CONTINUING CONNECTED TRANSACTIONS

RNS Number : 4849I

Air China Ld

31 August 2016

 

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 howsoever 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

On 30 August 2016 (after trading hours), the Company and Air China Cargo entered into the New ACC Framework Agreement to renew and amend the ACC Framework Agreement. On the same date, the Company and CNACG entered into the New CNACG Framework Agreement to renew and amend the CNACG Framework Agreement. Each of the New ACC Framework Agreement and the New CNACG Framework Agreement has a term of three years commencing on 1 January 2017 and ending on 31 December 2019.

Air China Cargo is a connected person of the Company as defined under the Hong Kong Listing Rules, and accordingly the ACC Transactions constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules. As the highest of the applicable Percentage Ratios in respect of the proposed annual caps applicable to the ACC Transactions is, on an annual basis, higher than 5.0%, the ACC Transactions and the proposed annual caps are subject to the announcement, reporting, annual review, circular (including independent financial advice) and independent shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

CNACG is a substantial Shareholder of the Company and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. Accordingly, the CNACG Transactions constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules. As each of the relevant Percentage Ratios (other than the profits ratio) in respect of the annual caps applicable to the CNACG Transactions is, on an annual basis, higher than 0.1% and less than 5.0%, the CNACG Transactions are subject to the announcement, reporting and annual review requirements, but are exempt from the circular (including independent financial advice) and independent shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

 The Company has appointed Octal Capital as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in connection with the ACC Transactions, the proposed annual caps under the New ACC Framework Agreement and the term of the Leases of GAC Regulated Property under the New ACC Framework Agreement. The Company has also appointed Octal Capital as the independent financial adviser to advise the lease term of the finance leases under the New CNACG Framework Agreement.

A circular containing, among other things, (i) details of the ACC Transactions and the proposed annual caps under the New ACC Framework Agreement; (ii) a letter from Octal Capital to the Independent Board Committee and the Independent Shareholders containing its advice on the ACC Transactions and the proposed annual caps thereunder; and (iii) the recommendation of the Independent Board Committee to the Independent Shareholders in respect of the ACC Transactions and the proposed annual caps thereunder, will be dispatched to Shareholders on or about 12 September 2016 in accordance with the Hong Kong Listing Rules.

1.       CONTINUING CONNECTED TRANSACTION WITH AIR CHINA CARGO

1.1   Introduction

Reference is made to the announcement of the Company dated 27 October 2011 and the circular of the Company dated 10 November 2011 in relation to the ACC Framework Agreement entered into between the Company and Air China Cargo on 27 October 2011 and the ACC Transactions contemplated thereunder. The current term of the ACC Framework Agreement will expire on 31 December 2016. As the Company expects that the ACC Transactions will continue to be conducted after 31 December 2016, on 30 August 2016 (after trading hours), the Company and Air China Cargo entered into the New ACC Framework Agreement to renew and amend the ACC Framework Agreement, and the New ACC Framework Agreement has a term of three years commencing on 1 January 2017 and ending on 31 December 2019.

1.2   The ACC Transactions

Parties and Connections of the Parties

The Company's principal business activity is air passenger, air cargo and airline-related services. The principal activity of Air China Cargo is the operation of cargo airline services.

Air China Cargo is a 51% held subsidiary of the Company. Cathay Pacific, a substantial Shareholder of the Company, holds more than 10% of the equity interest in Air China Cargo. Therefore, Air China Cargo is a connected person of the Company as defined under the Hong Kong Listing Rules.

Description of the ACC Transactions

Pursuant to the New ACC Framework Agreement, the Group will provide the following services to the ACC Group:

•        provision of bellyhold space of the passenger aircraft operated by the Company;

•        ground support services, such as airport apron services and aircraft cabin cleansing services; and

•        other services, including aircraft maintenance engineering services, engine and other aircraft related materials lease services, property lease services (including the lease of certain GAC Regulated Property) and labour management services.

Pursuant to the New ACC Framework Agreement, the ACC Group will provide the following services to the Group:

•        marketing and sales services of bellyhold space provided by the Company;

•        ground support services, such as cargo and mail ground loading and unloading and security inspection services;

•        other services, including engine and other aircraft related material lease services and property lease services.

With respect to engine and other aircraft related material lease services and property lease services, to the extent that the Group or the ACC Group possesses suitable engines, aircraft related materials or premises that could meet the operating needs of the Group or the ACC Group from time to time, the Group or the ACC Group may enter into lease agreements with the other party pursuant to the New ACC Framework Agreement.

Pricing Policies for the ACC Transactions

The consideration of any specific ACC Transactions shall be agreed on arm's length negotiations between the Group and the ACC Group and on normal commercial terms, which shall be determined in accordance with the pricing policies set forth below on a case-by-case basis.

The pricing policies for the ACC Transactions in relation to services provided by the Group to the ACC Group are as follows:

•        The prices for bellyhold space provided to the ACC Group will be determined by the Company based on the following formula: total annual sales amount = the average sales price of bellyhold space of the Company in the past three years*(1+adjustment

rate)*the total volume of bellyhold space provided by the Company. The adjustment rate generally ranges from -7% to +7%, which is determined by the Company with reference to the average annual revenue growth rate for air cargo services of other major aircraft operators in the PRC and the operating costs of the Company in connection with air transportation.

•        The prices for the ground support services provided by the Group will be negotiated and agreed by both parties primarily on a "cost-plus" basis, which will be determined based on the costs and expenses of the Company, including costs of human resources and costs of equipment, plus a margin generally ranging from 5% to 10%. In addition, the Group will also take into account various other factors, including the guidance from the Civil Aviation Administration of the PRC and the International Air Transport Association on the service prices and other terms for ground support services, and the market prices for comparable services provided to independent third parties or available from other service providers.

•        The prices for other services provided by the Group will be negotiated and agreed by both parties primarily on a "cost-plus" basis, which will be determined based on the costs and expenses of the Company, including costs of human resources and costs of relevant leased items or premises (as applicable), plus a margin generally ranging from 5% to 10%. The Group will also take into account certain other factors, including the prices for the same or similar type of services provided to and available from independent third parties, and the specific needs of the ACC Group.

For each individual ACC Transaction in terms of services provided by the Group to the ACC Group, to ensure that its pricing is on normal commercial terms, designated personnel of the Group will be responsible for monitoring and collating the industry data and market prices in connection with air cargo services and other services, analysing the costs and expenses of the Group and reporting to the management of the Company regularly. The management will review such information and make appropriate adjustments to the pricing of the relevant ACC Transaction when necessary. In general, for obtaining and comparing quotations and terms for comparable ground support services and other services available from or provided to independent third parties, enquiries on quotation and terms will be made to at least two independent third parties by e-mail, facsimile or telephone.

The pricing policies for the ACC Transactions in relation to services provided by the ACC Group to the Group are as follows:

•        With respect to ACC Group's provision of marketing and sales services of bellyhold space to end customers, the Company will pay commission fees to Air China Cargo primarily based on the costs and expenses in connection with the sales and marketing of bellyhold space to end customers by the ACC Group and the sales performance of the ACC Group on meeting the relevant sales targets, after taking into account the overall

market conditions. For the past three years ending 31 December 2014, 2015 and 2016, the total commission fees (including any performance-based sales incentive bonuses but excluding value-added tax) paid or payable to the ACC Group each year accounted for approximately 8.0% to 10.2% of the total amounts payable by the ACC Group for the Company's bellyhold space for the same year.

•        The prices for the ground support services provided by the ACC Group will be negotiated and determined by both parties on an arm's length basis, after taking into account various factors, including the guidance from the Civil Aviation Administration of the PRC and the International Air Transport Association on the service prices and other terms for ground support services, the market prices for comparable services available from other service providers and the quality of services.

•        The prices for other services provided by the ACC Group will be negotiated and determined by both parties on an arm's length basis with reference to comparable market prices for the same or similar type of services by independent third parties, after taking into account other relevant factors, including the quality of services and the specific needs of the Group.

For each individual ACC Transaction in terms of ground support services and other services provided by the ACC Group to the Group, to ensure that its pricing is on normal commercial terms, designated personnel of the Group will be responsible for obtaining and verifying quotations and terms for the same or similar type of services available from independent third parties. In general, enquiries on quotation and terms will be made to at least two independent third parties by e-mail, facsimile or telephone.

The Term of the New ACC Framework Agreement

The term of the New ACC Framework Agreement is three years, commencing on 1 January 2017 and ending on 31 December 2019, which is renewable for a successive term of three years unless being terminated by either party to the New ACC Framework Agreement by serving the other party notice of termination of not less than three months expiring on any 31 December.

During the term of the new ACC Framework Agreement, the Company (as the lessor) and Air China Cargo (as the lessee) are expected to enter into certain Leases of GAC Regulated Property, each with an initial term of five or six years ending by 31 December 2022 the latest. The fact that initial term of such Leases of GAC Regulated Property is longer than three years is primarily due to GAC's mandatory administrative requirement that the minimum term for any lease of GAC Regulated Property shall not be less than five years. In this connection, pursuant to Rule 14A.52 of the of the Hong Kong Listing Rules, the Company has engaged

Octal Capital as the independent financial adviser, to explain why a period longer than three years is required and confirming whether it is normal business practice for an agreement of this type to be of such duration.

Reasons for and Benefits of the ACC Transactions

The Directors believe that it is in the best interest of the Group to continue the ACC Transactions with the ACC Group having taken into account the following factors:

•        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;

•        As the Company and Air China Cargo both have significant presence in Beijing, the PRC, the aircraft related services such as ground support and aircraft maintenance engineering services could be easily accessible and therefore generate revenue and benefit for the Company with low additional cost; and

•        The long established successful cooperative relationship between the Company and Air China Cargo is able to provide streamlined and efficient cooperation and transaction between the Group and the ACC Group.

Historical Amounts and Proposed Annual Caps

In connection with the ACC Transactions, the table below sets out (i) the annual caps for the aggregate amount paid or payable by the ACC Group or the Group for each of the three years ending 31 December 2014, 2015, and 2016, respectively; (ii) the actual aggregate amounts paid by the ACC Group or the Group for each of the two years ending 31 December 2014 and

2015, and the estimated aggregate amount payable for the year ending 31 December 2016, respectively; and (iii) the proposed annual caps of amounts payable by the ACC Group or the Group for each of the three years ending 31 December 2017, 2018 and 2019, respectively.

	Historical Caps					Historical Figures			Proposed Annual Caps
	for the year ended/ending 31 December
Transactions	2014	2015	2016			2014	2015	2016*	2017	2018			2019
	(in millions of RMB)
Amount paid/payable by the
ACC Group to the Group	6,120	7,110		8,250	4,892		4,585	4,771	5,854		7,160	8,777
Amount paid/payable by the
Group to the ACC Group	1,060	1,250		1,480	792		956	1,362	1,625		1,944	2,326

*        Estimated annual amount payable by the ACC Group or by the Group to the other for the year ending 31 December 2016.

Breakdown of Historical Amounts and Proposed Annual Caps

In connection with the ACC Transactions, the table below sets out (i) the breakdown of the actual amounts paid by the ACC Group or the Group for each of the two years ending 31 December 2014 and 2015, and the estimated aggregate amount payable for the year ending 31 December 2016, respectively; and (ii) the breakdown of the proposed annual caps of amounts payable by the ACC Group or the Group for each of the three years ending 31 December 2017, 2018 and 2019, respectively.

	Historical Figures			Proposed Annual Caps
	for the year ended/ending 31 December
Transactions	2014	2015	2016*	2019	2018	2019
	(in millions of RMB)
Amount payable by the ACC Group to the Group	4,892	4,585	4,771	5,854	7,160	8,777
In terms of bellyhold space	4,482	4,045	4,176	5,182	6,429	7,977
In terms of ground support services	94	113	120	143	169	200
In terms of other services	316	427	475	529	562	600
Amount payable by the Group to the ACC Group	792	956	1,362	1,625	1,944	2,326
In terms of marketing and selling services of bellyhold	362	363	424	519	643	798
In terms of ground support services	430	465	798	932	1,088	1,269
In terms of other services	1	128	140	174	213	259

Note: Due to rounding, the historical figure for the amount payable by the Group to the ACC Group for the year ending 31 December 2014 does not correspond with the sum of the separate figures in connection with various types of services for the same period.

*        Estimated annual amount payable by the ACC Group or by the Group to the other for the year ending 31 December 2016.

The Proposed Annual Caps for the Leases of GAC Regulated Property

The table below sets out (i) the historical aggregate amounts paid or payable by the ACC Group to the Group in connection with the lease of certain GAC Regulated Property for each of the three years ending 31 December 2014, 2015 and 2016, respectively; and (ii) the proposed annual caps for the amount payable by the ACC Group to the Group in connection with the Leases of GAC Regulated Property for each of the six years ending 31 December 2017, 2018, 2019, 2020, 2021 and 2022, respectively.

For the avoidance of doubt, the historical figures for the amounts paid or payable by the ACC Group to the Group in connection with other services for each of the three years ending 31 December 2014, 2015 and 2016 and the proposed annual caps for the amount payable by the ACC Group to the Group in connection with the other services for each of the three years ending 31 December 2017, 2018 and 2019 stated in the section headed "Breakdown of Historical Amounts and Proposed Annual Caps" above have taken into account and reflected the historical amounts and the proposed annual caps in connection with the Leases of GAC Regulated Property stated below for the for the relevant period accordingly.

Historical Figures				Proposed Annual Caps
for the year ended/ending 31 December
2014	2015	2016*		2017	2018	2019	2020	2021	2022
(in millions of RMB)
143	143	143		180	180	180	200	200	200

*        Estimated annual amount payable by the ACC Group to the Group for the year ending 31 December 2016.

Basis for the Proposed Annual Caps

Amounts Payable by the ACC Group to the Group

In arriving at the estimated aggregate amounts payable by the ACC Group to the Group in connection with the provision of bellyhold space for the years ending 31 December 2017, 2018 and 2019, the Company has considered, among other things, the following factors:

•        Expansion of fleet capacity - The bellyhold space provided to the ACC Group will increase generally along with the expansion of the fleet capacity of passenger aircraft of the Company. The fleet capacity of the Company is currently expected to expand at an annual rate of approximately 12.8% from 2017 to 2019, which is determined by the Company primarily based on historical expansion rates as disclosed on the Company's annual reports and the Company's understanding and forecast of the market need.

•        Increase in unit price - Fuel costs account for a substantial portion of the Company's operating costs. As such, any significant fluctuations in the international oil prices could have a material impact on our operating costs, which in return could substantially affect the sales prices for our bellyhold space. The Company have considered the significant fluctuations in the international oil prices in the past few years and assumed that the unit price for bellyhold space will rise at an annual rate of approximately 10% from 2017 to 2019 to account for any substantial increase in international oil prices and the increase in our costs and expenses in connection with the expansion of our fleet capacity.

In arriving at the estimated aggregate amounts payable by the ACC Group to the Group in connection with ground support services provided by the Group for the years ending 31 December 2017, 2018 and 2019, the Company has considered, among other things, the following factors:

•        Increased need for relevant services - Due to the increase in the bellyhold space provided to the ACC Group by the Company, the need for ground support services by the ACC Group will generally increase accordingly. Given that the fleet capacity of the Company is currently expected to expand at an annual rate of approximately 12.8% from 2017 to 2019, the Company has assumed that the ACC Group's need for relevant services will increase at the same rate.

•        Increase in unit price - The Company have assumed that the unit price for our relevant services will generally rise at an annual rate of 5% from 2017 to 2019 to account for the increase in our costs and expenses primarily due to inflation and the overall improvement in our service quality.

In arriving at the estimated aggregate amounts payable by the ACC Group to the Group in connection with other services provided by the Group for the years ending 31 December 2017, 2018 and 2019, the Company has considered, among other things, the historical transaction amounts, the increase in unit price of the Group's services and a reasonable cushion to provide flexibility to cater for the ACC Group's operating need from time to time. The Company has assumed that the unit price for the relevant services provided by the Group will generally rise at an annual rate of 5% from 2017 to 2019.

Amounts Payable by the Group to the ACC Group

For the past three years ending 31 December 2014, 2015 and 2016, the total commission fees (including any performance-based sales incentive bonuses but excluding value-added tax) paid or payable to the ACC Group each year accounted for approximately 8.0% to 10.2% of the total amounts payable by the ACC Group for the Company's bellyhold space. As such, in arriving at the estimated aggregate amounts payable by the Group to the ACC Group in connection with the marketing and sales services of bellyhold space for the years ending 31 December 2017, 2018 and 2019, the Company has assumed that total commission fees (including any performance-based sales incentive bonuses but excluding value-added tax) paid or payable to the ACC Group each year will account for approximately 10% of the total amounts payable by the ACC Group for the Company's bellyhold space for the relevant year, which amounts are in turn subject to the Company's fleet capacity and the unit price for the Company's bellyhold space as stated above.

In arriving at the estimated aggregate amounts payable by the Group to the ACC Group in connection with the ground support services for the years ending 31 December 2017, 2018 and 2019, the Company has considered, among other things, the historical transaction amounts and the increased need for relevant ground support services in light of the expected expansion of the Company's fleet capacity at an annual rate of approximately 12.8%, and has assumed that the unit price for the relevant services provided by the ACC Group will generally rise at an estimated annual rate of 3.5% from 2017 to 2019.

In arriving at the estimated aggregate amounts payable by the Group to the ACC Group in connection with other services provided by the ACC Group for the years ending 31 December 2017, 2018 and 2019, the Company has considered, among other things, the increased need for relevant services in light of the expected expansion of the Company's fleet capacity at an annual rate of approximately 12.8%, the historical transaction amounts, the increase in the unit price for relevant services provided by the ACC Group and a reasonable cushion to provide flexibility to cater for the Group's operating need from time to time. The Company has assumed that the unit price for the relevant services provided by the ACC Group will generally rise at an estimated annual rate of 3.5% from 2017 to 2019.

Amounts Payable in Connection with the Leases of GAC Regulated Property

In arriving at the estimated aggregate amounts payable by the ACC Group to the Group under the Leases of GAC Regulated Property, the Company has primarily considered the historical figures, the ACC Group's need for such leases and the rent for comparable leases available from independent third parties for similar premises in close proximity to the property after taking into account specific needs of the ACC Group.

2.       CONTINUING CONNECTED TRANSACTION WITH CNACG

2.1   Introduction

Reference is made to the announcements of the Company dated 26 August 2008, 10 September 2010 and 26 September 2013 in relation to the CNACG Framework Agreement entered into between the Company and CNACG on 26 August 2008 and the CNACG Transactions contemplated thereunder. The current term of the CNACG Framework Agreement will expire on 31 December 2016. As the Company expects that the existing CNACG Transactions will continue to be conducted after 31 December 2016, on 30 August 2016 (after trading hours), the Company and CNACG entered into the New CNACG Framework Agreement to renew and amend the CNACG Framework Agreement, and the New CNACG Framework Agreement has a term of three years commencing on 1 January 2017 and ending on 31 December 2019.

2.2   The CNACG Transactions

Parties and Connection of the Parties

CNACG is a substantial Shareholder of the Company and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNACG is an investment holding company whose principal businesses include airport ground support services, airline catering services, aircraft maintenance and repair services, aircraft related materials lease services, property investment, ticket and tourism services, logistics and finance lease and operating lease services conducted through its subsidiaries.

Description of the CNACG Transactions

The New CNACG Framework Agreement provides a framework for the CNACG Transactions contemplated thereunder between any member of the Group on the one hand and any member of CNACG Group on the other hand. Pursuant to the New CNACG Framework Agreement, CNACG Group will provide ground support services, aircraft repair and maintenance services, administrative management services, as well as finance lease and operating lease services to the Group.

Pricing Policies for the CNACG Transactions

The consideration of any specific CNACG Transactions shall be agreed between the Group and CNACG Group in accordance with the pricing policies set forth below on a case-by-case basis:

•        The prices for the ground support services will be negotiated and determined by both parties on an arm's length basis, after taking into account various factors, including the guidance from the Civil Aviation Administration of the PRC and the International Air Transport Association on the service prices and other terms for ground support services, the prevailing market prices, the costs of human resources and the quality of services.

•        The prices for aircraft repair and maintenance services, and administrative management services will be negotiated and determined by both parties on an arm's length basis with reference to comparable market prices for the same or similar type of services provided by independent third parties after taking into account other relevant factors, including the quality of services and the special needs of the parties.

•        For finance lease and operating lease services, the amount payable by the Group to the CNACG Group will be subject to the procurement prices of the leased items, the financing costs, the term of leases, the nature and availability of the lease items and comparable lease arrangement fees, as applicable.

For each individual CNACG Transaction, to the extent available, designated personnel of the Group will be responsible for obtaining and verifying the quotation and terms for the same or similar type of services available from independent third parties. In general, inquires on quotation and terms will be made to at least two independent third parties by e-mail, facsimile or telephone.

The Term of the New CNACG Framework Agreement

The current term of the New CNACG Framework Agreement is three years, ending on 31 December 2019, which is renewable for a successive term of three years unless being terminated by either party to the New CNACG Framework Agreement by serving the other party notice of termination of not less than three months expiring on any 31 December.

Consistent with the common practice in the aviation industry, it is expected that the lease terms of the finance leases of aircraft engines or aircraft simulators under the New CNACG Framework Agreement will exceed three years in most cases given the useful life of aircraft engines is usually 12 to 17 years and the useful life of aircraft simulators is usually five to 10 years. Octal Capital is of the view that, based on its researches and analysis and its discussion

with management of the Company, it is a reasonable and a commonly adopted practice for such lease agreements to be of a term of more than three years depending on the nature of the leased assets.

Reasons for and Benefits of the CNACG Transactions

The Group has entered into a series of continuing connected transactions with CNACG Group in its ordinary and usual course of business. CNACG Group possesses ample management expertise and financial resources on airport ground support services and logistics, and is able to provide quality services to the Group.

In particular, entering into lease transactions with CNACG Group helps to streamline the process for the Group to secure relevant equipment that meets the specific needs of the Group with a lower cost of financing, higher flexibility and less impact on the Group's cash follow as compared to direct purchasing. In addition, certain subsidiaries of CNACG, to be acting as the lessors, are located in the free trade zones in the PRC and are entitled to certain favorable tax treatments which will further lower the transaction costs of the Group. Furthermore, CNACG Group will purchase certain ready-to-phase-out engines or ramp equipment from the Group and then lease back-up engines or ramp equipment to the Group based on the actual needs of the Group, which facilitates the Group to phase out obsolete equipment, reduce the maintenance costs and enhance its capital efficiency for securing relevant equipment.

Historical Amounts and Proposed Caps

The table below sets out (i) the annual caps for the aggregate amounts paid or payable by the Group to CNACG Group for each of the three years ending 31 December 2014, 2015 and 2016, respectively; (ii) the actual aggregate amounts paid by the Group to CNACG Group for each of the two years ended 31 December 2014 and 2015, and the estimated aggregate amount payable by the Group to CNACG Group for the year ending 31 December 2016, respectively; and (iii) the proposed annual caps for the aggregate amounts payable by the Group to CNACG Group for each of the three years ending 31 December 2017, 2018 and 2019, respectively.

	Historical Caps				Historical Figures				Future Caps
	for the year ended 31 December
Transactions	2014	2015	2016		2014	2015	2016*		2017	2018	2019
	(in millions of RMB)
Amount paid/payable by the Group to CNACG Group	350	350	350		262	277	330		2,450	2,450	2,450

*        Estimated maximum annual amount payable by the Group to CNACG Group for the year ending 31 December 2016.

Basis for the Future Caps

In arriving at the above annual caps, the Directors have considered the historical transaction amount of the CNACG Transactions and the Group's projections for its fleet sizes, daily utilisation of aircraft and other operating parameters, the need for leasing engines and other equipment and have taken into account the growth of the Company's fleet capacity.

The substantial increase in the future annual caps for the CNACG Transactions for each of the three years ending 31 December 2017, 2018 and 2019, as compared to those for each of the three years ending 31 December 2014, 2015 and 2016, is primarily due to the proposed finance lease and operating lease transactions to be entered into between the Group and the CNACG Group during such periods. Based on the assessment of relevant engines and other equipment operated by the Group and its business needs in the next few years, the Board has estimated that the maximum annual transaction amounts for the relevant lease transactions between the Group and the CNACG Group under the New CNACG Framework Agreement will be as follows: (i) RMB1,000 million for operating leases of back-up aircraft engines; (ii) RMB500 million for operating leases of ramp equipment; and (iii) RMB500 million for finance lease of aircraft simulators and new aircraft engines.

Based on the foregoing, the Board has determined that the annual caps for the amount payable by the Group to CNACG Group for each of the three years ending 31 December 2017, 2018 and 2019 are RMB2,450 million, RMB2,450 million and RMB2,450 million, respectively.

3.       HONG KONG LISTING RULE IMPLICATIONS

3.1               Air China Cargo is a connected person of the Company as defined under the Hong Kong Listing Rules, and accordingly the ACC Transactions constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules. As the highest of the applicable Percentage Ratios in respect of the proposed annual caps applicable to the ACC Transactions is, on an annual basis, higher than 5.0%, the ACC Transactions and the proposed annual caps thereunder are subject to the announcement, reporting, annual review, circular (including independent financial advice) and independent shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

3.2               CNACG is a substantial Shareholder of the Company and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. Accordingly, the CNACG Transactions constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules. As each of the relevant Percentage Ratios (other than the profits ratio) in respect of the annual caps applicable to the CNACG Transactions is, on an annual basis, higher than 0.1% and less than 5.0%, the CNACG Transactions are subject

to the announcement, reporting and annual review requirements, but are exempt from the circular (including independent financial advice) and independent shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

3.3               As the initial term of the Leases of GAC Regulated Property is longer than three years which is primarily due to GAC's mandatory administrative requirement that the minimum term for any lease of GAC Regulated Property shall not be less than five years, a letter from Octal Capital, the independent financial adviser, explaining why a period longer than three years is required and confirming whether it is normal business practice for an agreement of this type to be of such duration pursuant to Rule 14A.52 of the Hong Kong Listing Rules, will be included in the circular dispatched to Shareholders on or about 12 September 2016.

3.4               Consistent with the common practice in the aviation industry, it is expected that the lease terms of the finance leases of aircraft engines or aircraft simulators under the New CNACG Framework Agreement will exceed three years in most cases given the useful life of aircraft engines is usually 12 to 17 years and the useful life of aircraft simulators is five to 10 years. The Company engaged Octal Capital, the independent financial adviser, which has issued a letter explaining why a period longer than three years is required and confirming whether it is normal business practice for an agreement of this type to be of such duration pursuant to Rule 14A.52 of the Hong Kong Listing Rules. Octal Capital is of the view that, based on its researches and analysis and its discussion with management of the Company, it is a reasonable and a commonly adopted practice for such lease agreements to be of a term of more than three years depending on the nature of the leased assets.

4.       PRC LAW IMPLICATIONS

4.1               Pursuant to the Shanghai Listing Rules, Air China Cargo is a subsidiary of the Company in its consolidated financial statements and any transaction between the ACC Group and the Group does not constitute a related party transaction and is therefore exempted from disclosure and compliance with the relevant procedures.

4.2               Pursuant to the Shanghai Listing Rules, CNACG is a related party of the Company because it is controlled by the controlling shareholder of the Company, therefore any transaction between the CNACG Group and the Group constitutes a related party transaction. As such, the CNACG Transactions shall be disclosed in a timely manner.

5.       OPINION OF THE DIRECTORS

5.1               The Board (including the independent non-executive Directors) considers that the ACC Transactions and CNACG 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 on a continuing and regular basis and in the ordinary and usual course of business of the

5.1              

Company, are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and that the relevant annual caps for the ACC Transactions and the CNACG Transactions for each of the three years ending 31 December 2017, 2018 and 2019 and the proposed annual caps in connection with the Leases of GAC Regulated Property are fair and reasonable.

5.2               Mr. Cai Jingjiang, Mr. Song Zhiyong, Mr. John Robert Slosar and Mr. Ian Sai Cheung Shiu are considered to have a material interest in the ACC Transactions and therefore have abstained from voting on the relevant board resolutions of the Company in respect of the ACC Transactions.

5.3               Mr. Cai Jingjiang, Mr. Cao Jianxiong and Mr. Feng Gang are considered to have a material interest in the CNACG Transactions and therefore have abstained from voting on the relevant board resolutions of the Company in respect of the CNACG Transactions.

5.4               The Company has appointed Octal Capital as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in connection with the ACC Transactions, the proposed annual caps under the New ACC Framework Agreement, the term of the Leases of GAC Regulated Property under the New ACC Framework Agreement. The Company has also appointed Octal Capital as the independent financial adviser to advise the lease term of the finance leases under the New CNACG Framework Agreement.

5.5               A circular containing, among other things, (i) details of the ACC Transactions and the proposed annual caps under the New ACC Framework Agreement; (ii) a letter from Octal Capital to the Independent Board Committee and the Independent Shareholders containing its advice on the ACC Transactions and the proposed annual caps thereunder; and (iii) the recommendation of the Independent Board Committee to the Independent Shareholders in respect of the ACC Transactions and the proposed annual caps thereunder, will be dispatched to Shareholders on or about 12 September 2016 in accordance with the Hong Kong Listing Rules.

6.       DEFINITION

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

"ACC Framework Agreement"         the framework agreement, dated 27 October 2011, entered into between the
                                                   Company and Air China Cargo in respect of the ACC Transactions

"ACC Group"                                   Air China Cargo and its subsidiaries

"ACC Transactions"                          the continuing connected transactions contemplated under the

ACC Framework Agreement and the New ACC Framework Agreement, as applicable, between any member of the Group on the one hand, and any member of the ACC Group on the other hand

"Air China Cargo"                             Air China Cargo Co., Ltd, a company incorporated under the

laws of the PRC with limited liability and a non-wholly owned subsidiary of the Company

"Board"                                            the board of directors of the Company

"Cathay Pacific"                                Cathay Pacific Airways Limited, a company incorporated in

Hong Kong, whose shares are listed on the Hong Kong Stock Exchange, the principal activity of which is the operation of scheduled airline services

"CNACG"                                        China National Aviation Corporation (Group) Limited, a company incorporated under the laws of Hong Kong and a wholly-owned subsidiary of China National Aviation Holding Company (a company incorporated under the laws of the PRC with limited liability and a substantial Shareholder of the Company) as at the date of this announcement

"CNACG Group"                             CNACG and its associates

"CNACG Framework Agreement"    the framework agreement, dated 26 August 2008, entered into between the
                                                     Company and CNACG in respect of in respect of the CNACG Transactions

"CNACG Transactions"                    the continuing connected transactions contemplated under the

CNACG Framework Agreement and the new CNACG Framework Agreement, as applicable, between any member of the Group on the one hand, and any member of CNACG Group on the other hand

"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

"Director(s)"                                     the director(s) of the Company

"GAC"                                              the General Administration of Customs of the PRC (中華人民

共和國海關總署)

"GAC Regulated Prop-erty"              certain property of the Group that are located in the areas sub-

ject to the oversight and administration of the GAC in various cities of the PRC

"Group"                                            the Company and its subsidiaries, excluding the ACC Group (unless otherwise provided in this announcement)

"Hong Kong Listing Rules"                the Rules Governing the Listing of Securities on The Stock

Exchange of Hong Kong Limited

"Hong Kong Stock Exchange"            The Stock Exchange of Hong Kong Limited

"Independent Board Committee"          a board committee comprising Mr. Pan Xiaojiang, Mr. Simon To Chi Keung,
                                                       Mr. Stanley Hui Hon-chung and Mr. Li Dajin, all being the independent non-
                                                       executive directors of the Company

"Independent Shareholders"              the Shareholders of the Company excluding Cathay Pacific

and its associates, in connection with the independent share- holder's approval for the ACC Transactions and the proposed annual caps thereunder

"Leases of GAC Regulated Property"  the property lease contracts, each with an initial term of five or six years,
                                                       between the Company (as the lessor) and Air China Cargo (as the lessee) in
                                                       connection with the lease of certain GAC Regulated Property, as more
                                                       particularly described in Section 1.2 of this announcement

"New ACC Framework Agreement"    the framework agreement, dated 30 August 2016, entered into between the
                                                        Company and Air China Cargo in respect of the ACC Transactions

"New CNACG Framework Agreement"  the framework agreement, dated 30 August 2016, entered into between the
                                                           Company and CNACG in respect of the CNACG Transactions

"Octal Capital"                                  Octal Capital Limited, a corporation licensed to conduct Type

1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO, being the inde- pendent financial adviser to the Independent Board Committee and the Independent Shareholders in connection with the ACC Transactions, the proposed annual caps under the New ACC Framework Agreement and the term of the Leases of GAC Regulated Property under the New ACC Framework Agreement, and being the independent financial adviser to the Company in connection with the lease term of the finance leases under the New CNACG Framework Agreement

"Percentage Ratios"                           the percentage ratios set out in Rule 14.07 of the Hong Kong

Listing Rules, i.e. "assets ratio", "profits ratio", "revenue ra- tio", "consideration ratio" and "equity capital ratio"

"PRC"                                              the People's Republic of China, excluding, for the purpose of this announcement only, the Hong Kong Special Administra- tive Region, the Macau Special Administrative Region and Taiwan

"RMB"                                             Renminbi, the lawful currency of the PRC

"SFO"                                              the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended and modified from time to time

"Shanghai Listing Rules"                    the Rules Governing the Trading of Stocks on the Shanghai

Stock Exchange

"Shareholders"                                  the shareholders of the Company

By order of the Board

Air China Limited

Rao Xinyu      Tam Shuit Mui

Joint Company Secretaries

Beijing, the PRC, 30 August 2016

As at the date of this announcement, the directors of the Company are Mr. Cai Jianjiang, Mr. Song Zhiyong, Mr. Cao Jianxiong, Mr. Feng Gang, Mr. John Robert Slosar, Mr. Ian Sai Cheung Shiu, Mr. Pan Xiaojiang*, Mr. Simon To Chi Keung*, Mr. Stanley Hui Hon-chung* and Mr. Li Dajin*.

* Independent non-executive director of the Company

 

END

 

 

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