EX-1.1 2 u99922exv1w1.txt EX-1.1 CIRCULAR DATED JULY 12, 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, you should 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) MAJOR TRANSACTION 12th July, 2005 CONTENTS
Pages DEFINITIONS............................................................................. 1 LETTER FROM THE BOARD OF DIRECTORS ..................................................... 3 1. Introduction................................................................ 3 2. Parties..................................................................... 4 3. The aircraft agreements .................................................... 4 4. Implications under the Listing Rules........................................ 5 5. Additional information...................................................... 6 APPENDICES Appendix I Financial information of the Group....................................... I-1 Appendix II Certain additional information required under the Listing Rules.......... II-1 Appendix III General information .................................................... III-1
DEFINITIONS In this circular, unless the context otherwise requires, the following expressions have the following meanings: "737 AIRCRAFT" means the six Boeing 737-700 aircraft (with engines) to be delivered to the Company under the 737 Aircraft Agreement; "737 AIRCRAFT AGREEMENT" means an agreement of 23rd December, 2004 between the Company and Boeing Company; "747 AIRCRAFT" means the two Boeing 747-400 aircraft (with engines) to be delivered to China Cargo under the 747 Aircraft Agreement; "747 AIRCRAFT means an agreement of 28th May, 2005 between China AGREEMENT" Cargo and Boeing Company; "BOEING COMPANY" means Boeing Company, a company incorporated in the State of Delaware of the United States of America; "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; "CHINA CARGO" means [CHINESE CHARACTERS] (China Cargo Airlines Co., Ltd.), a subsidiary of the Company whose registered capital is held as to 70% by the Company and 30% by [CHINESE CHARACTERS] (China Ocean Shipping (Group) Company), which is otherwise a third party independent of the Company; "COMPANY" means [CHINESE CHARACTERS] (China Eastern Airlines Corporation Limited), a joint stock limited company incorporated in the People's Republic of China with limited liability, whose H shares, A shares and American depositary shares are listed on the Stock Exchange, the Shanghai Stock Exchange and the New York Stock Exchange, Inc., respectively; "DIRECTORS" means the directors of the Company; 1 DEFINITIONS "GROUP" means the Company and its subsidiaries; "HK$" means Hong Kong dollar, the lawful currency of Hong Kong; "HONG KONG" means the Hong Kong Special Administrative Region of the People's Republic of China; "LATEST PRACTICABLE means 8th July, 2005, being the latest practicable DATE" date for ascertaining certain information included herein before the printing of this circular; "LISTING RULES" means the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited; "RMB" means Renminbi yuan, the lawful currency of the People's Republic of China; "SFO" means the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong); "STOCK EXCHANGE" means The Stock Exchange of Hong Kong Limited; and "US$" means United States dollar, the lawful currency of the United States of America. 2 LETTER FROM THE BOARD OF DIRECTORS [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 Luo Chaogeng (President, 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 12th July, 2005 To the shareholders of the Company Dear Sir or Madam, MAJOR TRANSACTION 1. INTRODUCTION As disclosed in the announcement dated 6th June, 2005 issued by the Company, China Cargo (a subsidiary of the Company) agreed with Boeing Company on 28th May, 2005 to purchase two 3 LETTER FROM THE BOARD OF DIRECTORS Boeing 747-400 aircraft (with engines) from Boeing Company. The 747 Aircraft Agreement itself constitutes a major transaction of the Company under the Listing Rules as applied by the Stock Exchange. Further, the Stock Exchange takes the view that pursuant to Rule 14.22 of the Listing Rules, such agreement would be aggregated with the 737 Aircraft Agreement and treated as if they were one transaction for the purpose of Chapter 14 of the Listing Rules. Nonetheless, the 747 Aircraft Agreement, even if aggregated with the 737 Aircraft Agreement, is still classified as a major transaction of the Company under Chapter 14 of the Listing Rules. The purpose of this circular is to provide shareholders of the Company with further information in relation to such transaction as required under the Listing Rules. 2. PARTIES The Company is principally engaged in the business of civil aviation. China Cargo is principally engaged in the business of air cargo and mail transportation. Boeing Company, to the Directors' knowledge, is a company incorporated in the State of Delaware of the United States of America and is a principally engaged in the business of aircraft manufacturing. To the best of the Directors' knowledge, information and belief having made all reasonable enquiry, Boeing Company and its ultimate beneficial owner(s) are third parties independent of the Company and connected persons (as defined in the Listing Rules) of the Company, and are not connected persons of the Company. 3. THE AIRCRAFT AGREEMENTS 737 AIRCRAFT AGREEMENT Details of the 737 Aircraft Agreement and the transactions thereunder are set out in the Company's announcement and circular dated 23rd December, 2004 and 13th January, 2005, respectively. 747 AIRCRAFT AGREEMENT China Cargo agreed with Boeing Company on 28th May, 2005 to purchase the 747 Aircraft from Boeing Company. 747 AIRCRAFT 4 LETTER FROM THE BOARD OF DIRECTORS Based on the information provided by Boeing Company, the total asset value of the 747 Aircraft, as determined by reference to the relevant catalogue price of Boeing Company as at July 2004, amounts in aggregate to approximately US$427.6 million (approximately HK$3,326.7 million). No independent valuation on the 747 Aircraft has been conducted. CONSIDERATION AND PAYMENT TERMS The aggregate consideration for the 747 Aircraft, which was determined as a matter of commercial decision after arm's length negotiations, is less than the total asset value of the 747 Aircraft as stated above. The consideration is payable by cash in United States dollars in instalments, and is, as currently contemplated, being funded principally by way of bank loans from banking institutions. DELIVERY The 747 Aircraft are expected to be delivered in or around July 2006 and August 2007, respectively. CONDITION PRECEDENT The transaction under the 747 Aircraft Agreement is conditional upon the relevant approval(s) to be obtained from [CHINESE CHARACTERS] (National Development and Reform Commission of the People's Republic of China). REASONS FOR AND BENEFITS EXPECTED TO ACCRUE TO THE GROUP The brand-new 747 Aircraft will be introduced to China Cargo's fleet, to further expand the operating capacity of China Cargo, thereby enhancing the number of air routes it operates. The Directors believe that this will also increase the Group's market share and strengthen its position in the aviation industry. FINANCIAL IMPACT As mentioned above, the consideration is being funded principally by way of bank loans from banking institutions. The 747 Aircraft Agreement may therefore result in an increase in the Group's debt-to-equity ratio, but is not expected to impact on the its cash-flow position or its business operations. It is anticipated that the transaction would result in an increase in the Group's fixed assets, with liabilities to be settled by required bank loans. Save as described above, the transaction 5 LETTER FROM THE BOARD OF DIRECTORS is not expected to result in any material impact on the earnings and assets and liabilities of the Group. 4. IMPLICATIONS UNDER THE LISTING RULES As the relevant "percentage ratio" for the 747 Aircraft Agreement calculated under Rule 14.07 of the Listing Rules is above 25%, but less than 100%, the agreement itself constitutes a major transaction of the Company under the Listing Rules as applied by the Stock Exchange, and is subject to shareholders' approval. CEA Holding, which holds approximately 61.64% of the issued share capital of the Company, does not have any interest in China Cargo and the transaction (other than its indirect interest through the Company). No shareholder (including CEA Holding) is required to abstain from voting at any shareholders' general meeting, if convened, to approve such transaction, and written approval has been obtained from CEA Holding, approving the transactions under the 747 Aircraft Agreement. Therefore, pursuant to Rule 14.44 of the Listing Rules, no general meeting is required to be convened. Further, the Stock Exchange takes the view that pursuant to Rule 14.22 of the Listing Rules, the 747 Aircraft Agreement would be aggregated with the 737 Aircraft Agreement and treated as if they were one transaction for the purpose of Chapter 14 of the Listing Rules. Nonetheless, the 747 Aircraft Agreement, even if aggregated with the 737 Aircraft Agreement is still classified as a major transaction of the Company under Chapter 14 of the Listing Rules and, as mentioned above, the relevant regulatory requirements under the Listing Rules have accordingly been complied with. 5. ADDITIONAL INFORMATION Your attention is also drawn to the additional information set out in the appendices to this circular. Yours faithfully, For and on behalf of the board of Directors of CHINA EASTERN AIRLINES CORPORATION LIMITED LI FENGHUA Chairman 6 APPENDIX I 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. I-1 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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) ----------- ----------- ----------- Profit/(loss) attributable to shareholders 86,369 (949,816) 514,075 =========== =========== =========== Earnings/(loss) per share - basic and diluted RMB0.02 (RMB0.20) RMB0.11 =========== =========== ===========
I-2 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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) ----------- ----------- ----------- 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
I-3 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 CONSOLIDATED 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) 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) ----------- -----------
I-4 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 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 ---------- ----------
I-5 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 I-6 APPENDIX I 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 ========== ==========
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,
I-7 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 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 --------- --------- --------- ---------
I-8 APPENDIX I FINANCIAL INFORMATION OF THE GROUP - (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 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. I-9 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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. 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. I-10 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (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 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. I-11 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 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. I-12 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 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 I-13 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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. 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. I-14 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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. (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. I-15 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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. 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. I-16 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (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 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. I-17 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (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 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 I-18 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 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. I-19 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 Dividend distribution to the Company's shareholders is recognised 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%. I-20 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (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"). 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
I-21 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 ========= =========
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
I-22 APPENDIX I FINANCIAL INFORMATION OF THE GROUP - 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 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:- I-23 APPENDIX I 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 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%. I-24 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (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 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 I-25 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
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 ========== ========== ========= ========= ===========
I-26 APPENDIX I 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. 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 I-27 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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. 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 I-28 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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:-
PAID-UP PLACE AND CAPITAL ATTRIBUTABLE EQUITY PRINCIPAL DATE OF 2004 2003 INTEREST ACTIVITIES COMPANY ESTABLISHMENT RMB'000 RMB'000 2004 2003 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 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
I-29 APPENDIX I FINANCIAL INFORMATION OF THE GROUP * 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 ======= ======= ======= =======
GROUP 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 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:- I-30 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
PLACE AND PAID-UP ATTRIBUTABLE EQUITY DATE OF CAPITAL INTEREST COMPANY ESTABLISHMENT RMB'000 2004 2003 PRINCIPAL ACTIVITIES 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 services Co., Ltd. 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
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 ------- ------- -------
I-31 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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
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:- I-32 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
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 - - 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 I-33 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
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 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. I-34 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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:-
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 I-35 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
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 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 7,703,037 9,278,723 7,703,037 9,278,723
I-36 APPENDIX I FINANCIAL INFORMATION OF THE GROUP LIBOR +0.3% as at 31 December 2004; 2 to 10-year loans with final maturities through to 2013 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 ========== ========== ========== ==========
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 ========= =========
I-37 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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
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 ========= ========== ======== ======== ======== ========= ======== ========== ==========
I-38 APPENDIX I 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 -
I-39 APPENDIX I FINANCIAL INFORMATION OF THE GROUP - 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 ========= ========== ======== ======== ======== ========= ======== ========== ==========
(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:- I-40 APPENDIX I 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:
GROUP COMPANY 2004 2003 2004 2003 RMB'000 RMB'000 RMB'000 RMB'000 Deferred tax assets 395,465 399,771 344,711 349,318 Deferred tax liabilities (752,917) (740,112) (685,114) (663,954) -------- -------- -------- -------- (357,452) (340,341) (340,403) (314,636) ======== ======== ======== ========
I-41 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 AND COMPANY 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 ======== ========
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. I-42 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 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 I-43 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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:-
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 ======== ======== ======== ========
I-44 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (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 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. I-45 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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. 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 I-46 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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). 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:- I-47 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
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 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 =========
I-48 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 (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") I-49 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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") 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). I-50 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (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 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. I-51 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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 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:- I-52 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
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) Commission income on - CEA Northwest 93,062 51,667 carriage service provided by - CEA Yunnan 81,517 50,442 other airlines with air tickets - CEA Wuhan Airlines 32,396 28,964 sold 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 (Hong Kong) 3% to 9% of value of tickets Limited sold - 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 EAIEC (34,270) (21,393) 2% for purchase of aircraft, flight, equipment flight equipment spare parts and other fixed assets Ticket reservation service TravelSky Technology (86,311) (71,884) charges for utilisation of Limited computer reservation system Repairs and maintenance CEA Northwest (9,535) - expenses for ground service facilities
I-53 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Repairs and maintenance Shanghai Eastern (25,445) (25,361) expenses or aircraft and Union Aviation engines Wheels & Brakes Overhaul Engineering Co., Ltd. Lease rental income from CEA Wuhan Airlines 38,239 31,209 operating lease of aircraft Lease rental charges for - CEA Northwest (199,188) (69,118) operating lease of aircraft - Nanjing Airlines - (23,348) - CEA Yunnan (86,341) (27,726) 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 Shanghai Eastern (14,850) (3,149) equipment Aviation Equipment Manufacturing Corporation Rental expenses Shanghai Eastern (5,582) (5,945) Aviation Equipment Manufacturing Corporation Investment in China Eastern CEA Holding (5,000) - Air Real Estate Investment Co., Ltd.,a company 95% owned by CEA Holding Investment in an associate, CEA Holding - (43,820) Eastern Aviation Import & Export Co. Ltd., a company 55% owned by CEA Holding
I-54 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Investment in an associate, CEA Holding - (157,500) China Eastern Air Catering Investment Co., Ltd., 55% interests of which is owned by CEA Holding Investment in an associate, CEA Holding - (6,828) Shanghai Dongmei Aviation Travel Co., Ltd., 55% interests of which is owned by CEA Holding
(iv) Other related party arrangements with CEA Northwest/CEA Yunnan 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. I-55 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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. (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 I-56 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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. 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 I-57 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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). 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 =========== ========= ========== ==========
I-58 APPENDIX I 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, a net gain of RMB29,700,000 (2003: loss of RMB315,000) arising from changes in the fair value I-59 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 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. I-60 APPENDIX I FINANCIAL INFORMATION OF THE GROUP SUBSEQUENT SIGNIFICANT EVENTS The Group has entered into various aircraft purchase agreements, details of which are set out in the Company's announcements dated 17th March, 2005, 23rd March, 2005 and 21st April, 2005, its circulars dated 7th April, 2005, 20th May, 2005 and this circular. These agreements are in respect of purchases of five ERJ145 aircraft, five Airbus A319 aircraft, fifteen Airbus A320 series aircraft and two Boeing 747-400 aircraft (i.e. the 747 Aircraft) which were entered into by the Group subsequent to 31st December, 2004, and twenty Airbus A330-300 aircraft and six Boeing 737-700 aircraft (i.e. the 737 Aircraft) which were entered into by the Group prior to 31st December, 2004. The aforesaid agreements except for those in respect of the fifteen Airbus A320 series aircraft and two Boeing 747-400 aircraft (i.e. the 747 Aircraft) have already been included in Note 36(a) of the audited consolidated financial statements of the Group set out in this appendix. On 12th May, 2005, the Company, CEA Holding, [CHINESE CHARACTERS] (China Eastern Air Northwest Company) ("CEA Northwest") [CHINESE CHARACTERS] (China Eastern Air Yunnan Company) ("CEA Yunnan") entered into an acquisition agreement, pursuant to which the Company has conditionally agreed to acquire from CEA Holding certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan for an aggregate acquisition price of RMB985,692,800 (subject to adjustments). The Company has also agreed to assume aggregate liabilities of RMB8,556,199,600 under the acquisition. The acquisition constitutes a very substantial acquisition and a connected transaction of the Company under the Listing Rules, and has been approved by the independent shareholders of the Company at its 2004 annual general meeting held on 30th June, 2005. The conditions precedent under the acquisition agreement have accordingly been fulfilled. Further details of the transaction are set out in the Company's announcements dated 12th May, 2005 and 30th June, 2005 and its circular dated 19th May, 2005. I-61 APPENDIX II CERTAIN ADDITIONAL INFORMATION REQUIRED UNDER THE LISTING RULES INDEBTEDNESS BORROWINGS As at the close of the business on 31st May, 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 413,825 - 9,123,627 9,537,452 Notes payable - - 1,821,929 1,821,929 Long-term bank loans 6,879,124 398,247 2,740,100 10,017,471 Finance lease obligations 8,395,140 - - 8,395,140 Loans from an associate, Eastern Air Group Finance Co., Ltd. - - 315,765 315,765 ---------- ------- ---------- ---------- 15,688,089 398,247 14,001,421 30,087,757 ========== ======= ========== ==========
Secured long-term bank loans and secured short-term bank loans were secured by certain aircraft with an aggregate carrying amount of RMB10,738,905,000. In addition, secured long-term bank loans of approximately RMB1,010,586,000 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 RMB10,414,634,000, long-term bank deposits amounting to RMB1,832,108,000 and the relevant insurance policies and bank guarantees. MATERIAL CAPITAL COMMITMENTS Other than the capital commitments of the Group as at 31st December, 2004 disclosed in Note 36(a) of the audited consolidated financial statements of the Group set out in appendix I to this circular, the Group entered into aircraft purchase agreements with vendors subsequent to 31st December, 2004 and up to the Latest Practicable Date under which the Group has agreed to purchase fifteen Airbus A320 series aircraft as disclosed in its circular dated 20th May, 2005 and two Boeing 747-400 aircraft as mentioned in this circular. II-1 APPENDIX II CERTAIN ADDITIONAL INFORMATION REQUIRED UNDER THE LISTING RULES 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 and, as currently contemplated, will take up fifteen aircraft under the agreement. Details regarding the Company's actual purchase of such fifteen aircraft are however yet to be considered and discussed, and the formal agreement has not been signed up to the Latest Practicable Date. Please also refer to the matters regarding the acquisition of the aviation business of CEA Northwest and CEA Yunnan set out and as contemplated under the paragraph headed "Subsequent significant events" in appendix I to this circular. DISCLAIMER Save as aforesaid and apart from intra-group liabilities and normal trade payables in the ordinary course of business, the Group did not have any outstanding debt securities issued and outstanding or authorized 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 31st May, 2005. SUFFICIENCY OF WORKING CAPITAL The Directors are of the opinion that, after taking into account the Group's present internal resources and available banking facilities, the Group has sufficient working capital for its present requirements for at least 12 months from the date of this circular, having considered the matters set out and as contemplated under the paragraph headed "Subsequent significant events" in appendix I to this circular. TRADING AND FINANCIAL PROSPECTS TRADING PROSPECTS As an aviation enterprise that carries public utility functions, the Group and its operations are closely related to the regional and global political and economic development. Therefore, adverse circumstances such as geopolitical risks and outbreak of unexpected events may cause material II-2 APPENDIX II CERTAIN ADDITIONAL INFORMATION REQUIRED UNDER THE LISTING RULES 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 favorable 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, as 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, as 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 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. 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 be beneficial to the establishment of a healthy and orderly market competition situation. As a result of immense market demand, the Company expects that, Chinese carriers, including the Group, may experience positive revenue growth in 2005 subject to the impact of high aviation fuel price. II-3 APPENDIX II CERTAIN ADDITIONAL INFORMATION REQUIRED UNDER THE LISTING RULES 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 Group have been made up). II-4 APPENDIX III 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 Luo Chaogeng President, Executive - - - 0 - Director Cao Jianxiong Non-executive Director 2,800 A shares - - 2,800 A shares Beneficial owner (Note 1) (Note 1) Wan Mingwu Vice President, - - - 0 - Executive Director Zhong Xiong Non-executive Director 2,800 A shares - - 2,800 A shares Beneficial owner (Note 1) (Note 1) Luo Zhuping Executive Director, 2,800 A shares - - 2,800 A shares Beneficial owner Company secretary (Note 1) (Note 1) Hu Honggao Independent non- - - - 0 - executive Director Peter Lok Independent non- - - - 0 - executive Director
III-1 APPENDIX III GENERAL INFORMATION Wu Baiwang Independent - - - 0 - non-executive Director Zhou Ruijin Independent - - - 0 - non-executive Director Xie Rong Independent - - - 0 - non-executive Director Li Wenxin Chairman of the - - - 0 - Committee Supervisory Ba Shengji Supervisor 2,800 A shares - - 2,800 A shares Beneficial owner (Note 1) (Note 1) Yang Xingen Supervisor - - - 0 - Yang Jie Supervisor - - - 0 - Liu Jiashun Supervisor - - - 0 - Wu Jiuhong Vice President - - - 0 - Yang Xu Vice President 1,000 A shares - - 1,000 A shares Beneficial owner (Note 2) (Note 2) 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 III-2 APPENDIX III GENERAL INFORMATION 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, Luo Chaogeng, Cao Jianxiong, Zhong Xiong, Li Wenxin and Ba Shengji was as at the Latest Practicable Date a director or employee of China Easter Air Holding Company, 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. 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 Air A shares 3,000,000,000 61.64% 90.91% - - Holding Company (unlisted State-ownedlegal person shares) - HKSCC Nominees H shares 1,484,927,163 30.51% - 94.77% 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 1,484,927,163 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 III-3 APPENDIX III GENERAL INFORMATION 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 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:
APPROXIMATE PERCENTAGE OF SUBSIDIARY NAME OF RELEVANT SUBSTANTIAL SHAREHOLDER SHAREHOLDING ---------- ---------------------------------------- ------------ [CHINESE CHARACTERS] [CHINESE CHARACTERS] 49% (Shanghai Technology Aerospace (Singapore Technology Aerospace Company Limited) Limited) [CHINESE CHARACTERS] [CHINESE CHARACTERS] 45% (Eastern Airlines (Shantou) Economic (Shantou Aviation Equipment Group Development Co., Ltd.) Company) [CHINESE CHARACTERS] Aircraft Engineering Investment Ltd. 40% (Shanghai Eastern Aircraft Maintenance Co., Ltd.) [CHINESE CHARACTERS] [CHINESE CHARACTERS] 30% (China Cargo Airlines Co., Ltd.) (China Ocean Shipping (Group) Company) [CHINESE CHARACTERS] [CHINESE CHARACTERS] 30% (Shanghai Eastern Logistics Co., Ltd.) (China Ocean Shipping (Group) Company) [CHINESE CHARACTERS] [CHINESE CHARACTERS] (China Eastern Airlines Jiangsu Co., Ltd.) (Jiangsu Provincial Guoxin Asset 23.89% 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 directly or indirectly interested in 10% or more of the nominal value of any class of share III-4 APPENDIX III GENERAL INFORMATION capital carrying rights to vote in all circumstances at general meetings of any other member of the 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. Mr. Luo Weide, the Company's Chief Financial Officer having a professional accounting qualification recognised in the People's Republic of China, 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 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 (as defined in the Listing Rules) 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 Group, or are proposed III-5 APPENDIX III GENERAL INFORMATION to be acquired or disposed of by or leased to any member of the 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 Group. LITIGATION 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. MATERIAL CONTRACTS As mentioned in the paragraph headed "Subsequent significant events" in appendix I to this circular, on 12th May, 2005, the Company, CEA Holding, [CHINESE CHARACTERS] (China Eastern Air Northwest Company) ("CEA Northwest") and [CHINESE CHARACTERS] (China Eastern Air Yunnan Company) ("CEA Yunnan") entered into an acquisition agreement, pursuant to which the Company has conditionally agreed to acquire from CEA Holding certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan for an aggregate acquisition price of RMB985,692,800 (subject to adjustments). The Company has also agreed to assume aggregate liabilities of RMB8,556,199,600 under the acquisition. The acquisition constitutes a very substantial acquisition and a connected transaction of the Company under the Listing Rules, and has been approved by the independent shareholders of the Company at its 2004 annual general meeting held on 30th June, 2005. The conditions precedent under the acquisition agreement have accordingly been fulfilled. Further details of the transaction are set out in the Company's announcement dated 12th May, 2005 and 30th June, 2005 and its circular dated 19th May, 2005. Save as already disclosed or otherwise previously announced, no material contract (not being contract entered into in the ordinary course of business) has been entered into by any member of the 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 and public holidays) from the date of this circular: III-6 APPENDIX III GENERAL INFORMATION (i) the articles of association of the Company; (ii) the Company's 2002, 2003 and 2004 annual reports; (iii) the acquisition agreement dated 12th May, 2005 as referred to in the paragraph headed "Miscellaneous - Material contracts" in this appendix; and (iv) the Company's circulars dated 13th January, 2005 (regarding purchase of six Boeing 737-700 aircraft (i.e. the 737 Aircraft) by the Company), 7th April, 2005 (regarding purchase of five Airbus A319 aircraft by the Company and five ERJ145 aircraft by China Eastern Airlines Jiangsu Co., Ltd.), 19th May, 2005 (regarding acquisition by the Company of certain assets and liabilities relating to the aviation businesses of CEA Northwest and CEA Yunnan and certain continuing connected transactions) and 20th May, 2005, (regarding purchase of certain Airbus aircraft by the Company). III-7