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities, in case of financial assets or liabilities not at FVPL, are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs of financial assets carried at FVPL are expensed in consolidated income statement. Financial assets (Policy applicable from 1 January 2018) Non-equity investments held by the Group are classified into amortised cost, if the investment is held within a business model whose objective is to hold the investment and collect its contractual cash flows and the contractual terms of the investment give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. Interest income from the investment is calculated using the effective interest method (note 4(l)). An investment in equity securities is classified as financial assets measured at FVPL unless the equity investment is not held for trading purposes and on initial recognition of the investment the Group makes an election to designate the investment at FVOCI (non-recycling) such that subsequent changes in fair value are recognised in other comprehensive income. Dividends from an investment in equity securities, irrespective of whether classified as at FVPL or FVOCI (non-recycling), are recognised in profit or loss as “Other income”. Credit losses The Group recognises a loss allowance for ECLs on the financial assets measured at amortised cost (including bank balances and cash, pledged bank deposits and trade and other receivables). Financial assets measured at fair value, including unlisted equity securities measured at FVPL, are not subject to the ECL assessment. 121 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Financial instruments (Continued) Financial assets (Policy applicable from 1 January 2018) (Continued) Credit losses (Continued) Measurement of ECLs ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all expected cash shortfalls (i.e. the difference between the cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive). The expected cash shortfalls on bank balances and cash, pledged bank deposits and trade and other receivables are discounted using effective interest rate determined at initial recognition or an approximation thereof where the effect of discounting is material. The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk. In measuring ECLs, the Group takes into account reasonable and supportable information that is available without undue cost or effort. This includes information about past events, current conditions and forecasts of future economic conditions. ECLs are measured on either of the following bases: – 12-month ECLs: these are losses that are expected to result from possible default events within the 12 months after the reporting date; and – lifetime ECLs: these are losses that are expected to result from all possible default events over the expected lives of the items to which the ECL model applies. Loss allowances for trade receivables are always measured at an amount equal to lifetime ECLs. ECLs on these financial assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors and an assessment of both the current and forecast general economic conditions at the reporting date. For all other financial instruments, the Group recognises a loss allowance equal to 12-month ECLs unless there has been a significant increase in credit risk of the financial instrument since initial recognition, in which case the loss allowance is measured at an amount equal to lifetime ECLs. 122 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Financial instruments (Continued) Financial assets (Policy applicable from 1 January 2018) (Continued) Credit losses (Continued) Significant increases in credit risk In assessing whether the credit risk of a financial instrument (including a loan commitment) has increased significantly since initial recognition, the Group compares the risk of default occurring on the financial instrument assessed at the reporting date with that assessed at the date of initial recognition. In making this reassessment, the Group considers that a default event occurs when (i) the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or (ii) the financial asset is 90 days past due. The Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort. In particular, the following information is taken into account when assessing whether credit risk has increased significantly since initial recognition: – failure to make payments of principal or interest on their contractually due dates; – an actual or expected significant deterioration in a financial instrument’s external or internal credit rating (if available); – an actual or expected significant deterioration in the operating results of the debtor; and – existing or forecast changes in the technological, market, economic or legal environment that have a significant adverse effect on the debtor’s ability to meet its obligation to the Group. Despite the aforegoing, the Group assumes that the credit risk on a debt instrument has not increased significantly since initial recognition if the debt instrument is determined to have low credit risk at the end of each reporting period. A debt instrument is determined to have low credit risk if it has a low risk of default, the borrower has strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfill its contractual cash flow obligations. Depending on the nature of the financial instruments, the assessment of a significant increase in credit risk is performed on either an individual basis or a collective basis. When the assessment is performed on a collective basis, the financial instruments are grouped based on shared credit risk characteristics, such as past due status and credit risk ratings. ECLs are remeasured at each reporting date to reflect changes in the financial instrument’s credit risk since initial recognition. Any change in the ECL amount is recognised as an impairment gain or loss in profit or loss. The Group recognises an impairment gain or loss for all financial instruments with a corresponding adjustment to their carrying amount through a loss allowance account. 123 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Financial instruments (Continued) Financial assets (Policy applicable from 1 January 2018) (Continued) Credit losses (Continued) Significant increases in credit risk (Continued) Detailed analysis of the ECL assessment of trade receivables and other financial assets measured at amortised cost are set out in note 35. Basis of calculation of interest income on credit-impaired financial assets Interest income is calculated based on the gross carrying amount of the financial asset unless the financial asset is credit-impaired, in which case interest income is calculated based on the amortised cost (i.e. the gross carrying amount less loss allowance) of the financial asset. At each reporting date, the Group assesses whether a financial asset is credit-impaired. A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable events: – significant financial difficulties of the debtor; – a breach of contract, such as a default or delinquency in interest or principal payments; – it becoming probable that the borrower will enter into bankruptcy or other financial reorganisation; – significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; or – the disappearance of an active market for a security because of financial difficulties of the issuer. Write-off policy The gross carrying amount of a financial asset is written off (either partially or in full) to the extent that there is no realistic prospect of recovery. This is generally the case when the Group determines that the debtor does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. 124 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Financial instruments (Continued) Financial assets (Policy applicable from 1 January 2018) (Continued) Credit losses (Continued) Write-off policy (Continued) Subsequent recoveries of an asset that was previously written off are recognised as a reversal of impairment in profit or loss in the period in which the recovery occurs. Financial assets (Policy applicable prior to 1 January 2018) Financial assets are classified into the following categories: – loans and receivables; and – available-for-sale financial assets. Management determines the classification of its financial assets at initial recognition depending on the purpose for which the financial assets were acquired and where allowed and appropriate, re-evaluates this designation at every reporting date. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including trade and other receivables, pledged bank deposits and bank balances and cash) are initially recognised at fair value, and are subsequently measured at amortised cost using the effective interest method less any identified impairment losses. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction cost. Available-for-sale financial assets Non-derivative financial assets that do not qualify for inclusion in any of the other categories of financial assets are classified as available-for-sale financial assets. Investments in equity instruments classified as available-for-sale that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at each reporting date subsequent to initial recognition. 125 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Financial instruments (Continued) Financial assets (Policy applicable prior to 1 January 2018) (Continued) Impairment of financial assets An “incurred loss” model was used to measure impairment losses on financial assets not classified as at FVPL. Under the “incurred loss” model, an impairment loss was recognised only when there was objective evidence of impairment. Objective evidence of impairment included: – significant financial difficulty of the debtor; – a breach of contract, such as a default or delinquency in interest or principal payments; – it becoming probable that the debtor will enter bankruptcy or other financial reorganisation; – significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; and – a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost. Loss events in respect of a group of financial assets include observable data indicating that there is a measurable decrease in the estimated future cash flows from the group of financial assets. Such observable data including but not limited to adverse changes in the payment status of debtors in the group and, national or local economic conditions that correlate with defaults on the assets in the group. If any such evidence exists, the impairment loss is measured and recognised as follows: (i) Financial assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition), where the effect of discounting is material. The amount of the loss is recognised in profit or loss of the period in which the impairment occurs. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent that it does not result in a carrying amount of the financial asset exceeding what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal is recognised in profit or loss of the period in which the reversal occurs. 126 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Financial instruments (Continued) Financial assets (Policy applicable prior to 1 January 2018) (Continued) Impairment of financial assets (Continued) (ii) Financial assets carried at cost For financial assets carried at cost, the amount of impairment loss is measured as the difference between the carrying amount of the financial assets and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. The amount of the impairment losses is recognised in profit or loss of the period in which the impairment occurs and it is not reversed in subsequent periods. Impairment losses on financial assets other than trade receivables that are stated at amortised cost, are written off against the corresponding assets directly. Where the recovery of trade receivables is considered doubtful but not remote, the impairment losses for doubtful receivables are recorded using an allowance account. When the Group is satisfied that recovery of trade receivables is remote, the amount considered irrecoverable is written off against trade receivables directly and any amounts held in the allowance account in respect of that receivable are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in profit or loss. Impairment losses recognised in an interim period in respect of available-for-sale equity investment and unquoted equity investment carried at cost are not reversed in a subsequent period. Financial liabilities The Group’s financial liabilities include bank borrowings, bonds payables and trade and other payables. Financial liabilities are recognised when the Group becomes a party to the contractual provisions of the instrument. All interest related charges are recognised in accordance with the Group’s accounting policy for borrowing costs (see note 4(r)). A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amount is recognised in profit or loss. 127 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Financial instruments (Continued) Financial liabilities (Continued) Trade and other payables Trade and other payables are initially recognised at their fair values, and are subsequently measured at amortised cost, using the effective interest method. Interest bearing borrowings Interest bearing borrowings, including bank borrowings and bonds payables, are classified as financial liabilities and recognised initially at fair value, less transaction costs incurred. Interest bearing borrowings are subsequently stated at amortised cost, using the effective interest method. Interest bearing borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Financial guarantees issued A financial guarantee contract is a contract that requires the issuer (or guarantor) to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantees issued are initially recognised within “Trade and other payables” at fair value, which is determined by reference to fees charged in an arm’s length transaction for similar services, when such information is obtainable, or to interest rate differentials, by comparing the actual rates charged by lenders when the guarantee is made available with the estimated rates that lenders would have charged, had the guarantees not been available, where reliable estimates of such information can be made. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognised in accordance with the group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognised in profit or loss. Subsequent to initial recognition, the amount initially recognised as deferred income is amortised in profit or loss over the term of the guarantee as income from financial guarantees issued. 128 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Financial instruments (Continued) Financial liabilities (Continued) Financial guarantees issued (Continued) (i) Policy applicable from 1 January 2018 The Group monitors the risk that the specified debtor will default on the contract and recognises a provision when ECLs on the financial guarantees are determined to be higher than the amount carried in “Trade and other payables” in respect of the guarantees (i.e. the amount initially recognised, less accumulated amortisation). To determine ECLs, the Group considers changes in the risk of default of the specified debtor since the issuance of the guarantee. A 12-month ECL is measured unless the risk that the specified debtor will default has increased significantly since the guarantee is issued, in which case a lifetime ECL is measured. The same definition of default and the same assessment of significant increase in credit risk apply. As the Group is required to make payments only in the event of a default by the specified debtor in accordance with the terms of the instrument that is guaranteed, an ECL is estimated based on the expected payments to reimburse the holder for a credit loss that it incurs less any amount that the group expects to receive from the holder of the guarantee, the specified debtor or any other party. The amount is then discounted using the current risk-free rate adjusted for risks specific to the cash flows. (ii) Policy applicable prior to 1 January 2018 Prior to 1 January 2018, a provision would be recognised if and when it became probable that (i) the holder of the guarantee would call upon the Group under the guarantee and (ii) the amount of the claim on the group was expected to exceed the amount carried in “Trade and other payables” in respect of the guarantee. Derecognition Financial assets are derecognised when the rights to receive cash flows from the assets expired or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and the cumulative gain or loss that had been recognised directly in equity, if any, is recognised in profit or loss. For financial liabilities, they are derecognised from the Group’s consolidated statement of financial position when the obligation specified in the relevant contract is discharged, cancelled or expired. The difference between the carrying amount of the financial liabilities derecognised and the consideration paid or payable is recognised in profit or loss. 129 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (i) Property, plant and equipment Property, plant and equipment, other than construction in progress, are stated at cost less subsequent accumulated depreciation and accumulated impairment loss (see note 4(j)). Cost comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use, and for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Depreciation is provided to write off the cost of items of property, plant and equipment (other than construction in progress) over their estimated useful lives less their estimated residual values, if any, using the straight-line method as follows: Leasehold buildings 30 years Plant and machinery 7 to 10 years Leasehold improvements Over the shorter of the unexpired lease terms and 3 years Furniture and fixtures, office equipment 5 to 10 years and motor vehicles Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually. Gain or loss arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other costs, such as repairs and maintenance, are charged to profit or loss during the financial period in which they are incurred. Construction in progress is stated at cost less accumulated impairment losses (see note 4(j)). Cost includes all construction expenditure and other direct costs, including interest costs, attributable to such projects. Costs on completed construction works are transferred to the appropriate asset category. No depreciation is provided in respect of construction in progress until it is completed and available for use. 130 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (j) Impairment of non-current assets Internal and external sources of information are reviewed at the reporting date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased: – property, plant and equipment; – land lease prepayments; – intangible assets; – goodwill; and – investments in subsidiaries and interest in a joint venture in the Company’s statement of financial position. If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually whether or not there is any indication of impairment. – Calculation of recoverable amount The recoverable amount of an asset is the higher of its fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). – Recognition of impairment losses An impairment loss is recognised in profit or loss if the carrying amount of an asset, or the cashgenerating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable). 131 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (j) Impairment of non-current assets (Continued) – Reversals of impairment losses In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised. Under the Listing Rules, the Group is required to prepare an interim financial report in compliance with HKAS 34 “Interim Financial Reporting”, in respect of the first six months of the financial year. At the interim reporting date, the Group applies the same impairment testing, recognition, and reversal criteria as it would at the end of the financial year. Impairment losses recognised in an interim period in respect of goodwill, are not reversed in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognised had the impairment been assessed only at the end of the financial year to which the interim period relates. (k) Cash and cash equivalents Cash and cash equivalents include cash at banks and in hand, demand deposits with banks and short-term highly liquid investments with original maturities of three months or less that are readily convertible into known amounts of cash which are subject to an insignificant risk of changes in value. Cash and cash equivalents are assessed for ECLs in accordance with the policy set out in note 4(h). (l) Revenue recognition Sales of automobiles and automobile parts and components and scrap materials Revenue is generally recognised at a point in time when the customers obtain possession of and control of the promised goods in the contract. A receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. Revenue excludes value added tax (“VAT”) or related sales taxes and net of discounts. A contract liability is recognised when a customer pays consideration, or is contractually required to pay consideration and the amount is already due, before the Group recognises the related revenue. The Group recognised its contract liabilities under “Trade and other payables” as receipts in advance from customers in the consolidated statement of financial position. 132 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (l) Revenue recognition (Continued) Sales of automobiles and automobile parts and components and scrap materials (Continued) Where the contract contains a financing component which provides a significant financing benefit to the customer for more than 12 months, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction with the customer, and interest income is accrued separately under the effective interest method. Where the contract contains a financing component which provides a significant financing benefit to the Group, revenue recognised under that contract includes the interest expense accreted on the contract liability under the effective interest method. The Group takes advantage of the practical expedient in paragraph 63 of HKFRS 15 and does not adjust the consideration for any effects of a significant financing component if the period of financing is 12 months or less. Sales-related warranties associated with automobiles cannot be purchased separately and are served as an assurance that the products sold comply with agreed-upon specifications (i.e. assurance-type warranties). Accordingly, the Group accounts for warranties in accordance with HKAS 37 “Provisions, Contingent Liabilities and Contingent Assets”. Claim income on defective materials purchased Claim income on defective materials purchased is recognised when the claim has been made to and confirmed by relevant suppliers. Rental income from operating leases Rental income receivable under operating leases is recognised in profit or loss in equal instalments over the periods covered by the lease term. Interest income Interest income is recognised as it accrues using the effective interest method. (m) Taxation Income tax expense comprises current tax and deferred tax. Current tax and movement in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognised in other comprehensive income or directly in equity, respectively. Current tax is the expected tax payable on the taxable profit for the year. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous year. 133 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (m) Taxation (Continued) Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and are accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised for all deductible temporary differences, tax losses available to be carried forward as well as other unused tax credits, to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated, without discounting, at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the deferred tax is also dealt with in other comprehensive income or equity. The carrying amount of a deferred tax asset is reviewed at the reporting date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available. Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised. 134 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (m) Taxation (Continued) Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met: – in the case of current tax assets and current tax liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or – in the case of deferred tax assets and deferred tax liabilities, if they relate to income taxes levied by the same taxation authority on either: (i) the same taxable entity; or (ii) different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. (n) Equity settled share-based payments The fair value of share options granted to employees is recognised as an employee cost with a corresponding increase in the share option reserve within equity. The fair value is measured at grant date using the Binomial Option Pricing Model, taking into account the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the options, the total estimated fair value of the options is spread over the vesting period, taking into account the probability that the options will vest. During the vesting period, the number of share options that is expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognised in prior years is charged or credited to the profit or loss for the year of the review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the share option reserve. On vesting date, the amount recognised as an expense is adjusted to reflect the actual number of options that vest (with a corresponding adjustment to the share option reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The equity amount is recognised in the share option reserve until either the option is exercised (when it is included in the amount recognised in share premium for the shares issued) or the option expires (when it is released directly to accumulated profits). 135 Geely Automobile Holdings Limited Annual Report 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (n) Equity settled share-based payments (Continued) If the share options granted are cancelled or settled during the vesting period (other than a grant cancelled by forfeiture when the vesting conditions are not satisfied), the cancellation or settlement is accounted for as an acceleration of vesting, and the amount that otherwise would have been recognised for services received over the remainder of the vesting period is recognised immediately in profit or loss. (o) Employee benefits (i) Short term employee benefits and contributions to defined contribution retirement plans Salaries, annual bonuses, paid annual leave, contributions to defined contribution retirement plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values. (ii) Retirement benefit costs Payments to the Group’s Mandatory Provident Fund Scheme (“MPF Scheme”) in Hong Kong, the statemanaged retirement benefit scheme in the PRC and defined contribution superannuation funds in other overseas countries are charged as expenses as they fall due. (p) Leased assets An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease. (i) Classification of assets leased to the Group Assets that are held by the Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases. Except that land held for own use under an operating lease, the fair value of which cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the time that the lease was first entered into by the Group, or taken over from the previous lease. 136 Geely Automobile Holdings Limited Annual Report 2018 ACCOUNTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) (p) Leased assets (Continued) (ii) Operating lease charges Where the Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred. The cost of acquiring land held under an operating lease is amortised on a straight-line basis over the period of the lease term. (q) Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to income are deferred and recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate. The government grants relating to the purchase of land lease prepayments, intangible assets and property, plant and equipment for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognised in profit or loss over the useful life o