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China XLX Fertiliser Ltd., (the "Company") was admitted to the Official list of the Singapore Exchange Securities Trading Limited ("SGX-ST") on 20 June 2007. The Company is committed to achieving and maintaining high standards of corporate governance principles and processes in managing the business and affairs, so as to improve the performance, accountability, and transparency of the Company.

This corporate governance report sets out how the Company has applied the principles of good corporate governance in a disclosure-based regime where accountability of the Board to the Company's shareholders and the Management to the Board provides the framework for achieving a mutually beneficial tripartite relationship aimed at creating, enhancing and growing sustainable shareholders' value.

BOARD MATTERS
 
The Board's Conduct of its Affairs

Principle 1: Every company should be headed by an effective Board to lead and control the company. The Board is collectively responsible for the success of the company. The Board works with Management to achieve this and the Management remains accountable to the Board.

The Board of Directors (the "Board") comprises 3 Executive Directors and 3 Independent Directors having the appropriate mix of core competencies and diversity of experience to direct and lead the Company. As at the date of this report, the Board comprises the following members:

Mr Liu Xingxu	(Chief Executive Officer and Executive Chairman)
Ms Yan Yunhua	(Chief Financial Officer and Executive Director)
Mr Li Buwen	(Executive Director)
Mr Ong Kian Guan	(Lead Independent Director)
Mr Li Shengxiao	(Independent Director)
Mr Ong Wei Jin	(Independent Director)

 

The primary role of the Board is to protect and enhance long-term shareholders' value. It sets the corporate strategies of the Group, sets directions and goals for the Management. It supervises the Management and monitors performance of these goals to enhance shareholders' value. The Board is responsible for the overall corporate governance of the Group.

Regular meetings are held to deliberate the strategic policies of the Company including significant acquisitions and disposals, review and approve annual budgets, review the performance of the business and approve the public release of periodic financial results.

The Board has formed specialized Committees namely the Audit Committee, the Nominating Committee and the Remuneration Committee to assist in carrying out and discharging its duties and responsibilities efficiently and effectively.

These Committees function within clearly defined terms of references and operating procedures, which are reviewed on a regular basis. The effectiveness of each Committee is also constantly reviewed by the Board.

The following table discloses the number of meetings held for Board and Board Committees and the attendance of all Directors for the financial year ended 31 December 2007 since the Company was admitted to the Official list of the SGXST on 20 June 2007: -

Name of Company	BOARD	AUDIT COMMITTEE	REMUNERATION COMMITTEE	NOMINATING COMMITTEE
Number of meetings held	3	2	1	1
Mr Liu Xingxu	3	–	–	1
Ms Yan Yunhua	3	–	–	–
Mr Li Buwen	3	–	–	–
Mr Ong Kian Guan	3	2	1	–
Mr Li Shengxiao	3	2	1	1
Mr Ong Wei Jin	2	1	–	1

 

While the Board considers directors' attendance at Board meetings to be important, it should not be the only criterion to measure their contributions. It also takes into account the contributions by board members in other forms including periodical reviews, provision of guidance and advice on various matters relating to the Group.

Board Composition and Balance

Principle 2: There should be a strong and independent element on the Board, which is able to exercise objective judgment on corporate affairs independently, in particular, from Management. No individual or small group of individuals should be allowed to dominate the Board's decision making.

The Board consists of six Directors, of whom three are Independent Directors.

The criterion for independence is based on the definition given in the Code. The Board considers an "independent" director as one who has no relationship with the Company, its related companies or Officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director's independent judgment of the conduct of the Group's affairs.

The Board is of the view that the current Board members comprise persons whose diverse skills, experience and attributes provide for effective direction for the Group. The composition of the Board will be reviewed on an annual basis by the Nominating Committee to ensure that the Board has the appropriate mix of expertise and experience, and collectively possess the necessary core competencies for effective functioning and informed decision-making.

Key information regarding the directors is given in the ‘Board of Directors' section of the annual report.

Particulars of interests of Directors who held office at the end of the financial year in shares, debentures, warrants and share options in the Company and in related corporations (other than wholly-owned subsidiaries) are set out in the Directors' Report on pages 37 and 38 of this annual report.

Chairman and Chief Executive Officer

Principle 3: There should be a clear division of responsibilities at the top of the company – the working of the Board and the executive responsibility of the company's business – which will ensure a balance of power and authority, such that no one individual represents a considerable concentration of power.

The Executive Chairman and Chief Executive Officer ("CEO") is Mr Liu Xingxu. The Board is of the view that it is in the best interests of the Group to adopt a single leadership structure so as to ensure that the decision-making process of the Group would not be unnecessarily hindered.

Mr Liu Xingxu is the largest shareholder of the Company who is deemed to hold 34.34% of the issued share capital of the Company through Pioneer Top Holdings Limited. He is in charge of the Group's overall strategic directions and manages the day-to-day business operations. He also ensures timeliness of information flow between the Board and Management. He has played a vital role in developing the business of the Group and has also provided the Group with strong leadership and vision.

Major decisions made by the Executive Chairman and CEO are reviewed by the Board of Directors. His performance and appointment to the Board is being reviewed by the Nominating Committee and his remuneration package is being reviewed by the Remuneration Committee. The Audit Committee, Nominating Committee and Remuneration Committee comprise a majority of independent directors of the Company. As such, the Board believes that there are adequate safeguards in place to ensure a balance of power and authority, such that no one individual represents a considerable concentration of power.

Board Membership

Principle 4: There should be a formal and transparent process for the appointment of new directors to the Board.

The Nominating Committee ("NC") comprises three members, majority of whom including the Chairman are independent non-executive directors: -

Mr Li Shengxiao	(Chairman)
Mr Ong Wei Jin	(Member)
Mr Liu Xingxu	(Member)

The NC functions under the terms of reference which set out its responsibilities:

• to make recommendations to the Board on all board appointments, including re-nominations, having regard to the director's contribution and performance (for example, attendance, preparedness, participation and can dour) including, if applicable, as an independent director. All directors shall be required to submit themselves for re-nomination and re-election at regular intervals and at least every three years;
• to determine annually whether or not a director is independent;
• in respect of a director who has multiple board representations on various companies, to decide whether or not such director is able to and has been adequately carrying out his/her duties as director, having regard to the competing time commitments that are faced when serving on multiple boards; and
• to decide how the Board's performance may be evaluated and propose objective performance criteria, as
  approved by the Board that allows comparison with its industry peers, and address how the Board has enhanced long terms shareholders' value.

The Articles of Association of the Company require one-third of the Board to retire from office at each Annual General Meeting ("AGM"). Accordingly, the Directors will submit themselves for re-nomination and re-election at regular intervals of at least once every three years. The Company has in place the policy and procedures for the appointment of new directors to the Board, including a search and nomination process.

 

Board Performance

Principle 5: There should be a formal assessment of the effectiveness of the Board as a whole and the contribution by each director to the effectiveness of the Board.

The Nominating Committee ("NC") examines the Board's size on an annual basis to satisfy that it is appropriate for effective decision making, taking into account the nature and scope of the Company's operations.

The Nominating Committee has reviewed and evaluated the performance of the Board, taking into consideration the attendance record at the meetings of the Board and Board Committees and also the contribution of each Director to the effectiveness of the Board.

 

Access to Information

Principle 6: In order to fulfill their responsibilities, Board members should be provided with complete, adequate and timely information prior to board meetings and on an on-going basis.

All directors are from time to time furnished with information concerning the Company to enable them to be fully cognizant of the decisions and actions of the Company's executive management. The Board has unrestricted access to the Company's records and information.

Senior members of management staff are available to provide explanatory information in the form of briefings to the directors or formal presentations in attendance at Board meetings, or by external consultants engaged on specific projects.

The Board has separate and independent access to the Company Secretary and to other senior executives of the Company and of the Group at all times in carrying out their duties. The Company Secretary or her representative attends all Board meetings and meetings of the Board committees of the Company and ensures that Board procedures are followed and that applicable rules and regulations are complied with. The minutes of all Board committees' meetings are circulated to the Board.

Each director has the right to seek independent legal and other professional advice, at the Company's expense, concerning any aspect of the Group's operations or undertakings in order to fulfill their duties and responsibilities as directors.

 

REMUNERATION MATTERS

Procedures for Developing Remuneration Policies

Principle 7: There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his own remuneration.

The Remuneration Committee ("RC") comprises three members, all of whom are independent Directors. The members of the RC are:

Mr Ong Wei Jin	(Chairman)
Mr Ong Kian Guan	(Member)
Mr Li Shengxiao	(Member)

The RC recommends to the Board a framework of remuneration for the Directors and Executive Officers, and determines specific remuneration package for each Executive Director. The recommendations will be submitted for endorsement by the Board.

All aspects of remuneration, including but not limited to directors' fees, salaries, allowances, bonuses and benefits in kind, will be covered by the RC. Each RC member will abstain from voting on any resolution in respect of his remuneration package.

The RC is responsible for the following:

• to recommend to the Board a framework of remuneration for the Directors and Executive Officers, and to determine specific remuneration packages for each Executive Director and the CEO (or executive of equivalent rank);
• in the case of service contracts, to consider what compensation commitments the Directors' or Executive Officers' contracts of service, if any, would entail in the event of early termination with a view to be fair and avoid
  rewarding poor performance; and
• in respect of such long-term incentive schemes (if any) including share schemes as may be implemented, to consider whether directors should be eligible for benefits under such long-term incentive schemes.

The RC will be provided with access to expert professional advice on remuneration matters as and when necessary. The
expense of such services shall be borne by the Company.

 

Level and Mix of Remuneration

Principle 8: The level of remuneration should be appropriate to attract, retain and motivate the directors needed to run the company successfully but companies should avoid paying more than is necessary for this purpose. A significant proportion of executive directors' remuneration should be structured so as to link rewards to corporate and individual performance.

In setting remuneration packages, the Remuneration Committee will take into consideration the pay and employment conditions within the industry and in comparable companies. The remuneration of Non-Executive Directors is also reviewed to ensure that the remuneration is commensurate with the contribution and responsibilities of the Directors.

The Company will submit the quantum of directors' fee of each year to shareholders for approval at each Annual General Meeting.

The Executive Directors have service agreements. The service agreements cover the terms of employment, salaries and other benefits. Non-executive Directors have no service contracts.

 

Disclosure on Remuneration

Principle 9: Each company should provide clear disclosure of its remuneration policy, level and mix of remuneration, and the procedure for setting remuneration in the company's annual report. It should provide disclosure in relation to its remuneration policies to enable investors to understand the link between remuneration paid to directors and key executives, and performance.

The details of the remuneration of directors and top 5 key executives of the Group disclosed in bands for services rendered during the financial year ended 31 December 2007 are as follows:

	Number of directors		Top Five Key Executive
	2007	2006	2007	2006
$500,000 and above	1	-	-	-
$250,000 to $499,999	2	-	-	-
Below $249,999	3	5	5	5
Total	6	5	5	5

 

The summary compensation table for the Directors and top five key executives of the Group for the financial year ended 31 December 2007 is set out below:

	Salary	Bonus	Directors' Fees	Allowances and Other Benefits	Total Compensation
	%	%	%	%	%
Directors
Below S$249,999
Executive Directors: -
Mr Liu Xingxu	31	69	-	-	100
Ms Yan Yunhua	33	67	-	-	100
Mr Li Buwen	33	67	-	-	100
Non-Executive Directors: -
Mr Ong Kian Guan	-	-	100	-	100
Mr Li Shengxiao	-	-	100	-	100
Mr Ong Wei Jin	-	-	100	-	100

 

Immediate Family Member of Directors or Substantial Shareholders

No employee of the Company and its subsidiaries was an immediate family member of a Director and/or a Substantial Shareholder whose remuneration exceeded S$150,000 during the financial year ended 31 December 2007.

 

ACCOUNTABILITY AND AUDIT

Accountability

Principle 10: The Board should present a balanced and understandable assessment of the company's performance, position and prospects.

The Board is accountable to the shareholders and is mindful of its obligations to furnish timely information and to ensure full disclosure of material information to shareholders in compliance with statutory requirements and the Listing Manual of the SGX-ST.

Price sensitive information will be publicly released either before the Company meets with any group of investors or analysts or simultaneously with such meetings. Financial results and annual reports will be announced or issued within legally prescribed periods.
 

Audit Committee

Principle 11: The Board should establish an Audit Committee with written terms of reference which clearly set out its authority and duties.

The Audit Committee comprises the following three members, all of whom are independent directors:

Mr Ong Kian Guan	(Chairman)
Mr Li Shengxiao	(Member)
Mr Ong Wei Jin	(Member)

 

The Audit Committee functions under the terms of reference which sets out its responsibilities as follows:

• review the audit plans and reports of our internal and external auditors;
• review of the financial statements before submission to the Board for approval;
• review and consider the appointment or re-appointment of the external auditors and matters relating to resignation or dismissal thereof;
• review of interested person transactions (within the definition of the Listing Manual) involving the Group in accordance with the Listing Manual;
• review the effectiveness and adequacy of the internal accounting and financial control procedures;
• generally undertake such other functions and duties as may be required by the Listing Manual;
• review and approve future hedging policy, instruments used for hedging and foreign exchange policy and practice of the Group (if it becomes applicable to the Group in the future); and
• consider the appointment and termination of our internal auditors

 

The Audit Committee has the power to conduct or authorize investigations into any matters within the Audit Committee's scope of responsibility. The Audit Committee is authorized to obtain independent professional advice if it deems necessary in the discharge of its responsibilities. Such expenses are to be borne by the Company.

Each member of the Audit Committee shall abstain from voting any resolutions in respect of matters he is interested in.

The Audit Committee has full access to and co-operation of the Management and has full discretion to invite any Director or executive Officer to attend its meetings, and has been given reasonable resources to enable it to discharge its functions.

The Audit Committee meets with both the external and internal auditors without the presence of the Management at least once a year.

The Audit Committee reviews the independence of the external auditors annually. The Audit Committee, having reviewed the range and value of non-audit services performed by the external auditors, Ernst & Young, was satisfied that the nature and extent of such services will not prejudice the independence and objectivity of the external auditors. The Audit Committee recommended that Ernst & Young be nominated for re-appointment as auditors at the forthcoming AGM.

The Company has in place a whistle-blowing framework for employees of the Group to raise concerns about improprieties.

 

Internal Controls

Principle 12: The Board should ensure that the Management maintains a sound system of internal controls to safeguard the shareholders' investments and the company's assets.

The Audit Committee will ensure that a review of the effectiveness of the Company's material internal controls, including financial, operational and compliance controls and risk management, is conducted annually. In this respect, the Audit Committee will review the audit plans, and the findings of the external and internal auditors and will ensure that the Company follows up on the auditors' recommendations raised, if any, during the audit process.

 

Internal Audit

Principle 13: The Company should establish an internal audit function that is independent of the activities it audits.

The Company has in place an internal audit function comprising four staff and headed by Mr Huang Beng Fa, to check and report on the internal affairs of the Group. Mr Huang reports directly to the Audit Committee and is not related to the Directors, Executive Officers or Substantial Shareholders.

The primary functions of internal audit are to:

• assess if adequate systems of internal controls are in place to protect the funds and assets of the Group and to ensure control procedures are complied with;
• assess if operations of the business processes under review are conducted efficiently and effectively; and
• identify and recommend improvement to internal control procedures, where required.

The Audit Committee has reviewed the internal auditors and external auditors' report and the internal controls in place, and is satisfied that there are adequate internal controls in the Company.

 

COMMUNICATION WITH SHAREHOLDERS

Communication with Shareholders

Principle 14: Companies should engage in regular, effective and fair communication with shareholders.

Principle 15: Companies should encourage greater shareholder participation at AGM's and allow shareholders the opportunity to communicate their views on various matters affecting the Company.

In line with continuous obligations of the Company pursuant to the SGX-ST's Listing Rules, the Board's policy is that all shareholders be informed of all major developments that impact the Group.

Information is disseminated to shareholders on a timely basis through:

• SGXNET announcements and news release;
• Annual Report prepared and issued to all shareholders;
• Press releases on major developments of the Group;
• Notices of and explanatory memoranda for AGM and extraordinary general meetings ("EGM");
• Company's website at http://www.chinaxlx.com.sg at which shareholders can access information on the Group.; and Roadshows organized by banks and plant visits to our factory

The Company's AGMs are the principal forums for dialogue with shareholders. The Chairmen of the Audit, Remuneration and Nominating Committees are normally available at the meetings to answer any question relating to the work of these committees. The External Auditors shall also be present to assist the Directors in addressing any relevant queries by the shareholders.

Shareholders are encouraged to attend the AGM/EGM to ensure high level of accountability and to stay apprised of the Group's strategy and goals. Notice of the meeting will be advertised in newspapers and announced on SGXNET.

 

Use of IPO Proceeds

Below is the status of utilization of net proceeds from the Company's initial public offering:

	Planned utilization (RMB' million)	Amount utilized (RMB' million)	Balance (RMB' million)
To use RMB210.0 million to acquire the Old and New Plants	210.0	210.0	-
To use RMB 50.0 million as part of construction cost of new power generator system for use in the New Plant	50.0	50.0	-
Balance for General Working Capital	454.4	32.4	422.0
	714.4	292.4	422.0

 

Dealing In Securities

The Company has in place a policy prohibiting share dealings by Directors and employees of the Company for the period of two weeks prior to the announcement of the Company's quarterly results and one month prior to the announcement of the yearly results as the case may be, and ending on the date of the announcement of the relevant results. Directors and employees are expected to observe the insider trading laws at all times even when dealing in securities within permitted trading period.

Interested Person Transactions Policy

The Company adopted an internal policy in respect of any transactions with interested persons and has established procedures for review and approval of the interested person transactions entered into by the Group. The Audit Committee has reviewed the rationale and terms of the Group's interested person transactions and is of the view that the interested person transactions are on normal commercial terms and are not prejudicial to the interests of the shareholders.

The interested person transactions transacted for the financial year ended 31 December 2007 by the Group are as follows:

Name of Interested Person	Aggregate value of all interested person transactions conducted (excluding transactions less than $100,000 and transactions conducted under shareholders' mandate pursuant to Rule 920) RMB'000	Aggregate value of all interested person transactions conducted under shareholders' mandate pursuant to Rule 920 (excluding transactions less than $100,000) RMB'000
Henan Xinlianxin Chemicals Co., Ltd. Group	253,668	-

 

Material Contracts

There was no material contracts entered into by the Company or any of its subsidiary companies involving the interest of the Chief Executive Officer, any Director, or controlling shareholder.

The directors are pleased to present their report to the members together with the audited consolidated financial statements of China XLX Fertiliser Ltd. (the Company) and its subsidiary (collectively, the Group) and the balance sheet and statement of changes in equity of the Company for the financial year ended 31 December 2007.