Circ re. Major Transaction-2

Air China Ld 30 August 2005 Part 2 29. TRADE PAYABLES An aged analysis of the trade payables is as follows: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Within 30 days 3,108,028 1,157,293 2,740,974 31 to 60 days 805,858 669,970 673,690 61 to 90 days 304,943 497,402 243,448 Over 90 days 224,779 1,890,316 161,241 At end of year 4,443,608 4,214,981 3,819,353 Included in the Group's and the Company's trade payables was the following amount due to a joint venture: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Joint venture 179,934 123,581 449,835 30. BILLS PAYABLE An aged analysis of the bills payable is as follows: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Within 30 days --- 256,220 --- 31 to 60 days --- 189,931 --- 61 to 90 days --- 248,687 --- Over 90 days 362,033 622,382 362,033 At end of year 362,033 1,317,220 362,033 Included in the Group's and the Company's bills payable was the following amount due to CNAF: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 CNAF --- 692,372 --- 31. OTHER PAYABLES AND ACCRUALS Set out below is a breakdown of other payables and accruals: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Provision for staff housing benefits 469,617 772,874 448,694 Accrued salaries, wages and benefits 692,510 647,561 562,493 Interest expense payable 269,928 315,617 255,977 Accruals for share issuing expenses 208,644 --- 208,644 Custom duties and levies payable 742,201 207,098 665,986 Current portion of long-term payables (note 35) 101,802 174,363 101,802 Current portion of deferred income (note 36) 76,943 57,894 76,943 Advances from customers 294,798 348,716 224,321 Accrued operating expenses 716,548 533,399 611,257 Others 347,296 183,023 231,753 3,920,287 3,240,545 3,387,870 32. PROVISION FOR MAJOR OVERHAULS Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 At beginning of year 404,939 253,453 --- Transferred to the Company upon its incorporation --- --- 363,842 (note 1) Provision for the year 221,543 244,387 61,341 Utilised during the year (127,654) (92,901) (23,811) At the end of year 498,828 404,939 401,372 Less: Portion classified as current liabilities (28,130) (115,346) (28,130) Long-term portion 470,698 289,593 373,242 33. OBLIGATIONS UNDER FINANCE LEASES The Group and the Company have obligations under finance lease agreements expiring during the years from 2004 to 2011 in respect of aircraft and related equipment. As at the balance sheet date, future minimum lease payments under these finance leases, together with the present value of the net minimum lease payments, which are principally denominated in foreign currencies, are as follows: Group and Company Group Minimum Present value of minimum Minimum lease Present value of minimum lease lease payments payments lease payments payments 2004 2004 2003 2003 RMB'000 RMB'000 RMB'000 RMB'000 Amounts repayable: Within one year 2,313,871 1,705,146 2,285,703 1,607,056 In the second year 2,408,481 1,943,630 2,271,725 1,697,597 In the third to fifth years, 7,784,209 6,722,448 6,721,752 5,583,404 inclusive Over five years 2,049,406 1,910,163 5,406,410 4,810,836 Total minimum finance lease 14,555,967 12,281,387 16,685,590 13,698,893 payments Less: Amounts representing (2,274,580) (2,986,697) finance charges Present value of minimum lease 12,281,387 13,698,893 payments Less: Portion classified as (1,705,146) (1,607,056) current liabilities Long-term portion 10,576,241 12,091,837 Certain lease financing arrangements comprised finance leases between the Company and certain of its subsidiaries, and corresponding borrowings between such subsidiaries and the banks. The Company has guaranteed the subsidiaries' obligations under the bank borrowings and, accordingly, the relevant assets as mentioned aforesaid and obligations are recorded in the balance sheets to reflect the substance of the transactions. The future payments under these leases have therefore been presented by the Company and the Group in amounts that reflect the payments under the bank borrowings between the subsidiaries and the banks. At 31 December 2004, there were 23 aircraft under finance lease agreements. Under the terms of the leases, the Company has the option to purchase, at the end of or during the lease terms, certain aircraft at fair market value and others at either fair market value or at the price as stipulated in the finance lease agreements. For the current year, the effective borrowing rate ranged from 1.64% to 9.13% (2003: 1.64% to 9.13%). The Group's and the Company's finance leases were secured by: (a) mortgages over certain of the Group's and the Company's aircraft, which had an aggregate carrying value of approximately RMB11,999 million as at 31 December 2004 (2003: RMB13,310 million) (note 16); (b) the pledge of certain of the Group's and the Company's bank deposits amounting to approximately RMB16 million as at 31 December 2004 (2003: RMB42 million) (note 26); and (c) guarantees by certain commercial banks in an aggregate amount of approximately RMB14,785 million (2003: RMB18,949 million). As at 31 December 2004, certain PRC state-owned banks have provided counter-guarantees in an aggregate amount of RMB3,074 million (2003: RMB4,753 million) in respect of the commercial bank guarantee arrangements set out in note 33 (c) above. CNAHC and CNAF have, in turn, provided counter-guarantees to certain of these PRC state-owned banks in the amounts of RMB921 million (2003: RMB5,355 million) and RMB3,976 million (2003: RMB4,506 million) (note 46), respectively. 34. BANK AND OTHER LOANS Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Bank loans: Secured 13,685,002 14,519,345 13,643,002 Unsecured 7,519,047 7,228,169 7,144,917 21,204,049 21,747,514 20,787,919 Other loans: Secured 66,667 81,487 66,667 Unsecured 431,957 227,494 297,731 21,702,673 22,056,495 21,152,317 Bank loans repayable: Within one year 8,359,280 8,994,367 7,943,149 In the second year 3,049,084 1,903,342 3,049,084 In the third to fifth years, inclusive 6,178,222 6,227,447 6,178,222 Over five years 3,617,464 4,622,358 3,617,464 Other loans repayable: Within one year 446,771 242,307 312,546 In the second year 14,815 14,813 14,815 In the third to fifth years, inclusive 37,037 51,861 37,037 Total bank and other loans 21,702,673 22,056,495 21,152,317 Less: Portion classified as current liabilities (8,806,051) (9,236,674) (8,255,695) Long-term portion 12,896,622 12,819,821 12,896,622 Further details of bank and other loans at the balance sheet date are as follows: Nature Interest rate Group Company and final maturity 2004 2003 2004 RMB'000 RMB'000 RMB'000 RMB denominated loans: Loans for construction Floating interest rates ranging from 5.58% to 5.76% per --- 80,000 --- projects annum at 31 December 2003 with maturities through 2010 Loans for purchases of Floating interest rates ranging from 4.94% to 5.76% and 5,382,986 6,282,444 5,382,986 aircraft and related 4.94% to 6.21% per annum at 31 December 2004 and 2003 equipment with maturities through 2014 and 2013, respectively Loans for working capital Floating interest rates ranging from 4.54% to 4.94% and 2,528,869 2,931,230 2,171,800 4.54% to 5.73% per annum at 31 December 2004 and 2003 with maturities through 2007 and 2004, respectively Loans for purchases of Floating interest rate at 4.94% per annum at 31 December --- 72,000 --- properties 2003 with maturities through 2004 United States dollars denominated loans: Loans for purchases of Fixed interest rates ranging from 5.40% to 10.17% and 7,155,311 8,397,835 7,155,311 aircraft and related 4.94% to 10.17% per annum at 31 December 2004 and 2003 equipment with maturities through 2012 Loans for purchases of Floating interest rates at six months LIBOR + 0.4% to 1,270,236 81,487 1,270,236 aircraft and related 0.7% per annum at 31 December 2004 and 2003 with equipment maturities through 2014 and 2009, respectively Loans for working capital Floating interest rates at six months LIBOR + 0.6% to 5,365,271 4,072,432 5,171,984 0.8% and three to ten months LIBOR + 0.3% to 0.9% per annum at 31 December 2004 and 2003 with maturities through 2007 and 2004, respectively Japanese yen denominated loans: Loans for purchases of Fixed interest rates ranging from 4.84% to 5.30% per --- 139,067 --- aircraft and related annum at 31 December 2003 with maturities through 2004 equipment 21,702,673 22,056,495 21,152,317 Less: Loans due within one (8,806,051) (9,236,674) (8,255,695) year classified as current liabilities Loans due after one year 12,896,622 12,819,821 12,896,622 classified as long-term portion The interest rates of RMB denominated loans are set and subject to change by the People's Bank of China. The Group's and the Company's bank loans of approximately RMB13,710 million as at 31 December 2004 (2003: RMB14,252 million) were secured by: (a) mortgages over certain of the Group's and the Company's aircraft and related equipment, which had an aggregate carrying value of approximately RMB16,586 million as at 31 December 2004 (2003: RMB16,422 million) (note 16); (b) the pledges of certain of the Group's and the Company's bank deposits amounting to RMB64 million as at 31 December 2004 (2003: RMB1,177 million) (note 26); (c) guarantees by certain commercial banks amounting to RMB8,294 million (2003: RMB10,934 million); and (d) guarantees by Air China International Corporation and CNAC (PRC) of Nil (2003: RMB396 million) and Nil (2003: RMB380 million), respectively. As at 31 December 2004, certain PRC state-owned banks provided counter-guarantees in an aggregate amount of RMB5,943 million (2003: RMB7,244 million) to one of these commercial banks as mentioned in note 34 (c) above. CNAHC and CNAF have, in turn, provided counter-guarantees to certain of these PRC state-owned banks in the amounts of RMB1,455 million (2003: RMB3,198 million) and RMB761 million (2003: RMB907 million) (note 46), respectively. 35. LONG-TERM PAYABLES Long-term payables mainly represent custom duties and value-added tax payable after one year to the PRC government in respect of the acquisition of aircraft and related equipment under finance leases. The custom duties and value-added tax are payable upon repayment of the corresponding finance lease instalments. Set out below are details of the custom duties and value-added tax payable further analysed into non-current and current portions: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Custom duties and value-added tax payable 539,121 975,712 539,121 Others 8,992 --- 258 548,113 975,712 539,379 Less: Portion classified as current liabilities (note 31) (101,802) (174,363) (101,802) Long-term portion 446,311 801,349 437,577 36. DEFERRED INCOME In 2000, the Group acquired an aircraft which was funded by the PRC government, and a further aircraft was injected into the Group by the PRC government during 2004. In accordance with IAS 20 ''Accounting for Government Grants and Disclosure of Government Assistance'', the Group recorded these aircraft purchased in 2000 and received in 2004 as property, plant and equipment with the corresponding amounts of government grant recorded as deferred income at the respective dates of the delivery of the aircraft. As such, the government subsidies in relation to the aforesaid aircraft purchased in 2000 and the aircraft received in 2004 are recorded in deferred income of the Group in 2000 and 2004, respectively. The deferred income is recognised as income over the expected useful life of the relevant aircraft on the straight-line basis. The movements of deferred income as stated under current and non-current liabilities are as follows: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Deferred income: At beginning of year 1,157,880 1,157,880 --- Transferred to the Company upon its --- --- 1,462,667 incorporation (note 1) Addition during the year 304,787 --- --- At end of year 1,462,667 1,157,880 1,462,667 Accumulated income recognised as other operating revenues: At beginning of year 212,278 154,384 --- Transferred to the Company upon its incorporation (note 1) --- --- 263,636 Credit during the year (note 5) 70,593 57,894 19,235 At end of year 282,871 212,278 282,871 Net amount 1,179,796 945,602 1,179,796 Less: Portion classified as current liabilities (note 31) (76,943) (57,894) (76,943) Long-term portion 1,102,853 887,708 1,102,853 37. SHARE CAPITAL Number of shares Nominal value 2004 2004 RMB'000 Company and Group Registered, issued and fully paid --- State legal person shares of RMB1.00 each 4,855,945,675 4,855,946 --- Non-H Foreign Shares of RMB1.00 each 1,388,992,507 1,388,992 --- H shares of RMB1.00 each 2,805,680,000 2,805,680 9,050,618,182 9,050,618 A summary of the movements in the Company's issued share capital for the period from 30 September 2004 (date of incorporation of the Company) to 31 December 2004 was as follows: Number of shares Nominal value 2004 2004 RMB'000 Restructuring (note 37 (a)) 6,500,000,000 6,500,000 State legal person shares converted into H shares (note 37 (b)) (198,331,240) (198,331) Non-H Foreign Shares converted into H shares (note 37 (b)) (56,730,578) (56,731) Share placement and public offer (note 37 (c)) 2,805,680,000 2,805,680 9,050,618,182 9,050,618 The Company was incorporated on 30 September 2004 with an initial registered share capital of RMB6,500,000,000, divided into 6,500,000,000 shares with par value of RMB1.00 each. 5,054,276,915 State legal person shares and 1,445,723,085 non-H Foreign Shares with a par value of RMB1.00 each were issued to CNAHC and CNACG, respectively, all of which were credited as fully paid, in consideration for the transfer of the Relevant Businesses and interests in the Relevant Companies to the Company pursuant to the Restructuring referred to in note 1 to these financial statements. Notes: (a) As part of the Restructuring in preparation for the listing of the Company's H shares on the Hong Kong Stock Exchange and the London Stock Exchange, CNAHC and through its wholly-owned subsidiaries, transferred the Relevant Businesses and interests in the Relevant Companies to the Company (note 1). In consideration of the above, the Company issued 5,054,276,915 State legal person shares and 1,445,723,085 non-H Foreign Shares with a par value of RMB1.00 each to CNAHC and CNACG, respectively. (b) The Company's H shares were listed on the Hong Kong Stock Exchange and the London Stock Exchange on 15 December 2004 and 2,805,680,000 H shares, consisting of 2,550,618,182 new shares, 198,331,240 shares converted from State legal person shares and 56,730,578 shares converted from non-H Foreign Shares, with a par value of RMB1.00 each were issued to the public by way of placement and offer at HK$2.98 (equivalent to approximately RMB3.17072) each. The proceeds from the sale of the 198,331,240 State legal person shares and 56,730,578 non-H Foreign Shares aggregating approximately RMB759 million, after deducting the portion of share issuing expenses of approximately RMB50 million which were borne by the Social Security Fund in connection with these sales of State legal person shares and non-H Foreign Shares, were remitted to the Social Security Fund. (c) As referred to in note 37 (b) above, the Company issued 2,805,680,000 H shares to the public by way of placement and offer. After deducting aggregate net proceeds of approximately RMB759 million from the sale of 198,331,240 H shares converted from State legal person shares and 56,730,578 H shares converted from non-H Foreign Shares which were remitted to the Social Security Fund as referred to in note 37 (b) above and share issuing expenses of approximately RMB536 million (before deducting share issuing expenses of approximately RMB50 million borne by the Social Security Fund as referred to in note 37 (b) above), the Company raised net proceeds of approximately RMB7,601 million, of which paid-up share capital amounted to approximately RMB2,551 million and capital reserve amounted to approximately RMB5,050 million. The H shares rank pari passu, in all material respects, with the State legal person shares and non-H Foreign Shares of the Company. 38. RESERVES Group The amounts of the Group's reserves and the movements therein for each of the two years ended 31 December 2004 are presented in the consolidated statement of changes in equity on page 47 of these financial statements. Company Capital Statutory reserve Retained Total reserve funds profits RMB'000 RMB'000 RMB'000 RMB'000 Upon incorporation of the Company (note 38 (a)) (627,464) --- 34,813 (592,651) Profit for the period from 1 October 2004 to 31 --- --- 1,229,603 1,229,603 December 2004 Distributions (note 38 (b)) --- --- (377,550) (377,550) Transfer to statutory reserve funds (note 14) --- 51,908 (51,908) --- Issue of new shares upon listing (note 37 (c)) 5,536,678 --- --- 5,536,678 Share issuing expenses (note 37 (c)) (486,457) --- --- (486,457) At 31 December 2004 4,422,757 51,908 834,958 5,309,623 Notes: (a) As described in note 1 to these financial statements, the financial statements of the Group for the years ended 31 December 2003 and 2004 have been prepared as if the Group had been in existence throughout the period and as if the Relevant Businesses and the interests in the Relevant Companies were transferred to the Company at 1 January 2003. Upon incorporation of the Company on 30 September 2004, the historical net asset value of the Relevant Businesses and the interests in the Relevant Companies transferred to the Company were converted into the Company's registered capital as described in note 37 (a) to these financial statements with all the then existing reserves eliminated and the resulting difference dealt with in the capital reserve and retained profits. Accordingly, the aggregate of the capital reserve and retained profits amounts, being the difference between the amount of share capital issued and the historical net asset value of the Relevant Businesses and the interests in the Relevant Companies transferred to the Company as at 30 September 2004, were presented in the reserves of both the Group and the Company. Retained profits of the Company and the Group upon incorporation of the Company represent the amounts set aside for distributions, details of which are set out in note 14 to these financial statements. Therefore, these amounts were not capitalised by the Company and the Group upon the Company's incorporation. (b) Details of the distributions are set out in note 14 to these financial statements. 39. LONG-TERM COMPENSATION PLAN The Company has adopted a long-term compensation plan (the ''Plan'') which was approved by the shareholders on 18 October 2004 for the purpose of motivating its employees. The Plan provides for the grant of share appreciation rights (''SARs'') to eligible participants, including the Company's Directors (excluding independent non-executive Directors), supervisors (excluding independent supervisors), president, vice presidents, heads of key departments in the Company's headquarters, general managers and general deputy managers of principal branches and subsidiaries as well as selected senior professionals and key specialists. In any event, SARs will be granted to no more than 200 individuals. The Plan will remain in force unless otherwise cancelled or amended. Under the Plan, the holders of SARs are entitled the rights to receive an amount in respect of the appreciation in market value of the Company's H shares from the date of grant of SARs and the date of exercise. No shares will be issued under the Plan and therefore the Company's equity interests will not be diluted as a result of the issuance of SARs. The maximum number of unexercised SARs permitted to be granted under the Plan is, upon their exercise, limited to 2% of the Company's H shares in issue at any time during each year. The maximum number of SARs granted to eligible participants under the Plan within any 12-month period is, upon their exercise, limited to 0.4% of the Company's H shares in issue at any time during each year. The maximum number of SARs granted to any eligible participant is limited to 10% of the total number of unexercised SARs in issue at any time during each year. Any further grant of SARs in excess of the above limits is subject to shareholders' approval in general meetings. The exercise period of all SARs commences after a vesting period and ends on a date which is not later than five years from the date of grant of the SARs. As of each of the last day of the second, third and fourth anniversary of the date of grant, the total number of SARs exercisable will not exceed 30%, 70% and 100%, respectively, of the total SARs granted to the respective eligible participants. The exercise price of SARs will be equal to the average closing price of the Company's H shares on the Hong Kong Stock Exchange for the five consecutive trading days immediately preceding the date of the grant. As of 31 December 2004, no SARs had been issued under the Plan. 40. DISTRIBUTABLE RESERVES As at 31 December 2004, in accordance with the PRC Company Law, an amount of approximately RMB7,703.5 million standing to the credit of the Company's capital reserve account, and an amount of approximately RMB51.9 million standing to the credit of the Company's statutory reserve funds, as determined in accordance with the PRC GAAP, were available for distribution by way of future capitalisation issue. In addition, the Company had retained profits of approximately RMB207.6 million, as determined in accordance with the PRC GAAP and being the lesser amount of the retained profits determined in accordance with the PRC GAAP and IFRS, available for distribution as dividend. 41. CONTINGENT LIABILITIES Pursuant to the Restructuring, the following legal matters and litigation set out in items (a) to (c) below were transferred to or assumed by the Company upon its incorporation. As of 31 December 2004, the Group had the following contingent liabilities: (a) Pursuant to the agreement for the Restructuring entered into by the Company with CNAHC and CNACG, except for liabilities constituting or arising out of or relating to business undertaken by the Company after the Restructuring, no other liabilities were assumed by the Company and the Company is not liable, whether severally, or jointly and severally, for debts and obligations incurred prior to the Restructuring by CNAHC and CNACG. The Company has also undertaken to indemnify CNAHC and CNACG in respect of any damage suffered or incurred by CNAHC and CNACG as a result of any breach by the Company of any provision of the Restructuring Agreement. (b) On 15 April 2002, Flight CA129 crashed on approach to Gimhae International Airport, South Korea. There were 129 fatalities including 121 passengers and 8 crew members aboard the crashed aircraft. An investigation was conducted by the Chinese and the Korean civil aviation authorities, but the cause of the accident has yet to be released at the date of these financial statements. Certain injured passengers and families of the deceased passengers have commenced proceedings in Korean courts seeking damages against Air China International Corporation. The Group cannot predict the timing of the courts' judgements or the possible outcome of the lawsuits nor any possible appeal actions. Up to 31 December 2004, the Company, Air China International Corporation and the Company's insurer had paid an aggregate amount of RMB190 million in respect of passenger liability and other auxiliary costs. Included in the RMB190 million is an amount of RMB173 million borne by the Company's insurer. As part of the Restructuring, CNAHC has agreed to indemnify the Group for any liabilities relating to the crash of Flight CA129, excluding the compensation already paid up to 30 September 2004 (being the date of incorporation of the Company). The Directors of the Company believe that there will not be any material adverse impact to the Group's financial position. (c) Air China International Corporation is one of the defendants in a civil litigation in the High Court of Hong Kong (Action No. 515 of 2001) (the ''Litigation''). United Aero-Supplies System of China Limited (''UASSC'') had entered into an agreement with the defendants for the exclusive purchase of aviation equipment consigned to UASSC for sale and, that as the defendants failed to perform the agreement, UASSC has the right to compensation. Since UASSC is in the course of its winding up proceedings, all the rights and benefits of UASSC in connection with the claim have been transferred to New Link Consultants Limited (''NLC''). Air China International Corporation, as one of the defendants to the Litigation, was claimed by NLC for compensation of HK$60,000,000 (equivalent to approximately RMB63,600,000) for failing to perform the above agreement. Air China International Corporation has filed an objection in respect of the jurisdiction of the court, and has requested the court to transfer the case to Mainland China for trial. Air China International Corporation received an order in respect of this application on 3 May 2004. The judge granted the application and ordered that the action against Air China International Corporation be dismissed. Subsequent to this order, NLC has filed an appeal. The date of hearing for the appeal has been fixed on 28 July 2005. After considering the aforesaid order granted by the judge and consulting the legal counsel, the Directors of the Company consider that Air China International Corporation has a reasonable chance of success in its defence to the claim. Accordingly, the Directors of the Company consider that a provision for such claim and/or the associated legal costs is not required. (d) The Group and the Company have issued guarantees to banks in respect of the bank loans granted to the following parties: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Joint ventures --- 18,750 --- Associates 214,002 380,521 26,021 Related party --- 7,500 --- Third parties --- 149,170 --- 214,002 555,941 26,021 (e) In addition to the counter-guarantees provided by CNAF in respect of the Group's finance lease obligations and bank loans of RMB4,737 million (2003: RMB5,413 million) as disclosed in note 46 to these financial statements, the Group's associates have issued guarantees to banks in respect of the bank loans granted to the following parties: Group 2004 2003 RMB'000 RMB'000 Related parties 37,608 40,537 Third parties 160,778 20,722 198,386 61,259 42. COMMITMENTS (a) Capital commitments The Group had the following amounts of contractual commitments for the acquisition and construction of plant, property and equipment: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Contracted, but not provided for: Aircraft and flight equipment 12,738,066 8,315,908 11,260,840 Buildings 544,855 348,400 211,607 Others 8,426 40,082 8,426 13,291,347 8,704,390 11,480,873 Authorised, but not contracted for: Buildings 2,528,544 2,762,531 2,528,544 Others --- 200,062 --- 2,528,544 2,962,593 2,528,544 Total capital commitments 15,819,891 11,666,983 14,009,417 (b) Investment commitment As at 31 December 2004, the Company committed to make a capital contribution of approximately RMB422 million (US$51 million) (2003: Nil) to its joint venture. (c) Operating lease commitments The Group leases certain of its office premises, aircraft and related equipment under operating lease arrangements. Leases for these assets are negotiated for terms ranging from 1 to 20 years. The Group and the Company had the following future minimum lease payments under non-cancellable operating leases: Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 Within one year 1,140,228 908,204 748,202 In the second to fifth years, inclusive 3,215,879 2,626,283 2,111,282 Over five years 1,000,319 1,317,788 566,585 5,356,426 4,852,275 3,426,069 43. FINANCIAL INSTRUMENTS Financial assets of the Group and the Company mainly include cash and cash equivalents, pledged assets, trade receivables, other investments, deposits and other receivables. Financial liabilities of the Group and the Company mainly include bank and other loans, obligations under finance leases, trade payables, other payables, bills payable and air traffic liabilities. The carrying amounts of the Group's and the Company's financial instruments approximated their fair value as at the balance sheet date. Fair value estimates are made at a specific point in time and based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 44. CONCENTRATION OF RISK (a) Financial risk management objectives and policies The Group operates globally and generates revenues in various currencies. The Group's airline operations are exposed to business risk, liquidity risk, jet fuel price risk, foreign currency risk, interest rate risk and credit risk. The Group's overall risk management approach is to moderate the effects of such volatility on its financial performance. Financial risk management policies are periodically reviewed and approved by the Board of Directors. (b) Business risk The operations of the air transportation industry are substantially influenced by global political and economic development. Factors such as accidents and wars may have a material impact on the Group's operations or the industry as a whole. In addition, the Group primarily conducts its principal operations in the PRC and accordingly is subject to special consideration and significant risks not typically associated with companies in the United States of America and Western Europe. These include risks associated with, among other things, the political, economic and legal environment, competition and influence of the CAAC in the Chinese civil aviation industry. (c) Liquidity risk The Group's net current liabilities amounted to approximately RMB6,860 million as at 31 December 2004 (2003: RMB12,384 million). The Group recorded a net cash inflow from operating activities of approximately RMB6,151 million for the year ended 31 December 2004 (2003: RMB5,425 million). For the same period, the Group had a net cash outflow from investing activities of approximately RMB4,974 million (2003: RMB4,360 million). The Group also recorded a net cash inflow from financing activities of approximately RMB5,620 million for the year ended 31 December 2004 and a net cash outflow from financing activities of approximately RMB2,207 million for the year ended 31 December 2003. The Group has recorded an increase in cash and cash equivalents of approximately RMB6,824 million for the year ended 31 December 2004 but a decrease in cash and cash equivalents of approximately RMB1,057 million for the year ended 31 December 2003. With regards to 2005 and thereafter, the liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they fall due, and on its ability to obtain external financing to meet its committed future capital expenditures. With regards to its future capital commitments and other financing requirements, the Company has already obtained several banking facilities with several PRC banks of up to an amount of RMB71,700 million as at 31 December 2004, of which an amount of approximately RMB40,183 million was utilised. The Directors of the Company have carried out a detailed review of the cash flow forecast of the Group for the year ending 31 December 2005. Based on such forecast, the Directors have determined that adequate liquidity exists to finance the working capital and capital expenditure requirements of the Group during 2005. In preparing the cash flow forecast, the Directors have considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned loans financing which may impact the operations of the Group prior to the end of 2005. The Directors are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be realised. (d) Jet fuel price risk The Group's strategy for managing the risk on jet fuel price aims to provide the Group with protection against sudden and significant increases in prices. In meeting these objectives, the Group allows for the judicious use of approved derivative instruments such as swaps and collars with approved counter-parties and within approved limits. Moreover, counter-party credit risk is generally restricted to any gains on changes in fair value from time to time, and not the principal amount of the instrument. Therefore, the possibility of material loss arising in the event of non-performance by a counter-party is considered to be unlikely. The fair values of derivative instruments of the Group and the Company at the balance sheet date are as follows: Group and Company Group 2004 2004 2003 2003 Assets Liabilities Assets Liabilities RMB'000 RMB'000 RMB'000 RMB'000 Swaps and collars expiring: Within 6 months --- --- 8,000 (2,400) Over 6 months to 21 months --- --- 26,000 (3,600) --- --- 34,000 (6,000) Fair values of derivative instruments, denominated in United States dollars, are obtained from quoted market prices, dealer price quotations, discounted cash flow models and option pricing models, which consider current market and contractual prices for the underlying instruments, as well as time value of money, yield curve and volatility of the underlying instruments. (e) Foreign currency risk The Group's finance lease obligations as well as certain bank and other loans are denominated in United States dollars and Japanese yen, and certain expenses of the Group are denominated in currencies other than RMB. The Group generates foreign currency revenues from ticket sales made in overseas offices and would normally generate sufficient foreign currencies after payment of foreign currency expenses, to meet its foreign currency liabilities repayable within one year. RMB against United States dollars and Hong Kong dollars have been comparatively stable in the past. However, RMB against Japanese yen had experienced a significant level of fluctuation over 2004 which is the major reason for the significant exchange difference recognised by the Group for 2004. (f) Interest rate risk The Group's earnings are also affected by changes in interest rates due to the impact of such changes on interest income and expense from short-term deposits and other interest-bearing financial assets and liabilities. A significant portion of the Group's interest-bearing financial liabilities with maturities above one year have predominately fixed rates of interest and are denominated in United States dollars and Japanese yen. The Group's short-term deposits and other interest-bearing financial assets and liabilities are predominately denominated in RMB, United States dollars and Hong Kong dollars. (g) Credit risk The Group's cash and cash equivalents are deposited with PRC banks, overseas banks and an associate. The Group has policies in place to limit the exposure to any one financial institution. A significant portion of the Group's air tickets are sold by agents participating in the Billing and Settlements Plan (''BSP''), a clearing system between airlines and sales agents organised by the International Air Transportation Association. The balance due from BSP agents amounted to approximately RMB531 million as at 31 December 2004 (2003: RMB342 million). Except for the above, the Group has no significant concentration of credit risk, with exposure spread over a number of counter-parties. 45. CONSOLIDATED CASH FLOW STATEMENT (a) Analysis of balances of cash and cash equivalents is as follows: Group 2004 2003 RMB'000 RMB'000 Cash and cash equivalents for balance sheet (note 26) 9,734,074 2,620,221 Less: Non-pledged time deposits with original maturity of more than three months when acquired (320,850) (30,826) Cash and cash equivalents for consolidated cash flow statement 9,413,224 2,589,395 (b) Establishment of a joint venture The establishment of a joint venture has been shown in the consolidated cash flow statement as a single item. The cash flow effect can be analysed as follows: 2004 RMB'000 Cash and bank balances 561,509 Trade receivables 16,844 Other receivables 2,778 Property, plant and equipment (note 16) 565,840 Inventories 352 Trade payables (40,018) Other payables and accruals (357,517) Air traffic liabilities (2,010) Net assets attributable to the joint venture partners 747,778 Dilution gain on investment (note 9) 330,222 Cash contribution from the joint venture partners 1,078,000 Less: Cash attributable to the joint venture partners (561,509) Cash flow on establishment of a joint venture, 516,491 net of cash attributable to the joint venture partners (c) Major non-cash transactions (i) During the year, the Group received an aircraft injected by the PRC government amounting to RMB304,787,000 (note 36). This amount has been recorded in property, plant and equipment. (ii) Upon incorporation of the Company, CNAHC effected the transfer of certain land use rights in an aggregate amount of approximately RMB885,626,000 to the Company. 46. RELATED PARTY TRANSACTIONS The Group is part of a larger group of companies under CNAHC and has extensive transactions and relationships with members of CNAHC. As such, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. Related parties refer to corporations in which CNAHC is a shareholder and is able to exercise control or significant influence. The transactions were made at prices and terms mutually agreed between the parties. In addition to the Restructuring, further details of which are set out in note 1 to these financial statements, and transactions and balances detailed elsewhere in these financial statements, the Group had the following significant recurring transactions carried out in the ordinary course of business between the Group and (i) CNAHC, its subsidiaries (other than the Group), joint ventures and associates (collectively known as ''CNAHC Group''); (ii) its joint ventures; and (iii) its associates: Group 2004 2003 RMB'000 RMB'000 A. Included in air traffic revenues Sale of air tickets CNAHC Group 17,227 23,477 Associates 2,154 1,363 19,381 24,840 Sale of cargo space CNAHC Group 213,836 282,895 B. Included in other operating revenues Aircraft and related equipment lease income CNAHC Group 1,912 9,983 Aircraft engineering income Associates 9,876 14,511 Ground services income Joint ventures 942 --- Associates 19,849 15,281 20,791 15,281 Bellyhold income Joint ventures 1,384,457 --- Others CNAHC Group 5,734 1,100 Joint ventures 14,424 100 Associates 11,484 622 31,642 1,822 C. Included in finance costs Interest income Associates 3,409 8,736 Interest expense Associates 21,843 21,268 Group 2004 2003 RMB'000 RMB'000 D. Included in operating expenses Airport ground services, take-off, landing and depot expenses CNAHC Group 97,183 76,802 Associates 210,103 165,551 307,286 242,353 Air catering charges CNAHC Group 43,241 42,401 Joint ventures 85,874 58,913 Associates 5,123 --- 134,238 101,314 Repair and maintenance costs Joint ventures 472,378 324,470 Associates 107,508 45,095 579,886 369,565 Sale commission expenses CNAHC Group 25,913 16,357 Management fees CNAHC Group 44,080 36,493 Others CNAHC Group 71,729 47,846 Associates 9,050 --- 80,779 47,846 Group Company 2004 2003 2004 RMB'000 RMB'000 RMB'000 E. Deposits, loans and bills payable Deposits placed with an associate 566,985 1,457,103 519,655 Loans from an associate 481,132 297,484 364,400 Bills payable to an associate --- 692,372 --- (a) In addition to the above, on 18 October 1997, CNAC entered into a licence agreement with CNAC (PRC) pursuant to which CNAC (PRC) had agreed to grant a licence to CNAC, free of royalty, for the right to use certain trademarks in Hong Kong, the Taiwan region and Macau so long as CNAC is a subsidiary of CNACG. No royalty charge was levied in respect for the use of these trademarks during each of the two years ended 31 December 2004. On 25 August 2004, CNAC (PRC) entered into two assignment agreements with CNACG pursuant to which CNAC (PRC) has agreed to assign, free of royalty, the above-mentioned trademarks to CNACG for use in Hong Kong and Macau, respectively. On 25 August 2004, CNACG entered into two licence agreements with CNAC pursuant to which CNACG has agreed to grant licences to CNAC, free of royalty, for the rights to use those trademarks in Hong Kong and Macau, respectively, so long as CNAC is a direct or indirect subsidiary of CNAHC. These licence agreements supersede the licence agreement entered into between CNAC (PRC) and CNAC on 18 October 1997. (b) Pursuant to certain of the Company's aircraft leasing arrangements and bank loan arrangements, the overseas lessors and lenders require guarantees to be given by some major PRC state-owned banks. In giving such guarantees, the PRC state-owned banks in turn require CNAHC and CNAF to provide counter-guarantees in favour of the banks. As at the balance sheet date, the amounts of such counter-guarantees provided by CNAHC and CNAF were as follows: Group 2004 2003 RMB'000 RMB'000 CNAHC: Finance leases (note 33) 921,000 5,355,000 Operating leases --- 3,891,000 Bank loans (note 34) 1,455,000 3,198,000 2,376,000 12,444,000 CNAF: Finance leases (note 33) 3,976,000 4,506,000 Bank loans (note 34) 761,000 907,000 4,737,000* 5,413,000 7,113,000 17,857,000 * Subsequent to 31 December 2004, these counter-guarantees provided by CNAF amounting to RMB4,737 million in favour of the banks have been fully released. Certain of the Group's bank loans from the PRC banks are guaranteed by Air China International Corporation and other related parties, further details of which are set out in note 34 to these financial statements. (c) In connection with the Restructuring, the Company entered into several agreements with CNAHC which govern the use of trademarks granted by the Company to CNAHC, the provision of financial services by CNAF, the provision of construction project management services by China National Aviation Construction and Development Company, the subcontracting of charter-flight services to CNAHC, the leasing of properties from and to CNAHC, the provision of air ticketing and cargo services, media and advertising services arrangement to China National Aviation Media and Advertising Co., Ltd., the tourism services co-operation agreement with CNAHC, the comprehensive services agreement with CNAHC, and the provision of maintenance and other ground services by China Aircraft Services Limited. (d) On 19 August 2004, Fly Top Limited, a wholly-owned subsidiary of CNAC, entered into the following acquisition agreements: (i) a sale and purchase agreement with CNACG in relation to the acquisition of approximately 16% of the issued share capital of LSGHK, a company incorporated in Hong Kong with limited liability (''CNACG Agreement''); and (ii) a sale and purchase agreement with Hong Kong International Air Catering Limited (''HKIAC''), a company incorporated in Hong Kong with limited liability and in which Air China International Corporation has a 25% equity interest, in relation to the acquisition of approximately 4.2% of the issued share capital of LSGHK (''HKIAC Agreement''). The total consideration of the above acquisitions is approximately RMB122 million. Immediately after the completion of the CNACG Agreement and HKIAC Agreement, the Group's effective shareholding interests in LSGHK is approximately 14%. (e) All pension payments relating to the Supplementary Pension Benefits of approximately RMB39 million for the year ended 31 December 2004 (2003: RMB54 million) were borne by CNAHC (note 11). The Directors of the Company are of the opinion that the above transactions with related parties were conducted in the usual course of business. 47. EVENTS AFTER THE BALANCE SHEET DATE (a) On 11 January 2005, upon the exercise of the over-allotment option, the Company issued to the public by way of placement of 420,852,000 H Shares, consisting of 382,592,727 new shares and 29,749,686 State legal person shares and 8,509,587 non-H Foreign Shares, with a par value of RMB1.00 each at HK2.98 (equivalent to approximately RMB3.17072) per share. After deducting net proceeds of approximately RMB117 million received from the sale of these State legal person shares and non-H Foreign Shares, the amount of which should be remitted to the Social Security Fund, and share issue expenses of approximately RMB47 million (before deducting share issue expenses of approximately RMB4 million borne by the Social Security Fund as mentioned above), the Company raised net proceeds of approximately RMB1,170 million, of which paid-up share capital amounted to approximately RMB383 million and capital reserve amounted to approximately RMB787 million. The above H shares rank pari passu, in all material respects, with the State legal person shares and non-H Foreign Shares of the Company. (b) On 26 January 2005, the Company and AIE entered into an agreement with Airbus S.A.S. (''Airbus''), pursuant to which the Company has agreed to purchase 20 A330-200 aircraft (the ''Airbus Aircraft'') from Airbus for an aggregate consideration of approximately US$2.86 billion (equivalent to approximately RMB23.68 billion). The aggregate consideration for the acquisition of Airbus Aircraft is payable in cash by instalments. The Airbus Aircraft are scheduled to be delivered in stages to the Company from mid-2006 to end of 2008. Pursuant to the relevant Chinese regulations, the acquisition of Airbus Aircraft is conditional upon the PRC government's approval. As of the date of approval of these financial statements, the said government approval has not been obtained by the Company. (c) On 28 January 2005, the Company, other contracting Chinese airlines, China Aviation Supplies Import and Export Group Corporation (''CASGC'') and Boeing Company entered into an agreement (the ''Framework Agreement''), pursuant to which CASGC agreed to purchase (as an agent of the Company and other contracting Chinese airlines) 60 Boeing 7E7 aircraft. The aggregate catalog price of the aircraft is approximately US$7.3 billion (equivalent to approximately RMB60.42 billion). Pursuant to the Framework Agreement, the Company expects to enter into a specific purchase agreement with CASGC and Boeing Company in respect of the purchase of 15 Boeing 7E7 aircraft (the ''Boeing Aircraft''). The aggregate consideration for the acquisition of the Boeing Aircraft is expected to be lower than the catalog price. The delivery of the Boeing Aircraft is expected to take place in stages from mid-2008. The specific purchase agreement has not been finalised as at the date of approval of these financial statements. 48. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved and authorised for issue by the Board of Directors on 12 April 2005. III. INDEBTEDNESS The table below sets forth our total outstanding indebtedness as at 30 June 2005. As at 30 June 2005 Repayable Within One Year Repayable After One Year Total Notes RMB RMB RMB (in millions) (in millions) (in millions) Bank and other loans (1) 9,220 11,441 20,661 Finance lease obligations (2) 2,048 9,180 11,228 Bills payable 818 --- 818 Total 12,086 20,621 32,707 As at 30 June 2005 Total Indebtedness RMB (in millions) Indebtedness denominated in U.S. dollars (US$2,321 million) 19,210 Indebtedness denominated in Japanese yen 3,595 (Japanese yen 47,834 million) Indebtedness denominated in HK dollars (HK$245 million) 260 Indebtedness denominated in Renminbi 9,642 Total 32,707 Notes: (1) The Group's bank and other loans of approximately RMB12,469 million were secured by mortgages over certain of the Group's assets (consisting of aircraft and bank deposits) in the amount of approximately RMB16,241 million as at 30 June 2005. Certain commercial banks have provided guarantees in the amount of approximately RMB7,626 million to which certain major PRC state-owned banks have provided counter-guarantees in the amount of RMB5,486 million. (2) The Group's finance lease obligations of approximately RMB11,228 million were secured by certain of the Group's aircraft in the amount of approximately RMB10,923 million as at 30 June 2005. Certain commercial banks have provided guarantees in the amount of approximately RMB13,596 million to which certain major PRC state-owned banks have provided counter-guarantees of RMB2,858 million. As at 30 June 2005, certain of the Group's bank deposits in the amount of approximately RMB82 million were pledged against the Group's operating leases and financial derivatives. Contingent liabilities Pursuant to the restructuring of China National Aviation Holding Company (''CNAHC'') for the listing of the Company's H shares on the Hong Kong Stock Exchange and the London Stock Exchange (the ''Restructuring''), the legal matter and litigation set out in items (i) and (ii) below were transferred to or assumed by the Company upon its incorporation. As at 30 June 2005, the Group had the following contingent liabilities: (i) Pursuant to the agreement for the Restructuring (the ''Restructuring Agreement'') entered into by the Company with CNAHC and China National Aviation Corporation (Group) Limited (''CNACG''), except for liabilities constituting or arising out of or relating to business undertaken by the Company after the Restructuring, no other liabilities were assumed by the Company and the Company is not liable, whether severally, or jointly and severally, for debts and obligations incurred prior to the Restructuring by CNAHC and CNACG. The Company has also undertaken to indemnify CNAHC and CNACG in respect of any damage suffered or incurred by CNAHC and CNACG as a result of any breach by the Company of any provision of the Restructuring Agreement. (ii) On 15 April 2002, Flight CA129 crashed on approach to Gimhae International Airport, South Korea. There were 129 fatalities among 166 passengers and crew members aboard the Boeing 767 aircraft. An investigation was conducted by the Chinese and the Korean civil aviation authorities, but the cause of the accident has yet to be released at the date of this circular. Certain injured passengers and families of the deceased passengers have commenced proceedings in Korean courts seeking damages against Air China International Corporation. The Group cannot predict the timing of the courts' judgements or the possible outcome of the lawsuits nor any possible appeal actions. Up to 30 June 2005, the Company, Air China International Corporation and the Company's insurer had paid an aggregate amount of RMB190 million in respect of passenger liability and other auxiliary costs. Included in the RMB190 million is an amount of RMB173 million borne by the Company's insurer. As part of the Restructuring, CNAHC has agreed to indemnify the Group for any liabilities relating to the crash of Flight CA129, excluding the compensation already paid up to 30 September 2004 (being the date of incorporation of the Company). The directors of the Company believe that there will not be any material adverse impact to the Group's financial position. (iii) The Company is one of the defendants in a lawsuit pending in the San Francisco Superior Court filed by Environmental World Watch Inc. (''EWW''). The complaint alleges that the Company and certain other commercial airlines operating in California have violated the California Safe Drinking Water and Toxic Enforcement Act (Health and Safety Code Section 25249.5). EWW alleges that the Company and these other airlines caused environmental exposure and occupational exposure from aircraft emissions without providing warnings required by the statue. Up to the date of this circular, the Company has not been served with the complaint by EWW and, therefore, has not been required to appear in the court to defend against the allegation. The status of the proceedings is still preliminary and, therefore, the directors are of the view that it is not possible to estimate the eventual outcome of the claim with reasonable certainty at this stage. The directors are of the opinion that, based on advice from the Company's lawyers in the United States, even if the Company is served with the complaint and is therefore required to appear in the court, it would appear to have valid defence against this litigation and accordingly, the directors consider that no provision for this complaint is needed. (iv) The Group has issued guarantees to banks in respect of the bank loans granted to the following parties: As at 30 June 2005 RMB (in millions) Joint venture 115 Associates 179 Total 294 Except as disclosed above, as at 30 June 2005, the Group did not have any outstanding mortgages, charges, pledges, debentures, loan capital, bank loans and overdrafts, debt securities or other similar indebtedness, finance leases or hire purchase commitments, acceptance liabilities or acceptance credits, any guarantees or other material contingent liabilities. Except for as disclosed above, the directors have confirmed that there has been no material change in the indebtedness and guarantees of the Group since 30 June 2005. 1. RESPONSIBILITY STATEMENT (16)This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading. 2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS (17)As at the Latest Practicable Date, Mr. Zhang Xianlin, a Supervisor of the Company, had interests in 33,126,000 shares, which represents approximately 1% of the share capital of CNAC. Save as disclosed above, as at the Latest Practicable Date, none of the Directors, Supervisors or chief executive of the Company has interests or short positions in the shares, underlying shares and/or debentures (as the case may be) of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were notified to the Company and the Stock Exchange pursuant to SFO (including interests or short positions which he is taken or deemed to have under such provisions of the SFO), or recorded in the register maintained by the Company pursuant to Section 352 of the SFO, or which were notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of the Listed Companies. (18)None of the Directors or Supervisors of the Company has any direct or indirect interest in any assets which have been, since 31 December 2004 (the date to which the latest published audited financial statements of the Group were made up), acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to, to any member of the Group. (19)None of the Directors or Supervisors of the Company is materially interested in any contract or arrangement subsisting at the date of this circular and which is significant in relation to the business of the Group. (20)None of the Directors or Supervisors of the Company and their respective associates (as defined in the Listing Rules) has any competing interests which would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them were a controlling shareholder of the Company. 3. SUBSTANTIAL SHAREHOLDERS (21)As at the Latest Practicable Date, to the knowledge of the Directors, Supervisors and chief executive of the Company, the interests and short positions of the following persons (other than a Director, Supervisor or chief executive of the Company) who have an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company pursuant to the SFO, or who are, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group are as follows: (a) substantial interests in the Company Name Type of Type and Percentage of Percentage of the Percentage of the Percentage of Short interests number of the total total issued total issued non-H the total position shares of the issued shares domestic shares foreign shares of issued H shares Company of the Company of the Company the Company of the Company concerned CNAHC Beneficial 4,826,195,989 51.16% 100% --- --- --- owner domestic shares CNAHC(1) Attributable 1,380,482,920 14.64% --- 100% --- --- interests non-H foreign shares China National Beneficial 1,380,482,920 14.64% --- 100% --- --- Aviation owner non-H foreign Corporation shares (Group) Limited Cathay Pacific Beneficial 943,321,091 10.00% --- --- 29.24% --- owner H shares Swire Pacific Attributable 943,321,091 10.00% --- --- 29.24% --- Limited(2) interests H shares John Swire & Attributable 943,321,091 10.00% --- --- 29.24% --- Sons (H.K.) interests H shares Limited(2) John Swire & Attributable 943,321,091 10.00% --- --- 29.24% --- Sons Limited interests H shares (2) Wellington Investment 153,112,100 1.62% --- --- 4.75% --- Management manager H shares Company, LLP (3) Temasek Attributable 400,450,000 4.25% --- --- 12.41% --- Holdings interests H shares (Private) Limited(4) Note: Based on the information available to the Directors, chief executive and Supervisors of the Company (including such information as was available on the website of the Stock Exchange) and so far as the Directors, chief executive and Supervisors are aware, as at the Latest Practicable Date: 1. By virtue of CNAHC's 100% interest in China National Aviation Corporation (Group) Limited, CNAHC is deemed to be interested in the 1,380,482,920 non-H foreign shares of the Company directly held by China National Aviation Corporation (Group) Limited. 2. By virtue of John Swire & Sons Limited's 100% interest in John Swire & Sons (H.K.) Limited, John Swire & Son's (H.K.) Limited's 51.91% interest in Swire Pacific Limited, John Swire & Sons Limited's 52.86% interest in Swire Pacific Limited and Swire Pacific Limited's 46.48% interest in Cathy Pacific, each of John Swire & Son Limited, John Swire & Sons (H.K.) Limited and Swire Pacific Limited are deemed to be interested in the 943,321,091 H shares of the Company directly held by Cathy Pacific. 3. Pursuant to the last notification filed by Wellington Management Company, LLP dated 20 December 2005, it had an interest of 5.45% of the total issued H shares of the Company. Given subsequent issuance of H shares pursuant to the over-allotment option in January 2005, the Company believes the interests of Wellington Management Company, LLP in the total issued shares and in the total issued H shares of the Company have been reduced to 1.62% and 4.75%, respectively, as at 30 June 2005. 4. Temasek Holdings (Private) Limited, through its controlled entities, had an attributable interest in 400,450,000 H shares of the Company , out of which the interest in 292,500,000 H shares (representing approximately 9.07% of the total issued H shares) was held directly by Aranda Investment (Mauritius) Pte Ltd. and the interest in the remaining 107,950,000 H shares was held directly by Dahlia Investments Ptd Ltd, FPL Alpha Investment Pte Ltd and Fullerton (Private) Limited. (b) substantial interests in CNAC Capacity No. of shares Percentage of the issued share capital CNAHC(1) Attributable interest 2,264,628,000 68.36 The Company(2) Beneficial owner 2,264,628,000 68.36 Best Strikes Limited Beneficial owner 187,656,000 5.66 On Ling Investments Limited(3) Attributable interest 322,856,000 9.75 Novel Investments Holdings Limited(3) Attributable interest 322,856,000 9.75 Novel Enterprises (BVI) Limited(3) Attributable interest 322,856,000 9.75 Novel Credit Limited(3) Attributable interest 322,856,000 9.75 Novel Holdings (BVI) Limited(3) Attributable interest 322,856,000 9.75 Westleigh Limited(3) Attributable interest 322,856,000 9.75 Notes: 1. CNAHC owns approximately 51.16 per cent of the total issued share capital of the Company and the entire issued share capital of CNACG, a company incorporated in Hong Kong, which in turn owns approximately 14.64 per cent of the total issued share capital of the Company. Accordingly its interests in CNAC duplicate with those interest of the Company. 2. CNAGC, the Company's former immediate controlling shareholder, transferred its approximately 69 per cent shareholding interest in CNAC to the Company in September 2004 by way of a capital contribution in return for the Company's non-H foreign shares, as such the Company becomes the immediate controlling shareholder of CNAC. Its interest in CNAC duplicates with those interests of CNAHC. 3. 5.6% of the interest held by each of these companies in CNAC duplicates with Best Strikes Limited's interest in CNAC. The interests of these companies in CNAC also duplicate each other. (c) substantial interests in other members of the Group Member of the Group Name Approximate % of share capital Air Macau CNAC 51% Air Macau Sociedale de Turismo e Diversaes de Macau 14% Air Macau Servico, Administracao e Participacoes, Lda. 20% Ameco Deutsche Lufthansa AG 40% Air China Cargo Capital Airport Holding Company 24% Air China Cargo CITIC Pacific Limited 25% Save as disclosed above, as at the Latest Practicable Date, to the knowledge of the Directors, chief executive and Supervisors of the Company, no other person (other than a Director, Supervisor or chief executive of the Company) had an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company pursuant to the SFO, or otherwise was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Group. 4. MATERIAL CONTRACTS The Group has entered into the following material contracts within the two years immediately preceding the date of this circular (Capitalised terms used in this section has the same meaning as those defined in the Company's prospectus dated 3 December 2004): (a) the Restructuring Agreement dated 20 November 2004 entered into between the Company, CNAHC and CNACG regarding the Restructuring referred to in the section headed ''Business --- Connected Transactions'' of the Company's prospectus dated 3 December 2004; (b) the Non-competition Agreement dated 20 November 2004 entered into between the Company and CNAHC regarding the arrangement of non-competition as referred to in the section headed ''Business --- Connected Transactions'' of the Company's prospectus dated 3 December 2004; (c) the Trademark Licence Agreement dated 1 November 2004 entered into between the Company and CNAHC regarding the licensing of the trademark bearing ''Air China'' logo and other trademarks referred to in the section headed ''Business --- Connected Transactions'' of the Company's prospectus dated 3 December 2004; (d) the Comprehensive Services Agreement dated 1 November 2004 entered into between the Company and CNAHC regarding the general principle for the mutual provision of certain ancillary services to each other referred to in the section headed ''Business --- Connected Transactions'' of the Company's prospectus dated 3 December 2004; (e) the Financial Services Agreement dated 1 November 2004 entered into between the Company and CNAF regarding the general principle for the provision of a range of financial services to the Company by CNAF referred to in the section headed ''Business --- Connected Transactions'' of the Company's prospectus dated 3 December 2004. (As at 30 September 2004, there were 3 loans denominated in RMB in the total outstanding principal amount of RMB210,000,000 and 2 loans denominated in USD in the total outstanding principal amount of USD19,550,000 which have been granted by CNAF to the Company and which are outstanding, details of which are set out below: Outstanding principal amount Annual interest rate Term RMB100,000,000 4.536% 30 August 2004 to 28 February 2005 RMB60,000,000 4.536% 30 August 2004 to 28 February 2005 RMB50,000,000 4.536% 17 August 2004 to 16 February 2005 US$10,600,000 LIBOR+0.75% 12 July 2004 to 7 January 2005 US$8,950,000 6 month LIBOR+0.4% 15 May 2002 to 14 May 2009 All of the above loans are unsecured except for the USD8,950,000 loan which has been obtained by the Company to finance the terminal payment under the finance lease of a Boeing aircraft and security over the aircraft was given to CNAF pursuant to the loan agreement.) (f) the Sale and Purchase Agreement dated 21 April 2004 and supplemented on 26 April 2004 and 12 November 2004, respectively, between Fly Top Limited, a wholly owned subsidiary of CNAC and Air China International Corporation regarding CNAC's acquisition through Fly Top Limited of 60% equity interest in Beijing Air Catering Co., Ltd. (''BACL''), a company incorporated in the PRC, pursuant to which, among other things, (i) the total consideration payable by Fly Top Limited is RMB294 million; (ii) Air China International Corporation undertakes to complete the formal procedures for obtaining the land use rights with respect to the authorised operation of the land currently used by BACL for its production facilities within 6 months of the date of the Sale and Purchase Agreement and to lease such land to BACL for a term of up to 30 April 2023 at a rent to be calculated on the basis of the original cost for obtaining such land use rights once the land use rights certificate is obtained; (iii) Air China International Corporation gave certain representations and warranties including that it is the legal owner of the 60% equity interest in BACL and the subject matter of the transfer is not subject to any mortgage, options, pre-emptive rights or other third party interests and agreed to indemnify Fly Top Limited against any losses arising from breach of such representations and warranties; and (iv) the Sale and Purchase Agreement shall be effective when approved by the Ministry of Commerce. (g) the Sale and Purchase Agreement dated 21 April 2004 and supplemented on 26 April 2004 and 12 November 2004, respectively, between Fly Top Limited and Air China International Corporation regarding CNAC's acquisition through Fly Top Limited of 60% equity interest in Southwest Air Catering Company Limited (''SWACL''), a company incorporated in the PRC, pursuant to which, among other things, (i) the total consideration payable by Fly Top Limited is RMB67 million; (ii) Air China International Corporation agrees to complete the formal procedures for transferring the land use rights of certain land and the building ownership rights of certain production facilities, which had been agreed to be injected by Air China International Corporation into SWACL as part of its initial capital contribution when SWACL was established, from itself to SWACL within six months of the date of the Sale and Purchase Agreement; (iii) Air China International Corporation gave certain representations and warranties including that it is the legal owner of the 60% equity interest in SWACL and the subject matter of the transfer is not subject to any mortgage, options, pre-emptive rights or other third party interests and agreed to indemnify Fly Top Limited against any losses arising from breach of such representations and warranties; and (iv) the Sale and Purchase Agreement shall be effective when approved by the Ministry of Commerce. (h) the Sale and Purchase Agreement dated 19 August 2004 between Fly Top Limited and CNACG, regarding CNAC's acquisition, through Fly Top Limited, of approximately 16% of the issued share capital of LSG Lufthansa Service Hong Kong Limited (''LSGLS''), a company incorporated in Hong Kong and principally engaged in the provision of inflight catering services and laundry services. The consideration for the acquisition is HK$89 million. Fly Top Limited shall not be obliged to complete this agreement unless the sale and purchase of the equity interest in each of (i) Beijing Air Catering Co., Ltd. as referred to in paragraph (f) above and (ii) Southwest Air Catering Limited as referred to in paragraph (g) above are completed simultaneously. Upon completion of the agreement, Fly Top Limited would execute a deed of adherence and supplement (the ''Deed of Adherence and Supplement'') with LSG Catering Hong Kong Limited, Dragonair, Hong Kong International Air Catering Limited and LSGLS pursuant to which Fly Top Limited became bound by the terms of a shareholders' agreement governing the relationship between the shareholders of LSGLS and affairs of their dealing with LSGLS. The agreement is governed by Hong Kong law. (i) the Sale and Purchase Agreement dated 19 August 2004 between Fly Top Limited and Hong Kong International Air Catering Limited, a company incorporated in Hong Kong, regarding CNAC's acquisition through Fly Top Limited of approximately 4.2% of the issued share capital of LSGLS; the consideration for the acquisition is HK$24.5 million. Fly Top Limited shall not be obliged to complete this agreement unless the sale and purchase of the equity interest in each of (i) Beijing Air Catering Co., Ltd. as referred to in paragraph (f) above, (ii) SWACL as referred to in paragraph (g) above and (iii) LSGLS as referred to in paragraph (h) above have completed or are completed simultaneously. Upon completion of the agreement, Fly Top Limited would execute the Deed of Adherence and Supplement referred to in paragraph (h) above. The agreement is governed by Hong Kong law; (j) the 2004 Amendment to the Joint Venture Contract for Ameco between the Company and Lufthansa dated 19 July 2004, which provides, among other things, that (1) the term of Ameco shall be extended for further 25 years since the date of the issuance of the new business license; (2) the registered capital shall be increased by US$100 million (the instalment subscription schedule is set out in paragraph 2B of this Appendix; (3) the Company undertakes, upon Ameco's actual need of financing, to arrange total loan facility of approximately RMB282.7 million and Lufthansa undertakes, upon Ameco's actual need of financing, to arrange total loan facility of approximately US$69.3 million and; (4) restrictions shall apply on transfer of registered capital and profit allocation (set out in paragraph 2A of ''Appendix IX --- Statutory and General Information'' of the Company's prospectus); (k) the Assignment Agreement between us and CNAHC on October 8, 2004 regarding the equity interests in Shandong Aviation Group and Shandong Airlines referred to in the section headed ''Business --- Connected Transactions'' of the Company's prospectus dated 3 December 2004. Pursuant to this agreement: (i) CNAHC agreed to transfer all of its rights and obligations under two transfer agreements according to which CNAHC agreed to acquire a 48.0% equity interest in Shandong Aviation Group and a 22.8% equity interest in Shandong Airlines; (ii) Since CNAHC has already paid part of the equity transfer amount and relevant fees under the two transfer agreements, we have agreed to pay the same amount to CNAHC. The Company also agreed to pay the outstanding amount under the two transfer agreements to Shandong Aviation Group and Shandong Airlines. As at the latest Practicable Date, the total amount the Company owed to CNAHC was RMB95.6 million; the total amount the Company owed to Shandong Aviation Group and Shandong Airlines under the two transfer agreements was RMB465.2 million; (iii) the Company agreed to reimburse CNAHC for all the amounts and expenses that have been incurred and paid by CNAHC under the above two transfer agreements within seven (7) days of the effectiveness of the Assignment Agreement; (iv) CNAHC has given certain representations and warranties including that it has all the rights, power and authorisation to make such transfer and that such transfer will not result in the breach of any other agreements or documents that have been entered into by CNAHC; (v) CNAHC and the Company agreed to indemnify each other against all the damage and expenses arising from any breach of representations and warranties given by CNAHC or the Company, as the case may be; and (vi) the Assignment Agreement shall be effective after it is signed by both parties and approved by the relevant government authorities. (l) the Hong Kong Underwriting Agreement dated December 2, 2004 entered into among the Company, CNAHC, the Joint Global Coordinators, the Joint Sponsors, the Hong Kong Underwriters and HSBC Nominees (Hong Kong) Limited pursuant to which it is agreed, inter alia: (i) the Company agreed, subject to certain conditions, to issue and allot, at the Offer Price, the Offer Shares to be issued in connection with the Hong Kong Public Offering; (ii) the Hong Kong Underwriters agreed, subject to certain conditions, to procure subscribers (or subscribe themselves) for the Offer Shares; (iii) the Hong Kong Underwriters will be paid on admission to listing on the Hong Kong Stock Exchange a commission of 2.5% of the Offer Price multiplied by the number of Offer Shares allotted pursuant to the Hong Kong Public Offering; (iv) the obligations of the Hong Kong Underwriters to procure subscribers for, or failing which, themselves to subscribe for, Offer Shares are subject to certain conditions. These conditions include, amongst others, delivery of certain condition precedent documents and registering various documents with Registrar of Companies. In addition, the Hong Kong Underwriters have the right to terminate the Hong Kong Underwriting Agreement in certain circumstances prior to admission; (v) the Company agreed to pay certain costs, charges, fees and expenses of the Hong Kong Public Offering; (vi) each of the Company and CNAHC gave certain representations, warranties and other undertakings, subject to certain limits, to each of the Joint Global Coordinators, the Joint Sponsors and the Hong Kong Underwriters; (vii) the Company gave certain indemnities, subject to certain limits, to each of the Joint Global Coordinators, the Joint Sponsors and the Hong Kong Underwriters. (m) a Sponsor's Agreement dated December 3, 2004 between the Company and the London Sponsor pursuant to which the Company appoints the London Sponsor as the sponsor in connection with the London Listing in consideration for the Company agreeing to pay to Merrill Lynch Far East Limited as a Hong Kong Underwriter a commission under the Hong Kong Underwriting Agreement (See Paragraph (m) above) and all costs and expenses incurred in connection with the London Listing, provided that the London Sponsor will not commit or purport to commit the Company to pay any such amounts, save as agreed beforehand between the Company and the London Sponsor. The Company undertakes, among other things, to (i) procure that certain documents in connection with the London Listing are published, (ii) deliver the Prospectus to the UK Registrar of Companies and (iii) not make announcements regarding the London Listing without notifying the London Sponsor. The Sponsor's Agreement provides that the London Sponsor may terminate the Sponsor's Agreement if, among other things, (i) it comes to the attention of the London Sponsor that any statement in the Prospectus is untrue and (ii) the Company has not complied with the Sponsor's Agreement in any respect which is material in the context of the London Listing. (n) a Paying Agency Appointment Letter dated December 3, 2004 between the Company and Computershare Investor Services Plc (''Computershare'') pursuant to which the Company appoints Computershare as paying agent in connection with the London Listing and in consideration for the Company agreeing to pay an initial fee of 4,000 and a minimum annual fee of 5,000, Computershare shall, among other things, (i) calculate the amount of any dividend payable to each UK shareholder and (ii) dispatch all payments, as instructed by the Company. The Paying Agency Agreement also provides that the Company shall, in certain circumstances, indemnify Computershare against, among other things, all actions, proceedings, liability and claims in to acting in accordance with the Company's instructions. (o) the strategic placing agreement dated November 20, 2004 between the Strategic Investor, the Joint Global Coordinators and our Company, pursuant to which the Strategic Investor has agreed to, among other things, subscribe at the Offer Price for such number of Offer Shares that would constitute, in aggregate, 10.0% of our total issued share capital immediately following the completion of the Global Offering referred to in the section headed ''Strategic Investor'' of the Company's prospectus dated 3 December 2004. (p) (22)the Short-term Commercial Paper Underwriting Agreement dated 26 April 2005 entered between the Company and Bank of China Limited, pursuant to which Bank of China Limited has agreed to be to form an underwriting syndicate and be the lead underwriter for the RMB2 billion short term commercial paper issued by the Company for a lump sum consulting fee of RMB3 million and a lead underwriting fee of 0.12% of the value of the commercial paper issued by the Company; (q) the A330-200 Purchase Agreement dated 26 January 2005 entered into between the Company. AIE and Airbus S.A.S. in relation to the purchase of 20 A330--200 aircraft, the details of the agreement are set out in Company's circular dated 4 March 2005; and (r) the Boeing Aircraft Purchase Agreement dated 8 August 2005 entered into between the Company, AIE and Boeing Company in relation to the purchase of 15 Boeing 787 aircraft, the details of the agreement are set out in the section headed ''Letter from the Board --- The Boeing Aircraft Purchase Agreement'' of this circular. Except as disclosed above, no other material contract has been entered into by the Group within the two years immediately preceding the date of this circular. 5. LITIGATION (23)As at the Latest Practical Date, the litigation or claims of material importance pending or threatened against a member of the Group are as disclosed in paragraph (b) of the section headed ''Contingent Liabilities'' in ''Appendix I--II. Consolidated Financial Statements for the year ended 31 December 2004'' and in paragraphs (ii) and (iii) of the section headed ''Contingent liabilities'' in ''Appendix I--III. Indebtedness'' to this circular. In respect of the civil litigation as disclosed in paragraph (c) of the section headed ''Contingent Liabilities'' in ''Appendix I--II. Consolidated Financial Statements for the year ended 31 December 2004'' to this circular, Air China International Corporation, AIE and other parties entered into a settlement agreement with New Link Consultants Limited (''NLC'') on 20 July 2005, pursuant to which AIE agreed to pay a settlement amount of US$195,250 to NLC. The settlement amount was fully paid by AIE to NLC on 10 August 2005. Except as disclosed above, there was no litigation or claims of material importance pending or threatened against any member of the Group. 6. SERVICE CONTRACTS (24)None of the Directors has any existing or proposed service contract with any member of the Group which is not expiring or terminable by the Group within one year without payment of compensation (other than statutory compensation). 7. NO MATERIAL ADVERSE CHANGE (25)The Directors confirm that there has been no material adverse change in the Group's financial or trading position since 31 December 2004, being the date to which the latest published audited accounts of the Group have been made up. 8. PROCEDURE FOR DEMANDING A POLL BY SHAREHOLDERS (26)Pursuant to Article 72 of the Articles of Association of the Company, at any general meeting of shareholders of the Company a resolution shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded: . by the chairman of the meeting; . by at least two shareholders entitled to vote present in person or by proxy; or . by one or more shareholders present in person or by proxy and representing 10% or more of all shares carrying the right to vote at the meeting. The demand for a poll may be withdrawn by the person who makes such demand. Further details of the procedure for demanding a poll were set out in Appendix VIII ''Summary of Articles of Association'' to the Company's prospectus dated 3 December 2004. 9. MISCELLANEOUS (27)(a) The joint company secretaries of the Company are Zheng Baoan and Li Man Kit. Mr. Li is an associate member of the Institute of Chartered Secretaries and Administrators, UK and the Hong Kong Institute of Company Secretaries. (b) The qualified accountant of the Company is Chan Wai Kwong Joel. Mr. Chan is a fellow of the Association of Chartered Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants. (28)(c) The registered address of the Company is at 9/F, Blue Sky Mansion, 28 Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District, Beijing, China. The head office of the Company is at South Terminal, Beijing Capital International Airport, Chaoyang District, Beijing, China. (d) The Hong Kong branch share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited, Rooms 1712--1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong. (29)10. DOCUMENTS AVAILABLE FOR INSPECTION Copies of the following documents are available for inspection during normal business hours at the principal place of business of the Company in Hong Kong at 5th Floor, CNAC House 12 Tung Fai Road, Hong Kong International Airport, Hong Kong up to and including 13 September, 2005: (a) the articles of association of the Company; (b) major transaction circular dated 4 March 2005 issued by the Company in respect of the purchase of 20 A330-200 aircraft; (c) the audited financial information of the Group, the text of which is set out in Appendix I to this circular; and (d) material contracts referred in the section headed ''Material Contracts'' of this circular. -------------------------- (1) 14.58(1) (2) 2.14 (3) 14.60(1) (4) 14.58(3) (5) 14.58(2) (6) 14.58(3) 14.63(3) (7) 14.60(2) (8) 14.58(4) (9) 14.58(5) 14.58(6) (10) 14.58(8) (11) 14.60(4) 2.17 14.66(6) (12) Rule 14.64(5) (13) A1B29(1) (14) A1B30 (15) A1B31(3)(a) App.16(48) (1)(2) (16) A1B2 (17) A1B34 A1B38(1) 14.64(3) (18) A1B40(1) (19) A1B40(2) (20) 14.64(8) (21) A1B38(2) (22) A1B42 (23) A1B33 (24) 14.64(7) (25) A1B32 (26) A1B8A (27) A1B35 (28) A1B36 (29) A1B43 This information is provided by RNS The company news service from the London Stock Exchange

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Air China Ltd. (AIRC)

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