To Shareholders

A. Introduction

The global economy faced a number of unprecedented challenges in 2001. Originally poised for a recovery, the September 11 terrorist attacks in the U.S. caused the economy there to continue its tailspin. Eu’s economy weakened in reflection of the U.S., with Germany’s economy slowing sharply. In Asia, Japan’s economy continued to stumble, unemployment rose and consumer prices continued to display negative growth. Leading economic indicators remained at low levels, indicating that Japan remained clouded by deflation, with little sign of an upturn in the near term. Southeast Asian economies also faltered. Foreign investors have shrugged off the weak global economy and have charged into China due to low labor and land costs, and the attraction of a large domestic market. This has caused repid growth on China amid global weakness. However, even China’s economic growth are in 2001 cooled slightly from 2000 due to the impact of the global slowdown.

   Taiwan also was weak, highlighted by political and economic instability, a lack of resolution in cross-strait relations, a global economic contraction and deterioration in capital markets. Taiwan’s economic growth in 2001 was the weakest in 50 years. Its growth rate was the weakest of Asia’s “Four Dragons,” and its unemployment rate was stubbornly high. The government introduced plans to boost the economy through public works projects totaling NT$810 billion, and in August an economic development conference was held, at which a consensus was reached on 322 areas for implementation. It was hoped that these measures would spark the economy. However, a series of natural disasters struck Taiwan. And then the September 11 events dealt another blow to global consumption and investment. The economic outlook for Taiwan remained grim, trigering operational difficulties for many companies and pessimism in the corporate sector. 

Cement demand sustained a further decline in 2001 from previous years. According to statistics compiled by the Taiwan Cement Manufacturers Association, domestic makers posted aggregate cement and clinkersales of 17.79 million metric tons (MT) in 2001, up 1.43percent from the previous year. Domestic salesamounted to 14.36 million MT, a drop of 3.10 percentfrom 2000. In contrast, exports rose a significant 26.10 percent to 3.43 million MT. In 2001, Taiwan's cement consumption amounted to 16.69 million MT, averaging out to a per capita volume of around 745 kg.  

Various disadvantages at home and abroad combined to result in further reductions in Taiwan's cement output and sales last year. Still, unanimous efforts of ACC employees enabled the company to chalk up output and sales figures superior to those of its competitors for 2001. Sales topped NT$9,958,340,000 marking a 8.68 percent decrease from 2000. Operating profit fell 77.53 percent to NT$163,769,000.  Furthermore, non-operating income calculated by ACC under the equity method amounted to NT$399,206,000.  ACC posted 2001 pretax profit of NT$354,502,000 which translated into a 3.56 percent profit margin. Board of Directors resolved that the company would issue a NT$0.2 cash dividend per share for 2001.  

B. Operating Performance

a) Output of Cement & Clinker:  

1) Aggregate cement output in 2001 amounted to

5,447,705 MT, a decrease of 614,217 MT, or 10.13 percent, from the previous year. (The Hsinchu Plant contributed 1,514,754 MT to the total, while the Hualien and Keelung plants chalked up 3,888,943 MT and 44,008 MT, respectively.)  

2) The turnover of clinker hit 5,672,956 MT, a year-on-year decrease of 7.22 percent, or 441,390 MT. (The Hsinchu and Hualien plants contributed 1,607,335 MT and 4,065,621 MT, respectively.)

b) Sales of Cement & Clinker:

1) Domestic sales of cement totaled 4,300,449 MT, 680,940 MT or 13.67 percent below that of 2000. Clinker sales amounted to 141,473 MT, down 137,368 MT or 49.26 percent from a year earlier.

2) Outbound cement shipments decreased a hefty 4. 88 percent, or 61,350 MT, year-on-year to 1,195,230 MT. Clinker exports expanded 47.55 percent, or 85,180 MT, to 264,330 MT.  

Combined sales of cement in 2001, both at home and abroad, reached 5,495,679 MT, a decrease of 11.9 percent or 742,290 MT from 2000. Domestic and overseas clinker sales amounted to 405,803 MT, representing a decrease of 52,188 MT or 11.39 percent. Aggregate sales of cement and clinker topped NT$7, 793,003,000 down 16.35 percent or NT$1,523,728,000 year-on-year.

c) Sales of Gravel:

Sales of gravel in 2001. topped 3,113,755 cubic meters, up 1,306,175 cubic meters or 72.26 percent from a year earlier. In value terms, the total  expanded 59.42 precent or NT$635,270,000 to NT$1,704,344,000.

d) Sales of Granulated Blast-Furnace Slag:

Sales of granulated blast-furnace slag in 2001 topped 496,886 MT, down 38,721 MT or 7.23 percent from a year earlier. In value terms, the total fell 8.15 percent or NT$34,987,000 to NT$394,458,000.

e) Sales of Granulated Blast-Furnace and Fly Ash:

Sales of granulated blast-furnace and fly ash in 2001 attained 91,182 MT, down 25,218 MT or 21.66 percent from a year earlier. The total fell 28.44 percent or NT$25,550,000 in value terms to NT$64,303,000.  

C. Business Goals & Outlook

ACC has set the following goals for 2002: the Hsinchu Plant expects to produce 1,417,000 MT of cement and 1,595,000 MT of clinker; the Hualien Plant, 4,063,000 MT of cement and 4,200,000 MT of clinker. Namely, ACC expects to produce 5,480,000 MT of cement and 5,795,000 MT of clinker.

Data suggests that an economic upturn will gradually unfold in the second half of 2002. However, the key to realizing this is whether the U.S. economy can recover. Presently, there is widespread optimism of an American economic recovery in the second half. In terms of Europe, while German economic growth in 2001 was especially weak, the English, Frence and Italian economies showed stability. Signs indicate that the EU’s economic growth in 2002 can be maintained at a reasonable level. Japan on the other hand, continues to face fiscal, banking overdue loan and other structural problems, which will dampen growth prospects until _these issues are resolved. While China’s growth this year is expected to still reach 7%,but some uncertain problems could be happen due to WTO entry,such as potential economic problems caused by state-run company reform and the imbalance in the urban and rural economies. Overall, governments throughout the globe have adopted loss monetary policies and fiscal expansion measures in an effort to boost economic growth. Stability in stock market will boost consumption and investor confidence. As a result, the global outlook now is more optimistic than on September 11.

Taiwan’s entry into the WTO will expand trade opportunities. A large increase in sales will spark production and foreign trade. However, private consumption is unlikely to exhibit strong growth in the short term due to the country’s structural umemployment problem. Consumer expenditures will continue to remain conservative. Private investment, on the other hand, will recover gradually due to construction of the high-speed rail line, the issuance of 3G licenses, the development of large-scale industrial and commercial zones, and the implementation of policies aimed at improving the investment environment and attracting foreign investors. Generally speaking, Taiwan’s economy will improve compares with last year.

Looking at the cement sector, southeast Asia continued to display an oversupply situation. Given the anti-dumping petitions files by Taiwan cement manufacturers, dumping by Japanese, Korean and Philippine companies has been decreased. In addition, full-scale construction on the high-speed rail and the government’s NT810 billion economic  revitalization plan, which calls for the development of a rapid transit system in Kaohsiung and other major projects, should, if realized, lead to a better year for Taiwan’s cement industry.

D. The State of Major Investment

Projects

1) Subsidiary Ya Tung Ready-Mixed Concrete Co., Ltd., in addition to entering into strategic alliances and to having 21 sales outlets throughout Taiwan, has won contract bids to supply ready-mixed concrete for the high-speed rail’s C250, C260, C280 and C291 projects. Sales are expected to rise in 2002 to NT$4.865 billion, up sharply from 2001’s NT$3.726 billion and 2000’s NT$ 2.267 billion.

2) Subsidiary Jiangxi Yadong Cement Co. has completed construction of a cement factory in Ruichang of Jiangxi Province. With an annual capacity of 1.5 million MTof clinker, the factory inaugurated production on September 2,2000. The producion process has gone smoothly and quality is outstanding. Factory output is sold in the mid-and down stream Yangtze River region. The factory’s products have won awards from mainland authorities and the factory has also received ISO9001 cerification. Outstanding recognition has caused demand to outstrip supply. As a result, expansion of the second production line is underway after mainland authorities granted approval on July 24, 2001. Once in operation, costs will be reduced, boosting profits. Jiangxi Yadong subsidiary Wuhan Yadong has completed a grinding factory, which began operation in June 2001. This factory mainly produces cement and the factory’s product quality has been lauded.

3) Acc previously invested in Chiahui Power Corp., and construcion of a plant began in 2000. With the successful raising of capital via a syndicated loan, construction of the plant is moving full steam ahead. The plant is expected to become operational at the begging of 2004, and the power produced will be sold to Taiwan Power Co. according to a 25-year contract. This will provide another stable source of revenue to the company.

4) In an effort to achieve diversified operations, ACC has invested in the Kaohsiung mass rapid transit project. Presently, the Far Eastern Group holds a 10% stake in the project, ACC has a 4% share, amounting to NT$400 million. Construction began October 30, 2001 and the entire line is expected to be operational in December 2006. The Red Line R8 station will be at the entrance to the Group’s Asia Plaza, which is expected to further boost revenues. Cement usage for the repid transit project is expected to reach 1.5 million MT, and this is likely to be a boon for ACC and subsidiary Ya Tung Ready-Mixed Concrete Co.,  

E. Conclusion

Over the years, ACC employees have been dedicated to achieving innovation and surmounting whatever challenges with teamwork as the norm. Excellent scores have been attained in cost reduction, quality advancement, productivity upgrade and raising pollution control standards. These have enabled the company to establish a strong competitive edge. In the face of a still sagging cement industry, ACC is confident of drawing from the full support of shareholders and employees alike to attain the many goals laid down for 2001. At the same time, ACC is set to further diversify its non-operating portfolio so that its earnings capacity can be duly enhanced to optimize the return on equity.