20-F

As filed with the Securities and Exchange Commission on [June 30, 2003]

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	Commission file number: 1-14660

(Exact name of Registrant as specified in its charter)

CHINA SOUTHERN AIRLINES COMPANY LIMITED

(Translation of Registrant’s name into English)

THE PEOPLE’S REPUBLIC OF CHINA
(Jurisdiction of incorporation or organization)

BAIYUN INTERNATIONAL AIRPORT
GUANGZHOU
PEOPLE’S REPUBLIC OF CHINA

(Address of principal executive offices)

     Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class:	Name of each exchange on which registered:
Ordinary H Shares of par value RMB1.00 per share	New York Stock Exchange, Inc.
represented by American Depositary Shares

          Securities registered or to be registered pursuant to Section 12(g) of the Act: None

          Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

          Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 2,200,000,000 ordinary Domestic Shares of par value RMB1.00 per share and 1,174,178,000 ordinary H Shares of par value RMB1.00 per share were issued and outstanding as of December 31, 2002.

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes   x  No   o

          Indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17   o  Item 18   x

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS
INTRODUCTORY NOTE
GLOSSARY OF AIRLINE INDUSTRY TERMS
PART I
	ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
	ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
	ITEM 3. KEY INFORMATION
		Selected Financial Data
		Capitalization and Indebtedness
		Reasons for the Offer and Use of Proceeds
		Risk Factors
	ITEM 4. INFORMATION ON THE COMPANY
		History and Development of the Company
		Business Overview
		Organizational Structure
		Property, Plant and Equipment
	ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
		Critical Accounting Policies
		Overview
		Certain Financial Information and Operating Data by Geographic Region
		Operating Results
		Liquidity and Capital Resources
		Contractual Obligations and Commercial Commitments
	ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
		Directors and Senior Management
		Compensation
		Board Practices
		Employees
		Share Ownership
	ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
		Major Shareholders
		Related Party Transactions
	ITEM 8. FINANCIAL INFORMATION
		Consolidated Statements and Other Financial Information
		Significant Changes
	ITEM 9. THE OFFER AND LISTING
		Offer and Listing details
		Plan of Distribution
		Markets
		Selling Shareholders
		Dilution
		Expenses of the Issue
	ITEM 10. ADDITIONAL INFORMATION
		Share Capital
		Memorandum and Articles of Association
		Material Contracts
		Exchange Controls
		Taxation
		Dividends and paying Agents
		Statement by Experts
		Documents on Display
		Subsidiary Information
	ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
	ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
	ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
PART III
	ITEM 15. [RESERVED]
	ITEM 16. [RESERVED]
PART IV
	ITEM 17. FINANCIAL STATEMENTS
	ITEM 18. FINANCIAL STATEMENTS
	ITEM 19. EXHIBITS
SIGNATURES
Ex-1 Articles of Association
Ex-4.1 Form of Director's Service Agreement
Ex-4.2 Form of Non-Exclusive Director's Svc. Agmt
Ex-8 Subsidiaries of Company
EX-10.1 Cert Pursuant to 18 USC Section 1350

TABLE OF CONTENTS

China Southern Airlines Company Limited

		Page
Forward-Looking Statements			1
Introductory Note			1
Glossary of Airline Industry Terms			2
PART I
Item 1.     Identity of Directors, Senior Management and Advisers			3
Item 2.     Offer Statistics and Expected Timetable			3
Item 3.     Key Information			3
	Selected Financial Data		3
	Capitalization and Indebtedness		7
	Reasons for the Offer and Use of Proceeds		7
	Risk Factors		7
Item 4.     Information on the Company			11
	History and Development of the Company		11
	Business Overview		12
	Organizational Structure		30
	Property, Plant and Equipment		32
Item 5.     Operating and Financial Review and Prospects			33
	Critical Accounting Policies		33
	Overview		34
	Certain Financial Information and Operating Data by Geographic Region		34
	Operating Results		36
	Liquidity and Capital Resources		41
	Contractual Obligations and Commercial Commitments		43
Item 6.     Directors, Senior Management and Employees			43
	Directors and Senior Management		43
	Compensation		45

i

		Page
	Board Practices		45
	Employees		46
	Share Ownership		47
Item 7.     Major Shareholders and Related Party Transactions			47
	Major Shareholders		47
	Related Party Transactions		48
Item 8.     Financial Information			50
	Consolidated Statements and Other Financial Information		50
	Significant Changes		51
Item 9.     The Offer and Listing			51
	Offer and Listing Details		52
	Plan of Distribution		52
	Markets		52
	Selling Shareholders		52
	Dilution		52
	Expenses of the Issue		52
Item 10.     Additional Information			52
	Share Capital		52
	Memorandum and Articles of Association		52
	Material Contracts		57
	Exchange Controls		57
	Taxation		57
	Dividends and Paying Agents		58
	Statement by Experts		58
	Documents on Display		58
	Subsidiary Information		59
Item 11.     Quantitative and Qualitative Disclosures About Market Risk			59
Item 12.     Description of Securities other than Equity Securities			60
PART II

ii

	Page
Item 13.     Defaults, Dividend Arrearages and Delinquencies		60
Item 14.     Material Modifications to the Rights of Security Holders and Use of Proceeds		60
PART III
Item 15.     [Reserved]		62
Item 16.     [Reserved]		62
PART IV
Item 17.     Financial Statements		62
Item 18.     Financial Statements		62
Item 19.     Exhibits		62
Signatures		64

iii

FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements. These statements appear in a number of different places in this Annual Report. A forward looking statement is usually identified by the use in this Annual Report of certain terminology such as “estimates”, “projects”, “expects”, “intends”, “believes”, “plans”, “anticipates”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for the Company’s future operations, forecasts of future costs and expenditures, evaluation of market conditions, the outcome of legal proceedings (if any), the adequacy of reserves, or other business plans. You are cautioned that such forward-looking statements are not guarantees and involve risks, assumptions and uncertainties. The Company’s actual results may differ materially from those in the forward-looking statements due to risks facing the Company or due to actual facts differing from the assumptions underlying those forward-looking statements.

Some of these risks and assumptions, in addition to those identified under Item 3, “Key Information – Risk Factors,” include:

- general economic and business conditions, including changes in interest rates;

- prices and other economic conditions;

- natural phenomena;

- actions by government authorities, including changes in government regulation;

- the Company’s relationship with CSAHC (formerly the “SA Group”);

- uncertainties associated with legal proceedings;

- technological development;

- future decisions by management in response to changing conditions;

- the Company’s ability to execute prospective business plans; and

- misjudgments in the course of preparing forward-looking statements.

The Company advises you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to the Company, the Group, and persons acting on their behalf.

INTRODUCTORY NOTE

In this Annual Report, unless the context indicates otherwise, the “Company” means China Southern Airlines Company Limited, a joint stock company incorporated in China on March 25, 1995, the “Group” means the Company and its consolidated subsidiaries, and CSAHC means China Southern Air Holding Company, the Company’s parent company which holds a 65.2% controlling interest in the Company (Southern Airlines (Group) changed its official name to China Southern Air Holding Company on October 11, 2002.).

References to “China” or the “PRC” are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan. References to “Renminbi” or “RMB” are to the currency of China, references to “U.S. dollars”, “$” or “US$” are to the currency of the United States of America (the “U.S.” or “United States”), and reference to “HK$” is to the currency of Hong Kong. Reference to the “Chinese Government” is to the national government of China. References to “Hong Kong” or “Hong Kong SAR” are to the Hong Kong Special Administrative Region of the People’s Republic of China. References to “Macau” or “Macau SAR” are to the Macau Special Administrative Region of the People’s Republic of China.

The Company presents its financial statements in Renminbi. The consolidated financial statements of the Company as of December 31, 2001 and 2002, and the consolidated financial statements for the years ended December 31, 2000, 2001 and 2002, together with the notes thereto (collectively, the “Financial Statements”), have been prepared in accordance with International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board. IFRS includes International Accounting Standards (“IAS”) and related interpretations. IFRS differs in certain material respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). See Note 31 to the Financial Statements for a description of the material differences between IFRS and U.S. GAAP as of December 31 of 2001 and 2002 and for each of the years in the three-year period ended December 31, 2002 as they relate to the Company.

Solely for the convenience of the readers, this Annual Report contains translations of certain Renminbi amounts into U.S. dollars at the rate of US$1.00 = RMB8.2773, which is the average of the buying and selling rates as quoted by the People’s Bank of China at the close of business on December 31, 2002. No representation is made that the Renminbi amounts or U.S. dollar amounts included in this Annual Report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. Any discrepancies in the tables included herein between the amounts listed and the totals are due to rounding.

1

GLOSSARY OF AIRLINE INDUSTRY TERMS

In this Annual Report, unless the context indicates otherwise, the following terms shall have the respective meanings set forth below.

Capacity Measurements
“available seat kilometers” or “ASKs”	the number of seats made available for sale multiplied by the kilometers flown
“available ton kilometers” or “ATKs”	the number of tons of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometers flown
Traffic Measurements
“revenue passenger kilometers” or “RPKs”	the number of revenue passengers carried multiplied by the kilometers flown
“cargo ton kilometers”	the cargo load in tons multiplied by the kilometers flown
“revenue ton kilometers” or “RTKs”	the load (passenger and cargo) in tons multiplied by the kilometers flown
Yield Measurements
“passenger yield”	revenue from passenger operations divided by RPKs
“cargo yield”	revenue from cargo operations divided by cargo ton kilometers
“average yield”	revenue from airline operations (passenger and cargo) divided by RTKs
“ton”	a metric ton, equivalent to 2,204.6 pounds
Load Factors
“passenger load factor”	RPKs expressed as a percentage of ASKs
“overall load factor”	RTKs expressed as a percentage of ATKs
“breakeven load factor”	the load factor required to equate scheduled traffic revenue with operating costs assuming that total operating surplus is attributable to scheduled traffic operations
Utilization
“utilization rate”	the actual number of flight hours per aircraft per operating day
Equipment
“rotables”	aircraft parts that are ordinarily repaired and reused
“expendables”	aircraft parts that are ordinarily used up and replaced with new parts

2

PART I

ITEM 1.          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

Not applicable.

ITEM 2.          OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.

ITEM 3.          KEY INFORMATION.

Selected Financial Data

The following selected consolidated income statement data for each of the years in the five-year period ended December 31, 2002 and consolidated balance sheet data for each of the years in the five-year period ended December 31, 2002 have been derived from the consolidated financial statements of the Company. Such consolidated financial statements have been audited by KPMG, independent certified public accountants, and prepared in accordance with IFRS on the basis that the Company with all its present divisions and subsidiaries had been so constituted during the relevant periods. IFRS differs in certain material respects from U.S. GAAP. See Note 31 to the Financial Statements for a description of the material differences related to the Group between IFRS and U.S. GAAP as of December 31, 2001 and 2002 and for each of the years in the three-year period ended December 31, 2002. The following information should be read in conjunction with, and is qualified in its entirety by, the Financial Statements of the Group.

								Year ended December 31,
		1998			1999			2000			2001			2002			2002
		RMB			RMB			RMB			RMB			RMB			US$
					(in million, except per share data)
Income Statement Data:
IFRS:
	Operating revenue		11,849.4			13,299.6			15,178.3			16,879.7			18,018.6			2,176.9
	Operating expenses		11,259.4			11,449.7			13,996.2			15,479.0			15,992.5			1,932.1
	Operating income		590.0			1,849.9			1,182.1			1,400.7			2,026.1			244.8
	Equity (loss) income of affiliated companies		(1.8	)		36.1			45.9			53.0			37.0			4.5
	Equity loss of jointly controlled entities		—			—			—			(4.0	)		(3.4	)		(0.4	)
	Gain (loss) on sale of fixed assets		182.9			(18.7	)		372.6			(55.9	)		170.7			20.6
	Interest expense		(1,197.4	)		(1,192.2	)		(1,074.2	)		(933.7	)		(959.2	)		(115.9	)
	Exchange (loss) gain, net		(366.3	)		(426.5	)		318.5			296.8			(175.4	)		(21.2	)
	Other, net		205.2			119.9			86.3			38.4			43.3			5.2
	(Loss) income before taxation and minority interests		(587.4	)		368.5			931.2			795.3			1,139.1			137.6
	Taxation		178.6			(128.0	)		(338.9	)		(320.5	)		(398.2	)		(48.1	)
	Minority interests		(105.8	)		(158.1	)		(90.5	)		(134.6	)		(165.1	)		(19.9	)
	Net (loss) income		(514.6	)		82.4			501.8			340.2			575.8			69.6
	Basic (loss) earnings per share		(0.15	)		0.02			0.15			0.10			0.17			0.021
	Basic (loss) earnings per ADS		(7.63	)		1.22			7.44			5.04			8.53			1.03
U.S. GAAP:
	Net (loss) income		(582.2	)		370.3			354.4			430.7			474.0			57.3
	Basic (loss) earnings per share		(0.17	)		0.11			0.11			0.13			0.14			0.017
	Basic (loss) earnings per ADS		(8.63	)		5.49			5.25			6.38			7.02			0.85

3

						December 31,
		1998		1999		2000		2001		2002		2002
		RMB		RMB		RMB		RMB		RMB		US$
						(in million)
Balance Sheet Data:
IFRS:
	Cash and cash equivalents		4,103.7		4,588.4		4,197.5		2,817.9		3,771.0		455.6
	Other current assets		2,080.7		1,715.2		1,691.9		1,560.5		1,834.8		221.7
	Fixed assets, net		22,904.3		24,211.2		23,282.1		22,352.2		26,920.8		3,252.4
	Total assets		32,083.3		32,557.7		30,924.0		30,653.1		37,188.0		4,492.8
	Notes payable, including current portion of long term notes payable		666.8		613.3		783.1		2,177.5		5,240.7		633.1
	Current installments of obligations under capital leases		1,120.0		1,999.7		1,776.2		1,451.9		1,566.7		189.3
	Notes payable, excluding current portion		5,032.6		4,424.2		3,788.7		3,627.6		5,835.4		705.0
	Obligations under capital leases, excluding current installments		11,845.3		11,490.9		9,416.3		7,691.6		6,631.8		801.2
	Shareholders’ equity		8,297.3		8,379.7		8,881.4		9,221.7		9,613.2		1,161.4
U.S. GAAP:
	Shareholders’ equity		7,857.1		8,227.4		8,527.3		8,958.0		9,287.3		1,122.0

     Selected Operating Data

     The following selected operating data of the Group for the five years ended December 31, 2002 have been derived from financial statements prepared in accordance with IFRS and other data provided by the Group and have not been audited. In accordance with Order No. 88 of the General Administration of Civil Aviation of China (also known as the Civil Aviation Administration of China) (the “CAAC”), titled Measures for the Administration of China’s Civil Aviation Statistics, new statistical standards have been implemented with effect from January 1, 2001. The Group has not adjusted the operating data for the corresponding period in 1998 and 1999 according to the new standards. The main differences between the two sets of standards are set forth below:

1.	The standard passenger weight has been changed from 75 kg per person to 90 kg per person (luggage weight included). Luggage weight will not be separately calculated;
2.	Number of scheduled flights has been changed to number of takeoffs;
3.	Any passenger carried on flights which fly international routes will be counted as one domestic passenger and one international passenger; however, any passenger carried on an irregular flight will only be counted once; any cargo carried on flights which fly international routes will be counted as one domestic and one international cargo; however, cargo carried on an irregular flight will only be counted once.

     Apart from the data set out in the table below, the operating data and the profit analysis and comparison for the years 2001 and 2002 below is calculated and disclosed in accordance with the new statistical standards. See “Glossary of Airline Industry Terms” at the front of this Annual Report for definitions of certain terms used herein.

					Year ended December 31,
			1998		1999		2000		2001		2002
Capacity
ASK (million)
	— Domestic			23,417		24,900		28,345		31,393		33,753
	— Hong Kong regional			1,673		1,791		1,744		1,690		1,746
	— International			5,060		5,155		5,742		6,981		8,746
		Total		30,150		31,846		35,831		40,064		44,245
ATK (million)
	— Domestic			2,709		2,865		3,322		3,622		3,924
	— Hong Kong regional			206		214		198		185		193
	— International			667		683		1,087		1,317		1,798

4

					Year ended December 31,
			1998		1999		2000		2001		2002
		Total		3,582		3,762		4,607		5,124		5,915
Kilometers flown (thousand)				170,188		182,200		209,431		234,051		258,379
Hours flown (thousand)				239		287		326		365		405
Number of flights
	— Domestic			121,902		126,120		—		—		—
	— Hong Kong regional			12,477		13,460		—		—		—
	— International			5,930		6,600		—		—		—
		Total		140,309		146,180		—		—		—
Number of landing and take-offs
	— Domestic			—		—		165,726		183,651		194,776
	— Hong Kong regional			—		—		14,255		13,712		13,891
	— International			—		—		8,861		10,698		13,990
		Total		—		—		188,842		208,061		222,657
Traffic
RPK (million)
	— Domestic			14,637		14,511		16,974		19,447		22,092
	— Hong Kong regional			972		1,106		1,074		1,060		1,081
	— International			2,652		3,068		3,605		4,550		5,767
		Total		18,261		18,685		21,653		25,057		28,940
RTK (million)
	— Domestic			1,487		1,518		1,941		2,217		2,532
	— Hong Kong regional			92		106		107		105		108
	— International			336		379		565		712		974
		Total		1,915		2,003		2,613		3,034		3,614
Passengers carried (thousand)
	— Domestic			12,985		12,769		14,450		16,499		18,535
	— Hong Kong regional			1,287		1,434		1,444		1,409		1,369
	— International			780		909		957		1,213		1,589
		Total		15,052		15,112		16,851		19,121		21,493
Cargo and mail carried (tons)				348,041		390,750		353,000		398,000		470,000
Load Factors
Passenger load factor (RPK/ASK) (%)
	— Domestic			62.5		58.3		59.9		61.9		65.5
	— Hong Kong regional			58.1		61.8		61.6		62.7		61.9
	— International			52.4		59.5		62.8		65.2		65.9
		Total		60.6		58.7		60.4		62.5		65.4
Overall load factor (RTK/ATK) (%)
	— Domestic			54.9		53.0		58.4		61.2		64.5
	— Hong Kong regional			44.9		49.5		54.0		56.8		55.8
	— International			50.4		55.5		52.0		54.1		54.2
		Total		53.5		53.2		56.7		59.2		61.1
Breakeven load factor (%)				52.3		47.5		54.0		55.6		55.9
Yield
Yield per RPK (RMB)
	— Domestic			0.58		0.65		0.62		0.62		0.55
	— Hong Kong regional			1.14		1.00		1.06		1.06		0.98
	— International			0.40		0.42		0.43		0.41		0.42
		Total		0.58		0.63		0.61		0.60		0.54
Yield per cargo and mail ton kilometers				1.72		1.63		2.13		1.76		1.73

5

					Year ended December 31,
			1998		1999		2000		2001		2002
Yield per RTK (RMB)
	— Domestic			6.15		6.69		5.90		5.83		5.21
	— Hong Kong regional			12.59		11.00		11.19		11.26		10.36
	— International			3.71		3.96		3.63		3.31		3.25
		Total		6.04		6.40		5.63		5.43		4.84
Fleet
	— Boeing			81		81		89		91		102
	— Other			21		20		20		20		20
Total aircraft in service at period end				102		101		109		111		122
Overall utilization rate (hours per day)				7.7		8.1		8.7		9.1		9.8
Financial
Operating cost per ASK (RMB)				0.37		0.36		0.39		0.39		0.36
Operating cost per ATK (RMB)				3.14		3.04		3.04		3.02		2.70

     Exchange Rate Information

     The following table sets forth certain information concerning exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”), between Renminbi and U.S. dollars for the five most recent financial years.

			Average(1)
	Period
Period	End		(RMB per US$)		High		Low
Annual Exchange Rate
1998		8.2789		8.2789		8.2802		8.2770
1999		8.2793		8.2793		8.2917		8.2669
2000		8.2781		8.2784		8.2799		8.2768
2001		8.2766		8.2766		8.2910		8.2642
2002		8.2773		8.2773		8.2897		8.2152

     The following table sets out the range of high and low exchange rates, based on the Noon Buying Rate, between Renminbi and U.S. dollars, for the following periods.

Period	High		Low
Monthly Exchange Rate
December 2002		8.2775		8.2770
January 2003		8.2772		8.2766
February 2003		8.2775		8.2768
March 2003		8.2775		8.2770
April 2003		8.2774		8.2769
May 2003		8.2771		8.2768

     On June 20, 2003, the noon rate of exchange, as reported by the Federal Reserve Bank of New York, was RMB8.2770 per U.S. dollar.

(1) Determined by averaging the rates on the last business day of each month during the relevant period.

     Dividend Payments

     No interim dividend was paid during the year ended December 31, 2002. The Board of Directors of the Company does not recommend the payment of a final dividend in respect of the year ended December 31, 2002. A final dividend of RMB0.02 (before tax) per share totaling RMB67.5 million (before tax) in respect of financial year 2001 was paid to shareholders during the year.

6

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

Risk Factors

     Risks relating to the Company

     Government ownership and control of the Company

     All Chinese airlines are wholly- or majority-owned either by the Chinese Government or by provincial or municipal governments in China. CSAHC, an entity wholly-owned by the Chinese Government, holds and exercises the rights of ownership of all of the Domestic Shares or 65.2% of the equity of the Company. The interests of the Chinese Government in the Company and in other Chinese airlines may conflict with the interests of the holders of the ADSs and the H Shares. The public policy considerations of the Chinese Government in regulating the Chinese commercial aviation industry may also conflict with its indirect ownership interest in the Company.

     High operating leverage and foreign exchange exposure

     The airline industry is generally characterized by a high degree of operating leverage. In addition, due to high fixed costs, including payments made in connection with the Company’s aircraft leases, the expenses relating to the operation of any flight do not vary proportionately with the number of passengers carried, while revenues generated from a flight are directly related to the number of passengers carried and the fare structure of such flight. Accordingly, a decrease in revenues could result in a proportionately higher decrease in net income. Moreover, because the Company has substantial obligations denominated in foreign currencies, its results of operations are significantly affected by fluctuations in foreign exchange rates, particularly for the US dollar and the Japanese Yen. The Company recognized a net exchange gain of RMB297 million for 2001 and incurred a net exchange loss of RMB175 million for 2002, as a result of yen fluctuations. A majority of these exchange gain/loss were unrealized in nature.

     Potential conflicts of interest

     CSAHC will continue to be the controlling shareholder of the Company and CSAHC and certain of its affiliated companies will continue to provide certain important services to the Company, including the import and export of aircraft spare parts and other flight equipment, housing services and pension and financial services. In addition, Mr. Yan Zhi Qing, the Chairman of the Board of Directors of the Company (“Board of Directors”), also serves as the President of CSAHC. The interests of CSAHC may conflict with those of the Company. In addition, any disruption of the provision of services by the affiliated companies or a default by CSAHC of its obligations owed to the Company could affect the Company’s operations and financial condition. In particular, as part of its cash management system, the Company periodically places significant amount of demand deposits to Southern Airlines Group Finance Company Limited (“SA Finance”), a PRC authorized financial institution controlled by CSAHC and an affiliated company of the Group. As a result, the Company’s deposits with SA Finance are subject to the risks associated with the business of SA Finance over which the Company does not exercise control. As of December 31, 2001 and 2002, the Group had short-term deposits of RMB1,341 million and RMB901 million, respectively, with SA Finance.

     Certain transactions between the Company and CSAHC or its affiliates (as defined in the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Hong Kong Listing Rules”)) will constitute connected transactions of the Company under the Hong Kong Listing Rules and, unless exemptions are applicable or waivers are granted, will be subject to disclosure requirements and/or independent shareholders’ approval in a general meeting.

     Management reporting practices

     The Company’s management and other employees have experience operating the Company’s businesses since such businesses were conducted by CSAHC. However, by comparison to other long-established international airlines, the Company has fewer and less sophisticated financial, management and other reporting and planning practices.

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     Risks relating to certain real property

     Although systems for registration and transfer of land use rights and related real property interests in China have been implemented, such systems do not yet comprehensively account for all land and related property interests. The land in Guangzhou on which the Company’s headquarters buildings and related aircraft maintenance and other facilities are located and the buildings that the Company uses at its route base in Wuhan, Haikou and Zhengzhou are leased by the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and, as a consequence, the lease agreements between CSAHC and the Company for such land have not been registered with the relevant authorities. As a result, such lease agreements may not be enforceable. There are certain other parcels of land and buildings owned or used by the Company and the subsidiaries that lack adequate documentation. Lack of adequate documentation for land use rights and ownership of buildings subjects the Company to challenges and claims by third parties with respect to the Company’s use of such land and buildings, and impairs the ability of the Company to dispose of or mortgage such land use rights and buildings.

     The Company has been occupying all of the land and buildings described above without challenge. CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancy of the land in Guangzhou and certain related buildings and facilities. However, such assurance does not constitute formal evidence of CSAHC’s right to occupy such lands, buildings and facilities, or the right to transfer, mortgage or lease such real property interests. The Company cannot predict the magnitude of the adverse effect on its operations if its use of any one or more of these parcels of land or buildings were successfully challenged. CSAHC has agreed to indemnify the Company and Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”), the Company’s affiliated company, against any loss or damage caused by any challenge of, or interference with, the use by the Company and GAMECO of any of their respective land and buildings.

     Risks associated with Hong Kong regional routes

     The Company’s Hong Kong regional routes benefit from traffic originating in Taiwan. The Company’s Hong Kong regional routes may be materially adversely affected if direct flights between Taiwan and Mainland China were permitted in the future. In such event, Xiamen Airlines Company Limited (“Xiamen Airlines”), the Company’s subsidiary, may apply for route rights for direct flights between Taiwan and mainland China, due partly to the proximity to Taiwan of Fujian province, where Xiamen Airlines are based. However, there can be no assurance that sufficient routes and flights between destinations in Taiwan and mainland China could be obtained by Xiamen Airlines, if at all, or as to the yields on these routes and flights.

     Risks Relating to the Chinese Commercial Aviation Industry

     Impact of the Recent Outbreak of Severe Acute Respiratory Syndrome (“SARS”)

     The outbreak of SARS in the PRC, Hong Kong, Singapore and Taiwan has brought about uncertainty to the global economy. In particular, the outbreak of SARS in the PRC affected the domestic demand and has an overdue impact on the overall economy of the PRC.

     Based on the currently available information and certain historical figures of the Group,

(i)	the average revenue passenger kilometers (RPK) of the Group in May 2003 decreased by 73.48% compared to April 2003, or by 83.50% compared to the same period last year; and
(ii)	the total number of passengers of the Group in May 2003 decreased by 82.60% compared to the same period last year.

     In response to the adverse change in operational environment of the Group brought about by the outbreak of SARS, the Group has implemented various continuing measures to adjust its operational capacity accordingly, which include negotiating with aircraft manufacturers to explore the possibility of postponing the delivery date of new aircraft and requesting its staff to take leave at a reduced salary on rotation. In addition, the Group has continued its efforts in fully implementing the precautionary measures in accordance with the general guidelines issued by the Hygiene Department of the Chinese Government, in order to tackle the potential spread of SARS on its airlines and at all contact points with its passenger.

     Government regulation

     The Company’s ability to implement its business strategy will continue to be affected by regulations and policies issued or implemented by the CAAC, which encompass substantially all aspects of the Chinese commercial aviation industry, including the approval of

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domestic, Hong Kong regional and international route allocation, air fares, aircraft acquisition, jet fuel prices and standards for aircraft maintenance, airport operations and air traffic control. Such regulations and policies limit the flexibility of the Company to respond to market conditions, competition or changes in the Company’s cost structure. The implementation of specific CAAC policies could from time to time adversely affect the Company’s operations. The CAAC has confirmed in writing that the Company will be treated equally with other Chinese airlines with respect to certain matters regulated by the CAAC. Nevertheless, there can be no assurance that the CAAC will, in all circumstances, apply its regulations and policies in a manner that results in equal treatment of all airlines that are similarly situated.

     Jet fuel supply and costs

     The availability and cost of jet fuel have a significant impact on the Group’s results of operations. The Group’s jet fuel costs for 2002 accounted for 22.0% of its operating expenses. All of the domestic jet fuel requirements of Chinese airlines (other than at the Shenzhen, Zhuhai and Sanya airports) must be purchased from the exclusive providers, China Aviation Oil Supplies Company (the “CAOSC”) and Bluesky Oil Supplies Company, companies controlled and supervised by the CAAC. Chinese airlines may also purchase their jet fuel requirements at the Shenzhen, Zhuhai and Sanya airports from joint ventures in which the CAOSC is a partner. Jet fuel obtained from the CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by the CAOSC from time to time with the approval of the CAAC and the pricing department of the State Planning Commission based on market conditions and other factors. As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines. Prior to 1994, domestic jet fuel prices were generally below international jet fuel prices. Since then, however, domestic jet fuel price from CAOSC has always been higher than international jet fuel prices, often creating tension in fuel supply. In addition, jet fuel shortages have occurred in China and, on limited occasions before 1993, required the Company to delay or cancel flights. Although such shortages have not materially affected the Company’s results of operations since 1993, there can be no assurance that such shortage will not occur in the future. If such shortage occurs in the future and the Company is forced to delay or cancel flights due to fuel shortage, its operational reputation among passengers and results of operations may suffer.

     Infrastructure limitations

     The rapid increase in air traffic volume in China in recent years has put pressure on many components of the Chinese commercial aviation industry, including China’s air traffic control system, the availability of qualified flight personnel and airport facilities. Airlines, such as the Company, which have route networks that emphasize short- to medium-haul routes are generally more affected by insufficient aviation infrastructure in terms of on-time performance and high operating costs due to fuel inefficiencies resulting from the relatively short segments flown, as well as the relatively high proportion of time on the ground during turnaround. All of these factors may adversely affect the perception of the service provided by an airline and, consequently, the airline’s operating results. In recent years, the CAAC has placed increasing emphasis on the safety of Chinese airline operations and has implemented measures aimed at improving the safety record of the industry. The ability of the Company to increase utilization rates and to provide safe and efficient air transportation in the future will depend in part on factors such as the improvement of national air traffic control and navigation systems and ground control operations at Chinese airports, which factors are beyond the control of the Company.

     Competition

     The CAAC’s extensive regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless, competition has become increasingly intense in recent years due to a number of factors, including relaxation of certain regulations by the CAAC, and an increase in the capacity, routes and flights of Chinese airlines. Competition in the Chinese commercial aviation industry has led to widespread price-cutting practices that do not in all respects comply with applicable regulations. The CAAC has just begun to monitor these activities and has imposed fines on several airlines, including the Company and other major airlines. However, until the interpretation of these CAAC regulations has been finalized and strictly enforced, discounted tickets from competitors will continue to have an adverse effect on the Company’s sales.

     The Company faces varying degrees of competition on its Hong Kong regional routes from certain Chinese airlines and Dragon Air and on its international routes, primarily from non-Chinese airlines, most of which have significantly longer operating histories, substantially greater financial and technological resources and greater name recognition than the Company. In addition, the public’s perception of the safety and service records of Chinese airlines could adversely affect the Company’s ability to compete against its Hong Kong regional and international competitors. Many of the Company’s international competitors have larger sales networks and participate in reservation systems that are more comprehensive and convenient than those of the Company, or engage in promotional activities, such as International Alliance programs, that may enhance their ability to attract international passengers.

     Limitation on foreign ownership

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     Chinese Government policies limit foreign ownership in Chinese airlines. Under these policies, the percentage ownership of the Company’s total outstanding ordinary shares held by investors in Hong Kong and any country outside China (“Foreign Investors”) may not in the aggregate exceed 49%. Currently, 34.8% of the total outstanding ordinary shares of the Company is held by Foreign Investors. As a result of this limitation on foreign ownership, the Company will have no meaningful access to the international equity capital markets unless the restriction on foreign ownership of A Share is lifted. Currently A Shares are domestic shares listed or to be listed on a Chinese stock exchange.

     Consolidation and Restructuring

     In the second half of 2000, the CAAC announced a restructuring plan with respect to the PRC aviation industry. Pursuant to such restructuring plan, domestic airlines are directed to consolidate, on a voluntary basis, into three major airline groups in China: CSAHC, China National Aviation Holding Company (formerly, the “Air China Group”) and China Eastern Air Holding Group (formerly, the “Eastern Air Group”). After CSAHC informed the Company that CSAHC will participate in such restructuring plan, the Company announced that it will also participate in such consolidation and restructuring pursuant to the CAAC directives. The possible mergers of domestic airlines and other restructuring and consolidation activities pursuant to the CAAC restructuring plan may involve uncertainties and risks over a long period of time, including the following:

- failure to achieve the anticipated synergies, cost savings or revenue enhancing opportunities resulting from the restructuring activities;

- diversion of management’s attention from existing business concerns and other business opportunities of the Group;

- difficulty in integrating the assets and business of other airlines, including its employees, corporate culture, managerial systems and processes, business information systems and services;

- difficulty in exercising control and supervision over various new operations within the Group;

- failure to retain key personnel; and

- increase in financial pressure due to assumption of recorded/unrecorded liabilities of the acquired businesses.

     The inability to manage additional businesses or integrate successfully the acquired businesses without substantial expense, delay or other operational or financial problems, or the occurrence of one or more of the events enumerated above, could materially adversely affect the Group’s financial condition and results of operations.

     Risks relating to the PRC

     Foreign exchange risks

     Renminbi is not a freely convertible currency, and the Company’s ability to obtain or retain foreign currencies is subject to regulation in China. Limitations on the availability of foreign exchange could have a material adverse effect on the Company’s operations and financial condition, particularly in light of the Company’s substantial foreign currency obligations.

     The value of Renminbi is subject to changes in Chinese Government policies and depends to a large extent on China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rates for the conversion of Renminbi to US dollars have been stable. There can be no assurance, however, that such rates will not be volatile or that there will be no further devaluation of the Renminbi against the foreign currencies in which the Company’s obligations are denominated, principally the US dollar and the Japanese Yen. Based on the Company’s foreign currency denominated obligations as of December 31, 2002, a 1% change in the exchange rate between the Renminbi and the US dollar, or between the Renminbi and Japanese Yen, would have resulted in an unrealized gain or loss of RMB119 million (US$14 million). As the Company is not able to hedge effectively against the devaluation of the Renminbi other than by retaining its foreign exchange-denominated earnings and receipts to the extent permitted by applicable law, any future devaluation in the Renminbi could adversely affect the Company’s results of operations and financial condition. The Company’s results of operations and financial condition may also be affected by changes in the value of currencies other than the Renminbi in which the Company’s earnings and obligations are denominated.

     Developing legal system

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     The Chinese legal system is based on written statutes and is a system, unlike common law systems, in which decided legal cases have little precedential value. In 1979, China began to promulgate a more comprehensive system of laws. On December 29, 1993, the Chinese National People’s Congress promulgated the Company Law, which became effective on July 1, 1994. In August 1994, pursuant to the Company Law, the PRC State Council issued the PRC Special Regulations on Overseas Offering and Listing of Shares by Companies Limited by Shares to regulate joint stock companies that offer and list their shares overseas. These laws, regulations and legal requirements are relatively recent, and, like other laws, regulations and legal requirements applicable in China (including with respect to the commercial aviation industry), their interpretation and enforcement involve significant uncertainties.

     Taxation of holders of H Shares or ADS by China

     Chinese tax law generally provides for the imposition of a withholding tax on dividends paid by a Chinese company to a non-Chinese shareholder at a rate of 20%. In a notice issued by the State Taxation Bureau of the PRC and a letter issued by the State Taxation Bureau, however, the Chinese tax authorities confirmed that the imposition of this withholding tax on dividends paid by joint stock companies, such as the Company, had been suspended. Accordingly, any future dividends to be paid by the Company to holders of H Shares or ADS who are foreign individuals not resident in China or which are foreign enterprises with no permanent establishment in China will not be subject to a Chinese withholding tax. In the event that the suspension of the withholding tax is lifted, such payments will subject to withholding tax at the 20% rate unless the holder is entitled to a tax waiver or a lower tax rate under an applicable double-taxation treaty. See Item 10 “Additional Information – Taxation”.

ITEM 4.         INFORMATION ON THE COMPANY.

History and Development of the Company

The Company is a joint stock company incorporated in China on March 25, 1995, and is 65.2% owned by CSAHC. The registered address of the Company is Baiyun International Airport, Guangzhou 510405, People’s Republic of China (telephone no: (86)20-8612-4738, website: www.cs-air.com).

In the second half of 2000, the CAAC announced a restructuring policy with respect to the PRC aviation industry. Domestic airlines are directed, on a voluntary basis to consolidate into three major airline groups: CSAHC, China National Aviation Holding Company and China Eastern Air Holding Group . In line with such policy, CSAHC has acquired Zhongyuan Airlines, a regional airline based in Henan Province, the PRC in 2001.

In April 2001, SA Group informed the Company that SA Group would participate in the restructuring of the PRC aviation industry under PRC government directives. Although such directives are general guidelines relating to consolidation and restructuring of PRC aviation industry, it is highly unlikely that Chinese airlines will not follow all or most of such proposals. SA Group informed the Company that SA Group would conduct negotiations with China Northern Airlines and Xinjiang Airlines with respect to possible cooperation involving consolidation and restructuring with those airlines.

On October 11, 2002, SA Group, China Northern Airlines and Xinjiang Airlines restructured and consolidated into a new airline group named as China Southern Air Group after a long period of preparation. On the same date, SA Group changed its official name to China Southern Air Holding Company (“CSAHC”).

The Group had RMB1,381 million, RMB1,492 million and RMB6,351 in capital expenditures in 2000, 2001 and 2002 respectively. Of such capital expenditures in 2002, RMB3,832 million were financed by bank borrowings while the remaining RMB2,519 million were financed by internal resources. The capital expenditures were primarily incurred on the additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a small extent, additional investments in pilot training facilities and other facilities and building for operations.

Shareholders resolutions of the Company were passed at the second Extraordinary General Meeting of the Company in the year 2002 held on March 26, 2002 approving the issue of domestic ordinary share(s) of the Company of RMB 1.00 each. The number of A Shares proposed to be issued is not more than 1,000,000,000 A Shares. Other details of the A Shares Issue were previously published by way of announcement dated March 26, 2002. The proposed A Share Issue is subject to approval by the China Securities Regulatory Commission and Shanghai Stock Exchange of the listing and trading in the A Shares on the Shanghai Stock Exchange.

The Company has on June 18, 2002 entered into an Interest Transfer and Capital Injection Agreement with China State Post Bureau, Shanghai Municipal Post Office, Post Office of the Inner Mongolian Autonomous Region and China Philately Corporation, pursuant to which the

11

Company has injected RMB150 million (equivalent to approximately US$18.12 million) in cash to acquire 49% interest in China Postal Airlines, Ltd. The China State Post Bureau holds the remaining 51%.

In addition, during the year, the Group acquired 39% interest in Sichuan Airlines Corporation Limited to further expand its market shares in South-western China. The Group also jointly established Zhuhai Xiang Yi Aviation Technology Company Limited, the first sino-foreign joint venture company engaging in aviation training services in the PRC, with CAE.

Business Overview

     General

     The Group provides commercial airline services throughout China, Hong Kong and Macau regions, Southeast Asia and other parts of the world. The Group is one of the three largest Chinese airlines and, as of year end 2002, ranked first in terms of passengers carried, number of scheduled flights per week, number of hours flown and size of route network and aircraft fleet. During the three years ended December 31, 2002, the Group’s RPKs increased at a compound annual rate of 15.6%, from 21,653 million in 2000 to 28,940 million in 2002, while its capacity, measured in terms of ASKs, increased at a compound annual rate of 11.1%, from 35,831 million in 2000 to 44,245 million in 2002. In 2002, the Group carried 21.49 million passengers and had passenger revenue of RMB15,696 million (US$1,896 million). Net income for 2002 was RMB576 million (US$70 million).

     The Group conducts a portion of its airline operations through Xiamen Airlines, Southern Airlines (Group) Shantou Airlines Company Limited (“Shantou Airlines”), Guangxi Airlines Company Limited (“Guangxi Airlines”), Zhuhai Airlines Company Limited (“Zhuhai Airlines”) and Guizhou Airlines Company Limited (“Guizhou Airlines”) (collectively, the “Airline Subsidiaries”). In 2002, the Airline Subsidiaries carried 7.41 million passengers and had operating revenue of RMB4,829 million (US$583 million) and accounted for 34.5% and 26.8% of the Group’s passengers carried and operating revenue, respectively.

     The Group also provides air cargo and mail services. The Group’s airline operations are fully integrated with its airline-related businesses, including aircraft maintenance and air catering operations. The cargo and mail revenue of the Group increased by 27.0% to RMB1,786 million (US$216 million) in 2002 as compared with 2001.

     The Group operates the most extensive route network among Chinese airlines with a total of 349 routes as of December 31, 2002, including 286 domestic routes, 20 Hong Kong regional routes (which include Hong Kong routes and Macau routes), and 43 international routes. In 2002, the Group operated an average of 4,282 landing and take-offs per week serving 88 destinations, including 64 cities in China, including Beijing, Shanghai, Tianjin, Guangzhou, Shenzhen, Wuhan, Changsha, Zhengzhou, Xiamen, Xian and Chengdu. Most of the cities served by the Group are located in commercial centers or rapidly developing economic regions in China.

     The Group’s corporate headquarters and principal base of operations are located in Guangzhou, which is the capital of Guangdong Province and the largest city in southern China. Located in the rapidly developing Pearl River Delta region, Guangzhou is also the transportation hub of southern China and one of China’s major gateway cities. Guangzhou’s significance has increased as the transportation infrastructure of Guangdong Province has developed through the construction and development of expressways, an extensive rail network and the port cities of Yantian, Shekou, Chiwan, Mawan, Huangpu and Zhuhai.

     In addition to its main route base in Guangzhou, the Group also maintains ten regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Zhuhai, Xiamen, Haikou, Guilin, Shantou and Guiyang. All of these regional route bases are located in provincial capitals or major commercial centers in China.

     The Group’s operations primarily focus on the domestic market. In addition, the Group also operates Hong Kong regional and international flights. As of year end of 2002, the Group had 20 Hong Kong regional routes and 43 international routes. The Group’s Hong Kong regional operations include flights between destinations in China and Hong Kong and Macau. The Group’s international operations include scheduled services to Osaka, Amsterdam, Sharjah, Los Angeles, Fukuoka, Seoul, Sydney and ten Southeast Asian destinations. The Group operates the most extensive Southeast Asian route network among Chinese airlines.

     As of year end 2002, the Group operated a fleet of 122 aircraft, consisting primarily of Boeing 737-200, 737-300, 737-500, 737-700, 737-800, 747-200, 747-400, 757-200 and 777-200 aircraft and Airbus 320-200 aircraft. A significant portion of these aircraft are held under capital and operating leases. The average age of the Group’s aircraft was 7.76 years at year end 2002.

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     Restructuring and Initial Public Offering

     As part of China’s economic reforms in the 1980’s, the PRC State Council directed the CAAC to separate its governmental, administrative and regulatory role from the commercial airline operations that were being conducted by the CAAC and its regional administrators. As a result, CSAHC was established on January 26, 1991 for the purpose of assuming the airline and airline-related commercial operations of the Guangzhou Civil Aviation Administration, one of the six regional bureaus of the CAAC. CSAHC was one of the 55 large-scale enterprises designated by the Chinese Government to play a leading role in their respective industries.

     CSAHC was restructured in 1994 and 1995 in anticipation of the initial public offering of the Company. The restructuring was effected through the establishment of the Company and the execution of the Demerger Agreement, dated as of March 25, 1995, as amended (the “Demerger Agreement”), between CSAHC and the Company. Upon the restructuring, the Company assumed substantially all of the airline and airline-related businesses, assets and liabilities of CSAHC, and CSAHC retained its non-airline and non-airline-related businesses, assets and liabilities, and the non-business assets and liabilities. Upon this separation, all interests, rights, duties and obligations of CSAHC, whenever created or accrued, were divided between the Company and CSAHC based on the businesses, assets and liabilities assumed by each of them under the Demerger Agreement. Under the Demerger Agreement, CSAHC agreed not to conduct or participate or hold any interest in, either directly or indirectly, any business, activity or entity in or outside China that competes or is likely to compete with the commercial interests of the Group, although CSAHC may continue to hold and control the affiliates of CSAHC existing on the date of the Demerger Agreement and may continue to operate the businesses of such affiliates.

     In July 1997, the Company completed a private placement of 32,200,000 H Shares to certain limited partnership investment funds affiliated with Goldman Sachs & Co. and an initial public offering of 1,141,978,000 H Shares, par value RMB 1.00 per share, and listing of the H Shares on the Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) and American Depositary Shares (“ADSs”, each ADS representing 50 H Shares) on the New York Stock Exchange. Prior to the private placement and the initial public offering, all of the issued and outstanding shares of capital stock of the Company, consisting of 2,200,000,000 Domestic Shares, par value RMB 1.00 per share, were owned by CSAHC, which owns and exercises, on behalf of the Chinese Government and under the supervision of the CAAC, the rights of ownership of the Domestic Shares held by CSAHC. After giving effect to the private placement and the initial public offering, CSAHC continues to own the 2,200,000,000 Domestic Shares, representing approximately 65.2% of the total share capital of the Company, and will be entitled to elect all the directors of the Company and to control the management and policies of the Group. The remaining 34.8% of the share capital of the Company is owned by holders of H Shares. Domestic Shares and H Shares are both ordinary shares of the Company.

     The Company has applied to the relevant PRC authorities for the issue of not more than 1,000,000,000 A Shares and the listing of such A Shares on the Shanghai Stock Exchange (the “A Shares Issue Plan”). The A Shares Issue Plan was approved by the Independent shareholders at the Extraordinary General Meetings held on March 26, 2002 and May 21, 2002, and the Board was authorised to plan for and on behalf of the Company deal with all relevant matters relating to the A Shares Issue.

     Traffic

     The following table sets forth certain statistical information with respect to the Group’s passenger and cargo and mail traffic for the years indicated.

						Cargo and Mail Carried				Total Traffic
Passengers Carried						(tons)				(ton kilometers)
			Increase
			(decrease)					Increase				Increase
			over					over				over
Year	Total		previous year			Total		previous year		Total		previous year
	(in million)		(%)			(in thousand)		(%)		(in million)		(%)
1998		15.05		(1.3	)		348.0		11.6		1,915.0		6.7
1999		15.11		0.4			390.8		12.3		2,003.0		4.6
2000		16.85		11.5			353.0		9.7		2,613.0		30.5
2001		19.12		13.5			398.0		12.7		3,034.0		16.1
2002		21.49		12.4			470.0		18.1		3,614.0		19.1

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     Route Network

     Overview

     The Group operates the most extensive route network among Chinese airlines. As of year end 2002, the Group operated 349 routes consisting of 286 domestic routes, 20 Hong Kong regional routes and 43 international routes. At such date, the Group’s route network served 64 destinations within China and 24 destinations outside of China.

     The Group continually evaluates its network of domestic, Hong Kong regional and international routes in light of its operating profitability and efficiency. The Group seeks to coordinate flight schedules with the Airline Subsidiaries on shared routes to maximize load factors and utilization rates. The acquisition of domestic, Hong Kong regional and international routes is subject to approval of the CAAC, and the acquisition of Hong Kong regional and international routes is also subject to the existence and the terms of agreements between the Chinese Government and the government of the Hong Kong SAR, the government of Macau Special Administrative Region of the People’s Republic of China (“Macau SAR”) and the government of the proposed foreign destination.

     In April 1997, the Company and Delta Airlines, one of the largest U.S. airlines, entered into an agreement for the provision of code sharing in respect of the Group’s Guangzhou-Los Angeles route (the “Code Sharing Agreement”). The Code Sharing Agreement was approved by the CAAC and became effective in March 1999. Under the Code Sharing Agreement, Delta Airlines is permitted to sell tickets for the Los Angeles-Guangzhou route to passengers from various sales outlets in the United States using its “DL” code. Passengers use Delta Airlines within the United States for travel to Los Angeles, and the Group for travel from Los Angeles to Guangzhou. Similarly, the Group is permitted to sell tickets for travel between Guangzhou and 13 destinations in the United States using its “CZ” code. Under this arrangement, passengers use the Group for the Guangzhou-Los Angeles segment of the route and Delta Airlines between Los Angeles and one of the specified U.S. destinations. The Code Sharing Agreement increases the number of sales outlets within the United States for the Group’s Los Angeles-Guangzhou route and allows the Group to provide coordinated reservation, confirmation and baggage check-in services from Guangzhou to destinations in the United States.

     The Group has also entered into code-sharing agreements with several airlines such as Asiana Airlines, Japan Air System, Vietnam Airlines, Royal Dutch Airlines and Garuda Indonesian. Such operating measures expand the Group’s route network.

     Route Bases

     The Group’s main route base is in Guangzhou. The Group maintains ten regional route bases in Zhengzhou, Wuhan, Changsha, Shenzhen, Zhuhai, Xiamen, Haikou, Guilin, Shantou and Guiyang. All of these regional route bases are located in provincial capitals or major commercial centers in China. The Group’s network of route bases provides the Group with routes covering all of China, except for Inner Mongolia, Tibet and Ningxia.

     The Group believes that its extensive network of route bases enables it to coordinate flights and deploy its aircraft more effectively and to provide more convenient connecting flight schedules and access service and maintenance facilities for its aircraft. The Group believes that the number and location of these route bases may enhance the Group’s ability to obtain the CAAC’s approval of requests by the Group to open new routes and provide additional flights between these bases and other destinations in China. Under current regulations of the CAAC, airlines are generally expected to operate mainly from their route bases.

     The Chinese Government has approved a new Guangzhou airport project, which commenced construction in 2000, with completion targeted for late 2003. Upon completion, the new airport will replace the Baiyun International Airport as the main hub of the Group’s route network. With the approval of the Chinese Government, the Group began construction of its facilities at the new Guangzhou airport in 2000. The Group’s total investment will be RMB3,540 million, of which RMB2,620 million will be financed by bank loans. Several major banks in the PRC have committed to finance the project. The balance of RMB920 million will be financed by internal resources. As of December 31, 2002, the Group invested a total of RMB432.6 million for this new airport project. The Group believes that the completion of the new airport will substantially enhance the Group’s operations in the Southern China region.

     Domestic Routes

The Group’s domestic route network serves substantially all provinces and autonomous regions in China, including Guangdong, Fujian, Hubei, Hunan, Hainan, Guangxi, Jiangsu, Zhejiang, Henan and Anhui, and serves all four centrally-administered municipalities in China, namely, Beijing, Shanghai, Tianjin, and Chongqing. In 2002, the Group’s most profitable domestic routes were the routes between Guangzhou and Beijing, Guangzhou and Shanghai, Shenzhen and Shanghai, Shenzhen and Beijing, Beijing and Guangzhou, Shanghai and Guangzhou, Beijing and Shenzhen, Shanghai and Shenzhen, Guangzhou and Hangzhou; and between Guangzhou, Dalian and Harbin.

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     Hong Kong Regional Routes

     The Group offers scheduled service between Hong Kong and Guangzhou, Kunming, Xiamen, Shantou and Beijing. The Group’s Hong Kong regional routes also include routes between Hong Kong or Macau and other destinations in China, including Guilin, Zhengzhou, Changsha, Haikou,Luoyang, Sanya, Zhang Jia Jie and Guiyang, which the Group operates on a “charter” flight basis, as explained below. The Group believes that the routes on which it operates these “charter” flights are among its highest yielding routes, primarily because the Group faces limited competition on such routes and is consequently less subject to downward pricing pressures. In 2002, the most profitable Hong Kong regional routes were those between Guangzhou and Hong Kong, Hong Kong and Wuhan, Hong Kong and Guangzhou, Wuhan and Hong Kong, Hong Kong and Beijing, Hong Kong and Xiamen, Kunming and Hong Kong, Hong Kong and Kunming, Xiamen and Hong Kong; and between Beijing and Hong Kong.

     The Group’s “charter” flights are essentially regularly scheduled flights, but in theory permission to operate these “charter” flights is subject to monthly review by the CAAC and the Civil Aviation Department of the Hong Kong SAR. The CAAC has informally indicated that it primarily considers market demand and airline capability in granting permission for such flights. The Group has been able to maintain all of its Hong Kong regional routes on which it operates on a “charter” flight basis and believes that demand on such routes will continue. In 2002, the Group operated a total of more than 13,500 flights on its Hong Kong regional routes, accounting for approximately 31.2% of all passengers carried by Chinese airlines on routes between Hong Kong or Macau and destinations in China.

     International Routes

The Group is the principal Chinese airline connecting the rapidly developing Pearl River Delta region of China to Southeast Asia, with 26 routes serving ten Southeast Asian destinations, including Singapore and major cities in Indonesia, Thailand, Malaysia, Philippines, Vietnam and Laos. In 2002, the Group’s most profitable Southeast Asian routes were those between Manila, Xiamen and Beijing, Beijing, Xiamen and Manila, Singapore and Guangzhou; and between Guangzhou and Singapore . The Group believes that, among Chinese airlines, it is well-positioned to benefit from the business opportunities arising out of increased air traffic and the growing economic relationships between China and Southeast Asian countries.

     In addition to the 26 routes serving ten Southeast Asian destinations, the Group also operates seventeen other international routes providing scheduled service to Amsterdam, Sharjah, Osaka, Tokyo, Fukuoka, Seoul, Los Angeles, Sydney and Melbourne. In April 2002, an international route between Guangzhou and Tokyo was launched.

     Aircraft Fleet

     The Group’s fleet plan in recent years has emphasized expansion and modernization through the acquisition of new aircraft and the retirement of less efficient older aircraft. As of year end 2002, the Group operated a fleet of 122 aircraft with an average age of 7.76 years. All aircraft of the Group are Boeing and Airbus aircraft. The Group has the largest fleet among Chinese airline companies. Most of the aircraft operated by the Group are leased pursuant to various types of leasing arrangements.

     The following table sets forth certain information regarding the Group’s fleet of 122 aircraft as of December 31, 2002.

					Average
	Number of		Average Age		Passenger
Model	Aircraft		(years)		Capacity
Boeing 777-200		4		6.53		380
Boeing 777-21B1GW		5		5.28		292
Boeing 757-200		26		10.48		200
Boeing 737-800		5		0.22		167
Boeing 747F		4		7.01		n/a
Boeing 737-700		7		3.14		138
Boeing 737-500		18		10.15		132
Boeing 737-300		31		8.96		145
Boeing 737-200		2		15.77		128
Airbus 320-200		20		4.69		158
		122

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     During 2002, the Group continued to expand and modernize its aircraft fleet. In 2002, the Group’s major aircraft transactions included:

(i)	the cash purchase of one Boeing 757-200 aircraft and two Boeing 737-800 aircraft;
(ii)	the acquisitions of two Boeing 747-400 freighters and three Boeing 737-800 aircraft financed by long term bank loans;
(iii)	the acquisitions of five Boeing 737-300 aircraft from Zhongyuan Airlines, a subsidiary of CSAHC;
(iv)	the addition of one Boeing 737-700 aircraft under operating lease;
(v)	the extension of the operating leases of three Boeing 777-200 under operating leases for another five years;and
(vi)	the sale and operating leaseback of four Boeing 757-200 aircraft.

     Very Substantial Acquisition

     On October 3, 2001 the Company entered into an agreement with the Boeing Company for acquiring twenty Boeing 737-800 aircraft and two Boeing 747-400 freighters during the period between 2002 and 2005 (the “Transactions”). The aggregate consideration in the Transactions exceeds 100% of the net tangible assets of the Company as published in its annual report dated December 31, 2000 and constitutes very substantial transactions under the Hong Kong Listing Rules. The PRC government and CSAHC, the 65.2% controlling shareholder of the Company, have approved the Transactions. CSAHC does not have any interest in the Transactions other than as a shareholder of the Company.

     The twenty Boeing 737-800 aircraft acquired pursuant to the Transactions will replace twenty existing Boeing 737 series aircraft that the Company currently operates under operating leases. The Board considered that the Transactions are in the best interest of the Company and its shareholders as a whole.

     Waiver from the Stock Exchange of Hong Kong Limited

     A.     In March 2002, the Hong Kong Stock Exchange granted a waiver to allow the Company to use a new size test based on ATKs to replace the normal net asset test and consideration test under Chapter 14 of the Listing Rules in respect of acquisition and disposal of aircraft.

The Hong Kong Stock Exchange has granted the waiver on and subject to the following conditions:
1.	Instead of the normal tests under Chapter 14 of the Listing Rules, the tests may be calculated by reference to the ATKs for aircraft being acquired or disposed of as compared to the Company’s aggregate fleet ATKs.
2.	The proposed method of calculation for the four tests will replace the net asset test and the consideration test only, while the other two tests, namely, net profit and equity capital issued tests will continue to apply as set out in Chapter 14 of the Listing Rules.
3.	The calculation of ATKs will be as follows: i) fleet ATKs will be the aggregate actual ATKs for all aircraft in the Company’s fleet for the last financial year as disclosed in the Company’s annual report, ii) ATKs for aircraft being disposed of will be based on actual ATKs of the aircraft for the previous two financial years; and iii) ATKs for aircraft being acquired will be based on the historical operating data for the same type of aircraft. Where the aircraft to be acquired is a new type, the ATKs will be estimated based on other aircraft of similar size operated by the Company or the average for the Chinese civil aviation industry.
4.	The Company’s ATKs figure will be disclosed in the Company’s annual report and be reviewed by auditors who will confirm on an annual basis that the Company’s ATKs are calculated correctly and consistently.
5.	For the purposes of making the test as stated in paragraph 1 above, all acquisitions and disposals for the last 12 months will be aggregated, unless the acquisition or disposal has previously been reported as a notifiable transaction under these rules.
6.	The thresholds for classifying a transaction as a discloseable, major or very substantial acquisition will be 30%, 50% and 100% (assuming that there are no circumstances which would make it a connected transaction or a share transaction).

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7.	Where the transaction is a discloseable transaction, disclosure will take the form of a press announcement complying with rule 14.14 of the Listing Rules and details of the transaction will be set out in the Company’s next annual report and accounts. Where the transaction is a major transaction or a very substantial acquisition, the provisions of Chapter 14 of the Listing Rules will apply.
8.	An option to acquire aircraft will not be treated as acquisition while the exercise of such an option will be treated as the acquisition of an aircraft.
9.	The waiver will only apply to acquisition/disposal of aircraft, and acquisition or disposal of other types of assets by the Company will be subject to provisions under Chapter 14 of the Listing Rules.
10.	The Company will disclose in its annual reports and interim reports the following information:

(i)	regarding future deliveries of aircraft, details of aircraft on order including the number and type; and the years in which such aircraft are scheduled to be delivered;
(ii)	the number and type of aircraft which are subject to options exercisable during a period of not less than 12 months from the end of the financial year or period to which the annual report relates; and
(iii)	details of the waiver granted pursuant to the application.

11. The Company remains a subsidiary of CSAHC. Should there be any change in control of the Company, the Hong Kong Stock Exchange will need to reconsider whether the waiver continues to be appropriate.

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     B.     In November 2002, the Hong Kong Stock Exchange granted a waiver in relation to the in-flight meals and ticket sales arrangements between the Group and CSAHC after approval of the consolidation and restructuring proposal of the PRC aviation industry by the State Council of the PRC (the “Ongoing Connected Transactions for In-Flight meals and Ticket Sales”).

The Hong Kong Stock Exchange has granted the waiver on and subject to the following conditions:

1.     the Ongoing Connected Transactions for In-flight Meals and Ticket Sales shall be:

(a)	entered into in the ordinary and usual course of business of the Group;
(b)	conducted either on normal commercial terms or on terms no less favourable than terms available to (or from, as appropriate) independent third parties; and
(c)	on terms that are fair and reasonable so far as the shareholders of the Company and in the interest of the Company as a whole are concerned;

2.      the aggregate annual amount payable by the Group to CSAHC, and the aggregate annual amount payable by CSAHC to the Group, under the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales for each financial year will not exceed the higher of HK$10 million and 3% of the consolidated net tangible assets of the company as disclosed in its latest published audited accounts (the “Relevant Cap Amount”);

3.     the details of the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales will be disclosed in the company’s annual report as set out in Rule 14.25(1)(A) to (D) of the Listing Rules for the relevant financial year of the Company;

4.     the independent non-executive directors will review annually and confirm in the Company’s annual report of the relevant financial year that the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales have been conducted in the manner as stated in paragraph 1 above and comply with the Relevant Cap Amount as stated in paragraph 2 above;

5.     the auditors of the Company shall review annually the transactions and provide a letter to the Board of Directors stating that:

(a)	the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales have received approval of the Board of Directors of the Company;
(b)	the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales have been entered into in accordance with the terms of the agreements relating to the transactions;
(c)	the aggregate annual amount payable by the Group to CSAHC, and the aggregate annual amount payable by CSAHC to the Group, under the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales for each financial year shall not exceed the Relevant Cap Amount set out in paragraph 2 above; and
(d)	the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales are in accordance with the pricing policy of the Group.

        Where, for whatever reasons, the auditors decline to accept the engagement or are unable to provide the auditors’ letter, the Directors shall contact the Hong Kong Stock Exchange immediately.

6.     CSAHC shall provide to the Hong Kong Exchange an undertaking that, for so long as the Company’s shares are listed on the Hong Kong Stock Exchange, it will provide the Company’s auditors with full access to its relevant records for the purpose of the auditors’ review of the Ongoing Connected Transactions for In-Flight Meals and Ticket Sales.

     Aircraft Financing Arrangements

     Overview

     A significant portion of the Group’s aircraft is operated under long-term capital or operating leases or long-term mortgage loans with remaining terms to maturity ranging from one to nine years. As of December 31, 2002, 36 of the Group’s 122 Boeing and Airbus aircraft were

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operated under capital leases, 49 were operated under operating leases, 17 were financed by long-term mortgage loans, while the remaining were acquired either with cash proceeds or acquired by exercising the purchase options upon expiry of the respective capital leases. The Group’s planned acquisitions of aircraft in the foreseeable future will generally be made pursuant to operating or capital leases. The Group’s determination as to its acquisition strategy depends on the Group’s evaluation at the time of its capacity requirements, anticipated deliveries of aircraft, the Group’s capital structure and cash flow, prevailing interest rates and other general market conditions.

     The following table sets forth, as of December 31, 2002, the number of Boeing and Airbus aircraft operated by the Group pursuant to capital and operating leases and the remaining terms, expressed in years, of such leases.

					Average
	Capital		Operating		Remaining
Model	Lease		Lease		Lease Term
Boeing 777-200 and 777-21B		6		3		7.69
Boeing 757-200		3		11		5.17
Boeing 737-500		—		18		2.80
Boeing 737-300		9		12		2.16
Airbus 320-200		18		2		6.44
Boeing 737-700		—		1		6.67
		36		49

     Capital Leases

     As of December 31, 2002, the Group’s aggregate future minimum lease payments (including future finance charges) required under its capital leases were RMB 9,745 million (US$1,177 million). As of year end 2002, a majority of the Group’s capital leases had original terms ranging from ten to 15 years from the date of delivery of the relevant aircraft, and the remaining terms of these leases ranged from one to eight years. The Group’s capital leases typically cover a substantial portion of the relevant aircraft’s useful life and transfer the benefits and risks of ownership to the Group. Under its capital leases, the Group generally has an option to purchase the aircraft at or near the end of the lease term. As is customary in the case of capital leases, the Group’s obligations are secured by the related aircraft, as well as other collateral.

     Operating Leases

     As of December 31, 2002, the Group’s aggregate future minimum lease payments required under its operating leases were RMB8,537 million (US$1,031 million). As of year end 2002, the Group’s operating leases had original terms generally ranging from within one year to ten years from the date of delivery of the relevant aircraft, and the remaining terms of these leases generally ranged from one to eight years. Pursuant to the terms of the operating leases, the Group is obligated to make rental payments based on the lease term, with no termination payment obligations or purchase option, and the lessor bears the economic benefits and risks of ownership. Under its operating leases, the Group has no option to purchase the aircraft and is required to return the aircraft in the agreed condition at the end of the lease term. Although title to the aircraft remains with the lessor, the Group is responsible during the lease term for the maintenance, servicing, insurance, repair and overhaul of the aircraft.

     Aircraft Flight Equipment

     The jet engines used in the Group’s aircraft fleet are manufactured by General Electric Corporation, Rolls-Royce plc, United Technologies International, Inc., CFM International, Inc. and International Aviation Engines Corporation. As of year end 2002, the Group had 34 spare jet engines for its fleet. The Group determines its requirements for jet engines based on all relevant considerations, including manufacturers’ recommendations, the performance history of the jet engines and the planned utilization of its aircraft.

     Rotables and certain of the expendables for the Group’s aircraft are generally purchased by Southern Airlines (Group) Import & Export Trading Corporation (“SAIETC”), a subsidiary of CSAHC acting as agent for the Group, in consideration of an agency fee. The Group arranges the ordering of aircraft, jet engines and other flight equipment for the Airline Subsidiaries and keeps an inventory of rotables and expendables for the Airline Subsidiaries.

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     Aircraft Maintenance

     A major part of the maintenance for the Group’s fleet other than overhauls of jet engines is performed by GAMECO, a joint venture established by the Company, Lockheed Martin (“Lockheed”) and Hutchison Whampoa (“Hutchison”) consistent with the Group’s strategy to achieve fully integrated airline operations and to assure continued access to a stable source of high quality maintenance services. The remaining part of the maintenance for the Group’s fleet other than overhauls of jet engines is performed by service providers in China and overseas. GAMECO performs all types of maintenance services, ranging from maintenance inspections performed on aircraft before, after and between flights (“line maintenance services”) to major overhaul performed at specified intervals. GAMECO was the first of three aircraft maintenance facilities in China having been certified as a repair station by both the CAAC and the FAA. In March 1998, GAMECO received an approval certificate from the United Kingdom Civil Aviation Authority for the repair and maintenance of aircraft and aircraft engines.

     The Group believes that GAMECO performs major maintenance checks on the Group’s aircraft within time periods generally consistent with those of large international airline maintenance centers. GAMECO’s repair and maintenance capabilities include overhaul of more than 90% of the Group’s aircraft. Although rotables for the Group’s aircraft are generally imported through SAIETC, a portion of expendables and other maintenance materials are directly imported by GAMECO. GAMECO also provides line maintenance services to 18 other Chinese airlines and nine international airlines. GAMECO provides heavy maintenance services to fourteen other Chinese airlines and two international airline.

     Under the Aircraft Maintenance and Engineering Agreement entered into between GAMECO and the Company (the “Aircraft Maintenance Agreement”), GAMECO charges the Group for expendables on a cost plus basis, and for labor based on a formula that takes into account projected flight hours, costs and other relevant factors. Fees under the Aircraft Maintenance Agreement are payable 50% in Renminbi and 50% in U.S. dollars. Each year, the Company and GAMECO determine the components of the pricing formula. For the year ended December 31, 2002, GAMECO’s revenue totaled RMB592 million, approximately 95% of which was derived from services provided to the Group.

     Overhauls of jet engines are performed by overseas qualified service providers in Germany, Malaysia, Canada and England.

     Safety

     The Group endeavors to maintain strict compliance with all laws and regulations applicable to flight safety. In addition, the Group has adopted measures to eliminate or minimize factors that may impair flight safety, including specialized training programs and safety manuals. The Air Safety Management Department of the Company implements safety-related training programs on an ongoing basis in all of the Group’s operations to raise the safety awareness of all employees. As a result, overall flight safety has gradually improved. There was no serious incidents involving casualty or flight damage throughout the three years ended December 31, 2002. And for minor “incidents” which include various events and conditions prescribed by the CAAC which do not involve serious personal injury or material damage to flight equipment, the Group has kept the number consistently below the standard prescribed by the CAAC. For example, the Company’s “flight incident” ratio was 0.15, 0.19 and 0.42 in 2000, 2001 and 2002 respectively. In comparison, CAAC’s published maximum acceptable flight incident ratio was 1.6 in 2000, 2001 and 1.3 in 2002. This ratio is defined as the occurrence of one incident for every 10,000 hours of flight time.

     Jet Fuel

     Jet fuel costs typically represent a major component of an airline’s operating expenses. The Group’s jet fuel costs for 2002 accounted for 22.0% of the Group’s operating expenses. Like all Chinese airlines, the Group is generally required by the Chinese Government to purchase its jet fuel requirements from regional branches of CAOSC and Bluesky Oil Supplies Company, except at the Shenzhen, Zhuhai and Sanya airports which are supplied by Sino-foreign joint ventures in which CAOSC is a joint venture partner. CAOSC is a State-owned organization controlled and supervised by the CAAC that controls the importation and distribution of jet fuel throughout China.

     Jet fuel obtained from CAOSC’s regional branches is purchased at uniform prices throughout China that are determined and adjusted by CAOSC from time to time with the approval of the CAAC and the pricing department of the State Development and Planning Commission (“SDPC”) based on market conditions and other factors. As a result, the costs of transportation and storage of jet fuel in all regions of China are spread among all domestic airlines. Jet fuel costs in China are influenced by costs at State-owned oil refineries and limitations in the transportation infrastructure, as well as by insufficient storage facilities for jet fuel in certain regions of China.

     Prior to 1994, domestic jet fuel prices were generally below international jet fuel prices. The Chinese Government had gradually increased domestic jet fuel prices in order to reflect more accurately the costs of supplying jet fuel in China. As a result, domestic jet fuel

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prices have become higher than those in the international market since the beginning of 1994. With the WTO entry, the jet fuel price in China will probably be trimmed by the market force to be in line with the international market.

     CAOSC’s maximum fuel price in 2002 was RMB3,460 per ton. The average price paid by the Group in 2002 was RMB2,715 per ton, which represents a 12.8% decrease from that of 2001.

     To address the problem of high jet fuel prices since 2000, CAAC has announced a policy permitting airlines to impose a fuel surcharge on passengers carried by their domestic and Hong Kong regional flights for the purpose of offsetting the effect of rising jet fuel prices. Such surcharges have been imposed by the Group since November 1, 2000 at the prescribed rates set by the CAAC.

     In addition to purchases of jet fuel from CAOSC, the Group is also permitted by the Chinese Government to purchase a portion of its jet fuel requirements for its international flights from foreign fuel suppliers located outside China at prevailing international market prices. Jet fuel purchased from such sources outside China accounted for approximately 14.5% of the Group’s total jet fuel consumption in 2002.

     Flight Operations

     Flight operations for the Group’s flights originating in Guangzhou are managed by the Company’s flight operations and marketing divisions, which are responsible for formulating flight plans and schedules consistent with route and flight approvals received from the CAAC. The Company’s flight operations center in Guangzhou is responsible for the on-site administration of flights, including the dispatch and coordination of flights, deployment of aircraft, ground services and crew staffing. In addition, each of the Airline Subsidiaries maintains flight operations centers at all servicing airports for on-site administration of their flights. The Company’s general dispatch offices are responsible for monitoring conditions on the Group’s route network, administering the Group’s flight plans, collecting and monitoring navigation data and analyzing and monitoring airport conditions.

     To enhance its management of flight operations, the Group’s computerized flight operations control system (SOC) began operation in May 1999. The system utilizes advanced computer and telecommunications technology to manage the Group’s flights on a centralized, real-time basis. The Group believes that the system will assist it to (i) compile flight schedules more efficiently; (ii) increase the utilization of aircraft; (iii) allow real-time tracking of all of the Group’s flights; and (iv) improve coordination of the Group’s aircraft maintenance and ground servicing functions.

     Training of Pilots and Flight Attendants

     The Group believes that its pilot training program which was established in cooperation with the CAAC affiliated Beijing Aeronautics and Aviation University (the “BAAU”) has significantly improved the quality of the training received by the Group’s pilots and has helped maintain the quality of the Group’s staff of pilots at a level consistent with the expansion of operations called for by the Group’s business strategy.

     In the Group’s pilot training program, trainees have two years of theoretical training at the BAAU. After successful completion of academic and physical examinations, students receive flight training for a period of approximate 20 months at China Southern West Australian Flying College Pty Ltd. (the “Australian Pilot College”), a company that is 65% owned by the Company and 35% owned by CSAHC. Each student at the Australian Pilot College is required to fly at least 230 hours before being awarded a flight certificate. Graduates of the BAAU and the Australian Pilot College are hired by the Group as trainee pilots after passing a CAAC-administered examination to obtain a pilot license. The total training period for the Group’s trainee pilots is approximately five years. About 110 trainee pilots graduated from the Australian Pilot College each year.

     As part of the pilot training program, the Group also operates a flight simulator training center in Zhuhai, Guangdong Province (the “Zhuhai Training Center”), which is equipped with simulators for all models of aircraft currently operated by the Group. Trainee pilots receive their initial training in the operation of a specific aircraft at the Zhuhai Training Center, which also provides training to pilots from other Chinese airlines.

     The Group’s pilots are required to be licensed by the CAAC, which requires an annual recertification examination. The Group’s pilots attend courses in simulator training twice annually and in simulator emergency procedures annually at the Zhuhai Training Center. The Group also conducts regular advanced training courses for captains and captain candidates. Pilots advance in rank based on number of hours flown, types of aircraft flown and their performance history.

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     The Group conducts theoretical and practical training programs for its flight attendants at its Flight Attendants Training Center in Guangzhou (the “Guangzhou Training Center”). The Guangzhou Training Center is equipped with computerized training equipment, as well as simulator cabins for all models of aircraft currently operated by the Group. At the Guangzhou Training Center, flight attendants of the Group receive comprehensive training in areas such as in-flight service, emergency evacuation and water rescue.

     Ground Services

     The Group makes arrangements with airport authorities, other airlines or ground services companies for substantially all ground facilities, including jet-ways, waiting areas, ticket counters and support services buildings, at each airport that it serves. The Group pays landing, parking and other fees to such airports, including Baiyun International Airport in Guangzhou. At domestic airports, such fees are generally determined by the CAAC.

     At Baiyun International Airport in Guangzhou, the Group operates its own passenger check-in, cargo, mail and baggage handling, aircraft maintenance and cleaning services. The Group also provides such services to other airlines that operate in Baiyun International Airport.

     Ground services at the airports in Shenzhen, Changsha, Wuhan, Zhengzhou and Haikou are primarily operated directly by the Group. Ground services at other airports in China are provided to the Group by local airport authorities or local airlines pursuant to various service agreements. Ground services and other services at airports outside China are provided to the Group by foreign services providers pursuant to various service agreements with such parties. All such agreements of the Group are short-term and otherwise on terms that are customary in the industry.

     Air Catering

     The Company owns a 51% equity interest in Guangzhou Nanland Air Catering Company Limited (“Nanland”). Nanland provides in-flight meals, snacks, drinks and related services for all of the Group’s flights originating in Guangzhou and substantially all other flights departing from Baiyun International Airport. The Group contracts with various air catering suppliers with respect to in-flight catering services for flights originating from other airports, generally on an annual basis and otherwise on terms that are customary in the industry.

     Pursuant to an agreement dated March 24, 2001, Nanland has been providing and will provide in-flight meals to the Xinjiang Airlines, a subsidiary of CSAHC from time to time for a period of one year. The agreement will then be automatically extended annually.

     For the year ended December 31, 2002, the amount paid by Xinjiang Airlines to Nanland for the provision of in-flight meals was approximately RMB2.9 million.

     Pursuant to an agreement dated September 20, 1999, Xinjiang Airlines has been providing and will provide in-flight meals to the Company for a period of one year. The agreement will then be automatically extended annually. The amount paid by the Group to Xinjiang Airlines for the provision of in-flight meals for the year ended December 31, 2002 was approximately RMB1.1 million.

     Cargo and Mail

     The Group operates cargo and mail services primarily as part of its passenger transportation services. The Group’s cargo business expanded in recent years as a result of increased demand for cargo and mail services between Guangzhou and other destinations in China and Southeast Asia served by the Group. The Group plans to continue to expand its cargo and mail operations as a source of incremental revenue and as a means to improve overall load factors. In April 2000, the Company opened a new international cargo route between Shenzhen and Chicago, the U.S. for international cargo service. To further cope with the increased aviation logistics resulting from the growth of international trade as a result of the PRC’s entry into World Trade Organisation, the Group took delivery of two Boeing 747-400 freighters in the second half of 2002. The Group conducts its cargo business primarily through its cargo division in Shenzhen. In October 2002, the Group commenced cargo and mail services between Shenzhen, Pudong, and Leige for twice per week with one Boeing 747-400 freighter wet-leased from Atlas. Starting from April 10, 2003, the Group operates its own Boeing 747-400 freighter for the route between Shenzhen, Pudong and Leige twice a week, and three times a week for the route between Pudong and Leige.

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     Sales, Reservations and Marketing

     Passenger Ticket Sales and Reservations

     The Group’s ticket sales and reservations are conducted by or through independent sales agents and the Group’s own network of exclusive sales offices as well as the CAAC’s and CSAHC’s sales offices. The Group has sales offices in Guangzhou and its other route bases. In addition, the Group maintains regional sales offices in other cities in China, including Beijing and Shanghai. The Group maintains international sales offices in Bangkok, Manila, Hanoi, Ho Chi Minh City, Singapore, Kuala Lumpur, Penang, Jakarta and Phnom Penh in Southeast Asia, as well as in Osaka, Fukuoka, Tokyo, Seoul, Amsterdam, Los Angeles, Sydney, Melbourne and Sharjah.

     In Hong Kong, ticket sales and reservations services are provided to the Group by China National Aviation Corporation (a CAAC affiliate) and Nanlung Travel Agency Limited (a subsidiary of CSAHC) for a commission of 12% of the ticket price. The Group also has agency agreements with airlines in the Asia-Pacific region, Europe, the United States and Africa for the processing of ticket sales and reservations on a reciprocal basis. In 2002, approximately 30% of all ticket sales for the Group’s scheduled flights were made by the Group’s, CAAC’s and CSAHC’s network of sales offices. The Group also sells tickets and accepts reservations through an extensive network of non-exclusive independent sales agents, substantially all of whom operate in cities throughout China, with the remainder operating principally in Hong Kong and other Southeast Asian destinations served by the Group. Under the agency agreements with these sales agents, the Group pays commissions based on the value of tickets sold. The Group pays independent sales agents in China a commission of 3% of the ticket price, and pays independent sales agents outside China a commission ranging from 5% to 9% of the ticket price. Sales agents are typically permitted to withhold their commission from the proceeds of ticket sales that are remitted to the Group. In 2002, independent sales agents accounted for approximately 70% of the Group’s ticket sales for its scheduled flights.

     Substantially all of the Group’s sales offices and agents in China are linked electronically to the CAAC’s computerized ticketing and reservations system, which is in turn linked to all domestic airlines for flights throughout China. The Group has also entered into membership agreements with several international reservation systems, including ABACUS in Southeast Asia, SABRE and GALILEO in the United States, AMADEUS in Europe and INFINI in Japan. These systems facilitate reservations and sales of tickets for the Group’s international flights.

     Cargo

     The Group’s cargo and mail services are promoted through its own cargo divisions, Baiyun Xinhua and independent cargo agents both within and outside China that track available space among all airlines. In particular, the Group employs a number of cargo agents in the Pearl River delta region. The Group generally pays such agents a commission of 4% and 5% of the relevant cargo freight rate for domestic and international services, respectively.

     Promotional and Marketing Activities

     The Group engages in regular promotional and marketing activities in an effort to increase its market share. The Group’s promotional and marketing activities for domestic routes emphasize safety, passenger comfort and the frequency of the Group’s flights. The Group’s promotional and marketing activities for international and Hong Kong regional passengers emphasize the Group’s quality of service, extensive route network in China and greater frequency of flights relative to other Chinese airlines. In addition, the Group also promotes and markets its Hong Kong regional and international routes on the basis of price.

     The Group has been seeking to increase its name recognition by offering new services to passengers. For example, the Group was the first Chinese airline to provide off-airport check-in services. The Group also offers transfer and baggage “thru-handling” services to passengers connecting to other airlines, including passengers connecting in Hong Kong for flights to Taiwan.

     To enhance relationships with its passengers, the Group has launched two frequent flyer programs, namely the “China Southern Airlines Sky Pearl Club”, and the “Egret Mileage Plus”. By the end of 2002, the Group had approximately 2,370,000 members under these programs.

     Regulation

     The Chinese commercial aviation industry is subject to a high degree of regulation and oversight by the CAAC. Regulations and policies issued or implemented by the CAAC encompass substantially all aspects of airline operations, including the approval of domestic, Hong Kong regional and international route allocation, published airfares, aircraft acquisition, jet fuel prices and standards for aircraft maintenance, airport operations and air traffic control. The Civil Aviation Law, which became effective in March, 1996, provides a

23

framework for regulation of many of these aspects of commercial aviation activities. Although China’s airlines operate under the supervision and regulation of the CAAC, they are accorded an increasingly significant degree of operational autonomy, including with respect to the application for domestic, Hong Kong regional and international routes, the allocation of aircraft among routes, the purchase of flight equipment, the pricing of Hong Kong regional and international air fares within a certain range, the training and supervision of personnel and their day-to-day operations.

     As an airline providing services on international routes, the Group is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between China and various other countries. In addition, China is a contracting state, as well as a permanent member, of the International Civil Aviation Organization (the “ICAO”), an agency of the United Nations established in 1947 to assist in the planning and development of international air transport, and is a party to many other international aviation conventions. The ICAO establishes technical standards for the international aviation industry. The Group believes that it, in all material respects, complies with all such technical standards.

     Route Rights

     Domestic Routes. The right of any Chinese airline to carry passengers or cargo on any domestic route must be obtained from the CAAC. Non-Chinese airlines are not permitted to provide domestic air service between destinations in China. The CAAC’s policy is to assign a domestic route to the Chinese airline that is best suited to serve the route based, in part, on the location of the airline’s main or regional base at the point of origin. Under current regulations, airlines are generally expected to operate mainly from their route bases, and flights within a particular region are expected to be served by airlines based in that region. The Group believes that these regulatory parameters benefit airlines, such as the Group, that have a large number of regional route bases. The CAAC also considers other factors that may make a particular airline suitable to operate a domestic route, including the applicant’s general operating authority, compliance with pricing regulations and regulations applicable to safety and service quality, market demand, the ability of the applicant in terms of its existing route, and airport facilities and related support services.

     The CAAC considers market conditions for a domestic route in determining whether the route should be allocated to one or more airlines. The CAAC requires the passenger load factor on a particular route to reach 75% before additional flights may be added on that route. Airlines serving the route are given priority for such additional flights, and only if such airlines cannot operate more flights will the CAAC permit another airline to commence service.

     Hong Kong Regional Routes. Hong Kong regional routes and landing rights are derived from agreements between the Chinese Government and the government of the Hong Kong SAR, and between the Chinese Government and the Portuguese government before December 20, 1999 and the government of Macau SAR on and after December 20, 1999. Such rights are allocated by the CAAC among the seven Chinese airlines permitted to fly to Hong Kong or Macau.

     The Group understands that the criteria for determining whether a Hong Kong regional route will be allocated to a particular airline, include market demand, the ability of the airline to service the route and the appropriateness of the airline’s aircraft for such route. A number of Hong Kong regional routes are operated by Chinese airlines on a “charter” flight basis. Permission to operate these flights is in theory subject to monthly review by the CAAC and the Hong Kong Civil Aviation Department. The CAAC has informally indicated that it primarily considers market demand and airline capability in granting permission for such flights.

     International Routes. International route rights, as well as the corresponding landing rights, are derived from air services agreements negotiated between the Chinese Government, through the CAAC, and the government of the relevant foreign country. Each government grants to the other the right to designate one or more domestic airlines to operate scheduled service between certain destinations within each of such countries. Upon entering into an air services agreement, the CAAC determines the airline to be awarded such routes based on various criteria, including the availability of appropriate aircraft, flight and management personnel, safety record, the overall size of the airline, financial condition and sufficiency of assets to bear civil liabilities in international air services. These route rights may be terminated by the CAAC under special circumstances.

     The criteria for determining whether an international route will be allocated to a second airline generally include (i) the terms of the relevant bilateral civil aviation agreement; (ii) consistency with overall national plans and the national interest and the enhancement of reasonable competition; and (iii) whether the international airports to be used are sufficient for the aircraft flown and employ security measures consistent with international standards.

     In addition, if the relevant bilateral civil aviation agreement permits more than one Chinese airline to operate a particular international route, the CAAC will only permit a second airline to operate on such route if the number of passengers carried annually exceeds 100,000 and if there is a minimum average load factor of 68% for routes with at least five weekly flights by Chinese airlines, or 80% for routes with four or fewer weekly flights by Chinese airlines.

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     Air Fare Pricing Policy

     Published air fares of Chinese airlines for domestic routes are established by the CAAC and the pricing department of the SDPC. The CAAC determines and adjusts from time to time the published fare for each domestic route based on several factors, including average airline operating costs, market conditions, national transportation requirements and the ability of consumers to pay increased fares.

     In November 1997, the CAAC announced that Chinese airlines would be permitted to offer discounts within specified ranges to their customers. In response to this policy, the Group instituted a multiple class airfare pricing policy under which discounted rates were offered on certain air routes and flights within the parameters of the CAAC’s policy.

     This air fare policy resulted in severe price competition among Chinese airlines. The CAAC believed that this development was not conducive to the healthy development of Chinese airlines, and therefore in late May 1998 required that Chinese airlines may not offer a discount rate which is more than 20% below the published fare.

     In February 1999, the CAAC adopted a new air fare policy prohibiting discounting of domestic airfares except for special group of passengers such as teachers, students, touring group and disabled soldiers, etc. The new policy was intended to encourage Chinese airlines to compete on the basis of overall service instead of fares. The Group believes that the stabilization in ticket price to a certain extent contributed to the increase of the Group’s revenue and improved its results of operations in 2001.

     Published air fares of Chinese airlines for the Hong Kong regional routes are determined by the CAAC and the relevant civil aviation authorities in Hong Kong or Macau, subject to consultation between the relevant Chinese airlines and Hong Kong or Macau airlines. Airlines may offer discounts on flights on their Hong Kong regional routes.

     Published air fares of Chinese airlines for international routes are determined through consultation between the relevant Chinese airlines and foreign airlines in accordance with the civil aviation agreements between the Chinese Government and the relevant foreign government, taking into account the international air fare standards established through the International Air Transportation Association. All air fares for international routes must be approved by the CAAC. Discounting of published international air fares is permitted.

     Acquisition of Aircraft and Flight Equipment

     The CAAC requires all Chinese airlines to acquire their aircraft through China Aviation Supplies Import and Export Corporation (“CASC”), an entity controlled by the CAAC. If a Chinese airline plans to acquire an aircraft, the airline must first seek approval from the CAAC and SDPC. The airline must, as a condition of approval, provide specific acquisition plans, which are subject to modification by the CAAC and SDPC. If the CAAC and SDPC approve an aircraft acquisition, the airline negotiates the terms of the acquisition with the manufacturer together with CASC because CASC possesses the license required to import or export aircraft, and CASC receives a commission in respect thereof. Most Chinese airlines are also required to acquire their aircraft engines, spare parts and other flight equipment through CASC. The Company and a few other Chinese airlines are permitted to import jet engines and other flight equipment for their own use without the participation of CASC. In the case of the Company, SAIETC acts as its importer agent and is paid an agency fee for its services.

     Jet Fuel Supply and Pricing

     CAOSC and Bluesky Oil Supplies Company, companies controlled and supervised by the CAAC, are the only jet fuel supply companies in China, with the exception of the joint venture jet fuel supply companies that supply the Shenzhen, Zhuhai and Sanya airports, in each of which CAOSC is a partner. Airlines are generally not permitted to buy jet fuel from other suppliers in their domestic operations, since the direct import of jet fuel for domestic purposes is prohibited. As a result, all Chinese airlines purchase their domestic jet fuel supply requirements (other than in respect of their Shenzhen, Zhuhai or Sanya operations) from the seven regional branches of CAOSC. Jet fuel obtained from such regional branches is purchased at uniform prices throughout China that are determined and adjusted by CAOSC from time to time with the approval of the CAAC and the pricing department of the SDPC based on market conditions and other factors.

     Safety

     The CAAC has made the improvement of air traffic safety in China a high priority and is responsible for the establishment of operational safety, maintenance and training standards for all Chinese airlines. The Chinese airlines are required to provide monthly flight safety reports to the CAAC, including reports of flight or other incidents or accidents and other safety related problems involving such airline’s aircraft occurring during the relevant reporting period. The CAAC periodically conducts safety inspections on individual airlines.

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     The CAAC oversees the standards of all Chinese airline pilots through its operation of the CAAC Aviation College. The CAAC Aviation College is a monitoring unit located in Tianjin which implements a uniform pilot certification process applicable to all Chinese airline pilots and is responsible for the issuance, renewal, suspension and cancellation of pilot licenses. Every pilot is required to pass CAAC-administered examinations before obtaining a pilot license and is subject to an annual recertification examination.

     All aircraft operated by Chinese airlines, other than a limited number of leased aircraft registered in foreign countries, are required to be registered with the CAAC. All aircraft operated by Chinese airlines must have a valid certificate of airworthiness, which is issued annually by the CAAC. In addition, maintenance permits are issued to a Chinese airline only after its maintenance capabilities have been examined and assessed by the CAAC. Such maintenance permits are renewed annually. All aircraft operated by Chinese airlines may be maintained and repaired only by CAAC-certified maintenance facilities, whether located within or outside China. Aircraft maintenance personnel must be certified by the CAAC before assuming aircraft maintenance posts.

     Security

     The CAAC establishes and supervises the implementation of security standards and regulations for the Chinese commercial aviation industry. Such standards and regulations are based on Chinese laws, as well as standards developed by international commercial aviation organizations. Each airline and airport in China is required to submit to the CAAC an aviation security handbook describing specific security procedures established by such airline or airport for the day-to-day operations of commercial aviation and procedures for staff training on security. Such security procedures must be based on relevant CAAC regulations and international commercial aviation treaties. Chinese airports and airlines that operate international routes must also adopt security measures in accordance with the requirements of the relevant international agreements.

     Noise and Environmental Regulation

     All airlines in China must comply with the noise and environmental regulations of the PRC State Environmental Protection Agency. Applicable regulations of the CAAC permit Chinese airports to refuse take-off and landing rights to any aircraft that does not comply with noise regulations.

     Chinese Airport Policy

     The CAAC supervises and manages the administration of most civilian airports in China, including Baiyun International Airport, which is managed by Baiyun International Airport Company, a company directly controlled by the CAAC. Airports in China are also subject to regulation and ongoing review by the CAAC, which determines take-off and landing charges, as well as charges for the use of airports and airport services.

     Competition

     The CAAC’s extensive regulation of the Chinese commercial aviation industry has had the effect of managing competition among Chinese airlines. Nevertheless, competition has become increasingly intense in recent years due to a number of factors, including relaxation of certain regulations by the CAAC, an increase in the number of Chinese airlines and an increase in the capacity, routes and flights of Chinese airlines.

     In the Chinese aviation industry, the three dominant airlines are the Group, Air China and China Eastern Airlines (“China Eastern”). In 2002, these three airlines together controlled approximately 51% of the commercial aviation market in China as measured by passengers carried.

     Most major Chinese airlines have in recent years significantly expanded their fleets, while at the same time, passenger traffic has not increased proportionately. This has resulted in a reduction in the passenger load factors for most Chinese airlines. As a result, Chinese airlines are required to be more competitive with respect to, for example, quality of service, including ticketing and reservations, in-flight services, flight scheduling and timeliness.

     The Group expects that competition in China’s commercial aviation industry will continue to be intense. The Group will also face increasing competition from alternative means of transport, such as highway and rail, as China’s transportation infrastructure improves.

     Relative to other Chinese airlines, however, the Group believes that it possesses certain competitive advantages. The Group has the most extensive route network and the largest number of regional route bases among Chinese airlines, which the Group believes places it in a favorable position in the route allocation process. The Group also has the largest aircraft fleet of any Chinese airline, which, together with the

26

Group’s planned aircraft acquisitions, will permit the Group to expand its operations and to improve the deployment of the aircraft in its fleet. The Group also believes that its dominant presence in the populous and economically developed southern and central regions of China provides it with a competitive advantage in attracting new customers and that its fully integrated flight training, aircraft maintenance and air catering operations enable it to achieve and maintain high quality service to its customers.

     The following table sets forth the Group’s market share of passengers carried, cargo and mail carried and total traffic of Chinese airlines for the years indicated.

	Passengers				Cargo and Mail				Total Traffic
	Carried				Carried (tons)				(ton kilometers)
	Industry		Group’s		Industry		Group’s		Industry		Group’s
Year	Total		Share		Total		Share		Total		Share
	(in million)		(% of total)		(in thousand)		(% of total)		(in billion)		(% of total)
1997		56.3		27.1		1,247		25.0		8.7		20.7
1998		57.5		26.2		1,401		24.9		9.3		20.4
1999		60.9		24.8		1,704		22.9		10.6		18.9
2000		67.2		24.9		1,967		22.5		12.3		20.0
2001		75.2		25.4		1,709		23.3		14.1		21.5
2002		85.9		25.0		2,021		23.3		16.5		21.9

     Domestic Routes

     The Group competes against its domestic competitors primarily on the basis of flight schedule, route network, quality of service, safety, type and age of aircraft and, to a lesser extent and until recently, price. The Group competes against nine other Chinese airlines in its various domestic route markets. Of these competitors, the largest are three airlines owned or controlled by the Chinese Government, and the remaining six airlines are operated by or under the control of various Chinese provincial or municipal governments.

     The following table sets forth the Group’s market share of the passengers carried, cargo and mail carried on departing flights and total departing flights at the ten busiest airports in China, based on passenger volume, in 2002.

	Passengers		Cargo and		Departing
Airport	Carried (% of total)		Mail Carried (% of total)		Flights (% of total)
Beijing		12.5		12.6		11.8
Shanghai Hongqiao		15.5		10.6		15.2
Guangzhou		55.7		46.6		52.3
Shenzhen		33.5		35.8		28.6
Kunming		11.4		10.5		9.7
Chengdu		11.4		12.0		10.3
Xiamen		73.3		47.9		59.5
Haikou		28.5		32.5		20.4
Xian		10.2		13.7		7.2
Shanghai Pudong		11.2		5.8		11.2

     The following table sets forth the Group’s market share of the passengers carried, cargo and mail carried on departing flights and total departing flights at seven busiest airports in southern and central China (excluding Guangzhou, Shenzhen, Xiamen and Haikou, which are included in the table above), based on passenger volume, in 2002.

	Passengers		Cargo and		Departing
Airport	Carried (% of total)		Mail Carried (% of total)		Flights (% of total)
Wuhan Tianhe		53.9		52.5		36.9
Changsha		50.3		71.8		35.6
Zhengzhou		73.6		80.2		54.3

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	Passengers		Cargo and		Departing
Airport	Carried (% of total)		Mail Carried (% of total)		Flights (% of total)
Guiyang		29.9		39.8		23.6
Shantou		75.5		64.2		67.0
Guilin		38.3		17.9		32.9
Zhuhai		69.8		79.0		23.8

     Hong Kong Regional Routes

     The Group dominates the routes operated by Chinese airlines between Hong Kong and Macau and China. In 2002, the Group operated an average of more than 257 “charter” and other scheduled flights per week between China and Hong Kong or Macau, accounting for approximately 31.2% of the total number of passengers carried by all Chinese airlines on the Hong Kong regional routes. The Group believes that the routes on which it operates “charter” flights are among its highest yielding routes, primarily because the Group faces limited competition on such routes and is consequently less subject to downward pricing pressures. Dragon Air, which is a Hong Kong-based airline, competes with the Group on many of the Group’s Hong Kong regional routes.

     Air Macau Group Ltd. (“Air Macau”), a Macau-based airline, started to operate routes in 1996 between Macau and China, including destinations such as Beijing, Shanghai, Xiamen and Wuhan. Air Macau also operates routes between Macau and Taiwan, including flights which allow passengers to travel between Taiwan and China through Macau. The air fares on some of Air Macau’s routes are significantly less than air fares on comparable routes of the Group. Air Macau’s routes provide an alternative to and compete with the Group’s Hong Kong regional routes for passengers travelling between Taiwan and China.

     International Routes

     The Group competes with Air China, China Eastern and many well-established foreign airlines on its international routes. Most of these international competitors have significantly longer operating histories, substantially greater financial and technological resources and greater name recognition than the Group. In addition, the public’s perception of the safety and service records of Chinese airlines may adversely affect the Group’s ability to compete against its Hong Kong regional and international competitors. Many of the Group’s international competitors have larger sales networks and participate in reservation systems that are more comprehensive and convenient than those of the Group, or engage in promotional activities that may enhance their ability to attract international passengers.

     Air China has the most extensive international route network among Chinese airlines. Beijing, the hub of Air China’s operations, has been the destination for most international flights to China. The Group competes against, among other airlines, Thai Airways International, Singapore Airlines, Malaysian Airlines System, Air China and China Eastern on flights to Southeast Asian destinations. In the case of its European routes, the Group’s competitors include KLM-Royal Dutch Airlines. The Group faces competition on its international route from Air China and China Eastern, each of which operates several routes between destinations in China and the United States, as well as international airlines that fly to Los Angeles from Hong Kong. The Group competes in the international market primarily on the basis of safety, price, timeliness and convenience of scheduling.

     Airline Subsidiaries

     The Airline Subsidiaries are joint ventures established by the Company and local companies in the provinces or special economic zones where the Airline Subsidiaries are based and are engaged in providing airline and related services. The Company owns 60% equity interest in each of the Airline Subsidiaries.

     As of December 31, 2002, Xiamen Airlines operated under its own “MF” code a fleet of 26 aircraft on 79 domestic routes, four international route and five Hong Kong regional routes (exclusive of domestic and Hong Kong regional routes shared with the Company). In 2002, Xiamen Airlines carried a total of about 4.98 million passengers, or approximately 23.2% of the passengers carried by the Group in that year, and had RMB3,162 million in operating revenue.

     As of December 31, 2002, Shantou Airlines operated under the Group’s “CZ” code 4 aircraft on 48 domestic routes, one international route and two Hong Kong regional route. In 2002, Shantou Airlines carried a total of about 644,000 passengers, or 3.0% of the passengers carried by the Group in that year. Total operating revenue of Shantou Airlines for the year ended December 31, 2002 was RMB488 million.

     As of December 31, 2002, Guangxi Airlines operated under the “CZ” code 4 aircraft on 28 domestic routes (exclusive of domestic routes shared with the Company), two international routes and four Hong Kong regional routes. In 2002, Guangxi Airlines carried a total of about 626,000 passengers, or 2.9% of the total number of passengers carried by the Group in that year. Total operating revenue of Guangxi Airlines for the year ended December 31, 2002 was RMB433 million.

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     As of December 31, 2002, Zhuhai Airlines operated under the “CZ” code 4 aircraft on 21 domestic routes, and one international route. In 2002, Zhuhai Airlines carried a total of about 681,000 passengers, or approximately 3.2% of the total number of passengers carried by the Group in that year. Total operating revenue of Zhuhai Airlines for the year ended December 31, 2002 was RMB414 million.

     As of December 31, 2002, Guizhou Airlines operated under the “CZ” code 4 aircraft on 21 domestic routes, one international route and one Hong Kong regional route. In 2002, Guizhou Airlines carried a total of about 480,000 passengers, or approximately 2.2% of the total number of passengers carried by the Group in 2002. Total operating revenue of Guizhou Airlines was approximately RMB332 million for the year ended December 31, 2002.

     Insurance

     The CAAC maintains fleet and legal liability insurance on behalf of the Group and all other Chinese airlines with the People’s Insurance Company of China (“PICC”) under the PICC master policy. The Group maintains aviation hull all risks, spares and airline liability insurance, aircraft hull all risks and spare engines deductible insurance, aviation hull war and allied perils policy of the type and in the amount customary in the Chinese aviation industry.

     Under Chinese law, civil liability of Chinese airlines for injuries suffered by passengers on domestic flights is limited to RMB 70,000 (approximately US$8,455) per passenger. Under the Convention for the Unification of Certain Rules Relating to International Transportation by Air of 1929 (as amended by the protocol of 1955, the “Warsaw Convention”), unless a separate agreement has been entered into between China and a specific country, civil liability for injuries suffered by passengers on international flights is limited to US$20,000 per passenger. The Group believes that it maintains adequate insurance coverage for the maximum civil liability that can be imposed in respect of injuries to passengers under Chinese law, the Warsaw Convention or any separate agreement applicable to the Group.

     The CAAC allocates insurance premiums payable in respect of the PICC master policy to each participating airline based on the value of the airline’s insured aircraft or, in the case of leased aircraft, based on the amount required by the terms of the lease. Insurance claims made by any participating airline may cause the premiums paid by the Group under the PICC master policy to increase. PICC’s practice has been to reinsure a substantial portion of its aircraft insurance business through reinsurance brokers on the London reinsurance market.

     Intellectual Property

     The Group’s businesses and operations, other than the businesses and operations of Xiamen Airlines, are conducted under the names “China Southern” and “China Southern Airlines” in both English and Chinese. The Group uses as its logo a stylized rendition of a kapok plant. Xiamen Airlines conducts its businesses and operations under the name of “Xiamen Airlines” in English and Chinese and uses its own logo depicting a stylized rendition of an egret.

     The names “China Southern” and “China Southern Airlines” contain Chinese words of common usage and are therefore not eligible for registration as tradenames under current Chinese law. The kapok logo is a trademark registered in China and recorded with the International Air Transport Association (“IATA”), the rights to which are owned by CSAHC. The Company and CSAHC have entered into a trademark license agreement (the “Trademark License Agreement”), pursuant to which CSAHC has licensed to the Group the right to use the names “China Southern” and “China Southern Airlines” in both English and Chinese and granted the Company a 10-year renewable license from 1997 to use the kapok logo on a world-wide basis. CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses conducted as of the date of the Trademark License Agreement and to permit its affiliates that do not compete, directly or indirectly, with the Group to use the kapok logo. Xiamen Airlines owns all rights to its egret logo, which is a trademark registered in China, and recorded with the IATA.

The Company owns all rights to three trademarks, being SKY PEARL CLUB, the logo relating to Easy Cargo 5000 and “SKY PEARL CARD” which are registered in China, and recorded with Trademark Office of the State Administration for Industry and Commerce. Zhuhai Airlines Company Limited owns all rights to the airline logo which is registered with the Trademark Office of the State Administration for Industry and Commerce.

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Organizational Structure

The following chart illustrates the corporate structure of the Group as of year end 2002 and the aggregate effective equity interest of the Company in each of its principal subsidiaries, affiliated companies and jointly controlled entity.

30

The particulars of the Company’s principal subsidiaries at December 31, 2002 are as follows:

		Attributable equity
	Place and date of	interest to the
Name of company	establishment/operation	Company
		Direct		Indirect
		%		%
China Southern Airlines (Group)	PRC		100
Shenzhen Co.	October 14, 1983
Guangxi Airlines Company Limited	PRC		60		—
	April 28, 1994
Southern Airlines Group Shantou	PRC		60
Airlines Company Limited	July 20, 1993
Zhuhai Airlines Company Limited	PRC		60
	May 8, 1995
Xiamen Airlines Company Limited	PRC		60		—
	August 11, 1984
Guizhou Airlines Company Limited	PRC		60		—
	November 12, 1991
Guangzhou Nanland Air Catering	PRC		51		—
Company Limited	November 21, 1989
China Southern West Australian	Australia		65		—
Flying College Pty Ltd.	January 26, 1971
Baiyun Xinhua (Guangzhou) Air	PRC		70		—
Cargo Service Co.	January 4, 1989
China Southern Airlines (Group)	PRC		100		—
Zhuhai Helicopter Company Limited	August 31, 1993
Guangzhou Baiyun International	PRC		61		—
Logistic Company Ltd	July 23, 2002

Affiliated Companies and Jointly Controlled Entities

The particulars of the Group’s principal affiliated companies and jointly controlled entity at December 31, 2002 are as follows:

	Place and date of	Attributable equity interest
Name of company	establishment/operation	to the company
		Direct		Indirect
		%		%
Guangzhou Aircraft Maintenance	PRC		50		—
Engineering Company Limited	October 28, 1989

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	Place and date of	Attributable equity interest
Name of company	establishment/operation	to the company
		Direct		Indirect
		%		%
Southern Airlines Group	PRC		30		16.86
Finance Company Limited	June 28, 1995
Sichuan Airlines Corporation	PRC		30		—
Limited	August 28, 2002
China Postal Airlines Limited	PRC		49		—
	November 25, 1996
MTU Maintenance Zhuhai	PRC		50		—
Company Limited	April 6, 2001
Zhuhai Xiang Yi Aviation	PRC		51		—
Technology Company Limited	July 10, 2002

     Certain of the Company’s subsidiaries, affiliated companies and jointly controlled entities are PRC joint ventures which have limited duration pursuant to PRC law.

Property, Plant and Equipment

For a discussion of the Group’s aircraft, see Item 4, “Information on the Company — History and development of the Company -Aircraft Fleet.”

The Group’s headquarters in Guangzhou occupy an area of approximately 149,000 square meters of land and a total gross floor area of approximately 149,000 square meters. The Group leases from CSAHC the land in Guangzhou on which the Group’s headquarters and other facilities are located. The Group also leases from CSAHC certain buildings at the Wuhan, Haikou and Zhengzhou airports.

The Company’s principal properties are located at its headquarters site and at its route bases. The following table sets forth certain information with respect to the Company’s properties at its headquarters in Guangzhou and certain route bases as of the date hereof.

	Land				Buildings
	(in square meters)				(in square meters)
	Owned		Leased		Owned		Leased
Guangzhou		—		80,909		103,957		1,755
Shenzhen		208,740		—		35,936		—
Zhuhai		170,062		—		18,791		—
Changsha		138,949		—		21,482		—
Zhengzhou		290,841		—		9,672		—
Haikou		5,265		—		—		19,633
Wuhan		—		—		435		26,061
Nanyang		—		—		12,156		—

The following table sets forth certain information with respect to the properties of the Airline Subsidiaries as of the date hereof.

	Land				Buildings
	(in square meters)				(in square meters)
	Owned		Leased		Owned		Leased
Xiamen		211,632		—		29,292		1,564
Shantou		20,292		—		27,810		3,127
Zhuhai		53,797		—		29,697		1,513
Guilin		—		—		14,594		349

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	Land				Buildings
	(in square meters)				(in square meters)
	Owned		Leased		Owned		Leased
Guizhou		270,001		—		10,466		—

As systems for registration and transfer of land use rights and related real property interests in China have been implemented relatively recently, such systems do not yet comprehensively account for all land and related property interests. The land in Guangzhou on which the Group’s headquarters and other facilities are located and the buildings that the Group uses at its route base in Wuhan, Haikou and Zhengzhou are leased by the Company from CSAHC. However, CSAHC lacks adequate documentation evidencing CSAHC’s rights to such land and buildings, and, as a consequence, the lease agreements between CSAHC and the Company for such land may not be registered with the relevant authorities. Lack of registration may affect the validity of such lease agreements. There are certain other parcels of land and buildings owned or used by the Group that lack adequate documentation. Lack of adequate documentation for land use rights and ownership of buildings may impair the ability of the Group to dispose of or mortgage such land use rights and buildings.

The Group has been occupying all of the land and buildings described above without challenge. CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancy of the land in Guangzhou. The Group understands that the CAAC is basing its conclusion on an agreement among certain governmental authorities relating to such land. CSAHC has agreed to indemnify the Group against any loss or damage caused by any challenge of, or interference with, the use by the Group of any of their respective land and buildings.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

The following discussion and analysis should be read in conjunction with the Financial Statements of the Group contained elsewhere in this Annual Report. The Group maintains its books and accounts in accordance with accounting principles generally accepted in the PRC (“PRC GAAP”) and prepares its financial statements in accordance with both PRC GAAP and IFRS. The Financial Statements contained elsewhere in this Annual Report have been prepared in accordance with IFRS. IFRS differs in certain material respects from U.S. GAAP. For a discussion of the material differences between IFRS and U.S. GAAP relating to the Group, see “U.S. GAAP Reconciliation” and Note 31 to the Financial Statements.

Critical Accounting Policies

The discussion and analysis of the Group’s financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of such consolidated financial statements requires the Group to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Group believes that its critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Financial Statements.

     Revenue Recognition

     The Group records sales of passenger, cargo and mail tickets as a current liability on the consolidated balance sheet. Passenger, cargo and mail revenues are recognized and the related current liability is reduced when the transportation is provided. The Group makes estimates about a current liability for tickets sold but not yet reported to the Group, the timing and amount of tickets uplifted by other airlines and the amount of tickets sold that will not be used. The Group periodically evaluates the liability and record any resulting adjustments, which may be significant, in the consolidated statement of operations in the period in which the evaluations are completed.

     Fixed Assets

     The Group depreciates its fixed assets on a straight-line basis to their estimated residual values over their respective estimated useful life. In addition, the Group evaluates fixed assets used in operations for impairment. If circumstances indicate that the net book value of an asset or investment may not be recoverable, this asset may be considered “impaired”, and an impairment loss may be recognized in accordance with IAS 36 “Impairment of Assets”. The amount of impairment loss is the difference between the carrying amount of the asset and its recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, the Group utilizes certain assumptions, including, but not limited to: (i) estimated fair market value of the assets, and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Group’s operations and estimated residual values. The Group will use all readily available information in determining an

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amount that is a reasonable approximation of recoverable amounts, including estimates based on industry trends and reference to market rates and transactions. Changes to the above estimates may have a material effect on the Group’s Financial Statements.

Overview

During the year, the economic conditions in the PRC and other Asian regions continued to show steady improvement, leading to an increase in demand for aviation services. To increase the efficiency and global competitiveness of PRC domestic airlines, the PRC Government implemented various measures to maintain the momentum of economic growth and to streamline the airline industry through mergers and restructuring.

The Group conducts a portion of its airline operations through the Airline Subsidiaries. Operating results for the Airline Subsidiaries are included in each of the years presented in the Financial Statements. The Airline Subsidiaries, which derive substantially all of their operating revenue from passenger traffic, accounted for 29.7%, 29.7% and 26.8% of the Group’s total operating revenue, and 35.0%, 34.2% and 33.5% of the Group’s total passengers carried, in 2000, 2001 and 2002, respectively. Xiamen Airlines is the largest member of the Airline Subsidiaries, with operating revenue of RMB2,737 million, RMB3,185 million and Rmb3,162 million in 2000, 2001 and 2002, respectively, or 18.0%, 18.9% and 17.5% of the Group’s total operating revenue in such years.

The Group’s operating revenue is substantially dependent on overall passenger and cargo traffic volume, which is subject to seasonal and other changes in traffic patterns, the availability of appropriate time slots for the Group’s flights and alternative routes, the degree of competition from other airlines and alternate means of transportation, as well as other factors that may influence passenger travel demand and cargo and mail volume. In particular, the Group’s airline revenue is generally higher in the second and third quarters than in the first and fourth quarters.

Like most airlines, the Group is subject to a high degree of financial and operating leverage. A significant percentage of the Group’s operating expenses is fixed costs that do not vary proportionally based on the Group’s load factors or the number of passengers carried. These fixed costs include depreciation expense, jet fuel costs, landing and navigation fees, financing costs, operating lease payments, aircraft maintenance costs and labor for flight crew, cabin crew and ground personnel. Thus, a minor change in the Group’s yields or load factors would have a material effect on the Group’s results of operations. In addition, certain of these expenses, primarily financing costs, operating lease payments, labor costs and depreciation and amortization of aircraft and flight equipment, do not vary based on the number of flights flown. Thus, the Group’s operating results can also be substantially affected by minor changes in aircraft utilization rates. The Group is and will continue to be highly leveraged with substantial obligations denominated in foreign currencies and, accordingly, the results of its operations are significantly affected by fluctuations in foreign exchange rates, particularly for the U.S. dollar and the Japanese yen. The Group recorded a net exchange gain (loss) of RMB319 million, RMB297 million and RMB(175) million in 2000, 2001 and 2002, respectively. These amounts represented mainly unrealized exchange differences resulting from the retranslation of the foreign currency borrowings as of year end 2000, 2001 and 2002.

A number of other external variables, including political and economic conditions in China, tend to have a major impact on the Group’s performance. The Group’s financial performance is also significantly affected by factors arising from operating in a regulated industry. As substantially all aspects of the Group’s airline operations are regulated by the CAAC, the Group’s operating revenues and expenses are directly affected by the CAAC’s policies with respect to domestic airfares, jet fuel prices and landing and navigation charges, among others. The nature and extent of airline competition and the ability of Chinese airlines to expand are also affected by CAAC’s control over route allocations. Any changes in the CAAC’s regulatory policies, or any implementation of such policies may have a significant impact on the Group’s future operations and its ability to implement its operating strategy.

Certain Financial Information and Operating Data by Geographic Region

The following table sets forth certain financial information and operating data by geographic region for the years ended December 31, 2001 and 2002:

		Year ended December 31,				2002 vs. 2001
		2001		2002		% Increase/ (Decrease)
Traffic
RPK (million)
	Domestic		19,447		22,092		13.6
	Hong Kong regional		1,060		1,081		2.0
	International		4,550		5,767		26.7

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				Year ended December 31,				2002 vs. 2001
				2001		2002		% Increase/ (Decrease)
		Total			25,057		28,940		15.5
RTK (million)
	Domestic				2,217		2,532		14.2
	Hong Kong regional				105		108		2.9
	International				712		974		36.8
			Total		3,034		3,614		14.1
RTK (million)
	Passenger ton kilometres				2,236		2,584		15.6
	Cargo and mail ton kilometers				798		1,030		29.1
			Total		3,034		3,614		19.1
Passengers carried (thousand) Domestic					16,499		18,535		12.3
	Hong Kong regional				1,409		1,369		(2.8	)
	International				1,213		1,589		31.0
			Total		19,121		21,493		12.4
Cargo and mail carried (thousand tons)
	Domestic				348		404		16.1
	Hong Kong regional				14		14		—
	International				36		52		44.4
			Total		398		470		18.1
Capacity
ASK (million)
	Domestic				31,393		33,753		7.5
	Hong Kong regional				1,690		1,746		3.3
	International				6,981		8,746		25.3
		Total			40,064		44,245		10.4
ATK (million)
	Domestic				3,622		3,924		8.3
	Hong Kong regional				185		193		4.3
	International				1,317		1,798		36.5
			Total		5,124		5,915		15.4
Load Factors
Passenger load factor (RPK/ASK) (%)
	Domestic				61.9		65.5		5.8
	Hong Kong regional				62.7		61.9		(1.3	)
	International				65.2		65.9		1.1
			Total		62.5		65.4		4.6
Overall load factor (RTK/ATK) (%)
	Domestic				61.2		64.5		5.4
	Hong Kong regional				56.8		55.8		(1.8	)
	International				54.1		54.2		0.2
			Total		59.2		61.1		3.2
Yield
Yield per RPK (RMB)
	Domestic				0.62		0.55		(11.3	)
	Hong Kong regional				1.06		0.98		(7.5	)
	International				0.41		0.42		2.4
			Total		0.60		0.54		(10.0	)
Yield per RTK (RMB)
	Domestic				5.83		5.21		(10.6	)
	Hong Kong regional				11.26		10.36		(8.0	)
	International				3.31		3.25		(1.8	)
		Total			5.43		4.84		(10.9	)
Financial
Passenger revenue (RMB million)

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			Year ended December 31,				2002 vs. 2001
			2001		2002		% Increase/ (Decrease)
	Domestic			12,068		12,234		1.4
	Hong Kong regional			1,128		1,055		(6.5	)
	International			1,860		2,407		29.4
		Total		15,056		15,696		4.3
Cargo and mail revenue (RMB million)				1,406		1,786		27.0

Operating Results

The historical results of operations discussed below may not be indicative of the Group’s future operating performance. In addition to the factors discussed under “Overview” above, the Group’s future operations will be affected by, among other things, changes in the aviation market, the cost of jet fuel, aircraft acquisition and leasing costs, aircraft maintenance expenses, take-off and landing charges, wages, salaries and benefits and other operating expenses, foreign exchange rates and the rates of income taxes paid. The Group expects depreciation expenses to increase in future as the Group continues to expand its fleet.

     2002 Compared with 2001

     The Group recorded a net income of RMB576 million for 2002, as compared to a net income of RMB340 million for 2001. The Group’s operating revenue increased by RMB1,139 million or 6.7% from RMB16,880 million in 2001 to RMB18,019 million in 2002. Passenger load factor increased by 2.9 percentage points from 62.5% in 2001 to 65.4% in 2002. Passenger yield (in passenger revenue per RPK) decreased by 10.0% from RMB0.60 in 2001 to RMB0.54 in 2002. Average yield (in traffic revenue per RTK) decreased by 10.9% from RMB5.43 in 2001 to RMB4.84 in 2002. Operating expenses increased by RMB514 million or 3.3% from RMB15,479 million in 2001 to RMB15,993 million in 2002. As operating revenue increased more than operating expenses, operating profit increased by 44.7% from RMB1,401 million in 2001 to RMB2,026 million in 2002. The Group’s net non-operating expenses increased by 46.5%, from RMB605 million in 2001 to RMB887 million in 2002, mainly due to an unfavorable movement in exchange differences of RMB472 million, partly offset by a gain on disposal of four Boeing 757-200 aircraft of RMB199 million. Overall, the Group’s net income increased by 69.2%, from RMB340 million in 2001 to RMB576 million in 2002.

     Operating Revenue

     Substantially all of the Group’s operating revenue is attributable to its airline operations. Traffic revenue in 2002 and 2001 accounted for 97.0% and 97.5% respectively of total operating revenue. Passenger revenue and, cargo and mail revenue accounted for 89.8% and 10.2% respectively of total traffic revenue in 2002. The balance of the Group’s operating revenue is derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines that operate flights in and out of airports in Southern China (including the airports in Guangzhou, Shenzhen, Xiamen and Wuhan), air catering services and aircraft lease income.

     Operating revenue increased by 6.7% from RMB16,880 million in 2001 to RMB18,019 million in 2002. This increase was primarily due to a 4.3% rise in passenger revenue from RMB15,055 million in 2001 to RMB15,696 million in 2002 due to higher traffic volume. The total number of passengers carried increased by 12.4% to 21.49 million passengers in 2002. RPKs increased by 15.5% from 25,057 million in 2001 to 28,940 million in 2002, primarily as a result of an increase in passengers carried. However, passenger yield decreased by 10.0% from RMB0.60 in 2001 to RMB0.54 in 2002, mainly as a result of a fall in the average fares resulting from increased competition.

     Domestic passenger revenue, which accounted for 78.0% of total passenger revenue in 2002, increased by 1.4% from RMB12,068 million in 2001 to RMB12,234 million in 2002. For the Group’s domestic routes, passenger traffic in RPKs increased by 13.6%, while passenger capacity in ASKs increased by 7.5%, resulting in 3.6 percentage points increase in passenger load factor, or an increase of 5.8% from 2001. Passenger yield, however, decreased from RMB0.62 in 2001 to RMB0.55 in 2002 mainly as a result of increased competition among the PRC airlines.

     Hong Kong passenger revenue, which accounted for 6.7% of total passenger revenue, decreased by 6.5% from RMB1,128 million in 2001 to RMB1,055 million in 2002. For Hong Kong flights, passenger traffic in RPKs increased by 2.0%, while passenger capacity in ASKs increased by 3.3%, resulting in 0.8 percentage point decrease in passenger load factor, or a decrease of 1.3% from 2001. Passenger yield decreased from RMB1.06 in 2001 to RMB0.98 in 2002 mainly due to slack in traffic volume.

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     International passenger revenue, which accounted for 15.3% of total passenger revenue, increased by 29.4% from RMB1,860 million in 2001 to RMB2,407 million in 2002. For international flights, passenger traffic in RPKs increased by 26.7%, while passenger capacity in ASKs increased by 25.3%, resulting in a 0.7 percentage point gain in passenger load factor, or an increase of 1.1% from 2001. Passenger yield increased slightly by 2.4% from RMB0.41 in 2001 to RMB0.42 in 2002.

     Cargo and mail revenue, which accounted for 10.2% of the Group’s total traffic revenue and 9.9% of total operating revenue, increased by 27.0% from RMB1,406 million in 2001 to RMB1,786 million in 2002. The increase was primarily due to the opening of two international cargo routes in 2002.

     Other operating revenue increased by 28.4% from RMB418 million in 2001 to RMB537 million in 2002. The increase was primarily due to increase in fees charged for ground services rendered to other Chinese airlines as the traffic volume increased as well as an income from a lease arrangement effected during the year.

     Operating Expenses

     Substantially all of the Group’s operating expenses result from its airline operations. The vast majority of such expenses relate directly to flight operations, aircraft and traffic servicing, aircraft repairs and maintenance and to depreciation and amortization in respect of aircraft and flight equipment. Expenses associated directly with the Group’s flight operations (collectively, “flight operations expenses”) include fuel costs, operating lease payments, catering expenses, aircraft insurance, flight personnel payroll and welfare and training expenses. Expenses associated directly with repairs and maintenance in respect of the Group’s aircraft (collectively, “maintenance expenses”) include repairs and maintenance and overhaul charges, the costs of consumables and other maintenance materials and labor costs for maintenance personnel. Expenses associated directly with the Group’s aircraft and traffic servicing operations (collectively “aircraft and traffic servicing expenses”) include landing and navigation fees, rental payments and charges in respect of terminal and other ground facilities and labor costs for ground personnel. The balance of the Group’s operating expenses result from promotional and marketing activities (collectively, “promotion and sales expenses”) such as sales commissions, fees for use of the CAAC’s reservation system, ticket-printing and sales office expenses, advertising and promotional expenses, and from general and administrative expenses, such as administrative salaries and welfare and other personnel benefits and office expenses.

     Total operating expenses in 2002 amounted to RMB15,993 million, representing an increase of 3.3% or RMB514 million over 2001, primarily due to the combined effect of the growth in operations and increase in maintenance expenses. Total operating expenses as a percentage of total operating revenue decreased from 91.7% in 2001 to 88.76% in 2002 as the increase in operating revenue exceeded the increase in operating expenses.

     Flight operation expenses, which accounted for 42.1% of total operating expenses, decreased by 2.5% from RMB6,906 million in 2001 to RMB6,733 million in 2002, mainly due to a decrease in operating lease rentals. Fuel costs, which accounted for 52.3% of flight operations expenses decreased by 0.8% from RMB3,549 million in 2001 to RMB3,519 million in 2002 mainly resulting from decreased fuel prices. Operating lease rentals decreased by 25.9% from RMB1,913 million in 2001 to RMB1,417 million in 2002, primarily due to the termination of wet leases of five Boeing 737-300/37K aircraft from Zhongyuan Airlines in January 2002. Catering expenses increased by 12.8% from RMB554 million in 2001 to RMB625 million in 2002, reflecting primarily an increase in number of passengers carried. Aircraft insurance costs increased by 108.1% from RMB123 million in 2001 in the rates of aircraft insurance premiums subsequent to the 911 incident of the United States. Labor costs for flight personnel increased by 18.9% from RMB657 million in 2001 to RMB781 million in 2002, largely due to an increase in flight hours as well as an increase in bonuses for flight personnel.

     Maintenance expenses which accounted for 14.6% of total operating expenses, increased by 15.8% from RMB2,015 million in 2001 to RMB2,333 million in 2002. The increase was primarily attributable to a 15.7% increase in aircraft maintenance and repair charges from RMB1,845 million in 2001 to RMB2,135 million in 2002, mainly as a result of the effect of fleet expansion in recent years and the growth in operations.

     Aircraft and traffic servicing expenses, which accounted for 15.7% of total operating expenses, increased by 9.3% from RMB2,298 million in 2001 to RMB2,511 million in 2002. The increase primarily resulted from 9.1% rise in landing and navigation fees from RMB2,157 million in 2001 to RMB2,353 million in 2002, as the number of flights increased.

     Promotional and sales expenses, which accounted for 9.4% of total operating expenses, decreased by 2.7% from RMB1,541 million in 2001 to RMB1,500 million in 2002. The decrease was due to 15.9% decrease in sale commissions and bonuses paid to sales agents because of tighter cost controls exercised by the Group.

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     General and administrative expenses, which accounted for 6.6% of total operating expenses, increased by 18.8% from RMB892 million in 2001 to RMB1,060 million in 2002. This was mainly due to an increase in staff salaries and welfare benefits of 27.8% from RMB439 million in 2001 to RMB561 million in 2002 and increased scale of operations.

     Depreciation and amortization, which accounted for 11.5% of total operating expenses, increased by 1.4% from RMB1,815 million in 2001 to RMB1,840 million in 2002. This was primarily as a result of the additions of aircraft during 2002.

     Operating Profit

     Operating profit increased by 44.7% from RMB1,401 million in 2001 to RMB2,026 million in 2002, as operating revenue increased by RMB1,139 million or 6.7% from 2001, while operating expenses increased by RMB514 million or 3.3% over the same period.

     Non-operating Income/(Expenses)

     Interest expense increased by 2.7% from RMB934 million in 2001 to RMB959 million in 2002, mainly reflecting the additional bank loans borrowed to finance the acquisitions of aircraft, partly offset by scheduled debt repayments during the year.

     Interest income increased by 5.5% from RMB50 million in 2001 to RMB53 million in 2002. This was mainly due to an increase in cash balances.

     The Group recognized a net gain on sale of fixed assets of RMB171 million in 2002, mainly resulting from disposal of four Boeing 757-200 aircraft.

     During 2002, the Group recorded a net exchange loss of RMB175 million predominantly due to its Japanese yen denominated borrowings as a result of the Japanese yen appreciation. Such amount comprised mostly unrealized translation loss.

     Taxation

     The Group is subject to PRC income tax at a rate of 33%.

     Taxation expense increased by 24.2% from RMB321 million in 2001 to RMB398 million in 2002, reflecting primarily an increase in profit before taxation. A deferred tax asset of RMB149 million was recognized at December 31, 2002 in respect of the unrelieved PRC tax losses brought forward from prior years. Such tax losses are available for carry-forward to offset against future PRC taxable profits for a maximum period of 5 years.

     Minority Interests

     Minority interests increased by 22.7% from RMB135 million in 2001 to RMB165 million in 2002, primarily as a result of an increase in net profits of the Group’s Airline Subsidiaries.

     2001 Compared With 2000

     The Group recorded net income of RMB340 million for 2001, a decrease of 32.2% from RMB502 million for 2000. The Group’s operating revenue increased by RMB1,702 million or 11.2% from RMB15,178 million in 2000 to RMB16,880 million in 2001. Passenger load factor increased by 2.1 percentage point from 60.4% in 2000 to 62.5% in 2001. Passenger yield (in passenger revenue per RPK) decreased by 1.6% from RMB 0.61 in 2000 to RMB0.60 in 2001. Average yield (in traffic revenue per RTK) decreased by 3.6% from RMB5.63 in 2000 to RMB5.43 in 2001. Operating expenses increased by RMB1,483 million or 10.6% from RMB13,996 million in 2000 to RMB15,479 million in 2001. Of the increase in operating expenses, an approximate amount of RMB243 million was attributable to the increase in aircraft repair and maintenance expense and the remaining amount of approximately RMB1,240 million was primarily due to operational growth. As operating revenue increased more than operating expenses, operating income increased by 18.5% from RMB1,182 million in 2000 to RMB1,401 million in 2001. The Group’s net non-operating expenses increased by 141.3%, from RMB251 million in 2000 to RMB605 million in 2001, mainly reflecting a drop in sale of aircraft under sale and leaseback transactions of RMB318 million and a loss on sale of staff quarters of RMB111 million.

     Operating Revenue

     Substantially all of the Group’s operating revenue is attributable to airline operations. Traffic revenue in 2000 and 2001 accounted for 96.9% and 97.5% of total operating revenue, respectively. Passenger traffic and cargo and mail traffic accounted for 91.5% and 8.5% of

38

total traffic revenue in 2001, respectively. The balance of the Group’s operating revenue is derived from commission income, income from general aviation operations, fees charged for ground services rendered to other Chinese airlines, which operate flights in and out of airports in Southern China, including the airports in Guangzhou, Shenzhen, Xiamen and Wuhan, air catering services and aircraft lease income.

     Operating revenue increased by 11.2% from RMB15,178 million in 2000 to RMB16,880 million in 2001. This increase was primarily due to a 13.6% rise in passenger revenue from RMB13,255 million in 2000 to RMB15,056 million in 2001, primarily as a result of higher traffic volume. The total number of passengers carried increased by 13.5% to 19.12 million passengers in 2001. RPKs increased by 15.7% from 21,653 million in 2000 to 25,057 million in 2001, primarily as a result of an increase in passengers carried. However, passenger yield decreased by 1.6% from RMB0.61 in 2000 to RMB0.60 in 2001, primarily as a result of a fall in the average fares of international passenger traffic.

     Domestic passenger revenue, which accounted for 80.1% of total passenger revenue in 2001, increased by 14.2% from RMB10,564 million in 2000 to RMB12,068 million in 2001. For the Group’s domestic routes, passenger traffic in RPKs increased by 14.6%, while passenger capacity increased by 10.8%, resulting in a 2.0 percentage point increase in passenger load factor, or an increase of 3.3% from 2000. Passenger yield remained unchanged at RMB0.62.

     Hong Kong passenger revenue, which accounted for 7.5% of total passenger revenue, decreased by 1.3% from RMB1,143 million in 2000 to RMB1,128 million in 2001. For Hong Kong flights, passenger traffic in RPKs decreased by 1.3%, while passenger capacity in ASKs, decreased 3.1%, resulting in a 1.1 percentage point increase in passenger load factor, or an increase of 1.8% from 2000. Passenger yield remained unchanged at RMB1.06.

     International passenger revenue, which accounted for 12.4% of total passenger revenue, increased by 20.2% from RMB1,548 million in 2000 to RMB1,860 million in 2001. For international flights, passenger traffic in RPKs increased by 26.2%, while passenger capacity in ASKs increased by 21.6%, resulting in a 2.4 percentage point increase in passenger load factor, or an increase of 3.8% from 2000. Passenger yield decreased by 4.7% from RMB0.43 in 2000 to RMB0.41 in 2001, principally as a result of larger fare discounts being offered on the long-haul flights, especially on the two new routes to Australia, with a view to establishing the market share.

     Cargo and mail revenue, which accounted for 8.5% of the Group’s total traffic revenue and 8.3% of total operating revenue, decreased by 3.1% from RMB1,451 million in 2000 to RMB1,406 million in 2001. This decrease was primarily due to increased competition in domestic and international markets. In order to maintain its market share, larger discounts were given by the Group, resulting in a drop of yield per RTK of 17.4%.

     Other operating revenue decreased by 11.4% from RMB472 million in 2000 to RMB418 million in 2001. This decrease was primarily due to a drop in aircraft lease income of RMB45 million.

     Operating Expenses

     Substantially all of the Group’s operating expenses result from its airline operations. The vast majority of such expenses relate directly to flight operations, aircraft and traffic servicing, aircraft repairs and maintenance and to depreciation and amortization in respect of aircraft and flight equipment. Expenses associated directly with the Group’s flight operations (collectively, “flight operations expenses”) include fuel costs, operating lease rentals, catering expenses, aircraft insurance, flight personnel payroll and welfare and training expenses. Expenses associated directly with repairs and maintenance in respect of the Group’s aircraft (collectively “maintenance expenses”) include repairs and maintenance and overhaul charges, the costs of consumables and other maintenance materials and labor costs for maintenance personnel. Expenses associated directly with the Group’s aircraft and traffic servicing operations (collectively “aircraft and traffic servicing expenses”) include landing and navigation fees, rental payments and charges in respect of terminal and other ground facilities and labor costs for ground personnel. The balance of the Group’s operating expenses result from promotional and marketing activities (collectively, “promotional and marketing expenses”) such as sales commission, fees for use of the CAAC’s reservation system, ticket-printing and sales office expenses, advertising and promotional expenses, from general and administrative expenses, such as administrative salaries and welfare and other personnel benefits and office expenses, and from depreciation and amortization expenses.

     Total operating expenses in 2001 amounted to RMB15,479 million, representing an increase of 10.6% or RMB1,483 million over 2000, primarily due to the combined effect of the growth in operations and increases in operating lease rentals and repair and maintenance expenses. Total operating expenses as a percentage of total operating revenue decreased from 92.2% in 2000 to 91.7% in 2001 as the increase in operating revenue exceeded the increase in operating expenses.

     Flight operation expenses, which accounted for 44.6% of total operating expenses, increased by 13.0% from RMB6,109 million in 2000 to RMB6,906 million in 2001, primarily as a result of an increase in fuel costs, operating lease rentals, catering expenses, aircraft insurance costs and labor costs for flight personnel. Fuel costs, which accounted for 51.4% of flight operations expenses, increased by 9.5%

39

from RMB3,240 million in 2000 to RMB3,549 million in 2001 as a result of the traffic capacity growth. Operating lease rentals increased by 18.4% from RMB1,616 million in 2000 to RMB1,913 million in 2001, due primarily to the full year effect of five Boeing 737-300/37K aircraft wet leased from Zhongyuan Airlines commencing in 2000. Catering expenses increased by 14.5% from RMB483 million in 2000 to RMB554 million in 2001, reflecting primarily an increase in number of passengers carried. Aircraft insurance costs increased by 44.7% from RMB85 million in 2000 to RMB123 million in 2001, due largely to a rise in aircraft insurance premiums levied on PRC airlines by the People’s Insurance (Property) Company of China as a result of the September 11 attacks in the United States of America. Labor costs for flight personnel increased by 14.1% from RMB576 million in 2000 to RMB657 million in 2001, due largely to an increase in flight hours as well as an increase in bonuses for flight personnel.

     Maintenance expenses which accounted for 13.0% of total operating expenses, increased by 14.6% from RMB1,759 million in 2000 to RMB2,015 million in 2001. The increase was primarily attributable to a 15.2% increase in aircraft maintenance and repair charges from RMB1,602 million in 2000 to RMB1,845 million in 2001, mainly as a result of the effect of fleet expansion in recent years.

     Aircraft and traffic servicing expenses, which accounted for 14.8% of total operating expenses, increased by 11.0% from RMB2,069 million in 2000 to RMB2,298 million in 2001. The increase resulted from a 10.3% rise in landing and navigation fees from RMB1,955 million in 2000 to RMB2,157 million in 2001, as the number of flights increased.

     Promotional and marketing expenses, which accounted for 10.0% of total operating expenses, increased by 11.8% from RMB1,378 million in 2000 to RMB1,541 million 2001. The increase was due to a 11.2% increase in commission and bonuses paid to sales agents, which resulted from a rise in traffic revenue and increased competition.

     General and administrative expenses, which accounted for 5.9% of total operating expenses, increased by 10.3% from RMB809 million in 2000 to RMB892 million in 2001. This was mainly due to an increase in staff salaries and welfare benefits of 6.1% from RMB294 million in 2000 to RMB312 million in 2001 and increased scale of operations.

     Depreciation and amortization, which accounted for 11.7% of total operating expenses, decreased by 2.6% from RMB1,864 million in 2000 to RMB1,815 million in 2001. This was primarily as a result of the disposal of four Boeing 757-200 aircraft and two Airbus 320-200 aircraft under sale and leaseback transactions in 2000 and 2001 respectively and full depreciation of certain old flight equipment during 2001.

     Operating Income

     Operating income increased by 18.5% from RMB1,182 million in 2000 to RMB1,401 million in 2001, as operating revenue increased by RMB1,702 million or 11.2% as compared to 2000, while operating expenses increased by RMB1,483 million or 10.6% over the same period.

     Non-operating Income/(Expenses)

     Interest expense decreased by 13.1% from RMB1,074 million in 2000 to RMB934 million in 2001, mainly reflecting the scheduled debt repayments during the year.

     Interest income decreased by 44.8% from RMB90 million in 2000 to RMB50 million in 2001. This was mainly attributable to a decrease in domestic deposit rates as well as a fall in the cash balances.

     The Group recognized a net loss on sale of fixed assets of RMB56 million in 2001, mainly resulting from the net effect of a loss of RMB111 million on disposal of staff quarters and a gain of RMB60 million on disposal of two Airbus 320-200 aircraft under sale and leaseback arrangements.

     During 2001, the Group recorded a net exchange gain of RMB297 million predominantly due to its Japanese yen denominated borrowings as a result of the Japanese yen depreciation. Such amount comprised mostly unrealized translation gains.

     Taxation

     The Group is subject to PRC income tax at a rate of 33%. Taxation expense decreased by 5.4% from RMB339 million in 2000 to RMB321 million in 2001, reflecting primarily the decrease in income before taxation. A deferred tax asset of RMB176 million was recognized at December 31, 2001 in respect of the unrelieved PRC tax losses brought forward from prior years. Such tax losses are available for carry-forward to offset against future PRC taxable profits for a maximum period of five years.

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     Minority Interests

     Minority interests increased by 48.5% from RMB91 million in 2000 to RMB135 million in 2001, primarily as a result of an increase in net income of the Group’s Airline Subsidiaries.

Liquidity and Capital Resources

Prior to the initial public offering of the Company, the Group met its working capital and capital expenditure requirements through cash from its operations, the proceeds of certain long-term and short-term bank loans, capital lease financing and rebates available under certain of the Group’s aircraft leases. In July 1997, the Company received net proceeds of RMB5,459 million from its initial public offering. A majority part of these net proceeds were utilized to finance the Group’s working capital and capital expenditure requirements. As of December 31, 2002, the Group had loan facilities from several PRC commercial banks for providing long term loan finance up to an approximate amount of RMB12,360 million to the Group. As of December 31, 2002, an approximate amount of RMB7,258 million was utilized. As of December 31, 2001 and 2002, the Group’s cash and cash equivalents totaled RMB2,818 million and RMB3,771 million, respectively.

Net cash inflows from operating activities in 2000, 2001 and 2002 were RMB2,355 million, RMB2,224 million and RMB3,698 million respectively.

Net cash used in investing activities in 2000, 2001 and 2002 was RMB256 million, RMB3,036 million and RMB5,895 million respectively. Cash capital expenditures in 2000, 2001 and 2002 were RMB1,381 million, RMB1,492 million and RMB6,351 million, respectively, reflecting predominantly additional investments in aircraft and flight equipment under the Group’s fleet expansion plans and Guangzhou new airport, and, to a small extent, additional investments in pilot training facilities and other facilities and buildings for operations.

Financing activities resulted in net cash (outflows)/inflow of RMB(2,490) million, RMB(568) million and RMB3,150 million in 2000, 2001 and 2002, respectively. The net cash outflows of 2000 and 2001 were primarily as a result of making scheduled repayments of bank borrowings and capital lease obligations in excess of proceeds from new bank borrowings.

As of December 31, 2002, the Group’s aggregate long-term debt and obligations under capital leases totaled RMB14,851 million. Based on such amount, in 2003, 2004, 2005, 2006, 2007 and thereafter, amounts payable under such debt and obligations will be RMB2,384 million, RMB2,115 million, RMB2,111 million, RMB5,125 million and RMB3,116 respectively. Such borrowings were denominated, to a larger extent, in United States dollars and, to a smaller extent, in Japanese yen, with almost all being fixed interest rate borrowings. In the normal course of business, the Group is exposed to fluctuations in foreign currencies. The Group’s exposure to foreign currencies was primarily as a result of its foreign currency debts. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the State Administration of Foreign Exchange, or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorised PRC banks.

As of December 31, 2002, the Group’s short term bank debt was RMB4,423 million with interest rates ranging from 1.9% to 5.3%. The Group’s weighted average interest rate on short-term bank notes payable was 3.11% as of December 31, 2002. The primary use of the proceeds of the Group’s short-term debt is to finance working capital needs. The Group has generally been able to arrange short-term bank loans with domestic banks in China as necessary and believes it can continue to obtain them based on its well-established relationships with various lenders.

As of December 31, 2002, the Group had obligations under operating leases totalling RMB8,537 million, predominately for aircraft. Of such amount, RMB1,280 million, RMB1,328 million, RMB1,245 million, RMB1,002 million and RMB3,682 million respectively was due in 2003, 2004, 2005, 2006, 2007 and thereafter.

As of December 31, 2002, the Group had a working capital deficit of RMB7,016 million, as compared to a working capital deficit of RMB3,696 million as of December 31, 2001. Historically, the Group operated in a negative working capital position, relying on cash inflow from operating activities and short-term bank debt refinancings to meet its short-term liquidity and working capital needs. The increase in the Group’s working capital deficit from 2001 to 2002 was mainly because the Group sought increased short term bank loans to finance its aircraft acquisitions. Upon deliveries of the aircraft, the Group continued to seek renewal of its short-term loans instead of replacing such loans with long term loans, as the interest rate for short-term loans is lower. The liquidity of the Group in the future will primarily be dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they become due and, on its ability to obtain adequate external financing to meet its committed future capital expenditures. With regard to the future capital commitments, the

41

Group has obtained firm commitments from several PRC banks to provide loans up to approximately RMB5,102 million and sought letters of intent from several PRC banks to provide additional loans up to approximately RMB5,876 million. With regard to the Group’s long-term debt and lease obligations due in 2003 of RMB3,664 million, the Group intends to meet such payment using its operating cashflows. As the Group is subject to a high degree of operating leverage, a minor decrease in the Group’s yield and/or load factor could result in a significant decrease in its operating revenue and hence its operating cashflows. This could arise in such circumstances as where competition between Chinese airlines increases or where PRC aviation demand decreases. Similarly, a minor increase in the jet fuel prices, particularly those in domestic market, could result in a significant increase in the Group’s operating expenses and hence a significant decrease in its operating cashflows. This could be caused by fluctuations in supply and demand in international oil market. Currently, the Group’s existing debt and capital lease facilities do not contain any financial covenants. Nevertheless, as the Group is subject to a high degree of financial leverage, an adverse change in the Group’s operating cashflows could adversely affect its financial health and hence weaken its ability to obtain additional debt and lease facilities and to renew its short-term debt facilities as they fall due.

The Group acquired certain of its aircraft pursuant to capital or operating leases that obligate the Group to indemnify the lessors against any withholding or similar taxes that may be imposed on the lessors by taxing authorities in China with regard to payments made pursuant to such leases. In accordance with relevant PRC tax regulations, a PRC lessee is liable to pay PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 10% to 20% of the lease payments, or in certain cases, the interest components of such payments. Pursuant to an approval document from the State Taxation Bureau, lease arrangements executed prior to September 1, 1999 are exempt from PRC withholding tax. The PRC withholding tax payable in respect of the operating leases executed after September 1, 1999 of RMB5 million, RMB12 million and RMB14 million during 2000, 2001 and 2002 respectively, have been included as part of the operating lease charges.

As of December 31, 2002, the Group had capital commitments in 2003, 2004 and 2005 of approximately RMB6,204 million, RMB2,612 million and RMB731 million, respectively. Of such amounts, RMB2,801 million in 2003, RMB2,344 million in 2004 and RMB731 million in 2005 are related to the acquisition of aircraft and related flight equipment, and RMB2,890 million in 2003 and RMB237 million in 2004 are related to the Group’s facilities and equipment to be constructed and installed at the Guangzhou new airport. This new airport is expected to commence operations in late 2003 to replace the Baiyun International Airport as the Group’s main route base. The remaining amounts of RMB513 million in 2003 and RMB31 million in 2004 are related to the Group’s other airport and office facilities and equipment, overhaul and maintenance bases and training facilities. The Group’s capital expenditures are generally subject to receipt of various approvals of the Chinese Government and may be subject to change depending on the timing of such approvals, prevailing market condition, the availability of financing and other relevant factors.

As of December 31, 2002, the Group undertook to make a capital contribution of approximately RMB60 million and RMB201 million to jointly controlled entity and affiliated company, respectively.

As of December 31, 2002, cash and cash equivalents of the Group totaled RMB3,771 million. Of such balance, 23.7% was denominated in foreign currencies (mainly in United States dollars).

A final dividend of RMB0.02 (before tax) per share totaling RMB67.5 million (before tax) in respect of financial year 2001 was paid to shareholders during the year. No interim dividend was paid during the year ended December 31, 2002.

The Group expects that the Group’s cash from operations and short-term and long-term bank borrowings will be sufficient to meet its cash requirements in the foreseeable future.

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Contractual Obligations and Commercial Commitments

The following table sets forth the Group’s obligations and commitments to make future payments under contracts and under contingent commitments as of December 31, 2002.

			As of December 3, 2002
			Payment due by period
			less than
	Total		1 year		1-3 year		4-5 year		After 5 years
	(RMB million)
Contractual obligations
Short-term debt		4,423		4,423		—		—		—
Long-term debt		6,653		817		1,887		2,686		1,263
Capital lease obligations		8,198		1,567		2,339		2,439		1,853
Total contractual obligations		19,274		6,807		4,226		5,125		3,116
Other commercial commitments
Operating leases commitment		8,537		1,280		2,573		1,002		3,682
Aircraft purchase commitments		5,876		2,801		2,344		731		—
Capital commitments in respect of investments in the Guangzhou new airport		526		526		—		—		—
Other capital commitments		44		44		—		—		—
Investing commitments		261		261		—		—		—
Total commercial obligations		15,244		4,912		4,917		1,733		3,682

Note 1 Amounts shown are net of previously paid purchase deposits.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

Directors and Senior Management

The following table sets forth certain information concerning directors (“Directors”), senior management (“Senior Management”) and supervisors (“Supervisors”) of the Company in 2002. There were certain changes in the Company’s Directors, Senior Management and Supervisors subsequent to December 31, 2002, details of which are set forth below.

Name	Age		Position
Yan Zhi Qing		60	Chairman of the Board of Directors
Wang Chang Shun		45	Vice Chairman of the Board of Directors; President
Li Feng Hua		53	Director; Vice President
Wang Shao Xi		61	Director
Zhang Rui Ai		61	Director
Zhou Yong Jin		59	Director
Xu Jie Bo		37	Director; Chief Financial Officer
Wu Rong Nan		61	Director
Simon To		51	Independent Non-Executive Director
Peter Lok		66	Independent Non-Executive Director
Wei Ming Hai		38	Independent Non-Executive Director
Liang Hua Fu		61	Chairman of the Supervisory Committee
Gan Yu Hua		74	Supervisor
Li Qi Hong		55	Supervisor
Jiang Ping		52	Vice President
Li Kun		42	Vice President

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Name	Age		Position
Yuan Xin An		46	Vice President
Zheng En Ren		57	Vice President
Yang Guang Hua		49	Vice President
Su Liang		40	Company Secretary

On April 12, 2002, the Board of Directors by resolutions appointed Mr. Yuan Xi An, Mr. Zheng En Ren and Mr. Yang Guang Hua respectively as Vice President of the Company.

On October 11, 2002, Li Feng Hua resigned as the Director and Vice President of the Company due to work arrangement.

On March 14, 2003, Mr. Wang Shao Xi and Mr. Zhang Rui An tendered their resignations to the Company as Directors of the Company due to retirement. Such resignation took effect after approval at the 2002 Annual General Meeting of the Company.

In the Annual General Meeting held on May 13, 2003, it was resolved that Mr. Li Feng Hua, Mr. Wang Shao Xi and Mr. Zhang Rui Ai resigned as directors of the Company. It was also resolved that Mr. Liu Ming Qi, Mr. Peng An Fa, Mr. Wang Quan Hua, Mr. Zhao Liu An, Mr. Zhou Yong Qian, Mr. Wang Zhi and Mr. Sui Guang Jun were elected as directors of the Company during the same meeting.

Yan Zhi Qing is the Chairman of the Board of Directors. He became an employee of the Company in February 1996. Mr. Yan has 36 years of experience in the Chinese aviation industry. Administrative positions which Mr. Yan has held include Director of Flight Operations of the Hunan Provincial Civil Aviation Administration, Director of the Guangxi Provincial Civil Aviation Administration, Director of the Central and Southern China Civil Aviation Administration, Director of the Political Department of the CAAC and Party Secretary and Managing Vice President of CSAHC. Mr. Yan is currently the President and Party Secretary of CSAHC. Mr. Yan graduated from the School of Aviation Administration and Flight Control in 1962.

Wang Chang Shun is the Vice Chairman of the Board of Directors and the President of the Company. He began his career in civil aviation in February 1976, mainly involved in air traffic control. He has held positions such as Director of the Flight Operations Office of the Urumqi Civil Aviation Administration, Director of the Flight Meteorology and Flight Safety Monitoring Division, Party Secretary and Deputy General Manager of Xinjiang Airlines, and Party Secretary of Urumqi Civil Aviation Administration. Mr. Wang is also Vice President of CSAHC. Mr. Wang graduated from the Post-graduate Business Management School of the Chinese Academy of Social Sciences and is qualified as a Senior Expert of Political Science.

Zhou Yong Jin is a Director of the Company. He joined CSAHC in January 1991 and became an employee of the Company upon its establishment in March 1995. Mr. Zhou served as a Director of the Propaganda Department of CSAHC, Party Secretary of the Transportation Department (Guangzhou) of the Company, and Party Secretary of the Company Shenzhen branch. He is currently Chairman of the Labor Union of the Company and a director of the Company.

Xu Jie Bo is a Director and the Chief Financial Officer of the Company. He joined the Company in July 1998. Mr. Xu graduated from the Management Department of Tianjin University and worked in the Financial Department of Guangzhou Civil Aviation Administration upon graduation. In January 1992, he was a supervisor of the Financial Management Office for Infrastructure Projects. Subsequently in December 1992, he worked as a Deputy Director and Director of the Financial Department of Central and Southern China Civil Aviation Administration. In July 1998 he became General Manager of the Financial Department of the Company. He is a Director and the Chief Financial Officer. In addition, he is also a Director of Southern Airlines Group Shantou Airlines Company Limited and Guangxi Airlines Company Limited.

Wu Rong Nan is a Director of the Company. He joined CSAHC in January 1991 and became an employee of the Company upon its establishment in March 1995. Mr. Wu is an air traffic control engineer. He was once employed as the Director of Flight Operations of the Guangzhou Civil Aviation Administration and has been President of Xiamen Airlines since 1986.

Simon To is an Independent Non-executive Director of the Company. He is currently a Managing Director of Hutchison Whampoa (China) Limited, and also serves as director of several companies in Hong Kong and Foreign-invested companies in China. Mr. To has managed investment projects in China since early 1980’s and is familiar with the laws and regulations of Hong Kong and China. Mr. To graduated from Stanford University with a degree of Master of Business Administration.

Peter Lok is an Independent Non-executive Director of the Company. He joined the Civil Aviation Department of Hong Kong in 1956 and became its Assistant Director in 1982, Deputy Director in 1988, and Director from 1990 to 1996. During the period of 1997 to 2000, Mr. Lok first served as the advisor, and later became the president of Hong Kong Commercial Airlines Center. Mr. Lok has sat on various Committees

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such as the Evaluation Committees for the Design of Shanghai’s Pudong Airport, Committee for China’s Zhuhai Aviation and Spaceflight Fair, Evaluation Committees for the IATA Eagle Award. He is also an independent director of several other public airline companies.

Wei Ming Hai is an Independent Non-executive Director of the Company. He is a Professor and Dean of the School of Management of Zhongshan University. Professor Wei worked in Jiangxi Provincial Accounting Association, and he started working in Zhongshan University from 1991. In 1993 he became the chairman of the Accounting Department in the School of Management of Zhongshan University. In 1996 he became the Deputy Dean and in January 2000, Dean of the School of Management in Zhongshan University. Since 1998, Professor Wei has been a doctorate advisor for Accounting Information and Investment Analysis. Professor Wei is also on the board of directors of China Accountants Association, Vice Chairman of Accountants Association of Guangdong Province, Vice Chairman of Auditors Association of Guangzhou, Executive Member of the Research Institute of Financial Costs for Young and Middle-aged Accountants, member of American Accounting Association. Professor Wei holds an Economics Ph.D degree and a MBA degree from Tulane University in the United States of America. He has published over ten academic books or textbooks, and over 60 academic papers.

     Supervisory Committee

     As required by the Company Law and the Articles of Association, the Company has a supervisory committee (the “Supervisory Committee”) which is primarily responsible for the supervision of senior management of the Company, including the Board of Directors, executive officers and other senior management personnel, to ensure that they act in the interests of the Company, its shareholders and employees, as well as in compliance with applicable law. The Supervisory Committee consists of three Supervisors. Two of the Supervisors are shareholder representatives appointed by shareholders, and one Supervisor is a representative of the Company’s employees. The Supervisors serve terms of three years and may serve consecutive terms. All three Supervisors were appointed on January 27, 1995 at the first shareholders’ meeting of the Company and re-appointed in the 1997 Annual General Meeting held on June 15, 1998.

     Liang Hua Fu is the Chairman of the Supervisory Committee of the Company. Mr. Liang held numerous positions in the Guangzhou Civil Aviation Administration, including Chief of the Navigation Division, Party Secretary of the Transportation Department, Secretary of the Disciplinary Department and Director of Administration and Supervision. Mr. Liang attended Tianjin Aviation School and Guangzhou Political Science College.

     Gan Yu Hua is a Supervisor of the Company. Mr. Gan held various positions in the Chinese commercial aviation industry, including Deputy Director of the Finance Department, Deputy Chief Accountant and Director of the Audit Department of the Guangzhou Civil Aviation Administration. He holds a Senior Account Certificate and is a member of the International Auditors Association. Mr. Gan graduated from Shanghai Li Xin Accounting College in 1948.

     Li Qi Hong is a Supervisor of the Company and the Representative of the Labor Union of the Group. Mr. Li graduated from the CAAC Aviation College in 1968, and held various administrative positions in the commercial aviation industry in China.

All Directors and Supervisors of the Company have entered into service contracts with the Company for a term of three years commencing April 16, 2001. Except for such service contracts, none of the Directors or Supervisors of the Company has entered or has proposed to enter into any other service contract with the Company or the Airline Subsidiaries.

Compensation

RMB0.1 million has been paid to non-executive directors for the year ended December 31, 2002. The aggregate compensation paid by the Company to all directors (excluding non-executive directors), supervisors and senior management for 2002 was RMB1.4 million. For the year ended December 31, 2002, the Company accrued an aggregate of approximately RMB64,000 on behalf of its executive directors, supervisors and senior management pursuant to the SA Pension Scheme and the retirement plans operated by various municipal government in which the Company participates.

Board Practices

Directors’ service contracts with the Company or any of its subsidiaries provide prorated monthly salary upon termination of employment in accordance with his contract. The Director is entitled to paid leave in accordance with his contract.

     Audit Committee

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     The audit committee is appointed by the Board and consists of three independent non-executive Directors. The current members of the audit committee are Mr. Simon To, Mr. Peter Lok and Mr. Wei Ming Hai. At least once a year, the committee is required to meet with the external auditors without any executive members of the Board in attendance. The quorum necessary for the transaction of any business is two committee members. The committee will normally meet four times a year. The external auditors or the Chief Financial Officer of the Company may request a meeting of the audit committee.

     The audit committee selects and engages, on behalf of the Company, external auditors to audit the Company’s annual financial statements and considers questions regarding the audit fees and the resignation or dismissal of the external auditors. The audit committee also reviews and approves the planned scope of the Company’s annual audit. In addition, the audit committee reviews the annual and interim financial statements, the preliminary announcement of results and any other announcement regarding the Company’s results or other financial information to be made public, before submission to the Board. Moreover, the committee discusses problems arising from the audit and reviews the external auditors’ management letter and management’s response. Furthermore, the audit committee reviews the effectiveness of the system of internal financial controls from information provided by the Executive Directorate and management of the Company and by the independent auditors and ensures adherence to the Company’s control policies so that the Company’s assets are safeguarded and that the financial records are complete and accurate. The audit committee meets regularly with the Company’s senior financial, internal audit and the independent auditors to consider the Company’s financial reporting, the nature and scope of audit review and the effectiveness of the systems of internal control. The audit committee also reviews any significant transactions that are not in the ordinary course of business.

     The Company has an internal audit department which reviews procedures in all major financial and operational activities. This department is led by the head of internal audit who is directly responsible to the Chairman of the Board and submits regular reports to the audit committee.

     The Company does not have a Remuneration Committee. The executive compensation program of the Company is administered by the Board of Directors.

Employees

As of December 31, 2002, the Group had 17,031 employees, including 1,820 pilots, 2,570 flight attendants, 2,199 maintenance personnel, 3,832 sales and marketing personnel and 3,583 administrative personnel. All of the Group’s pilots, flight attendants, technical personnel, management personnel and sales and marketing personnel are contract employees, and most of the Group’s ancillary service workers are temporary employees. Contract employees are hired by the Group pursuant to renewable employment contracts with terms ranging from three to five years. Temporary employees generally are hired by the Group pursuant to at-will employment contracts or employment contracts with a term of one year.

The Company’s employees are members of a trade union organized under the auspices of the All-China’s Federation of Trade Unions, which is established in accordance with the Trade Union Law of China. A representative of the Company labor union currently serves on the Supervisory Committee of the Company. Each of the Company’s subsidiaries has its own trade union. The Group has not experienced any strikes, slowdowns or labor disputes that have interfered with its operations, and the Group believes that its relations with its employees are good.

All employees of the Group receive cash remuneration and certain non-cash benefits. Cash remuneration consists of salaries, bonuses and cash subsidies provided by the Group. Salaries are determined in accordance with the national basic wage standards. The total amount of wages payable by the Group to its employees is subject to a maximum limit determined by the CAAC based on the profitability of the Group and other factors. Bonuses are based on the profitability of the Group. Cash subsidies are intended as a form of cost-of-living adjustment. In addition to cash compensation, the Group’s contract employees receive certain non-cash benefits, including housing, education and health services, and the Group’s temporary employees receive limited health services, but not housing or education. CSAHC provides certain services in respect of these benefits to the Group’s employees in consideration of certain fees and other charges.

     Pension Programs

     Historically, the Group participated in an industry-wide pension scheme managed by the CAAC. With effect from January 1, 1998, the pension scheme of the CAAC was replaced by several new retirement schemes operated under the auspices of various municipal governments. Employees of the Group are currently covered by such schemes. Under such schemes, the Group is required to pay quarterly premiums to the relevant municipal governments. The premiums range from 14% to 19% of the total monthly salary, bonuses and other benefits paid by the Group to its employees.

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     In addition, the Group was selected as one of the pilot enterprises to establish a supplementary defined contribution retirement scheme for the benefit of employees. In this connection, employees of the Group participate in a supplementary defined contribution retirement scheme whereby the Group is required to make defined contributions at the rate of 4.5% of total salaries. This scheme which was previously organized by CSAHC has been handed over to relevant PRC government agencies since January 2002. The Group has no obligation for the payment of pension benefits beyond the contributions described above. Contributions to the retirement schemes are charged to consolidated statement of income as and when incurred..

     The Group is also required to provide retirees with medical benefits, transportation subsidies and other welfare facilities. Previously, the Group paid a fixed annual fee to CSAHC in return for CSAHC providing such benefits to the retired employees of the Group. With effect from January 1, 2002, such arrangement was terminated and the services are now provided by the Group itself..

     Workers’ Compensation

     There is no workers’ compensation or other similar compensation scheme under the Chinese labor and employment system. As required by Chinese law, however, the Group, subject to certain conditions and limitations, pays for the medical expenses of any contract employee who suffers a work-related illness, injury or disability and continues to pay the full salary of, and provides all standard cash subsidies to, such employee during the term of such illness, injury or disability. The Group also pays for certain medical expenses of its temporary employees.

     At no time during 2002 had any Director, Supervisor or member of the Senior Management or any of their spouses or minor children, been granted or exercised or subscribed for shares or debentures or options of the Company.

Share Ownership

As of the date of this Annual Report, no Director, Senior Management or Supervisor of the Company is a beneficial owner of any shares of the Company’s capital stock. As of the date of this Annual Report, no arrangement has been put in place involving issue or grant of options or shares or securities of the Company to any of the Director, Senior Management, Supervisor or employees of the Company.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

Major Shareholders

     Share Capital Structure

     As of December 31, 2002, the total share capital of the Company was 3,374,178,000 shares, of which approximately 65.2% (2,200,000,000 domestic shares) is held by CSAHC and approximately 34.8% (1,174,178,000 H shares) is held by Hong Kong and overseas shareholders.

     Substantial Shareholders

     As of December 31, 2002, the following shareholders had an interest of 5% or more in the Company’s shares:

		Approximate Percentage
Name	Number of Shares	of the Total Number of Shares
CSAHC	2,200,000,000 domestic shares		65.20	%
HKSCC Nominees Limited	1,148,129,999 H shares		34.03	%

The table below sets forth, as of December 31, 2002, the following entities hold 5% of the total number of H shares issued by the Company.

			Approximate Percentage of
Name	Number of H Shares		the Total Number of H Shares
The Hongkong and Shanghai Banking		643,649,717		54.82	%

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			Approximate Percentage of
Name	Number of H Shares		the Total Number of H Shares
Corporation Limited
Standard Chartered Bank		154,060,050		13.12	%

     Domestic shares and H shares have identical voting rights.

Related Party Transactions

The Company enters into transactions from time to time with CSAHC and its affiliates. For a description of such transactions, see Note 22 to the Financial Statements. In particular, the following arrangements, which the Company believes are material to its operations, have been made between the Company and CSAHC and its affiliates. The Company believes that these arrangements are effected in the prevailing market rates and are commercially reasonable and on terms no less favorable than terms available from third parties.

     Acquisition of Assets from CSAHC

     During the year, the Group acquired five Boeing 737-300/37K aircraft and related spare parts and certain vehicles from Zhongyuan Airlines, a subsidiary of CSAHC, at a consideration of approximately RMB1,097 million. The consideration was satisfied by cash of approximately RMB132 million together with an assumption by the Group of Zhongyuan Airlines’ debts of approximately RMB965 million. In addition, the Group received reimbursements of wet lease rentals totaling RMB150 million which it paid to Zhongyuan Airlines during the period from July 1, 2001 to December 31, 2001. Such reimbursements have been applied to reduce the purchase costs of the acquired assets.

     On August 29, 2002, the Company entered into agreements with CSAHC to acquire 90% registered capital in each of Guangzhou Aviation Hotel, South China International Aviation & Travel Services Company and Southern Airlines Advertising Company from CSAHC at considerations of RMB99 million, RMB5 million and RMB4 million, respectively. The remaining 10% registered capital in each of these companies are still held by CSAHC. Following the transfer, Guangzhou Aviation Hotel, South China International Aviation & Travel Services Company and Southern Airlines Advertising Company became subsidiaries of the Company. These acquisitions did not have a significant impact on the operating results of the Group for the year ended December 31, 2002 or its financial position at that date.

     Arrangement with CSAHC

     Trademark License Agreement

     The Company and CSAHC have entered into the Trademark License Agreement dated May 22, 1997, pursuant to which CSAHC has acknowledged that the Group has the right to use the name “China Southern” and “China Southern Airlines” in both Chinese and English, and has granted to the Company a 10-year renewable license to use the kapok logo on a world-wide basis in connection with its airline-related businesses. CSAHC has retained the right to use the kapok logo in connection with its non-airline related businesses conducted as of the date of the Trademark License Agreement and to permit its affiliates that do not compete, directly or indirectly, with the Group to use the kapok logo. Unless CSAHC gives written notice of termination three months before the expiration of the 10-year term of the agreement, the agreement will be automatically extended for another 10-year term.

     Leases

     The Company as lessee and CSAHC as lessor have entered into the following lease agreements:

     The Company and CSAHC have entered into a land lease agreement dated May 22, 1997, in respect of the land used by the Company within Baiyun International Airport. The total rental payment is RMB2.7 million per year. The term of the lease is five years commencing April 1, 1997, and is renewable by the Group thereafter.

     The Company and CSAHC have separately entered into four lease agreements dated May 22, 1997, in respect of office premises located at the east wing of the Guangzhou Railway Station on Guangzhou Huanshi Dong Road, office premises at Haikou Airport, office premises in Haikou City, and office premises at Tianhe Airport in Wuhan, Hubei Province. The aggregate rental payment under the four leases is RMB12.6 million per year. The original term of each lease is one year and is renewable annually by the Group thereafter.

     The Company and CSAHC have entered into an indemnification agreement dated May 22, 1997, in which CSAHC has agreed to indemnify the Company against any loss or damage caused by or arising from any challenge of, or interference with, the Company’s right to use certain land and buildings.

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     Comprehensive Services and Employee Benefits

The Company and CSAHC have entered into a comprehensive services agreement dated May 22, 1997, pursuant to which CSAHC agrees to provide adequate quarters to eligible employees of the Group as and when required. In return, the Group agrees to pay a fixed annual fee of RMB85 million to CSAHC for a ten-year period effective January 1, 1995.

     Arrangements with CSAHC’s Affiliates

     Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly-owned subsidiary of CSAHC

     The Company and SAIETC have entered into an agreement dated May 22, 1997, for the import and export of aircraft, flight equipment, special vehicles for airline use, communication and navigation facilities, and training facilities for a term extending from May 22, 1997 to May 22, 2000 (renewable by the parties). The agreement has been extended to May 22, 2003.

     For the year ended December 31, 2002, the amount incurred by the Group for the import and export of the above equipment was RMB584 million, inclusive of agency commission of 1.5% above the contract prices paid to SAIETC.

     Southern Airlines Advertising Company (“SAAC”), which is 90% owned by the Group and 10% owned by CSAHC

     In August 2002, the Group entered into a takeover agreement with CSAHC. As a result, the Group owns 90% and CSAHC owns 10% of SAAC.

     The Company and Southern Airlines Advertising Company have entered into an agreement dated May 22, 1997, for the provision of advertising services for a term extending from May 22, 1997 to May 22, 2000. The agreement has been extended to May 22, 2003.

     For the period from January to December 2002, , the amount incurred by the Group to SAAC for advertising services was RMB3.3 million.

     Southern Airlines Group Finance Company Limited (“SA Finance”), which is 42% owned by CSAHC, 30% owned by the Company, 28% owned by six subsidiaries of the Company

     The Company has entered into a financial agreement dated May 22, 1997, with SA Finance for the provision of financial services such as deposit and loan facilities, credit facilities, financial guarantees and credit references for a term extending from May 22, 1997 to May 22, 2000. The agreement has been extended up to May 22, 2006.

     Under such agreement, (a) all funds that the Company deposits with SA Finance will be deposited by SA Finance with the Commercial and Industrial Bank of China, Bank of Communications, Bank of Agriculture, China Construction Bank, or other banks of similar creditworthiness; and (b) SA Finance will not at any time have outstanding loans in excess of the amount representing the aggregate of (i) deposits received from entities other than the Company, (ii) SA Finance’s shareholders’ equity and (iii) capital reserves.

     As of December 31, 2002, the Group had short-term deposits placed with SA Finance amounting to RMB901.0 million, which earned interest at the rate of 1.98% - 3.90% per annum.

     Shenzhen Air Catering Company Limited, which is 33% owned by CSAHC, and 67% owned by two independent third parties

     The Company and Shenzhen Air Catering Company Limited have entered into an agreement dated May 23, 1997 for the sale and purchase of in-flight meals for flights originating or stopping at the airport in Shenzhen. Pursuant to such agreement, Shenzhen Air Catering Company Limited would supply in-flight meals to the Group from time to time during the term from May 23, 1997 to May 23, 1998. The term of agreement has been extended by the parties to May 23, 2003.

     For the year ended December 31, 2002, the amount paid by the Group to Shenzhen Air Catering Company Limited for the provision of in-flight meals was approximately RMB29.1 million.

     GAMECO, which is 50% owned by the Company and 50% owned by two independent third parties

     The Company and GAMECO have entered into an Aircraft Maintenance and Engineering Agreement for the provision of aircraft repair and maintenance services. On May 17, 1996, the Company and GAMECO entered into an agreement regarding the fee arrangement for

49

the provision of such repair and maintenance services (the “Fee Agreement”). Pursuant to the Fee Agreement and subsequent agreements, GAMECO charged the Company for expendables at cost plus 15%, and labor costs at US$30.0 per hour during 2002.

     For the year ended December 31, 2002, the amount incurred by the Company for such repair and maintenance services was RMB592.3 million.

     The China Southern West Australian Flying College Pty Ltd (the “Australian Pilot College”), which is 65% owned by the Company and 35% owned by CSAHC. The 35% shareholding was acquired by CSAHC from a previous shareholder in the Australian Pilot College in 2000.

     CSAHC and the Australian Pilot College entered into an agreement dated October 7, 1993, for the provision of pilot training in Australia to the cadet pilots of CSAHC (the “Training Agreement”). The Training Agreement will remain in force unless terminated by either party upon 90 days’ prior written notice to the other party. Pursuant to the Demerger Agreement, the Company has assumed all the interests, rights and obligations of CSAHC under the Training Agreement.

     For the year ended December 31, 2002, the amount paid by the Group to the Australian Pilot College for training services was RMB56.3 million.

     Southern Airlines (Group) Economic Development Company, which is 61% owned by CSAHC and 39% owned by an independent third party.

     The Company and Southern Airlines (Group) Economic Development Company have entered into an agreement dated May 22, 1997, for the provision of drinks, snacks, liquor, souvenirs and other products for a term extending from May 22, 1997, to May 22, 2007.

     For the year ended December 31, 2002, the amount paid by the Group to Southern Airlines (Group) Economic Development Company for the provision of drinks, snacks, liquor, souvenirs and other products was RMB101.4 million.

     Guangzhou Nanland Air Catering Company Limited (“Nanland”), which is 51% owned by the Company and 49% owned by an independent third party.

     The Company and Nanland have entered into a catering agreement dated May 22, 1999, for the sale and purchase of in-flight meals for flights originating or stopping at the airport in Guangzhou. Pursuant to such agreement, Nanland will supply inflight meals to the Company from time to time during the term from May 22, 1999 to May 22, 2000. The agreement will then be automatically extended annually.

     For the year ended December 31, 2002, the amount paid by the Group to Nanland for the provision of in-flight meals was RMB88.9 million.

     Ticket sales arrangements

     The Company has entered into ticket agency agreements for the sale of the Group’s air tickets with several subsidiaries of CSAHC (the “Agents”). The Agents charge a commission, at a rate prescribed by the CAAC and the International Aviation Transportation Association, for each air ticket sold in the amount of 3% of the ticket price for domestic tickets and 5% - 12% of the ticket price for Hong Kong regional/international tickets, respectively. In addition to the Agents, the Company has other air ticket sales agents in China who charge commission at the same rates. The Agents also act as air ticket sales agents for other Chinese airlines and charge the same rates of commission to such other airlines as those charged to the Company.

     For the year ended December 31, 2002, the aggregate amount of ticket sales of the Group conducted through the Agents was RMB226.5 million.

ITEM 8. FINANCIAL INFORMATION.

Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” for financial statements filed as part of this Annual Report.

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Significant Changes

No significant changes have occurred since the date of the financial statements provided in Item 18 below.

     Legal Proceedings

     The Company is not party to any material legal proceedings.

     Dividend Information

          A final dividend of RMB0.02 (before tax) per share totaling RMB67.5 million (before tax) in respect of financial year 2001 was paid to shareholders during the year. No interim dividend was paid during the year ended December 31, 2002.

ITEM 9. THE OFFER AND LISTING.

The principal trading market for the Company’s H Shares is the Hong Kong Stock Exchange, and the Company’s trading code is “1055”. The ADSs, each representing 50 H Shares, are evidenced by ADRs issued by The Bank of New York as the Depositary for the ADRs, and are listed on the New York Stock Exchange under the symbol “ZNH.” As of May 31, 2003, approximately 71,405,500 of the Company’s H Shares in the form of 1,428,110 ADSs were held in the U.S. by approximately 43 record holders in the U.S., including the Depository Trust Company. The Company’s Domestic Shares are not listed on any stock exchange and are essentially not transferable by CSAHC.

Set forth below for the periods indicated are the high and low sales prices of H Shares on the Hong Kong Stock Exchange and ADSs on the New York Stock Exchange.

		Price per H Share				Price per ADS
		(HK$)				(US$)
		High		Low		High		Low
Annual Market Prices
	Fiscal Year ended December 31, 1998		2.40		0.50		14.75		3.06
	Fiscal Year ended December 31, 1999		2.25		0.61		13.94		3.88
	Fiscal Year ended December 31, 2000		2.93		1.02		18.38		6.06
	Fiscal Year ended December 31, 2001		2.95		1.35		18.10		8.00
	Fiscal Year ended December 31, 2002		3.60		1.50		22.25		10.35
Quarterly Market Prices
	Fiscal Year ended December 31, 2000
	First Quarter		1.86		1.02		11.19		6.88
	Second Quarter		2.05		1.06		12.44		6.06
	Third Quarter		2.93		1.63		18.38		10.19
	Fourth Quarter		2.40		1.46		15.06		9.56
	Fiscal Year ended December 31, 2001
	First Quarter		2.70		1.83		17.38		12.22
	Second Quarter		2.95		1.89		18.10		12.00
	Third Quarter		2.53		1.35		16.50		8.00
	Fourth Quarter		2.42		1.66		15.25		9.8
	Fiscal Year ended December 31, 2002

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		Price per H Share			Price per ADS
		(HK$)			(US$)
	First Quarter		2.83	2.22		17.63	14.80
	Second Quarter		3.42	2.33		21.74	14.95
	Third Quarter		3.60	1.89		22.25	12.00
	Fourth Quarter		2.42	1.50		15.00	10.35
Monthly Market Prices
	December 2002		2.42	2.08		15.00	13.42
	January 2003		2.55	2.10		16.50	13.24
	February 2003		2.62	2.12		16.50	13.40
	March 2003		2.22	1.71		14.38	11.75
	April 2003		1.87	1.46		12.33	9.53
	May 2003		2.15	1.66		13.65	10.46

Offer and Listing details

Not applicable.

Plan of Distribution

Not applicable.

Markets

Not applicable.

Selling Shareholders

Not applicable.

Dilution

Not applicable.

Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION.

Share Capital

Not applicable.

Memorandum and Articles of Association

The Company is registered with and has obtained a business license from the China’s State Administration Bureau of Industry and Commerce on March 25, 1995. The Company’s business license number is 1000001001760.

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     Director

     Pursuant to Article 13 of the Articles of Association, the business purposes of the Company are: (i) to absorb domestic and foreign capital; (ii) to assist in developing the aviation industry of China; (iii) to promote the development of the national economy of China; (iv) to utilize corporate incentive mechanisms of privatization; (v) to draw on the advanced management expertise of other domestic and foreign companies; (vi) to continuously improve the management of the Company; (vii) to enhance the market competitiveness of the Company; (viii) to generate economic and social benefits for the Company; and (ix) to generate steady income for the Company’s shareholders. Pursuant to Article 14 of the Articles of Association, the scope of business of the Company shall be consistent with and subject to the scope of business approved by the relevant supervisory department of the State. The scope of business of the Company includes: (i) provision of scheduled and non-scheduled domestic, regional and international air transportation services for passengers, cargo, mail and luggage; (ii) undertaking general aviation services; (iii) provision of aircraft repair and maintenance services; (iv) acting as agent for other domestic and international airlines; (v) provision of air catering services and (vi) engaging in other airline or airline-related business, including advertising for such services.

     Pursuant to Article 154 of the Articles of Association, where a director of the Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the board of directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal therefor is otherwise subject to the approval of the board of directors.

     Pursuant to Article 108 of the Articles of Association, where a director is interested in any resolution proposed at a board meeting, such director shall not be present and shall not have a right to vote. Such director shall not be counted in the quorum of the relevant meeting.

     Pursuant to Article 162 of the Articles of Association, the Company shall, with the prior approval of shareholders in general meeting, enter into a contract in writing with a director wherein his emoluments are stipulated. The aforesaid emoluments include, emoluments in respect of his service as director, supervisor or senior administrative officer of the Company or any subsidiary of the Company; emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries; and payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office.

     Pursuant to Article 102(6) of the Articles of Association, the board of directors has the power to formulate proposals for increases or reductions in the Company’s registered capital and the issue of debentures of the Company; such resolutions must be passed by more than two-thirds of all the directors.

     There is no mandatory retirement age for the directors of the Company. The directors of the Company are not required to hold shares of the Company.

     Ordinary Shares

     Pursuant to Article 19 of the Articles of Association, subject to the approval of the securities authority of the State Council, the Company may issue and offer shares to domestic investors or foreign investors for subscription. Foreign investors are those investors of foreign countries and regions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the Company. Domestic investors are those investors within the territory of the PRC (excluding investors of the regions referred to in the preceding sentence) who subscribe for shares issued by the Company.

     Pursuant to Article 20 of the Articles of Association, Shares issued by the Company to domestic investors for subscription in Renminbi shall be referred to as “Domestic-Invested Shares”. Shares issued by the Company to foreign investors for subscription in foreign currencies shall be referred to as “Foreign-Invested Shares”. Foreign-Invested Shares which are listed overseas are called “Overseas-Listed Foreign-Invested Shares”. The foreign currencies mean the legal currencies (apart from Renminbi) of other countries or districts which are recognized by the foreign exchange control authority of the State and can be used to pay the Company for the share price.

     Pursuant to Article 21 of the Articles of Association, Domestic-Invested Shares issued by the Company shall be called “A Shares”. Overseas-Listed Foreign-Invested Shares issued by the Company and listed in Hong Kong shall be called “H Shares”. H Shares are shares which have been admitted for listing on The Stock Exchange of Hong Kong Limited, the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange in the United States of America in the form of American depositary receipts.

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     The Company has issued a total of 3,374,178,000 ordinary shares, of which (a) 2,200,000,000 domestic shares are held by CSAHC and (b) 1,174,178,000 H shares are held by Hong Kong and overseas shareholders.

     Pursuant to Article 54 of the Articles of Association, the ordinary shareholders of the Company shall enjoy the following rights:

(1)	the right to attend or appoint a proxy to attend shareholders’ general meetings and to vote thereat;
(2)	the right to dividends and other distributions in proportion to the number of shares held;
(3)	the right of supervisory management over the Company’s business operations, and the right to present proposals or enquiries;
(4)	the right to transfer, donate or pledge his shares in accordance with laws, administrative regulations and provisions of these articles of association;
(5)	the right of knowledge and decision making power with respect to important matters of the Company in accordance with laws, administrative regulations and these articles of association;
(6)	the right to obtain relevant information in accordance with the provisions of these articles of association, including:

(i)	the right to obtain a copy of these articles of association, subject to payment of the cost of such copy;
(ii)	the right to inspect and copy, subject to payment of a reasonable charge:
	(a)     all parts of the register of shareholders;
	(b)     personal particulars of each of the Company’s directors, supervisors, president and other senior administrative officers, including:
	(aa)          present name and alias and any former name or alias;
	(bb)          principal address (residence);
	(cc)          nationality;
	(dd)          primary and all other part-time occupations and duties;
	(ee)          identification documents and their relevant numbers;
	(c)     state of the Company’s share capital;
	(d)     reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of last accounting year and the aggregate amount paid by the Company for this purpose;
	(e)     minutes of shareholders’ general meetings;
	(f)     interim and annual reports of the Company.

(7)	in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held;
(8)	other rights conferred by laws, administrative regulations and these articles of association.

     Pursuant to Article 55 of the Articles of Association, the ordinary shareholders of the Company shall assume the following obligations:

54

(1)	to abide by these articles of association;
(2)	to pay subscription monies according to the number of shares subscribed and the method of subscription;
(3)	no right to return shares to the Company unless laws and regulations provide otherwise;
(4)	other obligations imposed by laws, administrative regulations and these articles of association.

     Shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription.

     Action necessary to change rights of shareholders

     Pursuant to Article 92 of the Articles of Association, those shareholders who hold different classes of shares are shareholders of different classes.

     The holders of the Domestic-Invested shares and holders of Overseas-Listed Foreign-Invested Shares shall be deemed to be shareholders of different classes.

     Pursuant to Article 93 of the Articles of Association, rights conferred on any class of shareholders in the capacity of shareholders (“class rights”) may not be varied or abrogated unless approved by a special resolution of shareholders in general meeting and by holders of shares of that class at a separate meeting conducted in accordance with Articles 95 to 99.

     Pursuant to Article 95 of the Articles of Association, shareholders of the affected class, whether or not otherwise having the right to vote at shareholders’ general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 94, but interested shareholder(s) shall not be entitled to vote at class meetings. “Interested shareholder(s)” is:

(1)	in the case of a repurchase of shares by offers to all shareholders or public dealing on a stock exchange under Article 31, a “controlling shareholder” within the meaning of Article 57;
(2)	in the case of a repurchase of share by an off-market contract under Article 31, a holder of the shares to which the proposed contract relates;
(3)	in the case of a restructuring of the Company, a shareholder within a class who bears less than a proportionate obligation imposed on that class under the proposed restructuring or who has an interest in the proposed restructuring different from the interest of shareholders of that class.

     Pursuant to Article 96 of the Articles of Association, resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to Article 95, are entitled to vote at class meetings.

     Pursuant to Article 97 of the Articles of Association, written notice of a class meeting shall be given forty-five (45) days before the date of the class meeting to notify all of the shareholders in the share register of the class of the matters to be considered, the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance at the class meeting to the Company twenty (20) days before the date of the class meeting.

     If the number of shares carrying voting rights at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one half of the voting shares at the class meeting, the Company may hold the class meeting; if not, the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the date and the place for the class meeting. The Company may then hold the class meeting after such publication of notice.

     Pursuant to Article 98 of the Articles of Association, notice of class meetings need only be served on shareholders entitled to vote thereat.

55

     Meeting of any class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders. The provisions of these articles of association relating to the manner to conduct any shareholders’ general meeting shall apply to any meeting of a class of shareholders.

     Pursuant to Article 99 of the Articles of Association, the special procedures for voting at any meeting of a class of shareholders shall not apply to the following circumstances:

(1)	where the Company issues, upon the approval by special resolution of its shareholders in general meeting, either separately or concurrently once every twelve months, not more than 20 per cent of each of its existing issued Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares;
(2)	where the Company’s plan to issue Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares at the time of its establishment is carried out within fifteen (15) months from the date of approval of the Securities Committee of the State Council.

     Meetings of shareholders

     Shareholders’ general meetings is the organ of authority of the Company and shall exercise its functions and powers, among other things, to decide on the Company’s operational policies and investment plans, to elect and replace directors and decide on matters relating to the remuneration of directors, to examine and approve reports of the board of directors, etc.

     There are two types of shareholders’ general meetings: annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by the board of directors. Annual general meetings are held once every year and within six (6) months from the end of the preceding financial year.

     Under any of the following circumstances, the board of directors shall convene an extraordinary general meeting within two (2) months:

(1)	when the number of directors is less than the number of directors required by the Company Law or two thirds of the number of directors specified in the Articles of Association;
(2)	when the unrecovered losses of the Company amount to one third of the total amount of its share capital;
(3)	when shareholder(s) holding 10 per cent or more of the Company’s issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting;
(4)	when deemed necessary by the board of directors or as requested by the supervisory committee.

     When the Company convenes a shareholders’ general meeting, written notice of the meeting shall be given forty five (45) days before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and the place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to the Company twenty (20) days before the date of the meeting.

     The Company shall, based on the written replies received twenty (20) days before the date of the shareholders’ general meeting from the shareholders, calculate the number of voting shares represented by the shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting reaches one half or more of the Company’s total voting shares, the Company may hold the meeting; if not, then the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the place and date for, the meeting. The Company may then hold the meeting after such publication of notice.

     Limitation on right to own securities

     The PRC Special Regulations on Overseas Offering and the Listing of Shares by Companies Limited by Share (the “Special Regulations”) and the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas (the “Mandatory Provisions”) provide for different classes of shares to be subscribed for and traded by local and overseas investors respectively. Shares which can be traded by overseas investors must be in registered form and while denominated in Renminbi, they are traded in foreign currency with dividends payable in foreign currency. Local investors are prohibited from dealing in such shares.

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     Merger, acquisition or corporate restructuring

     Pursuant to Article 193 of the Articles of Association, in the event of the merger or division of the Company, a plan shall be presented by the Company’s board of directors and shall be approved in shareholders’ general meeting and the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger or division to acquire that dissenting shareholder’s shareholding at a fair price. The contents of the resolution of merger or division of the Company shall be made into special documents for shareholders’ inspection. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares.

The Articles of Association do not contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed.

Material Contracts

The Company has not entered into any material contracts, other than in the ordinary course of business, during the preceding two years.

Exchange Controls

Under current Chinese foreign exchange regulations, Renminbi is fully convertible for current account transactions, but is not freely convertible for capital account transactions. Conversion from Renminbi into a foreign currency or vice versa for purposes of capital account transactions requires prior approvals of relevant Chinese Government agencies.

The Company is generally required by law to sell all its foreign exchange revenues to Chinese banks at the exchange rates published by Chinese banks on each business day, which rates may deviate only within a very narrow range from the official rate published daily by the People’s Bank of China, China’s central bank.

The Company may purchase foreign exchange directly from Chinese banks for any current account transactions, such as trade transactions in its normal course of business, including acquisition of aircraft and flight equipment (such acquisition requires approvals from relevant Chinese Government agencies).

The Company is permitted to retain the foreign exchange proceeds from its initial public offering in July 1997. A portion of the proceeds has been used, and the remaining proceeds will be used for the purposes which are consistent with the disclosure made in the Company’s prospectus dated July 1997.

Payment of dividends by the Company to holders of the Company’s H Shares and ADSs is considered a current account transaction under Chinese law. Therefore, there is no legal restriction on the conversion of Renminbi into foreign exchange for the purpose of paying dividends to such holders of H Shares and ADSs. In addition, the Company’s Articles of Association require the Company to pay dividends to holders of the Company’s H Shares and ADSs in foreign exchange.

     Other Limitations

     There are no limitations on the right of non-resident or foreign owners to hold or vote H Shares or ADSs imposed by Chinese law or by the Articles of Association or other constituent documents of the Company. However, under current Chinese law, foreign ownership of the Company may not exceed 49%.

Taxation

The following is a general summary of certain Chinese tax consequences of the acquisition, ownership and disposition of H Shares and ADSs. This summary is based upon tax laws of China as in effect on the date of this Annual Report, including the income tax treaty between the United States and China (the “U.S.-PRC Tax Treaty”), all of which are subject to change or different interpretation.

In general, for Chinese tax purposes, holders of ADSs will be treated as the owners of the H Shares represented by those ADSs, and exchanges of H Shares for ADSs, and ADSs for H Shares, will not be subject to taxation under the laws of China.

57

This summary does not purport to address all material tax consequences for holders or prospective purchasers of H Shares or ADSs, and does not take into account the specific circumstances of such investors. Investors should consult their own tax advisors as to Chinese or other tax consequences of the acquisition, ownership and disposition of H Shares or ADSs.

     Dividends

     Chinese tax law generally provides for the imposition of a withholding tax on dividends paid by a Chinese company to a non-Chinese shareholder at a rate of 20%. However, the Chinese tax authorities have temporarily suspended imposition of this withholding tax. Accordingly, dividends paid by the Company to holders of H Shares or ADSs who are foreign individuals not resident in China or which are foreign enterprises with no permanent establishment in China will currently not be subject to Chinese withholding tax. In the event that the suspension of the withholding tax is lifted, such payments will be subject to withholding tax at the 20% rate unless the holder is entitled to a tax waiver or a lower tax rate under an applicable double-taxation treaty.

     China currently has double-taxation treaties with a number of countries, including Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States. Under the U.S.-PRC Tax Treaty, China may tax a dividend paid by the Company to a U.S. holder up to a maximum of 10% of the gross amount of such dividend.

     Capital Gains from Transfer or Disposition of Shares

     Chinese tax law generally provides that an individual who transfers or otherwise disposes of a company’s shares of capital stock is subject to a 20% capital gains tax. Currently, foreign enterprises and all individuals are temporarily exempt from capital gains tax on transfers of shares of capital stock of joint stock companies, such as the Company. Should such temporary exemption be discontinued, such holders may be subject to a 20% capital gains tax unless reduced by an applicable double-taxation treaty. Under the U.S.-PRC Tax Treaty, for example, China may only impose a 20% capital gains tax from the sale or other disposition by a U.S. holder of H Shares or ADSs representing an interest in the Company of 25% or more.

     Stamp Duty

     Transfers of shares of capital stock of a company are not subject to Chinese stamp duty if the transfer does not take place within China (excluding Hong Kong, Macau and Taiwan).

Dividends and paying Agents

Not applicable.

Statement by Experts

Not applicable.

Documents on Display

The Company has filed this Annual Report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Statements made in this annual report as to the contents of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this annual report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.

The Company is subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission. Reports and other information which the Company filed with the Securities and Exchange Commission, including this Annual Report on Form 20-F, may be inspected and copied at the public reference facilities of the Securities and Exchange Commission at:

58

450 Fifth Street N.W.
Room 1024
Washington D.C. 20549

7 World Trade Center
New York, New York 10048

500 West Madison Street
Suite 1400
Chicago, Illinois 60661-2511

You can also obtain copies of this material by mail from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov. The Commission’s telephone number is 1-800-SEC-0330.

Subsidiary Information

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Group is subject to market risks due to fluctuations in interest rates. The majority of the Group’s borrowings is in the form of long-term fixed- and variable-rate debts with original maturities ranging from two to 12 years. Fluctuations in interest rates can lead to significant fluctuations in the fair value of such debt instruments. From time to time, the Group may enter into interest rate swaps designed to mitigate exposure relating to interest rate risks. No such contract was outstanding as of December 31, 2002.

The Group is also exposed to foreign currency risk as a result of its aircraft and flight equipment being sourced from overseas suppliers. Specifically, the Group’s foreign currency exposure relates primarily to its foreign currency long-term debts used to finance such capital expenditures and its capital commitments. Subject to certain restrictive conditions imposed by the State Administration of Foreign Exchange, the Group may, from time to time, enter into forward foreign exchange contracts to mitigate its foreign currency exposures. No such contract was outstanding as of December 31, 2002.

As of December 31, 2002, the Group operated a total of 85 aircraft under operating and capital leases at rates that are substantially fixed. Such leases expose the Group to market risks; however, in accordance with Item 305 of Regulation S-K, such leases have been excluded from the following market risk tables. Commitments under operating and capital leases are disclosed in Note 18 to the Financial Statements.

The following table provides information regarding the Group’s interest rate sensitive financial instruments as of December 31, 2002 and 2001:

		As of December 31, 2002
		Expected maturity date
		2003			2004			2005			2006			2007			Thereafter
		(Expressed in RMB million, except interest rates)
Debt
	Fixed-rate notes payable
	In US$		818			609			644			402			370			586
	Average interest rate		6.72	%		6.73	%		6.96	%		6.95	%		6.98	%		6.97	%
	Variable-rate notes payable
	In US$		2,254			—			—			—			—			—
	Average interest rate (1)		2.10	%		—			—			—			—			—
	In RMB		2,169			233			401			474			1,440			676

[Additional columns below]

[Continued from above table, first column(s) repeated]

		As of December 31, 2002					As of December 31, 2001
		Total					Total
		Recorded			Fair		recorded			Fair
		Amount			value(2)		amount			value(2)
		(Expressed in RMB million, except interest rates)
Debt
	Fixed-rate notes payable
	In US$		3,429			3,793		3,769			3,924
	Average interest rate		6.86	%		—		6.82	%		—
	Variable-rate notes payable
	In US$		2,254			2,254		498			498
	Average interest rate (1)		2.10	%		—		6.82	%		—
	In RMB		5,393			5,391		1,538			1,538

59

	As of December 31, 2002
	Expected maturity date
	2003			2004			2005			2006			2007			Thereafter
	(Expressed in RMB million, except interest rates)
Average interest rate (1)		4.19	%		5.40	%		5.00	%		5.15	%		5.08	%		5.18	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

	As of December 31, 2002					As of December 31, 2001
	Total					Total
	Recorded			Fair		recorded			Fair
	Amount			value(2)		amount			value(2)
	(Expressed in RMB million, except interest rates)
Average interest rate (1)		4.65	%		—		5.30	%		—

(1)	These interest rates are calculated based on the year end indices.
(2)	Fair value of debt instruments was estimated based on the interest rates applicable to similar debt instruments at December 31, 2002 and 2001.

The following table provides information regarding the Group’s foreign currency sensitive financial instruments and capital commitments as of December 31, 2002 and 2001 :

		As of December 31, 2002
		Expected maturity date
		2003			2004			2005			2006			2007			Thereafter
		(Expressed in RMB’ million, except interest rates)
Debt
	Fixed-rate notes payable
	In US$		818			609			644			402			370			586
	Average interest rate (1)		6.72	%		6.73	%		6.96	%		6.95	%		6.98	%		6.97	%
	Variable-rate notes payable
	In US$		2,254			—			—			—			—			—
	Average interest rate (1)		2.10	%		—			—			—			—			—
Capital commitments in US$			2,801			2,344			731			—			—			—

[Additional columns below]

[Continued from above table, first column(s) repeated]

		As of December 31, 2002					As of December 31, 2001
		Total					Total
		Recorded			Fair		recorded			Fair
		Amount			value(2)		amount			value(2)
		(Expressed in RMB’ million, except interest rates)
Debt
	Fixed-rate notes payable
	In US$		3,429			3,793		3,769			3,924
	Average interest rate (1)		6.86	%		—		6.82	%		—
	Variable-rate notes payable
	In US$		2,254			2,254		498			498
	Average interest rate (1)		2.10	%		—		6.82	%		—
Capital commitments in US$			5,876			5,876		12,053			12,053

(1)	These interest rates are calculated based on the year end indices.
(2)	Fair value of debt instruments was estimated based on the floating interest rates applicable to similar debt instruments at December 31, 2002 and 2001.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.

There were no material modifications affecting the rights of securities holders made during the fiscal year ended December 31, 2002.

Use of Proceeds

(1) Effective date of the Securities Act registration statement for which the use of proceeds information is being disclosed:

60

	July 23, 1997.
	SEC file number assigned to such registration statement: 333-7114.
(2)	The offering commenced on July 23, 1997.
(3)	The offering was not terminated prior to the sale of any securities registered under the registration statement.
(4)	(i)     The offering was not terminated prior to the sale of all securities registered under the registration statement.

(ii)	Name of the managing underwriter:
	Goldman Sachs (Asia) L.L.C. (global coordinator).
(iii) and (iv)

		Aggregate		Aggregate
		price of		offering
Title of each		offering		price of
class of	Amount	amount	Amount	amount
securities registered	registered(1)	registered(2)	sold(3)	sold(4)
Ordinary H Shares of par value RMB 1.00 per share represented by American Depositary Shares	861,823,000 shares	US$528,469,864	851,501,000 shares	US$522,140,413

Notes:

(1)     The amount does not include 322,677,000 H Shares (some of which in the form of ADSs) which have not been registered with the SEC, of which 290,477,000 H Shares were sold to certain corporate investors in Hong Kong as part of the global offering of the Company in July 1997 and 32,200,000 H Shares were sold to certain limited partnership investment funds affiliated with Goldman, Sachs & Co. in a private placement in June 1997 prior to the Company’s global offering.

(2)     Assumes that all H Shares were sold in the form of ADSs. The price to public for each ADS is US$30.66. Each ADS represents 50 H Shares.

(3)     The amount does not include 322,677,000 H Shares referred to in note (1) above.

(4)       The amount does not include US$197,865,536 which represents the proceeds from the sale of 322,677,000 H Shares referred to in note (1) above. If the latter amount is included, the aggregate amount of proceeds to the Company would be US$720,005,950. In addition, the aggregate amount is calculated on the assumption that all H Shares were sold in the form of ADSs. Based on the actual sale of H Shares and ADSs, the aggregate amount of proceeds to the Company was US$719,494,700. The issue price per H Share was HK$4.70.

(v)

Underwriting discounts and commissions	US$36,593,000
Finder’s fees		—
Expenses paid to or for underwriters	US$2,958,000
Other expenses	US$21,411,000
Total expenses	US$60,962,000

Note:     No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties.

(vi)	Net offering proceeds to the Company after deducting the total expenses in item (4)(v) above:
	US$658,532,700

61

Note:     The amount is calculated on the basis of the actual aggregate amount of proceeds to the Company, and includes the proceeds from the sale of 322,677,000 H Shares referred to in note (1) of item (4)(iv) above.

(vii) Amount of net offering proceeds to the Company used for as of December 31, 2002:

Construction of plant, building and facilities	US$41.9 million
Purchase and installation of machinery and equipment	US$389.7 million
Purchase of real estate	—
Acquisition of other business(es)	—
Repayment of indebtedness	US$192.4 million
Working Capital	US$29.6 million
Temporary investments (interest-bearing bank deposits)	US$4.9 million

Note:     No direct or indirect payments were made to directors, officers, general partners of the Company or their associates, or to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. All payments were made to third parties.

(viii) The uses of proceeds do not represent a material change in the use of proceeds described in the prospectus.

PART III

ITEM 15. [RESERVED]

ITEM 16. [RESERVED]

PART IV

ITEM 17. FINANCIAL STATEMENTS.

Not applicable.

ITEM 18. FINANCIAL STATEMENTS.

Index to Financial Statements

	Page
CONSOLIDATED FINANCIAL STATEMENTS OF CHINA SOUTHERN AIRLINES COMPANY LIMITED
Independent Auditors’ Report	F-1
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2002	F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002	F-3
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002	F-4
Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year
period ended December 31, 2002	F-5
Notes to Consolidated Financial Statements	F-6

ITEM 19. EXHIBITS.

62

Exhibit No.	Description of Exhibit
1	Articles of Association
4.1	Form of Director’s Service Agreement is incorporated by reference in Exhibit 4(c).1 of Form 20-F for the year of 2002.
4.2	Form of Non-Executive Director’s Service Agreement is incorporated by reference in Exhibit 4(c).2 of Form 20-F for the year of 2002.
8	Subsidiaries of the Company
10.1	Section 906 Certification

63

SIGNATURES

     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

CHINA SOUTHERN AIRLINES COMPANY LIMITED
(Registrant)

/s/ Yan Zhi Qing
                    Name: Yan Zhi Qing
                    Title:   Chairman of the Board of Directors

Date: June 27, 2003

64

CERTIFICATION

     I, Yan Zhi Qing, Chairman of the Board of Directors of CHINA SOUTHERN AIRLINES COMPANY LIMITED, hereby certify in connection with the filing with the U.S. Securities and Exchange Commission (“SEC”) of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (the “Annual Report”) that:

1.	I have reviewed this annual report on Form 20-F of CHINA SOUTHERN AIRLINES COMPANY LIMITED;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of CHINA SOUTHERN AIRLINES COMPANY LIMITED as of, and for, the periods presented in this annual report;
4.	CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for CHINA SOUTHERN AIRLINES COMPANY LIMITED and have:

(a)	designed such disclosure controls and procedures to ensure that material information relating to CHINA SOUTHERN AIRLINES COMPANY LIMITED, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)	evaluated the effectiveness of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have disclosed, based on our most recent evaluation, to CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors and the audit committee of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s board of directors (or persons performing the equivalent function):

(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect CHINA SOUTHERN AIRLINES COMPANY LIMITED’s ability to record, process, summarize and report financial data and have identified for CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors any material weaknesses in internal controls; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in CHINA SOUTHERN AIRLINES COMPANY LIMITED’s internal controls; and

6. CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Yan Zhi Qing

Name: Yan Zhi Qing
Title: Chairman of the Board of Directors

Date: June 27, 2003

65

CERTIFICATION

     I, Wang Chang Shun, President of CHINA SOUTHERN AIRLINES COMPANY LIMITED, hereby certify in connection with the filing with the U.S. Securities and Exchange Commission (“SEC”) of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (the “Annual Report”) that:

1.	I have reviewed this annual report on Form 20-F of CHINA SOUTHERN AIRLINES COMPANY LIMITED;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of CHINA SOUTHERN AIRLINES LIMITED as of, and for, the periods presented in this annual report;
4.	CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for CHINA SOUTHERN AIRLINES COMPANY LIMITED and have:

(a)	designed such disclosure controls and procedures to ensure that material information relating to CHINA SOUTHERN AIRLINES COMPANY LIMITED, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)	evaluated the effectiveness of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have disclosed, based on our most recent evaluation, to CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors and the audit committee of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s board of directors (or persons performing the equivalent function):

(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect CHINA SOUTHERN AIRLINES LIMITED’s ability to record, process, summarize and report financial data and have identified for CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors any material weaknesses in internal controls; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in CHINA SOUTHERN AIRLINES COMPANY LIMITED’s internal controls; and

6. CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Wang Chang Shun

Name: Wang Chang Shun
Title: President

Date: June 27, 2003

66

CERTIFICATION

     I, Xu Jie Bo, Chief Financial Officer of CHINA SOUTHERN AIRLINES COMPANY LIMITED, hereby certify in connection with the filing with the U.S. Securities and Exchange Commission (“SEC”) of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (the “Annual Report”) that:

1.	I have reviewed this annual report on Form 20-F of CHINA SOUTHERN AIRLINES COMPANY LIMITED;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of CHINA SOUTHERN AIRLINES COMPANY LIMITED as of, and for, the periods presented in this annual report;
4.	CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for CHINA SOUTHERN AIRLINES LIMITED and have:

(a)	designed such disclosure controls and procedures to ensure that material information relating to CHINA SOUTHERN AIRLINES COMPANY LIMITED, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)	evaluated the effectiveness of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have disclosed, based on our most recent evaluation, to CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors and the audit committee of CHINA SOUTHERN AIRLINES COMPANY LIMITED’s board of directors (or persons performing the equivalent function):

(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect CHINA SOUTHERN AIRLINES COMPANY LIMITED’s ability to record, process, summarize and report financial data and have identified for CHINA SOUTHERN AIRLINES COMPANY LIMITED’s auditors any material weaknesses in internal controls; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in CHINA SOUTHERN AIRLINES COMPANY LIMITED’s internal controls; and

6. CHINA SOUTHERN AIRLINES COMPANY LIMITED’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Xu Jie Bo

Name: Xu Jie Bo
Title: Chief Financial Officer

Date: June 27, 2003

67

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2002

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Independent Auditors’ Report		F-1
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2002		F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002		F-3
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002		F-4
Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2002		F-5
Notes to Consolidated Financial Statements		F-6

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Shareholders of
China Southern Airlines Company Limited:

     We have audited the accompanying consolidated balance sheets of China Southern Airlines Company Limited and its subsidiaries as of December 31, 2001 and 2002, and the related consolidated statements of income, cash flows and changes in shareholders’ equity for each of the years in the three-year period ended December 31, 2002, all expressed in Renminbi. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America and Hong Kong. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Southern Airlines Company Limited and its subsidiaries as of December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with International Financial Reporting Standards.

     International Financial Reporting Standards vary in certain material respects from accounting principles generally accepted in the United States of America. Application of accounting principles generally accepted in the United States of America would have affected results of operations for the years ended December 31, 2000, 2001 and 2002 and shareholders’ equity as of December 31, 2001 and 2002 to the extent summarized in Note 31 to the consolidated financial statements.

     The accompanying consolidated financial statements as of and for the year ended December 31, 2002 have been translated into United States dollars solely for the convenience of the reader. We have audited the translation, and in our opinion, the consolidated financial statements expressed in Renminbi have been translated into United States dollars on the basis set forth in Note 1 to the consolidated financial statements.

KPMG
Hong Kong
March 14, 2003

F-1

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2000, 2001 and 2002

(Amounts in thousands, except per share data)

		Note		2000			2001			2002			2002
				RMB			RMB			RMB			U.S. dollars
Operating revenue:
	Traffic revenue, net		3		14,706,159			16,461,532			17,481,892			2,112,028
	Other revenue		4		472,159			418,126			536,728			64,843
Total operating revenue					15,178,318			16,879,658			18,018,620			2,176,871
Operating expenses:
	Flight operations		5		6,109,021			6,905,628			6,732,543			813,374
	Maintenance		6		1,758,581			2,014,579			2,333,419			281,906
	Aircraft and traffic servicing		7		2,069,114			2,297,521			2,511,284			303,394
	Promotion and sales		8		1,377,682			1,540,780			1,499,587			181,169
	General and administrative		9		809,225			892,233			1,060,010			128,062
	Depreciation and amortization				1,863,789			1,814,974			1,839,871			222,279
	Other				8,805			13,270			15,829			1,912
Total operating expenses					13,996,217			15,478,985			15,992,543			1,932,096
Operating income					1,182,101			1,400,673			2,026,077			244,775
Non-operating income/(expenses):
	Equity income of affiliated companies				45,949			53,077			36,988			4,469
	Equity loss of jointly controlled entities				—			(4,034	)		(3,352	)		(405	)
	Gain/(loss) on sale of fixed assets		12, 21		372,596			(55,889	)		170,740			20,627
	Interest income				90,283			49,878			52,618			6,357
	Interest expense		17		(1,074,236	)		(933,717	)		(959,193	)		(115,882	)
	Exchange gain/(loss), net				318,502			296,777			(175,451	)		(21,197	)
	Other, net				(3,965	)		(11,509	)		(9,328	)		(1,127	)
Total non-operating expenses					(250,871	)		(605,417	)		(886,978	)		(107,158	)
Income before taxation and minority interests					931,230			795,256			1,139,099			137,617
Taxation			10		(338,907	)		(320,519	)		(398,227	)		(48,111	)
Income before minority interests					592,323			474,737			740,872			89,506
Minority interests					(90,552	)		(134,512	)		(165,111	)		(19,947	)
Net income					501,771			340,225			575,761			69,559
Basic earnings per share			2(w)		0.15			0.10			0.17			0.021

F-2

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2002

(Amounts in thousands)

		Note		2001		2002		2002
				RMB		RMB		U.S. dollars
ASSETS
CURRENT ASSETS
	Cash and cash equivalents		15		2,817,863		3,771,043		455,589
	Trade receivables		11		556,542		671,776		81,159
	Other receivables				196,751		372,586		45,013
	Inventories				467,018		545,700		65,927
	Prepaid expenses and other current assets				340,157		244,690		29,562
	TOTAL CURRENT ASSETS				4,378,331		5,605,795		677,250
FIXED ASSETS			12		22,352,215		26,920,829		3,252,368
CONSTRUCTION IN PROGRESS					340,063		661,352		79,899
LEASE PREPAYMENTS					357,622		201,854		24,386
INVESTMENTS			13		900,594		1,355,842		163,802
LEASE AND EQUIPMENT DEPOSITS					2,265,003		2,147,038		259,389
OTHER ASSETS					59,274		295,337		35,680
	TOTAL ASSETS				30,653,102		37,188,047		4,492,774
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
	Notes payable, including current portion of long-term notes payable		17		2,177,516		5,240,726		633,144
	Current instalments of obligations under capital leases		18		1,451,929		1,566,698		189,276
	Accounts payable				590,700		532,480		64,330
	Bills payable				—		1,299,680		157,017
	Sales in advance of carriage				370,546		390,531		47,181
	Taxes payable				73,464		78,145		9,441
	Amounts due to related companies				718,265		525,090		63,437
	Accrued expenses		16		2,013,555		2,341,454		282,877
	Other liabilities				678,133		646,989		78,164
	TOTAL CURRENT LIABILITIES				8,074,108		12,621,793		1,524,867
NOTES PAYABLE, EXCLUDING CURRENT PORTION			17		3,627,594		5,835,434		704,992
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT INSTALMENTS			18		7,691,634		6,631,751		801,197
PROVISION FOR MAJOR OVERHAULS			6		125,661		141,887		17,142
DEFERRED CREDITS			19		15,072		48,095		5,811
DEFERRED TAXATION			14		519,577		779,234		94,141
	TOTAL LIABILITIES				20,053,646		26,058,194		3,148,150
MINORITY INTERESTS					1,377,793		1,516,646		183,230
SHAREHOLDERS’ EQUITY			23,24		9,221,663		9,613,207		1,161,394
	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY				30,653,102		37,188,047		4,492,774

          See accompanying notes to consolidated financial statements.

F-3

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 2001 and 2002

(Amounts in thousands)

		2000			2001			2002			2002
		RMB			RMB			RMB			U.S. dollars
Cash inflows from operations (Note 27)			3,506,432			3,185,523			4,762,923			575,420
	Interest received		90,283			49,878			52,618			6,357
	Interest paid		(1,115,283	)		(970,734	)		(1,051,027	)		(126,977	)
	Income tax paid		(126,346	)		(40,724	)		(66,970	)		(8,091	)
Net cash inflows from operating activities			2,355,086			2,223,943			3,697,544			446,709
Investing activities:
	Proceeds from sale of aircraft		948,863			566,493			778,047			93,998
	Proceeds from sale of other fixed assets		70,948			38,892			47,150			5,696
	Proceeds from sale of investments		5,000			—			68			8
	Dividends received from affiliated companies		59,064			5,946			3,093			374
	Decrease/(increase) in other assets		21,291			(345	)		(943	)		(114	)
	Payment of lease and equipment deposits		(105,740	)		(2,027,063	)		(1,999,233	)		(241,532	)
	Refund of lease and equipment deposits		262,465			200,029			2,117,386			255,806
	Capital expenditures		(1,381,018	)		(1,492,126	)		(6,351,030	)		(767,283	)
	Purchase of investments		(137,119	)		(1,241	)		(6,721	)		(812	)
	Investments in affiliated companies		—			(147,875	)		(136,500	)		(16,491	)
	Investments in jointly controlled entities		—			(178,372	)		(295,670	)		(35,721	)
	Governmental subsidy for safety related capital expenditures		—			—			40,240			4,861
	Effect of acquisition of subsidiaries, net of cash and cash equivalents acquired		—			—			(90,491	)		(10,932	)
Net cash used in investing activities			(256,246	)		(3,035,662	)		(5,894,604	)		(712,142	)
Net cash inflows/(outflows) before financing activities			2,098,840			(811,719	)		(2,197,060	)		(265,433	)
Financing activities:
	Proceeds from bank notes payable		261,849			2,123,613			6,996,780			845,297
	Repayment of bank notes payable		(726,286	)		(890,228	)		(2,194,630	)		(265,138	)
	Repayment of principal under capital lease obligations		(1,986,768	)		(1,756,098	)		(1,546,185	)		(186,798	)
	Minority shareholders’ contributions		505			707			10,625			1,284
	Dividends paid to shareholders		—			—			(67,484	)		(8,153	)
	Dividends paid to minority shareholders		(39,038	)		(45,867	)		(48,866	)		(5,903	)
Net cash (outflows)/inflow from financing activities			(2,489,738	)		(567,873	)		3,150,240			380,589
(Decrease)/increase in cash and cash equivalents			(390,898	)		(1,379,592	)		953,180			115,156
Cash and cash equivalents at beginning of year			4,588,353			4,197,455			2,817,863			340,433
Cash and cash equivalents at end of year			4,197,455			2,817,863			3,771,043			455,589

          See accompanying notes to consolidated financial statements.

F-4

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2000, 2001 and 2002

(Amounts in thousands)

		Share		Share			Other			Retained
		capital		premium			reserves			profits			Total
		RMB		RMB			RMB			RMB			RMB
Shareholders’ equity at January 1, 2000			3,374,178		3,813,659			639,884			551,946			8,379,667
	Net income		—		—			—			501,771			501,771
	Appropriations to reserves		—		—			25,061			(25,061	)		—
Shareholders’ equity at December 31, 2000			3,374,178		3,813,659			664,945			1,028,656			8,881,438
	Net income		—		—			—			340,225			340,225
	Appropriations to reserves		—		—			22,229			(22,229	)		—
Shareholders’ equity at December 31, 2001			3,374,178		3,813,659			687,174			1,346,652			9,221,663
	Land use right adjustment (Notes 24 (f))		—		(129,703	)		—			12,970			(116,733	)
	Adjustments from adoption of new PRC accounting regulations (Notes 24(c))		—		—			(185,540	)		185,540			—
	Dividend paid		—		—			—			(67,484	)		(67,484	)
	Net income		—		—			—			575,761			575,761
	Appropriations to reserves		—		—			83,738			(83,738	)		—
Shareholders’ equity at December 31, 2002			3,374,178		3,683,956			585,372			1,969,701			9,613,207
Shareholders’ equity at December 31, 2002 in U.S. dollars			407,642		445,068			70,720			237,964			1,161,394

          See accompanying notes to consolidated financial statements.

F-5

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)

1.      BASIS OF PRESENTATION

     China Southern Airlines Company Limited (the “Company”) and its subsidiary companies (hereinafter collectively referred to as the “Group”) are principally engaged in the provision of domestic, Hong Kong regional and international passenger and cargo and mail airline services, with flights operating primarily from the Guangzhou Baiyun International Airport, which is both the main hub of the Group’s route network and the location of its corporate headquarters.

     The Company was established in the People’s Republic of China (the “PRC”, “China” or the “State”) on March 25, 1995 as a joint stock limited company as part of the Reorganization (the “Reorganization”) of the Company’s holding company, China Southern Air Holding Company (“CSAHC”) (formerly named as Southern Airlines (Group)). CSAHC is a state-owned enterprise under the supervision of the PRC central government.

     The Company’s H Shares and American Depositary Shares (“ADS”) (each ADS representing 50 H Shares) are listed on the Stock Exchange of Hong Kong Limited and the New York Stock Exchange, respectively, since July 1997.

     The consolidated financial statements have been prepared in Renminbi (“RMB”), the national currency of China. Solely for the convenience of the reader, the 2002 financial statements have been translated into United States dollars at the rate of US$ 1.00 = RMB 8.2773, the rate quoted by the People’s Bank of China on December 31, 2002. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars (“US$”) at that rate or at any other certain rate on December 31, 2002 or at any other certain date.

2.      PRINCIPAL ACCOUNTING POLICIES

(a)      Statement of compliance

     The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board. IFRS includes International Accounting Standards (“IAS”) and related interpretations.

     Differences between IFRS and accounting principles generally accepted in the United States of America (“U.S. GAAP”) and their effect on net income for the years ended December 31, 2000, 2001 and 2002, and on consolidated shareholders’ equity as of December 31, 2001 and 2002 are set forth in Note 31.

F-6

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

(b)      Basis of preparation

     The consolidated financial statements of the Group are prepared on the historical cost basis as modified by the revaluation of certain fixed assets (Note 12). The accounting policies have been consistently applied by the Group and except for a change in accounting policy for land use rights (refer to note 24(f)), are consistent with those used in previous years.

(c)      Basis of consolidation

     The consolidated financial statements include the financial statements of the Company and all of its subsidiaries (see Note 28 for details of the Company’s principal subsidiaries) made up to December 31, each year. Subsidiaries are those enterprises controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases.

     The results of subsidiary companies are included in the consolidated statement of income, and the share attributable to minority shareholders is deducted from or added to the consolidated income after taxation. Losses attributable to minority shareholders of partly owned subsidiaries are accounted for based on the respective equity owned by the minority shareholders up to the amount of the capital contribution and reserves attributable to the minority shareholders. Thereafter, all further losses are assumed by the Company.

     All significant intercompany balances and transactions have been eliminated on consolidation.

(d)      Interest- bearing borrowings

     Interest-bearing borrowings are recognized initially at cost, less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the consolidated statement of income over the period of the borrowings on an effective interest basis.

(e)      Cash and cash equivalents

     Cash and cash equivalents consist of cash in hand and balances with banks and other financial institutions with an original maturity within three months. For the purposes of the consolidated statement of cash flows, the Group considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. None of the Group’s cash and cash equivalents is restricted as to withdrawal.

(f)      Trade and other receivables

F-7

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     Trade and other receivables are stated at cost less allowance for doubtful accounts. Allowance for doubtful accounts are established based on evaluation of the recoverability of these accounts at the balance sheet date. In establishing such allowance, the Group considers various factors including its historical write-off experience and industry economic trend. Past due balances over a specific period and balances over a specific amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis

(g)      Inventories

     Inventories, which consist primarily of expendable spare parts and supplies, are stated at cost less any applicable provision for obsolescence, and are expensed when used in operations. Cost represents the average unit cost. Inventories held for disposal is stated at the lower of cost and net realizable value. Net realizable value represents estimated resale price.

(h)      Fixed assets and depreciation

     Fixed assets are stated at cost or revalued amounts less accumulated depreciation and impairment losses (refer to accounting policy n). Revaluations are performed periodically to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.

     Depreciation is provided to write off the costs, or revalued amounts where appropriate, of the fixed assets on a straight line basis over their estimated useful lives, to residual values, as follows:

		Depreciable life	Residual value
Buildings		15 to 40 years		Nil
Owned and leased aircraft		8 to 15 years		28.75%
Other flight equipment
	Jet engines	8 to 15 years		3%
	Others, including rotable spares	8 to 15 years		Nil
Machinery and equipment		5 to 10 years		3%
Vehicles		6 years		3%

     No depreciation is provided in respect of construction in progress.

F-8

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

(i)      Leased assets

     Flight equipment under capital leases is stated at an amount equal to lower of its fair value and the present value of minimum lease payments at inception of the lease, and is amortized on a straight line basis over the shorter of the lease term or estimated useful life of the asset to residual values. In cases where title to the asset will be acquired by the Group at the end of the lease, the asset is amortized on a straight line basis over the estimated useful life of the asset to its residual value.

     Amounts payable in respect of capital leases are apportioned between interest charges and reductions of obligations based on the interest rates implicit in the leases. Interest charges are included in the consolidated statement of income to provide a constant periodic rate of charge over the lease term.

     Gains on aircraft sale and leaseback transactions which result in capital leases are deferred and amortized over the terms of the related leases. Gains on other aircraft sale and leaseback transactions are recognized as income immediately if the transactions are established at fair value. Any excess of the sales price over fair value is deferred and amortized over the period the assets are expected to be used.

     Operating lease payments are charged to the consolidated statement of income on a straight line basis over the terms of the related leases.

(j)      Construction in progress

     Construction in progress represents office buildings, various infrastructure projects under construction and equipment pending installation, and is stated at cost. Cost comprises direct costs of construction as well as interest charges during the periods of construction and installation. Capitalization of these costs ceases and the construction in progress is transferred to fixed assets when the asset is substantially ready for its intended use, notwithstanding any delays in the issue of the relevant commissioning certificates by the relevant PRC authorities.

(k)       Lease prepayments

     Lease prepayments represent the purchase costs of land use rights and are amortized on a straight line basis over the period of land use rights (Note 24(f)).

F-9

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

(l)      Investments

     An affiliated company is an entity in which the Group has significant influence, but not control or joint control, over its management, including participating in the financial and operating policy decisions.

     A jointly controlled entity is an entity over whose activities the Group has joint control, established by contractual agreement.

     The consolidated statement of income includes the Group’s share of the results of its affiliated companies and jointly controlled entities for the year. In the consolidated balance sheet, the investments in affiliated companies and jointly controlled entities are stated at the Group’s attributable share of net assets. When the Group’s share of losses exceeds the carrying amount of the affiliated company or jointly controlled entity, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the affiliated company or jointly controlled entity.

     Other investments are stated at cost less impairment losses (refer to accounting policy n). Other investments represent unquoted available-for-sale equity securities of companies established in the PRC. There is no quoted market price for such equity securities and accordingly a reasonable estimate of the fair value could not be made without incurring excessive costs.

(m)      Deferred expenditure

     Custom duties and other direct costs in relation to modifying, introducing and certifying certain operating leased aircraft are deferred and amortized over the terms of the related leases.

     Lump sum housing benefits payable to employees of the Group are deferred and amortized on a straight line basis over a period of 10 years, which represents the vesting benefit period of the employees.

(n)      Impairment loss

     The carrying amounts of the Group’s assets, other than inventories (refer to accounting policy g) and deferred tax assets (refer to accounting policy u) are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value. The amount of the reduction is recognized as an expense in the consolidated statement of income.

F-10

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     The Group assesses at each balance sheet date whether there is any indication that an impairment loss recognized for an asset in prior years may no longer exist. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down or write-off cease to exist, is recognized as income. The reversal is reduced by the amount that would have been recognized as depreciation had the write-down or write-off not occurred.

(o)      Deferred credits

     In connection with the acquisition or operating lease of certain aircraft and engines, the Group receives various credits. Such credits are deferred until the aircraft and engines are delivered, at which time they are either applied as a reduction of the cost of acquiring the aircraft and engines, resulting in a reduction of future depreciation, or amortized as a reduction of rental expense for aircraft and engines under operating leases.

(p)      Revenue recognition

     Passenger, cargo and mail revenues are recognized when the transportation is provided. Ticket sales for transportation not yet provided are included in current liabilities of the consolidated balance sheet as sales in advance of carriage. Revenue from airline-related business is recognized when services are rendered. Revenue is stated net of sales tax and contributions to the Civil Aviation Administration of China (“CAAC”) Infrastructure Development Fund.

     Interest income is recognized as it accrues unless collectibility is in doubt. Dividend income is recognized when the Group’s right to receive payment is established.

     Operating lease income is recognized on a straight line basis over the terms of the respective leases.

(q)      Traffic commissions

     Traffic commissions are expensed when the transportation is provided and the related revenue is recognized. Traffic commissions for transportation not yet provided are recorded in the consolidated balance sheet as a prepaid expense.

(r)      Maintenance and overhaul costs

     Routine maintenance and repairs, and overhauls in respect of owned aircraft and aircraft held under capital leases are expensed in the consolidated statement of income as and when incurred. In respect of aircraft held under operating leases, a provision is made over the lease term for the estimated cost of scheduled overhauls required to be performed on the related aircraft prior to their return to the lessors.

F-11

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

(s)      Translation of foreign currencies

     Foreign currency transactions during the year are translated into Renminbi at the applicable rates of exchange prevailing on the transaction dates.

     Foreign currency monetary balances at the balance sheet date are translated into Renminbi at the exchange rates quoted by the People’s Bank of China ruling at the balance sheet date. Exchange differences are dealt with in the consolidated statement of income.

(t)      Borrowing costs

     Borrowing costs are expensed in the consolidated statement of income as and when incurred, except to the extent that they are capitalized as being directly attributable to the acquisition or construction of an asset which necessarily takes a substantial period of time to get ready for its intended use.

(u)      Deferred taxation

     Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes, except differences relating to the initial recognition of assets or liabilities which affect neither accounting nor taxable profit/loss.

     The tax value of losses expected to be available for utilization against future taxable income is recognized as a deferred tax asset and offset against the deferred tax liability attributable to the same legal tax unit and jurisdiction. Net deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(v)      Retirement benefits

     Contributions to retirement schemes and additional retirement benefits paid to retired employees are charged to the consolidated statement of income as and when incurred (see Note 21).

(w)      Basic earnings per share

     Basic earnings per share for the years ended December 31, 2000, 2001 and 2002 have been computed by dividing net income of RMB501,771, RMB340,225 and RMB575,761, respectively, by the weighted average number of shares in issue of 3,374,178,000 in 2000, 2001 and 2002.

(x)      Frequent flyer award programs

F-12

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     The Group maintains two frequent flyer award programs, namely, the China Southern Airlines Sky Pearl Club and Egret Mileage Plus, which provide travel awards to members based on accumulated mileage. The estimated incremental cost to provide free travel is recognized as an expense and accrued as a current liability as members accumulate mileage. As members redeem awards or their entitlements expire, the incremental cost liability is reduced accordingly to reflect the acquittal of the outstanding obligations.

(x)     Revenue from mileage sales under the frequent flyer award programs is recognized when the related transportation services are provided.

(y)      Provisions

     A provision is recognized in the consolidated balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligations. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

(z)      Related parties

     For the purposes of these consolidated financial statements, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals or entities.

(aa)     Segmental reporting

     The Group operates principally as a single business segment for the provision of air transportation services. The analysis of operating revenue and operating income by geographical segment is based on the following criteria:

(i)	Traffic revenue from domestic services within the PRC (excluding Hong Kong) is attributed to the domestic operation. Traffic revenue from inbound/outbound services between the PRC and Hong Kong, and the PRC and overseas destinations is attributed to the Hong Kong regional operation and international operation, respectively.
(ii)	Other revenue from ticket selling, general aviation and ground services, air catering and other miscellaneous services is attributed on the basis of where the services are performed.

(ab)     Use of estimates

     The preparation of consolidated financial statements of the Group in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

F-13

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

3.      TRAFFIC REVENUE

     Traffic revenue is stated net of sales tax and levies paid to PRC authorities and consists of:

	Year ended December 31,
	2000		2001		2002
	RMB		RMB		RMB
Passenger		13,254,714		15,055,496		15,695,622
Cargo and mail		1,451,445		1,406,036		1,786,270
		14,706,159		16,461,532		17,481,892

     Pursuant to various PRC revenue tax rules and regulations, the Group is required to pay sales tax to national and local tax authorities at the rate of approximately 3% of the ticket value in respect of flights originated in the PRC. Sales tax incurred by the Group for the years ended December 31, 2000, 2001 and 2002 amounted to RMB510,460, RMB535,473 and RMB557,784, respectively.

     In addition, the Group is required to pay contributions to the CAAC Infrastructure Development Fund which were calculated at the rates of 5% and 2%, respectively, of the domestic and international/Hong Kong regional traffic revenue for the years ended December 31, 2000, 2001 and 2002. Contributions to the CAAC Infrastructure Development Fund paid by the Group for the year ended December 31, 2000, 2001 and 2002 totaled RMB666,982, RMB759,385 and RMB798,386, respectively.      .

F-14

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     Pursuant to approval documents issued by the CAAC, the Group imposes a fuel surcharge on passengers carried by its domestic and Hong Kong regional flights at the following prescribed rates:

Applicable flights and periods	Rates of fuel surcharge
Domestic flights
From November 1, 2000 to February 5, 2001	Not more than 20% of published fare or
	RMB150 per passenger, whichever is lower
From February 6, 2001 to December 31, 2001	Not more than 14% of published fare or
	RMB150 per passenger, whichever is lower
From January 1, 2002 to October 9, 2002	Not more than 8% of published fare
From October 10, 2002 onward	Not more than 14% of published fare
Hong Kong regional flights
From Novmeber 16, 2000 to December 31, 2001	RMB64 to RMB70 per passenger
From January 1, 2002 onward	Nil

     The fuel surcharge forms part of the traffic revenue of the Group. For the year ended December 31, 2000, 2001 and 2002, the fuel surcharge revenue totaled RMB149,000, RMB1,001,000 and RMB554,000, respectively.

4.       OTHER OPERATING REVENUE

	Year ended December 31,
	2000		2001		2002
	RMB		RMB		RMB
Commission income		134,252		129,157		137,928
General aviation income		53,161		61,292		68,225
Ground services income		63,111		55,388		78,616
Air catering income		23,654		29,523		38,077
Aircraft lease income		110,635		65,486		46,640
Net income from a lease arrangement (Note 12)		—		—		51,682
Other		87,346		77,280		115,560
		472,159		418,126		536,728

F-15

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

5.       FLIGHT OPERATION EXPENSES

	Year ended December 31,
	2000		2001		2002
	RMB		RMB		RMB
Fuel costs		3,240,129		3,548,860		3,519,005
Operating lease rentals		1,615,574		1,912,832		1,416,524
Air catering expenses		482,838		554,165		625,489
Aircraft insurance		85,431		123,439		256,238
Flight personnel payroll and welfare		575,861		657,193		781,223
Training expenses		30,885		24,374		38,908
Other		78,303		84,765		95,156
		6,109,021		6,905,628		6,732,543

6.      MAINTENANCE EXPENSES

	Year ended December 31,
	2000		2001		2002
	RMB		RMB		RMB
Repairing and maintenance charges		1,327,248		1,558,331		1,842,213
Maintenance materials		274,987		286,505		292,492
Labor costs		94,565		104,949		130,254
Other		61,781		64,794		68,460
		1,758,581		2,014,579		2,333,419

F-16

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     An analysis of provision for major overhauls in respect of aircraft held under operating leases is as follows:

	Year ended December 31,
	2000			2001			2002
	RMB			RMB			RMB
Balance at beginning of year		289,228			241,895			187,125
Additional amount provided		15,267			12,889			49,051
Amount utilized		(62,600	)		(67,659	)		(42,289	)
Balance at end of year		241,895			187,125			193,887

     Balance of provision for major overhauls at December 31, 2001 and 2002 consisted of:

	December 31,
	2001		2002
	RMB		RMB
Current portion (included in accrued expenses) (Note 16)		61,464		52,000
Non-current portion		125,661		141,887
		187,125		193,887

7.       AIRCRAFT AND TRAFFIC SERVICING EXPENSES

	Year ended December 31,
	2000		2001		2002
	RMB		RMB		RMB
Landing and navigation fees		1,955,144		2,157,392		2,353,412
Ground service charges		113,970		140,129		157,872
		2,069,114		2,297,521		2,511,284

F-17

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

8.      PROMOTION AND SALES EXPENSES

	Year ended December 31,
	2000		2001		2002
	RMB		RMB		RMB
Sales commissions		802,277		891,646		749,953
Ticket office expenses		414,161		440,445		515,648
Computer reservation services		120,071		153,409		174,547
Advertising and promotion		24,719		26,434		31,513
Other		16,454		28,846		27,926
		1,377,682		1,540,780		1,499,587

9.      GENERAL AND ADMINISTRATIVE EXPENSES

	Year ended December 31,
	2000		2001		2002
	RMB		RMB		RMB
General corporate expenses		493,484		557,083		658,833
Salaries and welfare		294,358		312,396		379,406
Provision for doubtful accounts (Note 30)		2,072		1,729		1,304
Other taxes and levies		19,311		21,025		20,467
		809,225		892,233		1,060,010

10.       TAXATION

     Pursuant to the income tax rules and regulations of the PRC, the Group is liable to PRC income tax at a rate of 33% in respect of all periods presented.

     In respect of the Group’s overseas airline activities, the Group has either obtained exemptions from overseas taxation pursuant to the bilateral aviation agreements between the overseas governments and PRC governments, or has sustained tax losses in these overseas jurisdictions. Accordingly, no provision for overseas tax has been made for the years ended December 31, 2000, 2001 and 2002.

F-18

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     Income tax provision consisted of:

		Year ended December 31,
		2000		2001		2002
		RMB		RMB		RMB
Provision for income tax:
	Company and subsidiaries		59,297		37,032		71,651
	Affiliated companies		12,024		8,085		9,424
			71,321		45,117		81,075
Deferred taxation (Note 14)			267,586		275,402		317,152
			338,907		320,519		398,227

     Actual income tax expense differed from the amounts computed by applying the PRC income tax rate of 33% to income before taxation and minority interests as a result of the following:

		Year ended December 31,
		2000			2001			2002
		RMB			RMB			RMB
Expected PRC taxation expense			307,306			262,434			375,903
Adjustments:
	Gains on sale and leaseback transactions and their amortization		(7,612	)		(5,075	)		(851	)
	Rate differential on subsidiaries taxed at 15%		(40,745	)		(51,245	)		(60,530	)
	Non-deductible expenses		70,512			154,152			61,454
	Other, net		9,446			(39,747	)		22,251
			338,907			320,519			398,227

     In accordance with relevant PRC tax regulations, a PRC lessee is liable to pay PRC withholding tax in respect of any lease payments regularly made to an overseas lessor. Depending on the circumstances, this tax is generally imposed at a fixed rate ranging from 10% to 20% of the lease payments, or in certain cases, the interest components of such payments. Pursuant to an approval document from the State Taxation Bureau, lease arrangements executed prior to September 1, 1999 are exempted from PRC withholding tax.

F-19

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     The PRC withholding tax payable in respect of the operating leases executed after September 1, 1999 of RMB5,020, RMB11,962 and RMB14,305, respectively, during 2000, 2001 and 2002 has been included as part of the operating lease rentals.

11.       TRADE RECEIVABLES

	December 31,
	2001			2002
	RMB			RMB
Trade receivables, principally traffic		615,561			731,894
Less: Allowance for doubtful accounts (Note 30)		(59,019	)		(60,118	)
		556,542			671,776

12.       FIXED ASSETS

	December 31,
	2001			2002
	RMB			RMB
Buildings		2,966,159			3,207,816
Aircraft		19,845,652			24,970,695
Flight equipment, including rotable spares		5,858,622			6,350,363
Machinery, equipment and vehicles		1,539,889			1,667,764
		30,210,322			36,196,638
Less: Accumulated depreciation and amortization		(7,858,107	)		(9,275,809	)
		22,352,215			26,920,829

     Substantially all of the Group’s buildings are located in the PRC. The Group was formally granted the rights to use the twenty parcels of land in Guangzhou, Shenzhen, Zhuhai, Beihai, Changsha, Shantou, Haikou, Zhengzhou, Guiyang and Wuhan by the relevant PRC authorities for a period of 30 to 70 years, which expire between 2020 and 2068. For other land in the PRC on which the Group’s building are erected, the Group was formally granted the rights to use such land for periods of one to five years commencing in the second quarter of 1997 pursuant to various lease agreements between the Company and CSAHC. The leases with initial one-year term are automatically renewable for another one-year period unless the Group gives appropriate notice of termination. In this connection, rental payments totaling RMB15,224 were paid to CSAHC for each of the years ended December 31, 2000, 2001 and 2002 in respect of these leases. See Note 20.

F-20

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     The Group is obligated under various capital leases for aircraft that expire at various dates during the next nine years. The gross amount of aircraft and related accumulated amortization recorded under capital leases are as follows:

	December 31,
	2001			2002
	RMB			RMB
Aircraft		11,454,527			11,459,978
Less: Accumulated amortization		(2,238,389	)		(2,499,495	)
		9,216,138			8,960,483

     As of December 31, 2001 and 2002, certain aircraft of the Group with an aggregate carrying amount of approximately RMB5,079,342 and RMB5,822,076, respectively, were pledged as security under certain loan agreements. See Note 17.

     In compliance with the PRC rules and regulations governing initial public offering of shares by PRC joint stock limited companies, the fixed assets of the Group as of December 31, 1996 were revalued. This revaluation was conducted by Guangzhou Assets Appraisal Corp., a firm of independent valuers registered in the PRC, on a depreciated replacement cost basis, and approved by the China State-owned Assets Administration Bureau.

     In accordance with IAS 16 “Property, Plant and Equipment”, subsequent to the 1996 revaluation, which was based on a depreciated replacement costs, the fixed assets of the Group are carried at revalued amounts, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses. Revaluation is performed periodically to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. In accordance with the revaluation performed by the directors in respect of fixed assets held by the Group as of December 31, 2000, the carrying amounts of fixed assets did not differ materially from their respective fair value.

     The effect of the above revaluations was to increase annual depreciation charges by approximately RMB68,000, RMB65,000 and RMB 33,000, respectively, for 2000, 2001 and 2002.

     Pursuant to certain sale and leaseback arrangements, the Group sold four Boeing 757-200 aircraft, two Airbus 320-200 aircraft and four Boeing 757-200 aircraft, respectively, during 2000, 2001 and 2002 to independent third parties and then entered into operating leases with such parties to lease back the aircraft for a period of eight to nine years. The Group recognized a gain of RMB377,817, RMB59,855 and RMB199,394, respectively, in 2000, 2001 and 2002, being the excess of the sale proceeds which approximated the aircraft’s fair value on the date of disposal over the aircraft’s net book value and related disposal costs, under the sub-item “Gain/(loss) on sale of fixed assets” under “Non-operating income/(expenses)” in the consolidated statements of income.

F-21

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     During 2000, 2001 and 2002, the Group entered into arrangements to lease several of its aircraft to independent third parties. The terms of such leases generally range from one to twelve months. Depreciation of the relevant aircraft from the date of commencement of the leases to December 31, 2000, 2001 and 2002 or the expiry date of the leases, whichever is earlier, was RMB19,027, RMB9,671 and RMB4,176, respectively.

     During 2002, the Group entered into an arrangement with certain independent third parties under which the Group sold an aircraft and then immediately leased back the aircraft for a period of 26 years. As agreed, the lease payment obligations, with pre-determined net present value totaling RMB1,295,680 equivalent, is to be satisfied solely out of the sale proceeds and such amount has been placed irrevocably by the Group in form of deposits and debt securities in favor of the lessor. The Group has an option to purchase the aircraft at the 16.6th year and the agreed purchase price is to be satisfied by the balances of the deposits and debt securities outstanding at that date. In the event that the lease agreement is early terminated by the Group, the Group is liable to pay a pre-determined penalty to the lessor. As long as the Group complies with the lease agreement, the Group is entitled to the quiet use of, and continued possession and use or operation of, the aircraft. Since the Group retains substantially the same rights to its use as before the arrangement, no adjustment has been made to the fixed assets. As of December 31, 2002, the net present value of the lease commitments and the corresponding defeased deposits and debt securities amounted to RMB1,322,843. As a result of the arrangement, the Group received a net cash benefit of RMB51,682 which has been recognized as income for the year.

13.      INVESTMENTS

	2001		2002
	RMB		RMB
Share of net assets in affiliated companies		531,055		692,026
Share of net assets in jointly controlled entities		174,338		461,962
Other investments, at cost		195,201		201,854
		900,594		1,355,842

     Details of the Company’s principal affiliated companies and jointly controlled entities are set out in Note 28.

F-22

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

14.      DEFERRED TAXATION

     Movements in net deferred tax liabilities are as follows:

	December 31,
	2001			2002
	RMB			RMB
Balance at beginning of year		(244,175	)		(519,577	)
Land use rights adjustment (Note 24(f))		—			57,495
		(244,175	)		(462,082	)
Transferred to consolidated statement of income (Note 10)		(275,402	)		(317,152	)
Balance at end of year		(519,577	)		(779,234	)

     The deferred tax liabilities were made up of the taxation effect of:

				December 31,
				2001			2002
				RMB			RMB
Deferred tax assets:
	Tax losses carried forward				175,926			149,338
	Repairs and maintenance accruals				171,122			63,896
	Repair charges capitalized				265,319			319,697
	Accrued expenses				295,597			311,893
	Other				122,321			129,423
			Total deferred tax assets		1,030,285			974,247
Deferred tax liabilities:
	Undistributed profits of subsidiaries				219,330			254,210
	Repairs and maintenance accruals				73,851			78,083
	Depreciation of fixed assets				1,237,532			1,403,278
	Other				19,149			17,910
		Total deferred tax liabilities			1,549,862			1,753,481
Net deferred tax liabilities					(519,577	)		(779,234	)

F-23

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     As of December 31, 2001 and 2002, the Group had tax losses for PRC income tax purposes totaling approximately RMB533,109 and RMB452,539, respectively. Such tax losses are available for carry forward to set-off against future PRC assessable income for a maximum period of five years. As of December 31, 2001 and 2002, the Group recorded a deferred tax asset of RMB175,926 and RMB149,338, respectively, for such tax losses.

15.       CASH AND CASH EQUIVALENTS

     As of December 31, 2001 and 2002, cash and cash equivalents comprise cash at bank and in hand and deposits with Southern Airlines Group Finance Company Limited (“SA Finance”), a PRC authorized financial institution controlled by CSAHC and an affiliated company of the Group. In accordance with the financial agreement dated May 22, 1997 between the Company and SA Finance, all the Group’s deposits accepted by SA Finance as of December 31, 2001 and 2002 were simultaneously placed with several designated major PRC banks by SA Finance. As of December 31, 2001 and 2002, the Group’s deposits with SA Finance totaled RMB1,341,126 and RMB900,979, respectively. See Note 22.

16.       ACCRUED EXPENSES

	December 31,
	2001		2002
	RMB		RMB
Landing and traffic charges		353,148		497,372
Duties and levies		446,180		360,827
Fuel		169,777		297,626
Interest		202,274		174,626
Lease charges		11,658		40,900
Accrued salaries, wages and benefits		237,804		245,124
Insurance premium		2,955		1,972
Repairs and maintenance		306,088		198,465
Current portion of provision for major overhauls (Note 6)		61,464		52,000
Lump sum housing benefits payable (Note 21)		—		213,675
Other		222,207		258,867
		2,013,555		2,341,454

F-24

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

17.      DEBT

     Short-term notes payable

	December 31,
	2001		2002
	RMB		RMB
Short-term notes payable		1,431,105		4,422,926

     As of December 31, 2001 and 2002, borrowings under short-term notes payable of the Group totaling RMB976,644 and RMB1,450,000, respectively, were guaranteed by CSAHC.

     Borrowings under short-term notes payable are used primarily to finance working capital needs and are repayable in full on the respective due dates with interest rates ranging from 1.92% to 5.3%. The Group’s weighted average interest rate on short-term notes payable was 4.28% and 3.11%, respectively, as of December 31, 2001 and 2002.

F-25

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     Long-term notes payable

		December 31,
	Interest rate and final maturity	2001			2002
			RMB			RMB
Renminbi denominated notes payable:
Loans for construction projects	Floating interest rates ranging from 4.94% to 6.21% per annum as of December 31, 2002, with maturity through 2009.		115,562			893,838
	Non-interest bearing loans from a municipal government authority, repayable in 2004		3,000			3,000
Loans for purchase of aircraft	Floating interest rates ranging from 5.02% to 5.49% per annum as of December 31, 2002, with maturities through 2012		485,700			2,310,268
U.S. dollar denominated notes payable:
Loans for purchase of aircraft	Fixed interest rates ranging from 5.00% to 8.33% per annum as of December 31, 2002, with maturities through 2011.		3,741,749			3,426,038
Loan for purchase of flight equipment	Fixed interest rate of 8.35% per annum as of December 31, 2002, with maturity through 2004		27,994			20,090
			4,374,005			6,653,234
Less: current portion			(746,411	)		(817,800	)
			3,627,594			5,835,434

     As of December 31, 2001 and 2002, borrowings under long-term notes payable of the Group totaling RMB3,741,749 and RMB3,360,945, respectively, were guaranteed by certain financial institutions and secured by the mortgages over certain of the Group’s aircraft. In addition, as of December 31, 2001 and 2002, borrowings under long-term notes payable of the Group totaling RMB321,700 and RMB1,890,118, respectively, were guaranteed by CSAHC and as of December 31, 2002, RMB561,531 was guaranteed by SA Finance.

     As of December 31, 2002, the Group had banking facilities with several PRC commercial banks for providing loan finance up to an amount of RMB12,360,000. As of December 31, 2002, an amount of approximately RMB7,258,000 was utilized.

F-26

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     The aggregate annual maturities of long-term notes payable for each of the five years subsequent to December 31, 2002 and thereafter are as follows:

		RMB
Year ending December 31,
	2003		817,800
	2004		842,036
	2005		1,045,049
	2006		875,127
	2007		1,810,673
	Thereafter		1,262,549
			6,653,234

     Interest expense, net of the amounts capitalized, represents:

	Year ended December 31,
	2000		2001			2002
	RMB		RMB			RMB
Interest incurred		1,074,236		938,944			1,023,379
Interest capitalized		—		(5,227	)		(64,186	)
Interest expense		1,074,236		933,717			959,193

F-27

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

18.      LEASE OBLIGATIONS

Capital leases

     As of December 31, 2002, the Group leased 34 aircraft under capital leases. The majority of these leases have terms of 10 to 15 years, and expiration dates range from 2003 through 2011.

     As of December 31, 2002, future scheduled minimum lease payments under capital leases, which were 78% and 22%, respectively, denominated in U.S. dollars and Japanese yen, are as follows:

		Payments		*Interest		Obligations
		RMB		RMB		RMB
Year ending December 31,
	2003		2,006,392		439,694		1,566,698
	2004		1,624,381		351,237		1,273,144
	2005		1,352,472		286,208		1,066,264
	2006		1,390,900		205,592		1,185,308
	2007		1,409,863		156,188		1,253,675
	Thereafter		1,960,607		107,247		1,853,360
			9,744,615		1,546,166		8,198,449
Less: current instalments of obligations under capital leases							(1,566,698	)
							6,631,751

     *Interest rates ranged from 1.0% to 11.0%.

     Under the terms of the leases, the Group 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.

     Security, including charges over the assets concerned and relevant insurance policies, is provided to the lessors.

     In addition to the assets pledged as security under certain loan agreements (see Note 12), certain of the Group’s aircraft with an aggregate carrying amount of RMB9,216,138 and RMB8,960,483, respectively, as of December 31, 2001 and 2002 were pledged to secure facilities with financial institutions granted to lessors totaling RMB9,143,563 and RMB8,198,449, respectively, on these dates.

F-28

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

Operating leases

     As of December 31, 2002, future minimum lease payments under non-cancellable aircraft and flight equipment operating leases were as follows (principally denominated in U.S. dollars):

	RMB
Year ending December 31,
2003		1,280,060
2004		1,327,631
2005		1,245,150
2006		1,001,954
2007		783,739
Thereafter		2,898,104
Total minimum lease payments		8,536,638

     Amounts charged to rental expenses for operating leases for the years ended December 31, 2000, 2001 and 2002 totaled RMB1,415,997, RMB1,723,338 and RMB1,348,277, respectively.

     All of the Group’s obligations under capital and operating leases are guaranteed by financial institutions.

19.      DEFERRED CREDITS

	December 31,
	2001			2002
	RMB			RMB
Gains from sale and leaseback of fixed assets		2,999			—
Operating lease rebates		12,073			7,855
Governmental subsidy for safety related capital expenditures		—			40,240
		15,072			48,095
Movements during the year are as follows:
Balance at beginning of year		33,555			15,072
Additions during the year		—			40,240
Transferred to consolidated statement of income		(18,483	)		(7,217	)
Balance at end of year		15,072			48,095

F-29

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

Gains from sale and leaseback of fixed assets

     During 1991 and 1992, a total of ten aircraft under capital leases were sold. Seven of these aircraft were leased back under operating leases for a period of two years. Pursuant to the sales agreement, the Group agreed to lease an additional ten replacement aircraft. The gain on the sale of the ten aircraft was RMB575,811. Of this amount, RMB215,693 and RMB129,464, respectively, were recorded directly to other income in 1991 and 1992, and the balance, representing the sale price in excess of fair value of the replacement aircraft, has been deferred and amortized over the respective operating lease periods.

Operating lease rebates

     Pursuant to several operating lease arrangements for aircraft commenced in January 1998, the Group received cash rebates totaling RMB24,838 from an operating lessor in 1998. Such rebates have been deferred and amortized over the terms of the respective lease to reduce the future operating lease charges.

Governmental subsidy for safety related capital expenditures

     During 2002, the Group received governmental subsidy for safety related capital expenditures amounting to RMB40,240 for enhancing future flight protection and safety standards. Such governmental subsidy is to be amortized over the depreciable lives of the related fixed assets.

20.      COMMITMENTS AND CONTINGENCIES

     The Company has been advised by its Chinese legal counsel that, except for liabilities constituting or arising out of or relating to the business assumed by the Company in the Reorganization (see Note 1), no other liabilities were assumed by the Company, and the Company is not jointly and severally liable for other debts and obligations incurred by CSAHC prior to the Reorganization, except for certain loans from PRC banks which were fully repaid by CSAHC. There are not, however, any definitive PRC regulations or other pronouncements confirming such conclusion.

     The Group leases from CSAHC certain land in Guangzhou and certain land and buildings in Wuhan, Haikou and Zhengzhou. The Group has a significant investment in buildings and other leasehold improvements located on such land. However, such land in Guangzhou and such land and buildings in Wuhan, Haikou and Zhengzhou lack adequate documentation evidencing CSAHC’s rights thereto and the lease agreements between CSAHC and the Company may not be registered with the relevant authorities. Lack of registration may affect the validity of such lease agreements.

F-30

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     With respect to the facilities in Guangzhou, CSAHC has received written assurance from the CAAC to the effect that CSAHC is entitled to continued use and occupancy of the land in Guangzhou. The Company understands that the CAAC is basing its conclusion on an agreement among certain government authorities relating to such land. Such assurance does not constitute formal evidence of CSAHC’s right to transfer, mortgage or lease such real property interests. The Group cannot predict the magnitude of the effect on its financial condition or results of operations to the extent that its use of one or more of these parcels of land or the related facilities were successfully challenged. CSAHC has agreed to indemnify the Group against any loss or damage caused by any challenge or interference with the Group’s use of any of its land and buildings.

     As of December 31, 2002, the Group had on order fifteen Boeing 737-800 aircraft and certain flight equipment, scheduled for deliveries in 2003 to 2005. Deposits of RMB1,659,964 have been made towards the purchase of these aircraft and related equipment. As of December 31, 2002, the aggregate future payments, including estimated amounts for price escalation through anticipated delivery dates for these aircraft and related equipment totaled approximately RMB5,875,996.

     As of December 31, 2002, additional capital expenditures of approximately RMB3,671,852 have been authorized, of which approximately RMB569,587 have been committed, for the Group’s principal facilities. Such expenditures comprised mainly RMB3,127,420 for facilities and equipment at the Guangzhou New Airport and RMB544,432 for other airport and office facilities and equipment, overhaul and maintenance bases and training centers.

     As of December 31, 2002, the Group was committed to make a capital contribution of approximately RMB60,000 and RMB201,000, respectively, to jointly controlled entity and affiliated company.

21.      RETIREMENT AND POST-RETIREMENT MEDICAL BENEFITS

     Employees of the Group participate in several defined contribution retirement schemes organized separately by PRC municipal governments in regions where the major operations of the Group are located. The Group is required to contribute to these schemes at the rates ranging from 13% to 17% for 2000, 14% to 17% for 2001, and 14% to 19% for 2002, of salary costs including certain allowances. A member of the retirement schemes is entitled to pension benefits equal to a fixed proportion of the salary at the retirement date. The retirement benefit obligations of all existing and future retired staff of the Group are assumed by these schemes.

     In addition, the Group was selected as one of the pilot enterprises to establish a supplementary defined contribution retirement scheme for the benefit of employees. In this connection, employees of the Group participate in a supplementary defined contribution retirement scheme whereby the Group is required to make defined contributions at the rate of 4.5% of total salaries. This scheme which was previously organized by CSAHC has been handed over to relevant PRC government agencies since January 1, 2002. The Group has no obligation for the payment of pension benefits beyond the contributions described above. Contributions to the retirement schemes are changed to consolidated statement of income as and when incurred.

F-31

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     The Group is also required to provide retirees with medical benefits, transportation subsidies and other welfare facilities. Previously, the Group paid a fixed annual fee to CSAHC in return for CSAHC providing such benefits to the retired employees of the Group. With effect from January 1, 2002, such arrangement was terminated and the services are now provided by the Group itself.

     Furthermore, pursuant to the comprehensive services agreement (the “Services Agreement”) dated May 22, 1997 between the Company and CSAHC, CSAHC agrees to provide adequate quarters to eligible employees of the Group as and when required. In return, the Group agrees to pay a fixed annual fee of RMB85,000 to CSAHC for a ten-year period effective January 1, 1995.

     During 2001 and 2002, the Group provided additional quarters at its own expense to certain employees who are not eligible for quarters pursuant to the Services Agreement. These quarters were provided to the employees in accordance with the relevant PRC housing reform policy. In 2001 and 2002, the Group recognized a loss of RMB110,723 and RMB17,624, respectively, being the excess of the cost of these quarters over the considerations received by the Group from the employees, under “Non-operating income/(expenses)” in the consolidated statements of income.

     Subsequently, pursuant to an additional staff housing benefit scheme effective September 2002, the Group has agreed to pay lump sum housing allowances to certain employees who have not received quarters from CSAHC or the Group according to the relevant PRC housing reform policy, for subsidizing their purchases of housing. Such expenditure has been deferred and amortized on a straight line basis over a period of 10 years, which represents the vesting benefit period of the employees. An employee who quits prior to the end of the vesting benefit period is required to pay back a portion of the lump sum housing benefits determined on a pro-rata basis of the vesting benefit period remained. The Group has the right to effect a charge on the employee’s house and to enforce repayment through selling the house in the event of default in repayment. Any shortfall in repayment would be charged against consolidated statement of income. As of December 31, 2002, the Group already made payments totaling RMB46,325 under the scheme and recorded its remaining contractual liabilities totaling RMB213,675 as accrued liabilities on the consolidated balance sheet (See Note 16).

22.      RELATED PARTY TRANSACTIONS

     Substantially all transactions undertaken by the Group during the periods presented were effected on such terms as have been determined by the CAAC or other relevant PRC authorities. In addition, many of the involved counterparties were either regulated by or connected with such authorities. The principal related party transactions are described as follows:

Allocation of routes and air fares

     Both domestic and international routes on which the Group and other PRC airlines offer scheduled services are allocated by the CAAC.

F-32

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     International air fares are subject to bilateral agreements between the CAAC, acting on behalf of the PRC government, and other governments. Domestic air fares are regulated jointly by the CAAC and the PRC Price Administrative Bureau.

Procurement of aircraft and jet engines

     Certain PRC airlines, including the Group, were granted permission to acquire aircraft directly from manufacturers subject to the approval of their fleet expansion plans by the relevant PRC government authorities.

     The Group acquires engines through Southern Airlines (Group) Import and Export Trading Company (“SAIETC”), a wholly-owned subsidiary of CSAHC. In this connection, handling fees totaling RMB2,181, RMBNil and RMB2,840, respectively, were paid to SAIETC for 2000, 2001, and 2002.

Procurement of rotables and engineering spare parts

     The Group also acquires rotables and engineering spare parts through SAIETC and pays handling fees to it in return. Total purchases amounted to RMB352,679, RMB324,998 and RMB583,548, respectively, for 2000, 2001 and 2002. Handling fees totaling RMB11,602, RMB16,161 and RMB 33,466, respectively, were paid to SAIETC for 2000, 2001 and 2002.

Jet fuel supplies

     Jet fuel is subject to allocation in the PRC. The Group is required to purchase jet fuel domestically from the China Aviation Oil Supply Company and Lan Tian Oil Supply Company, companies controlled by the CAAC, at prices set by such suppliers in conjunction with the CAAC and other PRC government authorities. During the periods presented, such prices exceeded the international market prices. The cost of jet fuel purchased by the Group in accordance with such allocation was RMB2,387,646, RMB2,586,688 and RMB2,373,956, respectively, during 2000, 2001 and 2002. The remainder of the Group’s jet fuel was purchased from domestic markets and, to a lesser extent, from international markets.

Aircraft insurance

     Aviation insurance covering hull, war and passenger liability risk is arranged by the CAAC on behalf of all PRC airlines with the People’s Insurance (Property) Company of China (“PICC”) under a master policy. PICC reinsures a substantial portion of its aircraft insurance business through the international reinsurance market. Insurance premiums are allocated to each individual PRC airline by the CAAC based on the value of the airline’s aircraft and after taking into account the claims history of the airline. Insurance premiums totaling RMB85,431, RMB123,439 and RMB256,238, respectively, were incurred by the Group during 2000, 2001 and 2002.

Financial arrangements

F-33

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     The Group’s obligations under various lease and bank loan arrangements in connection with aircraft acquisitions are secured by guarantees provided by certain PRC financial institutions which obtained back-to-back guarantees from the CAAC. Guarantee fees totaling RMB1,985, RMB1,490 and RMB1,025, respectively, were paid to these financial institutions during 2000, 2001 and 2002.

     Interest income is received from short-term deposits with SA Finance. The applicable interest rate is determined in accordance with the savings rate published by the People’s Bank of China. Interest income totaling RMB35,728, RMB13,771 and RMB10,530, respectively, was earned by the Group on such deposits during 2000, 2001 and 2002. See Note 15.

Airline-related services

     The Group, jointly with other PRC airlines, participates in the CAAC’s computer reservation system, under which the Group purchases computer reservation services from the CAAC at rates determined based on the utilization of the system. Service fees paid by the Group to the CAAC during 2000, 2001 and 2002 totaled RMB82,725, RMB110,134 and RMB107,234, respectively.

     The Group utilizes the passenger departure and cargo handling computer systems installed by the CAAC at certain PRC airports. Service fees are levied by the CAAC based on the utilization of these systems. Service fees totaling RMB40,584, RMB57,424 and RMB62,111, respectively, were paid by the Group to the CAAC during 2000, 2001 and 2002.

     The Group is required to pay take-off and landing fees to various PRC airports in respect of take-off and landing slots allocated to the Group and other ancillary services provided. Fees are payable by the Group based on the scale rates published by the CAAC. Take-off and landing fees totaling RMB1,327,413, RMB1,527,600 and RMB1,667,706, respectively, were paid to various PRC airports during 2000, 2001 and 2002.

     The Group purchases certain inflight meals and related services from Shenzhen Air Catering Company Limited, a cooperative joint venture established in the PRC, in respect of which CSAHC is entitled to 33% of its income after tax. Such purchases amounted to RMB17,941, RMB22,707 and RMB29,058, respectively, during 2000, 2001 and 2002.

     Commission is earned by the CAAC’s sales offices, various PRC airlines and certain subsidiaries of CSAHC in connection with the air tickets sold by them on behalf of the Group. Commission is calculated based on a fixed rate ranging from 1.5% to 12% on the ticket value. Commission expenses incurred by the Group in respect of tickets sold by the CAAC’s sales offices, various PRC airlines and certain subsidiaries of CSAHC totaled RMB554,102, RMB547,186 and RMB481,446, respectively, during 2000, 2001 and 2002. Commission income received from other PRC airlines in connection with air tickets sold by the Group, calculated based on a fixed rate ranging from 3% to 9% on the ticket value, totaled RMB100,994, RMB89,842 and RMB81,931, respectively, during 2000, 2001 and 2002.

F-34

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     Ground service fees are received from other airlines in respect of ground services provided by the Group and Baiyun International Airport Group at Guangzhou Baiyun International Airport. The Group was entitled to 50% of the service fees. The Group’s share of ground service fees received totaled RMB20,933, RMB23,513 and RMB39,735, respectively, during 2000, 2001 and 2002.

     The Company has a 50% equity interest in Guangzhou Aircraft Maintenance Engineering Company Limited (“GAMECO”), which provides comprehensive maintenance services to the Group. Maintenance fees totaling RMB471,044, RMB534,828 and RMB592,311, respectively, were incurred by the Group for services provided by GAMECO during 2000, 2001 and 2002.

     Certain aircraft sundry supplies are purchased from Southern Airlines (Group) Economic Development Company (“SAGEDC”), a subsidiary of CSAHC. Supplies totaling RMB72,054, RMB86,386 and RMB101,350, respectively, were purchased by the Group from SAGEDC during 2000, 2001 and 2002.

Advertising services

     Advertising services are provided by Southern Airlines Advertising Company (“SA Advertising”). SA Advertising was a subsidiary of CSAHC up to July, 2002. In August 2002, the Group acquired 90% equity interest in SA Advertising from CSAHC. Expenses totaling RMB10,712, RMB9,940 and RMB3,275, respectively, were incurred by the Group for services provided by SA Advertising during 2000, 2001 and 2002.

Wet lease rentals

     Pursuant to certain wet lease arrangements effected in August and November 2000, the Group incurred RMB108,699 and RMB300,000, respectively, during 2000 and 2001 in respect of five Boeing 737-300/37K aircraft leased from Zhongyuan Airlines, a subsidiary of CSAHC. No such rentals were paid in 2002 since the termination of lease arrangements in January 2002.

     During 2002, wet lease rentals totaling RMB26,164 were paid to Xinjiang Airlines, a subsidiary of CSAHC, pursuant to a wet lease agreement in respect of a Boeing 757-200 aircraft effective October 2002.

     During the period from August to October 2002, the Group received wet lease rentals totaling RMB27,599 from wet leasing of an Airbus 320-200 aircraft to Sichuan Airlines Corporation Limited, an affiliated company of the Group.

Acquisition of aircraft and related spare parts and vehicles

     During the year, the Group acquired five Boeing 737-300/37K aircraft and related spare parts and certain vehicles from Zhongyuan Airlines, a subsidiary of CSAHC, at a consideration of approximately RMB1,096,866. The consideration was satisfied by cash of approximately RMB132,130 together with an assumption by the Group of Zhongyuan Airlines’ debts of approximately RMB964,736. In addition, the Group received reimbursements of wet lease rentals totaling RMB150,000 which it paid to Zhongyuan Airlines during the period from July 1, 2001 to

F-35

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

December 31, 2001. Such reimbursements have been applied to reduce the purchase costs of the acquired assets.

Acquisition of subsidiaries

     In August 2002, the Group acquired 90% equity interest in each of Guangzhou Aviation Hotel, Southern Airlines Advertising Company and South China International Aviation & Travel Services Company from CSAHC at an aggregate cash consideration of approximately RMB107,846. Such consideration is determined by reference to the valuation reports prepared by GZAA Incorporated, a firm of independent valuers registered in the PRC. These acquisitions did not have a significant impact on the operating results of the Group for the year ended December 31, 2002 or its financial position at that date.

Amounts due to related companies

     Amounts due to related companies include balances with the CAAC and CSAHC and their affiliated companies. These amounts are unsecured and non-interest bearing and have no fixed repayment terms. These amounts are normally settled on a current basis. Balances with other State-owned enterprises are excluded from this caption as other State-owned enterprises are not considered related parties.

23.      SHARE CAPITAL

		December 31,
		2001		2002
		RMB		RMB
Registered capital as of December 31:
	2,200,000,000 domestic shares of RMB 1.00 each		2,200,000		2,200,000
	1,174,178,000 H shares of RMB 1.00 each		1,174,178		1,174,178
			3,374,178		3,374,178
Issued and paid up capital as of December 31:
	2,200,000,000 domestic shares of RMB 1.00 each		2,200,000		2,200,000
	1,174,178,000 H shares of RMB 1.00 each		1,174,178		1,174,178
			3,374,178		3,374,178

     All the domestic and H shares rank pari passu in all material respects.

     As of December 31, 2001 and 2002, the retained earnings of the Group included RMB110,539 and RMB135,010, respectively, of undistributed earnings of affiliated companies accounted for under the equity method.

F-36

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     Pursuant to an extraordinary general meeting of shareholders held on May 21, 2002, a resolution was passed for the Company to issue not more than 1,000,000,000 A shares of par value of RMB1.00 each. As of the date of approval of these consolidated financial statements, no A shares have been issued.

F-37

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

24.      RESERVES

     Movements of reserves are as follows:

	December 31,
	2001		2002
	RMB		RMB
Statutory surplus reserve (Note (a))
Balance at beginning of year		381,216		391,867
Adjustments from adoption of PRC accounting regulations (Note (c))		—		(106,007	)
Transferred from consolidated statement of income		10,651		51,335
Balance at end of year		391,867		337,195
Statutory public welfare fund (Note (b))
Balance at beginning of year		219,877		225,440
Adjustments from adoption of PRC accounting regulations (Note (c))		—		(79,533	)
Transferred from consolidated statement of income		5,563		25,667
Balance at end of year		225,440		171,574
Discretionary surplus reserve (Note (d))
Balance at beginning of year		63,852		69,867
Transferred from consolidated statement of income		6,015		6,736
Balance at end of year		69,867		76,603
		687,174		585,372

Notes:

     (a)      According to the PRC Company Law and the Articles of Association of the Company and certain of its subsidiaries, the Company and the relevant subsidiaries are required to transfer 10% of their annual net income after taxation, as determined under relevant PRC accounting regulations, to a statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders.

     Statutory surplus reserve can be used to offset prior years’ losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholding or by increasing 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.

F-38

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     (b)       According to the PRC Company Law and the Articles of Association of the Company and certain of its subsidiaries, the Company and the relevant subsidiaries are required to transfer between 5% to 10% of their annual net income after taxation, as determined under PRC accounting regulations, to the statutory public welfare fund. This fund can only be utilized on capital items for the collective benefits of the Company’s and the relevant subsidiaries’ employees such as the construction of dormitories, canteen and other staff welfare facilities. This fund is non-distributable other than in liquidation. The transfer to this reserve must be made before distribution of a dividend to shareholders.

     (c)       During 2002, the Group adopted certain new PRC accounting regulations which resulted in adjustments to the amounts of the Group’s income determined under PRC accounting regulations in respect of prior years and corresponding adjustments to amounts appropriated to the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve for the prior years.

     (d)     The transfer to this reserve from the consolidated statement of income is subject to the approval of shareholders at general meetings. Its usage is similar to that of statutory surplus reserve.

     (e)     Dividend distributions may be proposed at the discretion of the Company’s Board of Directors, after consideration of the transfers referred to above and making up cumulative prior years’ losses, if any. Pursuant to the Company’s Articles of Association, the net income of the Company for the purpose of dividend distribution is deemed to be the lesser of net income determined in accordance with (i) PRC accounting principles and financial regulations, and (ii) IFRS; or if the financial statements of the Company are not prepared in accordance with IFRS, the accounting standards of one of the countries in which its shares are listed. See Note 26.

     (f)       In the current year, the Group adopted IAS 40 “Investment Property”. According to IAS 40, the land use rights which were previously included in fixed assets at revaluation base are now presented as lease prepayments and carried at historical cost base with effect from January 1, 2002. Accordingly, the unamortized surplus on previous revaluations of the land use rights, net of related deferred tax asset, are reversed to the share premium and retained profits accounts. The effect of this change did not have a material impact on the Group’s financial condition and results of operations in the periods prior to the change. As such, comparative figures of fixed assets, lease prepayments and reserves have not been adjusted for but have been reclassified to conform with the current year’s presentation.

F-39

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

25.          FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK

     Financial assets of the Group include cash and cash equivalents, investments, trade receivables and other receivables. Financial liabilities of the Group include notes payable, accounts payable and obligations under capital leases.

Business risk

     The Group conducts its principal operations in China and accordingly is subject to special considerations and significant risks not typically associated with investments in equity securities of the United States of America and Western European companies. These include risks associated with, among others, the political, economic and legal environment, influence of the CAAC over many aspects of its operations and competition in the passenger, cargo and mail airline services industry.

Interest rate risk

     The interest rates and terms of repayment of the notes payable and capital lease obligations of the Group are disclosed in Notes 17 and 18, respectively.

Foreign currency risk

     The Group has significant exposure to foreign currency as substantially all of the Group’s lease obligations and a significant portion of its notes payable are denominated in foreign currencies, principally US dollars, and to a lesser extent, Japanese yen. Depreciation or appreciation of the Renminbi against foreign currencies affects the Group’s results significantly because the Group’s foreign currency payments generally exceed its foreign currency receipts. The Group is not able to hedge its foreign currency exposure effectively other than by retaining its foreign currency denominated earnings and receipts to the extent permitted by the State Administration of Foreign Exchange (“SAFE”), or subject to certain restrictive conditions, entering into forward foreign exchange contracts with authorized PRC banks.

Credit risk

     Substantially all of the Group’s cash and cash equivalents are deposited with PRC financial institutions.

     A significant portion of the Group’s air tickets are sold by agents participating in the Billing and Settlement Plan (“BSP”), a clearing scheme between airlines and sales agents organized by International Air Transportation Association. As of December 31, 2001 and 2002, the balance due from BSP amounted to RMB226,135 and RMB353,246, respectively.

F-40

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

Liquidity risk

     As of December 31, 2001 and 2002, the Group’s net current liabilities amounted to RMB3,695,777 and RMB7,015,998, respectively. For the years ended December 2000, 2001 and 2002, the Group recorded a net cash inflow from operating activities of RMB2,355,086, RMB2,223,943 and RMB3,697,544, respectively, a net cash outflow from investing activities and financing activities of RMB2,745,984, RMB3,603,535 and RMB2,744,364, respectively, and an (decrease)/increase in cash and cash equivalents of RMB(390,898), RMB(1,379,592) and RMB953,180, respectively.

     With regard to 2003 and thereafter, the liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflow from operations to meet its debt obligations as they fall due, and on its ability to obtain adequate external finance to meet its committed future capital expenditures. With regard to its short-term notes payable outstanding as of December 31, 2002 of approximately RMB4,422,926, the Group has obtained firm commitments from several PRC banks to renew such borrowings as they fall due during 2003. With regard to the future capital commitments, the Group has already entered into loan financing agreements with several PRC banks to provide loan finance up to an approximate amount of RMB5,102,000 and sought letters of intent from several PRC banks to provide the remaining required loan finance of approximately RMB5,876,000. The directors of the Company believe that such financing will be available to the Group.

     The directors of the Company have carried out a detailed review of the cash flow forecast of the Group for the twelve months ending December 31, 2003. Based on such forecast, the directors have determined that adequate liquidity exists to finance the working capital and capital expenditure requirements of the Group during that period. In preparing the cash flow forecast, the directors have considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned loan finance which may impact the operations of the Group during the next twelve-month period. The directors are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, as with all assumptions in regard to future events, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be realized.

Self insurance risk

     The Group maintains a limited amount of property insurance in respect of certain personal and real property.

F-41

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

Fair value

     The carrying amounts and estimated fair values of significant financial assets and liabilities at December 31, 2001 and 2002 are set out below.

	December 31,
	2001				2002
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
	RMB		RMB		RMB		RMB
Cash and cash equivalents		2,817,863		2,817,863		3,771,043		3,771,043
Notes payable, current portion		2,177,516		2,208,056		5,240,726		5,326,511
Notes payable, non-current portion		3,627,594		3,752,143		5,835,434		6,111,052

     The following methods and assumptions were used to estimate the fair value and each class of financial instrument:

(i)      Cash and cash equivalents, and short-term notes payable

     The carrying amounts approximate fair value because of the short maturities of these instruments.

(ii)      Long-term notes payable

     The fair value has been estimated by applying a discounted cash flow approach using interest rates available to the Group for similar indebtedness.

     The economic characteristics of the Group’s capital leases vary from lease to lease. It is impractical to compare such leases with those prevailing in the market within the constraints of timeliness and cost for the purpose of estimating the fair value of such leases. Investments are unquoted equity interests in companies established in the PRC. There is no quoted market price for such interests and securities in the PRC and accordingly a reasonable estimate of the fair value could not be made without incurring excessive costs.

     Fair value estimates are made at a specific point in time and based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

F-42

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

26.      FOREIGN CURRENCY EXCHANGE

     The Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving Renminbi must take place either through the People’s Bank of China or other institutions authorized to buy and sell foreign exchange or at a swap center.

     The Group currently maintains bank accounts in currencies other than the Renminbi to engage in foreign exchange transactions. The amount of foreign exchange that can be retained by the Group under this system is determined by the SAFE based on the Group’s expected payment obligations in foreign currencies for lease and debt payments and for dividends. Any amounts of foreign exchange that the Group receives in excess of such amount must be converted into Renminbi at the rate prevailing in the PRC inter-bank market. The Group will have access to foreign currency through the inter-bank system, subject to the approval of the SAFE, to satisfy its foreign exchange requirements where these exceed the amount of foreign exchange that the Group has retained.

     The Articles of Association of the Company require cash dividends be declared in Renminbi and paid to holders of the H shares in Hong Kong dollars at the average closing exchange rate for Hong Kong dollars as announced by the People’s Bank of China for the calendar week preceding the date of the dividend declaration. To the extent that the Company is unable to pay dividends in foreign currency out of its own resources, it will have to obtain foreign currency through the swap centers and PRC banks. Hong Kong dollar dividend payments will be converted by the depositary and distributed to holders of American Depositary Shares in United States dollars.

F-43

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

27.      RECONCILIATION AND SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION

(a)       The reconciliation of income before taxation and minority interests to cash inflows from operations is as follows:

		Year ended December 31,
		2000			2001			2002
		RMB			RMB			RMB
Income before taxation and minority interests			931,230			795,256			1,139,099
Adjustments to reconcile income before taxation and minority interests to cash inflows from operations:
	Depreciation and amortization of fixed assets		1,845,279			1,802,462			1,839,293
	Other amortization		18,510			12,512			9,816
	Amortization of deferred credits		(26,160	)		(18,483	)		(7,217	)
	Equity income of affiliated companies		(45,949	)		(53,077	)		(36,988	)
	Equity income of jointly controlled entities		—			4,034			3,352
	Gain on sale of aircraft		(377,817	)		(59,855	)		(199,394	)
	Loss on sale of other fixed assets		5,221			115,744			28,654
	Interest income		(90,283	)		(49,878	)		(52,618	)
	Interest expense		1,074,236			933,717			959,193
	Non-cash exchange (gain)/loss, net		(312,592	)		(292,630	)		174,978
	Decrease/(increase) in inventories		41,682			(2,033	)		(76,472	)
	Increase/(decrease) in amounts due to related companies		144,565			98,040			(193,175	)
	(Increase)/decrease in trade receivables		(26,364	)		232,228			(110,749	)
	Decrease/(increase) in other receivables		8,552			42,938			(166,004	)
	Increase/(decrease) in prepaid expenses and other current assets		(5,579	)		(136,600	)		123,924
	Decrease in accounts payable		(137,333	)		(167,599	)		(61,843	)
	Increase in bills payable		—			—			1,299,680
	Increase in sales in advance of carriage		17,720			31,036			19,985
	Increase/(decrease) in accrued expenses		393,476			(132,121	)		86,215
	Increase/(decrease) in other liabilities		95,371			70,254			(33,032	)
	(Decrease)/increase in provision for major overhauls		(47,333	)		(40,422	)		16,226
Cash inflows from operations			3,506,432			3,185,523			4,762,923

F-44

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

(b)       Disclosure of non-cash investing and financing activities:

     During 2002, the Group assumed from Zhongyuan Airlines debts totaling RMB964,736 in partly satisfaction of the consideration payable for acquisition of five Boeing 737-300/37K aircraft and other assets from Zhongyuan Airlines (Note 21).

(C)       Effect of acquisitions of subsidiaries:

	Year ended December 31,
	2000		2001		2002
	RMB		RMB		RMB
Net assets acquired:
Fixed assets		—		—		96,636
Cash and cash equivalents						17,355
Trade receivables and other current assets		—		—		20,681
		—		—		134,672
Accounts payable						3,623
Accrued expenses and other liabilities		—		—		11,220
		—		—		14,843
Total net assets value		—		—		119,829
Minority interests’ share of net asset value		—		—		11,983
Net asset value acquired by the Group		—		—		107,846
Consideration paid		—		—		107,846
Cash and cash equivalents acquired		—		—		17,355
Net cash outflow from acquisition of subsidiaries		—		—		90,491

F-45

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

28.      PRINCIPAL SUBSIDIARIES AND AFFILIATED COMPANIES

     Details of the Company’s principal subsidiaries and affiliated companies as of December 31, 2002 are as follows:

		Attributable
		equity interest
	Place of
	establishment	Direct		Indirect		Principal
Name of company	/operation	%		%		activities
Subsidiaries
Guangxi Airlines Company Limited	PRC		60		—	Airline
Southern Airlines Group Shantou Airlines Company Limited	PRC		60		—	Airline
Zhuhai Airlines Company Limited	PRC		60		—	Airline
Guizhou Airlines Company Limited	PRC		60		—	Airline
Xiamen Airlines Company Limited	PRC		60		—	Airline
Guangzhou Nanland Air Catering Company Limited	PRC		51		—	Air catering
Affiliated companies
Guangzhou Aircraft Maintenance Engineering Company Limited	PRC		50		—	Provision of aircraft   repair and maintenance
Southern Airlines Group Finance Company Limited	PRC		30		16.86	Provision of  financial services
Sichuan Airlines Corporation Limited	PRC		39		—	Airline
Jointly controlled entities
MTU Maintenance Zhuhai Co. Limited	PRC		50		—	Provision of engine  repair and maintenance services
China Postal Airlines Limited	PRC		49		—	Airline
Zhuhai Xiang Yi Aviation Technology Company Limited	PRC		51		—	Provision of flight  simulation service

     Certain of the Company’s subsidiaries, affiliated companies and jointly controlled entities are PRC joint ventures which have limited lives pursuant to PRC law.

F-46

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

29.       SEGMENTAL INFORMATION

     The Group operates primarily as a single business segment for the provision of air transportation services. Geographic information about the Group’s operating revenue and income are as follows:

	Domestic		Hong Kong		International*		Total
	RMB		RMB		RMB		RMB
Year ended December 31, 2000
Traffic revenue		11,458,704		1,197,883		2,049,572		14,706,159
Other revenue		361,524		16,479		94,156		472,159
		11,820,228		1,214,362		2,143,728		15,178,318
Operating income		899,082		179,640		103,379		1,182,101
Year ended December 31, 2001
Traffic revenue		12,924,892		1,182,492		2,354,148		16,461,532
Other revenue		359,895		58,231		—		418,126
		13,284,787		1,240,723		2,354,148		16,879,658
Operating income		1,090,154		219,686		90,833		1,400,673
Year ended December 31, 2002
Traffic revenue		13,197,589		1,118,695		3,165,608		17,481,892
Other revenue		485,046		—		51,682		536,728
		13,682,635		1,118,695		3,217,290		18,018,620
Operating income		1,614,975		193,440		217,662		2,026,077

* Asian market accounted for approximately 76%, 75% and 70%, respectively, of the Group’s total international traffic revenue for the years ended December 31, 2000, 2001 and 2002. The remaining portion was mainly derived from the Group’s flights to/from European and North American regions.

     The major revenue-earning assets of the Group are its aircraft fleet, most of which are registered in the PRC. Since the Group’s aircraft fleet is employed flexibly across its route network, there is no suitable basis of allocating such assets to geographic segments. Substantially all of the Group’s non-aircraft identifiable assets are located in PRC.

F-47

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

30.      SUPPLEMENTAL INFORMATION

     Movements in allowance for doubtful accounts comprise:

	Year ended December 31,
	2000			2001			2002
	RMB			RMB			RMB
Balance at beginning of the year		72,110			72,644			59,019
Provision for doubtful accounts (Note 9)		2,072			1,729			1,304
Doubtful accounts written-off		(1,538	)		(15,354	)		(205	)
Balance at end of the year (Note 11)		72,644			59,019			60,118

31.      SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP

     The Group’s accounting policies conform with IFRS which differ in certain material respects from U.S. GAAP. Differences which have a significant effect on consolidated net income and shareholders’ equity are set out below.

(a)      Sale and leaseback accounting

     Under IFRS, gains on sale and leaseback transactions where the subsequent lease is an operating lease are recognized as income immediately, if the transactions are established at fair value. Differences between the sale price and fair value are deferred and amortized over the period for which the assets are expected to be used. Under U.S. GAAP, such gains are deferred and amortized over the term of the lease.

(b)      Lease arrangement

     As disclosed in Note 12 to the consolidated financial statements, the Group entered into an arrangement with certain independent third parties under which the Group sold an aircraft and then immediately leased back the aircraft for a minimum lease period of 16.6 years. As a result of the arrangement, the Group received a net cash benefit of RMB51,682 which has been recognized as income for the year under IFRS. Under U.S. GAAP, such benefit is deferred and amortized over the minimum lease period. In addition, under the lease arrangement, the commitments by the Group to make long-term lease payments have been defeased by the placement of security deposits. As such, under IFRS such commitments and deposits are not recognized on the consolidated balance sheet. Under U.S. GAAP, such commitments and deposits would be recognized on the consolidated balance sheet, as such commitments are not deemed as extinguished by the placement of security deposits.

(c)      Capitalized interest

F-48

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     Under IFRS, the Group capitalizes interest costs to the extent the related borrowings are directly attributable to the acquisition or construction of an asset.

     Under U.S. GAAP, interest costs capitalized are determined based on specific borrowings related to the acquisition or construction of an asset, if an entity’s financing plans associate a specific new borrowing with a qualifying asset. If average accumulated expenditures for the asset exceed the amounts of specific new borrowings associated with the asset, additional interest costs capitalized are based on the weighted average interest rate applicable to other borrowings of the entity.

(d)      Revaluation of fixed assets

     In connection with the Reorganization, the fixed assets of the Group were revalued as of December 31, 1996 (see Notes 1 and 12 to the consolidated financial statements). Such fixed asset revaluation resulted in an increase in shareholders’ equity with respect to the increase in carrying amount of certain fixed assets above their historical cost bases, while a charge to the consolidated statement of income was recorded with respect to the reduction in carrying amount of certain fixed assets below their historical cost bases. In addition, the revalued fixed asset amounts serve as the tax bases of fixed assets for years beginning in 1997. Accordingly, the fixed asset revaluation eliminated certain of the temporary differences which gave rise to a deferred tax asset as of December 1996. Such tax asset was offset against the revaluation surplus.

     Under U.S. GAAP, fixed assets are stated at their historical cost unless an impairment loss has been recorded. An impairment loss on fixed assets is recorded under U.S. GAAP if the carrying amount of such asset exceeds its future undiscounted cash flows, excluding finance costs. The future undiscounted cash flows, excluding finance costs, of the Group’s fixed assets whose carrying amount was reduced in connection with the Reorganization, exceed their historical cost carrying amount and, therefore, impairment of such assets is not appropriate under U.S. GAAP. Accordingly, the revaluation reserve recorded directly to shareholders’ equity and the charge recorded under IFRS in 1996 and the additional depreciation charges recorded in the six years ended December 31, 2002, as a result of the Reorganization are reversed for U.S. GAAP purposes.

     However, as a result of the tax deductibility of the net revaluation reserve, a deferred tax asset related to the reversal of the net revaluation reserve is created under U.S. GAAP with a corresponding increase in shareholders’ equity as of December 31, 1996. Such deferred tax asset will be reversed upon depreciation of the net revaluation surplus included in the fixed assets beginning 1997.

(e)      Investments in affiliated company and jointly controlled entity

     During the year, the Company invested in an affiliated company and a jointly controlled entity, which were PRC state-owned enterprises. Under IFRS, such investments are initially recorded on a fair value basis at the cost of purchases borne by the Company. In the consolidated statement of income, the equity share of results of the investees are measured based on the fair value of underlying net assets determined on the date of acquisitions.

F-49

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     Under U.S. GAAP, such transactions would be considered to be “combinations of businesses under common control”. Under U.S. GAAP, such investments are initially recorded at the Company’s equity share of net assets of the investees determined on a historical cost basis. The differences between such amounts and the cost of purchases are reflected as movements in the shareholders’ equity. In the consolidated statement of income, the equity share of results of the investees are measured based on the historical cost basis.

(f)      Acquisition of subsidiaries from CSAHC

     In August 2002, the Company acquired 90% equity interest in certain subsidiaries from CSAHC. Under IFRS, the purchase method of accounting was applied to such business combination such that as from the date of combination, the results of the acquired subsidiaries and their assets and liabilities are included in the consolidated financial statements of the Group.

     Under U.S. GAAP, such transaction would be considered to be “a combination of entities under common control”. Under U.S. GAAP, combination of entities under common control are accounted for under the “as if pooling-of-interests method” where assets and liabilities are accounted for at historical cost and financial statements of previously separate entities for periods prior to the combination generally are restated on a combined basis. The effect of this difference was not material to the years presented.

(g)      Financial statements presentation and disclosures

     In the consolidated statements of income presented under IFRS, gain/(loss) on sale of fixed assets is classified under “Non-operating income/(expenses)”. Under U.S. GAAP, such gain/(loss) would be classified under “Operating income/(expenses) - General and administrative”.

     As disclosed in Note 14 to the consolidated financial statements, deferred tax assets are presented on a net basis under IFRS. Under U.S. GAAP, the gross amounts of such deferred tax assets and any applicable valuation allowances would be separately disclosed.

(h)      New accounting pronouncements

SFAS No. 143

     In June 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires the Group to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Group is also required to record a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Group adopted SFAS No. 143 on January 1, 2003. The Group does not expect the adoption of SFAS No. 143 will have a material impact on its consolidated financial statements.

SFAS No. 145

F-50

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4 “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, SFAS No. 64 “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. SFAS No. 145 also rescinds SFAS No. 44 “Accounting for Intangible Assets of Motor Carriers”. SFAS No. 145 amends SFAS No. 13 “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions.

     The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are applied in fiscal years beginning after May 15, 2002. The provisions in paragraphs 8 and 9(c) of SFAS No. 145 related to SFAS No. 13 were effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 were effective for financial statements issued on or after May 15, 2002. The Group does not expect the adoption of SFAS No. 145 will have a material impact on its consolidated financial statements.

SFAS No. 146

     In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” which applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. SFAS No. 146 requires an entity to record a liability for cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and does not meet the requirement for recognizing a liability and the related expense. An entity is required to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit or disposal activity is initiated and in any subsequent period until the activity is completed. The Group is required to adopt SFAS No. 146 on January 1, 2003. The provisions of SFAS No. 146 are required to be applied prospectively after the adoption date to newly exit or disposal activities. Therefore, management cannot determine the potential effect that adoption of SFAS No. 146 will have on the Group’s consolidated financial statements.

SFAS No. 150

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity, and requires the classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Management believes the adoption of SFAS No. 150 will not have a material effect on the Group’s financial position or results of operations.

F-51

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

FIN No. 45

     In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34”. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002. As of December 31, 2002, the Group did not have any significant guarantees which would be required to be disclosed pursuant to this Interpretation. The Group does not expect the application of this Interpretation will have a material effect on its consolidated financial statements.

FIN No. 46

     In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Group will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The Group does not expect the application of this Interpretation will have a material impact on its consolidated financial statements.

F-52

CHINA SOUTHERN AIRLINES COMPANY LIMITED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Amounts in thousands, except share data)

     Effect on net income of significant differences between IFRS and U.S. GAAP is as follows:

				Year ended December 31,
	Note			2000			2001			2002			2002
				RMB			RMB			RMB			U.S. dollars
Net income under IFRS					501,771			340,225			575,761			69,559
U.S. GAAP adjustments:
Sale and leaseback accounting		(a	)		(281,101	)		54,254			(100,664	)		(12,161	)
Lease arrangement		(b	)		—			—			(49,960	)		(6,036	)
Capitalized interest		(c	)		(11,300	)		18,000			(31,473	)		(3,802	)
Reversal of additional depreciation arising from revaluation of fixed assets		(d	)		68,000			65,000			33,000			3,987
Investments in affiliated company and jointly controlled entity		(e	)		10,630			3,546			(541	)		(65	)
Deferred tax effects					66,440			(50,369	)		47,849			5,780
Net income under U.S. GAAP					354,440			430,656			473,972			57,262
Basic earnings per share under U.S. GAAP					0.11			0.13			0.14			0.017
Basic earnings per ADS under U.S. GAAP*					5.25			6.38			7.02			0.849

*Basic earnings per ADS is calculated on the basis that one ADS is equivalent to 50 H shares.

     Effect on shareholders’ equity of significant differences between IFRS and U.S. GAAP is as follows:

							December 31,
	Note			2001			2002			2002
				RMB			RMB			U.S. Dollars
Shareholders’ equity under IFRS					9,221,663			9,613,207			1,161,394
U.S. GAAP adjustments:
Sale and leaseback accounting		(a	)		(486,325	)		(586,989	)		(70,916	)
Lease arrangement		(b	)		—			(49,960	)		(6,036	)
Capitalized interest		(c	)		412,494			381,021			46,032
Revaluation of fixed assets, net of depreciation		(d	)		(253,348	)		(46,120	)		(5,572	)
Investments in affiliated company and jointly controlled entity		(e	)		(40,346	)		(118,003	)		(14,256	)
Deferred tax asset adjustment on revaluation of fixed assets					80,888			9,719			1,174
Deferred tax effects					22,933			84,456			10,203
Shareholders’ equity under U.S. GAAP					8,957,959			9,287,331			1,122,023

F-53

EXHIBIT INDEX

Exhibit No.	Description of Exhibit
1	Articles of Association
4.1	Form of Director’s Service Agreement
4.2	Form of Non-Executive Director’s Service Agreement
8	Subsidiaries of the Company
10.1	Section 906 Certification

EX-1 3 u98569exv1.txt EX-1 ARTICLES OF ASSOCIATION EXHIBIT 1 China Southern Airlines Company Limited (a joint stock limited company incorporated in the People's Republic of China with limited liability) ARTICLES OF ASSOCIATION ARTICLES OF ASSOCIATION OF CHINA SOUTHERN AIRLINES COMPANY LIMITED (Approved by Special Resolutions passed by the shareholders' extraordinary General Meeting held on 18 April 1997 and 22 May 1997 and Amended by the two Annual General Meetings held on 15 June 1998 and 15 June 1999, by the Extraordinary General Meetings held on 26 March 2002, and by the Annual General Meeting held on 13 May 2003.) Catalogue Chapter 1 General Provisions Chapter 2 Purposes and Scope of Business Chapter 3 Shares and Registered Capital Chapter 4 Reduction of Capital and Repurchase of Shares Chapter 5 Financial Assistance for Acquisition of Shares Chapter 6 Share Transfer Chapter 7 Shares Certificates and Register of Shareholders Chapter 8 Shareholders' Rights and Obligations Chapter 9 Shareholders' General Meetings Chapter 10 Special Procedures for Voting by a Class of Shareholders Chapter 11 Board of Directors Chapter 12 Secretary of the Board of Directors Chapter 13 Page 1 President Chapter 14 Supervisory Committee Chapter 15 The Qualifications and Duties of the Directors, Supervisors, President and other Senior Administrative Officers of the Company Chapter 16 Financial and Accounting Systems and Profit Distribution Chapter 17 Appointment of Accountant Firm Chapter 18 Insurance Chapter 19 Labor and Personnel Management Systems Chapter 20 Trade Union Chapter 21 Merger and Division of the Company Chapter 22 Dissolution and Liquidation Chapter 23 Procedures for Amendment of the Articles of Association Chapter 24 Settlement of Disputes Chapter 25 Notice Chapter 26 Definition and Interpretation of these Articles of Association CHAPTER 1 GENERAL PROVISIONS Article 1 The Company (or "Company") is a joint stock limited company established in accordance with the "Company Law of the People's Republic of China" (the "Company Law"), "State Council's Special Regulations Regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Share" (the "Special Regulations") and other relevant laws and administrative regulations of the State. The legitimate rights and interests of the Company and its shareholders are under the jurisdiction of and protected by Chinese laws, regulations and other relevant provisions of the Government. Page 2 The Company was established by way of promotion and approved by the People's Republic of China's State Commission for Restructuring the Economic System on 31 December 1994, as evidenced by approval document no. [1994] 139. It is registered with and has obtained a business license from China's State Administration Bureau of Industry and Commerce on 25 March 1995. The number of the Company's business license is: 1000001001760. Article 2 Promoter of the Company: (renamed as China Southern Air Holding Company). Registered Name of the Company: (Chinese) CHINA SOUTHERN AIRLINES COMPANY LIMITED (English) Article 3 The company's address: Baiyun International Airport Guangzhou Municipality Guangdong Province China Telephone: (020) 86123303 Facsimile: (020) 86644623 Article 4 The Company's legal representative is the Chairman of the board of directors of the Company. Article 5 The Company is a joint stock limited company in perpetual existence. Article 6 In accordance with the Company Law, the Special Regulations, "Mandatory Provisions for the Articles of Association of Companies to be Listed Outside China" (the "Mandatory Provisions") and other relevant laws and administrative regulations, the Company amended the Company's articles of association. Article 7 The registration formalities of the Original Articles of Association with China's State Administration Bureau of Industry and Commerce have been completed. The Company shall, within the period stipulated by laws or administrative regulations, process the registration of changing of mandatory registered items due to the amendment of the Original Articles of Association. Article 8 From the date of these articles of association becoming effective, these articles of association constitute a legally binding document regulating the Company's organization and activities, and the rights and obligations between the Company and each shareholder and among the shareholders. Article 9 These articles of association are binding on the Company and its shareholders, directors, supervisors, president and other senior administrative officers of the Company; all of whom are entitled to claim rights concerning the affairs of the Company in accordance with these articles of association. These articles of association are actionable by a shareholder against the Company and vice versa, by shareholders against each other and by a shareholder against the directors, supervisors, president and other senior administrative officers of the Company in respect of rights and obligations concerning the affairs of the Page 3 Company arising out of these articles of association. The actions referred to in the preceding paragraph include court proceedings and arbitration proceedings. Article 10 The Company may invest in other limited liability companies or joint stock limited companies. The Company's liabilities to an investee company shall be limited to the amount of its capital contribution to the investee company. Upon approval of the companies approving department authorized by the State Council, the Company may, according to its need of operation and management, operates as a holding company as prescribed in the second paragraph of Article 12 of the Company Law. Article 11 On condition of compliance with applicable laws and regulations of the People's Republic of China ("PRC"), the Company has the power to raise and borrow money which power includes without limitation the issue of debentures, the charging or mortgage of part or whole of the Company's business or properties and other rights permitted by PRC laws and administrative regulations. Article 12 For the purpose of these articles of association, other senior administrative officers of the Company refer to vice president, chief financial officer, board secretary, general economist, chief engineer and chief pilot. CHAPTER 2 PURPOSES AND SCOPE OF BUSINESS Article 13 The business purposes of the Company are: (i) to absorb domestic and foreign capital; (ii) to assist in developing the aviation industry of China; (iii) to promote the development of the national economy of China; (iv) to utilize corporate incentive mechanisms of privatization; (v) to draw on the advanced management expertise of other domestic and foreign companies; (vi) to continuously improve the management of the Company; (vii) to enhance the market competitiveness of the Company; (viii) to generate economic and social benefits for the Company; and (ix) to generate steady income for the Company's shareholders. Article 14 The scope of business of the Company shall be consistent with and subject to the scope of business approved by the relevant supervisory department of the State. The scope of business of the Company includes: (i) provision of scheduled and non-scheduled domestic, regional and international air transportation services for passengers, cargo, mail and luggage; (ii) undertaking general aviation services; (iii) provision of aircraft repair and maintenance services; (iv) acting as agent for other domestic and international airlines; (v) provision of air catering services and (vi) engaging in other airline or airline-related business, including advertising for such services. Article 15 The Company may, according to its ability to develop, and upon the approval by special resolution adopted by the shareholders' general meeting and the approval of the relevant state government authority, adjust its scope of business or investment orientation and method etc. Article 16 The Company may, upon the approval by the relevant authorities, establish its subsidiaries, branches and offices (whether wholly owned or otherwise) in China Page 4 and other countries and regions to assist its business development and to promote the Company's expansion. CHAPTER 3 SHARES AND REGISTERED CAPITAL Article 17 There must, at all times, be ordinary shares in the Company. Subject to the approval of the companies approving department authorized by the State Council, the Company may, according to its requirements, create other classes of shares. Article 18 The shares issued by the Company shall have a par value of Renminbi one yuan per share. The Renminbi referred to in the preceding paragraph is the legal currency of the PRC. Article 19 Subject to the approval of the securities authority of the State Council, the Company may issue and offer shares to domestic investors or foreign investors for subscription. Foreign investors referred to in the preceding paragraph means those investors of foreign countries and regions of Hong Kong, Macau and Taiwan who subscribe for shares issued by the Company. Domestic investors mean those investors within the territory of the PRC (excluding investors of the regions referred to in the preceding sentence) who subscribe for shares issued by the Company. Article 20 Shares issued by the Company to domestic investors for subscription in Renminbi shall be referred to as "Domestic-Invested Shares". Shares issued by the Company to foreign investors for subscription in foreign currencies shall be referred to as "Foreign-Invested Shares". Foreign-Invested Shares which are listed overseas are called "Overseas-Listed Foreign-Invested Shares". The foreign currencies referred to in the preceding paragraph mean the legal currencies (apart from Renminbi) of other countries or districts which are recognized by the foreign exchange control authority of the State and can be used to pay the Company for the share price. Article 21 Domestic-Invested Shares issued by the Company shall be called "A Shares". Overseas-Listed Foreign-Invested Shares issued by the Company and listed in Hong Kong shall be called "H Shares". H Shares are shares which have been admitted for listing on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"), the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange in the United States of America in the form of American depositary receipts. Shares issued by the Company, including Domestic-Invested Shares and Foreign-Invested Shares, are all ordinary shares. Article 22 In accordance with approvals granted by the Securities Commission of the State Council, the Company has issued a total of 3,374,178,000 ordinary shares, of which (a) 2,200,000,000 A Shares were issued upon the establishment of the Company and were all subscribed for by the promoter of the Company and (b) 1,174,178,000 H Shares were issued to foreign investors in connection with the first increase of capital of the Company, including shares issued pursuant to the exercise of the over-allotment option. The ordinary shares that the Company issued in connection with its first increase of capital after its establishment were 1,174,178,000 H Shares, representing Page 5 34.8% of the issued share capital of the Company. The share capital structure of the Company after such issue of shares is: (a) 2,200,000,000 A Shares held by the promoter, representing 65.2% of the total share capital, and (b) 1,174,178,000 H Shares held by foreign investors, representing 34.8% of the total share capital. Article 23 Upon approval by the securities governing authority of the State Council of the proposal to issue Overseas-listed Foreign-Invested Shares and Domestic-Invested Shares, the Company's board of directors may make separate implementing arrangements for their issuance. The Company's proposal to issue Overseas-Listed Foreign-Invested Shares and Domestic-Invested Shares pursuant to the preceding paragraph may be implemented within fifteen (15) months from the date of the approval of the securities governing authority of the State Council. Article 24 In respect of the total number of shares as stated in a shares issuing proposal, where the Company shall separately issue Overseas-Listed Foreign-Invested Shares and Domestic-Invested Shares, these respective shares shall be fully subscribed for at their respective offerings. If the shares cannot be fully subscribed for at their offerings due to some special circumstances, then subject to the approval of the securities governing authority of the State Council the shares may be issued by installments. Article 25 The registered capital of the Company is RMB3,374,178,000. The Company shall undertake its liability with all its assets and its shareholders shall undertake the Company's liability with all the shares they hold. Article 26 The Company may, based on its requirements for operation and development and in accordance with the relevant provisions of these articles of association, approve an increase of capital. The Company may increase its capital in the following ways: (1) offering new shares to non-specially-designated investors for subscription; (2) placing new shares to its existing shareholders; (3) allotting bonus shares to its existing shareholders; (4) any other ways permitted by relevant laws and administrative regulations. The Company's increase of capital by issuing new shares shall, after being approved in accordance with the provisions of these articles of association, be conducted in accordance with the procedures stipulated by relevant laws and administrative regulations. Article 27 Unless otherwise provided by relevant laws or administrative regulations, shares in the Company are freely transferable and are not subject to any lien. Page 6 CHAPTER 4 REDUCTION OF CAPITAL AND REPUCHASE OF SHARES Article 28 In accordance with the provisions of these articles of association, the Company may reduce its registered capital. Article 29 When the Company reduces its registered capital, it must draw up a balance sheet and an inventory of assets. The Company shall notify its creditors within ten (10) days of the date of the Company's resolution for reduction of capital and shall publish a notice in a newspaper at least three times within thirty (30) days of the date of such resolution. A creditor has the right within thirty (30) days of receiving the notice from the Company or, in the case of a creditor who does not receive the notice, within ninety (90) days of the date of the first public notice, to require the Company to repay its debts or provide a corresponding guarantee for such debt. The Company's registered capital after reduction shall not be less than the statutory minimum amount. Article 30 The Company may, with approval according to the procedures provided in these articles of association and subject to the approval of the relevant governing authority of the State, repurchase its issued shares under the following circumstances: (1) cancellation of shares for the reduction of its capital; (2) merging with another company that holds shares in the Company; (3) other circumstances permitted by relevant laws and administrative regulations. Article 31 The Company may, with the approval of the relevant State governing authority for repurchasing its shares, conduct the repurchase in one of the following ways: (1) making a pro rata general offer of repurchase to all its shareholders; (2) repurchasing shares through public dealing on a stock exchange; (3) repurchase by an off-market agreement outside a stock exchange. Article 32 Where the Company repurchases its shares by an off-market agreement outside a stock exchange, the prior sanction of shareholders shall be obtained in accordance with these articles of association. The Company may release, vary or waive its rights under a contract so entered into by the Company with the prior approval of shareholders obtained in the same manner. Page 7 A contract to repurchase shares referred to in the preceding paragraph includes (without limitation) an agreement to become obliged to repurchase or an acquisition of the right to repurchase shares of the Company. Rights of the Company under a contract to repurchase its shares are not capable of being assigned. Article 33 Shares repurchased in accordance with law by the Company shall be cancelled within the period prescribed by laws and administrative regulations, and the Company shall apply to the original companies registration authority for registration of the change of its registered capital. The amount of the Company's registered capital shall be reduced by the aggregate par value of those cancelled shares. Article 34 Unless the Company is in the course of liquidation, it must comply with the following provisions in relation to repurchase of its issued shares: (1) where the Company repurchases shares of the Company at par value, payment shall be made out of book surplus distributable profits of the Company or out of proceeds of a fresh issue of shares made for that purpose; (2) where the Company repurchases shares of the Company at a premium to its par value, payment up to the par value may be made out of the book surplus distributable profits of the Company or out of the proceeds of a fresh issue of shares made for that purpose. Payment of the portion in excess of the par value shall be effected as follows: (i) if the shares being repurchased were issued at par value, payment shall be made out of the book surplus distributable profits of the Company; (ii) if the shares being repurchased were issued at a premium to its par value, payment shall be made out of the book surplus distributable profits of the Company or out of the proceeds of a fresh issue of shares made for that purpose, provided that the amount paid out of the proceeds of the fresh issue shall not exceed the aggregate of premiums received by the Company on the issue of the shares repurchased nor the current amount (including the premiums on the fresh issue) of the Company's premium account (or capital common reserve fund account) at the time of the repurchase; (3) payment by the Company in consideration of the following shall be made out of the Company's distributable profits: (i) acquisition of rights to repurchase shares of the Company; (ii) variation of any contract to repurchase shares of the Company; (iii) release of any of the Company's obligation under any contract to repurchase Page 8 shares of the Company; (4) after the Company's registered capital has been reduced by the total par value of the cancelled shares in accordance with the relevant provisions, the amount deducted from the distributable profits of the Company for paying up the par-value portion of the shares repurchased shall be transferred to the Company's premium account (or capital common reserve fund account). CHAPTER 5 FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES Article 35 The Company and its subsidiaries shall not, by any means at any time, provide any kind of financial assistance to a person who is acquiring or is proposing to acquire shares in the Company. The said acquirer of shares of the Company includes a person who directly or indirectly incurs any obligations due to the acquisition of shares in the Company (the "obligor"). The Company and its subsidiaries shall not, by any means at any time, provide financial assistance to the obligor as referred to in the preceding paragraph for the purpose of reducing or discharging the obligations assumed by that person. This Article shall not apply to the circumstances specified in Article 37 of this Chapter. Article 36 For the purpose of this Chapter, "financial assistance" includes (without limitation) the following meanings: (1) gift; (2) guarantee (including the assumption of liability by the guarantor or the provision of assets by the guarantor to secure the performance of obligations by the obligor), or compensation (other than compensation in respect of the Company's own default) or release or waiver of any rights; (3) provision of loan or any other contract under which the obligations of the Company are to be fulfilled before the obligations of another party, or the novation of, or the assignment of rights arising under, such loan or contract; (4) any other form of financial assistance given by the Company when the Company is insolvent or has no net assets or when its net assets would thereby be reduced to a material extent. For the purpose of this Chapter, "incurring any obligations" includes the incurring of obligations by the changing of the obligor's financial position by way of contract or the making of arrangement (whether enforceable or not, and whether made on his own account or with any other persons), or by any other means. Article 37 The following transactions shall not be deemed to be activities prohibited by Article 35 of this Chapter: (1) Page 9 the provision of financial assistance by the Company where the financial assistance is given in good faith in the interests of the Company, and the principal purpose in giving the financial assistance is not for the acquisition of shares in the Company, or the giving of the financial assistance is an incidental part of some larger purpose of the Company; (2) the lawful distribution of the Company's assets by way of dividend; (3) the allotment of bonus shares as dividends; (4) a reduction of registered capital, a repurchase of shares of the Company or a reorganization of the share capital structure of the Company effected in accordance with these articles of association; (5) the lending of money by the Company within its scope of business and in the ordinary course of its business, where the lending of money is part of the scope of business of the Company (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of distributable profits); (6) the provision of money by the Company for contributions to staff and workers' shares schemes (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of distributable profits). CHAPTER 6 SHARE TRANSFER Article 38 The Company's shares are transferable according to law. Article 39 The Company shall not accept the Company's shares as subject matter of pledge. Article 40 The Company's directors, supervisors, president and other senior administrative officers shall periodically declare to the Company the number of shares they hold in the Company during their term of office. They may transfer their shares during the term of their office or after their departure from office in accordance with the requirements of the laws and the listing rules of the place of the stock exchange on which the Company's shares are listed. CHAPTER 7 SHARE CERTIFICATES AND REGISTER OF SHAREHOLDERS Article 41 Share certificates of the Company shall be in registered form. The share certificate of the Company shall include the following major items: (1) Company's name; (2) Page 10 the date of registration of the Company; (3) the class of the share certificates, the par value and the number of shares represented by the share certificate; (4) the serial number of the share certificate; (5) any other matters required by the Company Law and the Special Regulations; (6) other items required to be stated by the stock exchanges on which the Company's shares are listed. Article 42 Share certificates of the Company shall be signed by the Chairman of the Company's board of directors. Where the stock exchanges on which the Company's shares are listed require other senior administrative officer(s) of the Company to sign on the share certificates, the share certificates shall also be signed by such senior administrative officer(s). The share certificates shall take effect after being sealed or printed with the seal of the Company. The share certificates shall only be sealed with the Company's seal under the authorization of the board of directors. The signatures of the Chairman of the board of directors or other senior administrative officer(s) of the Company may be printed in mechanical form. Article 43 The Company shall keep a register of its shareholders and enter in the register the following particulars: (1) the name (title) and address (residence), the occupation or nature of each shareholder; (2) the class and quantity of shares held by each shareholder; (3) the amount paid or agreed to be paid on the shares of each shareholder; (4) the share certificate numbers of the shares held by each shareholder; (5) the date on which each person was entered in the register as a shareholder; (6) the date on which any shareholder ceased to be a shareholder. Unless contrary evidence is shown, the register of shareholders shall be sufficient evidence of the shareholders' shareholdings in the Company. Article 44 Page 11 The Company may, in accordance with the mutual understanding and agreements between the securities governing authority of the State Council and overseas securities regulatory organizations, maintain the register of shareholders of Overseas-Listed Foreign-Invested Shares overseas and appoint overseas agent(s) to manage such share register. The original share register for holders of Overseas-Listed Foreign-Invested Shares listed in Hong Kong shall be maintained in Hong Kong. A duplicate of the share register for holders of Overseas-Listed Foreign-Invested Shares shall be maintained at the Company's residence. The appointed overseas agent(s) shall ensure the consistency between the original and the duplicate of the share register. If there is any inconsistency between the original and the duplicate of the share register for holders of Overseas-Listed Foreign-Invested Shares, the original shall prevail. Article 45 The Company shall have a complete register of shareholders which shall comprise the following: (1) a part of the shareholders' register maintained at the Company's residence other than those parts mentioned in sub-paragraphs (2) and (3) of this Article; (2) a part of the shareholders' register in respect of the holders of Overseas-Listed Foreign-Invested Shares of the Company maintained in the place of the overseas stock exchange on which the shares are listed; and (3) any other parts of the shareholders' register maintained at such other places as the board of directors may consider necessary for the purpose of listing the shares of the Company. Article 46 Different parts of the shareholders' register shall not overlap. No transfer of any shares registered in any part of the register shall, during the continuance of that registration, be registered in any other part of the register. The alteration and rectification of each part of the shareholders' register shall be carried out in accordance with the laws of the place where the register is maintained. All the fully paid-up H Shares can be freely transferred in accordance with these articles of association. However, the board of directors may refuse to recognize any instrument of transfer without giving any reason, unless: (1) a fee (for each instrument of transfer) of two dollars and fifty cents Hong Kong dollars or any higher fee as agreed by the Stock Exchange has been paid to the Company for registration of any transfer or any other document which is related to or will affect ownership of or change of ownership of the shares; (2) the instrument of transfer only involves H Shares; (3) the stamp duty chargeable on the instrument of transfer has been paid; Page 12 (4) the relevant share certificate and upon the reasonable request of the board of directors any evidence in relation to the right of the transferor to transfer the shares have been submitted; (5) if it is intended to transfer the shares to joint owners, then the maximum number of joint owners shall not exceed four (4); (6) the Company does not have any lien on the relevant shares. If the Company refuses to register any transfer of shares, the Company shall within two months of the formal application for the transfer provide the transferor and the transferee with a notice of refusal to register such transfer. Article 47 No changes in the shareholders' register due to the transfer of shares may be made within thirty (30) days before the date of a shareholders' general meeting or within five (5) days before the record date for the Company's distribution of dividends. Article 48 Where the Company decides to convene a shareholders' general meeting, distribute dividends, liquidate or carry out other activities which would require the determination of shareholdings, the board of directors shall fix a record date for the purpose of determining shareholdings. A person who is registered in the register as shareholders of the Company at the end of the record date shall be a shareholder of the Company. Article 49 Any person aggrieved and claiming to be entitled to have his name (title) to be entered in or removed from the register of shareholders may apply to a court of competent jurisdiction for rectification of the register. Article 50 Any person who is a registered shareholder or who claims to be entitled to have his name (title) entered into the register of shareholders in respect of shares in the Company may, if his share certificate (the "original certificate") relating to the shares is lost, apply to the Company for a replacement new share certificate in respect of such shares (the "Relevant Shares"). If a shareholder of Domestic-Invested Shares loses his share certificate and applies to the Company for a replacement new share certificate, it shall be dealt with in accordance with article 150 of the Company Law. If a shareholder of Overseas-Listed Foreign Shares loses his share certificate and applies to the Company for a replacement new share certificate, it may be dealt with in accordance with the law of the place where the original register of holders of Overseas-Listed Foreign-Invested Shares is maintained, rules of the stock exchange or other relevant regulations. If a shareholder of Overseas-Listed Foreign-Invested Shares listed in Hong Kong (H Shares) loses his share certificate, the issue of a replacement new share certificate shall comply with following requirements: (1) The applicant shall submit an application to the Company in a prescribed form accompanied by notarial certificate or a statutory declaration (i) stating the Page 13 grounds upon which the application is made and the circumstances and the evidence of the loss; and (ii) declaring that no other person is entitled to have his name entered in the register of shareholders in respect of the Relevant Shares. (2) Before the Company decides to issue the replacement new share certificate, no statement made by any person other than the applicant declaring that his name shall be entered in the register of shareholders in respect of such shares has been received. (3) The Company shall, if it intends to issue a replacement new share certificate, publish a notice of its intention at least once every thirty (30) days in a period of ninety (90) consecutive days in such newspapers as may be prescribed by the board of directors. (4) The Company shall have, prior to publication of its intention to issue a replacement new share certificate, delivered to the stock exchange on which its shares are listed a copy of the notice to be published and may publish the notice upon receiving confirmation from such stock exchange that the notice has been exhibited in the premises of the stock exchange. Such notice shall be exhibited in the premises of the Stock Exchange for a period of 90 days. In the case of an application made without the consent of the registered holder of the Relevant Shares, the Company shall deliver by mail to such registered shareholder a copy of the notice to be published. (5) If, by the expiration of the 90-day period referred to in paragraphs (3) and (4) of this Article, the Company shall not have received from any person notice of any disagreement to such application, the Company may issue a replacement new share certificate to the applicant accordingly. (6) Where the Company issues a replacement new share certificate under this Article, it shall forthwith cancel the original share certificate and enter the cancellation and issue in the register of shareholders accordingly. (7) All expenses relating to the cancellation of an original share certificate and the issue of a replacement new share certificate by the Company shall be borne by the applicant and the Company is entitled to refuse to take any action until reasonable security is provided by the applicant. Article 51 Where the Company issues a replacement new share certificate pursuant to these articles of association, the name (title) of a bona fide purchaser gaining possession of such new share certificate or the person who is subsequently entered in the register of shareholders as holder of such shares (if he is a bona fide purchaser) shall not be removed from the register of shareholders. Article 52 The Company shall not be liable for any damages sustained by any person by reason of the cancellation of the original share certificate or the issue of the new share certificate, unless the claimant proves that the Company has acted deceitfully. CHAPTER 8 SHAREHOLDERS' RIGHTS AND OBLIGATIONS Page 14 Article 53 A shareholder of the Company is a person who lawfully holds shares in the Company and whose name (title) is entered in the register of shareholders. A shareholder shall enjoy rights and bear obligations according to the class and proportion of the shares held by him; shareholders who hold shares of the same class shall enjoy the same rights and bear the same obligations. Article 54 The ordinary shareholders of the Company shall enjoy the following rights: (1) the right to attend or appoint a proxy to attend shareholders' general meetings and to vote thereat; (2) the right to dividends and other distributions in proportion to the number of shares held; (3) the right of supervisory management over the Company's business operations, and the right to present proposals or enquiries; (4) the right to transfer, donate or pledge his shares in accordance with laws, administrative regulations and provisions of these articles of association; (5) the right of knowledge and decision making power with respect to important matters of the Company in accordance with laws, administrative regulations and these articles of association; (6) the right to obtain relevant information in accordance with the provisions of these articles of association, including: (i) the right to obtain a copy of these articles of association, subject to payment of the cost of such copy; (ii) the right to inspect and copy, subject to payment of a reasonable charge: (a) all parts of the register of shareholders; (b) personal particulars of each of the Company's directors, supervisors, president and other senior administrative officers, including: (aa) present name and alias and any former name or alias; (bb) principal address (residence); Page 15 (cc) nationality; (dd) primary and all other part-time occupations and duties; (ee) identification documents and their relevant numbers; (c) state of the Company's share capital; (d) reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of last accounting year and the aggregate amount paid by the Company for this purpose; (e) minutes of shareholders' general meetings; (f) interim and annual reports of the Company; (7) in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held; (8) other rights conferred by laws, administrative regulations and these articles of association. Article 55 The ordinary shareholders of the Company shall assume the following obligations: (1) to abide by these articles of association; (2) to pay subscription monies according to the number of shares subscribed and the method of subscription; (3) no right to return shares to the Company unless laws and regulations provide otherwise; (4) other obligations imposed by laws, administrative regulations and these articles of association. Shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription. Page 16 Article 56 In addition to the obligations imposed by laws and administrative regulations or required by the listing rules of the stock exchange on which shares of the Company are listed, a controlling shareholder shall not exercise his voting rights in respect of the following matters in a manner prejudicial to the interests of the shareholders generally or of some of the shareholders of the Company: (1) to relieve a director or supervisor of his duty to act honestly in the best interests of the Company; (2) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person), in any guise, of the Company's assets, including (without limitation) opportunities beneficial to the Company; (3) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person) of the individual rights of other shareholders, including (without limitation) rights to distributions and voting rights save pursuant to a restructuring submitted to shareholders for approval in accordance with these articles of association. Article 57 For the purpose of the foregoing Article, a "controlling shareholder" means a person who satisfies any one of the following conditions: (1) he alone or acting in concert with others has the power to elect more than half of the board of directors; (2) he alone or acting in concert with others has the power to exercise or to control the exercise of 30 per cent or more of the voting rights in the Company; (3) he alone or acting in concert with others holds 30 per cent or more of the issued and outstanding shares of the Company; (4) he alone or acting in concert with others in any other manner controls the Company in fact. CHAPTER 9 SHAREHOLDERS' GENERAL MEETINGS Article 58 The shareholders' general meeting is the organ of authority of the Company and shall exercise its functions and powers in accordance with law. Article 59 The shareholders' general meeting shall exercise the following functions and powers: (1) Page 17 to decide on the Company's operational policies and investment plans; (2) to elect and replace directors and decide on matters relating to the remuneration of directors; (3) to elect and replace the supervisors who are representatives of shareholders and decide on matters relating to the remuneration of supervisors; (4) to examine and approve reports of the board of directors; (5) to examine and approve reports of the supervisory committee; (6) to examine and approve the Company's proposed annual preliminary and final financial budgets; (7) to examine and approve the Company's profit distribution plans and plans for making up losses; (8) to decide on increases or reductions in the Company registered capital; (9) to decide on matters such as merger, division, dissolution and liquidation of the Company; (10) to decide on the issue of debentures by the Company; (11) to decide on the appointment, dismissal and disengagement of the accountants of the Company; (12) to amend these articles of association; (13) to consider motions raised by shareholders who represent 5 percent or more of the total shares of the Company carrying the right to vote; (14) to decide on other matters which require resolutions of the shareholders in general meeting according to relevant laws, administrative regulations and provisions of these articles of association; (15) to decide on matters which the board of directors may be delegated or authorized to deal with by the shareholders in general meeting. Page 18 When the shareholders' general meeting decide on matters which the board of directors may be delegated or authorized to deal with, the shareholders' general meeting shall maintain the legitimate rights and interests of the Company according to law and abide by laws and regulations strictly in order to ensure the Company's principle of efficient operation and scientific decision making. Matters delegated or authorized to the board of directors to deal with include (without limitation): (1) to modify the language of these articles of association after the shareholders' general meeting passed the resolution on the amendment of these articles of association in principle; (2) to distribute the interim profit; (3) to decide on matters in connection with the issue of new shares and equity convertible bonds; (4) to dispose of, mortgage and secure the fixed assets under the operation policy and investment plan passed by the shareholders' general meeting; (5) other matters delegated or authorized by the shareholders' general meeting to the board of directors to deal with at times in accordance with laws, regulations and these articles of association. Article 60 The Company shall not, without the prior approval of shareholders in general meeting, enter into any contract with any person other than a director, supervisor, president or other senior administrative officer whereby the management and administration of the whole or any substantial part of the business of the Company is to be handed over to such person. Article 61 Shareholders' general meetings are divided into annual general meetings and extraordinary general meetings. Shareholders' general meetings shall be convened by the board of directors. Annual general meetings are held once every year and within six (6) months from the end of the preceding financial year. Under any of the following circumstances, the board of directors shall convene an extraordinary general meeting within two (2) months: (1) when the number of directors is less than the number of directors required by the Company Law or two thirds of the number of directors specified in these articles of association; (2) when the unrecovered losses of the Company amount to one third of the total amount of its share capital; (3) when shareholder(s) holding 10 per cent or more of the Company's issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting; Page 19 (4) when deemed necessary by the board of directors or as requested by the supervisory committee. The number of shares held by shareholders in paragraph (3) above shall be calculated on the date when the written request is submitted. Article 62 When the company convenes a shareholders' general meeting, written notice of the meeting shall be given forty five (45) days before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and the place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to the Company twenty (20) days before the date of the meeting. Article 63 When the board of directors issues the notice for the convening of a shareholders' general meeting, the meeting shall not be postponed without reason. In case the shareholders' general meeting must be postponed under special circumstances, a notice regarding the postponement must be issued at least five (5) working days before the convening of the original shareholders' general meeting. In the postponement notice, the board of directors must state the reasons for the postponement and the date of the postponed meeting. When the shareholders' general meeting is postponed, the board of directors may not change the record date for the shareholders entitled to attend the shareholders' general meeting provided in the original notice. Article 64 When the Company convenes a shareholders' annual general meeting, shareholders holding 5 per cent or more of the total voting shares of the Company shall have the right to propose new motions in writing, and the Company shall, after the same having been reviewed and approved by the board of directors of the Company, place those matters in the proposed motions within the scope of functions and powers of the shareholders' general meeting on the agenda. If the board of directors decides not to put the motion on the agenda, it must give reasons and explanation to the shareholders' general meeting and publish the motion and the board's explanation along with resolutions adopted by the shareholders' general meeting at the end of the meeting. Article 65 The Company shall, based on the written replies received twenty (20) days before the date of the shareholders' general meeting from the shareholders, calculate the number of voting shares represented by the shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting reaches one half or more of the Company's total voting shares, the Company may hold the meeting; if not, then the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the place and date for, the meeting. The Company may then hold the meeting after such publication of notice. A shareholders' extraordinary general meeting shall not decide on any matter not stated in the notice of meeting. Article 66 A notice of meeting of shareholders shall meet the following requirements: (1) be in writing; (2) Page 20 specify the place, the date and time of the meeting; (3) state the matters to be discussed at the meeting; (4) provide such information and explanation as are necessary for the shareholders to make an informed decision on the proposals put before them. Without limiting the generality of the foregoing, where a proposal is made to amalgamate the Company with another, to repurchase shares, to reorganize the share capital, or to restructure the Company in any other way, the terms of the proposed transaction must be provided in detail together with copies of the proposed agreement, if any, and the cause and effect of such proposal must be properly explained; (5) contain a disclosure of the nature and extent, if any, of the material interests of any director, supervisor, president or other senior administrative officer in the proposed transaction and the effect of the proposed transaction on them in their capacity as shareholders in so far as it is different from the effect on the interests of the shareholders of the same class; (6) contain the full text of any special resolution to be proposed at the meeting; (7) contain conspicuously a statement that a shareholder entitled to attend and vote is entitled to appoint one or more proxies to attend and vote instead of him and that a proxy need not be a shareholder; (8) specify the time and place for lodging proxy forms for the relevant meeting. Article 67 Notice of shareholders' general meeting shall be served on the shareholders (whether or not entitled to vote at the meeting), by delivery or prepaid airmail to their addresses as shown in the register of shareholders. For the holders of Domestic-Invested Shares, notice of the meetings may be issued by way of public notice. The public notice referred to in the preceding paragraph shall be published in one or more newspapers designated by the securities governing authority of the State Council within the interval between forty-five (45) days and fifty (50) days before the date of the meeting; after the publication of notice, the holders of Domestic-Invested Shares shall be deemed to have received the notice of the relevant shareholders' general meeting. Article 68 The accidental omission to give notice of a meeting to, or the failure to receive the notice of a meeting by, any person entitled to receive notice shall not invalidate the proceedings at that meeting. Article 69 Any shareholder entitled to attend and vote at a meeting of the Company shall be entitled to appoint one or more other persons (whether a shareholder or not ) as his proxies to attend and vote on his behalf, and a proxy so appointed shall be entitled to exercise the following rights pursuant to the authorization from that shareholder: Page 21 (1) the shareholder's right to speak at the meeting; (2) the right to demand or join in demanding a poll; (3) the right to vote by hand or on a poll, but a proxy of a shareholder who has appointed more than one proxy may only vote on a poll. Where that shareholder is a recognized clearing house within the meaning of the Securities and Futures (Clearing Houses) Ordinance (Cap.420 of the laws of Hong Kong), it may authorize such person or persons as it thinks fit to act as its representative (or representatives) at any shareholders' general meeting or any meeting of any class of shareholders provided that, if more than one person is so authorized, the authorization must specify the number and class of shares in respect of which each such person is so authorized. The person so authorized will be entitled to exercise the same power on behalf of the recognized clearing house as that clearing house (or its nominees) could exercise if it were an individual shareholder of the Company. Article 70 The instrument appointing a proxy shall be in writing under the hand of the appointer or his attorney duly authorized in writing, or if the appointer is a legal entity, either under seal or under the hand of a director or attorney duly authorized. Article 71 The instrument appointing a voting proxy and, if such instrument is signed by a person under a power of attorney or other authority on behalf of the appointer, a notarially certified copy of that power of attorney or other authority shall be deposited at the residence of the Company or at such other place as is specified for that purpose in the notice convening the meeting, not less than twenty-four (24) hours before the time for holding the meeting at which the proxy propose to vote or the time appointed for the passing of the resolution. If the appointer is a legal person, its legal representative or such person as is authorized by resolution of its board of directors or other governing body may attend at any meeting of shareholders of the Company as a representative of the appointer. Article 72 Any form issued to a shareholder by the directors for use by him for appointing a proxy to attend and vote at meetings of the Company shall be such as to enable the shareholder, according to his free will, to instruct the proxy to vote in favor of or against the motions, such instructions being given in respect of each individual matter to be voted on at the meeting. Such a form shall contain a statement that in the absence of instructions by the shareholder the proxy may vote as he thinks fit. Article 73 A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the death or loss of capacity of the appointer or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the shares in respect of which the proxy is given, provided that no notice in writing of such death, loss of capacity, revocation or transfer as aforesaid shall have been received by the Company at its residence before the commencement of the meeting at which the proxy is used. Article 74 Page 22 A proxy who attends a shareholders' general meeting on behalf of a shareholder shall present his identification document. If the legal representative of a shareholder who is a legal person attend the meeting, he shall present his identification document. If shareholder who is a legal person appoints other person to attend the meeting, the person appointed shall present his own identification document and a notarially certified copy of the resolution of the board of directors or other governing body of the appointer or letter of authorization. Article 75 Resolutions of shareholders' general meetings shall be divided into ordinary resolutions and special resolutions. To adopt an ordinary resolution, votes representing more than one half of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favor of the resolution in order for it to be passed. To adopt a special resolution, votes representing more than two thirds of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favor of the resolution in order for it to be passed. The shareholders (including proxies) present at the meeting shall expressly state their agreement with or objection to every matter to be determined by voting. If a shareholder abstains from voting or casts an abstention vote, the Company shall disregard such vote as a voting share when counting the result of voting. Article 76 A shareholder (including proxy), when voting at a shareholders' general meeting, may exercise voting rights in accordance with the number of shares carrying the rights to vote and each share shall have one vote. Article 77 At any general meeting of shareholders, a resolution shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded: (1) by the chairman of the meeting; (2) by at least two shareholders entitled to vote present in person or by proxy; (3) by one or more shareholders present in person or by proxy and representing 10 per cent or more of all shares carry the right to vote at the meeting. Unless a poll be so demanded, a declaration by the chairman that a resolution has on a show of hands been carried unanimously, or carried by a particular majority, or lost, and an entry to that effect in the minutes of the meeting shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution. The demand for a poll may be withdrawn by the person who makes such demand. Article 78 A poll demanded on the election of the chairman of the meeting, or on a question of adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may Page 23 be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded. Article 79 On a poll taken at a meeting, a shareholder (including proxy) entitled to two or more votes need not cast all his votes in the same way. Article 80 In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded shall be entitled to one additional vote. Article 81 The following matters shall be resolved by an ordinary resolution at a shareholders' general meeting: (1) work reports of the board of directors and the supervisory committee; (2) plans formulated by the board of directors for distribution of profits and for making up losses; (3) removal of the members of the board of directors and members of the supervisory committee, their remuneration and method of payment; (4) annual preliminary and final budgets, balance sheets and profit and loss accounts and other financial statements of the Company; (5) matters other than those required by the laws and administrative regulations or by these articles of association to be adopted by special resolutions. Article 82 The following matters shall be resolved by a special resolution at a shareholders' general meeting: (1) the increase or reduction in share capital and the issue of shares of any class, warrants and other similar securities; (2) the issue of debentures of the Company; (3) the division, merger, dissolution and liquidation of the Company; (4) amendments to these Articles of Association; (5) repurchase of the Company's shares; Page 24 (6) any other matters considered by the shareholders' general meeting, resolved by way of an ordinary resolution, to be of a nature which may have a material impact on the Company and should be adopted by a special resolution. Article 83 Shareholders requisitioning the convening of extraordinary general meetings of shareholders or class meeting shall abide by the following procedures: (1) Two or more shareholders holding in aggregate 10 per cent or more of the shares carrying the right to vote at the meeting sought to be held shall sign one or more counterpart requisitions stating the object of the meeting and requiring the board of directors to convene a shareholders' extraordinary general meeting or a class meeting thereof. The board of directors shall as soon as possible proceed to convene the extraordinary general meeting of shareholders or a class meeting thereof after receiving the requisition. The amount of shareholdings referred to above shall be calculated as at the date of the deposit of the requisition. (2) If the board of directors fails to issue a notice of such a meeting within thirty (30) days from the date of the receipt of the requisition, the requisitionists may themselves convene such a meeting in a manner as similar as possible as that in which shareholders' meeting are to be convened by the board of directors within four (4) months from the date of receipt of the requisition by the board of directors. Any reasonable expenses incurred by the requisitions by reason of the failure of the board of directors to duly convene a meeting shall be repaid to the requisitionists by the Company and any sum so repaid shall be set off against sums owed by the Company to the directors in default. Article 84 The Chairman of the board of directors shall convene and take the chair of every shareholders' general meeting. If the Chairman is unable to attend the meeting for any reason, the vice-chairman of the board of directors shall convene and take the chair of the meeting. If both the Chairman and vice-chairman of the board of directors are unable to attend the meeting, then the board of directors may designate a director to convene and take the chair of the meeting. If no chairman of the meeting has been designated, shareholders present shall choose one person to be the chairman of the meeting. If for any reason, the shareholders shall fail to elect a chairman, then the shareholder (including proxy) present in person or by proxy and holding the largest number of shares carrying the right to vote thereat shall be the chairman of the meeting. Article 85 The chairman of the meeting shall be responsible for the determination of whether a resolution is passed. His decision, which is final and conclusive, shall be announced at the meeting and recorded in the minute book. Article 86 If the chairman of the meeting has any doubt as to the result of a resolution put to the vote of the meeting, he may have the votes counted. If the chairman of the meeting fails to have the votes counted, any shareholder who is present in person or by proxy and who objects to the result announced by the chairman of the meeting may demand that the votes be counted immediately after the declaration of the result, the chairman of the meeting shall have the votes counted immediately. Page 25 Article 87 If votes are counted at a shareholders' general meeting, the result of the count shall be recorded in the minute book. Article 88 When the shareholders' general meeting is examining and discussing a connected transaction, the connected shareholder shall not participate in the vote on the shares. His shares carrying the voting rights shall not be counted as effective votes in the total. The notice on the resolutions passed by the shareholders' general meeting shall fully disclose information regarding the voting of the independent shareholders. If under special circumstances, the connected shareholders cannot withdraw from the voting, they may vote in the normal course of proceeding after the Company has obtained the approval from the competent authorities provided that the Company shall give detailed explanation thereof in the notice on the resolutions passed by the shareholders' general meeting. Article 89 Shareholder's general meeting shall make minutes of the resolutions on the matters considered at the meeting to be signed by all the directors present at the meeting. The minutes, shareholders' attendance lists and proxy forms shall be kept at the Company's residence. Article 90 Copies of the minutes of proceedings of any shareholders' general meeting shall, during business hours of the Company, be open for inspection by any shareholder without charge. If a shareholder demands from the Company a copy of such minutes, the Company shall send a copy of such minutes to him within seven (7) days after having received reasonable charges. Article 91 Matters uncovered by these articles of association regarding the convening of shareholders' general meeting, voting procedures and deliberation of proposals shall be handled in accordance with the relevant provisions of laws and regulations currently effective in China. CHAPTER 10 SPECIAL PROCEDURES FOR VOTING BY A CLASS OF SHAREHOLDERS Article 92 Those shareholders who hold different classes of shares are shareholders of different classes. Apart from the holders of other classes of shares, the holders of the Domestic-Invested Shares and holders of Overseas Listed Foreign-Invested Shares shall be deemed to be shareholders of different classes. A class of shareholders shall, in accordance with laws, administrative regulations and these articles of association, enjoy rights and bear obligations. Article 93 Rights conferred on any class of shareholders in the capacity of shareholders ("class rights") may not be varied or abrogated unless approved by a special resolution of shareholders in general meeting and by holders of shares of that class at a separate meeting conducted in accordance with Article 95 to 99. Article 94 The following circumstances shall be deemed to be variation or abrogation of the rights of a class of shareholders: (1) Page 26 to increase or to decrease the number of shares of such class, or increase or decrease the number of shares of a class having voting or equity rights or privileges equal or superior to those of the shares of such class; (2) to effect an exchange of all or part of the shares of such class into shares of another class or to effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such class; (3) to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of such class; (4) to reduce or remove a dividend preference or a liquidation preference attached to shares of such class; (5) to add, remove or reduce conversion privileges, options, voting rights, transfer or pre-emptive rights, or rights to acquire securities of the Company attached to shares of such class; (6) to remove or reduce rights to receive payment payable by the Company in particular currencies attached to shares of such class; (7) to create a new class of shares having voting or equity rights or privileges equal or superior to those of the shares of such class; (8) to restrict the transfer or ownership of the shares of such class or add to such restriction; (9) to allot and issue rights to subscribe for, or convert into, shares in the Company of such class or another class; (10) to increase the rights or privileges of shares of another class; (11) to restructure the Company where the proposed restructuring will result in different classes of shareholders bearing a disproportionate burden of such proposed restructuring; (12) to vary or abrogate the provisions of this Chapter. Article 95 Shareholders of the affected class, whether or not otherwise having the right to vote at shareholders' general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 94, but interested shareholder(s) shall not be entitled to vote at class meetings. Page 27 The meaning of "interested shareholder(s)" as mentioned in the preceding paragraph is: (1) in the case of a repurchase of shares by offers to all shareholders or public dealing on a stock exchange under Article 31, a "controlling shareholder" within the meaning of Article 57; (2) in the case of a repurchase of share by an off-market contract under Article 31, a holder of the shares to which the proposed contract relates; (3) in the case of a restructuring of the Company, a shareholder within a class who bears less than a proportionate obligation imposed on that class under the proposed restructuring or who has an interest in the proposed restructuring different from the interest of shareholders of that class. Article 96 Resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to Article 95, are entitled to vote at class meetings. Article 97 Written notice of a class meeting shall be given forty-five (45) days before the date of the class meeting to notify all of the shareholders in the share register of the class of the matters to be considered, the date and the place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance at the class meeting to the Company twenty (20) days before the date of the class meeting. If the number of shares carrying voting rights at the meeting represented by the shareholders who intend to attend the class meeting reaches more than one half of the voting shares at the class meeting, the Company may hold the class meeting; if not, the Company shall within five (5) days notify the shareholders again by public notice of the matters to be considered, the date and the place for the class meeting. The Company may then hold the class meeting after such publication of notice. Article 98 Notice of class meetings need only be served on shareholders entitled to vote thereat. Meeting of any class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders. The provisions of these articles of association relating to the manner to conduct any shareholders' general meeting shall apply to any meeting of a class of shareholders. Article 99 The special procedures for voting at any meeting of a class of shareholders shall not apply to the following circumstances: (1) where the Company issues, upon the approval by special resolution of its shareholders in general meeting, either separately or concurrently once every twelve months, not more than 20 per cent of each of its existing issued Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares; (2) Page 28 where the Company's plan to issue Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares at the time of its establishment is carried out within fifteen (15) months from the date of approval by the Securities Committee of the State Council. CHAPTER 11 BOARD OF DIRECTORS Section 1 Directors and Board of Directors Article 100 The Company shall have a board of directors. The board of directors shall consist of fifteen (15) directors. The board of directors shall have one (1) Chairman, two (2) Vice-chairmen. Article 101 Directors shall be elected at the shareholders' general meeting. The term of office of the directors is three (3) years. At the expiry of a director's term, the term is renewable upon re-election. Directors may be elected by the shareholders' general meeting from the board of directors or from the candidates nominated by shareholders representing over 5% (including 5%) of the Company' shares issued. Notice in writing of the intention to propose a person for election as a director and detailed information about the nominated candidate for director shall be given to the Company seven (7) days before the date of such shareholders' general meeting for public disclosure. Candidates for directors shall make written promises seven (7) days before the shareholders' general meeting, indicating their willingness to accept the candidacy, guaranteeing the truthfulness and the completeness of the material disclosed in connection with their candidacy, and promising that they will conscientiously perform the duties of the director after they are elected. The Chairman and the Vice-chairman shall be elected and removed by more than one half of all the members of the board of directors. The term of office of each of the Chairman and the Vice-chairman is three (3) years, renewable upon re-election. The shareholders' general meeting may by ordinary resolution remove any director before the expiration of his term of office (but without prejudice to such director's right to claim damages based on any contract) on the condition that all the relevant laws and administrative regulations are fully complied with. The Directors shall not be required to hold shares of the Company. Article 102 The board of directors is responsible to the shareholders' general meeting and exercises the following powers: (1) to be responsible for the convening of the shareholders' general meeting and to report on its work to the shareholders' general meeting; (2) to implement the resolutions of the shareholders' general meetings; (3) to decide on the Company's business plans and investment plans; (4) Page 29 to formulate the Company's annual preliminary and financial budgets; (5) to formulate the Company's profit distribution plan and plan for making up losses; (6) to formulate proposals for increases or reductions in the Company's registered capital and the issue of debentures of the Company; (7) to draw up plans for the merger, division or dissolution of the Company; (8) to decide on the establishment of the Company's internal management structure; (9) to appoint or dismiss the Company's president, and pursuant to the president's nominations to appoint or dismiss the vice president, the financial controller and other senior administrative officers of the Company and decide on their remuneration; (10) to establish the Company's basic management system; (11) to formulate proposals for any amendments of the Company's articles of association; (12) to exercise any other powers conferred by these articles of association or the shareholders' general meetings. Except the board of directors' resolutions in respect of the matters specified in sub-paragraphs (6), (7) and (11) of this Article which shall be passed by more than two-thirds of all the directors, the board of directors' resolutions in respect of all other matters may be passed by more than one half of all the directors. Article 103 The board of directors shall not, without the prior approval of shareholders in a general meeting, dispose or agree to dispose of any fixed assets of the Company where the aggregate of the amount or value of the consideration for the proposed disposition, and the amount or value of the consideration for any such disposition of any fixed assets of the Company that has been completed in the period of four (4) months immediately preceding the proposed disposition, exceed 33 per cent of the value of the Company's fixed assets as shown in the last balance sheet placed before the shareholders in general meeting. For the purposes of this Article, disposition includes an act involving the transfer of an interest in assets but does not include the provision of fixed asset by way of security. The validity of a disposition by the Company shall not be affected by the breach of the preceding paragraph of this Article. Article 104 Board of directors shall abide by the laws and statutory regulations of the Page 30 state, these articles of association and resolutions of the shareholders' general meeting. Article 105 The Chairman of the board of directors shall exercise the following powers: (1) to preside over shareholders' general meetings and to convene and preside over meetings of the board of directors; (2) to check on the implementation of resolutions of the board of directors; (3) to sign the securities certificates issued by the Company; (4) to exercise other powers conferred by the board of directors. The Vice-chairman assists the Chairman with his work. When the Chairman is unable to exercise his powers, the Chairman may designate the Vice-chairman to exercise such powers on the Chairman's behalf. Article 106 Meetings of the board of directors shall be held at least twice every year and convened by the Chairman of the board of directors. Notice of the meeting shall be served by telex, telegram, facsimile, express delivery, registered mail or personal delivery on all of the directors ten (10) days before the date of the meeting. In case of any urgent matters, the Chairman may convene an extraordinary meeting of the board of directors. Upon requisition by more than half of the directors, the Chairman must convene an extraordinary meeting. Upon requisition by over one third of the directors, the supervisory committee or the president of the Company, the Chairman may convene an extraordinary meeting. The board meeting shall be held in principle at the place where the Company is located. It may be held at other places both at home and abroad upon resolution by the board of directors. Article 107 Meeting and extraordinary meetings of the board of directors shall be notified in the following ways: (1) No notice of directors' regular meeting shall be required, if the time and place of regular meetings of the board of directors have been fixed by the board of directors in advance. (2) Notice of the time and place of a meeting of the board of directors for which the time and place have not otherwise been set in advance by the board of directors shall be sent by the Chairman through the secretary to the board of directors to each of the directors and the chairman of the supervisory committee by telex, telegram, facsimile, express delivery, registered mail or personal delivery not less than ten (10) days before such meeting. (3) Notice shall be in Chinese and, where necessary, in English also and shall include an agenda of the meeting. Page 31 (4) An extraordinary board meeting may be held provided a notice is given by telephone, telegram or facsimile to all the directors at least eight(8) hours in advance. Article 108 Meeting of the board of directors shall be held only if more than half of the directors are present. Each director shall have one vote. A resolution of the board of directors must be passed by more than half of all the directors. Where the number of votes cast for and against a resolution is equal, the Chairman of the board of directors shall have a casting vote. Where a director is interested in any resolution proposed at a board meeting, such director shall not be present and shall not have a right to vote. Such director shall not be counted in the quorum of the relevant meeting. Article 109 Notice of a meeting shall be deemed to have been given to any director who attends the meeting without protesting against, before or at its commencement, any lack of notice. Article 110 Any regular or extraordinary meeting of the board of directors may be held by conference telephone or similar communication equipment so long as all directors participating in the meeting can clearly hear and communicate with each other, and all such directors shall be deemed to be present in person at the meeting. Article 111 In respect of any matter requiring the resolution of any extraordinary meeting of the board of directors, a resolution approved in writing by at least such number of directors as may be required pursuant to Article 102 of these articles of association after the proposed resolution has been reduced into writing and delivered to all directors, shall be deemed to be a valid resolution and a board meeting shall be dispensed with. Article 112 Directors shall attend the meetings of directors in person. Where a director is unable to attend a meeting for any reason, he may appoint another director by a written power of attorney to attend the meeting on his behalf. The power of attorney shall set out the scope of the authorization. A Director appointed as a representative of another director to attend the meeting shall exercise the rights of a director within the scope of authority conferred by the appointing director. Where a director is unable to attend a meeting of the board of directors and has not appointed a representative to attend the meeting on his behalf, he shall be deemed to have waived his right to vote at the meeting. Article 113 The board of directors shall keep minutes of resolutions on matters discussed at meetings. The minutes shall be signed by the directors present at the meeting and the person who recorded the minutes. The directors shall be liable for the resolutions of the board of directors. If a resolution of the board of directors violates the laws, administrative regulations or these articles of association and results in the Company sustaining serious losses, the directors participating in the resolution are liable to compensate the Company. However, if it can be proven that a director expressly objected to the resolution when the resolution Page 32 is voted on, and that such objection is recorded in the minutes of the meeting, such director may be released from such liability. Article 114 All the minutes of the meeting of the board of directors shall be kept in Chinese. All the minutes of the meeting shall be delivered to all the directors as soon as possible after the board meeting for them to review. Any director proposing to amend the minutes must submit his proposed amendments in the form of a written report to the chairman within six (6) working days of receiving such minutes. Article 115 The Chairman and all the directors (proxies) present and the board secretary should sign the minutes of the meeting when it is approved after reviewing and a copy thereof shall be sent to each director in time. Section 2 Independent Directors Article 116 The Company shall have independent directors. The independent directors shall have no other position in the Company (other than as director of the Company), and shall not be in any relationship with the Company or its major shareholders that will impair their independent and objective judgment. Article 117 An independent director shall meet the following requirements; (1) is qualified to serve as director of a listed company according to the laws, administrative rules and other relevant rules of the jurisdiction where the Company's shares are listed; (2) has basic knowledge of the operations of a listed company, and is well acquainted with relevant laws, administrative rules and other rules and regulations; (3) has at least five years of experience in the legal or economic field, or other experience necessary for performance of his duties as an independent director; (4) other conditions set forth in these articles of association. Article 118 The following persons shall not be independent directors of the Company: (1) persons who are employed by the Company or its subsidiaries, or direct and close relatives thereof (direct relatives mean spouses, parents, and offsprings, and close relatives include siblings, father-in-law and mother-in-law, daughter-in-law and son-in-law, brother-in-law and sister-in-law, and the siblings of the spouses); (2) natural persons who hold directly or indirectly more than 1% of the Company's Page 33 issued shares, or who are among the top ten shareholders of the Company, and direct relatives thereof; (3) persons employed by company shareholders which hold directly or indirectly more than 5% of the issued shares of the Company or are among the top five shareholders of the Company, and direct relatives thereof; (4) persons who fell under any of the above three categories in the past one year; (5) persons who provide financial, legal or consultation services to the Company or any of its subsidiaries; (6) other persons specified in these articles of association; (7) other persons specified by the China's Securities Regulatory Commission. Article 119 The independent directors owe a duty of fiduciary and diligence to the Company and its shareholders. They shall perform their duties in accordance with relevant laws and regulations and these articles of association, and shall protect the interests of the Company and prevent encroachment of the rights and interests of minority shareholders. The independent directors shall perform their duties independently, and shall not be influenced by the major shareholders, actual controllers or other interested entities and individuals, and shall ensure that they have sufficient time and ability in efficiently discharging their duties. The Company should make up for the required number of independent directors in accordance with the provisions if the independent directors do not satisfy the requirements of independence or they cannot perform their duties and functions as independent directors, resulting in insufficient number of independent directors as required. Article 120 Nomination, Election and Replacement of Independent Directors: (1) The board of directors, the supervisory committee, and shareholder(s) who alone or jointly with other persons hold(s) more than 5% of the issued shares of the Company shall have the right to nominate candidates as independent directors, and the nominated candidates shall become independent directors by election at a shareholders' general meeting. (2) The nominator shall have the approval of the proposed candidate for the nomination before making a nomination. The nominator shall have adequate knowledge of the profession, education, professional title and detailed work experience of the nominee as well as status of all his part-time jobs. The nominator shall also comment on the qualification and independence of the nominee as an independent director. The nominee shall make a public statement disclaiming any relationship between him and the Company that will affect his independent judgment. Before the shareholders meeting for the election of independent directors, the Company's board of directors shall announce the above information Page 34 in accordance with relevant provisions. (3) Before convening the shareholders' general meeting for the election of independent directors, the Company shall submit the written opinion of the board, and relevant materials of all the nominees to the China Securities Regulatory Commission and its local office as well as the stock exchange at which the Company's shares are listed. Dissenting opinions of the board with regard to the nominees shall also be submitted. Nominees of independent directors objected by China Securities Regulatory Commission may be candidates of the directors of the Company but not as candidates of independent directors of the Company. At the shareholders' general meeting for the election of independent directors, the board of directors shall make clear whether the nominees of independent directors are objected to by China Securities Regulatory Commission. (4) The term of office of the independent directors is the same as that of the other directors. Successive terms are allowed upon the expiration of the term, but may not be extended to more than 6 years. (5) An independent director who fails to attend in person three consecutive board meetings shall be deemed as unable to perform his duties and shall be replaced upon the proposal of the board to the shareholders' general meeting. Independent directors shall not be dismissed without just cause before the expiration of his term, unless the above condition or any of the conditions specifying the disqualification of a director under the Company Law has occurred. When an independent director is dismissed, the Company shall disclose the dismissal as a special discloseable matter and shall give reasons for the dismissal. The independent director may make a public statement if he thinks that such a dismissal is without justification. (6) Independent directors may resign before the expiration of their term. The resigning independent director shall submit written resignation to the board of directors. The written resignation shall contain explanations on matters related to his resignation or any other matters which in his opinion, should be brought to the notice of the shareholders and creditors of the Company. In the event that due to the resignation of an independent director the number of independent directors falls below the required percentage, the resignation of such independent director shall be effective only after a new independent director has been appointed to fill up the vacancy. Article 121 Rights and Obligations of Independent Directors: (1) To facilitate the independent directors in performing their function more efficiently, the independent directors shall have the following special powers, in addition to having those powers granted by the Company Law and other relevant laws and regulations to directors: (i) approve connected transactions the aggregate amount of which exceed 0.03% of the Company's tangible net assets before submission to the board for discussion. Before making the decision with respect to such transactions, the independent directors may engage the service of a professional institution to prepare independent financial adviser's reports as a basis for their decision; (ii) Page 35 propose to the board of directors with respect to engaging or disengaging accounting firms; (iii) propose to the board of directors with respect to the convening of extraordinary shareholders' meetings; (iv) propose the convening of board meetings; (v) engage external auditing firms or consultancy firms; (vi) publicly solicit and collect proxies before the convening of the shareholders' general meetings. (2) The independent director shall obtain the consent of over half of the independent directors in exercising any of the above powers. (3) If any of the above proposal has not been adopted or if any of the above powers cannot be exercised, the Company shall disclose the relevant information. (4) Apart from the powers of an ordinary director and the special powers of an independent director, an independent director shall comply with all the obligations of a director set forth in these articles of association. Article 122 The independent directors shall provide their opinions on all the important matters of the Company. (1) In addition to the above obligation, the independent directors shall provide their independent opinions to the board of directors or the shareholders' general meeting on the following matters: (i) nomination, appointment and removal of directors; (ii) appointment and dismissal of senior administrative officers; (iii) remuneration of directors and senior administrative officers; (iv) newly occurred transactions, loans and other forms of fund transfer between the Company and its shareholders, actual controllers or their affiliates, the aggregate amount of which exceeds 0.03% of the total tangible net assets of the Company, and whether the Company has taken effective measures to collect the amounts due; Page 36 (v) matters which may harm the interests of the minority shareholders; (vi) other matters provided for in these articles of association. (2) The independent directors shall choose to provide any of the following opinions in respect of the above matters: (i) agree; (ii) reserve opinion and the reasons therefor; (iii) dissent and the reasons therefor; (iv) unable to comment and the reasons therefor. (3) If the matters concerned fall under those which require disclosure, the Company shall publicly disclose the opinions of the independent directors. If the independent directors cannot reach a consensus, the Company shall publicly disclose the opinions of each of the independent directors. Article 123 To ensure that the independent directors will be able to perform their duties efficiently, the Company shall provide the following to the independent directors: (1) The Company shall ensure that the independent directors have the same right of access to information as its other directors. With regard to matters that require board decision, the Company shall serve notice on the independent directors in advance within the prescribed time, and provide sufficient materials. If the independent directors take the view that the materials are insufficient, they may request for supplementary information. When two or more independent directors take the view that the materials are insufficient or are inadequately explained, they may, in writing, jointly propose to the board for a postponement of the board meeting or for a postponement of determination of the matters concerned. Such proposal shall be adopted by the board. Materials provided by the Company to the independent directors shall be kept by the Company and the independent directors for at least five years. (2) The Company shall provide necessary working conditions to the independent directors for the performance of their duties. The secretary of the board shall give independent directors the necessary assistance liaising with and coordinating the work of the independent directors, including (but not limited to) briefing them on the status of the Company and providing them with the relevant materials. The secretary of the board shall be responsible for handling the disclosure matters in connection with any independent opinions, proposal or written explanatory statements made or given by the independent directors which shall be disclosed. Page 37 (3) The Company and its relevant personnel shall actively cooperate with the independent directors when the latter perform their duties and provide accurate information to the independent directors, and shall not refuse to do so, obstruct or interfere with the independent directors in discharging their duties or hide information from the independent directors. (4) The expenses incurred as a result of the engagement by the independent directors of professional institutions because of the performance of their duties shall be borne by the Company. (5) The Company shall pay subsidies to the independent directors. The rate of such subsidies shall be proposed by the board and then approved by the shareholders' general meeting. It shall also be disclosed in the Company's annual report. Apart from the above subsidies, the independent directors shall not take any extra and undisclosed interests from the Company or from its major shareholders, interested parties and other persons. Section 3 Special Committees of Board of Directors Article 124 The Company may set up several special committees according to the resolutions of shareholders' general meeting (including strategy, audit, nomination, remuneration and evaluation committees). Members of these special committees shall all be directors, and in the audit committee, the remuneration committee and the evaluation committee, the independent directors shall form the majority and shall be responsible for convening the committee meetings. In the auditing committee at least one independent director shall be an accounting professional. Article 125 The special committees may engage professionals for professional advice, and the expenses incurred shall be borne by the Company. Article 126 The special committees are accountable to the board of directors, and the proposals made by each of the special committees shall be submitted to the board of directors for examination and decision. Article 127 The chief powers and functions of each special committee shall be determined in accordance with the relevant regulations of the place where the Company is listed. CHAPTER 12 SECRETARY OF THE BOARD OF DIRECTORS Article 128 The Company shall have a secretary of the board of directors who shall be a senior administrative officer of the Company. Article 129 The secretary of the Company's board of directors shall be a natural person who has the requisite professional knowledge and experience, and shall be appointed by the board of directors. His primary responsibilities are to ensure that: Page 38 (1) the Company has complete organizational documents and records; (2) the Company prepares and delivers in accordance with law those reports and documents required by competent authorities entitled thereto; (3) the Company's registers of shareholders are properly maintained, and that persons entitled to the Company's records and documents are furnished with such records and documents without delay. Article 130 A director or other senior administrative officer of the Company may hold the office of the secretary of the board of directors concurrently. However, president, chief financial officer and the accountant(s) of the certified public accountant firm appointed by the Company shall not act as the secretary of the board of directors. Provided that where the officer of secretary is held concurrently by a director, and an act is required to be done by a director and a secretary separately, the person who holds the office of director and secretary may not perform the act in dual capacity. CHAPTER 13 PRESIDENT Article 131 The Company shall have one president, who shall be appointed and dismissed by the board of directors. The Company shall have a certain number of vice presidents who will assist the president in his work. The board of directors may decide that a member of the board of directors will concurrently act as the president. Article 132 The president shall be accountable to the board of directors and exercise the following functions and powers: (1) to be in charge of the Company's production, operation and management and to organize the implementation of the resolutions of the board of directors; (2) to organize the implementation of the Company's annual business plan and investment plan; (3) to draft plans for the establishment of the Company's internal management structure; (4) to establish the Company's basic management system; (5) to formulate basic rules and regulations for the Company; (6) Page 39 to propose the appointment or dismissal of the Company's vice president(s), the financial controller and other senior administrative officers appointed by the board of directors; (7) to appoint or dismiss management personnel other than those required to be appointed or dismissed by the board of directors; (8) other powers conferred by these articles of association and the board of directors. Article 133 The president may be present at meetings of the board of directors. The president has no voting rights at the board meetings unless he is also a director. Article 134 The president and vice presidents, in performing their functions and powers, shall act honestly and diligently and in accordance with the laws, administrative regulations, these articles of association and the requirements of the detailed rules of the president of the Company. The president and vice presidents shall not, in exercising their powers, vary the resolutions of shareholders' general meetings and those of the board of directors or exceed the scope of their authorities. In the event that the president and vice presidents violate any laws, regulations, and these articles of association resulting in losses to the Company, board of directors shall pursue their legal liabilities. CHAPTER 14 SUPERVISORY COMMITTEE Article 135 The Company shall have a supervisory committee. Article 136 The supervisory committee shall be composed of five (5) supervisors. The number of supervisors must be odd number. Specific number of supervisors shall be determined by shareholders' general meeting. One of the members of the supervisory committee shall be the chairman. The term of office of supervisors shall be three (3) years renewable upon re-election and re-appointment. The chairman of the supervisory committee is subject to election or removal with the consent of two thirds or more of the members of the supervisory committee. Article 137 The supervisory committee shall comprise of representatives of shareholders and the Company's staff and workers. Two (2) of them shall be representatives of the staff and workers. Supervisors representing shareholders shall be elected by the shareholders' general meeting from the supervisory committee or from the candidates nominated by shareholders representing over 5% (including 5%) of shares of the Company. Notice of candidates and candidates' written agreement to accept the nomination shall be sent to the Company seven (7) days before the shareholders' general meeting. Except those in the first supervisory committee and supervisors represented by representatives of staff and workers, supervisors must be elected by shareholders (including shareholders' proxies) representing half or more of the voting rights of the shareholders present at the shareholders' general meeting. The shareholders' general meeting may by ordinary resolution remove any supervisor represented by a representative of shareholders before the expiration of his term of office (but without prejudice to such supervisor's right to claim damages based on any contract) on the condition that all the relevant laws and administrative regulations are fully complied with, but the shareholders' general Page 40 meeting may not remove the supervisor without just cause. Supervisors represented by representatives of staff and workers shall be elected and removed by the staff and workers of the Company democratically. Article 138 The directors, president, vice presidents and financial controller shall not act concurrently as supervisors. Article 139 Meetings of the supervisory committee shall be held at least once every six months, and shall be convened by the chairman of the supervisory committee. Notice of the meeting shall be sent to each supervisor in writing ten (10) days before the meeting. The notice shall include the date, place, duration, reasons and topics of the meeting and the date on which the notice is sent. Article 140 The supervisory committee shall be accountable to the shareholders' general meeting and exercise the following functions and powers in accordance with law: (1) to examine the Company's financial situation; (2) to supervise the directors, president and other senior administrative officers to see whether they act in contradiction with the laws, administrative regulations and these articles of association; (3) to demand rectification from a director, the president or any other senior administrative officers when the acts of such persons are harmful to the Company's interest; (4) to check the financial information such as the financial report, business report and plans for distribution of profits to be submitted by the board of directors to the shareholders' general meetings and, should any queries arise, to authorize, in the name of the Company, a re-examination by the public certified accountants and practising auditors of the Company; (5) to propose to convene a shareholders' extraordinary general meeting; (6) to represent the Company in negotiation with or bringing an action against a director; (7) other functions and powers specified in these articles of association. Members of the supervisory committee shall be present at meetings of the board of directors. Other powers and functions of the supervisory committee shall be determined in accordance with the laws and regulations of the place where the Company is listed. Article 141 Page 41 Resolutions of the supervisory committee shall be passed by two thirds or more of all of its members. Article 142 Method of discussion and voting procedures of the supervisory committee shall follow the Rules of Procedures of the supervisory committee. Article 143 The supervisory committee meetings shall keep minutes. Supervisors present at the meeting and the person taking the minutes shall sign on the meeting minutes. Supervisors are entitled to make notes to the speech recorded in the minute book. The meeting minutes of supervisory committee shall be safely and properly kept as important file of the Company. Article 144 All reasonable fees incurred in respect of the employment of professionals such as lawyers, certified public accountants or practising auditors as are required by the supervisory committee in exercising its functions and powers shall be borne by the Company. Article 145 A supervisor shall carry out his duties honestly and faithfully in accordance with laws, administrative regulations and these articles of association. CHAPTER 15 THE QUALIFICATIONS AND DUTIES OF THE DIRECTORS, SUPERVISORS, PRESIDENT AND OTHER SENIOR ADMINISTRATIVE OFFICERS OF THE COMPANY Article 146 A person may not serve as a director, supervisor, president and any other senior administrative officer of the Company if any of the following circumstances apply: (1) a person without capacity for civil conduct or with restricted capacity for civil conduct; (2) a person who has committed an offence of corruption, bribery, infringement of property, misappropriation of property or sabotaging the social economic order and has been punished because of committing such offence; or who has been deprived of his political rights, in each case where less than five (5) years have elapsed since the date of the completion of implementation of his punishment; (3) a person who is former director, factory manager or general manager of a company or enterprise which has entered into insolvent liquidation because of mismanagement and is personally liable for the insolvency of such company or enterprise, where less than three (3) years have elapsed since the date of the completion of the insolvency and liquidation of the company or enterprise; (4) a person who is a former legal representative of a company or enterprise which had its business license revoked due to a violation of the law and who incurred personal liability, where less than three (3) years has elapsed since the date of the revocation of the business license; (5) Page 42 a person who has a relatively large amount of debts due and outstanding; (6) a person who is under criminal investigation or prosecution by judicial organs for violation of the criminal law which is not yet concluded; (7) a person who is not eligible for enterprise leadership according to laws and administrative regulations; (8) a non-natural person; (9) a person who is convicted of contravention of provisions of relevant securities regulations by a relevant competent authority, and such conviction involves a finding that he has acted fraudulently or dishonestly, where less than five (5) years has elapsed since the date of the conviction. Article 147 The validity of an act of a director, president or other senior administrative officer on behalf of the Company is not, vis-a-vis a bona fide third party, affected by any irregularity in his office, election or any defect in his qualification. Article 148 In addition to the obligations imposed by laws, administrative regulations or required by the listing rules of the stock exchange on which shares of the Company are listed, each of the Company's directors, supervisors, president and other senior administrative officers owes a duty to each shareholder, in the exercise of the functions and powers of the Company entrusted to him: (1) not to cause the Company to exceed the scope of business stipulated in its business license; (2) to act honestly in the best interests of the Company; (3) not to expropriate in any guise the Company's property, including (without limitation) usurpation of opportunities advantageous to the Company; (4) not to expropriate the individual rights of shareholders, including (without limitation) rights to distribution and voting rights, save pursuant to a restructuring of the Company submitted to shareholders for approval in accordance with these articles of association. Article 149 Each of the Company's directors, supervisors, president and other senior administrative officers owes a duty, in the exercise of his powers and discharge of his duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The Company's directors (including those intending to act as independent Page 43 directors) shall take an active part in training in order to understand the rights, obligations and responsibilities as directors, learn about relevant laws and regulations and master relevant knowledge required of a director. Article 150 Each of the Company's directors, supervisors, president and other senior administrative officers shall exercise his powers or carry on his duties in accordance with the principle of fiduciary; and shall not put himself in a position where his duty and his interest may conflict. This principle includes (without limitation) discharging the following obligations: (1) to act honestly in the best interests of the Company; (2) to exercise powers within the scope of his powers and not to exceed those powers; (3) to exercise the discretion vested in him personally and not to allow himself to act under the control of another and, unless and to the extent permitted by laws, administrative regulations or with the informed consent of shareholders given in general meeting, not to delegate the exercise of his discretion; (4) to treat shareholders of the same class equally and to treat shareholders of different classes fairly; (5) except in accordance with these articles of association or with the informed consent of shareholders given in general meeting, not to enter into any contract, transaction or agreement with the Company; (6) without the informed consent of shareholders given in general meeting, not to use the Company's property for his own benefit; (7) not to exploit his position to accept bribes or other illegal income or expropriate the Company's property by any means, including (without limitation) opportunities advantageous to the Company; (8) without the informed consent of shareholders given in general meeting, not to accept commissions in connection with the Company's transactions; (9) to abide by these articles of association, execute his official duties faithfully and protect the Company's interests, and not to exploit his position and power in the Company to advance his own private interests; (10) not to compete with the Company in any way unless with the informed consent of shareholders given in general meeting; (11) not to misappropriate the Company's funds or lend such funds to others, not to Page 44 open accounts in his own name or other names for the deposit of the Company's assets and not to provide a guarantee for debts of a shareholder of the Company or other individual(s) with the Company's assets; (12) unless otherwise permitted by informed shareholders in general meeting, to keep in confidence information acquired by him in the course of and during his tenure and not to use the information other than in furtherance of the interests of the Company, save that disclosure of such information to the court or other governmental authorities is permitted if: (i) disclosure is made under compulsion of law; (ii) the interests of the public require disclosure; (iii) the interest of the relevant director, supervisor, president or other senior administrative officers require disclosure. Article 151 Each director, supervisor, president or other senior administrative officer of the Company shall not cause the following persons or institutions ("associates") to do what he is prohibited from doing: (1) the spouse or minor child of that director, supervisor, president or other senior administrative officer; (2) a person acting in the capacity of trustee of that director, supervisor, president or other senior administrative officer or any person referred to in the preceding sub-paragraph (1); (3) a person acting in the capacity of partner of that director, supervisor, president or other senior administrative officer or any person referred to in sub-paragraphs (1) and (2) of this Article; (4) a company in which that director, supervisor, president or other senior administrative officer, alone or jointly with one or more persons referred to in sub-paragraph (1), (2) and (3) of this Article and other directors, supervisors, president and other senior administrative officers have a defacto controlling interest; (5) the directors, supervisors, president and other senior administrative officers of the controlled company referred to in the preceding sub-paragraph (4). Article 152 The fiduciary duties of the directors, supervisors, president and other senior administrative officers of the Company do not necessarily cease with the termination of their tenure. The duty of confidence in relation to trade secrets of the Company survives the termination of their tenure. Other duties may continue for such period as fairness may require depending on the time lapse Page 45 between the termination and the act concerned and the circumstances under which the relationships between them and the Company are terminated. Article 153 Subject to Article 56, a director, supervisor, president or other senior administrative officer of the Company may be relieved of liability for specific breaches of his duty by the informed consent of shareholders given at a general meeting. Article 154 Where a director, supervisor, president or other senior administrative officer of the Company is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, (other than his contract of service with the Company), he shall declare the nature and extent of his interests to the board of directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal therefor is otherwise subject to the approval of the board of directors. Unless the interested director, supervisor, president or other senior administrative officer discloses his interests in accordance with this Article and the contract, transaction or arrangement is approved by the board of directors at a meeting in which the interested director, supervisor, president or other senior administrative officer is not counted in the quorum and refrains from voting, a contract, transaction or arrangement in which that director, supervisor, president or other senior administrative officer is materially interested is voidable at the instance of the Company except as against a bona fide party thereto acting without notice of the breach of duty by the interested director, supervisor, president or other senior administrative officer. For the purposes of this Article, a director, supervisor, president or other senior administrative officer of the Company is deemed to be interested in a contract, transaction or agreement in which an associate of him is interested. Article 155 Where a director, supervisor, president or other senior administrative officer of the Company gives to the board of directors a general notice in writing stating that, by reason of the facts specified in the notice, he is interested in contracts, transactions or arrangements of any description which may subsequently be made by the Company, that notice shall be deemed for the purposes of the preceding Article to be a sufficient declaration of his interests, so far as the content stated in such notice is concerned, provided that such general notice shall have been given before the date on which the question of entering into the relevant contract, transaction or arrangement is first taken into consideration on behalf of the Company. Article 156 The Company shall not in any manner pay taxes for or on behalf of a director, supervisor, president or other senior administrative officer. Article 157 The Company shall not directly or indirectly make a loan to or provide any guarantee in connect with the making of a loan to a director, supervisor, president or other senior administrative officer of the Company or of the Company's holding company or any of their respective associates. However, the following transactions are not subject to such prohibition: (1) the provision by the Company of a loan or a guarantee of a loan to a company which is a subsidiary of the Company; (2) Page 46 the provision by the Company of a loan or a guarantee in connection with the making of a loan or any other funds to any of its directors, supervisors, president and other senior administrative officers to meet expenditure incurred or to be incurred by him for the purposes of the Company or for the purpose of enabling him to perform his duties properly, in accordance with the terms of a service contract approved by the shareholders in general meeting; (3) the Company may make a loan to or provide a guarantee in connection with the making of a loan to any of the relevant directors, supervisors, president and other senior administrative officers or their respective associates in the ordinary course of its business on normal commercial terms, provided that the ordinary course of business of the Company includes the lending of money or the giving of guarantees. Article 158 A loan made by the Company in breach of Article 157 shall be forthwith repayable by the recipient of the loan regardless of the terms of the loan. Article 159 A guarantee for repayment of loan provided by the Company in breach of Article 157 shall not be enforceable against the Company, unless: (1) the guarantee was provided in connection with a loan to an associate of any of the directors, supervisors, president and other senior administrative officers of the Company or of the Company's holding company and at the time the loan was advanced the lender did not know the relevant circumstances; or (2) the collateral provided by the Company has been lawfully disposed of by the lender to a bona purchaser. Article 160 For the purpose of the foregoing provisions of this Chapter, a "guarantee" includes an undertaking or property provided to secure the performance of obligations by the obligor. Article 161 In addition to any rights and remedies provided by the laws and administrative regulations, where a director, supervisor, president or other senior administrative officer of the Company is in breach of his duties to the Company, the Company has a right to: (1) claim damages from the director, supervisor, president or other senior administrative officer in compensation for losses sustained by the Company as a result of such breach; (2) rescind any contract or transaction entered into by the Company with the director, supervisor, president or other senior administrative officer or with a third party (where such third party knows or should know that there is such a breach of duties by such director, supervisor, president or other senior administrative officer); (3) demand an account of the profits made by the director, supervisor, president or Page 47 other senior administrative officer in breach of his duties; (4) recover any monies received by the director, supervisor, president or other senior administrative officer to the use of the Company, including (without limitation) commissions; and (5) demand payment of the interest earned or which may have been earned by the director, supervisor, president or other senior administrative officer on the monies that should have been paid to the Company. Article 162 The Company shall, with the prior approval of shareholders in general meeting, enter into a contract in writing with a director or supervisor wherein his emoluments are stipulated. The aforesaid emoluments include: (1) emoluments in respect of his service as director, supervisor or senior administrative officer of the Company; (2) emoluments in respect of his service as director, supervisor or senior administrative officer of any subsidiary of the Company; (3) emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries; (4) payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office. Except under a contract entered into in accordance with the foregoing, no proceedings may be brought by a director or supervisor against the Company for anything due to him in respect of the matters mentioned in this Article. Article 163 The contract concerning the emoluments between the Company and its directors or supervisors should provide that in the event of a takeover of the Company, the Company's directors and supervisors shall, subject to the prior approval of the shareholders in general meeting, have the right to receive compensation or other payment in respect of his loss of office or retirement. A takeover of the Company referred to in this paragraph means any of the following: (1) an offer made by any person to the general body of shareholders; (2) an offer made by any person with a view to the offeror becoming a "controlling shareholder" within the meaning of Article 57. If the relevant director or supervisor does not comply with this Article, any sum so received by him shall belong to those persons who have sold their shares as a result of the said offer made. The expense incurred in distributing that sum pro rata amongst those persons shall be borne by the relevant director or supervisor and not paid out of that sum. Page 48 Article 164 With the approval of shareholders' general meeting, the Company may buy liability insurance for directors, supervisors, president and other senior administrative officers of the Company with the exception of those liabilities resulting from violation of laws, regulations and these articles of association. CHAPER 16 FINANCIAL AND ACCOUNTING SYSTEMS AND PROFIT DISTRIBUTION Article 165 The Company shall establish its financial and accounting systems and internal audit system in accordance with laws, administrative regulations and PRC accounting standards formulated by the finance regulatory department of the State Council. Article 166 At the end of each fiscal year, the Company shall prepare a financial report, which shall be examined and verified as provided by law. The Company's financial reports shall include the following accounting statements and schedules: (1) balance sheet; (2) profit and loss statement; (3) statement of financial changes; (4) explanation of financial conditions; (5) profit distribution statement. Article 167 The board of directors of the Company shall place before the shareholders at every annual general meeting such financial reports as are required by any laws, administrative regulations or directives promulgated by competent regional and central governmental authorities to be prepared by the Company. Article 168 The Company's financial reports shall be made available for shareholders' inspection at the Company twenty (20) days before the date of every shareholders' annual general meeting. Each shareholder shall be entitled to obtain a copy of the financial reports referred to in this Chapter. The Company shall deliver or send to each shareholder of Overseas-Listed Foreign-Invested Shares by prepaid mail at the address registered in the register of shareholders the said report not later than twenty-one (21) days before the date of every annual general meeting of shareholders. Article 169 The financial statements of the Company shall, in addition to being prepared in accordance with PRC accounting standards and regulations, be prepared in accordance with either international accounting standards, or that of the place Page 49 outside the PRC where the Company's shares are listed. If there is any material difference between the financial statements prepared respectively in accordance with the two accounting standards, such difference shall be stated in the financial statements. When the Company is to distribute its after-tax profits, the lower of the after-tax profits as shown in the two financial statements shall be adopted. Article 170 Any interim results or financial information published or disclosed by the Company must also be prepared and presented in accordance with PRC accounting standards and regulations, and also in accordance with either international accounting standards or that of the overseas place where the Company's shares are listed. Article 171 The Company shall publish its financial reports twice every fiscal year, that is, the interim financial report shall be published within sixty (60) days after the expiration of the first six (6) months of each fiscal year; the annual financial report shall be published within one hundred and twenty (120) days after the expiration of each fiscal year. Article 172 The Company shall not keep accounts other than those provided by law. Article 173 The Company shall implement an internal auditing system, and establish an internal auditing organization or provide internal auditing personnel to undertake the internal auditing and supervision over the Company's income and expenses and other economic activities under the leadership of the supervisory committee. Article 174 The Company's after-tax profit shall be allocated in accordance with the following order: (1) making up for losses; (2) allocation to the statutory common reserve fund; (3) allocation to the statutory common welfare fund; (4) allocation to the discretionary common reserve fund; (5) payment of dividends in respect of ordinary shares. The board of directors shall, in accordance with the laws and administrative regulations of the State (if any) and the Company's operation and development requirements, determine the detail proportions of profit distributions in items (3) to (5) above and submit its determination to the shareholders' general meeting for approval. Article 175 Page 50 Capital common reserve fund includes the following items: (1) premium on shares issued at a premium price; (2) any other income designated for the capital common reserve fund by the regulations of the finance regulatory department of the State Council. Article 176 The common reserve fund of the Company shall be applied to the following purposes: making up losses, expansion of the Company's production and operation, or increase of the Company's capital. When the Company converts its common reserve fund into its capital upon a resolution adopted in shareholders' general meeting, the Company shall either distribute new shares in proportion to the shareholders' number of shares, or increase the par value of each share, provided, however, that when the statutory common reserve fund is converted to capital, the balance of the statutory common reserve fund may not fall below 25 per cent of the registered capital. The Company's statutory common welfare fund is used for the collective welfare of the Company's staff and workers. Article 177 Dividends shall be distributed in accordance with the proportion of shares held by shareholders. Unless otherwise resolved by the shareholders' general meeting, the Company apart from distributing annual dividends, may by its board of directors acting under the power conferred by the shareholders' general meeting, distribute interim dividends. Unless otherwise stipulated by laws or administrative regulations, the amount of interim dividends distributed shall not exceed 50 per cent of the distributable profits as stated in the interim profits statement of the Company. Article 178 The Company may distribute dividends in the following manner: (1) cash; (2) shares. Article 179 The Company shall, in accordance with the People's Republic of China's tax law, withhold and make payments on behalf of shareholders in respect of their tax payable on their dividends income. Article 180 The Company shall appoint on behalf of the holders of the Overseas-Listed Foreign-Invested Shares receiving agents to receive on behalf of such shareholders dividends declared and all other monies owing by the Company in respect of their shares. The receiving agents appointed by the Company shall comply with the relevant requirements of the law of the place and relevant regulations of the stock exchange where the Company's shares are listed. The receiving agents appointed on behalf of holders of H Shares shall be a company Page 51 registered as a trust company under the Trustee Ordinance of Hong Kong. Article 181 Dividends or other payments declared by the Company to be payable to holders of Domestic-Invested Shares shall be declared and calculated in Renminbi, and paid in Renminbi; and those payable to holders of Foreign-Invested Shares shall be declared and calculated in Renminbi, and paid in the local currency at the place where such Foreign-Invested Shares are listed (if there is more than one place of listing, then the principal place of listing as determined by the board of directors). The conversion formula of foreign currency is as follows: Conversion price of dividends and other sums to holders in foreign currency=dividends and other sums to holders in Renmibi/(to be divided by) the average closing rate for the relevant foreign currency announced by the Peoples' Bank of China for the week prior to the announcement of the payment of dividend or other sums. CHAPTER 17 APPOINTMENT OF ACCOUNTANT FIRM Article 182 The Company shall appoint an independent firm of accountants, which is qualified under the relevant regulations of the State to audit the Company's annual report and review the Company's other financial reports. The first accountant firm of the Company may be appointed by the inaugural meeting of the Company before the first annual general meeting and the accountant firm so appointed shall hold office until the conclusion of the annual general meeting. If the inaugural meeting fails to exercise its powers under the preceding paragraph, those powers shall be exercised by the board of directors. Article 183 The accountant firm appointed by the Company shall hold office from the conclusion of the annual general meeting of shareholders until the conclusion of the next annual general meeting of shareholders. Article 184 The accountant firm appointed by the Company shall have the following rights: (1) A right of access at any time to the books and records and vouchers of the Company, and shall be entitled to require from the director, supervisor, president or other senior administrative officers of the Company any relevant information and explanation; (2) A right to require the Company to take all reasonable steps to obtain from its subsidiaries such information and explanation as are necessary for the purpose of discharging its duties; (3) A right to attend shareholders' general meetings and to receive all notices of, and other communications relating to, any shareholders' general meeting which any shareholder is entitled to receive, and to speak at any shareholders' general meeting in relation to matters concerning its role as the Company's accountant firm. Article 185 Page 52 Before the convening of the shareholders' general meeting, the board of directors may fill any casual vacancy in the office of an accountant firm, but while any such vacancy continues, the surviving or continuing firms, if any, may act. Article 186 The shareholders in general meeting may by ordinary resolution remove an accountant firm before the expiration of its term of office, notwithstanding the stipulations in the contract between the Company and the firm, but without prejudice to the firm's right to claim, if any, for damages in respect of such removal. Article 187 The remuneration of an accountant firm or the manner in which such firm is to be remunerated shall be determined by the shareholders in general meeting. The remuneration of an accountant firm appointed by the board of directors shall be determined by the board of directors. Article 188 The Company's appointment of, removal of and non-reappointment of an accountant firm shall be resolved upon by shareholders in general meeting. The resolution of the shareholders' general meeting shall be filed with the securities governing authority of the State Council. Where it is proposed that any resolution be passed at a shareholders' general meeting concerning the appointment of an accountant firm which is not an incumbent firm to fill a casual vacancy in the office of the accountant firm; re-appointment of a retiring accountant firm which was appointed by the board of directors of the Company to fill a casual vacancy; or removal of the accountant firm before the expiration of its term of office, the following provisions shall apply: (1) A copy of the proposal shall be sent before notice of meeting is given to the shareholders to the firm proposed to be appointed or proposing to leave its post or the firm, which has left its post in the relevant fiscal year (leaving includes leaving by removal, resignation and retirement). (2) If the firm leaving its post makes representations in writing and requests the Company to notify such representations to the shareholders, the Company shall (unless the representations are received too late): (i) in any notice of the resolution given to shareholders, state the fact of the representations having been made; and (ii) attach a copy of the representations to the notice and deliver it to the shareholders in the manner stipulated in these articles of association. (3) If the firm's representations are not sent in accordance with the preceding sub-paragraph (2), the relevant firm may (in addition to its right to be heard) require that the representations be read out at the meeting. (4) An accountant firm which is leaving its post shall be entitled to attend: Page 53 (i) the shareholders' general meeting at which its term of office would otherwise have expired; (ii) any shareholders' general meeting at which it is proposed to fill the vacancy caused by its removal; and (iii) any shareholders' general meeting convened on its resignation; and to receive all notice of, and other communications relating to, any such meetings, and to speak at any such meeting in relation to matters concerning its role as the former accountant firm of the Company. Article 189 Prior to the removal or the non-renewal of the appointment of the accountant firm, notice of such removal or non-renewal shall be given to the accountant firm and such firm shall be entitled to make representation at the shareholders' general meeting. Where the accountant firm resigns its post, it shall make clear to the shareholders' general meeting whether there has been any impropriety on the part of the Company. An accountant firm may resign its office by depositing at the Company's legal address a resignation notice which shall become effective on the date of such deposit or on such later date as may be stipulated in such notice and such notice shall include the following: (1) a statement to the effect that there are no circumstances connected with its resignation which it considers should be brought to the notice of the shareholders or creditors of the Company; (2) a statement of any such circumstances. Where a notice is deposited under the preceding subparagraph, the Company shall within fourteen (14) days send a copy of the notice to the relevant governing authority. If the notice contains a statement under the preceding subparagraph (2), a copy of such statement shall be placed at the Company for shareholders' inspection. The Company should also send a copy of such statement by prepaid mail to every holder of Overseas-Listed Foreign-Invested Shares at the address registered in the register of shareholders. Where the accountant firm's notice of resignation contains a statement of any circumstance which should be brought to the notice of the shareholders or creditors of the Company, it may require the board of directors to convene a shareholders' extraordinary general meeting for the purpose of receiving an explanation of the circumstances connected with its resignation. CHAPTER 18 INSURANCE Article 190 The types of coverage, the insured amounts and periods of the Company's insurance shall be decided at a meeting of the board of directors based on the circumstances of the Company and the practices of similar industries in other countries and the practice and legal requirements in China. CHAPTER 19 LABOUR AND PERSONNEL MANAGEMENT SYSTEMS Article 191 Page 54 The Company shall, in accordance with the relevant provisions of the Labor Law of People's Republic of China and other relevant laws or regulations of the State, formulate its labor and personnel management systems, which shall be appropriate to its particular circumstances. CHAPTER 20 TRADE UNION Article 192 The Company shall establish trade union organizations and organize staff and workers to carry out trade union activities in accordance with the Trade Union Law of the People's Republic of China. The Company shall allocate funds to the trade union in accordance with the Trade Union Law of the People's Republic of China. Such fund shall be used by the trade union of the Company in accordance with the "Measures for the Management of trade Union Funds" formulated by the All China Federation of Trade Unions. CHAPTER 21 MERGER AND DIVISION OF THE COMPANY Article 193 In the event of the merger or division of the Company, a plan shall be presented by the Company's board of directors and shall be approved in accordance with the procedures stipulated in these articles of association and then the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger or division to acquire that dissenting shareholder's shareholding at a fair price. The contents of the resolution of merger or division of the Company shall be made into special documents for shareholders' inspection. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares. Article 194 The merger of the Company may take the form of either merger by absorption or merger by the establishment of a new company. In the event of a merger, the merging parties shall execute a merger agreement and prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within ten (10) days of the date of the Company's resolution to merge and shall publish a public notice in a newspaper at least three times within thirty (30) days of the date of the Company's resolution to merge. A creditor has the right within thirty (30) days of receiving such notice from the Company or, for creditors who do not receive the notice, within ninety (90) days of the date of the first public notice, to demand that the Company repay its debts to that creditor or provide a corresponding guarantee for such debt. Where the company fails to repay its debts or provide corresponding guarantees for such debts, it may not be merged. At the time of merger, rights in relation to debtors and indebtedness of each of the merged parties shall be assumed by the company which survives the merger or the newly established company. Article 195 When the Company is divided, its assets shall be spilt up accordingly. In the event of division of the Company, the parties to such division shall execute a division agreement and prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within ten (10) days of the date of the Company's resolution to divide and shall publish a public notice in a newspaper at least three times within thirty (30) days of the date of the Company's resolution to divide. A creditor has the right within thirty (30) days of receiving such notice from the Company or, for creditors who do not receive Page 55 the notice, within ninety (90) days of the date of the first public notice to demand that the Company repay its debts to that creditor or provide a corresponding guarantee for such debt. Where the Company fails to repay its debts or provide corresponding guarantees for such debts, it may not be divided. Debts of the Company prior to division are assumed by the post-division companies in accordance with the agreements entered into. Article 196 When the Company merges or divides and there is a change in any item in its registration, the Company shall change its registration with the company's registration authority in accordance with the law. When the Company dissolves, the Company shall cancel its registration in accordance with the law. When a new company is established, its establishment shall be registered in accordance with the law. CHAPTER 22 DISSOLUTION AND LIQUIDATION Article 197 The Company shall be dissolved and liquidated upon the occurrence of any of the following events: (1) a resolution for dissolution is passed by shareholders at a general meeting; (2) dissolution is necessary due to a merger or division of the Company; (3) the Company is legally declared insolvent due to its failure to repay debts due; and (4) the Company is ordered to close down because of its violation of laws and administrative regulations. Article 198 A liquidation group shall be set up within fifteen (15) days of the Company being dissolved pursuant to sub-paragraph (1) of the preceding Article, and the composition of the liquidation group of the Company shall be determined by an ordinary resolution of shareholders in general meeting. If a liquidation group to carry out liquidation procedures is not set up within the specified time limit, the creditors may apply to the People's court to have it designate relevant persons to form a liquidation group in order to carry out liquidation procedures. Where the Company is dissolved under sub-paragraph (3) of the preceding Article, the People's Court shall in accordance with provisions of relevant laws organize the shareholders, relevant organizations and relevant professional personnel to establish a liquidation group to carry out liquidation procedures. Where the Company is dissolved under sub-paragraph (4) of the preceding Article, the relevant governing authorities shall organize the shareholders, relevant organizations and professional personnel to establish a liquidation group to carry out liquidation procedures. Article 199 Where the board of directors proposes to liquidate the Company due to causes other than where the Company has declared that it is insolvent, the board shall include a statement in its notice convening a shareholders' general meeting to Page 56 consider the proposal to the effect that, after making full inquiry into the affairs of the Company, the board of directors is of the opinion that the Company will be able to pay its debts in full within twelve (12) months from the commencement of the liquidation. Upon the passing of the resolution by the shareholders in general meeting for the liquidation of the Company, all functions and powers of the board of directors shall cease. The liquidation group shall act in accordance with the instructions of the shareholders' general meeting to make a report at lease once every year to the shareholders' general meeting on the committee's receipts and payments, the business of the Company and the progress of the liquidation; and to present a final report to the shareholders' general meeting on completion of the liquidation. Article 200 The liquidation group shall within ten (10) days of its establishment send notice to creditors, and within sixty (60) days of its establishment publish a public notice in a newspaper at least three times. A creditor shall within thirty (30) days of receiving notice, or for creditors who do not receive notice, within ninety (90) days of the date of the first public notice, report its creditors' rights to the liquidation group. When reporting creditors' rights, the creditor shall provide an explanation of matters relevant to the creditor's rights and shall provide materials as evidence. The liquidation group shall carry out registration of creditors' rights. Article 201 During the liquidation period, the liquidation group shall exercise the following functions and powers: (1) to sort out the Company's assets and prepare a balance sheet and an inventory of assets respectively; (2) to send notices to creditors or notify them by public notice; (3) to dispose of and liquidate any relevant unfinished business matters of the Company; (4) to pay all outstanding taxes; (5) to settle claims and debts; (6) to deal with the assets remaining after the Company's debts have been repaid; (7) to represent the Company in any civil litigation proceedings. Article 202 After sorting out the Company's assets and the preparation of the balance sheet Page 57 and an inventory of assets, the liquidation group shall formulate a liquidation plan and represent it to a shareholders' general meeting or to the relevant governing authority for confirmation. To the extent that the Company is able to repay its debts, it shall, in the following order, pay: the liquidation expenses, wages of staff and workers, labor insurance fees, outstanding taxes, and the Company's debts. The remaining assets of the Company after its debts have been repaid in accordance with the provisions of the preceding paragraph shall be distributed to its shareholders according to the proportion of their shareholdings. During the liquidation period, the Company shall not commence any new operational activities. Article 203 If after putting the Company's assets in order and preparing a balance sheet and an inventory of assets in connection with the liquidation of the Company resulting from dissolution, the liquidation group discovers that the Company's assets are insufficient to repay the Company's debts in full, the liquidation group shall immediately apply to the People's Court for a declaration of insolvency. After a Company is declared insolvent by a ruling of the People's Court, the liquidation group shall turn over liquidation matters to the People's Court. Article 204 Following the completion of liquidation, the liquidation group shall present a report on liquidation and prepare a statement of the receipts and payments during the period of liquidation and financial books and records which shall be audited by Chinese registered accountants and submitted to the shareholders' general meeting or the relevant governing authority for confirmation. The liquidation group shall within thirty (30) days after such confirmation, submit the documents referred to in the preceding paragraph to the companies registration authority and apply for cancellation of registration of the Company, and publish a public notice relating to the termination of the Company. CHAPTER 23 PROCEDURES FOR AMENDMENT OF THE ARTICLES OF ASSOCIATION Article 205 The Company may amend its articles of association in accordance with the requirement of laws, administrative regulations and the Company's articles of association. Article 206 The amendment to the Company's article of association involving the contents of the Mandatory Provision shall become effective upon approvals by the companies approving department authorized by the State Council. If there is any change relating to the registered particulars of the Company, application shall be made for registration of the changes in accordance with law. CHAPTER 24 SETTLEMENT OF DISPUTES Article 207 The Company shall act according to following principles to settle disputes: (1) Whenever any disputes or claims arising between: holders of the Overseas-Listed Foreign-Invested Shares and the Company; holders of the Overseas-Listed Foreign-Invested Shares and the Company's directors, supervisors, president or other senior administrative officers; or holders of the Overseas-Listed Page 58 Foreign-Invested Shares and holders of Domestic-Invested Shares, based on these articles of association or any rights or obligations conferred or imposed by the Company Law or any other relevant PRC laws and administrative regulations concerning the affairs of the Company, such disputes or claims shall be referred by the relevant parties to arbitration. Where a dispute or claim of rights referred to in the preceding paragraph is referred to arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, shall abide by the arbitration provided that such person is the Company or the Company's shareholder, director, supervisor, president or other senior administrative officer. Disputes in relation to the definition of shareholders and disputes in relation to the shareholders' register need not be resolved by arbitration. (2) A claimant may elect arbitration at either the China International Economic and Trade Arbitration Commission in accordance with its Rules or the Hong Kong International Arbitration Center in accordance with its Securities Arbitration Rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. If a claimant elects arbitration at Hong Kong International Arbitration Center, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Center. (3) If any disputes or claims of rights are settled by way of arbitration in accordance with sub-paragraph (1) of this Article, the laws of the People's Republic of China shall apply, save as otherwise provided in laws and administrative regulations. (4) The award of an arbitration body shall be final and conclusive and binding on all parties. CHAPTER 25 NOTICE Article 208 When a notice is sent by mail, address should be clearly written with postage prepaid. The notice shall be sent in an envelope and shall be deemed to have been received by shareholders forty-eight (48) hours after being sent. Article 209 Any notice, document, material or written statement of shareholders or directors may be sent to the Company by personal delivery or by registered mail to the domicile of the Company. Article 210 In order to prove that shareholders or directors have already sent the notice, document, material or written statement, they should provide evidence to prove that such notice, document, material or written statement have been sent within the prescribed time in the normal way of sending with postage prepaid to the correct address of the Company. CHAPTER 26 DEFINITION AND INTERPRETATION OF THESE ARTICLES OF ASSOCIATION Article 211 Page 59 The board of directors is responsible for the interpretation of these articles of association. Uncovered matters in these articles of association shall be settled by special resolutions that board of directors proposes for shareholders' general meeting to adopt. Article 212 In these articles of association, the following terms have the following meanings: These articles of association refers to the articles of association of the Company currently effective. Board of directors refers to the board of directors of the Company. China refers to the People's Republic of China. Renminbi refers to the legal tender of China. Seal refers to the ordinary seal the Company uses from time to time and the official seal of the Company (if any) that the Company maintains or one of the two depending upon the circumstances. Article 213 In these articles of association, a sum and above include such sum while more than a sum or less than a sum does not include such a sum. Article 214 In these articles of association, the meaning of an accountant firm is the same as that of "auditors". Page 60 EX-4.1 4 u98569exv4w1.txt EX-4.1 FORM OF DIRECTOR'S SERVICE AGREEMENT EXHIBIT 4.1 This is only an English translation of the agreement in Chinese This English translation shall not have any binding effect. No responsibility can be accepted for reliance upon it. DIRECTOR'S SERVICE AGREEMENT CHINA SOUTHERN AIRLINES CO., LTD. After friendly negotiations in the spirit of equality and mutual benefit, China Southern Airlines Co., Ltd. (hereinafter referred to as "Party A" or the "Company") and ________________________ ("Party B"), who is currently domiciled at _____________________________________, entered into this Service Agreement on ____________ at Party A's domicile in Guangzhou Municipality, Guangdong Province, under which they agree as follows: ARTICLE 1 EMPLOYMENT 1.1 This Agreement is intended to define and govern the relationship between Party A as employer and Party B as employee. 1.2 Subject to the terms and conditions hereof, Party A agrees to employ Party B as director of its board of directors. 1.3 Subject to the terms and conditions hereof, Party B agrees to accept Party A's employment and serve as Party A's director. ARTICLE 2 TERM OF EMPLOYMENT 2.1 Party B's term of employment as Party A's director is three (3) years, beginning on ___________ and ending ___________. 2.2 Prior to the expiration of Party B's term of office as Party A's director, Party A shall not remove Party B from his office without any cause except as provided in Article 6 hereof. ARTICLE 3 PARTY B'S RESPONSIBILITIES 3.1 Party B represents and warrants that he shall perform his duties in accordance with the Company Law of the People's Republic of China and other applicable laws and administrative regulations, as well as Party A's articles of association, this Agreement and resolutions of Party A's shareholders meeting. 3.2 During his term of office, Party B shall (1) as director of the Company, perform such duties and exercise such powers Party A's shareholders meeting and board of directors shall assign or grant him from time to time; (2) comply with the lawful orders and instructions which the Company's shareholders' resolution or board of directors shall give or make from time to time, serve the Company in good faith and with due care, and use his best efforts to promote the business of the Company; and (3) attend to the business and interests of Party A with due diligence, and deal with matters relating to the Company's business and interest during business hours and at any other time at the reasonable request of the Company, except when Party B is not able to attend due to illness or other unexpected event. 1 Under such circumstances, he should give prompt notice on the Company, and provide evidence of such illness or event at the request of the Company. 3.3 During his term of office as director of the Company, Party B shall undertake not to (1) Embezzle Party A's funds or lend such funds to others; (2) Deposit Party A's funds in an account under his name or under the name of any other individual; (3) Use Party A's assets as collateral for the debts of the Company's shareholders or other individuals; (4) Operate for himself or for others in the same line of business as Party A's, or engage in activities detrimental to the interests of Party A; (5) Seek personal interest by using his position in the Company; or (6) Accept bribery or other unlawful incomes which come his way because of his position in the Company, or convert Party A's property to himself. 3.4 Party B shall (1) Act in good faith and in the overall interest of Party A; (2) Act with an appropriate purpose; (3) Account to Party A for the use or misuse of Party A's assets; (4) Avoid any actual or potential conflict of interest or state of divided loyalty; (5) Disclose unreservedly and fairly Party B's interest in his agreement with Party A; and (6) Act with the skill, care and diligence reasonably expected of a person having the same experience and knowledge and holding the position as Party A's director. 3.5 In performing his duties as director of the Company, Party B shall be held liable for any loss or injury of Party A that results from Party B's violation of the laws, administrative regulations, as well as Party A's articles of association. 3.6 Party B shall not engage in any activity that competes with the business of the Company in any country or region during the term of his office or within 12 months thereafter. However, this provision only applies to the products or services Party B is responsible for or related to during the said term of office. 3.7 During the term of his office and within 12 months thereafter, Party B shall not cause any customers or suppliers of the Company to become customers or suppliers of any other third party, nor shall he induce them to terminate their business with the Company. 3.8 During the term of his office and within 12 months thereafter, Party B shall not induce any employee of the Company to leave the Company or hire other employees from the Company. 3.9 At no time after the termination of his term of office shall Party B use for whatever purpose the name of the Company (both English and Chinese) or any other name similar thereto together with his own name or any other name to indicate that he is or was affiliated with the business of the Company. Nor shall he claim any such affiliation in any other way. 3.10 Party B has the right to: (1) Request Party A to provide the necessary working conditions and terms; and 2 (2) Seek compensation from Party A in the occurrence of economic loss or punishment consequent to a decision made in good faith by Party B. ARTICLE 4 COMPENSATIONS AND EXPENSES 4.1 During Party B's term of office, Party A shall pay an annual amount in RMB determined by the Company's policy as compensation for Party B's service, which he renders according to the terms of the Agreement as director of the Company. 4.2 Payment and amount of the director's compensation may be altered by resolution of the Company's shareholders meeting. 4.3 Party A shall withhold Party B's individual income tax from his income. 4.4 Party A and Party B shall, in accordance with relevant provisions of Chinese law, pay to relevant authorities or insurance companies their respective share of insurance premium for medical care, pension, unemployment, and for insurance against work-related accidents. 4.5 Party A shall be responsible for the reasonable expenses (such as traveling expenses) which Party B incurs in rendering services to Party A as director or for the purpose of Party A's business. If such expenses have already been paid by Party B, Party A shall reimburse Party B in accordance with Party A's relevant rules of financial management, provided, however, that Party B shall provide valid receipts or invoices. Party A may also advance Party B such payments for Party B to cover these necessary expenses. After using such advance money, Party B shall provide valid receipts or invoices for the said expenses for final settlement at a time requested by Party A. 4.6 Party B shall be entitled to annual paid leaves, which shall not include statutory holidays. The number of days of the annual paid leave shall be decided by the board of directors. Party B shall take leave at a time convenient to the board of directors after all urgent corporate matters have been taken into consideration, provided, however, that (A) Party B shall be entitled to paid leaves on a pro-rata basis according to the days of his actual employment by the Company in the year if his employment is terminated for reasons other than that under Article 6.2 hereunder; (B) If in any given year Party B does not take full advantage of the paid leaves, he has no claim on the Company, except when the Company holds in its own judgment that this is caused by the burdensome or urgent nature of his duty. Under such circumstances he can use the paid leave he is entitled to in the following year. 4.7 If Party B is unable to perform his duty under this Agreement due to illness, injury or accidents, he is still entitled to full compensation for one month or any shorter period during which he remains incapable of performing his duty, provided, however, that he provides evidence or reasons of his incapability satisfactory to the board of directors. If he remains incapable of performing his duty for more than six consecutive months, his compensation as director shall be withheld. 4.8 Party B may be removed from office by resolution of a shareholders meeting if he materially breaches any provision hereunder, if he seriously injures the interests of the Company, if he is bankrupt or insolvent, or if he has committed a crime. After his removal from office, Party B shall not be entitled to any bonus or other payments except his salary for that month on a pro-rata basis. Nor shall he be entitled to any damages for such removal. 4.9 If Party B's employment is terminated for reasons other than that under Article 6.2, (A) Party B shall be entitled to 3 (1) his prorated last monthly salary according to his actual days of employment in the month, in accordance with Article 2.1 hereunder; (2) his share of bonus for the last year of his employment under the Agreement, as decided by the board of directors in accordance with Article 2.1 hereunder; and (3) paid leaves for the last year of his employment under the Agreement, in accordance with Article 4.6 hereunder. Party B shall ask for such leave before the termination of his employment; and (B) Party B shall not claim any damages against the Company for termination of his employment hereunder. ARTICLE 5 CONFIDENTIALITY 5.1 Party B is aware that he has access to Party A's commercial secrets in performing his duties as director of the Company. These commercial secrets include, without limiting to, documents, materials, data, information, plans, inside news, etc. Party B acknowledges that these secrets are Party A's proprietary rights, and Party B is obligated to keep the confidentiality of such secrets. 5.2 Party B guarantees that at any time, including after the expiration or termination of his employment, (1) he will not disclose to any third party any confidential materials under Article 5.1 hereunder in any manner, except information which must be disclosed to related employees of Party A or experts hired by Party A for performance of his duty as director. (2) he will not use such confidential information in any way for his own benefit or for the benefit of his friends or relatives. (3) he will take necessary actions to prevent such confidential information from being disclosed or disseminated to any third party unauthorized by Party A; and (4) he will return to Party A all materials relating to Party A's business in a timely and valid manner before expiration or early termination of his term of office, including without limiting Party A's documents, notes taken by himself, records, reports, handbooks, blueprints, graphs, disks, tapes, models and samples. To avoid any ambiguity, it is hereby declared that all such documents belong to the Company at any time. 5.3 Party B agrees that all intellectual property rights in connection with products that are developed, created or manufactured during his term of office as director of the Company are the proprietary rights of Party A. ARTICLE 6 TERMINATION OF EMPLOYMENT 6.1 Under any of the following circumstances, the employment relationship between Party A and Party B shall be terminated: (1) Party B's term of office as director expires; (2) Party B dies; (3) Facts have been unearthed which, according to statutes, disqualify Party B as director, and the shareholders meeting has decided to terminate his employment by resolution. 4 (4) Party B fails to perform his duty for six (6) months due to illness or other reasons, upon approval by the resolution of the shareholders. 6.2 Under any of the following circumstances, Party A may terminate its employment relationship with Party B by written notice: (1) Party B has brought injury or loss to Party A intentionally or as a consequence of wanton misconduct in performing his duty as director; (2) Party B breaches his duty as director or violates the provisions of this Agreement, and refused to correct his behavior after a warning; (3) Party B violates the law in matters unrelated to Party A during his term of office, or damages the reputation of Party A because of his personal conduct. 6.3 Termination of employment hereunder does not eliminate Party A's existing rights under Articles 5 and 6. Articles 5 and 6 hereunder shall survive the termination of the employment relationship. ARTICLE 7 OTHERS 7.1 This Agreement is an agreement for Party B's rendition of personal service as director. Therefore, the rights, interests, obligations and duties of Party B hereunder shall not be assigned or delegated to any third party, except the right to attend Party A's board meetings, which may be exercised by proxy upon his written authorization. 7.2 Neither Party shall add to, delete or amend this Agreement or any provisions herein without the written consent of both Parties. 7.3 The law of the People's Republic of China shall govern the execution, interpretation, and performance of this Agreement as well as dispute resolution hereunder. 7.4 Disputes that arise out of the performance of this Agreement shall be resolved by the Parties through friendly negotiations. If the Parties are unable to resolve their disputes through negotiation, either Party may institute a legal action at a people's court with competent jurisdiction. 7.5 In the event that either Party breaches this Agreement, fails to perform its obligation hereunder, or renders non-conforming performance, the other Party has the right to request correction within a specific period of time, specific performance, removal of hindrances, damages and other remedies. Failure of either Party to exercise its right or a part of its right hereunder does not constitute a waiver of such right or such partial right. 7.6 Written notice under this Agreement may be delivered face-to-face, personally, or by fax or mail service. Party B shall notify Party A of his new address within 10 days after any address changes. 7.7 The Employee Handbook is attached hereto as a valid component part of this Agreement. 7.8 This Agreement shall become effective as of the date of its execution. 7.9 This Agreement shall have two counterparts, one for each of Party A and Party B. Party A China Southern Airlines Company Legal Representative: 5 Party B Date : _____________ 6 EX-4.2 5 u98569exv4w2.txt EX-4.2 FORM OF NON-EXCLUSIVE DIRECTOR'S SVC. AGMT Exhibit 4.2 This is only an English translation of the agreement in Chinese This English translation shall not have any binding effect. No responsibility can be accepted for reliance upon it. CHINA SOUTHERN AIRLINES CO., LTD. INDEPENDENT NON-EXECUTIVE DIRECTOR'S SERVICE AGREEMENT This Agreement is entered into between and by the following two parties as of __________: Party A: China Southern Airlines Co., Ltd., a limited liability company established under the laws of the People's Republic of China with its registered address at Baiyun Airfield of Guangzhou, Guangdong Province; Party B: [Name] [Address]. The two parties agree as follows: 1. Definition: 1.01 During the term of this Agreement, unless otherwise provided, "Board of Directors" refers to Party A's Board of Directors; "Month" refers to the calendar month. 1.02 Unless otherwise provided, articles referred in this Agreement all refer to the articles in this Agreement. 2. Appointment Party A shall appoint Party B in terms and conditions set forth in this Agreement and Party B shall assume the position of an Independent Non-Executive Director of the Board of Directors of Party A in terms and conditions set forth in this Agreement. 3. Term of Office Unless otherwise provided, Party A shall appoint Party B as Independent Non-Executive Director as of for a term of three (3) years. When the term of office expires, Party B may take consecutive terms subject to the approval of the Board of Directors of Party A and this Agreement remains effective until either party gives no less than one month prior written notice to the other party. 4. Party B's Duty and Responsibility During the term of office, Party B shall (a) perform as Party A's director the duties assigned from time to time by the Board of Directors and exercise the power conferred upon him from time to time by the Board of Directors; (b) comply with and conform to any lawful instructions or directions that the Board of Directors issue from time to time and serve the Company in good faith and prudent manner and shall do his best to promote the business of the Company; and (c) diligently and whole heartedly devote himself to Party A's business and interest and personally attend to Party A's business and interest at any time during the normal hours of business and other hours reasonably required by Party A with the exception when he is disabled due to illness or accident. 5. Payment 1 5.01 Party A shall pay Party B all reasonable expenses incurred in the performance of this Agreement, or for the attendance to the meeting of the Board of Directors of Party A, or for other matters during the term of office. Party B agrees to the annual payment of RMB50,000 (after income tax) by Party A to Party B as Party B's remuneration as the Independent Non-Executive Director of Party A. 6. Termination 6.01 In case Party B fails to perform his duty for six (6) months or more, Party A, with the resolution of the Board of Directors of Party A, may terminate Party B's term of office provided that a one month prior written notice is given. 6.02 If Party B is in serious violation of the provisions of this Agreement during the term of office, or seriously damages Party A's interests, or becomes bankrupt or fails to pay off his personal debts, or is indicted for any criminal acts, Party A, with the resolution of the Board of Directors of Party A, may remove him from office at once. If Party B is removed from his office, he is not entitled to any claim for the removal of his office. 6.03 When the appointment is terminated for whatever reasons, Party B shall resign from the Board of Directors of Party A at once. 7. Miscellaneous 7.01 Party B shall assume no personal liabilities when he performs any act in the capacity of a director provided that such act does not violate the criminal law or constitute a crime. If Party B, in the capacity of a director, performs in good faith an act, resulting in any claim or losses, Party A shall indemnify for Party B or make compensation to Party B. 7.02 Any notice, requirement or other communications made or issued in accordance with the provisions of this Agreement, should be issued or made in writing. 7.03 If any clauses of this Agreement become illegal, invalid or unenforceable at any time or in any respect, the legality, validity and forcibility of other clauses of this Agreement shall not be affected or damaged in any way. 7.04 Party B shall comply with the various rules and regulations that Party A formulates in accordance with the Laws of China. Party A has power to amend and supplement the aforesaid rules and regulations and reward and punish Party B according to them. 7.05 The execution, validity, interpretation and performance of this Agreement shall be governed by the Laws of the People's Republic of China. 7.06 The Agreement is written in Chinese. 7.07 Party B realizes that in the performance of his duties as director, he may learn Party A's commercial secrets, including but not limited to documents, reference materials, data, information, plans, etc. Party B acknowledges that these confidential materials belong to Party A exclusively and Party B has obligation to keep them confidential. 7.08 Any dispute arising out of the performance of or in connection with this Agreement shall be settled through friendly negotiation. If no settlement can be reached through negotiation, either party may file a suit with the competent people's court. 7.09 Any matter not covered by this Agreement shall be settled under the relevant laws and regulations of China or the rules and regulations of the local government. 7.10 This Agreement is made in two counterparts. Party A and Party B shall each hold one. PARTY A: CHINA SOUTHERN AIRLINES CO., LTD. REPRESENTATIVE: ___________________________ 2 PARTY B: Date: _____________________ 3 EX-8 6 u98569exv8.txt EX-8 SUBSIDIARIES OF COMPANY . . . EXHIBIT 8 SUBSIDIARIES OF THE COMPANY The particulars of the Company's principal subsidiaries at December 31, 2002 are as follows:

- ----------------------------------------------------------------------------------------------------------------- NAME OF COMPANY PLACE AND DATE OF ESTABLISHMENT/ OPERATION - ----------------------------------------------------------------------------------------------------------------- China Southern Airlines PRC (Group) Shenzhen Co. (a) October 14, 1993 - ----------------------------------------------------------------------------------------------------------------- China Southern Airlines (Group) PRC Zhuhai Helicopter Company Limited (a) August 31, 1993 - ----------------------------------------------------------------------------------------------------------------- Guangxi Airlines PRC Company Limited (a) April 28, 1994 - ----------------------------------------------------------------------------------------------------------------- Southern Airlines Group Shantou PRC Airlines Company Limited (a) July 20, 1993 - ----------------------------------------------------------------------------------------------------------------- Zhuhai Airlines PRC Company Limited (a) May 8, 1995 - ----------------------------------------------------------------------------------------------------------------- Xiamen Airlines PRC Company Limited (a) August 11, 1984 - ----------------------------------------------------------------------------------------------------------------- Guizhou Airlines PRC Company Limited (a) November 12, 1991 - ----------------------------------------------------------------------------------------------------------------- Baiyun Xinhua (Guangzhou) Air Cargo PRC Service Co. (b) January 4, 1989 - ----------------------------------------------------------------------------------------------------------------- Guangzhou Nanland Air PRC Catering Company Limited (b) November 21, 1989 - ----------------------------------------------------------------------------------------------------------------- China Southern West Australian Australia Flying College Pty Ltd January 26, 1971 - ----------------------------------------------------------------------------------------------------------------- Guangzhou Baiyun International Logistic Company Ltd PRC July 23, 2002 - ----------------------------------------------------------------------------------------------------------------- Guangzhou Aviation Hotel PRC January 8, 1997 - ----------------------------------------------------------------------------------------------------------------- Southern Airlines Advertising Company PRC March 3, 1994 - ----------------------------------------------------------------------------------------------------------------- South China International Aviation & Travel Services Company PRC May 11, 1992 - ----------------------------------------------------------------------------------------------------------------- CZ Flamingo Limited Cayman Islands December 8, 1993 - ----------------------------------------------------------------------------------------------------------------- CZ Skylark Limited Cayman Islands November 17, 1993 - ----------------------------------------------------------------------------------------------------------------- CZ Kapok Limited Cayman Islands October 26, 1993 - -----------------------------------------------------------------------------------------------------------------

E-8-1

- ----------------------------------------------------------------------------------------------------------------- NAME OF COMPANY PLACE AND DATE OF ESTABLISHMENT/ OPERATION - ----------------------------------------------------------------------------------------------------------------- CSA-I Limited Cayman Islands September 1, 1993 - ----------------------------------------------------------------------------------------------------------------- CZ93B Limited Cayman Islands May 11, 1993 - ----------------------------------------------------------------------------------------------------------------- CZ97A Limited Cayman Islands January 2, 1997 - ----------------------------------------------------------------------------------------------------------------- Zhong Yuan 99A Limited Cayman Islands February 15, 1999 - ----------------------------------------------------------------------------------------------------------------- CXA92A Limited Cayman Islands August 3, 1992 - ----------------------------------------------------------------------------------------------------------------- CXA93A Limited Cayman Islands July 1, 1993 - ----------------------------------------------------------------------------------------------------------------- CXA95B Limited Cayman Islands July 7, 1995 - ----------------------------------------------------------------------------------------------------------------- CXA95C Limited Cayman Islands October 16, 1995 - ----------------------------------------------------------------------------------------------------------------- CXA98A Limited Cayman Islands March 20, 1998 - ----------------------------------------------------------------------------------------------------------------- Xiamen Aviation Property PRC Development Company (a) June 22, 1993 - ----------------------------------------------------------------------------------------------------------------- Xiamen Aviation Advertising PRC Company Limited (a) December 17, 1992 - ----------------------------------------------------------------------------------------------------------------- Xiamen Aviation PRC Supplies Limited (a) July 30, 1997 - ----------------------------------------------------------------------------------------------------------------- Xiamen Aviation Development PRC Company Limited (a) February 18, 1998 - ----------------------------------------------------------------------------------------------------------------- Bai Lu Finance Limited Hong Kong February 22, 1996 - ----------------------------------------------------------------------------------------------------------------- Xiamen Air Holidays Limited Hong Kong April 28, 1994 - ----------------------------------------------------------------------------------------------------------------- Xiamen Macau Holidays Limited Macau May 11, 1995 - -----------------------------------------------------------------------------------------------------------------

E-8-2

- ----------------------------------------------------------------------------------------------------------------- NAME OF COMPANY PLACE AND DATE OF ESTABLISHMENT/ OPERATION - ----------------------------------------------------------------------------------------------------------------- Shantou Hua Kang Air Catering PRC Company Ltd (a) June 22, 1994 - -----------------------------------------------------------------------------------------------------------------

(a) These subsidiaries are PRC limited companies. (b) These subsidiaries are Sino-foreign equity joint venture companies. E-8-3 EX-10.1 7 u98569exv10w1.txt EX-10.1 CERT PURSUANT TO 18 USC SECTION 1350 EXHIBIT 10.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 20-F of CHINA SOUTHERN AIRLINES COMPANY LIMITED (the "Company") for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Yan Zhi Qing, as Chairman of the Board of Directors of the Company, Wang Chang Shun, as President of the Company, and Xu Jie Bo, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Yan Zhi Qing ------------------------------------------- Name: Yan Zhi Qing Title: Chairman of the Board of Directors Date: June 30, 2003 /s/ Wang Chang Shun ------------------------------------------- Name: Wang Chang Shun Title: President Date: June 30, 2003 /s/ Xu Jie Bo ------------------------------------------- Name: Xu Jie Bo Title: Chief Financial Officer Date: June 30, 2003 This certification accompanies the Report pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by ss.906 of the Sarbanes-Oxley Act of 2002 has been provided to China Southern Airlines Company Limited and will be retained by China Southern Airlines Company Limited and furnished to the Securities and Exchange Commission or its staff upon request. 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EX-1

                                                                       EXHIBIT 1

 China Southern Airlines Company Limited
(a joint stock limited company incorporated in the
 People's Republic of China with limited liability)

ARTICLES OF ASSOCIATION

ARTICLES OF ASSOCIATION
 OF CHINA SOUTHERN AIRLINES COMPANY LIMITED

(Approved by Special Resolutions passed by the shareholders' extraordinary
General Meeting held on 18 April 1997 and 22 May 1997 and Amended by the two
Annual General Meetings held on 15 June 1998 and 15 June 1999, by the
Extraordinary General Meetings held on 26 March 2002, and by the Annual General
Meeting held on 13 May 2003.)

Catalogue

Chapter 1

General Provisions

Chapter 2

Purposes and Scope of Business

Chapter 3

Shares and Registered Capital

Chapter 4

Reduction of Capital and Repurchase of Shares

Chapter 5

Financial Assistance for Acquisition of Shares

Chapter 6

Share Transfer

Chapter 7

Shares Certificates and Register of Shareholders

Chapter 8

Shareholders' Rights and Obligations

Chapter 9

Shareholders' General Meetings

Chapter 10

Special Procedures for Voting by a Class of Shareholders

Chapter 11

Board of Directors

Chapter 12

Secretary of the Board of Directors

Chapter 13

                                     Page 1


President

Chapter 14

Supervisory Committee

Chapter 15

The Qualifications and Duties of the Directors, Supervisors, President and other
Senior Administrative Officers of the Company

Chapter 16

Financial and Accounting Systems and Profit Distribution

Chapter 17

Appointment of Accountant Firm

Chapter 18

Insurance

Chapter 19

Labor and Personnel Management Systems

Chapter 20

Trade Union

Chapter 21

Merger and Division of the Company

Chapter 22

Dissolution and Liquidation

Chapter 23

Procedures for Amendment of the Articles of Association

Chapter 24

Settlement of Disputes

Chapter 25

Notice

Chapter 26

Definition and Interpretation of these Articles of Association

CHAPTER 1 GENERAL PROVISIONS

Article 1

The Company (or "Company") is a joint stock limited company established in
accordance with the "Company Law of the People's Republic of China" (the
"Company Law"), "State Council's Special Regulations Regarding the Issue of
Shares Overseas and the Listing of Shares Overseas by Companies Limited by
Share" (the "Special Regulations") and other relevant laws and administrative
regulations of the State. The legitimate rights and interests of the Company and
its shareholders are under the jurisdiction of and protected by Chinese laws,
regulations and other relevant provisions of the Government.

                                     Page 2


The Company was established by way of promotion and approved by the People's
Republic of China's State Commission for Restructuring the Economic System on 31
December 1994, as evidenced by approval document no. [1994] 139. It is
registered with and has obtained a business license from China's State
Administration Bureau of Industry and Commerce on 25 March 1995. The number of
the Company's business license is: 1000001001760.

Article 2

Promoter of the Company: (renamed as China Southern Air Holding Company).

Registered Name of the Company:
(Chinese)

CHINA SOUTHERN AIRLINES COMPANY LIMITED (English)

Article 3

The company's address: Baiyun International Airport
Guangzhou Municipality
Guangdong Province
China
Telephone:       (020) 86123303
Facsimile:       (020) 86644623

Article 4

The Company's legal representative is the Chairman of the board of directors of
the Company.

Article 5

The Company is a joint stock limited company in perpetual existence.

Article 6

In accordance with the Company Law, the Special Regulations, "Mandatory
Provisions for the Articles of Association of Companies to be Listed Outside
China" (the "Mandatory Provisions") and other relevant laws and administrative
regulations, the Company amended the Company's articles of association.

Article 7

The registration formalities of the Original Articles of Association with
China's State Administration Bureau of Industry and Commerce have been
completed.

The Company shall, within the period stipulated by laws or administrative
regulations, process the registration of changing of mandatory registered items
due to the amendment of the Original Articles of Association.

Article 8

From the date of these articles of association becoming effective, these
articles of association constitute a legally binding document regulating the
Company's organization and activities, and the rights and obligations between
the Company and each shareholder and among the shareholders.

Article 9

These articles of association are binding on the Company and its shareholders,
directors, supervisors, president and other senior administrative officers of
the Company; all of whom are entitled to claim rights concerning the affairs of
the Company in accordance with these articles of association.

These articles of association are actionable by a shareholder against the
Company and vice versa, by shareholders against each other and by a shareholder
against the directors, supervisors, president and other senior administrative
officers of the Company in respect of rights and obligations concerning the
affairs of the

                                     Page 3


Company arising out of these articles of association.

The actions referred to in the preceding paragraph include court proceedings and
arbitration proceedings.

Article 10

The Company may invest in other limited liability companies or joint stock
limited companies. The Company's liabilities to an investee company shall be
limited to the amount of its capital contribution to the investee company.

Upon approval of the companies approving department authorized by the State
Council, the Company may, according to its need of operation and management,
operates as a holding company as prescribed in the second paragraph of Article
12 of the Company Law.

Article 11

On condition of compliance with applicable laws and regulations of the People's
Republic of China ("PRC"), the Company has the power to raise and borrow money
which power includes without limitation the issue of debentures, the charging or
mortgage of part or whole of the Company's business or properties and other
rights permitted by PRC laws and administrative regulations.

Article 12

For the purpose of these articles of association, other senior administrative
officers of the Company refer to vice president, chief financial officer, board
secretary, general economist, chief engineer and chief pilot.

CHAPTER 2 PURPOSES AND SCOPE OF BUSINESS

Article 13

The business purposes of the Company are: (i) to absorb domestic and foreign
capital; (ii) to assist in developing the aviation industry of China; (iii) to
promote the development of the national economy of China; (iv) to utilize
corporate incentive mechanisms of privatization; (v) to draw on the advanced
management expertise of other domestic and foreign companies; (vi) to
continuously improve the management of the Company; (vii) to enhance the market
competitiveness of the Company; (viii) to generate economic and social benefits
for the Company; and (ix) to generate steady income for the Company's
shareholders.

Article 14

The scope of business of the Company shall be consistent with and subject to the
scope of business approved by the relevant supervisory department of the State.

The scope of business of the Company includes: (i) provision of scheduled and
non-scheduled domestic, regional and international air transportation services
for passengers, cargo, mail and luggage; (ii) undertaking general aviation
services; (iii) provision of aircraft repair and maintenance services; (iv)
acting as agent for other domestic and international airlines; (v) provision of
air catering services and (vi) engaging in other airline or airline-related
business, including advertising for such services.

Article 15

The Company may, according to its ability to develop, and upon the approval by
special resolution adopted by the shareholders' general meeting and the approval
of the relevant state government authority, adjust its scope of business or
investment orientation and method etc.

Article 16

The Company may, upon the approval by the relevant authorities, establish its
subsidiaries, branches and offices (whether wholly owned or otherwise) in China

                                     Page 4



and other countries and regions to assist its business development and to
promote the Company's expansion.

CHAPTER 3 SHARES AND REGISTERED CAPITAL

Article 17

There must, at all times, be ordinary shares in the Company. Subject to the
approval of the companies approving department authorized by the State Council,
the Company may, according to its requirements, create other classes of shares.

Article 18

The shares issued by the Company shall have a par value of Renminbi one yuan per
share.

The Renminbi referred to in the preceding paragraph is the legal currency of the
PRC.

Article 19

Subject to the approval of the securities authority of the State Council, the
Company may issue and offer shares to domestic investors or foreign investors
for subscription.

Foreign investors referred to in the preceding paragraph means those investors
of foreign countries and regions of Hong Kong, Macau and Taiwan who subscribe
for shares issued by the Company. Domestic investors mean those investors within
the territory of the PRC (excluding investors of the regions referred to in the
preceding sentence) who subscribe for shares issued by the Company.

Article 20

Shares issued by the Company to domestic investors for subscription in Renminbi
shall be referred to as "Domestic-Invested Shares". Shares issued by the Company
to foreign investors for subscription in foreign currencies shall be referred to
as "Foreign-Invested Shares". Foreign-Invested Shares which are listed overseas
are called "Overseas-Listed Foreign-Invested Shares".

The foreign currencies referred to in the preceding paragraph mean the legal
currencies (apart from Renminbi) of other countries or districts which are
recognized by the foreign exchange control authority of the State and can be
used to pay the Company for the share price.

Article 21

Domestic-Invested Shares issued by the Company shall be called "A Shares".
Overseas-Listed Foreign-Invested Shares issued by the Company and listed in Hong
Kong shall be called "H Shares". H Shares are shares which have been admitted
for listing on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"),
the par value of which is denominated in Renminbi and which are subscribed for
and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange
in the United States of America in the form of American depositary receipts.
Shares issued by the Company, including Domestic-Invested Shares and
Foreign-Invested Shares, are all ordinary shares.

Article 22

In accordance with approvals granted by the Securities Commission of the State
Council, the Company has issued a total of 3,374,178,000 ordinary shares, of
which (a) 2,200,000,000 A Shares were issued upon the establishment of the
Company and were all subscribed for by the promoter of the Company and (b)
1,174,178,000 H Shares were issued to foreign investors in connection with the
first increase of capital of the Company, including shares issued pursuant to
the exercise of the over-allotment option.

The ordinary shares that the Company issued in connection with its first
increase of capital after its establishment were 1,174,178,000 H Shares,
representing

                                     Page 5


34.8% of the issued share capital of the Company. The share capital structure of
the Company after such issue of shares is: (a) 2,200,000,000 A Shares held by
the promoter, representing 65.2% of the total share capital, and (b)
1,174,178,000 H Shares held by foreign investors, representing 34.8% of the
total share capital.

Article 23

Upon approval by the securities governing authority of the State Council of the
proposal to issue Overseas-listed Foreign-Invested Shares and Domestic-Invested
Shares, the Company's board of directors may make separate implementing
arrangements for their issuance.

The Company's proposal to issue Overseas-Listed Foreign-Invested Shares and
Domestic-Invested Shares pursuant to the preceding paragraph may be implemented
within fifteen (15) months from the date of the approval of the securities
governing authority of the State Council.

Article 24

In respect of the total number of shares as stated in a shares issuing proposal,
where the Company shall separately issue Overseas-Listed Foreign-Invested Shares
and Domestic-Invested Shares, these respective shares shall be fully subscribed
for at their respective offerings. If the shares cannot be fully subscribed for
at their offerings due to some special circumstances, then subject to the
approval of the securities governing authority of the State Council the shares
may be issued by installments.

Article 25

The registered capital of the Company is RMB3,374,178,000.

The Company shall undertake its liability with all its assets and its
shareholders shall undertake the Company's liability with all the shares they
hold.

Article 26

The Company may, based on its requirements for operation and development and in
accordance with the relevant provisions of these articles of association,
approve an increase of capital. The Company may increase its capital in the
following ways:

(1)

offering new shares to non-specially-designated investors for subscription;

(2)

placing new shares to its existing shareholders;

(3)

allotting bonus shares to its existing shareholders;

(4)

any other ways permitted by relevant laws and administrative regulations.

The Company's increase of capital by issuing new shares shall, after being
approved in accordance with the provisions of these articles of association, be
conducted in accordance with the procedures stipulated by relevant laws and
administrative regulations.

Article 27

Unless otherwise provided by relevant laws or administrative regulations, shares
in the Company are freely transferable and are not subject to any lien.

                                     Page 6


CHAPTER 4 REDUCTION OF CAPITAL AND REPUCHASE OF SHARES

Article 28

In accordance with the provisions of these articles of association, the Company
may reduce its registered capital.

Article 29

When the Company reduces its registered capital, it must draw up a balance sheet
and an inventory of assets.

The Company shall notify its creditors within ten (10) days of the date of the
Company's resolution for reduction of capital and shall publish a notice in a
newspaper at least three times within thirty (30) days of the date of such
resolution. A creditor has the right within thirty (30) days of receiving the
notice from the Company or, in the case of a creditor who does not receive the
notice, within ninety (90) days of the date of the first public notice, to
require the Company to repay its debts or provide a corresponding guarantee for
such debt.

The Company's registered capital after reduction shall not be less than the
statutory minimum amount.

Article 30

The Company may, with approval according to the procedures provided in these
articles of association and subject to the approval of the relevant governing
authority of the State, repurchase its issued shares under the following
circumstances:

(1)

cancellation of shares for the reduction of its capital;

(2)

merging with another company that holds shares in the Company;

(3)

other circumstances permitted by relevant laws and administrative regulations.

Article 31

The Company may, with the approval of the relevant State governing authority for
repurchasing its shares, conduct the repurchase in one of the following ways:

(1)

making a pro rata general offer of repurchase to all its shareholders;

(2)

repurchasing shares through public dealing on a stock exchange;

(3)

repurchase by an off-market agreement outside a stock exchange.

Article 32

Where the Company repurchases its shares by an off-market agreement outside a
stock exchange, the prior sanction of shareholders shall be obtained in
accordance with these articles of association. The Company may release, vary or
waive its rights under a contract so entered into by the Company with the prior
approval of shareholders obtained in the same manner.

                                     Page 7


A contract to repurchase shares referred to in the preceding paragraph includes
(without limitation) an agreement to become obliged to repurchase or an
acquisition of the right to repurchase shares of the Company.

Rights of the Company under a contract to repurchase its shares are not capable
of being assigned.

Article 33

Shares repurchased in accordance with law by the Company shall be cancelled
within the period prescribed by laws and administrative regulations, and the
Company shall apply to the original companies registration authority for
registration of the change of its registered capital.

The amount of the Company's registered capital shall be reduced by the aggregate
par value of those cancelled shares.

Article 34

Unless the Company is in the course of liquidation, it must comply with the
following provisions in relation to repurchase of its issued shares:

(1)

where the Company repurchases shares of the Company at par value, payment shall
be made out of book surplus distributable profits of the Company or out of
proceeds of a fresh issue of shares made for that purpose;

(2)

where the Company repurchases shares of the Company at a premium to its par
value, payment up to the par value may be made out of the book surplus
distributable profits of the Company or out of the proceeds of a fresh issue of
shares made for that purpose. Payment of the portion in excess of the par value
shall be effected as follows:

(i)

if the shares being repurchased were issued at par value, payment shall be made
out of the book surplus distributable profits of the Company;

(ii)

if the shares being repurchased were issued at a premium to its par value,
payment shall be made out of the book surplus distributable profits of the
Company or out of the proceeds of a fresh issue of shares made for that purpose,
provided that the amount paid out of the proceeds of the fresh issue shall not
exceed the aggregate of premiums received by the Company on the issue of the
shares repurchased nor the current amount (including the premiums on the fresh
issue) of the Company's premium account (or capital common reserve fund account)
at the time of the repurchase;

(3)

payment by the Company in consideration of the following shall be made out of
the Company's distributable profits:

(i)

acquisition of rights to repurchase shares of the Company;

(ii)

variation of any contract to repurchase shares of the Company;

(iii)

release of any of the Company's obligation under any contract to repurchase

                                     Page 8



shares of the Company;

(4)

after the Company's registered capital has been reduced by the total par value
of the cancelled shares in accordance with the relevant provisions, the amount
deducted from the distributable profits of the Company for paying up the
par-value portion of the shares repurchased shall be transferred to the
Company's premium account (or capital common reserve fund account).

CHAPTER 5 FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES

Article 35

The Company and its subsidiaries shall not, by any means at any time, provide
any kind of financial assistance to a person who is acquiring or is proposing to
acquire shares in the Company. The said acquirer of shares of the Company
includes a person who directly or indirectly incurs any obligations due to the
acquisition of shares in the Company (the "obligor").

The Company and its subsidiaries shall not, by any means at any time, provide
financial assistance to the obligor as referred to in the preceding paragraph
for the purpose of reducing or discharging the obligations assumed by that
person.

This Article shall not apply to the circumstances specified in Article 37 of
this Chapter.

Article 36

For the purpose of this Chapter, "financial assistance" includes (without
limitation) the following meanings:

(1)

gift;

(2)

guarantee (including the assumption of liability by the guarantor or the
provision of assets by the guarantor to secure the performance of obligations by
the obligor), or compensation (other than compensation in respect of the
Company's own default) or release or waiver of any rights;

(3)

provision of loan or any other contract under which the obligations of the
Company are to be fulfilled before the obligations of another party, or the
novation of, or the assignment of rights arising under, such loan or contract;

(4)

any other form of financial assistance given by the Company when the Company is
insolvent or has no net assets or when its net assets would thereby be reduced
to a material extent.

For the purpose of this Chapter, "incurring any obligations" includes the
incurring of obligations by the changing of the obligor's financial position by
way of contract or the making of arrangement (whether enforceable or not, and
whether made on his own account or with any other persons), or by any other
means.

Article 37

The following transactions shall not be deemed to be activities prohibited by
Article 35 of this Chapter:

(1)

                                     Page 9



the provision of financial assistance by the Company where the financial
assistance is given in good faith in the interests of the Company, and the
principal purpose in giving the financial assistance is not for the acquisition
of shares in the Company, or the giving of the financial assistance is an
incidental part of some larger purpose of the Company;

(2)

the lawful distribution of the Company's assets by way of dividend;

(3)

the allotment of bonus shares as dividends;

(4)

a reduction of registered capital, a repurchase of shares of the Company or a
reorganization of the share capital structure of the Company effected in
accordance with these articles of association;

(5)

the lending of money by the Company within its scope of business and in the
ordinary course of its business, where the lending of money is part of the scope
of business of the Company (provided that the net assets of the Company are not
thereby reduced or that, to the extent that the assets are thereby reduced, the
financial assistance is provided out of distributable profits);

(6)

the provision of money by the Company for contributions to staff and workers'
shares schemes (provided that the net assets of the Company are not thereby
reduced or that, to the extent that the assets are thereby reduced, the
financial assistance is provided out of distributable profits).

CHAPTER 6 SHARE TRANSFER

Article 38

The Company's shares are transferable according to law.

Article 39

The Company shall not accept the Company's shares as subject matter of pledge.

Article 40

The Company's directors, supervisors, president and other senior administrative
officers shall periodically declare to the Company the number of shares they
hold in the Company during their term of office. They may transfer their shares
during the term of their office or after their departure from office in
accordance with the requirements of the laws and the listing rules of the place
of the stock exchange on which the Company's shares are listed.

CHAPTER 7 SHARE CERTIFICATES AND REGISTER OF SHAREHOLDERS

Article 41

Share certificates of the Company shall be in registered form.

The share certificate of the Company shall include the following major items:

(1)

Company's name;

(2)

                                    Page 10


the date of registration of the Company;

(3)

the class of the share certificates, the par value and the number of shares
represented by the share certificate;

(4)

the serial number of the share certificate;

(5)

any other matters required by the Company Law and the Special Regulations;

(6)

other items required to be stated by the stock exchanges on which the Company's
shares are listed.

Article 42

Share certificates of the Company shall be signed by the Chairman of the
Company's board of directors. Where the stock exchanges on which the Company's
shares are listed require other senior administrative officer(s) of the Company
to sign on the share certificates, the share certificates shall also be signed
by such senior administrative officer(s). The share certificates shall take
effect after being sealed or printed with the seal of the Company. The share
certificates shall only be sealed with the Company's seal under the
authorization of the board of directors. The signatures of the Chairman of the
board of directors or other senior administrative officer(s) of the Company may
be printed in mechanical form.

Article 43

The Company shall keep a register of its shareholders and enter in the register
the following particulars:

(1)

the name (title) and address (residence), the occupation or nature of each
shareholder;

(2)

the class and quantity of shares held by each shareholder;

(3)

the amount paid or agreed to be paid on the shares of each shareholder;

(4)

the share certificate numbers of the shares held by each shareholder;

(5)

the date on which each person was entered in the register as a shareholder;

(6)

the date on which any shareholder ceased to be a shareholder.

Unless contrary evidence is shown, the register of shareholders shall be
sufficient evidence of the shareholders' shareholdings in the Company.

Article 44

                                    Page 11


The Company may, in accordance with the mutual understanding and agreements
between the securities governing authority of the State Council and overseas
securities regulatory organizations, maintain the register of shareholders of
Overseas-Listed Foreign-Invested Shares overseas and appoint overseas agent(s)
to manage such share register. The original share register for holders of
Overseas-Listed Foreign-Invested Shares listed in Hong Kong shall be maintained
in Hong Kong.

A duplicate of the share register for holders of Overseas-Listed
Foreign-Invested Shares shall be maintained at the Company's residence. The
appointed overseas agent(s) shall ensure the consistency between the original
and the duplicate of the share register.

If there is any inconsistency between the original and the duplicate of the
share register for holders of Overseas-Listed Foreign-Invested Shares, the
original shall prevail.

Article 45

The Company shall have a complete register of shareholders which shall comprise
the following:

(1)

a part of the shareholders' register maintained at the Company's residence other
than those parts mentioned in sub-paragraphs (2) and (3) of this Article;

(2)

a part of the shareholders' register in respect of the holders of
Overseas-Listed Foreign-Invested Shares of the Company maintained in the place
of the overseas stock exchange on which the shares are listed; and

(3)

any other parts of the shareholders' register maintained at such other places as
the board of directors may consider necessary for the purpose of listing the
shares of the Company.

Article 46

Different parts of the shareholders' register shall not overlap. No transfer of
any shares registered in any part of the register shall, during the continuance
of that registration, be registered in any other part of the register.

The alteration and rectification of each part of the shareholders' register
shall be carried out in accordance with the laws of the place where the register
is maintained.

All the fully paid-up H Shares can be freely transferred in accordance with
these articles of association. However, the board of directors may refuse to
recognize any instrument of transfer without giving any reason, unless:

(1)

a fee (for each instrument of transfer) of two dollars and fifty cents Hong Kong
dollars or any higher fee as agreed by the Stock Exchange has been paid to the
Company for registration of any transfer or any other document which is related
to or will affect ownership of or change of ownership of the shares;

(2)

the instrument of transfer only involves H Shares;

(3)

the stamp duty chargeable on the instrument of transfer has been paid;

                                    Page 12


(4)

the relevant share certificate and upon the reasonable request of the board of
directors any evidence in relation to the right of the transferor to transfer
the shares have been submitted;

(5)

if it is intended to transfer the shares to joint owners, then the maximum
number of joint owners shall not exceed four (4);

(6)

the Company does not have any lien on the relevant shares.

If the Company refuses to register any transfer of shares, the Company shall
within two months of the formal application for the transfer provide the
transferor and the transferee with a notice of refusal to register such
transfer.

Article 47

No changes in the shareholders' register due to the transfer of shares may be
made within thirty (30) days before the date of a shareholders' general meeting
or within five (5) days before the record date for the Company's distribution of
dividends.

Article 48

Where the Company decides to convene a shareholders' general meeting, distribute
dividends, liquidate or carry out other activities which would require the
determination of shareholdings, the board of directors shall fix a record date
for the purpose of determining shareholdings. A person who is registered in the
register as shareholders of the Company at the end of the record date shall be a
shareholder of the Company.

Article 49

Any person aggrieved and claiming to be entitled to have his name (title) to be
entered in or removed from the register of shareholders may apply to a court of
competent jurisdiction for rectification of the register.

Article 50

Any person who is a registered shareholder or who claims to be entitled to have
his name (title) entered into the register of shareholders in respect of shares
in the Company may, if his share certificate (the "original certificate")
relating to the shares is lost, apply to the Company for a replacement new share
certificate in respect of such shares (the "Relevant Shares").

If a shareholder of Domestic-Invested Shares loses his share certificate and
applies to the Company for a replacement new share certificate, it shall be
dealt with in accordance with article 150 of the Company Law.

If a shareholder of Overseas-Listed Foreign Shares loses his share certificate
and applies to the Company for a replacement new share certificate, it may be
dealt with in accordance with the law of the place where the original register
of holders of Overseas-Listed Foreign-Invested Shares is maintained, rules of
the stock exchange or other relevant regulations.

If a shareholder of Overseas-Listed Foreign-Invested Shares listed in Hong Kong
(H Shares) loses his share certificate, the issue of a replacement new share
certificate shall comply with following requirements:

(1)

The applicant shall submit an application to the Company in a prescribed form
accompanied by notarial certificate or a statutory declaration (i) stating the

                                    Page 13


grounds upon which the application is made and the circumstances and the
evidence of the loss; and (ii) declaring that no other person is entitled to
have his name entered in the register of shareholders in respect of the Relevant
Shares.

(2)

Before the Company decides to issue the replacement new share certificate, no
statement made by any person other than the applicant declaring that his name
shall be entered in the register of shareholders in respect of such shares has
been received.

(3)

The Company shall, if it intends to issue a replacement new share certificate,
publish a notice of its intention at least once every thirty (30) days in a
period of ninety (90) consecutive days in such newspapers as may be prescribed
by the board of directors.

(4)

The Company shall have, prior to publication of its intention to issue a
replacement new share certificate, delivered to the stock exchange on which its
shares are listed a copy of the notice to be published and may publish the
notice upon receiving confirmation from such stock exchange that the notice has
been exhibited in the premises of the stock exchange. Such notice shall be
exhibited in the premises of the Stock Exchange for a period of 90 days.

In the case of an application made without the consent of the registered holder
of the Relevant Shares, the Company shall deliver by mail to such registered
shareholder a copy of the notice to be published.

(5)

If, by the expiration of the 90-day period referred to in paragraphs (3) and (4)
of this Article, the Company shall not have received from any person notice of
any disagreement to such application, the Company may issue a replacement new
share certificate to the applicant accordingly.

(6)

Where the Company issues a replacement new share certificate under this Article,
it shall forthwith cancel the original share certificate and enter the
cancellation and issue in the register of shareholders accordingly.

(7)

All expenses relating to the cancellation of an original share certificate and
the issue of a replacement new share certificate by the Company shall be borne
by the applicant and the Company is entitled to refuse to take any action until
reasonable security is provided by the applicant.

Article 51

Where the Company issues a replacement new share certificate pursuant to these
articles of association, the name (title) of a bona fide purchaser gaining
possession of such new share certificate or the person who is subsequently
entered in the register of shareholders as holder of such shares (if he is a
bona fide purchaser) shall not be removed from the register of shareholders.

Article 52

The Company shall not be liable for any damages sustained by any person by
reason of the cancellation of the original share certificate or the issue of the
new share certificate, unless the claimant proves that the Company has acted
deceitfully.

CHAPTER 8 SHAREHOLDERS' RIGHTS AND OBLIGATIONS

                                    Page 14



Article 53

A shareholder of the Company is a person who lawfully holds shares in the
Company and whose name (title) is entered in the register of shareholders. A
shareholder shall enjoy rights and bear obligations according to the class and
proportion of the shares held by him; shareholders who hold shares of the same
class shall enjoy the same rights and bear the same obligations.

Article 54

The ordinary shareholders of the Company shall enjoy the following rights:

(1)

the right to attend or appoint a proxy to attend shareholders' general meetings
and to vote thereat;

(2)

the right to dividends and other distributions in proportion to the number of
shares held;

(3)

the right of supervisory management over the Company's business operations, and
the right to present proposals or enquiries;

(4)

the right to transfer, donate or pledge his shares in accordance with laws,
administrative regulations and provisions of these articles of association;

(5)

the right of knowledge and decision making power with respect to important
matters of the Company in accordance with laws, administrative regulations and
these articles of association;

(6)

the right to obtain relevant information in accordance with the provisions of
these articles of association, including:

(i)

the right to obtain a copy of these articles of association, subject to payment
of the cost of such copy;

(ii)

the right to inspect and copy, subject to payment of a reasonable charge:

(a)

all parts of the register of shareholders;

(b)

personal particulars of each of the Company's directors, supervisors, president
and other senior administrative officers, including:

(aa)

present name and alias and any former name or alias;

(bb)

principal address (residence);

                                    Page 15



(cc)

nationality;

(dd)

primary and all other part-time occupations and duties;

(ee)

identification documents and their relevant numbers;

(c)

state of the Company's share capital;

(d)

reports showing the aggregate par value, quantity, highest and lowest price paid
in respect of each class of shares repurchased by the Company since the end of
last accounting year and the aggregate amount paid by the Company for this
purpose;

(e)

minutes of shareholders' general meetings;

(f)

interim and annual reports of the Company;

(7)

in the event of the termination or liquidation of the Company, to participate in
the distribution of surplus assets of the Company in accordance with the number
of shares held;

(8)

other rights conferred by laws, administrative regulations and these articles of
association.

Article 55

The ordinary shareholders of the Company shall assume the following obligations:

(1)

to abide by these articles of association;

(2)

to pay subscription monies according to the number of shares subscribed and the
method of subscription;

(3)

no right to return shares to the Company unless laws and regulations provide
otherwise;

(4)

other obligations imposed by laws, administrative regulations and these articles
of association.

Shareholders are not liable to make any further contribution to the share
capital other than as agreed by the subscriber of the relevant shares on
subscription.

                                    Page 16



Article 56

In addition to the obligations imposed by laws and administrative regulations or
required by the listing rules of the stock exchange on which shares of the
Company are listed, a controlling shareholder shall not exercise his voting
rights in respect of the following matters in a manner prejudicial to the
interests of the shareholders generally or of some of the shareholders of the
Company:

(1)

to relieve a director or supervisor of his duty to act honestly in the best
interests of the Company;

(2)

to approve the expropriation by a director or supervisor (for his own benefit or
for the benefit of another person), in any guise, of the Company's assets,
including (without limitation) opportunities beneficial to the Company;

(3)

to approve the expropriation by a director or supervisor (for his own benefit or
for the benefit of another person) of the individual rights of other
shareholders, including (without limitation) rights to distributions and voting
rights save pursuant to a restructuring submitted to shareholders for approval
in accordance with these articles of association.

Article 57

For the purpose of the foregoing Article, a "controlling shareholder" means a
person who satisfies any one of the following conditions:

(1)

he alone or acting in concert with others has the power to elect more than half
of the board of directors;

(2)

he alone or acting in concert with others has the power to exercise or to
control the exercise of 30 per cent or more of the voting rights in the Company;

(3)

he alone or acting in concert with others holds 30 per cent or more of the
issued and outstanding shares of the Company;

(4)

he alone or acting in concert with others in any other manner controls the
Company in fact.

CHAPTER 9 SHAREHOLDERS' GENERAL MEETINGS

Article 58

The shareholders' general meeting is the organ of authority of the Company and
shall exercise its functions and powers in accordance with law.

Article 59

The shareholders' general meeting shall exercise the following functions and
powers:

(1)

                                    Page 17


to decide on the Company's operational policies and investment plans;

(2)

to elect and replace directors and decide on matters relating to the
remuneration of directors;

(3)

to elect and replace the supervisors who are representatives of shareholders and
decide on matters relating to the remuneration of supervisors;

(4)

to examine and approve reports of the board of directors;

(5)

to examine and approve reports of the supervisory committee;

(6)

to examine and approve the Company's proposed annual preliminary and final
financial budgets;

(7)

to examine and approve the Company's profit distribution plans and plans for
making up losses;

(8)

to decide on increases or reductions in the Company registered capital;

(9)

to decide on matters such as merger, division, dissolution and liquidation of
the Company;

(10)

to decide on the issue of debentures by the Company;

(11)

to decide on the appointment, dismissal and disengagement of the accountants of
the Company;

(12)

to amend these articles of association;

(13)

to consider motions raised by shareholders who represent 5 percent or more of
the total shares of the Company carrying the right to vote;

(14)

to decide on other matters which require resolutions of the shareholders in
general meeting according to relevant laws, administrative regulations and
provisions of these articles of association;

(15)

to decide on matters which the board of directors may be delegated or authorized
to deal with by the shareholders in general meeting.

                                    Page 18


When the shareholders' general meeting decide on matters which the board of
directors may be delegated or authorized to deal with, the shareholders' general
meeting shall maintain the legitimate rights and interests of the Company
according to law and abide by laws and regulations strictly in order to ensure
the Company's principle of efficient operation and scientific decision making.
Matters delegated or authorized to the board of directors to deal with include
(without limitation):

(1)

to modify the language of these articles of association after the shareholders'
general meeting passed the resolution on the amendment of these articles of
association in principle;

(2)

to distribute the interim profit;

(3)

to decide on matters in connection with the issue of new shares and equity
convertible bonds;

(4)

to dispose of, mortgage and secure the fixed assets under the operation policy
and investment plan passed by the shareholders' general meeting;

(5)

other matters delegated or authorized by the shareholders' general meeting to
the board of directors to deal with at times in accordance with laws,
regulations and these articles of association.

Article 60

The Company shall not, without the prior approval of shareholders in general
meeting, enter into any contract with any person other than a director,
supervisor, president or other senior administrative officer whereby the
management and administration of the whole or any substantial part of the
business of the Company is to be handed over to such person.

Article 61

Shareholders' general meetings are divided into annual general meetings and
extraordinary general meetings. Shareholders' general meetings shall be convened
by the board of directors. Annual general meetings are held once every year and
within six (6) months from the end of the preceding financial year.

Under any of the following circumstances, the board of directors shall convene
an extraordinary general meeting within two (2) months:

(1)

when the number of directors is less than the number of directors required by
the Company Law or two thirds of the number of directors specified in these
articles of association;

(2)

when the unrecovered losses of the Company amount to one third of the total
amount of its share capital;

(3)

when shareholder(s) holding 10 per cent or more of the Company's issued and
outstanding shares carrying voting rights request(s) in writing the convening of
an extraordinary general meeting;

                                    Page 19


(4)

when deemed necessary by the board of directors or as requested by the
supervisory committee.

The number of shares held by shareholders in paragraph (3) above shall be
calculated on the date when the written request is submitted.

Article 62

When the company convenes a shareholders' general meeting, written notice of the
meeting shall be given forty five (45) days before the date of the meeting to
notify all of the shareholders in the share register of the matters to be
considered and the date and the place of the meeting. A shareholder who intends
to attend the meeting shall deliver his written reply concerning the attendance
of the meeting to the Company twenty (20) days before the date of the meeting.

Article 63

When the board of directors issues the notice for the convening of a
shareholders' general meeting, the meeting shall not be postponed without
reason. In case the shareholders' general meeting must be postponed under
special circumstances, a notice regarding the postponement must be issued at
least five (5) working days before the convening of the original shareholders'
general meeting. In the postponement notice, the board of directors must state
the reasons for the postponement and the date of the postponed meeting. When the
shareholders' general meeting is postponed, the board of directors may not
change the record date for the shareholders entitled to attend the shareholders'
general meeting provided in the original notice.

Article 64

When the Company convenes a shareholders' annual general meeting, shareholders
holding 5 per cent or more of the total voting shares of the Company shall have
the right to propose new motions in writing, and the Company shall, after the
same having been reviewed and approved by the board of directors of the Company,
place those matters in the proposed motions within the scope of functions and
powers of the shareholders' general meeting on the agenda. If the board of
directors decides not to put the motion on the agenda, it must give reasons and
explanation to the shareholders' general meeting and publish the motion and the
board's explanation along with resolutions adopted by the shareholders' general
meeting at the end of the meeting.

Article 65

The Company shall, based on the written replies received twenty (20) days before
the date of the shareholders' general meeting from the shareholders, calculate
the number of voting shares represented by the shareholders who intend to attend
the meeting. If the number of voting shares represented by the shareholders who
intend to attend the meeting reaches one half or more of the Company's total
voting shares, the Company may hold the meeting; if not, then the Company shall
within five (5) days notify the shareholders again by public notice of the
matters to be considered, the place and date for, the meeting. The Company may
then hold the meeting after such publication of notice.

A shareholders' extraordinary general meeting shall not decide on any matter not
stated in the notice of meeting.

Article 66

A notice of meeting of shareholders shall meet the following requirements:

(1)

be in writing;

(2)

                                    Page 20


specify the place, the date and time of the meeting;

(3)

state the matters to be discussed at the meeting;

(4)

provide such information and explanation as are necessary for the shareholders
to make an informed decision on the proposals put before them. Without limiting
the generality of the foregoing, where a proposal is made to amalgamate the
Company with another, to repurchase shares, to reorganize the share capital, or
to restructure the Company in any other way, the terms of the proposed
transaction must be provided in detail together with copies of the proposed
agreement, if any, and the cause and effect of such proposal must be properly
explained;

(5)

contain a disclosure of the nature and extent, if any, of the material interests
of any director, supervisor, president or other senior administrative officer in
the proposed transaction and the effect of the proposed transaction on them in
their capacity as shareholders in so far as it is different from the effect on
the interests of the shareholders of the same class;

(6)

contain the full text of any special resolution to be proposed at the meeting;

(7)

contain conspicuously a statement that a shareholder entitled to attend and vote
is entitled to appoint one or more proxies to attend and vote instead of him and
that a proxy need not be a shareholder;

(8)

specify the time and place for lodging proxy forms for the relevant meeting.

Article 67

Notice of shareholders' general meeting shall be served on the shareholders
(whether or not entitled to vote at the meeting), by delivery or prepaid airmail
to their addresses as shown in the register of shareholders. For the holders of
Domestic-Invested Shares, notice of the meetings may be issued by way of public
notice.

The public notice referred to in the preceding paragraph shall be published in
one or more newspapers designated by the securities governing authority of the
State Council within the interval between forty-five (45) days and fifty (50)
days before the date of the meeting; after the publication of notice, the
holders of Domestic-Invested Shares shall be deemed to have received the notice
of the relevant shareholders' general meeting.

Article 68

The accidental omission to give notice of a meeting to, or the failure to
receive the notice of a meeting by, any person entitled to receive notice shall
not invalidate the proceedings at that meeting.

Article 69

Any shareholder entitled to attend and vote at a meeting of the Company shall be
entitled to appoint one or more other persons (whether a shareholder or not ) as
his proxies to attend and vote on his behalf, and a proxy so appointed shall be
entitled to exercise the following rights pursuant to the authorization from
that shareholder:

                                    Page 21


(1)

the shareholder's right to speak at the meeting;

(2)

the right to demand or join in demanding a poll;

(3)

the right to vote by hand or on a poll, but a proxy of a shareholder who has
appointed more than one proxy may only vote on a poll.

Where that shareholder is a recognized clearing house within the meaning of the
Securities and Futures (Clearing Houses) Ordinance (Cap.420 of the laws of Hong
Kong), it may authorize such person or persons as it thinks fit to act as its
representative (or representatives) at any shareholders' general meeting or any
meeting of any class of shareholders provided that, if more than one person is
so authorized, the authorization must specify the number and class of shares in
respect of which each such person is so authorized. The person so authorized
will be entitled to exercise the same power on behalf of the recognized clearing
house as that clearing house (or its nominees) could exercise if it were an
individual shareholder of the Company.

Article 70

The instrument appointing a proxy shall be in writing under the hand of the
appointer or his attorney duly authorized in writing, or if the appointer is a
legal entity, either under seal or under the hand of a director or attorney duly
authorized.

Article 71

The instrument appointing a voting proxy and, if such instrument is signed by a
person under a power of attorney or other authority on behalf of the appointer,
a notarially certified copy of that power of attorney or other authority shall
be deposited at the residence of the Company or at such other place as is
specified for that purpose in the notice convening the meeting, not less than
twenty-four (24) hours before the time for holding the meeting at which the
proxy propose to vote or the time appointed for the passing of the resolution.

If the appointer is a legal person, its legal representative or such person as
is authorized by resolution of its board of directors or other governing body
may attend at any meeting of shareholders of the Company as a representative of
the appointer.

Article 72

Any form issued to a shareholder by the directors for use by him for appointing
a proxy to attend and vote at meetings of the Company shall be such as to enable
the shareholder, according to his free will, to instruct the proxy to vote in
favor of or against the motions, such instructions being given in respect of
each individual matter to be voted on at the meeting. Such a form shall contain
a statement that in the absence of instructions by the shareholder the proxy may
vote as he thinks fit.

Article 73

A vote given in accordance with the terms of an instrument of proxy shall be
valid notwithstanding the death or loss of capacity of the appointer or
revocation of the proxy or of the authority under which the proxy was executed,
or the transfer of the shares in respect of which the proxy is given, provided
that no notice in writing of such death, loss of capacity, revocation or
transfer as aforesaid shall have been received by the Company at its residence
before the commencement of the meeting at which the proxy is used.

Article 74

                                    Page 22


A proxy who attends a shareholders' general meeting on behalf of a shareholder
shall present his identification document.

If the legal representative of a shareholder who is a legal person attend the
meeting, he shall present his identification document. If shareholder who is a
legal person appoints other person to attend the meeting, the person appointed
shall present his own identification document and a notarially certified copy of
the resolution of the board of directors or other governing body of the
appointer or letter of authorization.

Article 75

Resolutions of shareholders' general meetings shall be divided into ordinary
resolutions and special resolutions.

To adopt an ordinary resolution, votes representing more than one half of the
voting rights represented by the shareholders (including proxies) present at the
meeting must be exercised in favor of the resolution in order for it to be
passed.

To adopt a special resolution, votes representing more than two thirds of the
voting rights represented by the shareholders (including proxies) present at the
meeting must be exercised in favor of the resolution in order for it to be
passed.

The shareholders (including proxies) present at the meeting shall expressly
state their agreement with or objection to every matter to be determined by
voting. If a shareholder abstains from voting or casts an abstention vote, the
Company shall disregard such vote as a voting share when counting the result of
voting.

Article 76

A shareholder (including proxy), when voting at a shareholders' general meeting,
may exercise voting rights in accordance with the number of shares carrying the
rights to vote and each share shall have one vote.

Article 77

At any general meeting of shareholders, a resolution shall be decided on a show
of hands unless a poll is (before or after any vote by show of hands) demanded:

(1)

by the chairman of the meeting;

(2)

by at least two shareholders entitled to vote present in person or by proxy;

(3)

by one or more shareholders present in person or by proxy and representing 10
per cent or more of all shares carry the right to vote at the meeting.

Unless a poll be so demanded, a declaration by the chairman that a resolution
has on a show of hands been carried unanimously, or carried by a particular
majority, or lost, and an entry to that effect in the minutes of the meeting
shall be conclusive evidence of the fact without proof of the number or
proportion of the votes recorded in favor of or against such resolution.

The demand for a poll may be withdrawn by the person who makes such demand.

Article 78

A poll demanded on the election of the chairman of the meeting, or on a question
of adjournment of the meeting, shall be taken forthwith. A poll demanded on any
other question shall be taken at such time as the chairman of the meeting
directs, and any business other than that upon which a poll has been demanded
may

                                    Page 23


be proceeded with, pending the taking of the poll. The result of the poll shall
be deemed to be a resolution of the meeting at which the poll was demanded.

Article 79

On a poll taken at a meeting, a shareholder (including proxy) entitled to two or
more votes need not cast all his votes in the same way.

Article 80

In the case of an equality of votes, whether on a show of hands or on a poll,
the chairman of the meeting at which the show of hands takes place or at which
the poll is demanded shall be entitled to one additional vote.

Article 81

The following matters shall be resolved by an ordinary resolution at a
shareholders' general meeting:

(1)

work reports of the board of directors and the supervisory committee;

(2)

plans formulated by the board of directors for distribution of profits and for
making up losses;

(3)

removal of the members of the board of directors and members of the supervisory
committee, their remuneration and method of payment;

(4)

annual preliminary and final budgets, balance sheets and profit and loss
accounts and other financial statements of the Company;

(5)

matters other than those required by the laws and administrative regulations or
by these articles of association to be adopted by special resolutions.

Article 82

The following matters shall be resolved by a special resolution at a
shareholders' general meeting:

(1)

the increase or reduction in share capital and the issue of shares of any class,
warrants and other similar securities;

(2)

the issue of debentures of the Company;

(3)

the division, merger, dissolution and liquidation of the Company;

(4)

amendments to these Articles of Association;

(5)

repurchase of the Company's shares;

                                    Page 24


(6)

any other matters considered by the shareholders' general meeting, resolved by
way of an ordinary resolution, to be of a nature which may have a material
impact on the Company and should be adopted by a special resolution.

Article 83

Shareholders requisitioning the convening of extraordinary general meetings of
shareholders or class meeting shall abide by the following procedures:

(1)

Two or more shareholders holding in aggregate 10 per cent or more of the shares
carrying the right to vote at the meeting sought to be held shall sign one or
more counterpart requisitions stating the object of the meeting and requiring
the board of directors to convene a shareholders' extraordinary general meeting
or a class meeting thereof. The board of directors shall as soon as possible
proceed to convene the extraordinary general meeting of shareholders or a class
meeting thereof after receiving the requisition.

The amount of shareholdings referred to above shall be calculated as at the date
of the deposit of the requisition.

(2)

If the board of directors fails to issue a notice of such a meeting within
thirty (30) days from the date of the receipt of the requisition, the
requisitionists may themselves convene such a meeting in a manner as similar as
possible as that in which shareholders' meeting are to be convened by the board
of directors within four (4) months from the date of receipt of the requisition
by the board of directors.

Any reasonable expenses incurred by the requisitions by reason of the failure of
the board of directors to duly convene a meeting shall be repaid to the
requisitionists by the Company and any sum so repaid shall be set off against
sums owed by the Company to the directors in default.

Article 84

The Chairman of the board of directors shall convene and take the chair of every
shareholders' general meeting. If the Chairman is unable to attend the meeting
for any reason, the vice-chairman of the board of directors shall convene and
take the chair of the meeting. If both the Chairman and vice-chairman of the
board of directors are unable to attend the meeting, then the board of directors
may designate a director to convene and take the chair of the meeting. If no
chairman of the meeting has been designated, shareholders present shall choose
one person to be the chairman of the meeting. If for any reason, the
shareholders shall fail to elect a chairman, then the shareholder (including
proxy) present in person or by proxy and holding the largest number of shares
carrying the right to vote thereat shall be the chairman of the meeting.

Article 85

The chairman of the meeting shall be responsible for the determination of
whether a resolution is passed. His decision, which is final and conclusive,
shall be announced at the meeting and recorded in the minute book.

Article 86

If the chairman of the meeting has any doubt as to the result of a resolution
put to the vote of the meeting, he may have the votes counted. If the chairman
of the meeting fails to have the votes counted, any shareholder who is present
in person or by proxy and who objects to the result announced by the chairman of
the meeting may demand that the votes be counted immediately after the
declaration of the result, the chairman of the meeting shall have the votes
counted immediately.

                                    Page 25



Article 87

If votes are counted at a shareholders' general meeting, the result of the count
shall be recorded in the minute book.

Article 88

When the shareholders' general meeting is examining and discussing a connected
transaction, the connected shareholder shall not participate in the vote on the
shares. His shares carrying the voting rights shall not be counted as effective
votes in the total. The notice on the resolutions passed by the shareholders'
general meeting shall fully disclose information regarding the voting of the
independent shareholders. If under special circumstances, the connected
shareholders cannot withdraw from the voting, they may vote in the normal course
of proceeding after the Company has obtained the approval from the competent
authorities provided that the Company shall give detailed explanation thereof in
the notice on the resolutions passed by the shareholders' general meeting.

Article 89

Shareholder's general meeting shall make minutes of the resolutions on the
matters considered at the meeting to be signed by all the directors present at
the meeting. The minutes, shareholders' attendance lists and proxy forms shall
be kept at the Company's residence.

Article 90

Copies of the minutes of proceedings of any shareholders' general meeting shall,
during business hours of the Company, be open for inspection by any shareholder
without charge. If a shareholder demands from the Company a copy of such
minutes, the Company shall send a copy of such minutes to him within seven (7)
days after having received reasonable charges.

Article 91

Matters uncovered by these articles of association regarding the convening of
shareholders' general meeting, voting procedures and deliberation of proposals
shall be handled in accordance with the relevant provisions of laws and
regulations currently effective in China.

CHAPTER 10 SPECIAL PROCEDURES FOR VOTING BY A CLASS OF SHAREHOLDERS

Article 92

Those shareholders who hold different classes of shares are shareholders of
different classes.

Apart from the holders of other classes of shares, the holders of the
Domestic-Invested Shares and holders of Overseas Listed Foreign-Invested Shares
shall be deemed to be shareholders of different classes.

A class of shareholders shall, in accordance with laws, administrative
regulations and these articles of association, enjoy rights and bear
obligations.

Article 93

Rights conferred on any class of shareholders in the capacity of shareholders
("class rights") may not be varied or abrogated unless approved by a special
resolution of shareholders in general meeting and by holders of shares of that
class at a separate meeting conducted in accordance with Article 95 to 99.

Article 94

The following circumstances shall be deemed to be variation or abrogation of the
rights of a class of shareholders:

(1)

                                    Page 26



to increase or to decrease the number of shares of such class, or increase or
decrease the number of shares of a class having voting or equity rights or
privileges equal or superior to those of the shares of such class;

(2)

to effect an exchange of all or part of the shares of such class into shares of
another class or to effect an exchange or create a right of exchange of all or
part of the shares of another class into the shares of such class;

(3)

to remove or reduce rights to accrued dividends or rights to cumulative
dividends attached to shares of such class;

(4)

to reduce or remove a dividend preference or a liquidation preference attached
to shares of such class;

(5)

to add, remove or reduce conversion privileges, options, voting rights, transfer
or pre-emptive rights, or rights to acquire securities of the Company attached
to shares of such class;

(6)

to remove or reduce rights to receive payment payable by the Company in
particular currencies attached to shares of such class;

(7)

to create a new class of shares having voting or equity rights or privileges
equal or superior to those of the shares of such class;

(8)

to restrict the transfer or ownership of the shares of such class or add to such
restriction;

(9)

to allot and issue rights to subscribe for, or convert into, shares in the
Company of such class or another class;

(10)

to increase the rights or privileges of shares of another class;

(11)

to restructure the Company where the proposed restructuring will result in
different classes of shareholders bearing a disproportionate burden of such
proposed restructuring;

(12)

to vary or abrogate the provisions of this Chapter.

Article 95

Shareholders of the affected class, whether or not otherwise having the right to
vote at shareholders' general meetings, shall nevertheless have the right to
vote at class meetings in respect of matters concerning sub-paragraphs (2) to
(8), (11) and (12) of Article 94, but interested shareholder(s) shall not be
entitled to vote at class meetings.

                                    Page 27



The meaning of "interested shareholder(s)" as mentioned in the preceding
paragraph is:

(1)

in the case of a repurchase of shares by offers to all shareholders or public
dealing on a stock exchange under Article 31, a "controlling shareholder" within
the meaning of Article 57;

(2)

in the case of a repurchase of share by an off-market contract under Article 31,
a holder of the shares to which the proposed contract relates;

(3)

in the case of a restructuring of the Company, a shareholder within a class who
bears less than a proportionate obligation imposed on that class under the
proposed restructuring or who has an interest in the proposed restructuring
different from the interest of shareholders of that class.

Article 96

Resolutions of a class of shareholders shall be passed by votes representing
more than two-thirds of the voting rights of shareholders of that class
represented at the relevant meeting who, according to Article 95, are entitled
to vote at class meetings.

Article 97

Written notice of a class meeting shall be given forty-five (45) days before the
date of the class meeting to notify all of the shareholders in the share
register of the class of the matters to be considered, the date and the place of
the class meeting. A shareholder who intends to attend the class meeting shall
deliver his written reply concerning attendance at the class meeting to the
Company twenty (20) days before the date of the class meeting.

If the number of shares carrying voting rights at the meeting represented by the
shareholders who intend to attend the class meeting reaches more than one half
of the voting shares at the class meeting, the Company may hold the class
meeting; if not, the Company shall within five (5) days notify the shareholders
again by public notice of the matters to be considered, the date and the place
for the class meeting. The Company may then hold the class meeting after such
publication of notice.

Article 98

Notice of class meetings need only be served on shareholders entitled to vote
thereat.

Meeting of any class of shareholders shall be conducted in a manner as similar
as possible to that of general meetings of shareholders. The provisions of these
articles of association relating to the manner to conduct any shareholders'
general meeting shall apply to any meeting of a class of shareholders.

Article 99

The special procedures for voting at any meeting of a class of shareholders
shall not apply to the following circumstances:

(1)

where the Company issues, upon the approval by special resolution of its
shareholders in general meeting, either separately or concurrently once every
twelve months, not more than 20 per cent of each of its existing issued
Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares;

(2)

                                    Page 28



where the Company's plan to issue Domestic-Invested Shares and Overseas-Listed
Foreign-Invested Shares at the time of its establishment is carried out within
fifteen (15) months from the date of approval by the Securities Committee of the
State Council.

CHAPTER 11 BOARD OF DIRECTORS

Section 1

Directors and Board of Directors

Article 100

The Company shall have a board of directors. The board of directors shall
consist of fifteen (15) directors. The board of directors shall have one (1)
Chairman, two (2) Vice-chairmen.

Article 101

Directors shall be elected at the shareholders' general meeting. The term of
office of the directors is three (3) years. At the expiry of a director's term,
the term is renewable upon re-election. Directors may be elected by the
shareholders' general meeting from the board of directors or from the candidates
nominated by shareholders representing over 5% (including 5%) of the Company'
shares issued. Notice in writing of the intention to propose a person for
election as a director and detailed information about the nominated candidate
for director shall be given to the Company seven (7) days before the date of
such shareholders' general meeting for public disclosure.

Candidates for directors shall make written promises seven (7) days before the
shareholders' general meeting, indicating their willingness to accept the
candidacy, guaranteeing the truthfulness and the completeness of the material
disclosed in connection with their candidacy, and promising that they will
conscientiously perform the duties of the director after they are elected.

The Chairman and the Vice-chairman shall be elected and removed by more than one
half of all the members of the board of directors. The term of office of each of
the Chairman and the Vice-chairman is three (3) years, renewable upon
re-election.

The shareholders' general meeting may by ordinary resolution remove any director
before the expiration of his term of office (but without prejudice to such
director's right to claim damages based on any contract) on the condition that
all the relevant laws and administrative regulations are fully complied with.

The Directors shall not be required to hold shares of the Company.

Article 102

The board of directors is responsible to the shareholders' general meeting and
exercises the following powers:

(1)

to be responsible for the convening of the shareholders' general meeting and to
report on its work to the shareholders' general meeting;

(2)

to implement the resolutions of the shareholders' general meetings;

(3)

to decide on the Company's business plans and investment plans;

(4)

                                    Page 29


to formulate the Company's annual preliminary and financial budgets;

(5)

to formulate the Company's profit distribution plan and plan for making up
losses;

(6)

to formulate proposals for increases or reductions in the Company's registered
capital and the issue of debentures of the Company;

(7)

to draw up plans for the merger, division or dissolution of the Company;

(8)

to decide on the establishment of the Company's internal management structure;

(9)

to appoint or dismiss the Company's president, and pursuant to the president's
nominations to appoint or dismiss the vice president, the financial controller
and other senior administrative officers of the Company and decide on their
remuneration;

(10)

to establish the Company's basic management system;

(11)

to formulate proposals for any amendments of the Company's articles of
association;

(12)

to exercise any other powers conferred by these articles of association or the
shareholders' general meetings.

Except the board of directors' resolutions in respect of the matters specified
in sub-paragraphs (6), (7) and (11) of this Article which shall be passed by
more than two-thirds of all the directors, the board of directors' resolutions
in respect of all other matters may be passed by more than one half of all the
directors.

Article 103

The board of directors shall not, without the prior approval of shareholders in
a general meeting, dispose or agree to dispose of any fixed assets of the
Company where the aggregate of the amount or value of the consideration for the
proposed disposition, and the amount or value of the consideration for any such
disposition of any fixed assets of the Company that has been completed in the
period of four (4) months immediately preceding the proposed disposition, exceed
33 per cent of the value of the Company's fixed assets as shown in the last
balance sheet placed before the shareholders in general meeting.

For the purposes of this Article, disposition includes an act involving the
transfer of an interest in assets but does not include the provision of fixed
asset by way of security.

The validity of a disposition by the Company shall not be affected by the breach
of the preceding paragraph of this Article.

Article 104

Board of directors shall abide by the laws and statutory regulations of the

                                    Page 30


state, these articles of association and resolutions of the shareholders'
general meeting.

Article 105

The Chairman of the board of directors shall exercise the following powers:

(1)

to preside over shareholders' general meetings and to convene and preside over
meetings of the board of directors;

(2)

to check on the implementation of resolutions of the board of directors;

(3)

to sign the securities certificates issued by the Company;

(4)

to exercise other powers conferred by the board of directors.

The Vice-chairman assists the Chairman with his work. When the Chairman is
unable to exercise his powers, the Chairman may designate the Vice-chairman to
exercise such powers on the Chairman's behalf.

Article 106

Meetings of the board of directors shall be held at least twice every year and
convened by the Chairman of the board of directors. Notice of the meeting shall
be served by telex, telegram, facsimile, express delivery, registered mail or
personal delivery on all of the directors ten (10) days before the date of the
meeting. In case of any urgent matters, the Chairman may convene an
extraordinary meeting of the board of directors. Upon requisition by more than
half of the directors, the Chairman must convene an extraordinary meeting. Upon
requisition by over one third of the directors, the supervisory committee or the
president of the Company, the Chairman may convene an extraordinary meeting.

The board meeting shall be held in principle at the place where the Company is
located. It may be held at other places both at home and abroad upon resolution
by the board of directors.

Article 107

Meeting and extraordinary meetings of the board of directors shall be notified
in the following ways:

(1)

No notice of directors' regular meeting shall be required, if the time and place
of regular meetings of the board of directors have been fixed by the board of
directors in advance.

(2)

Notice of the time and place of a meeting of the board of directors for which
the time and place have not otherwise been set in advance by the board of
directors shall be sent by the Chairman through the secretary to the board of
directors to each of the directors and the chairman of the supervisory committee
by telex, telegram, facsimile, express delivery, registered mail or personal
delivery not less than ten (10) days before such meeting.

(3)

Notice shall be in Chinese and, where necessary, in English also and shall
include an agenda of the meeting.

                                    Page 31


(4)

An extraordinary board meeting may be held provided a notice is given by
telephone, telegram or facsimile to all the directors at least eight(8) hours in
advance.

Article 108

Meeting of the board of directors shall be held only if more than half of the
directors are present.

Each director shall have one vote. A resolution of the board of directors must
be passed by more than half of all the directors.

Where the number of votes cast for and against a resolution is equal, the
Chairman of the board of directors shall have a casting vote.

Where a director is interested in any resolution proposed at a board meeting,
such director shall not be present and shall not have a right to vote. Such
director shall not be counted in the quorum of the relevant meeting.

Article 109

Notice of a meeting shall be deemed to have been given to any director who
attends the meeting without protesting against, before or at its commencement,
any lack of notice.

Article 110

Any regular or extraordinary meeting of the board of directors may be held by
conference telephone or similar communication equipment so long as all directors
participating in the meeting can clearly hear and communicate with each other,
and all such directors shall be deemed to be present in person at the meeting.

Article 111

In respect of any matter requiring the resolution of any extraordinary meeting
of the board of directors, a resolution approved in writing by at least such
number of directors as may be required pursuant to Article 102 of these articles
of association after the proposed resolution has been reduced into writing and
delivered to all directors, shall be deemed to be a valid resolution and a board
meeting shall be dispensed with.

Article 112

Directors shall attend the meetings of directors in person. Where a director is
unable to attend a meeting for any reason, he may appoint another director by a
written power of attorney to attend the meeting on his behalf. The power of
attorney shall set out the scope of the authorization.

A Director appointed as a representative of another director to attend the
meeting shall exercise the rights of a director within the scope of authority
conferred by the appointing director. Where a director is unable to attend a
meeting of the board of directors and has not appointed a representative to
attend the meeting on his behalf, he shall be deemed to have waived his right to
vote at the meeting.

Article 113

The board of directors shall keep minutes of resolutions on matters discussed at
meetings. The minutes shall be signed by the directors present at the meeting
and the person who recorded the minutes. The directors shall be liable for the
resolutions of the board of directors. If a resolution of the board of directors
violates the laws, administrative regulations or these articles of association
and results in the Company sustaining serious losses, the directors
participating in the resolution are liable to compensate the Company. However,
if it can be proven that a director expressly objected to the resolution when
the resolution

                                    Page 32


is voted on, and that such objection is recorded in the minutes of the meeting,
such director may be released from such liability.

Article 114

All the minutes of the meeting of the board of directors shall be kept in
Chinese. All the minutes of the meeting shall be delivered to all the directors
as soon as possible after the board meeting for them to review. Any director
proposing to amend the minutes must submit his proposed amendments in the form
of a written report to the chairman within six (6) working days of receiving
such minutes.

Article 115

The Chairman and all the directors (proxies) present and the board secretary
should sign the minutes of the meeting when it is approved after reviewing and a
copy thereof shall be sent to each director in time.

Section 2

Independent Directors

Article 116

The Company shall have independent directors. The independent directors shall
have no other position in the Company (other than as director of the Company),
and shall not be in any relationship with the Company or its major shareholders
that will impair their independent and objective judgment.

Article 117

An independent director shall meet the following requirements;

(1)

is qualified to serve as director of a listed company according to the laws,
administrative rules and other relevant rules of the jurisdiction where the
Company's shares are listed;

(2)

has basic knowledge of the operations of a listed company, and is well
acquainted with relevant laws, administrative rules and other rules and
regulations;

(3)

has at least five years of experience in the legal or economic field, or other
experience necessary for performance of his duties as an independent director;

(4)

other conditions set forth in these articles of association.

Article 118

The following persons shall not be independent directors of the Company:

(1)

persons who are employed by the Company or its subsidiaries, or direct and close
relatives thereof (direct relatives mean spouses, parents, and offsprings, and
close relatives include siblings, father-in-law and mother-in-law,
daughter-in-law and son-in-law, brother-in-law and sister-in-law, and the
siblings of the spouses);

(2)

natural persons who hold directly or indirectly more than 1% of the Company's

                                    Page 33


issued shares, or who are among the top ten shareholders of the Company, and
direct relatives thereof;

(3)

persons employed by company shareholders which hold directly or indirectly more
than 5% of the issued shares of the Company or are among the top five
shareholders of the Company, and direct relatives thereof;

(4)

persons who fell under any of the above three categories in the past one year;

(5)

persons who provide financial, legal or consultation services to the Company or
any of its subsidiaries;

(6)

other persons specified in these articles of association;

(7)

other persons specified by the China's Securities Regulatory Commission.

Article 119

The independent directors owe a duty of fiduciary and diligence to the Company
and its shareholders. They shall perform their duties in accordance with
relevant laws and regulations and these articles of association, and shall
protect the interests of the Company and prevent encroachment of the rights and
interests of minority shareholders.

The independent directors shall perform their duties independently, and shall
not be influenced by the major shareholders, actual controllers or other
interested entities and individuals, and shall ensure that they have sufficient
time and ability in efficiently discharging their duties.

The Company should make up for the required number of independent directors in
accordance with the provisions if the independent directors do not satisfy the
requirements of independence or they cannot perform their duties and functions
as independent directors, resulting in insufficient number of independent
directors as required.

Article 120

Nomination, Election and Replacement of Independent Directors:

(1)

The board of directors, the supervisory committee, and shareholder(s) who alone
or jointly with other persons hold(s) more than 5% of the issued shares of the
Company shall have the right to nominate candidates as independent directors,
and the nominated candidates shall become independent directors by election at a
shareholders' general meeting.

(2)

The nominator shall have the approval of the proposed candidate for the
nomination before making a nomination. The nominator shall have adequate
knowledge of the profession, education, professional title and detailed work
experience of the nominee as well as status of all his part-time jobs. The
nominator shall also comment on the qualification and independence of the
nominee as an independent director. The nominee shall make a public statement
disclaiming any relationship between him and the Company that will affect his
independent judgment. Before the shareholders meeting for the election of
independent directors, the Company's board of directors shall announce the above
information

                                    Page 34


in accordance with relevant provisions.

(3)

Before convening the shareholders' general meeting for the election of
independent directors, the Company shall submit the written opinion of the
board, and relevant materials of all the nominees to the China Securities
Regulatory Commission and its local office as well as the stock exchange at
which the Company's shares are listed. Dissenting opinions of the board with
regard to the nominees shall also be submitted. Nominees of independent
directors objected by China Securities Regulatory Commission may be candidates
of the directors of the Company but not as candidates of independent directors
of the Company. At the shareholders' general meeting for the election of
independent directors, the board of directors shall make clear whether the
nominees of independent directors are objected to by China Securities Regulatory
Commission.

(4)

The term of office of the independent directors is the same as that of the other
directors. Successive terms are allowed upon the expiration of the term, but may
not be extended to more than 6 years.

(5)

An independent director who fails to attend in person three consecutive board
meetings shall be deemed as unable to perform his duties and shall be replaced
upon the proposal of the board to the shareholders' general meeting. Independent
directors shall not be dismissed without just cause before the expiration of his
term, unless the above condition or any of the conditions specifying the
disqualification of a director under the Company Law has occurred. When an
independent director is dismissed, the Company shall disclose the dismissal as a
special discloseable matter and shall give reasons for the dismissal. The
independent director may make a public statement if he thinks that such a
dismissal is without justification.

(6)

Independent directors may resign before the expiration of their term. The
resigning independent director shall submit written resignation to the board of
directors. The written resignation shall contain explanations on matters related
to his resignation or any other matters which in his opinion, should be brought
to the notice of the shareholders and creditors of the Company. In the event
that due to the resignation of an independent director the number of independent
directors falls below the required percentage, the resignation of such
independent director shall be effective only after a new independent director
has been appointed to fill up the vacancy.

Article 121

Rights and Obligations of Independent Directors:

(1)

To facilitate the independent directors in performing their function more
efficiently, the independent directors shall have the following special powers,
in addition to having those powers granted by the Company Law and other relevant
laws and regulations to directors:

(i)

approve connected transactions the aggregate amount of which exceed 0.03% of the
Company's tangible net assets before submission to the board for discussion.
Before making the decision with respect to such transactions, the independent
directors may engage the service of a professional institution to prepare
independent financial adviser's reports as a basis for their decision;

(ii)

                                    Page 35


propose to the board of directors with respect to engaging or disengaging
accounting firms;

(iii)

propose to the board of directors with respect to the convening of extraordinary
shareholders' meetings;

(iv)

propose the convening of board meetings;

(v)

engage external auditing firms or consultancy firms;

(vi)

publicly solicit and collect proxies before the convening of the shareholders'
general meetings.

(2)

The independent director shall obtain the consent of over half of the
independent directors in exercising any of the above powers.

(3)

If any of the above proposal has not been adopted or if any of the above powers
cannot be exercised, the Company shall disclose the relevant information.

(4)

Apart from the powers of an ordinary director and the special powers of an
independent director, an independent director shall comply with all the
obligations of a director set forth in these articles of association.

Article 122

The independent directors shall provide their opinions on all the important
matters of the Company.

(1)

In addition to the above obligation, the independent directors shall provide
their independent opinions to the board of directors or the shareholders'
general meeting on the following matters:

(i)

nomination, appointment and removal of directors;

(ii)

appointment and dismissal of senior administrative officers;

(iii)

remuneration of directors and senior administrative officers;

(iv)

newly occurred transactions, loans and other forms of fund transfer between the
Company and its shareholders, actual controllers or their affiliates, the
aggregate amount of which exceeds 0.03% of the total tangible net assets of the
Company, and whether the Company has taken effective measures to collect the
amounts due;

                                    Page 36


(v)

matters which may harm the interests of the minority shareholders;

(vi)

other matters provided for in these articles of association.

(2)

The independent directors shall choose to provide any of the following opinions
in respect of the above matters:

(i)

agree;

(ii)

reserve opinion and the reasons therefor;

(iii)

dissent and the reasons therefor;

(iv)

unable to comment and the reasons therefor.

(3)

If the matters concerned fall under those which require disclosure, the Company
shall publicly disclose the opinions of the independent directors. If the
independent directors cannot reach a consensus, the Company shall publicly
disclose the opinions of each of the independent directors.

Article 123

To ensure that the independent directors will be able to perform their duties
efficiently, the Company shall provide the following to the independent
directors:

(1)

The Company shall ensure that the independent directors have the same right of
access to information as its other directors. With regard to matters that
require board decision, the Company shall serve notice on the independent
directors in advance within the prescribed time, and provide sufficient
materials. If the independent directors take the view that the materials are
insufficient, they may request for supplementary information. When two or more
independent directors take the view that the materials are insufficient or are
inadequately explained, they may, in writing, jointly propose to the board for a
postponement of the board meeting or for a postponement of determination of the
matters concerned. Such proposal shall be adopted by the board. Materials
provided by the Company to the independent directors shall be kept by the
Company and the independent directors for at least five years.

(2)

The Company shall provide necessary working conditions to the independent
directors for the performance of their duties. The secretary of the board shall
give independent directors the necessary assistance liaising with and
coordinating the work of the independent directors, including (but not limited
to) briefing them on the status of the Company and providing them with the
relevant materials. The secretary of the board shall be responsible for handling
the disclosure matters in connection with any independent opinions, proposal or
written explanatory statements made or given by the independent directors which
shall be disclosed.

                                    Page 37


(3)

The Company and its relevant personnel shall actively cooperate with the
independent directors when the latter perform their duties and provide accurate
information to the independent directors, and shall not refuse to do so,
obstruct or interfere with the independent directors in discharging their duties
or hide information from the independent directors.

(4)

The expenses incurred as a result of the engagement by the independent directors
of professional institutions because of the performance of their duties shall be
borne by the Company.

(5)

The Company shall pay subsidies to the independent directors. The rate of such
subsidies shall be proposed by the board and then approved by the shareholders'
general meeting. It shall also be disclosed in the Company's annual report.

Apart from the above subsidies, the independent directors shall not take any
extra and undisclosed interests from the Company or from its major shareholders,
interested parties and other persons.

Section 3

Special Committees of Board of Directors

Article 124

The Company may set up several special committees according to the resolutions
of shareholders' general meeting (including strategy, audit, nomination,
remuneration and evaluation committees). Members of these special committees
shall all be directors, and in the audit committee, the remuneration committee
and the evaluation committee, the independent directors shall form the majority
and shall be responsible for convening the committee meetings. In the auditing
committee at least one independent director shall be an accounting professional.

Article 125

The special committees may engage professionals for professional advice, and the
expenses incurred shall be borne by the Company.

Article 126

The special committees are accountable to the board of directors, and the
proposals made by each of the special committees shall be submitted to the board
of directors for examination and decision.

Article 127

The chief powers and functions of each special committee shall be determined in
accordance with the relevant regulations of the place where the Company is
listed.

CHAPTER 12 SECRETARY OF THE BOARD OF DIRECTORS

Article 128

The Company shall have a secretary of the board of directors who shall be a
senior administrative officer of the Company.

Article 129

The secretary of the Company's board of directors shall be a natural person who
has the requisite professional knowledge and experience, and shall be appointed
by the board of directors. His primary responsibilities are to ensure that:

                                    Page 38



(1)

the Company has complete organizational documents and records;

(2)

the Company prepares and delivers in accordance with law those reports and
documents required by competent authorities entitled thereto;

(3)

the Company's registers of shareholders are properly maintained, and that
persons entitled to the Company's records and documents are furnished with such
records and documents without delay.

Article 130

A director or other senior administrative officer of the Company may hold the
office of the secretary of the board of directors concurrently. However,
president, chief financial officer and the accountant(s) of the certified public
accountant firm appointed by the Company shall not act as the secretary of the
board of directors.

Provided that where the officer of secretary is held concurrently by a director,
and an act is required to be done by a director and a secretary separately, the
person who holds the office of director and secretary may not perform the act in
dual capacity.

CHAPTER 13 PRESIDENT

Article 131

The Company shall have one president, who shall be appointed and dismissed by
the board of directors. The Company shall have a certain number of vice
presidents who will assist the president in his work. The board of directors may
decide that a member of the board of directors will concurrently act as the
president.

Article 132

The president shall be accountable to the board of directors and exercise the
following functions and powers:

(1)

to be in charge of the Company's production, operation and management and to
organize the implementation of the resolutions of the board of directors;

(2)

to organize the implementation of the Company's annual business plan and
investment plan;

(3)

to draft plans for the establishment of the Company's internal management
structure;

(4)

to establish the Company's basic management system;

(5)

to formulate basic rules and regulations for the Company;

(6)

                                    Page 39



to propose the appointment or dismissal of the Company's vice president(s), the
financial controller and other senior administrative officers appointed by the
board of directors;

(7)

to appoint or dismiss management personnel other than those required to be
appointed or dismissed by the board of directors;

(8)

other powers conferred by these articles of association and the board of
directors.

Article 133

The president may be present at meetings of the board of directors. The
president has no voting rights at the board meetings unless he is also a
director.

Article 134

The president and vice presidents, in performing their functions and powers,
shall act honestly and diligently and in accordance with the laws,
administrative regulations, these articles of association and the requirements
of the detailed rules of the president of the Company. The president and vice
presidents shall not, in exercising their powers, vary the resolutions of
shareholders' general meetings and those of the board of directors or exceed the
scope of their authorities. In the event that the president and vice presidents
violate any laws, regulations, and these articles of association resulting in
losses to the Company, board of directors shall pursue their legal liabilities.

CHAPTER 14 SUPERVISORY COMMITTEE

Article 135

The Company shall have a supervisory committee.

Article 136

The supervisory committee shall be composed of five (5) supervisors. The number
of supervisors must be odd number. Specific number of supervisors shall be
determined by shareholders' general meeting. One of the members of the
supervisory committee shall be the chairman. The term of office of supervisors
shall be three (3) years renewable upon re-election and re-appointment. The
chairman of the supervisory committee is subject to election or removal with the
consent of two thirds or more of the members of the supervisory committee.

Article 137

The supervisory committee shall comprise of representatives of shareholders and
the Company's staff and workers. Two (2) of them shall be representatives of the
staff and workers. Supervisors representing shareholders shall be elected by the
shareholders' general meeting from the supervisory committee or from the
candidates nominated by shareholders representing over 5% (including 5%) of
shares of the Company. Notice of candidates and candidates' written agreement to
accept the nomination shall be sent to the Company seven (7) days before the
shareholders' general meeting.

Except those in the first supervisory committee and supervisors represented by
representatives of staff and workers, supervisors must be elected by
shareholders (including shareholders' proxies) representing half or more of the
voting rights of the shareholders present at the shareholders' general meeting.

The shareholders' general meeting may by ordinary resolution remove any
supervisor represented by a representative of shareholders before the expiration
of his term of office (but without prejudice to such supervisor's right to claim
damages based on any contract) on the condition that all the relevant laws and
administrative regulations are fully complied with, but the shareholders'
general

                                    Page 40



meeting may not remove the supervisor without just cause. Supervisors
represented by representatives of staff and workers shall be elected and removed
by the staff and workers of the Company democratically.

Article 138

The directors, president, vice presidents and financial controller shall not act
concurrently as supervisors.

Article 139

Meetings of the supervisory committee shall be held at least once every six
months, and shall be convened by the chairman of the supervisory committee.
Notice of the meeting shall be sent to each supervisor in writing ten (10) days
before the meeting. The notice shall include the date, place, duration, reasons
and topics of the meeting and the date on which the notice is sent.

Article 140

The supervisory committee shall be accountable to the shareholders' general
meeting and exercise the following functions and powers in accordance with law:

(1)

to examine the Company's financial situation;

(2)

to supervise the directors, president and other senior administrative officers
to see whether they act in contradiction with the laws, administrative
regulations and these articles of association;

(3)

to demand rectification from a director, the president or any other senior
administrative officers when the acts of such persons are harmful to the
Company's interest;

(4)

to check the financial information such as the financial report, business report
and plans for distribution of profits to be submitted by the board of directors
to the shareholders' general meetings and, should any queries arise, to
authorize, in the name of the Company, a re-examination by the public certified
accountants and practising auditors of the Company;

(5)

to propose to convene a shareholders' extraordinary general meeting;

(6)

to represent the Company in negotiation with or bringing an action against a
director;

(7)

other functions and powers specified in these articles of association.

Members of the supervisory committee shall be present at meetings of the board
of directors.

Other powers and functions of the supervisory committee shall be determined in
accordance with the laws and regulations of the place where the Company is
listed.

Article 141

                                    Page 41



Resolutions of the supervisory committee shall be passed by two thirds or more
of all of its members.

Article 142

Method of discussion and voting procedures of the supervisory committee shall
follow the Rules of Procedures of the supervisory committee.

Article 143

The supervisory committee meetings shall keep minutes. Supervisors present at
the meeting and the person taking the minutes shall sign on the meeting minutes.
Supervisors are entitled to make notes to the speech recorded in the minute
book. The meeting minutes of supervisory committee shall be safely and properly
kept as important file of the Company.

Article 144

All reasonable fees incurred in respect of the employment of professionals such
as lawyers, certified public accountants or practising auditors as are required
by the supervisory committee in exercising its functions and powers shall be
borne by the Company.

Article 145

A supervisor shall carry out his duties honestly and faithfully in accordance
with laws, administrative regulations and these articles of association.

CHAPTER 15 THE QUALIFICATIONS AND DUTIES OF THE DIRECTORS, SUPERVISORS,
PRESIDENT AND OTHER SENIOR ADMINISTRATIVE OFFICERS OF THE COMPANY

Article 146

A person may not serve as a director, supervisor, president and any other senior
administrative officer of the Company if any of the following circumstances
apply:

(1)

a person without capacity for civil conduct or with restricted capacity for
civil conduct;

(2)

a person who has committed an offence of corruption, bribery, infringement of
property, misappropriation of property or sabotaging the social economic order
and has been punished because of committing such offence; or who has been
deprived of his political rights, in each case where less than five (5) years
have elapsed since the date of the completion of implementation of his
punishment;

(3)

a person who is former director, factory manager or general manager of a company
or enterprise which has entered into insolvent liquidation because of
mismanagement and is personally liable for the insolvency of such company or
enterprise, where less than three (3) years have elapsed since the date of the
completion of the insolvency and liquidation of the company or enterprise;

(4)

a person who is a former legal representative of a company or enterprise which
had its business license revoked due to a violation of the law and who incurred
personal liability, where less than three (3) years has elapsed since the date
of the revocation of the business license;

(5)

                                    Page 42



a person who has a relatively large amount of debts due and outstanding;

(6)

a person who is under criminal investigation or prosecution by judicial organs
for violation of the criminal law which is not yet concluded;

(7)

a person who is not eligible for enterprise leadership according to laws and
administrative regulations;

(8)

a non-natural person;

(9)

a person who is convicted of contravention of provisions of relevant securities
regulations by a relevant competent authority, and such conviction involves a
finding that he has acted fraudulently or dishonestly, where less than five (5)
years has elapsed since the date of the conviction.

Article 147

The validity of an act of a director, president or other senior administrative
officer on behalf of the Company is not, vis-a-vis a bona fide third party,
affected by any irregularity in his office, election or any defect in his
qualification.

Article 148

In addition to the obligations imposed by laws, administrative regulations or
required by the listing rules of the stock exchange on which shares of the
Company are listed, each of the Company's directors, supervisors, president and
other senior administrative officers owes a duty to each shareholder, in the
exercise of the functions and powers of the Company entrusted to him:

(1)

not to cause the Company to exceed the scope of business stipulated in its
business license;

(2)

to act honestly in the best interests of the Company;

(3)

not to expropriate in any guise the Company's property, including (without
limitation) usurpation of opportunities advantageous to the Company;

(4)

not to expropriate the individual rights of shareholders, including (without
limitation) rights to distribution and voting rights, save pursuant to a
restructuring of the Company submitted to shareholders for approval in
accordance with these articles of association.

Article 149

Each of the Company's directors, supervisors, president and other senior
administrative officers owes a duty, in the exercise of his powers and discharge
of his duties, to exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances.

The Company's directors (including those intending to act as independent

                                    Page 43



directors) shall take an active part in training in order to understand the
rights, obligations and responsibilities as directors, learn about relevant laws
and regulations and master relevant knowledge required of a director.

Article 150

Each of the Company's directors, supervisors, president and other senior
administrative officers shall exercise his powers or carry on his duties in
accordance with the principle of fiduciary; and shall not put himself in a
position where his duty and his interest may conflict. This principle includes
(without limitation) discharging the following obligations:

(1)

to act honestly in the best interests of the Company;

(2)

to exercise powers within the scope of his powers and not to exceed those
powers;

(3)

to exercise the discretion vested in him personally and not to allow himself to
act under the control of another and, unless and to the extent permitted by
laws, administrative regulations or with the informed consent of shareholders
given in general meeting, not to delegate the exercise of his discretion;

(4)

to treat shareholders of the same class equally and to treat shareholders of
different classes fairly;

(5)

except in accordance with these articles of association or with the informed
consent of shareholders given in general meeting, not to enter into any
contract, transaction or agreement with the Company;

(6)

without the informed consent of shareholders given in general meeting, not to
use the Company's property for his own benefit;

(7)

not to exploit his position to accept bribes or other illegal income or
expropriate the Company's property by any means, including (without limitation)
opportunities advantageous to the Company;

(8)

without the informed consent of shareholders given in general meeting, not to
accept commissions in connection with the Company's transactions;

(9)

to abide by these articles of association, execute his official duties
faithfully and protect the Company's interests, and not to exploit his position
and power in the Company to advance his own private interests;

(10)

not to compete with the Company in any way unless with the informed consent of
shareholders given in general meeting;

(11)

not to misappropriate the Company's funds or lend such funds to others, not to

                                    Page 44



open accounts in his own name or other names for the deposit of the Company's
assets and not to provide a guarantee for debts of a shareholder of the Company
or other individual(s) with the Company's assets;

(12)

unless otherwise permitted by informed shareholders in general meeting, to keep
in confidence information acquired by him in the course of and during his tenure
and not to use the information other than in furtherance of the interests of the
Company, save that disclosure of such information to the court or other
governmental authorities is permitted if:

(i)

disclosure is made under compulsion of law;

(ii)

the interests of the public require disclosure;

(iii)

the interest of the relevant director, supervisor, president or other senior
administrative officers require disclosure.

Article 151

Each director, supervisor, president or other senior administrative officer of
the Company shall not cause the following persons or institutions ("associates")
to do what he is prohibited from doing:

(1)

the spouse or minor child of that director, supervisor, president or other
senior administrative officer;

(2)

a person acting in the capacity of trustee of that director, supervisor,
president or other senior administrative officer or any person referred to in
the preceding sub-paragraph (1);

(3)

a person acting in the capacity of partner of that director, supervisor,
president or other senior administrative officer or any person referred to in
sub-paragraphs (1) and (2) of this Article;

(4)

a company in which that director, supervisor, president or other senior
administrative officer, alone or jointly with one or more persons referred to in
sub-paragraph (1), (2) and (3) of this Article and other directors, supervisors,
president and other senior administrative officers have a defacto controlling
interest;

(5)

the directors, supervisors, president and other senior administrative officers
of the controlled company referred to in the preceding sub-paragraph (4).

Article 152

The fiduciary duties of the directors, supervisors, president and other senior
administrative officers of the Company do not necessarily cease with the
termination of their tenure. The duty of confidence in relation to trade secrets
of the Company survives the termination of their tenure. Other duties may
continue for such period as fairness may require depending on the time lapse

                                    Page 45



between the termination and the act concerned and the circumstances under which
the relationships between them and the Company are terminated.

Article 153

Subject to Article 56, a director, supervisor, president or other senior
administrative officer of the Company may be relieved of liability for specific
breaches of his duty by the informed consent of shareholders given at a general
meeting.

Article 154

Where a director, supervisor, president or other senior administrative officer
of the Company is in any way, directly or indirectly, materially interested in a
contract, transaction or arrangement or proposed contract, transaction or
arrangement with the Company, (other than his contract of service with the
Company), he shall declare the nature and extent of his interests to the board
of directors at the earliest opportunity, whether or not the contract,
transaction or arrangement or proposal therefor is otherwise subject to the
approval of the board of directors.

Unless the interested director, supervisor, president or other senior
administrative officer discloses his interests in accordance with this Article
and the contract, transaction or arrangement is approved by the board of
directors at a meeting in which the interested director, supervisor, president
or other senior administrative officer is not counted in the quorum and refrains
from voting, a contract, transaction or arrangement in which that director,
supervisor, president or other senior administrative officer is materially
interested is voidable at the instance of the Company except as against a bona
fide party thereto acting without notice of the breach of duty by the interested
director, supervisor, president or other senior administrative officer. For the
purposes of this Article, a director, supervisor, president or other senior
administrative officer of the Company is deemed to be interested in a contract,
transaction or agreement in which an associate of him is interested.

Article 155

Where a director, supervisor, president or other senior administrative officer
of the Company gives to the board of directors a general notice in writing
stating that, by reason of the facts specified in the notice, he is interested
in contracts, transactions or arrangements of any description which may
subsequently be made by the Company, that notice shall be deemed for the
purposes of the preceding Article to be a sufficient declaration of his
interests, so far as the content stated in such notice is concerned, provided
that such general notice shall have been given before the date on which the
question of entering into the relevant contract, transaction or arrangement is
first taken into consideration on behalf of the Company.

Article 156

The Company shall not in any manner pay taxes for or on behalf of a director,
supervisor, president or other senior administrative officer.

Article 157

The Company shall not directly or indirectly make a loan to or provide any
guarantee in connect with the making of a loan to a director, supervisor,
president or other senior administrative officer of the Company or of the
Company's holding company or any of their respective associates. However, the
following transactions are not subject to such prohibition:

(1)

the provision by the Company of a loan or a guarantee of a loan to a company
which is a subsidiary of the Company;

(2)

                                    Page 46



the provision by the Company of a loan or a guarantee in connection with the
making of a loan or any other funds to any of its directors, supervisors,
president and other senior administrative officers to meet expenditure incurred
or to be incurred by him for the purposes of the Company or for the purpose of
enabling him to perform his duties properly, in accordance with the terms of a
service contract approved by the shareholders in general meeting;

(3)

the Company may make a loan to or provide a guarantee in connection with the
making of a loan to any of the relevant directors, supervisors, president and
other senior administrative officers or their respective associates in the
ordinary course of its business on normal commercial terms, provided that the
ordinary course of business of the Company includes the lending of money or the
giving of guarantees.

Article 158

A loan made by the Company in breach of Article 157 shall be forthwith repayable
by the recipient of the loan regardless of the terms of the loan.

Article 159

A guarantee for repayment of loan provided by the Company in breach of Article
157 shall not be enforceable against the Company, unless:

(1)

the guarantee was provided in connection with a loan to an associate of any of
the directors, supervisors, president and other senior administrative officers
of the Company or of the Company's holding company and at the time the loan was
advanced the lender did not know the relevant circumstances; or

(2)

the collateral provided by the Company has been lawfully disposed of by the
lender to a bona purchaser.

Article 160

For the purpose of the foregoing provisions of this Chapter, a "guarantee"
includes an undertaking or property provided to secure the performance of
obligations by the obligor.

Article 161

In addition to any rights and remedies provided by the laws and administrative
regulations, where a director, supervisor, president or other senior
administrative officer of the Company is in breach of his duties to the Company,
the Company has a right to:

(1)

claim damages from the director, supervisor, president or other senior
administrative officer in compensation for losses sustained by the Company as a
result of such breach;

(2)

rescind any contract or transaction entered into by the Company with the
director, supervisor, president or other senior administrative officer or with a
third party (where such third party knows or should know that there is such a
breach of duties by such director, supervisor, president or other senior
administrative officer);

(3)

demand an account of the profits made by the director, supervisor, president or

                                    Page 47



other senior administrative officer in breach of his duties;

(4)

recover any monies received by the director, supervisor, president or other
senior administrative officer to the use of the Company, including (without
limitation) commissions; and

(5)

demand payment of the interest earned or which may have been earned by the
director, supervisor, president or other senior administrative officer on the
monies that should have been paid to the Company.

Article 162

The Company shall, with the prior approval of shareholders in general meeting,
enter into a contract in writing with a director or supervisor wherein his
emoluments are stipulated. The aforesaid emoluments include:

(1)

emoluments in respect of his service as director, supervisor or senior
administrative officer of the Company;

(2)

emoluments in respect of his service as director, supervisor or senior
administrative officer of any subsidiary of the Company;

(3)

emoluments in respect of the provision of other services in connection with the
management of the affairs of the Company and any of its subsidiaries;

(4)

payment by way of compensation for loss of office, or as consideration for or in
connection with his retirement from office.

Except under a contract entered into in accordance with the foregoing, no
proceedings may be brought by a director or supervisor against the Company for
anything due to him in respect of the matters mentioned in this Article.

Article 163

The contract concerning the emoluments between the Company and its directors or
supervisors should provide that in the event of a takeover of the Company, the
Company's directors and supervisors shall, subject to the prior approval of the
shareholders in general meeting, have the right to receive compensation or other
payment in respect of his loss of office or retirement. A takeover of the
Company referred to in this paragraph means any of the following:

(1)

an offer made by any person to the general body of shareholders;

(2)

an offer made by any person with a view to the offeror becoming a "controlling
shareholder" within the meaning of Article 57.

If the relevant director or supervisor does not comply with this Article, any
sum so received by him shall belong to those persons who have sold their shares
as a result of the said offer made. The expense incurred in distributing that
sum pro rata amongst those persons shall be borne by the relevant director or
supervisor and not paid out of that sum.

                                    Page 48



Article 164

With the approval of shareholders' general meeting, the Company may buy
liability insurance for directors, supervisors, president and other senior
administrative officers of the Company with the exception of those liabilities
resulting from violation of laws, regulations and these articles of association.

CHAPER 16 FINANCIAL AND ACCOUNTING SYSTEMS AND PROFIT DISTRIBUTION

Article 165

The Company shall establish its financial and accounting systems and internal
audit system in accordance with laws, administrative regulations and PRC
accounting standards formulated by the finance regulatory department of the
State Council.

Article 166

At the end of each fiscal year, the Company shall prepare a financial report,
which shall be examined and verified as provided by law.

The Company's financial reports shall include the following accounting
statements and schedules:

(1)

balance sheet;

(2)

profit and loss statement;

(3)

statement of financial changes;

(4)

explanation of financial conditions;

(5)

profit distribution statement.

Article 167

The board of directors of the Company shall place before the shareholders at
every annual general meeting such financial reports as are required by any laws,
administrative regulations or directives promulgated by competent regional and
central governmental authorities to be prepared by the Company.

Article 168

The Company's financial reports shall be made available for shareholders'
inspection at the Company twenty (20) days before the date of every
shareholders' annual general meeting. Each shareholder shall be entitled to
obtain a copy of the financial reports referred to in this Chapter.

The Company shall deliver or send to each shareholder of Overseas-Listed
Foreign-Invested Shares by prepaid mail at the address registered in the
register of shareholders the said report not later than twenty-one (21) days
before the date of every annual general meeting of shareholders.

Article 169

The financial statements of the Company shall, in addition to being prepared in
accordance with PRC accounting standards and regulations, be prepared in
accordance with either international accounting standards, or that of the place

                                    Page 49



outside the PRC where the Company's shares are listed. If there is any material
difference between the financial statements prepared respectively in accordance
with the two accounting standards, such difference shall be stated in the
financial statements. When the Company is to distribute its after-tax profits,
the lower of the after-tax profits as shown in the two financial statements
shall be adopted.

Article 170

Any interim results or financial information published or disclosed by the
Company must also be prepared and presented in accordance with PRC accounting
standards and regulations, and also in accordance with either international
accounting standards or that of the overseas place where the Company's shares
are listed.

Article 171

The Company shall publish its financial reports twice every fiscal year, that
is, the interim financial report shall be published within sixty (60) days after
the expiration of the first six (6) months of each fiscal year; the annual
financial report shall be published within one hundred and twenty (120) days
after the expiration of each fiscal year.

Article 172

The Company shall not keep accounts other than those provided by law.

Article 173

The Company shall implement an internal auditing system, and establish an
internal auditing organization or provide internal auditing personnel to
undertake the internal auditing and supervision over the Company's income and
expenses and other economic activities under the leadership of the supervisory
committee.

Article 174

The Company's after-tax profit shall be allocated in accordance with the
following order:

(1)

making up for losses;

(2)

allocation to the statutory common reserve fund;

(3)

allocation to the statutory common welfare fund;

(4)

allocation to the discretionary common reserve fund;

(5)

payment of dividends in respect of ordinary shares.

The board of directors shall, in accordance with the laws and administrative
regulations of the State (if any) and the Company's operation and development
requirements, determine the detail proportions of profit distributions in items
(3) to (5) above and submit its determination to the shareholders' general
meeting for approval.

Article 175

                                    Page 50



Capital common reserve fund includes the following items:

(1)

premium on shares issued at a premium price;

(2)

any other income designated for the capital common reserve fund by the
regulations of the finance regulatory department of the State Council.

Article 176

The common reserve fund of the Company shall be applied to the following
purposes:

making up losses, expansion of the Company's production and operation, or
increase of the Company's capital.

When the Company converts its common reserve fund into its capital upon a
resolution adopted in shareholders' general meeting, the Company shall either
distribute new shares in proportion to the shareholders' number of shares, or
increase the par value of each share, provided, however, that when the statutory
common reserve fund is converted to capital, the balance of the statutory common
reserve fund may not fall below 25 per cent of the registered capital.

The Company's statutory common welfare fund is used for the collective welfare
of the Company's staff and workers.

Article 177

Dividends shall be distributed in accordance with the proportion of shares held
by shareholders.

Unless otherwise resolved by the shareholders' general meeting, the Company
apart from distributing annual dividends, may by its board of directors acting
under the power conferred by the shareholders' general meeting, distribute
interim dividends. Unless otherwise stipulated by laws or administrative
regulations, the amount of interim dividends distributed shall not exceed 50 per
cent of the distributable profits as stated in the interim profits statement of
the Company.

Article 178

The Company may distribute dividends in the following manner:

(1)

cash;

(2)

shares.

Article 179

The Company shall, in accordance with the People's Republic of China's tax law,
withhold and make payments on behalf of shareholders in respect of their tax
payable on their dividends income.

Article 180

The Company shall appoint on behalf of the holders of the Overseas-Listed
Foreign-Invested Shares receiving agents to receive on behalf of such
shareholders dividends declared and all other monies owing by the Company in
respect of their shares. The receiving agents appointed by the Company shall
comply with the relevant requirements of the law of the place and relevant
regulations of the stock exchange where the Company's shares are listed. The
receiving agents appointed on behalf of holders of H Shares shall be a company

                                    Page 51



registered as a trust company under the Trustee Ordinance of Hong Kong.

Article 181

Dividends or other payments declared by the Company to be payable to holders of
Domestic-Invested Shares shall be declared and calculated in Renminbi, and paid
in Renminbi; and those payable to holders of Foreign-Invested Shares shall be
declared and calculated in Renminbi, and paid in the local currency at the place
where such Foreign-Invested Shares are listed (if there is more than one place
of listing, then the principal place of listing as determined by the board of
directors).

The conversion formula of foreign currency is as follows:

Conversion price of dividends and other sums to holders in foreign
currency=dividends and other sums to holders in Renmibi/(to be divided by) the
average closing rate for the relevant foreign currency announced by the Peoples'
Bank of China for the week prior to the announcement of the payment of dividend
or other sums.

CHAPTER 17 APPOINTMENT OF ACCOUNTANT FIRM

Article 182

The Company shall appoint an independent firm of accountants, which is qualified
under the relevant regulations of the State to audit the Company's annual report
and review the Company's other financial reports.

The first accountant firm of the Company may be appointed by the inaugural
meeting of the Company before the first annual general meeting and the
accountant firm so appointed shall hold office until the conclusion of the
annual general meeting.

If the inaugural meeting fails to exercise its powers under the preceding
paragraph, those powers shall be exercised by the board of directors.

Article 183

The accountant firm appointed by the Company shall hold office from the
conclusion of the annual general meeting of shareholders until the conclusion of
the next annual general meeting of shareholders.

Article 184

The accountant firm appointed by the Company shall have the following rights:

(1)

A right of access at any time to the books and records and vouchers of the
Company, and shall be entitled to require from the director, supervisor,
president or other senior administrative officers of the Company any relevant
information and explanation;

(2)

A right to require the Company to take all reasonable steps to obtain from its
subsidiaries such information and explanation as are necessary for the purpose
of discharging its duties;

(3)

A right to attend shareholders' general meetings and to receive all notices of,
and other communications relating to, any shareholders' general meeting which
any shareholder is entitled to receive, and to speak at any shareholders'
general meeting in relation to matters concerning its role as the Company's
accountant firm.

Article 185

                                    Page 52



Before the convening of the shareholders' general meeting, the board of
directors may fill any casual vacancy in the office of an accountant firm, but
while any such vacancy continues, the surviving or continuing firms, if any, may
act.

Article 186

The shareholders in general meeting may by ordinary resolution remove an
accountant firm before the expiration of its term of office, notwithstanding the
stipulations in the contract between the Company and the firm, but without
prejudice to the firm's right to claim, if any, for damages in respect of such
removal.

Article 187

The remuneration of an accountant firm or the manner in which such firm is to be
remunerated shall be determined by the shareholders in general meeting. The
remuneration of an accountant firm appointed by the board of directors shall be
determined by the board of directors.

Article 188

The Company's appointment of, removal of and non-reappointment of an accountant
firm shall be resolved upon by shareholders in general meeting. The resolution
of the shareholders' general meeting shall be filed with the securities
governing authority of the State Council.

Where it is proposed that any resolution be passed at a shareholders' general
meeting concerning the appointment of an accountant firm which is not an
incumbent firm to fill a casual vacancy in the office of the accountant firm;
re-appointment of a retiring accountant firm which was appointed by the board of
directors of the Company to fill a casual vacancy; or removal of the accountant
firm before the expiration of its term of office, the following provisions shall
apply:

(1)

A copy of the proposal shall be sent before notice of meeting is given to the
shareholders to the firm proposed to be appointed or proposing to leave its post
or the firm, which has left its post in the relevant fiscal year (leaving
includes leaving by removal, resignation and retirement).

(2)

If the firm leaving its post makes representations in writing and requests the
Company to notify such representations to the shareholders, the Company shall
(unless the representations are received too late):

(i)

in any notice of the resolution given to shareholders, state the fact of the
representations having been made; and

(ii)

attach a copy of the representations to the notice and deliver it to the
shareholders in the manner stipulated in these articles of association.

(3)

If the firm's representations are not sent in accordance with the preceding
sub-paragraph (2), the relevant firm may (in addition to its right to be heard)
require that the representations be read out at the meeting.

(4)

An accountant firm which is leaving its post shall be entitled to attend:

                                    Page 53



(i)

the shareholders' general meeting at which its term of office would otherwise
have expired;

(ii)

any shareholders' general meeting at which it is proposed to fill the vacancy
caused by its removal; and

(iii)

any shareholders' general meeting convened on its resignation;

and to receive all notice of, and other communications relating to, any such
meetings, and to speak at any such meeting in relation to matters concerning its
role as the former accountant firm of the Company.

Article 189

Prior to the removal or the non-renewal of the appointment of the accountant
firm, notice of such removal or non-renewal shall be given to the accountant
firm and such firm shall be entitled to make representation at the shareholders'
general meeting. Where the accountant firm resigns its post, it shall make clear
to the shareholders' general meeting whether there has been any impropriety on
the part of the Company.

An accountant firm may resign its office by depositing at the Company's legal
address a resignation notice which shall become effective on the date of such
deposit or on such later date as may be stipulated in such notice and such
notice shall include the following:

(1)

a statement to the effect that there are no circumstances connected with its
resignation which it considers should be brought to the notice of the
shareholders or creditors of the Company;

(2)

a statement of any such circumstances.

Where a notice is deposited under the preceding subparagraph, the Company shall
within fourteen (14) days send a copy of the notice to the relevant governing
authority. If the notice contains a statement under the preceding subparagraph
(2), a copy of such statement shall be placed at the Company for shareholders'
inspection. The Company should also send a copy of such statement by prepaid
mail to every holder of Overseas-Listed Foreign-Invested Shares at the address
registered in the register of shareholders.

Where the accountant firm's notice of resignation contains a statement of any
circumstance which should be brought to the notice of the shareholders or
creditors of the Company, it may require the board of directors to convene a
shareholders' extraordinary general meeting for the purpose of receiving an
explanation of the circumstances connected with its resignation.

CHAPTER 18 INSURANCE

Article 190

The types of coverage, the insured amounts and periods of the Company's
insurance shall be decided at a meeting of the board of directors based on the
circumstances of the Company and the practices of similar industries in other
countries and the practice and legal requirements in China.

CHAPTER 19 LABOUR AND PERSONNEL MANAGEMENT SYSTEMS

Article 191

                                    Page 54



The Company shall, in accordance with the relevant provisions of the Labor Law
of People's Republic of China and other relevant laws or regulations of the
State, formulate its labor and personnel management systems, which shall be
appropriate to its particular circumstances.

CHAPTER 20 TRADE UNION

Article 192

The Company shall establish trade union organizations and organize staff and
workers to carry out trade union activities in accordance with the Trade Union
Law of the People's Republic of China.

The Company shall allocate funds to the trade union in accordance with the Trade
Union Law of the People's Republic of China. Such fund shall be used by the
trade union of the Company in accordance with the "Measures for the Management
of trade Union Funds" formulated by the All China Federation of Trade Unions.

CHAPTER 21 MERGER AND DIVISION OF THE COMPANY

Article 193

In the event of the merger or division of the Company, a plan shall be presented
by the Company's board of directors and shall be approved in accordance with the
procedures stipulated in these articles of association and then the relevant
examining and approving formalities shall be processed as required by law. A
shareholder who objects to the plan of merger or division shall have the right
to demand the Company or the shareholders who consent to the plan of merger or
division to acquire that dissenting shareholder's shareholding at a fair price.
The contents of the resolution of merger or division of the Company shall be
made into special documents for shareholders' inspection.

Such special documents shall be sent by mail to holders of Overseas-Listed
Foreign-Invested Shares.

Article 194

The merger of the Company may take the form of either merger by absorption or
merger by the establishment of a new company.

In the event of a merger, the merging parties shall execute a merger agreement
and prepare a balance sheet and an inventory of assets. The Company shall notify
its creditors within ten (10) days of the date of the Company's resolution to
merge and shall publish a public notice in a newspaper at least three times
within thirty (30) days of the date of the Company's resolution to merge. A
creditor has the right within thirty (30) days of receiving such notice from the
Company or, for creditors who do not receive the notice, within ninety (90) days
of the date of the first public notice, to demand that the Company repay its
debts to that creditor or provide a corresponding guarantee for such debt. Where
the company fails to repay its debts or provide corresponding guarantees for
such debts, it may not be merged.

At the time of merger, rights in relation to debtors and indebtedness of each of
the merged parties shall be assumed by the company which survives the merger or
the newly established company.

Article 195

When the Company is divided, its assets shall be spilt up accordingly.

In the event of division of the Company, the parties to such division shall
execute a division agreement and prepare a balance sheet and an inventory of
assets. The Company shall notify its creditors within ten (10) days of the date
of the Company's resolution to divide and shall publish a public notice in a
newspaper at least three times within thirty (30) days of the date of the
Company's resolution to divide. A creditor has the right within thirty (30) days
of receiving such notice from the Company or, for creditors who do not receive

                                    Page 55



the notice, within ninety (90) days of the date of the first public notice to
demand that the Company repay its debts to that creditor or provide a
corresponding guarantee for such debt. Where the Company fails to repay its
debts or provide corresponding guarantees for such debts, it may not be divided.

Debts of the Company prior to division are assumed by the post-division
companies in accordance with the agreements entered into.

Article 196

When the Company merges or divides and there is a change in any item in its
registration, the Company shall change its registration with the company's
registration authority in accordance with the law. When the Company dissolves,
the Company shall cancel its registration in accordance with the law. When a new
company is established, its establishment shall be registered in accordance with
the law.

CHAPTER 22 DISSOLUTION AND LIQUIDATION

Article 197

The Company shall be dissolved and liquidated upon the occurrence of any of the
following events:

(1)

a resolution for dissolution is passed by shareholders at a general meeting;

(2)

dissolution is necessary due to a merger or division of the Company;

(3)

the Company is legally declared insolvent due to its failure to repay debts due;
and

(4)

the Company is ordered to close down because of its violation of laws and
administrative regulations.

Article 198

A liquidation group shall be set up within fifteen (15) days of the Company
being dissolved pursuant to sub-paragraph (1) of the preceding Article, and the
composition of the liquidation group of the Company shall be determined by an
ordinary resolution of shareholders in general meeting. If a liquidation group
to carry out liquidation procedures is not set up within the specified time
limit, the creditors may apply to the People's court to have it designate
relevant persons to form a liquidation group in order to carry out liquidation
procedures.

Where the Company is dissolved under sub-paragraph (3) of the preceding Article,
the People's Court shall in accordance with provisions of relevant laws organize
the shareholders, relevant organizations and relevant professional personnel to
establish a liquidation group to carry out liquidation procedures.

Where the Company is dissolved under sub-paragraph (4) of the preceding Article,
the relevant governing authorities shall organize the shareholders, relevant
organizations and professional personnel to establish a liquidation group to
carry out liquidation procedures.

Article 199

Where the board of directors proposes to liquidate the Company due to causes
other than where the Company has declared that it is insolvent, the board shall
include a statement in its notice convening a shareholders' general meeting to

                                    Page 56



consider the proposal to the effect that, after making full inquiry into the
affairs of the Company, the board of directors is of the opinion that the
Company will be able to pay its debts in full within twelve (12) months from the
commencement of the liquidation.

Upon the passing of the resolution by the shareholders in general meeting for
the liquidation of the Company, all functions and powers of the board of
directors shall cease.

The liquidation group shall act in accordance with the instructions of the
shareholders' general meeting to make a report at lease once every year to the
shareholders' general meeting on the committee's receipts and payments, the
business of the Company and the progress of the liquidation; and to present a
final report to the shareholders' general meeting on completion of the
liquidation.

Article 200

The liquidation group shall within ten (10) days of its establishment send
notice to creditors, and within sixty (60) days of its establishment publish a
public notice in a newspaper at least three times. A creditor shall within
thirty (30) days of receiving notice, or for creditors who do not receive
notice, within ninety (90) days of the date of the first public notice, report
its creditors' rights to the liquidation group.

When reporting creditors' rights, the creditor shall provide an explanation of
matters relevant to the creditor's rights and shall provide materials as
evidence. The liquidation group shall carry out registration of creditors'
rights.

Article 201

During the liquidation period, the liquidation group shall exercise the
following functions and powers:

(1)

to sort out the Company's assets and prepare a balance sheet and an inventory of
assets respectively;

(2)

to send notices to creditors or notify them by public notice;

(3)

to dispose of and liquidate any relevant unfinished business matters of the
Company;

(4)

to pay all outstanding taxes;

(5)

to settle claims and debts;

(6)

to deal with the assets remaining after the Company's debts have been repaid;

(7)

to represent the Company in any civil litigation proceedings.

Article 202

After sorting out the Company's assets and the preparation of the balance sheet

                                    Page 57



and an inventory of assets, the liquidation group shall formulate a liquidation
plan and represent it to a shareholders' general meeting or to the relevant
governing authority for confirmation.

To the extent that the Company is able to repay its debts, it shall, in the
following order, pay: the liquidation expenses, wages of staff and workers,
labor insurance fees, outstanding taxes, and the Company's debts.

The remaining assets of the Company after its debts have been repaid in
accordance with the provisions of the preceding paragraph shall be distributed
to its shareholders according to the proportion of their shareholdings.

During the liquidation period, the Company shall not commence any new
operational activities.

Article 203

If after putting the Company's assets in order and preparing a balance sheet and
an inventory of assets in connection with the liquidation of the Company
resulting from dissolution, the liquidation group discovers that the Company's
assets are insufficient to repay the Company's debts in full, the liquidation
group shall immediately apply to the People's Court for a declaration of
insolvency.

After a Company is declared insolvent by a ruling of the People's Court, the
liquidation group shall turn over liquidation matters to the People's Court.

Article 204

Following the completion of liquidation, the liquidation group shall present a
report on liquidation and prepare a statement of the receipts and payments
during the period of liquidation and financial books and records which shall be
audited by Chinese registered accountants and submitted to the shareholders'
general meeting or the relevant governing authority for confirmation.

The liquidation group shall within thirty (30) days after such confirmation,
submit the documents referred to in the preceding paragraph to the companies
registration authority and apply for cancellation of registration of the
Company, and publish a public notice relating to the termination of the Company.

CHAPTER 23 PROCEDURES FOR AMENDMENT OF THE ARTICLES OF ASSOCIATION

Article 205

The Company may amend its articles of association in accordance with the
requirement of laws, administrative regulations and the Company's articles of
association.

Article 206

The amendment to the Company's article of association involving the contents of
the Mandatory Provision shall become effective upon approvals by the companies
approving department authorized by the State Council. If there is any change
relating to the registered particulars of the Company, application shall be made
for registration of the changes in accordance with law.

CHAPTER 24 SETTLEMENT OF DISPUTES

Article 207

The Company shall act according to following principles to settle disputes:

(1)

Whenever any disputes or claims arising between: holders of the Overseas-Listed
Foreign-Invested Shares and the Company; holders of the Overseas-Listed
Foreign-Invested Shares and the Company's directors, supervisors, president or
other senior administrative officers; or holders of the Overseas-Listed

                                    Page 58



Foreign-Invested Shares and holders of Domestic-Invested Shares, based on these
articles of association or any rights or obligations conferred or imposed by the
Company Law or any other relevant PRC laws and administrative regulations
concerning the affairs of the Company, such disputes or claims shall be referred
by the relevant parties to arbitration.

Where a dispute or claim of rights referred to in the preceding paragraph is
referred to arbitration, the entire claim or dispute must be referred to
arbitration, and all persons who have a cause of action based on the same facts
giving rise to the dispute or claim or whose participation is necessary for the
resolution of such dispute or claim, shall abide by the arbitration provided
that such person is the Company or the Company's shareholder, director,
supervisor, president or other senior administrative officer.

Disputes in relation to the definition of shareholders and disputes in relation
to the shareholders' register need not be resolved by arbitration.

(2)

A claimant may elect arbitration at either the China International Economic and
Trade Arbitration Commission in accordance with its Rules or the Hong Kong
International Arbitration Center in accordance with its Securities Arbitration
Rules. Once a claimant refers a dispute or claim to arbitration, the other party
must submit to the arbitral body elected by the claimant.

If a claimant elects arbitration at Hong Kong International Arbitration Center,
any party to the dispute or claim may apply for a hearing to take place in
Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong
International Arbitration Center.

(3)

If any disputes or claims of rights are settled by way of arbitration in
accordance with sub-paragraph (1) of this Article, the laws of the People's
Republic of China shall apply, save as otherwise provided in laws and
administrative regulations.

(4)

The award of an arbitration body shall be final and conclusive and binding on
all parties.

CHAPTER 25 NOTICE

Article 208

When a notice is sent by mail, address should be clearly written with postage
prepaid. The notice shall be sent in an envelope and shall be deemed to have
been received by shareholders forty-eight (48) hours after being sent.

Article 209

Any notice, document, material or written statement of shareholders or directors
may be sent to the Company by personal delivery or by registered mail to the
domicile of the Company.

Article 210

In order to prove that shareholders or directors have already sent the notice,
document, material or written statement, they should provide evidence to prove
that such notice, document, material or written statement have been sent within
the prescribed time in the normal way of sending with postage prepaid to the
correct address of the Company.

CHAPTER 26 DEFINITION AND INTERPRETATION OF THESE ARTICLES OF ASSOCIATION

Article 211

                                    Page 59



The board of directors is responsible for the interpretation of these articles
of association. Uncovered matters in these articles of association shall be
settled by special resolutions that board of directors proposes for
shareholders' general meeting to adopt.

Article 212

In these articles of association, the following terms have the following
meanings:

These articles of association refers to the articles of association of the
Company currently effective.

Board of directors refers to the board of directors of the Company.

China refers to the People's Republic of China.

Renminbi refers to the legal tender of China.

Seal refers to the ordinary seal the Company uses from time to time and the
official seal of the Company (if any) that the Company maintains or one of the
two depending upon the circumstances.

Article 213

In these articles of association, a sum and above include such sum while more
than a sum or less than a sum does not include such a sum.

Article 214

In these articles of association, the meaning of an accountant firm is the same
as that of "auditors".

                                    Page 60

EX-4.1

EXHIBIT 4.1

         This is only an English translation of the agreement in Chinese
           This English translation shall not have any binding effect.
             No responsibility can be accepted for reliance upon it.

                          DIRECTOR'S SERVICE AGREEMENT
                       CHINA SOUTHERN AIRLINES CO., LTD.

         After friendly negotiations in the spirit of equality and mutual
benefit, China Southern Airlines Co., Ltd. (hereinafter referred to as "Party A"
or the "Company") and ________________________ ("Party B"), who is currently
domiciled at _____________________________________, entered into this Service
Agreement on ____________ at Party A's domicile in Guangzhou Municipality,
Guangdong Province, under which they agree as follows:

ARTICLE 1         EMPLOYMENT

1.1      This Agreement is intended to define and govern the relationship
         between Party A as employer and Party B as employee.

1.2      Subject to the terms and conditions hereof, Party A agrees to employ
         Party B as director of its board of directors.

1.3      Subject to the terms and conditions hereof, Party B agrees to accept
         Party A's employment and serve as Party A's director.


ARTICLE 2         TERM OF EMPLOYMENT

2.1      Party B's term of employment as Party A's director is three (3) years,
         beginning on ___________ and ending ___________.

2.2      Prior to the expiration of Party B's term of office as Party A's
         director, Party A shall not remove Party B from his office without any
         cause except as provided in Article 6 hereof.

ARTICLE 3         PARTY B'S RESPONSIBILITIES

3.1      Party B represents and warrants that he shall perform his duties in
         accordance with the Company Law of the People's Republic of China and
         other applicable laws and administrative regulations, as well as Party
         A's articles of association, this Agreement and resolutions of Party
         A's shareholders meeting.

3.2      During his term of office, Party B shall

         (1)      as director of the Company, perform such duties and exercise
                  such powers Party A's shareholders meeting and board of
                  directors shall assign or grant him from time to time;

         (2)      comply with the lawful orders and instructions which the
                  Company's shareholders' resolution or board of directors shall
                  give or make from time to time, serve the Company in good
                  faith and with due care, and use his best efforts to promote
                  the business of the Company; and

         (3)      attend to the business and interests of Party A with due
                  diligence, and deal with matters relating to the Company's
                  business and interest during business hours and at any other
                  time at the reasonable request of the Company, except when
                  Party B is not able to attend due to illness or other
                  unexpected event.

                                       1



                  Under such circumstances, he should give prompt notice on the
                  Company, and provide evidence of such illness or event at the
                  request of the Company.

3.3      During his term of office as director of the Company, Party B shall
         undertake not to

         (1)      Embezzle Party A's funds or lend such funds to others;

         (2)      Deposit Party A's funds in an account under his name or under
                  the name of any other individual;

         (3)      Use Party A's assets as collateral for the debts of the
                  Company's shareholders or other individuals;

         (4)      Operate for himself or for others in the same line of business
                  as Party A's, or engage in activities detrimental to the
                  interests of Party A;

         (5)      Seek personal interest by using his position in the Company;
                  or

         (6)      Accept bribery or other unlawful incomes which come his way
                  because of his position in the Company, or convert Party A's
                  property to himself.

3.4      Party B shall

         (1)      Act in good faith and in the overall interest of Party A;

         (2)      Act with an appropriate purpose;

         (3)      Account to Party A for the use or misuse of Party A's assets;

         (4)      Avoid any actual or potential conflict of interest or state of
                  divided loyalty;

         (5)      Disclose unreservedly and fairly Party B's interest in his
                  agreement with Party A; and

         (6)      Act with the skill, care and diligence reasonably expected of
                  a person having the same experience and knowledge and holding
                  the position as Party A's director.

3.5      In performing his duties as director of the Company, Party B shall be
         held liable for any loss or injury of Party A that results from Party
         B's violation of the laws, administrative regulations, as well as Party
         A's articles of association.

3.6      Party B shall not engage in any activity that competes with the
         business of the Company in any country or region during the term of his
         office or within 12 months thereafter. However, this provision only
         applies to the products or services Party B is responsible for or
         related to during the said term of office.

3.7      During the term of his office and within 12 months thereafter, Party B
         shall not cause any customers or suppliers of the Company to become
         customers or suppliers of any other third party, nor shall he induce
         them to terminate their business with the Company.

3.8      During the term of his office and within 12 months thereafter, Party B
         shall not induce any employee of the Company to leave the Company or
         hire other employees from the Company.

3.9      At no time after the termination of his term of office shall Party B
         use for whatever purpose the name of the Company (both English and
         Chinese) or any other name similar thereto together with his own name
         or any other name to indicate that he is or was affiliated with the
         business of the Company. Nor shall he claim any such affiliation in any
         other way.

3.10     Party B has the right to:

(1)      Request Party A to provide the necessary working conditions and terms;
         and

                                       2



(2)      Seek compensation from Party A in the occurrence of economic loss or
         punishment consequent to a decision made in good faith by Party B.

ARTICLE 4         COMPENSATIONS AND EXPENSES

4.1      During Party B's term of office, Party A shall pay an annual amount in
         RMB determined by the Company's policy as compensation for Party B's
         service, which he renders according to the terms of the Agreement as
         director of the Company.

4.2      Payment and amount of the director's compensation may be altered by
         resolution of the Company's shareholders meeting.

4.3      Party A shall withhold Party B's individual income tax from his income.

4.4      Party A and Party B shall, in accordance with relevant provisions of
         Chinese law, pay to relevant authorities or insurance companies their
         respective share of insurance premium for medical care, pension,
         unemployment, and for insurance against work-related accidents.

4.5      Party A shall be responsible for the reasonable expenses (such as
         traveling expenses) which Party B incurs in rendering services to Party
         A as director or for the purpose of Party A's business. If such
         expenses have already been paid by Party B, Party A shall reimburse
         Party B in accordance with Party A's relevant rules of financial
         management, provided, however, that Party B shall provide valid
         receipts or invoices. Party A may also advance Party B such payments
         for Party B to cover these necessary expenses. After using such advance
         money, Party B shall provide valid receipts or invoices for the said
         expenses for final settlement at a time requested by Party A.

4.6      Party B shall be entitled to annual paid leaves, which shall not
         include statutory holidays. The number of days of the annual paid leave
         shall be decided by the board of directors. Party B shall take leave at
         a time convenient to the board of directors after all urgent corporate
         matters have been taken into consideration, provided, however, that

         (A)      Party B shall be entitled to paid leaves on a pro-rata basis
                  according to the days of his actual employment by the Company
                  in the year if his employment is terminated for reasons other
                  than that under Article 6.2 hereunder;

         (B)      If in any given year Party B does not take full advantage of
                  the paid leaves, he has no claim on the Company, except when
                  the Company holds in its own judgment that this is caused by
                  the burdensome or urgent nature of his duty. Under such
                  circumstances he can use the paid leave he is entitled to in
                  the following year.

4.7      If Party B is unable to perform his duty under this Agreement due to
         illness, injury or accidents, he is still entitled to full compensation
         for one month or any shorter period during which he remains incapable
         of performing his duty, provided, however, that he provides evidence or
         reasons of his incapability satisfactory to the board of directors. If
         he remains incapable of performing his duty for more than six
         consecutive months, his compensation as director shall be withheld.

4.8      Party B may be removed from office by resolution of a shareholders
         meeting if he materially breaches any provision hereunder, if he
         seriously injures the interests of the Company, if he is bankrupt or
         insolvent, or if he has committed a crime. After his removal from
         office, Party B shall not be entitled to any bonus or other payments
         except his salary for that month on a pro-rata basis. Nor shall he be
         entitled to any damages for such removal.

4.9      If Party B's employment is terminated for reasons other than that under
         Article 6.2,

         (A)      Party B shall be entitled to

                                       3



                  (1)      his prorated last monthly salary according to his
                           actual days of employment in the month, in accordance
                           with Article 2.1 hereunder;

                  (2)      his share of bonus for the last year of his
                           employment under the Agreement, as decided by the
                           board of directors in accordance with Article 2.1
                           hereunder; and

                  (3)      paid leaves for the last year of his employment under
                           the Agreement, in accordance with Article 4.6
                           hereunder. Party B shall ask for such leave before
                           the termination of his employment; and

         (B)      Party B shall not claim any damages against the Company for
                  termination of his employment hereunder.

ARTICLE 5         CONFIDENTIALITY

5.1      Party B is aware that he has access to Party A's commercial secrets in
         performing his duties as director of the Company. These commercial
         secrets include, without limiting to, documents, materials, data,
         information, plans, inside news, etc. Party B acknowledges that these
         secrets are Party A's proprietary rights, and Party B is obligated to
         keep the confidentiality of such secrets.

5.2      Party B guarantees that at any time, including after the expiration or
         termination of his employment,

         (1)      he will not disclose to any third party any confidential
                  materials under Article 5.1 hereunder in any manner, except
                  information which must be disclosed to related employees of
                  Party A or experts hired by Party A for performance of his
                  duty as director.

         (2)      he will not use such confidential information in any way for
                  his own benefit or for the benefit of his friends or
                  relatives.

         (3)      he will take necessary actions to prevent such confidential
                  information from being disclosed or disseminated to any third
                  party unauthorized by Party A; and

       (4)        he will return to Party A all materials relating to Party A's
                  business in a timely and valid manner before expiration or
                  early termination of his term of office, including without
                  limiting Party A's documents, notes taken by himself, records,
                  reports, handbooks, blueprints, graphs, disks, tapes, models
                  and samples. To avoid any ambiguity, it is hereby declared
                  that all such documents belong to the Company at any time.

5.3      Party B agrees that all intellectual property rights in connection with
         products that are developed, created or manufactured during his term of
         office as director of the Company are the proprietary rights of Party
         A.

ARTICLE 6         TERMINATION OF EMPLOYMENT

6.1      Under any of the following circumstances, the employment relationship
         between Party A and Party B shall be terminated:

         (1)      Party B's term of office as director expires;

         (2)      Party B dies;

         (3)      Facts have been unearthed which, according to statutes,
                  disqualify Party B as director, and the shareholders meeting
                  has decided to terminate his employment by resolution.

                                       4



         (4)      Party B fails to perform his duty for six (6) months due to
                  illness or other reasons, upon approval by the resolution of
                  the shareholders.

6.2      Under any of the following circumstances, Party A may terminate its
         employment relationship with Party B by written notice:

         (1)      Party B has brought injury or loss to Party A intentionally or
                  as a consequence of wanton misconduct in performing his duty
                  as director;

         (2)      Party B breaches his duty as director or violates the
                  provisions of this Agreement, and refused to correct his
                  behavior after a warning;

         (3)      Party B violates the law in matters unrelated to Party A
                  during his term of office, or damages the reputation of Party
                  A because of his personal conduct.

6.3      Termination of employment hereunder does not eliminate Party A's
         existing rights under Articles 5 and 6. Articles 5 and 6 hereunder
         shall survive the termination of the employment relationship.

ARTICLE 7         OTHERS

7.1      This Agreement is an agreement for Party B's rendition of personal
         service as director. Therefore, the rights, interests, obligations and
         duties of Party B hereunder shall not be assigned or delegated to any
         third party, except the right to attend Party A's board meetings, which
         may be exercised by proxy upon his written authorization.

7.2      Neither Party shall add to, delete or amend this Agreement or any
         provisions herein without the written consent of both Parties.

7.3      The law of the People's Republic of China shall govern the execution,
         interpretation, and performance of this Agreement as well as dispute
         resolution hereunder.

7.4      Disputes that arise out of the performance of this Agreement shall be
         resolved by the Parties through friendly negotiations. If the Parties
         are unable to resolve their disputes through negotiation, either Party
         may institute a legal action at a people's court with competent
         jurisdiction.

7.5      In the event that either Party breaches this Agreement, fails to
         perform its obligation hereunder, or renders non-conforming
         performance, the other Party has the right to request correction within
         a specific period of time, specific performance, removal of hindrances,
         damages and other remedies. Failure of either Party to exercise its
         right or a part of its right hereunder does not constitute a waiver of
         such right or such partial right.

7.6      Written notice under this Agreement may be delivered face-to-face,
         personally, or by fax or mail service. Party B shall notify Party A of
         his new address within 10 days after any address changes.

7.7      The Employee Handbook is attached hereto as a valid component part of
         this Agreement.

7.8      This Agreement shall become effective as of the date of its execution.

7.9      This Agreement shall have two counterparts, one for each of Party A and
         Party B.

Party A
China Southern Airlines Company
Legal Representative:

                                       5



Party B

Date : _____________

                                       6

EX-4.2

Exhibit 4.2

             This is only an English translation of the agreement in Chinese
             This English translation shall not have any binding effect.
             No responsibility can be accepted for reliance upon it.

                        CHINA SOUTHERN AIRLINES CO., LTD.
             INDEPENDENT NON-EXECUTIVE DIRECTOR'S SERVICE AGREEMENT

This Agreement is entered into between and by the following two parties as of
__________:

Party A:                   China Southern Airlines Co., Ltd., a limited
                           liability company established under the laws of the
                           People's Republic of China with its registered
                           address at Baiyun Airfield of Guangzhou, Guangdong
                           Province;

Party B: [Name] [Address].


The two parties agree as follows:

1.       Definition:

1.01     During the term of this Agreement, unless otherwise provided, "Board of
         Directors" refers to Party A's Board of Directors; "Month" refers to
         the calendar month.

1.02     Unless otherwise provided, articles referred in this Agreement all
         refer to the articles in this Agreement.

2.       Appointment

         Party A shall appoint Party B in terms and conditions set forth in this
         Agreement and Party B shall assume the position of an Independent
         Non-Executive Director of the Board of Directors of Party A in terms
         and conditions set forth in this Agreement.

3.       Term of Office

         Unless otherwise provided, Party A shall appoint Party B as Independent
         Non-Executive Director as of for a term of three (3) years. When the
         term of office expires, Party B may take consecutive terms subject to
         the approval of the Board of Directors of Party A and this Agreement
         remains effective until either party gives no less than one month prior
         written notice to the other party.

4.       Party B's Duty and Responsibility

         During the term of office, Party B shall

         (a)      perform as Party A's director the duties assigned from time to
                  time by the Board of Directors and exercise the power
                  conferred upon him from time to time by the Board of
                  Directors;

         (b)      comply with and conform to any lawful instructions or
                  directions that the Board of Directors issue from time to time
                  and serve the Company in good faith and prudent manner and
                  shall do his best to promote the business of the Company; and

         (c)      diligently and whole heartedly devote himself to Party A's
                  business and interest and personally attend to Party A's
                  business and interest at any time during the normal hours of
                  business and other hours reasonably required by Party A with
                  the exception when he is disabled due to illness or accident.

5.       Payment

                                       1


5.01     Party A shall pay Party B all reasonable expenses incurred in the
         performance of this Agreement, or for the attendance to the meeting of
         the Board of Directors of Party A, or for other matters during the term
         of office. Party B agrees to the annual payment of RMB50,000 (after
         income tax) by Party A to Party B as Party B's remuneration as the
         Independent Non-Executive Director of Party A.

6.       Termination

6.01     In case Party B fails to perform his duty for six (6) months or more,
         Party A, with the resolution of the Board of Directors of Party A, may
         terminate Party B's term of office provided that a one month prior
         written notice is given.

6.02     If Party B is in serious violation of the provisions of this Agreement
         during the term of office, or seriously damages Party A's interests, or
         becomes bankrupt or fails to pay off his personal debts, or is indicted
         for any criminal acts, Party A, with the resolution of the Board of
         Directors of Party A, may remove him from office at once. If Party B is
         removed from his office, he is not entitled to any claim for the
         removal of his office.

6.03     When the appointment is terminated for whatever reasons, Party B shall
         resign from the Board of Directors of Party A at once.

7.       Miscellaneous

7.01     Party B shall assume no personal liabilities when he performs any act
         in the capacity of a director provided that such act does not violate
         the criminal law or constitute a crime. If Party B, in the capacity of
         a director, performs in good faith an act, resulting in any claim or
         losses, Party A shall indemnify for Party B or make compensation to
         Party B.

7.02     Any notice, requirement or other communications made or issued in
         accordance with the provisions of this Agreement, should be issued or
         made in writing.

7.03     If any clauses of this Agreement become illegal, invalid or
         unenforceable at any time or in any respect, the legality, validity and
         forcibility of other clauses of this Agreement shall not be affected or
         damaged in any way.

7.04     Party B shall comply with the various rules and regulations that Party
         A formulates in accordance with the Laws of China. Party A has power to
         amend and supplement the aforesaid rules and regulations and reward and
         punish Party B according to them.

7.05     The execution, validity, interpretation and performance of this
         Agreement shall be governed by the Laws of the People's Republic of
         China.

7.06     The Agreement is written in Chinese.

7.07     Party B realizes that in the performance of his duties as director, he
         may learn Party A's commercial secrets, including but not limited to
         documents, reference materials, data, information, plans, etc. Party B
         acknowledges that these confidential materials belong to Party A
         exclusively and Party B has obligation to keep them confidential.

7.08     Any dispute arising out of the performance of or in connection with
         this Agreement shall be settled through friendly negotiation. If no
         settlement can be reached through negotiation, either party may file a
         suit with the competent people's court.

7.09     Any matter not covered by this Agreement shall be settled under the
         relevant laws and regulations of China or the rules and regulations of
         the local government.

7.10     This Agreement is made in two counterparts. Party A and Party B shall
         each hold one.


PARTY A:                   CHINA SOUTHERN AIRLINES CO., LTD.

REPRESENTATIVE: ___________________________

                                       2


PARTY B:

Date: _____________________

                                       3

EX-8

                                                                               .
                                                                               .
                                                                               .

EXHIBIT 8

SUBSIDIARIES OF THE COMPANY

The particulars of the Company's principal subsidiaries at December 31, 2002 are
as follows:



- -----------------------------------------------------------------------------------------------------------------
NAME OF COMPANY                                                        PLACE AND DATE OF ESTABLISHMENT/ OPERATION
- -----------------------------------------------------------------------------------------------------------------
                                                                    
China Southern Airlines                                                PRC
    (Group) Shenzhen Co. (a)                                           October 14, 1993

- -----------------------------------------------------------------------------------------------------------------
China Southern Airlines (Group)                                        PRC
    Zhuhai Helicopter Company Limited (a)                              August 31, 1993

- -----------------------------------------------------------------------------------------------------------------
Guangxi Airlines                                                       PRC
    Company Limited (a)                                                April 28, 1994

- -----------------------------------------------------------------------------------------------------------------
Southern Airlines Group Shantou                                        PRC
    Airlines Company Limited (a)                                       July 20, 1993

- -----------------------------------------------------------------------------------------------------------------
Zhuhai Airlines                                                        PRC
    Company Limited (a)                                                May 8, 1995

- -----------------------------------------------------------------------------------------------------------------
Xiamen Airlines                                                        PRC
    Company Limited (a)                                                August 11, 1984

- -----------------------------------------------------------------------------------------------------------------
Guizhou Airlines                                                       PRC
    Company Limited (a)                                                November 12, 1991

- -----------------------------------------------------------------------------------------------------------------
Baiyun Xinhua  (Guangzhou) Air Cargo                                   PRC
    Service Co. (b)                                                    January 4, 1989

- -----------------------------------------------------------------------------------------------------------------
Guangzhou Nanland Air                                                  PRC
    Catering Company Limited (b)                                       November 21, 1989

- -----------------------------------------------------------------------------------------------------------------
China Southern West Australian                                         Australia
    Flying College Pty Ltd                                             January 26, 1971

- -----------------------------------------------------------------------------------------------------------------
Guangzhou Baiyun International Logistic Company Ltd                    PRC
                                                                       July 23, 2002

- -----------------------------------------------------------------------------------------------------------------
Guangzhou Aviation Hotel                                               PRC
                                                                       January 8, 1997

- -----------------------------------------------------------------------------------------------------------------
Southern Airlines Advertising Company                                  PRC
                                                                       March 3, 1994

- -----------------------------------------------------------------------------------------------------------------
South China International Aviation & Travel Services Company           PRC
                                                                       May 11, 1992

- -----------------------------------------------------------------------------------------------------------------
CZ Flamingo Limited                                                    Cayman Islands
                                                                       December 8, 1993

- -----------------------------------------------------------------------------------------------------------------
CZ Skylark Limited                                                     Cayman Islands
                                                                       November 17, 1993

- -----------------------------------------------------------------------------------------------------------------
CZ Kapok Limited                                                       Cayman Islands
                                                                       October 26, 1993

- -----------------------------------------------------------------------------------------------------------------



                                     E-8-1




- -----------------------------------------------------------------------------------------------------------------
NAME OF COMPANY                                                        PLACE AND DATE OF ESTABLISHMENT/ OPERATION
- -----------------------------------------------------------------------------------------------------------------
                                                                    
CSA-I Limited                                                          Cayman Islands
                                                                       September 1, 1993

- -----------------------------------------------------------------------------------------------------------------
CZ93B Limited                                                          Cayman Islands
                                                                       May 11, 1993

- -----------------------------------------------------------------------------------------------------------------
CZ97A Limited                                                          Cayman Islands
                                                                       January 2, 1997

- -----------------------------------------------------------------------------------------------------------------
Zhong Yuan 99A Limited                                                 Cayman Islands
                                                                       February 15, 1999

- -----------------------------------------------------------------------------------------------------------------
CXA92A Limited                                                         Cayman Islands
                                                                       August 3, 1992

- -----------------------------------------------------------------------------------------------------------------
CXA93A Limited                                                         Cayman Islands
                                                                       July 1, 1993

- -----------------------------------------------------------------------------------------------------------------
CXA95B Limited                                                         Cayman Islands
                                                                       July 7, 1995

- -----------------------------------------------------------------------------------------------------------------
CXA95C Limited                                                         Cayman Islands
                                                                       October 16, 1995

- -----------------------------------------------------------------------------------------------------------------
CXA98A Limited                                                         Cayman Islands
                                                                       March 20, 1998

- -----------------------------------------------------------------------------------------------------------------
Xiamen Aviation Property                                               PRC
    Development Company (a)                                            June 22, 1993

- -----------------------------------------------------------------------------------------------------------------
Xiamen Aviation Advertising                                            PRC
    Company Limited (a)                                                December 17, 1992

- -----------------------------------------------------------------------------------------------------------------
Xiamen Aviation                                                        PRC
    Supplies Limited (a)                                               July 30, 1997

- -----------------------------------------------------------------------------------------------------------------
Xiamen Aviation Development                                            PRC
    Company Limited (a)                                                February 18, 1998

- -----------------------------------------------------------------------------------------------------------------
Bai Lu Finance Limited                                                 Hong Kong
                                                                       February 22, 1996

- -----------------------------------------------------------------------------------------------------------------
Xiamen Air Holidays Limited                                            Hong Kong
                                                                       April 28, 1994

- -----------------------------------------------------------------------------------------------------------------
Xiamen Macau Holidays Limited                                          Macau
                                                                       May 11, 1995

- -----------------------------------------------------------------------------------------------------------------


                                     E-8-2





- -----------------------------------------------------------------------------------------------------------------
NAME OF COMPANY                                                        PLACE AND DATE OF ESTABLISHMENT/ OPERATION
- -----------------------------------------------------------------------------------------------------------------
                                                                    
Shantou Hua Kang Air Catering                                          PRC
    Company Ltd (a)                                                    June 22, 1994

- -----------------------------------------------------------------------------------------------------------------


(a) These subsidiaries are PRC limited companies.

(b) These subsidiaries are Sino-foreign equity joint venture companies.

                                     E-8-3

EX-10.1

EXHIBIT 10.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 20-F of CHINA SOUTHERN AIRLINES
COMPANY LIMITED (the "Company") for the year ended December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
Yan Zhi Qing, as Chairman of the Board of Directors of the Company, Wang Chang
Shun, as President of the Company, and Xu Jie Bo, as Chief Financial Officer of
the Company, each hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that, to the best of his
knowledge:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material
     respects, the financial condition and results of operations of the Company.



                                     /s/ Yan Zhi Qing
                                     -------------------------------------------
                                     Name:   Yan Zhi Qing
                                     Title:  Chairman of the Board of Directors
                                     Date:   June 30, 2003



                                     /s/ Wang Chang Shun
                                     -------------------------------------------
                                     Name:   Wang Chang Shun
                                     Title:  President
                                     Date:   June 30, 2003



                                     /s/ Xu Jie Bo
                                     -------------------------------------------
                                     Name:   Xu Jie Bo
                                     Title:  Chief Financial Officer
                                     Date:   June 30, 2003



This certification accompanies the Report pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18
of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by ss.906 of the
Sarbanes-Oxley Act of 2002 has been provided to China Southern Airlines Company
Limited and will be retained by China Southern Airlines Company Limited and
furnished to the Securities and Exchange Commission or its staff upon request.