CONTINUING CONNECTED TRANSACTIONS

RNS Number : 7912F

Air China Ld

31 October 2018

 

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.

中國國際航空股份有限公司

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

Reference is made to the 2015 Circular in relation to the continuing connected transactions of the Company. At the 2015 EGM, the Independent Shareholders approved certain continuing connected transactions of the Company and their relevant annual caps for the three years ending 31 December 2018 that are required by the Shanghai Listing Rules to be approved by the Independent Shareholders. The Company expected certain continuing connected transactions set out in the 2015 Circular will continue to be conducted after 31 December 2018, therefore the Company will continue to comply with Chapter 14A of the Hong Kong Listing Rules for such continuing connected transactions to be conducted in the next three years (i.e. from 1 January 2019 to 31 December 2021).

On 30 October 2018, the Board approved the continuing connected transactions set out in this announcement and the relevant annual caps for each of them for the three years ending 31 December 2019, 2020 and 2021.

As each of the applicable Percentage Ratios (other than the profits ratio) of the continuing connected transactions (excluding the de minimis continuing connected transactions) set out in this announcement, on an annual basis, is higher than 0.1% and less than 5.0%, they therefore fall under Rule 14A.76(2)(a) of the Hong Kong Listing Rules. Accordingly, these continuing connected transactions are subject to the reporting, announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules, but are exempted from the Independent Shareholders' approval requirement.

However, pursuant to the Shanghai Listing Rules, the Company will seek Independent Shareholders' approval for the continuing connected transactions under Government Charter Flight Service Framework Agreement, Sales Agency Services Framework Agreement,

1.       INTRODUCTION

Reference is made to the 2015 Circular in relation to, among others, the continuing connected transactions of the Company. At the 2015 EGM, the Independent Shareholders approved certain continuing connected transactions of the Company and their relevant annual caps for the three years ending 31 December 2018 that are required by the Shanghai Listing Rules to be approved by the Independent Shareholders. The Company expected certain continuing connected transactions set out in the 2015 Circular will continue to be conducted after 31 December 2018, therefore the Company will continue to comply with Chapter 14A of the Hong Kong Listing Rules for such continuing connected transactions to be conducted in the next three years (i.e. from 1 January 2019 to 31 December 2021).

On 30 October 2018, the Board approved the continuing connected transactions set out in this announcement and the relevant annual caps for each of them for the three years ending 31 December 2021.

2.       PARTIES AND CONNECTIONS OF THE PARTIES

The Company, whose principal business activity is air passenger, air cargo and related services, conducts continuing connected transactions with the following parties:

•   CNAHC

CNAHC is a substantial shareholder of the Company and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNAHC is primarily engaged in managing its state-owned assets and its equity interest in investees, charter of aircraft and maintenance of aviation equipment.

•   CNAMC

CNAMC is a wholly-owned subsidiary of CNAHC and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNAMC is primarily engaged in media and advertising business.

•   CNACD

CNACD is a wholly-owned subsidiary of CNAHC and is therefore a connected person of the Company as defined under the Hong Kong Listing Rules. CNACD is primarily engaged in businesses such as entrusted asset management, real estate development, and implementation and supervision of construction projects.

3.       CONTINUING CONNECTED TRANSACTIONS

3.1.           Government Charter Flight Services

The Company entered into the Government Charter Flight Service Framework Agreement with CNAHC on 30 October 2018.

Description of transaction: Pursuant to the Government Charter Flight Service Framework Agreement, CNAHC shall resort to the Company's charter flight services so as to fulfill the government charter flight assignment. The Company's hourly rate of the charter flight service fee will be calculated on the basis of the following formula:

Hourly rate = Total cost per flight hour × (1 + 6.5%)

Total cost per flight hour includes direct costs and indirect costs.

The initial term of the Government Charter Flight Service Framework Agreement is from 1 January 2019 to 31 December 2021. Upon expiration of the initial term, the Government Charter Flight Service Framework Agreement may be automatically renewed for successive terms of three years each, subject to the satisfaction of the requirements of the Hong Kong Listing Rules/Shanghai Listing Rules and the performance of the approval procedures required by the Hong Kong Listing Rules/Shanghai Listing Rules. Upon expiry of the Government Charter Flight Service Framework Agreement, the Board will re-assess the terms and conditions of the Government Charter Flight Service Framework Agreement, and the Company will re-comply with the relevant rules governing connected transactions under the Hong Kong Listing Rules/Shanghai Listing Rules. During the term of the Government Charter Flight Service Framework Agreement, either party may terminate the agreement on any 31 December by giving the other party at least three months' written notice.

Reasons for the transaction: As the national flag carrier of China, the Company has historically provided charter flights for government related travel services to State leaders, government delegations, national sports teams and cultural envoys. The Company has gained significant brand recognition by being the designated government charter flight carrier. Based upon the hourly rate formula under the Government Charter Flight Service Framework Agreement, it is expected that the Company will generate good revenue from such transaction.

Historical Amounts and Proposed Caps:

Set forth below is a summary of the historical annual caps, the actual amounts and the proposed annual caps for the total amount payable by CNAHC to the Company under the Government Charter Flight Service Framework Agreement:

	Historical Annual Caps			Historical Actual Amounts				Proposed Annual Caps
Transaction	Annual cap for the year ended 31 December 2016	Annual cap for the year ended 31 December 2017	Annual cap for the year ended 31 December 2018	Actual annual amount for the year ended 31 December 2016	Actual annual amount for the year ended 31 December 2017	Unaudited historical amount for the period from 1 January to 30 June 2018	Estimated annual amount for the year ending 31 December 2018	Annual cap for the year ending 31 December 2019	Annual cap for the year ending 31 December 2020	Annual cap for the year ending 31 December 2021
Total amount payable by CNAHC to the Company in accordance with the Government Charter Flight Service Framework Agreement	RMB900 million	RMB900 million	RMB900 million	RMB518 million	RMB441 million	RMB178 million	RMB500 million	RMB900 million	RMB900 million	RMB900 million

Basis for such caps:

In arriving at the above caps, the Directors have considered the historical and estimated transaction amounts for the same type of transactions as set out in the table above and the following factors:

•     given the growing influence of China in the world, the government's visiting trips are expected to continue to increase during the period from 2019 to 2021; and

•     uncertainties such as the future jet fuel price could lead to an increase in flight- related costs.

3.2.           Sales Agency Services

The Company entered into the Sales Agency Services Framework Agreement with CNAHC on 30 October 2018.

Description of transaction: Pursuant to the Sales Agency Services Framework Agreement, the Sales Agency Companies will:

•    procure purchasers for the Group's air tickets and cargo spaces on a commission basis; or

•    purchase air tickets (other than domestic air tickets) and cargo spaces from the Group and resell such air tickets and cargo spaces to end customers.

As for the air passenger agency services, the Group will consult with the Sales Agency Companies on a fair and voluntary basis and determine the agency service fee standards. In addition, the Group and the Sales Agency Companies may agree on specific sales targets and the corresponding incentive plans for achieving such targets to the extent permitted by law and in accordance with the industry practice.

As for the air cargo agency services, the Group and the Sales Agency Companies will discuss and determine the applicable transportation prices, which shall be no less favourable than the prices offered by independent third parties in the PRC air cargo transportation market for transporting such products, with reference to prices charged by air cargo agencies of the same scale and type, as well as the specific product types and required transportation time. The Sales Agency Companies may formulate the transportation prices charged to their customers (including the prices for extended services offered to their customers) based on the aforesaid transportation prices, with differences to be retained as commissions. In addition, the Group and the Sales Agency Companies may agree on specific sales targets and the corresponding price discounts for achieving such sales targets in accordance with the industry practice.

The initial term of the Sales Agency Services Framework Agreement is from 1 January 2019 to 31 December 2021. Upon expiration of the initial term, the Sales Agency Services Framework Agreement may be automatically renewed for successive terms of three years each, subject to the satisfaction of the requirements of the Hong Kong Listing Rules/ Shanghai Listing Rules and the performance of the approval procedures required by the Hong Kong Listing Rules/Shanghai Listing Rules. Upon expiry of the Sales Agency Services Framework Agreement, the Board will re-assess the terms and conditions of the Sales Agency Services Framework Agreement, and the Company will re-comply with the relevant rules governing connected transactions under the Hong Kong Listing Rules/ Shanghai Listing Rules. During the term of the Sales Agency Services Framework Agreement, either party may terminate the agreement on any 31 December by giving the other party at least three months' written notice.

Reasons for the transaction: The Group has entered into similar transactions with various parties including both connected persons and independent third parties in its ordinary course of business. Air transportation sales agency is a highly marketized business.

In view of the long-term amicable sales agency cooperation relationship between the Group and the Sales Agency Companies as well as the rich experience and sizable customer base of the latter in the air transportation agency business, the Group is willing to continue working with the Sales Agency Companies to provide air transportation sales agency services.

For each of the three years ending 31 December 2019, 2020, and 2021, the aggregate annual amount of sales of airline tickets and cargo space by the Group to CNAHC Group and the aggregate annual amount of agency commission payable by the Group to CNAHC Group under the Sales Agency Services Framework Agreement are expected to fall below the de minimis threshold as stipulated under Rule 14A.76(1)(a) of the Hong Kong Listing Rules; therefore, the above transaction will be exempt from the reporting, annual review, announcement and independent shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules for continuing connected transactions.

3.3.           Comprehensive Services

The Company entered into the Comprehensive Services Framework Agreement with CNAHC on 30 October 2018.

Description of transaction: Pursuant to the Comprehensive Services Framework Agreement:

•     CNAHC Group will be appointed as one of the providers of ancillary production and supply services of the Group. The primary services provided by CNAHC Group (provided that its relevant members have obtained the relevant qualifications and certifications) to the Group include but are not limited to:

(1)             supply of various items for in-flight services;

(2)             property management services in areas including Beijing, Chengdu, Chongqing, Shanghai, Hangzhou and Guangzhou;

(3)             hotel accommodation and staff recuperation;

(4)             airline catering services; and

(5)             printing of air tickets and other publications.

•     The Company accepts the commission of CNAHC and will provide welfare-logistics services for CNAHC's retired employees.

•     The prices of airline catering services to be provided by CNAHC Group to the Group will be determined by the parties based on the prices for the same type of catering services available from independent third parties with reference to relevant

factors as mentioned below. A department or an officer designated by the two parties will be responsible for verifying market price for the same type of catering services available from independent third parties. In general, inquires on prices and terms will be made to at least two independent third parties by e-mail, facsimile or telephone. The transaction price will be determined by the two parties after comparison and taking into consideration certain factors including cost of raw materials and labour costs. When products change according to service demands, appropriate adjustment will be made upon negotiation between the two parties based on the variation in cost of raw materials or CPI index.

•    The prices of property management services to be provided by CNAHC Group to the Group will be determined by the parties based on the price for the same type of property management services available from independent third parties with reference to relevant factors as mentioned below. A department or an officer designated by the two parties will be responsible for verifying the prices and terms of the same type of property management services available from independent third parties. In general, inquiries on prices and terms will be made to at least two independent third parties by e-mail, facsimile or telephone. The price of property management services will be determined by the two parties after comparison and taking into consideration certain factors including quality, scope and type of property management services and specific needs of the parties.

•    The prices of hotel accommodation and staff recuperation services to be provided by CNAHC Group to the Group shall be no less favourable than the prices for the same type of guest room products or services available from independent third parties of the same level in the area of the hotel. A department or an officer designated by the Company will be responsible for verifying the prices and terms for the same type of products and services available from independent third parties. In general, inquires on prices and terms will be made to at least two independent third parties by e-mail, facsimile or telephone. The prices will be determined by the two parties after comparison and taking into consideration certain factors including quality of products and services, seasonal demand in the hotel industry, location of hotel and specific needs of the parties.

•    For supply of items for in-flight services, printing and other services to be provided by CNAHC Group to the Group, CNAHC Group as a supplier of the Group shall provide such services in accordance with the bidding management requirements of the Group. The prices of such services shall be no less favourable than the prices of similar products or services available from independent third parties.

•    The management charges payable by CNAHC to the Company for the welfare logistics services shall be settled at a rate of 4% of the actual aggregate welfare expense paid to such retired employees as confirmed by CNAHC.

The initial term of the Comprehensive Services Framework Agreement is from 1 January 2019 to 31 December 2021. Upon expiration of the initial term, the Comprehensive Services Framework Agreement may be automatically renewed for successive terms of three years each, subject to the satisfaction of the requirements of the Hong Kong Listing Rules/Shanghai Listing Rules and the performance of the approval procedures required by the Hong Kong Listing Rules/Shanghai Listing Rules. Upon expiry of the Comprehensive Services Framework Agreement, the Board will re-assess the terms and conditions of the Comprehensive Services Framework Agreement, and the Company will re-comply with the relevant rules governing connected transactions under the Hong Kong Listing Rules/ Shanghai Listing Rules. During the term of the Comprehensive Services Framework Agreement, either party may terminate the agreement on any 31 December by giving the other party at least three months' written notice.

Reasons for the transaction: For the services to be provided by CNAHC Group, the Directors believe that CNAHC Group has special strengths that independent parties do not possess, including (i) knowledge of the aviation industry; (ii) a proven track record of quality and timely service; and (iii) the sites, where services are provided by CNAHC Group, are generally near to the site of the Group, and therefore CNAHC Group is in a position to offer efficient services. In light of these factors, the Directors believe that it is in the best interest of the Group to enter into the above transactions with CNAHC Group.

Historical Amounts and Proposed Caps:

Set forth below is a summary of the historical annual caps, the actual amounts and the proposed annual caps of the total amount payable by the Group to CNAHC Group in accordance with the Comprehensive Services Framework Agreement:

	Historical Annual Caps			Historical Actual Amounts				Proposed Annual Caps
Transaction	Annual cap for the year ended 31 December 2016	Annual cap for the year ended 31 December 2017	Annual cap for the year ended 31 December 2018	Actual annual amount for the year ended 31 December 2016	Actual annual amount for the year ended 31 December 2017	Unaudited historical amount for the period from 1 January to 30 June 2018	Estimated annual amount for the year ending 31 December 2018	Annual cap for the year ending 31 December 2019	Annual cap for the year ending 31 December 2020	Annual cap for the year ending 31 December 2021
Amount payable by the Group to CNAHC Group in accordance with the Comprehensive Services Framework Agreement	RMB1,375 million	RMB1,513 million	RMB1,664 million	RMB1,251 million	RMB1,285 million	RMB711 million	RMB1,500 million	RMB2,100 million	RMB2,500 million	RMB3,000 million

For each of the three years ending 31 December 2019, 2020 and 2021, the aggregate annual amount payable by CNAHC to the Company for the provision of welfare-logistics services to the retired employees is expected to fall below the de minimis threshold as stipulated under Rule 14A.76(1)(a) of the Hong Kong Listing Rules, therefore such transaction will be exempt from the reporting, annual review, announcement and independent shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules for continuing connected transactions.

Basis for such caps:

In arriving at the above caps, the Directors have considered the historical transaction amount for the same type of transactions and have taken into account the expected growth of the Group's air passenger services in the next few years. As the Group has been continually expanding its fleet size and increasing its transportation capacity, the demand for ancillary production and supply services such as supply of items for in-flight services, airline catering services and aviation ground services will continue to grow and the transaction amount under the Comprehensive Services Framework Agreement is expected to increase accordingly. In addition, the increase in labour cost in the future will result in the increase in transaction amount. In light of the above factors, based on the annual cap of 2018 and the annual growth rate of approximately 20%, it is expected that the amount payable by the Group to CNAHC Group in 2019 in accordance with the Comprehensive Services Framework Agreement will not exceed RMB2,100 million, and will increase at an annual rate of 20% afterwards.

3.4.           Property Leasing

The Company entered into the Properties Leasing Framework Agreement with CNAHC on 30 October 2018.

Description of transaction: Pursuant to the Properties Leasing Framework Agreement, CNAHC Group agreed to lease part of its properties to the Group for uses as its business premises, offices and storage housing; and the Group also agreed to lease to CNAHC Group part of its properties for the same uses.

The rent payable under the Properties Leasing Framework Agreement will be determined by the two parties based on the prices for leasing services available from independent third parties for the same type of properties in close proximity to the properties with reference to relevant factors as mentioned below. A department or an officer designated by the two parties will be responsible for verifying the prices and terms for the same type of properties and related services available from independent third parties. In general, inquires on prices and terms will be made to at least two independent third parties by e- mail, facsimile or telephone.

The property leasing prices will be determined by the two parties after comparison and taking into consideration certain factors including property service quality, location and district of properties and specific needs of the parties, and specific property leasing agreements will be entered into.

The initial term of the Properties Leasing Framework Agreement is from 1 January 2019 to 31 December 2021. Upon expiration of the initial term, the Properties Leasing Framework Agreement may be automatically renewed for successive terms of three years each, subject to the satisfaction of the requirements of the Hong Kong Listing Rules/ Shanghai Listing Rules and the performance of the approval procedures required by the Hong Kong Listing Rules/Shanghai Listing Rules. Upon expiry of the Properties Leasing Framework Agreement, the Board will re-assess the terms and conditions of the Properties Leasing Framework Agreement, and the Company will re-comply with the relevant rules governing connected transactions under the Hong Kong Listing Rules/Shanghai Listing Rules. During the term of the Properties Leasing Framework Agreement, either party may terminate the agreement on any 31 December by giving the other party at least three months' written notice.

Reasons for such transaction: In the ordinary course of business, the Group has entered into similar property leasing transactions with various parties including both connected persons and independent third parties.

Historical Amounts:

Set forth below is the historical annual caps and the actual amounts of the rent payable by the Group to CNAHC Group under the properties leasing framework agreement entered between the Company and CNAHC on 29 October 2015:

	Historical Annual Caps			Historical Actual Amounts
Transaction	Annual cap for the year ended 31 December 2016	Annual cap for the year ended 31 December 2017	Annual cap for the year ended 31 December 2018	Actual annual amount for the year ended 31 December 2016	Actual annual amount for the year ended 31 December 2017	Unaudited historical amount for the period from 1 January to 30 June 2018	Estimated annual amount for the year ending 31 December 2018
Rent payable by the Group to CNAHC Group	RMB155 million	RMB178 million	RMB200 million	RMB104 million	RMB107 million	RMB52 million	RMB117 million

Proposed Caps:

As IFRS 16 "Lease" will take effect from 1 January 2019 and be applicable to financial years starting on or after 1 January 2019, pursuant to the requirements of the Hong Kong Stock Exchange, the annual caps for the continuing connected transactions of property leasing with the Group as the lessee for the years 2019, 2020 and 2021 will be set based on the total value of right-of-use assets relating to the leases to be entered into by the Group, as detailed in the table below:

	Proposed Annual Caps
	Annual cap for the year ending 31 December 2019	Annual cap for the year ending 31 December 2020	Annual cap for the year ending 31 December 2021
Total value of right-of-use assets relating to the leases to be entered into by the Group acting as lessee in accordance with the Properties Leasing Framework Agreement	RMB500 million	RMB550 million	RMB620 million

The aggregate annual amount of rent payable by CNAHC Group to the Group for each of the three years ending 31 December 2019, 2020 and 2021 are expected to fall below the de minimis threshold as stipulated under Rule 14A.76(1)(a) of the Hong Kong Listing Rules, and therefore such transaction will be exempt from the reporting, annual review, announcement and independent shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules for continuing connected transactions.

Basis for such caps:

In arriving at the above caps, the Directors have considered (i) the historical transaction amount for the same type of transactions; (ii) the future growth of rent (estimated to be approximately 5% per year) payable by the Group to CNAHC Group and the increase in the leasing of the Group (estimated to be approximately 10% per year) arising from business development of the Group; (iii) the estimated future total annual rents to be paid by the Group to CNAHC Group by taking the above factors into consideration, the amount of which for the years 2019, 2020 and 2021 is estimated to be not exceeding RMB135 million, RMB155 million and RMB179 million, respectively; and (iv) the value of right- of-use assets calculated by discounting the estimated total annual rents of the future years using the incremental borrowing rate of the Group as the discount rate.

3.5.           Media Services

The Company entered into the Media Services Framework Agreement with CNAMC on 30 October 2018.

Description of transaction: Pursuant to the Media Services Framework Agreement, CNAMC will provide Media Services to the Group. Of which, the Company grants CNAMC an exclusive right to distribute in-flight reading materials of the Company. Based on business needs, CNAMC and the Company will enter into relevant business execution agreements under which the Company shall be responsible for the standards, budgets, and appraisal of business execution while CNAMC shall be responsible for the actual implementation of business execution. Where CNAMC provides Media Services for the subsidiaries of the Company, the parties thereto will enter into relevant business execution agreements based on the principles under the Media Services Framework Agreement.

•    In respect of Media Services provided by CNAMC to the Company, the Company shall pay CNAMC relevant service fees as per the market price. In general, inquires by e-mail, facsimile or telephone on prices and terms will be made by the Company to at least two independent third parties, and the transaction price will be determined by the two parties after comparison and taking into consideration certain factors including specific needs of the parties to the transaction and the service quality.

•    In respect of the Company's media resources used by CNAMC in operating the Company's media business, CNAMC shall pay the Company an annual media resource charge of RMB13.8915 million for each of the three years of 2019, 2020, and 2021 as per the comparable market prices of the media resources.

The initial term of the Media Services Framework Agreement is from 1 January 2019 to 31 December 2021. Upon expiration of the initial term, the Media Services Framework Agreement may be automatically renewed for successive terms of three years each, subject to the satisfaction of the requirements of the Hong Kong Listing Rules/Shanghai Listing Rules and the performance of the approval procedures required by the Hong Kong Listing Rules/Shanghai Listing Rules. Upon expiry of the Media Services Framework Agreement, the Board will re-assess the terms and conditions of the Media Services Framework Agreement, and the Company will re-comply with the relevant rules governing connected transactions under the Hong Kong Listing Rules/Shanghai Listing Rules. During the term of the Media Services Framework Agreement, either party may terminate the agreement on any 31 December by giving the other party at least three months' written notice.

Reasons for such transaction: The Directors believe that it is in the best interest of the Company to enter into above transaction with CNAMC because:

•    media and advertising business is not the core competency of the Company while CNAMC has extensive experience in in-flight advertising operation and has a proven network of advertising sponsors to draw upon; and

•    as a company having engaged in the aviation media business for a long time, CNAMC possesses professional qualifications and team and has a profound understanding of the corporate culture and brand of the Company as well as advantages in aviation media business sectors such as entertainment programmes production and advertising agency.

Historical Amounts and Proposed Caps:

Set forth below is a summary of the historical annual caps, the actual amounts and the proposed annual caps for the amount payable by the Group to CNAMC under the Media Services Framework Agreement:

	Historical Annual Caps			Historical Actual Amounts				Proposed Annual Caps
Transaction	Annual cap for the year ended 31 December 2016	Annual cap for the year ended 31 December 2017	Annual cap for the year ended 31 December 2018	Actual annual amount for the year ended 31 December 2016	Actual annual amount for the year ended 31 December 2017	Unaudited historical amount for the period from 1 January to 30 June 2018	Estimated annual amount for the year ending 31 December 2018	Annual cap for the year ending 31 December 2019	Annual cap for the year ending 31 December 2020	Annual cap for the year ending 31 December 2021
Amount payable by the Group to CNAMC in accordance with the Media Services Framework Agreement	RMB270 million	RMB297 million	RMB326.7 million	RMB208 million	RMB158 million	RMB80 million	RMB290 million	RMB550 million	RMB700 million	RMB750 million

The annual amount payable by CNAMC to the Group under the Media Services Framework Agreement for each of the three years ending 31 December 2019, 2020 and 2021 is expected to fall below the de minimis threshold as stipulated under Rule 14A.76(1)(a) of the Hong Kong Listing Rules, and therefore such transaction will be exempt from the reporting, annual review, announcement and independent shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules for continuing connected transactions.

Basis for such caps:

In arriving at the above caps, the Directors have considered the historical and estimated transaction amounts for the same type of transactions as set out in the table above and the following factors:

Firstly, as the Group expands its fleet size, the need of the Group for aviation media businesses such as entertainment programmes and advertising agency will increase accordingly. Secondly, the Company's service development strategy requires the continuous enhancement of its service quality. Therefore, the Company will continuously increase its investment in the purchase, production, promotion, and dissemination of aviation media business, and commission CNAMC to provide more Media Services. As a result of the above factors, it is expected that the transaction amount from 2019 to 2021 will increase. Based on the estimated transaction amount to be paid by the Group to CNAMC in 2018 and given the above business growth, it is expected that the transaction amount will not exceed RMB550 million in 2019, and will not exceed RMB700 million and RMB750 million in 2020 and 2021, respectively.

3.6.           Construction Project

The Company entered into the Construction Project Management Framework Agreement with CNACD on 30 October 2018.

Description of transaction: Pursuant to the Construction Project Management Framework Agreement, CNACD is commissioned by the Company to serve as the manager of the construction projects and establish project headquarters. It shall provide management services for the Company's projects based on project characteristics using its industry expertise and professional skills. The management work includes the management at the early stage, management during the implementation of the project, and management at the late stage.

CNACD receives service fees from the Company based on the audited amounts in the financial settlement of specific commissioned projects in accordance with the commissioned management contract. The service fees shall be calculated as 3% of the audited amount in the financial settlement of the investment relating to the management contents provided by CNACD as commissioned by the Company, with the rewards and penalties agreed by both parties based on the project management progress and the balance and the particulars to be specified in individual project commissioned management contracts. Alternatively, CNACD may receive service fees from the Company as per the commissioned management contents based on the size of or investment in the projects to be commissioned, and the service fees shall be calculated as per the full-labor cost (including management fee) based on the human resources and materials invested by CNACD, with the rewards and penalties agreed by both parties based on the project management progress and the balance and the particulars to be specified in relevant agreements. If the actual settlement price of the project exceeds the investment amount agreed upon by both parties due to reasons not caused by the Company, the government and force majeure, CNACD shall pay the excess settlement price.

The initial term of the Construction Project Management Framework Agreement is from 1 January 2019 to 31 December 2021. Upon expiration of the initial term, the Construction Project Management Framework Agreement may be automatically renewed for successive terms of three years each, subject to the satisfaction of the requirements of the Hong Kong Listing Rules/Shanghai Listing Rules and the performance of the approval procedures required by the Hong Kong Listing Rules/Shanghai Listing Rules. Upon expiry of the Construction Project Management Framework Agreement, the Board will re-assess the terms and conditions of the Construction Project Management Framework Agreement, and the Company will re-comply with the relevant rules governing connected transactions under the Hong Kong Listing Rules/Shanghai Listing Rules. During the term of the Construction Project Management Framework Agreement, either party may terminate the agreement on any 31 December by giving the other party at least three months' written notice.

Reasons for such transaction: The Directors believe that it is in the best interest of the Group to enter into the above transaction with CNACD because:

•    CNACD specializes in construction projects relating to the aviation industry, has extensive experience in construction project management relating to the aviation industry, and cooperated well with the Company in the past; and

•    Commissioned management is a management model commonly used in large infrastructure construction projects. Outsourcing construction project management enables the Company to concentrate its management resources on the operation of core businesses.

Historical amount and proposed caps:

Set forth below is a summary of the historical annual caps, the actual amount and the proposed annual caps for the amount payable by the Company to CNACD under the Construction Project Management Framework Agreement:

	Historical Annual Caps			Historical Actual Amount				Proposed Annual Caps
Transaction	Annual cap for the year ended 31 December 2016	Annual cap for the year ended 31 December 2017	Annual cap for the year ended 31 December 2018	Actual annual amount for the year ended 31 December 2016	Actual annual amount for the year ended 31 December 2017	Unaudited amount for the period form 1 January to 30 June 2018	Estimated annual amount for the year ending 31 December 2018	Annual cap for the year ending 31 December 2019	Annual cap for the year ending 31 December 2020	Annual cap for the year ending 31 December 2021
Amount payable by the Company to CNACD in accordance with the Construction Project Management Framework Agreement	Below the de minimis threshold as stipulated under Rule 14A.76(1)(a) of the Hong Kong Listing Rules			RMB4 million	RMB1 million	RMB5 million	RMB27 million	RMB120 million	RMB130 million	RMB130 million

Basis for such caps: As its business develops, the Company expects an increase in demand for new, rebuilding and expansion, and maintenance projects over the next three years. Meanwhile, for construction projects that have been planned but not started, it is expected that the progress will be accelerated in the future as the Company's urgency for using the construction projects has intensified, and project expense will increase accordingly. Therefore, it is expected that the transaction amount from 2019 to 2021 will increase compared with that of the past. It is estimated that the total amount payable by the Company to CNACD under the Construction Project Management Framework Agreement will not exceed RMB120 million in 2019, and will not exceed RMB130 million in 2020 and 2021.

4.       INTERNAL CONTROL

The Company has adopted the following measures to ensure that the above continuing connected transactions will be conducted on normal commercial terms and in accordance their respective framework agreements and the pricing policies of the Company:

•    Before entering into the above connected transactions, the Finance Department, the Legal Department, the Asset Management Department (which has a dedicated sub-division responsible for management of connected transactions) and if applicable, certain other relevant departments of the Company will review the proposed terms for the individual transactions and discuss with the relevant business department of the Group to ensure that

such transactions are conducted on normal commercial terms and terms of applicable framework agreements and in compliance with the pricing policies of the Group before these relevant departments approve the finalized transaction agreements according to their authority within the Group.

•    The Asset Management Department of the Company is responsible for supervising connected transactions. The Asset Management Department will regularly monitor and collect detailed information on relevant continuing connected transactions (including but not limited to the implementation of the pricing policies, payment arrangement, and actual transaction amounts of the above continuing connected transactions) to ensure that such transactions are conducted in accordance with applicable framework agreements for continuing connected transactions. In addition, the Asset Management Department will be responsible for reviewing and evaluating the actual transaction amount and cap balance of the above continuing connected transactions on a monthly basis. If the relevant cap is expected to be exceeded, the Asset Management Department will report to the management of the Company and take appropriate measures in accordance with the relevant requirements of the Hong Kong Listing Rules and/or the Shanghai Listing Rules.

•    The Internal Audit Department of the Company is responsible for carrying out annual assessment on the internal control procedures of the Group, including but not limited to information relating to the management of continuing connected transactions. In addition, the Internal Audit Department is responsible for preparing the annual assessment report on internal control and will submit the same to the Board for review and approval.

•    The independent auditor and the independent non-executive Directors of the Company will conduct annual review on the non-exempt continuing connected transactions.

5.       HONG KONG LISTING RULES IMPLICATIONS

As each of the applicable Percentage Ratios (other than the profits ratio) of the continuing connected transactions (excluding the de minimis continuing connected transactions) set out above, on an annual basis, is higher than 0.1% and less than 5.0%, they therefore fall under Rule 14A.76(2)(a) of the Hong Kong Listing Rules. Accordingly, these continuing connected transactions are subject to the reporting, announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules, but are exempted from the Independent Shareholders' approval requirement.

Mr. Cai Jianjiang, Mr. Song Zhiyong, and Mr. Xue Yasong are considered to have a material interest in each of the continuing connected transactions set out above and therefore have abstained from voting in the relevant board resolutions in respect of the continuing connected transactions. Save as disclosed above, none of the Directors have a material interest in any of the continuing connected transactions and hence no other Director is required to abstain from voting in the relevant board resolutions.

The Board (including the independent non-executive Directors) considers that the terms and conditions of the abovementioned continuing connected transactions are fair and reasonable. Such continuing connected transactions are on normal commercial terms or better and in the ordinary and usual course of business of the Company, and are in the interests of the Company and its Shareholders as a whole. The Board also considers that the annual caps for each of the three years ending 31 December 2019, 2020 and 2021 for the abovementioned continuing connected transactions are fair and reasonable.

6.       PRC LAW IMPLICATIONS

Pursuant to the Shanghai Listing Rules, the following agreements shall be approved or ratified by the Independent Shareholders at the extraordinary general meeting of the Company:

(1)             Government Charter Flight Service Framework Agreement;

(2)             Sales Agency Services Framework Agreement;

(3)             Comprehensive Services Framework Agreement;

(4)             Properties Leasing Framework Agreement;

(5)             Media Services Framework Agreement.; and

(6)             Construction Project Management Framework Agreement.

A circular containing, among other things, details of the continuing connected transactions set out in this announcement, will be despatched to the Shareholders on or before 2 November 2018.

DEFINITIONS

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

"2015 Circular"                                the circular issued by the Company on 7 November 2015 to its

Shareholders in respect of certain continuing connected transactions

"2015 EGM"                                    the Company's extraordinary general meeting held on 22 December 2015

"Articles of Association"                  the articles of association of the Company, as amended from time

to time

"associate(s)"                                    has the meaning ascribed to it by the Hong Kong Listing Rules

"Board"                                            the board of Directors of the Company

"CNACD"                                        China National Aviation Construction and Development Company, a wholly-owned subsidiary of CNAHC

"CNACG"                                        China National Aviation Corporation (Group) Limited, a wholly- owned subsidiary of CNAHC

"CNAHC"                                        China National Aviation Holding Corporation Limited, a state- owned enterprise incorporated under the laws of the PRC and the controlling shareholder of the Company

"CNAHC Group"                            CNAHC, its subsidiaries and its associates (excluding the Group) "CNAMC"                                                         China National Aviation Media Co., Ltd., a wholly-owned

subsidiary of CNAHC

"Company"                                       Air China Limited, a company incorporated in the PRC, whose H shares are listed on the Stock Exchange as its primary listing venue and have been admitted to the Official List of the UK Listing Authority as its secondary listing venue, and whose A shares are listed on the Shanghai Stock Exchange

"Comprehensive Services Framework Agreement"

 

the comprehensive services framework agreement entered into between the Company and CNAHC on 30 October 2018

"connected person"                          has the meaning ascribed to it by the Hong Kong Listing Rules

"Construction Project Management Framework Agreement"

 

the framework agreement for assigning management of basic construction project entered into between the Company and CNACD on 30 October 2018

"CSRC"                                            the China Securities Regulatory Commission

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

"Government Charter Flight Service Framework Agreement"

 

the government charter flight service framework agreement entered into between the Company and CNAHC on 30 October 2018

"Group"                                            the Company and its subsidiaries

"H Shareholders"                              holders of the H Shares

"H Share(s)"                                     the overseas listed foreign share(s) in the share capital of the Company with a nominal value of RMB1.00 each, which are listed on the Stock Exchange as its primary listing venue and have been admitted to the Official List of the UK Listing Authority as its secondary listing venue

"Hong Kong"                                   Hong Kong Special Administrative Region of the PRC

"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 Shareholders"             the Shareholders of the Company other than CNAHC and its

associate(s)

"Media Services"                              including but not limited to the operation, design, creation,

planning, production, promotion, and dissemination in relation to aviation-related all-media business sectors such as in-flight entertainment system, in-flight network platform, brand management, media publicity management, advertisement management, all-media platform management, media cooperation management, and copyright management

"Media Services Framework Agreement"

 

the media services framework agreement entered into between the Company and CNAMC on 30 October 2018

"Percentage Ratio"                           has the meaning ascribed to it by the Hong Kong Listing Rules

"Properties Leasing Framework Agreement"

 

the properties leasing framework agreement entered into between the Company and CNAHC on 30 October 2018

"RMB"                                             Renminbi, the lawful currency of the PRC

"Sales Agency Companies"              certain subsidiaries of CNAHC acting as the Company's sales

agents pursuant to the Sales Agency Services Framework Agreement

"Sales Agency Services Framework Agreement"

 

the sales agency services framework agreement entered into between the Company and CNAHC on 30 October 2018

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

Exchange

"Shareholder(s)"                                the shareholders of the Company

"substantial shareholder"                   has the meaning ascribed thereto under the Hong Kong Listing

Rules

By Order of the Board

Air China Limited

Zhou Feng      Tam Shuit Mui

Joint Company Secretaries

Beijing, the PRC, 30 October 2018

As at the date of this announcement, the directors of the Company are Mr. Cai Jianjiang, Mr. Song Zhiyong, Mr. Xue Yasong, Mr. John Robert Slosar, Mr. Wang Xiaokang*, Mr. Liu Deheng*, Mr. Stanley Hui Hon-chung* and Mr. Li Dajin*.

* Independent non-executive director of the Company

 

END

 

 

POSXFLBXVBFLFBB