GENERAL MANDATE TO ISSUE DEBT FINANCING INSTRUMENT

RNS Number : 7214J

Air China Ld

04 April 2018

If you are in any doubt as to any aspect of this circular, you should consult a stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares of Air China Limited, you should at once hand this circular and the accompanying form of proxy and notice of attendance to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, 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 circular.

AIR CHINA LIMITED

中國國際航空股份有限公司

（stock code: 753.HK）

(1) GENERAL MANDATE TO ISSUE DEBT FINANCING INSTRUMENTS

(2) PROPOSED PAYMENT OF FINAL DIVIDENDS

(3) DISCLOSEABLE TRANSACTION AND CONTINUING CONNECTED TRANSACTION:

2018-2019 AIRCRAFT FINANCE LEASE SERVICE FRAMEWORK AGREEMENT AND

(4) NOTICE OF ANNUAL GENERAL MEETING

Independent Financial Adviser

to the Independent Board Committee and the Independent Shareholders

A letter from the Board is set out on pages 5 to 18 of this circular.

A letter from the Independent Board Committee, containing its advice to the Independent Shareholders of the Company, is set out on pages 19 to 20 of this circular.

A letter from the Independent Financial Adviser, containing its advice to the Independent Board Committee and the Independent Shareholders of the Company is set out on pages 21 to 35 of this circular.

A notice convening the AGM to be held at 2:00 p.m. on Friday, 25 May 2018 at The Conference Room C713, No. 30, Tianzhu Road, Airport Industrial Zone, Shunyi District, Beijing, PRC, is set out on pages 39 to 42 of this circular. Whether or not you are able to attend the AGM, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon as soon as possible but in any event not less than 24 hours before the time appointed for convening the AGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the AGM or any adjournment thereof should you so wish.

4 April 2018

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
II. General Mandate to Issue Debt Financing Instruments . . . . . . . . . . . . . . . . . . . . .	6
III. Proposed Payment of Final Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
IV. 2018-2019 Aircraft Finance Lease Service Framework Agreement . . . . . . . . . . . . .	10
V. AGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
VI. General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
VII. Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
VIII. Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . .	19
LETTER FROM CHALLENGE CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
APPENDIX I - GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
APPENDIX II - NOTICE OF ANNUAL GENERAL MEETING . . . . . . . . . . . . . . . . .	39

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

"2018-2019 Aircraft Finance Lease Service Framework Agreement"	the 2018-2019 aircraft finance lease service framework agreement entered into between the Company and CNACG on 27 March 2018, pursuant to which CNACG Group agreed to provide finance lease service to the Group in relation to the Leased Aircraft in accordance with its terms and conditions and the relevant implementation agreements contemplated thereunder
"AGM"	the 2017 annual general meeting of the Company to be held at 2:00 p.m. on Friday, 25 May 2018 at The Conference Room C713, No. 30, Tianzhu Road, Airport Industrial Zone, Shunyi District, Beijing, PRC, for the Shareholders to consider and approve the resolutions set out in the notice of annual general meeting
"Airbus S.A.S."	Airbus S.A.S., a company incorporated under the laws of France
"Aircraft Finance Lease Transactions"	the finance lease of the Leased Aircraft pursuant to the 2018-2019 Aircraft Finance Lease Service Framework Agreement
"Articles of Association"	the articles of association of the Company, as amended from time to time
"A Share(s)"	the domestic ordinary share(s) in the share capital of the Company with a nominal value of RMB1.00 each, which are listed on the Shanghai Stock Exchange and traded in RMB
"associate(s)"	has the meaning as defined in the Hong Kong Listing Rules
"Board"	the board of Directors
"Boeing Company"	Boeing Company, a company incorporated in the State of Delaware of the United States of America
"Cathay Dragon"	Hong Kong Dragon Airlines Limited
"Cathay Pacific"	Cathay Pacific Airways Limited
"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 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
"CNAHC"	China National Aviation Holding Corporation Limited (中國航空集團有限公司), a state-owned enterprise incorporated under the laws of the PRC and the controlling Shareholder of the Company
"CNACG"	China National Aviation Corporation (Group) Limited (中國航空（集團）有限公司), a company incorporated under the laws of Hong Kong and a wholly-owned subsidiary of CNAHC as at the Latest Practicable Date
"CNACG Group"	CNACG and its subsidiaries
"CSRC"	China Securities Regulatory Commission of the PRC
"Debt Financing Instruments"	the debt financing instruments denominated in RMB or foreign currencies to be issued by the Company and/or its controlled or wholly-owned subsidiary in one or multiple tranches, including but not limited to corporate bonds, ultra-short-term commercial paper, short-term commercial paper, mid-term notes, domestic non-public targeted debt financing instruments, overseas debt financing instruments and overseas bonds/notes
"Delivery Date"	the date on which the Lessor(s) delivers the Leased Aircraft to the Group pursuant to the respective Finance Lease Agreement
"Directors"	directors of the Company
"Finance Lease Agreement(s)"	the individual finance lease agreement(s) in relation to the Leased Aircraft to be entered into by the Group pursuant to the 2018-2019 Aircraft Finance Lease Service Framework Agreement from time to time
"Group"	the Company and its subsidiaries
"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
"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 primary listing venue) and has been admitted into the Official List of the UK Listing Authority (as secondary listing venue)

"Independent Board Committee"		a board committee comprising Mr. Wang Xiaokang, Mr. Liu Deheng, Mr. Stanley Hui Hon-chung and Mr. Li Dajin, all being the independent non-executive Directors
"Independent Financial Adviser" or "Challenge Capital"		Challenge Capital Management Limited, a corporation licensed to carry out Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities under the SFO and is the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Aircraft Finance Lease Transactions under the 2018-2019 Aircraft Finance Lease Service Framework Agreement and the proposed Maximum Transaction Amounts thereunder
"Independent Shareholders"		The Shareholders other than CNAHC and CNACG
"Latest Practicable Date"		27 March 2018, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
"Lessee(s)"		the Company or its subsidiaries
"Lessor(s)"		subsidiary(ies) of CNACG which is/are qualified for providing aircraft finance lease services
"Leased Aircraft"		part of the aircraft scheduled to be introduced by the Company in 2018 and 2019, and to be entered into the finance lease agreement(s) in respect of the Aircraft Finance Lease Transactions (subject to adjustment from time to time)
	"Maximum Transaction Amount"		the maximum aggregate amount payable under the Aircraft Finance Lease Transactions, which includes the rental fee payable and the arrangement fee payable throughout the entire lease period
	"PBOC"		the People's Bank of China
	"Percentage Ratio"		has the meaning ascribed to it by the Hong Kong Listing Rules
	"PRC" or "China"		the People's Republic of China (other than, for the purpose of this circular only, Hong Kong, Macau and Taiwan)
	"Previous Transaction"		the transactions contemplated under the framework agreement dated 30 August 2016 entered into between the Company and CNACG (i.e. the ground support services, aircraft repair and maintenance services, administrative management services and finance lease and operating lease services provided by CNACG Group to the Group), the details of which are set out in the announcement of the Company dated 30 August 2016
	"RMB"		Renminbi, the lawful currency of the PRC
	"SFO"		the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong)
	"Shanghai Listing Rules"		the Rules Governing the Listing of Stocks on the Shanghai Stock Exchange
	"Shares(s)"		collectively, the A Shares and H Shares
	"Shareholder(s)"		holder(s) of the Shares of the Company
	"Stock Exchange"		The Stock Exchange of Hong Kong Limited
	"Supervisor(s)"		the supervisor(s) of the Company
	"Supervisory Committee"		the supervisory committee of the Company
	"US$"		United States dollars, the lawful currency of the United States of America

Directors:

Non-Executive Directors:

Cai Jianjiang (Chairman)

John Robert Slosar

Xue Yasong (Employee representative director)#

Executive Director:

Song Zhiyong (President)

Independent Non-Executive Directors:

Wang Xiaokang Liu Deheng

Hui Hong-chung, Stanley Li Dajin

Registered Address:

Blue Sky Mansion

28 Tianzhu Road

Airport Industrial Zone

Shunyi District

Beijing, PRC

Principal Place of Business
in Hong Kong:

5th Floor, CNAC House

12 Tung Fai Road

Hong Kong International Airport

Hong Kong

4 April 2018

To the Shareholders

Dear Sirs or Madams,

(1) GENERAL MANDATE TO ISSUE DEBT FINANCING INSTRUMENTS

(2) PROPOSED PAYMENT OF FINAL DIVIDENDS

(3) DISCLOSEABLE TRANSACTION AND CONTINUING CONNECTED TRANSACTION:

2018-2019 AIRCRAFT FINANCE LEASE SERVICE FRAMEWORK AGREEMENT AND

(4) NOTICE OF ANNUAL GENERAL MEETING

I. INTRODUCTION

It is proposed that at the annual general meeting of the Company to be held on Friday, 25 May 2018, the notice of which is set out on pages 39 to 42 of this circular, resolutions will be proposed to, among others, (i) give a general mandate to the Directors to issue Debt Financing Instruments; (ii) approve the proposed payment of final dividends for the year ended 31 December 2017; and (iii) approve the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder.

II. GENERAL MANDATE TO ISSUE DEBT FINANCING INSTRUMENTS

1. Background

Given the general mandate to issue debt financing instruments granted by Shareholders at the last annual general meeting will lapse at the conclusion of the AGM, a special resolution will be proposed at the AGM to grant a general mandate to the Directors to issue the Debt Financing Instruments (the "Debt Financing Instrument Issue Mandate").

2. Particulars of Debt Financing Instruments

Particulars regarding the proposed issuance of the Debt Financing Instruments are as follows:

(i)	Issuer:	the Company and/or its wholly-owned or controlled subsidiary, and the specific issuer shall be determined by the Board according to the needs of issuance
(ii)	Placing arrangement:	no preferential placement to the Shareholders
(iii)	Issue size:	subject to that the balance of the Debt Financing Instruments outstanding shall be within the permissible size prescribed by the relevant laws and regulations and specified by regulatory authorities, and the specific issue size shall be determined by the Board according to the capital needs and the market situations
(iv)	Term and type:	not more than 15 years for one single-term instrument or a portfolio of instruments with various terms, and the specific term composition and the issue size of instruments with various terms shall be determined by the Board according to the relevant regulations and market situations
(v)	Use of proceeds:	the proceeds to be raised from the issuance are intended to be used towards meeting the demand of the Company's operations, adjusting its debt structure, replenishing its working capital and/or funding its capital investments, among others, and the specific use of proceeds shall be determined by the Board according to the capital needs
(vi)	Term of validity of the authorisation:	from the date of the passing of the resolution at the AGM to the date of the annual general meeting of the Company for the year ending 31 December 2018

If the Board (including its authorised person) has resolved to issue the Debt Financing Instruments within the term of the Debt Financing Instrument Issue Mandate, it shall be deemed as an extension to the term of the mandate granted to the Board (including its authorised person) in respect of such issue on the general meeting, provided that there is no conflict between the mandate renewed by the Board (including its authorised person) on the general meeting after the expiry of the mandate and the mandate granted to the Board (including its authorised person) in respect of such issue.

3. Authorisation to the Board

It is proposed to the Shareholders at the AGM to authorise the Board, generally and unconditionally, to deal with the followings in accordance with the specific needs of the Company and market conditions:

(i) to determine the issuer, issue size, type, specific instruments, detailed terms, conditions and other matters relating to the issuance (including, but not limited to, the issue size, actual principle amount, currency, issue price, interest rate or mechanism for determining the interest rate, issue place, issue timing, term, whether or not to issue in multiple tranches and number of tranches, whether or not to set put-back or redemption terms, credit rating, guarantee, repayment term, detailed fund-raising arrangements within the scope of use approved by the shareholders' meeting, detailed placing arrangements, underwriting arrangements and all other matters relating to the issuance);

(ii) to carry out all necessary and ancillary actions and procedures relating to the issuance (including, but not limited to, select and engage intermediary institutions, handle all approval, registration and filing procedures with the relevant regulatory authorities in connection with the issuance on behalf of the Company, execute all necessary legal documents, select bonds trustee manager for the issuance, formulate rules for the bondholders' meeting and handle any other matters relating to the issuance and trading);

(iii) to approve, confirm and ratify any action or procedure relating to the issuance as mentioned above already taken by the Company;

(iv) to make adjustments to the relevant matters such as the specific proposals for the issuance in accordance with the comments from the regulatory authorities or the prevailing market conditions within the authority granted at a general meeting, except where voting at a general meeting is required by any relevant laws and regulations and the Articles of Association;

(v) to determine and handle all relevant matters relating to the listing of the issued Debt Financing Instruments upon the completion of the issuance;

(vi) in the case of issuance of corporate Debt Financing Instruments, during the term of the corporate Debt Financing Instruments, to determine not to distribute dividends to the Shareholders to safeguard repayment of debts as required under the relevant laws and regulations in the event that the Company expects to, or does fail to pay the principal and/or coupon interests of such bonds as they fall due;

(vii) to approve, execute and dispatch any announcements or circulars relating to the issuance and make any related disclosure in accordance with the listing rules of the relevant jurisdictions where the shares of the Company are listed;

(viii) to authorise the Board to delegate the authorisations set forth in items (i) to (vi) above to the president and/or the general accountant of the Company; and

(ix) to authorise the Board to delegate the authorisation set forth in item (vii) above to the secretary of the Board.

III. PROPOSED PAYMENT OF FINAL DIVIDENDS

Reference is made to the annual results announcement of the Company dated 27 March 2018 in respect of the recommended payment of a final dividend of RMB1.1497 (including tax) per ten Shares for the year ended 31 December 2017.

Based on the 2017 profit distribution plan of the Company, the Board recommends the appropriation of 10% of the profit after tax as statutory surplus reserve and 10% as discretionary surplus reserve and the payment of a cash dividend of RMB1.1497 (including tax) for every ten shares for the year ended 31 December 2017, totalling approximately RMB1,670 million based on the total issued shares of 14,524,815,185 shares of the Company as of the Latest Practicable Date.

The proposed payment of the 2017 final dividends is subject to Shareholders' approval at the AGM. Dividends payable to the Shareholders shall be denominated and declared in Renminbi. Dividends payable to the holders of A Shares shall be paid in Renminbi while dividends payable to the holders of H Shares shall be paid in Hong Kong dollars. The amount of Hong Kong dollars payable shall be calculated on the basis of the average of the middle rate of Renminbi to Hong Kong dollars as announced by the People's Bank of China for the calendar week prior to the declaration of the 2017 final dividends (if approved) at the AGM.

The Company proposed to pay the aforesaid dividends on 4 July 2018. For the H Shares, the dividends shall be paid to Shareholders whose names appear on the register of members of the Company on 5 June 2018. The register of members of the Company will be closed from 31 May 2018 to 5 June 2018 (both dates inclusive) during which period no transfer of H Shares of the Company will be registered. For the A Shares, the dividends shall be paid to Shareholders whose names appear on the register of members of the Company at the close of business on 3 July 2018. The ex - dividend date of A Shares is 4 July 2018.

In accordance with the "Enterprise Income Tax Law of the People's Republic of China" 《( 中華人民共和國企業所得稅法》) and the "Rules for the Implementation of the Enterprise Income Tax Law of the People's Republic of China" 《( 中華人民共和國企業所得稅法實施條例》), both implemented on 1 January 2008 and the "Notice of the State Administration of Taxation on Issues Relevant to the Withholding of

Enterprise Income Tax on Dividends Paid by PRC Enterprises to Offshore Non-resident Enterprise Holders of H Shares" (Guo Shui Han [2008] No. 897) 《( 關於中國居民企業向境外H股非居民企業股東派發股息代扣代繳企業所得稅有關問題的通知》(國稅函[2008]897號)) promulgated by the State Administration of Taxation on 6 November 2008, the Company is obliged to withhold and pay PRC enterprise income tax on behalf of non-resident enterprise shareholders at a tax rate of 10% from 2008 onwards when the Company distributes any dividends to non-resident enterprise shareholders whose names appear on the register of members of H Shares of the Company. As such, any H Shares of the Company which are not registered in the name(s) of individual(s) (which, for this purpose, includes Shares registered in the name of HKSCC Nominees Limited, other nominees, trustees, or other organisations or groups) shall be deemed to be H Shares held by non-resident enterprise shareholder(s), and the PRC enterprise income tax shall be withheld from any dividends payable thereon. Non-resident enterprise shareholders may wish to apply for a tax refund (if any) in accordance with the relevant requirements, such as tax agreements (arrangements), upon receipt of any dividends.

In accordance with the "Circular on Certain Issues Concerning the Policies of Individual Income Tax" (Cai Shui Zi [1994] No. 020) 《( 關於個人所得稅若干政策問題的通知》(財稅字 [1994] 020號)) promulgated by the Ministry of Finance and the State Administration of Taxation on 13 May 1994, overseas individuals are, as an interim measure, exempted from the PRC individual income tax for dividends or bonuses received from foreign-invested enterprises. As the Company is a foreign-invested enterprise, the Company will not withhold and pay the individual income tax on behalf of individual shareholders when the Company distributes the 2017 final dividends to individual shareholders whose names appear on the register of members of H Shares of the Company.

Pursuant to the Circular on Tax Policies Concerning the Pilot Programme of the Shanghai and Hong Kong Stock Market Trading Interconnection Mechanism (Cai Shui [2014] No. 81) 《( 關於滬港股票市場交易互聯互通機制試點有關稅收政策的通知》(財稅[2014]81號)) and the Circular on Tax Policies Concerning the Pilot Programme of the Shenzhen and Hong Kong Stock Connect (Cai Shui [2016] No.127) 《( 關於深港股票市場交易互聯互通機制試點有關稅收政策的通知》(財稅[2016]127號)), promulgated by the Ministry of Finance, the State Administration of Taxation and CSRC on 31 October 2014 and 5 November 2016 respectively:

The Company is obliged to withhold PRC individual income tax on behalf of resident Shareholders at a tax rate of 20% when the Company distributes the 2017 final dividends to individual investors who invest in the Company's H Shares via Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect. Where individual investors have already paid foreign withholding taxes for such income, investors may apply to the competent tax authorities of China Securities Depository and Clearing Corporation Limited for foreign tax credit with valid tax withholding certificates. The Company is obliged to pay RRC individual income tax on behalf of Mainland securities investment funds investing in H Shares of the Company through Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect when the Company distributes the 2017 final dividends; and

The Company will not withhold income tax on behalf of Mainland enterprise investors investing in H Shares of the Company through Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect when the Company distributes the 2017 final dividends. The Mainland enterprise investors shall report the income and make tax payment by themselves.

Shareholders are recommended to consult their tax advisors regarding the ownership and disposal of H Shares of the Company in the PRC and in Hong Kong and other tax effects.

IV. 2018-2019 AIRCRAFT FINANCE LEASE SERVICE FRAMEWORK AGREEMENT

Reference is made to the announcement dated 27 March 2018 in relation to the Aircraft Finance Lease Transactions under the 2018-2019 Aircraft Finance Lease Service Framework Agreement. As the Group and the CNACG Group intend to carry out aircraft finance lease business in the years of 2018 and 2019, the Company and CNACG entered into the 2018-2019 Aircraft Finance Lease Service Framework Agreement on 27 March 2018 in relation to the Aircraft Finance Lease Transactions.

1. 2018-2019 Aircraft Finance Lease Service Framework Agreement

Date

27 March 2018

Parties

The Company and CNACG

Description of the Aircraft Finance Lease Transactions

Pursuant to the 2018-2019 Aircraft Finance Lease Service Framework Agreement, CNACG Group agreed to provide finance lease services to the Group in relation to Leased Aircraft. The Lessor(s) will be the subsidiary(ies) of CNACG which is/are qualified for providing aircraft finance lease services, and the Lessee(s) will be the Company or its subsidiaries.

The Leased Aircraft comprises part of the aircraft to be introduced by the Company in 2018 and 2019, subject to adjustment from time to time. The Company has signed aircraft purchase agreements with Airbus S.A.S. and Boeing Company in relation to the Leased Aircraft, which agreements have been negotiated and agreed independently and separately and has fulfilled the approval procedures of the Board and the Company's general meetings and announcement obligations in accordance with relevant laws and regulations (including the Hong Kong Listing Rules).

Rental Fee

The rental fee is the repayment of the principal amount for the Leased Aircraft and the interest under the Aircraft Finance Lease Transactions. The aggregate principal amount shall be not more than 100% of the consideration for the purchase of the Leased Aircraft. The applicable interest rate will be further determined and agreed by the Lessor and Lessee through requests for proposals issued by the Group or other procurement processes of the Group and shall satisfy the pricing policy as disclosed below.

The rental fee of which the principal portion is measured according to the equal- principal (equal instalment principal and corresponding interests incurred by the remaining principal) or average-principal-plus-interests (average instalment for all the principal and interests) standard, is payable monthly, quarterly or semi-annually in arrears, commencing on the Delivery Date of the Leased Aircraft and concluding on the date of the last payment for such Leased Aircraft. The frequency of rental fee payment and the calculation method of principal portion will be determined on a case-by-case basis taking into account the proposals submitted by CNACG Group and independent third parties and the cash position of the Lessee. The Lessor will provide the Lessee with full value added tax invoices in respect of the principal amount for the Leased Aircraft and the interest thereunder.

Arrangement Fee

The respective arrangement fee for the Leased Aircraft will be further determined and agreed by the Lessee(s) and Lessor(s) in line with the pricing policy as disclosed below. The arrangement fee shall be paid by the Lessee to the Lessor in one lump sum prior to the commencement of the respective Delivery Date.

Pricing policy

The actual determination of the interest rate and the arrangement fee will be considered as a whole and governed by the pricing policy as disclosed below.

The comprehensive costs (including the relevant rental fee plus arrangement fee) provided by CNACG Group to the Group in its finance lease proposal(s) shall be not higher than those provided by at least three independent third parties who have received the Group's request for proposals or are shortlisted in the same
procurement processes of the Group.

Other terms

Buy-back

Upon the payment of the last instalment of rental fee by the Lessee(s) to the Lessor(s) for the relevant Leased Aircraft, the Lessee(s) is entitled to purchase the relevant Leased Aircraft back from the Lessor(s) at a nominal purchase price.

Implementation Agreements

To implement the Aircraft Finance Lease Transactions, separate Finance Lease Agreement(s) will be entered into between the Lessee(s) and the Lessor(s) in respect of the Leased Aircraft, the terms of which will in all material respects be consistent with the binding principles, guidelines, terms and conditions contained in the 2018-2019 Aircraft Finance Lease Service Framework Agreement.

Term of the 2018-2019 Aircraft Finance Lease Service Framework Agreement

The 2018-2019 Aircraft Finance Lease Service Framework Agreement is effective upon approval of the 2018-2019 Aircraft Finance Lease Service Framework Agreement and the transactions and the Maximum Transaction Amounts contemplated thereunder by the Independent Shareholders at the AGM. The term of the 2018-2019 Aircraft Finance Lease Service Framework Agreement shall commence from the date of approval by the Independent Shareholders at the AGM to 31 December 2019.

The lease period of the Leased Aircraft under the 2018-2019 Aircraft Finance Lease Service Framework Agreement will be agreed upon entering into the individual Finance Lease Agreements. Based on previous similar transactions, the lease period of the Leased Aircraft under the individual Finance Lease Agreement(s) would be 10 to 12 years.

2. Proposed Maximum Transaction Amounts of the Aircraft Finance Lease Transactions

As at the Latest Practicable Date, CNACG Group has not carried out any aircraft finance lease transaction with the Group.

The total fee payable under the Aircraft Finance Lease Transaction(s) is the sum of the rental fee, the arrangement fee and the buy-back fee, and the total rental fee payable under the Aircraft Finance Lease Transactions equals to the sum of the principal and the interest payable under each Finance Lease Agreement for the entire lease period for each of the Leased Aircraft. The buy-back fee payable will be at a nominal level which is negligible when calculating the Maximum Transaction Amounts (normally ranges from nil to RMB10).

In arriving the proposed Maximum Transaction Amounts, considering the lease period for each of the Leased Aircraft would be 10 to 12 years, the Company adopted the prevailing benchmark interest rate i.e. 4.9%, for RMB loan for over 5 years promulgated by the PBOC (the "PBOC Benchmark Rate") for the calculation of estimated interest of the Aircraft Finance Lease Transactions. When entering into the separate Finance Lease Agreement for each of the Leased Aircraft, the actual interest rate will be determined through requests for proposals or other procurement processes with reference to the PBOC Benchmark Rate. During the term of the Aircraft Finance Lease Transactions, if the PBOC Benchmark Rate is adjusted by the PBOC, the interest rate for the Aircraft Finance Lease Transactions shall be adjusted accordingly in the same direction. However, based on the previous proposals received by the Group from independent third parties, the interest rate for each of the Leased Aircraft usually would not be higher than the PBOC Benchmark Rate.

The Company adopted 1% of the principal amount of the Leased Aircraft to calculate the estimated arrangement fee with reference to prevailing market conditions.

Based on (i) the above-mentioned calculation basis of the interest payable and arrangement fee payable under the Aircraft Finance Lease Transactions; (ii) the aircraft scheduled to be introduced by the Company for the period from 1 June 2018 to 31 December 2018 and for the year 2019 according to confirmed orders; and (iii) the assumption that the maximum aggregate principal amount of the

Aircraft Finance Lease Transaction(s) between the Company and CNACG Group for the period from 1 June 2018 to 31 December 2018 and for the financial year ending 31 December 2019 shall not exceed half of the aggregate consideration amount of the aircraft scheduled to be introduced during such period/financial year according to confirmed orders, it is estimated that, for the Aircraft Finance Lease Transactions to be entered into during the period from 1 June 2018 to 31 December 2018, the rental fee payable for the entire lease period will be approximately US$1,038.34 million and the arrangement fee payable will be approximately US$8.25 million; for the Aircraft Finance Lease Transactions to be entered into during the financial year ending 31 December 2019, the rental fee payable for the entire lease period will be approximately US$1,480.28 million and the arrangement fee payable will be approximately US$11.75 million. As such, the proposed Maximum Transaction Amounts under the Aircraft Finance Lease Transactions are set out below:

Units: US$ in millions

	For the period from 1 June 2018 to 31 December 2018	For the financial year ending 31 December 2019
Proposed Maximum Transaction Amount	1,046.59	1,492.03

3. Reasons for and benefits of the Aircraft Finance Lease Transactions

Entering into the 2018-2019 Aircraft Finance Lease Service Framework Agreement will broaden the aircraft financing channels to satisfy the business development need of the Group. The aircraft finance lease would provide more flexibility for the financing channels in respect of the aircraft to be introduced by the Group and have less impact on the cash flow of the Group. The Company is of the view that it is beneficial for the Company to enter into the 2018-2019 Aircraft Finance Lease Service Framework Agreement with CNACG after considering other financing options.

Firstly, compared with traditional bank loans, finance lease transaction(s)' application process is generally more relaxed and offers a higher loan-to-value ratio. Also, finance lease transaction is able to avoid the potential dilution effect from equity financing. In addition, by utilizing the finance lease structure to introduce the Leased Aircraft, the Lessor(s) can provide value added tax invoices for the principal amount and interest payments under the Finance Lease Agreements to the Lessee(s), and therefore, the Lessee(s) can use it to deduct value added tax. The respective arrangement fee for each of the Leased Aircraft would also be lower than the deductible value added tax in respect of the interest payments, which can help to reduce the financing costs of the Lessee(s).

Calculated based on the proposed Maximum Transaction Amounts of the Aircraft Finance Lease Transactions for the period from 1 June 2018 to 31 December 2018 and for the financial year ending 31 December 2019 respectively, through adopting the finance lease arrangement provided by CNACG Group under the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the estimated total savable financing costs for the Group as compared to adopting secured loans arrangements with equivalent interest rates provided by the market over the same period will be approximately US$22.96 million in 2018, and US$32.75 million in 2019.

Secondly, based on the fact that (i) CNACG Group has an management team with wealthy experiences and is in stable operation; (ii) CNACG Group possesses a fairly strong financing ability with comparatively favorable credit policies provided by numerous domestic and foreign banks; and (iii) the relevant subsidiaries of CNACG Group providing aircraft finance lease service were registered in Beijing Tianzhu Free Trade Zone and Tianjin Dongjiang Free Trade Port Zone, and can therefore enjoy preferential financial policies supported by local governmental agencies, CNACG Group possesses a fairly strong capital advantage, and can guarantee adequate funding sources, and has the qualification and ability to engage in large-scale aircraft finance lease transaction(s).

Thirdly, the relevant business team of CNACG Group possess extensive knowledge and experience in aviation finance industries and has well comprehension on the business needs of the Group, therefore the business communication between the Group and CNACG Group would be more smoothly, and it is easier to achieve a mutual understanding with the principle of maximizing both parties' benefits in the agreement negotiation stage.

4. Internal Control Measures

The Company adopted the following measures to ensure that the Aircraft Finance Lease Transactions with the CNACG Group will be conducted on normal commercial terms and in accordance with the terms of the 2018-2019 Aircraft Finance Lease Service Framework Agreement and the pricing policy of the Company:

• The Company's finance department will request for proposals from potential service providers in relation to aircraft finance lease. If any member of the CNACG Group has been selected as the service provider, the Company's finance department, legal department, asset management department (under which there is a division responsible for the management of connected transactions) and certain other relevant departments (if applicable) will review the proposed terms of the Aircraft Finance Lease Transaction(s) to ensure that the Aircraft Finance Lease Transaction(s) will be conducted (i) in the ordinary and usual course of business of the Group; (ii) on normal commercial terms or better; and (iii) according to the 2018-2019 Aircraft Finance Lease Service Framework Agreement on terms that are fair and reasonable and in the interests of the Company and the Shareholders as a whole. The reviewed final financing plan will be reported to the management of the Company for approval.

• The asset management department of the Company is responsible for overseeing the connected transactions of the Company. The asset management department will monitor and collect detailed information on the Aircraft Finance Lease Transactions on a regular basis, including but not limited to the implementation of pricing policies, payment arrangements and actual transaction amount under each Aircraft Finance Lease Transaction to ensure that the transactions are conducted in accordance with the 2018-2019 Aircraft Finance Lease Service Framework Agreement. In addition, the asset management department will be responsible for inspection and assessment of the balance of the Maximum Transaction Amounts for the Aircraft Finance Lease Transactions on a monthly basis. If it is expected that the relevant Maximum

Transaction Amount would 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.

• The Company's internal audit department is responsible for performing the annual evaluation procedure on the internal control procedures of the Group, including but not limited to the relevant information on the management of the continuing connected transactions. In addition, the internal audit department is responsible for compiling the annual internal control evaluation report and submitting the report to the Board for examination and approval.

• The Company's independent auditor and independent non-executive Directors will conduct annual review of the Aircraft Finance Lease Transactions.

Based on the above, the Directors (including the independent non-executive Directors) are of the view that the Company has implemented effective internal control and risk management measures, and such methods and procedures can ensure that the transactions contemplated under the 2018-2019 Aircraft Finance Lease Service Framework Agreement will be conducted on normal commercial terms and are in the interests of the Company and the Shareholders as a whole.

5. Parties and Connected Relationship of the Parties

The Company

The Company's principal business activity is air passenger, air cargo and airline-related services.

CNACG

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.

6. Hong Kong Listing Rules Implications

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. According to Rule 14.22 and Rule 14A.81 of the Hong Kong Listing Rules, the Aircraft Finance Lease Transactions shall be aggregated with the Previous Transaction. As the highest of the applicable Percentage Ratios is higher than 5.0% but less than 25%, the Aircraft Finance Lease Transactions constitute continuing connected transaction and discloseable transaction of the Company under the Hong Kong Listing Rules. Therefore, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts are subject to: (i) the disclosure, annual review and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules; and (ii) the requirementsapplicable to discloseable transactions under Chapter 14 of the Hong Kong Listing Rules.

The Independent Board Committee has been formed to advise the Independent Shareholders on the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder. Challenge Capital has been appointed as the independent financial adviser of the Company to advise the Independent Board Committee and the Independent Shareholders in this regard.

At the fifth meeting of the fifth session of the Board held on 27 March 2018, the Board approved the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder. Mr. Cai Jianjiang and Mr. Song Zhiyong are considered to have a material interest in the 2018-2019 Aircraft Finance Lease Service Framework Agreement and therefore have abstained from voting in the relevant board resolution in respect of the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder. Save as disclosed above, none of the Directors has a material interest in the 2018-2019 Aircraft Finance Lease Service Framework Agreement and hence no other Director is required to abstain from voting on the relevant board resolution.

7. Shanghai Listing Rules Implications

Pursuant to the Shanghai Listing Rules, CNACG is a related party of the Company as it is controlled by the controlling shareholder of the Company. Therefore, the 2018-2019 Aircraft Finance Lease Service Framework Agreement shall be approved or ratified by Independent Shareholders at the AGM.

V. AGM

The Company will convene the AGM at The Conference Room C713, No. 30, Tianzhu Road, Airport Industrial Zone, Shunyi District, Beijing, PRC at 2:00 p.m. on Friday, 25 May 2018. A form of proxy and a notice of attendance are also enclosed herein and published on the website of the Stock Exchange (www.hkexnews.hk). The notice of AGM is reproduced on pages 39 to 42 of this circular. Votes on the resolutions to be considered at the AGM shall be taken by way of poll.

Pursuant to Rule 14A.36 of the Hong Kong Listing Rules, any Shareholder with a material interest in the 2018-2019 Aircraft Finance Lease Service Framework Agreement is required to abstain from voting on the relevant resolution at the AGM. As at the Latest Practicable Date, CNACG is a wholly-owned subsidiary of CNAHC, therefore, CNAHC and CNACG are required to abstain from voting on the resolution in respect of the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder at the AGM. As at the Latest Practicable Date, CNAHC and CNACG held an aggregate of 7,508,571,617 shares of the Company (representing approximately 51.70% of the issued share capital of the Company), control or are entitled to control over the voting right in respect of their shares in the Company.

To the best knowledge, information and belief of the Directors, having made all reasonable enquiries, save as CNAHC and CNACG, no Shareholder has a material interest in the resolution in respect of the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder or should be required to abstain from voting on the relevant resolution at the AGM.

VI. GENERAL INFORMATION

The Company will close its register of members of H Shares and suspend the registration of transfer of H Shares from Wednesday, 25 April 2018 to Friday, 25 May 2018 (both days inclusive) in order to determine the list of holders of H Shares who will be entitled to attend and vote at the AGM. Shareholders whose names appear on the register of members of H Shares on Wednesday, 25 April 2018 may attend the AGM after completing the registration procedures.

In order to qualify for attendance at the AGM, instruments of transfer accompanied by share certificates and other appropriate documents must be lodged with the Company's H Share registrar, Computershare Hong Kong Investor Services Limited, by 4:30 p.m. on Tuesday, 24 April 2018.

Whether or not you intend to attend the AGM, you are requested to complete and return the form of proxy in accordance with the instruction printed thereon. If you intend to attend the AGM, you are required to complete and return the notice of attendance to the Company's H Share registrar, Computershare Hong Kong Investor Services Limited on or before Saturday, 5 May 2018.

Completion and return of the form(s) of proxy will not preclude you from attending and voting in person at the meetings or at any adjournment thereof should you so wish and completion and return of the notice of attendance do not affect the right of a shareholder to attend the respective meeting.

VII. RECOMMENDATION

The Board (including the independent non-executive Directors) considers that the 2018-2019 Aircraft Finance Lease Service Framework Agreement is on normal commercial terms or better and in the ordinary and usual course of business of the Group, and the terms and conditions contained therein and the proposed Maximum Transaction Amounts thereunder are fair and reasonable and in the interests of the Company and the Shareholders as a whole. The Board recommends that the Independent Shareholders vote to approve the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder.

The Board considers that other resolutions set out in the notice of the AGM are in the best interests of the Company and the Shareholders as a whole and accordingly recommend the Shareholders to vote in favour of all of these resolutions at the AGM.

VIII. ADDITIONAL INFORMATION

Your attention is drawn to the letter from the Independent Board Committee as set out on pages 19 to 20 of this circular which contains its recommendation to the Independent Shareholders as to the voting at the AGM regarding the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder.

Your attention is also drawn to the letter from the Independent Financial Adviser as set out on pages 21 to 35 of this circular, which contains, among others, its advice to the Independent Board Committee and the Independent Shareholders in relation to the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder as well as the principal factors and reasons considered by it in concluding its advice.

Your attention is also drawn to the additional information set out in Appendix I to this circular.

By order of the Board

Air China Limited

Cai Jianjiang

Chairman

Beijing, the PRC

Independent Board Committee:

Mr. Wang Xiaokang Mr. Liu Deheng

Mr. Stanley Hui Hon-chung Mr. Li Dajin

4 April 2018

To the Independent Shareholders of the Company

Dear Sirs or Madams,

DISCLOSEABLE TRANSACTION AND CONTINUING CONNECTED TRANSACTION:

2018-2019 AIRCRAFT FINANCE LEASE SERVICE FRAMEWORK AGREEMENT

We refer to the circular dated 4 April 2018 (the "Circular") issued by the Company to its Shareholders of which this letter forms a part. Terms defined in the Circular shall have the same meanings when used in this letter, unless the context otherwise requires.

On 27 March 2018, the Board approved the entry into of the 2018-2019 Aircraft Finance Lease Service Framework Agreement in respect of the Aircraft Finance Lease Transactions as set out in the Circular for a term commencing from the date of approval by the Independent Shareholders at the AGM and ending on 31 December 2019, and approved the proposed Maximum Transaction Amounts thereunder. The entry into the 2018-2019 Aircraft Finance Lease Service Framework Agreement and the proposed Maximum Transaction Amounts thereunder are subject to the the disclosure, annual review and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules.

The terms and the reasons for entering into the 2018-2019 Aircraft Finance Lease Service Framework Agreement are summarised in the Letter from the Board set out on pages 5 to 18 of the Circular.

The Independent Board Committee was formed to make a recommendation to the Independent Shareholders as to whether the entry into of the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts

thereunder are fair and reasonable and whether such transactions are in the interest of the Company and the Shareholders as a whole. Challenge Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

As your Independent Board Committee, we have discussed with the management of the Company the reasons for the entry into of the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder, their terms and the basis upon which the terms have been determined. We have also considered the key factors taken into account by Challenge Capital in arriving at its opinion regarding the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder as set out in the letter from Challenge Capital on pages 21 to 35 of the Circular, which we urge you to read carefully.

The Independent Board Committee, after taking into account, among other things, the advice of Challenge Capital, considers the 2018-2019 Aircraft Finance Lease Service Framework Agreement to be in the best interest of the Company and the Shareholders as a whole and to be fair and reasonable. The Independent Board Committee also considers the Aircraft Finance Lease Transactions to be carried out in the usual and ordinary course of business, on normal commercial terms and the proposed Maximum Transaction Amounts to be fair and reasonable. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the relevant ordinary resolution as set out in the notice of the AGM.

Yours faithfully,

Independent Board Committee

Mr. Wang Xiaokang

Mr. Liu Deheng

Mr. Stanley Hui Hon-chung

Mr. Li Dajin

Independent non-executive Director

Independent
non-executive Director

Independent non-executive Director

The following is the full text of a letter of advice from Challenge Capital Management Limited to the Independent Board Committee and the Independent Shareholders in respect of the Aircraft Finance Lease Transactions under the 2018-2019 Aircraft Finance Lease Service Framework Agreement and the proposed Maximum Transaction Amounts thereunder, which has been prepared for the purpose of inclusion in this circular.

3/F, Kailey Tower,

16 Stanley Street,

Central, Hong Kong

4 April 2018

To: The Independent Board Committee and the Independent Shareholders of Air China Limited

Dear Sirs,

DISCLOSEABLE TRANSACTION AND CONTINUING CONNECTED TRANSACTION:

2018-2019 AIRCRAFT FINANCE LEASE SERVICE FRAMEWORK AGREEMENT

INTRODUCTION

We refer to our engagement as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Aircraft Finance Lease Transactions under the 2018-2019 Aircraft Finance Lease Service Framework Agreement and the proposed Maximum Transaction Amounts thereunder, details of which are set out in the letter from the Board (the "Letter from the Board") contained in the circular of the Company to the Shareholders dated 4 April 2018 (the "Circular"), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Circular unless otherwise defined or the context requires otherwise.

On 27 March 2018, the Company and CNACG entered into the 2018-2019 Aircraft Finance Lease Service Framework Agreement, pursuant to which the CNACG Group agreed to provide finance lease services to the Group in relation to the Leased Aircraft for the period from 1 June 2018 to 31 December 2018 and the year ending 31 December 2019 (the "Relevant Periods") in accordance with the terms and conditions and the relevant implementation agreements contemplated thereunder.

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. According to Rule 14.22 and Rule 14A.81 of the Hong Kong Listing Rules, the Aircraft Finance Lease Transactions shall be aggregated with the Previous Transaction. As the highest of the applicable Percentage Ratios is higher than 5.0% but less than 25%, the Aircraft Finance Lease Transactions constitute continuing connected transaction and discloseable transaction of the Company under the Hong Kong Listing Rules. Therefore, the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts are subject to: (i) the disclosure, annual review and Independent Shareholders' approval requirements under Chapter 14A of the Hong Kong Listing Rules; and (ii) the requirements applicable to discloseable transactions under Chapter 14 of the Hong Kong Listing Rules.

The Independent Board Committee has been formed to advise the Independent Shareholders on the Aircraft Finance Lease Transactions and the proposed Maximum Transaction Amounts thereunder. We, Challenge Capital Management Limited, have been appointed as the independent financial adviser of the Company to advise the Independent Board Committee and the Independent Shareholders in this regard.

We are independent from and not connected with the Company, CNACG, or any of their respective associates. Accordingly, we are considered eligible to give independent advice on the Aircraft Finance Lease Transactions. Apart from normal advisory fees payable to us for our services rendered to the Company in connection with this appointment, no arrangement exists whereby we shall receive any other fees or benefits from the Company, CNACG, or any of their respective associates.

BASIS OF OUR OPINION

In formulating our opinion and recommendations, we have relied on the information, facts and representations contained or referred to in the Circular and the information, facts and representations provided to us by the Company, and the opinions expressed by its management. We have assumed that all information, facts and representations contained or referred to in the Circular, and the information, facts and representations provided by the Company, and the opinions expressed by its management, are true, accurate and complete in all material respects as at the date of the Circular and that they may be relied upon in formulating our opinion.

We have also assumed that all views, opinions and statements of intention provided by the Directors, advisors and representatives of the Company have been arrived at after due and careful enquiries. The Directors have confirmed to us that no material facts have been withheld or omitted from the information supplied and opinions expressed. We consider that we have been provided with, and have reviewed, all currently available information and documents which are available under present circumstances to enable us to reach an
informed view and to provide a reasonable basis for our opinion. We have no reason to suspect that any relevant information has been withheld, nor are we aware of any facts or circumstances which would render the information provided and representations made to us untrue, inaccurate or misleading. We consider that we have performed all the necessary steps to enable us to reach an informed view and to justify our reliance on the information provided so as to provide a reasonable basis for our opinion. We have not, however,
conducted any independent verification of the information provided by the Company and its management, nor have we conducted independent detailed investigation or audit into the businesses or affairs or future prospects of the Group. Our opinion is necessarily based on the financial, economic, market and other conditions in effect, and the information made available to us, as at the Latest Practicable Date.

All Directors jointly and severally accept full responsibility for the accuracy of the information contained in the Circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, the information contained in the Circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement in the Circular misleading.

This letter is issued for the information of the Independent Board Committee and the Independent Shareholders solely in connection with their consideration of the Aircraft Finance Lease Transactions, and, except for its inclusion in the Circular, is not to be quoted or referred to, in whole or in part, nor shall this letter be used for any other purposes, without our prior written consent.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion in respect of the Aircraft Finance Lease Transactions, we have considered the following principal factors and reasons:

1. Information of the Group and CNACG

(i) Background of the Group

The Company's principal activity is air passenger, air cargo and airline-related services. As stated in the interim report of the Company for the six months ended 30 June 2017 (the "2017 Interim Report"), the Company is the only Chinese civil aviation enterprise listed in "The World's 500 Most Influential Brands". It is the only national flag carrier of China and is a member of Star Alliance, the world's largest airline alliance. With Star Alliance, the network of the Company covered 1,307 destinations in 191 countries as at 30 June 2017.

As of 30 June 2017, the Group had a total of 628 aircraft, of which 176 were under finance leases, 204 were under operating leases, and 248 were self-owned, and maintained an average fleet age of 6.53 years (excluding aircraft under wet leases). As further disclosed in the 2017 Interim Report, the Group planned to introduce a total of 49 and 61 new aircraft in 2018 and 2019 respectively.

Set out below is a summary of the audited consolidated financial position of the Group as at 31 December 2016 and 2017, which was extracted from the annual results announcement of the Company for the year ended 31 December 2017 dated 27 March 2018:

	As at 31 December
	2016	2017
	RMB'000	RMB'000
	(audited)	(audited)
Assets
Non-current assets	204,064,614	214,884,642
Current assets	19,986,337	20,759,942

Total assets	224,050,951	235,644,584

Liabilities
Non-current liabilities	83,474,118	68,654,151
Current liabilities	64,180,434	72,131,835

Total liabilities	147,654,552	140,785,986


Equity
Net assets attributable to owners of the Company	68,799,255	86,047,562
Non-controlling interests	7,597,144	8,881,036

	76,396,399	94,858,598

The total assets of the Group increased by approximately 5.2% to approximately RMB235,645 million as at 31 December 2017 from approximately RMB224,051 million as at 31 December 2016. The total liabilities of the Group decreased from approximately RMB147,655 million as at 31 December 2016 to approximately RMB140,786 million as at 31 December 2017, representing a decrease of approximately 4.7%. The Group's gearing ratio (measured as total liabilities divided by total assets) was approximately 65.9% and 59.7% as at 31 December 2016 and 2017 respectively. The net assets of the Group amounted to approximately RMB94,859 million as at 31 December 2017, representing an increase of approximately 24.2% from approximately RMB76,396 million as at 31 December 2016.

As at 31 December 2017, total interest-bearing bank loans and other borrowings of the Group was approximately RMB50,763 million while total obligations under finance leases of the Group was approximately RMB44,036 million. The Group's cash and cash equivalents was approximately RMB5,563 million as at 31 December 2017.

(ii) Background of CNACG

2. Reasons for and benefits of the Aircraft Finance Lease Transactions

(i) Financing cost savings under the Aircraft Finance Lease Transactions

As stated in the Letter from the Board, by utilising the finance lease structure to introduce the Leased Aircraft, the Lessor(s) can provide value added tax invoices for the principal amount and interest payments under the Finance Lease Agreements to the Lessee(s), and therefore, the Lessee(s) can use such invoices to deduct value added tax. The respective arrangement fee for each of the Leased Aircraft would also be lower than the deductible value added tax in respect of the interest payments, which can help to reduce the financing costs of the Lessee(s). Calculated based on the proposed Maximum Transaction Amounts for the period from 1 June 2018 to 31 December 2018 and for the year ending 31 December 2019 respectively, through adopting the finance lease arrangement provided by the CNACG Group under the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the estimated total savable financing costs for the Group as compared to adopting secured loan arrangements with equivalent interest rates provided by the market over the same period will be approximately US$22.96 million in 2018 and US$32.75 million in 2019.

We are advised that the Company entered into the 2018-2019 Aircraft Finance Lease Service Framework Agreement with a view to utilise such finance lease structure to enjoy potential cost savings while executing the aircraft introduction plan of the Group from 2018 to 2019.

(ii) Broadening of financing channels to facilitate the business plan of the Group

The Company's principal activity is air passenger, air cargo and airline-related services. As disclosed in the 2017 Interim Report, the Group planned to introduce a total of 49 and 61 new aircraft in 2018 and 2019 respectively. We have discussed with the management of the Company and were given to understand that, the availability of financing channels is vital for the Group to facilitate its expansion plan.

According to "Current Aircraft Finance Market Outlook 2018" published by Boeing Capital Corporation in December 2017, the overall aircraft finance market is expected to continue to increase in 2018. According to "Guidance Material and Best Practices for Aircraft Leases (2th Edition)" published by the International Air Transportation Association in May 2015, an aircraft lease provides the airline with increased flexibility in fleet expansion. We noted from the previous annual reports of the Company and the 2017 Interim Report that, around 60% of the then fleet of the Group were held under finance leases and operating leases as at 31 December 2015, 31 December 2016 and 30 June 2017 respectively.

We further understand from the Company that, in respect of the aircraft to be introduced by the Group, the Company has been exploring alternative financing options such as bank borrowings and equity financing. Taking into account various factors including the generally less stringent application process and higher loan-to-value ratio offered by finance leasing as compared with traditional bank loans, and the potential dilution effect from equity financing, the Directors are of the view that it is beneficial for the Group to broaden its financing options by entering into the 2018-2019 Aircraft Finance Lease Service Framework Agreement.

In addition, the entering into the 2018-2019 Aircraft Finance Lease Service Framework Agreement provides an additional option to the Group to conduct its aircraft finance leasing business on terms no less favourable than those of independent third parties, which can in turn help to enhance the bargaining power of the Group in fund sourcing and hence the overall competitiveness of the Group.

In view of the above, we consider that the entering into of the 2018-2019 Aircraft Finance Lease Service Framework Agreement will help the Group to broaden its financing channels and provide additional flexibility to the Group to satisfy its need for introducing new aircraft in an organised and cost-efficient manner.

(iii) Resources of and relationship with CNACG

CNACG is a wholly-owned subsidiary of CNAHC, which is a state-owned enterprise under the supervision of the State Council and one of the three major air transportation groups in the PRC. Leveraging on the solid capital strength and the extensive network of CNAHC, it is believed that the CNACG Group can secure sufficient sources of funding to conduct aircraft finance lease transactions with the Group. Since the Company and CNACG are under common control of CNAHC, it is expected that smooth communication and cooperation between the two parties can help to maximise their mutual benefits. We were also given to understand that the business team responsible for conducting aircraft finance lease transactions of the CNACG Group possess extensive knowledge and experience in aviation finance industries. Having reviewed the profiles of the relevant business team members and taking into account the background of the CNACG Group and the Lessor(s) being qualified for providing aircraft finance lease services, we agreed with the Directors that the CNACG Group possesses the qualification and capability in engaging in large-scale aircraft finance lease transactions.

Furthermore, we noted that the Company and CNACG have previously entered into a framework agreement on 30 August 2016, details of which are set out in the announcement of the Company dated 30 August 2016. Pursuant to such framework agreement, the CNACG Group agreed to provide ground support services, aircraft repair and maintenance services, administrative management services, as well as finance lease services of aircraft simulators and new aircraft engines and operating lease services of back-up engines and ramp equipment to the Group. It is believed that the entering into of the 2018-2019 Aircraft Finance Lease Service Framework Agreement would allow the Group to receive more comprehensive finance lease services from the CNACG Group, which is favourable to the business development of the Group.

Based on the above, we are of the view that the entering into of the 2018-2019 Aircraft Finance Lease Service Framework Agreement is in the ordinary and usual course of business of the Group, and is in the interests of the Company and the Shareholders as a whole.

3. Principal terms of the 2018-2019 Aircraft Finance Lease Service Framework Agreement Date

Date	:	27 March 2018
Term	:	From the date of approval by the Independent Shareholders at the AGM to 31 December 2019
Lessor(s)	:	Subsidiary(ies) of CNACG which is/are qualified for providing aircraft finance lease services
Lessee(s)	:	The Company or its subsidiaries
Aircraft under the　　Aircraft Finance L e a s e Transactions	:	The Leased Aircraft comprises part of the aircraft to be introduced by the Company in 2018 and 2019, subject to adjustment from time to time.
Rental fee	:	The rental fee is the repayment of the principal amount for the Leased Aircraft and the interest under the Aircraft Finance Lease Transactions. The aggregate principal amount shall be not more than 100% of the consideration for the purchase of the Leased Aircraft. The applicable interest rate will be further determined and agreed by the Lessor and the Lessee through requests for proposals issued by the Group or other procurement processes of the Group and shall satisfy the pricing policy as disclosed below.
		The rental fee, of which the principal portion is measured according to the equal-principal (equal instalment principal and corresponding interests incurred by the remaining principal) or average-principal- plus-interests (average instalment for all the principal and interests) standard, is payable monthly, quarterly or semi-annually in arrears, commencing on the Delivery Date of the Leased Aircraft and concluding on the date of the last payment for such Leased Aircraft. The frequency of rental fee payment and the calculation method of principal portion will be determined on a case-by-case basis taking into account the proposals submitted by the CNACG Group and independent third parties and the cash position of the Lessee. The Lessor will provide the Lessee with full value added tax invoices in respect of the principal amount for the Leased Aircraft and the interest thereunder.

Arrangement fee	:	The respective arrangement fee for the Leased Aircraft will be further determined and agreed by the Lessee(s) and the Lessor(s) in line with the pricing policy as disclosed below. The arrangement fee shall be paid by the Lessee(s) to the Lessor(s) in one lump sum prior to the commencement of the respective Delivery Date.
Buy-back	:	Upon the payment of the last instalment of rental fee by the Lessee(s) to the Lessor(s) for the relevant Leased Aircraft, the Lessee(s) is entitled to purchase the relevant Leased Aircraft back from the Lessor(s) at a nominal purchase price.
Pricing policy	:	The actual determination of the interest rate and the arrangement fee will be considered as a whole and governed by the pricing policy as disclosed below:
		The comprehensive costs (including the relevant rental fee plus arrangement fee) provided by the CNACG Group to the Group in its finance lease proposal(s) shall be not higher than those provided by at least three independent third parties who have received the Group's request for proposals or are shortlisted in the same procurement processes of the Group.
Implementation agreements	:	To implement the Aircraft Finance Lease Transactions, separate Finance Lease Agreement(s) will be entered into between the Lessee(s) and the Lessor(s) in respect of the Leased Aircraft, the terms of which will in all material respects be consistent with the binding principles, guidelines, terms and conditions contained in the 2018-2019 Aircraft Finance Lease Service Framework Agreement.

Please refer to the sub-section headed "1. 2018-2019 Aircraft Finance Lease Service Framework Agreement" in the section headed "IV. 2018-2019 Aircraft Finance Lease Service Framework Agreement" in the Letter from the Board for the details of the terms of the 2018-2019 Aircraft Finance Lease Service Framework Agreement.

To assess the fairness and reasonableness of the terms of the Aircraft Finance Lease Transactions, we have obtained and reviewed the 2018-2019 Aircraft Finance Lease Service Framework Agreement and further discussed with the Company in relation to the pricing policy as stated above. We understand that the Group will obtain and review finance lease proposals submitted by at least three independent third parties through requests for proposals or other procurement processes and evaluate whether the comprehensive costs

(including the relevant rental fee plus arrangement fee) provided by the CNACG Group are fair and reasonable and no less favourable to the Group than those offered by independent third parties before conducting the Aircraft Finance Lease Transactions with the Lessor(s). We also noted the 2018-2019 Aircraft Finance Lease Service Framework Agreement stipulates that the separate Finance Lease Agreement(s) to be entered into between the Lessee(s) and the Lessor(s) in respect of the Leased Aircraft shall in all material respects be consistent with the binding principles, guidelines, terms and conditions contained in the 2018-2019 Aircraft Finance Lease Service Framework Agreement.

Additionally, in order to ensure that the Aircraft Finance Lease Transactions will be conducted on normal commercial terms and in accordance with the terms of the 2018-2019 Aircraft Finance Lease Service Framework Agreement, the Company has adopted internal control and risk management measures as the following:

(ii) on normal commercial terms or better; and (iii) according to the 2018-2019 Aircraft Finance Lease Service Framework Agreement on terms that are fair and reasonable and in the interests of the Company and the Shareholders as a whole. The reviewed final financing plan will be reported to the management of the Company for approval.

• The Company's independent auditor and independent non-executive Directors will conduct annual review of the Aircraft Finance Lease Transactions.

We noted from the above that the Company has adopted a set of internal control measures to assign specific responsibilities to various designated departments of the Company in performing regular review and cross-checking on the terms of the Aircraft Finance Lease Transactions in order to make sure that the Aircraft Finance Lease Transactions will be conducted in accordance with the terms of the 2018-2019 Aircraft Finance Lease Service Framework Agreement. We also consider that the requirement to obtain finance lease proposals from at least three independent third parties would allow the Group to obtain the then prevailing market terms of aircraft finance lease transactions in comparing the terms offered by the CNACG Group.

Having considered the above, we concur with the view of the Directors that the internal control and risk management measures of the Company can help to ensure that the Aircraft Finance Lease Transactions will be conducted in accordance with the terms of the 2018-2019 Aircraft Finance Lease Service Framework Agreement and that the pricing policy thereunder will enable the Aircraft Finance Lease Transactions to be conducted on terms no less favourable to the Group than those offered by independent third parties.

As such, we are of the view that that terms of the 2018-2019 Aircraft Finance Lease Service Framework Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

4. Proposed Maximum Transaction Amounts

The Company determines the proposed Maximum Transaction Amount for each of the Relevant Periods based on (i) the calculation basis of the interest payable and arrangement fee payable under the Aircraft Finance Lease Transactions as discussed below; (ii) the aircraft scheduled to be introduced by the Company for each of the Relevant Periods according to confirmed orders, and (iii) the assumption that the maximum aggregate principal amount of the Aircraft Finance Lease Transactions for each of the Relevant Periods shall not exceed half of the aggregate consideration amount of the aircraft scheduled to be introduced during the same period according to confirmed orders. It is estimated that, for the Aircraft Finance Lease Transactions to be entered into during the period from 1 June 2018 to 31 December 2018, the rental fee payable for the entire lease period will be approximately US$1,038.34 million and the arrangement fee payable will be approximately US$8.25 million; for the Aircraft Finance Lease Transactions to be entered into during the year ending 31 December 2019, the rental fee payable for the entire lease period will be approximately US$1,480.28 million and the arrangement fee payable will be approximately US$11.75 million.

Based on the above, the proposed Maximum Transaction Amounts are set out as below:

Units: US$ in millions

For the period from 1 June 2018 to

31 December 2018

For the year ending 31 December 2019

Proposed Maximum Transaction Amount

1,046.59

1,492.03

The proposed Maximum Transaction Amount for each of the Relevant Periods represents the maximum aggregate amount payable by the Lessee(s) to the Lessor(s) throughout the lease period and is the sum of the rental fee payable and the arrangement fee payable as estimated by the Group. In particular, the rental fee payable under the Aircraft Finance Lease Transactions equals to the sum of the principal and the interest payable in respect of the Leased Aircraft. As stated in the Letter from the Board, the buy-back fee payable will be at a nominal level (normally ranges from nil to RMB10) which is negligible when calculating the proposed Maximum Transaction Amounts.

In order to assess the fairness and reasonableness of the proposed Maximum Transaction Amounts, we have obtained from the Company a computation which includes the relevant aircraft scheduled to be introduced by the Company during each of the Relevant Periods according to confirmed orders (the "Relevant Aircraft"),
the expected purchase price upon delivery, together with the calculation of the rental fee (including the principal and interest payable) and arrangement fee with respect to the Leased Aircraft. As the maximum aggregate principal amount of the Aircraft Finance Lease Transactions for each of the Relevant Periods shall not exceed half of the aggregate consideration amount of the Relevant Aircraft scheduled to be introduced during the same period, we noted from the computation that the Company adopted half of the total expected purchase price upon delivery of the Relevant Aircraft scheduled to be introduced during each of the Relevant Periods as the relevant principal amount of the Aircraft Finance Lease Transactions, which also represents the principal portion of the rental fee with respect to the Leased Aircraft. The interest payable is derived by applying an annual interest rate to the relevant principal amount throughout the expected lease period of 10 years. The arrangement fee, which is a one-off fee payable prior to the delivery of the Relevant Aircraft, is calculated based on a percentage of the relevant principal amount.

We have performed a search of aircraft finance lease transactions announced by major airlines or aircraft leasing companies that are listed on the Stock Exchange since October 2017 on a best effort basis, and have not identified any such transaction which has disclosed the relevant information including interest rate, arrangement fee and buy-back fee. However, we noted that China Southern Airlines Company Limited (stock code: 1055) published a circular to its shareholders dated 26 October 2017 in relation to, among others, its aircraft finance lease continuing connected transactions, and has adopted the PBOC benchmark interest rate for RMB loan with term over 5 years as the interest rate, a 1% rate as the handling fee and a nominal purchase price as the buy-back fee in arriving the relevant proposed cap, which are in line with the relevant parameters adopted by the Company in determining the proposed Maximum Transaction Amounts. In addition, we have expanded our search scope to include finance lease transactions announced by listed companies on the Stock Exchange since October 2017 based on the following selection criteria: (i) the finance lease transactions are conducted in the PRC; and (ii) the underlying assets are used in the principal businesses of the listed companies. To the best of our knowledge and as far as we are aware of, 19 reference cases were identified based on the aforesaid criteria (the "Reference Cases"), the details of which are set out in the table below. While the underlying assets of the Reference Cases are not aircraft, we consider that the Reference Cases can provide a general reference for the relevant parameters such as interest rate, arrangement fee and buy-back fee of recent finance lease transactions in the PRC.

Stock code	Company name	Announcement date	Lease period	Principal amount	Interest rate charged(1)	Arrangement fee in terms of percentage of principal amount	Buy-back fee
				(RMB thousands)	(per annum)		(RMB)

449	Chigo Holding Limited	9/2/2018	3 years	31,572	Not disclosed	Not disclosed	1,000
697	Shougang Concord International Enterprises Company Limited	2/2/2018	1 year	60,000	5.5%	1.5%⁽²⁾	1
3330	Lingbao Gold Group Company Ltd.	2/1/2018	3 years	200,000	PBOC rate⁽³⁾	3%⁽²⁾	100
2345	Shanghai Prime Machinery Company Limited	26/12/2017	3 years	30,000	5.3125%	1.05%⁽²⁾	1
1091	CITIC Dameng Holdings Limited	22/12/2017	3 years	157,500	PBOC rate⁽⁴⁾	Not disclosed	500
2722	Chongqing Machinery & Electric Co., Ltd.	21/12/2017	5 years	210,000	4.75%⁽⁵⁾	Not disclosed	10,000
3300	China Glass Holdings Limited	18/12/2017	3 years	200,000	6.2%⁽⁶⁾	1.57%⁽²⁾	100
2014	Ozner Water International Holding Limited	18/12/2017	3 years	50,000	6.5%⁽⁶⁾	Not disclosed	100
1250	Beijing Enterprises Clean Energy Group Limited	14/12/2017	(i) 9 months (ii) 10 years	(i) 590,000 (ii) 304,000	PBOC rate plus a premium⁽⁷⁾	(i) 0.6%⁽²⁾ (ii) 3%⁽²⁾	(i) 1 (ii) 1
2858	Yixin Group Limited	14/12/2017	33 months	500,000	5.7%⁽⁸⁾	1.7%⁽²⁾	100
1492	China Zhongdi Dairy Holdings Company Limited	13/12/2017	3 years	120,000	5.32%⁽⁹⁾	Not disclosed	Not disclosed
1250	Beijing Enterprises Clean Energy Group Limited	11/12/2017	8 years	800,000	PBOC rate plus a premium⁽⁷⁾	Not disclosed	10,000
3300	China Glass Holdings Limited	9/11/2017	Until May 2020	89,000	7.5%	Not disclosed	2
1492	China Zhongdi Dairy Holdings Company Limited	9/11/2017	3 years	100,000	5.7%⁽⁹⁾	Not disclosed	1
1108	Luoyang Glass Company Limited	8/11/2017	5 years	50,000	PBOC rate⁽⁴⁾	2.5%⁽²⁾	1,000
1699	China Putian Food Holding Limited	6/11/2017	3 years	35,000	PBOC rate⁽⁴⁾	4.5%⁽²⁾	100
182	Concord New Energy Group Limited	13/10/2017	(i) 11 years (ii) 5 years	(i) 550,000 (ii) 20,000	PBOC rate⁽⁴⁾	Not disclosed	(i) 1 (ii) 1
449	Chigo Holding Limited	13/10/2017	3 years	60,000	Note⁽¹⁰⁾	Not disclosed	100
449	Chigo Holding Limited	11/10/2017	3 years	46,082	Not disclosed	Not disclosed	2,000

Source: Website of the Stock Exchange

Notes:

(1) The PBOC rate refers to the benchmark interest rate for RMB loans as promulgated by the PBOC from time to time for the corresponding period of the respective lease term.

(2) No arrangement fee is disclosed in the relevant announcement and a handling fee/service fee/commission and notarial fee/administration fee is payable by the lessee(s). Such fee has been adopted as arrangement fee in terms of percentage of principal amount in the above analysis.

(3) Interest rate is not disclosed in the relevant announcement. However, it is disclosed that the interest rate is calculated with reference to the benchmark interest rate for RMB 1-5 years loans according to the PBOC from time to time.

(4) Interest rate is not disclosed in the relevant announcement. However, it is disclosed that the interest rate is subject to adjustment with reference to the benchmark interest rate for RMB loans with the same maturity as the lease period as promulgated by the PBOC from time to time.

(5) It is disclosed in the relevant announcement that the interest rate is calculated on the basis of the 5-year benchmark loan interest rate published by the PBOC.

(6) It is disclosed in the relevant announcement that the interest rate shall be adjusted with reference to the benchmark interest rate for RMB loans as promulgated by the PBOC from time to time.

(7) Interest rate is not disclosed in the relevant announcement. However, it is disclosed that the interest rate shall be adjusted with reference to the benchmark interest rate for RMB loans with the same maturity as the lease period as promulgated by the PBOC from time to time plus a premium.

(8) It is disclosed in the relevant announcement that the interest rate is determined at a 20% premium over the three-year benchmark lending rate promulgated by the PBOC, and to be adjusted and calculated according to such benchmark lending rate during the lease period.

(9) It is disclosed in the relevant announcement that the interest rate is subject to adjustments during the lease period according to the then prevailing benchmark interest rate for loans for the same period.

(10) Interest rate is not disclosed in the relevant announcement. However, it is disclosed that the interest rate is subject to the changes of the benchmark interest rates in China.

We have reviewed the Company's previously published announcements in relation to the acquisition of the Relevant Aircraft (the "Previous Announcements") and noted that the expected delivery timeline for each of the Relevant Aircraft set out on the computation is within the delivery period as set out on the Previous Announcements and the expected purchase price upon delivery is within the basic price level as disclosed on the Previous Announcements. We have discussed with the management of the Company and were given to understand that the difference between the basic price and the expected purchase price upon delivery in respect of each of the Relevant Aircraft mainly relates to the price concessions granted by the aircraft manufacturer(s) to the Company which are consistent with customary business and industry practise and the Company's past transactions with the aircraft manufacturer(s).

With respect to the interest payable, we noted that the prevailing benchmark interest rate for RMB loan with term over 5 years as promulgated by the PBOC is applied for the purpose of the computation. In this regard, we have obtained and reviewed five sample aircraft finance lease proposals submitted by independent third parties to the Group in the past two years (the "Sample Finance Lease Proposals") and noted that the quoted interest rates were also determined with reference to such benchmark interest rate. We also noted from the Reference Cases that the applicable interest rate for finance lease arrangements conducted in the PRC are commonly determined with reference to the benchmark interest rate for RMB loans as promulgated by the PBOC from time to time.

With respect to the lease period, we understand from the management of the Company that the estimated useful life of the aircraft is often considered in determining the lease period for aircraft finance lease arrangement and that such period normally does not exceed the estimated useful life of the leased aircraft. According to the Letter from the Board, the Company expected that the lease period of the Leased Aircraft under the individual Finance Lease Agreement(s) would be 10 to 12 years, and we noted from the computation that a lease period of 10 years is applied. As disclosed in the annual report of the Company for the year ended 31 December 2016 and as confirmed with the Company, under the Company's accounting policy for depreciation of property, plant and equipment, the estimated useful life of its aircraft ranges from 15 to 30 years. We also noted from the Sample Finance Lease Proposals that the lease periods offered by the independent third parties were 10 years. Furthermore, we noted from the finance lease transactions in relation to new aircraft introduction previously announced by other major Chinese airlines that are listed on the Stock Exchange (namely, China Eastern Airlines Corporation Limited (stock code: 670) and China Southern Airlines Company Limited (stock code: 1055)) that the lease period of such transactions ranged from 10 to 12 years. Based on the above, we are of the view that the expected lease period of 10 to 12 years of the Leased Aircraft as adopted by the Company is in line with normal business practice in the Chinese aviation industry.

With respect to the arrangement fee computation, we noted that a 1% rate is adopted. We noted from the Sample Finance Lease Proposals that the one-off arrangement fees quoted by the independent third party lessors were based on a percentage ranging from nil to 0.5% of the principal amount of the finance leases. We also noted from the Reference Cases that, for those cases which have disclosed the arrangement fee, such fee ranged from approximately 0.6% to 4.5% of the principal amount of the finance leases.

As for the buy-back fee, the Lessee(s) is entitled to purchase the Leased Aircraft back from the Lessor(s) at a nominal purchase price upon the payment of the last instalment of the rental fee. We noted that the buy-back fee is not included in the computation as the Company considers that it will be at a nominal level which is negligible when calculating the proposed Maximum Transaction Amounts. In this regard, we noted from the Reference Cases that, for those which have disclosed the buy-back fee, it was common for the buy-back fee in respect of finance lease arrangement to be charged at a nominal price ranging from RMB1 to RMB10,000. We also noted from the Sample Finance Lease Proposals that the buy- back fee quoted by the independent third party lessors ranged from nil to RMB10.

Having considered the above, we are of the view that the proposed Maximum Transaction Amounts are fair and reasonable so far as the Independent Shareholders are concerned, and are in the interests of the Company and the Shareholders as a whole.

RECOMMENDATIONS

Having considered the above principal factors and reasons, we are of the opinion that the Aircraft Finance Lease Transactions are in the ordinary and usual course of business of the Company and on normal commercial terms, and the terms of the 2018-2019 Aircraft Finance Lease Service Framework Agreement (including the proposed Maximum Transaction Amounts) are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders, and advise the Independent Board Committee to recommend the Independent Shareholders, to vote in favour of the relevant resolution to be proposed at the AGM to approve the Aircraft Finance Lease Transactions under the 2018-2019 Aircraft Finance Lease Service Framework Agreement and the proposed Maximum Transaction Amounts thereunder.

Yours faithfully, For and on behalf of

Challenge Capital Management Limited

Jackson Woo

Managing Director

Wilson Fok

Managing Director

Mr. Jackson Woo is a licensed person registered with the SFC to carry out Type 6 (advising on corporate finance) regulated activity under the SFO and has over 10 years of experience in corporate finance.

Mr. Wilson Fok is a licensed person registered with the SFC to carry out Type 6 (advising on corporate finance) regulated activity under the SFO and has over 10 years of experience in corporate finance.

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Hong Kong Listing Rules for the purpose of giving information with regard to the Group. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTERESTS OF DIRECTORS AND SUPERVISORS

As at the Latest Practicable Date, none of the Directors, Supervisors or chief executive of the Company had interests or short positions in the shares, underlying shares and/or debentures (as the case may be) of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were notifiable to the Company and the Stock Exchange pursuant to the SFO, or were recorded in the register maintained by the Company pursuant to section 352 of the SFO, or which were notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies.

As at the Latest Practicable Date, none of the Directors or Supervisors has any direct or indirect interest in any assets which have been, since 31 December 2017 (the date to which the latest published audited financial statements of the Group were made up), acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group.

None of the Directors or Supervisors is materially interested in any contract or arrangement subsisting at the Latest Practicable Date and which is significant in relation to the business of the Group.

Mr. John Robert Slosar is a non-executive Director and is concurrently the chairman and an executive director of Cathay Pacific. Cathay Pacific is a substantial shareholder of the Company, holding 2,633,725,455 H shares in the Company as at Latest Practicable Date, and it wholly owns Cathay Dragon. Mr. Cai Jianjiang, who is the chairman and a non-executive Director, and Mr. Song Zhiyong, who is an executive Director, are concurrently non-executive directors of Cathay Pacific. Cathay Pacific and Cathay Dragon compete or are likely to compete either directly or indirectly with some aspects of the business of the Company as they operate airline services to certain destinations, which are also served by the Company.

Save as mentioned above, as at the Latest Practicable Date, none of the Directors or Supervisors and their respective close associates (as defined in the Hong Kong Listing Rules) has any competing interests which would be required to be disclosed under Rule 8.10 of the Hong Kong Listing Rules if each of them were a controlling shareholder of the Company.

3. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors or Supervisors has any existing or proposed service contract with any member of the Group which is not expiring or terminable by the Group within one year without payment of compensation (other than statutory compensation).

4. NO MATERIAL ADVERSE CHANGE

The Directors confirm that as at the Latest Practicable Date, there has been no material adverse change in the Group's financial or trading position since 31 December 2017, being the date to which the latest published audited financial statements of the Group have been made up.

5. EXPERT

The following is the qualifications of the expert who has given its opinion or advice, which is contained in this circular:

Name

Qualification

Challenge Capital Management Limited

a corporation licensed to carry out Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities under the SFO

a. As at the Latest Practicable Date, Challenge Capital did not have any direct or indirect interest in any assets which have been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2017 (the date to which the latest published audited financial statements of the Group were made up);

b. As at the Latest Practicable Date, Challenge Capital was not beneficially interested in the share capital of any member of the Group and had no right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group; and

c. Challenge Capital has given and has not withdrawn its written consent to the issue of this circular with inclusion of its opinion and the reference to its name included herein in the form and context in which it appears.

6. MISCELLANEOUS

a. The joint company secretaries of the Company are Zhou Feng and Tam Shuit Mui. Ms. Tam is an associate member of the Hong Kong Institute of Certified Public Accountants (HKICPA).

b. The registered address of the Company is at Blue Sky Mansion, 28 Tianzhu Road, Airport Industrial Zone, Shunyi District, Beijing, China. The head office of the Company is at No. 30, Tianzhu Road, Airport Industrial Zone, Shunyi District, Beijing, China.

c. The H Share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited, Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong.

7. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business of the Company in Hong Kong at 5th Floor, CNAC House, 12 Tung Fai Road, Hong Kong International Airport, Hong Kong during normal business hours on any business day from the date of this circular until 18 April 2018:

a. 2018-2019 Aircraft Finance Lease Service Framework Agreement;

b. the letter from the Independent Board Committee to the Independent Shareholders, the text of which is set out on pages 19 to 20 of this circular;

c. the letter from Challenge Capital to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 21 to 35 of this circular;

d. the consent letter issued by the expert referred to in this circular; and

e. this circular.

NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that an annual general meeting (the "AGM") of Air China Limited (the "Company") for the year ended 31 December 2017 will be held at 2:00 p.m. on Friday, 25 May 2018 at The Conference Room C713, No. 30, Tianzhu Road, Airport Industrial Zone, Shunyi District, Beijing, PRC to consider and, if thought fit, to pass the following resolutions.

ORDINARY RESOLUTIONS

1. To consider and approve the 2017 work report of the board of directors (the "Board") of the Company.

2. To consider and approve the 2017 work report of the supervisory committee of the Company.

3. To consider and approve the audited consolidated financial statements of the Company for the year 2017 prepared under the PRC Accounting Standards and the International Financial Reporting Standards.

4. To consider and approve the profit distribution proposal for the year 2017 as recommended by the Board.

5. To consider and approve the re-appointment of Deloitte Touche Tohmatsu as the Company's international auditor and Deloitte Touche Tohmatsu Certified Public Accountants LLP as the Company's domestic auditor and internal control auditor respectively for the year ending 31 December 2018 and to authorise the audit and risk management committee of the Board to determine their remunerations for the year 2018.

6. To consider and approve the entry into of the 2018-2019 aircraft finance lease service framework agreement dated 27 March 2018 between the Company and China National Aviation Corporation (Group) Limited as well as the transactions contemplated thereunder and the proposed maximum transaction amounts for the period from 1 June 2018 to 31 December 2018 and for the financial year ending 31 December 2019, being US$1,046.59 million and US$1,492.03 million respectively.

SPECIAL RESOLUTION

7. To consider and approve the issue of debt financing instruments (include but are not limited to corporate bonds, ultra-short-term commercial papers, short-term commercial papers, mid-term notes, domestic non-public targeted debt financing instruments, overseas debt financing instruments and overseas bonds/notes denominated in RMB or foreign currencies) within the permissible size under the applicable laws and regulations in one or multiple tranche(s), and generally and unconditionally authorise the Board to deal with the followings in accordance with the specific needs of the Company and market conditions:

(iii) to approve, confirm and ratify any action or procedure relating to the issuance as mentioned above already taken by the Company;

(v) to determine and handle all relevant matters relating to the listing of the issued Debt Financing Instruments upon the completion of the issuance;

(vi) in the case of issuance of corporate debt financing instruments, during the term of the corporate debt financing instruments, to determine not to distribute dividends to the Shareholders to safeguard repayment of debts as required under the relevant laws and regulations in the event that the Company expects to, or does fail to pay the principal and/or coupon interests of such bonds as they fall due;

(i)

(viii) to authorise the Board to delegate the authorisations set forth in items (i) to (vi) above to the president and/or the general accountant of the Company; and

(ix) to authorise the Board to delegate the authorisation set forth in item (vii) above to the secretary of the Board.

By order of the Board

Air China Limited

Cai Jianjiang

Chairman

Beijing, PRC, 4 April 2018

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

* Independent non-executive director of the Company

# Mr. Xue Yasong was elected as the employee representative director of the Company by the meeting of the second session of the employee representatives after the printing of this notice, the details of which are set out in the announcement of the Company dated 3 April 2018. Therefore, the list of directors of the printed notice does not include Mr. Xue.

Notes:

1. Closure of register of members and eligibility for attending and voting at the AGM

Holders of H Shares of the Company are advised that the register of members of H shares of the Company will close from Wednesday, 25 April 2018 to Friday, 25 May 2018 (both days inclusive), during which time no transfer of H Shares of the Company will be effected and registered. In order to qualify for attendance and voting at the AGM, instruments of transfer accompanied by share certificates and other appropriate documents must be lodged with the Company's H Share registrar, Computershare Hong Kong Investor Services Limited at Shops 1712-16, 17/F, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, by 4:30 p.m. on Tuesday, 24 April 2018.

H Share Shareholders of the Company whose names appear on the register of members of H Shares of the Company on Wednesday, 25 April 2018 are entitled to attend and vote at the AGM.

2. Notice of Attendance

H Share Shareholders who intend to attend the AGM should complete and lodge the accompanying notice of attendance and return it to the Company's H Share registrar on or before Saturday, 5 May 2018. The notice of attendance may be delivered by hand, by post or by fax to the Company's H Share registrar. Completion and return of the notice of attendance do not affect the right of a shareholder to attend and vote at the AGM. However, the failure to return the notice of attendance may result in an adjournment of the AGM, if the number of shares carrying the right to vote represented by the shareholders proposing to attend the AGM by the notice of attendance does not reach more than half of the total number of shares of the Company carrying the right to vote at the AGM.

3. Proxy

Every shareholder who has the right to attend and vote at the AGM is entitled to appoint one or more proxies, whether or not they are members of the Company, to attend and vote on his/her behalf at the AGM.

A proxy shall be appointed by an instrument in writing. Such instrument shall be signed by the appointor or his attorney duly authorised in writing. If the appointer is a legal person, then the instrument shall be signed under a legal person's seal or signed by its director or an attorney duly authorised in writing. The instrument appointing the proxy shall be deposited at the Company's H Share registrar for holders of H Shares not less than 24 hours before the time specified for the holding of the AGM. If the instrument appointing the proxy is signed by a person authorised by the appointer, the power of attorney or other document of authority under which the instrument is signed shall be notarised. The notarised power of attorney or other document of authority shall be deposited together and at the same time with the instrument appointing the proxy at the Company's H Share registrar.

4. Other business

(i) The AGM is expected to last for two hours. Shareholders and their proxies attending the meeting shall be responsible for their own traveling and accommodation expenses.

(ii) The address of Computershare Hong Kong Investor Services Limited is: 17M Floor

Hopewell Centre

183 Queen's Road East Wanchai

Hong Kong

Tel No.: (852) 2862 8628

Fax No.: (852) 2865 0990

FORM OF PROXY FOR ANNUAL GENERAL MEETING

Number of shares to which this form of proxy relates (Note 1)

I/We (Note 2) of being the registered holder(s) of (Note 3) H Shares in the share capital of Air China Limited (the "Company") HEREBY APPOINT (Note 4) the chairman of the meeting and/or (Note 4)

of as my/our proxy/proxies: (a) to act for me/us at the annual general meeting (or at any adjournment thereof) of the Company to be held at 2:00 p.m. on Friday, 25 May 2018 at The Conference Room C713, No. 30, Tianzhu Road, Airport Industrial Zone, Shunyi District, Beijing, PRC (the "Meeting") for the purpose of considering and, if thought fit, passing the resolutions (the "Resolutions") as set out in the notice convening the Meeting; and (b) at the Meeting (or at any adjournment thereof) to vote for me/us and in my/our name(s) in respect of the Resolutions as hereunder indicated or, if no such indication is given, as my/our voting proxy thinks fit.

ORDINARY RESOLUTIONS		FOR(Note 5)	AGAINST(Note 5)	ABSTAIN(Note 5)
1.	To consider and approve the 2017 work report of the board of directors (the "Board") of the Company.
2.	To consider and approve the 2017 work report of the supervisory committee of the Company.
3.	To consider and approve the audited consolidated financial statements of the Company for the year 2017 prepared under the PRC Accounting Standards and the International Financial Reporting Standards.
4.	To consider and approve the profit distribution proposal for the year 2017 as recommended by the Board.
5.	To consider and approve the re-appointment of Deloitte Touche Tohmatsu as the Company's international auditor and Deloitte Touche Tohmatsu Certified Public Accountants LLP as the Company's domestic auditor and internal control auditor respectively for the year ending 31 December 2018 and to authorise the audit and risk management committee of the Board to determine their remunerations for the year 2018.

ORDINARY RESOLUTIONS		FOR(Note 5)		AGAINST(Note 5)		ABSTAIN(Note 5)
6.	To consider and approve the entry into of the 2018-2019 aircraft finance lease service framework agreement dated 27 March 2018 between the Company and China National Aviation Corporation (Group) Limited as well as the transactions contemplated thereunder and the proposed maximum transaction amounts for the period from 1 June 2018 to 31 December 2018 and for the financial year ending 31 December 2019, being US$1,046.59 million and US$1,492.03 million respectively.
SPECIAL RESOLUTION		FOR(Note	5)	AGAINST(Note	5)	ABSTAIN(Note	5)
7.	To consider and approve the resolution in relation to the grant of a general mandate to the Board to issue debt financing instruments.

Dated this day of , 2018 Signature (Note 6)

Notes:

1. Please insert the number of shares registered in your name(s) to which this proxy form relates. If no number is inserted, this form of proxy will be deemed to relate to all shares registered in your name(s).

2. Full name(s) and address(es) to be inserted in BLOCK CAPITALS.

3. Please insert the total number of shares registered in your name(s).

4. A member entitled to attend and vote at the Meeting is entitled to appoint one or more proxies of his own choice to attend and vote instead of him. A proxy need not be a member of the Company. If any proxy other than the chairman of the Meeting is preferred, please strike out the words "the chairman of the meeting and/or" and insert the name(s) and address(es) of the proxy/proxies desired in the space provided. In the event that two or more persons (other than the chairman of the Meeting) are named as proxies and the words "the chairman of the meeting and/or" are not deleted, those words and references shall be deemed to have been deleted.

5. IMPORTANT: IF YOU WISH TO VOTE FOR THE RESOLUTION, TICK IN THE BOX MARKED "FOR". IF YOU WISH TO VOTE AGAINST THE RESOLUTION, TICK IN THE BOX MARKED "AGAINST". IF YOU WISH TO ABSTAIN FROM VOTING, TICK THE APPROPRIATE BOX MARKED "ABSTAIN". Failure to complete the boxes will entitle your voting proxy to cast his vote at his discretion. A member is entitled to one vote for every fully-paid share held and a member entitled to more than one vote need not use all his votes in the same way. A tick in the relevant box indicates that the votes attached to all the shares stated above as held by you will be cast accordingly. The total number of shares referred to in the three boxes for the same resolution cannot exceed the number of Shares stated above as held by you. The shares abstained will be counted in the calculation of the required majority.

6. This form of proxy must be signed by you or your attorney duly authorised in writing, or in the case of a corporation, must be either under seal or under the hand of a director or attorney duly authorised. If this form of proxy is signed by your attorney, the power of attorney or other document of authorisation must be notarised.

7. In order to be valid, this form of proxy, together with the notarised copy of the power of attorney or other document of authorisation (if any) under which it is signed, for holders of H Shares, must be delivered to the Company's H Share registrar, Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong, not less than 24 hours prior to the time appointed for holding the Meeting (or any adjournment thereof).

8. Completion and delivery of a form of proxy will not preclude you from attending and/or voting at the Meeting (or any adjournment thereof) if you so wish.

9. ANY ALTERATION MADE TO THIS FORM OF PROXY MUST BE INITIALLED BY THE PERSON(S) WHO SIGN(S) IT.

10. To attend and represent the shareholder(s) at the Meeting, the proxy so appointed must produce beforehand his identification document and any power of attorney duly signed by his appointor(s) or the legal representative(s) of his appointor(s). The power of attorney must state the date of issuance.

ANNUAL GENERAL MEETING NOTICE OF ATTENDANCE

To: Air China Limited (the "Company")

I/We (Note 1) of , being the registered holder of (Note 2) H Shares in the share capital of the Company hereby inform the Company that I/we intend to attend the annual general meeting to be held at 2:00 p.m. Friday, 25 May 2018 at The Conference Room C713, No. 30, Tianzhu Road, Airport Industrial Zone, Shunyi District, Beijing, PRC or to appoint proxies to attend on my/ our behalf.

Signature:

Date: 2018

Notes:

1. Please insert the full name(s) and address(es) of the shareholder(s) as it is recorded in the register of members of the Company in BLOCK CAPITALS.

2. Please insert the number of shares registered in your name(s).

3. Please duly complete and sign this Notice of Attendance, and deliver it to, for holders of H Shares, the Company's H Shares registrar, Computershare Hong Kong Investor Services Limited on or before Saturday, 5 May 2018.