EX-1.1 2 u99804exv1w1.txt EX-1.1 CIRCULAR DATED MAY 19, 2005 EXHIBIT 1.1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION IF YOU ARE IN ANY DOUBT about any of the contents of this circular or as to what action to take in relation to this circular, you should consult appropriate independent advisers to obtain independent professional advice. IF YOU HAVE SOLD OR TRANSFERRED all your shares in China Eastern Airlines Corporation Limited, you should at once hand this circular to the purchaser or the transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee. The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. [CHINA EASTERN AIRLINES CORPORATION LIMITED LOGO] (A joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock code: 670) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION CONTINUING CONNECTED TRANSACTIONS Financial adviser to China Eastern Airlines Corporation Limited [MORGAN STANLEY LOGO] MORGAN STANLEY DEAN WITTER ASIA LIMITED PRC financial adviser to China Eastern Airlines Corporation Limited [LOGO] GUOTAI JUNAN SECURITIES CO., LTD. THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION Independent financial adviser to the independent board committee and independent shareholders of China Eastern Airlines Corporation Limited [LOGO] SHENYIN WANGUO CAPITAL (H.K.) LIMITED A letter from the board of the directors of China Eastern Airlines Corporation Limited (the "COMPANY") is set out on pages 6 to 40 of this circular. A letter from the independent board committee of the Company is set out on pages 41 to 42 of this circular. A letter from Shenyin Wanguo Capital (H.K.) Limited, the independent financial adviser to the independent board committee and independent shareholders of the Company, is set out on pages 43 to 76 of this circular. A notice dated and issued on 13th May, 2005 convening the 2004 annual general meeting of the Company (the "AGM") to be held at Function Room 2, Grand Ballroom, Shanghai Marriott Hotel Hongqiao, 2270 Hongqiao Road, Shanghai, the People's Republic of China at 9:00 a.m. on Thursday, 30th June, 2005 is also set out at the end of this circular. Shareholders whose names appear on the register of members of the Company at the close of business on Monday, 30th May, 2005 will be entitled to attend the AGM upon completion of the necessary registration procedures. The H share register of members of the Company will be closed from Tuesday, 31st May, 2005 to Wednesday, 29th June, 2005, both days inclusive, during which period no transfer of the Company's H shares will be effected. Where applicable, shareholders of the Company's H shares intending to attend the AGM are therefore required to lodge their respective instrument(s) of transfer and the relevant share certificate(s) to the Company's H share registrar, Hong Kong Registrars Limited at Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, by 4:00 p.m. on Monday, 30th May, 2005. If you are eligible and intend to attend the AGM, please complete and return the attendance slip, a copy of which is enclosed, in accordance with the instructions printed thereon as soon as possible and in any event by Friday, 10th June, 2005. If you are not able to attend and/or vote at the AGM, you are strongly urged to complete and return the proxy form, a copy of which is also enclosed, in accordance with the instructions printed thereon as soon as possible and in any event not later than 24 hours before the time appointed for the holding of the AGM or any adjournment thereof. Completion and return of the proxy form will not preclude you from attending and voting in person at the AGM or any adjournment thereof should you so wish. 19th May, 2005 CONTENTS
Pages DEFINITIONS ......................................................................... 1 GLOSSARY ............................................................................ 4 LETTER FROM THE BOARD ............................................................... 6 1. Introduction........................................................... 6 2. Proposed Acquisition................................................... 8 2.1 Background...................................................... 8 2.2 Acquisition Agreement........................................... 8 2.3 Parties and their relationship.................................. 9 2.4 Assets and liabilities to be acquired by the Company............ 9 2.5 Consideration and payment terms................................. 11 2.6 Conditions, completion and delivery............................. 13 2.7 Non-competition undertaking..................................... 15 2.8 Reasons for and benefits of the Proposed Acquisition............ 15 2.9 Financial impact of the Proposed Acquisition.................... 19 2.10 Implications under the Listing Rules............................ 19 3. Continuing Connected Transactions...................................... 19 3.1 Background...................................................... 19 3.2 Property leasing................................................ 21 3.3 Financial services.............................................. 23 3.4 Import/export agency services................................... 27 3.5 Maintenance services............................................ 28 3.6 Catering services............................................... 30 3.7 Sales agency services........................................... 32 3.8 Advertising services............................................ 33 3.9 Summary of the Continuing Connected Transactions and the associated annual caps................... 35 3.10 Implications under the Listing Rules............................ 36 4. Recommendations........................................................ 36
CONTENTS 5. AGM.................................................................... 37 6. Additional information................................................. 39 LETTER FROM THE INDEPENDENT BOARD COMMITTEE ......................................... 41 LETTER FROM SW CAPITAL .............................................................. 43 APPENDICES Appendix I Information on the aviation businesses of CEA Northwest and CEA Yunnan...................................... I-1 Appendix II Accountants' report on financial information of the aviation businesses of CEA Northwest................................... II-1 Appendix III Accountants' report on financial information of the aviation businesses of CEA Yunnan ..................................... III-1 Appendix IV Financial information of the Group.............................. IV-1 Appendix V Financial information of the Enlarged Group..................... V-1 Appendix VI Property valuation.............................................. VI-1 Appendix VII General information............................................. VII-1 NOTICE OF AGM ....................................................................... i
DEFINITIONS In this circular, unless the context otherwise requires, the following expressions have the following meanings: "ACQUISITION AGREEMENT" means the conditional agreement dated 12th May, 2005 entered into among the Company, CEA Holding, CEA Northwest and CEA Yunnan in connection with the proposed acquisition by the Company of certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan; "AGM" means the 2004 annual general meeting of the Company proposed to be held at Function Room 2, Grand Ballroom, Shanghai Marriott Hotel Hongqiao, 2270 Hongqiao Road, Shanghai, the PRC at 9:00 a.m. on Thursday, 30th June, 2005, or any adjournment thereof; "ASSOCIATE(S)" has the meaning ascribed thereto under the Listing Rules; "BOARD" means the board of the Directors; "CEA HOLDING" means [CHINESE CHARACTERS] (China Eastern Air Holding Company), a wholly PRC state-owned enterprise and the controlling shareholder of the Company holding approximately 61.64% of its issued share capital; "CEA HOLDING GROUP" means CEA Holding and its subsidiaries and other associates, excluding members of the Enlarged Group; "CEA NORTHWEST" Means [CHINESE CHARACTERS] (China Eastern Air Northwest Company), a company wholly-owned by CEA Holding; "CEA YUNNAN" means [CHINESE CHARACTERS] (China Eastern Air Yunnan Company), a company wholly-owned by CEA Holding; "COMPANY" means [CHINESE CHARACTERS] (China Eastern Airlines Corporation Limited), a joint stock limited company incorporated in the PRC with limited liability, whose H shares, A shares and American depositary shares are listed on the Stock Exchange, the Shanghai Stock Exchange of the PRC and the New York Stock Exchange, Inc., respectively; "CONNECTED PERSON(S)" has the meaning ascribed thereto under the Listing Rules; "CONTINUING CONNECTED means the continuing connected transactions of the TRANSACTIONS" Company with the CEA Holding Group as more particularly described in the paragraph headed "Continuing Connected Transactions" of the "Letter from the Board" included in this circular (other than those transactions involving provision of loan and financing services under the Financial Services Agreement as described in sub-paragraph 3.3 (Financial services) of that paragraph); 1 DEFINITIONS "DIRECTORS" means the directors of the Company; "EFFECTIVE DATE" means the last date of the calendar month in which the Acquisition Agreement becomes unconditional (i.e. when all of the conditions set out under the paragraph headed "Proposed Acquisition - Conditions, completion and delivery - Conditions precedent" of the "Letter from the Board" included in this circular are fulfilled), which as at the date of this circular is expected to be 30th June, 2005; "ENLARGED GROUP" means the Company and its subsidiaries following completion of the Proposed Acquisition; "GROUP" means the Company and its subsidiaries; "HK$" means Hong Kong dollars, the lawful currency of Hong Kong; "HONG KONG" means Hong Kong Special Administrative Region of the People's Republic of China; "INDEPENDENT BOARD means a committee of the Board comprising all the COMMITTEE" independent non-executive Directors (namely, Mr. Hu Honggao, Mr. Peter Lok, Mr. Wu Baiwang, Mr. Zhou Ruijin and Mr. Xie Rong) established for the purpose of considering and advising the Independent Shareholders in connection with the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps; "INDEPENDENT means shareholders of the Company except CEA Holding SHAREHOLDERS" (being the controlling shareholder, and hence a connected person, of the Company having a material interest in the Proposed Acquisition and the Continuing Connected Transactions) and its associate(s), if any; "LATEST PRACTICABLE means 9th May, 2005, being the latest practicable date DATE" for ascertaining certain information included in this circular; "LISTING RULES" means the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited; "PRC" OR "CHINA" means the People's Republic of China; "PROPOSED ACQUISITION" means the proposed acquisition by the Company of certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan pursuant to the Acquisition Agreement; "RMB" means Renminbi yuan, the lawful currency of the PRC; "SFO" means the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong); "STOCK EXCHANGE" means The Stock Exchange of Hong Kong Limited; 2 DEFINITIONS "SW CAPITAL" means Shenyin Wanguo Capital (H.K.) Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders and a licensed corporation to carry out type 1 (dealing in securities), type 4 (advising on securities) and type 6 (advising on corporate finance) regulated activities under the SFO; and "%" means per cent. In this circular, unless otherwise stated, conversion of Renminbi yuan into Hong Kong dollars is calculated at the approximate rate of RMB1.06 to HK$1.00, for the purpose of illustration only, and does not constitute a representation that any amount has been, could have been, or may otherwise be exchanged or converted at this or any other rate. 3 GLOSSARY This glossary contains certain definitions for technical terms or expressions used in this circular and certain related industry indicators as they relate to the Company and its business. Such definitions however may not necessarily correspond to standard industry definitions. CAPACITY MEASUREMENTS "AVAILABLE SEAT number of seats available for sale multiplied by the KILOMETRES" OR "ASKS" kilometres flown "AVAILABLE FREIGHT TONNE tonnes of capacity available for carriage of cargo and KILOMETRES" OR "AFTKS" mail multiplied by the kilometres flown "AVAILABLE TONNE tonnes of capacity available for transportation of KILOMETRES" OR "ATKS" revenue load (passengers and cargo) multiplied by the kilometres flown "TONNE" a metric ton, equivalent to 2,204.6 pounds TRAFFIC MEASUREMENTS "CARGO TRAFFIC" measured in RFTKs, unless otherwise specified "PASSENGER TRAFFIC" measured in RPKs, unless otherwise specified "REVENUE FREIGHT TONNE revenue cargo and mail load in tonnes multiplied by the KILOMETRES" OR "RFTKS" kilometres flown "REVENUE PASSENGER number of revenue passengers carried multiplied by the KILOMETRES" OR "RPKS" kilometres flown "REVENUE TONNE revenue load (passengers and cargo) in tonnes KILOMETRES" OR "RTKS" multiplied by the kilometres flown YIELD MEASUREMENTS "AVERAGE YIELD" revenue from airline operations (passenger and cargo) divided by RTKs "CARGO YIELD" revenue from cargo operations divided by RFTKs "PASSENGER YIELD" revenue from passenger operations divided by RPKs LOAD FACTORS "CARGO LOAD FACTOR" RFTKs expressed as a percentage of AFTKs "OVERALL LOAD FACTOR" RTKs expressed as a percentage of ATKs "PASSENGER LOAD FACTOR" RPKs expressed as a percentage of ASKs UTILISATION 4 GLOSSARY "UTILISATION RATES" actual number of flight and taxi hours per aircraft per operating day 5 LETTER FROM THE BOARD [CHINA EASTERN AIRLINES CORPORATION LIMITED LOGO] (A joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock code: 670) DIRECTORS: LEGAL ADDRESS: Li Fenghua (Chairman, Executive Director) 66 Airport Street Ye Yigan (Non-executive Director) Pudong International Airport Cao Jianxiong (Non-executive Director) Shanghai Wan Mingwu (Vice President, Executive Director) The People's Republic of China Zhong Xiong (Non-executive Director) Luo Zhuping (Executive Director) HEAD OFFICE: 2550 Hongqiao Road INDEPENDENT NON-EXECUTIVE DIRECTORS: Shanghai Hu Honggao The People's Republic of China Peter Lok Wu Baiwang PRINCIPAL PLACE OF BUSINESS Zhou Ruijin IN HONG KONG: Xie Rong 5th Floor, McDonald's Building 48 Yee Wo Street Hong Kong HONG KONG SHARE REGISTRAR AND TRANSFER OFFICE: Hong Kong Registrars Limited Rooms 1712-1716, 17th Floor Hopewell Centre 183 Queen's Road East Hong Kong 19th May, 2005 To the shareholders of the Company Dear Sir or Madam, VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION CONTINUING CONNECTED TRANSACTIONS 1. INTRODUCTION As announced by the Company on 12th May, 2005, the Company, CEA Holding, CEA Northwest and CEA Yunnan entered into the Acquisition Agreement on that day, pursuant to which 6 LETTER FROM THE BOARD the Company has agreed to acquire from CEA Holding certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan. In respect of the Proposed Acquisition, the relevant "percentage ratio" applicable to the transaction under Rule 14.07 of the Listing Rules exceeds 100%. The Proposed Acquisition therefore constitutes a very substantial acquisition by the Company under the Listing Rules. Further, since CEA Holding is the controlling shareholder, and hence a connected person, of the Company, the Proposed Acquisition also constitutes a connected transaction of the Company under the Listing Rules and is subject to approval by the Independent Shareholders at the AGM. On 12th May, 2005, the Company also entered into various agreements with certain members of the CEA Holding Group in respect of the Continuing Connected Transactions and certain other transactions which will be carried out on a continuing basis between the Enlarged Group and the CEA Holding Group. Each of these agreements and the Continuing Connected Transactions is expected to constitute, or may in the on-going performance become, a non-exempt continuing connected transaction of the Company under Chapter 14A of the Listing Rules, and such transactions together with the associated annual caps will be subject to approval by the Independent Shareholders at the AGM. CEA Holding and its associate(s), if any, will at the AGM abstain from voting on the ordinary resolutions approving the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps, which will be taken on a poll as required under the Listing Rules. The Independent Board Committee has been established to advise the Independent Shareholders in respect of the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps. SW Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps. The purpose of this circular is to provide the Independent Shareholders with further information in relation to the Proposed Acquisition and the Continuing Connected Transactions as required under the Listing Rules, so as to enable the Independent Shareholders to make an informed decision to vote on the relevant resolutions set out in the Company's notice of the AGM. A letter from the Independent Board Committee and its recommendations to the Independent Shareholders is set out on pages 41 to 42 of this circular, and the opinion letter from SW Capital is set out on pages 43 to 76 of this circular. 2. PROPOSED ACQUISITION 2.1 BACKGROUND 7 LETTER FROM THE BOARD As disclosed in an announcement dated 11th October, 2002 issued by the Company, pursuant to a restructuring proposal approved by the State Council of the PRC, CEA Holding was established as a wholly PRC state-owned enterprise on 11th October, 2002. CEA Holding has since then become the immediate controlling shareholder of the Company, and holds the entire ownership interests in CEA Northwest and CEA Yunnan. As also mentioned in that announcement, it is proposed that the aviation businesses of CEA Northwest and CEA Yunnan, together with the relevant assets and liabilities, will be injected from CEA Holding to the Company pursuant to the restructuring proposal. Accordingly, the Company, CEA Holding, CEA Northwest and CEA Yunnan entered into the Acquisition Agreement in respect of the Proposed Acquisition as part of the implementation of the restructuring proposal. 2.2 ACQUISITION AGREEMENT On 12th May, 2005, the Company (as the acquirer), CEA Holding (as the seller), CEA Northwest and CEA Yunnan (as the parties effecting the transfers of the relevant assets and liabilities to the Company) entered into the Acquisition Agreement, pursuant to which the Company has agreed to acquire from CEA Holding certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan. The assets and liabilities being acquired by the Company under the Proposed Acquisition are particularised in the paragraph headed "Proposed Acquisition - Assets and liabilities to be acquired by the Company" below. Approvals from the State-owned Assets Supervision and Administration Commission of the PRC State Council in respect of (i) the transaction under the Proposed Acquisition and (ii) the results of the independent valuation as of 31st December, 2004 of the assets and liabilities to be acquired by the Company under the Proposed Acquisition (as described in the paragraph headed "Proposed Acquisition - Consideration and payment terms - Acquisition price" below) have been obtained in early May 2005, as required under PRC laws and regulations. 2.3 PARTIES AND THEIR RELATIONSHIP The following chart sets forth the shareholding structure of the Company, CEA Northwest and CEA Yunnan: 8 LETTER FROM THE BOARD [ORGANIZATION CHART] Since only the aviation businesses of CEA Northwest and CEA Yunnan will be acquired by the Company under the Proposed Acquisition, the shareholding structure will be the same immediately before and immediately after completion of the Proposed Acquisition. 2.4 ASSETS AND LIABILITIES TO BE ACQUIRED BY THE COMPANY As mentioned above, pursuant to the Acquisition Agreement, the Company will acquire from CEA Holding certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan, and will, in accordance with and following completion of the agreement, assume and undertake the aviation operations and businesses currently carried out by CEA Northwest and CEA Yunnan. The relevant air routes will also be injected into the Company with such aviation businesses. The assets and liabilities being acquired by the Company include the relevant aircraft, engines and aviation equipment and facilities, certain employees and operating contracts, other relevant fixed and current assets (whether owned or leased assets) and liabilities of CEA Northwest and CEA Yunnan, and are particularised as follows: The assets (with the relevant aggregate book value as at 31st December, 2004 stated below) to be acquired by the Company in relation to the aviation businesses of CEA Northwest and CEA Yunnan include: (i) current assets amounting to approximately RMB1,541,520,000, including cash and cash equivalents, accounts receivable, prepayments and other receivables, and flight equipment spare parts; (ii) long-term investments amounting to approximately RMB5,803,000, including long-term equity investments; (iii) fixed assets amounting to approximately RMB6,835,883,000, including buildings, aircraft, engines, mechanical equipments, electronic equipments and transport equipments; 9 LETTER FROM THE BOARD (iv) projects under construction and the installation of related equipments amounting to approximately RMB7,240,000; and (v) long-term deposits and prepayments amounting to approximately RMB762,397,000, including bank deposits, deposits for aircraft under operating leases and fuel, and other prepayments. The liabilities (with the relevant aggregate book value as at 31st December, 2004 stated below) to be acquired by the Company in relation to the aviation businesses of CEA Northwest and CEA Yunnan include: (i) current liabilities amounting to approximately RMB4,971,075,000, including short-term bank loans, accounts payable, notes payable, receipts in advance, current portion of long-term liabilities, provisions, other payables and accrued expenses; and (ii) long-term liabilities amounting to approximately RMB4,049,754,000, including long-term bank loans, finance lease obligations, accrued aircraft overhaul expenses, post-retirement benefit obligations, deferred income and other long-term payables. An independent valuation as of 31st December, 2004 of the assets and liabilities to be acquired under the Proposed Acquisition was conducted by [CHINESE CHARACTERS] (China Consultants of Accounting and Financial Management Co. Ltd.) primarily by way of cost replacement method. [CHINESE CHARACTERS] (China Consultants of Accounting and Financial Management Co. Ltd.), not being a connected person of the Company, is an independent PRC valuer qualified to carry out the valuation, and has experience in conducting asset valuations involving aviation and transportation projects. The valuation results have been approved by the State-owned Assets Supervision and Administration Commission of the PRC State Council in early May 2005. According to such valuation, as of 31st December, 2004, the appraised value of the aggregate assets to be acquired under the Proposed Acquisition was RMB9,541,892,400 (equivalent to approximately HK$9,001,785,283) and that of the aggregate liabilities to be acquired was RMB8,556,199,600 (equivalent to approximately HK$8,071,886,415), and thus the appraised value of the aggregate net assets was RMB985,692,800 (equivalent to approximately HK$929,898,868). The aggregate (loss)/profit, before taxation, attributable to the aviation businesses of CEA Northwest and CEA Yunnan to be acquired by the Company under the Proposed Acquisition for the two financial years ended 31st December, 2003 and 2004 was RMB(1,344,037,000) (equivalent to approximately HK$(1,267,960,000)) and RMB182,308,000 (equivalent to approximately 10 LETTER FROM THE BOARD HK$171,990,000), respectively. The aggregate (loss)/profit, after taxation, attributable to such businesses for the two financial years ended 31st December, 2003 and 2004 was RMB(1,251,193,000) (equivalent to approximately HK$(1,180,370,000)) and RMB166,740,000 (equivalent to approximately HK$157,300,000), respectively. (There were no extraordinary items attributable to the aviation businesses of CEA Northwest and CEA Yunnan for the two financial years ended 31st December, 2003 and 2004.) CERTAIN ASSETS AND LIABILITIES BEING RETAINED BY CEA NORTHWEST AND CEA YUNNAN Nonetheless, following completion of the Proposed Acquisition, certain businesses, assets and liabilities which are not related or are otherwise ancillary or peripheral to the civil aviation businesses of CEA Northwest and CEA Yunnan will not be transferred to the Company under the Acquisition Agreement, but will be retained by CEA Northwest and CEA Yunnan. These retained assets and liabilities include those relating to the provision of media and advertising, catering, and hotel and accommodation services, and related ancillary businesses, and certain assets and liabilities which are peripheral to the relevant civil aviation businesses (for example, land prepayments, certain buildings and construction in progress). In addition, in respect of the liabilities associated with the aviation businesses of CEA Northwest and CEA Yunnan, except for those described above and itemised in the Acquisition Agreement, all other liabilities (including, for example, contingent liabilities, and deferred tax liabilities occasioned before the Effective Date) of CEA Northwest and CEA Yunnan will not be transferred to the Company under the Acquisition Agreement, and will continue to be borne and assumed by CEA Holding, CEA Northwest and/or CEA Yunnan (as the case may be). Further, under the Acquisition Agreement, any compensation or indemnity as may arise or result from the Proposed Acquisition, or as occasioned before the Effective Date in connection with the relevant assets and liabilities being acquired thereunder, shall also be borne by the CEA Holding, CEA Northwest and/or CEA Yunnan. 2.5 CONSIDERATION AND PAYMENT TERMS The Proposed Acquisition was negotiated and entered into on an arm's length basis and on normal commercial terms. ACQUISITION PRICE The aggregate acquisition price to be paid by the Company under the Acquisition Agreement is RMB985,692,800 (equivalent to approximately HK$929,898,868), subject to adjustments as described below. The Company will also assume aggregate liabilities of RMB8,556,199,600 11 LETTER FROM THE BOARD (equivalent to approximately HK$8,071,886,415) under the Proposed Acquisition. The acquisition price was determined on the basis of the results of the independent valuation as of 31st December, 2004 of the assets and liabilities to be acquired conducted by [CHINESE CHARACTERS] (China Consultants of Accounting and Financial Management Co. Ltd.) as described above. According to such valuation, as of 31st December, 2004, the appraised value of the aggregate assets to be acquired under the Proposed Acquisition was RMB9,541,892,400 (equivalent to approximately HK$9,001,785,283) and that of the aggregate liabilities to be acquired was RMB8,556,199,600 (equivalent to approximately HK$8,071,886,415), and thus the appraised value of the aggregate net assets was RMB985,692,800 (equivalent to approximately HK$929,898,868). Under the Acquisition Agreement, the acquisition price shall be adjusted by the profit generated or loss incurred by the aviation businesses of CEA Northwest and CEA Yunnan during the period from 31st December, 2004 to the Effective Date, to which CEA Holding shall be entitled. The amount of such profit/loss will be determined with reference to the relevant financial statements prepared under PRC Accounting Standards and Regulations for the period from 31st December, 2004 to the Effective Date, to be audited by independent PRC accountants jointly appointed by the Company and CEA Holding. The adjustment mechanism, as the Directors believe, is customary in arms' length acquisition transactions, such that any profit generated or loss incurred by the aviation businesses of CEA Northwest and CEA Yunnan being acquired by the Company before completion will effectively be adjusted against the acquisition price being paid. PAYMENT TERMS The acquisition price shall be payable by the Company in the manner as follows: (i) 70% of the initial acquisition price (i.e., RMB689,984,960 (equivalent to approximately HK$650,929,208)) shall be payable within five days from the Effective Date; and (ii) the balance of the adjusted acquisition price shall be payable within 15 days from the date of occurrence of the last of the following events: (a) the issue of an audit report by independent PRC accountants being jointly appointed by the Company and CEA Holding on the financial statements in respect of the aviation businesses of CEA Northwest and CEA Yunnan prepared under PRC Accounting Standards and Regulations for the period from 31st December, 2004 to the Effective Date; 12 LETTER FROM THE BOARD (b) consents having been obtained from parties who are entitled to pre-emptive rights in respect of assets to be transferred to the Company under the Proposed Acquisition; (c) consents having been obtained from lessors and/or financiers of aircraft regarding the novation of the relevant aircraft finance leases and operating leases from CEA Northwest and CEA Yunnan to the Company; and (d) consents having been obtained from the relevant creditors regarding transfers to the Company of liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan. The parties have been in discussions in obtaining these third-party consents. As further elaborated below, CEA Holding has undertaken to the Company that all necessary third-party consents required to effect the relevant transfers will be, if not then already have been, obtained as soon as practicable after the Effective Date. FUNDING The Company currently intends to fund the cash payment for the consideration as to approximately 50% with its internal cash resources and the remaining by way of financing arrangements with financial institutions depending on the financial position of the Company at the material time. The Company will issue further announcement if there is a material change to the actual source of funding deployed as and when considered appropriate. 2.6 CONDITIONS, COMPLETION AND DELIVERY CONDITIONS PRECEDENT The Acquisition Agreement is conditional upon fulfillment of the following conditions precedent: (i) the approval of the Proposed Acquisition by the Independent Shareholders being obtained at the AGM, at which CEA Holding and its associate(s), if any, will abstain from voting; (ii) the results of the independent valuation as of 31st December, 2004 of the assets and liabilities to be acquired by the Company under the Proposed Acquisition being 13 LETTER FROM THE BOARD approved by the State-owned Assets Supervision and Administration Commission of the PRC State Council; and (iii) the transaction under the Proposed Acquisition being approved by the State-owned Assets Supervision and Administration Commission of the PRC State Council. As mentioned before, approvals from the State-owned Assets Supervision and Administration Commission of the PRC State Council in respect of the conditions numbered (ii) and (iii) above have been obtained, and these two conditions precedent have thereby been fulfilled. COMPLETION After the above conditions are fulfilled (which is currently expected to occur on 30th June, 2005), the parties shall proceed with completion in accordance with the terms and conditions of the Acquisition Agreement. Completion of the Proposed Acquisition shall be deemed to take place on the Effective Date (i.e. the last date of the calendar month in which the above conditions are fulfilled), subject to all necessary third-party consents required to effect the transfers of the relevant assets and liabilities being obtained (including the consents mentioned in the paragraph headed "Proposed Acquisition - Consideration and payment terms - Payment terms" of this letter from the Board). DELIVERY Under the Acquisition Agreement, CEA Holding shall, within five business days from the Effective Date, deliver to the Company the relevant assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan being acquired, including all documents evidencing or constituting ownership of such assets and liabilities. Further, CEA Holding shall, forthwith after the Effective Date, proceed with the required procedures to transfer to the Company all necessary business licences, permits and registrations associated with the aviation operations and businesses of CEA Northwest and CEA Yunnan. CEA Holding, CEA Northwest and CEA Yunnan shall also obtain consent from the Civil Aviation Administration of China for the transfer of the relevant air routes to the Company immediately after the Effective Date. OWNERSHIP OF THE ASSETS AND LIABILITIES TO BE ACQUIRED Pursuant to the Acquisition Agreement, the ownership of the assets and liabilities to be acquired in relation to the aviation businesses of CEA Northwest and CEA Yunnan will pass from 14 LETTER FROM THE BOARD CEA Northwest and CEA Yunnan to the Company upon completion of the Acquisition Agreement. All gains and losses arising from and attaching to such assets and liabilities (including those occasioned prior to the Acquisition Agreement and subsisting at completion) will become gains and losses of the Company forthwith after completion of the Acquisition Agreement. In cases where the transfers of the assets and liabilities in relation to the aviation businesses of CEA Northwest and CEA Yunnan are subject to any necessary third-party consents (including, for example, the consents mentioned in the paragraph headed "Proposed Acquisition - Consideration and payment terms - Payment terms" of this letter from the Board) or can only be effected after appropriate amendments are made to the relevant contracts or after registration or filing procedures with the relevant PRC authorities are duly performed pursuant to the relevant PRC laws and regulations, and therefore cannot be fully effected immediately upon completion of the Acquisition Agreement, CEA Northwest and CEA Yunnan will hold and administer such assets and liabilities on behalf of the Company from the date of the Acquisition Agreement until such transfers are fully effected. Under the Acquisition Agreement, CEA Holding has agreed to complete all such required amendments and necessary registration and/or filing procedures in accordance with the relevant PRC laws and regulations within 90 days after the Effective Date. Further, CEA Holding has undertaken to the Company in the Acquisition Agreement that all necessary third-party consents (including consents from the relevant creditors, aircraft lessors and/or financiers and counterparties of certain operating contracts in connection with the aviation businesses and daily operations of CEA Northwest and CEA Yunnan) required to effect the transfers will be obtained as soon as practicable after the Effective Date. 2.7 NON-COMPETITION UNDERTAKING Under the Acquisition Agreement, each of CEA Holding, CEA Northwest and CEA Yunnan has undertaken that at any time after completion of the Acquisition Agreement, it will not, and will procure its respective subsidiaries and associated companies (including members of the CEA Holding Group) not to, carry out, engage in or otherwise become involved or interested in any business which competes or may compete, either directly or indirectly, with the Company's aviation business following completion of the Acquisition Agreement. The undertaking is not made for any definite period. 2.8 REASONS FOR AND BENEFITS OF THE PROPOSED ACQUISITION The Group is principally engaged in the business of civil aviation in the PRC. The Board believes that the Proposed Acquisition provides the Group with an opportunity to capitalise on the 15 LETTER FROM THE BOARD growing market potentials in the PRC civil aviation industry, and in turn to further its business pursuits and developments. Through the Proposed Acquisition, the Group will be able to expand its scope and size of operation, effectively rearrange the deployment of available market resources, integrate the existing marketing network, readjust the combined air routes operated by CEA Northwest and CEA Yunnan under CEA Holding, and capitalise on the transportation potentials of its aircraft fleet as will be expanded after the Proposed Acquisition. In addition, the optimisation of resources allocation according to market demands being made possible following the Proposed Acquisition will facilitate reduction of the Group's operating costs, improvement of its service quality, and in turn enhancement of its overall strength and market competitiveness. The Group, with its streamlined and strengthened operations, will, as is expected, be equipped and able to enter into the rivalry of international air transportation market. As a result, it is believed that the Group will integrate and capitalise its business resources, and increase its future revenue after the Proposed Acquisition, thereby enhancing its operation efficiency, profitability and thus shareholders' return. In addition, the Proposed Acquisition is expected to eliminate any competition among the Company, CEA Northwest and CEA Yunnan, and reduce the volume of relevant connected transactions. (i) A NEED TO FACE THE COMPETITION BROUGHT BY INTERNATIONAL AVIATION ALLIANCES Following the progress of economic globalisation, it has been the prevailing trend in the international civil aviation industry that international strategic alliances are established among airline companies. Statistics, based on the Company's internal business and marketing analysis, reveal that among the 41 top airline companies (in terms of passenger volume) in the world, around 35 of such airline companies are members of international strategic alliances, such as the Star Alliance, One World and Sky Team alliances, occupying the majority of the market share. By sharing codes, these alliances enter the PRC market and put significant pressure on Chinese enterprises which engage in aviation businesses. In order to compete with these international strategic alliances in the future and to better equip the Company with ability to meet challenges and handle expected competition in the PRC aviation industry following the accession of China into the World Trade Organisation, the Company needs to increase its size and scale by way of the Proposed Acquisition. (ii) EXPANSION OF GEOGRAPHICAL OPERATION AND AVIATION NETWORK At present, the geographical coverage of the Group's aviation network is primarily focused in Eastern China, with its 10 major bases all located in the eastern and middle regions 16 LETTER FROM THE BOARD of China. Through the Proposed Acquisition, it is believed that the Group's aviation business over other areas having considerable development potentials in the market, such as the northwest and southwest regions of China, will expand. Air routes of the Group covering Southeast Asia and its neighbouring countries will also increase. As a result, the Company is expected to establish and consolidate an enhanced air route network, with Shanghai, Xi'an and Kunming as major departure cities, which will cover destinations in most cities in the PRC and certain major cities overseas. This will further strengthen the market position of the Company as one of the three major airline companies in the PRC. The following illustrates the domestic aviation network of the Group and the Enlarged Group before and after the Proposed Acquisition: [MAPS SHOWING BEFORE AND AFTER PROPOSED ACQUISITIONS] (iii) EXPANSION OF AIRCRAFT FLEET AND SIZE OF OPERATION As at 31st December, 2004, the Group operated 103 large and medium transportation aircraft.* Following the transfer of altogether 60 commercial passenger and cargo aircraft of CEA Northwest and CEA Yunnan pursuant to the Proposed Acquisition, the number of aircraft of the Group will increase by approximately 58%. The following demonstrates the expected expansion of the Group's aircraft fleet and its operations after completion of the Proposed Acquisition:
BEFORE THE PROPOSED ACQUISITION AFTER THE APPROXIMATE (AS AT 31ST PROPOSED PERCENTAGE DECEMBER, 2004) ACQUISITION INCREASE Number of aircraft 103 163 58% Available tonne kilometres, or ATKs 7,071 million 8,852 million 25% Available seat kilometres, or ASKs 41,599 million 57,160 million 37% Revenue passenger
17 LETTER FROM THE BOARD kilometres, or RPKs 27,581 million 38,517 million 40% Passenger volume 17,711,000 26,823,000 51%
These statistics demonstrate that the Proposed Acquisition will strengthen the favourable market position of the Group and significantly enhance its economy of scale. * The Company recently entered into various aircraft purchase agreements, including, for example, its agreements with Airbus SAS of 9th October, 2004, 16th March, 2005 and 21st April, 2005 to purchase twenty A330 aircraft, five A319 aircraft and fifteen A320 series aircraft, respectively. Details of these agreements and the relevant transactions are set out in the Company's announcements dated 13th October, 2004, 17th March, 2005 and 21st April, 2005, respectively. (iv) INCREASE OF INCOME AND ENHANCEMENT OF COST EFFICIENCY AND PROFITABILITY After the Proposed Acquisition, the Group will be able to adjust its air routes and operational capability to develop customer resources in the northwest and southwest regions of China to increase its passenger revenue. In addition, the expansion of the aircraft fleet will increase the capability of the Group to operate its air cargo business and will enable the Group to benefit from the development of its air cargo business in China. Through the integration of operations and internal resources, and centralization of procurement of aviation materials, the Proposed Acquisition is also expected to increase the Group's operational efficiency and reduce operation costs. Further, the aviation businesses operated by the Group, CEA Northwest and CEA Yunnan maintain extensive air tickets' sales and marketing networks in China, and have operating centres located at major domestic airports providing line maintenance and ground support services. The Enlarged Group is expected to benefit from the integration of these resources which is made possible through the Proposed Acquisition, thereby minimising its operating expenses and enhancing its operational efficiency. (v) OPTIMISATION OF AIR FLIGHTS AND AIR ROUTES In particular, after the completion of the Proposed Acquisition, the Group may allocate aircraft in the expected combined air routes of CEA Northwest and CEA Yunnan, and reallocate its expanded aircraft fleet and flight crew with greater flexibility so that the demand for air routes during periods requiring higher transportation capacity could be satisfied and the balance in supply and demand of transportation capacity throughout the year would be better assured. 18 LETTER FROM THE BOARD (vi) ELIMINATION OF COMPETITION AND REDUCTION OF CONNECTED TRANSACTIONS As mentioned above, each of CEA Holding, CEA Northwest and CEA Yunnan has made a non-competition undertaking in respect of any business which competes or may compete with the Company's aviation business following completion of the Acquisition Agreement. The Proposed Acquisition is therefore expected to eliminate any competition among the Company, CEA Northwest and CEA Yunnan. The Proposed Acquisition is also expected to help regulate and reduce the volume of connected transactions between the Company and CEA Holding, resulting in an enhanced efficiency of overall management and streamlined operations of the Company. Based on the above, the Directors believe that the Proposed Acquisition is fair and reasonable and is in the interests of the Group and the Company's shareholders as a whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the AGM to approve the Proposed Acquisition. 2.9 FINANCIAL IMPACT OF THE PROPOSED ACQUISITION The financial impact of the Proposed Acquisition (including its effect on the earnings and assets and liabilities) is illustrated by way of the unaudited pro forma financial information of the Enlarged Group included in appendix V to this circular. 2.10 IMPLICATIONS UNDER THE LISTING RULES In respect of the Proposed Acquisition, the relevant "percentage ratio" applicable to the transaction under Rule 14.07 of the Listing Rules exceeds 100%. The Proposed Acquisition therefore constitutes a very substantial acquisition by the Company under the Listing Rules. Further, since CEA Holding is the controlling shareholder, and hence a connected person, of the Company, the Proposed Acquisition also constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules and is subject to approval by the Independent Shareholders at the AGM. CEA Holding and its associate(s), if any, will at the AGM abstain from voting on the ordinary resolutions approving the Proposed Acquisition, which will be taken on a poll as required under the Listing Rules. The Independent Board Committee has been established to advise the Independent Shareholders in respect of, among other things, the Proposed Acquisition. SW Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of, among other things, the Proposed Acquisition. The letter from the Independent Board Committee and its recommendations to the Independent Shareholders 19 LETTER FROM THE BOARD is set out on pages 41 to 42 of this circular, and the opinion letter from SW Capital is set out on pages 43 to 76 of this circular. 3. CONTINUING CONNECTED TRANSACTIONS 3.1 BACKGROUND The Company has in place agreements with certain members of the CEA Holding Group in respect of provision of goods and/or services which are carried out on a continuing basis between the Group and the CEA Holding Group. The Company has a conditional waiver, granted by the Stock Exchange at the time when its H shares are listed in Hong Kong, from strict compliance with the relevant connected transaction regulatory requirements in respect of these agreements and the transactions thereunder. Information in relation to the waiver was disclosed in the Company's prospectus dated 28th January, 1997. To accommodate the anticipated expansion in the Enlarged Group's daily and business operations following completion of the Proposed Acquisition, and to promote enhanced compliance with the applicable requirements under Chapter 14A of the Listing Rules, the Company (for itself and on behalf of other members of the Enlarged Group) has entered into various agreements with certain members of the CEA Holding Group in respect of the Continuing Connected Transactions and certain other transactions. Such agreements are made to further regulate the expected continuing business relationships between the Enlarged Group, on the one hand, and the CEA Holding Group, on the other. These agreements are as follows:
AGREEMENTS COUNTERPARTIES AND CONNECTED PERSON RELATIONSHIP - PROPERTY LEASING CEA Holding, CEA Northwest and CEA Yunnan AGREEMENT - FINANCIAL SERVICES [CHINESE CHARACTERS] (Eastern Air Group Finance Company AGREEMENT Limited) (the "FINANCE COMPANY"), which is interested as to approximately 46.25% by, and thus an associate of, CEA Holding - IMPORT AND [CHINESE CHARACTERS] Eastern Aviation Import & Export EXPORT AGENCY Company) (the "IMPORT & EXPORT COMPANY"), which is AGREEMENT interested as to 55% by, and thus an associate of, CEA Holding - MAINTENANCE [CHINESE CHARACTERS] (Shanghai Eastern Aviation Equipment SERVICES Manufacturing Corporation) (the "MAINTENANCE COMPANY"), AGREEMENT which is a wholly-owned subsidiary, and thus an associate, of CEA Holding - CATERING SERVICES A number of subsidiaries or associates of CEA Holding
20 LETTER FROM THE BOARD AGREEMENTS (collectively, the "CATERING COMPANIES") - SALES AGENCY A number of subsidiaries or associates of CEA Holding SERVICES (collectively, the "SALES COMPANIES") AGREEMENTS - ADVERTISING [CHINESE CHARACTERS] (Shanghai Eastern Aviation SERVICES Advertising Company Limited) (the "ADVERTISING COMPANY"), AGREEMENT which is interested as to 55% by, and thus an associate of, CEA Holding
These agreements and the Continuing Connected Transactions are expected to constitute, or may in the on-going performance become, non-exempt continuing connected transactions of the Company under Chapter 14A of the Listing Rules, and such transactions, together with the associated annual caps, will be subject to approval by the Independent Shareholders at the AGM. Details of the Continuing Connected Transactions and the associated annual caps, and certain principal terms of the relevant agreements, are set out below as required under the Listing Rules. Certain charges for the services under the agreements are determined based on tariffs, if available and applicable, set by the relevant PRC or industry regulatory authorities. Those transactions where the charges are not set by reference to prescribed regulatory tariffs are determined based on commercial negotiations between the parties, in each case on an arm's length basis. The terms of these transactions are, as currently anticipated, no less favourable than the terms as may be available to the Enlarged Group from independent third parties. In compliance with the relevant requirements under the Listing Rules, the Company has set maximum annual consideration or values, or annual caps, in respect of each of the Continuing Connected Transactions. These annual caps are, to the extent appropriate, determined by reference to factors including previous transactions and figures when available and readily ascertainable. Nonetheless, since the Group's business and financial positions were adversely affected by the outbreak of atypical pneumonia (severe acute respiratory syndrome, or SARS) in 2003, the relevant historical figures for the financial year of 2003 may therefore to a certain extent be compromised, and might not necessarily be indicative of the position had the Group's operations not been affected by SARS. The various existing agreements between the Company and the relevant members of the CEA Holding Group in respect of the provision of goods and services between the Group and the CEA Holding Group will each be terminated at the time when the relevant agreement in respect of the corresponding Continuing Connected Transaction becomes effective in accordance with its terms. 3.2 PROPERTY LEASING 21 LETTER FROM THE BOARD PROPERTY LEASING AGREEMENT On 12th May, 2005, the Company entered into a Property Leasing Agreement with CEA Holding, CEA Northwest and CEA Yunnan, pursuant to which the Company will lease from CEA Holding, for use by the Enlarged Group in its daily airlines and other business operations: (i) a maximum of altogether 33 land properties owned by CEA Holding through, and registered in the name of, CEA Northwest, covering an aggregate site area of approximately 692,539 square metres located primarily in Xi'an, Xianyang and Yongdeng, together with a total of 225 building properties and related construction, infrastructure and facilities occupying an aggregate floor area of approximately 269,148 square metres; and (ii) a maximum of altogether seven land properties owned by CEA Holding through, and registered in the name of, CEA Yunnan, covering an aggregate site area of approximately 420,768 square metres primarily located in Kunming, together with a total of 81 building properties and related construction, infrastructure and facilities occupying an aggregate floor area of approximately 457,722 square metres. TERM Subject to approval being obtained from the Independent Shareholders at the AGM, the Property Leasing Agreement will become effective from the Effective Date for a term of three years. If the Company notifies CEA Holding of its intention to renew the agreement by at least 60-day written notice, the agreement will be renewed with the same terms for a further period of three years. PRICING Under the Property Leasing Agreement, the Company shall pay annual rentals in an aggregate amount of approximately RMB55,400,000 to CEA Holding. Such rentals are determined on the basis of property valuation reports issued in April 2005 by [CHINESE CHARACTERS] and [CHINESE CHARACTERS] (China Consultants of Accounting and Financial Management Co. Ltd.) (independent qualified PRC property valuers, not being connected persons of the Company) in respect of the properties under the Property Leasing Agreement, and are calculated based on market rates or the depreciation and maintenance charges in respect of the relevant properties, provided that such depreciation and maintenance charges shall be no higher than the market rates. Chesterton Petty Limited, the Company's independent property valuer, has reviewed the Property 22 LETTER FROM THE BOARD Leasing Agreement, and has confirmed that the rentals payable by the Company are no higher than prevailing market rates. The rentals are payable half-yearly in advance, and are subject to review and adjustments provided that the adjustments shall not exceed the applicable inflation rates published by the relevant local PRC authorities. REASONS FOR AND BENEFITS OF THE TRANSACTION The Enlarged Group's civil aviation business as expanded following completion of the Proposed Acquisition will comprise businesses being currently operated by CEA Northwest and CEA Yunnan. Accordingly, properties currently held, occupied and/or used by CEA Northwest and CEA Yunnan associated with their civil aviation businesses shall be leased to the Company, such that the Enlarged Group will be able to continue to use such properties in its daily airlines and other business operations. The Company therefore entered into the Property Leasing Agreement with CEA Holding, CEA Northwest and CEA Yunnan, which secures the Enlarged Group its right to use and take possession of the relevant properties at rentals which are no higher, and thus no less favourable, than prevailing market rates. HISTORICAL FIGURES Before completion of the Proposed Acquisition, the Company, in its business operations, is not required to, and therefore does not, enter into arrangements to lease properties of CEA Northwest and CEA Yunnan. Accordingly, no relevant or comparable historical figures are available or readily ascertainable. ANNUAL CAPS As mentioned above, the annual rentals payable by the Company to CEA Holding, as provided for under the Property Leasing Agreement, are fixed as an aggregate amount of approximately RMB55,400,000. Such rentals are determined on the basis of the relevant property valuation reports issued in April 2005 by the independent qualified PRC property valuers as described above, and Chesterton Petty Limited has confirmed that such rentals are no higher than prevailing market rates. The rentals are subject to adjustments provided that the adjustments shall not exceed the applicable inflation rates published by the relevant local PRC authorities. Based on the above circumstances and the expected significant increase in number of properties being leased by the Company following the Proposed Acquisition as contemplated under the Property Leasing Agreement, coupled with the relevant current market rentals for such 23 LETTER FROM THE BOARD properties, factoring in any anticipated possible inflation, the total annual rentals payable by the Company to CEA Holding under the Property Leasing Agreement are not expected to exceed RMB60,000,000 for each of the three financial years ending 31st December, 2005, 2006 and 2007. Accordingly, this amount has been set as the proposed annual cap for this Continuing Connected Transaction in respect of each of the three financial years ending 31st December, 2005, 2006 and 2007. 3.3 FINANCIAL SERVICES FINANCIAL SERVICES AGREEMENT The Finance Company is a non-bank finance company approved and regulated by the relevant PRC regulatory authorities including the People's Bank of China and the China Banking Regulatory Commission. On 12th May, 2005, the Company entered into a Financial Services Agreement with the Finance Company, pursuant to which the Finance Company will from time to time provide the Enlarged Group with a range of financial services including (i) deposit services, (ii) loan and financing services and (iii) other financial services such as the provision of trust loans, financial guarantees and credit facilities and credit references. Pursuant to the Financial Services Agreement, the Finance Company shall deposit all moneys deposited by the Enlarged Group under the agreement with commercial bank(s) in China, including, for example, Industrial and Commercial Bank of China, China Construction Bank, Bank of Agriculture and Bank of Communications. The Finance Company has also undertaken under the Financial Services Agreement that all outstanding loans it provides to members of the CEA Holding Group will not at any time and from time to time exceed the aggregate amount of its equity capital, surplus reserves and deposits received from other parties. TERM Subject to approval being obtained from the Independent Shareholders at the AGM, the Financial Services Agreement will become effective from 1st July, 2005 for a term of three years, subject to renewal. PRICING Under the Financial Services Agreement: 24 LETTER FROM THE BOARD (i) The Finance Company shall accept deposits from the Enlarged Group at interest rates not lower, and thus no less favourable, than the relevant standard rates set by the People's Bank of China for similar deposits; (ii) The Finance Company shall provide loan and financing services to the Enlarged Group at interest rates not higher than the relevant standard rates set by the People's Bank of China for similar services; and (iii) In respect of the provision of other financial services, the fees and charges payable by the relevant member(s) of the Enlarged Group to the Finance Company shall be determined by reference to the applicable standard fees and charges as specified by the People's Bank of China from time to time, and if no such standard fees and/or charges have been specified by the People's Bank of China for the particular services, such services shall be provided by the Finance Company on terms no less favourable than terms available from commercial banks in China. The fees and charges, together with other details in respect of each specific transaction for the particular services, will then be recorded in separate implementation agreement(s) between the relevant member(s) of the Enlarged Group and the Finance Company in the performance of the Financial Services Agreement. REASONS FOR AND BENEFITS OF THE TRANSACTION As mentioned above, under the Financial Services Agreement, the Enlarged Group will receive interest on its moneys deposited with the Finance Company at rates which are no less favourable than the standard rates set by the People's Bank of China, and will be able obtain loans and financing from the Finance Company at interest rates not higher than such standard rates. Further, the Company is not restricted under the Financial Services Agreement to approach, and in fact may choose, any bank or financial institution to satisfy its financial service needs. Its criteria in making the choice could be made on costs and quality of services. Therefore, the Enlarged Group may, but is not obliged to, continue to use the Finance Company's services if the service quality provided is competitive. Having such flexibility afforded under the Financial Services Agreement, the Enlarged Group is able to better manage its current capital and cashflow position. In addition, with such an agreement in place, it is also expected that the Finance Company will provide more efficient settlement service to the Enlarged Group, as compared to independent third-party banks. Accordingly, the Directors believe that it is in the interests of the Company to enter into the Financial Services Agreement. LISTING RULES' IMPLICATIONS 25 LETTER FROM THE BOARD Since CEA Holding is the controlling shareholder of the Company, the Finance Company, being an associate of CEA Holding, is therefore a connected person of the Company. In respect of the provision of deposit services under the Financial Services Agreement, the relevant "percentage ratio" applicable to such transaction for the purpose of Chapter 14A of the Listing Rules is likely to exceed 2.5% on an annual basis in the on-going performance of the agreement. The transaction is expected to constitute a non-exempt continuing connected transaction of the Company under the Listing Rules, and such transaction together with the associated annual caps will be subject to approval by the Independent Shareholders at the AGM. In respect of the provision of loan and financing services under the Financial Services Agreement, since the services are being provided by the Finance Company to the Enlarged Group at interest rates not higher than the relevant standard rates set by the People's Bank of China, the transaction involves provision of financial assistance by the Finance Company for the benefit of the Enlarged Group on normal commercial terms (or better to the Enlarged Group) where no security over the assets of the Enlarged Group is granted in respect of the financial assistance. The transaction is therefore exempt from the reporting, announcement and independent shareholders' approval requirements of Chapter 14A of the Listing Rules, by virtue of Listing Rule 14A.65(4). In respect of the provision of other financial services under the Financial Services Agreement (i.e. financial services other than deposit and loan and financing services), the Finance Company had not provided any such services to the Group before the Proposed Acquisition, and any future transaction that may take place between the Enlarged Group and the Finance Company in respect of such services is expected to be minimal. Yet, such transaction will be subject to approval by the Independent Shareholders at the AGM as required by the Stock Exchange pursuant to the aggregation principle under Rule 14A.27 of the Listing Rules. HISTORICAL FIGURES The historical figures of the deposit services provided by the Finance Company to the Group, CEA Northwest and CEA Yunnan combined for the three financial years ended 31st December, 2002, 2003 and 2004 are approximately RMB440,000,000, RMB1,034,000,000 and RMB971,000,000, respectively. The Finance Company had not provided any financial services other than deposit and loan and financing services to the Group for the three financial years ended 31st December, 2002, 2003 and 2004. ANNUAL CAPS 26 LETTER FROM THE BOARD Having considered the historical figures and taking account of (i) the anticipated possible increase in the Enlarged Group's working capital requirements due to expected expansion and developments of its business following the Proposed Acquisition and the continual increasing demand for air transportation in the market and (ii) the consequential possible increase in its cash inflows and outflows, the maximum aggregate annual amounts in respect of the deposit and other financial services as contemplated under the Financial Services Agreement for the three financial years ending 31st December, 2005, 2006 and 2007 are not expected to exceed RMB1,050,000,000, RMB1,100,000,000 and RMB1,150,000,000, respectively, taking into account the anticipated gradual and organic growth of the Enlarged Group's business over these years. Accordingly, these amounts have been set as the proposed annual caps for this Continuing Connected Transaction. The Directors believe that these proposed annual caps will be able to provide the Enlarged Group with sufficient flexibility for its expected future financial arrangements with the Finance Company. 3.4 IMPORT/EXPORT AGENCY SERVICES IMPORT AND EXPORT AGENCY AGREEMENT The Import & Export Company is a company approved by the PRC Ministry of Commerce and is licensed to engage in the business of import and export of aircraft and related aviation equipment and materials in the PRC. On 12th May, 2005, the Company entered into an Import and Export Agency Agreement with the Import & Export Company, pursuant to which the Import & Export Company will from time to time as its agent provide the Enlarged Group with agency services for the import and export of aircraft and related raw materials, accessories, machinery and equipment required in the daily airlines operations and civil aviation business of the Enlarged Group. TERM Subject to approval being obtained from the Independent Shareholders at the AGM, the Import and Export Agency Agreement will become effective from 1st July, 2005 for a term of three years, subject to renewal. PRICING 27 LETTER FROM THE BOARD Under the Import and Export Agency Agreement, the Company shall pay commissions and expenses to the Import & Export Company for the services it provides at prescribed rates which are no less favourable than those offered by the Import & Export Company to independent third parties. REASONS FOR AND BENEFITS OF THE TRANSACTION The Directors believe that the entering into of the Import and Export Agency Agreement will be beneficial to the Enlarged Group and its business developments, and in turn is believed to be conducive to the interests of the Company's shareholders. This is because the Import & Export Company is a PRC qualified company, licensed and experienced in providing import and export agency services in respect of aircraft and related aviation equipment and materials in the PRC. Compared with the few other independent third-party service providers in the market, through its cooperation with the Group for the last consecutive eight years, the Import & Export Company has secured a better understanding of the Enlarged Group's operations, as is evident from the proven track record it attains. Accordingly, the Directors believe that the Import & Export Company will be able to deliver timely services to accommodate the operating needs of the Enlarged Group, catering for its day-to-day business and administrative schedule. With the Import and Export Agency Agreement in place, the Enlarged Group will be able to benefit from, as is believed, better organised, efficient and cost-effective import and export agency services required, at prescribed rates which are no less favourable than those offered by the Import & Export Company to independent third parties. HISTORICAL FIGURES The historical figures of the total commissions and expenses paid by the Group to the Import & Export Company for its agency services provided in respect of each of the three financial years ended 31st December, 2002, 2003 and 2004 are approximately RMB20,160,000, RMB21,390,000 and RMB34,270,000, respectively. ANNUAL CAPS Based on such historical figures, the expected expansion and developments of the Enlarged Group's business following the Proposed Acquisition, and the extent and volume of import/export agency services the Enlarged Group expects the Import & Export Company to provide, the total amounts of commissions and expenses payable by the Company to the Import & Export Company for its provision of such services for the three financial years ending 31st December, 2005, 2006 and 2007 are not expected to exceed RMB40,000,000, RMB55,000,000 and RMB55,000,000, respectively, taking into account the anticipated gradual and organic growth of the Enlarged 28 LETTER FROM THE BOARD Group's business over these years. Accordingly, these amounts have been set as the proposed annual caps for this Continuing Connected Transaction. 3.5 MAINTENANCE SERVICES MAINTENANCE SERVICES AGREEMENT The Maintenance Company is a company located in Shanghai, which is principally engaged in the businesses of providing maintenance, repair and overhaul services in respect of aircraft and aviation equipment, and the manufacturing and sale of related equipment and materials. On 12th May, 2005, the Company entered into a Maintenance Services Agreement with the Maintenance Company, pursuant to which the Maintenance Company will from time to time provide the Enlarged Group with comprehensive services in relation to maintenance, repair and overhaul of aircraft and aviation equipment, and procurement of related equipment and materials required in the daily operations of the Enlarged Group. TERM Subject to approval being obtained from the Independent Shareholders at the AGM, the Maintenance Services Agreement will become effective from 1st July, 2005 for a term of three years, subject to renewal. PRICING Under the Maintenances Services Agreement, in relation to the provision of maintenance and ancillary services, the service fees payable to the Maintenance Company for its services shall be based on prevailing market rates available from independent third-party service providers under comparable conditions. Such service fees shall be determined based on arm's length negotiations, and shall be no less favourable than those offered by the Maintenance Company to independent third parties. Such service fees are payable quarterly in arrears. The parties will perform an annual review of the then prevailing service fees before the 31st of December in each calendar year, and agree on any required adjustments to the service fees in respect of the next calendar year. In relation to procurement and supply of equipment and materials by the Maintenance Company, the purchase price payable by the Company in respect of each specific transaction, which will be documented in separate implementation agreement(s) when occurred, shall be no less favourable than that offered by the Maintenance Company to independent third parties. 29 LETTER FROM THE BOARD REASONS FOR AND BENEFITS OF THE TRANSACTION The Directors believe that it is in the best interest of the Enlarged Group to procure the required services and the supply of equipment and materials from the Maintenance Company considering that the Maintenance Company has special strengths that independent third-party service or other providers generally do not possess. Such strengths include the aviation industry expertise, knowledge and qualification of the Maintenance Company to meet the demand of certain types of work, its track record of quality and timely service available to the Group, and its convenient location, in the vicinity of certain local sites of the Enlarged Group, to offer quick services. HISTORICAL FIGURES The historical figures of the total amounts paid by the Group to the Maintenance Company for each of the three financial years ended 31st December, 2002, 2003 and 2004 are approximately RMB12,903,000, RMB9,094,000 and RMB20,432,000, respectively. ANNUAL CAPS Based on such historical figures, and the expected expansion and developments of the Enlarged Group's business following the Proposed Acquisition, the total amounts payable by the Company to the Maintenance Company under the Maintenance Services Agreement for the three financial years ending 31st December, 2005, 2006 and 2007 are not expected to exceed RMB30,000,000, RMB36,000,000 and RMB43,200,000, respectively, taking into account the anticipated gradual and organic growth of the Enlarged Group's business over these years. Accordingly, these amounts have been set as the proposed annual caps for this Continuing Connected Transaction. In arriving at these proposed caps, the Company has also taken account of the expected growth of the Enlarged Group's air transportation business in the coming years which will in turn require an increasing volume of maintenance, repair and overhaul services and procurement of related equipment and materials required from the Maintenance Company. 3.6 CATERING SERVICES CATERING SERVICES AGREEMENTS 30 LETTER FROM THE BOARD The Catering Companies are companies principally engaged in the business of providing catering and related services for airline companies, and have established operating centres at various airports located in Shanghai, Xi'an, Kunming, Jinan and Qingdao. On 12th May, 2005, the Company entered into several Catering Services Agreements with the Catering Companies, pursuant to which the Catering Companies will from time to time provide the Enlarged Group with in-flight catering services (including the supply of in-flight meals and beverages, cutlery and tableware) and related storage and complementary services required in the daily airline operations and civil aviation business of the Enlarged Group. The Catering Companies shall provide their services in accordance with the specifications and schedules as from time to time specified by the relevant member(s) of the Enlarged Group to accommodate its operation needs. TERM Subject to approval being obtained from the Independent Shareholders at the AGM, each of the Catering Services Agreements will become effective from 1st July, 2005 for a term of three years, subject to renewal. PRICING Under the Catering Services Agreements, the service fees payable to each of the Catering Companies for its services provided shall be based on prevailing market rates available from independent third-party service providers under comparable conditions. Such service fees shall be determined based on arm's length negotiations, and shall be no less favourable than those offered by the relevant Catering Company to independent third parties. Such service fees are payable monthly in arrears, within 60 days of the receipt of invoices issued by the relevant Catering Company. The parties will perform an annual review of the then prevailing service fees before the 31st of December in each calendar year, and agree on any required adjustments to the service fees in respect of the next calendar year. REASONS FOR AND BENEFITS OF THE TRANSACTION The Directors believe that the entering into of the Catering Services Agreements will be beneficial to the Enlarged Group and its business operations, and in turn is believed to be conducive to the interests of the Company's shareholders. This is because the Catering Companies are companies specialised in the provision of catering and related services for airline companies, and more importantly have local operating centres at various airports located in Shanghai, Xi'an, Kunming, Jinan and Qingdao, covering the 31 LETTER FROM THE BOARD focal operating areas of the Enlarged Group's airlines and aviation business as expanded following the Proposed Acquisition. Indeed, the Catering Companies have been providing catering services to the Group, CEA Northwest and CEA Yunnan, and will have good understanding of the Enlarged Group's culture and operations. The Catering Companies, through their operating centres, will therefore be able to provide fast and high-quality catering services in response to requirements, normal or special, as may be specified from time to time by the relevant member(s) of the Enlarged Group to accommodate its day-to-day operation needs, and to, for example, cater for its different flight schedules (including regular, chartered and temporary flights). Further, the various operating centres of the Catering Companies are equipped with advanced facilities and required infrastructure for the provision of catering and related services, and are believed to be able to provide reliable and efficient services. HISTORICAL FIGURES The historical figures of the total service fees paid by the Group, CEA Northwest and CEA Yunnan combined to the Catering Companies for each of the three financial years ended 31st December, 2002, 2003 and 2004 are approximately RMB194,095,000, RMB152,461,000 and RMB302,543,000, respectively. ANNUAL CAPS Based on such historical figures, and the expected expansion and developments of the Enlarged Group's business following the Proposed Acquisition, the total amounts of service fees payable by the Company to the Catering Companies under the Catering Services Agreements for the three financial years ending 31st December, 2005, 2006 and 2007 are not expected to exceed RMB363,000,000, RMB417,000,000 and RMB480,000,000, respectively, taking into account the anticipated gradual and organic growth of the Enlarged Group's business over these years. Accordingly, these amounts have been set as the proposed annual caps for this Continuing Connected Transaction. 3.7 SALES AGENCY SERVICES SALES AGENCY SERVICES AGREEMENTS The Sales Companies are companies principally engaged in the business of providing agency services in relation to sale of domestic and international air tickets and complementary services such as tourism services (including hotel reservation and sale of souvenirs and other hospitality products). The Sales Companies have established local operating centres in Shanghai, Xi'an, Kunming and other cities and areas in China, including Hong Kong. 32 LETTER FROM THE BOARD On 12th May, 2005, the Company entered into several Sales Agency Services Agreements with the Sales Companies, pursuant to which the Sales Companies will from time to time provide the Enlarged Group as its agents with services for sale of air tickets and the provision of complementary services required in the daily airline operations and civil aviation business of the Enlarged Group. TERM Subject to approval being obtained from the Independent Shareholders at the AGM, each of the Sales Agency Services Agreements will become effective from 1st July, 2005 for a term of three years, subject to renewal. PRICING Under the Sales Agency Services Agreements, the Sales Companies charge commissions at a rate by reference to that prescribed by the Civil Aviation Administration of China and the International Air Transport Association, as determined following arm's length negotiations. Such commissions are payable monthly in arrears. The parties will perform an annual review of the then prevailing commission rate before the 31st of December in each calendar year, and agree on any required adjustments to such commission rate in respect of the next calendar year. REASONS FOR AND BENEFITS OF THE TRANSACTION The Company has always been focusing on enhancing its marketing and sales strategies and efforts, and has been actively involved in the promotion and expansion of its sales network and market share. The Sales Companies, as mentioned above, have local operating centres in Shanghai, Xi'an, Kunming and other cities and areas in China, covering the focal operating areas of the Enlarged Group's airlines and aviation business as expanded following the Proposed Acquisition. With the Sales Agency Services Agreements in place, all members of the Enlarged Group will be able to obtain services for sale of air tickets and related complementary services at standard terms and rates prescribed by the Civil Aviation Administration of China and the International Aviation Transportation Association. The Directors therefore believe that the entering into of the Sales Agency Services Agreements will be beneficial to the Enlarged Group and its business pursuits, and in turn is believed to be conducive to the interests of the Company's shareholders. HISTORICAL FIGURES 33 LETTER FROM THE BOARD The historical figures of the total commissions paid by the Group, CEA Northwest and CEA Yunnan combined to the Sales Companies for each of the three financial years ended 31st December, 2002, 2003 and 2004 are approximately RMB58,262,000, RMB56,452,000 and RMB61,693,000, respectively. ANNUAL CAPS Based on such historical figures, and the expected expansion and developments of the Enlarged Group's business following the Proposed Acquisition, the total amounts of commissions payable by the Company to the Sales Companies under the Sales Agency Services Agreements for the three financial years ending 31st December, 2005, 2006 and 2007 are not expected to exceed RMB77,116,000, RMB88,683,000 and RMB101,985,000, respectively, taking into account the anticipated gradual and organic growth of the Enlarged Group's business over these years. Accordingly, these amounts have been set as the proposed annual caps for this Continuing Connected Transaction. 3.8 ADVERTISING SERVICES ADVERTISING SERVICES AGREEMENT The Advertising Company is a company principally engaged in the businesses of multi-media advertising operations, including advertising design and production, and organising promotional functions and campaigns. On 12th May, 2005, the Company entered into an Advertising Services Agreement with the Advertising Company, pursuant to which the Advertising Company will from time to time provide the Enlarged Group with multi-media advertising services to promote its business and to organise promotional functions and campaigns to enhance its reputation in the civil aviation industry. TERM Subject to approval being obtained from the Independent Shareholders at the AGM, the Advertising Services Agreement will become effective from 1st July, 2005 for a term of three years, subject to renewal. PRICING Under the Advertising Services Agreements, the service fees payable to the Advertising Company for its services provided shall be based on prevailing market rates available from 34 LETTER FROM THE BOARD independent third-party service providers under comparable conditions. Such service fees shall be determined based on arm's length negotiations, and shall be no less favourable than those offered by the Advertising Company to independent third parties. The parties will perform an annual review of the then prevailing service fees before the 31st of December in each calendar year, and agree on any required adjustments to the service fees in respect of the next calendar year. At the beginning of each calendar year, the Company will pay the Advertising Company a lump sum representing its budgeted advertising expenses for that year, and the Advertising Company shall accordingly structure and carry out its advertising functions for the Enlarged Group, and shall offset its service fees from that sum deposited by the Company on a quarterly basis in arrears. REASONS FOR AND BENEFITS OF THE TRANSACTION The Directors believe that the entering into of the Advertising Services Agreement will be beneficial to the Enlarged Group and its future business pursuits, and in turn is believed to be conducive to the interests of the Company's shareholders. This is because advertising businesses are not the core competencies of the Enlarged Group while the Advertising Company is experienced in advertising operations and has a proven track record with an extensive network of advertising sponsors to draw upon. In addition, compared with other independent third-party service providers, the Advertising Company has, through its cooperation with the Group for the last consecutive eight years, secured a better understanding of the Enlarged Group's culture and operations, and thus the advertising functions procured by the Advertising Company for the Enlarged Group would better fit and cater to its public relations and marketing strategies. Further, the advertising functions of all members within the Enlarged Group will be centrally organised by the Advertising Company, which will, as is believed, be better managed and cost-effective. HISTORICAL FIGURES The historical figures of the total service fees paid by the Group to the Advertising Company for each of the three financial years ended 31st December, 2002, 2003 and 2004 are approximately RMB4,857,000, RMB2,676,000 and RMB5,629,000, respectively. ANNUAL CAPS Based on such historical figures, and the expected expansion and developments of the Enlarged Group's business following the Proposed Acquisition, the total amounts of service fees 35 LETTER FROM THE BOARD payable by the Company to the Advertising Company under the Advertising Services Agreement for the three financial years ending 31st December, 2005, 2006 and 2007 are not expected to exceed RMB13,000,000, RMB16,000,000 and RMB19,000,000, respectively, taking into account the anticipated gradual and organic growth of the Enlarged Group's business over these years. Accordingly, these amounts have been set as the proposed annual caps for this Continuing Connected Transaction. 3.9 SUMMARY OF THE CONTINUING CONNECTED TRANSACTIONS AND THE ASSOCIATED ANNUAL CAPS
ANNUAL CAPS FOR THE FINANCIAL YEAR ENDING 31ST DECEMBER, 31ST DECEMBER, 31ST DECEMBER, TRANSACTIONS 2005 2006 2007 Property leasing RMB60,000,000 RMB60,000,000 RMB60,000,000 Financial services Deposit and other financial services RMB1,050,000,000 RMB1,100,000,000 RMB1,150,000,000 Import/export agency services RMB40,000,000 RMB55,000,000 RMB55,000,000 Maintenance services RMB30,000,000 RMB36,000,000 RMB43,200,000 Catering services RMB363,000,000 RMB417,000,000 RMB480,000,000 Sales agency services RMB77,116,000 RMB88,683,000 RMB101,985,000 Advertising services RMB13,000,000 RMB16,000,000 RMB19,000,000
In respect of each of the Continuing Connected Transactions, the associated annual cap represents the maximum aggregate annual value of consideration payable under the relevant transaction. If any annual cap for a transaction is exceeded, the Company will be required to re-comply with the applicable connected transaction regulatory requirements under Chapter 14A of the Listing Rules. 3.10 IMPLICATIONS UNDER THE LISTING RULES Since CEA Holding is the controlling shareholder of the Company, each member of the CEA Holding Group is therefore a connected person of the Company. In respect of each of the Continuing Connected Transactions, the relevant "percentage ratio" applicable to such transaction for the purpose of Chapter 14A of the Listing Rules is expected or likely to exceed 2.5% on an annual basis, and such transactions are not expected to fall under any of the categories set out in Rules 14A.16(1) to (4) of the Listing Rules. Accordingly, the Continuing Connected Transactions are expected to constitute, or may in the on-going performance become, non-exempt continuing connected transactions of the Company under the Listing Rules, and such transactions together with the associated annual caps will be subject to approval by the Independent Shareholders at the AGM. 36 LETTER FROM THE BOARD CEA Holding and its associate(s), if any, will at the AGM abstain from voting on the ordinary resolutions approving the Continuing Connected Transactions and the associated annual caps, which will be taken on a poll as required under the Listing Rules. Based on the information described above, the Board is of the view that the Continuing Connected Transactions are on normal commercial terms, in the ordinary and usual course of business, fair and reasonable and in the interests of the Group and the Company's shareholders as a whole. The Independent Board Committee has been established to advise the Independent Shareholders in respect of, among other things, the Continuing Connected Transactions and the associated annual caps. SW Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of, among other things, the Continuing Connected Transactions and the associated annual caps. The letter from the Independent Board Committee and its recommendations to the Independent Shareholders is set out on pages 41 to 42 of this circular, and the opinion letter from SW Capital is set out on pages 43 to 76 of this circular. 4. RECOMMENDATIONS Based on the relevant information disclosed herein, the Directors believe that the Proposed Acquisition and the Continuing Connected Transactions are fair and reasonable and are in the interests of the Group and the Company's shareholders as a whole. The Directors also consider that the Continuing Connected Transactions are in the ordinary course of business and on normal commercial terms, and that the associated annual caps are fair and reasonable. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the AGM to approve the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps. As mentioned above, SW Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Proposed Acquisition and the Continuing Connected Transactions. Having taken into account the advice of SW Capital, the Independent Board Committee considers that the Proposed Acquisition and the Continuing Connected Transactions are fair and reasonable and are in the interests of the Group and the Company's shareholders as a whole. The Independent Board Committee also considers that the Continuing Connected Transactions are in the ordinary course of business and on normal commercial terms, and that the associated annual caps are fair and reasonable. Accordingly, the Independent Board Committee recommends the 37 LETTER FROM THE BOARD Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the AGM in respect of the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps. 5. AGM NOTICE OF AGM The AGM is resolved to be held at Function Room 2, Grand Ballroom, Shanghai Marriott Hotel Hongqiao, 2270 Hongqiao Road, Shanghai, the PRC at 9:00 a.m. on Thursday, 30th June, 2005 to approve, among other things including the Company's financial statements for the financial year ended 31st December, 2004, ordinary resolutions in respect of the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps, with CEA Holding and its associate(s), if any, abstaining from voting. A notice dated and issued on 13th May, 2005 convening the AGM is also set out at the end of this circular. CLOSURE OF BOOKS Shareholders whose names appear on the register of members of the Company at the close of business on Monday, 30th May, 2005 will be entitled to attend the AGM upon completion of the necessary registration procedures. The H share register of members of the Company will be closed from Tuesday, 31st May, 2005 to Wednesday, 29th June, 2005, both days inclusive, during which period no transfer of the Company's H shares will be effected. Where applicable, shareholders of the Company's H shares intending to attend the AGM are therefore required to lodge their respective instrument(s) of transfer and the relevant share certificate(s) to the Company's H share registrar, Hong Kong Registrars Limited at Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, by 4:00 p.m. on Monday, 30th May, 2005. ATTENDANCE SLIP AND PROXY FORM If you are eligible and intend to attend the AGM, please complete and return the attendance slip, a copy of which is enclosed, in accordance with the instructions printed thereon as soon as possible and in any event by Friday, 10th June, 2005. If you are not able to attend and/or vote at the AGM, you are strongly urged to complete and return the proxy form, a copy of which is also enclosed, in accordance with the instructions printed thereon as soon as possible and in any event not later than 24 hours before the time appointed for the holding of the AGM or any adjournment thereof. Completion and return of the proxy form will 38 LETTER FROM THE BOARD not preclude you from attending and voting in person at the AGM or any adjournment thereof should you so wish. VOTING CEA Holding and its associate(s), if any, will at the AGM abstain from voting on the ordinary resolutions approving the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps, which will be taken on a poll as required under the Listing Rules. To the extent that the Company is aware having made all reasonable enquiries, as at the Latest Practicable Date: (i) there was no voting trust or other agreement, arrangement or understanding entered into by or binding upon CEA Holding; (ii) CEA Holding was not subject to any obligation or entitlement whereby it had or might have temporarily or permanently passed control over the exercise of the voting right in respect of its shares in the Company to a third party, whether generally or on a case-by-case basis; (iii) it was not expected that there would be any discrepancy between CEA Holding's beneficial shareholding interest in the Company as disclosed in appendix VII to this circular and the number of shares in the Company in respect of which it would control or would be entitled to exercise control over the voting right at the AGM. PROCEDURE TO OTHERWISE DEMAND A POLL Pursuant to articles 73 to 75 of the Company's articles of association, a poll may (before or after any vote by show of hands) be demanded: (i) by the chairman of the meeting; (ii) by at least two shareholders entitled to vote present in person or by proxy; (iii) by one or more shareholders present in person or by proxy and representing 10% or more of all shares carrying the right to vote at the meeting. The demand for a poll may be withdrawn by the person who makes such demand. 39 LETTER FROM THE BOARD A poll demanded on the election of the chairman of the meeting, or on a question of adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded. On a poll taken at the meeting, a shareholder (including proxy) entitled to two or more votes need not cast all his or her votes in the same way. 6. ADDITIONAL INFORMATION Your attention is also drawn to the letter from the Independent Board Committee to the Independent Shareholders set out on pages 41 to 42 of this circular, the letter from SW Capital to the Independent Board Committee and the Independent Shareholders set out on pages 43 to 76 of this circular, and the additional information set out in the appendices to this circular. Regarding the property valuation report included in appendix VI to this circular, since a large number of properties is involved, it would be unduly burdensome and practically not feasible to include in this circular a full valuation report of such properties in strict compliance with the relevant Listing Rule requirements. Therefore, the Company has applied for a waiver from strict compliance with the content requirements under the Listing Rules in respect of the property valuation report included in this circular on the condition that: (i) the full valuation report (which is prepared in the Chinese language only) in compliance with the applicable requirements under Chapter 5 of, and Practice Note 12 to, the Listing Rules, is being made available for public inspection; and (ii) a summary valuation report prepared on the basis of the full valuation report, which sets out separately under defined categories the interests in the relevant land and/or building properties and various structures of the Group and the CEA Holding Group (as the case may be) at locations where such properties are situated, is included in appendix VI to this circular. Yours faithfully, For and on behalf of the Board [CHINESE CHARACTERS] CHINA EASTERN AIRLINES CORPORATION LIMITED LI FENGHUA Chairman 40 LETTER FROM THE INDEPENDENT BOARD COMMITTEE [CHINA EASTERN AIRLINES CORPORATION LIMITED LOGO] (A joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock code: 670) LEGAL ADDRESS: 66 Airport Street Pudong International Airport Shanghai The People's Republic of China HEAD OFFICE: 2550 Hongqiao Road Shanghai The People's Republic of China 19th May, 2005 To the Independent Shareholders Dear Sir or Madam, VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION CONTINUING CONNECTED TRANSACTIONS We refer to the circular dated 19th May, 2005 (the "CIRCULAR") to the shareholders of the Company of which this letter forms part. Unless otherwise specified, terms defined in the Circular shall have the same meanings in this letter. We have been appointed as members of the Independent Board Committee, which has been established to advise the Independent Shareholders in respect of the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps, details of which are set out in the letter from the Board contained in the Circular. None of us has a material interest in any of the Proposed Acquisition and the Continuing Connected Transactions. 41 LETTER FROM THE INDEPENDENT BOARD COMMITTEE Since CEA Holding is the controlling shareholder, and hence a connected person, of the Company, the Proposed Acquisition constitutes a connected transaction of the Company under the Listing Rules and is subject to approval by the Independent Shareholders at the AGM. We understand that the Proposed Acquisition also constitutes a very substantial acquisition by the Company under the Listing Rules. Furthermore, because CEA Holding is the controlling shareholder of the Company, each member of the CEA Holding Group is therefore a connected person of the Company. In respect of each of the Continuing Connected Transactions, the relevant "percentage ratio" applicable to such transaction for the purpose of Chapter 14A of the Listing Rules is expected or likely to exceed 2.5% on an annual basis, and such transactions are not expected to fall under any of the categories set out in Rules 14A.16(1) to (4) of the Listing Rules. Accordingly, the Continuing Connected Transactions are expected to constitute, or may in the on-going performance become, non-exempt continuing connected transactions of the Company under the Listing Rules, and such transactions together with the associated annual caps will be subject to approval by the Independent Shareholders at the AGM. SW Capital has been appointed as the independent financial adviser to advise us and the Independent Shareholders in respect of the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps. We wish to draw your attention to the opinion letter from SW Capital set out on pages 43 to 76 of the Circular. As members of your independent Board committee, we have discussed with the management of the Company in relation to the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps, and the basis upon which the terms of the transactions have been determined and the annual caps calculated. We have also taken into account the principal factors and reasons considered by SW Capital in forming its opinion in relation to the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps, and have discussed with SW Capital its opinion letter and its advice. On the basis of the above, we consider, and agree with the view of SW Capital, that the Proposed Acquisition and the Continuing Connected Transactions are fair and reasonable and are in the interests of the Group and the Company's shareholders as a whole. We also consider that the Continuing Connected Transactions are in the ordinary course of business and on normal commercial terms, and that the associated annual caps are fair and reasonable. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the AGM in respect of the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps. 42 LETTER FROM THE INDEPENDENT BOARD COMMITTEE Yours faithfully, HU HONGGAO PETER LOK WU BAIWANG ZHOU RUIJIN XIE RONG Independent Board Committee 43 LETTER FROM SW CAPITAL The following is the text of the letter of advice dated 19 May, 2005 from SW Capital to the Independent Board Committee and the Independent Shareholders in respect of the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps prepared for incorporation into this circular: [LOGO] SHENYIN WANGUO CAPITAL (H.K.) LIMITED 28th Floor Citibank Tower Citibank Plaza 3 Garden Road Central Hong Kong 19 May, 2005 China Eastern Airlines Corporation Limited 2550 Hongqiao Road Shanghai The People's Republic of China To the Independent Board Committee and The Independent Shareholders Dear Sirs, VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS INTRODUCTION We refer to our engagement by the Company as independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Proposed 44 LETTER FROM SW CAPITAL Acquisition and the Continuing Connected Transactions, details of which are contained in the letter from the Board (the "Board Letter") set out in the circular of the Company dated 19 May, 2005 to its shareholders (the "Circular") of which this letter forms part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise requires. According to an announcement of the Company dated 12 May, 2005, the Company entered into the Acquisition Agreement with CEA Holding, CEA Northwest and CEA Yunnan on 12 May, 2005 in respect of the Proposed Acquisition. The Company also entered into various agreements with certain members of the CEA Holding Group on 12 May, 2005 in respect of the Continuing Connected Transactions and certain other transactions which will be carried out on a continuing basis between the Enlarged Group and the CEA Holding Group in order to accommodate the anticipated expansion in the Enlarged Group's daily business operations following completion of the Proposed Acquisition. As at the Latest Practicable Date, CEA Holding was interested in approximately 61.64% of the issued share capital of the Company. Accordingly, CEA Holding is a controlling shareholder of the Company under the Listing Rules, and it and its associates (as defined in the Listing Rules) are regarded as connected persons of the Company under the Listing Rules. Each of the parties (other than the Company) to the agreements in respect of the Continuing Connected Transactions is a subsidiary or associate of CEA Holding and is thus regarded as a connected person of the Company under the Listing Rules. For details, please refer to the Board Letter set out in the Circular. Pursuant to the Listing Rules, the Proposed Acquisition constitutes both a very substantial acquisition and a connected transaction for the Company, which will be subject to the Independent Shareholders' approval at the AGM by way of poll. In respect of the Continuing Connected Transactions, the Directors advised that the relevant "percentage ratio" applicable to each of the Continuing Connected Transactions for the purpose of Chapter 14A of the Listing Rules is expected or likely to exceed 2.5% on an annual basis, and such transactions are not expected to fall under any of the categories set out in Rules 14A.16(1) to (4) of the Listing Rules. Accordingly, the Continuing Connected Transactions are expected to constitute, or may in the on-going performance become, non-exempt continuing connected transactions of the Company under the Listing Rules, and such transactions together with the associated annual caps will be subject to the Independent Shareholders' approval at the AGM by way of poll and will be subject to the reporting requirements set out in Rule 14A.46 and the annual review requirements of Rules 14A.37 to 14A.40. CEA Holding, the controlling shareholder of the Company, and its associates will abstain from voting at the AGM on ordinary resolutions in approving, among other things, the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps which will be conducted by poll. The Independent Board Committee has been established to advise the Independent Shareholders on whether the terms and conditions of the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps are fair and reasonable and in the interests of the Company and its shareholders as a whole. 45 LETTER FROM SW CAPITAL BASIS OF OUR RECOMMENDATION In formulating our opinion with regard to the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps, we have reviewed, amongst other things, the Circular, the Acquisition Agreement, the accountants' reports on the aviation businesses of each of CEA Northwest and CEA Yunnan as set out in Appendices II and III to the Circular, the PRC valuation report in respect of the Proposed Acquisition prepared by [CHINESE CHARACTER] (China Consultants of Accounting and Financial Management Co. Ltd.) ("CCAFM"), the property rental reports in respect of property leasing under the Continuing Connected Transactions prepared by Chesterton Petty Limited and [CHINESE CHARACTER] (Beijing National Land Information Centre), and the agreements relating to the Continuing Connected Transactions. We have also considered the information, given in writing and orally, by the Directors, the Company's advisers and the management of the Company, CEA Northwest and CEA Yunnan. We have been advised by the Directors that no material facts have been omitted and we are not aware of any facts or circumstances which would render the information provided or the representations made to, and relied upon by, us untrue, inaccurate or misleading. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors. The Directors have collectively and individually accepted full responsibility for the accuracy of the information contained in the Circular and have confirmed, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statements in the Circular misleading. We have assumed that all statements of intention of the Company's management or its Directors, as set forth in the Circular, will be implemented and that each of the Acquisition Agreement and the agreements relating to the Continuing Connected Transactions is enforceable against each of the parties thereto in accordance with its terms and that each of the parties will perform, and will be able to perform, its obligations thereunder, and as otherwise described in the Circular, in full when due. We consider that we have reviewed sufficient information to reach an informed view in order to provide a reasonable basis for our advice. We have not, however, carried out any independent verification of the information provided to us nor have we conducted any form of independent in-depth investigation into the commercial viability or the future prospects of the Proposed Acquisition or the financial condition or future prospects of those assets and liabilities to be acquired by the Company in relation to the aviation businesses of CEA Northwest and CEA Yunnan or the Continuing Connected Transactions or the Company. We have further assumed that all material governmental, regulatory, or other consents and approvals necessary for the effectiveness and implementation of the Proposed Acquisition and the Continuing Connected Transactions have been or will be obtained without any adverse effect on those assets and liabilities to be acquired by the Company in relation to the aviation businesses of CEA Northwest and CEA Yunnan, the Company or the contemplated benefits to the Company. 46 LETTER FROM SW CAPITAL This letter is for the information of the Independent Board Committee and the Independent Shareholders solely in connection with their consideration of the Proposed Acquisition and the Continuing Connected Transactions and the associated annual caps 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. 1. THE PROPOSED ACQUISITION PRINCIPAL FACTORS AND REASONS CONSIDERED In arriving at our recommendation in respect of the terms of the Acquisition Agreement, we have taken into consideration the following principal factors and reasons. Our conclusions are based on the results of all the analyses taken as a whole. (a) PRINCIPAL BUSINESS OF THE GROUP The Company is one of the three largest airline companies in the PRC and is headquartered in Shanghai with 10 major operational bases located in the eastern and middle regions of the PRC. The Group is principally engaged in the business of civil aviation as well as air cargo and mail in the PRC. As at 31 December, 2004, the Group operated a total of 238 air routes, of which 179 were inland routes (including 15 Hong Kong routes) and 59 were international routes (including 13 international freight routes). With a fleet of 103 aircraft as at 31 December, 2004, the Group operated a total of 3,057 weekly scheduled flights connecting a total of 88 cities within and outside the PRC. Upon completion of the Proposed Acquisition, Xi'an and Kunming will become the operational bases of the Group in the northwestern and southwestern regions of the PRC. (b) CONSOLIDATION AND RESTRUCTURING OF THE AVIATION INDUSTRY IN THE PRC In the second half of 2000, the Civil Aviation Administration of China introduced a policy with the principle of restructuring the PRC aviation industry on a voluntary basis under government directives and taking advantage of economies of scale. Under the policy, domestic airlines are encouraged to participate in consolidation and restructuring, centering around Eastern Air Group Company, the then controlling shareholder of the Company, China Southern Air Holding Company and Air China Group, in order to form three largest airline groups in the PRC. On 3 August, 2002, the merger and restructuring proposal of Eastern Air Group Company in relation to the merger and restructuring of Eastern Air Group Company with [CHINESE CHARACTER] (China Northwest Air Company) (presently known as CEA Northwest), [CHINESE CHARACTER] (Yunnan 47 LETTER FROM SW CAPITAL Air Company) (presently known as CEA Yunnan) and the air transportation businesses operated by them (the "Restructuring Proposal") was approved in principle by the State Council of the PRC. As disclosed in the announcement of the Company dated 11 October, 2002, Eastern Air Group Company merged with CEA Northwest and CEA Yunnan to form CEA Holding on the same date. CEA Holding has since then become the immediate controlling shareholder of the Company, and holds the entire ownership interests in CEA Northwest and CEA Yunnan. After the implementation of the merger, CEA Holding has been preparing for the injection of the aviation businesses operated by CEA Northwest and CEA Yunnan together with the relevant assets and liabilities into the Group as part of the Restructuring Proposal in order to consolidate its aviation businesses, eliminate the competition among the Company, CEA Northwest and CEA Yunnan, and reduce connected transactions. (c) REASONS FOR AND BENEFITS OF THE PROPOSED ACQUISITION We have considered the reasons for and the benefits of the Proposed Acquisition as highlighted in the Board Letter and we have noted the following: - the entry of international aviation alliances into the PRC aviation market calls for a need for the Company to increase its competitiveness through increasing its size and scale of operation; - the Proposed Acquisition is in line with the consolidation and restructuring strategy adopted by the Group in light of the proposed consolidation and restructuring plans of CEA Holding and of the PRC aviation industry; We concur with the Director's view that: - the Proposed Acquisition will provide the Company with an opportunity to extend the scope of its business geographically to the northwestern and southwestern regions of the PRC, as well as to increase its air routes covering Southeast Asia and its neighboring countries. The Company will also be able to consolidate its air route network with Shanghai, Xi'an and Kunming being its major operational bases to cover destinations in most cities in the PRC and certain major cities overseas, which in turn would help strengthen the market position of the Company; - the Proposed Acquisition will enable the Company to expand its size of operation by increasing its fleet size by 58.3% from 103 as at 31 December, 2004 to 163, its ATKs by 25.2% from approximately 7,071 million as at 31 December, 2004 to approximately 48 LETTER FROM SW CAPITAL 8,852 million, and its ASKs by 37.4% from approximately 41,599 million as at 31 December, 2004 to approximately 57,160 million. This is expected to enhance economies of scale and strengthen the competitiveness and market position of the Company; - the Proposed Acquisition will enable cost savings and improve the operating efficiency of the Company through optimisation of air routes and aircraft utilization, integration of operations and internal resources, and centralisation of procurement of aviation materials of the three aviation operations; - the Proposed Acquisition will result in an increase in future revenue and better customer service as the Company plans to reallocate its flights to capture the potential in the northwestern and southwestern regions of the PRC and to satisfy those routes that have high market demand; and - the Proposed Acquisition is expected to eliminate the competition among the Company, CEA Northwest and CEA Yunnan as each of CEA Holding, CEA Northwest and CEA Yunnan is subject to a non-competition undertaking in respect of any business which competes or may compete with the Company's aviation business following completion of the Proposed Acquisition. (d) ASSETS AND LIABILITIES TO BE ACQUIRED BY THE COMPANY Pursuant to the Acquisition Agreement, the Company will acquire from CEA Holding certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan, and will assume and undertake the aviation operations and businesses currently carried out by CEA Northwest and CEA Yunnan in accordance with and following completion of the agreement. Such assets to be acquired by the Company in relation to the aviation businesses of CEA Northwest and CEA Yunnan include the relevant aircraft, engines and aviation equipment and facilities, certain employees and operating contracts, and other relevant fixed and current assets (whether owned or leased assets). And the liabilities to be assumed by the Company consist of certain current liabilities and long-term liabilities owed by CEA Northwest and CEA Yunnan in relation to their aviation businesses. In addition, the relevant air routes will be injected into the Company with such aviation businesses. Details of those assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan to be acquired by the Company are set out in the sub-section headed "Assets and liabilities to be acquired by the Company" in the Board Letter. 49 LETTER FROM SW CAPITAL Each of CEA Northwest and CEA Yunnan is a leading airline in its respective operating regions in the PRC. Both of them are engaged in the operation of civil aviation, air cargo, postal delivery, luggage transportation, agency services provided to both local and overseas airline companies and other services in relation to air transportation. CEA Northwest is headquartered in Xi'an with its major operating centers in Xi'an and Lanzhou. As at 31 December, 2004, CEA Northwest operated a total of 137 air routes (including 110 domestic routes, 22 international routes and 5 regional routes connecting the mainland and Hong Kong as well as Macau), covering 56 domestic and foreign cities with northwestern China being its major market. CEA Northwest's international routes mainly cover major cities such as Toyko and Osaka in Japan. CEA Northwest owned or operated a total of 35 medium to large-sized aircraft offering an average of approximately 644 weekly scheduled flights as at 31 December, 2004. CEA Yunnan has its headquarters and major operating centre in Kunming. As at 31 December, 2004, CEA Yunnan operates a total of 128 air routes (including 108 domestic routes, 18 international routes and 2 regional routes connecting the mainland and Hong Kong as well as Macau), covering 73 domestic and foreign cities with southwestern China being its major market. CEA Yunnan's international routes mainly cover major cities in Southeast Asian and other East Asian countries. As at 31 December, 2004, CEA Yunnan owned or operated a total of 25 medium to large-sized aircraft providing an average of approximately 896 weekly scheduled flights. (e) FINANCIAL PERFORMANCE OF THE AVIATION BUSINESSES OF CEA NORTHWEST AND CEA YUNNAN Based on the accountants' reports on the aviation businesses of CEA Northwest and CEA Yunnan as set out in Appendices II and III to the Circular respectively, we summarise below the operating revenue, the operating profit before interest, taxation, depreciation, amortisation and rental under operating leases ("EBITDAR"), the operating profit/loss, and the net profit/loss of (i) the aviation business of CEA Northwest; and (ii) the aviation business of CEA Yunnan for each of the three years ended 31 December, 2004. The aviation business of CEA Northwest
FOR THE YEARS ENDED 31 DECEMBER, 2002 2003 2004 -------------- -------------- -------------- (approximately (approximately (approximately RMB million) RMB million) RMB million) (Note) (Note) (Note) Operating revenue 3,344 2,872 4,207 EBITDAR/(LBITDAR) 288 (39) 1,104
50 LETTER FROM SW CAPITAL Operating profit/(loss) (394) (745) 372 Net profit/(loss) (736) (1,062) 136
The aviation business of CEA Yunnan
FOR THE YEARS ENDED 31 DECEMBER, 2002 2003 2004 -------------- -------------- -------------- (approximately (approximately (approximately RMB million) RMB million) RMB million) (Note) (Note) (Note) Operating revenue 2,507 2,476 3,466 EBITDAR 300 342 660 Operating profit/(loss) (184) (142) 147 Net profit/(loss) (262) (190) 31
Note: On the basis of presentation adopted in the accountants' reports on the aviation businesses of CEA Northwest and CEA Yunnan as set out in Appendices II and III to the Circular respectively, such financial information includes the results related to those assets and liabilities that will not be acquired or assumed by the Company, but were historically associated with the aviation businesses of CEA Northwest and CEA Yunnan. The aviation business of CEA Northwest Operating revenue For the year ended 31 December, 2003, the operating revenue of the aviation business of CEA Northwest was approximately RMB2,872 million (equivalent to approximately HK$2,709 million), a decrease of approximately RMB472 million (equivalent to approximately HK$445 million) or 14.1% from 2002. The decrease was mainly due to decreased passenger revenues caused by the outbreak of the atypical pneumonia (severe acute respiratory syndrome, or SARS). For the year ended 31 December, 2004, the operating revenue of the aviation business of CEA Northwest was approximately RMB4,207 million (equivalent to approximately HK$3,969 million), an increase of approximately RMB1,335 million (equivalent to approximately HK$1,260 million) or 46.5% from 2003. The increase was mainly due to increased passenger revenues as a result of the recovery of the air transportation market from the impact of the outbreak of SARS. In addition, carriage capacity was enhanced as a result of the introduction of six A320 aircraft to its operation. EBITDAR 51 LETTER FROM SW CAPITAL For the year ended 31 December, 2003, the operating loss before interest, taxation, depreciation, amortisation and rental under operating leases ("LBITDAR") of the aviation business of CEA Northwest was approximately RMB39 million (equivalent to approximately HK$37 million), as opposed to an EBITDAR of approximately RMB288 million (equivalent to approximately HK$272 million) in 2002. The LBITDAR was mainly due to decreased operating revenue caused by the outbreak of SARS and the increase in revaluation deficit of fixed assets. For the year ended 31 December, 2004, the EBITDAR of the aviation business of CEA Northwest was approximately RMB1,104 million (equivalent to approximately HK$1,042 million), as opposed to a LBITDAR in 2003. The improvement was mainly attributable to an increase in operating revenue and the recording of a revaluation surplus of fixed assets as compared to a revaluation deficit in 2003. Operating profit/loss The operating loss of the aviation business of CEA Northwest was approximately RMB745 million (equivalent to approximately HK$703 million) for the year ended 31 December, 2003, widening by approximately RMB351 million (equivalent to approximately HK$331 million) or 89.1% from 2002. The increase in operating loss was mainly due to the outbreak of SARS and the increase in revaluation deficit of fixed assets from 2002. The aviation business of CEA Northwest recorded an operating profit of approximately RMB372 million (equivalent to approximately HK$351 million) for the year ended 31 December, 2004, improving from the operating loss in 2003 mainly due to the recovery of the air transportation market from the impact of the outbreak of SARS. The aviation business of CEA Yunnan Operating revenue For the year ended 31 December, 2003, the operating revenue of the aviation business of CEA Yunnan was approximately RMB2,476 million (equivalent to approximately HK$2,336 million), a decrease of approximately RMB31 million (equivalent to approximately HK$29 million) or 1.2% from 2002. The decrease was mainly due to a fall in passenger revenues as well as cargo and mail revenues caused by the outbreak of SARS. For the year ended 31 December, 2004, the operating revenue of the aviation business of CEA Yunnan was approximately RMB3,466 million (equivalent to approximately HK$3,270 million), an increase of approximately RMB990 million (equivalent to approximately HK$934 52 LETTER FROM SW CAPITAL million) or 40.0% from 2003. The increase was mainly due to increased passenger revenues as a result of the recovery of the air transportation market from the impact of the outbreak of SARS. EBITDAR For the year ended 31 December, 2003, the EBITDAR of the aviation business of CEA Yunnan was approximately RMB342 million (equivalent to approximately HK$322 million), an increase of approximately RMB42 million (equivalent to approximately HK$39 million) or 13.9% from 2002. The increase in EBITDAR in the year, despite a fall in operating revenue, was mainly due to decreased catering expenses and revaluation deficit of fixed assets. For the year ended 31 December, 2004, the EBITDAR of the aviation business of CEA Yunnan was approximately RMB660 million (equivalent to approximately HK$623 million), an increase of approximately RMB319 million (equivalent to approximately HK$301 million) or 93.3% from 2003. The increase was mainly attributable to a rise in operating revenue as a result of the recovery of the air transportation market from the impact of the outbreak of SARS as well as the recording of a revaluation surplus of fixed assets as opposed to a revaluation deficit in 2003. Operating profit/loss For the year ended 31 December, 2003, the operating loss of the aviation business of CEA Yunnan was approximately RMB142 million (equivalent to approximately HK$134 million), a decrease of approximately RMB42 million (equivalent to approximately HK$39 million) or 22.7% from 2002. The decrease in operating loss was mainly due to decreased catering expenses and revaluation deficit of fixed assets. For the year ended 31 December, 2004, the aviation business of CEA Yunnan recorded an operating profit of approximately RMB147 million (equivalent to approximately HK$139 million), comparing to an operating loss in 2003. The improvement in operating results was mainly due to the recovery of the air transportation market from the impact of the outbreak of SARS and the recording of a revaluation surplus of fixed assets as opposed to a revaluation deficit in 2003. The tables below set forth the financial position of each of the aviation businesses of CEA Northwest and CEA Yunnan for the three-year period ended 31 December, 2004 with reference to the accountants' reports on the aviation businesses of CEA Northwest and CEA Yunnan as set out in Appendices II and III to the Circular: The aviation business of CEA Northwest 53 LETTER FROM SW CAPITAL
FOR THE YEARS ENDED 31 DECEMBER, 2002 2003 2004 2004 -------------- -------------- -------------- -------------- (approximately (approximately (approximately (approximately RMB million) RMB million) RMB million) RMB million) (Note 1) (Note 1) (Note 1) (Note 2) Net current liabilities 5,139 5,663 5,743 1,839 Net liabilities 3,738 4,850 4,534 962 Net cash flow from operating activities 162 (192) 1,023 n/a
The aviation business of CEA Yunnan
FOR THE YEARS ENDED 31 DECEMBER, 2002 2003 2004 2004 -------------- -------------- -------------- -------------- (approximately (approximately (approximately (approximately RMB million) RMB million) RMB million) RMB million) (Note 1) (Note 1) (Note 1) (Note 2) Net current liabilities 1,025 1,436 1,713 1,591 Net assets 1,503 1,288 1,336 1,094 Net cash flow from operating activities 745 60 1,070 n/a
Note 1: On the basis of presentation adopted in the accountants' reports on the aviation businesses of CEA Northwest and CEA Yunnan as set out in Appendices II and III to the Circular respectively. Such financial information includes the results related to those assets and liabilities that will not be acquired or assumed by the Company, but were historically associated with the aviation businesses of CEA Northwest and CEA Yunnan. Note 2: These financial figures relating to the aviation businesses of CEA Northwest and CEA Yunnan for the year ended 31 December, 2004 are extracted from the unaudited pro forma financial information of the Enlarged Group as set out in Appendix V to the Circular, after making pro forma adjustments. Such pro forma adjustments relate to certain assets and liabilities included in the respective combined balance sheets of CEA Northwest and CEA Yunnan as at 31 December, 2004 as per Appendices II and III to the Circular which were historically associated with the aviation businesses of CEA Northwest and CEA Yunnan but will not be acquired or assumed by the Company pursuant to the Acquisition Agreement. As revealed from the table above, the aviation business of CEA Northwest had net current liabilities and net liabilities position for the three-year period ended 31 December, 2004, while the 54 LETTER FROM SW CAPITAL aviation business of CEA Yunnan had net current liabilities but net assets position for the three-year period ended 31 December, 2004. We note that due to the capital intensive nature of the aviation industry, it is not unusual for aviation companies to have net current liabilities position. For the three years ended 31 December, 2004, the aviation business of CEA Northwest recorded positive operating cash flow except in 2003, whereas the aviation business of CEA Yunnan recorded positive operating cash flow in each of the three years. However, the net current liabilities and net liabilities of the aviation business of CEA Northwest as at 31 December, 2004 would reduce substantially to RMB1,839 million and RMB962 million respectively after adjusting for those assets and liabilities which were historically associated with the aviation business of CEA Northwest but will not be acquired or assumed by the Company pursuant to the Acquisition Agreement. Such assets which are not to be acquired by the Company consist of mainly buildings, prepayments, deposits and other receivables and construction in progress, while such liabilities not to be assumed by the Company comprise amount due to CEA Holding, short-term bank loans and other liabilities. On the other hand, the net current liabilities and net assets of the aviation business of CEA Yunnan would reduce to RMB1,591 million and RMB1,094 million respectively after adjusting for those assets and liabilities which were historically associated with the aviation business of CEA Yunnan but will not be acquired or assumed by the Company pursuant to the Acquisition Agreement. Such assets which are not to be acquired by the Company consist of mainly buildings and construction in progress, while such liabilities not to be assumed by the Company comprise of primarily trade and other payables and deferred tax liabilities. Further details of the assets and liabilities not to be acquired or assumed by the Company pursuant to the Acquisition Agreement were set out in the section headed "Notes to the financial information" in Appendices II and III to the Circular. We have discussed with the Directors and understand that those assets not being acquired by the Company under the Acquisition Agreement are mainly buildings, construction in progress and trade and other receivables, the exclusion of which, save for those properties to be leased to the Company under the Property Leasing Agreement, will not have any material impact on the aviation business of either CEA Northwest or CEA Yunnan. Having considered the nature of the assets, we concur with the Directors' view. (f) BASIS OF THE CONSIDERATION The Proposed Acquisition was negotiated and entered into on an arm's length basis between the Company, CEA Holding, CEA Northwest and CEA Yunnan and on normal commercial terms. The provisional amount of the consideration for the assets to be acquired by the Company relating to the aviation businesses of CEA Northwest and CEA Yunnan under the Acquisition Agreement was set at RMB9,541,892,400 (equivalent to approximately HK$9,001,785,283). Such 55 LETTER FROM SW CAPITAL provisional amount of consideration was determined based on an independent valuation of the assets and liabilities to be acquired by the Company relating to the aviation businesses of CEA Northwest and CEA Yunnan prepared primarily using cost replacement method. Such valuation was conducted by CCAFM, an independent qualified PRC valuer with experience in conducting valuations in aviation and transportation businesses. According to such valuation, as at 31 December, 2004, the appraised value of the aggregate assets to be acquired under the Proposed Acquisition was RMB9,541,892,400 (equivalent to approximately HK$9,001,785,283). Pursuant to the Acquisition Agreement, the provisional amount of the consideration for the Proposed Acquisition will be satisfied by the payment of the provisional amount of the aggregate acquisition price of RMB985,692,800 (equivalent to approximately HK$929,898,868) and the assumption of the aggregate liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan in the provisional amount of RMB8,556,199,600 (equivalent to approximately HK$8,071,886,415). The provisional amount of the aggregate liabilities to be assumed under the Proposed Acquisition was also determined based on the independent valuation as of 31 December, 2004 of the assets and liabilities to be acquired by the Company relating to the aviation businesses of CEA Northwest and CEA Yunnan conducted by CCAFM. As referred to in the Board Letter, the results of the independent valuation conducted by CCAFM have been approved by the State-owned Assets Supervision and Administration Commission of the PRC State Council in early May 2005. Having reviewed and discussed with CCAFM on the methodologies, bases and assumptions used in the preparation of its valuation report, we consider that the valuation of the assets to be acquired and the liabilities to be assumed by the Company in relation to the aviation businesses of CEA Northwest and CEA Yunnan are fair and reasonable. Under the Acquisition Agreement, the provisional amount of the aggregate acquisition price for the Proposed Acquisition shall be adjusted by the profit generated or loss incurred by the aviation businesses of CEA Northwest and CEA Yunnan during the period from 31 December, 2004 to the Effective Date, to which CEA Holding shall be entitled. The amount of such profit or loss will be determined with reference to the financial statements prepared under the PRC Accounting Standards and Regulations for the period from 31 December, 2004 to the Effective Date, to be audited by PRC independent accountants jointly appointed by the Company and CEA Holding. (g) FINANCING OF THE PROPOSED ACQUISITION Pursuant to the Acquisition Agreement, the Company will pay the provisional amount of the aggregate acquisition price for the Proposed Acquisition of RMB985,692,800 (equivalent to 56 LETTER FROM SW CAPITAL approximately HK$929,898,868), subject to adjustments as mentioned above, in cash to CEA Holding for the acquisition of assets relating to the aviation businesses of CEA Northwest and CEA Yunnan after assuming the relevant liabilities in the aggregate amount of RMB8,556,199,600 (equivalent to approximately HK$8,071,886,415). As stated in the Board Letter, the Company currently intends to fund the cash payment for the aggregate acquisition price for the Proposed Acquisition as to approximately 50% with its internal cash resources and the remaining by way of financing arrangements with financial institutions depending on the financial position of the Company at the material time. We understand from the Company that in determining the payment method, that is to satisfy the major portion of the consideration for the assets to be acquired under the Acquisition Agreement through the assumption of liabilities with the remainder to be settled in cash, it took into consideration the existing cash and bank balance position, the operating cash flow, the estimated capital expenditure and the banking facilities available to the Enlarged Group, and it is of the view that such payment method should not cause material negative impact to the Group's business operations. Should the Company finance the majority of the consideration by cash instead of the assumption of liabilities, there may be a material negative impact on the Group's financial position given the Group's cash balances of approximately RMB2,114 million (equivalent to approximately HK$1,994 million) as at 31 December, 2004, as compared to the provisional amount of the consideration for the assets to be acquired under the Acquisition Agreement of RMB9,541,892,400 (equivalent to approximately HK$9,001,785,283). The Company also confirmed that it has sufficient internal and external financial resources to fund the payment of RMB985,692,800 (equivalent to approximately HK$929,898,868) of the aggregate acquisition price for the Proposed Acquisition without a material negative impact on its ongoing operations and capital expenditure requirements. Based on the above, we consider that the terms for the financing of the Proposed Acquisition are fair and reasonable from a financial point of view, insofar as the Independent Shareholders are concerned. (h) VALUATION OF THE AVIATION BUSINESSES AND ASSETS TO BE ACQUIRED BY THE COMPANY Due to the heavy capital investment in aircraft, the profitability of aviation companies will, to a large extent, be distorted by the accounting policy and the amount of depreciation and amortisation of aircraft. The methods and terms of financing for aircraft will also significantly affect the operating performance of an aviation company. Due to this specific nature of the aviation industry, in order to fairly compare the operating profitability (without being distorted by depreciation, amortisation and financing terms) of the aviation businesses of CEA Northwest and CEA Yunnan (together known as the "Target Group") with those of other comparable aviation 57 LETTER FROM SW CAPITAL companies in the market, in addition to price/earnings ratio ("P/E") analysis, we have made reference to another commonly used market valuation benchmark for aviation companies, the EV/EBITDAR ratio, being the quotient of the enterprise value ("EV") divided by EBITDAR, in assessing the valuation of the Target Group. EV is defined as the sum of the equity value of a company plus its net debt. The total amount of the aggregate acquisition price for the Proposed Acquisition of RMB985,692,800 (equivalent to approximately HK$929,898,868) implies an EV for the Target Group of approximately RMB5,471,290,800 (equivalent to approximately HK$5,161,595,094), being the total amount of the aggregate acquisition price for the Proposed Acquisition plus the net debt of the Target Group of approximately RMB4,485,598,000 (equivalent to approximately HK$4,231,696,226) as at 31 December, 2004 extracted from the unaudited pro forma financial information of the aviation business of CEA Northwest and CEA Yunnan as set out in Appendix V to the Circular. For analysis purposes, we have identified four aviation companies (the "Aviation Comparables") based on the selection criteria that those companies (1) conduct their businesses and generate their revenue primarily in the PRC, and (2) are all listed in the Stock Exchange. Set out below is the summary of the P/E and the EV/EBITDAR ratios of the Aviation Comparables and of the Target Group:
NAME OF AVIATION COMPARABLES P/E(1) EV/EBITDAR(2) ------------------------------------------ ------------- -------------- Air China Limited 11.63 5.80 China Eastern Airlines Corporation Limited 14.00 6.71 China National Aviation Company Limited 15.18 10.17 China Southern Airlines Company Limited n/a 9.59 Range for Aviation Comparables 11.63 - 15.18 5.80 - 10.17 Average for Aviation Comparables 13.60 8.07 Target Group(3) 4.22 3.07
SOURCE: DATA FOR THE AVIATION COMPARABLES ARE SOURCED FROM BLOOMBERG Note: (1) Based on the Aviation Comparables' audited net profits for the year ended 31 December, 2004 and their respective closing share prices on 11 May, 2005. 58 LETTER FROM SW CAPITAL (2) Calculated based on the audited consolidated financial information for the year ended 31 December, 2004 reported by the Aviation Comparables, and their respective closing share prices on 11 May, 2005. (3) Calculated based on the combined pro forma net profit attributable to owner and combined pro forma EBITDAR of the aviation businesses of CEA Northwest and CEA Yunnan for the year ended 31 December, 2004 with reference to the unaudited pro forma financial information on the aviation businesses of CEA Northwest and CEA Yunnan as set out in Appendix V to the Circular. Based on the above statistics of market comparables, we note that the P/E ratio of the Target Group is at a discount of approximately 69.0% to the average and is lower than the low-end of the range of the P/E ratios of the Aviation Comparables. The EV/EBITDAR ratio of the Target Group is at a discount of approximately 62.0% to the average and is lower than the low-end of the range of the EV/EBITDAR ratios of the Aviation Comparables. We consider the significant discounts of the P/E ratio and EV/EBITDAR ratio of the Target Group to the averages of the P/E ratios and EV/EBITDAR ratios of the Aviation Comparables have already factored in discounts associated with the illiquid nature of investment in the Target Group as compared to the publicly traded Aviation Comparables. On these bases, we consider the aggregate acquisition price as fair and reasonable in so far as the Company and the Independent Shareholders are concerned. (i) FINANCIAL EFFECTS We have conducted various analyses on the potential financial effects of the Proposed Acquisition on the Group, which were prepared based on the Financial Information of the Group as set out in Appendix IV to the Circular and the unaudited pro forma financial information of the Enlarged Group as set out in Appendix V to the Circular. (i) Earnings The pro forma net profit of the Enlarged Group for the year ended 31 December, 2004 would be approximately RMB594,185,000 (equivalent to approximately HK$560,551,887), which is approximately RMB80,110,000 or 15.6% higher than the net profit of the Group. (ii) Gearing The pro forma total debt (including obligations under finance lease) of the Enlarged Group would be approximately RMB32,260 million (equivalent to approximately HK$30,434 million) as at 31 December, 2004, representing an increase of approximately 22.1% from the total debt of 59 LETTER FROM SW CAPITAL approximately RMB26,426 million (equivalent to approximately HK$24,930 million) of the Group as at the same date. The pro forma net debt (total debt less cash and cash equivalents) of the Enlarged Group would increase by 22.2% to approximately RMB29,716 million (equivalent to approximately HK$28,034 million) from RMB24,311 million (equivalent to approximately HK$22,935 million) of the Group as at 31 December, 2004. The pro forma ratio of net debt to total shareholders' equity of the Enlarged Group would be approximately 431.8% as at 31 December, 2004, as compared to approximately 353.2% of the Group as at the same date. On a pro forma basis, the ratio of total debt to total assets would increase slightly from approximately 62.3% for the Group to approximately 62.4% for the Enlarged Group. The increase in gearing ratios mainly results from the increase in borrowings following the assumption of liabilities (including certain debt and obligations under the finance leases) of the aviation businesses of CEA Northwest and CEA Yunnan by the Company. We consider that the increase in the net debt to total shareholders' equity ratio will not only increase the overall financial risk of the Group, but may also increase the financial burden and future financing costs of the Group. (iii) Working capital It is noted that the cash payment of the aggregate acquisition price for the Proposed Acquisition would be approximately RMB986 million (equivalent to approximately HK$930 million) of which approximately 50% will be funded by the Company's internal cash resources and the remaining by way of financing arrangements with financial institutions depending on the financial position of the Company at the material time. We understand from the Directors that having taken into account the existing cash and bank balance position, the operating cash flow, the estimated capital expenditure and the banking facilities available to the Enlarged Group, the Directors consider that the Proposed Acquisition would not have a material adverse impact on the Group's operations. As at 31 December, 2004, the Group had cash and cash equivalents of approximately RMB2,114 million (equivalent to approximately HK$1,994 million), which is more than the aggregate acquisition price for the Proposed Acquisition of RMB985,692,800 (equivalent to approximately HK$929,898,868). We also noted that the Directors are of the opinion that the Enlarged Group has sufficient working capital for its present requirements for at least 12 months from the date of the Circular after taking into account the Enlarged Group's present internal resources and available banking facilities. 2. CONTINUING CONNECTED TRANSACTIONS At the time of the listing of the Company's H shares on the Stock Exchange, the Company obtained from the Stock Exchange a conditional waiver from strict compliance with the relevant connected transaction regulatory requirements under the then Listing Rules regarding various agreements between the Company and certain members of the CEA Holding Group in respect of 60 LETTER FROM SW CAPITAL the provision of goods and/or services for its airline business, which are carried out on a continuing basis between the Group and the CEA Holding Group. In order to accommodate the anticipated expansion in the Enlarged Group's daily business operations following completion of the Proposed Acquisition, and to promote enhanced compliance with the applicable requirements under Chapter 14A of the Listing Rules, the Company (for itself and on behalf of other members of the Enlarged Group) has entered into various agreements with certain members of the CEA Holding Group in respect of the Continuing Connected Transactions and certain other transactions. Such agreements are made to further regulate the expected continuing business relationships between the Enlarged Group and the CEA Holding Group. The existing agreements between the Company and the relevant members of the CEA Holding Group in respect of the provision of goods and/or services between the Group and the CEA Holding Group will each be terminated at the time when the relevant agreement in respect of the corresponding Continuing Connected Transaction becomes effective in accordance with its terms. Since CEA Holding is the controlling shareholder of the Company, the relevant members of the CEA Holding Group, being the parties to the agreements in respect of the Continuing Connected Transactions, are therefore regarded as connected persons of the Company. As referred to in the Board Letter, the relevant "percentage ratio" applicable to each of the Continuing Connected Transactions for the purpose of Chapter 14A of the Listing Rules is expected or likely to exceed 2.5% on an annual basis, and such transactions are not expected to fall under any of the categories set out in Rules 14A.16(1) to (4) of the Listing Rules. Accordingly, the Continuing Connected Transactions are expected to constitute, or may in the on-going performance become, non-exempt continuing connected transactions of the Company under the Listing Rules, and such transactions together with the associated annual caps will be subject to approval by the Independent Shareholders at the AGM by way of poll. Our recommendation in respect of the terms of each of the Continuing Connected Transactions and the associated annual caps is set out below. PROPERTY LEASING In arriving at our recommendation in respect of the terms of the Property Leasing Agreement and its associated annual caps, we have taken into consideration the following principal factors and reasons. (a) TERMS OF THE PROPERTY LEASING AGREEMENT 61 LETTER FROM SW CAPITAL On 12 May, 2005, the Company entered into an agreement with CEA Holding, CEA Northwest and CEA Yunnan, pursuant to which the Company will lease from CEA Holding certain land, buildings and related construction, infrastructure and facilities for use by the Enlarged Group in its daily airline and other business operations (the "Property Leasing Agreement") including: (i) a maximum of altogether 33 land properties owned by CEA Holding through, and registered in the name of, CEA Northwest, covering an aggregate site area of approximately 692,539 square metres located primarily in Xi'an, Xianyang and Yongdeng, together with a total of 225 building properties and related construction, infrastructure and facilities occupying an aggregate floor area of approximately 269,148 square metres; and (ii) a maximum of altogether seven land properties owned by CEA Holding through, and registered in the name of, CEA Yunnan, covering an aggregate site area of approximately 420,768 square metres primarily located in Kunming, together with a total of 81 building properties and related construction, infrastructure and facilities occupying an aggregate floor area of approximately 457,722 square metres. The Property Leasing Agreement will become effective from the Effective Date for a term of three years, subject to approval being obtained from the Independent Shareholders at the AGM, and is renewable. The Directors advised that the Property Leasing Agreement was entered into in the usual and ordinary course of business of the Group. Under the Property Leasing Agreement, the Company shall pay annual rentals in an aggregate amount of approximately RMB55,400,000 to CEA Holding. In addition, such rentals are subject to review and adjustments provided that the adjustments shall not exceed the applicable inflation rates published by the relevant local PRC authorities. Chesterton Petty Limited, an independent property valuer, has given its opinion that the rentals payable by the Company to CEA Holding are no higher than prevailing market rates. We have reviewed the opinion issued by Chesterton Petty Limited and consider the bases and assumptions adopted are fair and reasonable. (b) REASONS FOR AND BENEFITS OF THE PROPERTY LEASING AGREEMENT Following completion of the Proposed Acquisition, the Enlarged Group's civil aviation business will be expanded by the inclusion of the aviation businesses being currently operated by CEA Northwest and CEA Yunnan. Accordingly, land and properties currently held, occupied and/or used by CEA Northwest and CEA Yunnan associated with their aviation businesses, but not 62 LETTER FROM SW CAPITAL to be acquired by the Company under the Acquisition Agreement, shall be leased to the Company, such that the Enlarged Group will be able to continue to use such properties in its daily operations. Therefore, the entering into of the Property Leasing Agreement secures the Enlarged Group its right to use the relevant properties at rentals that are no higher, and thus no less favourable, than prevailing market rates. (c) PROPOSED ANNUAL CAPS FOR PROPERTY LEASING There are no relevant or comparable historical figures available or readily ascertainable since the Company has not entered into any arrangements regarding the leasing of properties of CEA Northwest and CEA Yunnan in its present business operations. The Company sets the proposed annual caps for this Continuing Connected Transaction according to the total annual rentals payable by the Company to CEA Holding under the Property Leasing Agreement, which are not expected to exceed RMB60,000,000 for each of the three financial years ending 31 December, 2005, 2006 and 2007. The difference between the fixed total annual rentals and the proposed amount of annual caps is due to the possible adjustments in relation to inflation. Having considered the opinion given by Chesterton Petty Limited and the rental adjustment mechanism, we are of the view that the annual caps proposed for this Continuing Connected Transaction are in the interests of the Group and the Company's shareholders as a whole and the terms of the Property Leasing Agreement are fair and reasonable so far as the interests of the Independent Shareholders are concerned. FINANCIAL SERVICES In arriving at our recommendation in respect of the terms of the Financial Services Agreement, in particular the provision of deposit and other financial services and its associated annual caps, we have taken into consideration the following principal factors and reasons. (a) TERMS OF THE FINANCIAL SERVICES AGREEMENT On 12 May, 2005, the Company entered into an agreement with [CHINESE CHARACTER] (Eastern Air Group Finance Company Limited) (the "Finance Company"), pursuant to which the Finance Company will from time to time provide the Enlarged Group with a range of financial services (the "Financial Services Agreement") including: 63 LETTER FROM SW CAPITAL (1) accept deposit of money from the Enlarged Group at interest rates not lower, and thus no less favorable, than the relevant standard rates set by the People's Bank of China (the "PBOC") for similar deposits. The Finance Company will in turn deposit all such monies with commercial bank(s) in China including but not limited to the Industrial and Commercial Bank of China, China Construction Bank, Bank of Agriculture and Bank of Communications; (2) provide loan and financing services to the Enlarged Group at interest rates not higher than the relevant standard rates set by the PBOC for similar services. In order to guarantee the implementation of the agreement, the Finance Company has undertaken under the Financial Services Agreement that all outstanding loans it provides to members of CEA Holding Group will not at any time and from time to time exceed the aggregate amount of its equity capital, surplus reserves and deposits received from other parties; and (3) provide other financial services such as trust loans, credit facilities, financial guarantees and credit references, subject to the entering into of separate implementation agreement(s) which will set out the fees, charges together with other details in respect of each specific transaction for the particular services between the relevant member(s) of the Enlarged Group and the Finance Company in the performance of the Financial Services Agreement. The fees and charges payable by the relevant member(s) of the Enlarged Group to the Finance Company shall be determined by reference to the applicable standard fees and charges as specified by the PBOC from time to time, and if no such standard fees and/or charges have been specified by the PBOC for the particular services, such services shall be provided by the Finance Company on terms no less favourable than terms available at commercial banks in the PRC. The Financial Services Agreement will become effective from 1 July, 2005 for a fixed term of three years, subject to approval being obtained from the Independent Shareholders at the AGM, and is renewable. The Enlarged Group is not subject to any extra charges for depositing money with or obtaining loans or financing services from the Finance Company under the Financial Services Agreement. The relevant member(s) of the Enlarged Group will make payment of such interest, fees and commissions in accordance with the payment terms of separate agreements for the provision of loans or other financial services as might be entered into between the relevant member(s) of the Enlarged Group and the Finance Company. 64 LETTER FROM SW CAPITAL (b) INFORMATION RELATING TO THE FINANCE COMPANY The Finance Company is a non-bank finance company approved and regulated by the relevant PRC regulatory authorities including the PBOC and the China Banking Regulatory Commission. The Finance Company's main business scope is to provide various financial services, including but not limited to deposit and loan facilities, credit facilities, guarantees, remittance of money, credit references, securities investment and financial advisory, to companies comprising CEA Holding Group. The registered capital of the Finance Company is RMB400,000,000. As at the Latest Practicable Date, CEA Holding is the controlling shareholder of the Company with a beneficial interest of approximately 61.64% of the issued share capital of the Company. As advised by the Directors, the Finance Company is currently owned as to 46.25% by, and thus an associate of, CEA Holding, and is therefore regarded as a connected person of the Company under the Listing Rules. (c) REASONS FOR AND BENEFITS OF THE FINANCIAL SERVICES AGREEMENT Pursuant to the Financial Services Agreement, the Enlarged Group will receive interest on its money deposited with the Finance Company at rates which are no less favourable than the relevant standard rates set by the PBOC for similar deposits. This arrangement will allow the Enlarged Group to achieve a more efficient use of its current capital by enjoying rates equal to or better than the standard interest rates set by the PBOC on depositing its current capital with the Finance Company. Besides, the Enlarged Group will be able to obtain loans and financing from the Finance Company at interest rates not higher than the standard rates set by the PBOC. The Financial Services Agreement also provides that the Finance Company will render other financial services as mentioned above to the Enlarged Group with fees and charges being made by reference to the applicable standard fees and charges specified by the PBOC or else on terms no less favourable than those available to the Enlarged Group from commercial banks in the PRC. We have reviewed the Financial Services Agreement and we understand that it does not preclude the Enlarged Group from choosing similar services provided by any commercial banks or financial institutions in the PRC, meaning that the Enlarged Group is not obliged to use the Finance Company's services and can choose amongst financial service providers based on costs and service quality. Having such flexibility afforded under the Financial Services Agreement, the Enlarged Group is able to better manage its current capital and cashflow position. In addition, the Financial Services Agreement also provides that the Finance Company will provide more efficient settlement service to the Enlarged Group with the Financial Services Agreement in place, as compared to independent third-party commercial banks. 65 LETTER FROM SW CAPITAL Based on the above analysis, we are of the view that the terms of the Financial Services Agreement are fair and reasonable and in the interests of the Group. (d) PROPOSED ANNUAL CAPS FOR THE PROVISION OF DEPOSIT SERVICES AND OTHER FINANCIAL SERVICES Set out below is a summary of the proposed annual caps for the maximum aggregate amounts in respect of the deposit and other financial services under the Financial Services Agreement during the term of such agreement, as well as the basis of determination of the proposed annual caps.
ANNUAL CAPS FOR THE FINANCIAL YEARS ENDING 31 DECEMBER, 31 DECEMBER, 31 DECEMBER, TRANSACTION 2005 2006 2007 --------------------------------- ------------- ------------- ------------- RMB RMB RMB Provision of deposit services and other financial services 1,050,000,000 1,100,000,000 1,150,000,000
The historical figures of the deposit services provided by the Finance Company to the Group, CEA Northwest and CEA Yunnan combined for the three financial years ended 31 December, 2002, 2003 and 2004 are approximately RMB440,000,000, RMB1,034,000,000 and RMB971,000,000, respectively. The Finance Company had not provided any financial services other than deposit and loan and financing services to the Group for the three financial years ended 31 December, 2002, 2003 and 2004. We are of the view that the annual caps proposed for the provision of deposit services and other financial services, which are determined based on (i) the historical figures on deposit and (ii) the anticipated business growth brought by the expansion of the Enlarged Group's fleet size, ATKs and ASKs following completion of the Proposed Acquisition as set out in the subsection headed "Reasons for and benefits of the Proposed Acquisition" above, are in the interests of the Group and the Company's shareholders as a whole and the terms of which are fair and reasonable so far as the interests of the Independent Shareholders are concerned. IMPORT/EXPORT AGENCY SERVICES In arriving at our recommendation in respect of the terms of the Import and Export Agency Agreement and its associated annual caps, we have taken into consideration the following principal factors and reasons. (a) TERMS OF THE IMPORT AND EXPORT AGENCY AGREEMENT 66 LETTER FROM SW CAPITAL On 12 May, 2005, the Company entered into an agreement with [CHINESE CHARACTER] (Eastern Aviation Import & Export Company) (the "Import & Export Company"), pursuant to which the Import & Export Company will from time to time as its agent provide the Enlarged Group with agency services for the import and export of aircraft and related raw materials, accessories, machinery and equipment required in the daily airlines operations and civil aviation business of the Enlarged Group (the "Import and Export Agency Agreement"). The Import and Export Agency Agreement will become effective from 1 July, 2005 for a term of three years, subject to approval being obtained from the Independent Shareholders at the AGM, and is renewable. In regard to the terms of the Import and Export Agency Agreement, the Directors advised that the transaction as contemplated in the Import and Export Agency Agreement will be conducted on an arm's length basis and on normal commercial terms and in the usual and ordinary course of business of the Group. Under the Import and Export Agency Agreement, the Company shall pay commissions and expenses to the Import & Export Company for the services it provides at prescribed rates which are no less favourable than those offered by the Import & Export Company to independent third parties. (b) INFORMATION RELATING TO THE IMPORT & EXPORT COMPANY The Import & Export Company is a PRC limited company approved by the PRC Ministry of Commerce and is licensed to engage in the business of import and export of aircraft and related aviation equipment and materials in the PRC. The registered capital of the Import & Export Company is RMB80,000,000. As at the Latest Practicable Date, CEA Holding is the controlling shareholder of the Company with a beneficial interest of approximately 61.64% of the issued share capital of the Company. As advised by the Directors, the Import & Export Company, which is currently owned as to 55% by CEA Holding and 45% by the Company, is thus regarded as a connected person of the Company under the Listing Rules. (c) REASONS FOR AND BENEFITS OF THE IMPORT AND EXPORT AGENCY AGREEMENT The Directors believe that the entering into of the Import and Export Agency Agreement will be beneficial to the Enlarged Group and its business developments and is in the interests of the Company's shareholders, as the Import & Export Company, being a PRC qualified company, is licensed and experienced in providing import and export agency services in respect of aircraft and related aviation equipment and materials in the PRC. Throughout its cooperation with the Group 67 LETTER FROM SW CAPITAL for the last consecutive eight years, the Import & Export Company has secured a good understanding of the Enlarged Group's operations. Accordingly, the Directors believe that the Import & Export Company will be able to deliver timely services to accommodate the operating needs of the Enlarged Group, catering for its day-to-day business and administrative schedule. With the Import and Export Agency Agreement in place, the Directors also believe that Enlarged Group will be able to benefit from better organised, efficient and cost-effective import and export agency services required, at prescribed rates which are no less favourable than those offered by the Import & Export Company to independent third parties. (d) PROPOSED ANNUAL CAPS FOR THE PROVISION OF IMPORT AND EXPORT AGENCY SERVICES Set out below is a summary of the proposed annual caps for the total amounts of commissions and expenses payable by the Enlarged Group to the Import & Export Company in respect of the provision of import and export agency services under the Import and Export Agency Agreement during the term of such agreement, as well as the basis of determination of the proposed annual caps.
ANNUAL CAPS FOR THE FINANCIAL YEARS ENDING 31 DECEMBER, 31 DECEMBER, 31 DECEMBER, TRANSACTION 2005 2006 2007 ------------------------ ------------ ------------ ------------ RMB RMB RMB Provision of import and export agency services 40,000,000 55,000,000 55,000,000
The historical figures of the total commissions and expenses paid by the Group to the Import & Export Company for its agency services provided for each of the three financial years ended 31 December, 2002, 2003 and 2004 are approximately RMB20,160,000, RMB21,390,000 and RMB34,270,000, respectively. We are of the view that the annual caps proposed for the provision of import and export agency services, which are determined based on (i) the historical figures on the total commissions and expenses paid and (ii) the anticipated business growth brought by the expansion of the Enlarged Group's fleet size, ATKs and ASKs following completion of the Proposed Acquisition as set out in the subsection headed "Reasons for and benefits of the Proposed Acquisition" above, are in the interests of the Group and the Company's shareholders as a whole and the terms of which are fair and reasonable so far as the interests of the Independent Shareholders are concerned. MAINTENANCE SERVICES 68 LETTER FROM SW CAPITAL In arriving at our recommendation in respect of the terms of the Maintenance Services Agreement and its associated annual caps, we have taken into consideration the following principal factors and reasons. (a) TERMS OF THE MAINTENANCE SERVICES AGREEMENT On 12 May, 2005, the Company entered into an agreement with [CHINESE CHARACTER] (Shanghai Eastern Aviation Equipment Manufacturing Corporation) (the "Maintenance Company"), pursuant to which the Maintenance Company will from time to time provide the Enlarged Group with comprehensive services in relation to maintenance, repair and overhaul of aircraft and aviation equipment, and procurement of related equipment and materials required in the daily operations of the Enlarged Group (the "Maintenance Services Agreement"). The Maintenance Services Agreement will become effective from 1 July, 2005 for a term of three years, subject to approval being obtained from the Independent Shareholders at the AGM, and is renewable. In regard to the terms of the Maintenance Services Agreement, the Directors advised that the transactions as contemplated in the Maintenance Services Agreement will be conducted on an arm's length basis and on normal commercial terms and in the usual and ordinary course of business of the Group. Regarding the provision of maintenance and ancillary services under the Maintenance Services Agreement, the service fees payable by the Company to the Maintenance Company for its services shall be based on prevailing market rates available from independent third-party service providers under comparable conditions. Such service fees shall be determined based on arm's length negotiations between the parties to the Maintenance Services Agreement, and shall be no less favourable than those offered by the Maintenance Company to independent third parties. Such service fees are payable quarterly in arrears. According to the terms of the Maintenance Services Agreement, the parties will perform an annual review of the then prevailing service fees before the 31st of December in each calendar year, and agree on any required adjustments to the service fees in respect of the next calendar year. In relation to the procurement and supply of equipment and materials by the Maintenance Company, the purchase price payable by the Company in respect of each specific transaction, which will be documented in separate implementation agreement(s) when occurred, shall be no less favourable than that offered by the Maintenance Company to independent third parties. (b) INFORMATION RELATING TO THE MAINTENANCE COMPANY 69 LETTER FROM SW CAPITAL The Maintenance Company, a company located in Shanghai, is principally engaged in the businesses of providing maintenance, repair and overhaul services in respect of aircraft and aviation equipment, and the manufacturing and sale of related equipment and materials. The registered capital of the Maintenance Company is RMB67,320,000. As at the Latest Practicable Date, CEA Holding is the controlling shareholder of the Company with a beneficial interest of approximately 61.64% of the issued share capital of the Company. As advised by the Directors, the Maintenance Company is a wholly-owned subsidiary of CEA Holding and is therefore regarded as a connected person of the Company under the Listing Rules. (c) REASONS FOR AND BENEFITS OF THE MAINTENANCE SERVICES AGREEMENT The Directors believe that it is in the best interest of the Enlarged Group to procure the required services and the supply of equipment and materials from the Maintenance Company considering that the Maintenance Company has the knowledge, qualification and expertise in the aviation industry. In addition, the Directors believe that the Maintenance Company will be able to deliver the required maintenance services and the supply of equipment and materials given its track record of quality, quick and timely service provided to the Group. (d) PROPOSED ANNUAL CAPS FOR THE PROVISION OF MAINTENANCE SERVICES Set out below is a summary of the proposed annual caps for the total amounts of commissions and expenses payable by the Enlarged Group to the Maintenance Company in respect of the provision of maintenance services under the Maintenance Services Agreement during the term of such agreement, as well as the basis of determination of the proposed annual caps.
ANNUAL CAPS FOR THE FINANCIAL YEARS ENDING 31 DECEMBER, 31 DECEMBER, 31 DECEMBER, TRANSACTION 2005 2006 2007 --------------------------------- ------------ ------------ ------------ RMB RMB RMB Provision of maintenance services 30,000,000 36,000,000 43,200,000
The historical figures of the total amounts paid by the Group to the Maintenance Company for the maintenance services provided for each of the three financial years ended 31 December, 2002, 2003 and 2004 are approximately RMB12,903,000, RMB9,094,000 and RMB20,432,000, respectively. We are of the view that the annual caps proposed for the provision of maintenance services, which are determined based on (i) the historical figures on the total amounts paid and (ii) the anticipated business growth brought by the expansion of the Enlarged Group's fleet size, ATKs 70 LETTER FROM SW CAPITAL and ASKs following completion of the Proposed Acquisition as set out in the subsection headed "Reasons for and benefits of the Proposed Acquisition" above, are in the interests of the Group and the Company's shareholders as a whole and the terms of which are fair and reasonable so far as the interests of the Independent Shareholders are concerned. CATERING SERVICES In arriving at our recommendation in respect of the terms of the Catering Services Agreements and their associated annual caps, we have taken into consideration the following principal factors and reasons. (a) TERMS OF THE CATERING SERVICES AGREEMENTS On 12 May, 2005, the Company entered into several agreements with a number of subsidiaries and associates of CEA Holding (collectively, the "Catering Companies"), pursuant to which the Catering Companies will from time to time provide the Enlarged Group with in-flight catering services (including the supply of in-flight meals and beverages, cutlery and tableware) and related storage and complementary services required in the daily airline operations and civil aviation business of the Enlarged Group (the "Catering Services Agreements"). The Catering Companies shall provide their services in accordance with the specifications and schedules as from time to time specified by the relevant member(s) of the Enlarged Group to accommodate its operation needs. Each of the Catering Services Agreements will become effective from 1 July, 2005 for a term of three years, subject to approval being obtained from the Independent Shareholders at the AGM, and is renewable. The Directors advised that the transactions as contemplated in the Catering Services Agreements will be conducted on an arm's length basis and on normal commercial terms and in the usual and ordinary course of business of the Group. Under the Catering Services Agreements, the service fees payable by the Company to each of the Catering Companies for its services provided shall be based on prevailing market rates available from independent third-party service providers under comparable conditions. Such service fees shall be determined based on arm's length negotiations, and shall be no less favourable than those offered by the relevant Catering Company to independent third parties. Such service fees are payable monthly in arrears, within 60 days of the receipt of invoices issued by the relevant Catering Company. According to the terms of the Catering Services Agreements, the parties will perform an annual review of the then prevailing service fees before the 31st of December in each calendar year, and agree on any required adjustments to the service fees in respect of the next calendar year. 71 LETTER FROM SW CAPITAL (b) INFORMATION RELATING TO THE CATERING COMPANIES The Catering Companies are companies principally engaged in the business of providing catering and related services for airline companies, and have established operating centres at various airports located in Shanghai, Xi'an, Kunming, Jinan and Qingdao. As at the Latest Practicable Date, CEA Holding is the controlling shareholder of the Company with a beneficial interest of approximately 61.64% of the issued share capital of the Company. As stated in the Board Letter, each of the Catering Companies is either a subsidiary or an associate of CEA Holding and is therefore regarded as a connected person of the Company under the Listing Rules. (c) REASONS FOR AND BENEFITS OF THE CATERING SERVICES AGREEMENTS The Directors believe that the entering into of the Catering Services Agreements will be beneficial to the Enlarged Group and its business operations and is in the interests of the Company's shareholders, as the Catering Companies are specialised in the provision of catering and related services for airline companies with local operating centres at various airports located in Shanghai, Xi'an, Kunming, Jinan and Qingdao, covering the focal operating areas of the airlines and aviation businesses of the Enlarged Group as expanded following the Proposed Acquisition. The Directors consider that the Catering Companies have been providing catering services to the Group, CEA Northwest and CEA Yunnan, and will have a good understanding of the Enlarged Group's culture and operations. Therefore, the Catering Companies will be able to provide fast and high-quality catering services in response to requirements, normal or special, as may be specified from time to time by the relevant member(s) of the Enlarged Group to accommodate its day-to-day operation needs through their operating centers, and to, for instance, cater for its different flight schedules (including regular, chartered and temporary flights). In addition, the Directors also consider that the various operating centres of the Catering Companies are equipped with advanced facilities and required infrastructure for the provision of catering and related services, and are believed to be able to provide reliable and efficient services. (d) PROPOSED ANNUAL CAPS FOR THE PROVISION OF CATERING SERVICES Set out below is a summary of the proposed annual caps for the total service fees payable by the Enlarged Group to the Catering Companies in respect of the provision of catering services under the Catering Services Agreements during the term of such agreements, as well as the basis of determination of the proposed annual caps. 72 LETTER FROM SW CAPITAL
ANNUAL CAPS FOR THE FINANCIAL YEARS ENDING 31 DECEMBER, 31 DECEMBER, 31 DECEMBER, TRANSACTION 2005 2006 2007 ----------- ------------ ------------ ------------ RMB RMB RMB Provision of catering services 363,000,000 417,000,000 480,000,000
The historical figures of the total service fees paid by the Group, CEA Northwest and CEA Yunnan combined to the Catering Companies for each of the three financial years ended 31 December, 2002, 2003 and 2004 are approximately RMB194,095,000, RMB152,461,000 and RMB302,543,000, respectively. We are of the view that the annual caps proposed for the provision of catering services, which are determined based on (i) the historical figures on the total service fees paid and (ii) the anticipated business growth brought by the expansion of the Enlarged Group's fleet size, ATKs and ASKs following completion of the Proposed Acquisition as set out in the subsection headed "Reasons for and benefits of the Proposed Acquisition" above, are in the interests of the Group and the Company's shareholders as a whole and the terms of which are fair and reasonable so far as the interests of the Independent Shareholders are concerned. SALES AGENCY SERVICES In arriving at our recommendation in respect of the terms of the Sales Agency Services Agreements and their associated annual caps, we have taken into consideration the following principal factors and reasons. (a) TERMS OF THE SALES AGENCY SERVICES AGREEMENTS On 12 May, 2005, the Company entered into several agreements with a number of subsidiaries and associates of CEA Holding (collectively, the "Sales Companies"), pursuant to which the Sales Companies will from time to time provide the Enlarged Group as it agents with services for sale of air tickets and the provision of complementary services required in the daily airline operations and civil aviation business of the Enlarged Group (the "Sales Agency Services Agreements"). Each of the Sales Agency Services Agreements will become effective from 1 July, 2005 for a term of three years, subject to the Independent Shareholders' approval at the AGM, and is renewable. In regard to the terms of the Sales Agency Services Agreements, the Directors advised that the transactions as contemplated in the Sales Agency Services Agreements will be conducted on an arm's length basis and on normal commercial terms and in the usual and ordinary course of 73 LETTER FROM SW CAPITAL business of the Group. Under the Sales Agency Services Agreements, the Sales Companies charge the Enlarged Group commissions at a rate by reference to that prescribed by the Civil Aviation Administration of China and the International Air Transport Association, as determined following arm's length negotiations. Such commissions are payable monthly in arrears. According to the terms of the Sales Agency Services Agreements, the parties will perform an annual review of the then prevailing commission rate before the 31st of December in each calendar year, and agree on any required adjustments to such commission rate in respect of the next calendar year. (b) INFORMATION RELATING TO THE SALES COMPANIES The Sales Companies are companies principally engaged in the business of providing agency services in relation to sale of domestic and international air tickets and complementary services such as tourism services (including hotel reservation and sale of souvenirs and other hospitality products). The Sales Companies have established local operating centres in Shanghai, Xi'an, Kunming and other cities and areas in China, including Hong Kong. As at the Latest Practicable Date, CEA Holding is the controlling shareholder of the Company with a beneficial interest of approximately 61.64% of the issued share capital of the Company. As stated in the Board Letter, each of the Sales Companies is either a subsidiary or an associate of CEA Holding and is therefore regarded as a connected person of the Company under the Listing Rules. (c) REASONS FOR AND BENEFITS OF THE SALES AGENCY SERVICES AGREEMENTS Given that the Sales Companies have local operating centres in Shanghai, Xi'an, Kunming and other cities and areas in China, the Enlarged Group's focal operating areas will be covered. The Directors therefore believe that the entering into of the Sales Agency Services Agreements will be beneficial to the Enlarged Group and is in the interests of the Company's shareholders. (d) PROPOSED ANNUAL CAPS FOR THE PROVISION OF SALES AGENCY SERVICES Set out below is a summary of the proposed annual caps for the total commissions payable by the Enlarged Group to the Sales Companies in respect of the provision of sales agency services under the Sales Agency Services Agreements during the term of such agreements, as well as the basis of determination of the proposed annual caps. 74 LETTER FROM SW CAPITAL
ANNUAL CAPS FOR THE FINANCIAL YEARS ENDING 31 DECEMBER, 31 DECEMBER, 31 DECEMBER, TRANSACTION 2005 2006 2007 ----------- ------------ ------------ ------------ RMB RMB RMB Provision of sales agency services 77,116,000 88,683,000 101,985,000
The historical figures of the total commissions paid by the Group, CEA Northwest and CEA Yunnan combined to the Sales Companies for each of the three years ended 31 December, 2002, 2003 and 2004 are approximately RMB58,262,000, RMB56,452,000 and RMB61,693,000, respectively. We are of the view that the annual caps proposed for the provision of sales agency services, which are determined based on (i) the historical figures on the total commissions paid and (ii) the anticipated business growth brought by the expansion of the Enlarged Group's fleet size, ATKs and ASKs following completion of the Proposed Acquisition as set out in the subsection headed "Reasons for and benefits of the Proposed Acquisition" above, are in the interests of the Group and the Company's shareholders as a whole and the terms of which are fair and reasonable so far as the interests of the Independent Shareholders are concerned. 7. ADVERTISING SERVICES In arriving at our recommendation in respect of the terms of the Advertising Services Agreement and its associated annual caps, we have taken into consideration the following principal factors and reasons. (a) TERMS OF THE ADVERTISING SERVICES AGREEMENT On 12 May, 2005, the Company entered into an agreement with [CHINESE CHARACTERS](Shanghai Eastern Aviation Advertising Company Limited) (the "Advertising Company"), pursuant to which the Advertising Company will from time to time provide the Enlarged Group with multi-media advertising services to promote its business and to organise promotional functions and campaigns to enhance its reputation in the civil aviation industry (the "Advertising Services Agreement"). The Advertising Services Agreement will become effective from 1 July, 2005 for a term of three years, subject to the Independent Shareholders' approval at the AGM, and is renewable. The Directors advised that the transaction as contemplated in the Advertising Services Agreement will be conducted on an arm's length basis and on normal commercial terms and in the usual and ordinary course of business of the Group. Under the Advertising Services Agreement, the 75 LETTER FROM SW CAPITAL service fees payable to the Advertising Company for the services it provided to the Enlarged Group shall be based on prevailing market rates available from independent third-party service providers under comparable conditions. Such service fees shall be determined based on arm's length negotiations, and shall be no less favourable than those offered by the Advertising Company to independent third parties. According to the terms of the Advertising Services Agreement, the parties will perform an annual review of the then prevailing service fees before the 31st of December in each calendar year, and agree on any required adjustments to such service fees in respect of the next calendar year. (b) INFORMATION RELATING TO THE ADVERTISING COMPANY The Advertising Company is a company principally engaged in the business of multi-media advertising operations, including advertising design and production, and organising promotional functions and campaigns. The registered capital of the Advertising Company is RMB10,000,000. As at the Latest Practicable Date, CEA Holding is the controlling shareholder of the Company with a beneficial interest of approximately 61.64% of the issued share capital of the Company. As advised by the Directors, the Advertising Company, which is currently owned as to 55% by CEA Holding and 45% by the Company, is regarded as a connected person of the Company under the Listing Rules. (c) REASONS FOR AND BENEFITS OF THE ADVERTISING SERVICES AGREEMENT As the advertising businesses are not the core competencies of the Enlarged Group while the Advertising Company is experienced in advertising operations and has a proven track record with an extensive network of advertising sponsors to draw upon, the Directors believe that the entering into of the Advertising Services Agreement will be beneficial to the Enlarged Group and its future business pursuits, and in turn are in the interests of the Company's shareholders. In addition, the Advertising Company has, through its cooperation with the Group in the last consecutive eight years, secured a good understanding of the Enlarged Group's culture and operations. (d) PROPOSED ANNUAL CAPS FOR THE PROVISION OF ADVERTISING SERVICES Set out below is a summary of the proposed annual caps for the total amounts of service fees payable by the Enlarged Group to the Advertising Company in respect of the provision of advertising services under the Advertising Services Agreement during the term of such agreement, as well as the basis of determination of the proposed annual caps. 76 LETTER FROM SW CAPITAL
ANNUAL CAPS FOR THE FINANCIAL YEARS ENDING 31 DECEMBER, 31 DECEMBER, 31 DECEMBER, TRANSACTION 2005 2006 2007 ----------- ------------ ------------ ------------ RMB RMB RMB Provision of advertising services 13,000,000 16,000,000 19,000,000
The historical figures of the total service fees paid by the Group to the Advertising Company for the advertising services for each of the three years ended 31 December, 2002, 2003 and 2004 are approximately RMB4,857,000, RMB2,676,000 and RMB5,629,000, respectively. We are of the view that the proposed annual caps for the provision of advertising services, which are determined based on (i) the historical figures on the total service fees paid and (ii) the anticipated business growth brought by the expansion of the Enlarged Group's fleet size, ATKs and ASKs following completion of the Proposed Acquisition as set out in the subsection headed "Reasons for and benefits of the Proposed Acquisition" above, are in the interests of the Group and the Company's shareholders as a whole and the terms of which are fair and reasonable so far as the interests of the Independent Shareholders are concerned. SUMMARY Having considered the above principal factors and reasons, we draw your attention to the following key factors in arriving at our opinion: (a) the Proposed Acquisition will provide the Group with an opportunity to expand its business in the northwestern and southwestern regions of the PRC as well as increasing its air route coverage in Southeast Asia and its neighboring countries; (b) the terms of the Acquisition Agreement and the Continuing Connected Transactions were negotiated on an arm's length basis and on normal commercial terms; (c) the aggregate acquisition price of the Proposed Acquisition was arrived at after arm's length negotiations between the Company, CEA Holding, CEA Northwest and CEA Yunnan, and by making reference to the valuation as at 31 December, 2004 of the assets and liabilities to be acquired by the Company in relation to the aviation businesses of CEA Northwest and CEA Yunnan, which was conducted by an independent PRC valuer; (d) based on our analysis, the aggregate acquisition price for the Proposed Acquisition suggests a valuation of the Target Group which is lower than both the average and the low-end of the range of the valuations of the Aviation Comparables; 77 LETTER FROM SW CAPITAL (e) notwithstanding the net debt to shareholders' equity ratio and the financial burden of the Group would be increased as a result of the Proposed Acquisition, the Proposed Acquisition will bring various benefits to the Group, including increasing its fleet size and transportation capacity, broadening its air route network, increasing its future revenue, reducing its operating costs through integrating and optimizing its business resources, as well as enhancing its operating efficiency and profitability, which we consider are beneficial to the Group in the long run; (f) the Continuing Connected Transactions have been and will continue to be conducted in the ordinary and usual course of business of the Group and on normal commercial terms, and the terms have been or will be determined after arm's length negotiations between the parties; (g) in addition to obtaining Independent Shareholders' approval for the Continuing Connected Transactions together with the associated annual caps at the AGM, the Company is, in respect of the Continuing Connected Transactions, subject to the reporting requirements under Rule 14A.46 and the annual review requirements under Rules 14A.37 to 14A.40 of the Listing Rules to the extent and so far as applicable; and (h) if the total amount of any of the Continuing Connected Transactions in respect of any relevant financial year exceeds the respective cap, or if there is a material change to the terms of the agreements of the Continuing Connected Transactions, the Company is required by Rule 14A.36 to re-comply with the applicable requirements under Chapter 14A of the Listing Rules. RECOMMENDATION Having considered the above principal factors and reasons and the terms of the Proposed Acquisition, we consider that the terms of the Proposed Acquisition to be on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Group and the shareholders of the Company as a whole. We urge the Independent Shareholders to note that as a result of the Proposed Acquisition, the net debt to shareholders' equity ratio of the Group would increase significantly, which could have an adverse impact on the financial position of the Group as well as the short term share price performance of the Company. However, as the Proposed Acquisition will bring various benefits to the Group as mentioned in the Board Letter, we consider the Proposed Acquisition to be beneficial to the Group in the long run. In respect of the Continuing Connected Transactions, we consider that the respective agreements relating to the Continuing Connected Transactions are conducted on an arm's length basis and on normal commercial terms and in the usual and ordinary course of business of the Group, and the 78 LETTER FROM SW CAPITAL terms of the Continuing Connected Transactions, including the respective annual caps, are fair and reasonable so far as the interests of the Independent Shareholders are concerned, and are in the interests of the Group and the Company's shareholders as a whole. Accordingly, we recommend, and advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of ordinary resolutions to be proposed at the AGM to approve the Proposed Acquisition, the Continuing Connected Transactions and the associated annual caps. Yours faithfully, For and on behalf of SHENYIN WANGUO CAPITAL (H.K.) LIMITED SIMON LEE Director, Head of Corporate Finance 79 APPENDIX I INFORMATION ON THE AVIATION BUSINESSES OF CEA NORTHWEST AND CEA YUNNAN CEA HOLDING On 11th October, 2002, Eastern Air Group Company, the then controlling shareholder of the Company, merged with CEA Northwest and CEA Yunnan to form CEA Holding. After the merger, CEA Holding substituted Eastern Air Group Company and became the immediate controlling shareholder of the Company holding approximately 61.64% of its issued share capital. CEA Holding also holds the entire ownership interests in CEA Northwest and CEA Yunnan. The predecessor of CEA Northwest, [CHINESE CHARACTERS] (China Northwest Airlines), was established in December 1989 with its headquarters in Xi'an and a registered capital of RMB1,491,217,000. The predecessor of CEA Yunnan, [CHINESE CHARACTERS] (Yunnan Airlines), was established in July 1992 with its headquarters in Kunming and a registered capital of RMB533,350,000. Each of CEA Northwest and CEA Yunnan is a leading airline company in its respective operating regions providing passenger transportation, cargo transportation and other related services. CEA NORTHWEST CEA Northwest is a wholly-owned subsidiary of CEA Holding and is engaged in the operation of civil aviation, air cargo, postal delivery, luggage transportation, the agency services provided to both local and overseas airline companies and other services in relation to air transportation. OPERATING INFORMATION OF CEA NORTHWEST In 2004, the income from passenger transportation accounted for 93.48% of the total income, while income from cargo transportation accounted for 5.53% of the total income. CEA Northwest also provide aircraft repair and maintenance services and other aviation related services. During the last three years, the passenger transportation business of CEA Northwest increased gradually with passenger load factor risen to 66% in 2004 from 58% in 2002, attaining a compound growth of 10.50% in annual RPK. The major operating data of CEA Northwest during 2002 to 2004 are set out as follows: I-1 APPENDIX I INFORMATION ON THE AVIATION BUSINESSES OF CEA NORTHWEST AND CEA YUNNAN
ITEMS UNITS 2002 2003 2004 Available tonne-kilometres Millions (ATKs) tonne-kilometres 962 805 1,012 Domestic routes 740 645 799 International routes 179 142 196 Regional routes 43 18 17 Available seat-kilometres Millions (ASKs) passenger- kilometres 8,089 6,812 8,589 Domestic routes 6,386 5,559 6,850 International routes 1,358 1,098 1,584 Regional routes 345 155 155 Revenue tonne-kilometres Millions (RTKs) tonne-kilometres 512 444 609 Domestic routes 403 367 493 International routes 91 69 107 Regional routes 18 8 9 Revenue passenger-kilometres Millions (RPKs) passenger- kilometres 4,669 4,105 5,701 Domestic routes 3,691 3,420 4,623 International routes 803 608 990 Regional routes 175 77 88 Revenue freight tonne-kilometres Millions (RFTKs) tonne-kilometres 97 78 98 Domestic routes 76 62 78 International routes 19 15 19 Regional routes 2 1 1 Number of passenger carried Thousands 3,534 3,147 4,471 Domestic routes 2,920 2,734 3,820 International routes 476 360 601 Regional routes 138 53 50 Weight of cargo and mail carried Million tonnes 66 50 88 Domestic routes 53 40 76 International routes 12 9 11 Regional routes 2 1 1 Load factor (RTK/ATK) 53% 55% 60% Domestic routes 54% 57% 62% International routes 51% 49% 55% Regional routes 42% 44% 53% Passenger load factor (RPK/ASK) 58% 60% 66% Domestic routes 58% 62% 67% International routes 59% 55% 63% Regional routes 51% 50% 57%
I-2 APPENDIX I INFORMATION ON THE AVIATION BUSINESSES OF CEA NORTHWEST AND CEA YUNNAN Overall yield RMB 6.49 6.18 6.13 Domestic routes 5.37 5.47 5.06 International routes 11.14 9.83 10.87 Regional routes 8.11 7.26 8.44 Passenger yield RMB 0.65 0.62 0.62 Domestic routes 0.56 0.56 0.52 International routes 1.04 0.92 1.05 Regional routes 0.77 0.68 0.78 Cargo yield RMB 2.91 2.66 2.13 Domestic routes 1.25 1.29 0.98 International routes 9.29 8.11 6.55 Regional routes 5.15 5.18 7.56
OPERATING CENTRES OF CEA NORTHWEST The major operating centres of CEA Northwest are located in Xi'an and Lanzhou. Xi'an Xi'an Xianyang International Airport is situated at Dizhang Town in Xianyang City, Shaanxi Province. In 2004, the volume of passengers and cargo of CEA Northwest at this airport accounted for 35% and 38% of its total turnover of passengers and cargo respectively, including luggages. This airport, owned and operated by Shaanxi Airport Management Group Company [CHINESE CHARACTERS], is equipped with a 3,000 meters long runway as well as modern communication and navigation systems. In 2004, 77,655 times of flight take-off and landing were completed with a volume of passenger transportation of 6.36 million and a volume of cargo transportation of 111,200 tonnes. Lanzhou Lanzhou Zhongchuan Airport is situated at Qinwangchuan Basin located to the Northwest of Lanzhou City, Gansu Province. In 2004, the turnover of passengers and cargo of CEA Northwest at this airport accounted for 55% and 76% of its total volume of passengers and cargo respectively. Lanzhou Zhongchuan Airport is owned and operated by Gansu Airport Group Company [CHINESE CHARACTERS]. In 2004, 17,960 times of flight take-off and landing were completed with a volume of passenger transportation of 1.04 million and a volume of cargo transportation of 10,400 tonnes. AIR ROUTE NETWORK I-3 APPENDIX I INFORMATION ON THE AVIATION BUSINESSES OF CEA NORTHWEST AND CEA YUNNAN As at 31st December, 2004, CEA Northwest, based in Xi'an, operated a total of 137 air routes (including 110 domestic routes, 22 international routes and 5 regional routes connecting mainland and Hong Kong as well as Macau), reaching 56 cities in the PRC and overseas. An extensive air route network centered at Xi'an and Lanzhou is thus formed with bases at Zhuhai and Nanjing. CEA Northwest's international routes mainly cover major cities such as Toyko and Osaka in Japan. In recent years, as international routes were opened up for chartered flights to Jiddah, Singapore, Seoul, Bangkok and other cities, CEA Northwest has now become the biggest aviation enterprise in the Northwest China. AIRCRAFT FLEET As at 31st December, 2004, CEA Northwest owned or operated a total of 35 medium to large-sized aircraft providing an average of approximately 644 scheduled flights per week. The average age of these aircraft is 8.63 years. AIRCRAFT OWNED OR OPERATED BY CEA NORTHWEST
MODEL SELF-OWNED FINANCE LEASES OPERATING LEASES TOTAL A300-600 - 3 - 3 A320-200 - 7 12 19 A310-200 - 3 - 3 BAE146-300 7 - - 7 BAE146-100 3 - - 3
STAFF As at 31st December, 2004, CEA Northwest had a total staff of 5,380 in relation to its core aviation business. STAFF STRUCTURE OF CEA NORTHWEST Pilots 486 Flight attendants 504 Maintenance staff 1,059 Sales and marketing personnel 948 Administration and supporting staff 1,019 Others 1,364 Total 5,380
I-4 APPENDIX I INFORMATION ON THE AVIATION BUSINESSES OF CEA NORTHWEST AND CEA YUNNAN After the completion of the asset acquisition, the above staff will be taken up by the Company together with the aviation business. CEA YUNNAN CEA Yunnan is a wholly-owned subsidiary of CEA Holding and is engaged in the operation of civil aviation, air cargo, postal delivery, luggage transportation, agency services provided to both local and overseas airline companies and other services in relation to air transportation. OPERATING INFORMATION OF CEA YUNNAN In 2004, the income from passenger transportation accounted for 95.02% of the total income, while income from cargo transportation accounted for 3.78% of the total income. During the last three years, the passenger transportation business of CEA Yunnan increased gradually with passenger load factor risen to 75% in 2004 from 61% in 2002, attaining a compound growth of 14.27% in annual RPK. The major operating data of CEA Yunnan during 2002 to 2004 are set out as follows:
ITEMS UNITS 2002 2003 2004 Available tonne-kilometres Million (ATKs) tonne-kilometres 724 655 769 Domestic routes 653 607 697 International routes 59 37 64 Regional routes 12 11 8 Available seat-kilometres Million (ASKs) passenger- kilometres 6,544 5,905 6,972 Domestic routes 5,904 5,468 6,306 International routes 524 332 593 Regional routes 116 105 73 Revenue tonne-kilometres Million (RTKs) tonne-kilometres 462 447 587 Domestic routes 425 423 551 International routes 32 18 33 Regional routes 5 5 4
I-5 APPENDIX I INFORMATION ON THE AVIATION BUSINESSES OF CEA NORTHWEST AND CEA YUNNAN Revenue passenger-kilometres Million (RPKs) passenger- kilometres 4,009 3,963 5,235 Domestic routes 3,641 3,721 4,862 International routes 312 184 331 Regional routes 56 58 42 Revenue freight tonne-kilometres Million (RFTKs) tonne-kilometres 101 90 116 Domestic routes 97 88 113 International routes 4 2 3 Regional routes 0 0 0 Number of passenger carried Thousands 3,934 3,767 4,641 Domestic routes 3,724 3,622 4,446 International routes 166 101 164 Regional routes 44 44 31 Weight of cargo and mail carried Thousand tonnes 67 61 75 Domestic routes 65 59 73 International routes 2 1 2 Regional routes 0 0 0 Load factor (RTK/ATK) 64% 68% 76% Domestic routes 65% 70% 79% International routes 54% 50% 51% Regional routes 43% 48% 50% Passenger load factor (RPK/ASK) 61% 67% 75% Domestic routes 62% 68% 77% International routes 60% 55% 56% Regional routes 48% 55% 58% Overall yield RMB 5.34 5.40 5.37 Domestic routes 5.39 5.44 5.39 International routes 4.45 4.38 4.96 Regional routes 6.55 5.80 5.85 Passenger yield RMB 0.58 0.58 0.58 Domestic routes 0.60 0.59 0.59 International routes 0.43 0.40 0.46 Regional routes 0.60 0.53 0.54 Cargo yield RMB 1.30 1.25 1.04 Domestic routes 1.26 1.19 0.97 International routes 2.34 3.93 3.52 Regional routes 1.94 3.21 2.67
I-6 APPENDIX I INFORMATION ON THE AVIATION BUSINESSES OF CEA NORTHWEST AND CEA YUNNAN OPERATING CENTRES OF CEA YUNNAN The major operating centre of CEA Yunnan is located in Kunming. Kunming Kunming Wujiaba International Airport is situated at Wujiaba in Guandu District of Kunming, Yunnan, a distance of 6.5 kilometres from downtown. In 2004, the turnover of passengers and cargo of CEA Yunnan at Wujiaba Airport accounted for 47% of its total volume of passengers and cargo. This airport, owned and operated by Yunnan Airport Group Company [CHINESE CHARACTERS], is equipped with a 3,520 meters long runway as well as modern communication and navigation systems. In 2004, 92,385 times of flight take-off and landing were completed with a volume of passenger transportation of 9.80 million and a volume of cargo transportation of 171,000 tonnes. AIR ROUTE NETWORK As at 31st December, 2004, CEA Yunnan, based in Kunming, operated a total of 128 air routes (including 108 domestic routes, 18 international routes and 2 regional routes connecting mainland and Hong Kong as well as Macau), reaching 73 cities in the PRC and overseas. An extensive air route network centered at Kunming is thus formed which covers cities small and large in the PRC as well as other East Asian and Southeast Asian countries (regions) including Japan, Kampuchea, Korea, Malaysia, Thailand, Singapore, Burma and Vietnam. AIRCRAFT FLEET As at 31st December, 2004, CEA Yunnan owned or operated a total of 25 medium to large-sized aircraft providing an average of approximately 896 scheduled flights per week. The average age of these aircraft is 8.15 years. AIRCRAFT OWNED OR OPERATED BY CEA YUNNAN
MODEL SELF-OWNED FINANCE LEASES OPERATING LEASES TOTAL 737-300 9 1 3 13 737-700 4 - - 4 767-300 - 3 - 3 CRJ-200 5 - - 5
STAFF I-7 APPENDIX I INFORMATION ON THE AVIATION BUSINESSES OF CEA NORTHWEST AND CEA YUNNAN As at 31st December, 2004, CEA Yunnan had a total staff of 3,197 in relation to its core aviation business. STAFF STRUCTURE OF CEA YUNNAN Pilots 312 Flight attendants 339 Maintenance Staff 701 Sales and marketing personnel 922 Administration and supporting staff 425 Others 498 Total 3,197
After the completion of the asset acquisition, the above staff will be taken up by the Company together with the aviation business. I-8 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST The following is the text of a report dated 19 May 2005 made by the independent reporting accountants, PricewaterhouseCoopers, Certified Public Accountants, for the purpose of incorporation in this circular: [PRICEWATERHOUSECOOPERS LOGO] [CHINESE CHARACTERS] PricewaterhouseCoopers 22nd Floor Prince's Building Central Hong Kong 19 May 2005 The Directors China Eastern Airlines Corporation Limited Dear Sirs, We set out below our report on the combined balance sheets of the airlines and airlines related operations (the "Aviation Businesses") of China Eastern Air Northwest Company and its subsidiary ("CEA Northwest"), under Sections I to V below, presented as described in Note 1 under Section V, as at 31 December 2002, 2003 and 2004 and the related combined statements of income, cash flows and changes in owner's equity for the years then ended (the "Financial Information"). The Financial Information has been prepared for inclusion in the circular of China Eastern Airlines Corporation Limited (the "Company" or "CEA") dated 19 May 2005 (the "Circular"). CEA Northwest, formerly known as China Northwest Airlines ("Northwest Airlines"), was established in the People's Republic of China (the "PRC") as a limited liability company on 17 April 1989 and is a wholly owned subsidiary of China Eastern Air Holding Company ("CEA Holding"), the ultimate holding company of CEA. CEA Northwest is principally engaged in the operation of civil aviation, air cargo, postal delivery, luggage transportation, and other extended transportation services. Pursuant to the acquisition agreement (the "Acquisition Agreement") dated 12 May 2005 between CEA Holding, CEA, China Eastern Air Northwest Company and China Eastern Air Yunnan Company ("CEA Yunnan"), which is described more fully in the section headed "The Acquisition Agreement" in the letter from the Board of the Company contained in the Circular, the Company is to acquire the Aviation Businesses of CEA Northwest together with the related assets II-1 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST and liabilities (the "Proposed Acquisition") except for certain assets and liabilities as explained in Note 1 under Section V below. China Eastern Air Northwest Company and its subsidiary have adopted 31 December as their financial year end date. There is no requirement for the Aviation Businesses of CEA Northwest to prepare annual financial statements for each of the three years ended 31 December 2004. The Financial Information has been prepared by management of the Aviation Businesses based on management accounts of the Aviation Businesses of CEA Northwest prepared for the purpose of this report, and on the basis set out in Note 1 under Section V below, to conform with International Financial Reporting Standards ("IFRS"). As more fully explained in Note 1 under Section V, the Financial Information shows the assets and liabilities of the Aviation Businesses of CEA Northwest as at 31 December 2002, 2003 and 2004 and the related results for the years ended for the purpose of the proposed acquisition, and does not purport to represent the results or financial position of the Aviation Businesses of CEA Northwest if they were separate operating entities. For the purpose of this report, we have examined the Financial Information and carried out independent audit procedures and such additional procedures as are necessary in accordance with the Auditing Guideline "Prospectuses and the Reporting Accountant" issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA"). Management of the Aviation Businesses of CEA Northwest is responsible for preparing the Financial Information which gives a true and fair view. In preparing the Financial Information, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion. In our opinion, the Financial Information, for the purpose of this report, and prepared on the basis set out in Note 1 under Section V below, gives a true and fair view of the combined financial position of the Aviation Businesses of CEA Northwest as at 31 December 2002, 2003 and 2004, and of the combined results and cash flows for the years then ended. II-2 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST I COMBINED INCOME STATEMENTS YEAR ENDED 31 DECEMBER 2002, 2003 AND 2004
YEAR ENDED 31 DECEMBER ---------------------------------------- NOTE 2002 2003 2004 RMB'000 RMB'000 RMB'000 Traffic revenues Passenger 3,041,904 2,535,242 3,525,227 Cargo and mail 282,191 207,499 208,628 Other operating revenues 19,527 36,588 37,259 ---------- ---------- ---------- Turnover 3, 31 3,343,622 2,779,329 3,771,114 Other operating income 4 - 92,466 435,981 Operating expenses Wages, salaries and benefits 5 (291,012) (300,645) (468,384) Take-off and landing charges (486,323) (426,173) (497,318) Aircraft fuel (680,257) (610,719) (830,183) Food and beverages (139,001) (81,573) (77,642) Aircraft depreciation and operating leases (606,661) (636,632) (670,057) Other depreciation and operating leases (75,161) (69,488) (62,533) Aircraft maintenance (747,451) (439,036) (573,771) Commissions (188,761) (121,651) (148,324) Office and administration (173,497) (171,613) (159,917) Revaluation (deficit)/surplus of fixed assets 10 (62,209) (564,461) 81,444 Other (287,230) (194,623) (428,582) ---------- ---------- ---------- Total operating expenses (3,737,563) (3,616,614) (3,835,267) ---------- ---------- ---------- Operating (loss)/profit (393,941) (744,819) 371,828 Finance costs, net 6 (342,194) (316,722) (236,711) Share of results before tax of an associate 12 (45) 40 677 ---------- ---------- ---------- (Loss)/profit before taxation 7 (736,180) (1,061,501) 135,794 Taxation 8 - (76) (64) ---------- ---------- ---------- (Loss)/profit for the year attributable to owner (736,180) (1,061,577) 135,730 ========== ========== ==========
II-3 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST II COMBINED BALANCE SHEETS AS AT 31 DECEMBER 2002, 2003 AND 2004
31 DECEMBER ------------------------------------------------- NOTE 2002 2003 2004 RMB'000 RMB'000 RMB'000 NON-CURRENT ASSETS Fixed assets 10 4,396,183 3,451,382 3,397,865 Construction in progress 11 57,009 42,548 42,250 Investment in an associate 12 595 559 1,172 Other long-term receivables 13 632,446 667,655 723,354 ---------- ---------- ---------- 5,086,233 4,162,144 4,164,641 ---------- ---------- ---------- CURRENT ASSETS Flight equipment spare parts less allowance for obsolescence (2002: RMB42,289,000; 2003: RMB47,528,000; 2004: RMB73,116,000) 108,793 102,279 87,438 Trade receivables less allowance for doubtful accounts (2002: RMB51,888,000; 2003: RMB36,393,000; 2004: RMB37,635,000) 14 295,096 75,444 68,943 Prepayments and other receivables 15 280,751 639,199 377,105 Cash and cash equivalents 16 254,709 455,737 487,676 ---------- ---------- ---------- 939,349 1,272,659 1,021,162 ---------- ---------- ---------- CURRENT LIABILITIES Trade payables 17 (76,285) (6,174) (2,926) Notes payable 18 (100,595) (20,000) (50,000) Sales in advance of carriage (46,175) (13,756) (13,898) Other payables and accrued expenses 19 (5,261,269) (5,496,034) (5,473,979) Current portion of obligations under finance leases 20 (369,075) (389,371) (413,781) Current portion of long-term bank loans 21 (64,002) - - Short-term bank loans 22 (161,000) (1,010,393) (810,014) ---------- ---------- ----------
II-4 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST (6,078,401) (6,935,728) (6,764,598) ---------- ---------- ---------- NET CURRENT LIABILITIES (5,139,052) (5,663,069) (5,743,436) ---------- ---------- ---------- TOTAL ASSETS LESS CURRENT LIABILITIES (52,819) (1,500,925) (1,578,795) ---------- ---------- ----------
31 DECEMBER ----------------------------------------- NOTE 2002 2003 2004 RMB'000 RMB'000 RMB'000 NON-CURRENT LIABILITIES Obligations under finance leases 20 (2,960,845) (2,695,584) (2,320,549) Accrued aircraft overhaul expenses 23 (74,267) (83,532) (118,693) Post-retirement benefit liabilities 24 (237,160) (244,511) (257,202) Provision for staff housing allowances 25(b) (96,713) (107,855) (118,613) Other long-term payables 26 (316,211) (217,799) (140,042) ---------- ---------- ---------- (3,685,196) (3,349,281) (2,955,099) ---------- ---------- ---------- NET LIABILITIES (3,738,015) (4,850,206) (4,533,894) ========== ========== ========== REPRESENTING: OWNER'S DEFICIT (3,738,015) (4,850,206) (4,533,894) ========== ========== ==========
III COMBINED STATEMENTS OF CHANGES IN OWNER'S EQUITY YEAR ENDED 31 DECEMBER 2002, 2003 AND 2004
TOTAL RMB'000 Balance at 1 January 2002 (3,051,501) Loss attributable to owner (736,180) Revaluation surplus of fixed assets (Note 10) 24,556 Contributions from owner (Note 1) 25,110 ---------- Balance at 31 December 2002 (3,738,015) ========== Balance at 1 January 2003 (3,738,015) Loss attributable to owner (1,061,577) Revaluation deficit of fixed assets (Note 10) (45,060) Distributions to owner (Note 1) (5,554) ---------- Balance at 31 December 2003 (4,850,206) ==========
II-5 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Balance at 1 January 2004 (4,850,206) Profit attributable to owner 135,730 Revaluation surplus of fixed assets (Note 10) 163,347 Contributions from owner (Note 1) 17,235 ---------- Balance at 31 December 2004 (4,533,894) ==========
IV COMBINED STATEMENTS OF CASH FLOWS YEAR ENDED 31 DECEMBER 2002, 2003 AND 2004
YEAR ENDED 31 DECEMBER ---------------------------------------- NOTE 2002 2003 2004 RMB'000 RMB'000 RMB'000 CASH FLOWS FROM OPERATING ACTIVITIES (LOSS)/PROFIT ATTRIBUTABLE TO OWNER (736,180) (1,061,577) 135,730 ADJUSTMENTS TO RECONCILE (LOSS)/ PROFIT ATTRIBUTABLE TO OWNER TO NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES: Depreciation of fixed assets 448,574 456,461 414,739 Losses/(gains) on disposals of fixed assets 32,331 1,167 (2,172) Amortisation of deferred credit on aircraft operating lease rental (12,531) (12,531) (12,530) Provision for post-retirement benefits 14,821 9,223 12,691 Provision for staff housing allowances 10,832 11,142 10,758 Revaluation deficit of fixed assets 62,209 564,461 (81,444) Interest income (18,026) (31,041) (33,762) Interest expenses 302,613 254,365 229,791 Share of results after tax of an associate 45 36 (613) Foreign exchange losses 15,421 86,784 27,881 Impairment of construction in progress - 50 577 Long-term portion of accrued aircraft overhaul expenses (1,723) 9,265 35,161 MOVEMENTS IN: Flight equipment spare parts 19,277 6,514 14,841 Trade receivables, other receivables, deposits and prepayments 128,959 (112,024) 252,015 Trade payables, other payables and accrued expenses 201,698 (87,218) 249,197
II-6 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Sales in advance of carriage (3,773) (32,419) 142 --------- --------- --------- 1,200,727 1,124,235 1,117,272 --------- --------- --------- CASH GENERATED FROM OPERATIONS 464,547 62,658 1,253,002 Interest paid (302,613) (254,365) (229,791) --------- --------- --------- NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES 161,934 (191,707) 1,023,211 --------- --------- ---------
YEAR ENDED 31 DECEMBER ----------------------------------------- 2002 2003 2004 NOTE RMB'000 RMB'000 RMB'000 CASH FLOWS FROM INVESTING ACTIVITIES Additions of aircraft and flight equipment (51,096) (57,280) (84,950) Proceeds on disposals of fixed assets 168,062 31,655 10,056 Additions of buildings, other fixed assets and equipment (45,870) (70,829) (37,854) Additions of construction in progress (51,066) (11,483) (1,790) Investment in an associate (640) - - Increase in long-term bank deposits (20,012) (29,601) (29,528) Interest received 18,026 31,041 33,762 --------- --------- ---------- NET CASH INFLOW/(OUTFLOW) FROM INVESTING ACTIVITIES 17,404 (106,497) (110,304) --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term bank loans 407,800 1,072,512 810,014 Repayments of short-term bank loans (453,777) (223,119) (1,010,393) Repayments of long-term bank loans - (64,002) - Principal repayments of finance lease obligations (347,358) (369,075) (389,371) Repayment of other loan on aircraft lease (65,319) (85,881) (65,227) Proceeds on loan from a fellow subsidiary 200,000 250,000 - Repayment of loan from a related company - - (274,500) Increase/(decrease) in notes payable 92,095 (80,595) 30,000 (Distributions to) /contributions from owner - (5,554) 17,235 --------- --------- ---------- NET CASH (OUTFLOW)/INFLOW FROM FINANCING ACTIVITIES (166,559) 494,286 (882,242) --------- --------- ----------
II-7 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST NET INCREASE IN CASH AND CASH EQUIVALENTS 12,779 196,082 30,665 CASH AND CASH EQUIVALENTS AT 1 JANUARY 234,297 254,709 455,737 EXCHANGE ADJUSTMENT 7,633 4,946 1,274 --------- --------- ---------- CASH AND CASH EQUIVALENTS AT 31 DECEMBER 16 254,709 455,737 487,676 ========= ========= ==========
V NOTES TO THE FINANCIAL INFORMATION 1 BASIS OF PRESENTATION The Financial Information for the three years ended 31 December 2002, 2003 and 2004 (the "Relevant Periods") presents the results of the Aviation Businesses as if the Aviation Businesses had been in operation on a stand alone basis as of the earliest date presented and had been in existence throughout the Relevant Periods. The non-aviation related operations (the "Non-Aviation Businesses") of CEA Northwest, which having been managed separately from the Aviation Businesses and mainly consisting of hotels, property management and travel agency, are not acquired by the Company and therefore are not included in the Financial Information. The Financial Information is prepared solely for the purpose of the Proposed Acquisition and (i) does not purport to represent what the operating results of the Aviation Businesses would have been if they were in fact operated on a stand alone basis and (ii) should not be construed as indicative of the financial performance of the Aviation Businesses in any future period. Pursuant to the Acquisition Agreement, the Company does not assume any contingent liabilities of the Aviation Businesses which exist prior to the date of completion of the Proposed Acquisition. In addition, certain assets and liabilities (collectively the "Non-Acquired Items") which were historically associated with the Aviation Businesses are not acquired by the Company. As these Non-Acquired Items are an integral part of the Aviation Businesses, the Financial Information for the Relevant Periods includes these Non-Acquired Items and their results of operations on the same basis as those assets and liabilities to be acquired by the Company. As at 31 December 2004, the Non-Acquired Items consist of the following:
RMB'000 ASSETS - Buildings 291,498 - Other fixed assets and equipment 916 - Construction in progress 40,691
II-8 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST - Flight equipment spare parts 605 - Trade receivables 2,440 - Prepayments, deposits and other receivables 187,026 - Cash and cash equivalents 2,524 ------- 525,700 -------
RMB'000 LIABILITIES - Short-term bank loans (313,424) - Amount due to CEA Holding (3,682,966) - Other liabilities (101,011) ---------- (4,097,401) ---------- Net liabilities assumed by owner (3,571,701) ==========
The Company has entered into certain lease agreements to lease certain of the Non-Acquired Items (mainly buildings) from CEA Holding and its affiliates ("CEA Holding Group") after the completion of the Proposed Acquisition (Note 35). Movements of CEA Northwest's interests in Non-Aviation Businesses during the Relevant Periods are included in the combined statements of changes in owner's equity as distributions to or contributions from owner. Distributions to owner represent additional investments in subsidiaries and associates within the Non-Aviation Businesses which are not part of the Aviation Businesses. Contributions from owner represent the proceeds from disposal of investments in subsidiaries, associates and long-term investments within the Non-Aviation Businesses, retained in Aviation Businesses. Notwithstanding the Aviation Businesses of CEA Northwest having net current liabilities as at 31 December 2004, the Financial Information has been prepared on a going concern basis on the assumption that the Aviation Businesses of CEA Northwest will be able to obtain adequate financial support from CEA Holding up to the date of completion of the Proposed Acquisition and from the Company thereafter. In addition, upon completion of the Proposed Acquisition, CEA Holding will assume a significant portion of the net liabilities of the Aviation Businesses and, accordingly, the net capital deficiency of the Aviation Businesses will decrease substantially. 2 PRINCIPAL ACCOUNTING POLICIES II-9 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST (a) Basis of preparation The Financial Information has been prepared in accordance with International Financial Reporting Standards ("IFRS"), including International Accounting Standard ("IAS") and Interpretations adopted by the International Accounting Standards Board. No financial statements had previously been prepared for the Aviation Businesses of CEA Northwest because there are no such statutory or other requirements. The Financial Information for the Aviation Businesses of CEA Northwest is the first set of financial information prepared by management in accordance with IFRS, including IFRS 1 "First-time Adoption of IFRS". The Financial Information has been prepared under historical cost convention, as modified by the revaluation of fixed assets. The preparation of the Financial Information in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of each balance sheet date and the reported amounts of revenues and expenses for the Relevant Periods. Although these estimates are based on management's best knowledge of current event and actions, actual results ultimately may differ from those estimates. (b) Group accounting (i) Subsidiaries Subsidiaries, which are those entities in which the Aviation Businesses have an interest of more than one half of the voting rights or otherwise have power to govern the financial and operating policies, are consolidated. Subsidiaries are included from the date on which control is transferred to the Aviation Businesses and are no longer included from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. See Note 2(l) for the accounting policy on goodwill. Intercompany transactions, balances and unrealised gains on transactions among companies of the Aviation Businesses II-10 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST are eliminated. Where necessary, accounting policies of subsidiaries have been changed to ensure the consistency with the policies adopted by the Aviation Businesses. Minority interests represent the interests of outside members in the operating results and net assets of subsidiaries. (ii) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Aviation Businesses' share of the post-acquisition profits or losses of associates is recognised in the combined income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Aviation Businesses has between 20% to 50% of the voting rights, or over which the Aviation Businesses has significant influence, but which it does not control. Unrealised gains on transactions between the Aviation Businesses and its associates are eliminated to the extent of their interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Aviation Businesses' investment in associates includes goodwill (net of accumulated amortisation) on acquisition. When the Aviation Businesses' share of losses in an associate equals or exceeds its interest in the associate, the Aviation Businesses does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associates. (c) Foreign currency translation The Aviation Businesses maintain their books and records in Renminbi ("RMB") which is the measurement currency of the Aviation Businesses. Transactions in foreign currencies are translated at the applicable rates of exchange prevailing at the dates of the transactions, quoted by the People's Bank of China. Monetary assets and liabilities in foreign currencies are translated to RMB at the rates prevailing at the balance sheet date as quoted by the People's Bank of China. Exchange differences are included in the combined income statement, except when deferred in equity as qualifying cashflow hedges. (d) Revenue recognition and sales in advance of carriage II-11 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Passenger, cargo and mail revenues are recognised as traffic revenues when the transportation services are provided. The value of sold but unused tickets is included in the current liabilities as sales in advance of carriage. Revenues from other operating businesses, including income derived from the provision of ground services and commission income, are recognised when services are rendered. Commission income includes amounts earned from other carriers in respect of sales made by the Aviation Businesses. Rental income from leasing aircraft under operating leases is recognised on a straight-line basis over the lease term. Prior to 1 April 2004, revenues are presented net of business tax and civil aviation infrastructure levies. Effective from 1 April 2004, in accordance with the related new policy promulgated by the PRC Government, civil aviation infrastructure levies are payable based on the traffic capacity of the airlines, and the levies are included in the operating expenses. Interest income is recognised using the effective interest method. (e) Segmental reporting In accordance with the Aviation Businesses' internal financial reporting, the Aviation Businesses has determined that business segments be presented as the primary reporting format and geographical as the secondary reporting format. In respect of the geographical segment, the analysis of turnover and operating profit by geographical segment is based on the following criteria: (i) Traffic revenue from domestic services within the PRC (excluding Hong Kong Special Administrative Region ("Hong Kong")) is attributed to the domestic operation. Traffic revenue from inbound and outbound services between the PRC and Hong Kong or overseas markets is attributed to the geographical area in which the relevant overseas origin or destination lies. (ii) Other operating revenues from ticket handling services, airport ground services and other miscellaneous services are attributed on the basis of where the services are performed. II-12 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST (f) Retirement benefits The Aviation Businesses participate in defined contribution retirement schemes regarding pension and medical benefit for employees organised by the municipal governments of respective provinces. The contributions to the schemes are charged to the combined income statements as and when incurred. In addition, the Aviation Businesses provide retirees with post-retirement benefits including retirement subsidies, medical subsidies and other welfare. The cost of providing the aforementioned post-retirement benefits under Aviation Businesses' defined benefit plans is actuarially determined and recognised over the employees' service period by using the projected unit credit method. Post-retirement benefit expenses recognised in the combined income statements include, if applicable, current service cost, interest cost, amortised actuarial gains and losses, the effect of any curtailment or settlement and past service cost. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees' expected average remaining working lives. Past-service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period. (g) Maintenance and overhaul costs In respect of aircraft and engines under operating leases, the Aviation Businesses have the responsibility to fulfill certain return conditions under relevant leases. In order to fulfill these return conditions, major overhauls are required to be conducted on a regular basis. Accordingly, the present value of estimated costs of major overhauls for aircraft and engines under operating leases are accrued and charged to the combined income statement over the estimated period between overhauls using the ratios of actual flying hours/cycles and estimated flying hours/cycles between overhauls. The costs of major overhaul comprise mainly labour and materials. Differences between the estimated cost and the actual cost of the overhaul are included in the combined income statements in the period of overhaul. II-13 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST All other routine repairs and maintenance costs incurred in restoring such leased fixed assets to their normal working condition are charged to the combined income statements as and when incurred. Improvements are capitalised and depreciated over their expected useful lives to the Aviation Businesses. (h) Government grant Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Aviation Businesses will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the combined income statement over the period necessary to match them with the costs they are intended to compensate. Government grants relating to the property, plant and equipment are included in non-current liabilities and are credited to the combined income statement on a straight-line basis over the estimated useful lives of the related assets. (i) Taxation The Aviation Businesses provide for taxation on the basis of the results for the Relevant Periods as adjusted for items which are not assessable or deductible for income tax purposes. Taxation of the Aviation Businesses is determined in accordance with the relevant tax rules and regulations applicable in the jurisdictions where the Aviation Businesses operate. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the combined financial statements. Deferred tax is measured using tax rates enacted, or substantially enacted at the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (j) Fixed assets II-14 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST (i) Fixed Assets are recognised initially at cost which comprises purchase price, costs transferred from construction in progress and any directly attributable costs of bringing the assets to the condition for their intended use. Subsequent to the initial recognition, aircraft, engines and other flight equipment are stated at revalued amount less accumulated depreciation and accumulated impairment losses. Independent valuations are performed at least every five years or sooner if considered necessary by management. In the intervening years, management reviews the carrying values of the aircraft, engines and other flight equipment and adjustment is made where these are materially different from fair value. Increases in the carrying amount arising on revaluation are credited to the revaluation reserves. Decreases in valuation of aircraft, engines and other flight equipment are first offset against increases from earlier valuations of the same asset and are thereafter charged to the combined income statements. All other decreases in valuation are charged to the combined income statements. Any subsequent increases are credited to the combined income statements up to the amount previously charged. (ii) Depreciation of fixed assets is calculated on the straight-line method to write off the cost or revalued amount of each asset to their residual value over their estimated useful lives. The estimated useful lives used for the calculation of annual depreciation charges are calculated as follows:- Aircraft - over 20 years Flight equipment - Engines - over 20 years - Other flight equipment - over 20 years Buildings - over 8 to 35 years Other fixed assets and equipment - over 6 to 20 years
(iii) Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. When revalued assets are sold, the amounts included in revaluation reserves are transferred to retained earnings. (k) Construction in progress Construction in progress represents office buildings, various infrastructure projects under construction and plant and equipment pending installation. This includes the costs of construction II-15 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST and acquisition and interest capitalised. No depreciation is provided on construction in progress until the asset available for use, being when it is in the location and condition necessary for it to be capable of operating in the manner intended by the management. (l) Goodwill and negative goodwill (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Aviation Businesses' share of the net assets of the acquired subsidiary and associate at the date of acquisition. Goodwill arising from a business combination is presented as cost less accumulated amortisation and accumulated impairment losses. Amortisation is made using the straight-line method over its estimated useful life of five to fifteen years. Management determines the estimated useful life of goodwill based on its evaluation of the respective companies at the time of the acquisition, considering factors such as existing market share, potential growth and other factors inherent in the acquired companies. At each balance sheet date, the Aviation Businesses assess whether there is any indication of impairment. If such indications exist, an analysis is performed to assess whether the carrying amount of goodwill is fully recoverable. A write down is made if the carrying amount exceeds the recoverable amount. (ii) Negative goodwill Negative goodwill represents the excess of the fair value of the Aviation Businesses' share of the net assets acquired subsidiary or associate over the cost of acquisition. Negative goodwill is presented in the same balance sheet classifications as goodwill. To the extent that negative goodwill relates to expected future losses and expenses that are identified in the Aviation Businesses' plan for the acquisition and can be measured reliably, but which do not represent identifiable liabilities, that portion of negative goodwill is recognised as income when the future losses and expenses are recognised. Any remaining negative goodwill, not exceeding the fair value of the non-monetary assets acquired, is recognised in the income statement over the remaining weighted average useful life of those assets. Negative goodwill in excess of the fair value of those assets is recognised in the income statement immediately. II-16 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST The gain or loss on disposals of an entity includes the carrying amount of goodwill relating to the entity sold. (m) Borrowing costs Interest attributable to funds used to finance the acquisition of new aircraft during the period of its construction and construction of major ground facilities is capitalised as an additional cost of the related asset. Interest is capitalised at the Aviation Businesses weighted average interest rate on borrowings or, where applicable, the interest rate related to specific borrowings during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are charged to combined income statements in the period in which they are incurred. (n) Long-term bank deposits Long-term bank deposits placed to secure finance lease obligations are classified as held-to-maturity financial assets and measured at amortised cost. (o) Impairment Fixed assets and other non-current assets, including goodwill are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset's net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. (p) Flight equipment spare parts Flight equipment spare parts are carried at weighted average cost less allowance for obsolescence. (q) Trade receivables Trade receivables are recognised at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established if II-17 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST there is objective evidence that the Aviation Businesses will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the present value of expected cashflows, discounted at the effective interest rate. (r) Cash and cash equivalents Cash and short-term highly liquid investments, which are readily convertible into cash and have original maturities of three months or less at the date of acquisition, are classified as cash and cash equivalents. (s) Provisions Provisions are recognised when the Aviation Businesses have a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate of the amount can be made. Where the Aviation Businesses expect a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. (t) Leases (i) The Aviation Businesses are the lessees Leases of fixed assets where Aviation Businesses have substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to combined income statements over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using the straight-line method over the shorter of the expected useful lives of the asset or the lease terms. II-18 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Leases of assets under which a significant portion of the lease risks and rewards of ownership are retained by the lessor are classified as operating leases. Lease payments made under operating leases are charged to the combined income statements on a straight-line basis over the period of the lease. (ii) The Aviation Businesses are the lessors Assets leased out under operating leases are included in fixed assets in balance sheets. They are depreciated over their expected useful lives on a basis consistent with similar property, plant and equipment. Rental income is recognised on a straight-line basis over the lease term. 3 REVENUES AND TURNOVER The Aviation Businesses are principally engaged in the provision of domestic, Hong Kong and international passenger, cargo and mail airline services. Turnover comprises:
YEAR ENDED 31 DECEMBER ----------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Gross revenues from airline and related services 3,575,431 2,856,648 3,886,479 Less: Business tax (note (a)) (91,861) (32,789) (115,365) Civil aviation infrastructure levies (note (b)) (139,948) (44,530) - --------- --------- --------- 3,343,622 2,779,329 3,771,114 ========= ========= =========
(a) Pursuant to various PRC business tax rules and regulations, Aviation Businesses are required to pay PRC business tax. Except for traffic revenues derived from inbound international and regional flights which are not subject to PRC business tax, Aviation Businesses' traffic revenues, commission income and ground service income are subject to PRC business tax levied at rates ranging from 3% to 5%. From 1 May 2003 to 31 December 2003, PRC business tax for all domestic, international and regional passenger traffic revenues of all the PRC airlines (including CEA Northwest) were waived by the PRC Government, compensating for their losses on revenue due to the outbreak of Severe Acute Respiratory Syndrome ("SARS"). II-19 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST (b) Prior to 1 May 2003, the civil aviation infrastructure levies were paid to Civil Aviation Administration of China ("CAAC"), at rates of 5% on domestic and 2% on international or regional traffic revenues. From 1 May 2003 to 31 March 2004, civil aviation infrastructure levies on the traffic revenues were waived by CAAC, compensating for the airlines' losses on revenue due to the outbreak of SARS. Effective from 1 April 2004, in accordance with the related new policy promulgated by the PRC Government, civil aviation infrastructure levies are payable based on traffic capacity and the levies of RMB 48,030,000 incurred for the year ended 31 December 2004 are included in the operating expenses. 4 OTHER OPERATING INCOME
YEAR ENDED 31 DECEMBER ------------------------------------ 2002 2003 2004 RMB'000 RMB'000 RMB'000 Rental income from operating lease of aircraft - 92,466 435,981 ======= ======= =======
Amounts in 2003 represent rental income from operating leases of two A300 aircraft to CEA from 1 October 2003 to 31 December 2003 and of three Bae146 aircraft to China Eastern Airlines Jiangsu Co., Ltd. ("CEA Jiangsu"), a fellow subsidiary, from 1 July 2003 to 31 December 2003. Amounts in 2004 represent rental income from operating leases of two A300 aircraft and three A310 aircraft to CEA from 1 January 2004 to 30 September 2004 and three Bae146 aircraft to CEA Jiangsu from 1 January 2004 and 31 December 2004. 5 WAGES, SALARIES AND BENEFITS
YEAR ENDED 31 DECEMBER ------------------------------------ 2002 2003 2004 RMB'000 RMB'000 RMB'000 Wages, salaries and allowances 226,266 235,803 393,465 Contribution under defined contribution retirement schemes
II-20 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST - Pension (Note 24(a)(i)) 30,231 35,068 37,443 - Medical insurance (Note 24(a)(ii)) 3,595 3,065 5,811 Post-retirement benefits (Note 24(b)(iii)) 20,088 15,567 20,907 Staff housing allowances (Note 25(b)) 10,832 11,142 10,758 ------- ------- ------- 291,012 300,645 468,384 ======= ======= ======= Average number of employees 5,977 5,983 5,523 ======= ======= =======
6 FINANCE COSTS, NET
YEAR ENDED 31 DECEMBER ------------------------------------ 2002 2003 2004 RMB'000 RMB'000 RMB'000 Interest charged on obligations under finance leases 211,694 189,977 171,036 Interest on short-term loan from Eastern Air Group Finance Co., Ltd. ("EAGF") (Note 32(c)) 31 8,296 14,594 Interest on bank and other loans wholly repayable within five years 36,562 17,988 23,401 Interest on loans for aircraft leases wholly repayable within five years (Note 26(a)) 54,326 38,104 20,760 ------- ------- ------- 302,613 254,365 229,791 Exchange losses, net 57,607 93,398 40,682 Interest income on - restricted long-term bank deposits (14,886) (19,969) (25,763) - short-term deposits with EAGF (Note 32(c)) (1,875) (6,411) (1,336) - other bank deposits (1,265) (4,661) (6,663) (18,026) (31,041) (33,762) ======= ======= ======= 342,194 316,722 236,711 ======= ======= =======
7 (LOSS)/PROFIT BEFORE TAXATION II-21 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST
YEAR ENDED 31 DECEMBER ------------------------------------ 2002 2003 2004 RMB'000 RMB'000 RMB'000 (Loss)/profit before taxation is stated after charging:- Depreciation of fixed assets - owned assets 284,485 291,777 263,739 - held under finance leases 164,089 164,684 151,000 Operating lease rentals - aircraft 216,875 236,717 301,388 - land and buildings 16,373 12,942 16,463 Loss on disposals of fixed assets 32,331 1,167 - Consumption of consumables 53,442 48,555 56,680 Allowances for obsolescence of flight equipment spare parts 244 5,239 23,398 Allowances for doubtful accounts - 2,488 990 Auditors' remuneration 626 1,112 976 ======= ======= ======= And after crediting:- Reversal of provision for doubtful debts 13,038 - - Gain on disposals of fixed assets - - 2,172 ======= ======= =======
8 TAXATION Taxation is (charged)/credited to the income statements as follows:-
YEAR ENDED 31 DECEMBER ------------------------------------ 2002 2003 2004 RMB'000 RMB'000 RMB'000 Share of tax attributable to an associate - (76) (64) ======= ======= =======
The Aviation Businesses operate international flights to certain overseas destinations. There was no material overseas taxation for the year as there exists double tax relief between PRC and the corresponding jurisdictions (including Hong Kong). The difference between the actual taxation charge in the combined income statements and the amounts which would result from applying the enacted tax rate to (loss)/profit before taxation can be reconciled as follows:-
2002 2003 2004 RMB'000 RMB'000 RMB'000 (Loss)/profit before taxation (736,180) (1,061,501) 135,794 -------- ---------- -------
II-22 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Tax credit/(charge) calculated at enacted tax rate of 33 % 242,939 350,295 (44,812) Expenses not deductible for tax purposes (4,022) (4,931) (4,347) Unrecognised tax losses of the Aviation Businesses (238,917) (345,440) (43,890) Utilisation of previously unrecognised tax losses - - 92,985 -------- -------- ------- Tax charge - (76) (64) -------- -------- -------
(9) DIRECTORS' EMOLUMENTS AND INDIVIDUALS WITH HIGHEST EMOLUMENTS (a) Directors' emoluments No board of directors or similar corporate governance body was established by the Aviation Businesses of CEA Northwest during the Relevant Periods. Accordingly, no directors' emoluments were paid during the Relevant Periods. (b) Individuals with highest emoluments Details of emoluments paid to the five highest paid individuals are as follows:
YEAR ENDED 31 DECEMBER ------------------------------------ 2002 2003 2004 RMB'000 RMB'000 RMB'000 Salaries, allowances and benefits in kind 750 689 1,479 Retirement benefits 6 5 6 ------- ------- ------- 756 694 1,485 ======= ======= =======
An analysis of emoluments paid to the five highest paid individuals by number of individuals and emolument ranges is as follows:
YEAR ENDED 31 DECEMBER --------------------------------- 2002 2003 2004 RMB Nil - RMB1,060,000 (HK$1,000,000 equivalent) 5 5 5 ==== ==== ====
None of these employees received any inducements or compensation for loss of office, or waived any emoluments during the Relevant Periods. II-23 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST 10 FIXED ASSETS
AIRCRAFT AND FLIGHT EQUIPMENT ------------------------- HELD UNDER OTHER FIXED FINANCE ASSETS AND OWNED LEASES BUILDINGS EQUIPMENT TOTAL RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Cost or valuation At 1 January 2002 3,067,251 3,579,743 419,600 351,298 7,417,892 Transfer from construction in progress (Note 11) - - 167,218 6,394 173,612 Additions 51,096 - 20,962 24,908 96,966 Disposals - - (198,733) (17,177) (215,910) Revaluation (deficit)/surplus (39,376) 1,723 - - (37,653) --------- ---------- --------- ----------- --------- At 31 December 2002 3,078,971 3,581,466 409,047 365,423 7,434,907 --------- ---------- --------- ----------- --------- Accumulated depreciation At 1 January 2002 1,510,325 836,472 78,829 180,041 2,605,667 Charge for the year 225,697 164,089 18,011 40,777 448,574 Disposals - - (4,663) (10,854) (15,517) --------- ---------- --------- ----------- --------- At 31 December 2002 1,736,022 1,000,561 92,177 209,964 3,038,724 ========= ========== ========= =========== ========= Net book value At cost - - 316,870 155,459 472,329 At valuation 1,342,949 2,580,905 - - 3,923,854 --------- ---------- --------- ----------- --------- At 31 December 2002 1,342,949 2,580,905 316,870 155,459 4,396,183 ========= ========== ========= =========== ========= Cost or valuation At 1 January 2003 3,078,971 3,581,466 409,047 365,423 7,434,907 Transfer from construction in progress (Note 11) - - 22,901 2,993 25,894 Additions 57,280 - 27,241 43,588 128,109 Disposals (39,539) - (11,122) (38,693) (89,354) Revaluation deficit (409,449) (200,072) - - (609,521) --------- ---------- --------- ----------- --------- At 31 December 2003 2,687,263 3,381,394 448,067 373,311 6,890,035 --------- ---------- --------- ----------- --------- Accumulated depreciation At 1 January 2003 1,736,022 1,000,561 92,177 209,964 3,038,724 Charge for the year 235,231 164,684 14,713 41,833 456,461 Disposals (28,700) - (1,908) (25,924) (56,532) --------- ---------- --------- ----------- ---------
II-24 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST At 31 December 2003 1,942,553 1,165,245 104,982 225,873 3,438,653 ========= ========= ======= ======= ========= Net book value At cost - - 343,085 147,438 490,523 At valuation 744,710 2,216,149 - - 2,960,859 --------- --------- ------- ------- --------- At 31 December 2003 744,710 2,216,149 343,085 147,438 3,451,382 ========= ========= ======= ======= ========= Cost or valuation At 1 January 2004 2,687,263 3,381,394 448,067 373,311 6,890,035 Transfer from construction in progress (Note 11) - - 48 1,463 1,511 Additions 84,950 - 1,574 36,280 122,804 Disposals - - (8,037) (13,730) (21,767) Revaluation surplus 101,332 143,459 - - 244,791 --------- --------- ------- ------- --------- At 31 December 2004 2,873,545 3,524,853 441,652 397,324 7,237,374 --------- --------- ------- ------- --------- Accumulated depreciation At 1 January 2004 1,942,553 1,165,245 104,982 225,873 3,438,653 Charge for the year 217,669 151,000 14,437 31,633 414,739 Disposals - - (5,954) (7,929) (13,883) --------- --------- ------- ------- --------- At 31 December 2004 2,160,222 1,316,245 113,465 249,577 3,839,509 ========= ========= ======= ======= ========= Net book value At cost - - 328,187 147,747 475,934 At valuation 713,323 2,208,608 - - 2,921,931 --------- --------- ------- ------- --------- At 31 December 2004 713,323 2,208,608 328,187 147,747 3,397,865 ========= ========= ======= ======= =========
Chesterton Petty Valuation Company Limited, an independent qualified valuer in Hong Kong, carried out valuation of the Aviation Businesses' aircraft and engines as at 31 December 2002, 2003 and 2004 on an open market value basis. In addition, the flight equipment as at 31 December 2002 and 2003 were revalued by the management of CEA Northwest on a replacement cost basis. On 31 December 2004, the flight equipment were revalued by China Consultants of Accounting and Finance Management Co., Ltd. (the "PRC Valuer"), an independent valuer registered in the PRC, on a depreciated replacement cost basis. Movement of revaluation reserve is as follows:
31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 202,703 227,259 182,199
II-25 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Revaluation surplus/(deficit) 24,556 (45,060) 163,347 ------- ------- ------- At 31 December 227,259 182,199 345,546 ======= ======= =======
The result of revaluation reserves is summarised below:
31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Revaluation surplus/(deficit) credited to/ (deducted from) owner's equity 24,556 (45,060) 163,347 Revaluation (deficit)/surplus (charged)/ credited to combined income statement (62,209) (564,461) 81,444 ------- -------- ------- (Decrease)/increase in carrying value of aircraft, engines and flight equipment (37,653) (609,521) 244,791 ======= ======== =======
Had the Aviation Businesses' aircraft, engines and other flight equipment been stated at cost less accumulated depreciation and impairment losses, the carrying amounts of aircraft, engines and other flight equipment would have been RMB4,885,340,000, RMB4,565,024,000 and RMB4,239,990,000 as at 31 December 2002, 2003 and 2004 respectively. Certain buildings of the Aviation Businesses are erected on land assigned by the PRC Government and certificates of these land use rights have not been obtained. However, the Aviation Businesses are entitled to lawfully and validly occupy and use such land for its daily operations in spite of the deficiency in legal title. Buildings erected on such land with deficiency in legal title represent Non-Acquired Items (Note 1) and are not to be acquired by the Company. The Aviation Businesses has entered into an agreement with CEA Holding to lease these properties which have been occupied by Aviation Businesses for an initial term of three years after completion of the Proposed Acquisition with renewal option (Note 35). Due to the deficiency in legal title, no valuation has been carried out and the buildings of the Aviation Businesses are carried at cost less accumulated depreciation and impairment losses. Certain aircraft of the Aviation Businesses with an aggregate carrying value of approximately RMB2,811,640,000, RMB2,386,829,000 and RMB2,350,653,000 as at 31 December 2002, 2003 and 2004 respectively were pledged as collateral under certain finance lease agreements (Note 20) and other loans (Note 26(a)). II-26 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Certain buildings of Aviation Businesses with an aggregate carrying value of approximately RMB17,892,000 as at 31 December 2002 were pledged as collateral under a long-term bank loan (Note 21). 11 CONSTRUCTION IN PROGRESS
31 DECEMBER --------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 179,555 57,009 42,548 Additions 51,066 11,483 1,790 Impairment - (50) (577) Transfer to fixed assets (Note 10) (173,612) (25,894) (1,511) -------- ------- ------- At 31 December 57,009 42,548 42,250 ======== ======= =======
12 INVESTMENTS (a) Investment in a subsidiary Particulars of the subsidiary, which is established and operating in the PRC, are as follows:
DATE OF PARTICULARS OF ATTRIBUTABLE COMPANY ESTABLISHMENT PAID-UP CAPITAL EQUITY INTERESTS PRINCIPAL ACTIVITIES ---------------------- ------------- --------------- --------------------------- -------------------- RMB'000 31 DECEMBER 2002 2003 2004 Interest directly held Nanjing Airlines 4 July 1991 293,847 70% 70% 70% Provision of air Company Limited transportation services
(b) Investment in an associate Movements in investment in an associate are as follows:
YEAR ENDED 31 DECEMBER ----------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Share of net assets at 1 January - 595 559 Investment at cost 640 - - Share of results before tax of an associate (45) 40 677 Share of taxation (Note 8) - (76) (64) ------- ------- ------- Share of net assets at 31 December 595 559 1,172 ======= ======= =======
II-27 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Particulars of the associate, which is incorporated and operating in the PRC, are as follows:
DATE OF ATTRIBUTABLE COMPANY ESTABLISHMENT PAID-UP CAPITAL EQUITY INTERESTS PRINCIPAL ACTIVITIES ---------------------- ------------- --------------- --------------------------- ----------------------- RMB'000 31 DECEMBER 2002 2003 2004 Xi'an Civil Aviation 9 July 2002 640 32% 32% 32% Provision of aviation Cares Technology information technology Company services
13 OTHER LONG-TERM RECEIVABLES
31 DECEMBER --------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Long-term bank deposits (Note 20 and 26(a)) 343,243 405,232 444,355 Deposits for aircraft under operating leases 258,299 251,918 251,055 Prepayments for flight training costs 30,904 10,505 27,944 ------- ------- ------- 632,446 667,655 723,354 ------- ------- -------
14 TRADE RECEIVABLES LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS The credit terms given to trade customers are determined on an individual basis, with the credit period ranging from half a month to three months.
31 DECEMBER --------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Less than 31 days 126,531 5,700 11,504 31 to 60 days 34,829 10,132 4,628 61 to 90 days 30,140 3,381 3,223 Over 90 days 103,596 56,231 49,588 ------- ------- ------- 295,096 75,444 68,943 ======= ======= =======
15 PREPAYMENTS AND OTHER RECEIVABLES II-28 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST
31 DECEMBER --------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Amounts due from related companies (Note 32(a)(i)) 129,360 565,611 295,322 Prepaid aircraft operating lease rentals 25,862 22,291 22,818 Receivable from sales of staff quarters 30,284 626 754 Prepayments for purchase of flight equipment and spare parts 23,380 15,786 9,420 Staff loans 11,444 4,037 8,502 Rental prepayments and deposits 10,206 7,448 8,384 Others 50,215 23,400 31,905 ------- ------- ------- 280,751 639,199 377,105 ======= ======= =======
16 CASH AND CASH EQUIVALENTS
31 DECEMBER --------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Cash and bank balances 250,614 371,754 397,681 Short-term deposit with a related company (Note 32(a)(ii)) 4,095 83,983 89,995 ------- ------- ------- 254,709 455,737 487,676 ======= ======= =======
As at 31 December 2002, 2003 and 2004, approximately RMB 174,529,000, RMB 379,333,000 and RMB 464,574,000 respectively of the Aviation Businesses' cash and cash equivalent are denominated in RMB. The remaining balances are denominated in US dollars, Japanese Yen, Korean Won and Hong Kong dollars. As at 31 December 2002, 2003 and 2004, approximately RMB 50,000,000, Nil and RMB 30,000,000 respectively of the cash and bank balances are pledged for the notes payable (Note 18). 17 TRADE PAYABLES As at 31 December 2002, 2003 and 2004, all trade payables were current balances and aged within 30 days. II-29 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST 18 NOTES PAYABLE Notes payable are repayable within 6 months with interest bearing ranged from 0% to 2.88% per annum, 0% per annum and 0% to 3.60% per annum for the years ended 31 December 2002, 2003 and 2004 respectively. 19 OTHER PAYABLES AND ACCRUED EXPENSES
31 DECEMBER ------------------------------------------ 2002 2003 2004 RMB'000 RMB'000 RMB'000 Amounts due to related companies (Note 32(a)(i)) 3,836,651 4,150,551 3,936,311 Accrued operating expenses 519,269 477,184 535,556 Flight equipment purchase payable 201,764 144,541 156,129 Civil aviation infrastructure levies payable 170,838 164,458 176,120 Current portion of accrued aircraft overhaul expenses (Note 23) 23,720 77,380 133,578 Duties and levies payable 131,541 109,478 97,759 Accrued salaries, wages and benefits 103,013 93,318 113,769 Current portion of long term payables (Note 26) 73,215 93,770 77,754 Current portion of post-retirement benefit liabilities (Note 24(b)(i)) 6,344 8,216 8,216 Others 194,914 177,138 238,787 --------- --------- --------- 5,261,269 5,496,034 5,473,979 ========= ========= =========
20 OBLIGATIONS UNDER FINANCE LEASES At 31 December 2002, 2003 and 2004, the Aviation Businesses had 10 aircraft under finance leases. Under the terms of the leases, the Aviation Businesses have the options to purchase, at or near the end of the lease term, certain aircraft at fair market value and others at either fair market value or a percentage of the respective lessor's defined cost of the aircraft. The future minimum lease payments, interest and present value of minimum lease payments which are principally denominated in foreign currencies, under these finance leases as at 31 December 2002, 2003 and 2004 are as follows:- II-30 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST
31 DECEMBER 2002 31 DECEMBER 2003 31 DECEMBER 2004 ---------------------------------- --------------------------------- ------------------------------- PRESENT PRESENT PRESENT VALUE OF VALUE OF VALUE OF MINIMUM MINIMUM MINIMUM MINIMUM MINIMUM MINIMUM LEASE LEASE LEASE LEASE LEASE LEASE PAYMENTS INTEREST PAYMENTS PAYMENTS INTEREST PAYMENTS PAYMENTS INTEREST PAYMENTS RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Within one year 559,052 189,977 369,075 560,407 171,036 389,371 560,808 147,027 413,781 In the second year 559,053 166,841 392,212 560,408 145,413 414,995 893,575 115,670 777,905 In the third to fifth years inclusive 2,056,413 306,555 1,749,858 2,190,048 200,766 1,989,282 1,632,314 89,670 1,542,644 After the fifth year 844,207 25,432 818,775 293,712 2,405 291,307 - - - --------- -------- --------- --------- -------- --------- --------- -------- --------- Total 4,018,725 688,805 3,329,920 3,604,575 519,620 3,084,955 3,086,697 352,367 2,734,330 Less: amount repayable within one year (559,052) (189,977) (369,075) (560,407) (171,036) (389,371) (560,808) (147,027) (413,781) --------- -------- --------- --------- -------- --------- --------- -------- --------- Long-term portion 3,459,673 498,828 2,960,845 3,044,168 348,584 2,695,584 2,525,889 205,340 2,320,549 ========= ======== ========= ========= ======== ========= ========= ======== =========
At 31 December 2002, 2003 and 2004, the Aviation Businesses had long-term bank deposits totalling RMB343,243,000, RMB405,232,000 and RMB444,355,000 respectively pledged as collateral under certain finance lease arrangements (Note 13). All of these bank deposits are used to meet future lease obligations as they fall due. In addition, the finance lease obligations are secured by the related aircraft, the relevant insurance policies and bank guarantees. 21 LONG-TERM BANK LOANS As at 31 December 2002, a secured bank loan denominated in Japanese Yen amounted to RMB4,002,000 was borrowed in 1995 for certain construction projects. The loan was secured by certain properties of Aviation Businesses (Note 10) bearing a fixed interest rate of 2.88% per annum. The final maturity of the loan was on 20 June 2003. In addition, as at 31 December 2002, two unsecured bank loans denominated in Renminbi totalled RMB60,000,000 were borrowed in 1998 and 1999 respectively for a construction project bearing fixed interest rates of 7.65% per annum and 6.03% per annum respectively. The final maturity of the loans was 8 July 2003 and 6 September 2003 respectively. II-31 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST 22 SHORT-TERM BANK LOANS Short-term bank loans of the Aviation Businesses are unsecured except for an amount of RMB810,014,000 as at 31 December 2004 which is guaranteed by CEA Holding. They are repayable within one year with interest charged at the prevailing market rates based on the rates quoted by the People's Bank of China. The interest rates related to such short-term bank loans ranged from 3.78% to 5.76% per annum, 1.81% to 5.76% per annum and 4.10% to 4.90% per annum as at 31 December 2002, 2003 and 2004 respectively. During the years ended 31 December 2002, 2003 and 2004, the weighted average interest rates on short-term bank loans were 4.73% per annum, 2.49% per annum and 4.49% per annum respectively. 23 ACCRUED AIRCRAFT OVERHAUL EXPENSES
31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 59,520 97,987 160,912 Additional provisions 38,467 69,763 106,631 Utilised during the year - (6,838) (15,272) ------- ------- -------- At 31 December 97,987 160,912 252,271 Less: current portion (Note 19) (23,720) (77,380) (133,578) ------- ------- -------- Long-term portion 74,267 83,532 118,693 ======= ======= ========
Accrued aircraft overhaul expenses represent present value of estimated costs of major overhauls for aircraft and engines under operating leases as the Aviation Businesses has the responsibility to fulfill certain return conditions under the relevant leases. 24 RETIREMENT BENEFIT PLANS AND POST-RETIREMENT BENEFITS (a) Defined contribution retirement schemes (i) Pension Substantially all of the employees of the Aviation Businesses are eligible to participate in its retirement schemes. The Aviation Businesses participate in defined contribution retirement schemes organised by Xi'an municipal government. The Aviation Businesses are required to make annual contributions to the schemes at a rate of 18.5% to 20% of salary II-32 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST costs (including certain allowances) subject to certain ceilings. Employees contribute approximately 6% to 7% of their basic salary. For defined contribution retirement schemes, the Aviation Businesses have no other material obligation for the payment of retirement benefits beyond the annual contributions under these schemes. For the year ended 31 December 2002, 2003 and 2004, the Aviation Businesses' pension cost for defined contribution retirement schemes charged to the combined income statements amounted to RMB30,231,000, RMB35,068,000 and RMB37,443,000 respectively. (ii) Medical insurance In 1998, the State Council announced that each municipal government should introduce a medical insurance scheme for employees and retirees of all enterprises, of which the detailed policies and regulations were to be set out by individual municipal government. In October 1999, the Xi'an municipal government promulgated the detailed policies and regulations of its medical insurance scheme. In 2002, the Aviation Businesses joined this scheme under which the Aviation Businesses and their employees contribute approximately 7% and 2% of the employee's basic salaries to the scheme respectively. The Aviation Businesses have no other obligation for the payment of medical expense beyond the annual contributions. For the years ended 31 December 2002, 2003 and 2004, the Aviation Businesses' medical insurance contribution charged to the combined income statements amounted to approximately RMB3,595,000, RMB3,065,000 and RMB5,811,000 respectively. (b) Post-retirement benefits In addition to the defined contribution retirement schemes as described in (a) above, the Aviation Businesses provide retirees with post-retirement benefits including retirement subsidies, medical subsidies and other welfare. The expected cost and obligations of providing these post-retirement benefits are actuarially determined and recognised by using the projected unit credit method, which involves a number of assumptions and estimates including the rate of inflation, discount rate and employees' turnover ratio. (i) The post-retirement benefit liabilities recognised in the combined balance sheets of the Aviation Businesses are as follows:- II-33 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST
31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Present value of unfunded post-retirement benefit obligation 249,158 192,819 278,601 Unrecognised actuarial (loss)/gain (5,654) 59,908 (13,183) ------- ------- ------- Post-retirement benefit liabilities 243,504 252,727 265,418 Less: current portion (Note 19) (6,344) (8,216) (8,216) ------- ------- ------- Post-retirement benefit liabilities - long-term portion 237,160 244,511 257,202 ======= ======= =======
(ii) Changes in post-retirement benefit liabilities are as follows:-
YEAR ENDED 31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 228,683 243,504 252,727 Current service cost 8,654 6,016 8,839 Interest on obligation 11,434 9,551 13,708 Recognised actuarial gain - - (1,640) Payments made in the year (5,267) (6,344) (8,216) ------- ------- ------- At 31 December 243,504 252,727 265,418 ======= ======= =======
(iii) The costs of post-retirement benefits recognised under wages, salaries and benefits in the combined income statements for the Relevant Periods are as follows:-
31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Current service cost 8,654 6,016 8,839 Interest on obligation 11,434 9,551 13,708 Recognised actuarial gain - - (1,640) ------- ------- ------- At 31 December 20,088 15,567 20,907 ======= ======= =======
(iv) The principal actuarial assumptions at the balance sheet dates are as follows:- II-34 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST
31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Discount rate 5% 5% 5% Annual rate of increase of per capita benefit payment 1.5% 1.5% 1.5% Employees turnover rate 0.7% 2.0% 2.0%
25 STAFF HOUSING BENEFITS (a) Staff housing fund In accordance with the PRC housing reform regulations, the Aviation Businesses are required to make contribution to the State-sponsored housing fund at a range from 1% to 15% of the specified salary amount of its PRC employees. At the same time, the employees are required to make contribution equal to the contribution of the Aviation Businesses out of their salaries. The employees are entitled to claim the entire sum of the fund contribution under certain specified withdrawal circumstances. For the years ended 31 December 2002, 2003 and 2004, the staff housing fund contributed by the Aviation Businesses amounted to RMB19,055,000, RMB22,487,000 and RMB39,948,000 respectively, which are charged to the combined income statements for the Relevant Periods. (b) Staff housing allowances In 1998 and 2000, the State Council of the PRC issued circulars stipulating that distribution of quarters to employees at discounted prices should be discontinued and cash allowance should be made to employees thereafter. Eligible staff who have not been allocated with any quarters or who have not been allocated with a quarter up to the minimum area as set out by the Government are entitled to an one-off cash allowance. However, the specific timetable and procedures of implementation of these policies are to be determined by individual provincial or municipal government based on the particular situation of the province or municipality. The Xi'an municipal government has not announced the detailed implementation procedures. In determining such obligations of the Aviation Businesses, management made reference to the staff housing policies already implemented by other enterprises. As at 31 December 2002, 2003 and 2004, the provision for staff housing allowances amounted to RMB96,713,000, RMB107,855,000 and RMB118,613,000 respectively. For the years ended 31 December 2002, 2003 and 2004, the staff housing allowance provided amounted to RMB10,832,000, RMB11,142,000 and RMB10,758,000 respectively and were charged to the combined income statement (Note 5). II-35 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST 26 OTHER LONG-TERM PAYABLES
31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Loans for aircraft leases (note (a)) 265,243 199,917 118,674 Deferred credit on aircraft operating Lease rental (note (b)) 85,623 73,092 60,562 Deferred income (note (c)) 38,560 38,560 38,560 ------- ------- ------- 389,426 311,569 217,796 Less: Current portion (Note 19) (73,215) (93,770) (77,754) ------- ------- ------- 316,211 217,799 140,042 ======= ======= =======
(a) The balances include other loans of RMB164,111,000, RMB155,464,000 and RMB112,935,000 as at 31 December 2002, 2003 and 2004 respectively, denominated in Japanese Yen and US dollars, which were drawn down to finance Japanese Yen deposits placed at banks (Note 13) for securing the future repayments under finance lease arrangements of certain aircraft. These loans are secured by the related aircraft, repayable by installment with final maturities through to 2008 and interest bearing at fixed interest rates ranging from 6.46% to 8.62% per annum. In addition, the balances also include loans from lessors under certain financing arrangements amounting to RMB101,132,000, RMB44,453,000 and RMB5,739,000 as at 31 December 2002, 2003 and 2004 respectively. The loans are secured by related aircraft (Note 10), repayable by instalment with final maturity through to 2006 and interest bearing at fixed interest rates ranging from 24.45% to 32.15% per annum. (b) Deferred credit on aircraft operating lease rental represents the unamortised portion of lease incentives from the lessor. (c) Deferred income represents government grant to the Aviation Businesses for construction and acquisition of safety and security facilities. The Aviation Businesses have not yet constructed or purchased such facilities since the receipt of such government grant. 27 DEFERRED TAXATION II-36 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST As at the balance sheet dates, the deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction) and are made up of taxation effects of the following:-
2002 2003 2004 RMB'000 RMB'000 RMB'000 Deferred tax assets:- Tax losses carried forward 510,833 463,600 274,206 Provision for obsolete flight equipment and spare parts 13,955 15,684 - Repair cost on flight equipment 17,671 46,951 33,801 Provision for post-retirement benefits 80,356 83,400 87,588 Provision for overhaul 278,839 56,202 66,073 Depreciation and amortization 234,463 68,739 62,196 Other accrued expenses 116,991 - 1,939 ----------- --------- --------- 1,253,108 734,576 525,803 Less: unrecognised assets (1,253,108) (621,505) (352,468) ----------- --------- --------- - 113,071 173,335 ----------- --------- --------- Deferred tax liabilities:- Provision for overhaul - (110,339) (3,512) Depreciation and amortisation - - (169,823) Other accrued liabilities - (2,732) - ----------- --------- --------- - (113,071) (173,335) ----------- --------- --------- Deferred tax assets/(liabilities), net - - - =========== ========= =========
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current liabilities and when the deferred income taxes relate to the same authority. No deferred tax assets and liabilities are recorded during the Relevant Periods as the deferred tax liabilities are appropriately and entirely offset by the deferred tax assets available to the Aviation Businesses. In accordance with PRC tax law, tax losses may be carried forward against future taxable income for a period of five years. As at 31 December 2002, 2003 and 2004, the Aviation Businesses had tax losses carried forward of approximately RMB1,548 million, RMB1,405 million and RMB831 million respectively, which expire between 2002 and 2009, available to set off against the Aviation Businesses' future taxable income. The Aviation Businesses did not recognise deferred tax asset arising from tax losses as management does not consider it probably that such tax losses will be realised before they expire. II-37 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST 28 CAPITAL COMMITMENTS As at 31 December 2002, 2003 and 2004, the Aviation Businesses had the following capital commitments:-
2002 2003 2004 RMB'000 RMB'000 RMB'000 Authorised and contracted for:- - Aircraft and related equipment 18,490 34,947 111,788 ======= ======= ======= Authorised but not contracted for:- - Land use right - - 72,980 ======= ======= =======
29 OPERATING LEASE COMMITMENTS As at 31 December 2002, 2003 and 2004, the Aviation Businesses had commitments under operating leases to pay future minimum lease rentals as follows:-
31 DECEMBER -------------------------------------------------------------------------- 2002 2003 2004 ----------------------- ----------------------- ---------------------- AIRCRAFT AIRCRAFT AIRCRAFT AND FLIGHT LAND AND AND FLIGHT LAND AND AND FLIGHT LAND AND EQUIPMENT BUILDINGS EQUIPMENT BUILDINGS EQUIPMENT BUILDINGS RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Within one year 236,739 4,315 218,264 1,485 210,567 2,899 In the second year 210,567 1,392 210,567 342 210,567 423 In the third to fifth year inclusive 631,701 545 631,701 410 631,701 67 After the fifth year 379,252 - 273,969 - 168,685 - ---------- --------- ---------- --------- ---------- --------- 1,458,259 6,252 1,334,501 2,237 1,221,520 3,389 ========== ========= ========== ========= ========== =========
30 CONTINGENT LIABILITIES As at 31 December 2004, the Aviation Businesses provided guarantee to a bank in respect of a bank loan granted to Zhuhai Northwest Airlines Hotel Co., Ltd., a subsidiary of CEA Northwest within the Non-Aviation Businesses, to the extent of RMB 18,000,000. The guarantee will expire in December 2005 together with the final maturity of the subject bank loan. 31 SEGMENTAL REPORTING II-38 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST (a) Primary reporting format by business segment The Aviation Businesses operates in one business segment which is the common carriage of passengers, cargo and mail over various routes authorised by CAAC. (b) Secondary reporting format by geographical segment The Aviation Businesses' turnover and operating profit/(loss) by geographical segments are analysed as follows:-
HONG DOMESTIC KONG JAPAN KOREA TOTAL RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 2002 Traffic revenues - Passenger 2,069,493 135,598 797,430 39,383 3,041,904 - Cargo and mail 95,302 10,296 175,168 1,425 282,191 --------- ------- ------- ------- --------- 2,164,795 145,894 972,598 40,808 3,324,095 Other operating revenues 12,165 927 6,176 259 19,527 --------- ------- ------- ------- --------- Turnover 2,176,960 146,821 978,774 41,067 3,343,622 --------- ------- ------- ------- Segment results (654,958) (21,696) 368,668 (23,746) (331,732) --------- ------- ------- ------- Unallocated expense (see note below) (62,209) --------- Operating loss (393,941) ========= 2003 Traffic revenues - Passenger 1,926,174 52,142 521,870 35,056 2,535,242 - Cargo and mail 79,903 5,952 120,931 713 207,499 --------- ------- ------- ------- --------- 2,006,077 58,094 642,801 35,769 2,742,741 Other operating revenues 12,290 1,916 21,205 1,177 36,588 --------- ------- ------- ------- --------- Turnover 2,018,367 60,010 664,006 36,946 2,779,329 --------- ------- ------- ------- --------- Segment results (338,576) (16,792) 186,271 (11,261) (180,358) --------- ------- ------- -------
II-39 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Unallocated expense (see note below) (564,461) --------- Operating loss (744,819) ========= 2004 Traffic revenues - Passenger 2,417,771 68,415 985,138 53,903 3,525,227 - Cargo and mail 76,590 7,564 121,641 2,833 208,628 --------- ------ --------- ------- --------- 2,494,361 75,979 1,106,779 56,736 3,733,855 Other operating revenues 30,204 432 6,300 323 37,259 --------- ------ --------- ------- --------- Turnover 2,524,565 76,411 1,113,079 57,059 3,771,114 --------- ------ --------- ------- --------- Segment results (183,774) 10,457 490,803 (27,102) 290,384 --------- ------ --------- ------- Unallocated income (see note below) 81,444 --------- Operating profit 371,828 =========
Unallocated income and expenses represent revaluation surplus/(deficit) of fixed assets. The major revenue-earning assets of the Aviation Businesses are its aircraft fleet, all of which are registered in the PRC. Since the aircraft fleet of the Aviation Businesses is deployed flexibly across its route network, there is no suitable basis of allocating such assets and the related liabilities to geographical segments and hence segment assets and capital expenditure by segment has not been presented. 32 RELATED PARTY TRANSACTIONS (a) Balances with related companies (i) Amounts due from/to related companies As at 31 December 2002, 2003 and 2004, amounts due from/to related companies mainly included the following:- CEA Holding, ultimate holding company - Amount due to CEA Holding of RMB3,633,003,000, RMB3,683,921,000 and RMB3,682,966,000 as at 31 December 2002, 2003 and 2004 respectively, mainly II-40 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST represents advance from CEA Holding for settlement of Aviation Businesses' bank loans, is unsecured, interest free with no fixed terms of repayment. CEA, a fellow subsidiary - Amount due from CEA of RMB1,510,000, RMB217,680,000 and RMB 118,433,000 as at 31 December 2002, 2003 and 2004 respectively mainly represents receivable for the uplift of "781 logo" tickets sold by CEA on behalf of the Aviation Businesses and unsettled aircraft operating lease rental income. The balance is unsecured, interest free and has no fixed terms of repayment. CEA Jiangsu, a fellow subsidiary - Amounts of Nil, RMB 15,535,000 and RMB 44,370,000 due to CEA Jiangsu as at 31 December 2002, 2003 and 2004 respectively comprise aircraft operating lease rental income. EAGF, a fellow subsidiary - Short-term financing from EAGF of RMB200,000,000, RMB450,000,000 and RMB175,500,000 as at 31 December 2002, 2003 and 2004 is unsecured, interest bearing at rates ranging from 4.78% to 5.04% per annum, zero to 5.72% per annum, and 3.98% to 4.78% per annum for the year ended 31 December 2002, 2003 and 2004 respectively, and repayable within one year. Zhuhai CNW Hotel Company Ltd ("Zhuhai Hotel"), Xi'an Northwest Aviation Centre Ltd ("Aviation Centre") and CNWA (Hong Kong) Holidays Limited ("CNWA Holidays"), subsidiaries - Advances to Zhuhai Hotel of RMB46,785,000, RMB50,734,000 and RMB64,425,000, Aviation Centre of RMB63,817,000, RMB64,079,000 and RMB64,770,000, and CNWA Holidays of RMB2,267,000, RMB57,437,000 and Nil, as at 31 December 2002, 2003 and 2004 respectively, are unsecured, interest free and have no fixed terms of repayment. (ii) Short-term deposits with a related company II-41 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST EAGF, a fellow subsidiary - Short-term deposits of RMB4,095,000, RMB83,983,000 and RMB89,995,000 as at 31 December 2002, 2003 and 2004 respectively are placed with EAGF. The short-term deposits yield interest at an average rate of 0.72% for the years ended 31 December 2002, 2003 and 2004. (b) Guarantee by the holding company Short-term bank loans of RMB497,000,000 of the Aviation Businesses as at 31 December 2004 are guaranteed by CEA Holding. (c) Related party transactions Except as disclosed elsewhere in the Financial Information, the Aviation Businesses had the following material transactions with its related parties during the Relevant Periods which were carried out in the normal course of business: (i) Lease arrangement with CEA (1) Lease aircraft from CEA During the year ended 31 December 2004, CEA entered into operating lease agreements with two third-party lessors to lease six A320 aircraft on behalf of the Aviation Businesses. These aircraft were operated by the Aviation Businesses from the effective date of the relevant lease to the date of agreement being modified (refer below for details). No agreements were entered into between CEA and the Aviation Businesses regarding the arrangement, nor written consents obtained from the lessors for the operation of the six A320 by the Aviation Businesses. Under the lease arrangement with the third-party lessors, CEA is liable to the lessors for all obligations under the lease agreement. The Aviation Businesses entered into agreements in December 2004 and April 2005 with the third-party lessors, CEA, and the relevant leasing company to modify the original lease agreement (the "Novation and Amendment Agreements") to completely relieve CEA of the lease obligations for the lease arrangements. From the inception of the lease to the effective date of the Novation and Amendment Agreements, the Aviation Businesses paid the same amount to CEA that CEA paid to the third-party lessors for use of the six A320 aircraft. II-42 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Under the Novation and Amendment Agreements, CEA was relieved from all obligations related to the original lease arrangements from the inception of the lease and the Aviation Businesses will become the sole lessee to the amended lease agreements. During 2004, prior to the execution of the Novation and Amendment Agreements, the Aviation Businesses recognised rental expense of RMB83,241,000 to CEA as related to the aircraft operating leases. (2) Lease aircraft to CEA During the years ended 31 December 2003 and 2004, the Aviation Businesses entered into certain lease arrangement to lease 5 and 8 aircraft respectively to CEA and its subsidiary to operate on certain of CEA's air routes. Lease revenues for lease arrangements to CEA amounted to RMB92,466,000 and RMB435,981,000 for the years ended 31 December 2003 and 2004, respectively. (3) Rescission of lease arrangements with CEA Of the lease revenues of RMB 435,981,000 for the year ended 31 December 2004 as described in note (ii) above, RMB 236,793,000 is related to the lease arrangements of the Aviation Businesses to lease three A310 aircraft and three Bae146 aircraft (collectively, the "Leased Aircraft") to CEA and its subsidiary in 2004 which had not been properly authorized and approved in advance by the Board of Directors of CEA. As such lease arrangements were not properly approved in advance, the Board of Directors of CEA resolved in August and December 2004 to terminate lease arrangements, and agreement was reached between the Aviation Businesses and CEA to terminate such arrangements. In connection with the termination of the lease arrangements, the Aviation Businesses and CEA agreed to retroactively rescind the transactions from the inception of the lease arrangements as permitted under PRC laws. The impact of the retroactive rescission of these lease arrangements was an aggregate settlement to CEA in the amount of RMB133,029,000 (the "Settlement Amount"), which represents the operating losses incurred by CEA on the operation of the Leased Aircraft during 2004. The Settlement Amount, effected through a waiver of part of the inter-company receivable account of the Aviation Businesses with CEA, was recognised as other operating expense for the year ended 31 December 2004. II-43 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST (ii) In addition to the transaction disclosed above, Aviation Businesses had the following transactions, with its related parties during the year ended 31 December 2002, 2003 and 2004:
REVENUE/(EXPENSES, PAYMENTS OR PURCHASE CONSIDERATION) YEAR ENDED 31 DECEMBER -------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 NATURE OF TRANSACTION RELATED PARTY With CEA Holding or companies directly or Indirectly held by CEA Holding:- Sourcing of food and beverages Shanghai Eastern Air (3,259) (12,408) (16,596) Catering Co. Ltd. Commission expenses on air CEA - (51,667) (93,062) tickets sold on behalf of Aviation Businesses at rates ranging from 3% to 9% of value of tickets sold Commission income on CEA - 17,776 14,181 carriage service provided by other airline with air tickets sold by Aviation Businesses at rates ranging from 3% to 9% of value to tickets sold Interest expense on EAGF (31) (8,296) (14,594) short-term loan (Note 6) Interest income on short-term EAGF 1,875 6,411 1,336 deposits (Note 6) Purchase of raw materials CEA - (1,067) - Eastern Aviation Import - (2,160) (4,426) & Export Co., Ltd. Repairs and maintenance CEA - - 9,535 income receivable for ground service facilities
II-44 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Flight training expense Shanghai Eastern - (2,541) (1,727) Flight Training Co Ltd. With entities directly held by CEA Northwest but excluded from Aviation Businesses:- Sourcing of food and Xi'an Air Catering (13,487) (7,416) (15,897) beverages Co., Ltd
Other related party arrangements with CEA In addition to the related party transactions disclosed above, the Aviation Businesses also have other non-monetary arrangements with CEA as follows: - Air routes - In the PRC, air routes are assigned by CAAC. CEA has permitted the Aviation Businesses to use some of the air routes allocated to CEA by CAAC during the year of 2004 at no charge as CEA did not have sufficient capacity to fully utilise those air routes. - Inter-airline billing code - As with all other airlines in the PRC, CEA pays a processing fee to CAAC for use of the ticket settlement system based on the volume of the tickets processed. At the direction of CAAC, CEA has permitted the Aviation Businesses to use CEA's unique inter-airline billing code ("781") at no incremental charge other than amounts paid to CAAC to facilitate ticket settlement between the airlines. CEA did not charge the Aviation Businesses any internal administrative cost for ticket handling and processing. Management of the Aviation Businesses is of the opinion that, except for the Settlement Amount in connection with the rescission of the lease arrangements with CEA as disclosed in Note 32(c)(i), the above transactions with related parties were entered into on normal commercial terms or in accordance with the relevant government regulations governing such transactions. In accordance with a specific exemption in IAS24, "Related Party Disclosure", the Aviation Businesses does not accumulate or disclose transactions with other state-owned enterprises as related party transactions. 33 FINANCIAL RISK MANAGEMENT II-45 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST Financial assets of the Aviation Businesses mainly include short-term deposit with a related company, cash and bank balances, amounts due from related companies, trade receivables, other receivables and deposits, long-term receivables and deposits. Financial liabilities of the Aviation Businesses include bank and other loans, obligations under finance leases, amounts due to related companies, trade and notes payables and other payables. (a) Business risk The operations of the air transportation industry are substantially influenced by global political and economic development. Accidents, wars, natural disasters, etc. may have material impact on the Aviation Businesses or the industry as a whole. In addition, the Aviation Businesses conducts its principal operations in the PRC and accordingly is subject to special consideration and significant risks not typically associated with companies in the United States of America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, competition and influence of CAAC in the PRC civil aviation industry. (b) Price risk The Aviation Businesses' results of operations may be significantly affected by the fluctuation of the fuel prices which is a major expense category. While the international fuel prices are determined by worldwide market demand and supply, domestic fuel prices are regulated by CAAC. (c) Interest rate risk The Aviation Businesses has significant bank borrowings and is exposed to risk on variability in the cashflow arising from changes in market interest rates. The interest rates and terms of repayment of loans made to the Aviation Businesses are disclosed in Notes 21 and 22. (d) Credit risk The Aviation Businesses has no significant concentrations of credit risk. The Aviation Businesses has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. The Aviation Businesses also receives deposit from customers and counter-parties, where appropriate, if they require credit. A major portion of sales is conducted II-46 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST through sales agents and majority of these agents is connected to various settlement plans and/or clearing systems which have tight requirements on credit standing of these agents (i) Deposit with a fellow subsidiary and cash and bank balances Substantially all the Aviation Businesses' cash and bank balances are placed with a number of international and PRC banks and a related company, EAGF. Details of deposits placed with EAGF have been disclosed in Note 32(a)(ii). (ii) Trade receivables These are mainly tickets sales receivable from sales agents and receivables related to uplifts by the Aviation Businesses on behalf of other carriers which are spread among numerous third parties. (iii) Other receivables and deposits These are spread among numerous third parties. (iv) Amounts due from or to the related companies These balances are disclosed in Note 32(a)(i). (e) Liquidity risk The Aviation Businesses' primary cash requirements have been for additions of and upgrades on aircraft and flight equipment and payments on related debts. The Aviation Businesses finances its working capital requirements through a combination of funds generated from operations and short-term bank loans. The Aviation Businesses generally acquires aircraft through long-term finance leases. The Aviation Businesses generally operates with a working capital deficit. As at 31 December 2002, 2003 and 2004, the Aviation Businesses' net current liabilities amounted to RMB5,139 million, RMB5,663 million and RMB5,743 million respectively. For the years ended 31 December 2002, 2003 and 2004, the Aviation Businesses recorded net cash inflow from operating activities of RMB162 million, outflow of RMB192 million and inflow of RMB1,023 million respectively. Net cash inflow from investing activities of RMB17 million, outflow of RMB106 II-47 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST million and RMB110 million were recorded for the years ended 31 December 2002, 2003 and 2004 respectively. Net cash outflow from financing activities of RMB167 million, inflow of RMB494 million and outflow of RMB882 million were recorded for the years ended 31 December 2002, 2003 and 2004 respectively. Consequently, an increase in cash and cash equivalent of RMB13 million, RMB196 million and RMB31 million were recorded respectively for the years ended 31 December 2002, 2003 and 2004. Notwithstanding the Aviation Businesses having net current liabilities as at 31 December 2004, management of CEA Northwest believes that adequate financial support from CEA Holding up to the date of completion of the Proposed Acquisition and from the Company thereafter will be available which enable the Aviation Businesses to operate on a going concern basis. In addition, upon completion of the Proposed Acquisition, CEA Holding will assume a significant portion of the net liabilities of the Aviation Businesses and, accordingly, the net capital deficiency of the Aviation Businesses will decrease substantially. (f) Foreign currency risk The Aviation Businesses' finance lease obligations as well as certain bank and other loans are denominated in US dollars, Japanese Yen and certain expenses of the Aviation Businesses are denominated in currencies other than RMB. The Aviation Businesses generate foreign currency revenues from ticket sales made in overseas offices and have the ability to obtain financing in foreign currencies to meet its foreign currency liabilities repayable within one year. (g) Fair value The carrying amounts and estimated fair value of the Aviation Businesses' significant financial assets and liabilities at the balance sheet dates are set out as follows:
31 DECEMBER ---------------------------------------------------------------------------- 2002 2003 2004 Carrying Carrying Carrying amount Fair value Amount Fair value amount Fair value RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Deposits for aircraft under operating leases 258,299 255,923 251,918 250,425 251,055 249,929 Long-term bank deposits 343,243 402,643 405,232 449,058 444,355 459,176 Obligations under finance leases 3,329,920 3,472,019 3,084,955 3,134,840 2,734,330 2,796,518 Other loans for aircraft leases 265,243 322,962 199,917 227,721 118,674 126,542
II-48 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST The fair value of the long-term bank deposits, obligations under finance leases and other loans for aircraft lease are estimated by applying a discounted cashflow approach using current market interest rates for similar indebtedness/investment. The fair value of cash and bank balances, trade receivables, other receivables and deposits, amounts due from and to related companies, trade payables, notes payable, other payables and short-term bank loans are not materially different from their carrying amounts because of the short maturities of these instruments. Fair value estimates are made at specific point in time and are based on relevant market information. This estimate is subjective in nature and involves uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in valuation methods and assumptions could significantly affect the estimates. 34 ULTIMATE HOLDING COMPANY CEA Holding, a company established in the PRC, is being regarded as the immediate holding and ultimate holding company of the Aviation Businesses. 35 POST BALANCE SHEET DATE EVENTS On 12 May 2005, CEA Northwest, CEA Holding, the Company and CEA Yunnan, a fellow subsidiary of CEA Northwest, entered into the Acquisition Agreement pursuant to which, inter-alia, certain assets and liabilities relating to the Aviation Businesses are to be acquired by the Company subject to the terms and conditions stipulated therein. On the same date and subject to the completion of the Acquisition Agreement, the Company has entered into various agreements with CEA Holding Group to accommodate the anticipated expansion in the business operations of the Company and its subsidiaries following the completion of the Proposed Acquisition. These include property leasing agreement, financial services agreement, import and export agency agreement, maintenance services agreement, catering services agreements, sales agency services agreements and advertising services agreement. Detailed terms and pricing of these agreements have been set out in Section 3 "Continuing Connected Transactions" under heading "Letter from the Board" of the Circular. Following completion of the Proposed Acquisition, the Aviation Businesses will continue to occupy the properties under the II-49 APPENDIX II ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA NORTHWEST respective leasing agreements and receive services from CEA Holding Group according to the terms of these agreements. 36 SUBSEQUENT FINANCIAL STATEMENTS No audited financial statements have been prepared for the Aviation Businesses in respect of any period subsequent to 31 December 2004. In addition, no dividend or distribution has been declared, made or paid by Aviation Businesses in respect of any period subsequent to 31 December 2004. Yours faithfully PRICEWATERHOUSECOOPERS Certified Public Accountants Hong Kong II-50 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN The following is the text of a report dated 19 May 2005 made by the independent reporting accountants, PricewaterhouseCoopers, Certified Public Accountants, for the purpose of incorporation in this circular: [PRICEWATERHOUSECOOPERS LOGO] [CHINESE CHARACTER] PRICEWATERHOUSECOOPERS 22nd Floor Prince's Building Central Hong Kong 19 May 2005 The Directors China Eastern Airlines Corporation Limite Dear Sirs, We set out below our report on the combined balance sheets of the airlines and airlines related operations (the "Aviation Businesses") of China Eastern Air Yunnan Company and its subsidiaries ("CEA Yunnan") under Sections I to V below, presented as described in Note 1 under Section V, as at 31 December 2002, 2003 and 2004 and the related combined statements of income, cash flows and changes in owner's equity for the years then ended (the "Financial Information"). The Financial Information has been prepared for inclusion in the circular of China Eastern Airlines Corporation Limited (the "Company" or "CEA") dated 19 May 2005 (the "Circular"). CEA Yunnan, formerly known as Yunnan Airlines, was established in the People's Republic of China (the "PRC") as a limited liability company on 28 July 1992 and is a wholly owned subsidiary of China Eastern Air Holding Company ("CEA Holding"), the ultimate holding company of CEA. The Aviation Businesses are principally engaged in the operation of civil aviation, air cargo, postal delivery, luggage transportation, and other extended transportation services. Pursuant to the acquisition agreement (the "Acquisition Agreement") dated 12 May 2005 between CEA Holding, CEA, China Eastern Air Northwest Company ("CEA Northwest") and CEA Yunnan, which is described more fully in the section headed "The Acquisition Agreement" in the letter from the Board of the Company contained in the Circular, the Company is to acquire the III-1 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Aviation Businesses of CEA Yunnan together with the related assets and liabilities (the "Proposed Acquisition") except for certain assets and liabilities as explained in Note 1 under Section V below. China Eastern Air Yunnan Company and its subsidiaries have adopted 31 December as its financial year end date. There is no requirement for the Aviation Businesses of CEA Yunnan to prepare annual financial statements for each of the three years ended 31 December 2004. The Financial Information has been prepared by management of the Aviation Businesses based on management accounts of the Aviation Businesses of CEA Yunnan prepared for the purpose of this report, and on the basis set out in Note 1 under Section V below, to conform with International Financial Reporting Standards ("IFRS"). As more fully explained in Note 1 under Section V, the Financial Information shows the assets and liabilities of the Aviation Businesses of CEA Yunnan as at 31 December 2002, 2003 and 2004 and the related results for the years ended for the purpose of the proposed acquisition, and does not purport to represent the results or financial position of the Aviation Businesses of CEA Yunnan if they were separate operating entities. For the purpose of this report, we have examined the Financial Information and carried out independent audit procedures and such additional procedures as are necessary in accordance with the Auditing Guideline "Prospectuses and the Reporting Accountant" issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA"). Management of the Aviation Businesses of CEA Yunnan is responsible for preparing the Financial Information which gives a true and fair view. In preparing the Financial Information, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion. In our opinion, the Financial Information, for the purpose of this report, and prepared on the basis set out in Note 1 under Section V below, gives a true and fair view of the combined financial position of the Aviation Businesses of CEA Yunnan as at 31 December 2002, 2003 and 2004, and of the combined results and cash flows for the years then ended. I COMBINED INCOME STATEMENTS YEAR ENDED 31 DECEMBER 2002, 2003 AND 2004 III-2 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN
YEAR ENDED 31 DECEMBER -------------------------------------------- NOTE 2002 2003 2004 RMB'000 RMB'000 RMB'000 Traffic revenues Passenger 2,335,874 2,298,105 3,031,232 Cargo and mail 131,529 112,220 120,575 Other operating revenues 39,439 38,223 38,143 Turnover 3, 30 2,506,842 2,448,548 3,189,950 Other operating income 4 - 27,726 276,522 Operating expenses Wages, salaries and benefits 5 (262,855) (306,342) (406,998) Take-off and landing charges (373,133) (385,581) (447,643) Aircraft fuel (546,037) (567,087) (819,791) Food and beverages (119,108) (87,917) (99,107) Aircraft depreciation and operating leases (439,504) (438,677) (452,200) Other depreciation and operating leases (43,682) (44,441) (59,942) Aircraft maintenance (252,543) (256,428) (453,391) Commissions (70,212) (70,259) (100,683) Office and administration (98,281) (104,720) (125,347) Revaluation (deficit)/surplus of fixed assets 11 (294,912) (161,192) 67,737 Other 6 (190,800) (196,111) (422,028) ---------- ---------- ---------- Total operating expenses (2,691,067) (2,618,755) (3,319,393) ---------- ---------- ---------- Operating (loss)/profit (184,225) (142,481) 147,079 Finance costs, net 7 (173,757) (141,357) (101,771) Share of results before tax of an associate 14 1,080 1,302 1,206 ---------- ---------- ---------- (Loss)/profit before taxation 8 (356,902) (282,536) 46,514 Taxation 9 95,083 92,920 (15,504) ---------- ---------- ---------- (Loss)/profit attributable to owner (261,819) (189,616) 31,010 ========== ========== ==========
II COMBINED BALANCE SHEETS AS AT 31 DECEMBER 2002, 2003 AND 2004
31 DECEMBER --------------------------------------------- NOTE 2002 2003 2004 RMB'000 RMB'000 RMB'000 Non-current assets Fixed assets 11 4,894,059 4,523,089 4,184,414 Construction in progress 12 234,007 30,951 57,732 Lease prepayments 13 33,839 32,884 31,930 Investment in an associate 14 3,734 4,281 4,631
III-3 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Other long-term receivables 15 7,528 7,228 39,043 ---------- ---------- ---------- 5,173,167 4,598,433 4,317,750 ---------- ---------- ---------- Current assets Flight equipment spare parts less allowance for obsolescence (2002: RMB23,689,000; 2003: RMB30,285,000; 2004: RMB46,869,000) 113,497 109,193 87,618 Trade receivables less allowance for doubtful accounts (2002: RMB44,946,000; 2003: RMB37,709,000; 2004: RMB39,217,000) 16 149,120 103,566 51,459 Derivative assets 33 - 11,266 - Prepayments and other receivables 17 187,736 253,084 158,941 Cash and cash equivalents 18 444,697 504,369 436,815 ---------- ---------- ---------- 895,050 981,478 734,833 ---------- ---------- ---------- Current liabilities Trade payables 19 93,522 138,474 136,214 Sales in advance of carriage 35,572 1,283 534 Other payables and accrued expenses 20 812,764 892,402 999,737 Current portion of long-term bank loans 21 370,091 325,657 279,324 Tax payable - 6,631 79,104 Short-term bank loans 22 607,741 1,053,197 952,557 1,919,690 2,417,644 2,447,470 ---------- ---------- ---------- Net current liabilities (1,024,640) (1,436,166) (1,712,637) ========== ========== ========== Total assets less current liabilities 4,148,527 3,162,267 2,605,113 ---------- ---------- ---------- Non-current liabilities Accrued aircraft overhaul expenses 23 55,887 49,174 14,394 Post-retirement benefit liabilities 24 200,880 215,355 234,140 Deferred tax liabilities 27 290,306 179,765 174,183 Derivative liabilities 33 - - 741 Long-term bank loans 21 2,037,971 1,365,261 776,090 Provision for staff housing allowances 25(b) 28,700 33,181 37,440 Deferred income 26 31,850 31,850 31,850 2,645,594 1,874,586 1,268,838 ---------- ---------- ---------- Net assets 1,502,933 1,287,681 1,336,275 ========== ========== ========== Representing: Owner's equity 1,502,933 1,287,681 1,336,275 ========== ========== ==========
III-4 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN III COMBINED STATEMENTS OF CHANGES IN OWNER'S EQUITY YEAR ENDED 31 DECEMBER 2002, 2003 AND 2004
TOTAL RMB'000 Balance at 1 January 2002 1,774,182 Loss attributable to owner (261,819) Revaluation deficit of fixed assets (Note 11) (136) Distributions to owner (Note 1) (9,294) --------- Balance at 31 December 2002 1,502,933 ========= Balance at 1 January 2003 1,502,933 Loss attributable to owner (189,616) Revaluation deficit of fixed assets (Note 11) (21,485) Distributions to owner (Note 1) (4,151) --------- Balance at 31 December 2003 1,287,681 ========= Balance at 1 January 2004 1,287,681 Profit attributable to owner 31,010 Revaluation surplus of fixed assets (Note 11) 128,285 Distributions to owner (Note 1) (110,701) --------- Balance at 31 December 2004 1,336,275 =========
IV COMBINED STATEMENTS OF CASH FLOWS YEAR ENDED 31 DECEMBER 2002, 2003 AND 2004
YEAR ENDED 31 DECEMBER ---------------------------------- NOTE 2002 2003 2004 RMB'000 RMB'000 RMB'000 CASH FLOWS FROM OPERATING ACTIVITIES (LOSS)/PROFIT ATTRIBUTABLE TO OWNER (261,819) (189,616) 31,010 ADJUSTMENTS TO RECONCILE (LOSS)/PROFIT ATTRIBUTABLE TO OWNER TO NET CASH INFLOW FROM OPERATING ACTIVITIES: Depreciation of fixed assets 408,705 420,948 433,467 Losses/(gains) on disposals of fixed assets 72 (699) 1,655 Amortisation of lease prepayments 954 955 954 Provision for post-retirement benefits 17,601 16,650 18,785 Provision of staff housing allowance 4,900 4,481 4,259
III-5 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Revaluation deficit/(surplus) 294,912 161,192 (67,737) Interest income (2,991) (3,049) (3,558) Fair value gain on interest rate swap - (11,266) (13,260) Interest expenses 177,172 155,989 118,688 Share of results before tax of an associate (1,080) (1,302) (1,206) Impairment of construction in progress - 4,359 - Taxation (95,083) (92,920) 15,504 Foreign exchange gains (108) (278) (104) Other long-term receivable 227 300 (31,815) Long-term portion of accrued aircraft overhaul expenses (19,726) (6,713) (34,780) MOVEMENTS IN: Flight equipment spare parts 29,521 4,304 21,575 Trade receivables, prepayments and other receivables (150,736) (35,782) 170,247 Trade payables, other payables and accrued expenses 542,165 (177,585) 537,344 Sales in advance of carriage (21,903) (34,289) (749) ---------- ---------- --------- 1,184,602 405,295 1,169,269 ---------- ---------- --------- CASH GENERATED FROM OPERATIONS 922,783 215,679 1,200,279 Interest paid (177,172) (155,989) (118,688) Income tax paid (816) (46) (11,431) ========== ========== ========= NET CASH INFLOW FROM OPERATING ACTIVITIES 744,795 59,644 1,070,160 ---------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions of aircraft and flight equipment (593,207) (13,767) (89,031) Proceeds on disposals of aircraft, flight equipment, other fixed assets and equipment 32,733 2,536 3,571 Additions of buildings, other fixed assets and equipment (18,095) (9,486) (30,943) Additions of construction in progress (38,768) (7,135) (29,145) Interest received 2,991 3,049 28,825 Dividend received from an associate - 392 490 Receipt of government grant 31,850 - - ---------- ---------- --------- NET CASH USED IN INVESTING ACTIVITIES (582,496) (24,411) (116,233) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term bank loans 607,741 1,662,200 1,200,800 Repayments of short-term bank loans (277,493) (1,216,744) (1,301,440) Proceeds from long-term bank loans 560,235 360,000 - Repayments of long-term bank loans (1,029,871) (1,077,144) (635,504) Proceeds on advance from a related company - 300,000 -
III-6 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Repayments of an advance to a related company - - (300,000) (Distributions to)/contribution from owner (9,294) (4,151) 14,559 -------- ------- --------- NET CASH (OUTFLOW)/INFLOW FROM FINANCING ACTIVITIES (148,682) 24,161 (1,021,585) -------- ------- --------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 13,617 59,394 (67,658) CASH AND CASH EQUIVALENTS AT 1 JANUARY 430,972 444,697 504,369 EXCHANGE ADJUSTMENT 108 278 104 -------- ------- --------- CASH AND CASH EQUIVALENTS AT 31 DECEMBER 18 444,697 504,369 436,815 ======== ======= =========
V NOTES TO THE FINANCIAL INFORMATION 1 BASIS OF PRESENTATION The Financial Information for the three years ended 31 December 2002, 2003 and 2004 (the "Relevant Periods") presents the results of the Aviation Businesses as if the Aviation Businesses had been in operation on a stand alone basis as of the earliest date presented and had been in existence throughout the Relevant Periods. The non-airline related operations (the "Non-Aviation Businesses") of CEA Yunnan and its subsidiaries, which having been managed separately from the Aviation Businesses and mainly consisting of hotels, property management and travel agency, are not acquired by the Company and therefore are not included in the Financial Information. The Financial Information is prepared solely for the purpose of the Proposed Acquisition and (i) does not purport to represent what the operating results of the Aviation Businesses would have been if it was in fact operated on a stand alone basis and (ii) should not be construed as indicative of the financial performance of the Aviation Businesses in any future period. Pursuant to the Acquisition Agreement, the Company does not assume any contingent liabilities of the Aviation Businesses which exist prior to the date of completion of the Proposed Acquisition. In addition, certain assets and liabilities (collectively the "Non-Acquired Items") which were historically associated with the Aviation Businesses are not acquired by the Company. As these Non-Acquired Items are an integral part of the Aviation Businesses, the Financial Information for the Relevant Periods includes these Non-Acquired Items and their results of operations on the same basis as those assets and liabilities to be acquired by the Company. As at 31 December 2004, the Non-Acquired Items consist of the following: III-7 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN
RMB'000 ASSETS - Buildings 453,982 - Construction in progress 52,051 - Lease prepayments 31,930 - Trade and other receivables 21,880 --------- 559,843 --------- LIABILITIES - Trade and other payables (143,592) - Deferred tax liabilities (174,183) --------- (317,775) ========= Net assets not to be acquired 242,068 =========
The Company has entered into certain lease agreements to lease certain of the Non-Acquired Items (mainly buildings and lease prepayments) from CEA Holding and its affiliates (the "CEA Holding Group") after the Proposed Acquisition (Note 35). Movements of CEA Yunnan's interests in Non-Aviation Businesses during the Relevant Periods are included in the combined statements of changes in owner's equity as distributions to or contributions from owner. Distributions to owner comprise fixed assets and construction in progress and additional investments in subsidiaries and associates within the Non-Aviation Businesses which are not part of the Aviation Businesses. Contributions from owner represent the proceeds from disposal of investments in subsidiaries and associates within the Non-Aviation Businesses, retained in Aviation Businesses. Notwithstanding the Aviation Businesses of CEA Yunnan having net current liabilities as at 31 December 2004, the Financial Information has been prepared on a going concern basis on the assumption that the Aviation Businesses of CEA Yunnan has obtained adequate financial support from CEA Holding up to the date of completion of the Proposed Acquisition and from the Company thereafter. 2 PRINCIPAL ACCOUNTING POLICIES (a) Basis of preparation The Financial Information has been prepared in accordance with International Financial Reporting Standards ("IFRS"), including International Accounting Standards ("IAS") and Interpretations adopted by the International Accounting Standards Board. III-8 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN No financial statements had previously been prepared for the Aviation Businesses of CEA Yunnan because there are no such statutory or other requirements. The Financial Information for the Aviation Businesses of CEA Yunnan is the first set of financial information prepared by management in accordance with IFRS, including IFRS 1 "First-time Adoption of IFRS". The Financial Information has been prepared under historical cost convention, as modified by the revaluation of fixed assets and derivative financial instruments. The preparation of the Financial Information in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of each balance sheet date and the reported amounts of revenues and expenses for the Relevant Periods. Although these estimates are based on management's best knowledge of current event and actions, actual results ultimately may differ from those estimates. (b) Group accounting (i) Subsidiaries Subsidiaries, which are those entities in which the Aviation Businesses have an interest of more than one half of the voting rights or otherwise have power to govern the financial and operating policies, are consolidated. Subsidiaries are included from the date on which control is transferred to the Aviation Businesses and are no longer included from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. See Note 2(l) for the accounting policy on goodwill. Intercompany transactions, balances and unrealised gains on transactions among companies of the Aviation Businesses are eliminated. Where necessary, accounting policies of subsidiaries have been changed to ensure the consistency with the policies adopted by the Aviation Businesses. Minority interests represent the interests of outside members in the operating results and net assets of subsidiaries. III-9 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN (ii) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Aviation Businesses' share of the post-acquisition profits or losses of associates is recognised in the combined income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Aviation Businesses has between 20% to 50% of the voting rights, or over which the Aviation Businesses has significant influence, but which it does not control. Unrealised gains on transactions between the Aviation Businesses and its associates are eliminated to the extent of their interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Aviation Businesses' investment in associates includes goodwill (net of accumulated amortisation) on acquisition. When the Aviation Businesses' share of losses in an associate equals or exceeds its interest in the associate, the Aviation Businesses does not recognise further losses, unless it has incurred obligations or payments on behalf of the associates. (c) Foreign currency translation The Aviation Businesses maintain their books and records in Renminbi ("RMB") which is the measurement currency of the Aviation Businesses. Transactions in foreign currencies are translated at the applicable rates of exchange prevailing at the dates of the transactions, quoted by the People's Bank of China. Monetary assets and liabilities in foreign currencies are translated to RMB at the rates prevailing at the balance sheet date as quoted by the People's Bank of China. Exchange differences are included in the combined income statement, except when deferred in equity as qualifying cashflow hedges. (d) Revenue recognition and sales in advance of carriage Passenger, cargo and mail revenues are recognised as traffic revenues when the transportation services are provided. The value of sold but unused tickets is included in the current liabilities as sales in advance of carriage. III-10 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Revenues from other operating businesses, including commission income, are recognised when services are rendered. Commission income includes amounts earned from other carriers in respect of sales made by the Aviation Businesses. Rental income from leasing aircraft under operating leases is recognised on a straight-line basis over the lease term. Prior to 1 April 2004, revenues are presented net of business tax and civil aviation infrastructure levies. Effective from 1 April 2004, in accordance with the related new policy promulgated by the PRC Government, civil aviation infrastructure levies are payable based on the traffic capacity of the airlines, and the levies are included in the operating expenses. Interest income is recognised using the effective interest method. (e) Segmental reporting In accordance with the Aviation Businesses' internal financial reporting, the Aviation Businesses has determined that business segments be presented as the primary reporting format and geographical as the secondary reporting format. In respect of the geographical segment, the analysis of turnover and operating profit by geographical segment is based on the following criteria: (i) Traffic revenue from domestic services within the PRC (excluding Hong Kong Special Administrative Region ("Hong Kong")) is attributed to the domestic operation. Traffic revenue from inbound and outbound services between the PRC and Hong Kong or overseas markets is attributed to the geographical area in which the relevant overseas origin or destination lies. (ii) Other operating revenues from ticket handling services and other miscellaneous services are attributed on the basis of where the services are performed. (f) Retirement benefits The Aviation Businesses participate in defined contribution retirement schemes regarding pension and medical benefit for employees organised by the municipal governments of respective III-11 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN provinces. The contributions to the schemes are charged to the combined income statements as and when incurred. In addition, the Aviation Businesses provide retirees with post-retirement benefits including retirement subsidies, medical subsidies and other welfare. The cost of providing the aforementioned post-retirement benefits under Aviation Businesses' defined benefit plans is actuarially determined and recognised over the employees' service period by using the projected unit credit method. Post-retirement benefit expenses recognised in the combined income statements include, if applicable, current service cost, interest cost amortised actuarial gains and losses, the effect of any curtailment or settlement and past service cost. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees' expected average remaining working lives. Past-service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period. (g) Maintenance and overhaul costs In respect of aircraft and engines under operating leases, the Aviation Businesses have the responsibility to fulfill certain return conditions under relevant leases. In order to fulfill these return conditions, major overhauls are required to be conducted on a regular basis. Accordingly, the present value of estimated costs of major overhauls for aircraft and engines under operating leases are accrued and charged to the combined income statement over the estimated period between overhauls using the ratios of actual flying hours/cycles and estimated flying hours/cycles between overhauls. The costs of major overhaul comprise mainly labour and materials. Differences between the estimated cost and the actual cost of the overhaul are included in the combined income statements in the period of overhaul. All other routine repairs and maintenance costs incurred in restoring such leased fixed assets to their normal working condition are charged to the combined income statements as and when incurred. III-12 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Improvements are capitalised and depreciated over their expected useful lives to the Aviation Businesses. (h) Government grant Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Aviation Businesses will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the combined income statement over the period necessary to match them with the costs they are intended to compensate. Government grants relating to the property, plant and equipment are included in non-current liabilities and are credited to the combined income statement on a straight-line basis over the estimated useful lives of the related assets. (i) Taxation The Aviation Businesses provide for taxation on the basis of the results for the Relevant Periods as adjusted for items which are not assessable or deductible for income tax purposes. Taxation of the Aviation Businesses is determined in accordance with the relevant tax rules and regulations applicable in the jurisdictions where the Aviation Businesses operate. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the combined financial statements. Deferred tax is measured using tax rates enacted, or substantially enacted at the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (j) Fixed assets (i) Fixed Assets are recognised initially at cost which comprises purchase price, costs transferred from construction in progress and any directly attributable costs of bringing the assets to the condition for their intended use. III-13 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Subsequent to the initial recognition, aircraft, engines and other flight equipment are stated at revalued amount less accumulated depreciation and accumulated impairment losses. Independent valuations are performed at least every five years or sooner if considered necessary by management. In the intervening years, management reviews the carrying values of the aircraft, engines and other flight equipment and adjustment is made where these are materially different from fair value. Increases in the carrying amount arising on revaluation are credited to the revaluation reserves. Decreases in valuation of aircraft, engines and other flight equipment are first offset against increases from earlier valuations of the same asset and are thereafter charged to the combined income statements. All other decreases in valuation are charged to the combined income statements. Any subsequent increases are credited to the combined income statements up to the amount previously charged. (ii) Depreciation of fixed assets is calculated on the straight-line method to write off the cost or revalued amount of each asset to their residual value over their estimated useful lives. The annual depreciation charges are calculated as follows:- Aircraft-CRJ - 15 years Aircraft-Others - 20 years Flight equipment - Engines-CRJ - 15 years - Engines-Others - 20 years - Other flight equipment-CRJ - 15 years - Other flight equipment-Others - 20 years Buildings - 8 to 35 years Other fixed assets and equipment - 6 to 15 years (iii) Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. When revalued assets are sold, the amounts included in revaluation reserves are transferred to retained earnings. (k) Construction in progress Construction in progress represents office buildings, various infrastructure projects under construction and plant and equipment pending installation. This includes the costs of construction and acquisition and interest capitalised. No depreciation is provided on construction in progress III-14 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN until the asset available for use, being when it is in the location and condition necessary for it to be capable of operating in the manner intended by the management. (l) Goodwill and negative goodwill (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Aviation Businesses' share of the net assets of the acquired subsidiary and associate at the date of acquisition. Goodwill arising from a business combination is presented as cost less accumulated amortisation and accumulated impairment losses. Amortisation is made using the straight-line method over its estimated useful life of five to fifteen years. Management determines the estimated useful life of goodwill based on its evaluation of the respective companies at the time of the acquisition, considering factors such as existing market share, potential growth and other factors inherent in the acquired companies. At each balance sheet date, the Aviation Businesses assess whether there is any indication of impairment. If such indications exist, an analysis is performed to assess whether the carrying amount of goodwill is fully recoverable. A write down is made if the carrying amount exceeds the recoverable amount. (ii) Negative goodwill Negative goodwill represents the excess of the fair value of the Aviation Businesses' share of the net assets acquired subsidiary or associate over the cost of acquisition. Negative goodwill is presented in the same balance sheet classifications as goodwill. To the extent that negative goodwill relates to expected future losses and expenses that are identified in the Aviation Businesses' plan for the acquisition and can be measured reliably, but which do not represent identifiable liabilities, that portion of negative goodwill is recognised as income when the future losses and expenses are recognised. Any remaining negative goodwill, not exceeding the fair value of the non-monetary assets acquired, is recognised in the income statement over the remaining weighted average useful life of those assets. Negative goodwill in excess of the fair value of those assets is recognised in the income statement immediately. III-15 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN The gain or loss on disposals of an entity includes the carrying amount of goodwill relating to the entity sold. (m) Lease prepayments Lease prepayments represent acquisition costs of land use rights less accumulated amortisation. Amortisation is provided over the lease period of land use rights on a straight-line basis. (n) Borrowing costs Interest attributable to funds used to finance the acquisition of new aircraft during the period of its construction and construction of major ground facilities is capitalised as an additional cost of the related asset. Interest is capitalised at the Aviation Businesses weighted average interest rate on borrowings or, where applicable, the interest rate related to specific borrowings during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are charged to combined income statements in the period in which they are incurred. (o) Impairment Fixed assets and other non-current assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset's net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. (p) Flight equipment spare parts Flight equipment spare parts are carried at weighted average cost less allowance for obsolescence. (q) Trade receivables III-16 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established if there is objective evidence that the Aviation Businesses will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the present value of expected cashflows, discounted at the effective interest rate. (r) Cash and cash equivalents Cash and short-term highly liquid investments, which are readily convertible into cash and have original maturities of three months or less at the date of acquisition, are classified as cash and cash equivalents. (s) Provisions Provisions are recognised when the Aviation Businesses have a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate of the amount can be made. Where the Aviation Businesses expect a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. (t) Leases (i) The Aviation Businesses are the lessees Leases of fixed assets where Aviation Businesses have substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to combined income statements over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using the straight-line method over their expected useful lives to residual values. III-17 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Leases of assets under which a significant portion of the lease risks and rewards of ownership are retained by the lessor are classified as operating leases. Lease payments made under operating leases are charged to the combined income statements on a straight-line basis over the period of the lease. (ii) The Aviation Businesses are the lessors Assets leased out under operating leases are included in fixed assets in balance sheets. They are depreciated over their expected useful lives on a basis consistent with similar property, plant and equipment. Rental income is recognised on a straight-line basis over the lease term. (u) Derivative financial instruments Derivative financial instruments are initially recognised in the balance sheet at cost and subsequently are remeasured at their fair value. The method of recognising the resulting gain or loss is dependent on the nature of the item being hedged. The Aviation Businesses designates certain derivatives as either (1) a hedge of the fair value of a recognised asset or liability (i.e. fair value hedge), or (2) a hedge of a forecasted transaction or of a firm commitment (i.e. cashflow hedge). Derivative financial instrument that does not qualify for hedge accounting is accounted for as trading instrument and any unrealised gain or loss, being changes in fair value of the derivative, is recognised in the combined income statement immediately. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective, are recorded in the combined income statement, along with any changes in the fair value of the hedged assets or liabilities that are attributable to the hedged risk. Derivative financial instrument that qualifies for hedge accounting and is designated as a specific hedge of the variability in cashflows of a highly probable forecast transaction, is accounted for as follows:- (i) the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. Where the forecasted transaction or firm commitment results in the recognition of an asset or a libility, the gains or losses previously deferred in equity are III-18 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN included in the initial measurement of the cost of the asset or liability. Otherwise, the cumulative gain or loss on the derivative financial instrument is removed from equity and recognised in the combined income statement in the same period during which the hedged forecast transaction affects net profit or loss. (ii) the ineffective part of any gain or loss is recognised in the combined income statement immediately. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the combined income statement when the committed or forecasted transaction ultimately occurs. When a committed or forecasted transaction is no longer expected to occur, the cumulative gain or loss that was recorded in equity is immediately transferred to the combined income statement. 3 REVENUES AND TURNOVER The Aviation Businesses are principally engaged in the provision of domestic, Hong Kong and international passenger, cargo and mail airline services. Turnover comprises:-
YEAR ENDED 31 DECEMBER ---------------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Gross revenues from airline and related services 2,716,447 2,511,547 3,294,797 Less: Business tax (note (a)) (81,188) (26,524) (104,847) Civil aviation infrastructure levies (note (b)) (128,417) (36,475) - --------- --------- --------- 2,506,842 2,448,548 3,189,950 ========= ========= =========
(a) Pursuant to various PRC business tax rules and regulations, Aviation Businesses are required to pay PRC business tax. Except for traffic revenues derived from inbound international and regional flights which are not subject to PRC business tax, Aviation Businesses' traffic revenues, commission income and ground service income are subject to PRC business tax levied at rates ranging from 3% to 5%. From 1 May 2003 to 31 December 2003, PRC business tax for all domestic, international and regional passenger traffic revenues of all the PRC airlines (including III-19 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN CEA Yunnan) were waived by the PRC Government, compensating for their losses on revenue due to the outbreak of Severe Acute Respiratory Syndrome ("SARS"). (b) Prior to 1 May 2003, the civil aviation infrastructure levies were paid to Civil Aviation Administration of China ("CAAC"), at rates of 5% on domestic and 2% on international or regional traffic revenues. From 1 May 2003 to 31 March 2004, civil aviation infrastructure levies on the traffic revenues were waived by CAAC, compensating for the airlines' losses on revenue due to the outbreak of SARS. Effective from 1 April 2004, in accordance with the related new policy promulgated by the PRC Government, civil aviation infrastructure levies are payable based on traffic capacity and the levies of RMB59,452,000 incurred for the year ended 31 December 2004 are included in the operating expenses. 4 OTHER OPERATING INCOME
YEAR ENDED 31 DECEMBER -------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Rental income from operating leases of aircraft (note (a)) - 27,726 86,341 Insurance compensation on crash of aircraft (Note 6) - - 190,181 ------- ------- ------- - 27,726 276,522 ======= ======= =======
(a) Amounts represent rental income from operating leases of three CRJ-200 aircraft to CEA from 1 October 2003 to 30 September 2004 (Note 31(b)). 5 WAGES, SALARIES AND BENEFITS
YEAR ENDED 31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Wages, salaries and allowances 229,974 271,327 367,602 Contributions under defined contribution
III-20 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN retirement schemes (Note 24(a)) 7,366 10,693 10,986 Post-retirement benefits (Note 24(b)(iii)) 20,615 19,841 24,151 Staff housing allowances (Note 25(b)) 4,900 4,481 4,259 ------- ------- ------- 262,855 306,342 406,998 ======= ======= ======= Average number of employees 2,508 3,014 3,394 ======= ======= =======
6. OTHER OPERATING EXPENSES Included in other operating expenses for the year ended 31 December 2004 are the following in connection with an aircraft crash accident: Impairment of aircraft (Note 11) 132,759 Provision for auxiliary costs 34,902 Provision for claims 19,020 ------- 186,681 =======
On 21 November 2004, an aircraft crashed in Baotou, China during the course of the flight. An investigation was conducted by the Chinese civil aviation authorities but the cause of the accident has yet to be released at the date of this report. The Aviation Businesses lost an aircraft and are exposed to claims or potential claims by the families of the deceased passengers and crew aboard. In addition, the aircraft fell on a park which led to further injuries or fatalities, damage to some properties and pollution of the lake inside the park. The Aviation Businesses are therefore exposed to third-party liability claims. Furthermore, auxiliary costs of RMB34,902,000 were incurred in connection with this accident up to 31 December 2004. A master insurance policy maintained by CAAC on behalf of the Aviation Businesses principally covers all of the above exposure. The Aviation Businesses received from the insurer a compensation for loss of aircraft amounted to RMB190,181,000 (US$23 million) before 31 December 2004 (Note 4). As confirmed by the insurer, claims by the families of the deceased passengers amounted to RMB 11,750,000 will be fully reimbursed by the insurer. Accordingly, such claims expenses and the corresponding compensation from insurer are offset against each other and the amount is therefore not reflected in other operating expenses shown above. Insurance claims receivable and a III-21 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN provision for claims of this amount are separately recorded in the combined balance sheet as at 31 December 2004 (Note 17 and 20). For the claims and potential claims by the families of the deceased crew aboard and the injured or decreased persons in the park, management of the Aviation Businesses estimates the amounts of provision by reference to the statutory obligations in PRC and believes that the provision of RMB 11,020,000 currently made in the combined financial statements is adequate. With regard to claims for compensation of damages to the properties and the lake, the amount of compensation is still under negotiation. Having taken the advice from the insurer on the estimated compensation necessary for full settlements of these claims, management makes a provision of RMB 8,000,000 and believes that such provision is adequate. While no receivable has been recognized for this expected reimbursement, management believe that it is probable these claims will be reimbursed by the insurer. 7 FINANCE COSTS, NET
YEAR ENDED 31 DECEMBER --------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Interest on bank loans wholly repayable within five years 177,172 155,989 118,688 Fair value gain on interest rate swap - (11,266) (13,260) Exchange gains, net (424) (317) (99) Interest income (2,991) (3,049) (3,558) ------- ------- ------- 173,757 141,357 101,771 ======= ======= =======
8 (LOSS)/PROFIT BEFORE TAXATION
YEAR ENDED 31 DECEMBER ----------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 (Loss)/profit before taxation is stated after charging:- Depreciation of fixed assets 408,705 420,948 433,467 Operating lease rentals - aircraft 67,648 55,418 72,631 - land and buildings 6,833 6,752 6,044 Loss/(gain) on disposals of fixed assets 72 (699) 1,655
III-22 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Impairment of aircraft (Note 6) - - 132,759 Amortisation of lease prepayments 954 955 954 Consumption of consumables 48,607 52,924 63,660 Allowances for obsolescence of flight equipment spare parts 5,896 6,596 17,538 Allowances for doubtful accounts 13,478 7,064 5,286 Auditors' remuneration 81 500 584 ====== ====== =======
9 TAXATION Taxation is (charged)/credited to the income statements as follows:-
YEAR ENDED 31 DECEMBER ----------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Provision for PRC income tax - current year (15,682) (6,677) (83,904) Deferred taxation (Note 27) 110,765 99,960 68,766 ------- ------- ------- 95,083 93,283 (15,138) Share of tax attributable to an associate - (366) (363) ------- ------- ------- 95,083 92,920 (15,504) ======= ====== =======
The Aviation Businesses operate international flights to certain overseas destinations. There was no material overseas taxation for the year as there exists double tax relief between PRC and the corresponding jurisdictions (including Hong Kong). The difference between the actual taxation charge in the combined income statements and the amounts which would result from applying the enacted tax rate to (loss)/profit before taxation can be reconciled as follows:-
2002 2003 2004 RMB'000 RMB'000 RMB'000 (Loss)/profit before taxation (356,902) (282,536) 46,514 -------- -------- ------- Tax credit/(charge) calculated at enacted tax rate of 33 % 117,778 93,237 (15,350) Adjustments:- Income not subject to tax - 243 245 Expenses not deductible for tax (22,695) (560) (399) -------- -------- ------- Tax credit / (charge) 95,083 92,920 (15,504) ======== ======== =======
III-23 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN 10 DIRECTORS' EMOLUMENTS AND INDIVIDUALS WITH HIGHEST EMOLUMENTS (a) Directors' emoluments No board of directors or similar corporate governance body was established by the Aviation Businesses of CEA Yunnan during the Relevant Periods. Accordingly, no directors' emoluments were paid during the Relevant Periods. (b) Individuals with highest emoluments Details of emoluments paid to the five highest paid individuals are as follows:
YEAR ENDED 31 DECEMBER ----------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Salaries, allowances and benefits in kind 1,663 1,933 2,678 Retirement benefits 29 36 39 ----- ----- ----- 1,692 1,969 2,717 ===== ===== =====
An analysis of emoluments paid to the five highest paid individuals by number of individuals and emolument ranges is as follows:
YEAR ENDED 31 DECEMBER -------------------------------------- 2002 2003 2004 RMB Nil - RMB1,060,000 (HK$1,000,000 equivalent) 5 5 5 === === ===
None of these employees received any inducements or compensation for loss of office, or waived any emoluments during the Relevant Periods. 11 FIXED ASSETS III-24 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN
AIRCRAFT OTHER FIXED AND FLIGHT ASSETS AND EQUIPMENT BUILDINGS EQUIPMENT TOTAL RMB'000 RMB'000 RMB'000 RMB'000 Cost or valuation At 1 January 2002 5,767,355 405,762 180,715 6,353,832 Transfer from construction in progress (Note 12) - 106,070 - 106,070 Additions 933,205 - 18,095 951,300 Disposals (448) (11,904) (22,144) (34,496) Revaluation deficit (295,115) - - (295,115) --------- ------- ------- --------- At 31 December 2002 6,404,997 499,928 176,666 7,081,591 --------- ------- ------- --------- Accumulated depreciation At 1 January 2002 1,652,007 41,523 86,540 1,780,070 Charge for the year 371,856 15,942 20,907 408,705 Disposals - (674) (569) (1,243) --------- ------- ------- --------- At 31 December 2002 2,023,863 56,791 106,878 2,187,532 ========= ======= ======= ========= Net book value At cost - 443,137 69,788 512,925 At valuation 4,381,134 - - 4,381,134 --------- ------- ------- --------- At 31 December 2002 4,381,134 443,137 69,788 4,894,059 ========= ======= ======= ========= Cost or valuation At 1 January 2003 6,404,997 499,928 176,666 7,081,591 Transfer from construction in progress (Note 12) - 205,832 - 205,832 Additions 30,641 361 9,125 40,127 Disposals (1,296) (1,392) (9,539) (12,227) Revaluation deficit (193,258) - - (193,258) --------- ------- ------- --------- At 31 December 2003 6,241,084 704,729 176,252 7,122,065 --------- ------- ------- --------- Accumulated depreciation At 1 January 2003 2,023,863 56,791 106,878 2,187,532 Charge for the year 383,259 26,574 11,115 420,948 Disposals (410) (349) (8,745) (9,504) --------- ------- ------- --------- At 31 December 2003 2,406,712 83,016 109,248 2,598,976 ========= ======= ======= ========= Net book value at At cost - 621,713 67,004 688,717 At valuation 3,834,372 - - 3,834,372 --------- ------- ------- --------- 31 December 2003 3,834,372 621,713 67,004 4,523,089 ========= ======= ======= ========= Cost or valuation At 1 January 2004 6,241,084 704,729 176,252 7,122,065 Transfer from construction in progress (Note 12) - 299 791 1,090 Additions 67,929 4,243 26,700 98,872 Disposals (2,825) (5,432) (15,070) (23,327) Impairment (Note 6) (153,319) - - (153,319) Distribution to owner (see note below) - (131,800) - (131,800) Revaluation surplus 259,206 - - 259,206 --------- ------- ------- --------- At 31 December 2004 6,412,075 572,039 188,673 7,172,787 --------- ------- ------- --------- Accumulated depreciation
III-25 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN At 1 January 2004 2,406,712 83,016 109,248 2,598,976 Charge for the year 379,569 24,910 28,988 433,467 Disposals (420) (913) (14,363) (15,696) Impairment (Note 6) (20,560) - - (20,560) Distribution to owner (see note below) - (7,814) - (7,814) --------- ------- ------- --------- At 31 December 2004 2,765,301 99,199 123,873 2,988,373 ========= ======= ======= ========= Net book value At cost - 472,840 64,800 537,640 At valuation 3,646,774 - - 3,646,774 --------- ------- ------- --------- At 31 December 2004 3,646,774 472,840 64,800 4,184,414 ========= ======= ======= =========
Chesterton Petty Valuation Company Limited, an independent qualified valuer in Hong Kong, carried out valuation of the Aviation Businesses' aircraft and engines as at 31 December 2002, 2003 and 2004 on an open market value basis. In addition, the flight equipment as at 31 December 2002 and 2003 were revalued by the management of CEA Yunnan on a replacement cost basis. On 31 December 2004, the flight equipment were revalued by China Consultants of Accounting and Finance Management Co., Ltd. (the "PRC Valuers"), an independent valuer registered in the PRC, on a depreciated replacement cost basis. Movement of revaluation reserve is as follows:
31 DECEMBER -------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 245,274 245,138 223,653 Revaluation surplus/(deficit) - gross (203) (32,066) 191,469 - tax 67 10,581 (63,184) ======= ======= ======= (136) (21,485) 128,285 ======= ======= ======= At 31 December 245,138 223,653 351,938 ======= ======= =======
The result of the revaluation is summarized as follows:
31 DECEMBER ----------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Revaluation (deficit)/ surplus (deducted from)/ credited to owner's equity (203) (32,066) 191,469 Revaluation (deficit)/ surplus (charged)/ credited to income statement (294,912) (161,192) 67,737 -------- -------- ------ (Decrease)/increase in carrying value of aircraft, engines and flight equipment (295,115) (193,258) 259,206 ======== ======== =======
III-26 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Had the Aviation Businesses' aircraft, engines and other flight equipment been stated at cost less accumulated depreciation and impairment losses, the carrying amounts of aircraft, engines and other flight equipment would have been RMB5,158,596,000, RMB4,797,542,000 and RMB4,305,412,000 as at 31 December 2002, 2003 and 2004 respectively. Certain buildings of the Aviation Businesses are erected on land assigned by the PRC Government and certificates of these land use rights have not been obtained. However, the Aviation Businesses are entitled to lawfully and validly occupy and use such land for its daily operations in spite of the deficiency in legal title. Buildings erected on such land with deficiency in legal title represent Non-Acquired Items as explained in Note 1 and are not to be acquired by the Company. The Aviation Businesses has entered into an agreement with CEA Holding to lease these properties which have been occupied by Aviation Businesses for an initial term of three years after completion of the Proposed Acquisition with renewal option (Note 35). Due to the deficiency in legal title, no valuation has been carried out and the buildings of the Aviation Businesses are carried at cost less accumulated depreciation and impairment losses. In 2004, the Aviation Businesses transferred certain buildings to CEA Holding by way of distribution. The cost and accumulated depreciation of these buildings at the date of transfer are RMB131,800,000 and RMB7,814,000 respectively. Certain aircraft of the Aviation Businesses with an aggregate carrying value of approximately RMB1,110,726,000, RMB998,608,000 and RMB980,356,000 as at 31 December 2002, 2003 and 2004 respectively were pledged as collateral for certain long-term bank loans (Note 21). 12 CONSTRUCTION IN PROGRESS
31 DECEMBER -------------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 301,309 234,007 30,951 Additions 38,768 7,135 29,145 Transfer to fixed assets (Note 11) (106,070) (205,832) (1,090) Impairment - (4,359) - Distribution to owner - - (1,274) -------- -------- ------ At 31 December 234,007 30,951 57,732 ======== ======== ======
III-27 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN 13 LEASE PREPAYMENTS
31 DECEMBER ------------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 34,793 33,839 32,884 Amortisation charge (Note 8) (954) (955) (954) ------ ------ ------ At 31 December 33,839 32,884 31,930 ====== ====== ====== At 31 December Cost 40,312 40,312 40,312 Accumulated amortisation (6,473) (7,428) (8,382) ------ ------ ------ Net book value 33,839 32,884 31,930 ====== ====== ======
Lease prepayments represent unamortised prepayments for land use rights. The land use rights are located in the PRC and majority of these land use rights have terms of 50 years from the date of grant. As at 31 December 2004, majority of these land use rights had remaining terms of 45 years (2003: 46 years; 2002: 47 years). 14 INVESTMENT IN AN ASSOCIATE Movements in investment in an associate are as follows:
YEAR ENDED 31 DECEMBER -------------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Share of net assets at 1 January 2,654 3,734 4,281 Share of results before tax of an associate 1,080 1,302 1,206 Share of taxation (Note 9) - (363) (366) Dividend - (392) (490) ----- ----- ----- Share of net assets at 31 December 3,734 4,281 4,631 ----- ----- -----
Particulars of the associate, which is established and operating in the PRC, are as follows: III-28 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN
Date of Paid-up Attributable Company establishment capital equity interests Principal activities ------- ------------- ------- ----------------------- -------------------- RMB'000 31 December 2002 2003 2004 Yunnan Kaiya 15 June 2000 980 49% 49% 49% Provision of ticket Information reservation, Co., Ltd transportation and other services
15 OTHER LONG-TERM RECEIVABLES
31 DECEMBER ------------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Prepaid office rentals 2,525 2,225 1,925 Fuel deposits 5,003 5,003 5,003 Deposits for aircraft under operating leases - 19,814 - Prepaid staff benefits (see below) - - 12,301 ----- ------ ------ 7,528 7,228 39,043 ===== ====== ======
In 2004, management of the Aviation Businesses implemented a motor vehicle reform policy under which qualified employees (the "Qualified Employees") of the Aviation Businesses, as determined at management's discretion, would receive an one-off subsidy as an encouragement of motor vehicle purchased by the employees. The Aviation Businesses will no longer provide motor vehicles for the use of the Qualified Employees after the implementation of the policy. The Qualified Employees are required to serve the Aviation Businesses for six years from the date of receipt of subsidies in order to be entitled to the entire subsidy. If a Qualified Employee leaves the Aviation Businesses before the end of the six-year period, a refund by the employee is required calculated on a pro-rata basis. These subsidies are to be amortised over six years on the straight-line method. 16 TRADE RECEIVABLES LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS The credit terms given to trade customers are determined on an individual basis, with the credit period ranging from half a month to three months.
31 DECEMBER -------------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Less than 31 days 125,054 32,793 20,924 31 to 60 days 2,601 11,488 10,006 61 to 90 days 3,801 23,904 9,139 Over 90 days 17,664 35,381 11,390 ------- ------- ------ 149,120 103,566 51,459 ======= ======= ======
III-29 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN 17 PREPAYMENTS AND OTHER RECEIVABLES
31 DECEMBER ---------------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Amounts due from related companies (Note 31(a)) 28,279 150,136 4,928 Prepayments for aircraft equipment 79,866 63,878 103,938 Staff loans 26,383 3,590 1,897 Insurance claims receivables (Note 6) -- 11,750 Others 53,208 35,480 36,428 ------- ------- ------- 187,736 253,084 158,941 ======= ======= =======
18 CASH AND CASH EQUIVALENTS
31 DECEMBER ---------------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Cash and bank balances 444,697 502,784 436,796 Short-term deposit with a related company (Note 31(a)) - 1,585 19 ------- ------- ------- 444,697 504,369 436,815 ======= ======= =======
As at 31 December 2002, 2003 and 2004, approximately RMB406,094,000, RMB471,052,000 and RMB408,348,000 respectively of the Aviation Businesses' cash and cash equivalent are denominated in RMB. The remaining balances are denominated in US dollars, Singapore dollars, Korean Won and Thailand Baht. 19 TRADE PAYABLES As at 31 December 2002, 2003 and 2004, all trade payables were current balances and aged within 30 days. 20 OTHER PAYABLES AND ACCRUED EXPENSES III-30 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN
31 DECEMBER ------------------------------------------ 2002 2003 2004 RMB'000 RMB'000 RMB'000 Amounts due to related companies (Note 31(a)) 43,431 330,290 42,573 Accrued operating expenses 319,837 314,810 402,344 Current portion of accrued aircraft overhaul (Note 23) 81,178 51,543 153,624 Flight equipment purchase payable 49,107 53,622 76,692 Staff housing fund 28,348 45,157 79,925 Duties and levies payable 28,324 6,426 48,483 Deposits from agents 36,183 26,079 44,565 Accrued salaries, wages and benefits 34,060 23,481 36,535 Civil aviation infrastructure levies payable - 19,610 Current portion of post-retirement benefit liabilities (Note 24(b)(i)) 3,191 5,366 5,366 Amount due to CAAC Yunnan Branch - - Provision for claims and auxiliary costs in relating to the aircraft crash accident (Note 6) - - 65,672 Others 47,326 35,628 24,348 ------- ------- ------- 812,764 892,402 999,737 ======= ======= =======
21 LONG-TERM BANK LOANS
31 DECEMBER ---------------------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Bank loans - secured 2,408,062 1,440,918 905,414 - unsecured - 250,000 150,000 --------- --------- --------- Total 2,408,062 1,690,918 1,055,414 Less: amount repayable within one year (370,091) (325,657) (279,324) --------- --------- --------- Long-term portion 2,037,971 1,365,261 776,090 ========= ========= ========= The bank loans are repayable as follows: Within one year 370,091 325,657 279,324 In the second year 391,751 279,165 432,460 In the third to fifth year inclusive 1,475,279 1,061,133 343,630 After the fifth year 170,941 24,963 - --------- --------- --------- Total 2,408,062 1,690,918 1,055,414 ========= ========= =========
The secured bank loans for the purchases of aircraft are secured by the related aircraft (Note 11). III-31 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN The terms of long-term loans can be summarised as follows:
INTEREST RATE AND FINAL MATURITIES 2002 2003 2004 RMB'000 RMB'000 RMB'000 RMB denominated bank loans:- Loans for Fixed interest rate of 4.941% normal per annum as at 31 December operations 2004; 3-year loans with final maturity through to 2006 - 250,000 150,000 Loans for the Fixed interest rates ranging from purchases 5.022% to 5.7285% per annum of aircraft as at 31 December 2004; 4 to 5-year loans with final maturity through to 2007 776,000 210,000 - --------- --------- --------- 776,000 460,000 150,000 U.S. dollar denominated bank loans:- Loans for the Fixed interest rates ranging from purchases 6.75% to 7.61% per annum of aircraft as at 31 December 2004; 5-year loans with final maturity through to 2008 1,632,062 1,230,918 905,414 --------- --------- --------- Total long-term bank loans 2,408,062 1,690,918 1,055,414 ========= ========= =========
22 SHORT-TERM BANK LOANS Short-term bank loans of the Aviation Businesses were unsecured, repayable within one year with interest charged at the prevailing market rates based on the rates quoted by the People's Bank of China. The interest rates related to such loans were between 2.20% to 5.02% per annum, 1.99% to 4.54% per annum and 1.99% to 4.70% per annum as at 31 December 2002, 2003 and 2004 respectively. During the years ended 31 December 2002, 2003 and 2004, the weighted average interest rates on short-term bank loans were 4.36%, 2.85% and 4.09% per annum respectively. 23 ACCRUED AIRCRAFT OVERHAUL EXPENSES
31 DECEMBER ------------------------------ 2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 89,668 137,065 100,717 Additional provisions 158,125 170,371 294,657 Utilised during the year (110,728) (206,719) (227,356) -------- -------- --------
III-32 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN At 31 December 137,065 100,717 168,018 Less: current portion (Note 20) (81,178) (51,543) (153,624) ------- ------- -------- Long-term portion 55,887 49,174 14,394 ======= ======= ========
Accrued aircraft overhaul expenses represent present value of estimated costs of major overhauls for aircraft and engines under operating leases as the Aviation Businesses has the responsibility to fulfill certain return conditions the under relevant leases. 24 RETIREMENT BENEFIT PLANS AND POST-RETIREMENT BENEFITS (a) Defined contribution retirement schemes Substantially all of the employees of the Aviation Businesses are eligible to participate in its retirement schemes. The Aviation Businesses participate in defined contribution retirement schemes organised by Kunming municipal government. The Aviation Businesses are required to make annual contributions to the schemes at a rate of 18.5%~20% of salary costs (including certain allowances) subject to certain ceilings. Employees contribute approximately 8% of their basic salary. For defined contribution retirement schemes, the Aviation Businesses have no other material obligation for the payment of retirement benefits beyond the annual contributions under these schemes. For the year ended 31 December 2002, 2003 and 2004, the Aviation Businesses' pension cost for defined contribution retirement schemes charged to the combined income statements amounted to RMB7,366,000, RMB10,693,000 and RMB10,986,000 respectively. (b) Post-retirement benefits In addition to the defined contribution retirement schemes as described in (a) above, the Aviation Businesses provide retirees with post-retirement benefits including retirement subsidies, medical subsidies and other welfare. The expected cost and obligations of providing these post-retirement benefits are actuarially determined and recognised by using the projected unit credit method, which involves a number of assumptions and estimates including the rate of inflation, discount rate and employees' turnover ratio. (i) The post-retirement benefit liabilities recognised in the combined balance sheets of the Aviation Businesses are as follows:- III-33 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN
31 DECEMBER ----------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Present value of unfunded post-retirement benefit obligations 202,023 189,268 255,428 Unrecognised actuarial gain/(loss) 2,048 31,453 (15,922) ------- ------- ------- Post-retirement benefit liabilities 204,071 220,721 239,506 Less: current portion (Note 20) (3,191) (5,366) (5,366) ------- ------- ------- Post-retirement benefit liabilities - long-term portion 200,880 215,355 234,140 ======= ======= =======
(ii) Changes in post-retirement benefit obligations are as follows: -
YEAR ENDED 31 DECEMBER ----------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 186,470 204,071 220,721 Current service cost 11,292 10,494 13,034 Interest on obligation 9,323 9,347 11,553 Recognised actuarial gain - - (436) Payments made in the year (3,014) (3,191) (5,366) ------- ------- ------- At 31 December 204,071 220,721 239,506 ======= ======= =======
(iii) The costs of post-retirement benefits recognised under wages, salaries and benefits in the combined income statements for the Relevant Periods are as follows:-
YEAR ENDED 31 DECEMBER -------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Current service cost 11,292 10,494 13,034 Interest on obligation 9,323 9,347 11,553 Recognised actuarial gain - - (436) ------ ------ ------ Total 20,615 19,841 24,151 ====== ====== ======
(iv) The principal actuarial assumptions at the balance sheet dates are as follows:-
YEAR ENDED 31 DECEMBER ---------------------- 2002 2003 2004 Discount rate 5% 5% 5% Annual rate of increase of per capita benefit payment 1.5% 1.5% 1.5% Employees turnover rate 0.7% 2.0% 2.0%
III-34 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN 25 STAFF HOUSING BENEFITS (a) Staff housing fund In accordance with the PRC housing reform regulations, the Aviation Businesses are required to make contribution to the State-sponsored housing fund at a range from 1% to 15% of the specified salary amount of its PRC employees. At the same time, the employees are required to make contribution equal to the contribution of the Aviation Businesses out of their salaries. The employees are entitled to claim the entire sum of the fund contribution under certain specified withdrawal circumstances. For the years ended 31 December 2002, 2003 and 2004, the staff housing fund contributed by the Aviation Businesses amounted to RMB6,500,000, RMB11,908,000 and 22,612,000 respectively, which are charged to the combined income statements for the Relevant Periods. (b) Staff housing allowances In 1998 and 2000, the State Council of the PRC issued circulars stipulating that distribution of quarters to employees at discounted prices should be discontinued and cash allowance should be made to employees thereafter. Eligible staff who have not been allocated with any quarters or who have not been allocated with a quarter up to the minimum area as set out by the Government are entitled to an one-off cash allowance. However, the specific timetable and procedures of implementation of these policies are to be determined by individual provincial or municipal government based on the particular situation of the province or municipality. The Kunming municipal government has not announced the detailed implementation procedures. In determining such obligations of the Aviation Businesses, management made reference to the staff housing policies already implemented by other enterprises. As at 31 December 2002, 2003 and 2004, the provision for staff housing allowances amounted to RMB28,700,000, RMB33,181,000 and RMB37,440,000 respectively. For the years ended 31 December 2002, 2003 and 2004, the staff housing allowance provided amounted to RMB4,900,000, RMB4,481,000 and RMB4,259,000 respectively and were charged to the combined income statement (Note 5). 26 DEFERRED INCOME Deferred income represents government grant to the Aviation Businesses for construction and acquisition of safety and security facilities. The Aviation Businesses have not yet constructed or purchased such facilities since the receipt of such government grant. III-35 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN 27 DEFERRED TAXATION As at the balance sheet dates, the deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction) were made up of taxation effects of the following:-
2002 2003 2004 RMB'000 RMB'000 RMB'000 Deferred tax assets:- Provision for obsolete flight equipment and spare parts 7,817 9,679 15,467 Provision for trade and other receivables 21,413 24,727 30,059 Provision for post-retirement benefits 67,343 72,838 79,037 Others 6,295 - - -------- -------- -------- 102,868 107,244 124,563 -------- -------- -------- Deferred tax liabilities:- Provision for overhaul (170,997) (119,717) (88,402) Depreciation and amortisation (222,177) (139,903) (205,387) Others - (27,389) (4,957) -------- -------- -------- (393,174) (287,009) (298,746) -------- -------- -------- Deferred tax liabilities, net (290,306) (179,765) (174,183) ======== ======== ========
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current liabilities and when the deferred income taxes relate to the same authority. The following amounts, determined after appropriate offsetting, are shown in the balance sheets:
2002 2003 2004 RMB'000 RMB'000 RMB'000 Deferred tax liabilities (290,306) (179,765) (174,183) ======== ======== ========
Movements in net deferred taxation liabilities are as follows:-
2002 2003 2004 RMB'000 RMB'000 RMB'000 At 1 January 401,138 290,306 179,765 Credited to combined income statement (110,765) (99,960) (68,766) (Credited)/charged to owner's equity (67) (10,581) 63,184 -------- ------- ------- At 31 December 290,306 179,765 174,183 ======== ======= =======
28 SUPPLEMENTARY INFORMATION TO THE CONSOLIDATED CASHFLOW STATEMENT III-36 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN
2002 2003 2004 RMB'000 RMB'000 RMB'000 Major non-cash transactions:- Discounts on aircraft acquisition used for purchases of flight equipment and spare parts - 15,988 26,152 Distributions of fixed assets and Construction in progress to owner - - 125,260 ------- ------- -------
29 COMMITMENTS (a) Capital commitments As at 31 December 2002, 2003 and 2004, the Aviation Businesses had the following capital commitments:-
2002 2003 2004 RMB'000 RMB'000 RMB'000 Authorised and contracted for:- - Aircraft and related equipment - - 418,791 ------- -------- -------
The above commitments are in relation to the purchase of 3 B-737 aircraft currently used by the Aviation Business under operating lease. The acquisition of the aircraft was completed in February 2005. (b) Operating lease commitments As at 31 December 2002, 2003 and 2004, the Aviation Businesses had commitments under operating leases to pay future minimum lease rentals as follows:-
31 DECEMBER ----------------------------------------------------------------------------- 2002 2003 2004 ----------------------- ----------------------- ----------------------- AIRCRAFT AIRCRAFT AIRCRAFT AND FLIGHT LAND AND AND FLIGHT LAND AND AND FLIGHT LAND AND EQUIPMENT BUILDINGS EQUIPMENT BUILDINGS EQUIPMENT BUILDINGS RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Within one year 55,003 5,038 48,802 4,111 66,046 1,720
III-37 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN In the second year 48,802 1,031 31,017 1,767 103,787 1,081 In the third to fifth year inclusive 64,799 2,138 33,782 2,115 - 1,700 After the fifth year - 720 - - - 425 ------- ----- ------- ----- ------- ----- 168,604 8,927 113,601 7,993 169,833 4,926 ======= ===== ======= ===== ======= =====
30 SEGMENTAL REPORTING (a) Primary reporting format by business segment The Aviation Businesses operates in one business segment which is the common carriage of passengers, cargo and mail over various routes authorised by CAAC. (b) Secondary reporting format by geographical segment The Aviation Businesses' turnover and operating profit/(loss) by geographical segments are analysed as follows:-
HONG OTHER DOMESTIC KONG COUNTRIES TOTAL RMB'000 MB'000 RMB'000 RMB'000 2002 Traffic revenues - Passenger 2,169,348 33,364 133,162 2,335,874 - Cargo and mail 122,308 155 9,066 131,529 --------- ------ ------- --------- 2,291,656 33,519 142,228 2,467,403 Other operating revenues 33,762 1,083 4,594 39,439 --------- ------ ------- --------- Turnover 2,325,418 34,602 146,822 2,506,842 --------- ------ ------- --------- Segment results 133,457 (8,118) (14,652) 110,687 --------- ------ ------- --------- Unallocated expense (see note below) (294,912) --------- Operating loss (184,225) ========= 2003 Traffic revenues - Passenger 2,194,207 30,582 73,316 2,298,105 - Cargo and mail 104,623 353 7,244 112,220 --------- ------ ------- --------- 2,298,830 30,935 80,560 2,410,325 Other operating revenues 36,155 574 1,494 38,223 --------- ------ ------- --------- Turnover 2,334,985 31,509 82,054 2,448,548 --------- ------ ------- --------- Segment results 66,885 (9,934) (38,240) 18,711 --------- ------ ------- ---------
III-38 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Unallocated expense (see note below) (161,192) --------- Operating loss (142,481) ========= 2004 Traffic revenues - Passenger 2,856,281 22,786 152,165 3,031,232 - Cargo and mail 109,090 560 10,925 120,575 --------- ------ ------- --------- 2,965,371 23,346 163,090 3,151,807 Other operating revenues 37,508 80 555 38,143 --------- ------ ------- --------- Turnover 3,002,879 23,426 163,645 3,189,950 --------- ------ ------- --------- Segment results 153,439 (7,812) (66,285) 79,342 --------- ------ ------- --------- Unallocated income (see note below) 67,737 --------- Operating profit 147,079 =========
Unallocated income and expenses represent revaluation surplus/(deficit) of fixed assets. The major revenue-earning assets of the Aviation Businesses are its aircraft fleet, all of which are registered in the PRC. Since the aircraft fleet of the Aviation Businesses is deployed flexibly across its route network, there is no suitable basis of allocating such assets and the related liabilities to geographical segments and hence segment assets and capital expenditure by segment has not been presented. 31 RELATED PARTY TRANSACTIONS (a) Balances with related companies (i) Amounts due from/to related companies As at 31 December 2002, 2003 and 2004, amounts due from/to related companies mainly included the following:- CEA, a fellow subsidiary - Amount due from/(to) CEA of RMB994,000, RMB129,789,000 and RMB(42,087,000) as at 31 December 2002, 2003 and 2004 respectively mainly represents receivable for the uplift of "781 logo" tickets sold by CEA on behalf of III-39 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN the Aviation Businesses and unsettled aircraft operating lease rental income. The balance is unsecured, interest free and has no fixed terms of repayment. Eastern Air Group Finance Co., Ltd. ("EAGF"), a fellow subsidiary - Short-term advances from EAGF of Nil, RMB300,000,000 and Nil as at 31 December 2002, 2003 and 2004 respectively are unsecured, interest bearing at rates ranging from zero to 5.04% per annum, and repayable within one year. (ii) Short-term deposits with a related company EAGF, a fellow subsidiary Short-term deposits of Nil, RMB1,585,000 and RMB19,000 as at 31 December 2002, 2003 and 2004 respectively are placed with EAGF. The short-term deposits yield interest at an average rate of 0.72% for the years ended 31 December 2002, 2003 and 2004. (b) Related party transactions Except as disclosed elsewhere in the Financial Information, the Aviation Businesses had the following material transactions with its related parties during the Relevant Periods which were carried out in the normal course of business:
REVENUE/(EXPENSES, PAYMENTS OR PURCHASE CONSIDERATION) YEAR ENDED 31 DECEMBER 2002 2003 2004 NATURE OF TRANSACTION RELATED PARTY RMB'000 RMB'000 RMB'000 With CEA Holding or companies directly or indirectly held by CEA Holding:- Sourcing of food and beverages Shanghai Eastern Air Catering Co. Ltd. (2,238) (2,712) (3,336) Yunnan Eastern Air Catering Co. Ltd. (39,450) (32,062) (36,308)
III-40 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Commission expenses on air tickets sold on CEA - (50,442) (81,517) behalf of Aviation Businesses at rate ranging from 3% to 9% of value of tickets sold Commission income on carriage service CEA - 10,743 22,494 provided by other airlines with air tickets sold by Aviation Businesses at fixed rate ranging from 3% to 9% of value to tickets sold Operating lease rental income from lease CEA - 27,726 86,341 of aircraft
In addition to the related party transactions disclosed above, the Aviation Businesses also have other non-monetary arrangements with CEA as follows: - Air routes - In the PRC, air routes are assigned by CAAC. CEA has permitted the Aviation Businesses to use some of the air routes allocated to CEA by CAAC at no charge as CEA did not have sufficient capacity to fully utilise those air routes. - Inter-airline billing code - As with all other airlines in the PRC, CEA pays a processing fee to CAAC for use of the ticket settlement system based on the volume of the tickets processed. At the direction of CAAC, CEA has permitted the Aviation Businesses to use CEA's unique inter-airline billing code ("781") at no incremental charge other than amounts paid to CAAC to facilitate ticket settlement between the airlines. CEA did not charge the Aviation Businesses any internal administrative cost for ticket handling and processing. Management of the Aviation Businesses is of the opinion that the above transactions with related parties were entered into on normal commercial terms or in accordance with the relevant government regulations governing such transactions. In accordance with a specific exemption in IAS24, "Related Party Disclosure", the Group does not accumulate or disclose transactions with other state-owned enterprises as related party transactions. 32 FINANCIAL RISK MANAGEMENT Financial assets of the Aviation Businesses mainly include short-term deposit with a related company, cash and bank balances, amounts due from related companies, trade receivables, other III-41 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN receivables and deposits, long-term receivables and derivative assets. Financial liabilities of the Aviation Businesses include bank loans, amounts due to related companies, trade payables, other payables and derivative liabilities. (a) Business risk The operations of the air transportation industry are substantially influenced by global political and economic development. Accidents, wars, natural disasters, etc. may have material impact on the Aviation Businesses or the industry as a whole. In addition, the Aviation Businesses conducts its principal operations in the PRC and accordingly is subject to special consideration and significant risks not typically associated with companies in the United States of America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, competition and influence of CAAC in the PRC civil aviation industry. (b) Price risk The Aviation Businesses' results of operations may be significantly affected by the fluctuation of the fuel prices which is a major expense category. While the international fuel prices are determined by worldwide market demand and supply, domestic fuel prices are regulated by CAAC. (c) Interest rate risk The Aviation Businesses has significant bank borrowings and is exposed to risk on variability in the cashflow arising from changes in market interest rates. It is the Aviation Businesses' plan to strengthen the control over interest rate risk through financial derivatives. The interest rates and terms of repayment of loans made to the Aviation Businesses are disclosed in Notes 21 and 22. (d) Credit risk The Aviation Businesses has no significant concentrations of credit risk. The Aviation Businesses has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. The Aviation Businesses also receives deposit from customers and counter-parties, where appropriate, if they require credit. A major portion of sales is conducted through sales agents and majority of these agents is connected to various settlement plans and/or clearing systems which have tight requirements on credit standing of these agents. III-42 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN (i) Deposit with a fellow subsidiary and cash and bank balances Substantially all the Aviation Businesses' cash and bank balances are placed with a number of international and PRC banks, and a fellow subsidiary, EAGF. Details of the deposits placed with EAGF have been disclosed in Note 31(a)(ii). (ii) Trade receivables These are mainly tickets sales receivable from sales agents and receivables related to uplifts by the Aviation Businesses on behalf of other carriers which are spread among numerous third parties. (iii) Other receivables and deposits These are spread among numerous third parties. (iv) Amounts due from or to the related companies These balances are disclosed in Note 31(a)(i). (e) Liquidity risk The Aviation Businesses' primary cash requirements have been for additions of and upgrades on aircraft and flight equipment and payments on related debts. The Aviation Businesses finances its working capital requirements through a combination of funds generated from operations and short-term bank loans. The Aviation Businesses generally purchases aircraft through long-term bank loans. The Aviation Businesses generally operates with a working capital deficit. As at 31 December 2002, 2003 and 2004, the Aviation Businesses' net current liabilities amounted to RMB1,025 million, RMB1,436 million and RMB1,713 million. For the year ended 31 December 2002, 2003 and 2004, the Aviation Businesses recorded a net cash inflow from operating activities of RMB 745 million, RMB60 million and RMB1,070 million respectively, and a net cash used in investing activities of RMB582 million, RMB24 million and RMB116 million respectively. Net cash outflow from financing activities of RMB149 million, inflow of RMB24 million and outflow of RMB1,022 million were recorded for the years ended 31 December 2002, 2003 and 2004 respectively. Consequently, an increase in cash and cash equivalents of RMB14 million, RMB59 III-43 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN million and a decrease of RMB68 million, respectively, were recorded for the years ended 31 December 2002, 2003 and 2004. Notwithstanding the Aviation Businesses of CEA Yunnan having net current liabilities as at 31 December 2004, management of CEA Yunnan believes that adequate financial support from CEA Holding up to the date of completion of the Proposed Acquisition and from the Company thereafter will be available which will enable the Aviation Businesses to operate on a going concern basis. (f) Foreign currency risk Certain bank loans of Aviation Businesses are denominated in US dollars and certain expenses of the Aviation Businesses are denominated in currencies other than RMB. The Aviation Businesses generates foreign currency revenues from ticket sales made in overseas offices and have sufficient available banking facilities in foreign currencies to meet its foreign currency liabilities repayable within one year. (g) Fair value The carrying amounts and estimated fair value of the Aviation Businesses' significant financial assets and liabilities at the balance sheet dates are set out as follows:-
31 DECEMBER ----------------------------------------------------------------------------- 2002 2003 2004 ----------------------- ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Long-term bank loans 2,408,062 2,390,171 1,690,918 1,678,116 1,055,414 1,045,259
The fair value of the long-term bank loans is estimated by applying a discounted cashflow approach using current market interest rates for similar indebtedness. The fair value of cash and bank balances, trade receivables, other receivables and deposits, amounts due from and to related companies, trade payables, other payables and short-term bank loans are not materially different from their carrying amounts because of the short maturities of these instruments. III-44 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN Fair value estimates are made at specific point in time and are based on relevant market information. This estimate is subjective in nature and involves uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in valuation methods and assumptions could significantly affect the estimates. 33 DERIVATIVE FINANCIAL INSTRUMENTS
31 DECEMBER --------------------------------- 2002 2003 2004 RMB'000 RMB'000 RMB'000 Interest rate swaps - Assets - 11,266 - - Liabilities - - (741) ------- ------- ------- - 11,266 (741) ======= ======= =======
The Aviation Businesses use interest rate swaps to reduce risk of changes in market interest rates on bank borrowings (Note 32(c)). The interest rate swaps entered into by the Aviation Businesses, generally for swapping fixed rates (ranging from 6.75% to 7.61%) to variable rates (with reference to LIBOR). The notional amounts of the outstanding interest rate swap agreements as at 31 December 2002, 2003 and 2004 are Nil, US$140 million and US$109 million, respectively, which will expire in 2006. The Aviation Businesses, however, do not fulfil the criteria for hedge accounting. The fair value gain on derivative financial instruments recognised in the combined income statements for the years ended 31 December 2002, 2003 and 2004 are Nil, RMB11,266,000 and RMB13,260,000 respectively (Note 7). 34 ULTIMATE HOLDING COMPANY CEA Holding, a company established in the PRC, is being regarded as the immediate holding and ultimate holding company of Aviation Businesses. 35 POST BALANCE SHEET DATE EVENTS On 12 May 2005, CEA Yunnan, CEA Holding, the Company and CEA Northwest, a fellow subsidiary of CEA Yunnan, entered into the Acquisition Agreement pursuant to which, inter-alia, certain assets and liabilities relating to the Aviation Businesses are to be acquired by the Company subject to the terms and conditions stipulated therein. III-45 APPENDIX III ACCOUNTANTS' REPORT ON FINANCIAL INFORMATION OF THE AVIATION BUSINESSES OF CEA YUNNAN On the same date and subject to the completion of the Acquisition Agreement, the Company has entered into various agreements with CEA Holding Group to accommodate the anticipated expansion in the business operations of the Company and its subsidiaries following the completion of the Proposed Acquisition. These include property leasing agreement, financial services agreement, import and export agency agreement, maintenance services agreement, catering services agreements, sales agency services agreements and advertising services agreement. Detailed terms and pricing of these agreements have been set out in Section 3 "Continuing Connected Transactions" under heading "Letter from the Board" of the Circular. Following completion of the Proposed Acquisition, the Aviation Businesses will continue to occupy the properties under the respective leasing agreements and receive services from CEA Holding Group according to the terms of these agreements. 36 SUBSEQUENT FINANCIAL STATEMENTS No audited financial statements have been prepared for the Aviation Businesses in respect of any period subsequent to 31 December 2004. In addition, no dividend or distribution has been declared, made or paid by Aviation Businesses in respect of any period subsequent to 31 December 2004. Yours faithfully PRICEWATERHOUSECOOPERS Certified Public Accountants Hong Kong III-46 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP The following is a summary of the audited financial information of the Group for the three financial years ended 31 December 2004 and the audited financial statements of the Group for the financial year ended 31 December 2004. The financial information is extracted from the Company's annual reports. Certain comparative figures have been reclassified to conform with the presentation in the Company's 2004 financial statements. THREE YEARS FINANCIAL SUMMARY CONSOLIDATED INCOME STATEMENTS
2002 2003 2004 RMB'000 RMB'000 RMB'000 Traffic revenues Passenger 10,037,830 10,261,027 15,357,614 Cargo and mail 2,444,667 3,186,984 4,428,360 Other operating revenues 596,492 829,147 1,252,802 ----------- ----------- ----------- Turnover 13,078,989 14,277,158 21,038,776 Other operating income, net 281,183 60,890 154,422 Operating expenses ----------- ----------- ----------- Wages, salaries and benefits (1,035,853) (1,449,054) (1,865,879) Take-off and landing charges (1,987,835) (2,254,456) (3,019,742) Aircraft fuel (2,563,701) (3,044,956) (5,429,658) Food and beverages (605,894) (541,669) (758,046) Aircraft depreciation and operating leases (2,455,403) (2,851,047) (3,672,133) Other depreciation, amortisation and operating leases (400,291) (495,079) (495,916) Aircraft maintenance (1,077,764) (1,329,304) (1,396,283) Commissions (379,674) (465,147) (772,219) Office and administration (1,044,113) (1,057,500) (1,337,850) Revaluation deficit of fixed assets (171,753) - - Others (574,424) (628,373) (966,295) ----------- ----------- ----------- Total operating expenses (12,296,705) (14,116,585) (19,714,021) ----------- ----------- ----------- Operating profit 1,063,467 221,463 1,479,177 Non-operating income - - 133,029 Finance costs, net (768,907) (782,783) (762,687) Share of results before tax of associates (31,666) (28,511) (4,112) ----------- ---------- ---------- Profit/(loss) before taxation 262,894 (589,831) 845,407 Income tax expenses (54,438) (247,554) (181,224) ----------- ---------- ---------- Profit/(loss) after taxation 208,456 (837,385) 664,183 Minority interests (122,087) (112,431) (150,108) ----------- ---------- ----------
IV-1 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Profit/(loss) attributable to shareholders 86,369 (949,816) 514,075 ======= ======= ======= Earnings/(loss) per share - basic and diluted RMB0.02 (RMB0.20) RMB0.11 ======= ======= =======
THREE YEARS FINANCIAL SUMMARY (CONTINUED) CONSOLIDATED BALANCE SHEETS
2002 2003 2004 RMB'000 RMB'000 RMB'000 NON-CURRENT ASSETS Fixed assets 20,465,950 26,838,903 30,220,319 Construction in progress 413,812 219,788 188,654 Lease prepayments 867,368 847,319 828,808 Investments in associates 331,570 626,084 656,190 Goodwill and negative goodwill 40,707 38,505 36,303 Advances on aircraft and flight equipment 3,227,720 2,239,893 2,678,603 Other long-term receivables and investments 2,223,768 1,962,362 2,202,606 Deferred tax assets 569,997 399,771 395,465 Derivative assets 9,891 2,814 11,571 ---------- ---------- ----------- 28,150,783 33,175,439 37,218,519 CURRENT ASSETS Flight equipment spare parts less ---------- ---------- ----------- allowance for obsolescence 556,376 552,172 523,186 Trade receivables less allowance for doubtful accounts 965,226 1,325,677 1,462,672 Prepayments, deposits and other receivables 854,673 1,371,043 1,108,964 Short-term investments 290,000 - - Cash and cash equivalents 1,944,525 1,582,780 2,114,447 ---------- ---------- ----------- 4,610,800 4,831,672 5,209,269 CURRENT LIABILITIES ---------- ---------- ----------- Trade payables 64,523 109,242 64,718 Notes payables 411,250 756,490 838,337 Sales in advance of carriage 700,714 926,453 719,957 Other payables and accrued expenses 2,791,033 4,299,989 5,353,649 Current portion of obligations under finance leases 2,247,059 1,692,084 1,189,648 Current portion of long-term bank loans 1,261,902 2,250,734 3,193,432 Tax payable 44,560 106,113 162,606 Short-term bank loans 4,526,509 4,631,918 6,188,919 ---------- ---------- ----------- 12,047,550 14,773,023 17,711,266 ---------- ---------- ----------- NET CURRENT LIABILITIES (7,436,750) (9,941,351) (12,501,997) ---------- ---------- -----------
IV-2 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP TOTAL ASSETS LESS CURRENT LIABILITIES 20,714,033 23,234,088 24,716,522 ========== ========== ========== SHARE CAPITAL 4,866,950 4,866,950 4,866,950 RESERVES 2,512,153 1,515,201 2,015,294 ---------- ---------- ----------- TOTAL CAPITAL AND RESERVES 7,379,103 6,382,151 6,882,244 MINORITY INTERESTS 404,517 522,713 831,208 NON-CURRENT LIABILITIES ---------- ---------- ----------- Obligations under finance leases 5,936,907 5,408,802 7,472,638 Long-term bank loans 5,232,729 8,972,189 7,542,828 Deferred tax liabilities 802,822 740,112 752,917 Accrued aircraft overhaul expenses 243,684 191,384 175,960 Long-term portion of other payable 142,250 121,860 100,204 Post-retirement benefit obligations 528,924 545,771 562,632 Long-term portion of staff housing allowances - 254,669 276,248 Derivative liabilities 43,097 94,437 119,643 12,930,413 16,329,224 17,003,070 ---------- ---------- ----------- 20,714,033 23,234,088 24,716,522 ========== ========== ==========
AUDITED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2004 CONSOLIDATED INCOME STATEMENT (Prepared in accordance with International Financial Reporting Standards) Year ended 31 December 2004
2004 2003 NOTE RMB'000 RMB'000 Traffic revenues Passenger 15,357,614 10,261,027 Cargo and mail 4,428,360 3,186,984 Other operating revenues 1,252,802 829,147 ---------- ---------- Turnover 3 21,038,776 14,277,158 Other operating income, net 4 154,422 60,890 Operating expenses ---------- ---------- Wages, salaries and benefits 5 (1,865,879) (1,449,054) Take-off and landing charges (3,019,742) (2,254,456) Aircraft fuel (5,429,658) (3,044,956) Food and beverages (758,046) (541,669) Aircraft depreciation and operating leases (3,672,133) (2,851,047) Other depreciation, amortisation and operating leases (495,916) (495,079) Aircraft maintenance (1,396,283) (1,329,304) Commissions (772,219) (465,147)
IV-3 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Office and administration (1,337,850) (1,057,500) Others (966,295) (628,373) ---------- ---------- Total operating expenses (19,714,021) (14,116,585) ---------- ---------- Operating profit 1,479,177 221,463 Non-operating income 38(c)(ii) 133,029 - Finance costs, net 6 (762,687) (782,783) Share of results before tax of associates 16 (4,112) (28,511) ---------- ---------- Profit/(loss) before taxation 7 845,407 (589,831) Income tax expenses 9(a) (181,224) (247,554) ---------- ---------- Profit/(loss) after taxation 664,183 (837,385) Minority interests 32 (150,108) (112,431) ---------- ---------- Profit/(loss) attributable to shareholders 514,075 (949,816) ========== ========== Earnings/(loss) per share - basic and diluted 10 RMB0.11 (RMB0.20) ========== ==========
CONSOLIDATED BALANCE SHEET (Prepared in accordance with International Financial Reporting Standards) As at 31 December 2004
2004 2003 NOTE RMB'000 RMB'000 NON-CURRENT ASSETS Fixed assets 12 30,220,319 26,838,903 Construction in progress 13 188,654 219,788 Lease prepayments 14 828,808 847,319 Investments in associates 16 656,190 626,084 Goodwill and negative goodwill 17 36,303 38,505 Advances on aircraft and flight equipment 18 2,678,603 2,239,893 Other long-term receivables and investments 19 2,202,606 1,962,362 Deferred tax assets 30 395,465 399,771 Derivative assets 40 11,571 2,814 ---------- ---------- 37,218,519 33,175,439 ---------- ---------- CURRENT ASSETS Flight equipment spare parts less allowance for obsolescence (2004: RMB471,750,000; 2003: RMB400,534,000) 523,186 552,172 Trade receivables less allowance for doubtful accounts (2004: RMB94,147,000; 2003: RMB83,663,000) 20 1,462,672 1,325,677
IV-4 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Prepayments, deposits and other receivables 21 1,108,964 1,371,043 Cash and cash equivalents 2,114,447 1,582,780 ----------- ---------- 5,209,269 4,831,672 CURRENT LIABILITIES Trade payables 22 64,718 109,242 Notes payables 22 838,337 756,490 Sales in advance of carriage 719,957 926,453 Other payables and accrued expenses 23 5,353,649 4,299,989 Current portion of obligations under finance leases 25 1,189,648 1,692,084 Current portion of long-term bank loans 26 3,193,432 2,250,734 Tax payable 162,606 106,113 Short-term bank loans 27 6,188,919 4,631,918 ----------- ---------- 17,711,266 14,773,023 ----------- ---------- NET CURRENT LIABILITIES (12,501,997) (9,941,351) ----------- ---------- TOTAL ASSETS LESS CURRENT LIABILITIES 24,716,522 23,234,088 ========== ==========
2004 2003 NOTE RMB'000 RMB'000 SHARE CAPITAL 28 4,866,950 4,866,950 RESERVES 29 2,015,294 1,515,201 ---------- ---------- TOTAL CAPITAL AND RESERVES 6,882,244 6,382,151 MINORITY INTERESTS 32 831,208 522,713 NON-CURRENT LIABILITIES Obligations under finance leases 25 7,472,638 5,408,802 Long-term bank loans 26 7,542,828 8,972,189 Deferred tax liabilities 30 752,917 740,112 Accrued aircraft overhaul expenses 24 175,960 191,384 Long-term portion of other payable 31 100,204 121,860 Post-retirement benefit obligations 33(b) 562,632 545,771 Long-term portion of staff housing allowances 34(b) 276,248 254,669 Derivative liabilities 40 119,643 94,437 ---------- ---------- 17,003,070 16,329,224 ---------- ---------- 24,716,522 23,234,088 ========== ==========
These financial statements have been approved for issue by the Board of Directors on 12 April 2005. LI FENGHUA WAN MINGWU Director Director IV-5 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP CONSOLIDATED CASH FLOW STATEMENT (Prepared in accordance with International Financial Reporting Standards) Year ended 31 December 2004
2004 2003 RMB'000 RMB'000 CASH FLOWS FROM OPERATING ACTIVITIES: Profit/(loss) after taxation before minority interests 664,183 (837,385) ADJUSTMENTS TO RECONCILE PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS TO NET CASH FROM OPERATING ACTIVITIES: Depreciation of fixed assets 2,282,195 1,974,462 Losses on disposal of aircraft and flight equipment 40,564 28,767 (Gains)/losses on disposals of other fixed assets (13,001) 4,811 Fair value gains on short-term investments (5,235) (21,920) Amortisation of lease prepayments 18,414 20,049 Provision for post-retirement benefits 24,611 20,844 Amortisation of goodwill and negative goodwill 2,202 2,202 Interest income (including amortisation of bond discount) (129,020) (147,846) Interest expenses 870,988 860,304 Provision for income tax 160,502 124,530 Share of results after tax of associates 5,256 32,738 Foreign exchange (gains)/losses (40,168) 77,850 MOVEMENTS IN: Flight equipment spare parts 28,986 4,204 Trade receivables (136,995) (360,451) Prepayments and other receivables (361,345) 197,006 Trade payables (44,524) 44,719 Sales in advance of carriage (206,496) 225,739 Other payables and accrued expenses 1,069,237 1,759,628 Interest accrued on a long-term payable 8,344 9,610 Deferred taxation 19,578 118,797 Long-term portion of accrued aircraft overhaul expenses (15,424) (52,300) --------- --------- 3,578,669 4,923,743 --------- --------- CASH GENERATED FROM OPERATIONS 4,242,852 4,086,358 Interest paid (872,738) (860,304) Income tax paid (104,009) (62,977) --------- --------- NET CASH INFLOW FROM OPERATING ACTIVITIES 3,266,105 3,163,077 ========= =========
IV-6 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
2004 2003 RMB'000 RMB'000 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions of aircraft and flight equipment (1,206,508) (5,560,406) Instalment payment for acquisition of an airlines business (30,000) (30,000) Proceeds on disposals of aircraft, flight equipment, other fixed assets and equipment 667,824 91,940 Purchase of buildings, other fixed assets and equipment (319,337) (216,211) Additions of construction in progress (178,065) (249,737) Investments in associates (12,673) (327,252) Advances on aircraft and flight equipment (2,076,990) (1,295,656) Repayments of advances on aircraft and flight equipment 80,000 - Proceeds from maturity of US Treasury zero coupon bonds 585,736 - Increase in long-term bank deposits (51,108) (64,255) Purchase of short-term investments (270,350) - Proceeds from disposals of short-term investments 275,585 311,920 Interest received 71,900 104,243 Net decrease/(increase) in short-term deposits with original maturities over three months 31,424 (69,246) ---------- ---------- NET CASH OUTFLOW FROM INVESTING ACTIVITIES (2,432,562) (7,304,660) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term bank loans 8,988,970 10,920,917 Repayments of short-term bank loans (7,431,931) (10,815,508) Proceeds from long-term bank loans 2,155,310 5,606,107 Repayments of long-term bank loans (2,647,930) (898,022) Principal repayments of finance lease obligations (1,617,001) (1,400,749) Proceeds from notes payables 1,347,786 1,254,030 Repayments of notes payables (1,265,939) (908,790) Capital injection from minority shareholders 218,387 5,765 Dividends paid to minority shareholders (60,000) - ---------- ---------- NET CASH (OUTFLOW)/INFLOW FROM FINANCING ACTIVITIES (312,348) 3,763,750 ---------- ---------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 521,195 (377,833) CASH AND CASH EQUIVALENTS AT 1 JANUARY 1,582,780 1,944,525 EXCHANGE ADJUSTMENT 10,472 16,088 ---------- ---------- CASH AND CASH EQUIVALENTS AT 31 DECEMBER 2,114,447 1,582,780 ========== ==========
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Prepared in accordance with International Financial Reporting Standards) Year ended 31 December 2004
SHARE OTHER RETAINED CAPITAL RESERVES PROFITS (NOTE 28) (NOTE 29) (NOTE 29) TOTAL RMB'000 RMB'000 RMB'000 RMB'000 --------- ---------- --------- --------- BALANCE AT 1 JANUARY 2003 4,866,950 1,004,655 1,507,498 7,379,103
IV-7 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Net gains/(losses) not recognised in the income statement Unrealised losses on cashflow hedges - (62,810) - (62,810) Realised losses on cashflow hedges - 13,156 - 13,156 Release of reserves upon disposals of aircraft - (14,269) 16,787 2,518 --------- --------- ------- --------- - (63,923) 16,787 (47,136) Loss attributable to shareholders - - (949,816) (949,816) Transfer from retained profits to other reserves - 72,510 (72,510) - --------- --------- ------- --------- BALANCE AT 31 DECEMBER 2003 AND 1 JANUARY 2004 4,866,950 1,013,242 501,959 6,382,151 Net losses not recognised in the income statement Unrealised losses on cashflow hedges - (5,143) - (5,143) Realised gains on cashflow hedges - (8,839) - (8,839) --------- --------- ------- --------- - (13,982) - (13,982) Profit attributable to shareholders - - 514,075 514,075 Transfer from retained profits to other reserves - 67,136 (67,136) - --------- --------- ------- --------- BALANCE AT 31 DECEMBER 2004 4,866,950 1,066,396 948,898 6,882,244 ========= ========= ======= =========
NOTES TO THE FINANCIAL STATEMENTS (Prepared in accordance with International Financial Reporting Standards) Year ended 31 December 2004 1. CORPORATE INFORMATION China Eastern Airlines Corporation Limited (the "Company") was incorporated in the People's Republic of China ("PRC") as a joint stock company limited by shares on 14 April 1995. The Company is majority owned by China Eastern Air Holding Company ("CEA Holding"), a state-owned enterprise. The Company and its subsidiaries (the "Group") are principally engaged in the operation of civil aviation, air cargo, postal delivery and other extended transportation services. 2. PRINCIPAL ACCOUNTING POLICIES (a) Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and the disclosure requirements of the Hong Kong IV-8 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Companies Ordinance. This basis of accounting differs in certain material respects from that used in the preparation of the Group's statutory accounts in the PRC. The statutory accounts of the Group have been prepared in accordance with the accounting principles and the relevant regulations applicable to PRC joint stock limited companies ("PRC Accounting Regulations"). In preparing these financial statements, appropriate restatements have been made to the Group's statutory accounts to conform with IFRS. The consolidated financial statements have been prepared under historical cost convention as modified by the revaluation of fixed assets, short-term investments and derivative financial instruments. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current event and actions, actual results ultimately may differ from those estimates. (b) Group accounting The consolidated financial statements include the financial statements of the Company and its subsidiaries made up to 31 December. (i) Subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. See note 2(m) for the accounting policy on goodwill. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. IV-9 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. Minority interests represent the interests of outside members in the operating results and net assets of subsidiaries. In the Company's balance sheet, the investments in subsidiaries are stated at cost less provision for impairment losses. (ii) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Company's share of the post-acquisition profits or losses of associates is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group's investment in associates includes goodwill (net of accumulated amortisation) on acquisition. When the Group's share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. In the Company's balance sheet, the investments in associates are stated at cost less provision for impairment losses. The results of associates are accounted for by the Company on the basis of dividends received and receivable. (c) Foreign currency translation The Group maintains its books and records in Renminbi ("RMB") which is the measurement currency of the Group. Transactions in foreign currencies are translated at the applicable rates of exchange prevailing at the dates of the transactions, quoted by the People's Bank of China. Monetary assets and liabilities denominated in foreign currencies are translated into RMB at the IV-10 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP rates prevailing at the balance sheet date as quoted by the People's Bank of China. Exchange differences are included in the income statement, except when deferred in equity as qualifying cashflow hedges. (d) Revenue recognition and sales in advance of carriage Passenger, cargo and mail revenues are recognised as traffic revenues when the transportation services are provided. The value of sold but unused tickets is included in the current liabilities as sales in advance of carriage. Revenues from other operating businesses, including income derived from the provision of ground services and commission income are recognised when services are rendered. Commission income includes amounts earned from other carriers in respect of sales made by the Group's agents. The related commission payable to agents are included as commission expenses in the income statement in the period that revenue is recognised. Rental income from leasing office premises and cargo warehouses is recognised on a straight-line basis over the lease term. Revenues are presented net of business tax. Interest income is recognised on a time-proportionate basis. Rental income from subleases is recognised on a straight-line basis over the terms of the respective leases. (e) Segmental reporting In accordance with the Group's internal financial reporting, the Group has determined that business segments be presented as the primary reporting format and geographical as the secondary reporting format. In respect of the geographical segment, the analysis of turnover and operating profit by geographical segment is based on the following criteria:- (i) Traffic revenue from domestic services within the PRC (excluding Hong Kong Special Administrative Region ("Hong Kong")) is attributed to the domestic operation. Traffic revenue from inbound and outbound services between the PRC and Hong Kong or IV-11 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP overseas markets is attributed to the geographical area in which the relevant overseas origin or destination lies. (ii) Other operating revenues from ticket handling services, airport ground services and other miscellaneous services are attributed on the basis of where the services are performed. (f) Retirement benefits The Group participates in defined contribution retirement schemes regarding pension and medical benefit for employees organised by the municipal governments of respective provinces. The contributions to the schemes are charged to the income statement as and when incurred. In addition, the Group provides retirees with post-retirement benefits including retirement subsidies, transportation subsidies, social function activity subsidies as well as other welfare. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees' expected average remaining working lives. Past-service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period. (g) Maintenance and overhaul costs IV-12 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP In respect of aircraft and engines under operating leases, the Group has the responsibility to fulfill certain return conditions under relevant leases. In order to fulfill these return conditions, major overhauls are required to be conducted on a regular basis. Accordingly, the present value of estimated costs of major overhauls for aircraft and engines under operating leases are accrued and charged to the income statement over the estimated period between overhauls using the ratios of actual flying hours/cycles and estimated flying hours/cycles between overhauls. The costs of major overhaul comprise mainly labour and materials. Differences between the estimated cost and the actual cost of the overhaul are included in the income statement in the period of overhaul. All other routine repairs and maintenance costs incurred in restoring such fixed assets to their normal working condition are charged to the income statement as and when incurred. Improvements are capitalised and depreciated over their expected useful lives to the Group. (h) Government grant Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate. Government grants relating to the fixed assets are included in non-current liabilities as other liabilities and are credited to the income statement on a straight-line basis over the expected lives of the related assets. (i) Taxation The Group provides for taxation on the basis of the results for the year as adjusted for items which are not assessable or deductible for income tax purposes. Taxation of the Group is determined in accordance with the relevant tax rules and regulations applicable in the jurisdictions where the Group operates. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is measured using tax rates enacted, or substantively enacted at the balance sheet date. IV-13 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (j) Fixed assets (i) Fixed assets are recognised initially at cost which comprises purchase price, costs transferred from construction in progress and any directly attributable costs of bringing the assets to the condition for their intended use. Subsequent to the initial recognition, fixed assets are stated at revalued amount less accumulated depreciation and accumulated impairment losses. Independent valuations are performed at least every five years or sooner if considered necessary by the directors. In the intervening years, the directors review the carrying values of the fixed assets and adjustment is made where these are materially different from fair value. Increases in the carrying amount arising on revaluation are credited to the revaluation reserve. Decreases in valuation of fixed assets are first offset against increases from earlier valuations of the same asset and are thereafter charged to the income statement. All other decreases in valuation are charged to the income statement. Any subsequent increases are credited to the income statement up to the amount previously charged. (ii) Depreciation of fixed assets is calculated on the straight-line method to write off the cost or revalued amount of each asset to their residual value over their estimated useful lives. The estimated useful lives used for the calculation of annual depreciation charges are as follows:- Aircraft - 20 years Flight equipment - Engines - 20 years - Other flight equipment - 20 years Buildings - 15 to 35 years Other fixed assets and equipment - 5 to 20 years
(iii) Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. When revalued assets are sold, the amounts included in revaluation reserves are transferred to retained earnings. IV-14 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP (k) Construction in progress Construction in progress represents office buildings, various infrastructure projects under construction and plant and equipment pending installation. This includes the costs of construction and acquisition and interest capitalised. No depreciation is provided on construction in progress until the asset is completed and put into use. (l) Lease prepayments Lease prepayments represent acquisition costs of land use rights less accumulated amortisation. Amortisation is provided over the lease period of land use rights on a straight-line basis. (m) Goodwill and negative goodwill (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets of the acquired subsidiary or associate at the date of acquisition. Goodwill arising from a business combination is presented as cost less accumulated amortisation and accumulated impairment losses. Amortisation is made using the straight-line method over its estimated useful life. Management determines the estimated useful life of goodwill based on its evaluation of the respective companies at the time of the acquisition, considering factors such as existing market share, potential growth and other factors inherent in the acquired companies. At each balance sheet date, the Group assesses whether there is any indication of impairment. If such indications exist, an analysis is performed to assess whether the carrying amount of goodwill is fully recoverable. A write down is made if the carrying amount exceeds the recoverable amount. (ii) Negative goodwill Negative goodwill represents the excess of the fair value of the Group's share of the net assets acquired subsidiary or associate over the cost of acquisition. Negative goodwill is presented in the same balance sheet classifications as goodwill. IV-15 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP To the extent that negative goodwill relates to expected future losses and expenses that are identified in the Group's plan for the acquisition and can be measured reliably, but which do not represent identifiable liabilities, that portion of negative goodwill is recognised as income when the future losses and expenses are recognised. Any remaining negative goodwill, not exceeding the fair values of the non-monetary assets acquired, is recognised in the income statement over the remaining weighted average useful life of those assets. Negative goodwill in excess of the fair values of those assets is recognised in the income statement immediately. At each balance sheet date, the Group assesses whether there is any indication of impairment. If such indications exist, an analysis is performed to assess whether the carrying amount of goodwill is fully recoverable. A write down is made if the carrying amounts exceeds the recoverable amount. The gain or loss on disposals of an entity includes the carrying amount of goodwill relating to the entity sold. (n) Advances on aircraft and flight equipment Advance contract payments to aircraft manufacturers to secure deliveries of aircraft and flight equipment in future years are capitalised along with attributable interests, and transferred to fixed assets upon delivery of the aircraft. (o) Borrowing costs Interest attributable to funds used to finance the acquisition of new aircraft and construction of major ground facilities is capitalised as an additional cost of the related asset. Interest is capitalised at the Group's weighted average interest rate on borrowings or, where applicable, the interest rate related to specific borrowings during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are charged to the income statement in the period in which they are incurred. (p) Long-term bank deposits IV-16 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Long-term bank deposits placed to secure future lease obligations are classified as held-to-maturity financial assets and measured at amortised cost. (q) Impairment Fixed assets and other non-current assets, including goodwill are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset's net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cashflows. (r) Flight equipment spare parts Flight equipment spare parts are carried at weighted average cost less allowance for obsolescence. (s) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the present value of expected cashflows, discounted at the effective interest rate. (t) Cash and cash equivalents Cash and short-term highly liquid investments, which are readily convertible into cash and have original maturities of three months or less at the date of acquisition, are classified as cash and cash equivalents. (u) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision IV-17 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. (v) Leases (i) A Group company is the lessee Leases of fixed assets where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using the straight-line method over their expected useful lives to residual values. Leases of assets under which a significant portion of the lease risks and rewards of ownership are retained by the lessor are classified as operating leases. Lease payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. (ii) A Group company is the lessor When assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. Assets leased out under operating leases are included in fixed assets in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar fixed assets. Rental income is recognised on a straight-line basis over the lease term. (w) Derivative financial instruments IV-18 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Derivative financial instruments are initially recognised in the balance sheet at cost and subsequently are remeasured at their fair value. The method of recognising the resulting gain or loss is dependent on the nature of the item being hedged. The Group designates certain derivatives as either (1) a hedge of the fair value of a recognised asset or liability (i.e. fair value hedge), or (2) a hedge of a forecasted transaction or of a firm commitment (i.e. cashflow hedge). Derivative financial instrument that does not qualify for hedge accounting is accounted for as trading instrument and any unrealised gain or loss, being changes in fair value of the derivative, is recognised in the income statement immediately. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective, are recorded in the income statement, along with any changes in the fair value of the hedged assets or liabilities that are attributable to the hedged risk. Derivative financial instrument that qualifies for hedge accounting and is designated as a specific hedge of the variability in cashflows of a highly probable forecast transaction, is accounted for as follows:- (i) the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. Where the forecasted transaction or firm commitment results in the recognition of an asset or a liability, the gains and losses previously deferred in equity are included in the initial measurement of the cost of the asset or liability. Otherwise, the cumulative gain or loss on the derivative financial instrument is removed from equity and recognised in the income statement in the same period during which the hedged forecast transaction affects net profit or loss. (ii) the ineffective part of any gain or loss is recognised in the income statement immediately. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the committed or forecasted transaction ultimately occurs. When a committed or forecasted transaction is no longer expected to occur, the cumulative gain or loss that was recorded in equity is immediately transferred to the income statement. (x) Dividend IV-19 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Dividend distribution to the Company's shareholders is recongised as a liability in the Group's financial statements in the period in which the dividends are approved by the Company's shareholders. (y) Comparatives Where necessary, comparative figures have been reclassified to conform with changes in presentation in the current year. 3. REVENUES AND TURNOVER The Group is principally engaged in the provision of domestic, Hong Kong and international passenger, cargo and mail airline services. Turnover comprises revenues from airline and related services net of business tax and civil aviation infrastructure levies.
GROUP 2004 2003 RMB'000 RMB'000 Gross turnover 21,566,944 14,575,443 Less: Business tax (note (a)) (528,168) (168,639) Civil aviation infrastructure levies (note (b)) - (129,646) ---------- ---------- 21,038,776 14,277,158 ========== ==========
(a) Pursuant to various PRC business tax rules and regulations, the Group is required to pay PRC business tax. Except for traffic revenues derived from inbound international and regional flights which are not subject to PRC business tax, the Group's traffic revenues, commission income and ground service income are subject to PRC business tax levied at rates ranging from 3% to 5%. (b) Prior to 1 May 2003, the civil aviation infrastructure levies were paid to Civil Aviation Administration of China ("CAAC"), at rates of 5% and 2% respectively for domestic and international or regional traffic revenues. From 1 May 2003 to 31 March 2004, civil aviation infrastructure levies for all traffic revenues of the Group are waived by CAAC, in compensating for the airlines' losses on revenue due to the outbreak of Severe Acute Respiratory Syndrome ("SARS"). IV-20 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Effective from 1 April 2004, in accordance with the related new policy promulgated by the PRC Government, civil aviation infrastructure levies are payable based on the route, aircraft model and tonne-kilometres, and the levies of RMB251,185,000 incurred for the year ended 31 December 2004 are recorded in the operating expenses. 4. OTHER OPERATING INCOME, NET
GROUP 2004 2003 RMB'000 RMB'000 Rental income from operating subleases of aircraft (note 38(c)(i)) 121,480 31,209 Government subsidy (note (a)) 73,506 58,448 Losses on disposals of aircraft and engines (note (b)) (40,564) (28,767) ------- ------- 154,422 60,890 ======= =======
(a) In 2004, government subsidy was granted by the local government to the Company in consideration of the relocation of the Company's international flights and related facilities from Hongqiao Airport to Pudong International Airport. In 2003, the government subsidy was granted for compensation of SARS impact on airlines business. (b) During the year, the Group disposed 17 engines (2003: three B737-200 aircraft) to a third party. 5. WAGES, SALARIES AND BENEFITS
GROUP 2004 2003 RMB'000 RMB'000 Wages, salaries and allowances 1,590,722 1,027,092 Contribution under defined contribution retirement schemes (note 33(a)) 194,200 121,200 Post-retirement benefits (note 33(b)(iii)) 51,704 40,299 Staff housing allowances (note 34(b)) 29,253 260,463 --------- --------- 1,865,879 1,449,054 ========= ========= Average number of employees for the year ended 19,666 16,435 ========= =========
IV-21 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP 6. FINANCE COSTS, NET
GROUP 2004 2003 RMB'000 RMB'000 Interest charged on obligations under finance leases 339,276 490,456 Interest on bank loans - wholly repayable within five years 431,517 265,955 - not wholly repayable within five years 144,693 180,291 -------- -------- 576,210 446,246 Net foreign exchange losses 32,207 62,179 Interest accrued on a long-term payable (note 31) 8,344 9,610 Interest on loans from an associate 1,629 6,396 Less: amounts capitalised into advances on aircraft and flight equipment (note 18) (57,120) (97,414) -------- -------- 900,546 917,473 Interest income (129,020) (147,846) -------- -------- 771,526 769,627 Fair value (gains)/losses on financial instrument - interests rate swap 2,659 5,010 - forward foreign exchange contract (11,498) 8,146 -------- -------- 762,687 782,783 ======== ========
The capitalisation rates used for the year ended 31 December 2004 ranged between 3 months LIBOR+0.25% and 5.76% per annum (2003: 3 months LIBOR+0.25% and 5.76% per annum). 7. PROFIT/(LOSS) BEFORE TAXATION
GROUP 2004 2003 RMB'000 RMB'000 Profit/(loss) before taxation is stated after charging:- Depreciation of fixed assets - owned assets 1,698,260 1,396,739 - assets held under finance leases and for own use 583,935 577,723 Operating lease rentals - aircraft 1,720,736 1,238,012 - land and buildings 146,704 116,279 Amortisation of lease prepayments 18,414 20,049 Loss on disposals of other fixed assets - 4,811 Amortisation of goodwill and negative goodwill 2,202 2,202 Consumption of consumables 139,711 86,009
IV-22 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Allowances for obsolescence of flight equipment spare parts 73,406 53,336 Allowances for doubtful accounts 24,250 19,229 Auditors' remuneration 7,380 7,380 --------- --------- and after crediting:- Gain on disposals of other fixed assets 13,001 - Fair value gain on disposals of short-term investments 5,235 21,920 ========= =========
8. EMOLUMENTS OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT (a) Directors' and supervisors' emoluments comprise the following:-
GROUP 2004 2003 RMB'000 RMB'000 Emoluments for executive directors - salaries, allowances and benefits in kind 202 425 - bonuses 269 124 Emoluments for supervisors - salaries, allowances and benefits in kind 127 46 - bonuses 113 18 --- --- 711 613 === ===
During the year ended 31 December 2004, no directors and supervisors waived their emoluments (2003: nil). (b) The five highest paid individuals of the Group are as follows:-
NUMBER OF INDIVIDUALS 2004 2003 Directors 1 2 Non-directors and non-supervisors 4 3 --- --- 5 5 === ===
(c) The emoluments of the five highest paid individuals:- IV-23 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP One (2003: two) of the Group's five highest paid individuals in 2004 are executive directors whose remunerations are included in the directors' emoluments above. Details of the remuneration of the remaining four (2003: three) highest paid individuals are as follows:-
GROUP 2004 2003 RMB'000 RMB'000 Salaries, allowances and benefits in kind 981 705 Bonuses 431 138 ----- --- 1,412 843 ===== ===
During the year ended 31 December 2004, no emoluments were paid by the Group to the directors, supervisors or the five highest paid individuals as an inducement to join or upon joining the Group, or as a compensation for loss of office (2003: nil). 9. TAXATION (a) Taxation is charged to the consolidated income statement as follows:-
GROUP 2004 2003 RMB'000 RMB'000 Provision for PRC income tax - current year 160,502 124,530 Deferred taxation (note 30) 19,578 118,797 ------- ------- 180,080 243,327 Share of tax attributable to associates (note 16) 1,144 4,227 ------- ------- 181,224 247,554 ======= =======
(i) Pursuant to the Circular Hu Shui Er Cai (2001) No. 104 dated 22 October 2001 issued by local tax bureau, with retrospective effect from 1 July 2001, the Company is entitled to a reduced income tax rate of 15%. (ii) The Company has two major subsidiaries, namely China Cargo Airlines Co., Ltd. ("China Cargo") and China Eastern Airlines Jiangsu Co., Ltd. ("CEA Jiangsu"). Pursuant to the Circular (2000) No. 52 jointly issued by the Shanghai IV-24 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Municipal Financial Bureau and Shanghai Municipal State Tax Bureau, China Cargo is subject to a reduced income tax rate of 15%. CEA Jiangsu is subject to the standard PRC income tax rate of 33%. (iii) The difference between the actual taxation charge in the consolidated income statement and the amounts which would result from applying the enacted tax rate to profit/(loss) before taxation can be reconciled as follows:-
GROUP 2004 2003 RMB'000 RMB'000 Profit/(loss) before taxation 845,407 (589,831) Tax calculated at enacted tax rate of 15% (126,811) 88,475 Effect attributable to subsidiaries and associates charged at tax rate of 33% (24,902) (4,117) Adjustments:- Expenses not deductible for tax purposes (35,428) (62,421) Utilisation of previously unrecognised tax losses of the Company 6,395 - Unrecognised tax losses of the Company - (258,515) Unrecognised tax losses of associates (20,993) (14,821) Utilisation of previously unrecognised tax losses of associates 19,998 - Others 517 3,845 -------- -------- Tax charge (181,224) (247,554) ======== ========
(b) The Group operates international flights to certain overseas destinations. There was no material overseas taxation for the year as there exists double tax relief between PRC and the corresponding jurisdictions (including Hong Kong). 10. EARNINGS/(LOSS) PER SHARE The calculation of earnings/(loss) per share is based on the profit attributable to shareholders of RMB514,075,000 (2003: loss of RMB949,816,000) and 4,866,950,000 (2003: 4,866,950,000) shares in issue during the year. The Company has no potential dilutive ordinary shares. 11. DIVIDEND On 12 April 2005, the Board of Directors proposed a final dividend of RMB0.02 per share totalling RMB97,339,000 for the year ended 31 December 2004 (2003: nil). These financial IV-25 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP statements do not reflect this dividend payable, which will be accounted for in the shareholders' equity as an appropriation of retained earnings in the year ending 31 December 2005. 12. FIXED ASSETS
GROUP AIRCRAFT AND FLIGHT EQUIPMENT HELD UNDER OTHER FIXED FINANCE ASSETS AND OWNED LEASES BUILDINGS EQUIPMENT TOTAL RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 VALUATION At 1 January 2004 22,163,218 10,956,426 2,224,520 2,038,181 37,382,345 Reclassification upon purchase of aircraft under a finance lease 356,328 (356,328) - - - Lease rebate upon purchase of aircraft under a finance lease (note a) (98,921) - - - (98,921) Transfers from construction in progress (note 13) - - 84,847 124,352 209,199 Transfers from advances (note 18) 535,548 1,079,852 - - 1,615,400 Additions 1,574,829 2,808,904 22,159 227,428 4,633,320 Disposals (912,312) - (77,511) (68,604) (1,058,427) ---------- ---------- --------- --------- ---------- At 31 December 2004 23,618,690 14,488,854 2,254,015 2,321,357 42,682,916 ========== ========== ========= ========= ========== ACCUMULATED DEPRECIATION At 1 January 2004 5,657,593 3,613,309 334,951 937,589 10,543,442 Reclassification upon purchase of aircraft under a finance lease 40,746 (40,746) - - - Charge for the year 1,367,462 583,935 85,761 245,037 2,282,195 Disposals (283,444) - (28,503) (51,093) (363,040) ---------- ---------- --------- --------- ---------- At 31 December 2004 6,782,357 4,156,498 392,209 1,131,533 12,462,597 ---------- ---------- --------- --------- ---------- NET BOOK VALUE AT 31 DECEMBER 2004 16,836,333 10,332,356 1,861,806 1,189,824 30,220,319 ========== ========== ========= ========= ========== Net book value at 31 December 2003 16,505,625 7,343,117 1,889,569 1,100,592 26,838,903 ========== ========== ========= ========= ==========
IV-26 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
COMPANY AIRCRAFT AND FLIGHT EQUIPMENT HELD UNDER OTHER FIXED FINANCE ASSETS AND OWNED LEASES BUILDINGS EQUIPMENT TOTAL RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 VALUATION At 1 January 2004 17,922,994 10,956,426 1,347,425 1,392,428 31,619,273 Reclassification upon purchase of aircraft under a finance lease 356,328 (356,328) - - - Lease rebate upon purchase of aircraft under a finance lease (note a) (98,921) - - - (98,921) Transfer to a subsidiary (257,407) - - - (257,407) Transfers from construction in progress (note 13) - - 75,659 13,218 88,877 Transfer from advance (note 18) 535,548 1,079,852 - - 1,615,400 Additions 1,356,662 2,808,904 20,812 188,199 4,374,577 Disposals (912,312) - (72,901) (57,072) (1,042,285) ---------- ---------- --------- --------- ---------- At 31 December 2004 18,902,892 14,488,854 1,370,995 1,536,773 36,299,514 ---------- ---------- --------- --------- ---------- ACCUMULATED DEPRECIATION At 1 January 2004 4,687,965 3,613,309 235,517 698,722 9,235,513 Reclassification upon purchase of aircraft under a finance lease 40,746 (40,746) - - - Transfer to a subsidiary (40,746) - - - (40,746) Charge for the year 1,012,161 583,935 56,878 179,772 1,832,746 Disposals (283,444) - (28,021) (41,651) (353,116) ---------- ---------- --------- --------- ---------- At 31 December 2004 5,416,682 4,156,498 264,374 836,843 10,674,397 ---------- ---------- --------- --------- ---------- NET BOOK VALUE AT 31 DECEMBER 2004 13,486,210 10,332,356 1,106,621 699,930 25,625,117 ========== ========== ========= ========= ========== Net book value at 31 December 2003 13,235,029 7,343,117 1,111,908 693,706 22,383,760 ========== ========== ========= ========= ==========
(a) In January 2004, the Company exercised its right upon settlement and termination of a finance lease arrangement to purchase an aircraft at a consideration equal to the present value of the remaining minimum lease payments on the date of the purchase. As part of the finance lease arrangement, the Company is entitled to receive a rebate in the amount of RMB98,921,000 if it meets certain conditions as defined in the lease arrangement. IV-27 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP All the conditions to receive such rebate had been satisfied and the amount was received in February 2004 and was recognised as an adjustment to the carrying value of the aircraft to which the rebate relates. (b) On 30 June 2001, the fixed assets were revalued by an independent valuer registered in PRC on a market value basis. The revalued amount were not materially different from the carrying values of these fixed assets. On 31 December 2002, the Group's fixed assets were revalued by the directors of the Company on a market value basis. The difference between the valuation and the carrying amount of the fixed assets as at 31 December 2002 was recognised. On 31 December 2004, the directors of the Company reviewed the carrying value of the Group's fixed assets as at 31 December 2004 and are of the opinion that the carrying amount is not materially different from the fair value. Had the Group's fixed assets been stated at cost less accumulated depreciation and impairment losses as at 31 December 2004, the carrying amounts of fixed assets would have been RMB30,067,348,000 (2003: RMB26,618,747,000). (c) Certain aircraft of the Group and the Company with an aggregate carrying value of approximately RMB13,032,759,000 were pledged as collateral under certain loan agreements as at 31 December 2004 (2003: RMB9,735,106,000) (see note 26). 13. CONSTRUCTION IN PROGRESS
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 At 1 January 219,788 413,812 92,520 109,785 Additions 178,065 249,737 73,891 52,439 Transfer to fixed assets (note 12) (209,199) (443,761) (88,877) (69,704) -------- -------- ------- ------- At 31 December 188,654 219,788 77,534 92,520 ======== ======== ======= =======
14. LEASE PREPAYMENTS Lease prepayments represent unamortised prepayments for land use rights. IV-28 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP The Group's land use rights are located in the PRC and majority of these land use rights have terms of 50 years from the date of grant. As at 31 December 2004, majority of these land use rights had remaining terms ranging from 42 to 48 years (2003: from 43 to 49 years). Certificates of certain land use rights with nil carrying value (2003: nil) of the Group are currently registered under the name of CEA Holding. The procedures to change the registration of the land use rights certificates with the relevant municipal land bureaus are currently being addressed by CEA Holding. Until the completion of these transfer procedures, the Group is unable to assign or pledge these land use rights. However, the Group currently has no need to assign and no intention to pledge these land use rights. In addition, the Group is entitled to lawfully and validly occupy and use these lands for its daily operations in spite of the fact that the procedures of changing the registration of these land use rights have not been fully completed. Accordingly, the directors of the Company do not believe the lack of certificates of certain land use rights has any material impact on the financial position of the Group. 15. INVESTMENTS IN SUBSIDIARIES
COMPANY 2004 2003 RMB'000 RMB'000 Unlisted shares, at cost 2,146,856 1,600,156 Amounts due from subsidiaries 614,652 2,208,459 --------- --------- 2,761,508 3,808,615 ========= =========
Particulars of the principal subsidiaries, all of which are limited companies established and operating in the PRC, are as follows:-
PLACE AND DATE OF PAID-UP ATTRIBUTABLE EQUITY PRINCIPAL COMPANY ESTABLISHMENT CAPITAL INTEREST ACTIVITIES 2004 2003 2004 2003 RMB'000 RMB'000 China Cargo Airlines PRC 500,000 500,000 70% 70% Provision of Co., Ltd. 22 July 1998 cargo carriage services China Eastern Airlines PRC 803,666 236,579 63% 55% Provision of Jiangsu Co., Ltd.(*) 3 May 1993 airline services
IV-29 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Eastern Airlines PRC 70,000 70,000 86% 86% Provision of hotel Hotel Co., Ltd. 18 March 1998 services to crew members Shanghai Eastern PRC 473,000 473,000 95% 95% Provision of Flight Training Co., 18 December 1995 flight training Ltd. services Shanghai Eastern PRC 412,500 412,500 99% 99% Investment holding Airlines Investment 8 May 2002 Co., Ltd. Shanghai Eastern PRC 200,000 - 70% - Provision of Logistics Co., Ltd. (**) 23 August 2004 cargo logistics services
* In 2004, the Company and one of a minority shareholder contributed additional capital of RMB408,100,000 and RMB158,987,000 respectively to the subsidiary. The Company's interest in the subsidiary increased from 55% to 63% because the Company contributed proportionally more than its original ownership interest. ** In 2004, the Company, China Cargo and a minority shareholder contributed capital of RMB138,600,000, RMB2,000,000 and RMB59,400,000 respectively to set up the subsidiary. 69% shareholding are held directly and 1% shareholding are held indirectly by the Company. 16. INVESTMENTS IN ASSOCIATES
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Unlisted investment, at cost - - 625,964 590,601 Share of net assets 609,130 572,818 - - Goodwill 47,060 53,266 - - ------- ------- ------- ------- 656,190 626,084 625,964 590,601 ======= ======= ======= =======
COMPANY 2004 2003 RMB'000 RMB'000 Movement of investments in associates is as follows:- At 1 January 626,084 331,570 Cost of investments 35,362 327,252
IV-30 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Share of results before taxation (4,112) (28,511) Share of taxation (note 9(a)) (1,144) (4,227) ------- ------- At 31 December 656,190 626,084 ======= =======
The share of results before taxation includes an amortisation of RMB6,206,000 (2003: RMB6,206,000) for the goodwill in respect of acquisition of associates and a provision of RMB51,200,000 (2003: RMB28,000,000) for a receivable from a shareholder of an associate. Particulars of the principal associates, all of which are limited companies established and operating in the PRC, are as follows:-
PLACE AND DATE OF PAID-UP ATTRIBUTABLE EQUITY PRINCIPAL COMPANY ESTABLISHMENT CAPITAL INTEREST ACTIVITIES RMB'000 2004 2003 China Eastern Airlines PRC 600,000 40% 40% Provision of air Wuhan Co., Ltd. 16 August 2002 transportation services Eastern Air Group PRC 400,000 25% 25% Provision of Finance Co., Ltd. 6 December 1995 financial services to companies comprising CEA Holding Eastern Aviation PRC 10,000 45% 45% Provision of Advertising Services 4 March 1986 aviation Co., Ltd. advertising agency services China Eastern Air PRC 350,000 45% 45% Provision of air Catering Investment 17 November 2003 catering Co., Ltd. services Eastern Aviation Import PRC 80,000 45% 45% Provision of & Export Co., Ltd. 9 June 1993 aviation equipment, spare parts and tools trading Shanghai Dongmei PRC 31,000 45% 45% Provision of Aviation Travel 17 October 2003 travelling and Co., Ltd. accommodation agency services Qingdao Liuting PRC 450,000 25% 25% Provision of International Airport 1 December 2000 airport Co., Ltd operation services
IV-31 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP 17. GOODWILL AND NEGATIVE GOODWILL
GROUP AND COMPANY NEGATIVE GOODWILL GOODWILL TOTAL RMB'000 RMB'000 RMB'000 Cost At 1 January 2004 and 31 December 2004 113,105 (55,245) 57,860 ------- ------- ------ Accumulated amortisation At 1 January 2004 28,275 (8,920) 19,355 Charge for the year 5,654 (3,452) 2,202 ------- ------- ------ At 31 December 2004 33,929 (12,372) 21,557 ======= ======= ====== Net book value At 31 December 2004 79,176 (42,873) 36,303 ======= ======= ====== At 31 December 2003 84,830 (46,325) 38,505 ======= ======= ======
18. ADVANCES ON AIRCRAFT AND FLIGHT EQUIPMENT
GROUP AND COMPANY 2004 2003 RMB'000 RMB'000 At 1 January 2,239,893 3,227,720 Additions 1,996,990 1,198,242 Interest capitalised during the year (note 6) 57,120 97,414 Transfers to fixed assets (note 12) (1,615,400) (2,283,483) ---------- ---------- At 31 December 2,678,603 2,239,893 ========== ==========
Included in the balance as at 31 December 2004 is interest capitalised of RMB160,016,000 (2003: RMB130,965,000). 19. OTHER LONG-TERM RECEIVABLES AND INVESTMENTS IV-32 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Long-term bank deposits (note 25) 1,908,398 1,743,924 1,908,398 1,743,924 Deposits for aircraft under operating leases 133,159 110,812 133,159 90,339 Prepaid custom duty and value added tax 21,083 37,410 21,083 37,410 Prepayments and other long-term receivables 139,966 70,216 118,941 53,875 --------- --------- --------- --------- 2,202,606 1,962,362 2,181,581 1,925,548 ========= ========= ========= =========
20. TRADE RECEIVABLES LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS The credit terms given to trade customers are determined on an individual basis, with the credit period ranging from half a month to three months. As at 31 December 2004, the aging analysis of the trade receivables are as follows:-
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Less than 31 days 1,077,804 853,303 738,246 564,870 31 to 60 days 216,236 348,159 95,537 221,498 61 to 90 days 68,845 28,094 43,910 968 Over 90 days 99,787 96,121 49,400 58,168 --------- --------- ------- ------- 1,462,672 1,325,677 927,093 845,504 ========= ========= ======= =======
21. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Amounts due from related companies (note 38(a)(i)) 122,253 45,389 116,001 35,785 Receivables from provision of ground services 243,890 111,129 243,890 111,129 Receivables from provision of cargo handling services 118,446 70,022 - -
IV-33 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Prepaid aircraft operating lease rentals 115,456 95,959 101,358 79,340 Short-term deposits with original maturity over three months 77,446 108,870 12,721 7,441 Discounts on aircraft acquisitions receivable 31,136 29,814 31,136 29,814 US Treasury zero coupon bonds - 585,736 - 585,736 Others 400,337 324,124 314,888 273,266 --------- --------- ------- --------- 1,108,964 1,371,043 819,994 1,122,511 ========= ========= ======= =========
22. TRADE PAYABLES AND NOTES PAYABLES As at 31 December 2004 and 2003, all trade payables were current balances and aged within 30 days. As at 31 December 2004, all notes payables were unsecured, interest free and repayable in six months. 23. OTHER PAYABLES AND ACCRUED EXPENSES
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Amounts due to related companies (note 38(a)(i)) 138,968 771,643 164,216 739,427 Accrued fuel cost 1,290,038 697,652 1,136,343 603,381 Accrued take-off and landing charges 749,458 703,994 629,948 540,298 Current portion of accrued aircraft overhaul expenses (note 24) 539,249 385,168 464,268 377,224 Other accrued operating expenses 427,294 603,260 290,727 492,295 Accrued salaries, wages and benefits 333,910 138,954 286,467 119,117 Flight equipment purchase payable 289,232 147,775 281,001 141,920 Airport construction levy payable 243,295 - 243,295 - Levies collected from ticket sales on behalf of overseas tax authorities 218,915 82,862 218,915 82,862 Duties and levies payable 188,627 10,049 150,178 - Airport expenses related to provision of ground services 98,162 42,320 98,162 42,320 Current portion of provision for staff housing allowances (note 34 (b)) 93,427 85,973 85,387 78,771 Current portion of long-term payables (note 31) 30,000 30,000 30,000 30,000
IV-34 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Current portion of post-retirement benefit obligations (note 33(b)(i)) 27,500 19,750 25,771 18,635 Amounts due to minority shareholders - 156,308 - - Others 685,574 424,281 580,920 339,670 --------- --------- --------- --------- 5,353,649 4,299,989 4,685,598 3,605,920 ========= ========= ========= =========
24. ACCRUED AIRCRAFT OVERHAUL EXPENSES
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 At 1 January 2004 576,552 547,813 515,534 441,863 Additional provisions 244,625 123,213 175,314 121,839 Over provision (20,814) (59,456) (20,814) (26,860) Utilised during the year (85,154) (35,018) (72,755) (21,308) -------- -------- -------- -------- At 31 December 2004 715,209 576,552 597,279 515,534 Less: current portion (note 23) (539,249) (385,168) (464,268) (377,224) -------- -------- -------- -------- Long-term portion 175,960 191,384 133,011 138,310 ======== ======== ======== ========
Accrued aircraft overhaul expenses represent present value of estimated costs of major overhauls for aircraft and engines under operating lease as the Group has the responsibility to fulfill certain return conditions under relevant leases. 25. OBLIGATIONS UNDER FINANCE LEASES At 31 December 2004, the Group and the Company had 22 aircraft (2003: 18 aircraft) under finance leases. Under the terms of the leases, the Group and the Company has the option to purchase, at or near the end of the lease term, certain aircraft at fair market value and others at either fair market value or a percentage of the respective lessor's defined cost of the aircraft. The future minimum lease payments, interest and present value of minimum lease payments which are principally denominated in foreign currencies, under these finance leases as at 31 December 2004 are as follows:- IV-35 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
GROUP AND COMPANY 2004 2003 PRESENT Present VALUE OF value of MINIMUM MINIMUM Minimum minimum LEASE LEASE lease lease PAYMENTS INTEREST PAYMENTS payments Interest payments RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Within one year 1,526,981 337,333 1,189,648 2,049,079 356,995 1,692,084 In the second year 1,962,208 262,372 1,699,836 1,242,950 256,355 986,595 In the third to fifth year inclusive 3,924,600 168,346 3,756,254 4,361,682 322,316 4,039,366 After the fifth year 2,401,578 385,030 2,016,548 408,853 26,012 382,841 ---------- --------- ---------- ---------- -------- ---------- Total 9,815,367 1,153,081 8,662,286 8,062,564 961,678 7,100,886 ---------- --------- ---------- ---------- -------- ---------- Less: amount repayable within one year (1,526,981) (337,333) (1,189,648) (2,049,079) (356,995) (1,692,084) ---------- --------- ---------- ---------- -------- ---------- Long-term portion 8,288,386 815,748 7,472,638 6,013,485 604,683 5,408,802 ========== ========= ========== ========== ======== ==========
At 31 December 2004, the Group and the Company had long-term bank deposits totalling RMB1,908,398,000 (2003: long-term bank deposits and U.S. Treasury zero coupon bonds totalling RMB2,329,660,000) pledged as securities under certain finance lease arrangements (see note 19). All of these bank deposits will be used to meet future lease obligations as they fall due. In addition, the Group's finance lease obligations are secured by the related aircraft, the relevant insurance policies and bank guarantees. 26. LONG-TERM BANK LOANS
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Bank loans - secured 5,912,958 6,495,507 5,912,958 6,495,507 - unsecured 4,823,302 4,727,416 4,792,679 4,727,416 ---------- ---------- ---------- ---------- Total 10,736,260 11,222,923 10,705,637 11,222,923 Less: amount repayable within one year (3,193,432) (2,250,734) (3,185,156) (2,250,734) ---------- ---------- ---------- ---------- Long-term portion 7,542,828 8,972,189 7,520,481 8,972,189 ========== ========== ========== ========== The bank loans are repayable as follows:- Within one year 3,193,432 2,250,734 3,185,156 2,250,734
IV-36 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP In the second year 2,386,862 2,438,574 2,370,309 2,438,574 In the third to fifth year inclusive 3,216,181 4,163,578 3,210,387 4,163,578 After the fifth year 1,939,785 2,370,037 1,939,785 2,370,037 ---------- ---------- ---------- ---------- Total 10,736,260 11,222,923 10,705,637 11,222,923 ========== ========== ========== ==========
The terms of long-term bank loans can be summarised as follows:-
GROUP COMPANY 2004 2003 2004 2003 INTEREST RATE AND FINAL MATURITIES RMB'000 RMB'000 RMB'000 RMB'000 RMB denominated bank loans:- Loans for Fixed interests rates ranging working from 4.94% to 5.76% capital per annum as at 31 December 2004; 3-year loans with final maturity through to 2007 1,710,100 1,306,700 1,710,100 1,306,700 Loans for the Fixed interest rate of 5.18% purchases per annum as at 31 December of aircraft 2004; 2 to 8-year loans with final maturity through to 2012 880,000 - 880,000 - Loans for Fixed interest rate of 5.76% per construction annum as at 31 December projects 2004; 7 to 10-year loans with final maturities through to 2007 412,500 637,500 412,500 637,500 U.S. dollar denominated bank loans:- Loans for the Fixed interest rates ranging purchases of from 5.65% to 6.86% per aircraft annum and floating interest rates ranging from 3 months LIBOR +0.25% to 6 months LIBOR +0.3% as at 31 December 2004; 2 to 10-year loans with final maturities through to 2013 7,703,037 9,278,723 7,703,037 9,278,723 Loan for the Floating interest rates of 6 purchase of months LIBOR +0.6% as at an aircraft 31 December 2004; 3-year simulator loans with final maturity in 2007 30,623 - - - ---------- ---------- ---------- ---------- Total long-term bank loans 10,736,260 11,222,923 10,705,637 11,222,923 ========== ========== ========== ==========
IV-37 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP All secured bank loans as at 31 December 2004 and 2003 of the Group and the Company for the purchases of aircraft were secured by the related aircraft (note 12(b)). In addition, certain secured bank loans with aggregate amount of RMB1,162,186,000 (2003: RMB1,456,320,000) were also guaranteed by Export-Import Bank of the United States, China Industrial and Commercial Bank and China Construction Bank. Certain unsecured bank loans of the Group and the Company with aggregate amount of RMB2,122,600,000 (2003: RMB1,944,200,000) were guaranteed by CEA Holding (note 38(b)). 27. SHORT-TERM BANK LOANS Short-term bank loans of the Group and the Company are repayable within one year with interest charged at the prevailing market rates based on the rates quoted by the People's Bank of China. The interest rates related to such loans were between 2.22% and 5.04% per annum (2003: 2.06% and 5.04% per annum). During the year ended 31 December 2004, the weighted average interest rate on short-term bank loans was 3.81% per annum (2003: 3.34% per annum). 28. SHARE CAPITAL
2004 2003 RMB'000 RMB'000 Registered, issued and fully paid of RMB1.00 each A shares State-owned shares held by CEA Holding 3,000,000 3,000,000 Shares held by public 300,000 300,000 --------- --------- 3,300,000 3,300,000 Overseas listed foreign H shares 1,566,950 1,566,950 --------- --------- 4,866,950 4,866,950 ========= =========
Pursuant to articles 49 and 50 of the Company's Articles of Association, the A shares held by CEA Holding, employees, the public and H shares are all registered ordinary shares, carrying equal rights. 29. RESERVES IV-38 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
STATUTORY STATUTORY DISCRETIONARY COMMON COMMON COMMON RESERVE WELFARE RESERVE HEDGING SHARE FUND FUND FUND REVALUATION CAPITAL RESERVE RETAINED PREMIUM (NOTE (b)) (NOTE (c)) (NOTE (d)) RESERVE RESERVE (NOTE 40) PROFITS TOTAL RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 GROUP AT 1 JANUARY 2004 1,006,455 143,498 142,548 27,989 490,688 (720,057) (77,879) 501,959 1,515,201 UNREALISED LOSSES ON CASHFLOW HEDGES (NOTE 40) - GROSS - - - - - - (7,610) - (7,610) - TAX - - - - - - 1,141 - 1,141 REALISED GAINS ON CASHFLOW HEDGES (NOTE 40) - GROSS - - - - - - (8,839) - (8,839) - TAX - - - - - - 1,326 - 1,326 PROFIT ATTRIBUTABLE TO SHAREHOLDERS - - - - - - - 514,075 514,075 TRANSFER FROM RETAINED PROFITS TO RESERVES (NOTE (A)) - 35,299 31,837 - - - - (67,136) - --------- ------- ------- ------ ------- -------- ------- ------- --------- AT 31 DECEMBER 2004 1,006,455 178,797 174,385 27,989 490,688 (720,057) (91,861) 948,898 2,015,294 ========= ======= ======= ====== ======= ======== ======= ======= ========= COMPANY AT 1 JANUARY 2004 1,006,455 77,214 77,214 27,908 448,859 (720,057) (77,879) 131,249 970,963 UNREALISED LOSSES ON CASHFLOW HEDGES (NOTE 40) - GROSS - - - - - - (7,610) - (7,610) - TAX - - - - - - 1,141 - 1,141 REALISED GAINS ON CASHFLOW HEDGES (NOTE 40) - GROSS - - - - - - (8,839) - (8,839) - TAX - - - - - - 1,326 - 1,326 RELEASE OF RESERVES UPON DISPOSALS OF AIRCRAFT, NET OF TAX - - - - (13,782) - - 13,782 - PROFIT FOR THE YEAR - - - - - - - 393,291 393,291 --------- ------- ------- ------ ------- -------- ------- ------- --------- AT 31 DECEMBER 2004 1,006,455 77,214 77,214 27,908 435,077 (720,057) (91,861) 538,322 1,350,272 ========= ======= ======= ====== ======= ======== ======= ======= =========
IV-39 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
STATUTORY STATUTORY DISCRETIONARY COMMON COMMON COMMON RESERVE WELFARE RESERVE HEDGING SHARE FUND FUND FUND REVALUATION CAPITAL RESERVE RETAINED PREMIUM (NOTE (b)) (NOTE (c)) (NOTE (d)) RESERVE RESERVE (NOTE 40) PROFITS TOTAL RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Group At 1 January 2003 1,006,455 106,809 106,727 27,989 504,957 (720,057) (28,225) 1,507,498 2,512,153 Unrealised losses on cashflow hedges (note 40) - gross - - - - - - (71,573) - (71,573) - tax - - - - - - 10,736 - 10,736 Realised losses on cashflow hedges (note 40) - gross - - - - - - 13,156 - 13,156 - tax - - - - - - (1,973) - (1,973) Release of reserves upon disposals of aircraft - gross - - - - (16,787) - - 16,787 - - tax - - - - 2,518 - - - 2,518 Loss attributable to Shareholders - - - - - - - (949,816) (949,816) Transfer from retained Profits to reserves (note (a)) - 36,689 35,821 - - - - (72,510) - --------- ------- ------- ------ ------- -------- ------- ---------- ---------- At 31 December 2003 1,006,455 143,498 142,548 27,989 490,688 (720,057) (77,879) 501,959 1,515,201 ========= ======= ======= ====== ======= ======== ======= ========== ========== Company At 1 January 2003 1,006,455 77,214 77,214 27,908 517,549 (720,057) (28,225) 1,297,904 2,255,962 Unrealised losses on cashflow hedges (note 40) - gross - - - - - - (71,573) - (71,573) - tax - - - - - - 10,736 - 10,736 Realised losses on cashflow hedges (note 40) - gross - - - - - - 13,156 - 13,156 - tax - - - - - - (1,973) - (1,973) Release of reserves upon disposals of aircraft - gross - - - - (80,812) - - 80,812 - - tax - - - - 12,122 - - - 12,122 Loss for the year - - - - - - - (1,247,467) (1,247,467) --------- ------- ------- ------ ------- -------- ------- ---------- ---------- At 31 December 2003 1,006,455 77,214 77,214 27,908 448,859 (720,057) (77,879) 131,249 970,963 ========= ======= ======= ====== ======= ======== ======= ========== ==========
IV-40 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP (a) For the year ended 31 December 2004, under the PRC Accounting Regulations, the profit for the year of the Company is used to offset the loss incurred in 2003. Accordingly, no profit appropriation of the Company to reserves has been made for the year ended 31 December 2004 (2003: nil). Transfer from retained profits to reserves for the year represents the profit appropriation to reserves of certain subsidiaries of the Company. (b) Pursuant to PRC regulations and the Company's Articles of Association, the Company is required to transfer 10% of its profit for the year, as determined under the PRC Accounting Regulations, to statutory common reserve fund until the fund aggregates to 50% of the Company's registered capital. Statutory common reserve fund can be used to make good previous years' losses, if any, and to issue new shares to shareholders in proportion to their existing shareholdings or to increase the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital. (c) Pursuant to PRC regulations and the Company's Articles of Association, the Company is required to transfer 5% to 10% of its profit for the year, as determined under the PRC Accounting Regulations, to the statutory common welfare fund. This fund can only be used to provide staff welfare facilities and other collective benefits to the Company's employees. This fund is non-distributable other than in liquidation. (d) The Company is allowed to transfer 5% of the profit for the year as determined under the PRC Accounting Regulations, to discretionary common reserve fund. The transfer to this reserve is subject to the approval by shareholder's meetings. 30. DEFERRED TAXATION As at 31 December 2004, the deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction) were made up of taxation effects of the followings:- IV-41 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
2004 2003 CURRENT NON-CURRENT TOTAL Current Non-current Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 GROUP Deferred tax assets:- Tax losses carried forward - 349,562 349,562 - 312,916 312,916 Provision for obsolete flight equipment and spare parts - 54,014 54,014 - 41,960 41,960 Repair cost on flight equipment - 119,039 119,039 - 160,541 160,541 Provision for post-retirement benefits 4,192 91,060 95,252 2,999 86,734 89,733 Other accrued expenses 104,493 16,211 120,704 108,518 13,744 122,262 ------- -------- --------- ------- -------- -------- 108,685 629,886 738,571 111,517 615,895 727,412 Less: unrecognised assets - (252,120) (252,120) - (258,515) (258,515) ------- -------- --------- ------- -------- -------- 108,685 377,766 486,451 111,517 357,380 468,897 ------- -------- --------- ------- -------- -------- Deferred tax liabilities:- Provision for overhaul - (106,128) (106,128) - (103,853) (103,853) Depreciation and amortisation - (737,775) (737,775) - (705,385) (705,385) ------- -------- --------- ------- -------- -------- - (843,903) (843,903) - (809,238) (809,238) ------- -------- --------- ------- -------- -------- Deferred tax assets/(liabilities), net 108,685 (466,137) (357,452) 111,517 (451,858) (340,341) ======= ======== ========= ======= ======== ======== COMPANY Deferred tax assets:- Tax losses carried forward - 349,562 349,562 - 312,916 312,916 Provision for obsolete flight equipment and spare parts - 53,108 53,108 - 43,660 43,660 Repair cost on flight equipment - 120,071 120,071 - 161,573 161,573 Provision for post-retirement benefits 3,866 78,161 82,027 2,795 77,900 80,695 Other accrued expenses 66,838 16,211 83,049 64,371 13,744 78,115 ------- -------- --------- ------- -------- -------- 70,704 617,113 687,817 67,166 609,793 676,959 Less: unrecognised assets - (252,120) (252,120) - (258,515) (258,515) ------- -------- --------- ------- -------- -------- 70,704 364,993 435,697 67,166 351,278 418,444 ------- -------- --------- ------- -------- -------- Deferred tax liabilities:- Provision for overhaul - (60,619) (60,619) - (60,441) (60,441) Depreciation and amortisation - (715,481) (715,481) - (672,639) (672,639) ------- -------- --------- ------- -------- -------- - (776,100) (776,100) - (733,080) (733,080) ------- -------- --------- ------- -------- -------- Deferred tax assets/(liabilities), net 70,704 (411,107) (340,403) 67,166 (381,802) (314,636) ======= ======== ========= ======= ======== ========
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current liabilities and when the deferred income taxes relate to the same authority. The following amounts, determined after appropriate offsetting, are shown in the balance sheets: IV-42 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Deferred tax assets 395,465 99,771 44,711 49,318 Deferred tax liabilities (752,917) (740,112) (685,114) (663,954) -------- -------- -------- -------- (357,452) (340,341) (340,403) (314,636) ======== ======== ======== ========
In accordance with PRC tax law, tax losses may be carried forward against future taxable income for a period of five years. As at 31 December 2004, the Company had tax losses carried forward of approximately RMB2,330 million (2003: RMB2,086 million) which will expire between 2006 and 2009, available to set off against the Company's future taxable income. For the year ended 31 December 2004, the Company did not recognise RMB252,120,000 (2003: RMB258,515,000) of deferred tax asset arising from the tax losses available as management believe it was more likely than not that such tax losses would not be realised before they expire. Movement in net deferred taxation liability is as follows:-
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 At 1 January 340,341 232,825 314,636 217,941 Charged/(credited) to income statement 19,578 118,797 28,234 117,580 Charged/(credited) to equity - revaluation reserves - (2,518) - (12,122) - unrecognised losses on cashflow hedges (2,467) (8,763) (2,467) (8,763) ------- ------- ------- ------- At 31 December 357,452 340,341 340,403 314,636 ======= ======= ======= =======
31. LONG-TERM PORTION OF OTHER PAYABLE
GROUP 2004 2003 RMB'000 RMB'000 At 1 January 151,860 172,250 Less: instalments paid during the year (30,000) (30,000) ------- ------- 121,860 142,250 Interest accrued during the year (note 6) 8,344 9,610 ------- ------- At 31 December 130,204 151,860 Less: Current portion (note 23) (30,000) (30,000) ------- ------- Long-term portion 100,204 121,860 ======= =======
IV-43 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Balance is unsecured, accrue interest at an effective rate of 6.21% and is repayable by annual instalment of RMB30 million (before taking into account of time value) up to year 2009. 32. MINORITY INTERESTS
GROUP 2004 2003 RMB'000 RMB'000 At 1 January 522,713 404,517 Contributions from minority shareholders 218,387 5,765 Dividends paid to minority shareholders (60,000) - Share of profits of subsidiaries 150,108 112,431 -------- ------- At 31 December 831,208 522,713 ======== =======
33. RETIREMENT BENEFIT PLANS AND POST-RETIREMENT BENEFITS (a) Defined contribution retirement schemes (i) Pension Substantially all of the Group employees are eligible to participate in the Group's retirement schemes. The Group participates in defined contribution retirement schemes organised by the municipal governments of the various provinces in which the Group operates. The Group is required to make annual contributions to the schemes at rates ranging from 20% to 22% of salary costs including certain allowances calculated in the prior year. Employees contribute at rates ranging from 7% to 8% of their basic salaries. The Group has no other material obligation for the payment of retirement benefits beyond the annual contributions under these schemes. For the year ended 31 December 2004, the Group's pension cost charged to the income statement amounted to RMB146,500,000 (2003: RMB121,200,000). (ii) Medical insurance IV-44 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP In 1998, the State Council announced that each municipal government should introduce a medical insurance scheme for employees and retirees of all enterprises, of which the detailed policies and regulations were to be set out by individual municipal government. In the end of 2000, the Shanghai Municipal Government promulgated the detailed policies and regulations of its medical insurance scheme. In January 2001, the Group joined this scheme under which the Group and its employees contribute approximately 12% and 2% of the employee's basic salaries to the scheme respectively. The Group has no other obligation for the payment of medical expense beyond the annual contributions. For the year ended 31 December 2004, the Group's medical insurance contribution charged to the income statement amounted to RMB76,288,000 (2003: RMB65,012,000). (b) Post retirement benefits In addition to the above retirement schemes, the Group provides retirees with post-retirement benefits including transportation subsidies, social function activities subsidies as well as other welfare. The expected cost of providing these post-retirement benefits is actuarially determined and recognised by using the projected unit credit method, which involves a number of assumptions and estimates including the rate of inflation, discount rate and employees' turnover ratio. (i) As at 31 December 2004, the post-retirement benefit obligations recognised in the balance sheets of the Group and the Company were as follows:-
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Present value of unfounded post-retirement benefit obligations 538,428 514,351 462,997 440,362 Unrecognised actuarial gains 51,704 51,170 34,948 48,702 -------- -------- -------- -------- Post-retirement benefit obligations 590,132 565,521 497,945 489,064 Less: current portion (note 23) (27,500) (19,750) (25,771) (18,635) -------- -------- -------- -------- Post-retirement benefit obligations - long-term portion 562,632 545,771 472,174 470,429 ======== ======== ======== ========
(ii) Changes in post-retirement benefit obligations are as follows:- IV-45 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 At 1 January 565,521 544,677 489,064 466,068 Current service cost 20,849 13,064 17,497 11,262 Interest on obligation 29,857 27,235 25,058 23,474 Actuarial loss recognised 998 - 998 - Payment made in the year (27,093) (19,455) (26,067) (18,712) Transfer (to)/from subsidiaries - - (8,605) 6,972 ------- ------- ------- ------- At 31 December 590,132 565,521 497,945 489,064 ======= ======= ======= =======
(iii) The costs of post-retirement benefits were recognised under wages, salaries and benefits in the consolidated income statement for the year as follows:-
GROUP 2004 2003 RMB'000 RMB'000 Current service cost 20,849 13,064 Interest on obligation 29,857 27,235 Actuarial loss recognised 998 - ------ ------ Total (note 5) 51,704 40,299 ====== ======
(iv) Principal actuarial assumptions at the balance sheet date are as follows:-
GROUP 2004 2003 Discount rate 5.00% 5.00% Annual rate of increase of per capita benefit payment 1.50% 1.50% Employees turnover rate 3.00% 3.00% ==== ====
34. STAFF HOUSING BENEFITS (a) Staff housing fund In accordance with the PRC housing reform regulations, the Group is required to make contribution to the State-sponsored housing fund at a range from 1% to 15% (2003: 1% to 15%) of the specified salary amount of its PRC employees. At the same time, the employees are required to IV-46 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP make contribution equal to the Group's contribution out of their salaries. The employees are entitled to claim the entire sum of the fund contribution under certain specified withdrawal circumstances. For the year ended 31 December 2004, the Group's contributions to the housing funds amounted to RMB94,200,000 (2003: RMB65,300,000) which is charged to the income statement. (b) Staff housing allowances Upon the issuance of the government circulars in 2000, the Company's directors estimated a provision of approximately RMB80,179,000 for staff housing allowance payable to eligible employees who joined in the Group prior to 1998 with reference to staff housing policies already set out by certain provincial governments then. Such provision for staff housing benefits is included in other payables in the Group's consolidated balance sheet as at 31 December 2002. In October 2003, the Board of directors approved a new staff housing policy (the "New Staff Housing Policy") which is extended to cover all existing staff who have not been allocated sufficient housing quarters. The benefit level given to the staff under the New Staff Housing Policy is generally higher as compared to the policies to which the Company's directors made reference in 2000. Under the New Staff Housing Policy, staff who have not been allocated with any housing quarters or who have not been allocated with a quarter up to the minimum area as set out in the New Staff Housing Policy are entitled to a cash allowance. An eligible staff's entitlement is calculated based on area of quarter entitled and the unit price as set out in the New Staff Housing Policy. The total entitlement is principally vested over a period of 20 years. Upon an employee's resignation, his or her entitlement will cease and any unpaid entitlement related to past services will be paid. Upon the establishment of the New Staff Housing Policy, employees are entitled to a portion of the total entitlement already accrued based on his or her past service period. Such entitlement will be paid over a period of 4 to 5 years. The Group recognised a provision of RMB 340,642,000 as related to its present obligation for its employee's staff housing entitlements, RMB 85,973,000 of which is classified as current portion in other payables in the Group's consolidated balance sheet as at 31 December 2003 (note 23). The incremental obligation of RMB 260,463,000 for staff housing benefits as a result of the New Staff Housing Policy was charged to the 2003's income statement. For the year ended 31 December 2004, the staff housing benefit provided under the New Staff Housing Policy amounted to RMB29,253,000 and is charged to the income statement. IV-47 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP 35. SUPPLEMENTARY INFORMATION TO THE CONSOLIDATED CASHFLOW STATEMENT
2004 2003 RMB'000 RMB'000 Investing activities not affecting cash:- Discounts on aircraft acquisition used for purchases of flight equipment and spare parts - 50,220 Financing activities not affecting cash:- Finance lease obligations incurred for acquisition of aircraft 3,177,225 - ========= ======
36. COMMITMENTS AND CONTINGENT LIABILITIES (a) Capital commitments As at 31 December 2004, the Group and the Company had the following capital commitments:-
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Authorised and contracted for:- - Aircraft and related equipment 8,791,472 7,668,801 8,791,472 7,668,801 - Other 437,574 358,415 406,494 358,415 ---------- --------- ---------- ---------- 9,229,046 8,027,216 9,197,966 8,027,216 ---------- --------- ---------- ---------- Authorised but not contracted for:- - Aircraft and related equipment 3,533,000 723,000 1,900,000 - - Additional investment in subsidiaries - - - 992,183 - Other 2,381,710 1,122,526 2,117,727 1,054,650 ---------- --------- ---------- ---------- 5,914,710 1,845,526 4,017,727 2,046,833 ========== ========= ========== ========== 15,143,756 9,872,742 13,215,693 10,074,049 ========== ========= ========== ==========
The above commitments mainly include amounts for acquisition of five A320, two A321, twenty A330, six B737, five A319 and five ERJ145 aircraft (2003: ten A320, two A340, four A321 aircraft and two A340 engines) for delivery between 2005 and 2008 (2003: between 2004 and 2005). IV-48 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Contracted expenditures for the above aircraft and related equipment, including deposits prior to delivery, subject to an inflation increase built in the contracts and any discounts available upon delivery of the aircraft, were expected to be paid as follows:-
GROUP AND COMPANY 2004 RMB'000 2005 6,945,235 2006 1,350,420 2007 495,817 --------- 8,791,472 =========
(b) Operating lease commitments As at 31 December 2004, the Group and the Company had commitments under operating leases to pay future minimum lease rentals as follows:-
2004 2003 AIRCRAFT Aircraft AND FLIGHT LAND AND and flight Land and EQUIPMENT BUILDINGS equipment buildings RMB'000 RMB'000 RMB'000 RMB'000 GROUP Within one year 1,024,857 19,287 1,063,619 49,532 In the second year 1,095,792 14,874 1,134,669 12,284 In the third to fifth year inclusive 3,094,495 25,401 2,735,477 24,413 After the fifth year 550,310 22,139 1,145,355 11,206 --------- ------ --------- ------ 5,765,454 81,701 6,079,120 97,435 ========= ====== ========= ====== COMPANY Within one year 831,187 19,207 869,944 45,343 In the second year 902,122 14,794 940,995 12,175 In the third to fifth year inclusive 2,397,661 25,379 1,910,171 24,313 After the fifth year 550,310 22,139 1,080,134 11,206 --------- ------ --------- ------ 4,681,280 81,519 4,801,244 93,037 ========= ====== ========= ======
37. SEGMENTAL REPORTING (a) Primary reporting format by business segment IV-49 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP The Group operates in one business segment which is the common carriage of passengers, cargo and mail over various routes authorised by CAAC. (b) Secondary reporting format by geographical segment The Group's turnover and segment results by geographical segments is analysed as follows:-
OTHER DOMESTIC HONG KONG JAPAN COUNTRIES(*) TOTAL RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 2004 TRAFFIC REVENUES - PASSENGER 8,283,701 2,186,810 1,466,070 3,421,033 15,357,614 - CARGO AND MAIL 298,846 592,008 647,181 2,890,325 4,428,360 8,582,547 2,778,818 2,113,251 6,311,358 19,785,974 OTHER OPERATING REVENUES 1,163,205 22,223 16,900 50,474 1,252,802 --------- --------- --------- --------- ---------- TURNOVER 9,745,752 2,801,041 2,130,151 6,361,832 21,038,776 --------- --------- --------- --------- ---------- SEGMENT RESULTS 226,803 388,497 238,192 471,263 1,324,755 --------- --------- --------- --------- UNALLOCATED INCOME (NOTE 4) 154,422 ---------- OPERATING PROFIT 1,479,177 ========== 2003 Traffic revenues - Passenger 5,591,640 1,627,093 977,610 2,064,684 10,261,027 - Cargo and mail 279,003 390,088 588,361 1,929,532 3,186,984 5,870,643 2,017,181 1,565,971 3,994,216 13,448,011 Other operating revenues 788,811 10,738 8,336 21,262 829,147 --------- --------- --------- --------- ---------- Turnover 6,659,454 2,027,919 1,574,307 4,015,478 14,277,158 --------- --------- --------- --------- ---------- Segment results (576,838) 224,683 190,042 322,686 160,573 --------- --------- --------- --------- Unallocated income (note 4) 60,890 ---------- Operating profit 221,463 ==========
(*) include U.S., Europe and other Asian countries The major revenue-earning assets of the Group are its aircraft fleet, all of which are registered in the PRC. Since the Group's aircraft fleet is deployed flexibly across its route network, there is no suitable basis of allocating such assets and the related liabilities to geographical segments and hence segment assets and capital expenditure by segment has not been presented. 38. RELATED PARTY TRANSACTIONS IV-50 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP (a) Balances with related companies (i) Amounts due from/to fellow subsidiaries Amounts due from/to fellow subsidiaries arising from trading activities are unsecured, interest free and with no fixed terms of repayment. As at 31 December 2004, such balances mainly included the following:- China Eastern Air Northwest Company ("CEA Northwest") Amount of RMB118,433,000 (2003: RMB217,680,000) due to CEA Northwest comprised amount of air tickets sold by CEA but uplift by CEA Northwest and operating lease rental charges for aircraft. China Eastern Air Yunnan Company ("CEA Yunnan") Amount of RMB42,087,000 due from CEA Yunnan (2003: amount due to CEA Yunnan RMB129,789,000) comprised amount of air tickets sold by CEA but uplift by CEA Yunnan and operating lease rental charges for aircraft. Nanjing Airlines Co., Ltd. ("Nanjing Airlines") Amount of RMB44,370,000 (2003: RMB15,535,000) due from Nanjing Airlines comprised operating lease rental charges for aircraft. (ii) Amounts due from/to associates China Eastern Airlines Wuhan Co., Ltd. ("CEA Wuhan Airlines") Amount of RMB19,063,000 (2003: RMB36,099,000) due to CEA Wuhan Airlines comprised amount of air tickets sold by CEA but uplift by CEA Wuhan Airlines and operating lease rental income for operating lease of aircraft. Eastern Aviation Import & Export Co., Ltd. ("EAIEC") Amount of RMB47,093,000 (2003: RMB509,249,000) due to EAIEC comprised prepayments and purchases of flight equipment and flight equipment spare parts payable to EAIEC. Shanghai Dongmei Aviation Travel Co., Ltd. ("SDATC") IV-51 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Amount of RMB39,485,000 (2003: RMB24,940,000) due from SDATC represented amount of tickets sold by SDATC. (iii) Short-term deposits with an associate The Group and the Company have short-term deposits of RMB413,870,000 and RMB43,207,000 (2003: RMB214,241,000 and RMB88,124,000) respectively placed with Eastern Air Group Finance Co., Ltd. ("EAGF"), an associate. The short-term deposits yield interest at an average rate of 0.72% per annum (2003: 0.72% per annum). (iv) Short-term loans from an associate The Group and the Company have short-term loans of RMB140,765,000 and RMB132,765,000 (2003: RMB860,000,000 and RMB830,000,000) respectively from EAGF. During the year ended 31 December 2004, the weighted average interest rate on the loan was 4.5% per annum (2003: 4.54% per annum). (b) Guarantee by the holding company As at 31 December 2004, unsecured long-term bank loans of the Group and the Company with aggregate amount of RMB2,122,600,000 (2003: RMB1,944,200,000) are guaranteed by CEA Holding (note 26). (c) Related party transactions Except as disclosed in note 8 of the financial statement, the Group had the following material transactions with its related parties during the year ended 31 December 2004, which were, in the opinion of the directors, carried out in the normal course of business:- (i) Sublease arrangement with CEA Northwest During the year ended 31 December 2004, the Company entered into operating lease agreements with two third-party lessors to lease six A320 aircraft. These aircraft were operated by CEA Northwest from the effective date of the relevant lease to the date of agreement being modified (refer below for details). No agreements were entered into between the Company and CEA Northwest regarding the arrangement, nor written consents obtained from the lessors for the operation of the six A320 by CEA Northwest. Under the lease IV-52 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP arrangement, the Company is liable to the lessors for all obligations under the lease agreement. Upon the Board of Directors being notified of the arrangement in August 2004, it appropriately took action and the Company entered into agreements in December 2004 and April 2005 with the third-party lessors, CEA Northwest, and the relevant leasing company to modify the original lease agreement (the "Novation and Amendment Agreements") to completely relieve the Company of the lease obligations for the lease arrangements. From the inception of the lease to the effective date of the Novation and Amendment Agreements, the Company charged CEA Northwest the same amount it paid to the third-party lessors for use of the six A320 aircraft. Under the Novation and Amendment Agreements, the Company was relieved from all obligations related to the original lease arrangements from the inception of the lease and CEA Northwest will become the sole lessee to the amended lease agreements. During 2004, prior to the execution of the Novation and Amendment Agreements, the Company account for the arrangement as a sublease, the lease income of RMB83,241,000 from CEA Northwest are recorded as other operating income, and the same amount paid to the third-party lessors as lease expense. (ii) Rescission of lease arrangements with fellow subsidiaries During the year ended 31 December 2004, the Group entered into certain lease arrangements to lease aircraft from fellow subsidiaries to operate on certain of the Company's air routes. In connection with the lease arrangements, the Company operated the aircraft, recognising traffic revenue and expenses, relating to payments to independent third parties for fuel, take-off and landing fees, and other costs related to the operation of those aircraft. Under PRC Company Law and applicable stock exchange listing rules, certain related party transactions meeting specified thresholds, including lease transactions, require prior approval by the Board of Directors, including the independent directors. Certain of the lease arrangements to lease three A310 aircraft from CEA Northwest and three Bae146 aircraft from Nanjing Airlines, a subsidiary of CEA Northwest, (collectively, the "Leased Aircraft") in 2004 had not been properly authorised and approved in advance by the Board of Directors. Accordingly, as such lease arrangements were not properly approved in advance, the Board of Directors resolved in August and December 2004 to terminate the lease arrangements, and agreement was reached with CEA Northwest to terminate such arrangements. In connection with the termination of the lease arrangements, the Company and CEA Northwest agreed to retroactively rescind the transactions from the inception of the lease arrangements as IV-53 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP permitted under PRC laws. The Company has been advised by its external PRC counsel that under PRC law, a transaction can be rendered invalid from inception upon agreement by all parties. However, under IFRS, because the Group actually operated the Leased Aircraft in its normal business operations during the period from the inception to rescission of the lease, the air traffic revenue of RMB440,864,000 and related operating costs of RMB573,893,000 (including the lease charges of RMB192,098,000 and RMB44,695,000 payable to CEA Northwest and Nanjing Airlines respectively) have been recognised in the financial statements of the Company. The impact of the retroactive rescission of the CEA Northwest lease arrangements was for CEA Northwest and Nanjing Airlines to waive amounts owed by the Group totaling RMB133,029,000 (the "Settlement Amount"), which represents the operating losses incurred on the operation of the Leased Aircraft during 2004. The Settlement Amount was in effect an extinguishment of a financial liability through a reduction of the Group's inter-company payable account with CEA Northwest or Nanjing Airlines, as applicable. The Settlement Amount was recognised as non-operating income for the year ended 31 December 2004 due to its nature being that of a financing transaction. The action of the Board of Directors to disapprove and retroactively rescind such arrangement, with consent from CEA Northwest or Nanjing, was to ensure that the Group's financial position being restored to what it would have been had the lease arrangements never been entered into. (iii) In addition to the transaction disclosed above, the Group had the following transactions, with its related parties during the year ended 31 December, 2004:-
INCOME/ (EXPENSES, PAYMENTS OR PURCHASE CONSIDERATION) 2004 2003 NATURE OF TRANSACTION RELATED PARTY RMB'000 RMB'000 WITH CEA HOLDING OR COMPANIES DIRECTLY OR INDIRECTLY HELD BY CEA HOLDING:- Interest income on deposits at EAGF 4,897 4,096 rates of 0.72% per annum (2003: 0.72% per annum) Interest expenses on loans at EAGF (1,150) (6,396) rates of 4.5% per annum (2003: 4.54% per annum)
IV-54 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Commission income on carriage - CEA Northwest 93,062 51,667 service provided by other - CEA Yunnan 81,517 50,442 airlines with air tickets sold - CEA Wuhan Airlines 32,396 28,964 by the Group at fixed rates ranging from 3% to 9% of value of tickets sold Commission expenses on air - Shanghai Tourism (13,201) (6,046) tickets sold on behalf of the Company Group at rates ranging from 3% (Hong Kong) to 9% of value of tickets sold Limited - CEA Northwest (14,181) (17,776) - CEA Yunnan (22,494) (10,743) - Certain other (19,402) (25,466) subsidiaries of CEA Holding - CEA Wuhan (32,396) (8,547) - Airlines - SDATC (8,228) (24,940) Handling charges of 0.1% to 2% for EAIEC (34,270) (21,393) purchase of aircraft, flight, equipment flight equipment spare parts and other fixed assets Ticket reservation service charges TravelSky Technology (86,311) (71,884) for utilisation of computer Limited reservation system Repairs and maintenance expenses CEA Northwest (9,535) - for ground service facilities Repairs and maintenance expenses Shanghai Eastern (25,445) (25,361) for aircraft and engines Union Aviation Wheels & Brakes Overhaul Engineering Co., Ltd. Lease rental income from operating CEA Wuhan Airlines 38,239 31,209 lease of aircraft Lease rental charges for operating - CEA Northwest (199,188) (69,118) lease of aircraft - Nanjing Airlines - (23,348) - CEA Yunnan (86,341) (27,726)
IV-55 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Source of food and beverages - Eastern Air (Shantou) (57,623) (36,413) Economic Development Co., Ltd. - China Eastern Air (188,406) - Catering Investment Co., Ltd - Shanghai Eastern - (96,984) Air Catering Co., Ltd - Qilu Eastern Air - (5,285) Catering Co., Ltd. - Qingdao Air Service - (2,518) Co., Ltd. Advertising expenses Eastern Aviation (5,629) (2,676) Advertising Service Co., Ltd. ("EAASC") Purchase of aviation equipment Shanghai Eastern (14,850) (3,149) Aviation Equipment Manufacturing Corporation Rental expenses Shanghai Eastern (5,582) (5,945) Aviation Equipment Manufacturing Corporation Investment in China Eastern Air CEA Holding (5,000) - Real Estate Investment Co., Ltd., a company 95% owned by CEA Holding Investment in an associate, Eastern CEA Holding - (43,820) Aviation Import & Export Co. Ltd., a company 55% owned by CEA Holding Investment in an associate, China CEA Holding - (157,500) Eastern Air Catering Investment Co., Ltd., 55% interests of which is owned by CEA Holding Investment in an associate, Shanghai CEA Holding - (6,828) Dongmei Aviation Travel Co., Ltd., 55% interests of which is owned by CEA Holding
(iv) Other related party arrangements with CEA Northwest/CEA Yunnan IV-56 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP In addition to the related party transactions disclosed above, the Company also has other non-monetary arrangements with CEA Northwest and CEA Yunnan as follows: - Air routes - In the PRC, air routes are assigned by CAAC. The Company has permitted CEA Northwest and CEA Yunnan to use some of the air routes allocated to the Company during the year of 2004 at no charge to CEA Northwest or CEA Yunnan, as applicable, as the Company did not have sufficient capacity to fully utilise those air routes. - Inter-airline billing code - As with all other airlines in the PRC, the Company pays a processing fee to CAAC for use of the ticket settlement system based on the volume of the tickets processed. At the direction of CAAC, the Company has permitted CEA Northwest and CEA Yunnan to use the Company's unique inter-airline billing code ("781") at no incremental charge other than amounts paid to CAAC to facilitate ticket settlement between the airlines. Internal administrative cost for ticket handling and processing are not charged to CEA Northwest and CEA Yunnan. (v) Related party transaction of an associate China Eastern Air Catering Investment Co., Ltd, an associate of the Company in which the Company and CEA Holding hold 45% and 55% interest respectively, acquired certain subsidiaries from CEA Holding in an aggregate consideration of RMB263,804,000 during the year ended 31 December 2004. (d) In accordance with a specific exemption in IAS 24, "Related Party Disclosure", the Group does not accumulate or disclose transactions with other state-owned enterprises as related party transactions. 39. FINANCIAL RISK MANAGEMENT Financial assets of the Group mainly include short-term deposits and bank balances, deposits with and amounts due from related companies, trade receivables, long-term receivables, bank deposits, short-term investments and derivative assets. Financial liabilities of the Group include bank and other loans, obligations under finance leases, amounts due to related companies, trade payables, notes payables, derivative liabilities and other payables. IV-57 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP (a) Business risk The operations of the air transportation industry are substantially influenced by global political and economic development. Accidents, wars, natural disasters, etc. may have material impact on the Group's operations or the industry as a whole. In addition, the Group conducts its principal operations in the PRC and accordingly is subject to special consideration and significant risks not typically associated with companies in the United States of America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, competition and influence of CAAC in the PRC civil aviation industry. (b) Price risk The Group's results of operations may be significantly affected by the fluctuation of the fuel prices which is a significant expense for the Group. While the international fuel prices are determined by worldwide market demand and supply, domestic fuel prices are regulated by CAAC. It is the Group's plan to strengthen the control over the fuel price risk through financial derivatives. (c) Interest rate risk The Group has significant bank borrowings and is exposed to risk arising from changes in market interest rates. To hedge against the variability in the cashflow arising from a change in market interest rates, the Group entered into certain interest rate swaps during the year (note 40(a)). The interest rates and terms of repayment of loans made to the Group are disclosed in notes 25, 26 and 27. (d) Credit risk The Group has no significant concentrations of credit risk. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. The Group also receives deposit from customers and counter-parties, where appropriate, if they require credit. A major portion of sales is conducted through sales agents and majority of these agents is connected to various settlement plans and/or clearing systems which have tight requirements on credit standing of these agents. IV-58 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP Transactions in relation to derivative financial instruments are only carried out with financial institutions of high reputation. The Group has policies that limit the amount of credit exposure to any one financial institution. (i) Deposits with an associate and cash and bank balances Substantially all the Group's cash and bank balances are placed with a number of international and PRC banks and an associate, EAGF. Amount placed with any one institution is subject to a cap. Regular assessment of credit ratings on these institution has been performed. Details of deposits placed with EAGF have been disclosed in note 38(a)(iii). (ii) Trade receivables These are mainly tickets sales receivable from sales agents and receivables related to uplifts by the Company on behalf of other carriers which are spread among numerous third parties. (iii) Other receivables These are spread among numerous third parties. (e) Liquidity risk The Group's primary cash requirements have been for additions of and upgrades on aircraft and flight equipment and payments on related debts. The Group finances its working capital requirements through a combination of funds generated from operations and short-term bank loans. The Group generally acquires aircraft through long-term finance leases. To take advantage of the low interest rate for long-term loans, recently the Group also purchased certain number of aircraft through long-term loans from banks in the PRC. The Group generally operates with a working capital deficit. As at 31 December 2004, the Group's net current liabilities amounted to RMB 12,502 million (2003: RMB9,941 million). For the year ended 31 December 2004, the Group recorded a net cash inflow from operating activities of RMB3,266 million (2003: RMB3,163 million), a net cash outflow from investing activities and financing activities of RMB2,745 million (2003: RMB3,541 million), and an increase in cash and cash equivalents of RMB521 million (2003: decrease of RMB378 million). IV-59 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP The directors of Company believe that cash from operations and short-term bank borrowings will be sufficient to meet the Group's operating cashflow. Due to the dynamic nature of the underlying businesses, the Group treasury aims at maintaining flexibility in funding by keeping credit lines available. The directors of the Company believe that the Group has obtained sufficient general credit facilities from PRC banks for financing future capital commitments and for working capital purposes. (f) Foreign currency risk The Group's finance lease obligation as well as certain bank and other loans are denominated in US dollars, Japanese Yen and Euro, and certain expenses of the Group are denominated in currencies other than RMB. The Group generates foreign currency revenues from ticket sales made in overseas offices and would normally generate sufficient foreign currencies after payment of foreign currency expenses, to meet its foreign currency liabilities repayable within one year. RMB against US dollars had been comparatively stable in the past. However, RMB against Japanese Yen and Euro had experienced a significant level of fluctuation over the past two years which is the major reason for the significant exchange differences recognised by the Group for the years ended 31 December 2003 and 2004. The Group enters into certain foreign currency forward contracts with PRC banks to hedge against foreign currency risk (note 40). (g) Fair value The carrying amounts and estimated fair value of the Group's significant financial assets and liabilities at 31 December 2004 are set out as follows:-
GROUP AND COMPANY 2004 2003 CARRYING Carrying AMOUNT FAIR VALUE amount Fair value RMB'000 RMB'000 RMB'000 RMB'000 Long-term bank loans 10,705,637 9,878,592 11,222,923 10,131,805 Obligations under finance leases 8,662,286 8,382,324 7,100,886 7,069,346 Long-term bank deposits 1,908,398 1,990,832 1,743,924 1,840,139 ========== ========= ========== ==========
IV-60 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP The fair values of the long-term bank loans, obligation under finance leases and long-term bank deposits are estimated by applying a discounted cashflow approach using current market interest rates for similar indebtedness/investment. The fair value of cash and bank balances, trade receivables, other receivables, amounts due from and to related companies, trade payables, notes payables, other payables and short-term bank loans are not materially different from their carrying amounts because of the short maturities of these instruments. Fair value estimates are made at specific point in time and are based on relevant market information. This estimate is subjective in nature and involves uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in valuation methods and assumptions could significantly affect the estimates. 40. DERIVATIVE FINANCIAL INSTRUMENTS
GROUP AND COMPANY ASSETS LIABILITIES RMB'000 RMB'000 AT 31 DECEMBER 2004 INTEREST RATE SWAPS (NOTE (A)) 11,571 19,447 FORWARD FOREIGN EXCHANGE CONTRACTS (NOTE (B)) - 100,196 ------ ------- 11,571 119,643 ====== ======= At 31 December 2003 Interest rate swaps (note (a)) 2,814 40,390 Forward foreign exchange contracts (note (b)) - 54,047 ------ ------- 2,814 94,437 ====== =======
(a) Interest rate swaps The Group uses interest rate swaps to reduce risk of changes in market interest rates (note 39(c)). The interest rate swaps entered into by the Group generally for swapping variable rates, usually reference to LIBOR, with fixed rates. The Group's interest rate swaps fulfill the criteria for hedge accounting and are accounted for as cashflow hedge. As at 31 December 2004, the notional amount of the outstanding interest rate swap agreements was approximately US$437 million (2003: US$164 million) which will expire between 2006 and 2013. For the year ended 31 December 2004, IV-61 APPENDIX IV FINANCIAL INFORMATION OF THE GROUP a net gain of RMB29,700,000 (2003: loss of RMB315,000) arising from changes in the fair value of the interest rate swaps subsequent to initial recognition is recognised directly in the hedging reserve (note 29). (b) Forward foreign exchange contracts The Group uses currency forward contracts to reduce risks of changes in currency exchange rates in respect of ticket sales and expenses denominated in foreign currencies (note 39(f)). These contracts were generally entered for sales of Japanese Yen and purchases of U.S. dollars at fixed exchange rates. The Group's currency forward contracts qualify for hedge accounting and are accounted for as cashflow hedges of firm commitments. As at 31 December 2004, the notional amount of the outstanding currency forward contracts were approximately US$226 million (2003: US$237 million). These currency forward contracts will expire between 2006 and 2010. For the year ended 31 December 2004, a net loss of RMB46,149,000 (2003: RMB58,102,000) arising from changes in the fair value of these foreign currency forwards subsequent to initial recognition is recognised directly in the hedging reserve (note 29). 41. ULTIMATE HOLDING COMPANY The directors regard CEA Holding, a company established in the PRC, as being the immediate holding and the ultimate holding company. 42. POST BALANCE SHEET DATE EVENT On 2 March 2005, the Company entered into an agreement with United Technologies Far East Limited ("UTFEL"), to establish Hamilton Sundstrand (Shanghai) Aerospace Technology Limited ("HSSATL"), a jointly controlled entity which will be principally engaged in the provision of repair and maintenance services for auxiliary power units of aircraft in the PRC. The registered capital of HSSATL is US$8,900,000, which is to be contributed by the Company and UTFEL in proportion of 51% and 49% respectively. IV-62 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information of the Enlarged Group is prepared by the Directors. A. UNAUDITED PRO FORMA BALANCE SHEET OF THE ENLARGED GROUP Set out below is an illustrative and unaudited pro forma balance sheet of the Enlarged Group as at 31 December 2004 which has been prepared for the purpose of illustration as if the Proposed Acquisition had been completed on 31 December 2004. The unaudited pro forma balance sheet of the Enlarged Group is prepared based on the audited consolidated balance sheet of the Group as at 31 December 2004, and the audited combined balance sheets of the aviation businesses of CEA Northwest and its subsidiary and CEA Yunnan and its subsidiaries (the "Target Businesses") as at 31 December 2004 as extracted from Appendices II and III to this circular, after making pro forma adjustments that are necessary. The unaudited pro forma balance sheet of the Enlarged Group has been prepared to provide the unaudited pro forma financial information of the Enlarged Group as if the Proposed Acquisition had been completed on 31 December 2004. As it has been prepared for illustrative purpose only and because of its nature, it may not give a true picture of the financial position of the Enlarged Group as at 31 December 2004 and at any future date. V-1 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP
AVIATION BUSINESSES OF CEA NORTHWEST AND ITS SUBSIDIARY -------------------------------- PRO FORMA ADJUSTMENTS BALANCES RELATED TO BALANCES BEFORE NON- AFTER PRO PRO FORMA ACQUIRED FORMA THE GROUP ADJUSTMENTS ITEMS ADJUSTMENTS RMB'000 RMB'000 RMB'000 RMB'000 (Note 1) (Note 2) NON-CURRENT ASSETS Fixed assets 30,220,319 3,397,865 (292,414) 3,105,451 Construction in progress 188,654 42,250 (40,691) 1,559 Lease prepayments 828,808 - - - Investments in associates 656,190 1,172 - 1,172 Goodwill and negative goodwill 36,303 - - - Advances on aircraft and flight equipment 2,678,603 - - - Other long-term receivables and investments 2,202,606 723,354 - 723,354 Deferred tax assets 395,465 - - - Derivative assets 11,571 - - - 37,218,519 4,164,641 (333,105) 3,831,536 CURRENT ASSETS Flight equipment spare parts less allowance for obsolescence 523,186 87,438 (605) 86,833 Trade receivables less allowance for doubtful accounts 1,462,672 68,943 (2,440) 66,503 Prepayments, deposits and other receivables 1,108,964 377,105 (187,026) 190,079 Cash and cash equivalents 2,114,447 487,676 (2,524) 485,152 5,209,269 1,021,162 (192,595) 828,567 CURRENT LIABILITIES Trade payables 64,718 2,926 - 2,926 Notes payables 838,337 50,000 - 50,000 Sales in advance of carriage 719,957 13,898 - 13,898 Other payables and accrued expenses 5,353,649 5,473,979 (3,783,977) 1,690,002 AVIATION BUSINESSES OF CEA YUNNAN --------------------------------- PRO FORMA ADJUSTMENTS BALANCES RELATED TO BALANCES BEFORE NON- AFTER PRO PRO FORMA PRO FORMA ACQUIRED FORMA PRO FORMA ENLARGED ADJUSTMENTS ITEMS ADJUSTMENTS ADJUSTMENTS GROUP RMB'000 RMB'000 RMB'000 RMB'000 NOTE RMB'000 (Note 1) (Note 2) NON-CURRENT ASSETS Fixed assets 4,184,414 (453,982) 3,730,432 - 37,056,202 Construction in progress 57,732 (52,051) 5,681 - 195,894 Lease prepayments 31,930 (31,930) - - 828,808 Investments in associates 4,631 - 4,631 - 661,993 Goodwill and negative goodwill - - - 643,590 4(vi) 679,893 Advances on aircraft and flight equipment - - - - 2,678,603 Other long-term receivables and investments 39,043 - 39,043 13,695 4(i) 2,978,698 Deferred tax assets - - - - 395,465 Derivative assets - - - - 11,571 4,317,750 (537,963) 3,779,787 657,285 45,487,127 CURRENT ASSETS Flight equipment spare parts less allowance for obsolescence 87,618 - 87,618 142,899 4(i) 840,536 Trade receivables less allowance for doubtful accounts 51,459 - 51,459 - 1,580,634 Prepayments, deposits and other receivables 158,941 (21,880) 137,061 (205,456) 4(iii) 1,230,648 Cash and cash equivalents 436,815 - 436,815 (492,846) 4(iv) 2,543,568 734,833 (21,880) 712,953 (555,403) 6,195,386 CURRENT LIABILITIES Trade payables 136,214 - 136,214 - 203,858 Notes payables - - - - 888,337 Sales in advance of carriage 534 - 534 - 734,389 Other payables and accrued expenses 999,737 (143,592) 856,145 (205,456) 4(iii) 7,694,340
V-2 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP
AVIATION BUSINESSES OF CEA NORTHWEST AND ITS SUBSIDIARY --------------------------------- PRO FORMA ADJUSTMENTS BALANCES RELATED TO BALANCES BEFORE NON- AFTER PRO PRO FORMA ACQUIRED FORMA THE GROUP ADJUSTMENTS ITEMS ADJUSTMENTS RMB'000 RMB'000 RMB'000 RMB'000 (Note 1) (Note 2) Current portion of obligations under finance leases 1,189,648 413,781 - 413,781 Current portion of long-term bank loans 3,193,432 - - - Tax payable 162,606 - - - Short-term bank loans 6,188,919 810,014 (313,424) 496,590 17,711,266 6,764,598 (4,097,401) 2,667,197 ----------- ---------- ---------- ---------- NET CURRENT LIABILITIES (12,501,997) (5,743,436) 3,904,806 (1,838,630) ----------- ---------- ---------- ---------- TOTAL ASSETS LESS CURRENT LIABILITIES 24,716,522 (1,578,795) 3,571,701 1,992,906 =========== ========== ========== ========== SHAREHOLDERS' EQUITY/(DEFICIT) 6,882,244 (4,533,894) 3,571,701 (962,193) MINORITY INTERESTS 831,208 - - - NON-CURRENT LIABILITIES Obligations under finance leases 7,472,638 2,320,549 - 2,320,549 Long-term bank loans 7,542,828 - - - Deferred tax liabilities 752,917 - - - Accrued aircraft overhaul expenses 175,960 118,693 - 118,693 Long-term portion of other payable 100,204 140,042 - 140,042 Post-retirement benefit obligations 562,632 257,202 - 257,202 Long-term portion of staff housing allowances 276,248 118,613 - 118,613 Derivative liabilities 119,643 - - - 17,003,070 2,955,099 - 2,955,099 ----------- ---------- ---------- ---------- 24,716,522 (1,578,795) 3,571,701 1,992,906 =========== ========== ========== ========== AVIATION BUSINESSES OF CEA YUNNAN --------------------------------- PRO FORMA ADJUSTMENTS BALANCES RELATED TO BALANCES BEFORE NON- AFTER PRO PRO FORMA PRO FORMA ACQUIRED FORMA PRO FORMA ENLARGED ADJUSTMENTS ITEMS ADJUSTMENTS ADJUSTMENTS GROUP RMB'000 RMB'000 RMB'000 RMB'000 NOTE RMB'000 (Note 1) (Note 2) Current portion of obligations under finance leases - - - - 1,603,429 Current portion of long-term bank loans 279,324 - 279,324 - 3,472,756 Tax payable 79,104 - 79,104 - 241,710 Short-term bank loans 952,557 - 952,557 492,847 4(iv) 8,130,913 2,447,470 (143,592) 2,303,878 287,391 22,969,732 ---------- -------- ---------- -------- ----------- NET CURRENT LIABILITIES (1,712,637) 121,712 (1,590,925) (842,794) (16,774,346) ---------- -------- ---------- -------- ----------- TOTAL ASSETS LESS CURRENT LIABILITIES 2,605,113 (416,251) 2,188,862 (185,509) 28,712,781 ========== ======== ========== ======== =========== SHAREHOLDERS' EQUITY/(DEFICIT) 1,336,275 (242,068) 1,094,207 (132,014) 4(v) 6,882,244 MINORITY INTERESTS - - - - 831,208 NON-CURRENT LIABILITIES Obligations under finance leases - - - 62,188 4(i) 9,855,375 Long-term bank loans 776,090 - 776,090 (10,155) 4(i) 8,308,763 Deferred tax liabilities 174,183 (174,183) - (113,396) 4(ii) 639,521 Accrued aircraft overhaul expenses 14,394 - 14,394 - 309,047 Long-term portion of other payable 31,850 - 31,850 7,868 4(i) 279,964 Post-retirement benefit obligations 234,140 - 234,140 - 1,053,974 Long-term portion of staff housing allowances 37,440 - 37,440 - 432,301 Derivative liabilities 741 - 741 - 120,384 1,268,838 (174,183) 1,094,655 (53,495) 20,999,329 ---------- -------- ---------- -------- ----------- 2,605,113 (416,251) 2,188,862 (185,509) 28,712,781 ========== ======== ========== ======== ===========
V-3 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Notes to unaudited pro forma balance sheet of the Enlarged Group 1. The balances are extracted from the audited combined balance sheets of the Target Businesses as at 31 December 2004 as set out in Appendices II and III respectively. 2. The pro forma adjustments relate to certain assets and liabilities included in the combined balance sheets of the Target Businesses as at 31 December 2004 as per Appendices II and III but are not to be acquired or assumed by the Group pursuant to the Acquisition Agreement (the "Non-Acquired Items"). For the purpose of this unaudited pro forma financial information, the amounts of the Non-Acquired Items are identified in accordance with the terms of the Acquisition Agreement and are based on the financial position as at 31 December 2004. These Non-Acquired Items are excluded from the unaudited pro forma balance sheet of the Enlarged Group and a corresponding net amount is deducted from the shareholder's equity. The final amounts of these pro forma adjustments will be determined by reference to the carrying amounts of the Non-Acquired Items at the Effective Date which may be different from the amounts disclosed in this Appendix. 3. Upon completion of the Proposed Acquisition, the Group will apply the purchase method to account for the acquisition in the consolidated accounts of the Enlarged Group. In applying the purchase method, the identifiable assets and liabilities of the Target Businesses to be acquired or assumed by the Group (the "Acquired Items") will be accounted for on the balance sheet of the Enlarged Group at their fair value at the Effective Date. Any goodwill or negative goodwill arising on the acquisition will be determined as the excess or deficit of the purchase consideration incurred by the Group over the Group's interests in the fair value of the Acquired Items at the Effective Date. For the purpose of preparing the unaudited pro forma balance sheet of the Enlarged Group, the fair value of the Acquired Items as at 31 December 2004 are applied in calculating the estimated goodwill arising from the acquisition. Since the fair value of the Acquired Items at the Effective Date may be substantially different from their fair value as at 31 December 2004, the actual goodwill arising from the acquisition may be different from the estimated goodwill as shown above. 4. The pro forma adjustments reflect the following: (i) fair value adjustments on long-term bank deposits, deposits for aircraft under operating leases, flight equipment spare parts, long-term bank loans, finance lease obligations and other loans as at 31 December 2004 to be acquired by the Group; V-4 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP (ii) deferred tax effect on difference in tax base and accounting base calculated using the Company's applicable income tax rate of 15%. The Company's applicable income tax rate of 15% is used because, following the completion of the Proposed Acquisition, the Company will set up branches in respective locations where the Target Businesses operate, and such branches will be subject to the Company's income tax rate in accordance with the current relevant PRC tax regulations. Tax base represents the revalued amounts of the Acquired Items determined by China Consultants of Accounting and Finance Management Co., Ltd. (the "PRC Valuers") pursuant to the relevant PRC rules and regulations with respect to the Proposed Acquisition. Accounting base represents fair value of the Acquired Items in accordance with International Financial Reporting Standards ("IFRS") including, inter-alia, the fair value of aircraft and engines determined with reference to the valuation report prepared by Chesterton Petty Valuation Company Limited, the fair value of aircraft overhaul provision determined in accordance with IFRS and the fair value of financial assets and liabilities and flight equipment spare parts as described in note (i) above. (iii) elimination of the inter-company balances between the Group and the Target Businesses and among Target Businesses; (iv) payment of purchase consideration of RMB985,693,000 satisfied by internal cash resources amounting to RMB492,846,000 and short-term bank loans amounting to RMB492,847,000. (v) elimination of the CEA Holding's interests in the Target Businesses, excluding the Non-Acquired Items as described in Note 2; and (vi) goodwill arising from the acquisition. B. UNAUDITED PRO FORMA INCOME STATEMENT OF THE ENLARGED GROUP Set out below is an illustrative and unaudited pro forma income statement of the Enlarged Group for the year ended 31 December 2004 which has been prepared for the purpose of illustration as if the Proposed Acquisition had been completed on 1 January 2004. The unaudited pro forma income statement of the Enlarged Group is prepared based on the audited consolidated income statement of the Group for the year ended 31 December 2004, and the V-5 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP audited combined income statements of the Target Businesses for the year ended 31 December 2004 as extracted from Appendices II and III to this circular, after making pro forma adjustments that are necessary. The unaudited pro forma income statement of the Enlarged Group has been prepared to provide the unaudited pro forma financial information of the Enlarged Group as if the Proposed Acquisition had been completed on 1 January 2004. As it has been prepared for illustrative purpose only and because of its nature, it may not give a true picture of the results of the Enlarged Group for the year ended 31 December 2004 and for any future financial periods. V-6 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP
AVIATION BUSINESSES OF CEA NORTHWEST AND ITS SUBSIDIARY ------------------------ PRO FORMA ADJUSTMENTS BALANCES RELATED TO BALANCES BEFORE NON- AFTER PRO PRO FORMA ACQUIRED FORMA THE GROUP ADJUSTMENTS ITEMS ADJUSTMENTS RMB'000 RMB'000 RMB'000 RMB'000 (Note 1) (Note 2) Traffic revenues Passenger 15,357,614 3,525,227 - 3,525,227 Cargo and mail 4,428,360 208,628 - 208,628 Other operating revenues 1,252,802 37,259 - 37,259 Turnover 21,038,776 3,771,114 - 3,771,114 Other operating income, net 154,422 435,981 - 435,981 Operating expenses Wages, salaries and benefits (1,865,879) (468,384) - (468,384) Take-off and landing charges (3,019,742) (497,318) - (497,318) Aircraft fuel (5,429,658) (830,183) - (830,183) Food and beverages (758,046) (77,642) - (77,642) Aircraft depreciation and operating leases (3,672,133) (670,057) - (670,057) Other depreciation, amortisation and operating leases (495,916) (62,533) 12,923 (49,610) Aircraft maintenance (1,396,283) (573,771) - (573,771) Commissions (772,219) (148,324) - (148,324) Office and administration (1,337,850) (159,917) 18,022 (141,895) Revaluation surplus of fixed assets - 81,444 - 81,444 Others (966,295) (428,582) 111 (428,471) ----------- ----------- ----------- ----------- Total operating expenses (19,714,021) (3,835,267) 31,056 (3,804,211) ----------- ----------- ----------- ----------- Operating profit 1,479,177 371,828 31,056 402,884 Non-operating income 133,029 - - - Finance costs, net (762,687) (236,711) 14,073 (222,638) Share of results before tax of associates (4,112) 677 - 677 ----------- ----------- ----------- ----------- AVIATION BUSINESSES OF CEA YUNNAN ------------------------------------- PRO FORMA ADJUSTMENTS BALANCES RELATED TO BALANCES BEFORE NON- AFTER PRO PRO FORMA PRO FORMA ACQUIRED FORMA PRO FORMA ENLARGED ADJUSTMENTS ITEMS ADJUSTMENTS ADJUSTMENTS GROUP RMB'000 RMB'000 RMB'000 RMB'000 NOTE RMB'000 (Note 1) (Note 2) Traffic revenues Passenger 3,031,232 - 3,031,232 - 21,914,073 Cargo and mail 120,575 - 120,575 - 4,757,563 Other operating revenues 38,143 - 38,143 (222,516) 3(iii) 1,105,688 Turnover 3,189,950 - 3,189,950 (222,516) 27,777,324 Other operating income, net 276,522 - 276,522 (605,563) 3(iii) 261,362 Operating expenses Wages, salaries and benefits (406,998) - (406,998) 1,727 3(iii) (2,739,534) Take-off and landing charges (447,643) - (447,643) - (3,964,703) Aircraft fuel (819,791) - (819,791) - (7,079,632) Food and beverages (99,107) - (99,107) - (934,795) Aircraft depreciation and operating leases (452,200) - (452,200) 605,563 3(iii) (4,188,827) Other depreciation, amortisation and operating leases (59,942) 24,194 (35,748) (64,359) 3(v) (645,633) Aircraft maintenance (453,391) - (453,391) (88,998) 3(i) (2,502,908) 9,535 3(iii) Commissions (100,683) - (100,683) 211,254 3(iii) (809,972) Office and administration (125,347) 1,602 (123,745) - (1,603,490) Revaluation surplus of fixed assets 67,737 - 67,737 - 149,181 Others (422,028) - (422,028) 133,029 3(iii) (1,683,765) ----------- ----------- ----------- ----------- ----------- Total operating expenses (3,319,393) 25,796 (3,293,597) 807,751 (26,004,078) ----------- ----------- ----------- ----------- ----------- Operating profit 147,079 25,796 172,875 (20,328) 2,034,608 Non-operating income - - - (133,029) 3(iii) - Finance costs, net (101,771) - (101,771) 7,366 3(ii) (1,106,432) (26,702) 3(iv) Share of results before tax of associates 1,206 - 1,206 - (2,229) ----------- ----------- ----------- ----------- -----------
V-7 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP
AVIATION BUSINESSES OF CEA YUNNAN ------------------------------------- PRO FORMA ADJUSTMENTS BALANCES RELATED TO BALANCES BEFORE NON- AFTER PRO PRO FORMA PRO FORMA ACQUIRED FORMA PRO FORMA ENLARGED ADJUSTMENTS ITEMS ADJUSTMENTS ADJUSTMENTS GROUP RMB'000 RMB'000 RMB'000 RMB'000 NOTE RMB'000 (Note 1) (Note 2) Profit before taxation 845,407 135,794 45,129 180,923 Income tax expenses (181,224) (64) - (64) ----------- ----------- ----------- ----------- Profit after taxation 664,183 135,730 45,129 180,859 Minority interests (150,108) - - - ----------- ----------- ----------- ----------- Profit attributable to shareholders 514,075 135,730 45,129 180,859 =========== =========== =========== =========== Profit before taxation 46,514 25,796 72,310 (172,693) 925,947 Income tax expenses (15,504) (3,869) (19,373) 19,007 3(vi) (181,654) ----------- ----------- ----------- ----------- ----------- Profit after taxation 31,010 21,927 52,937 (153,686) 744,293 Minority interests - - - - (150,108) ----------- ----------- ----------- ----------- ----------- Profit attributable to shareholders 31,010 21,927 52,937 (153,686) 594,185 =========== =========== =========== =========== ===========
V-8 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Notes to unaudited pro forma income statement of the Enlarged Group 1. The amounts are extracted from the audited combined income statements of the Target Businesses for the year ended 31 December 2004 as set out in Appendices II and III respectively. 2. The pro forma adjustments in relation to Non-Acquired items represent depreciation charge of certain property, plant and equipment, amortisation charge of lease prepayments, interest expenses on bank and other loans, provision for doubtful debts, operating results of a branch office and the corresponding tax effect, as appropriate. As certain properties are not acquired by the Group, the Group has entered into operating leasing agreements with CEA Holding, CEA Northwest and CEA Yunnan to lease these properties following completion of the Proposed Acquisition with annual rental charges of approximately RMB55,400,000 which are not reflected in the unaudited pro forma income statement of the Enlarged Group. 3. The pro forma adjustments reflect the following: (i) additional aircraft maintenance costs arising from fair value adjustments of flight equipment spare parts; (ii) change in interest income/expenses arising from fair value adjustments on long-term bank deposits; deposits for aircraft under operating leases; long-term bank loans, finance lease obligations and other loans for aircraft leases; (iii) elimination of the inter-company transactions between the Group and the Target Businesses and among Target Businesses; (iv) additional interest expenses on short-term bank loans of an amount equivalent to RMB492,847,000 bearing interest at 4.698% per annum borrowed and reduction of interest income at 0.720% per annum on internal cash resources to satisfy the purchase consideration; (v) amortisation of estimated goodwill arising from the acquisition, for the purpose of the unaudited pro forma financial information of the Enlarged Group, calculated in accordance with International Accounting Standard IAS 22 "Business Combinations" as if the Proposed Acquisition had been completed on 1 January 2004. For illustration purposes, the estimated goodwill of approximately RMB639,601,000 is amortised over a period of 10 years on the straight-line basis. V-9 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP International Financial Reporting Standard IFRS 3 "Business Combinations", which is issued by International Accounting Standard Board, will become effective for accounting period commencing 1 January 2005 and will supersede IAS 22. The Proposed Acquisition of the Target Businesses will be accounted for by the Enlarged Group using IFRS 3 instead of IAS 22, for the year ending 31 December 2005. Under IFRS 3, amortisation is prohibited, instead they are tested for impairment annually, or more frequently if events or changes in circumstances indicate a possible impairment. (vi) On the basis that the Proposed Acquisition had been completed on 1 January 2004, profits generated by the Target Businesses were to be offset against the tax losses available to the Company according to the current relevant PRC tax regulations. As at 31 December 2004, the unrecognised deferred tax assets arising from tax losses available to the Company amounted to RMB252,120,000. The income tax charge for the year ended 31 December 2004 recorded by the Target Businesses was therefore reversed, except for the tax attributable to the associates of the Target Businesses. C. UNAUDITED PRO FORMA CONDENSED CASH FLOW STATEMENT OF THE ENLARGED GROUP Set out below is illustrative and unaudited pro forma condensed cash flow statement of the Enlarged Group for the year ended 31 December 2004 which has been prepared for the purpose of illustration as if the Proposed Acquisition had been completed on 1 January 2004. The unaudited pro forma condensed cash flow statement of the Enlarged Group is prepared based on the audited consolidated cash flow statement of the Group for the year ended 31 December 2004, and the audited combined cash flow statements of the Target Businesses for the year ended 31 December 2004 as extracted from Appendices II and III to this circular, after making pro forma adjustments that are necessary. The unaudited pro forma condensed cash flow statement of the Enlarged Group has been prepared to provide the unaudited pro forma financial information of the Enlarged Group as if the Proposed Acquisition had been completed on 1 January 2004. As it has been prepared for illustrative purpose only and because of its nature, it may not give a true picture of the cash flows of the Enlarged Group for the year ended 31 December 2004 and any future financial periods. V-10 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP
AVIATION BUSINESSES OF CEA NORTHWEST AND ITS SUBSIDIARY -------------------------------- PRO FORMA BALANCES BEFORE ADJUSTMENTS BALANCES AFTER PRO PRO FORMA RELATED TO NON- FORMA THE GROUP ADJUSTMENTS ACQUIRED ITEMS ADJUSTMENTS RMB'000 RMB'000 RMB'000 RMB'000 (Note 1) (Note 2) Net cash inflow from operations 3,266,105 1,023,211 14,073 1,037,284 Net cash used in investing activities (2,432,562) (110,304) - (110,304) ---------- --------------- --------------- ------------------ Net cash inflow before financing activities 833,543 912,907 14,073 926,980 Net cash outflow from financing activities (312,348) (882,242) (313,424) (1,195,666) ---------- --------------- --------------- ------------------ Increase/(decrease) in cash and cash equivalents 521,195 30,665 (299,351) (268,686) Cash and cash equivalents at 1 January 2004 1,582,780 455,737 (2,524) 453,213 Exchange adjustments 10,472 1,274 - 1,274 ---------- --------------- --------------- ------------------ Cash and cash equivalents at 31 December 2004 2,114,447 487,676 (301,875) 185,801 ========== =============== =============== ================== AVIATION BUSINESSES OF CEA YUNNAN ------------------------------------------------ BALANCES PRO FORMA BEFORE ADJUSTMENTS BALANCES AFTER PRO PRO FORMA PRO FORMA RELATED TO NON- FORMA PRO FORMA ENLARGED ADJUSTMENTS ACQUIRED ITEMS ADJUSTMENTS ADJUSTMENTS GROUP RMB'000 RMB'000 RMB'000 RMB'000 NOTE RMB'000 (Note 1) (Note 2) Net cash inflow from operations 1,070,650 - 1,070,650 (23,154) 3(ii) 5,350,885 Net cash used in investing activities (116,723) - (116,723) (989,241) 3(i) (3,648,830) ----------- --------------- ------------------ ----------- ---- ---------- Net cash inflow before financing activities 953,927 - 953,927 (1,012,395) 1,702,055 Net cash outflow from financing activities (1,021,585) - (1,021,585) 492,847 3(i) (2,036,752) ----------- --------------- ------------------ ----------- ---- ---------- Increase/(decrease) in cash and cash equivalents (67,658) - (67,658) (519,548) (334,697) Cash and cash equivalents at 1 January 2004 504,369 - 504,369 - 2,540,362 Exchange adjustments 104 - 104 - 11,850 ----------- --------------- ------------------ ----------- ---- ---------- Cash and cash equivalents at 31 December 2004 436,815 - 436,815 (519,548) 2,217,515 =========== =============== ================== =========== ==== ==========
V-11 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Notes to unaudited pro forma condensed cash flow statement of the Enlarged Group 1. The amounts are extracted from the audited combined cash flow statements of the Target Businesses for the year ended 31 December 2004 as set out in Appendices II and III respectively. 2. The pro forma adjustments relate to the cash and cash equivalents and short-term bank loans included in the combined balance sheets of the Target Businesses as at 31 December 2004 which comprise the Non-Acquired Items and the corresponding interest paid. The final amount of these pro forma adjustments will be determined by reference to the carrying amounts of the subject bank accounts and short-term bank loans at Effective Date which may be different from the amounts disclosed in this Appendix. 3. The pro forma adjustments reflect the following: (i) the payment of purchase consideration of RMB985,693,000 satisfied by short-term bank loans amounting to RMB492,847,000 and internal cash resources amounting to RMB492,846,000 as if the Proposed Acquisition had been completed on 1 January 2004; (ii) additional interest paid on short-term bank loans amounting to RMB492,847,000 bearing interest at 4.698% per annum and reduction of interest income on internal cash resources amounting to RMB492,846,000 at 0.720% per annum. D. UNAUDITED PRO FORMA STATEMENT OF ADJUSTED NET TANGIBLE ASSETS OF THE ENLARGED GROUP BEFORE AND AFTER CLOSING Set out below is a statement of unaudited adjusted net tangible assets of the Group before completion of the Proposed Acquisition compiled based on the audited consolidated balance sheet of the Group as at 31 December 2004 as set out in Appendix IV to this circular, and a statement of unaudited pro forma adjusted net tangible assets of the Enlarged Group after completion of the Proposed Acquisition compiled based on the unaudited pro forma balance sheet of the Enlarged Group as at 31 December 2004 as set out in this Appendix:
UNAUDITED ADJUSTED NET TANGIBLE ASSETS OF THE GROUP AS AT 31 DECEMBER 2004 ATTRIBUTABLE TO EACH SHARE AUDITED CONSOLIDATED LESS: UNAMORTISED UNAUDITED ADJUSTED OF THE COMPANY NET ASSETS OF THE INTANGIBLE ASSETS NET TANGIBLE ASSETS BEFORE GROUP AS AT OF THE GROUP AS AT OF THE GROUP AS AT COMPLETION OF THE 31 DECEMBER 2004 31 DECEMBER 2004 31 DECEMBER 2004 PROPOSED ACQUISITION RMB'000 RMB'000 RMB'000 RMB (Note 1) 6,882,244 (865,111) 6,017,133 1.24 ==================== ================== =================== ====================
V-12 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP
UNAUDITED PRO FORMA ADJUSTED NET TANGIBLE UNAUDITED PRO FORMA ASSETS OF THE ENLARGED UNAUDITED PRO FORMA ADJUSTED NET TANGIBLE GROUP ATTRIBUTABLE NET ASSETS OF THE LESS: ESTIMATED ASSETS OF THE TO EACH SHARE OF THE ENLARGED GROUP AFTER LESS: UNAMORTISED GOODWILL ARISING ENLARGED GROUP AFTER COMPANY AFTER COMPLETION COMPLETION OF THE INTANGIBLE ASSETS FROM THE PROPOSED COMPLETION OF THE OF THE PROPOSED PROPOSED ACQUISITION OF THE GROUP ACQUISITION PROPOSED ACQUISITION ACQUISITION RMB'000 RMB'000 RMB'000 RMB'000 RMB (Note 2) (Note 1) 6,882,244 (865,111) (643,590) 5,373,543 1.10 ==================== ================= ================= ===================== ===================
Notes: 1. The number of shares used for the calculation of this figure is 4,866,950,000 existing shares of the Company as at 31 December 2004, represinting the total of 3,300,000,000 A shares and 1,566,950,000 H shares. 2. The balance is extracted from Section A headed "Unaudited Pro Forma Balance Sheet of the Enlarged Group" as set out in this appendix. E. REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP [PRICEWATERHOUSECOOPERS LOGO] [CHINESE CHARACTERS] PricewaterhouseCoopers 22nd Floor Prince's Building Central Hong KOng 19 May 2005 The Directors China Eastern Airlines Corporation Limited Dear Sirs, V-13 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP We report on the unaudited pro forma financial information (the "Pro Forma Financial Information"), which comprises pro forma balance sheet, pro forma income statement and pro forma condensed cash flow statement of China Eastern Airlines Corporation Limited (the "Company") and its subsidiaries (collectively the "Group"), and the airlines and airlines related operations (the "Aviation Businesses") of China Eastern Air Northwest Company and its subsidiary ("CEA Northwest") and China Eastern Air Yunnan Company and its subsidiaries ("CEA Yunnan") (hereinafter referred to as the "Enlarged Group") and the unaudited pro forma statement of adjusted net tangible assets of the Enlarged Group, set out on pages V-1 to V-10 of Appendix V of the Company's circular dated 19 May 2005 (the "Circular") in connection with the proposed acquisition of the Aviation Businesses of CEA Northwest and CEA Yunnan by the Company pursuant to an agreement (the "Acquisition Agreement") dated 12 May 2005 between the Company, China Eastern Air Holding Company, China Eastern Air Northwest Company and China Eastern Air Yunnan Company (hereinafter referred to as the "Transaction"). The unaudited Pro Forma Financial Information has been prepared by the Directors of the Company, for illustrative purposes only, to provide information about how the Transaction might have affected the relevant financial information of the Enlarged Group as at 31 December 2004 and for the year then ended. RESPONSIBILITIES It is the responsibility solely of the Directors of the Company to prepare the unaudited Pro Forma Financial Information in accordance with rule 14.69, rule 4.29 and paragraph 13 of Appendix 1B of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules"). It is our responsibility to form an opinion, as required by paragraph 4.29 of the Listing Rules, on the unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue. BASIS OF OPINION We conducted our work with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 "Reporting on pro forma financial information pursuant to the Listing Rules" issued by the Auditing Practices Board in the United Kingdom, where applicable. Our work, which involved no independent examination of any of the underlying financial V-14 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the unaudited Pro Forma Financial Information with the Directors of the Company. Our work does not constitute an audit or review in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants, and accordingly, we do not provide any such assurance on the unaudited Pro Forma Financial Information. The unaudited Pro Forma Financial Information has been prepared on the bases set out on pages V-1 to V-10 of Appendix V for illustrative purpose only and, because of its nature, it may not be indicative of: - the financial position of the Enlarged Group at any future date; or - the results and cash flows of the Enlarged Group for any future periods. OPINION In our opinion: a) the unaudited Pro Forma Financial Information has been properly compiled by the Directors of the Company on the basis stated; b) such basis is consistent with the accounting policies of the Company, and c) the adjustments are appropriate for the purposes of the unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 4.29 of the Listing Rules. Yours faithfully PRICEWATERHOUSECOOPERS Certified Public Accountants Hong Kong V-15 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP INDEBTEDNESS THE GROUP BORROWINGS As at the close of the business on 31 March, 2005, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had the following borrowings:
UNSECURED -------------------------- SECURED GUARANTEED NON-GUARANTEED TOTAL RMB'000 RMB'000 RMB'000 RMB'000 Short-term bank loans - - 8,257,539 8,257,539 Notes payable - - 1,379,566 1,379,566 Long-term bank loans 6,927,275 2,060,100 1,296,325 10,283,700 Finance lease obligations 8,311,929 - - 8,311,929 Loans from an associate, Eastern Air Group Finance Co., Ltd. ("EAGF") - - 215,765 215,765 ---------- ---------- -------------- ---------- 15,239,204 2,060,100 11,149,195 28,448,499 ========== ========== ============== ==========
Secured long-term bank loans and other loans were secured by certain aircraft with an aggregate carrying amount of RMB12,859,224,000. In addition, secured long-term bank loans of approximately RMB1,040,414,000 were guaranteed by Export-Import Bank of the United States, China Industrial and Commercial Bank and China Construction Bank. The unsecured guaranteed long-term bank loans were guaranteed by CEA Holding. Finance lease obligations were secured by the related aircraft under finance leases with an aggregate carrying amount of RMB10,161,397,000, long-term bank deposits amounting to RMB1,852,028,000 and the relevant insurance policies and bank guarantees. MATERIAL CAPITAL COMMITMENTS Other than the capital commitments of the Group as at 31 December 2004 disclosed in Note 36(a) of the audited consolidated financial statements of the Group set out in Appendix IV, the Group entered into various aircraft purchase agreements with three vendors subsequent to 31 December 2004 and up to the Latest Practicable Date under which the Group committed to V-16 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP purchase 25 aircraft with engines which are expected to be delivered to the Group in stages from August 2005 to October 2008. The total asset value of the aircraft (as determined based on the relevant price catalog) amounts to be approximately RMB9,710,000,000. The aggregate consideration for the aircraft to be paid by the Group, determined on a commercial decision basis after arm's length negotiations and subject to certain adjustments stipulated in the purchase agreements is less than the total value of the aircraft as stated above. The consideration is payable in cash by instalments and is being funded principally by way of financing arrangements with banks or financial institutions or out of internal resources according to the Group's financial position at the relevant time. In addition, China Aviation Supplies Import & Export Corporation, as the agency company in the PRC in respect of import and export of civil aircraft, entered into an agreement with a vendor regarding the proposed purchase of certain aircraft for future use by various PRC airline companies. The Company is one of such airline companies, as currently contemplated, will take up 15 aircraft under the agreement. Details regarding the Company's actual purchase of such 15 aircraft are however yet to be considered and discussed, and the formal agreement has not been signed up to the Latest Practicable Date. AVIATION BUSINESSES OF CEA NORTHWEST BORROWINGS As at the close of the business on 31 March 2005, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the aviation businesses of CEA Northwest had the following borrowings:
UNSECURED -------------------------- SECURED GUARANTEED NON-GUARANTEED TOTAL RMB'000 RMB'000 RMB'000 RMB'000 Short-term bank loans - 840,014 - 840,014 Notes payable 114,000 - - 114,000 Finance lease obligations 2,584,883 - - 2,584,883 Loans from an associate, EAGF - - 175,500 175,500 Other loans 95,633 - - 95,633 Loan from CEA Holding - - 3,682,966 3,682,966 ---------- ---------- -------------- ---------- 2,794,516 840,014 3,858,466 7,492,996 ========== ========== ============== ==========
The unsecured guaranteed short-term bank loans were guaranteed by CEA Holding. V-17 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Notes payable were secured by bank deposits amounting to RMB34,200,000 and guaranteed by CEA Holding. Finance lease obligations were secured by the related aircraft under finance leases with an aggregate carrying amount of RMB2,170,938,000, long-term bank deposits amounting to RMB523,057,000 and the relevant insurance policies and bank guarantees. Other loans were secured by certain aircraft with an aggregate carrying amount of RMB122,187,000. Loan from CEA Holding amounting to RMB3,682,966,000, representing the loan balance as at 31 December 2004, is not to be assumed by the Company pursuant to the Acquisition Agreement. CONTINGENT LIABILITIES CEA Northwest provides guarantee to a bank in respect of a bank loan granted to Zhuhai Northwest Airlines Hotel Co., Ltd., a subsidiary of CEA Northwest which is not part of the aviation businesses of CEA Northwest, to the extent of RMB6,000,000 as at 31 March 2005. The guarantee will expire in December 2005 together with the final maturity of the subject bank loan. Pursuant to the Acquisition Agreement, such contingent liability is not to be assumed by the Company. AVIATION BUSINESSES OF CEA YUNNAN BORROWINGS As at the close of the business on 31 March 2005, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the aviation businesses of CEA Yunnan had the following borrowings:
SECURED UNSECURED TOTAL RMB'000 RMB'000 RMB'000 Short-term bank loans - 1,574,325 1,574,325 Long-term bank loans 787,930 150,000 937,930 ------- --------- --------- 787,930 1,724,325 2,512,255 ======= ========= =========
V-18 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Secured long-term bank loans were secured by certain aircraft with an aggregate carrying amount of RMB744,635,000. DISCLAIMER Save as aforesaid and apart from intra-group liabilities and normal trade payables in the ordinary course of business, the Group and the aviation businesses of CEA Northwest and CEA Yunnan did not have any outstanding debt securities issued and outstanding or authorised or otherwise created but unissued, term loans, other borrowings or indebtedness in the nature of borrowing including bank overdrafts, liabilities under acceptances (other than normal trade bills), acceptance credits, hire purchase commitments, mortgages and charges, material contingent liabilities or guarantees outstanding at the close of business on 31 March 2005. The Directors have confirmed that there has not been any material change in the indebtedness and contingent liabilities of the Group and the aviation businesses of CEA Northwest and CEA Yunnan since 31 March 2005 and up to the Latest Practicable Date. SUFFICIENCY OF WORKING CAPITAL The Directors are of the opinion that, after taking into account the Enlarged Group's present internal resources and available banking facilities, the Enlarged Group has sufficient working capital for its present requirements for at least 12 months from the date of this circular. MANAGEMENT DISCUSSION AND ANALYSIS 2004 COMPARED WITH 2003 THE GROUP Turnover The Group's turnover increased 47.4% from RMB14,277 million in 2003 to RMB21,039 million in 2004. This increase was primarily due to an increase of the Group's passenger and cargo revenues, which were net of the applicable PRC sales tax. V-19 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Traffic revenues from the Group's passenger as well as cargo and mail transportation business increased 47.1% from RMB13,448 million in 2003 to RMB19,786 million in 2004. Compared to 2003, the average aircraft daily utilization increased by 1.7 hours to 9.7 hours in 2004. Passenger revenues, which accounted for 77.6% of the Group's total traffic revenues in 2004, increased 49.7% from RMB10,261 million in 2003 to RMB15,358 million in 2004. This increase was primarily due to the market recovery following the end of severe acute respiratory syndrome (SARS) and the increase of the Group's transportation capacity. The Group's domestic passenger revenues, which accounted for 53.9% of its total passenger revenues, increased 48.1% from RMB5,592 million in 2003 to RMB8,284 million in 2004. This increase was principally a result of the growing market demand following the end of SARS and the expansion of the Group's transportation capacity, including the launch of new routes and increase in the number of flights. Compared to 2003, the Group's domestic passenger traffic increased by 40.8% in 2004, and its domestic passenger load factor increased from 64.8% in 2003 to 70.3% in 2004. As a result of the favourable condition in the domestic passenger market since the end of 2003, the Group increased capacity on its domestic routes by 29.7% in 2004. The Group's domestic passenger yield increased from RMB0.54 in 2003 to RMB0.57 in 2004 per passenger-kilometre. This increase was principally a result of the increased pricing level due to strong demand in the domestic transportation. Hong Kong passenger revenues, which accounted for 14.2% of the Group's total passenger revenues, increased 34.4% from RMB1,627 million in 2003 to RMB2,187 million in 2004. This increase was primarily due to the market recovery following the end of SARS and the increase in the number of business and leisure travelers. Hong Kong passenger traffic increased by 57.1% in 2004 over that of 2003. In order to meet market demand, the Group increased the passenger capacity on its Hong Kong routes by 31.6% in 2004. The Group's Hong Kong passenger load factor increased from 52.4% in 2003 to 62.6% in 2004, and its Hong Kong passenger yield decreased from RMB0.84 in 2003 to RMB0.72 in 2004 per passenger-kilometre. The decrease in passenger yield on Hong Kong routes was primarily due to (1) an increase in the number of leisure travelers subscribing for package air tickets at a discounted price, (2) various promotions offered by the Group and (3) competition from other airlines. International passenger revenues, which accounted for 31.8% of the Group's total passenger revenues, increased 60.7% from RMB3,042 million in 2003 to RMB4,887 million in 2004. This increase was mainly due to the market recovery following the end of SARS and the increasing demand as a result of the recovering global economy in 2004. As a result, international passenger V-20 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP traffic increased by 74.1% in 2004 compared to 2003. The Group's international passenger capacity increased by 58.2% in 2004 compared to 2003. The Group's international passenger load factor increased from 56.7% in 2003 to 62.4% in 2004. The Group's international passenger yield decreased from RMB0.53 in 2003 to RMB0.49 in 2004 per passenger-kilometre. This decrease was primarily due to competition and the increase in the number of leisure travelers subscribing for package air tickets at a discounted price. The Group generates cargo and mail revenues from the transportation of cargo and mail on its designated cargo aircraft as well as from the carriage of cargo and mail on passenger aircraft. Revenues from cargo and mail operations, which accounted for 21.1% of the Group's total transportation revenues in 2004, increased 39.0% from RMB3,187 million in 2003 to RMB4,428 million in 2004. This increase was primarily due to the increasing demand for cargo transportation driven by the continuing rapid growth of China's economy following its accession to the World Trade Organization, the increase of the Group's transportation capacity as well as the increase of its market share. The Group's cargo and mail traffic (as measured in revenue freight tonne-kilometres, or RFTKs) increased 44.6% from 1,297 million RFTKs in 2003 to 1,875 million RFTKs in 2004. This increase was primarily due to a significant increase in the capacity of the Group's cargo transportation which resulted from the completion of the remodeling of MD-11 passenger aircraft into freighters, launch of new routes as well as an increase in the number of passenger flights which also carry cargo. Cargo yield decreased from RMB2.46 in 2003 to RMB2.36 in 2004 per cargo tonne-kilometre. This decrease was primarily due to intensified competition. Other operating revenues are primarily generated from airport ground services and ticket handling services. Airport ground services include loading and unloading, aircraft cleaning, fueling and ground transportation of cargo and passenger luggage for airlines operating to or from Hong Qiao International Airport and Pudong International Airport. The Group is currently the principal provider of airport ground services at both Hong Qiao International Airport and Pudong International Airport. Other operating revenues increased 51.1% from RMB829 million in 2003 to RMB1,253 million in 2004, which is higher than the 39.0% growth rate achieved in 2003. This increase was mainly due to the increase in the number of flights following the end of SARS and the enhancement of the Group's capability in carriage, storage and handling of cargo with the establishment of Shanghai Eastern Logistics Co., Ltd., a subsidiary of the Company. Other net operating income included rental income from operating sublease of aircraft and government subsidy net of loss on disposal of aircraft and engines. The Group's other operating income increased to RMB154 million in 2004 from RMB61 million in 2003. This increase was primarily due to a significant increase in rental income from operating sublease of aircraft. V-21 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Operating expenses The Group's total operating expenses increased 39.7% from RMB14,117 million in 2003 to RMB19,714 million in 2004. This increase was primarily due to increases in aviation fuel expenses, aircraft depreciation and operating lease expenses, take-off and landing charges, food and beverage expenses, salary costs, commission expenses and other expenses. The Group's total operating expenses as a percentage of its turnover decreased from 98.9% in 2003 to 93.7% in 2004. Aviation fuel expenses increased 78.3% from RMB3,045 million in 2003 to RMB5,430 million in 2004. This increase was principally a result of the Group's business expansion in 2004 and the increased international aviation fuel prices in 2004. In 2004, the Group consumed a total of 1,454,500 tonnes of aviation fuel, representing an increase of 42.1% compared to 2003. In 2004, the weighted average domestic and international fuel prices paid by the Group compared to 2003 increased by approximately 24.4% and 30.6%, respectively. Aircraft depreciation and operating lease expenses increased 28.8% from RMB2,851 million in 2003 to RMB3,672 million in 2004. This increase was primarily due to the Group's fleet expansion. Other depreciation, amortization and operating lease expenses increased from RMB495 million in 2003 to RMB496 million in 2004. The wages, salaries and benefits increased 28.8% from RMB1,449 million in 2003 to RMB1,866 million in 2004. This increase was primarily due to an increase in the number of staff resulting from the expansion of the Group and its main operations as well as an increase in staff's average salaries with the introduction of an incentive compensation plan that is linked to profit. The increase was also partially attributable to the introduction of an incentive plan for the Group's pilots that links allowances to flying hours. Take-off and landing charges increased 34.0% from RMB2,254 million in 2003 to RMB3,020 million in 2004, which accounted for 15.3% of the Group's total operating expenses in 2004. This increase was primarily due to the expansion of the Group's business and the increased number of flights. Aircraft maintenance expenses were RMB1,396 million in 2004, compared to RMB1,329 million in 2003, an increase of 5.0%. This increase was mainly due to the increased aircraft maintenance performed as a result of the increase in the number of the Group's flights in 2004. V-22 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Commission expenses increased 66.0% from RMB465 million in 2003 to RMB772 million in 2004. This increase was primarily due to the increase in the revenues of the Group's domestic and international businesses. Food and beverage expenses increased 39.9% from RMB542 million in 2003 to RMB758 million in 2004. This increase was primarily due to an increase in the number of travelers which was partially offset by a decrease of the average cost of food and beverage as a result of the Group's cost-control initiatives. Office and administration expenses increased by 26.5% from RMB1,058 million in 2003 to RMB1,338 million in 2004. This increase was primarily due to an increase in pilot and aircrew training expenses, overseas expenses as well as travel expenses. Other operating expenses increased 53.8% from RMB628 million in 2003 to RMB966 million in 2004. Other operating expenses mainly included SITA ticket reservation system charges, SITA departure control system charges, civil aviation infrastructure levy, provision for obsolescence of flight equipment spare parts, maintenance expenses and loss on disposal of other fixed assets, insurance costs, investment income and expenses relating to the newly-established Shanghai Eastern Logistics Co., Ltd. This increase was mainly attributable to increases in SITA ticket reservation system charges, SITA departure control system charges, civil aviation infrastructure levy as well as expenses relating to the newly-established Shanghai Eastern Logistics Co., Ltd. Non-operating income Non-operating income was RMB133 million in 2004, which was due to the rescission of certain related party lease arrangements with CEA Northwest. For more details, please see Note 38(c)(ii) to the Group's audited consolidated financial statements for the fiscal year ended 31st December, 2004. Net profits As a result of the foregoing, net profit attributable to shareholders was RMB514 million in 2004 compared to a loss of RMB950 million in 2003. Fixed assets V-23 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP The Group had approximately RMB30.2 billion of fixed assets as of 31st December, 2004, including aircraft and flight equipment with a value of approximately RMB27.169 billion, while the Group had approximately RMB26.8 billion of fixed assets as of 31st December, 2003, including aircraft and flight equipment with a value of approximately RMB23.8 billion. Fixed assets are initially recognized at cost and are subsequently stated at revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation. Valuation of fixed assets is based on market conditions and global economic factors that the Group may not control. The determination of fair value requires significant judgment, including judgment on valuations by the Company's management and/or by independent professional appraisers. The Company's directors have reviewed the carrying value of the Group's fixed assets as of 31st December, 2004 and are of the opinion that the carrying amount is not materially different from the fair value of the Group's fixed assets. AVIATION BUSINESS OF CEA NORTHWEST Operating revenue In 2004, transportation revenues amounted to RMB3,734 million, representing an increase of RMB991 million, or 36.14%, as compared to 2003. The increase was mainly a result of an increase of 39.05% of passenger revenues for the year. The times of passengers carried increased 42.07% to reach 4,471,000 passengers/times. RPKs increased 38.88% to reach RMB5,701 million. Passenger revenues for 2004 amounted to RMB3,525 million, representing an increase of 39.05% as compared to 2003, accounting for 94.41% of the total traffic revenues. The increase was principally a result of an increase of 38.88% in RPKs. Domestic passenger revenues for 2004 amounted to RMB2,418 million, representing an increase of 25.52% as compared to 2003. Domestic passenger revenues represented 68.58% of the total passenger revenues. The increase of domestic passenger revenues was principally attributable to an increase of 35.18% in RPKs to RMB4,623 million. The increase of RPKs was attributable to a better recovery of the transport market in 2004 than in 2003 which was affected by the outbreak of atypical pneumonia (severe acute respiratory syndrome, or SARS), and an enhancement of carriage capacity as a result of the introduction of six A320 aircraft. International passenger revenues for 2004 amounted to RMB1,107 million (representing an increase of 81.83% as compared to 2003), accounting for 31.42% of the total passenger revenues. V-24 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP The increase of international passenger revenues was principally attributable to an increase of 57.37% in RPKs to 1,078 million kilometres and an increase of 15.73% in each RPK to RMB1.03. The increases of RPKs and passenger revenues were attributable to a better recovery of the transport market in 2004 than in 2003 which was affected by the outbreak of SARS, and an enhancement of carriage capacity as a result of the introduction of six A320 aircraft. In 2004, cargo and mail revenues amounted to RMB209 million, representing an increase of 0.54% as compared to 2003. Cargo and mail revenues accounted for 5.59% of the revenues from transportation in 2004. The increase of cargo and mail revenues was primarily due to an increase of 25.64% in cargo and mail RTKs to 98 million RFTKs. The increase of mail RTKs was primarily due to an enhancement of carriage capacity. In 2004, other operating revenues increased 1.83% to RMB37 million. The increase was primarily generated from the operating lease of two A300 passenger aircraft to CEA during the period from 1st January, 2004 to 30th September, 2004. Operating expenses In 2004, total operating expenses increased to RMB219 million, or 6.05%, to RMB3,835 million as compared to 2003. The increase was mainly a result of an increase in wages and welfare expense and a reform of the wage system in the year. The increase in variable costs such as aircraft repairs and maintenance, aviation fuel cost, take-off and landing charges was attributable to an increase of transportation capacity, flight hours and the number of take-offs and landings in 2004. Aviation fuel costs increased 35.94%, to RMB830 million which was mainly a result of fuel consumption following the increase of number of flights and of an increase of oil price. Catering expenses decreased 4.82% to RMB78 million. The decrease of catering expenses was primarily a result of the stringent control over catering expenses, which led to a fall in the catering expenses of unit customer. Wages and welfare expenditure increased 55.79% to RMB468 million, mainly a result of an upward adjustment of the wage levels of staff and an increase of the flight hours of aviation staff. Take-off and landing charges accounted for 12.97% of the total operating expenses for 2004, representing an increase of 16.69% to RMB497 million, mainly a result of an increase of take-offs and landing driven by an increased investment in carriage capacity. V-25 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Depreciation and operating lease expenses accounted for 19.10% of the total operating expenses for 2004, representing an increase of 3.75% to RMB733 million, of which 91.46% of the total depreciation and operating lease expenses was aircraft depreciation and operating lease expenses, which increased 5.25% to RMB670 million. The increase was primarily due to a rental increase following an increase of six aircraft on operating lease. Aircraft repairs and maintenance expenses accounted for 14.96% of the total operating expenses for 2004, representing an increase of 30.69% to RMB574 million. The increase was primarily due to an increased number of aircraft and engine overhauls in 2004. Commission expenses accounted for 3.87% of the total operating expenses for 2004, representing an increase of 21.93% to RMB148 million. The increase was primarily due to an increase of the commission paid to agents following an increase of transportation revenues. Office and administration expenses accounted for 4.17% of the total operating expenses for 2004, representing a decrease of 6.82% to RMB160 million. The decrease was primarily due to the cost control practised. The increase in fixed assets revaluation credited to the income statement amounts to RMB81 million, as compared to an impairment loss from revaluation of RMB564 million charged to the income statement in 2003, primarily a result of a rise in the evaluated prices of aircraft and engines after the SARS incident. Other expenses, mainly including insurance expenses, booking expenses, expenses of the repairs and maintenance of other fixed assets, aviation construction funds expenses and the costs incurred from the cessation of certain aircraft leasing arrangement with the Company, increased 120.21% to RMB429 million, primarily a result of the addition of aviation infrastructure funds of RMB48,030,000 to this item and an expenses of RMB133 million arising from termination of certain leases. Net interest expenses Net interest expenses for 2004 decreased 25.26% to RMB237 million, primarily a result of a gradual fall of aircraft leasing interest following the repayment of the principal amount. Taxes V-26 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP There is no payable income tax for CEA Northwest due to a tax offset in 2004 of the tax losses recorded in previous years. In 2004, the tax expenses decreased 15.79% to RMB64,000, primarily due to a decrease in taxable income of an associated company. Owing to the abovementioned factors, the aviation business of CEA Northwest recorded a net profit of RMB136 million for 2004 as compared to a net loss of RMB1,062 million for 2003. AVIATION BUSINESS OF CEA YUNNAN Operating revenue In 2004, transportation revenues amounted to RMB3,152 million, representing an increase of RMB741 million, or 30.79%, as compared to 2003. The increase was mainly a result of an increase of 31.90% of passenger revenues. The times of passengers carried increased 23.18% to reach 4,641,000 passengers/times. RPKs increased 32.09% to reach RMB5,235 million. Passenger revenues for 2004 amounted to RMB3,031 million, representing an increase of 31.90% as compared to 2003, accounting for 96.17% of the total traffic revenues. The increase was principally a result of an increase of 32.09% in RPKs. Domestic passenger revenues for 2004 amounted to RMB2,856 million, representing an increase of 30.17% as compared to 2003. Domestic passenger revenues represented 94.23% of the total passenger revenues. The increase of domestic passenger revenues was principally attributable to an increase of 30.66% in RPKs to RMB4,862 million. The increase of RPKs was attributable to the rapid recovery of the aviation market following the end of the SARS incident in the second half of 2003. International passenger revenues for 2004 amounted to RMB175 million, representing an increase of 68.39% as compared to 2003 and accounting for 5.77% of the passenger revenues. The increase of international passenger revenues was principally attributable to an increase of 54.13% in RPKs to 373 million passenger-kilometres, and an 9.1% increase of every passenger-kilometres yield to RMB0.47. In 2004, cargo and mail revenues amounted to RMB121 million, representing an increase of 7.45% as compared to 2003. Cargo and mail revenues accounted for 3.83% of the total revenues from transportation in 2004. The increase of cargo and mail revenues was primarily due to an V-27 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP increase of 29.64% in the turnover of cargo and mail traffic to 118 million freight tonne kilometres and a decrease of 17.12% to RMB1.02 in the profit from each freight tonne kilometre. The increase of the turnover of cargo was primarily due to an enhanced market demand in 2004 than in 2003. The decrease in every freight tonne-kilometres yield was primarily due to a fall in transportation prices as a result of competition from other means of transport. Other operating revenues (expenses), including revenues from external leasing of aircraft and insurance compensation for aircraft accidents, increased 897.34% to RMB277 million, primarily a result of a longer period of external leasing of aircraft in 2004 and the insurance compensation for the crash of the B3072 aircraft in an accident in November 2004. Operating expenses Total operating expenses increased to RMB701 million, or 26.75%, to RMB3,319 million as compared to 2003. The increase was mainly a result of an increase in wages and welfare expense, take-off and landing and ground service charges, depreciation, operating lease expenses, aviation fuel cost, repairs and maintenance, and commission expenses. Aviation fuel costs amounted to RMB820 million, representing an increase of 44.56%, primarily a result of an increase in flight kilometres which leads to an increased consumption of aviation fuel, and an increase of the domestic price of aviation fuel costs from RMB3,400/tonne to RMB4,190/tonne. Catering expenses increased 12.73% to RMB99 million, primarily due to an increase in the number of passengers carried in 2004. The expenses of the wages and welfare expenditure increased 32.86% to RMB407 million, mainly a result of an enhancement of wages standards and an increase of the flight hours of aviation staff. Take-off and landing charges accounted for 13.49% of the total operating expenses for 2004, representing an increase of 16.10% to RMB448 million, mainly a reflection of an increase of number of flights as a result of favourable market demand in 2004. Aircraft depreciation and operating lease expenses accounted for 13.62% of the total operating expenses for 2004, representing an increase of 3.08% to RMB452 million, primarily due to an increase of rental for the operating lease arrangement involving engines. V-28 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Repairs and maintenance expenses accounted for 13.66% of the total operating expenses for 2004, representing an increase of 76.81% to RMB453 million. The increase was primarily due to an increase of overhauls as a result of an increasing number of aircraft engines reaching flight cycle hours requiring aircraft overhaul, and an increase of flight hours resulting in an increase of day-to-day repairs and maintenance expenses. Commission expenses accounted for 3.03% of the total operating expenses for 2004, representing an increase of 43.30% to RMB101 million. The increase was primarily due to an increase of the commission paid to agents following a significant growth of sales revenues. Office and administration expenses accounted for 3.78% of the total operating expenses for 2004, representing an increase of 19.70% to RMB125 million. The increase was primarily due to an expansion of operating scale and reform of wages structure in 2004. A fixed assets revaluation surplus of RMB68 million was credited to the income statement as compared to a revaluation deficit charged to the income statement of RMB161 million in 2003. The revaluation surplus was primarily a result of an increase of the market value of individual aircraft as compared with their original book values, as indicated in an valuation exercise carried out by an independent valuation organisation based on the market prices as at late 2004. Other expenses experienced a 115.20% increase to RMB422 million incurred in items, except for those mentioned above, including production and operating expenses and expenses incurred in relation to aircraft accidents, comprising principally expenses incurred in relation to the B3072 aircraft accident in November 2004. Net interest expenses Net interest expenses for 2004 decreased 28.00% to RMB102 million, mainly because of a decrease of interest corresponding to a progressive decrease of aircraft on operating leases over the years, and the gain generated from interest swaps. Taxes The income tax expense for 2004 was RMB16 million, as compared to the income tax benefit of RMB93 million for 2003. The increase in income tax expenditure was primarily a result of a pre- V-29 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP income tax profit of RMB46 million generated from the aviation business of CEA Yunnan in 2004, while a pre-income tax loss of RMB283 million was recorded for 2003. Owing to the abovementioned factors, the aviation business of CEA Yunnan recorded a net profit of RMB31 million for 2004 as compared to a net loss of RMB190 million for 2003. 2003 COMPARED WITH 2002 THE GROUP Turnover The Group's turnover increased from RMB13,079 million in 2002 to RMB14,277 million in 2003, or 9.2%, reflecting increase in its domestic passenger and cargo revenues. These revenues were net of the applicable PRC sales tax and civil aviation infrastructure levies. Revenues from the Group's passenger and cargo and mail transportation business increased from RMB12,482 million in 2002 to RMB13,448 million in 2003, or 7.7%. Compared to 2002, the average aircraft daily utilization decreased by 0.6 hours to 8.0 hours in 2003. Passenger revenues, which accounted for 76.3% of the Group's total transportation revenues in 2003, increased from RMB10,038 million in 2002 to RMB10,261 million in 2003, or 2.2%, reflecting increase in domestic passenger revenues driven by the recovery of the domestic passenger market during the second half of 2003. Passenger revenues in the second half of 2003 were RMB6,555 million, representing an increase of 21.3% from RMB5,405 million in the second half of 2002. The Group's domestic passenger revenues, which accounted for 54.4% of the Group's total passenger revenues, increased from RMB4,670 million in 2002 to RMB5,592 million in 2003, or 19.7%, primarily because it took advantage of the opportunities created by the recovery of the domestic passenger market during the second half of 2003 and attracted more customers. Domestic passenger revenues in the second half of 2003 were RMB3,651 million, representing an increase of 46.9% from RMB2,485 million in the second half of 2002. Compared to 2002, the Group's domestic passenger traffic increased by 21.0% in 2003, and the Group's domestic passenger load factor increased from 63.1% in 2002 to 64.8% in 2003. In response to the market demand, the Group increased capacity on its domestic routes by 17.9% in 2003. The Group's domestic passenger V-30 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP yield decreased slightly from RMB0.55 in 2002 to RMB0.54 in 2003 per passenger-kilometre, primarily due to competition in the domestic market. Hong Kong passenger revenues, which accounted for 15.9% of the Group's total passenger revenues, decreased from RMB1,911 million in 2002 to RMB1,627 million in 2003, or 14.9%, primarily due to the adverse effect on the traffic volume on its Hong Kong regional routes by the outbreak and spread of SARS in Hong Kong and other areas in China. Hong Kong passenger traffic decreased by 13.4% in 2003 over that of 2002. In order to increase its market share and in response to competition on its Hong Kong routes, the Group increased the passenger capacity on its Hong Kong routes by 1.2% in 2003. The Group's Hong Kong passenger load factor decreased from 61.2% in 2002 to 52.4% in 2003, and its Hong Kong passenger yield decreased from RMB0.86 in 2002 to RMB0.84 in 2003 per passenger-kilometre. The decrease in passenger load factor and passenger yield on Hong Kong routes was also attributable to competition from other airlines. International passenger revenues, which accounted for 29.7% of the Group's total passenger revenues, decreased from RMB3,457 million in 2002 to RMB3,042 million in 2003, or 12.0%. The decrease in international passenger revenues mainly reflected decreased international passenger traffic caused by SARS. Starting from the end of 2002 until mid June 2003, most areas of China were affected by SARS. The SARS-related travel advice issued by the World Health Organization as well as governmental agencies and private companies of other countries significantly discouraged business travelers and tourists to travel to China. Other factors such as the Iraq war and the terrorist activities also affected the international traffic. As a result, international passenger traffic decreased by 22.7% in 2003 over that of 2002. The Group's international passenger capacity decreased by 5.9% in 2003 compared to 2002. The Group's international passenger load factor decreased from 68.9% in 2002 to 56.7% in 2003. However, the Group's international passenger yield increased from RMB0.46 in 2002 to RMB0.53 in 2003 per passenger-kilometre primarily because the increase in customers who flied business class on its international routes and the appreciation of certain foreign currencies against Renminbi in 2003. The Group generates cargo and mail revenues from the transportation of cargo and mail on its designated cargo aircraft as well as from the carriage of cargo and mail on passenger aircraft. Revenues from cargo and mail operations, which accounted for 23.7% of the Group's total transportation revenues in 2003, increased from RMB2,445 million in 2002 to RMB3,187 million in 2003, or 30.4%. The increase in the Group's cargo revenues was primarily the result of its increased freight charges in response to the increased demand. The demand was driven by increased importation and exportation after China's admission to the World Trade Organization, or WTO. The Group's cargo and mail traffic (as measured in revenue freight tonne-kilometres, or V-31 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP RFTKs) increased from 1,023 million RFTKs in 2002 to 1,297 million RFTKs in 2003, or 26.7%. In response to the rapid growth in its cargo and mail operations, the Group successively remodeled three MD-11 passenger aircraft into freighters in the second half of 2003. Cargo yield increased from RMB2.39 in 2002 to RMB2.46 in 2003 per cargo tonne-kilometre primarily as a result of increased market demand. Other operating revenues are primarily generated from airport ground services and ticket handling services. Airport ground services include loading and unloading, aircraft cleaning, fueling and ground transportation of cargo and passenger luggage for airlines operating to or from Hong Qiao International Airport and Pudong International Airport. Other operating revenues increased from RMB596 million in 2002 to RMB829 million in 2003, or 39.0%, which is higher than the 25.8% growth rate achieved in 2002. The increase in other operating revenues in 2003 was mainly due to increase in the Group's airport ground service revenues as a result of increased volume of imported and exported goods after China's admission to the WTO. It is also attributable to the increase in the Group's commission revenues generated from its ticket handling services provided to other airlines. Operating expenses The Group's total operating expenses increased from RMB12,297 million in 2002 to RMB14,117 million in 2003, or 14.8%, reflecting mainly increase in aviation fuel expenses, wages, salaries and benefits, other depreciation, amortization and operating lease expenses, aircraft maintenance expenses, commissions and take-off and landing charges. The Group's total operating expenses as a percentage of its turnover increased from 94.0% in 2002 to 98.9% in 2003. Aviation fuel expenses increased from RMB2,564 million in 2002 to RMB3,045 million in 2003, or 18.8%, primarily as a result of increased fuel prices and the expansion of the Group's fleet. In 2003, the Group consumed a total of 1,023,700 tonnes of aviation fuel, representing an increase of 8.8% compared to 2002. In 2003, due to the Iraqi war, the weighted average domestic and international fuel prices paid by the Group increased by approximately 10.6% and 3.6%, respectively. Aircraft depreciation and operating lease expenses increased from RMB2,455 million in 2002 to RMB2,851 million in 2003, or 16.1%. Other depreciation, amortization and operating lease expenses increased from RMB400 million in 2002 to RMB495 million in 2003, or 23.7%, primarily due to the expansion of the Group's fleet. V-32 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP The wages, salaries and benefits increased from RMB1,036 million in 2002 to RMB1,449 million in 2003, or 39.9%, mainly because the Group's work force increased by approximately 5% compared to 2002, and in order to meet the requirements of its fleet expansion, most of the Group's newly hired staff are pilots and cabin crew that are paid relatively high compared to its average salaries. In addition, in accordance with relevant government regulations and with reference to the policies implemented by enterprises in nearby regions, the Group formulated a staff housing allowance plan in 2003. The housing allowance standards under the new housing plan are higher than the standards to which the Group made references in 2000 in making provisions. Moreover, the number of employees who are qualified to receive housing allowance also increased in 2003. As a result, the Group recognized provisions of RMB340 million as of 31st December, 2003, which amount is RMB260 million higher than the provisions of RMB80 million that it made in 2000. The increased amount of the provisions was fully charged to the Group's income statement for its fiscal year ended 31st December, 2003. Take-off and landing charges increased from RMB1,988 million in 2002 to RMB2,254 million in 2003, or 13.4%, which accounted for 16.0% of the Group's total operating expenses in 2003, primarily due to the mandatory increase in the take-off and landing charges for domestic flights by the Civil Aviation Administration of China, effective September 1, 2002, and a 20.1% increase in 2003 in its domestic flight take-offs and landings compared to 2002. Aircraft maintenance expenses were RMB1,329 million in 2003, compared to RMB1,078 million in 2002, an increase of 23.3%. This increase is mainly due to increased number of aircraft and engines that were subject to overhaul in 2003, and increased maintenance of aircraft that were temporarily out of service during the period of SARS. Commission expenses increased from RMB380 million in 2002 to RMB465 million in 2003, or 22.5%, primarily due to commission payments to CEA Northwest and CEA Yunnan that began to sell the Group's passenger tickets since March 2003. Food and beverage expenses decreased from RMB606 million in 2002 to RMB542 million in 2003, or 10.6%, primarily due to decreased provision of food and beverage during the period of SARS, and the Group's effective control over purchases and provision of food and beverage, which is partially offset by the increased expenses resulted from the increased traffic volume on domestic routes. Other operating expenses increased from RMB574 million in 2002 to RMB628 million in 2003, or 9.4%. Other operating expenses included provision for obsolescence of flight equipment V-33 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP spare parts, maintenance expenses of other fixed assets, computer and telecommunications expenses and other expenses. The increase was mainly attributable to increase in provision for obsolescence of flight equipment spare parts and maintenance expenses for the Group's office building in Pudong. Net losses The net losses attributable to shareholders was RMB950 million in 2003, compared to a net profit of RMB86 million in 2002. Fixed assets The Group had approximately RMB26.8 billion of fixed assets as of 31st December, 2003, including aircraft and flight equipment with a value of approximately RMB23.8 billion, while it had approximately RMB20.5 billion of fixed assets as of 31st December, 2002, including aircraft and flight equipment with a value of approximately RMB17.8 billion. Fixed assets are initially recognized at cost and are subsequently stated at revalued amount, being its fair value at the date of revaluation less accumulated depreciation. In view of recent volatility in the global aviation industry and change in market value for aircraft, on 31st December, 2002, the Group conducted a revaluation on its fixed assets pursuant to the requirements of International Financial Reporting Standards. As a result of the revaluation, the Group recognized a net revaluation surplus of RMB137 million in the revaluation reserve and a revaluation deficit of RMB172 million in the income statement. Valuation of fixed assets is based on market conditions and global economic factors that the Group may not control. The determination of fair market value requires significant judgment, including judgment on valuations by the Company's management and/or by independent professional appraisers. The revaluation deficit on fixed assets as recognized in 2002 is a non-cash charge and has no impact on the Group's cash flows. It is not an indication of any impairment of the Group's fleet. AVIATION BUSINESS OF CEA NORTHWEST Operating revenue V-34 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP In 2003, transportation revenues amounted to RMB2,743 million, representing an decrease of RMB581 million, or 17.49%, as compared to 2002. The decrease was mainly a result of a decrease of 16.66% of passenger revenues following a decrease of RPKs caused by the outbreak of SARS. Passenger revenues for 2003 amounted to RMB2,535 million, representing a decrease of 16.66% as compared to 2002, accounting for 92.43% of the total traffic revenues. The decrease was principally a result of a decrease of 12.08% in RPKs to 4,105 million kilometres and a decrease of 5.20% in every revenue passenger-kilometres yield. Domestic passenger revenues for 2003 amounted to RMB1,962 million, representing an decrease of 6.93% as compared to 2002, or 75.98% of the total passenger revenues. The decrease of domestic passenger revenues was principally attributable to a decrease of 7.34% in the turnover volume of passengers to RMB3,420 million and a 0.12% decrease of revenues from each RPK to RMB0.56. The decrease of RPKs and every revenue passenger-kilometres yield was attributable to a fall in the number of passengers following the outbreak of SARS. International passenger revenues for 2003 amounted to RMB609 million, representing an decrease of 37.37% as compared to 2002 and accounting for 24.02% of the total passenger revenues. The decrease of international passenger revenues was principally attributable to a 29.96% decrease in RPKs to RMB685 million and a 10.57% decrease in every revenue passenger-kilometres yield to RMB0.89. The decrease in RPKs and in every revenue passenger-kilometres yield was a result of a decrease in the number of passengers carried following the outbreak of SARS. Cargo and mail revenues for 2003 amounted to RMB207 million, representing a decrease of 26.47% as compared to 2002. Cargo and mail revenues accounted for 7.57% of the total revenues from transportation. The decrease of cargo and mail revenues was primarily due to a decrease in the number of flights. In 2003, other operating revenues increased 83.37% to RMB37 million . The increase was primarily attributable to the rental income from the leasing by the Company of two aircraft. Operating expenses Total operating expenses for 2003 decreased RMB121 million, or 3.24%, to RMB3,617 million as compared to the 2002. The decrease was mainly a result of the outbreak of SARS, and a V-35 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP decrease in variable costs such as catering expenses, take-off and landing charges, aircraft repairs and maintenance, and commission expenses. Aviation fuel costs decreased 10.22% to RMB611 million, which was mainly a result of a decrease in the number of flights. In 2003, catering expenses decreased 41.31% to RMB82 million, primarily due to the adoption of a more stringent approach in cost control and a decrease in the turnover volume of passengers. Wages and welfare expenditure increased 3.31% to RMB301 million, mainly a result of an upward adjustment of the wage levels. Take-off and landing charges accounted for 11.78% of the total operating expenses, representing a decrease of 12.37% to RMB426 million, mainly a result of a decrease of the total number of take-offs and landings following a significant decrease of number of flights during the period of the occurrence of SARS. Depreciation and operating lease expenses accounted for 19.52% of the total operating expenses for 2003, representing an increase of 3.56% to RMB706 million, of which 90.16% of the total depreciation and operating lease expenses was aircraft depreciation and operating lease expenses, which increased 4.94% to RMB637 million. The decrease was primarily due to a short term leasing of two A320 aircraft for the period from the fourth quarter of 2002 to the third quarter of 2003. Aircraft repairs and maintenance expenses accounted for 12.14% of the total operating expenses for 2003, representing a decrease of 41.26% to RMB439 million. The decrease was primarily due to a decrease in the overhauls of aircraft and engines in 2003. Commission expenses accounted for 3.36% of the total operating expenses for 2003, representing a decrease of 35.55% to RMB122 million. The decrease was primarily due to a decrease of the commission paid to agents following a decrease of transportation revenues. Office and administration expenses accounted for 4.74% of the total operating expenses for 2003, representing a decrease of 1.09% to RMB172 million. The decrease was primarily due to a tightening-up of cost control. V-36 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP The losses from fixed assets revaluation increased 807.36% to RMB564 million, primarily a result of a continual decrease in the revaluation amount of individual aircraft in comparison with their original book values, as indicated in an revaluation exercise carried out by an independent valuation organisation during the period of the occurrence of SARS based on the open market prices as at late 2003 for the aircraft. Other expenses, including primarily the expenses of sales, recorded a decrease of 32.24% to RMB195 million, mainly a result of a decrease of agent fees owing to the decrease of turnover, and the fall of sales following the consolidation of overseas offices. Net interest expenses Net interest expenses for 2003 decreased 7.44% to RMB317 million, primarily a result of a decrease of interest expenses corresponding to the continual reduction of the principal of leasing indebtedness. Taxes In 2003, the income tax expense of the aviation business of CEA Northwest was RMB76,000, and there was no income tax expense in 2002. In 2002 and 2003, there was no income tax expense payable by CEA Northwest for its aviation business which recorded a loss. However, an associated company of CEA Northwest, recorded a profit for 2003, and the income tax expense was RMB76,000. Owing to the abovementioned factors, the aviation business of CEA Northwest recorded a net loss of RMB1,062 million for 2003 as compared to a net loss of RMB736 million for 2002. AVIATION BUSINESS OF CEA YUNNAN Operating revenue In 2003, transportation revenues amounted to RMB2,410 million, representing a decrease of RMB57 million, or 2.31%, as compared to 2002. The decrease was mainly a result of a decrease of 1.62% of passenger revenues and a decrease of 14.68% in cargo and mail revenues. Passenger revenues for 2003 amounted to RMB2,298 million, representing a decrease of 1.62% as compared to 2002, accounting for 95.34% of the total traffic revenues. The decrease was V-37 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP principally a result of a decrease of 1.15% in RPKs and a decrease of 0.15% in every revenue passenger-kilometres yield. Domestic passenger revenues for 2003 amounted to RMB2,194 million, representing an increase of 1.15% as compared to 2002. Domestic passenger revenues represented 95.48% of the total passenger revenues. The increase of domestic passenger revenues was principally attributable to a net impact of an increase of 2.20% in RPKs to RMB3,721 million passenger-kilometres and a decrease of 1.03% in every revenue passenger-kilometres yield to RMB0.59. The increase in RPKs was attributable to the rapid recovery of the aviation market following the end of the SARS incident in the second half of 2003. The decrease of every revenue passenger-kilometres yield was primarily a result of an intensifying competition. International passenger revenues for 2003 amounted to RMB104 million, representing a decrease of 37.61% as compared to 2002 and accounting for 4.52% of the total passenger revenues. The decrease of international passenger revenues was principally attributable to the impact of the outbreak of SARS, and a decrease of 34.24% in international RPKs to RMB242 million, and a 4.87% decrease of every revenue passenger-kilometres yield to RMB0.42. Cargo and mail revenues for 2003 amounted to RMB112 million, representing a decrease of 14.68% as compared to 2002. Cargo and mail revenues accounted for 4.66% of the revenues from transportation in 2003. The decrease of cargo and mail revenues was primarily due to the impact of the outbreak of SARS, a decrease of 11.07% in RFTKs and a decrease of 4.07% to RMB1.25 in the every freight tonne-kilometres yield. In 2003, other operating revenues were RMB28 million as a result of the leasing of three CRJ-200 aircraft to the Company during the period from 1st October, 2003 to 30th September, 2004. Other operating revenues were revenues from aircraft leasing. Operating expenses Total operating expenses for 2003 decreased RMB72 million, or 2.69%, to RMB2,619 million as compared to 2002. The decrease was mainly a result of a decrease of catering expenses and provision for an increase/decrease in the value of fixed assets in 2003. Aviation fuel costs increased 3.86% to RMB567 million, primarily resulting from a surge in the price of aviation fuel costs. V-38 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP Catering expenses decreased 26.19% to RMB88 million in 2003, primarily a result of the adoption of a more stringent and effective approach in cost control. Wages and welfare expenditure increased 16.54% to RMB306 million, mainly a result of wages adjustments. The expenses of aircraft and transportation services (take-off and landing charges) accounted for 14.72% of the total operating expenses for 2003, representing an increase of 3.34% to RMB386 million, primarily a result of an increase of domestic take-off and landing charges and navigation charges effective from September 2002. Aircraft depreciation and operating lease expenses accounted for 18.45% of the total operating expenses for 2003, representing a decrease of 0.01% to RMB483 million, of which 90.80% of the total depreciation and operating lease expenses were aircraft depreciation and operating lease expenses, which decreased 0.19% to RMB439 million. Aircraft repairs and maintenance expenses accounted for 9.79% of the total operating expenses for 2003, representing an increase of 1.54% to RMB256 million. The increase was primarily due to an increase in the number of overhauls of aircraft in 2003 over 2002. Commission expenses accounted for 2.68% of the total operating expenses for 2003, representing an increase of 0.07% to RMB70 million. The increase was primarily due to an increase of the commission and allowance paid to sales agents as a result of an increase of sales. Office and administration expenses accounted for 4.00% of the total operating expenses for 2003, representing an increase of 6.55% to RMB105 million. There was no significant change. The losses from fixed assets revaluation decreased 45.34% to RMB161 million, primarily a result of a continual decrease in the revaluation amount of individual aircraft in comparison with their original book values, as indicated in an revaluation exercise carried out by an independent valuation organisation based on the open market prices as at late 2003 for the aircraft during the period of the occurrence of SARS. Other expenses increased 2.78% to RMB196 million. There was no significant change. Net interest expenses V-39 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP The net interest expenses for 2003 decreased 18.65% to RMB141 million, primarily due to the adoption or advanced and effective measures for funds operation. Taxes The income tax credit decreased 2.27% to RMB93 million in 2003, primarily a result of a fall of loss before tax over that of 2002. Owing to the abovementioned factors, the aviation business of CEA Yunnan recorded a net loss of RMB190 million for 2003 as compared to a net loss of RMB262 million for 2002. TRADING AND FINANCIAL PROSPECTS TRADING PROSPECTS As an aviation enterprise that carries public utility functions, the Group and its operations are closely related to regional and global political and economic development. Therefore, adverse circumstances such as geopolitical risks and the outbreak of unexpected events may cause material impact on the Group or the industry as a whole. The Company is of the view that in 2004, despite the volatility of oil prices, economic conditions were generally favourable as recovery was considerably strong in most regions and countries. The United States, Euro zone and Japan showed signs of recovery, while developing economies in Asia also experienced considerable growth. The Chinese economy, in particular, has maintained steady growth, and is beginning to assume a more prominent status and importance in the global economy. With accelerating regional economic integration in the global context, bilateral and multi-lateral trade will, the Directors believe, continue to provide impetus for economic growth. The positive economic development of China following its accession into the World Trade Organisation (WTO) has created business opportunities for many countries. Following the implementation of further measures as a result of WTO-membership, China is expected to participate more extensively in the global economical and technological cooperation and competition. This will, the Directors further believe, also continue to fuel the regional demand for air transport and maintain its steady growth. Chinese consumers nowadays have higher expectation. The vast territory of China houses tourism resources, which will drive the demand for air transport consumption products. As such, the industry has potential. The Group will take advantage of such demand and the traditional V-40 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP holidays and travel seasons by making timely adjustments to the allocation of its transportation capacity, in order to fully enhance its transportation volume and relevant income. Shanghai, the Group's major base of operation, is one economic, financial and transportation hub of China. Its status is well-established and becomes increasingly prominent. The Yangtze Delta Region, headed by Shanghai, has a city cluster that enjoys the economic growth in the country. Following continual development of western China, foreign trade of the western and other regions is anticipated to increase significantly. Meanwhile, areas covered by the aviation networks of CEA Northwest and CEA Yunnan have tourism resources. These factors will continue to enhance the demand for air transport in the region. The significance of Xi'an and Kunming as aviation hubs in the western regions will also become increasingly prominent. FINANCIAL OUTLOOK The Directors believe that China's air passenger and cargo traffic will continue to grow in 2005 and beyond, reflecting a positive outlook for China's economic and trade growth, rising domestic consumption and growth of business and leisure travel. At the same time, industry consolidation as evidenced by the restructuring undertaken by the three major airline groups in China, i.e. Air China, China Southern Airlines, and China Eastern Airlines (i.e. the Company's group), will keep the supply of capacity in a controlled manner. As a result of the expected favourable supply/demand balance, Chinese carriers, including the Enlarged Group, are believed to have higher passenger load factors in 2005, and if pricing pressure is under control, may experience positive revenue growth in 2005 as the Company expects. However, air traffic and revenue growth of the Enlarged Group, as well as the airline industry in general, could be adversely affected by any exterior demand shocks, such as the SARS outbreak in 2003 and accidents, such as the crash of an aircraft of CEA Yunnan in November 2004. In addition, the healthy supply/demand balance could also be changed by the emergence and growth of low-cost carriers in China. Shanghai, as the commercial and financial centre of China, is believed to continue to drive the growth of the Enlarged Group's traffic and revenue growth in 2005, and the addition of Xi'an and Yunnan as the Enlarged Group's major hubs, will drive its traffic and revenue growth in the northwestern and southeastern regions of China. V-41 APPENDIX V FINANCIAL INFORMATION OF THE ENLARGED GROUP The restructuring of the Enlarged Group pursuant to the Acquisition Agreement is expected to rationalise its route network and fleet, centralise its procurement of aircraft and aircraft components, integrate its maintenance resources, and streamline its sales channels, leading to anticipated enhanced unit revenues and lower unit costs. Fuel cost is nonetheless anticipated to be an important factor in determining the Enlarged Group's profitability in 2005 and beyond, given fuel is the single largest cost item for the Enlarged Group. Higher oil prices would likely have a major negative impact on its earnings. Due to the high fixed cost nature of the industry, the Enlarged Group has a high level of indebtedness. As the United States Federal Reserve has been, and is generally forecasted to continue, raising its Federal Funds rate in 2005, the Enlarged Group is likely to experience an increase in interest expenses, hence a possibly negative impact on its earnings in 2005. NO MATERIAL ADVERSE CHANGE Save as disclosed in this circular or otherwise previously announced, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31st December, 2004 (being the date to which the latest published audited accounts of the Company have been made up). V-42 APPENDIX VI PROPERTY VALUATION The following is the text of a letter, summary of values and valuation certificates dated 19 May 2005 prepared by the independent property valuer, Chesterton Petty Limited, for the purpose of incorporation in this circular. [CHESTERTON PETTY LOGO] International Property Consultants Chesterton Petty Limited 16/F CITIC Tower 1 Tim Mei Avenue Central Hong Kong Tel (852) 2840 1177 Fax (852) 2840 0600 19 May 2005 The Directors China Eastern Airlines Corporation Limited 2550 Hongqiao Road Shanghai The People's Republic of China Dear Sirs In accordance with your instructions to us to value the property interests to be acquired by China Eastern Airlines Corporation Limited (hereinafter referred to as "the Company) from China Eastern Air Holding Company ("CEA Holding") which are originally held by China Eastern Air Northwest Company ("CEA Northwest") and China Eastern Air Yunnan Company ("CEA Yunnan") and those property interests held by the Company and its principal subsidiaries (hereinafter together referred to as "the Group"), we confirm that we have carried out inspections, made relevant enquiries and searches and obtained such further information as we consider necessary for the VI-1 APPENDIX VI PROPERTY VALUATION purpose of providing you with our opinion of the open market values of such property interests as at 31 March 2005. Our valuation is our opinion of the open market value which we would define as intended to mean "the best price at which the sale of an interest in a property would have been completed unconditionally for cash consideration on the date of valuation assuming:- (a) a willing seller; (b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale; (c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation; (d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and (e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion. Our valuation has been made on the assumption that the owner sells the property interest in the open market without the benefit of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to increase the values of the property interests. In addition, no account has been taken of any option or right of pre-emption concerning or affecting the sale of the property interest and no forced sale situation in any manner is assumed in our valuation. We have valued portion of the property interests in Group I and the property interests in Groups IV and V by adopting the "Direct Comparison Approach" assuming sale of the property interest in its existing state with the benefit of vacant possession and by making reference to comparable sales evidence as available in the relevant market. Due to the specific purposes for which most of the buildings and structures of those remaining properties in Groups I and III have been constructed, there are no readily identifiable market comparables available, thus the buildings and structures cannot be valued on the basis of VI-2 APPENDIX VI PROPERTY VALUATION direct comparison. They have therefore been valued on the basis of their depreciated replacement cost. We would define "depreciated replacement cost" to be our opinion of the land value in its existing use together with an estimate of the new replacement costs of the buildings and structures, including fees and finance charges, from which deductions are then made to allow for age, condition and functional obsolescence. The depreciated replacement cost approach generally provides the most reliable indication of value for property in the absence of a known market based on comparable sales. Property interests in Group VI, which are under construction, have been valued on the basis of their prevailing cost level and status of construction as at the date of valuation, and we have also assumed that all consents, approvals and licences from the relevant government authorities for such construction and related development proposal will be granted without any onerous conditions or undue delay which might affect their values. The properties in Group II which are to be rented by the Company from CEA Holding under a leasing agreement and those in Group VII which are rented by the Group both under various agreements in the PRC and overseas, respectively, have been assigned no commercial value due to the prohibition against assignment or sub-letting, or lack of substantial profit rent. In valuing the property interests, we have had regarded to the requirements contained within the relevant provisions of the Companies Ordinance and of those as stipulated in the Chapter 5 and Practice Note 12 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. We have been provided with copies of extracts of title documents relating to the property interests. However, we have not inspected the original documents to verify the ownership or to verify any amendments which may not appear on the copies handed to us. We have relied to a considerable extent on information given by the Company and the legal opinion of the Company's PRC legal advisers, the Commerce & Finance Law Office, and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, tenure, particulars of occupancy, identification of the property, floor and site areas, and all other relevant information. Dimensions, measurements and areas included in the valuation certificate are based on information contained in the documents provided to us and are therefore only approximations. We have not been able to carry out detailed on-site measurements to verify the correctness of the site and the floor areas of the properties and we have assumed that the site and the floor areas shown on the documents handed to us are correct. VI-3 APPENDIX VI PROPERTY VALUATION We have inspected the exteriors and, where possible, the interiors of the properties. However, we have not carried out any site investigations to determine the suitability of the ground conditions and the services etc, for any future development. Our valuation is prepared on the assumption that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during the construction period. Moreover, no structural survey has been made, but in the course of our inspection, we did not note any serious defects. We are not, however, able to report that the premises are free of rot, infestation, or any other structural defects. No test has been carried out to any of the services. No allowance has been made in our valuation for any charges, mortgages or amounts owing on any property or for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property is free from encumbrances, restrictions and outgoings of an onerous nature which could affect its value. Unless otherwise stated, all money amounts are stated in Renminbi. We enclose herewith a summary of values and valuation certificate. Yours faithfully For and on behalf of CHESTERTON PETTY LIMITED CHARLES C K CHAN Chartered Estate Surveyor MSc FRICS FHKIS MCIArb RPS(GP) Executive Director Note: Charles C K Chan, MSc, FRICS, FHKIS, MCIArb, RPS (GP), has been a qualified valuer with Chesterton Petty Limited since June 1987 and has about 20 years' experience in the valuation of properties in Hong Kong and extensive experience in the valuation of properties in the People's Republic of China. SUMMARY OF VALUES OPEN MARKET VALUE IN EXISTING STATE AS AT PROPERTY 31 MARCH 2005 VI-4 APPENDIX VI PROPERTY VALUATION
RMB GROUP I - PROPERTIES TO BE ACQUIRED BY THE COMPANY FROM CEA HOLDING 1. Various properties to be acquired by the Company from CEA 52,800,000 Northwest in Guangzhou, Shanghai, Shenzhen and Zhuhai in the PRC and Nagoya in Japan 16,790,000 2. Various properties to be acquired by the Company from CEA Yunnan in Guangzhou, Chengdu and Chongqing in the PRC 69,590,000 SUB-TOTAL: GROUP II - PROPERTIES TO BE RENTED BY THE COMPANY FROM CEA HOLDING 3. Various properties to be rented by the Company from CEA No commercial value Holding in Shaanxi Province, Gansu Province and Yunnan Province 4. Various leased properties rented by CEA Holding from third No commercial value parties to be transferred to the Company in Beijing, Shanghai, Shenzhen, Yinchuan, Yunnan Province, Shaanxi Province and Xinjiang Autonomous Administration Region SUB-TOTAL: Nil
OPEN MARKET VALUE IN PERCENTAGE OF CAPITAL VALUE EXISTING STATE INTEREST AT TRIBUTABLE TO AS AT ATTRIBUTABLE TO THE GROUP AS AT PROPERTY 31 MARCH 2005 THE GROUP 31 MARCH 2005 -------- -------------- ---------------- RMB RMB GROUP III - PROPERTIES HELD BY THE GROUP IN THE PRC 5. Various properties held by China 474,560,000 100% 474,560,000 Eastern Airlines Corporation Limited Shanghai Headquarters in Shanghai, Ningbo, Chongqing, Guangzhou and Fuzhou 6. Various properties held by China 2,330,000 62.56% 1,457,648 Eastern Airlines Jiangsu Co., Ltd in Jiangsu Province
VI-5 APPENDIX VI PROPERTY VALUATION 7. Various properties held by China Cargo 596,860,000 70% 417,802,000 Airlines Co., Ltd in Shanghai 8. Eastern Airlines Beijing Hotel held by No commercial 85.86% No commercial Eastern Airlines Industrial Co., Ltd in value value Beijing 9. An office building held by Shanghai 80,440,000 95% 76,418,000 Eastern Flight Training Co., Ltd in Shanghai 10 Various properties held by China No commercial 100% No commercial value Eastern Airlines Corporation Limited value Anhui Branch in Anhui Province 11. Various properties held by China No commercial value 100% No commercial value Eastern Airlines Corporation Limited Jiangxi Branch in Jiangxi Province 12. Various properties held by China 116,230,000 100% 116,230,000 Eastern Airlines Corporation Limited Ningbo Branch in Ningbo and Guanghan 13. Various properties held by China 64,550,000 100% 64,550,000 Eastern Airlines Corporation Limited Shandong Branch in Shandong Province 14. Various properties held by China No commercial value 100% No commercial value Eastern Airlines Corporation Limited Shanxi Branch in Shanxi Province 15. Various properties held by China No commercial value 100% No commercial value Eastern Airlines Corporation Limited Hebei Branch in Hebei Province SUB-TOTAL: 1,334,970,000 1,151,017,648
GROUP IV - PROPERTIES HELD BY THE GROUP IN USA VI-6 APPENDIX VI PROPERTY VALUATION 16. 112 N. Primose Ave 12,570,000 100% 12,570,000 Alhambra CA 91801 USA 17. 422 N 3rd Street 10,300,000 100% 10,300,000 Alhambra CA 91801 USA 18. Brittney Lane 16,400,000 100% 16,400,000 Townhouse 11015 Southeast 208th St Kent WA 98031 USA SUB-TOTAL: 39,270,000 39,270,000 GROUP V - PROPERTIES HELD BY THE GROUP IN KOREA 19. Unit No. 908 on 9/F of 3,210,000 100% 3,210,000 Building No. 102, Banpo Hanshin Tower Apartment in 71-11 Jamwon-dong, Seocho-gu, Seoul Korea 20. Namyang Hotel, 292-27, 5,600,000 100% 5,600,000 Yeon-dong, Jeju-city Jeju-province Korea 21. Unit Nos. 233, 234, 235, 236 and 237 6,600,000 100% 6,600,000 on 2F of Ocean Tower Building in 760-3 Woo-dong, Haeundae-gu Busan, Korea SUB-TOTAL: 15,410,000 15,410,000
GROUP VI - PROPERTIES HELD UNDER CONSTRUCTION BY THE GROUP IN THE PRC VI-7 APPENDIX VI PROPERTY VALUATION 22. Various properties held under No commercial 100% No commercial construction by China Eastern Airlines value value Corporation Limited Shanghai Headquarters in Shanghai 23. An office building held under No commercial 62.56% No commercial construction by China Eastern Airlines value value Jiangsu Co., Ltd in Nanjing, Jiangsu Province 24. Various properties held under No No commercial 70% No commercial commercial construction by Shangahai value value Eastern Logistics Co., Ltd in Shanghai 25. A building held under construction by 600,000 100% 600,000 China Eastern Airlines Corporation Limited Ningbo Branch in Ningbo, Zhejiang Province 26. Various properties held under No commercial 100% No commercial construction by China Eastern Airlines value value Corporation Limited Shandong Branch in Shandong Province 27. Various properties held under No commercial 100% No commercial construction by China Eastern Airlines value value Corporation Limited Shanxi Branch in Taiyuan, Shanxi Province SUB-TOTAL: 600,000 600,000 GROUP VII - PROPERTIES RENTED BY THE GROUP 28. Various properties rented by China No commercial 100% No commercial Eastern Airlines Corporation Limited value value Shanghai Headquarters in Guangzhou, Changsha, Guilin, Guiyang, Zhengzhou and Chongqing 29. A property rented by China Eastern No commercial 55% No commercial Airlines Jiangsu Co., Ltd in Jiangsu value value Province
VI-8 APPENDIX VI PROPERTY VALUATION 30. A property rented by China Eastern No commercial 100% No commercial Airlines Corporation Limited Jiangxi value value Branch in Jiangxi Province 31. Various properties rented by China No commercial 100% No commercial Eastern Airlines Corporation Limited value value Ningbo Branch in Ningbo 32. Various properties rented by China No commercial 100% No commercial Eastern Airlines Corporation Limited value value Shandong Branch in Shandong Province 33. Various properties rented by China No commercial 100% No commercial Eastern Airlines Corporation Limited value value Shanxi Branch in Shanxi Province 34. A property rented by China Eastern No commercial 100% No commercial Airlines Corporation Limited Hebei value value Branch in Hebei Province 35. Various properties rented by China No commercial 100% No commercial Eastern Airlines Corporation Limited value value Overseas Offices in Japan, Spain, France, Singapore, England, Thailand and USA SUB-TOTAL: Nil Nil TOTAL: 1,275,887,648
VALUATION CERTIFICATE GROUP I - PROPERTY INTERESTS TO BE ACQUIRED BY THE COMPANY FROM CEA HOLDING VI-9 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE PARTICULARS OF IN EXISTING STATE AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ---------- ---------------------- -------------- ------------------------ RMB 1. Various properties The properties comprise 25 dormitory, The properties are 52,800,000 to be acquired by operational and ancillary buildings located in occupied by CEA the Company from the PRC completed in various stages between 1994 Northwest for sales CEA Northwest in and 1999 with a total gross floor area of office, dormitory, Guangzhou, approximately 7,302.11 sq.m. (78,600 sq.ft.) and staff canteen and Shanghai, Shenzhen a staff dormitory located in Nagoya of Japan ancillary purposes. and Zhuhai in the with a total gross floor area of approximately PRC and Nagoya in 806.31 sq.m. (8,679 sq.ft.). Japan Details of gross floor areas of the properties located in the PRC are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA --------------- --------------------- SQ.M. SQ.FT. Sales office 583.89 6,285 Staff dormitory 5,790.46 762,329 Ancillary 927.76 9,986 -------- ------- Total: 7,302.11 78,600
The land upon which the 3 properties located in Zhuhai currently erected thereon comprises a parcel of land with a site area of 4,378.00 sq.m. (47,125 sq.ft.) 15 properties located in the PRC have a total site area of approximately 200.47 sq.m. (2,158 sq.ft.) whilst the site areas of the remaining 7 properties located in the PRC have not been specified in the relevant title certificates. The land use rights of the 3 Zhuhai properties have been granted for a term of 70 years from 9 March 1995 to 9 March 2065 for residential use. The land use rights of 20 properties located in the PRC have been granted for various terms of 44 years to 70 years with latest expiry date on 21 September 2064 for commercial, residential and other uses. The land use right terms of the remaining 2 properties located in the PRC have not been specified in the relevant title certificates. Notes: (1) According to three Real Estate Title Certificate Yue Fang Di Zheng Zi Di Nos. C0282954-6 , the titles to 3 buildings with a total gross floor area of approximately 5,006.50 sq.m. and a parcel of land with a site area of approximately 4,378.00 sq.m. located in Zhuhai are vested to CEA Northwest, which is a wholly-owned VI-10 APPENDIX VI PROPERTY VALUATION subsidiary of CEA Holding, for a land use term of 70 years from 9 March 1995 to 9 March 2065 for residential use. (2) According to 22 Real Estate Title Certificates, the title to the other 22 properties located in the PRC with a total gross floor area of approximately 2,295.61 sq.m. are vested in CEA Northwest for respective land use right terms. (3) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) China Eastern Air Northwest Company is granted with land use rights of a parcel of land in Zhuhai with a site area of 4,378.00 sq.m. for a term from 9 March 1995 to 9 March 2065 and has obtained the legal title to the 25 properties with a total gross floor area of 7,302.11 sq.m. (ii) Since the relevant State-owned Land Use Right Certificate and Building Ownership Certificates/Real Estate Title Certificates for the properties have been obtained and the land use rights of the properties have been granted, CEA Northwest holds the land use rights and ownership of the buildings of the properties and is entitled to freely transfer, lease, mortgage or dispose of the property. (iii) After the transfer of the property from CEA Holding to the Company, the names of the registered users of the State-owned Land Use Right Certificate and Building Ownership Certificates/Real Estate Title Certificates of the properties can be changed to the Company without any legal impediment.
OPEN MARKET VALUE PARTICULARS OF IN EXISTING STATE AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ---------- ------------------------------------------------ ------------------ ------------------------ RMB 2. Various properties The properties comprises 11 dormitory, The properties are 16,790,000 to be acquired by operational and ancillary buildings completed in occupied by CEA the Company from various stages between 2001 and 2004 with a Yunnan for sales CEA Yunnan in total gross floor area of approximately 1,660.12 offices, dormitory Guangzhou, Chengdu sq.m. (17,870 sq.ft.). and ancillary and Chongqing in purposes. the PRC Details of gross floor areas of the properties are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA --------------- --------------------- sq.m. sq.ft. Sales office 753.45 8,110
VI-11 APPENDIX VI PROPERTY VALUATION Staff dormitory 36.30 391 Ancillary 870.37 9,369 -------- ------ Total: 1,660.12 17,870
The property located in Chongqing has a site area of approximately 19.32 sq.m. (208 sq.ft.) whilst the site areas of the remaining properties have not been specified in the relevant title certificates. The land use rights of the properties have been granted for various terms of 50 to 70 years with latest expiry date on 8 December 2068. Notes: (1) According to nine Real Estate Title Certificates and two Building Title Certificates, the title to the properties with a total gross floor area of approximately 1,660.12 sq.m. are vested in CEA Yunan, which is a wholly-owned subsidiary of CEA Holding. (2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) CEA Yunan has obtained the legal title to the properties with a total gross floor area of 1,660.12 sq.m.. (ii) Since CEA Holding has obtained the Building Ownership Certificates/Real Estate Title Certificates for the properties and the land use rights of the properties have been granted, CEA Yunnan holds the land use rights and ownership of the buildings of the properties and is entitled to freely transfer, lease, mortgage or dispose of the property. (iii) After the transfer of the property from CEA Holding to the Company, the names of the registered users of the Building Ownership Certificates/Real Estate Title Certificates of the properties can be changed to the Company without any legal impediment. GROUP II - PROPERTY INTERESTS TO BE RENTED BY THE COMPANY FROM CEA HOLDING VI-12 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE PARTICULARS OF IN EXISTING STATE AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ---------- ------------------------------------------------ ------------------ ----------------------- RMB 3. Various properties The properties comprise 212 various operational The properties are No commercial to be rented by the and ancillary buildings with a total gross floor occupied by China value Company from CEA area of approximately 292,435.03 sq.m. Eastern Air Holding in Shaanxi (3,147,771 sq.ft.) and various structures Northwest Company Province, Gansu completed in various stages between 1968 and and China Eastern Province and Yunnan 2003 and 40 parcel of lands with a total site Air Yunnan Company Province area of approximately 1,113,307.13 sq.m. for office, (11,983,638 sq.ft.). warehouse, workshop, carport, ancillary Details of gross floor areas of the 212 buildings staff buildings of the properties are listed as quarters, and other follows: ancillary facilities for operating purposes.
APPROXIMATE USE GROSS FLOOR AREA --- --------------------------- sq.m. sq.ft. Office 78,096.36 840,629 Warehouses 40,247.17 433,221 Dormitory 60,140.34 647,351 Factory 5,336.11 57,438 Retail 5,744.44 61,833 Ancillary buildings 102,870.61 1,107,299 ---------- --------- Total: 292,435.03 3,147,771
The 94 structures of the properties have a total area of approximately 434,434.88 sq.m. According to the information provided, the properties will be leased by the Company from CEA Holding, CEA Northwest and CEA Yunnan under a property lease agreements for a term of 3 years from the effective date of the agreement at an annual rental of RMB55,399,040.46. Notes: (1) According to the property lease agreement entered into among the Company, CEA Holding, China Eastern Air Northwest Company and China Eastern Air Yunnan Company on 12 May 2005, the land use rights of 40 parcels of land, 306 buildings and various structures will be rented by the Company for a term of 3 years commencing from the effective date of this agreement at an annual rental of RMB55,399,040.46. (2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: VI-13 APPENDIX VI PROPERTY VALUATION (i) The leasing agreement is legal, binding and enforceable according to the PRC Law. (ii) According to the leasing agreement, the Company has legal right to use and occupy the land, buildings, structures and ancillary facilities of the properties.
OPEN MARKET VALUE PARTICULARS OF IN EXISTING STATE AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ---------- ---------------------------------------------- ------------------ ----------------------- RMB 4. Various leased The property comprises 36 various operational The properties are No commercial properties rented and ancillary buildings and various structures occupied by the value by CEA Holding from with a total gross floor area of approximately Group for office, third parties to be 16,400.98 sq.m. (176,540 sq.ft.) dormitory, retail transferred to the and ancillary Company in Beijing, Details of gross floor areas of the properties purposes. Shanghai, Shenzhen, are listed as follows: Yinchuan, Yunnan Province, Shaanxi Province and Xinjiang Autonomous Administrative Region
APPROXIMATE USE GROSS FLOOR AREA ---------- ------------------------- sq.m. sq.ft. Office 10,683.23 114,994 Dormitory 891.92 9,601 Warehouse 72.09 776 Retail 4,114.23 44,286 Ancillary buildings 639.51 6,884 --------- ------- Total: 16,400.98 176,540
The properties are currently rented by CEA Northwest and CEA Yunnan from independent third parties under tenancy agreements for various terms with the latest expiry date at 17 March 2047 at a total annual rental of RMB28,747,638.74. Notes: (1) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) According to the tenancy agreements entered into among CEA Northeast, CEA Yunnan and independent third parties. CEA Northwest and CEA Yunnan have rented a total of 36 properties from independent third parties. VI-14 APPENDIX VI PROPERTY VALUATION (ii) Except some of the tenancy agreements have been expired and are currently under renewal, the tenancy agreements have been signed by the corresponding parties and are valid and binding according to the PRC laws. (iii) After obtaining the consent from the landlords of the properties, CEA Holding has the right to transfer its rights and obligations as stated in the tenancy agreements to the Company. (iv) After the transfer of the rights and obligations of the tenants as stated in the tannacy agreements, the Company can enjoy the legal rights as the tenants of the properties. GROUP III - PROPERTY INTERESTS HELD BY THE GROUP IN THE PRC
OPEN MARKET VALUE PARTICULARS OF IN EXISTING STATE AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ---------- -------------------------------------------- -------------------- ----------------------- RMB 5. Various properties The properties comprise 143 operational and The properties are 474,560,000 held by China ancillary buildings with a total gross floor occupied by the (100% interest Eastern Airlines area of approximately 286,212.82 sq.m. Group for office, attributable to Corporation Limited (3,080,795 sq.ft.) and various structures warehouse, factory, the Group: Shanghai completed in various stages between 1972 and retail and ancillary 474,560,000) Headquarters in 2004. purposes. Shanghai, Ningbo, Chongqing, Details of gross floor areas of the properties Guangzhou and Fuzhou are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA --- ------------------------ sq.m. sq.ft. Office 94,903.47 1,021,541 Warehouses 35,422.68 381,290 Ancillary buildings 67,330.17 724,742 Factory 85,054.68 915,529 Retail 3,501.82 37,694 ---------- --------- Total: 286,212,82 3,080,795
The land upon which portion of the properties currently erected thereon comprises 4 parcels of land with a total area of approximately 272,604.00 sq.m. (2,934,309 sq.ft.) The land use rights of the properties have been granted for a term of 50 years commencing from 19 April 2001 for composite use. VI-15 APPENDIX VI PROPERTY VALUATION Notes: (1) According to 4 State-owned Land Use Right Certificates and 21 Building Ownership Certificates, the land use rights of 4 parcels of land with a total area of approximately 272,604.00 sq.m. and the building ownership rights of 22 buildings with a total gross floor area of approximately 115,147.20 sq.m. of the properties are owned by China Eastern Airlines Corporation Limited Shanghai Headquarters, which is a wholly-owned subsidiary of the Group. (2) We have attributed no commercial value to the remaining 122 buildings with a total gross floor area of approximately 171,065.62 sq.m. of the properties as China Eastern Airlines Corporation Limited Shanghai Headquarters has not obtained the relevant State-owned Land Use Rights Certificates and Building Ownership Certificates. However, for indication purposes, the depreciated replacement cost of the 122 buildings are approximately RMB182,980,000 as at the date of valuation. (3) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) China Eastern Airlines Corporation Limited Shanghai Headquarters has acquired the land use rights of 4 parcels of land with a total site area of 272,604.00 sq.m. and the ownership of 21 buildings with a total gross floor area of 115,147.20 sq.m. of the properties. (ii) China Eastern Airlines Corporation Limited Shanghai Headquarters is entitled to freely transfer, lease, mortgage and dispose of the aforesaid 4 parcels of land and 21 buildings of the properties. (iii) China Eastern Airlines Corporation Limited Shanghai Headquarters cannot transfer, lease, mortgage and dispose of the remaining 122 buildings of the properties.
OPEN MARKET VALUE IN PARTICULARS OF EXISTING STATE AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------- ------------------ ----------------------------- RMB 6. Various properties The properties comprise 17 various The properties are 2,330,000 held by China operational and ancillary buildings occupied by the (62.56% interest attributable Eastern Airlines and various structures completed in various Group for office, to the Group: 1,457,648) Jiangsu Co., Ltd in stages between 1997 and 2004 with a total warehouse, factory Jiangsu Province gross floor area of approximately 33,764.16 and ancillary sq.m. (363,437 sq.ft.). purposes. Details of gross floor areas of the properties are listed as follows:
VI-16 APPENDIX VI PROPERTY VALUATION
APPROXIMATE USE GROSS FLOOR AREA ---------- --------------------- sq.m. sq.ft. Office 12,647.00 136,132 Warehouses 6,808.54 73,287 Ancillary 6,792.89 73,119 Factory 7,515.73 80,899 --------- ------- Total: 33,764.16 363,437
The land upon which the properties currently erected comprises 3 parcels of land with a total area of 364,106.20 sq.m. (3,919,239 sq.ft.) The land use rights of 2 parcels of land with a total site area of approximately 186.50 sq.m. have been granted for a term of 70 years for residential use. The remaining parcel of land with a site area of approximately 363,919.70 sq.m. is allocated land. Notes: (1) According to 2 Land Use Right Certificates and 2 Building Ownership Certificates, the land use rights of 2 parcels of land with a total site area of 186.50 sq.m. are granted to and the building ownership of 2 buildings with a total gross floor area of 285.84 sq.m. are held by China Eastern Airlines Jiangsu Co., Ltd, which is a 55%-owned subsidiary of the Group. (2) We have attributed no commercial value to the land use right of the parcel of allocated land with a site area of approximately 363,919.70 sq.m. and 8 buildings erected thereon with a total gross floor area of approximately 27,496.09 sq.m.. However, for indication purposes, the depreciated replacement costs of the 8 buildings are approximately RMB76,640,000 as at the date of valuation. In addition, we have attributed no commercial value to 7 buildings of the properties with a total gross floor area of approximately 5,982.23 sq.m. which have not been issued with the Building Ownership Certificates. However, for indication purposes, the depreciated replacement costs of the 7 buildings are approximately RMB9,350,000 as at the date of valuation. (3) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) China Eastern Airlines Jiangsu Co., Ltd. has obtained the land use rights of 2 parcels of land with a total area of 186.50 sq.m. and the building ownership of 2 buildings with a total gross floor area of 285.84 VI-17 APPENDIX VI PROPERTY VALUATION sq.m. erected thereon. China Eastern Airlines Jiangsu Co., Ltd. is entitled to freely transfer, lease, mortgage and dispose of the said lands and buildings. (ii) For the land with a site area of 363,919.70 sq.m. which is allocated to China Eastern Airlines Jiangsu Co., Ltd., the land use right cannot be freely transferred, leased, mortgaged and disposed of. For the 8 buildings with a total gross floor area of 27,496.09 sq.m. erected on the said allocated land, China Eastern Airlines Jiangsu Co., Ltd. cannot freely transfer or mortgage the buildings unless China Eastern Airlines Jiangsu Co., Ltd. is approved by the relevant land administration department and paid the land grant fee to obtain the granted land use right. (iii) China Eastern Airlines Jiangsu Co., Ltd. cannot transfer, lease, mortgage and dispose of the remaining 7 buildings of the properties.
OPEN MARKET VALUE IN EXISTING STATE AS AT PROPERTIES DESCRIPTION AND TENURE PARTICULARS OF OCCUPANCY 31 MARCH 2005 --------------------------- ----------------------------------- ------------------------ ------------------- RMB 7. Various properties held The property comprises 54 various The properties are 596,860,000 by China Cargo Airlines operational and ancillary buildings occupied by the Group (70% interest Co., Ltd in Shanghai with a total gross floor area of for office, production attributable to the approximately 124,763.06 sq.m. and ancillary purposes. Group: 417,802,000) (1,342,950 sq.ft.) and various structures completed in various stages between 1999 and 2004. Details of gross floor areas of the buildings of the properties are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA ------------------- -------------------------- sq.m. sq.ft. Office 40,838.00 439,580 Warehouse 56,310.23 606,123 Ancillary buildings Factory 23,726.47 255,392 ---------- -------- Total: 124,763.06 1,342,95
VI-18 APPENDIX VI PROPERTY VALUATION The land upon which 12 buildings of the properties currently erected comprises 4 parcels of land with a total site area of approximately 759,785.00 sq.m. (8,178,326 sq.ft.) The land use rights of the one of the said lands with a site area of approximately 33,343.00 sq.m. have been granted for a term of 50 years commencing from 1 January 1999 for office use. The land use rights of 2 parcels of the said land with a total site area of approximately 663,921.00 sq.m. have been granted for a term of 44 years commencing from 1 September 2004 for warehouse and storage uses. The remaining parcel of land with a site area of approximately 62,521.00 sq.m. is allocated land held under an indefinite term for warehouse uses. Notes (1) According to a State-owned Land Use Right Certificate and 6 Building Ownership Certificates, the land use rights of a parcel of land with a site area of 33,343.00 sq.m. are granted to and the building ownership of 6 buildings with a total gross floor area of 2,980.74 sq.m. are held by China Cargo Airlines Co., Ltd, which is a 70%-owned subsidiary of the Group. (2) According to 2 Land Use Rights Certificates and 6 Building Ownership Certificates, the land use rights of 2 parcels of land with a total site area of 663,921.00 sq.m. are granted to and the building ownership of 6 buildings with a total gross floor area of 24,328.41 sq.m. are held by China Cargo Airlines Co., Ltd, which is 70% owned by the Group. (3) We have attributed no commercial value to 42 buildings of the properties with a total gross floor area of approximately 97,453.91 sq.m. which have not been issued with the Building Ownership Certificates. However, for indication purposes, the depreciated replacement costs of the 42 buildings are approximately RMB222,430,000 as at the date of valuation. (4) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) China Cargo Airlines Co., Ltd. is granted with the land use rights of 3 parcels of land, with a total site area of 697,264.00 sq.m., and has obtained the building ownership of 12 buildings with a total gross floor area of 27,309.15 sq.m. erected on the lands. VI-19 APPENDIX VI PROPERTY VALUATION (ii) China Cargo Airlines Co., Ltd. is entitled to freely transfer, lease, mortgage and dispose of the said land and buildings.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- --------------------------------------- ------------------- -------------------- RMB 8. Eastern Airlines The property comprises a 8-storey hotel The property is No commercial value Beijing Hotel held building with a gross floor area of occupied by (85.86% interest by Eastern Airlines approximately 13,308.90 sq.m. (143,257 the Group for hotel attributable to the Industrial Co., Ltd sq.ft.) completed in 1997. purposes. Group: No commercial in Beijing value)
Notes: (1) According to the Building Ownership Certificate, the building with a gross floor area of 13,308.90 sq.m. is held by Eastern Airlines Industrial Co., Ltd. [CHINESE CHARECTER] which is 86% owned by the Group. (2) We have attributed no commercial value to the property due to its non-transferability in the market originating from its title defect. However, for indication purposes, the depreciated replacement costs of the building are approximately RMB78,660,000 as at the date of valuation. (3) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) Eastern Airlines Industrial Co., Ltd. has obtained the building ownership of the property with a gross floor area of 13,308.90 sq.m. (ii) As Eastern Airlines Industrial Co., Ltd. has not obtained the State-owned Land Use Right Certificate for the land of the property, Eastern Airlines Industrial Co., Ltd. cannot transfer and mortgage the property. VI-20 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN PARTICULARS OF EXISTING STATE AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- --------------------------------------- ------------------- ---------------------- RMB 9. An office building The property comprises an office The property is 80,440,000 held by Shanghai building with an approximate occupied by (95% interest Eastern Flight gross floor areas of 30,796.00 sq.m. the Group for attributable to Training Co., Ltd (331,488 sq.ft.) erected on a office purposes. the Group: 76,418,000) in Shanghai site with a site area of approximately 19,520.68 sq.m. (210,121 sq.ft.) completed in 2000. The land use rights of the property have been granted for a terms of 50 years commencing from 1996 for industrial use.
Notes: (1) According to a State-owned Land Use Right Certificate and a Building Ownership Certificate , the land use rights of a parcel of land with a site area of approximately 30,796.00 sq.m. is granted to and the building ownership of a building with a gross floor area of approximately 19,520.68 sq.m. is held by Shanghai Eastern Flight Training Co., Ltd., which is a 95%-owned subsidiary of the Group. (2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: Shanghai Eastern Flight Training Co., Ltd. is granted with the land use rights of the property and has obtained the building ownership of the building of the property. Shanghai Eastern Flight Training Co., Ltd. is entitled to freely transfer, lease, mortgage and dispose of the property.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ------------------------ ---------------------------------------------------- ------------------- --------------- RMB 10. Various properties The properties comprise 44 various operational and The properties are No commercial held by China ancillary buildings with a total gross floor area of occupied by the value Eastern Airlines approximately 50,228.90 sq.m. (540,664 sq.ft.) and Group for office, (100% interest Corporation Limited various structures completed in various stages warehouse, factory, attributable to Anhui Branch in between 1965 and 2004. retail and the Group: Anhui Province ancillary purposes. No commercial Details of gross floor areas of the buildings of the value) properties are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA ------------------- ------------------------ SQ.M. SQ.FT. Office 17,398.40 187,276 Warehouses 6,288.50 67,689 Ancillary buildings 15,909.00 171,244 Factory 8,915.00 95,961 Retail 1,718.00 18,492 --------- ------- Total: 50,228.90 540,664
VI-21 APPENDIX VI PROPERTY VALUATION The land upon which portion of the buildings of the properties currently erected thereon comprises 4 parcels of land. There is no site area stipulated in the relevant title document for a parcel of land and the total site area of the remaining 3 parcels of land is approximately 87,371.50 sq.m. (940,466 sq.ft.) All the 4 parcels of land of the properties are allocated land. Notes: (1) According to 4 State-owned Land Use Right Certificates and 5 Building Ownership Certificates, the land use rights of 4 parcels of land with total site area of 87,371.50 sq.m. (there is no site area stipulated in the relevant State-owned Land Use Rights Certificate for one of the 4 parcels of land) are allocated to and the building ownership of 5 buildings of the properties with total gross floor area of 11,014.40 sq.m. is held by China Eastern Airlines Corporation Limited Anhui Branch, which is a wholly-owned subsidiary of the Group. (2) According to 6 Building Ownership Certificates, 6 buildings of the properties with a total gross floor area of approximately 16,388.25 sq m., erected on land parcels without State-owned Land Use Right Certificates, is held by China Eastern Airlines Corporation Limited Anhui Branch. (3) As portion of the properties are built on allocated land and the remaining portion of the property is erected on land with no title document, we have attributed no commercial value to the properties due to its in-transferability in the open market. However, for indication purposes, the depreciated replacement costs of the 44 buildings of properties are approximately RMB54,470,000 as at the date of valuation. (4) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) For the allocated lands of the properties, China Eastern Airlines Corporation Limited Anhui Branch cannot transfer, lease and mortgage the land use rights. (ii) For the buildings erected upon allocated land or land with no State-owned Land Use Right Certificate issued, China Eastern Airlines Corporation Limited Anhui Branch cannot transfer and mortgage the buildings. VI-22 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------ ------------------- ----------------- RMB 11. Various properties The properties comprise 19 various operational The properties are No commercial held by China and ancillary buildings with a total gross floor occupied by the value Eastern Airlines area of approximately 35,413.23 sq.m. (381,188 Group for office, (100% interest Corporation sq.ft.) and various structures completed in factory and attributable to Limited Jiangxi various stages between 1995 and 2004. ancillary purposes. the Group: Branch in Jiangxi No commercial Province value)
Details of gross floor areas of the buildings of the properties are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA --------- ----------------------- sq.m. sq.ft. Office 11,750.26 126,480 Ancillary 3,003.45 32,329 buildings Factory 20,659.52 222,379 --------- ------- Total: 35,413.23 381,188
Notes: (1) According to 11 Building Ownership Certificates, 19 buildings of the properties are held by China Eastern Airlines Corporation Limited Jiangxi Branch, which is a wholly-owned subsidiary of the Group. (2) We have attributed no commercial value to the properties due to its non-transferability in the market as no State-owned Land Use Right Certificate has been issued. However, for indication purposes, the depreciated replacement costs of the properties are approximately RMB36,890,000 as at the date of valuation. (3) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: China Eastern Airlines Corporation Limited Jiangxi Branch has acquired the building ownership of the properties but have not obtained the State-owned Land Use Right Certificate and cannot transfer and mortgage the properties. VI-23 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------- -------------------- ----------------- RMB 12. Various properties The property comprises 81 various operational The properties are 116,230,000 held by China and ancillary buildings with a total gross floor occupied by the (100% interest Eastern Airlines area of approximately 12,764.25 sq.m. Group for office, attributable to Corporation (137,394 sq.ft.) and various structures warehouse, factory, the Group: Limited Ningbo completed in various stages between 1996 and 2004 retail and ancillary 116,230,000) Branch in Ningbo purposes. and Guanghan
Details of gross floor areas of the properties are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA ---------- -------------------- sq.m. sq.ft. Office 882.37 9,498 Warehouses 2,052.38 22,092 Ancillary 5,836.18 62,821 buildings Factory 3,905.71 42,041 Retail 87.61 943 ---------- ------- Total: 12,764. 25 137,394
The land upon which the properties currently erected thereon comprises 69 parcels of land with a total site area of approximately 61,891.44 sq.m. (666,199 sq.ft.) The land use rights of 4 parcels of land with total site area of approximately 61,237.04 sq.m. (659,155 sq.ft.) of the properties have been granted for various terms ranging from 30 to 50 years commencing from 2000 to 2003. The remaining 65 parcels of land with total site area of approximately 654.40 sq.m. (7,044 sq.ft.) are allocated land. Notes: (1) According to 4 State-owned Land Use Right Certificates and 10 Building Ownership Certificates, the land use rights of 4 parcels of land with a total site area of 61,237.04 sq.m. are granted to and the building ownership of 10 buildings with a total gross floor area of 7,120.38 sq.m. is held by China Eastern Airlines Corporation Limited Ningbo Branch, which is a wholly-owned subsidiary of the Group. (2) According to 65 State-owned Land Use Right Certificates and 62 Building Ownership Certificates, the land use rights of 65 parcels of land with a total site area of 654.40 sq.m. are allocated to and the building ownership of VI-24 APPENDIX VI PROPERTY VALUATION 62 buildings with a total gross floor area of 3,598.63 sq.m. is held by China Eastern Airlines Corporation Limited Ningbo Branch. (3) According to a Building Ownership Certificate, the building ownership of a building with a gross floor area of 882.37 sq.m. is held by China Eastern Airlines Corporation Limited Ningbo Branch. According the PRC legal opinion, no State-owned Land Use Right Certificate has been obtained for the Building. (4) As advised by the Company, 8 buildings of the properties with a total gross floor area of approximately 1,162.87 sq.m. have not obtained Building Ownership Certificates and are erected on land without State-owned Land Use Right Certificate. (5) Apart from the lands and buildings as stated in note (1) above, the remaining portions of the properties do not have granted land use rights and are thus not transferable in the open market. We have thus attributed no commercial value to these portions of the properties. However, for indication purposes, the depreciated replacement costs of these portions of the properties are approximately RMB5,130,000 as at the date of valuation. (6) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) China Eastern Airlines Corporation Limited Ningbo Branch has acquired the land use rights of 4 parcels of granted land with a total site area of 61,237.04 sq.m. and the building ownership of 10 buildings with a total gross floor area of 7,120.38 sq.m. erected thereon. China Eastern Airlines Corporation Limited Ningbo Branch is entitled to freely transfer, lease and mortgage the said lands and buildings. (ii) China Eastern Airlines Corporation Limited Ningbo Branch holds the land use rights of 65 parcels of land with a total area of approximately 654.40 sq.m. and the building ownership of 62 buildings with a total gross floor area of approximately 3,598.63 sq.m. erected thereon. China Eastern Airlines Corporation Limited Ningbo Branch is not entitled to freely transfer and mortgage the said lands and buildings unless China Eastern Airlines Corporation Limited Ningbo Branch is approved by the relevant land administration department and paid the land grant fee to obtain the granted land use right. (iii) China Eastern Airlines Corporation Limited Ningbo Branch holds the ownership of a building with a gross floor area of 882.37 sq.m. which is erected on a parcel of land without State-owned Land Use Right Certificate. China Eastern Airlines Corporation Limited Ningbo Branch cannot transfer and mortgage the building. VI-25 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------ ------------------ ----------------- RMB 13. Various properties The property comprises 44 various operational The properties are 64,550,000 held by China and ancillary buildings with a total gross floor occupied by the (100% interest Eastern Airlines area of approximately 71,431.68 sq.m. (768,891 Group for office, attributable to Corporation sq.ft.) and various structures completed in warehouse, factory the Group: Limited Shandong various stages between 1992 and 2004. and ancillary 64,550,000) Branch in Shandong purposes. Province
Details of gross floor areas of the properties are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA ---------- ------------------ sq.m. sq.ft. Office 29,407.72 316,545 Warehouses 8,741.79 94,097 Ancillary buildings 18,338.30 197,393 Factory 14,943.87 160,856 --------- ------- Total: 71,431.68 768,891
The land upon which portion of the properties currently erected thereon comprises 2 parcels of land with a total site area of 101,299.8 sq.m. (1,090,391 sq.ft.). The 2 parcels of land are allocated land. Notes: (1) According to a Realty Title Certificate, the title to two buildings with a total gross floor are a of approximately 13,069.33 sq.m. are vested in China Eastern Airlines Corporation Limited Shandong Branch, which is a wholly-owned subsidiary of the Group. (2) According to two State-owned Land Use Right Certificates and two Building Ownership Certificates, the land use rights of two parcels of land with a total site area of 101,299.80 sq.m. are allocated to and the building ownership of 9 buildings with a total gross floor area of 32,961.65 sq.m. is held by China Eastern Airlines Corporation Limited Shangdong Branch. (3) According to the PRC legal opinion, a building of the properties with a gross floor area of 3,422.93 sq.m. has obtained the Building Ownership Certificate but has not obtained the State-owned Land Use Right Certificate. VI-26 APPENDIX VI PROPERTY VALUATION (4) According to the PRC legal opinion provided to us, 3 buildings of the properties with a total gross floor area of 4,335.76 sq.m. is commodity housing with Sales and Purchase Contract but no State-owned Land Use Right Certificate issued. (5) As advised by the Company, the remaining 29 buildings with a total gross floor area of approximately 17,642.01 sq .m. have not obtained the Building Ownership Certificates. (6) Apart from the lands and buildings as stated in note (1) above, the remaining portions of the properties do not have granted land use rights and thus not transferable in the open market. We have attributed no commercial value to these portions of the properties. However, for indication purposes, the depreciated replacement costs of these portions of the properties are approximately RMB108,800,000 as at the date of valuation. (7) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) China Eastern Airlines Corporation Limited Shandong Branch is entitled to freely transfer, lease and mortgage the two buildings with a total gross floor area of 13,069.33 sq.m which are erected on granted land. (ii) China Eastern Airlines Corporation Limited Shandong Branch holds the land use rights of 2 parcels of land with a total area of approximately 101,299.80 sq.m. and the building ownership of 9 buildings with a total gross floor area of approximately 32,961.65 sq.m. erected thereon. China Eastern Airlines Corporation Limited Shandong Branch is not entitled to freely transfer and mortgage the said lands and buildings unless China Eastern Airlines Corporation Limited Shandong Branch is approved by the relevant land administration department and paid the land grant fee to obtain the granted land use right. (iii) China Eastern Airlines Corporation Limited Shandong Branch holds the ownership of a building with a gross floor area of 3,422.93 sq.m. which is erected on a parcel of land without State-owned Land Use Right Certificate. China Eastern Airlines Corporation Limited Shandong Branch cannot transfer and mortgage the building. VI-27 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------ -------------------- ----------------- RMB 14. Various properties The property comprises 10 various operational The properties are No commercial held by China and ancillary buildings with a total gross floor occupied by the value Eastern Airlines area of approximately 9,690.25 sq.m. (104,307 Group for office, (100% interest Corporation sq.ft.) and various structures completed in warehouse, factory, attributable to Limited Shanxi various stages between 2000 and 2003. retail and ancillary the Group: Branch in Shanxi purposes. No commercial Province value)
Details of gross floor areas of the properties are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA ---------------------------------- ----------------- sq.m. sq.ft. Office 240.00 2,583 Warehouses 1,949.00 20,979 Ancillary buildings and structures 3,494.25 37,612 Factory 4,007.00 43,131 Total: -------- ------- 9,690.25 104,307
Note: (1) According to the PRC legal opinion, the properties do not have granted land use rights and are thus not transferable in the open market. We have attributed no commercial value to the properties. However, for indication purposes, the depreciated replacement costs of the properties are approximately RMB21,600,000 as at the date of valuation. (2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: China Eastern Airlines Corporation Limited Shanxi Branch cannot transfer, lease and mortgage the properties.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ---------------------------------------------- -------------------- ----------------- RMB 15. Various properties The properties comprise an office and a The properties are No commercial held by China production buildings with a total gross floor occupied by the value Eastern Airlines area of approximately 15,278.96 sq.m. (164,463 Group for office and 100% interest Corporation sq.ft.) and structures completed in 2002. production purposes. attributable to Limited Hebei the Group: Branch in Hebei No commercial Province value)
Details of gross floor areas of the properties are listed as follows: VI-28 APPENDIX VI PROPERTY VALUATION
APPROXIMATE USE GROSS FLOOR AREA ---------- ----------------- sq.m. sq.ft. Office 11,602.92 124,894 Production 3,676.00 39,568 --------- ------- Total: 15,278.96 164,463
The land upon which portion of the properties currently erected thereon comprises a parcel of land with site area of approximately 9,449.50 sq.m. (101,714 sq.ft.) The said land of the properties is allocated land held under an indefinite term. Notes: (1) According to a State-owned Land Use Right Certificate and a Building Ownership Certificate, the land use rights of a parcel of land with a site area of 9,449.50 sq.m. is allocated to and the building ownership of a building with a gross floor area of 11,602.96 sq.m. is held by China Eastern Airlines Corporation Limited Hebei Branch. (2) According to the PRC legal opinion, the properties do not have granted land use rights and are thus not transferable in the open market. We have attributed no commercial value to the properties. However, for indication purposes, the depreciated replacement costs of the properties are approximately RMB26,320,000 as at the date of valuation. (3) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: China Eastern Airlines Corporation Limited Hebei Branch cannot transfer, lease and mortgage the properties. GROUP IV - PROPERTIES HELD BY THE GROUP IN USA VI-29 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 -------------------- ----------------------------------------------- ------------------- ----------------- RMB 16. 112 N. Primrose The property comprises a rectangular level site The property is 12,570,000 Ave Alhambra CA with a site area of approximately 999.63 sq.m. occupied by the (100% interest 91801 USA (10,760 sq.ft.). Currently situated on the site Group as dormitory. attributable to are two 2-storey apartment buildings. the Group: 12,570,000 The property comprises 7 units, 14 covered carparking spaces and 2 uncovered carparking spaces with a total gross floor area of approximately 647.16 sq.m. (6,966) sq.ft. completed in 1987.
Note: As advised by the Company, the owner of the property is China Eastern Airlines Corporation Limited.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ---------------------- ----------------------------------------------- ------------------- ----------------- RMB 17. 422 N 3rd Street The property comprises a rectangular level site The property is 10,300,000 Alhambra CA 91801 with an area of approximately 764.12 sq.m. occupied by the (100% interest USA (8,225 sq.ft.). Currently situated on the site Group as dormitory. attributable to is a 2-storey apartment building. the Group: 10,300,000) The property comprises 5 units and 10 covered carparking spaces with a total gross floor area of approximately 537.53 sq.m. (5,786 sq.ft.) completed in 1989.
Note: As advise by the Company, the owner of the property is China Eastern Airlines Corporation Limited.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------ ------------------- ----------------- RMB 18. Britnney Lane The property comprises a rectangular level site The property is 16,400,000 Townhouse 11015 with an area of approximately 4,653.85 sq.m. occupied by the (100% interest Southeast 208th St (50,094 sq.ft.). Currently situated on the site Group as dormitory. attributable to Kent WA 98031 USA is a 2-storey apartment building. the Group: 16,400,000) The property comprises 18 townhouse apartment units with a total gross floor area of approximately 2,115.11 sq.m. (22,767) sq.ft.) completed in 1993.
VI-30 APPENDIX VI PROPERTY VALUATION Note: As advised by the Company, the owner of the property is China Eastern Airlines Corporation Limited. GROUP V - PROPERTIES HELD BY THE GROUP IN THE KOREA
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ----------------------------------------------- ---------------- ----------------- RMB 19. Unit No.908 on 9F The property comprises a residential unit with The property is 3,210,000 of Building No.102, an area of approximately 59.81 sq.m. (643.79 occupied by the (100% interest Banpo Hanshin Tower sq.ft.) on the 9th floor of a 18-storey Group for attributable to Apartment in 71-11 residential building completed in 1996. residential the Group: Jamwon-dong purposes. 3,210,000 Seocho-gu The land use right of the property is freehold. Seoul Korea
Note: According to the Purchase Agreement provided by the Company, the owner of the property is China Eastern Airlines Corporation Limited. 20. Namyang Hotel The property comprises a rectangular-shaped The 1st floor is 5,600,000 292-27 Yeon-dong level site with an area of approximately 450.7 partially leased by (100% interest Jeju-city sq.m. (4,851.3 sq.ft.). Currently situated on a tenant (office attributable to Jeju-province Korea the site is a 5-storey reinforced concrete use), and partially the Group: structure with slab roof building. occupied by the 5,600,000) owner (office use). The property comprises a hotel and 6 uncovered The remaining car-parking spaces with a total gross floor area portion is vacant. of approximately 1,442.38 sq.m. (15,526 sq.ft.) completed in 1978. The land use right of the property is freehold.
Note: According to the Purchase Agreement provided by the Company and as advised by the Company, the owner of the property is China Eastern Airlines Corporation Limited. VI-31 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ---------------------------------------------- ------------------ ----------------- RMB 21. Unit Nos. 233,234, The property comprises 5 office units with a The properties are 6,600,000 (100% 235, 236,237 on 2F total gross floor area of approximately 96.6 occupied by the interest of Ocean Tower sq.m. (19.32 sq.m. each) (1,040 sq.ft.) on the Group for office attributable to Building in 760-3 second floor of a 20 - storey office building purposes. the Group) Woo-dong completed in 1993. 6,600,000 Haeundae-gu Busan Korea The land use right of the property is freehold.
Note: According to the Purchase Agreement provided by the Company, and as advised by the Company, the owner of the property is China Eastern Airlines Corporation Limited. GROUP VI - PROPERTIES HELD UNDER CONSTRUCTION BY THE GROUP IN THE PRC
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------ ------------------- ----------------- RMB 22. Various properties The properties are 9 buildings and 1 structures The properties are No commercial held under under development. Upon completion, the proposed under construction. value construction by buildings will have a total gross floor area of (100% interest China Eastern approximately 19,748.00 sq.m. (212,567.47 attributable to Airlines sq.ft.). The properties are expected to complete the Group: Corporation in 2005. No commercial Limited Shanghai value) Headquarters in Shanghai
Notes: (1) According to the PRC legal opinion, as the properties do not have granted land use rights or approval for development, we have attributed no commercial value to the properties. However, for indication purposes, the depreciated replacement costs of the properties are approximately RMB20,090,000 as at the date of valuation. (2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: VI-32 APPENDIX VI PROPERTY VALUATION (i) The Company has not obtained the State-owned Land Use Right Certificate or development approvals of the properties, there may be legal impediment for the Company to register the title after completion of the properties. (ii) If the Company failes to register the title to the properties, the Company will not legally acquire the ownership of the properties and cannot freely transfer, lease or mortgage the properties.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ----------------------------------------------- ------------------- ----------------- RMB 23. An office building The property comprises an office building under The property is No commercial held under development. Upon completion, the proposed under construction. value construction by building will have a gross floor area of (62.56% interest China Eastern approximately 8,977.74 sq.m. (96,636 sq.ft.). attributable to Airlines Jiangsu The property is expected to complete in 2005. the Group: Co., Ltd in No commercial Nanjing, Jiangsu value) Province
Notes: (1) According to the PRC legal opinion, as the properties do not have granted land use rights or approval for development, we have attributed no commercial value to the properties. However, for indication purposes, the depreciated replacement costs of the properties are approximately RMB4,400,000 as at the date of valuation. (2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) The Company has not obtained the State-owned Land Use Right Certificate or development approvals of the property, there may be legal impediment for the Company to register the title after completion of the property. (ii) If the Company failes to register the title to the property, the Company will not legally acquire the ownership of the property and cannot freely transfer, lease or mortgage the property. VI-33 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ----------------------------------------------- ------------------- ----------------- RMB 24. Various properties The properties comprise 3 buildings and a The properties are No commercial held under structure under development. Upon completion, under construction. value construction by the proposed buildings will have a total gross (70% interest Shangahai Eastern floor area of approximately 182,355.64 sq.m. attributable to Logistics Co., Ltd (1,962,876 sq.ft.). The properties are expected the Group: in Shanghai to complete in 2005. No commercial value)
Notes: (1) According to the PRC legal opinion, as the properties do not have granted land use rights or approval for development, we have attributed no commercial value to the properties. However, for indication purposes, the depreciated replacement costs of the properties are approximately RMB304,650,000 as at the date of valuation. (2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) The Company has not obtained the State-owned Land Use Right Certificate or development approvals of the properties, there may be legal impediment for the Company to register the title after completion of the properties. (ii) If the Company failes to register the title to the properties, the Company will not legally acquire the ownership of the properties and cannot freely transfer, lease or mortgage the properties.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ----------------------------------------------- ------------------- ----------------- RMB 25. A building held The property comprises a building under The property is 600,000 under construction development to be erected upon a parcel of land under construction. (100% interest by China Eastern with site area of approximately 25,130.00 sq.m. attributable to Airlines (270,499 sq.ft.). Upon completion, the proposed the Group: Corporation building will have a gross floor area of 600,000) Limited Ningbo approximately 4,740.00 sq.m. Branch in Ningbo, (51,021 sq.ft.). The property is expected to (Please refer to Zhejiang Province complete in 2005. note (1)) The land use rights of the property have been granted for a term commencing from 2003.
Notes: (1) The open market value of the property only comprises the value for the building portion and the value of the land of the property is included in Property (12). VI-34 APPENDIX VI PROPERTY VALUATION (2) According to a State-owned Land Use Rights Certificate, the land use rights of a parcel of land with a site area of 25,130.00 sq.m. are granted to China Eastern Airlines Corporation Limited Ningbo Branch, which is a wholly-owned subsidiary of the Group. (3) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) The Company has obtained the State-owned Land Use Right Certificate and development approvals of the property, there is no legal impediment for the Company to register the title after completion of the property. (ii) After the Company registered the title to the property and obtained the title certificates, the Company will legally acquire the ownership of the property and is entitled to freely transfer, lease or mortgage the property.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------------ ------------------- ----------------- RMB 26. Various properties The properties comprise 3 buildings and a The properties are No commercial held under structure under development. Upon completion, under construction. value construction by the proposed development will have a total gross (100% interest China Eastern floor area of approximately 9,354.00 sq.m. attributable to Airlines (100,686 sq.ft.). The properties are expected to the Group: Corporation complete in 2005. No commercial Limited Shandong value) Branch in Shandong One of the proposed buildings with a planned Province gross floor area of approximately 377.00 sq.m. will be erected upon a parcel of land with site area of approximately 97,914.80 sq.m. (1,053,955 sq.ft.) The said land of the properties is allocated land held under an indefinite term for airport use.
Notes: (1) According to the PRC legal opinion, as the properties do not have granted land use rights or approval for development, we have attributed no commercial value to the properties. However, for indication purposes, the depreciated replacement costs of the properties are approximately RMB4,900,000 as at the date of valuation. VI-35 APPENDIX VI PROPERTY VALUATION (2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) For the proposed building with a gross floor area of 377 sq.m., which is to be erected on an allocated land, there is no legal impediment for the Company to register the title after completion of the building. After the Company registered the ownership of the building and obtained the title certificate of the building, the Company will legally acquire the building ownership of the completed building. (ii) The Company has not obtained the State-owned Land Use Right Certificate or development approvals of the remaining portion of the properties, there may be legal impediment for the Company to register the title after completion. (iii) The Company cannot freely transfer, lease and mortgage the properties.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------ ------------------- ----------------- RMB 27. Various properties The properties comprise a building and a The properties are No commercial held under structure under development. Upon completion, under construction. value construction by the proposed building will have a gross floor (100% interest China Eastern area of approximately 2,420.00 sq.m. (26,049 attributable to Airlines sq.ft.). The properties are expected to complete the Group: Corporation in 2005. No commercial Limited Shanxi value) Branch in Taiyuan, Shanxi Province
Notes: (1) According to the PRC legal opinion, as the properties do not have granted land use rights or approval for development, we have attributed no commercial value to the properties. However, for indication purposes, the depreciated replacement costs of the properties are approximately RMB4,560,000 as at the date of valuation. (2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: (i) The Company has not obtained the State-owned Land Use Right Certificate or development approvals of the properties, there may be legal impediment for the Company to register the title after completion of the properties. VI-36 APPENDIX VI PROPERTY VALUATION (ii) If the Company failes to register the title to the properties, the Company will not legally acquire the ownership of the properties and cannot freely transfer, lease or mortgage the properties. GROUP VII - PROPERTIES RENTED BY THE GROUP
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------- ------------------- ----------------- RMB 28. Various properties The property comprises 14 various operational and The properties are No commercial leased by China ancillary buildings and various structures occupied by the value Eastern Airlines completed in various stages between 1988 and 2002 Group for office, Corporation with a total gross floor area of approximately retail and Limited Shanghai 1,324.95 sq.m. (14,262 sq.ft.) ancillary purposes. Headquarters in Guangzhou, Details of gross floor areas of the properties Changsha, Guilin, are listed as follows: Guiyang, Zhengzhou and Chongqing
APPROXIMATE USE GROSS FLOOR AREA --------- ---------------- sq.m. sq.ft. Office 932.30 10,035 Ancillary 32.00 344 buildings Retail 360.65 3,882 -------- ------ Total: 1,324.95 14,262
The properties are rented from independent third parties under various tenancy agreements for various terms with the latest expiry date on 19 June 2007 at a total annual rental of RMB6,575,472.00. Note: We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: The tenancy agreements of the properties are legally valid and binding to both parties of the agreements. VI-37 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 --------------------- ------------------------------------------------ ------------------- ----------------- RMB 29. A property rented The property comprises a single-storey warehouse The properties are No commercial by China Eastern completed in the 2000's with a gross floor area occupied by the value Airlines Jiangsu of approximately 240.00 sq.m. (2,583 sq.ft.) Group for warehouse Co., Ltd in purposes. Jiangsu Province The property is rented from an independent third party under tenancy agreement for a term expiring on 15 December 2005 at an annual rental of RMB117,440.
Note: We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: The tenancy agreement of the property is legally valid and binding to both parties of the agreement.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ---------------------- ----------------------------------------------- ------------------ ----------------- RMB 30. A property rented The property comprises a portion of a The properties are No commercial by China Eastern single-storey building completed in 1996 with a occupied by the value Airlines gross floor area of approximately 42 sq.m. (452 Group for retail Corporation sq.ft.) purposes. Limited Jiangxi Branch in Jiangxi The property is rented by from an independent Province third party under tenancy agreement for a term in July 2009 at an annual rental of RMB25,200.
Note: We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: The tenancy agreement of the property is legally valid and binding to both parties of the agreement. VI-38 APPENDIX VI PROPERTY VALUATION
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- -------------------------------------------------- ------------------ ----------------- RMB 31. Various properties The property comprises 9 office premises The properties are No commercial rented by China completed in various stages between 1996 and occupied by the value Eastern Airlines 2001 with a total gross floor area of Group for office Corporation approximately 3,557.83 sq.m. (38,296 sq.ft.) purposes. Limited Ningbo Branch in Ningbo The properties are rented from independent third parties under tenancy agreements for various terms with the latest expiring in June 2012 at a total annual rental of RMB3,357,669.00.
Note: We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: The tenancy agreements of the properties are legally valid and binding to both parties of the agreements.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------- -------------------- ----------------- RMB 32. Various properties The property comprises 7 various operational and The properties are No commercial rented by China ancillary buildings completed in various stages occupied by the value Eastern Airlines between 1988 and 2002 with a total gross floor Group for office, Corporation area of approximately 503.21 sq.m. (5,417 sq.ft.) warehouse and retail Limited Shandong purposes. Branch in Shandong Province
Details of gross floor areas of the properties are listed as follows:
APPROXIMATE USE GROSS FLOOR AREA ---------- ----------------- sq.m. sq.ft. Office 357.80 3,851 Warehouses 50 538 Retail 95.41 1,027 ------ ----- Total: 503.21 5,417
The properties are rented from independent third parties under tenancy agreements for various terms with the latest expiry date on 1 April 2007 at a total annual rental of RMB601,550. Note: VI-39 APPENDIX VI PROPERTY VALUATION We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: The tenancy agreement of the properties are legally valid and binding to both parties of the agreements.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ------------------------------------------------ -------------------- ----------------- RMB 33. Various properties The property comprises 88 various office and The properties are No commercial rented by China operational buildings and various structures occupied by the value Eastern Airlines completed in various stages between 1980's and Group for office and Corporation 1990's with a total gross floor area of operation purposes. Limited Shanxi approximately 58,809.35 sq.m. (633,024 sq.ft.) Branch in Shanxi Province The properties are rented from CEA Holding under a tenancy agreement for a term expiring in 2007 at a total annual rental of RMB2,325,330.
Note: We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: The tenancy agreements of the properties are valid and binding to both parties of the agreements.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ---------------------- ------------------------------------------------ ----------------- ----------------- RMB 34. A property rented The property comprises a 6-storey office The property is No commercial by China Eastern building completed in 1995 with a gross floor occupied by the value Airlines area of approximately 8,852.82 sq.m. (95,292 Group for office Corporation sq.ft.). purposes. Limited Hebei Branch in Hebei The property is rented from CEA Holding under a Province tenancy agreement for a term expiring on 31 December 2009 at an annual rental of RMB971,290.
Note: We have been provided with a copy of the legal opinion on the title to the properties prepared by Commerce & Finance Law Office, the Company's PRC legal adviser, which contains, inter-alia, the following information: VI-40 APPENDIX VI PROPERTY VALUATION The tenancy agreement of the property is legally valid and binding to both parties of the agreement.
OPEN MARKET VALUE IN EXISTING STATE PARTICULARS OF AS AT PROPERTIES DESCRIPTION AND TENURE OCCUPANCY 31 MARCH 2005 ----------------------- ----------------------------------------------- -------------------- ----------------- RMB 35. Various properties The properties comprises 70 various operational The properties are No commercial rented by China and ancillary buildings completed in various occupied by the value Eastern Airlines stages between 1980's and 2000's with a total Group for office, Corporation gross floor area of approximately 20,007.83 retail and ancillary Limited Overseas sq.m. (215,364 sq.ft.). purposes. Offices in Japan, Spain, France, The properties are rented under various tenancy Singapore, agreements for various terms with the latest England, Thailand expiry date in November 2009 at a total annual and USA rental of approximately RMB16,277,000.
VI-41 APPENDIX VII GENERAL INFORMATION RESPONSIBILITY STATEMENT This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts not contained in this circular, the omission of which would make any statement herein misleading. DISCLOSURE OF INTERESTS DIRECTORS, SUPERVISORS, CHIEF EXECUTIVES AND SENIOR MANAGEMENT The interests of the Directors, supervisors, chief executives and senior management in the issued share capital of the Company as at the Latest Practicable Date were set out as follows:
NUMBER AND TYPE OF SHARES HELD AND NATURE OF INTEREST CAPACITY IN WHICH THE A SHARES NAME POSITION PERSONAL FAMILY CORPORATE TOTAL WERE HELD Li Fenghua Chairman, - - - 0 - Executive Director Ye Yigan Non-executive Director - - - 0 - Cao Jianxiong Non-executive Director 2,800 A shares - - 2,800 A shares Beneficial (Note 1) (Note 1) owner Wan Mingwu Vice President, - - - 0 - Executive Director Zhong Xiong Non-executive Director 2,800 A shares - - 2,800 A shares Beneficial (Note 1) (Note 1) owner Luo Zhuping Executive Director, 2,800 A shares - - 2,800 A shares Beneficial Company secretary (Note 1) (Note 1) owner Hu Honggao Independent non- - - - 0 - executive Director Peter Lok Independent non- - - - 0 - executive Director Wu Baiwang Independent non- - - - 0 - executive Director Zhou Ruijin Independent non- - - - 0 - executive Director Xie Rong Independent non- - - - 0 - executive Director Li Wenxin Chairman of the - - - 0 - Supervisory Committee Ba Shengji Supervisor 2,800 A shares - - 2,800 A shares Beneficial
VII-1 APPENDIX VII GENERAL INFORMATION (Note 1) (Note 1) owner Yang Xingen Supervisor - - - 0 - Yang Jie Supervisor - - - 0 - Liu Jiashun Supervisor - - - 0 - Luo Chaogeng President - - - 0 - Wu Yulin Vice President 2,800 A shares - - 2,800 A shares Beneficial (Note 1) (Note 1) owner Wu Jiuhong Vice President - - - 0 - Yang Xu Vice President 1,000 A shares - - 1,000 A shares Beneficial (Note 2) (Note 2) owner Zhou Liguo Vice President - - - 0 - Zhang Jianzhong Vice President - - - 0 - Tong Guozhao Vice President - - - 0 - Luo Weide Chief Financial - - - 0 - Officer
Note 1: representing approximately 0.000933% of the Company's total issued listed A shares, totalling 300,000,000 A shares, as at the Latest Practicable Date Note 2: representing approximately 0.000333% of the Company's total issued listed A shares, totalling 300,000,000 A shares, as at the Latest Practicable Date Save as disclosed above, as at the Latest Practicable Date, none of the Directors, the Company's supervisors, chief executives or members of senior management of the Company had any interest or short position in the shares, underlying shares and/or debentures (as the case may be) of the Company and/or any of its associated corporations (within the meaning of Part XV of the SFO) which was required to be (i) notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including any interest and short position which he/she was taken or deemed to have under such provisions of the SFO) or (ii) entered in the register of interests required to be kept by the Company pursuant to section 352 of the SFO or (iii) notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies as set out in appendix 10 to the Listing Rules. Each of Li Fenghua, Ye Yigan, Cao Jianxiong, Zhong Xiong, Li Wenxin, Ba Shengji and Luo Chaogeng was as at the Latest Practicable Date a director or employee of CEA Holding, which, as disclosed below, was a company having, as at the Latest Practicable Date, an interest in the Company's shares required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO. VII-2 APPENDIX VII GENERAL INFORMATION Save as disclosed, no new director or member of senior management will be joining the Company after the Proposed Acquisition or in connection with the Continuing Connected Transactions. SUBSTANTIAL SHAREHOLDERS Interests in the Company So far as is known to the Directors, as at the Latest Practicable Date, each of the following persons, other than a Director, supervisor, chief executive or member of the Company's senior management, had an interest and/or short position in the Company's shares or underlying shares (as the case may be) which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or was otherwise interested in 5% or more of any class of the then issued share capital of the Company:
INTEREST AS AT THE LATEST PRACTICABLE DATE APPROXIMATE APPROXIMATE APPROXIMATE PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF SHAREHOLDING IN SHAREHOLDING IN SHAREHOLDING IN THE COMPANY'S THE COMPANY'S THE COMPANY'S NAME OF NATURE OF NUMBER OF TOTAL ISSUED TOTAL ISSUED TOTAL ISSUED SHORT SHAREHOLDER SHARES HELD SHARES HELD SHARE CAPITAL A SHARES H SHARES POSITION China Eastern A shares 3,000,000,000 61.64% 90.91% - - Air Holding (unlisted State- Company owned legal person shares) HKSCC Nominees H shares 1,484,749,163 30.51% - 94.75% - Limited (Note)
Note: Based on the information available to the Directors and so far as they are aware, as at the Latest Practicable Date, among the 1,484,749,163 H shares held by HKSCC Nominees Limited, no person had an interest or short position in the Company's shares or underlying shares (as the case may be) which would fall to be and was disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO. Interests in other members of the Group VII-3 APPENDIX VII GENERAL INFORMATION So far as is known to the Directors, as at the Latest Practicable Date, each of the following persons, other than the Company or any of its directors, supervisors, chief executives and members of the senior management, was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the relevant subsidiary of the Company:
NAME OF RELEVANT SUBSTANTIAL APPROXIMATE PERCENTAGE SUBSIDIARY SHAREHOLDER OF SHAREHOLDING [CHINESE CHARACTERS] [CHINESE CHARACTERS] 49% (Shanghai Technology (Singapore Technology Aerospace Company Aerospace Limited) Limited) [CHINESE CHARACTERS] [CHINESE CHARACTERS] 45% [CHINESE CHARACTERS] (Shantou Aviation Equipment (Eastern Airlines Group Company) (Shantou) Economic Development Co., Ltd.) [CHINESE CHARACTERS] Aircraft Engineering Investment Ltd. 40% [CHINESE CHARACTERS](Shanghai Eastern Aircraft Maintenance Co., Ltd.) [CHINESE CHARACTERS] [CHINESE CHARACTERS] 30% (China Cargo Airlines (China Ocean Shipping (Group) Co., Ltd.) Company) [CHINESE CHARACTERS] [CHINESE CHARACTERS] [CHINESE CHARACTERS](Shanghai (China Ocean Shipping (Group) Eastern Logistics Co. Ltd.) Company) [CHINESE CHARACTERS] [CHINESE CHARACTERS] 23.89% [CHINESE CHARACTERS](China (Jiangsu Provincial Guoxin Asset Eastern Airlines Jiangsu Co., Ltd.) Management Group Co., Ltd.)
Save as disclosed above and so far as is known to the Directors, as at the Latest Practicable Date, no other person (other than the Directors, the Company's supervisors, chief executives or members of senior management of the Company) had an interest or short position in the Company's shares or underlying shares (as the case may be) which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or was VII-4 APPENDIX VII GENERAL INFORMATION directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group. EXPERT STATEMENTS This circular includes statement(s) made by the following experts:
NAME QUALIFICATION Shenyin Wanguo Capital (H.K.) Licensed corporation to carry out type 1 Limited (dealing in securities), type 4 (advising on securities) and type 6 (advising on corporate finance) regulated activities under the SFO PricewaterhouseCoopers Certified public accountants Chesterton Petty Limited Chartered surveyor
Each of the above experts has given and has not withdrawn its written consent to the issue of this circular with its statement(s) included in the form and context in which it is/they are included. As at the Latest Practicable Date, none of the above experts had any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group. As at the Latest Practicable Date, none of the above experts had any interest in any assets which have been, since 31st December, 2004 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group. MISCELLANEOUS COMPANY'S OFFICERS Mr. Luo Zhuping, who is a holder of a Master's degree in global economics, is a Director and the secretary of the Company. VII-5 APPENDIX VII GENERAL INFORMATION Mr. Luo Weide, the Company's Chief Financial Officer having a professional accounting qualification recognised in the PRC, is the qualified accountant of the Company appointed pursuant to Rule 3.24 of the Listing Rules. Since Mr. Luo does not possess the professional qualification normally required under Rule 3.24 of the Listing Rules, the Company has applied for, and the Stock Exchange has granted, a conditional waiver from strict compliance with that rule for a period of three years commencing on 28th January, 2005. Details of the waiver are disclosed in the Company's announcement dated 1st February, 2005. SERVICE CONTRACTS As at the Latest Practicable Date, none of the Directors or proposed directors of the Company had any existing or proposed service contract with any member of the Enlarged Group (excluding contracts expiring or terminable by the employer within a year without payment of any compensation (other than statutory compensation)). COMPETING INTERESTS As at the Latest Practicable Date, none of the Directors or, so far as is known to them, any of their respective associates was interested in any business (apart from the Group's business) which competes or is likely to compete either directly or indirectly with the Group's business (as would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them were a controlling shareholder). INTERESTS IN THE GROUP'S ASSETS OR CONTRACTS OR ARRANGEMENTS SIGNIFICANT TO THE GROUP As at the Latest Practicable Date, none of the Directors, supervisors, proposed directors or proposed supervisors of the Company had any interest in any assets which have been, since 31st December, 2004 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group. As at the Latest Practicable Date, none of the Directors or supervisors of the Company was materially interested in any contract or arrangement, subsisting at the date of this circular, which is significant in relation to the business of the Enlarged Group. LITIGATION VII-6 APPENDIX VII GENERAL INFORMATION As at the Latest Practicable Date, the Directors were not aware of any litigation or claim of material importance pending or threatened against any member of the Group or the Enlarged Group. MATERIAL CONTRACTS Save as mentioned herein or otherwise previously announced, no material contract (not being contracts entered into in the ordinary course of business) has been entered into by any member of the Enlarged Group within the two years immediately preceding the issue of this circular. DOCUMENTS FOR INSPECTION Copies of the following documents are available for inspection during normal business hours at the Company's principal place of business in Hong Kong at 5th Floor, McDonald's Building, 48 Yee Wo Street, Hong Kong for a period of 14 days (excluding Saturdays) from the date of this circular: (i) the articles of association of the Company; (ii) the Acquisition Agreement; (iii) each of the Property Leasing Agreement, the Financial Services Agreement, the Import and Export Agency Agreement, the Maintenance Services Agreement, the Catering Services Agreements, the Sales Agency Services Agreements and the Advertising Services Agreement as more particularly described and summarised in the paragraph headed "Continuing Connected Transactions" of the "Letter from the Board" included in this circular; (iv) the letter dated 19th May, 2005 from the Independent Board Committee to the Independent Shareholders, the text of which is out on pages 41 to 42 of this circular; (v) the opinion letter dated 19th May, 2005 from SW Capital, the text of which is set out on pages 43 to 76 of this circular; (vi) the accountants' report on financial information of the aviation businesses of CEA Northwest, the text of which is set out in appendix II to this circular; VII-7 APPENDIX VII GENERAL INFORMATION (vii) the accountants' report on financial information of the aviation businesses of CEA Yunnan, the text of which is set out in appendix III to this circular; (viii) the 2002, 2003 and 2004 annual reports of the Company; (ix) the unaudited pro forma financial information of the Enlarged Group and the report of PricewaterhouseCoopers thereon, the text of which is set out in the section headed "Pro forma financial information" in appendix V to this circular; (x) the letter, summary of values and valuation certificates prepared by Chesterton Petty Limited (the Company's independent property valuer), the text of which is set out in appendix VI to this circular, and the full property valuation report issued by Chesterton Petty Limited and mentioned in the paragraph headed "Additional information" in the "Letter from the Board" included in this circular; (xi) the confirmation letter issued by Chesterton Petty Limited regarding the rentals payable by the Company under the Property Leasing Agreement as referred to in sub-paragraph 3.2 (Property leasing) under the paragraph headed "Continuing Connected Transactions" of the "Letter from the Board" included in this circular; (xii) each of the written consents issued by SW Capital, PricewaterhouseCoopers and Chesterton Petty Limited as referred to in the paragraph headed "Expert statements" in this appendix; and (xiii) each of the discloseable transaction circulars dated 13th January, 2005 and 7th April, 2005, respectively, issued by the Company. VII-8 NOTICE OF AGM [CHINA EASTERN AIRLINES CORPORATION LIMITED LOGO] (A joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock code: 670) NOTICE OF 2004 ANNUAL GENERAL MEETING NOTICE IS HEREBY GIVEN THAT the 2004 annual general meeting (the "AGM") of [CHINESE CHARACTERS] (China Eastern Airlines Corporation Limited) (the "COMPANY") will be held at Function Room 2, Grand Ballroom, Shanghai Marriott Hotel Hongqiao [CHINESE CHARACTERS], 2270 Hongqiao Road, Shanghai, the People's Republic of China (the "PRC") at 9:00 a.m. on Thursday, 30th June, 2005 for the purpose of considering the following matters: ORDINARY RESOLUTIONS 1. To consider and approve the report of the board of the directors of the Company (the "BOARD") for the year 2004. 2. To consider and approve the report of the supervisory committee of the Company for the year 2004. 3. To consider and approve the audited financial statements and the auditors' reports for the year 2004. 4. To consider and approve the Company's profit distribution proposal for the year 2004. (Note 1) 5. To consider and approve the re-appointments of Shanghai Zhonghua Certified Public Accountants as the Company's domestic auditors for the financial year ending 31st December, 2005 and PricewaterhouseCoopers, Certified Public Accountants, Hong Kong as the Company's international auditors for the financial year ending 31st December, 2005, and to authorise the Board to determine and finalise their remuneration. 6. To consider and approve the appointment of Mr. Luo Chaogeng [CHINESE CHARACTERS] as a director of the Company with effect from the conclusion of the AGM. (Note 2) i NOTICE OF AGM 7. To confirm and ratify an agreement of 9th October, 2004 between the Company and Airbus SAS in respect of the purchase by the Company of twenty Airbus A330 aircraft (with engines) from Airbus SAS, an agreement of 16th March, 2005 between the Company and Airbus SAS in respect of the purchase by the Company of five Airbus A319 aircraft (with engines) from Airbus SAS, and an agreement of 21st April, 2005 between the Company and Airbus SAS in respect of the purchase by the Company of fifteen Airbus A320 series aircraft (comprising eleven Airbus A321 aircraft and four Airbus A320 aircraft) (with engines) from Airbus SAS, and all transactions thereunder, details of all of which are set out in the announcements dated 13th October, 2004, 17th March, 2005 and 21st April, 2005, respectively, issued by the Company. 8. To consider, approve, confirm and ratify a conditional acquisition agreement dated 12th May, 2005 (the "ACQUISITION AGREEMENT"), a copy of which will be produced to the AGM marked "A" and initialed by the Chairman of the AGM for the purpose of identification, entered into among the Company, [CHINESE CHARACTERS] (China Eastern Air Holding Company), [CHINESE CHARACTERS] (China Eastern Air Northwest Company) and [CHINESE CHARACTERS] (China Eastern Air Yunnan Company) and all transactions thereunder, details of which are set out in the announcement dated 12th May, 2005 (the "ANNOUNCEMENT") issued by the Company under the section headed "Proposed Acquisition"; and to authorise any director of the Company to sign all such documents and/or do all such things and acts as he may consider necessary or expedient and in the interest of the Company for the purpose of effecting or otherwise in connection with all transactions contemplated under the Acquisition Agreement or any matter incidental thereto. 9. To consider, approve, confirm and ratify a conditional property leasing agreement dated 12th May, 2005 (the "PROPERTY LEASING AGREEMENT"), a copy of which will be produced to the AGM marked "B" and initialed by the Chairman of the AGM for the purpose of identification, entered into among the Company, [CHINESE CHARACTERS] (China Eastern Air Holding Company), [CHINESE CHARACTERS] (China Eastern Air Northwest Company) and [CHINESE CHARACTERS] (China Eastern Air Yunnan Company) and all transactions thereunder and the associated maximum aggregate annual values in respect of such transactions as determined pursuant to and for the purpose of the connected transaction regulatory requirements under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "LISTING RULES"), details of all of which are set out in the Announcement under the paragraph headed "Continuing Connected Transactions - Property leasing"; and to authorise any director of the Company to sign all such documents and/or do all such things and acts as he may consider necessary or expedient and in the interest of the Company for the purpose of effecting or otherwise in connection with all transactions contemplated under the Property Leasing Agreement or any matter incidental thereto. ii NOTICE OF AGM 10. To consider, approve, confirm and ratify a conditional financial services agreement dated 12th May, 2005 (the "FINANCIAL SERVICES AGREEMENT"), a copy of which will be produced to the AGM marked "C" and initialed by the Chairman of the AGM for the purpose of identification, entered into between the Company and [CHINESE CHARACTERS] (Eastern Air Group Finance Company Limited) and all transactions thereunder in relation to the provision of deposit and other financial services other than the provision of loan and financing services and the relevant associated maximum aggregate annual values in respect of such transactions as determined pursuant to and for the purpose of the connected transaction regulatory requirements under the Listing Rules, details of all of which are set out in the Announcement under the paragraph headed "Continuing Connected Transactions - Financial services"; and to authorise any director of the Company to sign all such documents and/or do all such things and acts as he may consider necessary or expedient and in the interest of the Company for the purpose of effecting or otherwise in connection with all transactions contemplated under the Financial Services Agreement or any matter incidental thereto. 11. To consider, approve, confirm and ratify a conditional import and export agency agreement dated 12th May, 2005 (the "IMPORT AND EXPORT AGENCY AGREEMENT"), a copy of which will be produced to the AGM marked "D" and initialed by the Chairman of the AGM for the purpose of identification, entered into between the Company and [CHINESE CHARACTERS] (Eastern Aviation Import & Export Company) and all transactions thereunder and the associated maximum aggregate annual values in respect of such transactions as determined pursuant to and for the purpose of the connected transaction regulatory requirements under the Listing Rules, details of all of which are set out in the Announcement under the paragraph headed "Continuing Connected Transactions - Import/export agency services"; and to authorise any director of the Company to sign all such documents and/or do all such things and acts as he may consider necessary or expedient and in the interest of the Company for the purpose of effecting or otherwise in connection with all transactions contemplated under the Import and Export Agency Agreement or any matter incidental thereto. 12. To consider, approve, confirm and ratify a conditional maintenance services agreement dated 12th May, 2005 (the "MAINTENANCE SERVICES AGREEMENT"), a copy of which will be produced to the AGM marked "E" and initialed by the Chairman of the AGM for the purpose of identification, entered into between the Company and [CHINESE CHARACTERS] (Shanghai Eastern Aviation Equipment Manufacturing Corporation) and all transactions thereunder and the associated maximum aggregate annual values in respect of such transactions as determined pursuant to and for the purpose of the connected transaction regulatory requirements under the Listing Rules, details of all of which are set out in the Announcement under the paragraph headed "Continuing Connected Transactions - iii NOTICE OF AGM Maintenance services"; and to authorise any director of the Company to sign all such documents and/or do all such things and acts as he may consider necessary or expedient and in the interest of the Company for the purpose of effecting or otherwise in connection with all transactions contemplated under the Maintenance Services Agreement or any matter incidental thereto. 13. To consider, approve, confirm and ratify the conditional catering services agreements dated 12th May, 2005 (the "CATERING SERVICES AGREEMENTS"), copies of all of which will be produced to the AGM marked "F" and initialed by the Chairman of the AGM for the purpose of identification, entered into between the Company, on the one hand, and various subsidiaries or associates of [CHINESE CHARACTERS] (China Eastern Air Holding Company), on the other hand, and all transactions thereunder and the associated maximum aggregate annual values in respect of such transactions as determined pursuant to and for the purpose of the connected transaction regulatory requirements under the Listing Rules, details of all of which are set out in the Announcement under the paragraph headed "Continuing Connected Transactions - Catering services"; and to authorise any director of the Company to sign all such documents and/or do all such things and acts as he may consider necessary or expedient and in the interest of the Company for the purpose of effecting or otherwise in connection with all transactions contemplated under the Catering Services Agreements or any matter incidental thereto. 14. To consider, approve, confirm and ratify the conditional sales agency services agreements dated 12th May, 2005 (the "SALES AGENCY SERVICES AGREEMENTS"), copies of all of which will be produced to the AGM marked "G" and initialed by the Chairman of the AGM for the purpose of identification, entered into between the Company, on the one hand, and various subsidiaries or associates of [CHINESE CHARACTERS] (China Eastern Air Holding Company), on the other hand, and all transactions thereunder and the associated maximum aggregate annual values in respect of such transactions as determined pursuant to and for the purpose of the connected transaction regulatory requirements under the Listing Rules, details of all of which are set out in the Announcement under the paragraph headed "Continuing Connected Transactions - Sales agency services"; and to authorise any director of the Company to sign all such documents and/or do all such things and acts as he may consider necessary or expedient and in the interest of the Company for the purpose of effecting or otherwise in connection with all transactions contemplated under the Sales Agency Services Agreements or any matter incidental thereto. 15. To consider, approve, confirm and ratify a conditional advertising services agreement dated 12th May, 2005 (THE "ADVERTISING SERVICES AGREEMENT"), a copy of which will be produced to the AGM marked "H" and initialed by the Chairman of the AGM for the purpose of iv NOTICE OF AGM identification, entered into between the Company and [CHINESE CHARACTERS] (Shanghai Eastern Aviation Advertising Company Limited) and all transactions thereunder and the associated maximum aggregate annual values in respect of such transactions as determined pursuant to and for the purpose of the connected transaction regulatory requirements under the Listing Rules, details of all of which are set out in the Announcement under the paragraph headed "Continuing Connected Transactions - Advertising services"; and to authorise any director of the Company to sign all such documents and/or do all such things and acts as he may consider necessary or expedient and in the interest of the Company for the purpose of effecting or otherwise in connection with all transactions contemplated under the Advertising Services Agreement or any matter incidental thereto. 16. To consider and approve other necessary matters, if any. SPECIAL RESOLUTION 1. To consider and approve, by way of a special resolution, the following resolution: "THAT the articles of association of the Company (the "Articles") be amended as follows: (i) ARTICLE 52 of the Articles shall be amended by adding the following new paragraph as the first paragraph of Article 52: "A controlling shareholder or an actual controlling person of the Company owns fiduciary duties to the Company and its public shareholders. A controlling shareholder shall exercise the rights as an investor in strict compliance with the laws. A controlling shareholder may not (1) prejudice the legal rights and interests of the Company and its public shareholders by means of connected transaction, distribution of profits, restructuring of assets, external investment, appropriation of funds, loan guarantee etc., or (2) prejudice the interests and rights of the Company and its public shareholders by abusing its controlling position." (ii) ARTICLE 60 of the Articles shall be amended by adding the following two new paragraphs as the second and the third paragraphs, respectively, of Article 60: "A proposal for consideration at a shareholders' general meeting shall meet the following requirements: v NOTICE OF AGM (1) its content does not contravene the laws, regulations and these articles of association and falls within the scope of the duties and responsibilities of the shareholders' general meeting; (2) there is definite topic(s) and specific matter(s) for resolution; and (3) it is submitted or delivered to the board of directors in writing. The board of directors shall examine each proposal for consideration at a shareholders' general meeting in the best interests of the Company and shareholders." (iii) The following new article shall be added as ARTICLE 64(A) of the Articles immediately after Article 64: "The board of directors shall determine the record date with respect to a shareholders' general meeting. The shareholders recorded on the Company's register of shareholders as of the record date are entitled to attend the relevant shareholders' general meeting. The shareholders who intend to attend a shareholders' general meeting shall make registration on such date and at such venue as designated in the relevant notice." (iv) ARTICLE 72 of the Articles shall be amended by adding the following new paragraph as the first paragraph of Article 72: "The shareholders' general meeting shall take a vote on each of the matters for its consideration." (v) ARTICLE 73 of the Articles shall be amended by adding the following two new paragraphs as the second last paragraph and the last paragraph, respectively, of Article 73: "The Company shall increase the attendance of the public shareholders at shareholders' general meetings by various means including the use of modern information technologies (for example, online voting facilities), provided that: (1) it is permissible under all applicable laws and regulations and/or is acceptable to relevant regulatory authorities as well as complies with satisfies all relevant rules; and (2) the legality and validity of a shareholders' general meeting is assured. vi NOTICE OF AGM Subject to all applicable laws and regulations, the board of directors, independent directors and qualified shareholders may solicit proxies from shareholders to vote at a shareholders' general meeting. No consideration shall be paid for any proxy and adequate information should be furnished to the shareholders whose proxies are solicited. Information so furnished must be previously published information which remains accurate and is not misleading at the time it is quoted. The shareholders whose proxies are solicited should be encouraged to consult professional advisers." (vi) The following two new articles shall be added as Articles 78(A) and 78(B) of the Articles immediately after Article 78: "78(A) Subject to these articles of association, all applicable laws and regulations and/or other rules or requirements that may be promulgated by relevant authorities from time to time, implementation of or application for any of the following matters requires approval by the shareholders' general meeting and approval by votes representing more than half of the voting rights held by public shareholders who vote at the meeting: (1) the Company's follow-on public offering (including offering of Overseas-Listed Foreign-Invested Shares or other equity securities), offering of convertible bonds and rights issue (except a controlling shareholder undertakes prior to the meeting to subscribe for the rights issue shares wholly in cash); (2) restructuring of material assets with the total consideration for the assets acquired equal to or exceeding 120% of the audited book value of such assets; (3) repayment of debts owed by a shareholder to the Company with equity shares of the Company; (4) overseas listing of a subsidiary of the Company that has material effect on the Company; and (5) matters relating to the development of the Company that have material effect on the interests and rights of the public shareholders. vii NOTICE OF AGM If a shareholders' general meeting is convened in connection with any of the above matters, the Company shall provide the shareholders with online voting facilities, provided that it is permissible under all applicable laws and regulations and/or acceptable to relevant regulatory authorities as well as complies with and satisfies all relevant rules. "78(B) Under any of the above circumstances, after giving notices of meeting of shareholders, the Company shall publicly announce a notice of meeting of shareholders within 3 days after the relevant record date." (vii) ARTICLE 81 of the Articles shall be amended by adding the following new paragraph as the second paragraph of Article 81: "Public announcements shall be made with respect to the resolutions of the shareholders' general meeting in accordance with the relevant regulations." (viii) The title of CHAPTER 10 of the Articles shall be amended to read as "Board of Directors and Independent Directors". (ix) ARTICLE 94 of the Articles shall be amended by deleting therefrom the second paragraph reading as follows: "The board of directors shall have at least three (3) independent directors. Independent directors are directors who do not hold any position in the Company other than as directors and do not maintain with the Company and its substantial shareholders any connection which may hamper their independent and objective judgments." (x) The following new article shall be added as ARTICLE 97(A) of the Articles immediately after Article 97: "Provision of guarantee by the Company for the benefits of any other person: (1) must complies with and satisfies these articles of association, all applicable laws and regulations and/or other rules or requirements that may be promulgated by relevant authorities from time to time; and (2) requires approvals by the audit committee of the board of directors, more than two-thirds of the board of directors and the shareholders' general meeting." vii NOTICE OF AGM (xi) ARTICLE 104 of the Articles shall be amended by adding the following new paragraph as the second paragraph of Article 104: "A resolution of the board of directors shall be decided on a show of hands." (xii) The following new articles shall be added as ARTICLES 106(A) to 106(G) of the Articles immediately after Article 106: "106(A) At least one-third and not less than three of the members of the board of directors shall be independent directors, at least one of whom must be an accounting professional. Independent directors shall carry out duties faithfully, safeguard the interests of the Company as well as pay close attention to the protection of the legal rights and interests of the public shareholders from detriment. Independent directors shall carry out duties independently and shall not be influenced by: (1) any substantial shareholder or actual controlling person of the Company; or (2) any interested entity or individual of the Company or any of its substantial shareholders or actual controlling persons. 106(B) Except relevant laws and regulations provide otherwise, the board of directors, supervisory committee or shareholder(s) individually or jointly holding more than 1% of the outstanding shares of the Company may nominate candidates for election at a shareholders' general meeting as independent directors. 106(C) Any material connected transaction of the Company and the retaining or dismissal of an accounting firm shall not be submitted for consideration by the board of directors unless it is approved by more than half of the independent directors. Consent of more than half of the independent directors is required for: (1) any request by the independent directors to the board of directors to convene an extraordinary shareholders' general meeting or a board meeting; or (2) public solicitation for proxies from shareholders prior to a shareholders' general meeting. With the consent of all independent directors, the independent directors may retain outside auditors or consultants for audit or consultation with respect to any specific matters of the Company. The Company shall bear the related expenses. ix NOTICE OF AGM 106(D) The independent directors shall: (1) attend the meetings of the board of directors as scheduled; (2) familiarize themselves with the business operations of the Company; and (3) make voluntary inquiries and gather the information and materials required for making decisions. The independent directors shall submit to the shareholders' annual general meetings annual reports of all independent directors which should discuss the performance by the independent directors of their duties. 106(E) The Company shall establish work procedures of independent directors. The secretary of the board of directors shall cooperate with independent directors with respect to the performance of their duties. The Company shall: (1) ensure that the independent directors enjoy the same right of access to information as other directors; (2) furnish the independent directors with relevant materials and information in a timely manner; (3) make available information relating to the operations of the Company periodically; and (4) arrange on-site visits for the independent directors, if necessary. 106(F) The term of office of the independent directors shall be the same as that of other directors. Subject to all applicable laws and regulations, at the expiry of an independent director's term, the term is renewable upon re-election. Any independent director shall not be dismissed without due cause prior to the expiration of his/her term of office. The Company shall disclose as a special discloseable matter any dismissal prior to expiration of term. 106(G) An independent director may resign before his/her term of office expires. An independent director shall submit to the board of directors his/her letter of resignation, in which he/she shall explain any issue that is related to his/her resignation or warrants attention of shareholders and creditors of the Company. If resignation of any independent director results in the number of independent directors or directors being less than the minimum number prescribed by law or these articles of association, the independent director shall carry out duties in accordance with the laws, regulations and these articles of association until election of a successor independent director. The board of director shall convene a shareholders' general x NOTICE OF AGM meeting within two months for the election of the successor independent director. A resigning independent director may cease to carry out duties in the case of failure by the board of directors to convene the shareholders' general meeting within the time limit." (xiii) ARTICLE 108 of the Articles shall be amended by adding the following new item as item (4) of the first paragraph of Article 108: "(4) The Company shall have a department of investor relations that is specially responsible for strengthening the communications with shareholders, especially public shareholders. The secretary of the board of directors shall be in charge of the department of investor relations." (xiv) ARTICLE 119 of the Articles shall be amended by adding the following new paragraph as the second paragraph of Article 119: "A person convening a meeting shall notify all supervisors in writing 10 days prior to the meeting. A notice of meeting shall specify: (1) the date and the place of the meeting; (2) the length of the meeting; (3) the matters and topics to be discussed; and (4) the date of the notice." (xv) ARTICLE 121 of the Articles shall be amended by adding the following two new paragraphs as the first and the second paragraphs, respectively, of Article 121: "Meetings of the supervisory committee shall be held only when more than half of the supervisors are present. A resolution of the supervisory committee shall be decided on a show of hands. Each supervisor shall have one vote.", and THAT the Board be authorised to attend to such procedures for any approval, endorsement, filing and/or registration in relation to such amendments to the Articles as may be required xi NOTICE OF AGM from any relevant authority(ies), and to do such things and acts as are necessary or expedient to effect, for the purpose of or otherwise in connection with such amendments." (Note 3) By order of the Board [CHINESE CHARACTERS] CHINA EASTERN AIRLINES CORPORATION LIMITED LUO ZHUPING Director and Company Secretary The Company's directors, as at the date hereof, are: Li Fenghua (Chairman, Executive Director) Ye Yigan (Non-executive Director) Cao Jianxiong (Non-executive Director) Wan Mingwu (Vice President, Executive Director) Zhong Xiong (Non-executive Director) Luo Zhuping (Executive Director) Hu Honggao (Independent non-executive Director) Peter Lok (Independent non-executive Director) Wu Baiwang (Independent non-executive Director) Zhou Ruijin (Independent non-executive Director) Xie Rong (Independent non-executive Director) Shanghai, the PRC 13th May, 2005 Notes: 1. THE COMPANY'S PROFIT DISTRIBUTION PROPOSAL FOR THE YEAR 2004 The Board did not recommend payment of any interim dividend for the six months ended 30th June, 2004. As at 31st December, 2004, based on the financial statements prepared in accordance with PRC Accounting Standards and Regulations, the Company's retained distributable profit was RMB443,488,200. Having considered the Company's expected cashflow position in 2005, subject to shareholders' approval being obtained at the AGM, the Board recommended distribution of retained distributable profit of the Company to its shareholders in the form of a final dividend of RMB0.02 per share (including tax) in cash, totalling RMB97,339,000 xii NOTICE OF AGM (based on the Company's total issued share capital comprising 4,866,950,000 shares as at 31st December, 2004, and excluding expenses incurred in the distribution). Shareholders of the Company's H shares and American depositary shares, or ADSs, will receive an equivalent amount of the final dividend, converted into relevant currencies based on the average foreign exchange rate within the five business days after the AGM as published by the People's Bank of China. 2. PROPOSED APPOINTMENT OF MR. LUO CHAOGENG [CHINESE CHARACTERS] AS A DIRECTOR OF THE COMPANY Mr. Luo Chaogeng [CHINESE CHARACTERS], aged 55, is currently the President and a deputy party secretary of the Company. Mr. Luo joined the civil aviation industry in 1970 and worked for the Civil Aviation Lanzhou Bureau as a flight mechanic of the aviation instructing team from August 1970 to August 1972. From August 1972 to March 1989, Mr. Luo was a flight mechanic and a deputy instructor of the Civil Aviation 8th Fleet. From March 1989 to August 1994, Mr. Luo was a deputy political commissar, political commissar and a party secretary of the Xi'an fleet of China Northwest Airlines. He was the party secretary of China Northwest Airlines aircraft repair factory from August 1994 to October 1996. Mr. Luo was a party secretary and deputy general manager of China Northwest Airlines aircraft repair base from October 1996 to March 1997 and a deputy director of the Civil Aviation Northwest Bureau from March 1997 to December 2000. Mr. Luo was a general manager of Yunnan Airlines Company and was also the Head and a deputy party secretary of the Civil Aviation Yunnan Bureau from December 2000 to November 2001. Mr. Luo was the general manager and a deputy party secretary of Yunnan Airlines Company from November 2001 to September 2004. Mr. Luo was a member of the party committee and deputy general manager of China Eastern Air Holding Company and was a general manager of China Eastern Airlines Yunnan Co., Ltd. from September 2002 to September 2004. Since September 2004, Mr. Luo has been a member of the party committee and a deputy general manager of China Eastern Air Holding Company, and the President and a detputy party secretary of the Company. Mr. Luo studied in the post-graduate economic management class for leaders of Shan'xi Province held by the Central Party College from September 1998 to June 2001. He holds the title of First Class Flight Mechanic. Save as described above or herein, Mr. Luo was not a director of any listed public company other than the Company in the last three years; he does not hold any position with other members of the Company's group save for being a director and the Chairman of China Cargo Airlines Co., Ltd. (a subsidiary of the Company); he does not have any relationship with any other directors, supervisors, senior management or substantial or controlling shareholder(s) of the Company; and he does not have any interest in the shares of the Company within the xiv NOTICE OF AGM meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). The appointment of Mr. Luo, subject to approval from the Company's shareholders at the AGM, will commence at the conclusion of the AGM, expiring at the conclusion of the Company's 2006 annual general meeting as currently expected. His annual emoluments will be determined after his appointment becomes effective. Save as disclosed herein, there are no other matters regarding Mr. Luo Chaogeng that in the Company's opinion is required to be brought to the attention of its shareholders. 3. PROPOSED AMENDMENTS TO THE ARTICLES The proposed amendments to the Articles are made in compliance with the relevant laws and regulations prescribed by the China Securities Regulatory Commission, stipulating provisions mandatory or recommended for inclusion in articles of association of PRC listed companies. 4. PERSONS ENTITLED TO ATTEND THE AGM Persons who hold A shares or H shares of the Company and are registered as holders of the Company's A shares or H shares on the register of members maintained by China Securities Depository and Clearing Corporation Limited, Shanghai Branch and Hong Kong Registrars Limited, respectively, at the close of business on Monday, 30th May, 2005 will be entitled to attend the AGM upon completion of the necessary registration procedures. 5. REGISTRATION PROCEDURES FOR ATTENDING THE AGM (1) Holders of the Company's domestic shares shall deposit documents of certification of their shares and their authorised representatives' documents of identity with the Company at its place of business located at 2550 Hongqiao Road, Shanghai, the PRC (for the attention of the Secretary Office of the Board of Directors) on or before Friday, 10th June, 2005. In case such holders are represented by authorised representatives, they shall also deliver their powers of attorney and copies of the attorney's documents of identity to the above place of business of the Company. (2) Holders of the Company's H shares shall deliver their written replies for attending the AGM, copies of transfers or copies of their share certificates or copies of receipts of share transfers, together with copies of their identity cards or other documents of identity, to the Company at its place of business stated above on or before Friday, 10th xiv NOTICE OF AGM June, 2005. If proxies are appointed by shareholders to attend the AGM, they shall, in addition to the aforementioned documents, deliver the proxy forms and copies of their identity cards or other documents of identity to the above place of business of the Company. (3) Shareholders can deliver the necessary documents for registration to the Company in the following manner: in person, by post or by facsimile. Upon receipt of such documents, the Company will complete the registration procedures for attending the AGM and will despatch to shareholders voting forms by post or by facsimile. Shareholders may present the voting forms when attending the AGM as evidence of eligibility to attend the meeting. 6. APPOINTING PROXIES (1) Shareholders who have the right to attend and vote at the AGM are entitled to appoint in writing one or more proxies (whether a member of the Company or not) to attend and vote at the meeting on their behalf. (2) The instrument appointing a proxy must be duly authorised in writing by the appointor or his attorney. If that instrument is signed by an attorney of the appointor, the power of attorney authorising that attorney to sign (or other documents of authorisation) must be notarially certified. For the Company's domestic shareholders, the notarially certified power of attorney or other documents of authorisation and proxy forms must be delivered to the registrar of the Company not less than 24 hours before the time scheduled for the holding of the AGM before such documents would be considered valid. For the Company's H shareholders, the aforementioned documents must also be delivered to Hong Kong Registrars Limited, the Company's H share registrar, within the same time limit in order for such documents to be valid. (3) If more than one proxy has been appointed by any shareholder of the Company, such proxies shall not vote at the same time. 7. DURATION OF THE AGM The AGM is expected to last for half a day. Shareholders or their proxies attending the AGM shall be responsible for their own accommodation and travel expenses. 8. PROCEDURE TO OTHERWISE DEMAND A POLL xv NOTICE OF AGM As disclosed in the Announcement, China Eastern Air Holding Company and its associate(s), if any, will abstain from voting on the ordinary resolutions numbered 8 to 15 set out above, which will be taken on a poll as required under the Listing Rules. Pursuant to Articles 73 to 75 of the Articles, a poll may (before or after any vote by show of hands) otherwise generally be demanded: (i) by the chairman of the meeting; (ii) by at least two shareholders entitled to vote present in person or by proxy; (iii) by one or more shareholders present in person or by proxy and representing 10% or more of all shares carrying the right to vote at the meeting. The demand for a poll may be withdrawn by the person who makes such demand. A poll demanded on the election of the chairman of the meeting, or on a question of adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded. On a poll taken at the meeting, a shareholder (including proxy) entitled to two or more votes need not cast all his or her votes in the same way. 9. CLOSURE OF BOOKS The H share register of members of the Company will be closed from Tuesday, 31st May, 2005 to Wednesday, 29th June, 2005, both days inclusive, during which period no transfer of the Company's H shares will be effected. Where applicable, shareholders of the Company's H shares intending to attend the AGM are therefore required to lodge their respective instrument(s) of transfer and the relevant share certificate(s) to the Company's H share registrar, Hong Kong Registrars Limited, by 4:00 p.m. on Monday, 30th May, 2005. The address and contact details of Hong Kong Registrars Limited are as follows: Hong Kong Registrars Limited Rooms 1712-1716, 17th Floor, Hopewell Centre 183 Queen's Road East xvi NOTICE OF AGM Wanchai Hong Kong Telephone: +852 2862 8628 Fax: +852 2865 0990 xvii