REPORT TO SHAREHOLDERS

  I. Preface

In 2006, thanks to the relative slump of oil prices, the upturn of international stock market, and the reduction of pressure caused by the inflation and rising interest rates in U.S.A. , main economies, including U.S.A. , Japan , Europe, and China , all showed pleasing economic performance.

    Domestically, according to several authoritative reports regarding international economic evaluation, which include “Growth Competitiveness Index” and “The Global Competitiveness Report” analyzed by World Economic Forum (WEF), “Corporate Environmental Reports“ issued by World Bank, “World Competitiveness Yearbook” released by Switzerland’s International Institute for Management Development (IMD), and the rank in world trade graded by World Trade Organization (WTO), Taiwan’s ranking among all economies fell as compared to previous years when emerging countries substantially lift their competitiveness. Additionally, Taiwan also performed weakly in social coherence, political stability, and policy consistency. All of these phenomena implied the future economic prospects for Taiwan were concerned. However, the advantageous conditions like continuing global economic boom, growing international trade, and close-coordinate industrial division in Asian area, enable the steady expansion of Taiwan ’s external trade and industrial production, and realize the improvement of unemployment rate and price reasonableness. For 2006, the annual economic growth rate posted 4.62%; that is superior than 2005.

For the cement business, driven by strong demand from markets in the Middle East, Africa, and U.S.A, global cement and clinker trade reached a new high record, 0.13 billion metric tons(MT). Domestic cement manufacturers also have satisfactory performance in export trade. Although numerous policies which might affect cement industry came into effect,  such as land restoration and conservation plan approved by government, the issuance of accounting standards relating to assets impairment and financial instruments(Financial Accounting Standards No. 34, 35, 36), the implementation of Kyoko Treaty, the impacts of these policies on cement industry were limited. According to statistics compiled by the Taiwan Cement Manufacturers’ Association, the cement and clinker sales by the domestic firms totaled 19.40 million MT in 2006, sliding 3.47 percent from the previous year. Domestic sales amounted to 12.67 million MT, a descent of 3.06 percent from 2005. Export sales deceased 4.27 percent to 6.73 million MT, compared to 2005. In 2006, Taiwan ’s cement consumption amounted to 14.42 million MT, averaging out to a per capita volume of around 630kg .

In spite of unsatisfactory achievement on the cement production and sales affected by numerous factors in the last year, the Company still enjoyed relatively positive business performance among the local cement manufacturers due to the concerted efforts made by dedicated ACC employees. The net sales of 2006 posted NT$ 10.811363 billion with an increase of 0.59 percent from 2005. The operating profit rose by 14.34 percent to NT$ 2.370737 billion. Also, in virtue of the splendid performance from its affiliated business like Far Eastern Textile Ltd. and U-Ming Marine Transport Corp. etc., the equity in gain of affiliates of 2006 was recognized as NT$ 5.113943 billion, while the income before income tax amounted to NT$ 7.734910 billion which translated into the profit margin before tax at 71 percent. Regarding the dividend distribution for 2006, the 11th Meeting of the 22nd term of the Board of Directors of the Company resolved to distribute NT$1.50 for the cash dividends and NT$0.80 for the stock dividends per share.

II. Operating performance of 2006

1. Production:

(KPI)：Aggregate cement output actually amounted to 4,991,107 MT, which was originally estimated at 5,307,000 MT. The successful rate reached 94.05 percent.

Aggregate clinker output actually amounted to 5,248,912 MT, which was originally estimated at 5,510,000 MT. The successful rate reached 95.26 percent. 

2. Sales:                                                   (UNIT:NT$1,000; MT)

(KPI)：Aggregate sales of cement and clinker actually amounted to 5,456,153 MT, which was originally estimated at 5,857,000 MT. The successful rate reached 93.16 percent.

III. Overview of ACC’s Business in Mainland China

After the Government permitted domestic firms to invest in cement industry in China , ACC has pioneered the relevant investment activities; since then, twelve years have passed. At present, the Company’s investing activities in Mainland China are mainly based in Jiangxi , Sichuan , Hubei , Shanghai and YangZhou areas. The overall operating strategies are deployed through Jiangxi YaDong Cement Co., Sichuan Yadong Cement Co., Hubei Yadong Cement Co., and YangZhou Yadong Cement Co. as core production bases in the Eastern South China, Western South China, Middle China, and East Coast, respectively, in collaboration with three grinding factories, five cement products companies, four transportation companies along with five terminals, eight sale offices, constituting an efficient and solid network for production, transportation and sales.

ACC’s subsidiaries in Mainland China show the following achievements. The aggregate output of clinker in 2006 reached 3.63 million MT with a year-on-year increase of 10 percent. Aggregate sales of cement, clinker, and slag powder in 2006 amounted to 6.19 million MT, up 29 percent compared to 2005. The equity in gain of the Company’s business in Mainland China was recognized for NT$ 364.971 million.

In the light of the rapid growth of China ’s economic development, the amount of cement consumption in Mainland China was 1.23 billion MT in 2006. Compared to 1.04 billion MT in 2005, the cement consumption in Mainland China of 2006 increased largely by 18 percent. Additionally, China ’s macro-control measures, in terms of cement industry, encourage the construction of new-style rotary kilns to produce high-grade cement, aiming to restrain the overheated investment and improve the quality of building construction. These measures will help to fulfill the policy of eliminating obsolete vertical shaft kilns and push the adjustment of cement industrial structure. In the short term, this might influence the prices and consumption of cement, but in the long term, accompanied with China’s stable economic growth in coordination with the great demand required for 2008 Beijing Olympic Games, 2010 Shanghai World Exposition, and construction projects such as south-north water transfer, diversion of natural gas from the western to the eastern regions, and development of western regions, the total demand for high-grade cement is very considerable in quantity. The above conditions suggest that the prospects for China ’s cement industry are promising.

IV. Deployment of ACC’s Investing Activities in Mainland China  

1. Jiangxi Yadong Cement Co., Ltd.

The company is planning four-stage construction of building four kilns, each with annual capacity of 1.6 million MT of clinker. The first and second stage construction projects have been completed and begun to operate by July 2000 and September 2003 respectively. The company’s third stage construction is expected to be completed and begin to operate by June 2007. Once in operation, the annual output of clinker will amount to 4.8 million MT, which is expected to be ground into 6 million MT of cement. The waste heat recycling generators of No.1 and No.2 kilns annually produce 107 million KWH electric power. This substantially reduce the cost of electric power and minimize the dependence on external power supply.   

2. Sichuan Yadong Cement Co., Ltd.

The company is planning three-stage construction of building three kilns, each with annual capacity of 1.6 million MT of clinker. At present, the first-stage construction has been finished and put into operation by September 28, 2006, which can produce 2 million MT of cement annually and supply the market in Mainland China ’s western area. Additionally, the installation of waste heat recycling generator of No. 1 is expected to be completed by May 2007, certainly that can reduce the cost of electric power. The second stage construction has started on December 1, 2006, which is due to be completed by April 2009. Once in operation, the annual output of clinker will amount to 3.2 million MT, which is expected to be ground into 4 million MT of cement.    

3. Hubei Yadong Cement Co., Ltd.

The company is planning two-stage construction of building two kilns, each with annual capacity of 1.6 million MT of clinker. The company’s No.1 grinding system has began construction, which is expected to put into operation by June 2007. Once in operation, it is estimated to produce 1.35 million MT of cement and 0.55 million MT of slag powder. Moreover, since the problem of mineral sources supply has been solved, once the construction of cement factory is completed by April 2009, the annual output of cement will amount to 2 million MT.

4. Huanggang Yadong Cement Co., Ltd.

  The company is planning the construction of building one kiln with annual capacity of 1.6 million MT of clinker. The completion will be due by September 2009, and then 2 million MT of cement will be produced annually.

5. YangZhou Yadong Cement Co., Ltd.

  The company is planning the construction of grinding factory, warehouse, and dock; the groundbreaking of these projects was held on January 4, 2007. The completion will be due by June 2008; once in operation, besides 2.3 million MT of cement will annually be produced, cement warehousing and sales can begin operation.   

6. Wuhan Yadong Cement Co., Ltd.

The company annually can produce 1.6 million MT of cement and 0.7 million MT of slag powder to supply the market in Wuhan area. 

7. Nanchang Yadong Cement Co., Ltd.

The company annually can produce 1.2 million MT of slag cement to supply the market in Nanchang area. 

8. Chengdu Yaxin Slag Powder Co., Ltd.

The company is set up to manage slag sources from Chengdu which can further reduce the cost of cement. It is estimated to grind 0.17 million MT of slag powder annually; the second set of grinding equipment will be constructed until the slag supply is sufficient.   

V. Business Goals for 2007

The Company has set the following goals for 2007: the Hsinchu Plant is expected to produce 1,175,000 MT of cement and 1,120,000 MT of clinker; the Hualien Plant, 4,118,000 MT of cement and 4,280,000 MT of clinker. In short, the Company anticipates the total volume of cement production will achieve 5,293,000 MT and clinker production for 5,400,000 MT. The sales of cement and clinker are estimated at 5,800,000 MT; to fully sell out the estimated sales amount is the Company’s persistent principle. The Company’s subsidiaries in Mainland China are estimated to aggregately produce 5,550,000 MT of clinker, 7,700,000 MT of cement, and sale 9,000,000 MT of cement.

VI. Business Prospects for 2007 

Looking forward to 2007, the cement export in U.S.A. will reduce to 6 million MT due to the decline in local real estate market. However, the economic growth in Europe will drive the cement demand continuingly up and therefore it can be foreseen the cement import in this area will exceed 18 million MT. Moreover, the counties in Africa, such as Nigeria and the Republic of South Africa , showed their demands for cement export; overall, a flourishing international cement market in 2007 can be anticipated. The Company’s export volume for the year is expected to make a new record because besides existing markets in Singapore and Hongkong, we have stepped into new markets spreading across Hawaii , east coast and southern area in U.S.A. , and Africa etc. Additionally, the domestic cement demand is still stable as the impacts from the cooling real estate market and the gradual increase in cement import will be hampered by construction projects impelled by government like the enlargement of public constructions, the improvement of water supply system, the replacement of railroad facilities, the expansion of electric power and oil refining systems, and the treatment of water outburst, etc. In mainland China , the cement market is still at the stage of industrial structure adjustment. The demand for high-grade cement is eager in virtue of numerous large-scale public projects under construction. It is predicable that the increasing production capacity of the Company’s subsidiaries will follow a splendid business performance.

VII. The Operating Performance in the First Quarter of 2007:                    

1.Operating Income: NT$ 575,731,000

2.Income Before Income Tax: NT$ 2,489,237,000

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