Continuing Connected Transactions

RNS Number : 0282R

Air China Ld

28 October 2011

 



Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss whatsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

AIR CHINA LIMITED 

(a joint stock limited company incorporated in the People's Republic of China with limited liability)

(Stock Code: 00753)

CONTINUING CONNECTED TRANSACTIONS

AND

REVISED ANNUAL CAPS FOR EXISTING

CONTINUING CONNECTED TRANSACTIONS

SUMMARY Reference is made to the circular of the Company dated 8 April 2010 and the announcement of the Company dated 29 March 2011 in relation to, among other things, the existing continuing connected transactions between the Company and Air China Cargo. In anticipation of the expiry of the existing arrangements between the Company and Air China Cargo, on 27 October 2011, the Board approved the Air China Cargo Transactions. The Company will seek Independent Shareholders' approval of the Air China Cargo Transactions and the relevant annual caps for the years ending 31 December 2011, 2012 and 2013 in accordance with the Listing Rules. Reference is made to the circular of the Company dated 6 November 2009 in relation to, among other things, the Advertising Services Framework Agreement between the Company and CNAMC. On 27 October 2011, the Board approved the Supplemental Advertising Services Framework Agreement and the revised caps for the continuing connected transactions between the Company and CNAMC for the years ending 31 December 2011 and 2012. As the highest of the applicable Percentage Ratios of the continuing connected transactions under the Advertising Services Framework Agreement between the Company and CNAMC (as amended by the Supplemental Advertising Services Framework Agreement), on an annual basis, is higher than 0.1% and less than 5.0%, such transactions are subject to the reporting and announcement requirements set out under Chapter 14A of the Listing Rules, but are exempt from the requirements of independent shareholders' approval. The Directors (including the independent non-executive Directors) consider that the abovementioned continuing connected transactions have been conducted on normal commercial terms or on terms no less favourable than those available to independent third parties and were entered into in the ordinary and usual course of business of the Company, are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and each of the relevant annual caps for the abovementioned continuing connected transactions are fair and reasonable.

A circular containing, among other things, (i) details of Air China Cargo Transactions; (ii) a letter from China Merchants Securities to the Independent Board Committee and the Independent Shareholders containing its advice in connection with the Air China Cargo Transactions and the relevant annual caps; and (iii) the recommendation of the Independent Board Committee, in respect of the Air China Cargo Transactions and the relevant annual caps, will be despatched to Shareholders in accordance with the Listing Rules as soon as practicable.

CONTINUING CONNECTED TRANSACTIONS WITH AIR CHINA CARGO

Reference is made to the circular of the Company dated 8 April 2010 and the announcement of the Company dated 29 March 2011 in relation to, among other things, the existing continuing connected transactions between the Company and Air China Cargo. In anticipation of the expiry of the existing arrangements between the Company and Air China Cargo, on 27 October 2011, the Board approved the Air China Cargo Transactions.

Description of the Air China Cargo Transactions

Pursuant to the Framework Agreement, the Group (apart from Air China Cargo) will provide the following services to Air China Cargo:

(1)     the provision of bellyhold space of the passenger aircrafts operated by the Company;

(2)     ground support and aircraft maintenance engineering including, among others, the repair and maintenance of aircrafts and engines; and

(3)     other services to Air China Cargo including, among others, labour management and import and export agency services.

Air China Cargo will provide the following services to the Group (apart from Air China Cargo):

(1)     ground support including, among others, cargo and mail ground loading and unloading and security inspection services; and

(2)     other services provided to the Group (apart from Air China Cargo).

The consideration of specific continuing connected transactions under the Framework Agreement shall be agreed between the Company and Air China Cargo on a case-by-case basis.

The term of the Framework Agreement is three years, ending on 31 December 2013, which is renewable unless being terminated by either party to the Framework Agreement.

Reasons for and Benefits of the Air China Cargo Transactions

The Directors believe that it is in the best interest of the Company to enter into the Air China Cargo Transactions because Air China Cargo, being a company having engaged in air cargo business for a long time, has a profound understanding of and extensive experience in the air cargo business and the air cargo industry, and therefore possesses certain advantages in promoting the Company's air cargo business with access to the Company's bellyhold space. In addition, as the Company and Air China Cargo both have significant presence in Beijing, the aircraft related services such as ground support and aircraft maintenance engineering services could be easily accessible and thereby generate revenue and benefit for the Company with low additional cost. The long-time successful cooperative relationship between the Company and Air China Cargo is able to provide streamlined and efficient cooperation and transaction between the Company and Air China Cargo.

Historical Amounts and Proposed Caps

The actual aggregate amount paid by Air China Cargo to the Company for the years ended 31 December 2008, 2009 and 2010 was approximately RMB3.3 billion, RMB2.7 billion and RMB3.9 billion, respectively. The actual aggregate amount paid by the Company to Air China Cargo for the years ended 31 December 2008, 2009 and 2010 was nil, nil and nil, respectively.

It is proposed that for the years ending 31 December 2011, 2012 and 2013, the annual caps for the aggregate amount payable by Air China Cargo to the Company shall be RMB5.6 billion, RMB6.3 billion and RMB7.7 billion, respectively. The annual caps for the aggregate amount payable by the Company to Air China Cargo for the years ending 31 December 2011, 2012 and 2013 are proposed to be RMB46.0 million, RMB46.0 million and RMB46.0 million, respectively.

	Historical Figures			Future Caps
Transactions	Actual   annual   amount for   the year   ended   31 December  2008	Actual   annual   amount for   the year   ended   31 December  2009	Actual   annual   amount for   the year   ended   31 December  2010	Annual cap   for the year  ending   31 December  2011	Annual cap   for the year  ending   31 December  2012	Annual cap   for the year  ending   31 December  2013
Amount paid/payable  by Air China    Cargo to the Company	RMB3.3 billion	RMB2.7 billion	RMB3.9 billion	RMB5.6 billion	RMB6.3 billion	RMB7.7 billion
Amount paid/payable by the    Company to Air China Cargo	nil	nil	nil	RMB46.0 million	RMB46.0 million	RMB46.0 million

In arriving at the above annual caps, the Directors have considered the historical transaction amount and the expected growth of such transactions, as well as the Company's projections for its fleet sizes, annual aircraft utilisation and other operating parameters, and have taken into account the increase in aviation fuel prices and its impact on the Air China Cargo Transactions. In arriving at the estimated aggregate amount payable by the Company to Air China Cargo for the years ending 31 December 2011, 2012 and 2013, the Company also considered, among other things, potential additional services to be provided by Air China Cargo to the Company, such as ground support services and lease of properties.

REVISED ANNUAL CAPS FOR EXISTING CONTINUING CONNECTED TRANSACTIONS WITH CNAMC

Reference is made to the circular of the Company dated 6 November 2009 in relation to, among other things, the Advertising Services Framework Agreement between the Company and CNAMC, pursuant to which, CNAMC should be entitled to, among others, distribute in-flight reading materials, operate specific media (such as boarding passes and aircraft seat pillow sheets, etc.) and purchase in-flight entertainment programmes. The annual caps for the aggregate amount of all expenses to be paid by the Company to CNAMC for the years ending 31 December 2011 and 2012 were estimated to be RMB60.0 million and RMB60.0 million, respectively.

The Directors have been monitoring the amounts of the continuing connected transactions under the Advertising Services Framework Agreement between the Company and CNAMC, having regard to internal estimates of demand and operating conditions.

For the following reasons, the existing annual caps for the aggregate amount of all expenses to be paid by the Company to CNAMC for the years ending 31 December 2011 and 2012 will not be sufficient to meet the requirements of the Company's operations:

•        As the Company's service development strategy aims at continuously enhancing its service quality, the Company gradually increased its investment in the purchase and production of entertainment programmes as well as its investment in advertising on an annual basis. As a result, CNAMC participated more in the Company's advertising promotion work; and

•        Due to the increased number of aircraft of the Company, the need for entertainment programmes increased correspondingly.

Accordingly, it is proposed that the annual caps for the aggregate amount of all expenses to be paid by the Company to CNAMC for the years ending 31 December 2011 and 2012 be revised as set out in the table below:

	For the year ending  31 December 2011	For the year ending  31 December 2012
	(RMB million)	(RMB million)
Existing annual caps	60.0	60.0
Revised annual caps	100.0	120.0

In arriving at the above caps, the Directors have considered (i) the historical and estimated transaction amounts; (ii) the Company's business plan about increased flight routes and the demand for services provided under the Advertising Services Framework Agreement and (iii) the further expansion of  the business capacity of CNAMC.

INFORMATION ABOUT THE COMPANY AND THE COUNTERPARTIES

The Company is the only national flag carrier of China and a member of the Star Alliance, the world's largest airline alliance. The Company's principal business activity is air passenger, air cargo and airline-related services.

Air China Cargo is a non-wholly owned subsidiary of the Company where Cathay Pacific, being a substantial shareholder of the Company, owns 25% of its equity interest and is therefore a connected person of the Company. The principal activity of Air China Cargo is the operation of cargo airline services.

CNAMC is a wholly owned subsidiary of the Company's substantial shareholder, China National Aviation Holding Company, and therefore a connected person of the Company. CNAMC is primarily engaged in media and advertising business.

LISTING RULES IMPLICATIONS

As the highest of the applicable Percentage Ratios of the Air China Cargo Transactions under the Framework Agreement between the Company and Air China Cargo, on an annual basis, is higher than 5.0%, the Air China Cargo Transactions fall under Rule 14A.17 of the Listing Rules and constitute non-exempt continuing connected transactions which are subject to the announcement, reporting and independent Shareholders' approval requirements set out under Chapter 14A of the Listing Rules.

The Independent Board Committee has been formed to advise the Independent Shareholders in connection with the Air China Cargo Transactions and the relevant annual caps. China Merchants Securities has been appointed as the independent financial adviser of the Company to advise the Independent Board Committee and the Independent Shareholders in this regard.

The Air China Cargo Transactions and the relevant annual caps will be considered, and if thought fit, approved at the EGM. Voting will be by poll and Cathay Pacific, being a substantial shareholder of the Company and Air China Cargo, together with its associates, will abstain from voting.

As the highest of the applicable Percentage Ratios of the continuing connected transaction under the Advertising Services Framework Agreement between the Company and CNAMC (as amended by the Supplemental Advertising Services Framework Agreement), on an annual basis, is higher than 0.1% and less than 5.0%, such transactions fall under Rule 14A.34 of the Listing Rules. Accordingly, they are subject to the reporting and announcement requirements set out under Chapter 14A of the Listing Rules, but are exempt from the requirements of independent Shareholders' approval.

A circular containing, among other things, (i) details of Air China Cargo Transactions; (ii) a letter from China Merchants Securities to the Independent Board Committee and the Independent Shareholders containing its advice in connection with the Air China Cargo Transactions and the relevant annual caps; and (iii) the recommendation of the Independent Board Committee, in respect of the Air China Cargo Transactions and the relevant annual caps, will be despatched to Shareholders in accordance with the Listing Rules as soon as practicable.

OPINION OF THE DIRECTORS

The Directors (including the independent non-executive Directors) consider that the abovementioned continuing connected transactions have been conducted on normal commercial terms or on terms no less favourable than those available to independent third parties and were entered into in the ordinary and usual course of business of the Company, are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and the relevant annual caps for the abovementioned continuing connected transactions are fair and reasonable.

DEFINITIONS

In this announcement, unless the context otherwise requires, the following terms shall have the following meanings:

"Advertising Services    Framework Agreement"	the advertising services framework agreement entered into between the Company and CNAMC dated 27 October 2009
"Air China Cargo"	Air China Cargo Co., Ltd., a company with limited liability incorporated under the laws of the PRC and with 51% of its registered capital owned by the Company as at the date of this announcement
"Air China Cargo Transactions"	the continuing connected transactions contemplated under the Framework Agreement between the Company and Air China Cargo in relation to the provision of bellyhold space, ground support and aircraft maintenance engineering, as well as other services between Air China Cargo and the Group
"Board"	the board of Directors
"Cathay Pacific"	Cathay Pacific Airways Limited, a company incorporated in Hong Kong and listed on the Hong Kong Stock Exchange, the principal activity of which is the operation of scheduled airline services
"China Merchants Securities"	China Merchants Securities (HK) Co., Limited, a corporation licensed to conduct Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) of the regulated activities under the Securities and Futures Ordinance (Cap. 571), the independent financial adviser to the Independent Board Committee and the Independent Shareholders in connection with the Air China Cargo Transactions and the relevant annual caps

"Company"	Air China Limited, a company incorporated in the PRC, whose H shares are listed on the Hong Kong Stock Exchange as its primary listing venue and on the Official List of the UK Listing Authority as its secondary listing venue, and whose A shares are listed on the Shanghai Stock Exchange
"CNAMC"	China National Aviation Media and Advertisement Co., Ltd., a wholly owned subsidiary of China National Aviation Holding Company which is a substantial shareholder of the Company, and therefore a connected person of the Company as defined under the Listing Rules
"Director(s)"	the director(s) of the Company
"EGM"	the extraordinary general meeting of the Company to be held on 25 November 2011 to consider, and if thought fit, approve, among others, the Air China Cargo Transactions and the relevant annual caps. Please refer to the notice of the Company dated 10 October 2011 for details
"Framework Agreement"	the framework agreement entered into between the Company and Air China Cargo dated 27 October 2011 in respect of the Air China Cargo Transactions
"Group"	the Company and its subsidiaries
"Hong Kong Stock Exchange"	The Stock Exchange of Hong Kong Limited
"Independent Board Committee"	a board committee comprising Mr. Fu Yang, Mr. Li Shuang, Mr. Han Fangming and Mr. Yang Yuzhong, all being the independent non-executive Directors
"Independent Shareholder(s)"	the Shareholder(s) other than Cathay Pacific and its associates
"Listing Rules"	The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
"Percentage Ratios"	the percentage ratios set out in Rule 14.07 of the Listing Rules, i.e. "assets ratio", "profits ratio", "revenue ratio", "consideration ratio" and "equity capital ratio"
"PRC"	the People's Republic of China excluding, for the purpose of this announcement only, Hong Kong, Macau and Taiwan

"RMB"	Renminbi, the lawful currency of the PRC
"Shareholder(s)"	shareholder(s) of the Company
"Supplemental Advertising    Services Framework    Agreement"	the supplemental advertising services framework agreement entered into between the Company and CNAMC dated 27 October 2011

By Order of the Board

Air China Limited

Huang Bin         Tam Shuit Mui

Joint Company Secretaries

Beijing, 27 October 2011

As at the date of this announcement, the Directors are Mr. Kong Dong, Ms. Wang Yinxiang, Mr. Cao Jianxiong, Mr. Sun Yude, Mr. Christopher Dale Pratt, Mr. Ian Sai Cheung Shiu, Mr. Cai Jianjiang, Mr. Fan Cheng, Mr. Fu Yang*, Mr. Li Shuang*, Mr. Han Fangming* and Mr. Yang Yuzhong*.

* Independent non-executive Director

 

END

 

 

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