Audit Report
To the Shareholders of Yantai Zhenghai Magnetic Material Co., Ltd.:
I. Audit Opinion
We have audited the financial statements of Yantai Zhenghai Magnetic Material Co., Ltd. (hereinafter referred to as "Zhenghai Magnetic Material"), which comprise the consolidated and parent company balance sheets as of December 31, 2025, the consolidated and parent company income statements, consolidated and parent company cash flow statements, consolidated and parent company statements of changes in owners' equity for the year ended December 31, 2025, and related notes to the financial statements.
In our opinion, the accompanying financial statements, in all material respects, are prepared in accordance with the requirements of the Accounting Standards for Business Enterprises, and fairly present the consolidated and parent company financial position of Zhenghai Magnetic Material as of December 31, 2025, and its consolidated and parent company results of operations and cash flows for the year ended December 31, 2025.
II. Basis for Audit Opinion
We conducted our audit in accordance with the Standards on Auditing for Certified Public Accountants in China. Our responsibilities under those standards are further described in the "Auditor's Responsibilities for the Audit of the Financial Statements" section of our report. We are independent of Zhenghai Magnetic Material in accordance with the Code of Professional Ethics for Certified Public Accountants in China and other ethical requirements, and we have fulfilled our other ethical responsibilities. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
III. Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the current period. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined that revenue recognition is a key audit matter to be communicated in the audit report.
1. Matter Description
As disclosed in Note V.41 "Operating Revenue and Operating Costs" to the financial statements, Zhenghai Magnetic Material's operating revenue for 2025 was RMB 7,031,091,154.17. Given the importance of operating revenue to the overall financial statements of Zhenghai Magnetic Material and its status as a key performance indicator, there is an inherent risk of management manipulation of revenue to achieve specific targets. Therefore, we identified the recognition of revenue as a key audit matter.
2. Audit Response
In our audit of this significant matter, we performed the following audit procedures:
(1) We understood and evaluated the internal controls over the sales and collection cycle and performed control testing to determine the reasonableness of the control design and whether the controls were effective.
(2) We understood the specific methods of revenue recognition, compared them with the revenue recognition policies of peer companies, and selected sales contracts as samples to identify clauses related to the transfer of control of goods. We evaluated whether the revenue recognition timing met the requirements of the Accounting Standards for Business Enterprises and ensured consistent application.
(3) We performed analytical procedures to examine the reasonableness of the changes in sales revenue and gross profit margin for each category of products.
(4) We performed detailed testing by selecting samples from sales delivery notes and accounting records (both ways) and reconciling them with sales contracts (orders), sales delivery notes, logistics documents, customer receipt or acceptance reports, payment settlement documents, and settlement invoices as supporting documents. For export revenue, we obtained export customs declarations and reconciled them with accounting records. We also sampled and inspected sales contracts, export customs declarations, bills of lading, sales invoices, and other supporting documents.